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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 September 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) 
Delaware47-4303305
(State or other jurisdiction of incorporation or organization) (I.R.S. employer Identification number)
2500 Columbia Avenue17603
LancasterPennsylvania
(Address of principal executive offices)(Zip Code)
(717)672-9611
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueAFINew 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 21,626,222 shares of common stock, $0.0001 par value, outstanding at October 26, 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
September 30
           Nine Months Ended September 30
2020201920202019
Net sales$156.6 $165.6 $440.9 $485.0 
Cost of goods sold129.0 153.8 365.3 414.9 
Gross profit27.6 11.8 75.6 70.1 
Selling, general and administrative expenses37.7 40.0 104.6 110.2 
Operating (loss) (10.1)(28.2)(29.0)(40.1)
Interest expense2.8 0.8 4.6 2.7 
Other (income) expense, net(1.5)0.7 (2.4)1.2 
(Loss) from continuing operations before income taxes(11.4)(29.7)(31.2)(44.0)
Income tax expense (benefit)0.3   (3.0)
Net (loss) from continuing operations(11.7)(29.7)(31.2)(41.0)
Net (loss) income from discontinued operations (1.7) 7.6 
Net (loss)$(11.7)$(31.4)$(31.2)$(33.4)
Basic (loss) earnings per share of common stock:
Basic (loss) per share of common stock from continuing operations$(0.53)$(1.36)$(1.42)$(1.65)
Basic (loss) earnings per share of common stock from discontinued operations (0.08) 0.31 
  Basic (loss) per share of common stock$(0.53)$(1.44)$(1.42)$(1.34)
Diluted (loss) earnings per share of common stock:
Diluted (loss) per share of common stock from continuing operations$(0.53)$(1.36)$(1.42)$(1.65)
Diluted (loss) earnings per share of common stock from discontinued operations (0.08) 0.31 
  Diluted (loss) per share of common stock$(0.53)$(1.44)$(1.42)$(1.34)

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

2

Table of Contents    

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


Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net (loss) $(11.7)$(31.4)$(31.2)$(33.4)
Changes in other comprehensive income (loss), net of tax:
 Foreign currency translation adjustments3.6 (3.7)2.7 (4.3)
 Derivative adjustments(0.3)0.1 0.1 (0.7)
 Pension and postretirement adjustments0.9 1.9 3.1 3.7 
 Total other comprehensive income (loss)4.2 (1.7)5.9 (1.3)
 Total comprehensive (loss)$(7.5)$(33.1)$(25.3)$(34.7)


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

3

Table of Contents    

Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except par value)


September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$22.2 $27.1 
Accounts and notes receivable, net43.8 36.1 
Inventories, net129.9 111.6 
Prepaid expenses and other current assets13.8 10.7 
Assets held-for-sale19.3  
Total current assets229.0 185.5 
Property, plant, and equipment, net246.0 277.2 
Operating lease assets5.3 6.0 
Intangible assets, net20.5 25.4 
Deferred income tax assets5.3 5.3 
Other noncurrent assets2.5 2.8 
Total assets$508.6 $502.2 
Liabilities and Stockholders’ Equity
Current liabilities:
 Short-term debt$6.3 $ 
Current installments of long-term debt2.1 0.2 
Accounts payable and accrued expenses112.9 104.4 
Total current liabilities121.3 104.6 
Long-term debt, net of unamortized debt issuance costs62.1 42.5 
Noncurrent operating lease liabilities2.3 2.7 
Postretirement benefit liabilities56.2 59.7 
Pension benefit liabilities11.1 16.0 
Other long-term liabilities8.3 6.0 
Deferred income tax liabilities2.4 2.4 
Total liabilities263.7 233.9 
Commitments and contingencies
Stockholders’ equity:
Common stock with par value $.0001 per share: 100,000,000 shares authorized; 28,376,662 issued and 21,626,222 outstanding shares as of September 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, 6,750,440 shares as of September 30, 2020 and 6,837,897 shares as of December 31, 2019(87.3)(88.9)
Additional paid-in capital677.0 676.7 
Accumulated deficit(276.0)(244.8)
Accumulated other comprehensive (loss)(68.8)(74.7)
Total stockholders’ equity244.9 268.3 
Total liabilities and stockholders’ equity$508.6 $502.2 

See accompanying notes to Condensed Consolidated Financial Statements (Unaudited).
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Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(Dollars in millions)

