# ARMSTRONG WORLD INDUSTRIES INC (AWI) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ARMSTRONG WORLD INDUSTRIES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/7431/000095017022001531/awi-20211231.htm
Accession: 0000950170-22-001531
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AWI/
All MD&A years: /company/AWI/mda/
Next year: /company/AWI/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891.

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 Form 10-K.

Overview

AWI is a leading manufacturer and designer of ceiling systems for use in the construction and renovation of commercial and residential buildings in the Americas. These 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. In 2020, we experienced a significant decrease in customer demand throughout our business during the second through fourth quarters due to COVID-19. Specifically, 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. In response to COVID-19, we temporarily reduced capital expenditures and discretionary spending including compensation, travel and marketing expenses in 2020. Customer demand continued to improve in 2021 but remained lower than pre-pandemic levels. We continue to monitor and manage the impact of COVID-19 and its potential impacts to our business, most notably global supply chain and labor disruptions, which have contributed to raw material and transportation cost inflation, in addition to construction activity delays.

As of December 31, 2021, all of our manufacturing facilities were operational, excluding the 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 and have implemented preventative measures that include remote and hybrid work models, providing personal protective equipment, limiting group meetings, enhancing cleaning and sanitizing procedures, and social distancing.

We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during 2021 or 2020, 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.

Acquisitions

In December 2020, we acquired all issued and outstanding equity of Arktura LLC (“Arktura”) and certain subsidiaries with operations in the United States and Argentina. Arktura is a designer and fabricator of metal and felt ceilings, walls, partitions and facades with one manufacturing facility based in Los Angeles, California.

In August 2020, we acquired the business and assets of Moz Designs, Inc. (“Moz”), based in Oakland, California. Moz is a designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers for interior and exterior applications with one manufacturing facility.

In July 2020, we acquired all issued and outstanding capital stock of TURF Design, Inc. (“Turf”), with one manufacturing facility in Elgin, Illinois and a design center in Chicago, Illinois. Turf is a designer and manufacturer of acoustic felt ceilings and wall products.

In November 2019, we acquired the business and assets of MRK Industries, Inc. (“MRK”), based in Libertyville, Illinois. MRK is a manufacturer of specialty metal ceiling, wall and exterior solutions with one manufacturing facility.

In March 2019, we acquired the business and assets of Architectural Components Group, Inc. (“ACGI”), based in Marshfield, Missouri. ACGI is a manufacturer of custom wood ceilings and walls with one manufacturing facility.

The operations, assets and liabilities of these acquisitions are included in our Architectural Specialties segment.

Discontinued Operations

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 WAVE, our joint venture with Worthington in which AWI holds a 50% interest (collectively, the “Sale”), to Knauf International GmbH (“Knauf”).

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In January 2021, we finalized post-closing adjustments to the purchase price related to certain pension liabilities assumed by Knauf in the Sale. During the first quarter of 2021, we paid $11.8 million to Knauf related to this purchase price adjustment.

The EMEA and Pacific Rim segment historical financial results through September 30, 2019 have been reflected in AWI’s Consolidated Statements of Operations and Comprehensive Income as discontinued operations for all periods presented.

See Notes 5 and 6 to the Consolidated Financial Statements for additional information related to our acquisitions and discontinued operations.

Manufacturing Plants

As of December 31, 2021, we operated 16 manufacturing plants in two countries, with 14 plants located within the U.S. and two plants in Canada. We closed our St. Helens, Oregon mineral fiber manufacturing plant in the second quarter of 2018, and the facility was classified as an asset held for sale as of December 31, 2021.

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 for use in commercial and residential settings. Our mineral fiber products offer various performance attributes such as acoustical control, rated fire protection, aesthetic appeal, and health and sustainability features. 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 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 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 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 assets, liabilities, income and expenses formerly reported in our EMEA and Pacific Rim segments that were not included in the Sale.

