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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, 2020
 
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
 
 
17603
(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 21,594,124 shares of common stock, $0.0001 par value, outstanding at July 27, 2020.
 



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, income 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:

the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties;
global economic conditions;
competition;
availability and costs of raw materials and energy;
key customers;
construction activity;
execution of strategy;
international operations;
debt covenants;
liquidity;
debt;
information systems and transition services;
personnel;
intellectual property rights;
claims and litigation;
labor;
internal controls;
environmental and regulatory matters;
outsourcing; 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 our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 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,
 
2020
 
2019
 
2020
 
2019
Net sales
$
145.6

 
$
177.7

 
$
284.3

 
$
319.4

Cost of goods sold
120.9

 
141.5

 
236.3

 
261.1

Gross profit
24.7

 
36.2

 
48.0

 
58.3

Selling, general and administrative expenses
30.3

 
32.5

 
66.9

 
70.2

Operating (loss) income
(5.6
)
 
3.7

 
(18.9
)
 
(11.9
)
Interest expense
1.2

 
0.9

 
1.8

 
1.9

Other (income) expense, net
(0.5
)
 
0.2

 
(0.9
)
 
0.5

(Loss) earnings from continuing operations before income taxes
(6.3
)
 
2.6

 
(19.8
)
 
(14.3
)
Income tax (benefit)

 
(2.7
)
 
(0.3
)
 
(3.0
)
Net (loss) income from continuing operations
$
(6.3
)
 
$
5.3

 
$
(19.5
)
 
$
(11.3
)
Gain on disposal of discontinued operations, net of tax

 
9.4

 

 
9.3

Net income from discontinued operations

 
9.4

 

 
9.3

Net (loss) income
$
(6.3
)
 
$
14.7

 
$
(19.5
)
 
$
(2.0
)
 
 
 
 
 
 
 
 
Basic (loss) earnings per share of common stock:
 
 
 
 
 
 
 
Basic (loss) earnings per share of common stock from continuing operations
$
(0.29
)
 
$
0.20

 
$
(0.89
)
 
$
(0.43
)
Basic earnings per share of common stock from discontinued operations

 
0.36

 

 
0.35

  Basic (loss) earnings per share of common stock
$
(0.29
)
 
$
0.56

 
$
(0.89
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
Diluted (loss) earnings per share of common stock:
 
 
 
 
 
 
 
Diluted (loss) earnings per share of common stock from continuing operations
$
(0.29
)
 
$
0.20

 
$
(0.89
)
 
$
(0.43
)
Diluted earnings per share of common stock from discontinued operations

 
0.36

 

 
0.35

  Diluted (loss) earnings per share of common stock
$
(0.29
)
 
$
0.56

 
$
(0.89
)
 
$
(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,
 
2020
 
2019
 
2020
 
2019
Net (loss) income
$
(6.3
)
 
$
14.7

 
$
(19.5
)
 
$
(2.0
)
Changes in other comprehensive income, net of tax:
 
 
 
 
 
 
 
 Foreign currency translation adjustments
1.6

 
(2.8
)
 
(0.9
)
 
(0.6
)
 Derivative (loss) gain
(0.9
)
 
(0.3
)
 
0.4

 
(0.8
)
 Pension and postretirement adjustments
0.9

 
0.6

 
2.2

 
1.8

 Total other comprehensive income (loss)
1.6

 
(2.5
)
 
1.7

 
0.4

 Total comprehensive (loss) income
$
(4.7
)
 
$
12.2

 
$
(17.8
)
 
$
(1.6
)

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, 2020
 
December 31, 2019
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34.1

 
$
27.1

Accounts and notes receivable, net
45.0

 
36.1

Inventories, net
122.3

 
111.6

Income tax receivable
1.1

 
0.7

Prepaid expenses and other current assets
11.6

 
10.0

Total current assets
214.1

 
185.5

Property, plant, and equipment, less accumulated depreciation and amortization of $333.4 and $318.4, respectively
266.6