Common StockTreasury StockAdditional Paid-in CapitalAccumulated Other Comprehensive (Loss)Accumulated DeficitTotal Equity
SharesAmountSharesAmount
December 31, 201921,519,761$ 6,837,897$(88.9)$676.7 $(74.7)$(244.8)$268.3 
Net (loss)— — — — — — (13.2)(13.2)
Stock-based employee compensation, net36,072  (36,072)0.7  — — 0.7 
Other comprehensive income— — — — — 0.1 — 0.1 
March 31, 202021,555,833  6,801,825 (88.2)676.7 (74.6)(258.0)255.9 
Net (loss)— — — — — — (6.3)(6.3)
Stock-based employee compensation, net37,689  (18,685)0.3 0.3 — — 0.6 
Other comprehensive income— — — — — 1.6 — 1.6 
June 30, 202021,593,522  6,783,140 (87.9)677.0 (73.0)(264.3)251.8 
Net (loss)— — — — — — (11.7)(11.7)
Stock-based employee compensation, net32,700  (32,700)0.6  — — 0.6 
Other comprehensive income— — — — — 4.2 — 4.2 
September 30, 202021,626,222 $ 6,750,440 $(87.3)$677.0 $(68.8)$(276.0)$244.9 

Common StockTreasury StockAdditional Paid-in CapitalAccumulated Other Comprehensive (Loss)(Accumulated Deficit)Total Equity
SharesAmountSharesAmount
December 31, 201825,832,193 $ 2,452,165 $(39.7)$678.6 $(61.6)$(186.3)$391.0 
Net (loss)— — — — — — (16.7)(16.7)
Stock-based employee compensation, net53,908 — (50,251)0.9 (0.5)— — 0.4 
Other comprehensive income— — — — — 2.9 — 2.9 
March 31, 201925,886,101  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, net93,305 — (49,130)0.9 0.1 — — 1.0 
Other comprehensive (loss)— — — — — (2.5)— (2.5)
June 30, 201921,474,902  6,857,288 (89.2)678.2 (61.2)(188.3)339.5 
Net (loss)— — — — — — (31.4)(31.4)
Stock-based employee compensation, net24,888 —   0.1 — — 0.1 
Other comprehensive (loss)— — — — — (1.7)— (1.7)
September 30, 201921,499,790 $ 6,857,288 $(89.2)$678.3 $(62.9)$(219.7)$306.5 

See accompanying notes to Condensed Consolidated Financial Statements (Unaudited).
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Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
Nine Months Ended
September 30
20202019
Cash flows from operating activities:
Net (loss)
$(31.2)$(33.4)
Adjustments to reconcile net (loss) to net cash (used for) operating activities:
Depreciation and amortization
32.0 35.2 
Gain on disposal of discontinued operations (7.6)
Inventory write down 13.6 
Deferred income taxes
(0.9)(3.5)
Stock-based compensation
2.0 2.4 
Gain from long-term disability plan change
(1.1) 
U.S. pension expense
2.8 4.2 
Other non-cash adjustments, net
0.6 (0.2)
Changes in operating assets and liabilities:
Receivables
(7.7)(4.5)
Inventories
(18.0)13.7 
Accounts payable and accrued expenses
11.2 (22.0)
Income taxes payable and receivable0.6 (0.2)
Other assets and liabilities(6.6)0.5 
Net cash (used for) operating activities(16.3)(1.8)
Cash flows from investing activities:
Purchases of property, plant and equipment
(15.2)(22.9)
Proceeds from sale of assets0.1  
Net payment related to the sale of discontinued operations (1.9)
Net cash (used for) investing activities(15.1)(24.8)
Cash flows from financing activities:
Proceeds from revolving credit facility
43.1  
Payments on revolving credit facility
(79.2)(25.0)
Issuance of long-term debt
70.0  
Financing costs
(7.4)(0.1)
Payments on long-term debt
(0.2)(3.0)
Purchases of treasury stock
 (51.3)
Proceeds from exercised stock options
 0.1 
Value of shares withheld related to employee tax withholding
 (0.8)
Net cash provided by (used for) financing activities26.3 (80.1)
Effect of exchange rate changes on cash and cash equivalents 0.2 (0.5)
Net (decrease) in cash and cash equivalents (4.9)(107.2)
Cash and cash equivalents at beginning of year27.1 173.8 
Cash and cash equivalents at end of period$22.2 $66.6 
Supplemental Cash Flow Disclosure:
Amounts in accounts payable for capital expenditures
$2.9 $2.2 
Interest paid3.6 2.5 
Income taxes paid, net0.4 1.2 


See accompanying notes to Condensed Consolidated Financial Statements (Unaudited).
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Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(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 commercial, residential 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 Condensed Consolidated Financial Statements include management estimates and judgments, where appropriate. Management uses estimates to record many items including certain asset values, allowances for expected credit losses, 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 nine months ended September 30, 2020 and 2019 included in this report are unaudited. Quarterly results are not necessarily indicative of annual results, primarily due to the seasonality of the business and the possibility of changes in economic conditions between periods.
The accounting policies used in preparing the Condensed Consolidated Financial Statements in this Quarterly Report on 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 business 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 reduced employee benefits for a portion of the year. We are also pursuing a plan expected to monetize non-core assets. The ultimate duration and 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 results for the nine months ended September 30, 2020 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 nine months of 2020, such charges are possible in the future, which could have a material adverse effect on our future results.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2020:
On January 1, 2020, we adopted Accounting Standards Update ("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 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.

