NOTE 3. DISCONTINUED OPERATIONS

Separation and Distribution of AFI

On April 1, 2016, in connection with the separation and distribution of AFI, we entered into several agreements with AFI that, together with a plan of division, provide for the separation and allocation between AWI and AFI of the flooring assets, employees, liabilities and obligations of AWI and its subsidiaries attributable to periods prior to, at and after AFI’s separation from AWI, and govern the relationship between AWI and AFI subsequent to the completion of the separation and distribution.

These agreements include a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Transition Trademark License Agreement and a Campus Lease Agreement.

Under the Transition Services Agreement, AWI and AFI will provide various services to each other during a transition period expiring no later than December 31, 2017, including information technology, accounts payable, payroll, and other financial functions and administrative services. We do not anticipate the Transition Services Agreement will need to be extended beyond December 31, 2017.

The Tax Matters Agreement generally governs AWI’s and AFI’s respective rights, responsibilities and obligations after the separation and distribution with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and other matters regarding taxes for any tax period ending on or before the distribution date, as well as tax periods beginning after the distribution date. In addition, the Tax Matters Agreement provides that AFI is liable for taxes incurred by AWI that may arise if AFI takes, or fails to take, certain actions that may result in the separation, the distribution or certain related transactions failing to qualify as tax-free for U.S. federal income tax purposes. Upon distribution, AWI received an opinion from its tax counsel that the separation and distribution qualified as a tax-free transaction for AWI and its shareholders.

The Employee Matters Agreement governs certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of AWI and AFI. Pursuant to this agreement and in connection with the distribution, AWI transferred assets and liabilities from the AWI defined benefit pension and postretirement plans to AFI that relate to active AFI employees and certain former AFI employees to mirror plans established by AFI. Based on preliminary analyses provided by our actuaries, approximately $28.0 million and approximately $90.0 million of U.S. defined benefit pension and U.S. postretirement benefit plan net liabilities under AWI’s plans as of April 1, 2016, respectively, were transferred to mirror plans established by AFI during the second quarter of 2016. During the third quarter of 2016, we reduced the total U.S. defined benefit pension and U.S. postretirement benefit plan net liabilities transferred to AFI by approximately $26.0 million and $4.0 million, respectively, based on updated actuarial analyses. The reduction was due to an increase in estimated plan assets transferred to AFI in comparison to our original estimate. The total net U.S. defined benefit plan liability transferred to AFI of $2.0 million consisted of an approximately $364.0 million projected benefit obligation, partially offset by the fair value of approximately $362.0 million of plan assets.

Pursuant to the Trademark License Agreement, AWI provided AFI with a perpetual, royalty-free license to utilize the “Armstrong” trade name and logo. Pursuant to the Transition Trademark License Agreement, AFI provided us with a five-year royalty-free license to utilize the “Inspiring Great Spaces” tagline, logo and related color scheme.

Under the Campus Lease Agreement, certain portions of the AWI headquarters are being leased to AFI to use as its corporate headquarters for an initial term of five years, subject to certain renewal rights.

The following is a summary of the results of operations related to AFI, our former Resilient Flooring and Wood Flooring segments, which are presented as discontinued operations.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2015		2016			2015
Net sales	$	322.6	$	284.4		$	908.6
Cost of goods sold		255.8		237.2			735.0
Gross profit		66.8		47.2			173.6
Selling, general and administrative expenses		46.4		50.5			129.6
Operating income (loss)		20.4		(3.3	)		44.0
Other non-operating expense		2.4		1.1			2.4
Earnings (loss) from discontinued operations before income taxes		18.0		(4.4	)		41.6
Income tax expense		7.4		0.1			18.1
Earnings (loss) from discontinued operations	$	10.6	$	(4.5	)	$	23.5

The following is a summary of the carrying amount of the major classes of assets and liabilities classified as assets and liabilities of discontinued operations as of December 31, 2015 related to AFI.

