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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-37589
ARMSTRONG FLOORING, INC.
(Exact name of Registrant as specified in its charter) 
Delaware
 
47-4303305
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer Identification number)
 
 
 
 
 
 
 
       2500 Columbia Avenue,
Lancaster,
PA
 
 
17604
(Address of principal executive offices)
 
(Zipcode)
 
(717)
672-9611
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
AFI
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   þ No   ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.)  Yes   þ No  
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes     No   þ

The Registrant had 21,495,973 shares of common stock, $0.0001 par value, outstanding at July 31, 2019.
 



Armstrong Flooring, Inc.

Table of Contents
 
 
Page Number
 
 
 
 
PART I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5
Item 6.
 
 
 



Table of Contents    


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q ("Form 10-Q") and the documents incorporated by reference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, our expectations concerning our commercial and residential markets and their effect on our operating results, and our ability to increase revenues, earnings and earnings before interest, taxes, depreciation and amortization. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “predict,” “believe,” “may,” “will,” “would,” “could,” “should,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our financial condition, liquidity, results of operations or future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

global economic conditions;
competition;
availability and costs of raw materials and energy;
key customers;
construction activity;
costs savings and productivity initiatives;
strategic transactions;
information systems and transition services;
personnel;
intellectual property rights;
international operations;
labor;
claims and litigation;
liquidity;
debt;
debt covenants;
outsourcing;
environmental and regulatory matters; and
other risks detailed from time to time in our filings with the Securities and Exchange Commission ("SEC"), press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K and in the documents incorporated by reference.

Such forward-looking statements speak only as of the date they are made. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.



1

Table of Contents    


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in millions, except per share data)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
177.7

 
$
201.2

 
$
319.4

 
$
365.5

Cost of goods sold
141.5

 
157.5

 
261.1

 
292.5

Gross profit
36.2

 
43.7

 
58.3

 
73.0

Selling, general and administrative expenses
32.5

 
40.0

 
70.2

 
78.2

Operating earnings (loss)
3.7

 
3.7

 
(11.9
)
 
(5.2
)
Interest expense
0.9

 
1.0

 
1.9

 
2.0

Other expense, net
0.2

 
0.7

 
0.5

 
1.3

Earnings (loss) from continuing operations before income taxes
2.6

 
2.0

 
(14.3
)
 
(8.5
)
Income tax (benefit)
(2.7
)
 
(0.9
)
 
(3.0
)
 
(1.0
)
Net earnings (loss) from continuing operations
$
5.3

 
$
2.9

 
$
(11.3
)
 
$
(7.5
)
Earnings from discontinued operations, net of tax

 
7.6

 

 
7.6

Gain on disposal of discontinued operations, net of tax
9.4

 

 
9.3

 

Net earnings from discontinued operations
9.4

 
7.6

 
9.3

 
7.6

Net earnings (loss)
$
14.7

 
$
10.5

 
$
(2.0
)
 
$
0.1

 
 
 
 
 
 
 
 
Basic earnings (loss) per share of common stock:
 
 
 
 
 
 
 
Basic earnings (loss) per share of common stock from continuing operations
$
0.20

 
$
0.11

 
$
(0.43
)
 
$
(0.29
)
Basic earnings per share of common stock from discontinued operations
0.36

 
0.29

 
0.35

 
0.29

  Basic earnings (loss) per share of common stock
$
0.56

 
$
0.40

 
$
(0.08
)
 
$

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share of common stock:
 
 
 
 
 
 
 
Diluted earnings (loss) per share of common stock from continuing operations
$
0.20

 
$
0.11

 
$
(0.43
)
 
$
(0.29
)
Diluted earnings per share of common stock from discontinued operations
0.36

 
0.29

 
0.35

 
0.29

  Diluted earnings (loss) per share of common stock
$
0.56

 
$
0.40

 
$
(0.08
)
 
$

 
 
 
 
 
 
 
 

See accompanying notes to Condensed Consolidated Financial Statements.