 
277.2

Operating lease assets
5.7

 
6.0

Intangible assets, less accumulated amortization of $22.5 and $19.0, respectively
22.0

 
25.4

Deferred income taxes
5.1

 
5.3

Other noncurrent assets
2.2

 
2.8

Total assets
$
515.7

 
$
502.2

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
 Short-term debt
$
4.2

 
$

Current installments of long-term debt
1.1

 
0.2

Accounts payable and accrued expenses
114.9

 
104.4

Total current liabilities
120.2

 
104.6

Long-term debt, net of unamortized debt issuance costs
62.7

 
42.5

Noncurrent operating lease liabilities
2.2

 
2.7

Postretirement benefit liabilities
57.5

 
59.7

Pension benefit liabilities
12.6

 
16.0

Other long-term liabilities
6.0

 
5.8

Noncurrent income taxes payable
0.2

 
0.2

Deferred income taxes
2.5

 
2.4

Total liabilities
263.9

 
233.9

Stockholders’ equity:
 
 
 
Common stock with par value $.0001 per share: 100,000,000 shares authorized; 28,376,662 issued and 21,593,522 outstanding shares as of June 30, 2020 and 28,357,658 issued and 21,519,761 outstanding shares as of December 31, 2019

 

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

 

Treasury stock, at cost, 6,783,140 shares as of June 30, 2020 and 6,837,897 shares as of December 31, 2019
(87.9
)
 
(88.9
)
Additional paid-in capital
677.0

 
676.7

Accumulated deficit
(264.3
)
 
(244.8
)
Accumulated other comprehensive (loss)
(73.0
)
 
(74.7
)
Total stockholders’ equity
251.8

 
268.3

Total liabilities and stockholders’ equity
$
515.7

 
$
502.2


See accompanying notes to Condensed Consolidated Financial Statements.

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Table of Contents    


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, 2019
21,519,761
 
$

 
6,837,897
 
$
(88.9
)
 
$
676.7

 
$
(74.7
)
 
$
(244.8
)
 
$
268.3

Net (loss)

 

 

 

 

 

 
(13.2
)
 
(13.2
)
Stock-based employee compensation, net
36,072

 

 
(36,072
)
 
0.7

 

 

 

 
0.7

Other comprehensive income

 

 

 

 

 
0.1

 

 
0.1

March 31, 2020
21,555,833

 
$

 
6,801,825

 
$
(88.2
)
 
$
676.7

 
$
(74.6
)
 
$
(258.0
)
 
$
255.9

Net (loss)

 

 

 

 

 

 
(6.3
)
 
(6.3
)
Stock-based employee compensation, net
37,689

 

 
(18,685
)
 
0.3

 
0.3

 

 

 
0.6

Other comprehensive income

 

 

 

 

 
1.6

 

 
1.6

June 30, 2020
21,593,522

 
$

 
6,783,140

 
$
(87.9
)
 
$
677.0

 
$
(73.0
)
 
$
(264.3
)
 
$
251.8

 
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

See accompanying notes to Condensed Consolidated Financial Statements.

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Table of Contents    


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net (loss)
(19.5
)
 
(2.0
)
Adjustments to reconcile net (loss) to net cash (used for) operating activities:
 
 
 
Depreciation and amortization
20.9

 
22.3

Deferred income taxes
(0.6
)
 
(0.6
)
Stock-based compensation
1.3

 
2.1

Gain from long-term disability plan change
(1.1
)
 

U.S. pension expense
1.9

 
2.7

Other non-cash adjustments, net
0.5

 
(0.5
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(9.2
)
 
(26.8
)
Inventories
(11.0
)
 
3.4

Accounts payable and accrued expenses
15.4

 
(32.2
)
Other assets and liabilities
(5.5
)
 
(2.2
)
Net cash (used for) operating activities
(6.9
)
 
(33.8
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(10.9
)
 
(15.5
)
Net cash (used for) investing activities
(10.9
)
 
(15.5
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
41.2

 

Payments on revolving credit facility
(79.2
)
 