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





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 on 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 on 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.

The following accounting standards have been issued and become effective for the Company at a future date:

In December 2019, the Financial Accounting Standards Board ("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.

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
September 30
           Nine Months Ended September 30
2020201920202019
Net sales
United States$116.3 $125.1 $345.4 $371.0 
China22.3 20.6 46.3 51.1 
Canada7.8 8.7 21.3 29.3 
Australia6.9 7.1 19.4 21.3 
Other3.3 4.1 8.5 12.3 
Total net sales$156.6 $165.6 $440.9 $485.0 


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



NOTE 4. INCOME TAXES
The following table presents details related to our income taxes:
Three Months Ended
September 30
               Nine Months Ended September 30
2020201920202019
(Loss) from continuing operations before income taxes$(11.4)$(29.7)$(31.2)$(44.0)
Income tax expense (benefit)0.3   (3.0)
Effective tax rate(2.7)% % %6.8 %
Pursuant to the FASB's Accounting Standards Codification - Topic 740 - Income Taxes, we are required to consider all items (including items recorded in discontinued operations and other comprehensive income) in determining the amount of income tax expense (benefit) that results from a loss from continuing operations.

For the three months and nine months ended September 30, 2020 we recognized an income tax expense consisting of U.S. income tax benefit offset by 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 months and nine months ended September 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.

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 September 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 $1.9 million payment to TZI in the third quarter of 2019.
The following is a summary of the results related to the net gain on disposal of the wood business, which is included in discontinued operations:
Three
Months Ended September 30, 2019
Nine
Months Ended September 30, 2019
(Loss) gain on disposal of discontinued operations before income tax$(2.3)$10.3 
Income tax (benefit) expense (0.6)2.7 
Net (loss) income on disposal of discontinued operations $(1.7)$7.6 


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



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
The table below details the calculation and reconciliation of shares used in the calculation for basic and diluted earnings (loss) per share calculations for the periods indicated.
Three Months Ended
September 30
Nine Months Ended
September 30
2020201920202019
Net (loss) from continuing operations$(11.7)$(29.7)$(31.2)$(41.0)
Weighted average shares outstanding:
Weighted average common shares outstanding21,600,477 21,496,319 21,567,629 24,300,804 
Weighted average common shares, vested not yet issued357,635 401,402 340,599 552,198 
Weighted average common shares outstanding - Basic21,958,112 21,897,721 21,908,228 24,853,002 
Dilutive impact of stock-based compensation plans    
Weighted average common shares outstanding - Diluted21,958,112 21,897,721 21,908,228 24,853,002 
(Loss) per share of common stock from continuing operations:
Basic (loss) per share of common stock from continuing operations$(0.53)$(1.36)$(1.42)$(1.65)
Diluted (loss) per share of common stock from continuing operations$(0.53)$(1.36)$(1.42)$(1.65)

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 stock-based compensation awards were excluded from the computation of diluted (loss) per share of common stock from continuing operations:
Three Months Ended
September 30
Nine Months Ended
September 30
2020201920202019
Potentially dilutive common shares excluded from diluted computation, as inclusion would be anti-dilutive981,739 753,898 1,019,716 535,111
Performance awards excluded from diluted computation, as performance conditions not met154,679 330,392170,119 394,632

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




NOTE 7. ACCOUNTS AND NOTES RECEIVABLE
The following table presents accounts and note receivables, net:
September 30,
2020
December 31,
2019
Customer receivables$58.1 $47.1 
Miscellaneous receivables4.5 7.2 
Less: allowance for product claims, discounts, returns and losses(18.8)(18.2)
Total accounts and notes receivable, net$43.8 $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 expected credit losses. 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 credits against accounts receivable from the independent distributor to AFI.

