For more information regarding securities authorized for issuance under our equity compensation plans, see Note 2421 to the Consolidated Financial Statements included in this Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical consolidated financial data should be read in conjunction with our audited consolidated financial statements, the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. The selected historical consolidated financial data for the periods presented have been derived from our audited consolidated financial statements.

Notes:

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

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

This discussion should be read in conjunction with the financial statements, the accompanying notes, the cautionary note regarding forward-looking statements and risk factors included in this Form 10-K.

Overview

We are a leading global producer of flooring products and ceiling systems for use primarily in the construction and renovation of residential, commercial and institutional buildings. We design, manufacture and sell flooring products (primarily resilient and wood) and ceiling systems (primarily mineral fiber, fiberglass and metal) around the world.

On December 4, 2014, our Board of Directors approved the cessation of funding to our former DLW subsidiary, which was our former European Resilient Flooring business. This decision followed a comprehensive evaluation of the strategic alternatives for the business. As a result of this decision, DLW management concluded that its operations could not be financed and sustained without funding from us and filed for insolvency in Germany on December 11, 2014. See Note 4 to the Consolidated Financial Statements for more information.

During 2013, we opened three new manufacturing facilities in China; consisting of two resilient flooring plants and a mineral fiber ceiling plant.

During 2012, we closed two previously idled facilities: an engineered wood production facility in Statesville, NC, and a Building Products plant in Mobile, AL. Additionally, in 2012, we sold the assets of our wood flooring distribution (Patriot) and cabinets businesses. As of December 31, 2013,2014, we operated 3531 manufacturing plants in eight countries, including 20 plants located throughout the U.S.

Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc., operates eight additional plants in five countries to produce suspension system (grid) products which we use in our ceiling systems.

We report our financial results through the following segments: Building Products, Resilient Flooring, Wood Flooring, and Unallocated Corporate. See “Results of Operations” and “Reportable Segment Results” for additional financial information on our consolidated company and our segments.

Factors Affecting Revenues

For information on our segments’ 20132014 net sales by geography, see Note 3 to the Consolidated Financial Statements included in this Form 10-K.

Markets. We compete in building material markets around the world. The majority of our sales are in North America and Europe.America. We closely monitor publicly available macroeconomic trends that provide insight to commercial and residential market activity including Gross Domestic Product, the Architecture Billings Index and the Consumer Confidence Index. In addition, we noted several factors and trends within our markets that directly affected our business performance during 2013,2014, including:

Americas

We noted softness in commercial markets, particularly educationhealthcare and, to a lesser extent, healthcare,education, as public spending remained constrained. In addition, we saw some regional variability in the office market and strengthsome softening in retail.retail markets. These trends impacted both our Building Products and Resilient Flooring businesses, but with greater impact on Resilient Flooring, as a significant portion of our commercial sales in Resilient Flooring originate from the educationhealthcare and healthcareeducation markets.

Residential markets continued to improve, driven primarily by strength insoftened as builder activity whilegrew, but at a slower rate than in the prior year and renovation activity increased slightly.remained constrained. Softer market conditions drove consumers to trade down to lower value products and led to more aggressive actions by competitors, resulting in pressure on mix and price. These trends, as well as accelerating share shifts within product categories and excess industry capacity, impacted our Wood and Resilient businesses.

Europe, Middle East and Africa (“EMEA”)

The majority of our sales in EMEA are to commercial markets in sectors dependent on public spending. Continued softness in commercial sectors, such as office, education and healthcare, contributed to mixed results across EMEA. These trends impacted our Building Products and Resilient Flooring businesses.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Revenues for all our businesses were negatively impacted by severe weather conditions experienced during the first quarter of 2014.

Europe, Middle East and Africa (“EMEA”)

Continued softness in commercial sectors, such as office, education and healthcare, and the significant devaluation of the Russian Ruble contributed to mixed results in our Building Products business.

Pacific Rim

A continued soft commercial construction marketCommercial markets for our Building Products businesses in India and Australia negatively impactedgrew, while markets in China were soft. Commercial markets for our Resilient Flooring and Building Products businesses. Commercial marketsbusinesses grew in India and Southeast Asia grew, while China markets were mixed.but declined in Australia.

Pricing Initiatives. We periodically modify prices in each of our business segments in responsedue to changes in costs for raw materials and energy, and to market conditions and the competitive environment. In certain cases, realized price increases are less than the announced price increases because of competitive reactions and changing market conditions. We estimate that pricing actions increased our 20132014 consolidated net sales by approximately $40$57 million, compared to 2012.2013.

