NOTE 4. ACQUISITIONS AND DISCONTINUED OPERATIONS

ACQUISITION OF TECTUM

On January 13, 2017, in connection with the acquisition of Tectum, the $31.2 million purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values, with the remaining unallocated amount recorded as goodwill. The total fair value of tangible assets acquired, less liabilities assumed, in connection with the Tectum acquisition was $4.4 million. The total fair value of intangible assets acquired, comprised of amortizable customer relationships and non-amortizing brand names, was $16.0 million, resulting in $10.8 million of goodwill. All of the acquired goodwill is deductible for tax purposes.

EMEA AND PACIFIC RIM BUSINESSES

On November 17, 2017, in connection with the Purchase Agreement we entered into with Knauf, we agreed to sell certain subsidiaries comprising our businesses in EMEA and the Pacific Rim. Pursuant to the Purchase Agreement, prior to the closing, we and Knauf will enter into (i) an agreement relating to the mutual supply of certain products after the closing, (ii) an agreement relating to the use of certain intellectual property by Knauf after the closing, including the Armstrong trade name and (iii) an agreement relating to certain transition services to be provided by AWI to Knauf after closing for a period of one year. WAVE and Knauf will also enter into similar agreements for such purposes.

As of December 31, 2017, based on anticipated net sales proceeds to be received from Knauf, the fair value of EMEA and Pacific Rim net assets are less than their carrying value. As a result, we recorded an impairment charge of $74.0 million during the fourth quarter of 2017, which included $51.4 million of accumulated other comprehensive income adjustments, primarily accumulated foreign currency translation amounts, that will be subsequently reclassified to earnings from discontinued operations upon sale of our EMEA and Pacific Rim businesses.

FLOORING BUSINESSES

Separation and Distribution of AFI

On April 1, 2016, we completed our separation of Armstrong Flooring, Inc. (“AFI”) by allocating 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. Separation costs for 2016 and 2015 were $34.5 million and $34.3 million, respectively. Separation costs for all periods primarily related to outside professional services and employee compensation and retention and severance accruals which were recorded within the Unallocated Corporate segment in conjunction with this initiative.

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, provided 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. AWI and AFI provided various services to each other during a transition period that expired on 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 matters. 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 governed 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. See Note 16 for additional details.

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.

European Resilient Flooring

On December 4, 2014, our Board of Directors approved the cessation of funding to our former DLW subsidiary, which was our former European flooring business. As a result, DLW management filed for insolvency in Germany on December 11, 2014. The German insolvency court subsequently appointed an administrator (the “Administrator”) to oversee DLW operations.

As of December 4, 2014, 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 proceeding. The amount of the net liability, included within Accounts payable and accrued expenses on our Consolidated Balance Sheets, was $11.9 million as of December 31, 2016. In April 2017, we entered into a settlement agreement and mutual release with the Administrator on behalf of the DLW estate to settle all claims of the Administrator related to the insolvency for a cash payment of $11.8 million. DLW was previously shown within our Resilient Flooring reporting segment.

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. Net loss on disposal of discontinued operations in 2015 related to the settlement of a multi-employer pension plan.

Summarized Financial Information of Discontinued Operations

The following tables detail the businesses and line items that comprise income from discontinued operations on the Consolidated Statements of Earnings and Comprehensive Income.

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
2017:
Net sales	$	436.2		$	-		$	436.2
Cost of goods sold		350.8			-			350.8
Gross profit		85.4			-			85.4
Selling, general and administrative expenses		78.3			-			78.3
Operating income		7.1			-			7.1
Interest expense		1.2			-			1.2
Other non-operating (income), net		(1.9	)		-			(1.9	)
Earnings from discontinued operations before income tax		7.8			-			7.8
Income tax expense		3.6			-			3.6
Gain from discontinued operations	$	4.2		$	-		$	4.2

(Loss) on expected disposal of discontinued businesses before income tax ⁽¹⁾	$	(74.0	)	$	(0.1	)	$	(74.1	)
Income tax (benefit)		-			(4.1	)		(4.1	)
Net (loss) gain on disposal of discontinued businesses	$	(74.0	)	$	4.0		$	(70.0	)

Net (loss) gain from discontinued operations	$	(69.8	)	$	4.0		$	(65.8	)

⁽¹⁾

Loss on disposal of EMEA and Pacific Rim businesses for the year ended December 31, 2017 represents the estimated write-down of EMEA and Pacific Rim assets based on our expected sales proceeds to be received upon closure of the transaction.