Factors Affecting Revenues

For information on our segments’ 2021 net sales by geography, see Note 3 to the Consolidated Financial Statements included in this Form 10-K. For information on our segments’ 2021 net sales disaggregated by major customer groups, see Note 4 to the Consolidated Financial Statements included in this Form 10-K.

Markets. We compete in the commercial and residential construction markets of the Americas. We closely monitor publicly available macroeconomic trends that provide insight into commercial and residential market activity, including GDP, office vacancy rates, the Architecture Billings Index, new commercial construction starts, state and local government spending, corporate profits and retail

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sales.

We noted several factors and trends within our markets that directly affected our business performance during 2021 compared to 2020, most importantly an increase in demand as the negative financial impacts of the COVID-19 pandemic lessened. The increase in demand was tempered by an uneven market recovery, including shifts in revenue opportunities between new commercial construction and renovation, variability in demand increases across different geographies and project delays. We continue to monitor the pandemic's impact on the demand for ceiling and wall systems, overall construction activity and sustained remote or hybrid work models. During 2021, increased sales volumes contributed $35 million to revenue compared to 2020. In addition, our 2020 acquisitions of Turf, Moz and Arktura (collectively, the "2020 Acquisitions") contributed $82 million and $18 million of revenues in 2021 and 2020, respectively.

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 the announced price increases because of project pricing, competitive reactions 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 2021 by approximately $71 million compared to 2020. Our Architectural Specialties segment generates revenues that are primarily earned based on individual contracts that include a mix of products, both manufactured by us and sourced from third parties, that vary by project. As such, we do not track AUV performance for this segment, but rather attribute most changes in sales to volume.

During each quarter of 2021, we implemented price increases on Mineral Fiber ceiling, grid products and certain Architectural Specialties products. In the fourth quarter of 2021, we announced price increases on Mineral Fiber ceiling, grid products and certain Architectural Specialties products which became effective in the first quarter of 2022. We may implement future pricing actions based on numerous factors, including the rate and pace of inflation's 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 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. In 2021, higher costs for raw materials and energy negatively impacted operating income by $14 million compared to 2020.

2020 Acquisition-Related Expenses and (Gains) Losses

In connection with the 2020 Acquisitions, we recorded certain acquisition-related expenses and (gains) losses to operating income in 2021 and 2020, summarized as follows (dollar amounts in millions):

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[[/GREPCENT_TABLE]]

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

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acquisitions and is remeasured quarterly during each acquisition's respective earn-out period. See Note 19 to the 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. See Note 5 to the Consolidated Financial Statements for further information.

RESULTS OF OPERATIONS

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Please refer to Notes 3 and 6 to the Consolidated Financial Statements for a reconciliation of segment operating income to consolidated earnings from continuing operations before income taxes and additional financial information related to discontinued operations.

2021 COMPARED TO 2020

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Consolidated net sales increased 18.1% as higher volumes, including the impact of the 2020 Acquisitions, contributed $99 million and favorable AUV contributed $71 million. Mineral Fiber net sales increased $93 million year-over-year and Architectural Specialties net sales increased $77 million. The increase in Mineral Fiber segment net sales was driven by improved AUV and both segments experienced improved sales volumes as market demand continued to recover from COVID-19 impacts. The Architectural Specialties segment net sales also benefited $64 million from the 2020 Acquisitions.

Cost of goods sold was 63.3% of net sales in 2021, compared to 64.4% in 2020. The decrease in cost of goods sold as a percent of net sales was due to favorable AUV performance and improved manufacturing productivity, which was partially offset by higher inflation and normalization of costs that we proactively reduced in 2020 in response to the COVID-19 pandemic.