DueIn response to continued rising input and raw material prices we implemented price increases in the fourth quarter of 2014 in our Building Products business in India and multiple increases in Russia to offset currency devaluations. We also announced price increases in ouron select resilient flooring, wood flooring, ceilings and grid businessesproducts in the Americas and in our ceilingsBuilding Products businesses in the Americas, EMEA and the Pacific Rim effective in the first quarter of 2014.2015. We may implement additional pricing actions ifbased upon future movements in raw material prices continue at, or rise from, current levels.foreign currency valuations.

Mix.Each of our businesses offers a wide assortment of products that are differentiated by style, design and performance attributes. Pricing and margins for products within the assortment vary. Changes in the relative quantity of products purchased at the different price points can impact year-to-year comparisons of net sales and operating income. We estimate that mix improvements increased our 20132014 consolidated net sales by approximately $13$49 million, compared to 2012.2013.

Factors Affecting Operating Costs

Operating Expenses. Our operating expenses are comprised of direct production costs (principally raw materials, labor and energy), manufacturing overhead costs, freight, costs to purchase sourced products and selling, general and administrative (“SG&A”) expenses.

Our largest individual raw material expenditures are forinclude lumber and veneers, PVC resins and plasticizers. Natural gas is also a significant input cost. Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results. In 2013,2014, the costs for raw materials, sourced products and energy negatively impacted operating income by approximately $45$34 million, compared to 2012.2013.

During 2013, our Resilient Flooring business2014, we incurred approximately $12$15 million of charges associated with cost reduction actionsthe closure of our Thomastown, Australia resilient flooring plant and the closure of our Kunshan, China engineered wood flooring plant. Production activity for both plants was shifted to our existing facilities in Europe, and another $4 million associated with cost reductions in Australia. During 2012, we decided to close our Building Products plant in Mobile, AL, and recorded approximately $21 million of accelerated depreciation, impairment and other charges. We subsequently sold that facility during the third quarter of 2013 and recorded a pre-tax gain of $3.8 million within SG&A expense (inclusive of release of unused environmental liabilities and asset retirement obligations). During 2012, we also incurred approximately $4 million of net costs related to the collective bargaining contract settlement with employees at the Marietta, PA Building Products plant.United States.

We continue to evaluate the efficiency of our manufacturing footprint and may take additional actions in support of our cost and standardization initiatives. The charges associated with any additional cost reduction initiatives could include severance and related termination benefits, fixed asset write-downs, asset impairments and accelerated depreciation and may be material to our financial statements.

Intangible Asset Impairment. In the fourth quarter of 2014 we recorded a non-cash impairment charge of $10.0 million to reduce the carrying value of a Wood Flooring trademark to its estimated fair value based on the results of our annual impairment test. The estimated fair value was negatively impacted by competitive conditions in the U.S. residential housing market resulting in lower projected profitability.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

See also “Results of Operations” for further discussion of other significant items affecting operating costs.

Employees

As of December 31, 2013,2014, we had approximately 8,7007,400 full-time and part-time employees worldwide, compared to approximately 8,5007,800 employees as of December 31, 2012.2013. Most of the increasedecrease related to crews addeda reduction in staff at three of our U.S. wood flooring plants, along with the closing of our Kunshan, China and Thomastown, Australia flooring plants. As a result of our exit from the European Resilient Flooring business, we no longer include approximately 900 employees in our reported employee count.

During 2013,2014, we negotiated three collective bargaining agreements covering approximately 400 production and maintenance employees in North America.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

During 2014, we negotiated a collective bargaining agreement covering approximately 700 production and maintenance900 employees at one of our wood flooringfour U.S. plants. Collective bargaining agreements covering approximately 400 production and maintenance500 employees at threetwo U.S. plants are scheduled towill expire throughout the remainder of 2014.during 2015.

CRITICAL ACCOUNTING ESTIMATES

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

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

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

The discount rate is used to determine retirement plan liabilities and to determine the interest cost component of net periodic pension and postretirement cost. Management utilizes the Aon Hewitt AA only above median yield curve, which is a hypothetical AA yield curve comprised of a series of annualized individual discount rates, as the primary basis for determining the discount rate. As of December 31, 20132014 and 2012,2013, we assumed discount rates of 4.75%4.05% and 3.95%4.75%, respectively, for the U.S. defined benefit pension plans. As of December 31, 2013,2014, we assumed a discount rate of 4.50%3.90% compared with a discount rate of 3.75%4.50% as of December 31, 20122013 for the U.S. postretirement plans. The effects of the change in discount rate will be amortized into earnings as described below. Absent any other changes, a one-quarter percentage point decrease in the discount rates for the U.S. pension and postretirement plans would decrease 20142015 operating income by $4.7$6.8 million and a one-quarter percentage point increase in the discount rates would increase 20142015 operating income by $4.6$6.5 million.