(25.0
)
Issuance of long-term debt
70.0

 

Financing costs
(6.9
)
 
(0.1
)
Payments on long-term debt
(0.1
)
 
(2.1
)
Purchases of treasury stock

 
(51.3
)
Proceeds from exercised stock options

 
0.1

Value of shares withheld related to employee tax withholding

 
(0.7
)
Net cash provided by (used for) financing activities
25.0

 
(79.1
)
Effect of exchange rate changes on cash and cash equivalents
(0.2
)
 
0.1

Net increase (decrease) in cash and cash equivalents
7.0

 
(128.3
)
Cash and cash equivalents at beginning of year
27.1

 
173.8

Cash and cash equivalents at end of period
$
34.1

 
$
45.5

Supplemental Cash Flow Disclosure:
 
 
 
Amounts in accounts payable for capital expenditures
$
2.0

 
$
4.6

Interest paid
1.7

 
1.8

Income taxes paid (refunded), net
0.4

 
1.1

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.
Basis of Presentation
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, 2020 and 2019 included in this report are unaudited. Quarterly results are not necessarily indicative of annual income, primarily due to the different level of sales in each quarter of the year and the possibility of changes in economic conditions between periods.
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, 2019, 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, 2019.
All significant intercompany transactions within AFI have been eliminated from the Condensed Consolidated Financial Statements.

COVID-19

The COVID-19 pandemic has significantly impacted our operations and resulted in lower than expected revenue in 2020. In response, we have implemented several cost reduction initiatives, including reduced capital spending, implementing a furlough of certain salaried employees and reducing employee benefits. We are also pursuing a plan expected to monetize non-core assets. The impact of the pandemic on our future results is unknown. We have incurred net losses for the past several years, and negative cash flows from operations beginning in 2019. The pandemic’s impacts, our recurring losses and our negative cash flows resulted in the identification of a triggering event requiring impairment testing of our North America long-lived assets in the first quarter of 2020. The results of this testing indicated that, as of March 31, 2020, our North America long-lived assets were not impaired. Our actual second quarter 2020 results exceeded the assumptions used in our first quarter 2020 impairment test. While no long-lived asset impairment, significant inventory write-down or significant incremental accounts receivable reserves were recorded in the first six months of 2020, such charges are possible in the future, which could have a material adverse effect on our future results.
Recently Adopted Accounting Standards
On January 1, 2020, we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." The guidance and subsequent amendments issued, requires immediate recognition of estimated credit losses that are expected to occur over the remaining life of many financial assets. The most notable impact of this ASU related to our processes around

7

Table of contents

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

the assessment of the adequacy of our allowance for doubtful accounts on trade account receivables. We adopted using the modified retrospective transition method. The adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.

On January 1, 2020, we adopted ASU 2018-13, "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The guidance eliminates, adds and modifies certain disclosure requirements. Adoption of the standard did not have an impact our financial condition, results of operations or cash flows.

On January 1, 2020, we adopted ASU 2018-14, "Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The guidance changes the disclosure requirements by eliminating certain disclosures that are no longer considered cost beneficial and added new ones that are considered pertinent. Adoption of the standard did not have an impact our financial condition, results of operations or cash flows.

On January 1, 2020, we adopted 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. We adopted using the prospective transition method. This standard did not have a material impact on our financial condition, results of operations and cash flows.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)." The guidance simplifies accounting for income taxes by removing certain exceptions. This new guidance is effective for fiscal years beginning after December 15, 2020 for public companies. Early adoption is permitted. We are continuing to evaluate the impact the adoption of this standard will have on our financial condition, results of operations and cash flows.


8

Table of contents

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

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.
 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,
 
2020
 
2019
 
2020
 
2019
Net sales
 
 
 
 
 
 
 
United States
$
113.9

 
$
136.6

 
$
229.1

 
$
245.9

China
17.4

 
19.1

 
24.0

 
30.5

Canada
6.2

 
10.6

 
13.5

 
20.6

Other
8.1

 
11.4

 
17.7

 
22.4

Total net sales
$
145.6

 
$
177.7

 
$
284.3

 
$
319.4



NOTE 3. SEVERANCE

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.

