ARMSTRONG WORLD INDUSTRIES INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

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

For the transition period from to

Commission File Number: 1-2116

ARMSTRONG WORLD INDUSTRIES, INC.

(Exact Name of Registrant as Specified in its Charter)


Pennsylvania	23-0366390
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2500 Columbia Avenue, Lancaster, Pennsylvania	17603
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

AWI

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

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

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

Number of shares of Armstrong World Industries, Inc.’s common stock outstanding as of October 20, 2022 – 45,662,803.

TABLE OF CONTENTS


		PAGE
Cautionary Note Regarding Forward-Looking Statements		3

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

When we refer to “AWI,” the “Company,” “we,” “our” or “us,” we are referring to Armstrong World Industries, Inc. and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, our expectations concerning our markets and their effect on our operating results; the impacts of COVID-19 on our business; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings and earnings before interest, taxes, depreciation and amortization (as discussed below). Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “predict,” “believe,” “may,” “will,” “would,” “could,” “should,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our financial condition, liquidity, results of operations or future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

Risks Related to Our Operations

•

key customers;

•

availability and costs of manufacturing inputs or sourced products;

•

Worthington Armstrong Venture, our joint venture with Worthington Industries, Inc;

•

labor;

•

costs savings and productivity initiatives;

•

sustainability;

Risks Related to Our Strategy

•

digitalization initiatives and new technology;

•

strategic transactions;

Risks Related to Financial Matters

•

negative tax consequences;

•

our indebtedness;

•

our liquidity;

•

covenants in our debt agreements;

•

defined benefit plan obligations;

•

the tax consequences of the separation of our flooring business from our ceilings business;

Risks Related to Legal and Regulatory Matters

•

environmental matters;

•

litigation;

•

claims;

•

intellectual property rights;

•

international operations;

Risks Related to General Economic and Other Factors

•

economic conditions;

•

construction activity;

•

competition;

•

customer consolidation;

•

information technology disruptions and cybersecurity breaches;

•

geographic concentration;

•

dividend payments;

•

public health epidemics or pandemics (like COVID-19); and

•

other risks detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021, and in the documents incorporated by reference herein and therein.

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

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Income

(amounts in millions, except per share data)

Unaudited


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net sales	$	325.0		$	292.2		$	928.6		$	824.1
Cost of goods sold		207.5			181.5			591.0			521.0
Gross profit		117.5			110.7			337.6			303.1
Selling, general and administrative expenses		59.3			62.3			177.9			176.5
Loss (gain) related to change in fair value of contingent consideration		7.1			(0.3	)		13.3			(9.8	)
Equity (earnings) from joint venture		(22.2	)		(23.4	)		(61.7	)		(68.1	)
Operating income		73.3			72.1			208.1			204.5
Interest expense		7.0			6.1			17.9			17.4
Other non-operating (income), net		(1.4	)		(1.4	)		(4.1	)		(4.3	)
Earnings from continuing operations before income taxes		67.7			67.4			194.3			191.4
Income tax expense		13.2			16.6			43.2			48.0
Earnings from continuing operations		54.5			50.8			151.1			143.4
Gain (loss) from disposal of discontinued businesses, net of tax (benefit) expense of ($3.0), $-, ($3.0) and $1.7		3.0			-			3.0			(2.1	)
Net earnings (loss) from discontinued operations		3.0			-			3.0			(2.1	)
Net earnings	$	57.5		$	50.8		$	154.1		$	141.3
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(2.1	)		(0.8	)		(2.3	)		0.3
Derivative gain, net		4.9			0.8			18.5			5.7
Pension and postretirement adjustments		0.2			0.1			0.9			0.5
Total other comprehensive income		3.0			0.1			17.1			6.5
Total comprehensive income	$	60.5		$	50.9		$	171.2		$	147.8
Earnings per share of common stock, continuing operations:
Basic	$	1.18		$	1.07		$	3.24		$	3.00
Diluted	$	1.18		$	1.06		$	3.23		$	2.98
Earnings (loss) per share of common stock, discontinued operations:
Basic	$	0.07		$	-		$	0.06		$	(0.04	)
Diluted	$	0.07		$	-		$	0.06		$	(0.04	)
Net earnings per share of common stock:
Basic	$	1.25		$	1.07		$	3.30		$	2.96
Diluted	$	1.25		$	1.06		$	3.29		$	2.94
Average number of common shares outstanding:
Basic		46.1			47.5			46.6			47.7
Diluted		46.1			47.8			46.7			48.0

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share and per share data)


	Unaudited
	September 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	86.8		$	98.1
Accounts and notes receivable, net		119.4			109.1
Inventories, net		115.1			90.2
Income taxes receivable		6.9			1.4
Other current assets		23.6			23.1
Total current assets		351.8			321.9
Property, plant, and equipment, less accumulated depreciation and amortization of $534.1 and $494.0, respectively		541.2			542.8
Operating lease assets		19.0			21.0
Finance lease assets		16.6			18.4
Prepaid pension costs		112.7			109.0
Investment in joint venture		58.1			50.0
Goodwill		166.6			167.0
Intangible assets, net		409.0			421.4
Income taxes receivable		-			0.6
Other non-current assets		64.4			57.9
Total assets	$	1,739.4		$	1,710.0
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt		25.0			25.0
Accounts payable and accrued expenses		178.7			174.9
Operating lease liabilities		6.1			5.6
Finance lease liabilities		2.2			2.2
Income taxes payable		0.4			1.9
Total current liabilities		212.4			209.6
Long-term debt, less current installments		658.3			606.4
Operating lease liabilities		13.2			15.6
Finance lease liabilities		15.1			16.8
Postretirement benefit liabilities		68.2			71.1
Pension benefit liabilities		35.4			36.9
Other long-term liabilities		27.4			46.7
Income taxes payable		13.2			20.3
Deferred income taxes		175.0			166.9
Total non-current liabilities		1,005.8			980.7
Shareholders' equity:
Common stock, $0.01 par value per share, 200 million shares authorized, 62,881,645 shares issued and 45,771,839 shares outstanding as of September 30, 2022 and 62,775,155 shares issued and 47,302,299 shares outstanding as of December 31, 2021		0.6			0.6
Capital in excess of par value		569.3			561.3
Retained earnings		1,132.8			1,011.4
Treasury stock, at cost, 17,109,806 shares as of September 30, 2022 and 15,472,856 shares as of December 31, 2021		(1,089.0	)		(944.0	)
Accumulated other comprehensive loss		(92.5	)		(109.6	)
Total shareholders' equity		521.2			519.7
Total liabilities and shareholders' equity	$	1,739.4		$	1,710.0

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(amounts in millions, except share data)

Unaudited


	Three Months Ended September 30, 2022
																Accumulated
						Additional										Other
	Common Stock					Paid-In		Retained			Treasury Stock					Comprehensive
	Shares			Amount		Capital		Earnings			Shares		Amount			(Loss)			Total
June 30, 2022		46,462,821		$	0.6	$	565.7	$	1,086.0			16,413,011	$	(1,029.0	)	$	(95.5	)	$	527.8
Stock issuance, net		5,813			-		-		-			-		-			-			-
Cash dividends - $0.231 per common share		-			-		-		(10.7	)		-		-			-			(10.7	)
Share-based employee compensation		-			-		3.6		-			-		-			-			3.6
Net earnings		-			-		-		57.5			-		-			-			57.5
Other comprehensive income		-			-		-		-			-		-			3.0			3.0
Acquisition of treasury stock		(696,795	)		-		-		-			696,795		(60.0	)		-			(60.0	)
September 30, 2022		45,771,839		$	0.6	$	569.3	$	1,132.8			17,109,806	$	(1,089.0	)	$	(92.5	)	$	521.2

	Nine Months Ended September 30, 2022
																Accumulated
						Additional										Other
	Common Stock					Paid-In		Retained			Treasury Stock					Comprehensive
	Shares			Amount		Capital		Earnings			Shares		Amount			(Loss)			Total
December 31, 2021		47,302,299		$	0.6	$	561.3	$	1,011.4			15,472,856	$	(944.0	)	$	(109.6	)	$	519.7
Stock issuance, net		106,490			-		-		-			-		-			-			-
Cash dividends - $0.693 per common share		-			-		-		(32.7	)		-		-			-			(32.7	)
Share-based employee compensation		-			-		8.0		-			-		-			-			8.0
Net earnings		-			-		-		154.1			-		-			-			154.1
Other comprehensive income		-			-		-		-			-		-			17.1			17.1
Acquisition of treasury stock		(1,636,950	)		-		-		-			1,636,950		(145.0	)		-			(145.0	)
September 30, 2022		45,771,839		$	0.6	$	569.3	$	1,132.8			17,109,806	$	(1,089.0	)	$	(92.5	)	$	521.2

	Three Months Ended September 30, 2021
																Accumulated
						Additional										Other
	Common Stock					Paid-In		Retained			Treasury Stock					Comprehensive
	Shares			Amount		Capital		Earnings			Shares		Amount			(Loss)			Total
June 30, 2021		47,732,943		$	0.6	$	554.7	$	939.8			15,005,603	$	(893.9	)	$	(102.9	)	$	498.3
Stock issuance, net		1,608			-		-		-			-		-			-			-
Cash dividends - $0.21 per common share		-			-		-		(10.0	)		-		-			-			(10.0	)
Share-based employee compensation		-			-		3.0		-			-		-			-			3.0
Net earnings		-			-		-		50.8			-		-			-			50.8
Other comprehensive income		-			-		-		-			-		-			0.1			0.1
Acquisition of treasury stock		(186,929	)		-		-		-			186,929		(20.0	)		-			(20.0	)
September 30, 2021		47,547,622		$	0.6	$	557.7	$	980.6			15,192,532	$	(913.9	)	$	(102.8	)	$	522.2