We have two U.S. defined benefit pension plans, a qualified funded plan and a nonqualified unfunded plan. For the qualified funded plan, the expected long-term return on plan assets represents a long-term view of the future estimated investment return on plan assets. This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals on the expected performance of the asset classes over 10 to 30 years. Historical asset returns are monitored and considered when we develop our expected long-term return on plan assets. An incremental component is added for the expected return from active management based on historical information obtained from the plan’s investment consultants. These forecasted gross returns are reduced by estimated management fees and expenses, yielding a long-term rate of return assumption of 7.0% per annum for 2014.2015. Over the 10 year period ended December 31, 2013,2014, the historical annualized return was approximately 7.2% 7.0%

Management’s Discussion and Analysis of Financial Condition and Results of Operations

compared to an average expected return of 7.6%7.5%. The actual return on plan assets achieved for 20132014 was 3.7%10.3%. The difference between the actual and expected rate of return on plan assets will be amortized into earnings as described below.

The expected long-term return on plan assets used in determining our 20132014 U.S. pension credit was 6.25%7.0%. We have assumed a return on plan assets during 20142015 of 7.0%. The 20142015 expected return on assets was calculated in a manner consistent with 2013.2014. A one-quarter percentage point increase or decrease in this assumption would increase or decrease 20142015 operating income by approximately $5.0 million.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Contributions to the unfunded plan were $3.9$4.3 million in 20132014 and were made on a monthly basis to fund benefit payments. We estimate the 20142015 contributions will be approximately $3.9$4.0 million. See Note 1816 to the Consolidated Financial Statements for more information.

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

The difference between the actual and expected health care costs is amortized into earnings as described below. As of December 31, 2013,2014, health care cost increases are estimated to decrease ratably until 2021,2025, after which they are estimated to be constant at 5%. A one percentage point increase in the assumed health care cost trend rate would reduce 2014 operating income by $0.9 million, while a one percentage pointor decrease in the assumed health care cost trend rate would increase 2014not materially impact 2015 operating income by $1.0 million.income. See Note 1816 to the Consolidated Financial Statements for more information.

Actual results that differ from our various pension and postretirement plan estimates are captured as actuarial gains/losses. When certain thresholds are met, the gains and losses are amortized into future earnings over the expected remaining service period of plan participants, which is approximately eight years for our U.S. pension plans and our U.S. postretirement plans. Changes in assumptions could have significant effects on earnings in future years.

We recognized a decreasean increase in net actuarial losses related to our U.S. pension benefit plans of $127.8$194.9 million in 20132014 primarily due to changes in actuarial assumptions (most significantly an 80a 70 basis point increasereduction in the discount rate)rate and our adoption of the Society of Actuaries RP-2014 mortality tables). The $127.8$194.9 million actuarial gainloss due to our U.S. pension plans is reflected as a component of other comprehensive income in our Consolidated Statement of Earnings and Comprehensive Income along with actuarial gains and losses from our foreign pension plans and our U.S. postretirement benefit plans.

Impairments of Long-Lived Tangible and Intangible Assets – Our indefinite-lived intangibles are primarily trademarks and brand names, which are integral to our corporate identity and expected to contribute indefinitely to our corporate cash flows. Accordingly, they have been assigned an indefinite life. We conduct our annual impairment test for non-amortizable intangible assets during the fourth quarter, although we conduct interim impairment tests if events or circumstances indicate the asset might be impaired. We conduct impairment tests for tangible assets and amortizable intangible assets when indicators of impairment exist, such as operating losses and/or negative cash flows. If an indication of impairment exists, we compare the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the assets. The estimate of an asset group’s fair value is based on discounted future cash flows expected to be generated by the asset group, or based on management’s estimated exit price assuming the assets could be sold in an orderly transaction between market participants or estimated salvage value if no sale is assumed. If the fair value is less than the carrying value of the asset group, we record an impairment charge equal to the difference between the fair value and carrying value of the asset group.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The principal assumption utilized in our impairment tests for definite-lived intangible assets is operating profit adjusted for depreciation and amortization. The principal assumptions utilized in our impairment tests for indefinite-lived intangible assets include revenue growth rate, discount rate and royalty rate. Revenue growth rate and operating profit assumptions are derived from those utilized in our operating plan and strategic planning processes. The discount rate assumption is calculated based upon an estimated weighted average cost of equity which reflects the overall level of inherent risk and the rate of return a

Management’s Discussion and Analysis of Financial Condition and Results of Operations

market participant would expect to achieve. Methodologies used for valuing our intangible assets did not change from prior periods.