SG&A expenses in 2021 were $237.4 million, or 21.5% of net sales, compared to $163.2 million, or 17.4% of net sales, in 2020. The increase in SG&A expenses was driven by a $40 million increase in SG&A expenses due to the 2020 Acquisitions, including intangible asset amortization of $13 million, a $15 million increase in incentive and deferred compensation expenses, a $6 million reduction related to higher environmental insurance settlements, net of charges, received in 2020, a $6 million decrease in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf ("Knauf TSA") in 2020 and a $5 million increase in spending related to digital growth initiatives. Also contributing to the increase in SG&A expenses was the return of discretionary spending, including travel, compensation, and outside services that we proactively reduced in 2020 in response to the COVID-19 pandemic. Offsetting these increased costs was the absence of a $10 million charitable contribution to the Armstrong World Industries Foundation made in 2020.

In 2021 and 2020, we recorded $4.1 million of remeasurement gains and $0.1 million of remeasurement losses, respectively, for changes in the fair value of contingent consideration related to the acquisitions of Turf and Moz. See Note 19 to the Consolidated Financial Statements for further information.

In 2020, we recorded a $21.0 million gain related to the sale of fixed and intangible assets from the sale of our idled Mineral Fiber plant in China, which was reported within our Unallocated Corporate segment. There was no similar activity in 2021.

Equity earnings from our WAVE joint venture were $87.7 million in 2021, compared to $64.0 million in 2020. The increase in WAVE earnings was related to favorable AUV and higher volumes, which was partially offset by increased steel costs and SG&A expenses. See Note 11 to the Consolidated Financial Statements for further information.

Interest expense was $22.9 million in 2021, compared to $24.1 million in 2020, as the benefits from lower effective interest rates year-over-year outweighed slightly higher average debt balances.

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Other non-operating income, net, was $5.6 million in 2021, compared to $357.4 million of expense, net, in 2020. The change in other non-operating income, net, for 2021 compared to 2020 was primarily related to a $374.4 million settlement loss and a $2.0 million special termination benefit charge, both related to our RIP, in 2020. This was partially offset by lower credits from non-service cost components of pension and postretirement net period benefit costs. See Note 18 to the Consolidated Financial Statements for further information.

Income tax expense was $57.4 million in 2021, compared to $42.6 million of income tax benefit in 2020, primarily driven by the effects of our first quarter 2020 pension settlement. The effective tax rate for 2021 was 23.7% compared to a rate of 33.6% for 2020. The effective tax rate for 2021 was lower than the statutory rate primarily due to the benefits recognized from current year statute closures. The effective tax rate for 2020 was higher than the statutory rate primarily due to the pre-tax benefits recognized on the sale of our idled Mineral Fiber plant in China.

Total Other Comprehensive Loss (“OCL”) was $0.3 million in 2021, compared to Total Other Comprehensive Income (“OCI”) of $266.8 million in 2020. The change in OCL was primarily driven by pension and postretirement adjustments, primarily related to the absence of the $278.6 settlement loss, net of taxes, related to our RIP. Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans. Also impacting the change in OCL were derivative gains/losses and foreign currency translation adjustments. Derivative gain/loss represents the adjustments to fair value of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies.

REPORTABLE SEGMENT RESULTS

Mineral Fiber

(dollar amounts in millions)

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[[/GREPCENT_TABLE]]

Net sales increased due to $71 million of favorable AUV and $22 million due to higher sales volumes. The improvement in AUV was driven by favorable price and customer channel mix. Increased volumes were driven by comparison against a prior-year period that was negatively impacted by the pandemic.

Operating income increased primarily due to a $53 million benefit from favorable AUV, a $24 million increase in WAVE equity earnings, a $14 million benefit from higher volumes, a $10 million benefit from the absence of the prior year charitable contribution to the Armstrong World Industries Foundation and a $5 million benefit related to a Coronavirus Aid, Relief, and Economic Recovery Act Employee Retention Credit. These benefits were partially offset by a $22 million increase in manufacturing costs, primarily related to raw material and energy inflation, a $15 million increase in incentive and deferred compensation expenses, a $6 million reduction related to higher environmental insurance settlements, net of charges, received in 2020, a $6 million decrease related to reimbursements received under our Knauf TSA in 2021 compared to 2020 and a $5 million increase in spending related to digital growth initiatives. Operating income was also impacted by more normalized discretionary spending that we proactively reduced in 2020 in response to the COVID-19 pandemic.

