NOTE 3. NATURE OF OPERATIONS

Effective December 31, 2017 and in connection with the announced sale of our EMEA and Pacific Rim businesses, our former EMEA and Pacific Rim segments have been excluded from our results of continuing operations. As a result, effective December 31, 2017 and for all periods presented, our operating segments are as follows: Mineral Fiber, Architectural Specialties and Unallocated Corporate.

Mineral Fiber – produces suspended mineral fiber and soft fiber ceiling systems for use in commercial and residential settings. Products offer various performance attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling products are sold to resale distributors and to ceiling systems contractors. Residential ceiling products are sold primarily to wholesalers and retailers (including large home centers). The Mineral Fiber segment also includes the results of our Worthington Armstrong Venture (“WAVE”) joint venture with Worthington Industries, Inc., which manufactures suspension system (grid) products and ceiling component products that are invoiced by both us 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. To a lesser extent, however, in some markets, WAVE sells its suspension systems products to us for resale to customers. Our 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 and sources ceilings and walls for use in commercial settings. Products are available in numerous materials, such as metal 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 produce standard and customized products, with the majority of Architectural Specialties revenues derived from sourced products. Architectural Specialties products are sold to resale distributors and ceiling systems contractors. The majority of revenues are project driven, which can lead to more volatile sales patterns due to project scheduling. Operating results for the Architectural Specialties segment include a minor portion of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.

Unallocated Corporate – includes assets, liabilities, income and expenses that have not been allocated to our other business segments and consist 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 facilities and income tax balances. Effective December 31, 2017 and for all periods presented, our Unallocated Corporate segment also includes all assets, liabilities, income and expenses formerly reported in our EMEA and Pacific Rim segments that are not included in the pending sale to Knauf.

Segment results below have been restated for all periods presented as a result of the disaggregation of our former Americas segment and the reclassification of Unallocated Corporate assets.

	Mineral Fiber			Architectural Specialties		Unallocated Corporate			Total
For the year ended 2017
Net sales to external customers	$	756.4		$	137.2	$	-		$	893.6
Equity (earnings) from joint venture		(67.0	)		-		-			(67.0	)
Segment operating income (loss)		231.9			27.7		(4.5	)		255.1
Segment assets		1,193.5			53.2		320.7			1,567.4
Depreciation and amortization⁽¹⁾		59.2			1.8		6.0			67.0
Investment in joint venture		107.3			-		-			107.3
Purchases of property, plant and equipment ⁽¹⁾		76.1			1.6		-			77.7

	Mineral Fiber			Architectural Specialties		Unallocated Corporate			Total
For the year ended 2016
Net sales to external customers	$	736.6		$	100.7	$	-		$	837.3
Equity (earnings) from joint venture		(73.1	)		-		-			(73.1	)
Segment operating income (loss)		223.9			19.2		(54.2	)		188.9
Segment assets		1,145.1			17.3		249.3			1,411.7
Depreciation and amortization⁽¹⁾		53.6			0.8		0.4			54.8
Investment in joint venture		106.2			-		-			106.2
Purchases of property, plant and equipment ⁽¹⁾		66.1			0.2		-			66.3

	Mineral Fiber			Architectural Specialties		Unallocated Corporate			Total
For the year ended 2015
Net sales to external customers	$	723.7		$	81.4	$	-		$	805.1
Equity (earnings) from joint venture		(66.1	)		-		-			(66.1	)
Segment operating income (loss)		270.3			16.5		(129.8	)		157.0
Segment assets		1,132.8			17.2		271.0			1,421.0
Depreciation and amortization⁽¹⁾		43.9			0.8		11.9			56.6
Investment in joint venture		130.8			-		-			130.8
Purchases of property, plant and equipment ⁽¹⁾		51.5			0.6		22.4			74.5

⁽¹⁾

Totals will differ from the totals on our Consolidated Statement of Cash Flows by the amounts that have been classified as discontinued operations. See Note 4 for additional details.

Segment operating income (loss) is the measure of segment profit or loss reviewed by the chief operating decision maker. The sum of the segments’ operating income (loss) equals the total consolidated operating income as reported on our Consolidated Statements of Earnings and Comprehensive Income. The following reconciles our total consolidated operating income to earnings from continuing operations before income taxes. These items are only measured and managed on a consolidated basis:

	2017			2016			2015
Segment operating income	$	255.1		$	188.9		$	157.0
Interest expense		35.4			49.5			44.6
Other non-operating (income)/expense, net		(2.4	)		(11.2	)		17.8
Earnings from continuing operations before income taxes	$	222.1		$	150.6		$	94.6

Accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The sales in the table below are allocated to geographic areas based on the location of our selling entities.

	2017		2016		2015
Geographic Areas
Net trade sales
Mineral Fiber:
United States	$	699.8	$	680.8	$	670.8
Canada		56.6		55.8		52.9
Total Mineral Fiber		756.4		736.6		723.7

Architectural Specialties:
United States		129.5		95.1		75.1
Canada		7.7		5.6		6.3
Total Architectural Specialties		137.2		100.7		81.4
Total net trade sales	$	893.6	$	837.3	$	805.1

	2017		2016
Property, plant and equipment, net at December 31,
Mineral Fiber:
United States	$	488.7	$	457.3
Total Mineral Fiber		488.7		457.3

Architectural Specialties:
Canada	$	4.5	$	4.0
United States		3.0		0.3
Total Architectural Specialties		7.5		4.3

Unallocated Corporate ⁽¹⁾		3.7		3.6
Total property, plant and equipment, net	$	499.9	$	465.2

⁽¹⁾

Includes property, plant and equipment located in China that were formerly reported in our Pacific Rim segment and will not be included in the sale to Knauf.

Impairment testing of our tangible assets occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

In September 2017, we made the decision to permanently close a previously idled plant in China, which is reported as a component of Unallocated Corporate as of December 31, 2017. As a result, during 2017 we recorded $5.6 million in costs of goods sold for accelerated depreciation of machinery and equipment based on management estimates. During the fourth quarter of 2017, we announced the closing of our St. Helens, Oregon mineral fiber manufacturing facility, expected to occur in the first half of 2018. During the fourth quarter of 2017, we recorded $4.0 million in costs of goods sold primarily related to accelerated depreciation of machinery and equipment within our Mineral Fiber segment based on management estimates.