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

During the fourth quarter of 2014, we recorded a non-cash impairment charge of $10.0 million to reduce the carrying amount of a Wood Flooring trademark to its estimated fair value based on the results of our annual impairment test. The fair value was negatively affected by lower expected sales and profits due to the competitive environment in the U.S. residential housing market. The remaining carrying value of the Wood Flooring trademarks at December 31, 2014 was $31.9 million. Continued competitive pressure beyond our expectations could lead to future material impairments of the Wood Flooring intangible assets.

There waswere no impairment chargecharges in 2013 2012 or 20112012 related to intangible assets.

We tested the tangible assets within the following reporting units for impairment:

Based upon the impairment testing in 20122014 and 2011,2012, the carrying value of the tangible assets for each of these asset groups was determined to be recoverable (except as discussed below) because the related undiscounted cash flows and/or fair value exceeded the carrying value of assets.

During the third quarter of 2014, we recorded an impairment charge of $11.9 million on the tangible assets of the European Resilient Flooring business as a result of disappointing operating results. This charge is reflected within Discontinued Operations due to DLW’s insolvency filing. See Note 4 to the Consolidated Financial Statements for further information.

During the second quarter of 2014, we decided to close our resilient flooring plant in Thomastown, Australia and our engineered wood flooring plant in Kunshan, China. During 2014, we recorded $2.2 million in cost of goods sold for accelerated depreciation due to the closure of the resilient flooring plant in Australia. We sold this facility in January 2015. We also recorded $4.0 million in 2014 in cost of goods sold for accelerated depreciation due to the closure of the wood flooring plant in China.

During 2014, we also made the decision to dispose of certain idle equipment at five of our wood flooring manufacturing facilities and as a result we recorded a $4.4 million impairment charge in cost of goods sold.

During the first quarter of 2012, we made the decision to permanently close a previously idled ceiling tile plant in Mobile, AL. As a result, we recorded accelerated depreciation of $11.0 million for machinery and equipment and a $4.6 million impairment charge for the buildings in cost of goods sold. The fair values were determined by management estimates and an independent valuation based on information available at that time (considered Level 2 inputs in the fair value hierarchy as described in Note 1816 to the Consolidated Financial Statements). We sold this facility in the third quarter of 2013.

During the third quarter

Management’s Discussion and Analysis of 2012, we recorded a $17.5 million impairment charge to the valueFinancial Condition and Results of the cabinets’ assets to reflect the expected proceeds from the sale of the cabinets business, which was accounted for as a discontinued operation.Operations

During the fourth quarter of 2012, we made the decision to permanently close a previously idled engineered wood flooring production facility in Statesville, NC. As a result, we recorded accelerated depreciation of $0.6 million for machinery and equipment and a $0.6 million impairment charge for the buildings in cost of goods sold. The fair values were determined by management estimates and an independent valuation based on information available at that time (considered Level 2 inputs in the fair value hierarchy).

We recorded an asset impairment charge of $2.2 millionsold this facility in the third quarter of 2011 in SG&A expense for a European Resilient Flooring office building. The fair value was determined by management estimates of market prices based upon information available at that time, including offers received from potential buyers of the property (considered Level 3 inputs in the fair value hierarchy).

The carrying value of tangible assets within the European Resilient Flooring business was $92.4 million as of December 31, 2013. Material uncertainties that could lead to a future material impairment charge include the level of European commercial construction and renovation activity.

During the fourth quarter of 2011, we recorded asset impairment charges of $1.1 million in cost of goods sold for two previously occupied manufacturing facilities. The fair values were determined by management estimates and independent market valuations based on information available at that time. The valuation information included sales of similar facilities and estimates of market prices (considered Level 2 inputs in the fair value hierarchy) for these assets.January 2015.

We cannot predict the occurrence of certain events that might lead to material impairment charges in the future. Such events may include, but are not limited to, the impact of economic environments, particularly

Management’s Discussion and Analysis of Financial Condition and Results of Operations

related to the commercial and residential construction industries, material adverse changes in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions.

See Notes 3 and 1110 to the Consolidated Financial Statements for further information.