	Nine Months Ended September 30, 2021
																Accumulated
						Additional										Other
	Common Stock					Paid-In		Retained			Treasury Stock					Comprehensive
	Shares			Amount		Capital		Earnings			Shares		Amount			(Loss)			Total
December 31, 2020		47,913,821		$	0.6	$	553.7	$	869.8			14,685,510	$	(863.9	)	$	(109.3	)	$	450.9
Stock issuance, net		140,823			-		-		-			-		-			-			-
Cash dividends - $0.63 per common share		-			-		-		(30.5	)		-		-			-			(30.5	)
Share-based employee compensation		-			-		4.0		-			-		-			-			4.0
Net earnings		-			-		-		141.3			-		-			-			141.3
Other comprehensive income		-			-		-		-			-		-			6.5			6.5
Acquisition of treasury stock		(507,022	)		-		-		-			507,022		(50.0	)		-			(50.0	)
September 30, 2021		47,547,622		$	0.6	$	557.7	$	980.6			15,192,532	$	(913.9	)	$	(102.8	)	$	522.2

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited


	Nine Months Ended
	September 30,
	2022			2021

Cash flows from operating activities:
Net earnings	$	154.1		$	141.3
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		63.5			74.3
Deferred income taxes		1.5			6.8
Share-based compensation		10.9			8.5
Loss on disposal of discontinued operations		-			0.4
Equity earnings from joint venture		(61.7	)		(68.1	)
U.S. pension (credit) cost		(0.6	)		0.1
Loss (gain) from change in fair value of contingent consideration		13.3			(9.8	)
Payments of contingent consideration in excess of acquisition date fair value		(1.9	)		-
Other non-cash adjustments, net		0.7			0.7
Changes in operating assets and liabilities:
Receivables		(18.9	)		(24.6	)
Inventories		(25.1	)		(9.8	)
Accounts payable and accrued expenses		4.2			27.5
Income taxes receivable and payable, net		(13.5	)		2.8
Other assets and liabilities		(7.3	)		(12.2	)
Net cash provided by operating activities		119.2			137.9
Cash flows from investing activities:
Purchases of property, plant and equipment		(46.5	)		(47.9	)
Return of investment from joint venture		54.1			55.0
Cash paid for acquisitions, net of cash acquired		-			(0.8	)
Payments to Knauf upon disposal of discontinued operations		-			(11.8	)
Other investing activities		0.5			0.1
Net cash provided by (used for) investing activities		8.1			(5.4	)
Cash flows from financing activities:
Proceeds from revolving credit facility		130.0			75.0
Payments of revolving credit facility		(60.0	)		(145.0	)
Payments of long-term debt		(18.7	)		(18.7	)
Dividends paid		(32.6	)		(30.4	)
Payments from share-based compensation plans, net of tax		(2.9	)		(4.5	)
Payments for finance leases		(1.7	)		(1.5	)
Payments of acquisition related contingent consideration		(6.7	)		-
Payments for treasury stock acquired		(145.0	)		(50.0	)
Net cash (used for) financing activities		(137.6	)		(175.1	)
Effect of exchange rate changes on cash and cash equivalents		(1.0	)		-
Net (decrease) in cash and cash equivalents		(11.3	)		(42.6	)
Cash and cash equivalents at beginning of year		98.1			136.9
Cash and cash equivalents at end of period	$	86.8		$	94.3
Supplemental Cash Flow Disclosures:
Interest paid	$	17.0		$	17.5
Income tax payments, net		52.3			40.1
Amounts in accounts payable for capital expenditures		1.2			0.3

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

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

Except as disclosed in this note, 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, 2021. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Operating results for the third quarter and first nine months of 2022 and 2021 included in this report are unaudited. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.

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 certain asset values, contingent purchase price liabilities, allowances for bad debts, inventory obsolescence and lower of cost and net realizable value charges, warranty reserves, workers’ compensation, general liability and environmental claims, and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information and may confer with outside parties, including external counsel. Actual results may differ from these estimates.

Certain prior year amounts have been recast in the Condensed Consolidated Financial Statements to conform to the 2022 presentation.

COVID-19 Considerations

The impact of the COVID-19 pandemic on our future consolidated results of operations remains uncertain. The extent to which COVID-19 impacts our employees, operations, customers, suppliers and financial results depends on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic (and whether there is a resurgence or multiple resurgences in the future, including the impact of new variants); government actions taken in response to the pandemic, including required shutdowns or vaccine or testing mandates; the availability, acceptance, distribution and continued effectiveness of vaccines; the impact on construction activity, including the effect on our customers' demand for our ceiling and wall systems; supply chain disruptions; rising inflation; labor shortages; sustained remote or hybrid work models; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. While many of our products support life sustaining activities and essential construction, we and certain of our customers or suppliers may be impacted by state actions, orders and policies regarding the COVID-19 pandemic, including; temporary closures of non-life-sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement of which vary by individual U.S. states and by individual countries in the Americas. We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the third quarter and first nine months of 2022 and 2021, but future events may require such charges which could have a material adverse effect on our financial condition, liquidity or results of operations.

NOTE 2. SEGMENT RESULTS


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net sales
Mineral Fiber	$	233.7	$	214.5	$	671.4	$	611.3
Architectural Specialties		91.3		77.7		257.2		212.8
Total net sales	$	325.0	$	292.2	$	928.6	$	824.1

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Segment operating income (loss)
Mineral Fiber	$	70.8		$	68.5		$	199.8		$	201.2
Architectural Specialties		3.4			5.0			11.0			7.5
Unallocated Corporate		(0.9	)		(1.4	)		(2.7	)		(4.2	)
Total consolidated operating income	$	73.3		$	72.1		$	208.1		$	204.5


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Total consolidated operating income	$	73.3		$	72.1		$	208.1		$	204.5
Interest expense		7.0			6.1			17.9			17.4
Other non-operating (income), net		(1.4	)		(1.4	)		(4.1	)		(4.3	)
Earnings from continuing operations before income taxes	$	67.7		$	67.4		$	194.3		$	191.4


	September 30, 2022		December 31, 2021
Segment assets
Mineral Fiber	$	1,132.6	$	1,133.9
Architectural Specialties		388.7		366.3
Unallocated Corporate		218.1		209.8
Total consolidated assets	$	1,739.4	$	1,710.0

NOTE 3. REVENUE

Disaggregation of Revenues

Our Mineral Fiber and Architectural Specialties operating segments both manufacture and sell ceiling and wall systems (primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt) throughout the Americas. We disaggregate revenue based on our product-based segments and major customer channels, as they represent the most appropriate depiction of how the nature, amount and timing of revenues and cash flows are affected by economic factors. Net sales by major customer channel are as follows:

Distributors – represents net sales to building materials distributors who re-sell our products to contractors, subcontractors’ alliances, large architecture and design firms, and major facility owners. Geographically, this category includes sales throughout the U.S., Canada, and Latin America.

Home centers – represents net sales to home centers, such as Lowe’s Companies, Inc. and The Home Depot, Inc. This category includes sales primarily to U.S. customers.

Direct customers – represents net sales to contractors, subcontractors, and large architect and design firms. This category includes sales primarily to U.S. customers.

Retailers and other – represents net sales to independent retailers and certain national account customers, including wholesalers who re-sell our products to dealers who service builders, contractors and consumers, online customers, major facility owners, group purchasing organizations and maintenance, repair and operating entities. Geographically, this category includes sales throughout the U.S., Canada and Latin America.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

The following tables provide net sales by major customer channel within our Mineral Fiber and Architectural Specialties segments for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Mineral Fiber	2022		2021		2022		2021
Distributors	$	173.8	$	161.5	$	495.0	$	453.5
Home centers		24.0		20.2		75.6		68.4
Direct customers		16.1		16.3		46.6		44.3
Retailers and other		19.8		16.5		54.2		45.1
Total	$	233.7	$	214.5	$	671.4	$	611.3


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Architectural Specialties	2022		2021		2022		2021
Distributors	$	44.7	$	41.4	$	129.4	$	116.0
Direct customers		45.3		35.7		125.0		94.6
Retailers and other		1.3		0.6		2.8		2.2
Total	$	91.3	$	77.7	$	257.2	$	212.8

NOTE 4. DISCONTINUED OPERATIONS

Separation and Distribution of Armstrong Flooring Inc.

On April 1, 2016, we completed our separation of Armstrong Flooring, Inc. ("AFI") by transferring the assets and liabilities related primarily to our Resilient and Wood Flooring segments to AFI and then distributing the common stock of AFI to our shareholders at a ratio of one share of AFI common stock for every two shares of AWI common stock. During the three and nine months ended September 30, 2022, we recorded a $1.0 million tax benefit related to federal tax statute of limitation closures.

EMEA and Pacific Rim Businesses

In 2019, we completed the sale of certain subsidiaries comprising our businesses and operations in Europe, the Middle East and Africa (including Russia) (“EMEA”) and the Pacific Rim, including the corresponding businesses and operations conducted by Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc. (“Worthington”) in which AWI holds a 50% interest (collectively, the “Sale”), to Knauf International GmbH (“Knauf”). We did not record a gain or loss during the three months ended September 30, 2021. During the nine months ended September 30, 2021, we recorded a pre-tax loss on sale of $0.4 million for final purchase price adjustments related to certain pension liabilities included in the Sale and paid $11.8 million to Knauf related to this purchase price adjustment. During the three and nine months ended September 30, 2022, we recorded a $2.0 million tax benefit related to federal tax statute of limitation closures.