	December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	35.5
Accounts and notes receivable, net		70.0
Inventories, net		242.8
Deferred income taxes		5.8
Other current assets		27.2
Total current assets discontinued operations		381.3
Property, plant, and equipment, less accumulated depreciation and amortization		448.2
Intangible assets, net		42.5
Deferred income taxes		1.3
Other non-current assets		7.3
Total non-current assets of discontinued operations		499.3
Total assets of discontinued operations	$	880.6
Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	149.3
Deferred income taxes		0.3
Total current liabilities		149.6
Long-term debt, less current installments		14.7
Postretirement benefit liabilities		85.2
Pension benefit liabilities		45.5
Other long-term liabilities		3.7
Total non-current liabilities of discontinued operations		149.1
Total liabilities of discontinued operations	$	298.7

In connection with the separation and distribution of AFI, on April 1, 2016 we received a $50.0 million dividend from AFI. In addition, $56.8 million of accumulated other comprehensive losses, net of tax, were transferred to AFI, consisting of amounts related to transferred pension and postretirement liabilities, net derivatives assets and a cumulative translation adjustment. The impact of these items, in addition to the net effect of all assets and liabilities transferred to AFI upon separation resulted in a $660.7 million reduction to additional paid-in capital as of September 30, 2016.

The following is a summary of total depreciation and amortization and capital expenditures related to AFI which are presented as discontinued operations and included as components of operating and investing cash flows on our consolidated statements of cash flows:

	Nine Months Ended September 30,
	2016			2015
Depreciation and amortization	$	11.4		$	29.0
Purchases of property, plant and equipment		(8.4	)		(37.5	)

European Resilient Flooring

On December 4, 2014, our Board of Directors approved the cessation of funding to our DLW subsidiary, which at that time was our European flooring business. As a result, DLW management filed for insolvency in Germany on December 11, 2014.

The DLW insolvency filing in December 2014 resulted in our disposal and presentation of DLW for all historical periods as a discontinued operation. However, the insolvency filing did not meet the U.S. tax criteria to be considered disposed of until the first quarter of 2015. In determining the U.S. tax impact of the disposition, the liabilities, including an unfunded pension liability of approximately $115.0 million, were considered proceeds. However, pension deductions for tax purposes result only when the benefit payments are made. Accordingly, a deferred tax asset and non-cash income tax benefit of $43.4 million were recorded in the first quarter of 2015 within discontinued operations for the tax benefit of the future pension deductions.

At deconsolidation, DLW had a net liability of $12.9 million, representing assets of $151.9 million and liabilities of $164.8 million, which were removed from our balance sheet. This net liability was recognized as a contingent liability on our consolidated balance sheet pending the closure and results of the insolvency proceedings. Any shortfall will be recognized immediately when identified and any excess will be reflected when insolvency proceedings are finalized, all through discontinued operations. The amount of the net liability was $12.0 million as of September 30, 2016. DLW was previously shown within our Resilient Flooring reporting segment.

The following is a summary of the results related to the flooring businesses which are included in discontinued operations.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Gain (loss) on disposal of discontinued business before income tax	$	-		$	0.2		$	0.1		$	(0.7	)
Income tax (benefit)		(14.7	)		(0.7	)		(16.6	)		(44.1	)
Net gain on disposal of discontinued business	$	14.7		$	0.9		$	16.7		$	43.4

During the third quarter of 2016, a non-cash income tax benefit of $14.7 million was recorded within discontinued operations due to the reversal of reserves for uncertain tax positions as a result of an expiration of the federal statute of limitations to review previously filed income tax returns.

Cabinets

In September 2012, we entered into a definitive agreement to sell our cabinets business to American Industrial Partners. The sale was completed in October 2012. The following is a summary of the results related to the cabinets business, which are included in discontinued operations.

	Three and Nine
	Months Ended
	September 30,
	2015
Gain on disposal of discontinued business before income tax	$	0.6
Income tax (benefit)		-
Net gain on disposal of discontinued business	$	0.6