2

Table of Contents    


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in millions)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net earnings (loss)
$
14.7

 
$
10.5

 
$
(2.0
)
 
$
0.1

Changes in other comprehensive income, net of tax:
 
 
 
 
 
 
 
 Foreign currency translation adjustments
(2.8
)
 
(6.2
)
 
(0.6
)
 
(1.5
)
 Derivative (loss) gain
(0.3
)
 
0.9

 
(0.8
)
 
1.7

 Pension and postretirement adjustments
0.6

 
2.5

 
1.8

 
4.6

 Total other comprehensive (loss) income
(2.5
)
 
(2.8
)
 
0.4

 
4.8

 Total comprehensive earnings (loss)
$
12.2

 
$
7.7

 
$
(1.6
)
 
$
4.9


See accompanying notes to Condensed Consolidated Financial Statements.


3

Table of Contents    


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions, except par value)
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
44.7

 
$
173.8

Restricted cash
0.8

 

Accounts and notes receivable, net
65.9

 
39.0

Inventories, net
136.0

 
139.5

Income tax receivable
0.6

 
0.6

Prepaid expenses and other current assets
15.3

 
18.0

Total current assets
263.3

 
370.9

Property, plant, and equipment, less accumulated depreciation and amortization of $335.2 and $318.8, respectively
291.4

 
296.1

Operating lease assets
7.5

 

Intangible assets, less accumulated amortization of $15.5 and $12.0, respectively
28.8

 
32.0

Deferred income taxes
5.7

 
5.6

Other noncurrent assets
2.8

 
3.6

Total assets
$
599.5

 
$
708.2

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
 Short-term debt
$

 
$
25.0

Current installments of long-term debt
4.0

 
3.7

Accounts payable and accrued expenses
110.6

 
141.4

Income tax payable
0.1

 
0.5

Total current liabilities
114.7

 
170.6

Long-term debt
69.0

 
70.6

Noncurrent operating lease liabilities
3.9

 

Postretirement benefit liabilities
53.7

 
55.7

Pension benefit liabilities
9.1

 
11.3

Other long-term liabilities
6.8

 
6.7

Noncurrent income taxes payable
0.2

 
0.2

Deferred income taxes
2.6

 
2.1

Total liabilities
260.0

 
317.2

Stockholders’ equity:
 
 
 
Common stock with par value $.0001 per share: 100,000,000 shares authorized; 28,332,190 issued and 21,474,902 outstanding shares as of June 30, 2019 and 28,284,358 issued and 25,832,193 outstanding shares as of December 31, 2018

 

Preferred stock with par value $.0001 per share: 15,000,000 shares authorized; none issued

 

Treasury stock, at cost, 6,857,288 shares as of June 30, 2019 and 2,452,165 shares as of December 31, 2018
(89.2
)
 
(39.7
)
Additional paid-in capital
678.2

 
678.6

Accumulated deficit
(188.3
)
 
(186.3
)
Accumulated other comprehensive (loss)
(61.2
)
 
(61.6
)
Total stockholders’ equity
339.5

 
391.0

Total liabilities and stockholders’ equity
$
599.5

 
$
708.2


See accompanying notes to Condensed Consolidated Financial Statements.

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Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(Dollars in millions)
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss)
 
(Accumulated Deficit)
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
December 31, 2018
25,832,193
 
$

 
2,452,165
 
$
(39.7
)
 
$
678.6

 
$
(61.6
)
 
$
(186.3
)
 
$
391.0

Net (loss)

 

 

 

 

 

 
(16.7
)
 
(16.7
)
Stock-based employee compensation, net
53,908

 

 
(50,251
)
 
0.9

 
(0.5
)
 

 

 
0.4

Other comprehensive income

 

 

 

 

 
2.9

 

 
2.9

March 31, 2019
25,886,101

 
$

 
2,401,914

 
$
(38.8
)
 
$
678.1

 
$
(58.7
)
 
$
(203.0
)
 
$
377.6

Net income

 

 

 

 

 

 
14.7

 
14.7

Repurchase of common stock
(4,504,504
)
 

 
4,504,504

 
(51.3
)
 

 

 

 
(51.3
)
Stock-based employee compensation, net
93,305

 