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
2016:
Net sales	$	397.2		$	284.4		$	681.6
Cost of goods sold		331.8			237.2			569.0
Gross profit		65.4			47.2			112.6
Selling, general and administrative expenses		69.7			50.5			120.2
Operating (loss)		(4.3	)		(3.3	)		(7.6	)
Interest expense		0.3			-			0.3
Other non-operating expense, net		1.7			1.1			2.8
(Loss) from discontinued operations before income tax		(6.3	)		(4.4	)		(10.7	)
Income tax (benefit) expense		(0.9	)		0.1			(0.8	)
(Loss) from discontinued operations	$	(5.4	)	$	(4.5	)	$	(9.9	)

Gain on disposal of discontinued businesses before income tax	$	-		$	0.1		$	0.1
Income tax (benefit)		-			(15.2	)		(15.2	)
Net gain on disposal of discontinued businesses	$	-		$	15.3		$	15.3

Net (loss) gain from discontinued operations	$	(5.4	)	$	10.8		$	5.4

	EMEA and Pacific Rim Businesses			Flooring Businesses			Cabinets		Total
2015:
Net sales	$	426.2		$	1,188.7		$	-	$	1,614.9
Cost of goods sold		355.8			962.3			-		1,318.1
Gross profit		70.4			226.4			-		296.8
Selling, general and administrative expenses		86.9			179.5			-		266.4
Operating (loss) income		(16.5	)		46.9			-		30.4
Interest expense		0.7			-			-		0.7
Other non-operating (income) expense, net		(2.7	)		3.1			-		0.4
(Loss) earnings from discontinued operations before income tax		(14.5	)		43.8			-		29.3
Income tax expense		16.8			17.8			-		34.6
(Loss) earnings from discontinued operations	$	(31.3	)	$	26.0		$	-	$	(5.3	)

(Loss) gain on disposal of discontinued businesses before income tax	$	-		$	(0.8	)	$	0.6	$	(0.2	)
Income tax (benefit) expense		-			(42.0	)		0.2		(41.8	)
Net gain on disposal of discontinued businesses	$	-		$	41.2		$	0.4	$	41.6

Net (loss) gain from discontinued operations	$	(31.3	)	$	67.2		$	0.4	$	36.3

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, 2017 and 2016 related to our EMEA and Pacific Rim businesses.

	December 31, 2017		December 31, 2016
Assets
Current assets:
Accounts and notes receivable, net	$	61.4	$	49.5
Inventories, net		59.2		62.1
Income tax receivable		3.1		4.0
Other current assets		12.9		9.6
Total current assets discontinued operations		136.6		125.2
Property, plant, and equipment, less accumulated depreciation and amortization ^{(1) (2)}		131.3		204.4
Prepaid pension costs ⁽¹⁾		26.1		7.9
Goodwill and intangible assets, net ⁽¹⁾		7.2		6.8
Deferred income taxes ⁽¹⁾		4.0		1.0
Other non-current assets ⁽¹⁾		0.9		1.0
Total non-current assets of discontinued operations ⁽¹⁾		169.5		221.1
Total assets of discontinued operations ⁽¹⁾	$	306.1	$	346.3
Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	78.6	$	80.1
Income tax payable		1.3		0.7
Total current liabilities		79.9		80.8
Pension benefit liabilities ⁽³⁾		34.7		29.5
Other long-term liabilities ⁽³⁾		1.8		2.1
Deferred income taxes ⁽³⁾		12.1		2.4
Total non-current liabilities of discontinued operations ⁽³⁾		48.6		34.0
Total liabilities of discontinued operations ⁽³⁾	$	128.5	$	114.8

⁽¹⁾

Presented as Current assets of discontinued operations on the Consolidated Balance Sheets as of December 31, 2017.

⁽²⁾

Includes a pre-tax impairment charge of $74.0 million recorded during the fourth quarter of 2017.

⁽³⁾ Presented as Current liabilities of discontinued operations on the Consolidated Balance Sheets as of December 31, 2017.

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

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
2017:
Depreciation and amortization	$	22.2		$	-		$	22.2
Fixed asset impairment ⁽¹⁾		74.0			-			74.0
Purchases of property, plant and equipment		(12.0	)		-			(12.0	)

2016:
Depreciation and amortization	$	23.0		$	11.4		$	34.4
Purchases of property, plant and equipment		(25.8	)		(12.1	)		(37.9	)

2015:
Depreciation and amortization	$	22.6		$	39.1		$	61.7
Purchases of property, plant and equipment		(34.6	)		(61.6	)		(96.2	)

⁽¹⁾