Summarized Financial Information of Discontinued Operations

The following table details the line items that comprise discontinued operations on the Condensed Consolidated Statements of Earnings and Comprehensive Income.


	EMEA and Pacific Rim Businesses			AFI			Total
Three and Nine Months Ended September 30, 2022
Earnings from discontinued operations before income tax	$	-		$	-		$	-
Income tax benefit		(2.0	)		(1.0	)		(3.0	)
Net earnings from discontinued operations, net of tax	$	2.0		$	1.0		$	3.0

Net earnings from discontinued operations	$	2.0		$	1.0		$	3.0

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)


	EMEA and Pacific Rim Businesses
Nine Months Ended September 30, 2021
Loss from disposal of discontinued businesses, before income tax	$	(0.4	)
Income tax expense		1.7
Loss from disposal of discontinued businesses, net of tax	$	(2.1	)

Net loss from discontinued operations	$	(2.1	)

NOTE 5. ACCOUNTS AND NOTES RECEIVABLE


	September 30, 2022			December 31, 2021
Customer receivables	$	113.9		$	104.7
Miscellaneous receivables		9.2			7.9
Less allowance for warranties, discounts and losses		(3.7	)		(3.5	)
Accounts and notes receivable, net	$	119.4		$	109.1

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.

As of September 30, 2022 and December 31, 2021, miscellaneous receivables included $5.5 million and $5.9 million of Employee Retention Credit receivables, respectively, representing a refundable payroll tax credit for eligible wages paid to our employees in 2020 and 2021 under the Coronavirus Aid, Relief, and Economic Recovery Act.

NOTE 6. INVENTORIES


	September 30, 2022			December 31, 2021
Finished goods	$	65.2		$	49.9
Goods in process		7.9			6.4
Raw materials and supplies		62.8			48.4
Less LIFO reserves		(20.8	)		(14.5	)
Total inventories, net	$	115.1		$	90.2

NOTE 7. OTHER CURRENT ASSETS


	September 30, 2022		December 31, 2021
Prepaid expenses	$	16.9	$	17.2
Assets held for sale		4.6		4.6
Other		2.1		1.3
Total other current assets	$	23.6	$	23.1

As of September 30, 2022 and December 31, 2021, assets held for sale included the property, plant and equipment of our idled Mineral Fiber plant in St. Helens, Oregon.

NOTE 8. EQUITY INVESTMENT

Investment in joint venture reflects our 50% equity interest in WAVE. The WAVE joint venture is reflected within the Mineral Fiber segment in our condensed consolidated financial statements using the equity method of accounting. Condensed financial statement data for WAVE is summarized below.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net sales	$	116.9	$	114.2	$	356.3	$	321.5
Gross profit		64.0		64.5		180.1		188.0
Net earnings		46.7		49.1		130.0		143.2

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

NOTE 9. GOODWILL AND INTANGIBLE ASSETS

The following table details amounts related to our goodwill and intangible assets as of September 30, 2022 and December 31, 2021.


		September 30, 2022				December 31, 2021
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizing intangible assets
Customer relationships	1-20 years	$	181.4	$	139.5	$	196.7	$	144.8
Developed technology	13-20 years		93.4		83.2		92.9		82.6
Software	7 years		9.1		2.3		9.1		1.3
Trademarks and brand names	5-10 years		3.9		2.4		4.0		2.0
Non-compete agreements	3-5 years		5.6		2.3		5.6		1.4
Other	Various		0.4		0.1		0.4		0.1
Total		$	293.8	$	229.8	$	308.7	$	232.2
Non-amortizing intangible assets
Trademarks and brand names	Indefinite		345.0				344.9
Total intangible assets		$	638.8			$	653.6

Goodwill	Indefinite	$	166.6			$	167.0

The decrease in goodwill since December 31, 2021 resulted from foreign exchange movements.


	Nine Months Ended
	September 30,
	2022		2021
Amortization expense	$	12.8	$	28.0

NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES


	September 30, 2022		December 31, 2021
Payables, trade and other	$	106.6	$	105.8
Employment costs		21.5		30.3
Current portion of pension and postretirement liabilities		9.9		9.9
Acquisition-related contingent consideration		17.5		8.6
Other		23.2		20.3
Total accounts payable and accrued expenses	$	178.7	$	174.9

NOTE 11. INCOME TAX EXPENSE


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Earnings from continuing operations before income taxes	$	67.7		$	67.4		$	194.3		$	191.4
Income tax expense		13.2			16.6			43.2			48.0
Effective tax rate		19.5	%		24.6	%		22.2	%		25.1	%

The effective tax rate for the third quarter of 2022 was lower compared to the same period in 2021 primarily due to the benefits recognized from federal and state statute closures in the current year. The effective tax rate for the first nine months of 2022 was lower compared to the same period in 2021 due primarily to the benefits recognized from statute closures, in addition to a reduction in our valuation allowance for capital loss carryforwards.

It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be reliably made at this time. Changes to unrecognized tax benefits could result from the expiration of statutes of limitations, the completion of ongoing examinations, or other unforeseen circumstances.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

NOTE 12. DEBT

Our long-term debt is comprised of borrowings outstanding under our $1,000.0 million variable rate senior credit facility, which is comprised of a $500.0 million revolving credit facility (with a $150.0 million sublimit for letters of credit) and a $500.0 million Term Loan A. As of September 30, 2022 and December 31, 2021, the principal balance of our Term Loan A was $450.0 million and $468.7 million, respectively. As of September 30, 2022 and December 31, 2021, borrowings outstanding under our revolving credit facility were $235.0 million and $165.0 million, respectively. Additionally, we have a $25.0 million letter of credit facility, also known as our bi-lateral facility.

We utilize lines of credit and other commercial commitments to ensure that adequate funds are available to meet operating requirements. Letters of credit are currently arranged through our revolving credit facility and our bi-lateral facility. Letters of credit may be 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. The following table presents details related to our letters of credit facilities:


	September 30, 2022
Financing Arrangements	Limit		Used		Available
Bi-lateral facility	$	25.0	$	8.1	$	16.9
Revolving credit facility		150.0		-		150.0
Total	$	175.0	$	8.1	$	166.9

NOTE 13. PENSIONS AND OTHER BENEFIT PROGRAMS

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
U.S. defined benefit plans:
Pension benefits
Service cost of benefits earned during the period	$	1.0		$	1.2		$	2.8		$	3.6
Interest cost on projected benefit obligation		2.6			2.2			7.9			6.7
Expected return on plan assets		(4.6	)		(4.1	)		(13.8	)		(12.4	)
Amortization of net actuarial loss		1.0			0.9			3.1			2.7
Net periodic pension cost	$	-		$	0.2		$	-		$	0.6
Retiree health and life insurance benefits
Interest cost on projected benefit obligation	$	0.4		$	0.3		$	1.1		$	0.9
Amortization of prior service credit		(0.1	)		(0.1	)		(0.2	)		(0.2	)
Amortization of net actuarial gain		(0.7	)		(0.6	)		(2.1	)		(1.7	)
Net periodic postretirement (credit)	$	(0.4	)	$	(0.4	)	$	(1.2	)	$	(1.0	)

We also have an unfunded defined benefit pension plan in Germany, which was not included as part of prior dispositions. This plan is reported as a component of our Unallocated Corporate segment. Net periodic pension cost for this plan was immaterial for the three and nine months ended September 30, 2022 and 2021.

The service cost component of net benefit cost has been presented in the Condensed Consolidated Statements of Earnings and Comprehensive Income within cost of goods sold and selling, general and administrative ("SG&A") expenses for all periods presented, which are the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are presented in the Condensed Consolidated Statements of Earnings and Comprehensive Income separately from the service cost component within other non-operating (income) expense, net.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

NOTE 14. FINANCIAL INSTRUMENTS AND CONTINGENT CONSIDERATION

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


	September 30, 2022						December 31, 2021
	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value
Assets (liabilities), net:
Total long-term debt, including current portion	$	(683.3	)	$	(673.4	)	$	(631.4	)	$	(626.0	)
Interest rate swap contracts		11.2			11.2			(14.2	)		(14.2	)
Acquisition-related contingent consideration		(17.5	)		(17.5	)		(12.8	)		(12.8	)

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt are based on quotes from a major financial institution of recently observed trading levels of our Term Loan A debt. The fair value estimates for interest rate swap contracts are estimated by obtaining quotes from major financial institutions with verification by internal valuation models. We engage independent, third-party valuation specialists to determine the fair value estimate for acquisition-related contingent consideration payable based on future performance, which is measured using a Monte Carlo simulation. As of December 31, 2021, $8.6 million of the carrying amount of contingent consideration liabilities payable, related to final achievement of certain financial and performance milestones through December 31, 2021 for the acquisitions of Moz Designs, Inc. (“Moz”) in August 2020 and TURF Design, Inc. (“Turf”) in July 2020, was equal to fair value as milestone achievements were known.

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. Three levels of inputs may be used to measure fair value:

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

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

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

The fair value measurement of assets and liabilities measured at fair value on a recurring basis and reported on the Condensed Consolidated Balance Sheets is summarized below:


	September 30, 2022					December 31, 2021
	Fair value based on					Fair value based on
	Other observable inputs		Other unobservable inputs			Other observable inputs			Other unobservable inputs
	Level 2		Level 3			Level 2			Level 3
Assets (liabilities), net:
Interest rate swap contracts	$	11.2	$	-		$	(14.2	)	$	-
Acquisition-related contingent consideration		-		(17.5	)		-			(4.2	)

As of September 30, 2022 and December 31, 2021, the acquisition-related contingent consideration liability represents the estimated fair value of additional cash consideration payable related to our acquisition of Turf upon the achievement of certain financial and performance milestones through December 31, 2022. The liability was measured based on a Monte Carlo simulation and was classified as a current liability as of September 30, 2022.