 
(49,130
)
 
0.9

 
0.1

 

 

 
1.0

Other comprehensive (loss)

 

 

 

 

 
(2.5
)
 

 
(2.5
)
June 30, 2019
21,474,902

 
$

 
6,857,288

 
$
(89.2
)
 
$
678.2

 
$
(61.2
)
 
$
(188.3
)
 
$
339.5


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Table of Contents    


 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss)
 
(Accumulated Deficit)
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
December 31, 2017
25,734,222

 
$

 
2,448,996

 
$
(39.9
)
 
$
674.2

 
$
(52.5
)
 
$
(31.8
)
 
$
550.0

Cumulative effect of adoption of ASC 606 new revenue recognition standard as of January 1

 

 

 

 

 

 
(4.1
)
 
(4.1
)
Cumulative effect of adoption of ASU 2018-02 related to tax reform as of January 1

 

 

 

 

 
(12.6
)
 
12.6

 

Net (loss)

 

 

 

 

 

 
(10.4
)
 
(10.4
)
Repurchase of common stock
(69,353
)
 

 
69,353

 
(1.0
)
 

 

 

 
(1.0
)
Stock-based employee compensation, net
77,258

 

 
(52,486
)
 
1.0

 
(0.1
)
 

 

 
0.9

Other comprehensive income

 

 

 

 

 
7.6

 

 
7.6

March 31, 2018
25,742,127

 
$

 
2,465,863

 
$
(39.9
)
 
$
674.1

 
$
(57.5
)
 
$
(33.7
)
 
$
543.0

Net income

 

 

 

 

 

 
10.5

 
10.5

Stock-based employee compensation, net
29,313

 

 
(13,698
)
 
0.2

 
0.9

 

 

 
1.1

Other comprehensive (loss)

 

 

 

 

 
(2.8
)
 

 
(2.8
)
June 30, 2018
25,771,440

 
$

 
2,452,165

 
$
(39.7
)
 
$
675.0

 
$
(60.3
)
 
$
(23.2
)
 
$
551.8

See accompanying notes to Condensed Consolidated Financial Statements.

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Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(2.0
)
 
$
0.1

Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:
 
 
 
Depreciation and amortization
22.3

 
28.0

Deferred income taxes
(0.6
)
 
0.3

Stock-based compensation
2.1

 
2.3

U.S. pension expense
2.7

 
3.4

Other non-cash adjustments, net
(0.5
)
 
1.0

Changes in operating assets and liabilities:
 
 
 
Receivables
(26.8
)
 
(24.4
)
Inventories
3.4

 
(10.7
)
Accounts payable and accrued expenses
(32.2
)
 
18.8

Income taxes payable and receivable

 
3.1

Other assets and liabilities
(2.2
)
 
2.7

Net cash (used for) provided by operating activities
(33.8
)
 
24.6

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(15.5
)
 
(17.4
)
Other investing activities

 
0.1

Net cash used for investing activities
(15.5
)
 
(17.3
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility

 
27.0

Payments on revolving credit facility
(25.0
)
 
(43.0
)
Financing costs
(0.1
)
 

Payments on long-term debt
(2.1
)
 

Payments on capital lease

 
(0.1
)
Purchases of treasury stock
(51.3
)
 
(1.0
)
Proceeds from exercised stock options
0.1

 
0.2

Value of shares withheld related to employee tax withholding
(0.7
)
 
(0.5
)
Net cash (used for) financing activities
(79.1
)
 
(17.4
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
0.1

 
(0.4
)
Net decrease in cash, cash equivalents and restricted cash
(128.3
)
 
(10.5
)
Cash, cash equivalents and restricted cash at beginning of year
173.8

 
39.0

Cash, cash equivalents and restricted cash at end of period
$
45.5

 
$
28.5

Cash, cash equivalents and restricted cash at end of period from discontinued operations

 
(3.5
)
Cash, cash equivalents and restricted cash at end of period from continuing operations
$
45.5

 
$
32.0

Supplemental Cash Flow Disclosure:
 
 
 
Amounts in accounts payable for capital expenditures
$
4.6

 
$
4.1

Interest paid
1.8

 
1.6

Income taxes paid (refunded), net
1.1

 
(1.6
)
See accompanying notes to Condensed Consolidated Financial Statements.