NOTE 4. INCOME TAXES
The following table presents details related to our income taxes:
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
(Loss) income from continuing operations before income taxes
$
(6.3
)
 
$
2.6

 
$
(19.8
)
 
$
(14.3
)
Income tax (benefit)

 
(2.7
)
 
(0.3
)
 
(3.0
)
Effective tax rate
%
 
(103.8
)%
 
1.5
%
 
21.0
%

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.

For the six months ended June 30, 2020, we recognized an income tax benefit consisting of a U.S. income tax benefit and a foreign income tax expense from various jurisdictions. The U.S. income tax benefit relates to a reduction in the Company’s valuation allowance due to the tax impact of the gains in other comprehensive income.

For the three and six months ended June 30, 2019, we recognized an income tax benefit consisting of a U.S. income tax benefit and a foreign income tax expense from various jurisdictions. The U.S. income tax benefit relates to a reduction in our valuation allowance due to the tax impact of the gains from resolution of our antidumping case in discontinued operations and gains on other comprehensive income.



9

Table of contents

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



Upon audit, taxing authorities may challenge all or part of an uncertain income tax position. 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 2020 to our unrecognized tax benefits as of December 31, 2019.
As of June 30, 2020, we consider foreign unremitted income to be permanently reinvested.

NOTE 5. DISCONTINUED OPERATIONS
In December 2018, we completed the sale of our wood business to Tarzan Holdco, Inc. ("TZI"), a Delaware corporation and an affiliate of American Industrial Partners. The proceeds from the sale were $90.2 million, net of closing costs, transaction fees and taxes. The transaction was subject to a customary post-closing working capital adjustment process which resulted in us making a $1.9 million payment to TZI in the third quarter of 2019.
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, 2019
 
Six Months Ended June 30, 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

During the second quarter of 2019, we reached a resolution in our antidumping case regarding our previously operated plant in Kunshan, China that manufactured multilayered wood flooring. We resolved our potential liability outside of litigation pursuant to a settlement agreement with the petitioners. As a result, we reversed the previously recognized liability of $11.4 million, which was reflected in gain on disposal of discontinued operations.
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.

10

Table of contents

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

 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Numerator
 
 
 
 
 
 
 
Net (loss) income from continuing operations
$
(6.3
)
 
$
5.3

 
$
(19.5
)
 
$
(11.3
)
  Net income from discontinued operations

 
9.4

 

 
9.3

Net (loss) income
$
(6.3
)
 
$
14.7

 
$
(19.5
)
 
$
(2.0
)
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
21,574,595

 
25,602,519

 
21,551,024

 
25,726,288

Weighted average number of vested shares not yet issued
346,845

 
455,263

 
331,987

 
628,845

Weighted average number of common shares outstanding - Basic
21,921,440

 
26,057,782

 
21,883,011

 
26,355,133

Dilutive impact of stock-based compensation plans

 
81,701

 

 

Weighted average number of common shares outstanding - Diluted
21,921,440

 
26,139,483

 
21,883,011

 
26,355,133



For the three months and six months ended June 30, 2020 and 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. For the three months ended June 30, 2019 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.

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,
 
2020
 
2019
 
2020
 
2019
Potentially dilutive common shares excluded from diluted computation, as inclusion would be anti-dilutive
1,016,278

 
411,360

 
1,038,705

 
425,718
Performance awards excluded from diluted computation, as performance conditions not met
175,174

 
344,440

 
177,839

 
426,753



11

Table of contents

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, 2020
 
December 31, 2019
Customer receivables
$
59.2

 
$
47.1

Miscellaneous receivables
4.0

 
7.2

Less: allowance for product claims, discounts, returns and losses
(18.2
)
 
(18.2
)
Total
$
45.0

 
$
36.1


On January 1, 2020 we adopted 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. 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. We adopted this ASU using the modified retrospective transition method. The adoption of the standard did not have a material impact on our results of operations or cash flows.
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,
 