Architectural Specialties

(dollar amounts in millions)

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[[/GREPCENT_TABLE]]

Net sales increased $77 million, with the 2020 Acquisitions contributing $64 million. Additionally, an improvement in sales volumes, driven by a rebound in economic activity compared to the prior year, contributed to year-over-year net sales growth.

Operating income decreased primarily due to an increase in SG&A expenses related to the 2020 Acquisitions, including a $13 million increase in amortization expense and a $12 million increase in acquisition-related expenses, an increase in manufacturing costs, primarily related to the 2020 Acquisitions, and the negative margin impact of delays from custom project driven revenues which was driven by higher manufacturing input costs. Operating income was also impacted by more normalized discretionary spending that we proactively reduced in 2020 in response to the COVID-19 pandemic and additional investments in selling and design capabilities.

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These costs were partially offset by the positive impact of higher sales volumes, including the 2020 Acquisitions, and $4 million of remeasurement gains for changes in the fair value of contingent consideration related to Moz and Turf.

Unallocated Corporate

Unallocated Corporate operating loss was $5 million in 2021 compared to $14 million of operating income in 2020. The change in Unallocated Corporate operating loss was primarily related to the absence of the gain on the sale of our idled Mineral Fiber plant in China. See Note 3 to the Consolidated Financial Statements for further information.

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow

Operating activities for 2021 provided $187.2 million of cash, compared to $218.8 million in 2020. The decrease was primarily due to an increase in income tax payments and lower cash earnings, partially offset by positive working capital changes. Working capital changes compared to 2020 were primarily due to an increase in accounts payable and accrued expenses driven by the timing of payments, partially offset by an increase in accounts receivable.

Net cash used for investing activities was $13.9 million for 2021, compared to $141.1 million in 2020. The favorable change in cash used in 2021 compared to 2020 was primarily due to a decrease in cash paid for acquisitions and the absence of the remittance of Knauf proceeds to WAVE, partially offset by an increase in purchases of property, plant and equipment and a decrease in proceeds from the sale of fixed assets.

Net cash used for financing activities was $212.1 million in 2021, compared to $13.5 million of cash provided in 2020. The change in cash was primarily due to a decrease in proceeds from borrowings and higher repurchases of outstanding common stock.

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 1.25% 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 December 31, 2021, total borrowings outstanding under our senior credit facility were $165.0 million under the revolving credit facility and $468.7 million under Term Loan A.

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 December 31, 2021, we were in compliance with all covenants of the senior credit facility.

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):

[[GREPCENT_TABLE]]
[["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 6, 2020","","$","50.0","","March 2020 to March 2022","","USD-LIBOR"],["March 10, 2020","","$","50.0","","March 2021 to March 2024","","USD-LIBOR"],["March 11, 2020","","$","50.0","","March 2021 to March 2024","","USD-LIBOR"]]
[[/GREPCENT_TABLE]]

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.

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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 (dollar amounts in millions):

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["Financing Arrangements","","Limit","","","Used","","","Available"],["Bi-lateral facility","","$","25.0","","","$","8.4","","","$","16.6"],["Revolving credit facility","","","150.0","","","","-","","","","150.0"],["Total","","$","175.0","","","$","8.4","","","$","166.6"]]
[[/GREPCENT_TABLE]]

The table below reflects future payments of long-term debt, excluding $2.3 million of unamortized debt financing costs, and the related interest payments, which are projected based on market-based interest rate swap curves (dollar amounts in millions):

[[GREPCENT_TABLE]]
[["","","2022","","","2023","","","2024","","","2025","","","Total"],["Long-term debt","","$","25.0","","","$","25.0","","","$","583.7","","","$","-","","","$","633.7"],["Scheduled interest payments","","","20.7","","","","21.9","","","","15.7","","","","0.3","","","","58.6"]]
[[/GREPCENT_TABLE]]

As of December 31, 2021, we had $98.1 million of cash and cash equivalents, $87.1 million in the U.S. and $11.0 million in various foreign jurisdictions, primarily Canada. As of December 31, 2021, we also had $335.0 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 payment of debt obligations. In 2022, we expect to spend approximately $90 million to $100 million on capital expenditures and approximately $45 million on dividends.