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Table of contents

Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)


NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Background
Armstrong Flooring, Inc. (“AFI”) is a leading global producer of resilient flooring products for use primarily in the construction and renovation of residential, commercial and institutional buildings. AFI designs, manufactures, sources and sells resilient flooring products in North America and the Pacific Rim. When we refer to "AFI," "the Company," "we," "our," and "us" in this report, we are referring to Armstrong Flooring, Inc., a Delaware corporation, and its consolidated subsidiaries.
Discontinued Operations
On November 14, 2018, AFI entered into a Stock Purchase Agreement with Tarzan Holdco, Inc. ("TZI"), a Delaware corporation and an affiliate of American Industrial Partners ("AIP"), to sell its North American wood flooring business. On December 31, 2018, AIP completed the purchase of all of the issued and outstanding shares of Armstrong Wood Products, Inc. ("AWP"), a Delaware corporation, including its direct and indirect wholly owned subsidiaries.
Basis of Presentation
The historical results of operations and financial position of the North American wood flooring business are reported as discontinued operations in the Condensed Consolidated Statements of Operations. The historical information in the accompanying Notes to the Condensed Consolidated Financial Statements have been restated to reflect the effects of the sale of the North American wood flooring business. For further information on discontinued operations, see Note 5.
These Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The statements include management estimates and judgments, where appropriate. Management uses estimates to record many items including certain asset values, allowances for bad debts, inventory obsolescence, lower of cost or market or net realizable value charges, warranty reserves, workers compensation, general liability and environmental claims and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates. In the opinion of management, all adjustments of a normal, recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Operating results for the three and six months ended June 30, 2019 and 2018 included in this report are unaudited. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in economic conditions between periods.
Certain amounts in the prior year’s Condensed Consolidated Financial Statements and related notes thereto have been recast to conform to the 2019 presentation. Otherwise, the accounting policies used in preparing the Condensed Consolidated Financial Statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended December 31, 2018 except as noted below. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
All significant intercompany transactions within AFI have been eliminated from the Condensed Consolidated Financial Statements.
Recently Adopted Accounting Standards
On January 1, 2019 we adopted ASU 2016-02, "Leases." The guidance, and subsequent amendments issued, requires a lessee to recognize the assets and liabilities that arise from a lease agreement. Specifically, this new guidance requires

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Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

lessees to recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term, with limited exceptions.

Adoption of the new standard resulted in the recording of lease assets and lease liabilities of $9.2 million as of January 1, 2019.

 
 
December 31, 2018
 
Impact from Adoption
 
January 1, 2019
Assets
 
 
 
 
 
 
Operating lease assets
 
$

 
$
8.6

 
$
8.6

Finance lease assets
 

 
0.6

 
0.6

Total lease assets
 
$

 
$
9.2

 
$
9.2

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current
 
 
 
 
 
 
      Operating
 
$

 
$
3.5

 
$
3.5

Noncurrent
 
 
 
 
 
 
      Operating
 

 
5.1

 
5.1

      Finance
 

 
0.6

 
0.6

Total lease liabilities
 
$

 
$
9.2

 
$
9.2



See Note 9 to the Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." The guidance requires immediate recognition of estimated credit losses that are expected to occur over the remaining life of many financial assets. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019, but early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows. We believe that the most notable impact of this ASU will relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on trade account receivables.

In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal use software license. Capitalized implementation costs should be amortized over the term of the service agreement on a straight line basis and should be assessed for impairment in a manner similar to long-lived assets. This new guidance is effective for fiscal years beginning after December 15, 2019 for public companies. Early adoption is permitted. We do not believe there will be a material impact from the adoption of this standard on our financial condition, results of operations and cash flows.
NOTE 2. REVENUE
We disaggregate revenue based on customer geography as geography represents the most appropriate depiction of how the nature, timing and uncertainty of revenues and cash flows are impacted by economic factors. 