2020
 
2019
Balance as of January 1
$
(9.0
)
 
$
(6.4
)
Reductions for payments
3.3

 
3.5

Current year claim accruals
(3.8
)
 
(5.0
)
Balance as of June 30
$
(9.5
)
 
$
(7.9
)


NOTE 8. INVENTORIES
The following table presents details related to our inventories, net:
 
June 30, 2020

December 31, 2019
Finished goods
$
93.8

 
$
87.1

Goods in process
5.6

 
4.5

Raw materials and supplies
22.9

 
20.0

Total
$
122.3

 
$
111.6



NOTE 9. LEASES
On June 26, 2020, we entered into new Headquarters (HQ) and Technical Center lease agreements with High Properties. The term of the HQ lease will be ten years and four months, with an anticipated commencement date of June 1, 2021.

12

Table of contents

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

The term of the Technical Center lease will be ten years and seven months, with an anticipated commencement date of March 1, 2021. Both leases will be recorded as operating leases.
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.

NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table details amounts related to our accounts payable and accrued expenses:
 
June 30, 2020
 
December 31, 2019
Payables, trade and other
$
83.9

 
$
70.5

Employment costs
13.9

 
13.8

Other accrued expenses
13.6

 
16.8

Current operating lease liabilities
3.5

 
3.3

Total
$
114.9

 
$
104.4


NOTE 11. DEBT
 
June 30, 2020
 
December 31, 2019
Credit Lines
$
4.2

 
$

ABL Facility

 
42.2

Current portion of Term Loan Facility
0.9

 

Current portion of finance lease
0.2

 
0.2

Noncurrent portion of Term Loan Facility
69.1

 

Noncurrent portion of finance leases
0.5

 
0.3

Total principal balance outstanding
74.9

 
42.7

Less: Deferred financing costs, net
(6.9
)
 

Total
$
68.0

 
$
42.7


On June 23, 2020, we entered into a Third Amendment to the ABL Credit Facility (the "Amendment"), which reduces commitments from $100 million to $90 million, amends the interest rates applicable to the loans, modifies certain financial maintenance and other covenants, and permits indebtedness under the Term Loan Agreement defined below. The Amended ABL Credit Facility provides for a borrowing base that is derived from our accounts receivable and inventory, collectively, with the equity interests in the guarantors, (the "ABL Priority Collateral"), subject to certain reserves and other limitations. The Amended ABL Credit Facility matures in December 2023.

The Amendment permits us to grant a first priority security interest in real estate, machinery and equipment and intellectual property collateral to Pathlight Capital LP (the "Term Loan Agent") (collectively, the “Term Loan Priority Collateral”). Bank of America, N.A., as administrative agent and collateral agent (in such capacities, the “ABL Agent”) will not have a security interest in the real property securing the Term Loan Agreement (as defined below) but will have a second priority security interest in machinery and equipment and intellectual property constituting Term Loan Priority Collateral.

13

Table of contents

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

Borrowings under the Amended ABL Credit Facility will bear interest at a rate per annum equal to, at our option, a base rate or a Eurodollar rate equal to the London interbank offered rate (“LIBOR”) for the relevant interest period, plus, in each case, an applicable margin determined in accordance with the provisions of the Amendment. The base rate will be the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) LIBOR plus 1.00%. The applicable margin for borrowings under the Amended ABL Credit Facility will be determined based on the Company’s Consolidated Leverage Ratio (as defined in the Amendment) and will range from 1.75% to 3.00% with respect to base rate borrowings and 2.75% to 4.00% with respect to Eurodollar rate borrowings. In addition to paying interest on outstanding principal under the Amended ABL Credit Facility, we will pay a commitment fee to the lenders with respect to the unutilized revolving commitments thereunder at a rate ranging from 0.375% to 0.50% depending on the Company’s Consolidated Leverage Ratio.