Acquisition-related contingent consideration of $17.5 million and $4.2 million as of September 30, 2022 and December 31, 2021, respectively, was measured with the use of significant unobservable inputs, which included financial projections over the earn-out period, the volatility of the underlying financial metrics and estimated discount rates. All changes in the contingent consideration liability subsequent to the initial acquisition-date measurements were recorded as a component of operating income on our Condensed Consolidated Statements of Earnings and Comprehensive Income.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

The following table summarizes the weighted-average of the significant unobservable inputs used to measure Turf's acquisition-related contingent consideration as of September 30, 2022:


Unobservable input
Volatility	22.2	%
Discount rate	4.0	%

Unobservable inputs were weighted based on the relative fair value of the components of contingent consideration.

The changes in fair value of the acquisition-related contingent consideration liability for the three and nine months ended September 30, 2022 and 2021 were as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022		2021			2022			2021
Fair value of contingent consideration as of beginning of period	$	10.4	$	7.4		$	12.8		$	16.9
Cash consideration paid		-		-			(8.6	)		-
Loss (gain) related to change in fair value of contingent consideration		7.1		(0.3	)		13.3			(9.8	)
Fair value of contingent consideration as of end of period	$	17.5	$	7.1		$	17.5		$	7.1

During the nine months ended September 30, 2022, the change in fair value was primarily due to changes in Turf's financial projections over the earn out period. During the nine months ended September 30, 2022, we paid $8.6 million of additional cash consideration, which represented the final achievement of certain financial and performance milestones through December 31, 2021 for the acquisitions of Moz and Turf. The additional cash consideration paid was classified as cash flows from financing activities in our Condensed Consolidated Statements of Cash Flows, up to the acquisition date fair value. The portion of additional cash consideration paid in excess of the acquisition date fair value was classified as cash flows from operating activities in our Condensed Consolidated Statements of Cash Flows.

NOTE 15. 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, cash flows and financial condition. We use interest rate derivatives to manage our exposures to interest rates. At inception, interest rate swap derivatives that we designate as hedging instruments are formally documented as a hedge of a forecasted transaction or cash flow 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 the 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.

Counterparty Risk

We only enter into derivative transactions with established financial institution counterparties having an investment-grade credit rating. We monitor counterparty credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We do not post nor do we receive cash collateral with any counterparty for our derivative transactions. These ISDAs do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements. Exposure to individual counterparties is controlled and we consider the risk of counterparty default to be negligible.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

Interest Rate Risk

We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. These swaps are designated as cash flow hedges against changes in the London Interbank Offered Rate (“LIBOR”) for a portion of our variable rate debt. The following table summarizes our interest rate swaps as of September 30, 2022:


Trade Date	Notional Amount		Coverage Period	Risk Coverage
November 28, 2018	$	200.0	November 2018 to November 2023	USD-LIBOR
November 28, 2018	$	100.0	March 2021 to March 2025	USD-LIBOR
March 10, 2020	$	50.0	March 2021 to March 2024	USD-LIBOR
March 11, 2020	$	50.0	March 2021 to March 2024	USD-LIBOR
September 19, 2022	$	25.0	September 2022 to December 2023	USD-LIBOR

Under the terms of our interest rate swaps above, we pay a fixed rate monthly and receive 1-month LIBOR, inclusive of a 0% floor.

Financial Statement Impacts

The following tables detail amounts related to our derivatives as of September 30, 2022 and December 31, 2021. We did not have any derivative assets or liabilities not designated as hedging instruments as of September 30, 2022 or December 31, 2021. The derivative asset and liability amounts below are shown gross and have not been netted.


	Derivative Assets					Derivative Liabilities
		Fair Value					Fair Value
	Balance Sheet Location	September 30, 2022		December 31, 2021		Balance Sheet Location	September 30, 2022		December 31, 2021
Interest rate swap contracts	Other current assets	$	-	$	-	Accounts payable and accrued expenses	$	-	$	0.1
Interest rate swap contracts	Other non-current assets		11.2		0.4	Other long-term liabilities		-		14.5


	Amount of Gain Recognized in AOCI				Location of Gain Reclassified from AOCI into Net Earnings	Gain Reclassified from AOCI into Net Earnings
	Nine Months Ended					Three Months Ended				Nine Months Ended
	September 30,					September 30,				September 30,
	2022		2021			2022		2021		2022		2021
Derivatives in cash flow hedging relationships
Interest rate swap contracts	$	28.2	$	14.1	Interest expense	$	-	$	2.2	$	3.5	$	6.3

As of September 30, 2022, the amount of existing gains in Accumulated Other Comprehensive Income (“AOCI”) expected to be recognized in earnings over the next twelve months was $8.5 million.

NOTE 16. OTHER LONG-TERM LIABILITIES


	September 30, 2022		December 31, 2021
Long-term deferred compensation arrangements	$	17.5	$	17.6
Fair value of derivative liabilities		-		14.5
Environmental insurance recoveries received in excess of cumulative expenses incurred		3.7		4.8
Acquisition-related contingent consideration		-		4.2
Other		6.2		5.6
Total other long-term liabilities	$	27.4	$	46.7

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

NOTE 17. SHAREHOLDERS’ EQUITY

Common Stock Repurchase Plan

On July 29, 2016, our Board of Directors approved our share repurchase program pursuant to which we are authorized to repurchase up to $1,200.0 million of our outstanding shares of common stock through December 31, 2023 (the “Program”). We had $368.8 million remaining under the Board’s repurchase authorization as of September 30, 2022.

Repurchases under the Program may be made through open market, block and privately negotiated transactions, including Rule 10b5-1 plans, at such times and in such amounts as management deems appropriate, subject to market and business conditions, regulatory requirements and other factors. The Program does not obligate AWI to repurchase any particular amount of common stock and may be suspended or discontinued at any time without notice.

During the three months ended September 30, 2022, we repurchased 0.7 million shares under the Program for a total cost of $60.0 million, excluding commissions, or an average price of $86.11 per share. During the nine months ended September 30, 2022, we repurchased 1.6 million shares under the Program for a total cost of $145.0 million, excluding commissions, or an average price of $88.58 per share. Since inception, we have repurchased 12.1 million shares under the Program for a total cost of $831.2 million, excluding commissions, or an average price of $68.45 per share.

Dividends

In February, April and July 2022, our Board of Directors declared $0.231 per share quarterly dividends, which were paid to shareholders in March, May and August 2022. On October 19, 2022, our Board of Directors declared a $0.254 per share quarterly dividend to be paid in November 2022.

Accumulated Other Comprehensive (Loss)


	Foreign Currency Translation Adjustments			Derivative Gain (1)		Pension and Postretirement Adjustments (1)			Total Accumulated Other Comprehensive (Loss) (1)
Balance, June 30, 2022	$	2.1		$	4.5	$	(102.1	)	$	(95.5	)
Other comprehensive (loss) income before reclassifications, net of tax (expense) of $-, ($1.6), $- and ($1.6)		(2.1	)		4.9		-			2.8
Amounts reclassified from accumulated other comprehensive (loss)		-			-		0.2			0.2
Net current period other comprehensive (loss) income		(2.1	)		4.9		0.2			3.0
Balance, September 30, 2022	$	-		$	9.4	$	(101.9	)	$	(92.5	)


	Foreign Currency Translation Adjustments			Derivative (Loss) Gain (1)			Pension and Postretirement Adjustments (1)			Total Accumulated Other Comprehensive (Loss) (1)
Balance, December 31, 2021	$	2.3		$	(9.1	)	$	(102.8	)	$	(109.6	)
Other comprehensive (loss) income before reclassifications, net of tax (expense) of $-, ($6.9), ($0.1) and ($7.0)		(2.3	)		21.3			0.3			19.3
Amounts reclassified from accumulated other comprehensive (loss)		-			(2.8	)		0.6			(2.2	)
Net current period other comprehensive (loss) income		(2.3	)		18.5			0.9			17.1
Balance, September 30, 2022	$	-		$	9.4		$	(101.9	)	$	(92.5	)

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)


	Foreign Currency Translation Adjustments			Derivative (Loss) (1)			Pension and Postretirement Adjustments (1)			Total Accumulated Other Comprehensive (Loss) (1)
Balance, June 30, 2021	$	3.4		$	(14.1	)	$	(92.2	)	$	(102.9	)
Other comprehensive (loss) income before reclassifications, net of tax (expense) of $-, ($0.9), $- and ($0.9)		(0.8	)		2.5			(0.1	)		1.6
Amounts reclassified from accumulated other comprehensive (loss)		-			(1.7	)		0.2			(1.5	)
Net current period other comprehensive (loss) income		(0.8	)		0.8			0.1			0.1
Balance, September 30, 2021	$	2.6		$	(13.3	)	$	(92.1	)	$	(102.8	)