The following table summarizes the activity for the allowance for product claims:
Nine Months Ended
September 30
20202019
Balance as of January 1$(9.0)$(6.4)
Reductions for payments4.9 5.2 
Current year claim accruals(5.9)(7.5)
Balance as of September 30$(10.0)$(8.7)

NOTE 8. INVENTORIES
The following table presents details related to our inventories, net:
September 30,
2020
December 31,
2019
Finished goods$101.2 $87.1 
Goods in process5.7 4.5 
Raw materials and supplies23.0 20.0 
Total inventories, net$129.9 $111.6 






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





NOTE 9. PROPERTY, PLANT AND EQUIPMENT

The following table presents details related to our property, plant and equipment, net:

September 30,
2020
December 31,
2019
Land$10.2 $28.2 
Buildings80.1 88.3 
Machinery and equipment461.2 444.6 
Computer software16.4 15.3 
Construction in progress12.3 19.2 
Less accumulated depreciation and amortization(334.2)(318.4)
Total property, plant and equipment, net$246.0 $277.2 

Three Months Ended
September 30
      Nine Months Ended September 30
2020201920202019
Depreciation expense$9.3 $11.1 $26.8 $29.9 

The Company reclassified to Assets held-for-sale, $19.3 million of primarily land and buildings for two properties that met all related criteria under U.S. GAAP as of September 30, 2020. The ultimate sale of these assets is expected to occur within one year from initial classification as Assets held-for-sale. Long-lived assets that meet the held-for-sale criteria are reported at the lower of their carrying value or fair value, less estimated costs to sell. The Company had no Assets held-for-sale as of December 31, 2019. Assets held-for-sale are recorded as current assets and are presented as a separate caption on the Company's Condensed Consolidated Balance Sheets.


NOTE 10. INTANGIBLE ASSETS

The following table details amounts related to our intangible assets, net:

September 30, 2020December 31, 2019
Estimated Useful LifeGross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Finite-lived intangible assets:
   Contractual arrangements5 years$36.5 $22.4 $36.4 $17.3 
   Intellectual property2-15 years5.5 1.9 5.3 1.7 
      Subtotal42.0 24.3 41.7 19.0 
Indefinite-lived intangible assets:
   Trademarks and brand namesIndefinite2.8 2.7 
Total intangible assets, net$44.8 $24.3 $44.4 19.0 

Three Months Ended
September 30
Nine Months Ended September 30
2020201920202019
Amortization expense$1.7 $1.7 $5.2 $5.2 

20202021202220232024
Expected annual amortization expense$7.0 $7.0 $3.7 $0.4 $0.4 
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Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)




NOTE 11. LEASES
On October 16, 2020, we entered into a new lease for additional warehouse space. The term of the lease is five years and will commence on November 1, 2020. This lease will be recorded as an operating lease.
On June 26, 2020, we entered into new Headquarters ("HQ") and Technical Center lease agreements with High Properties. The term of the HQ lease is ten years and four months, with an anticipated commencement date of June 1, 2021. The term of the Technical Center lease is 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 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table details amounts related to our accounts payable and accrued expenses:
September 30, 2020December 31,
2019
Payables, trade and other$78.2 $70.5 
Employment costs14.7 13.8 
Other accrued expenses17.0 16.8 
Current operating lease liabilities2.9 3.3 
Income tax payable0.1  
Total accounts payable and accrued expenses$112.9 $104.4 

NOTE 13. DEBT
September 30,
2020
December 31,
2019
Credit lines (international)$4.3 $ 
Insurance premiums financing2.0  
Short-term debt6.3  
Current installment of Term Loan Facility1.8  
Current installment of finance leases0.3 0.2 
Current installments of long-term debt2.1 0.2 
Noncurrent portion of Term Loan Facility68.2  
ABL Facility 42.2 
Noncurrent portion of finance leases0.6 0.3 
Total principal balance outstanding68.8 42.5 
Less: Deferred financing costs, net(6.7) 
Long-term debt, net of unamortized debt issuance costs:62.1 42.5 
Total$70.5 $42.7 




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






On June 23, 2020, we entered into a Third Amendment to the ABL Credit Facility (the "Amended ABL Credit Facility"), 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.
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.
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Table of contents

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



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.

The Company capitalized $6.9 million of fees related to the new term loan facility, all of which had been recorded and principally paid at June 30, 2020. The deferred financing costs will be amortized through 2025 over the life of the term loan facility.

NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
The following table summarizes our pension and postretirement expense:
Three Months Ended
September 30
        Nine Months Ended September 30
2020201920202019
Defined-benefit pension, U.S.
Service cost$0.6 $0.7 $1.9 $2.0 
Interest cost3.2 3.7 9.4 11.2 
Expected return on plan assets(5.3)(5.4)(16.0)(16.2)
Amortization of net actuarial loss2.5 2.5 7.6 7.3 
Total, defined-benefit pension, U.S.$1.0 $1.5 $2.9 $4.3 
Defined-benefit pension, Canada