In addition, the Amendment also amends certain financial covenants. The Amended ABL Credit Facility requires, among other things, that we maintain a minimum Consolidated Cash Flow (as defined in the Amendment) for the three-fiscal quarter period ending September 30, 2020 and for any four-fiscal quarter period ending thereafter, have minimum Availability (as defined in the Amended ABL Credit Facility) of $30 million and, during a Financial Covenant Trigger Period (as defined in the Amendment), maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Amendment) of at least 1.00 to 1.00 (such covenants, the “Financial Covenants”).

On June 23, 2020 we also entered into a new term loan facility with Pathlight Capital LP as the administrative agent ("Term Loan Agreement"). The Term Loan Agreement provides us with a secured term loan credit facility of $70 million (the “Term Loan Facility”). The borrowing base is derived from the Company’s machinery and equipment, intellectual property and real property, subject to certain reserves and other limitations. The Term Loan Facility is scheduled to mature on June 23, 2025. The principal balance of the Term Loan Facility is payable in quarterly installments beginning in June 2021. We used the proceeds of the Term Loan Facility to pay down the Amended ABL Credit Facility.
Borrowings under the Term Loan Facility will bear interest at a rate per annum equal to LIBOR for a three-month interest period, plus an applicable margin of 12.00%.
We must use cash proceeds from certain dispositions, including sales of real estate, equity and debt issuances and extraordinary events to prepay outstanding loans under the Term Loan Facility, subject to specified exceptions, including the prepayment requirements with respect to the Amended ABL Credit Facility. Prepayments of loans under the Term Loan Facility prior to the third anniversary of the closing date are subject to certain premiums.
All obligations under the Term Loan Agreement are guaranteed by each of our wholly owned domestic subsidiaries that individually, or together with its subsidiaries, has assets of more than $1.0 million and are secured by a first priority lien on the Term Priority Collateral and a second priority lien on the ABL Priority Collateral.
The Term Loan Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to create liens, to undertake fundamental changes, to incur debt, to sell or dispose of assets, to make investments, to make restricted payments such as dividends, distributions or equity repurchases, to change the nature of our businesses, to enter into transactions with affiliates and to enter into certain burdensome agreements.
In addition, the Term Loan Agreement requires us to comply with the amended ABL Credit Facility Financial Covenants.
The Term Loan Agreement also contains customary affirmative covenants and events of default, including a cross-default provision in respect of certain material indebtedness and a change of control provision. If an event of default occurs, the lenders may choose to accelerate the maturity of the Term Loan Facility and require repayment of all obligations thereunder.


14

Table of contents

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

NOTE 12. 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,
 
2020
 
2019
2020
 
2019
Defined-benefit pension, U.S.
 
 
 
 
 
 
Service cost
$
0.7

 
$
0.7

$
1.3

 
$
1.3

Interest cost
3.1

 
3.7

6.2

 
7.5

Expected return on plan assets
(5.4
)
 
(5.4
)
(10.7
)
 
(10.8
)
Amortization of net actuarial loss
2.5

 
2.4

5.1

 
4.8

Total, defined-benefit pension, U.S.
$
0.9

 
$
1.4

$
1.9

 
$
2.8

Defined-benefit pension, Canada
 
 
 
 
 
 
Interest cost
$
0.1

 
$
0.2

$
0.2

 
$
0.3

Expected return on plan assets
(0.2
)
 
(0.2
)
(0.3
)
 
(0.3
)
Amortization of net actuarial loss
0.1

 

0.2

 
0.1

Total, defined-benefit pension, Canada
$

 
$

$
0.1

 
$
0.1

Defined-benefit postretirement, U.S.
 