	Foreign Currency Translation Adjustments		Derivative (Loss) (1)			Pension and Postretirement Adjustments (1)			Total Accumulated Other Comprehensive (Loss) (1)
Balance, December 31, 2020	$	2.3	$	(19.0	)	$	(92.6	)	$	(109.3	)
Other comprehensive income (loss) before reclassifications, net of tax (expense) of $-, ($3.5), $- and ($3.5)		0.3		10.6			(0.1	)		10.8
Amounts reclassified from accumulated other comprehensive (loss)		-		(4.9	)		0.6			(4.3	)
Net current period other comprehensive income		0.3		5.7			0.5			6.5
Balance, September 30, 2021	$	2.6	$	(13.3	)	$	(92.1	)	$	(102.8	)

(1)

Amounts are net of tax


	Amounts Reclassified from Accumulated Other Comprehensive (Loss)												Affected Line Item in the Condensed Consolidated Statements of Earnings and Comprehensive Income
	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Derivative Adjustments:
Interest rate swap contracts, before tax	$	-		$	(2.2	)	$	(3.5	)	$	(6.3	)	Interest expense
Tax impact		-			0.5			0.7			1.4		Income tax expense
Total (income), net of tax		-			(1.7	)		(2.8	)		(4.9	)

Pension and Postretirement Adjustments:
Prior service credit amortization		(0.1	)		(0.1	)		(0.2	)		(0.2	)	Other non-operating (income), net
Amortization of net actuarial loss		0.3			0.3			1.0			1.0		Other non-operating (income), net
Total loss, before tax		0.2			0.2			0.8			0.8
Tax impact		-			-			(0.2	)		(0.2	)	Income tax expense
Total loss, net of tax		0.2			0.2			0.6			0.6
Total reclassifications for the period	$	0.2		$	(1.5	)	$	(2.2	)	$	(4.3	)

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

NOTE 18. LITIGATION AND RELATED MATTERS

ENVIRONMENTAL MATTERS

Environmental Compliance

Our manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. While these expenditures are not typically material, the applicable regulatory requirements continually change and, as a result, we cannot predict with certainty the amount, nature or timing of future expenditures associated with environmental compliance.

Environmental Sites

Summary

We are actively involved in the investigation and remediation of existing or potential environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and state Superfund and similar environmental laws at two domestically owned locations allegedly resulting from past industrial activity.

In each location, we are one of multiple potentially responsible parties and have agreed to jointly fund the required investigation and remediation, while preserving our defenses to the liability. We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. We have pursued coverage and recoveries under those applicable insurance policies with respect to certain of the sites, including the Macon, GA site and the Elizabeth City, NC site, each of which is summarized below. Other than disclosed below, we are unable to predict the outcome of these matters or the timing of any future recoveries, whether through settlement or otherwise. We are also unable to predict the extent to which any recoveries might cover our final share of investigation and remediation costs for these sites. Our final share of investigation and remediation costs may exceed any such recoveries, and such amounts net of insurance recoveries may be material.

Between 2017 and 2021, we entered settlement agreements totaling $53.0 million with certain legacy insurance carriers to resolve ongoing litigation and recover fees and costs previously incurred by us in connection with certain environmental sites. These settlements were initially recorded as reductions to cost of goods sold and SG&A expenses, reflecting the same income statement categories where environmental expenditures were historically recorded. Beginning in 2020, cumulative insurance recoveries exceeded cumulative expenses to date related to the respective environmental sites and the excess was recorded within long-term liabilities on our Condensed Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, insurance recoveries in excess of cumulative expenses were $3.7 million and $4.8 million, respectively. The excess recoveries will be released to offset any future expenses incurred on the respective environmental sites. We may enter into additional settlement agreements in the future, which may or may not be material, with other legacy insurers to obtain reimbursement or contribution for environmental site expenses.

Estimates of our future liability at the environmental sites are based on evaluations of currently available facts regarding each individual site. We consider factors such as our activities associated 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, the site activities of other parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters, and the effect of our October 2006 Chapter 11 reorganization upon the validity of the claim, if any.

Specific Material Events

Macon, GA

The U.S. Environmental Protection Agency (the “EPA”) has listed two landfills located on a portion of our facility in Macon, GA, along with the former Macon Naval Ordnance Plant landfill adjacent to our property, portions of Rocky Creek, and certain tributaries leading to Rocky Creek (collectively, the “Macon Site”) as a Superfund site on the National Priorities List due to the presence of contaminants, most notably polychlorinated biphenyls (“PCBs”).

In September 2010, we entered into an Administrative Order on Consent for a Removal Action (the “Removal Action”) with the EPA to investigate PCB contamination in one of the landfills on our property, the Wastewater Treatment Plant Landfill (the “WWTP Landfill,” also known as “Operable Unit 1”). After completing an investigation of the WWTP Landfill and submitting our final

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

Engineering Evaluation/Cost Analysis, the EPA issued an Action Memorandum in July 2013 selecting our recommended remedy for the Removal Action. The Operable Unit 1 response action for the WWTP Landfill is complete and the final report was submitted to the EPA in October 2016. The EPA approved the final report in November 2016, and a Post-Removal Control Plan was submitted to the EPA in March 2017.

It is probable that we will incur field investigation, engineering and oversight costs associated with a Remedial Investigation and Feasibility Study (“RI/FS”) with respect to the remainder of the Superfund site, which includes the other landfill on our property, as well as areas on and adjacent to our property and Rocky Creek (“Operable Unit 2”). In September 2015, AWI and other Potential Responsible Parties (“PRPs”) received a Special Notice Letter from the EPA under CERCLA inviting AWI and the PRPs to enter into the negotiation of an agreement to conduct an RI/FS of Operable Unit 2. We and the other PRPs entered into a settlement agreement with the EPA effective September 2018, in response to the Special Notice Letter to conduct the RI/FS. The PRPs submitted a complete RI/FS work plan, which was approved by the EPA in September 2019. Investigative work on this portion of the site commenced in December 2019.

In June 2021, the PRPs submitted the Site Characterization Summary Report (SCSR) for Operable Unit 2 to the EPA. The purpose of the SCSR is to demonstrate that the available data for Operable Unit 2 is adequate for the risk assessment and for the development of remedial action objectives. In May 2022, the PRPs submitted a Baseline Ecological Risk Assessment for Operable Unit 2 to the EPA. In August 2022, the PRPs submitted a Human Health Baseline Risk Assessment to the EPA. The PRPs are working on a draft Remedial Investigation Report and evaluating any additional investigation work needed for the Feasibility Study. We may ultimately incur costs in remediating any contamination discovered during the RI/FS. The current estimate of future liability at this site includes only our estimated share of the costs of the investigative work that the EPA is requiring the PRPs to perform at this time. We are unable to reasonably estimate our final share of the total costs associated with the investigation work or any resulting remediation therefrom, although such amounts may be material to any one quarter's or year's results of operations in the future. We do not expect the total future costs to have a material adverse effect on our liquidity or financial condition as the cash payments may be made over many years.

Elizabeth City, NC

This site is a former cabinet manufacturing facility that was operated by Triangle Pacific Corporation, now known as Armstrong Wood Products, Inc. (“AWP”), from 1977 until 1996. The site was formerly owned by the U.S. Navy (“Navy”) and Westinghouse, which was purchased by Paramount Global (“Paramount”) (then known as CBS Corporation). We assumed ownership of the site when we acquired the stock of AWP in 1998. Prior to our acquisition, the North Carolina Department of Environment and Natural Resources listed the site as a hazardous waste site. In 1997, AWP entered into a cost sharing agreement with Westinghouse whereby the parties agreed to share equally in costs associated with investigation and potential remediation. In 2000, AWP and Paramount entered into an Administrative Order on Consent to conduct an RI/FS with the EPA for the site. In 2007, we and Paramount entered into an agreement with the Navy whereby the Navy agreed to pay one third of defined past and future investigative costs up to a certain amount, which has now been exhausted. The EPA approved the RI/FS work plan in August 2011. In January 2014, we submitted draft Remedial Investigation and Risk Assessment reports and conducted supplemental investigative work based upon agency comments to those reports. In connection with the separation of Armstrong Flooring, Inc. in 2016, we agreed to retain any legacy environmental liabilities associated with the AWP site. The EPA published an Interim Action Proposed Plan for the site in April 2018 seeking public comment until June 2018. The EPA evaluated comments, including ours, and has published its Interim Record Of Decision selecting an interim cleanup approach. In September 2018, AWI and Paramount received a Special Notice Letter from the EPA under CERCLA inviting AWI and Paramount to enter into the negotiation of a settlement agreement to conduct or finance the response action at the site. In response to the September 2018 Special Notice Letter, we and Paramount submitted a good faith offer to the EPA in May 2019. In June 2021, we entered into a negotiated Partial Consent Decree and Site Participation Agreement with the EPA, Paramount and the United States on behalf of the Navy for the remedial design and remedial action for the interim remedy. Since the United States does not conduct work as a PRP at Superfund sites, similar to the 2007 agreement, the United States agreed to pay its share of the estimated costs of performing the work. The Partial Consent Decree was entered by the U.S. District Court for the Eastern District of North Carolina in January 2022. A Remedial Design Work Plan for the site was submitted to the EPA in June 2022. The current estimate of future liability at this site includes only our estimated share of the costs of the interim remedial action that, at this time, we anticipate the EPA will require the PRPs to perform. We are unable to reasonably estimate our final share of the total costs associated with the interim or final remediation at the site, although such amounts may be material to any one quarter’s or year’s results of operations in the future. We do not expect the total future costs to have a material adverse effect on our liquidity or financial condition as the cash payments may be made over many years.