Since July 29, 2016, our Board of Directors has 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 $513.8 million remaining under the Board’s repurchase authorization as of December 31, 2021.

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.

The impacts of COVID-19 could create volatility in financial markets which may impact the terms under which we access capital. We continue to evaluate our discretionary spending, capital expenditures and other costs in light of the uncertainty related to the COVID-19 pandemic.

CRITICAL ACCOUNTING ESTIMATES

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), we are required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an on-going basis, using relevant internal and external information. We believe that our estimates and assumptions are reasonable. However, actual results may differ from what was estimated and could have a significant impact on the financial statements.

We have identified the following as our critical accounting estimates. We have discussed these critical accounting estimates with our Audit Committee.

U.S. Pension Credit and Postretirement Benefit Costs – We maintain significant pension and postretirement plans in the U.S. Our defined benefit pension and postretirement benefit costs are developed from actuarial valuations. These valuations are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets and the estimated inflation in health care costs. These assumptions are generally updated annually.

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Management utilizes the Aon Hewitt AA only above median yield curve, which is a hypothetical AA yield curve comprised of a series of annualized individual discount rates, as the primary basis for determining discount rates. As of December 31, 2021 and 2020, we assumed discount rates of 2.98% and 2.68%, respectively, for the U.S. defined benefit pension plans. As of December 31, 2021 and 2020, we assumed discount rates of 2.72% and 2.37%, respectively, for the U.S. postretirement plan. The effects of the change in discount rate will be amortized into earnings as described below. Absent any other changes, a one-quarter percentage point increase or decrease in the discount rates for the U.S. pension and postretirement plans would impact 2022 operating or non-operating income by $0.3 million.

We manage two U.S. defined benefit pension plans, our RIP, which is a qualified funded plan, and a nonqualified unfunded plan. For the RIP, the expected long-term return on plan assets represents a long-term view of the future estimated investment return on plan assets. This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals on the expected performance of the asset classes over 10 to 30 years. Historical asset returns are monitored and considered when we develop our expected long-term return on plan assets. An incremental component is added for the expected return from active management based on historical information obtained from the plan’s investment consultants. These forecasted gross returns are reduced by estimated management fees and expenses. Over the 10-year period ended December 31, 2021, the historical annualized return was approximately 6.84% compared to an average expected return of 6.08%. The actual loss on plan assets incurred for 2021 was 1.12%, net of fees. The difference between the actual and expected rate of return on plan assets will be amortized into earnings as described below.

The expected long-term return on plan assets used in determining our 2021 U.S. pension cost was 3.25%. We have assumed a return on plan assets for 2022 of 3.75%. The 2022 expected return on assets was calculated in a manner consistent with 2021. Absent any other changes, a one-quarter percentage point increase or decrease in this assumption would impact 2022 non-operating income by $1.2 million.

Contributions to the unfunded pension plan were $2.9 million in 2021 and were made on a monthly basis to fund benefit payments. We estimate the 2022 contributions will be approximately $2.9 million. See Note 18 to the Consolidated Financial Statements for more information.