 
 
 
 
 
Service cost
$

 
$

$

 
$
0.1

Interest cost
0.5

 
0.7

1.0

 
1.3

Amortization of prior service credits
(0.1
)
 

(0.2
)
 

Amortization of net actuarial gains
(1.2
)
 
(0.8
)
(2.4
)
 
(1.6
)
Total, defined-benefit postretirement, U.S.
$
(0.8
)
 
$
(0.1
)
$
(1.6
)
 
$
(0.2
)


15

Table of contents

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

NOTE 13. COMMON STOCK REPURCHASE PLAN

On March 6, 2017, we announced that our board of directors had approved a share repurchase program pursuant to which we were authorized to repurchase up to $50.0 million of our outstanding shares of common stock. From inception of the share repurchase program through May 3, 2019, we repurchased approximately 2.5 million shares for a total cost of $41.0 million, with an average price of $16.23 per share. On May 3, 2019, we announced that our board of directors had authorized an increased share repurchase program for an additional $50.0 million beyond the $41.0 million already repurchased under the prior share repurchase program, effective immediately. Repurchases under the new program could be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deemed appropriate, subject to market and business conditions, regulatory requirements and other factors.

On May 17, 2019, we announced the commencement of a modified "Dutch auction" self-tender offer to repurchase up to $50.0 million in cash of shares of our common stock. As a result of the auction, on June 21, 2019 we purchased 4,504,504 shares of common stock at a purchase price of $11.40 per share, for a total cost of $51.3 million, including fees and expenses. After the completion of the tender offer, we have no remaining authorization to purchase further shares.

NOTE 14. ACCUMULATED OTHER COMPREHENSIVE (LOSS)
The following table summarizes the activity, by component, related to the change in AOCI.
 
Foreign Currency Translation Adjustments
 
Derivative Adjustments
 
Pension and Postretirement Adjustments
 
Total Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2019
$
(0.5
)
 
$
(0.6
)
 
$
(73.6
)
 
$
(74.7
)
Other comprehensive (loss) income before reclassifications, net of tax impact of $ − in all periods
(0.9
)
 
0.7

 
0.2

 

Amounts reclassified from accumulated other comprehensive income

 
(0.3
)
 
2.0

 
1.7

Net current period other comprehensive (loss) income
(0.9
)
 
0.4

 
2.2

 
1.7

Balance, June 30, 2020
$
(1.4
)
 
$
(0.2
)
 
$
(71.4
)
 
$
(73.0
)
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
1.7

 
$
0.8

 
$
(64.1
)
 
$
(61.6
)
Other comprehensive (loss) before reclassifications, net of tax impact of $- , $0.3, ($0.8), and ($0.5)
(0.6
)
 
(0.4
)
 
(0.8
)
 
(1.8
)
Amounts reclassified from accumulated other comprehensive income

 
(0.4
)
 
2.6

 
2.2

Net current period other comprehensive (loss) income
(0.6
)
 
(0.8
)
 
1.8

 
0.4

Balance, June 30, 2019
$
1.1

 
$

 
$
(62.3
)
 
$
(61.2
)



16

Table of contents

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

The amounts reclassified from AOCI and the affected line item of the Condensed Consolidated Statements of Operations are presented in the table below.
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
 
2020
 
2019
 
2020
 
2019
 
Affected Line Item
Derivative adjustments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts - purchases
$
(0.1
)
 
$
(0.1
)
 
$
(0.2
)
 
$
(0.2
)
 
Cost of goods sold
Foreign exchange contracts - sales
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.2
)
 
Net sales
Total (income) before tax
(0.2
)
 
(0.2
)
 
(0.3
)
 
(0.4
)
 
 
Tax impact

 

 

 

 
Income tax (benefit)
Total (income), net of tax
(0.2
)
 
(0.2
)
 
(0.3
)
 
(0.4
)
 
 
Pension and postretirement adjustments
 
 
 
 
 
 
 
 
 
Prior service cost amortization
(0.2
)
 

 
(0.2
)
 

 
Other expense, net
Amortization of net actuarial loss
1.5

 
1.6

 
2.9

 
3.3

 
Other expense, net
Tax impact
(0.4
)
 
(0.3
)
 
(0.7
)
 
(0.7
)
 
Income tax (benefit)
Total expense, net of tax
0.9

 
1.3

 
2.0

 
2.6

 
 
Total reclassifications for the period