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

Summary of Financial Position

Total liabilities of $0.4 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively, were recorded for environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. As of September 30, 2022, $0.4 million of environmental liabilities were reflected within other long-term liabilities on the Condensed Consolidated Balance Sheets. As of December 31, 2021, $0.2 million of environmental liabilities were reflected within accounts payable and accrued expenses and $0.5 million were reflected within other long-term liabilities on the Condensed Consolidated Balance Sheets. During the three months ended September 30, 2021 and September 30, 2022, we did not record any additional reserves for environmental liabilities. During the nine months ended September 30, 2022, we recorded $0.6 million of additional reserves for potential environmental liabilities. During the nine months ended September 30, 2021, we recorded $0.2 million of additional reserves for potential environmental liabilities. As noted above, expenses associated with the additional reserves recorded in 2022 and 2021 are offset through the release of a portion of the balance of insurance recoveries in excess of cumulative expenses. 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 remediation activities progress at each site, these liabilities are reviewed to reflect new information as it becomes available and adjusted to reflect amounts actually incurred and paid. These liabilities are undiscounted.

The estimated environmental liabilities above do not take into account any claims for additional recoveries from insurance or third parties. It is our policy to record insurance recoveries as assets in the Condensed Consolidated Balance Sheets when realizable. We incur costs to pursue environmental insurance recoveries, which are expensed as incurred.

Actual costs to be incurred at identified sites may vary from our estimates. Based on our knowledge of the identified sites, it is not possible to reasonably estimate future costs in excess of amounts already recognized.

OTHER CLAIMS

From time to time, we are involved in other various lawsuits, claims, investigations and other legal matters that arise in the ordinary course of business, including matters involving our products, intellectual property, relationships with suppliers, relationships with distributors, relationships with competitors, employees and other matters. In connection with those matters, we may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. When applicable and appropriate, we will pursue coverage and recoveries under those policies, but are unable to predict the outcome of those demands. While complete assurance cannot be given to the outcome of any proceedings relating to these matters, we do not believe that any current claims, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

NOTE 19. EARNINGS PER SHARE

The following table is a reconciliation of earnings to earnings attributable to common shares used in our basic and diluted Earnings Per Share (“EPS”) calculations for the three and nine months ended September 30, 2022 and 2021. EPS components may not add due to rounding.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Earnings from continuing operations	$	54.5		$	50.8		$	151.1		$	143.4
(Earnings) allocated to participating vested share awards		(0.1	)		(0.1	)		(0.2	)		(0.2	)
Earnings from continuing operations attributable to common shares	$	54.4		$	50.7		$	150.9		$	143.2

The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the three and nine months ended September 30, 2022 and 2021 (shares in millions):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Basic shares outstanding		46.1		47.5		46.6		47.7
Dilutive effect of common stock equivalents		-		0.3		0.1		0.3
Diluted shares outstanding		46.1		47.8		46.7		48.0

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

Anti-dilutive stock awards excluded from the computation of dilutive EPS for the three and nine months ended September 30, 2022 were 3,812 and 6,202, respectively. There were no anti-dilutive stock awards excluded from the computation of diluted EPS for the three months ended September 30, 2021. Anti-dilutive stock awards excluded from the computation of dilutive EPS for the nine months ended September 30, 2021 were 11,397.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, the accompanying notes, the cautionary note regarding forward-looking statements and risk factors included in this report and our Annual Report on Form 10-K for the year ended December 31, 2021.

OVERVIEW

AWI is a leader in the design, innovation and manufacture of ceiling and wall solutions in the Americas. Our products primarily include mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt. We also manufacture ceiling suspension system (grid) products through a joint venture with Worthington Industries, Inc. ("Worthington") called Worthington Armstrong Venture ("WAVE").

COVID-19

The impact of the COVID-19 pandemic on our future consolidated results of operations remains uncertain. During 2020, we noted delays in construction driven by temporary closures of non-essential businesses, with the most significant impacts in certain major metropolitan areas impacted by COVID-19. Beginning in 2021, market conditions began to improve as the impact of the pandemic lessened. Throughout the first nine months of 2022, our results of operations have continued to be impacted by delays in construction starts and extended project timelines, in addition to higher inflation, all of which were related, in part, to the pandemic and subsequent recovery. We continue to monitor and manage the impact of COVID-19 and its potential impacts to our business.

As of September 30, 2022, all of our manufacturing facilities were operational, excluding our St. Helens, Oregon facility which was idled in the second quarter of 2018. In an effort to operate safely and responsibly, we continue to follow guidelines from governmental health authorities across all our facilities.

We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the first nine months of 2022 or the full year of 2021, although future events may require such charges. We will continue to evaluate the nature and extent of the COVID-19 pandemic’s impact on our financial condition, results of operations and cash flows.

Manufacturing Plants

As of September 30, 2022, we operated 16 manufacturing plants in two countries, with 14 plants located within the U.S. and two plants in Canada. This includes our closed St. Helens, Oregon mineral fiber manufacturing plant, which was closed in the second quarter of 2018. The facility was classified as an asset held for sale as of September 30, 2022.

WAVE operates six additional plants in the U.S. to produce suspension system (grid) products, which we use and sell in our ceiling systems.

Reportable Segments

Our operating segments are as follows: Mineral Fiber, Architectural Specialties and Unallocated Corporate.

Mineral Fiber – produces suspended mineral fiber and soft fiber ceiling systems. Our mineral fiber products offer various performance attributes such as acoustical control, rated fire protection, aesthetic appeal, and health and sustainability features. Ceiling products are sold to resale distributors, ceiling systems contractors and wholesalers and retailers (including large home centers). The Mineral Fiber segment also includes the results of WAVE, which manufactures and sells suspension system (grid) products and ceiling component products that are invoiced by both AWI and WAVE. Segment results relating to WAVE consist primarily of equity earnings and reflect our 50% equity interest in the joint venture. Ceiling component products consist of ceiling perimeters and trim, in addition to grid products that support drywall ceiling systems. For some customers, WAVE sells its suspension systems products to AWI for resale to customers. Mineral Fiber segment results reflect those sales transactions. The Mineral Fiber segment also includes all assets and liabilities not specifically allocated to our Architectural Specialties or Unallocated Corporate segment, including all property and related depreciation associated with our Lancaster, PA headquarters. Operating results for the Mineral Fiber segment include a significant majority of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.

Architectural Specialties – produces, designs and sources ceilings and walls for use in commercial settings. Products are available in numerous materials, such as metal, felt and wood, in addition to various colors, shapes and designs. Products offer various performance attributes such as acoustical control, rated fire protection and aesthetic appeal. We sell standard, premium and

Management’s Discussion and Analysis of Financial Condition and Results of Operations

customized products, a portion of which are derived from sourced products. Architectural Specialties products are sold primarily to resale distributors and direct customers, primarily ceiling systems contractors. The majority of this segment's revenues are project driven, which can lead to more volatile sales patterns due to project scheduling uncertainty. Operating results for the Architectural Specialties segment include a portion of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.

Unallocated Corporate – includes certain assets, liabilities, income and expenses that have not been allocated to our other business segments and consists of: cash and cash equivalents, the net funded status of our U.S. Retirement Income Plan (“RIP”), the estimated fair value of interest rate swap contracts, outstanding borrowings under our senior credit facility and income tax balances. Our Unallocated Corporate segment also includes all expenses related to our German defined benefit pension plan that was formerly reported in our Europe, the Middle East and Africa (including Russia) (“EMEA”) and Pacific Rim segments and was not included in the sale of certain subsidiaries comprising our businesses and operations in EMEA and the Pacific Rim to Knauf International GmbH.

Factors Affecting Revenues

For information on our segments' 2022 net sales by segment, see Notes 2 and 3 to the Condensed Consolidated Financial Statements.

Markets. We compete in the building product construction markets of the Americas. We closely monitor publicly available macroeconomic trends that provide insight into commercial construction market activity, including, but not limited to, GDP, office vacancy rates, the Architecture Billings Index, new commercial construction starts, state and local government spending, corporate profits and retail sales. The company continues to monitor the impacts of global events, including the conflict in Ukraine, which due to our Americas-only geography, had minimal direct impact on our results of operations during the first nine months of 2022.

We noted several factors and trends within our markets that directly affected our business performance during the third quarter of 2022 compared to the third quarter of 2021, most importantly the elongated economic recovery due to the lessoning impact from the COVID-19 pandemic combined with on-going challenges to global supply chains and labor availability, in addition to the impact of higher inflation. Our results benefited from improved performance within our Architectural Specialties segment, primarily driven by our recent acquisitions. For the three months and nine months ended September 30, 2022, increased sales volumes contributed $17 million and $40 million, respectively, to revenue compared to the same periods in 2021.

Average Unit Value. We periodically modify sales prices of our products due to changes in costs for raw materials and energy, market conditions and the competitive environment. Typically, realized price increases are less than announced price increases because of project pricing, competitive adjustments and changing market conditions. We also offer a wide assortment of products that are differentiated by style, design and performance attributes. Pricing and margins for products within the assortment vary. In addition, changes in the relative quantity of products purchased at different price points can impact year-to-year comparisons of net sales and operating income. Within our Mineral Fiber segment, we focus on improving sales dollars per unit sold, or average unit value (“AUV”), as a measure that accounts for the varying assortment of products and like-for-like pricing impacting our revenues. We estimate that favorable AUV increased our total consolidated net sales for the three and nine months ended September 30, 2022 by approximately $16 million and $64 million, respectively, compared to the same periods in 2021. Our Architectural Specialties segment revenues are primarily earned based on individual contracts that include a mix of products, both manufactured by us and sourced from third parties, which varies by project. As such, we do not track AUV performance for this segment, but attribute most changes in sales to volume.

