Acquisition and Discontinued Operations

3 Months Ended

Mar. 31, 2019

NOTE 4. ACQUISITION AND DISCONTINUED OPERATIONS

ACQUISITION OF ACGI

On March 4, 2019, we acquired the business and assets of ACGI. The $43.1 million purchase price, which is subject to customary working capital adjustments, 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, was $9.9 million. The total fair value of identifiable intangible assets acquired was $12.0 million, mostly comprised of amortizable customer relationships of $7.4 million and amortizable tradenames of $2.8 million, resulting in $21.2 million of goodwill. All of the acquired goodwill is deductible for tax purposes. These amounts are subject to adjustment as our purchase accounting analysis is completed.

ACQUISITION OF STEEL CEILINGS

On August 16, 2018, we acquired the business and assets of Steel Ceilings. The $12.3 million purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values, with the remaining amount recorded as goodwill. In October 2018, we sold certain assets related to an acquired product line to WAVE for $2.0 million. The total fair value of tangible assets acquired, less liabilities assumed, was $4.4 million. The total fair value of identifiable intangible assets acquired was mostly comprised of amortizable customer relationships of $1.4 million and tradenames of $1.3 million, resulting in $3.2 million of goodwill. All of the acquired goodwill is deductible for tax purposes.

ACQUISITION OF PLASTERFORM

On May 31, 2018, we acquired the business and assets of Plasterform. The $11.9 million purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values, with the remaining amount recorded as goodwill. The total fair value of tangible assets acquired, less liabilities assumed, was $2.2 million. The total fair value of identifiable intangible assets acquired, comprised of amortizable customer relationships, was $4.8 million, resulting in $4.9 million of goodwill. All of the acquired goodwill is deductible for tax purposes.

EMEA AND PACIFIC RIM BUSINESSES

On November 17, 2017, we agreed to sell certain subsidiaries comprising our businesses in EMEA and the Pacific Rim to Knauf.

Each quarter we compare the anticipated sales proceeds from Knauf to the carrying value of EMEA and Pacific Rim net assets. We record an estimated loss if the carrying value exceeds the anticipated sales proceeds. Net gains can only be recorded to the extent of previous estimated losses. In 2017, we recorded an estimated loss of $74.0 million, which included $51.4 million of unfavorable Accumulated Other Comprehensive Income (“AOCI”) adjustments. In 2018, we recorded an estimated loss of $19.3 million, which included $25.5 million of unfavorable AOCI adjustments. During the three months ended March 31, 2019, we recorded a net gain of $2.2 million, which included $9.1 million of favorable AOCI adjustments. These AOCI adjustments related primarily to accumulated foreign currency translation amounts that will be subsequently reclassified to earnings from discontinued operations upon sale of our EMEA and Pacific Rim businesses.

See Note 1 for further discussion of the divestiture status.

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.

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 Tax Matters Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Transition Trademark License Agreement and a Campus Lease Agreement.

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.

Summarized Financial Information of Discontinued Operations

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

	EMEA and Pacific Rim Businesses
Three months ended March 31, 2019:
Net sales	$	96.9
Cost of goods sold		75.7
Gross profit		21.2
Selling, general and administrative expenses		20.8
Operating income		0.4
Earnings from discontinued operations before income tax		0.4
Income tax (benefit)		(0.1	)
Net earnings from discontinued operations, net of tax	$	0.5

Gain from disposal of discontinued businesses, before income tax	$	2.2
Income tax expense		-
Gain from disposal of discontinued businesses, net of tax	$	2.2

Net earnings from discontinued operations	$	2.7

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Three months ended March 31, 2018:
Net sales	$	104.4		$	-		$	104.4
Cost of goods sold		77.8			-			77.8
Gross profit		26.6			-			26.6
Selling, general and administrative expenses		22.0			-			22.0
Operating income		4.6			-			4.6
Interest expense		0.4			-			0.4
Other non-operating (income), net		(1.2	)		-			(1.2	)
Earnings from discontinued operations before income tax		5.4			-			5.4
Income tax expense		1.5			-			1.5
Net earnings from discontinued operations, net of tax	$	3.9		$	-		$	3.9

Loss from disposal of discontinued businesses, before income tax	$	(17.7	)	$	-		$	(17.7	)
Income tax (benefit)		-			(0.4	)		(0.4	)
Loss from disposal of discontinued business, net of tax	$	(17.7	)	$	0.4		$	(17.3	)

Net loss from discontinued operations	$	(13.8	)	$	0.4		$	(13.4	)

The following is a summary of the carrying amount of major classes of assets and liabilities classified as assets and liabilities of discontinued operations as of March 31, 2019 and December 31, 2018 related to our EMEA and Pacific Rim businesses.

	March 31, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	10.0	$	10.0
Accounts and notes receivable, net		47.3		56.2
Inventories, net		65.3		59.8
Income tax receivable		4.2		1.8
Other current assets		10.3		8.2
Total current assets discontinued operations		137.1		136.0
Property, plant, and equipment, less accumulated depreciation and amortization ^{(1) (2)}		109.3		103.8
Prepaid pension costs ⁽¹⁾		29.9		28.9
Goodwill and intangible assets, net ⁽¹⁾		7.0		6.8
Deferred income taxes ⁽¹⁾		3.1		3.0
Lease ROU assets ⁽¹⁾		21.8		-
Other non-current assets ⁽¹⁾		0.7		1.0
Total non-current assets of discontinued operations ⁽¹⁾		171.8		143.5
Total assets of discontinued operations ⁽¹⁾	$	308.9	$	279.5
Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	73.2	$	67.1
Income tax payable		1.2		1.1
Total current liabilities		74.4		68.2
Pension benefit liabilities ⁽³⁾		33.6		33.8
Lease non-current liabilities ⁽³⁾		12.7		-
Other long-term liabilities ⁽³⁾		1.8		1.8
Income taxes payable ⁽³⁾		0.2		-
Deferred income taxes ⁽³⁾		6.6		6.5
Total non-current liabilities of discontinued operations ⁽³⁾		54.9		42.1
Total liabilities of discontinued operations ⁽³⁾	$	129.3	$	110.3

(1)

Presented as Assets of discontinued operations on the Condensed Consolidated Balance Sheets.

(2)

Includes reversal of previous pre-tax estimated losses of $2.2 million recorded in the first three months of 2019. As of December 31, 2018, cumulative pre-tax estimated losses were $93.3 million.

(3)

Presented as Liabilities of discontinued operations on the Condensed Consolidated Balance Sheets.

The following is a summary of total estimated gains and losses, capital expenditures, and operating lease information related to our EMEA and Pacific Rim businesses which are presented as discontinued operations and included as components of operating and investing cash flows on our Condensed Consolidated Statements of Cash Flows:

	Three Months Ended March 31,
	2019			2018
Reversal of previous estimated loss on sale to Knauf ⁽¹⁾		(2.2	)		-
Estimated loss on sale to Knauf ⁽¹⁾		-			17.7
Purchases of property, plant and equipment		(0.4	)		(1.2	)
Operating lease cost ⁽²⁾		2.3			-
ROU assets obtained in exchange for lease obligations ⁽²⁾		24.6			-

(1)

Represents comparison of the EMEA and Pacific Rim net assets to the expected sales proceeds to be received upon closure of the transaction.

(2)

Operating lease cost and non-cash activity relating to ASC Topic 842 – Leases. We do not believe the amount of cash paid for amounts included in the measurement of lease liabilities to be materially different from our operating lease cost for the three months ended March 31, 2019.