The estimated inflation in health care costs represents a 5-10 year view of the expected inflation in our postretirement health care costs. We separately estimate expected health care cost increases for pre-65 retirees and post-65 retirees due to the influence of Medicare coverage at age 65, as illustrated below:

[[GREPCENT_TABLE]]
[["","","Assumptions","","","Actual"],["","","Post-65","","","Pre-65","","","Post-65","","","Pre-65"],["2020","","","8.2","%","","","7.2","%","","","3.3","%","","","0.7","%"],["2021","","","7.6","%","","","6.7","%","","","12.8","%","","","(48.1",")%"],["2022","","","7.1","%","","","6.6","%"]]
[[/GREPCENT_TABLE]]

The decrease in health care costs for pre-65 related to higher claims in 2020, in addition to population changes in 2021. The difference between the actual and expected health care costs is amortized into earnings as described below. As of December 31, 2021, health care cost increases are estimated to decrease ratably until 2029 for pre-65 retirees and 2027 for post-65 retirees, after which they are estimated to be constant at 4.50%. See Note 18 to the Consolidated Financial Statements for more information.

Actual results that differ from our various pension and postretirement plan estimates are captured as actuarial gains/losses. When certain thresholds are met, the gains and losses are amortized into future earnings over the remaining life expectancy of participants. Changes in assumptions could have significant effects on earnings in future years.

Total net actuarial losses related to our U.S. pension benefit plans as of December 31, 2021 increased by $9.5 million in 2021 primarily due to a less favorable than expected return on assets, partially offset by changes in actuarial assumptions (most significantly a 30-basis point increase in the discount rate). The $9.5 million actuarial loss impacting our U.S. pension plans is reflected as a component of other comprehensive income in our Consolidated Statements of Operations and Comprehensive Income along with actuarial gains and losses from our foreign pension plan and our U.S. postretirement benefit plan.

Income Taxes – Our effective tax rate is primarily determined based on our pre-tax income, statutory income tax rates in the jurisdictions in which we operate, and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred income tax assets and liabilities. Deferred income tax assets are also recorded for state net operating losses (“NOL”), capital loss carryforwards, and foreign tax credit (“FTC”) carryforwards.

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As of December 31, 2021, we have recorded valuation allowances totaling $60.6 million for various federal and state deferred tax assets. While we have considered future taxable income in assessing the need for the valuation allowances based on our best available projections, if these estimates and assumptions change in the future or if actual results differ from our projections, we may be required to adjust our valuation allowances accordingly. Such adjustments could be material to our Consolidated Financial Statements.

As further described in Note 16 to the Consolidated Financial Statements, our Consolidated Balance Sheet as of December 31, 2021 includes deferred income tax liabilities of $166.9 million, net of $132.3 million of deferred tax assets. We have established valuation allowances in the amount of $60.6 million consisting of $41.2 million for state deferred tax assets, primarily operating loss carryforwards, $18.8 million for federal and state deferred tax assets related to capital loss carryforwards and $0.6 million for federal deferred tax assets related to FTC carryforwards. Inherent in determining our effective tax rate are judgments regarding business plans and expectations about future operations. These judgments include the amount and geographic mix of future taxable income, limitations on usage of NOL carryforwards, the impact of ongoing or potential tax audits, the amount of foreign source income and other future tax consequences.

As of December 31, 2021 and 2020, we had $700.9 million and $806.9 million, respectively, of gross state NOL carryforwards expiring between 2022 and 2041. We estimate we will need to generate future U.S. taxable income of approximately $476.0 million for state income tax purposes during the respective realization periods (ranging from 2022 to 2041) to be able to fully realize the net state NOL deferred income tax assets.

Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation and insufficient future taxable income prior to expiration of certain deferred tax assets.

Impairments of Tangible Assets, Intangible Assets and Goodwill – Our indefinite-lived assets include goodwill and other intangibles, primarily trademarks and brand names. Those trademarks and brand names are integral to our corporate identity and expected to contribute indefinitely to our corporate cash flows. Accordingly, they have been assigned an indefinite life. We conduct our annual impairment tests for these indefinite-lived intangible assets and goodwill during the fourth quarter. These assets undergo more frequent tests if an indication of possible impairment exists. We conduct impairment tests for tangible assets and definite-lived intangible assets when indicators of impairment exist for the asset group, such as operating losses and/or negative cash flows.