During the first three quarters of 2022, we implemented multiple price increases on Mineral Fiber ceiling, grid products and certain Architectural Specialties products. In the third quarter of 2022, we announced increases on Mineral Fiber ceiling and certain Architectural Specialties products that will go into effect in the fourth quarter. We may implement future pricing actions based on numerous factors, namely the rate and pace of inflation impact on our business.

Seasonality. Historically, our sales tend to be stronger in the second and the third quarters of our fiscal year due to more favorable weather conditions, customer business cycles and the timing of renovation and new construction.

Factors Affecting Operating Costs

Operating Expenses. Our operating expenses are comprised of direct production costs (principally raw materials, labor and energy), manufacturing overhead costs, freight, costs to purchase sourced products and selling, general and administrative (“SG&A”) expenses.

Our largest raw material expenditures are primarily for fiberglass, perlite, recycled paper and starch. Other raw materials include aluminum, clays, felt, pigment, steel, wood and wood fiber. We manufacture most of our mineral wool needs at one of our

Management’s Discussion and Analysis of Financial Condition and Results of Operations

manufacturing facilities. Natural gas and packaging materials are also significant input costs. Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results. Global supply chain and labor disruptions have contributed to raw material, natural gas and transportation cost inflation. For the three and nine months ended September 30, 2022, higher costs for raw materials and energy negatively impacted operating income by $11 million and $28 million, respectively, compared to the same periods in 2021.

2020 Acquisition-Related Expenses and (Gains) Losses

In connection with our acquisitions of TURF Design, Inc. (“Turf”) in July 2020, Moz Designs, Inc. (“Moz”) in August 2020, and Arktura LLC (“Arktura”) in December 2020, we recorded certain acquisition-related expenses and (gains) losses to operating income in the three and nine months ended September 30, 2022 and 2021, summarized as follows (dollar amounts in millions):


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022		2021			2022		2021			Affected Line Item in the Condensed Consolidated Statement of Earnings and Comprehensive Income
Deferred revenue	$	-	$	-		$	-	$	0.7		Net sales
Loss (gain) related to change in fair value of contingent consideration		7.1		(0.3	)		13.3		(9.8	)	Loss (gain) related to change in fair value of contingent consideration
Deferred cash and restricted stock expenses		1.9		3.3			5.9		9.8		SG&A expenses
Inventory		-		-			-		0.3		Cost of goods sold
Net negative impact to operating income	$	9.0	$	3.0		$	19.2	$	1.0

The deferred revenue and inventory amounts above reflect the post-acquisition expenses associated with recording these liabilities and assets at fair value as part of purchase accounting. The change in fair value of contingent consideration is related to our Moz and Turf acquisitions and is remeasured quarterly during each acquisition’s respective earn-out period. See Note 14 to the Condensed Consolidated Financial Statements for further information. Expenses related to the deferred cash and restricted stock awards for Arktura’s former owners and employees are recorded over their respective service periods, as such payments are subject to the awardees’ continued employment with AWI. Depreciation of fixed assets acquired and amortization of intangible assets acquired have been excluded from the table above.

Employees

As of September 30, 2022 and December 31, 2021, we had approximately 2,960 and 2,820 full-time and part-time employees, respectively.

RESULTS OF CONTINUING OPERATIONS

Please refer to Notes 2 and 4 to the Condensed Consolidated Financial Statements for a reconciliation of operating income to consolidated earnings from continuing operations before income taxes and additional financial information related to discontinued operations.

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)


	2022		2021		Change is Favorable
Three Months Ended September 30,
Total consolidated net sales	$	325.0	$	292.2		11.2	%
Operating income	$	73.3	$	72.1		1.7	%

Nine Months Ended September 30,
Total consolidated net sales	$	928.6	$	824.1		12.7	%
Operating income	$	208.1	$	204.5		1.8	%

Consolidated net sales for the third quarter of 2022 increased 11.2% from prior-year results with higher volumes contributing $17 million and favorable AUV contributing $16 million. Mineral Fiber net sales increased $19 million and Architectural Specialties net

Management’s Discussion and Analysis of Financial Condition and Results of Operations

sales increased $14 million from third-quarter 2021 results. The increase in Mineral Fiber net sales was driven by improved AUV, due to favorable price partially offset by negative customer channel mix, and higher volumes. Architectural Specialties net sales growth resulted from improved performance from our recent acquisitions compared to the same period in 2021 and positive impacts from increases in custom project sales.

Consolidated net sales for the first nine months of 2022 increased 12.7 % from the prior-year as favorable AUV contributed $64 million and higher volumes contributed $40 million. Mineral Fiber net sales increased $60 million year-over-year and Architectural Specialties net sales increased $44 million. The increase in Mineral Fiber net sales was driven by improved AUV and partially offset by lower volumes. The favorable AUV was driven by favorable price, partially offset by negative customer channel mix. The lower volumes resulted primarily from a reduction of inventory levels at certain distributor customers earlier in 2022 in addition to a deceleration of market conditions throughout the third quarter. Architectural Specialties net sales increased due to improved performance from our recent acquisitions compared to the same period in 2021 and positive impacts from increases in custom project sales.

Cost of goods sold in the third quarter of 2022 was 63.8% of net sales, compared to 62.1% for the same period in 2021. Cost of goods sold in the first nine months of 2022 was 63.6% of net sales, compared to 63.2% for the same period in 2021. The increase in cost of goods sold in both periods was driven by higher input cost inflation, partially offset by favorable AUV performance and improved manufacturing productivity.

SG&A expenses in the third quarter of 2022 were $59.3 million, or 18.2% of net sales, compared to $62.3 million, or 21.3% of net sales, for the same period in 2021. The third-quarter 2022 decrease in SG&A expenses was driven primarily by a $4 million decrease in intangible asset amortization and acquisition-related expenses related to the Architectural Specialties segment, and a $3 million decrease in incentive compensation expense partially offset by a $2 million benefit recorded in the prior-year period related to a 2020 Coronavirus Aid, Relief, and Economic Act Employee Retention Credit (“ERC Benefit”) and a $1 million increase in selling expenses.

SG&A expenses in the first nine months of 2022 were $177.9 million, or 19.2% of net sales, compared to $176.5 million, or 21.4% of net sales, for the 2021 period. The increase in SG&A expenses for the first nine months of 2022 compared to the same period in 2021 was driven by a $14 million increase in selling expenses in support of increased sales and growth initiatives and a $2 million ERC Benefit recorded in the prior-year period partially offset by a $15 million decrease in intangible asset amortization and acquisition-related expenses related to the Architectural Specialties segment.

During the third quarter and first nine months of 2022, we recorded $7.1 million and $13.3 million, respectively, of remeasurement losses for changes in the fair value of contingent consideration related to the acquisition of Turf. During the same periods in 2021, we recorded $0.3 million and $9.8 million, respectively, of remeasurement gains related to the acquisitions of Turf and Moz. See Note 14 to the Condensed Consolidated Financial Statements for further information.

Equity earnings from our WAVE joint venture were $22.2 million in the third quarter of 2022, compared to $23.4 million in the prior-year period, and were $61.7 million in the first nine months of 2022 compared to $68.1 million in the first nine months of 2021. The decrease in WAVE earnings during the third quarter and first nine months of 2022 compared to the same periods in 2021 resulted primarily from lower volumes and higher steel cost partially offset by favorable AUV. Volumes for WAVE during the first nine months of 2022 were negatively impacted by a reduction of inventory levels at certain distributor customers in addition to a deceleration of market conditions throughout the third quarter. See Note 8 to the Condensed Consolidated Financial Statements for further information.

Interest expense was $7.0 million in the third quarter of 2022 compared to $6.1 million in the third quarter of 2021. Interest expense was $17.9 million in the first nine months of 2022 compared to $17.4 million in the first nine months of 2021. The increase in interest expense was primarily due to higher interest rates on floating rate debt.

Other non-operating income, net, was $1.4 million in the third quarter of 2022 and 2021. Other non-operating income, net, was $4.1 million in the first nine months of 2022, compared to $4.3 million in the first nine months of 2021. Other non-operating income, net, is primarily comprised of the non-service cost components of pension and postretirement net period benefit costs.

Income tax expense was $13.2 million in the third quarter of 2022 compared to $16.6 million in the third quarter of 2021. The effective tax rate for the third quarter of 2022 was 19.5% compared to 24.6% for the same period of 2021. The effective tax rate for the third quarter of 2022 was lower compared to the same period in 2021 primarily due to the benefits recognized from federal and state statute closures in the current year.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Income tax expense was $43.2 million in the first nine months of 2022 compared to $48.0 million in the first nine months of 2021. The effective tax rate was 22.2% in the first nine months of 2022 compared to 25.1% in the same period of 2021. The effective tax for the first nine months of 2022 was lower compared to the same period in 2021 primarily due to the benefits recognized from statute closures, in addition to a reduction in our valuation allowance for capital loss carryforwards.

Total Other Comprehensive Income (“OCI”) was $3.0 million in the third quarter of 2022 compared to $0.1 million in the third quarter of 2021. OCI was $17.1 million in the first nine months of 2022 compared to $6.5 million in the first nine months of 2021. The increase in OCI in the third quarter and first nine months of 2022 compared to the same periods in 2021 was primarily driven by derivative gains. Derivative gain represents the mark-to-market value adjustments of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI. Also impacting the change in OCI were foreign currency translation adjustments and pension and postretirement adjustments. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. Amounts in the third quarter and first nine months of 2022 and 2021 were driven primarily by changes in the Canadian dollar. Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans.