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Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

The following table presents our revenues disaggregated by geographic area based upon the location of the customer.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
United States
$
136.6

 
$
156.5

 
$
245.9

 
$
286.5

China
19.1

 
17.7

 
30.5

 
28.2

Canada
10.6

 
14.9

 
20.6

 
27.1

Other
11.4

 
12.1

 
22.4

 
23.7

Total net sales
$
177.7

 
$
201.2

 
$
319.4

 
$
365.5


NOTE 3. SEVERANCE EXPENSE
In the second quarter of 2019, we recorded $2.9 million in selling, general and administrative ("SG&A") expenses for severance and related expenses to reflect the separation costs for our former President and Chief Executive Officer.

In the first quarter of 2018, we announced that we were changing our residential go-to-market strategy and empowering our distributors with the responsibilities of marketing, merchandising and direct sales representation. The new structure was designed to provide enhanced support and responsiveness to retailers. As a result of the reorganization, approximately 70 positions were eliminated, and the impacted employees received severance benefits. We recognized charges of $3.1 million primarily in SG&A expenses.

NOTE 4. INCOME TAXES
The following table presents details related to our income taxes:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Earnings (loss) from continuing operations before income taxes
$
2.6

 
$
2.0

 
$
(14.3
)
 
$
(8.5
)
Income tax (benefit)
(2.7
)
 
(0.9
)
 
(3.0
)
 
(1.0
)
Effective tax rate
(103.8
)%
 
(45.0
)%
 
21.0
%
 
11.8
%

Pursuant to ASC 740, we are required to consider all items (including items recorded in discontinued operations and other comprehensive income) in determining the amount of tax benefit that results from a loss from continuing operations. As such, we recorded year to date income tax benefits of $3.9 million as a result of the income included in discontinued operations and other comprehensive income. The remaining tax expense relates to the mix of income among tax jurisdictions.
Upon audit, taxing authorities may challenge all or part of an uncertain income tax position. While AFI has no history of tax audits on a stand-alone basis, AWI was routinely audited by U.S. federal, state and local, and non-U.S. taxing authorities. Accordingly, AFI regularly assesses the outcome of potential examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. We do not expect to record any material changes during 2019 to our unrecognized tax benefits as of December 31, 2018.
As of June 30, 2019, we consider foreign unremitted earnings to be permanently reinvested.

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Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

NOTE 5. DISCONTINUED OPERATIONS
In December 2018, we completed the sale of our wood business to TZI. The proceeds from the sale were $90.2 million, net of closing costs, transaction fees and taxes. The transaction is subject to a customary post-closing working capital adjustment process, which was completed in the third quarter of 2019.
The financial results of the wood business have been reclassified as discontinued operations for all periods presented. The Condensed Consolidated Statements of Cash Flows do not separately report the cash flows of the discontinued operation.
The following is a summary of the operating results of the wood business, which are included in discontinued operations.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2018
Net sales
$
104.8

 
$
198.4

Cost of goods sold
85.7

 
169.3

Gross profit
19.1

 
29.1

Selling, general and administrative expenses
8.8

 
18.8

Operating earnings
10.3

 
10.3

Interest expense

 

Other expense, net

 

Earnings before income tax
10.3

 
10.3

Income tax expense
2.7

 
2.7

Net earnings from discontinued operations
$
7.6

 
$
7.6

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2018
Depreciation and Amortization
$
2.9

 
$
5.9

Capital Expenditures
(1.6
)
 
(3.7
)

The following is a summary of the results related to the net gain on disposal of the wood business which is included in discontinued operations:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2019
Gain on disposal of discontinued operations before income tax
$
12.7

 
$
12.6

Income tax expense
3.3

 
3.3

Net gain on disposal of discontinued operations
$
9.4

 
$
9.3


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Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

During the second quarter of 2019, we reached a resolution in our antidumping case resulting in a reversal of a previously recognized liability of $11.4 million, which was reflected in gain on disposal of discontinued operations. See Note 14 for further information.
NOTE 6. EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings per share components may not add due to rounding.
The table below shows a reconciliation of the numerator and denominator for basic and diluted earnings (loss) per share calculations for the periods indicated.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Numerator
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
5.3