The principal assumptions used in our impairment tests for definite-lived intangible assets is operating profit adjusted for depreciation and amortization and, if required to estimate the fair value, the discount rate. The principal assumptions used in our impairment tests for indefinite-lived intangible assets include revenue growth rates, discount rate and royalty rate. The principal assumptions utilized in our impairment tests for goodwill include after-tax cash flows growth rates and discount rate. Revenue growth rates, after-tax cash flows growth rates and operating profit assumptions are derived from those used in our operating plan and strategic planning processes. The discount rate assumption is calculated based upon an estimated weighted average cost of capital which reflects the overall level of inherent risk and the rate of return a market participant would expect to achieve. The royalty rate assumption represents the estimated contribution of the intangible assets to the overall profits of the related businesses. Methodologies used for valuing our intangible assets did not change from prior periods.

In 2021, indefinite-lived intangibles and goodwill were tested for impairment based on the identified asset (for indefinite-lived intangibles) or on our identified reporting units (for goodwill). There were no impairment charges recorded in 2021, 2020 or 2019 related to intangible assets. We did not test tangible assets within our continuing operations for impairment in 2021, 2020 or 2019 as no indicators of impairment existed.

The revenue and cash flow estimates used in applying our impairment tests are based on management’s analysis of information available at the time of the impairment test and represent a market participant view. Actual cash flows lower than the estimate could lead to significant future impairments. If subsequent testing indicates that fair values have declined, the carrying values would be reduced and our future statements of operations would be affected.

We cannot predict the occurrence of certain events that might lead to material impairment charges in the future. Such events may include, but are not limited to, the impact of economic environments, particularly related to the commercial and residential construction industries, material adverse changes in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions. See Notes 3 and 13 to the Consolidated Financial Statements for further information.

Environmental Liabilities – We are actively involved in the investigation, closure and/or 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 a few cases, we are one of several potentially responsible parties and have agreed to jointly fund the required investigation, 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.

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We provide for environmental remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Accruals are estimates based on the judgment of management related to ongoing proceedings. Estimates of our future liability at the environmental sites are based on evaluations of currently available facts regarding each individual site. 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.

We evaluate the measurement of recorded liabilities each reporting period based on current facts and circumstances specific to each matter. The ultimate losses incurred upon final resolution may materially differ from the estimated liability recorded. Changes in estimates are recorded in earnings in the period in which such changes occur.

We are unable to predict the extent to which any recoveries from other parties or coverage under insurance policies might cover our final share of 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. However, 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.

Business Combinations and Contingent Consideration – Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the assets acquired and liabilities assumed at their respective fair values. Any excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed is recorded as goodwill. The estimated fair value of contingent consideration is recorded as a liability on the balance sheet at the date of acquisition. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets and contingent consideration. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies. We engage independent, third-party valuation specialists to assist in determining the fair values of acquired intangible assets and contingent consideration.

Both the Moz and Turf acquisitions in 2020 included the potential for contingent earn-out payments based on the financial performance of the acquired companies. We estimated the fair value of these contingent consideration liabilities upon acquisition and are required to measure the liability at fair value each reporting period until the contingency is resolved, with changes in the fair value after the acquisition date affecting earnings in the period of the estimated fair value change. See Notes 5 and 19 to the Consolidated Financial Statements for further information.

The principal assumptions used in valuing certain intangible assets and contingent consideration include future expected cash flows from sales and acquired developed technologies, the acquired company's trade names and customer relationships as well as assumptions about the period of time the acquired trade names and customer relationships will continue to be used in the combined company's portfolio, the probability of meeting the future revenue and EBITDA growth targets and discount rates used to determine the present value of estimated future cash flows.

These estimates are inherently uncertain and unpredictable, and if different estimates were used the total consideration, including the estimated fair value of the contingent consideration, could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value assigned to an acquired asset or an increase in the amounts recorded for assumed liabilities.

ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN FUTURE PERIODS

See Note 2 to the Consolidated Financial Statements for further information.

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