REPORTABLE SEGMENT RESULTS

Mineral Fiber

(dollar amounts in millions)


	2022		2021		Change is Favorable/(Unfavorable)
Three Months Ended September 30,
Total segment net sales	$	233.7	$	214.5		9.0	%
Operating income	$	70.8	$	68.5		3.4	%

Nine Months Ended September 30,
Total segment net sales	$	671.4	$	611.3		9.8	%
Operating income	$	199.8	$	201.2		(0.7	)%

Third-quarter 2022 net sales increased $19 million compared to the prior-year period due to favorable AUV of $16 million and higher sales volumes of $3 million. For the first nine months of 2022, net sales improved $60 million from the prior-year period due to favorable AUV of $64 million, partially offset by a negative impact of $4 million from lower sales volumes. The improvement in AUV in both the third quarter and first nine months of 2022 was driven by favorable price, partially offset by negative customer channel mix. The volume increase for the third quarter of 2022 was driven by growth in the home center customer channel and growth in Latin America, partially offset by headwinds from a deceleration of market conditions throughout the third quarter. Volumes for the first nine months of 2022 were negatively impacted by a reduction of inventory levels at certain distributor customers earlier in 2022 in addition to deceleration of market conditions throughout the third quarter.

Third-quarter 2022 operating income increased from the prior-year period primarily due to a $16 million favorable AUV margin impact, a $3 million decrease in incentive compensation expense, and a $2 million increase resulting from higher sales volumes. These increases were partially offset by a $16 million increase in manufacturing costs, primarily driven by elevated raw material and energy inflation and a $2 million ERC benefit recorded in the prior-year period.

Operating income for the first nine months of 2022 compared to the same period in 2021 benefited from a $55 million favorable AUV margin impact, offset by a $37 million increase in manufacturing costs, primarily driven by increased raw material and energy costs, a $7 million increase in selling expenses, primarily due to investments in growth initiatives, a $6 million decrease in equity earnings, a $4 million decrease resulting from lower sales volumes and a $2 million ERC benefit recorded in the prior-year period.

Architectural Specialties

(dollar amounts in millions)


	2022		2021		Change is Favorable/(Unfavorable)
Three Months Ended September 30,
Total segment net sales	$	91.3	$	77.7		17.5	%
Operating income	$	3.4	$	5.0		(32.0	)%

Nine Months Ended September 30,
Total segment net sales	$	257.2	$	212.8		20.9	%
Operating income	$	11.0	$	7.5		46.7	%

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net sales increased $14 million and $44 million in the third quarter and first nine months of 2022, respectively, compared to the prior-year periods. These increases were primarily due to improved performance from our recent acquisitions compared to the same periods in 2021 and positive impacts from custom project sales.

Operating income for the third quarter of 2022 compared to the same period in 2021 was positively impacted by a $7 million margin benefit from increased sales and a $2 million reduction in intangible asset amortization, partially offset by higher selling expenses of $2 million and a $2 million increase in manufacturing costs. The year-over-year decrease in operating income was also impacted by a $6 million increase in acquisition-related expenses and losses, primarily due to the change in the fair value of contingent consideration.

Operating income for the first nine months of 2022 compared to the same period in 2021 was positively impacted by a $23 million margin benefit from increased sales and an $11 million reduction in intangible asset amortization, partially offset by higher selling expenses of $7 million, primarily related to additional investments in selling capabilities and incentive compensation, and a $5 million increase in manufacturing costs. Also impacting the change in operating income was a $19 million increase in acquisition-related expenses and losses, primarily due to the change in the fair value of contingent consideration.

Unallocated Corporate

Unallocated Corporate operating loss was $1 million in the third quarter of 2022 and 2021. Unallocated Corporate operating loss was $3 million in the first nine months of 2022, compared to $4 million in the first nine months of 2021.

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow

Operating activities for the first nine months of 2022 provided $119.2 million of cash, compared to $137.9 million in the first nine months of 2021. The decrease was primarily due to negative working capital changes in accounts payable and accrued expenses and inventory, primarily due to timing and an increase in income tax payments. These decreases were partially offset by higher cash earnings.

Net cash provided by investing activities was $8.1 million in the first nine months of 2022, compared to $5.4 million used in the first nine months of 2021. The favorable change in cash compared to the same period in 2021 was primarily due to the absence of the purchase price adjustments paid to Knauf.

Net cash used for financing activities was $137.6 million in the first nine months of 2022, compared to $175.1 million in the first nine months of 2021. The favorable change in cash was primarily due to an increase in net borrowings under our revolving credit facility, partially offset by an increase in repurchases of outstanding common stock and payments of acquisition-related contingent consideration in 2022.

Liquidity

Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal cash flow needs, since cash flow is historically lower during the first and fourth quarters of our fiscal year. We have a $1,000.0 million variable rate senior credit facility, which is comprised of a $500.0 million revolving credit facility (with a $150.0 million sublimit for letters of credit) and a $500.0 million Term Loan A. The revolving credit facility and Term Loan A are currently priced at 1.50% over LIBOR. The senior credit facility also has a $25.0 million letter of credit facility, also known as our bi-lateral facility. The revolving credit facility and Term Loan A mature in September 2024. The $1,000.0 million senior credit facility is secured by the capital stock of material U.S. subsidiaries and a pledge of 65% of the stock of our material first-tier foreign subsidiary in Canada. The unpaid balances of the revolving credit facility and Term Loan A may be prepaid without penalty at the maturity of their respective interest reset periods. Any principal amounts paid on the Term Loan A may not be re-borrowed.

As of September 30, 2022, total borrowings outstanding under our senior credit facility were $450.0 million under Term Loan A and $235.0 million under the revolving credit facility.

The senior credit facility includes two financial covenants that require the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated cash interest expense minus cash consolidated interest income to be greater than or equal to 3.0 to 1.0 and requires the ratio of consolidated funded indebtedness, minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million, to EBITDA to be less than or equal to 3.75 to 1.0. As of September 30, 2022, we were in compliance with all covenants of the senior credit facility.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Term Loan A is currently priced on a variable interest rate basis. The following table summarizes our interest rate swaps (dollar amounts in millions):


Trade Date	Notional Amount		Coverage Period	Risk Coverage
November 28, 2018	$	200.0	November 2018 to November 2023	USD-LIBOR
November 28, 2018	$	100.0	March 2021 to March 2025	USD-LIBOR
March 10, 2020	$	50.0	March 2021 to March 2024	USD-LIBOR
March 11, 2020	$	50.0	March 2021 to March 2024	USD-LIBOR
September 19, 2022	$	25.0	September 2022 to December 2023	USD-LIBOR

Under the terms of our interest rate swaps above, we pay a fixed rate monthly and receive 1-month LIBOR, inclusive of a 0% floor.

These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt.


	September 30, 2022
Financing Arrangements	Limit		Used		Available
Bi-lateral facility	$	25.0	$	8.1	$	16.9
Revolving credit facility		150.0		-		150.0
Total	$	175.0	$	8.1	$	166.9

As of September 30, 2022, we had $86.8 million of cash and cash equivalents, $73.0 million in the U.S. and $13.8 million in various foreign jurisdictions, primarily Canada. As of September 30, 2022, we also had $265.0 million available under our revolving credit facility. We believe cash on hand and cash generated from operations, together with borrowing capacity under our credit facility, will be adequate to address our near-term liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates disclosed in our 2021 Annual Report on Form 10-K.

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 Annual Report on Form 10-K for the year ended December 31, 2021.

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, as amended (the “Act”), 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 principal executive officer and our chief financial officer, as of September 30, 2022, our principal 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 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting. There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the second quarter of 2022, we changed our enterprise resource planning system. In connection with this change, we have updated the processes that comprise the Company's internal control over financial reporting, as necessary, to accommodate related changes in the Company's systems and business processes. To date, this change has not had, and the Company does not believe it will have in the future, an adverse effect on the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 18 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our 2021 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Approximate Value of Shares that may yet be Purchased under the Plans or Programs
July 1 – 31, 2022		168,449	$	79.82		168,292	$	415,353,688
August 1 – 31, 2022		355,543	$	89.71		355,543	$	383,457,747
September 1 – 30, 2022		173,072	$	84.82		172,960	$	368,787,991
Total		697,064				696,795

(1)

Includes shares reacquired through the withholding of shares to pay employee tax obligations upon the exercise of options or vesting of restricted shares previously granted under our long-term incentive plans.

During the three months ended September 30, 2022, we repurchased 0.7 million shares under the Program for a total cost of $60.0 million, excluding commissions, or an average price of $86.11 per share. During the nine months ended September 30, 2022, we repurchased 1.6 million shares under the Program for a total cost of $145.0 million, excluding commissions, or an average price of $88.58 per share. Since inception, through September 30, 2022, we have repurchased 12.1 million shares under the Program for a total cost of $831.2 million, excluding commissions, or an average price of $68.45 per share.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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


Exhibit No.		Description

31.1		Certification of Chief Executive Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. †

31.2		Certification of Chief Financial Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. †

32.1		Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section 1350. ††

32.2		Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section 1350. ††

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. †

101.SCH		Inline XBRL Taxonomy Extension Schema. †

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase. †

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase. †

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase. †

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase. †

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 has been formatted in Inline XBRL.

† Filed herewith.

†† Furnished herewith.

SIGNATURES

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


	Armstrong World Industries, Inc.

By:		/s/ Christopher P. Calzaretta
		Christopher P. Calzaretta, Senior Vice President and
		Chief Financial Officer (Principal Financial Officer)

By:		/s/ James T. Burge
		James T. Burge, Vice President and
		Controller (Principal Accounting Officer)

Date: October 25, 2022