 
$
2.9

 
$
(11.3
)
 
$
(7.5
)
  Net earnings from discontinued operations
9.4

 
7.6

 
9.3

 
7.6

Net earnings (loss)
$
14.7

 
$
10.5

 
$
(2.0
)
 
$
0.1

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
25,602,519

 
25,759,232

 
25,726,288

 
25,748,571

Weighted average number of vested shares not yet issued
455,263

 
180,060

 
628,845

 
171,487

Weighted average number of common shares outstanding - Basic
26,057,782

 
25,939,292

 
26,355,133

 
25,920,058

Dilutive impact of stock-based compensation plans
81,701

 
55,928

 

 
99,419

Weighted average number of common shares outstanding - Diluted
26,139,483

 
25,995,220

 
26,355,133

 
26,019,477



For the three months ended June 30, 2019 and three and six months ended June 30, 2018, the diluted earnings per share was calculated using net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period, determined using the treasury stock method. For the six months ended June 30, 2019 the diluted loss per share was calculated using basic common shares outstanding, as inclusion of potentially dilutive common shares would be anti-dilutive.

Performance-based employee compensation awards are considered potentially dilutive in the initial period in which the performance conditions are met.

The following awards were excluded from the computation of diluted earnings (loss) per share:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Potentially dilutive common shares excluded from diluted computation, as inclusion would be anti-dilutive
411,360

 
506,255

 
425,718

 
716,587
Performance awards excluded from diluted computation, as performance conditions not met
344,440

 
1,119,301

 
426,753

 
1,031,082


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Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

NOTE 7. ACCOUNTS AND NOTES RECEIVABLE
The following table presents accounts and note receivables, net of allowances:
 
June 30, 2019
 
December 31, 2018
Customer receivables
$
76.5

 
$
45.4

Miscellaneous receivables
5.2

 
6.2

Less: allowance for product claims, discounts, returns and losses
(15.8
)
 
(12.6
)
Total
$
65.9

 
$
39.0


Generally, we sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.
Allowance for product claims represents expected reimbursements for cost associated with warranty repairs and customer accommodation claims, the majority of which is provided to our independent distributors through a credit against accounts receivable from the distributor to AFI.

The following table summarizes the activity for the allowance for product claims:
 
Six Months Ended June 30,
 
2019
 
2018
Balance as of January 1
$
(6.4
)
 
$
(5.6
)
Cumulative effect of adoption of new revenue recognition standard as of January 1

 
(1.7
)
Reductions for payments
3.5

 
3.8

Current year claim accruals
(5.0
)
 
(2.5
)
Balance as of June 30
$
(7.9
)
 
$
(6.0
)

NOTE 8. INVENTORIES
The following table presents details related to our inventories, net:
 
June 30, 2019

December 31, 2018
Finished goods
$
107.9

 
$
110.5

Goods in process
6.1

 
5.7

Raw materials and supplies
22.0

 
23.3

Total
$
136.0

 
$
139.5


NOTE 9. LEASES
We lease certain real estate (warehouse and office space), vehicles and equipment. For leases with an initial term of less than 13 months we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with an initial term of thirteen months or more are recorded on the balance sheet. We consider all payments fixed unless there is a material impact to the balance sheet at any given time during the lease period.
Our leases have remaining lease terms of one month to ten years. Many leases include one or more options to renew, with renewal terms that can extend the lease term from one month to ten years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable

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Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The FASB allows companies transition and practical expedient elections to simplify the transition of the new standard. We have elected the following:
We have elected to not restate comparative prior periods but instead recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, if a difference existed between the initial lease liability and related right of use asset.
We have elected to use the hindsight practical expedient with respect to determining the lease term allowing us to consider the actual outcome of lease renewals, termination options and purchase options, and in assessing impairment of right-of-use assets for existing leases.
We have elected to combine lease and non-lease components as a single component and account for it as a lease for all asset classes with the exception of land and non-operating buildings. Lease and non-lease components of land and non-operating buildings are generally accounted for separately.
We have elected to use a portfolio approach to determine the discount rate and defined portfolio based on the geographic location of the asset by country and duration of the lease.
The following table summarizes components of lease expense:
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Finance lease cost
 
 
 
 
   Amortization of right-of-use asset
 
$
0.1

 
$
0.2

Operating lease cost
 
1.1

 
2.1

Short-term lease cost
 
0.1

 
0.6

Sublease income
 
(1.1
)
 
(1.4
)
Total lease cost
 
$
0.2

 
$
1.5



In the second quarter of 2019 we recognized $0.9 million and $1.6 million of sublease income and income from non-lease components, respectively, in SG&A expenses related to termination fees received from TZI due to the cancellation of a sublease before the end of the lease term.


14

Table of contents

Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

The following table summarizes supplemental balance sheet information related to leases:
 
 
Balance Sheet Classification
 
June 30, 2019
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
7.5

Finance lease assets
 
Property, plant and equipment, less accumulated depreciation
 
0.6

Total lease assets
 
 
 
$
8.1

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
      Operating
 
Accounts payable and accrued expenses
 
$
3.7

      Finance
 
Current installments of long-term debt
 
0.3

Noncurrent
 
 
 
 
      Operating
 
Noncurrent operating lease liabilities
 
3.9

      Finance
 
Long-term debt
 
0.3

Total lease liabilities
 
 
 
$
8.2



The following table summarizes supplemental cash flow information related to leases:
 
 
Six Months Ended June 30,
 
 
2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
   Operating cash flows from operating leases
 
$
1.1

   Financing cash flows from finance leases
 
0.1



The following table summarizes weighted average remaining lease term and weighted average discount rate:
 
 
June 30, 2019
 
 
Weighted Average
 
 
Remaining Lease Term (Years)
 
Discount Rate
 
 
 
 
 
Operating leases
 
3.0
 
5.8
%
Finance leases
 
2.7
 
5.4
%



15

Table of contents

Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

The following table provides future minimum payments at June 30, 2019 by year and in the aggregate, having non-cancelable lease terms in excess of one year.
 
 
Operating Leases
 
Finance Leases
2019 (Remaining)
 
$
2.2

 
$
0.2

2020
 
3.6

 
0.2

2021
 
1.2

 
0.1

2022
 
0.3

 
0.1

2023
 
0.3

 

Thereafter
 
1.2

 

Total
 
$
8.8

 
$
0.6



In our 2018 Form 10-K we disclosed expected future minimum lease payments at December 31, 2018 of $20.4 million. The adoption of ASC 842 reduced the expected future minimum lease payments by removing costs related to non-lease components of existing contracts and agreements no longer defined as operating leases by $8.2 million and $2.3 million, respectively.

The following table provides reconciliation of future minimum lease payment and lease liability:
 
June 30, 2019
 
Operating Leases
 
Finance Leases
Future minimum lease payments
$
8.8

 
$
0.6

  Less: Unamortized interest
1.2

 

Total lease liability
$
7.6

 
$
0.6



NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table details amounts related to our accounts payable and accrued expenses:
 
June 30, 2019
 
December 31, 2018
Payables, trade and other
$
78.5

 
$
99.5

Employment costs
14.6

 
25.0

Other accrued expenses
13.8

 
16.9

Current operating lease liabilities
3.7

 

Total
$
110.6

 
$
141.4



16

Table of contents

Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
The following table summarizes our pension and postretirement expense:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Defined-benefit pension, U.S.
 
 
 
 
 
 
 
Service cost
$
0.7

 
$
1.0

 
$
1.3

 
$
1.9

Interest cost
3.7

 
3.6

 
7.5

 
7.3

Expected return on plan assets
(5.4
)
 
(5.5
)
 
(10.8
)
 
(11.1
)
Amortization of net actuarial loss
2.4

 
2.7

 
4.8

 
5.4

Total, defined-benefit pension, U.S.
$
1.4

 
$
1.8

 
$
2.8

 
$
3.5

Defined-benefit pension, Canada
 
 
 
 
 
 
 
Interest cost
$
0.2

 
$
0.2

 
$
0.3