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

Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income (“FSI”), the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

Specifically with respect to the domestic FTC carryforward deferred tax asset of $94.4$54.3 million at December 31, 2013,2014, we considered the following positive and negative evidence in assessing the need for a valuation allowance and concluded that a valuation allowance is not required:

Positive Evidence

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Negative Evidence

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The ability to fully utilize the FTC carryforwards may be affected by the following factors:

As of December 31, 2013,2014, we have recorded valuation allowances totaling $228.4$87.9 million for various federal, state, and foreign deferred tax assets. While we have considered future taxable income in assessing the need for the valuation allowances based on our best available projections, if these estimates and assumptions change in the future or if actual results differ from our projections, we may be required to adjust our valuation allowances accordingly. Such adjustments could be material to our Consolidated Financial Statements.

As further described in Note 1614 to the Consolidated Financial Statements, our Consolidated Balance Sheet as of December 31, 20132014 includes net deferred income tax assets of $320.9$243.9 million. Included in this amount are deferred federal income tax assets for FTC carryforwards of $94.4$54.3 million, state NOL deferred income tax assets of $47.6$41.3 million, and foreign NOL deferred tax assets of $182.6$41.8 million. We have established valuation allowances in the amount of $228.4$87.9 million consisting of $25.3$31.6 million for federal capital loss carryovers and statutorily limited operating lossfederal NOL carryovers, $9.4$14.6 million for state deferred tax assets, primarily operating loss carryovers, and $193.7$41.7 million for foreign deferred tax assets, primarily foreign operating loss carryovers.

The federal FTC carryforwards arose primarily as a result of the payment of intercompany dividends from our foreign affiliates from earnings which were previously not considered as permanently reinvested. The state NOLs arose primarily as a result of the amounts paid to the Asbestos PI Trust in 2006.

Inherent in determining our effective tax rate are judgments regarding business plans and expectations about future operations. These judgments include the amount and geographic mix of future taxable income, the amount of FSI, limitations on usage of NOL carryforwards, the impact of ongoing or potential tax audits, earnings repatriation plans, and other future tax consequences.

We estimate we will need to generate future U.S. taxable income of approximately $1,286.6$1,012.8 million for state income tax purposes during the respective realization periods (ranging from 20142015 to 2033)2034) in order to fully realize the net deferred income tax assets.

TheAs previously disclosed in prior SEC filings, our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation, insufficient future taxable income prior to expiration of certain deferred tax assets, annual limits imposed under Section 382 of the Internal Revenue Code and some states impose limitations on(“Section 382”) or by state law, as a corporation’s ability to utilize tax attributes, including FTCs and NOLs, if it experiencesresult of an “ownership change.” An ownership change may result from transactions increasing theThis “ownership change” is defined as a cumulative increase in certain shareholders’ ownership of certain shareholdersthe Company by more than 50 percentage points over a three-yearduring the previous rolling three year period. There have been no ownership changes as defined

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Asbestos PI Trust and TPG collectively sold 5,980,000 shares, 12,057,382 shares, 6,000,000 shares and 3,900,000 shares of the Company’s common shares during the fourth quarter of 2012, the third quarter of 2013, the fourth quarter of 2013, and the first quarter of 2014, respectively. Those sales significantly increase the likelihood that future sales by the Asbestos PI Trust will cause an “ownership change” under Section 382. At this time, we estimate that an additional sale of the Company’s common shares by the Asbestos PI Trust prior to December 2015 would be reasonably likely to cause an “ownership change” under Section 382. An “ownership change” may result in limitations on the Internal Revenue Code subsequent to our bankruptcy emergence. Future ownership changes could have an impact onutilization of certain tax attributes, primarily our ability to utilizededuct state NOLs against future state taxable income. If such “ownership change” were to occur, then we would be required to record a one-time, non-cash charge in our income statement in the deferredperiod in which such “ownership change” occurs. We currently estimate that, if such “ownership change” had occurred in the fourth quarter of 2014, based on the factors discussed below, the one-time income tax assets.charge that would have been taken would have reduced our net earnings by an amount between $4.0 million and $8.0 million. This pro forma estimated range of net earnings reduction is based on current management estimates and assumptions that are subject to change over time. The actual amount of the required charge, if any, may differ materially from this current estimate. Key factors impacting the calculation include, but are not limited to, our stock price on the date of the “ownership change”, the applicable tax-exempt interest rate, the tax basis and fair market value of our assets, federal and state tax regulations, projections of future taxable income and prior NOL usage.

We recognize the tax benefits of an uncertain tax position if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently

Management’s Discussion and Analysis of Financial Condition and Results of Operations

recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN FUTURE PERIODS

There were noIn April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” which is part of ASC 205: Presentation of Financial Statements and Accounting Standards Codification (“ASC”) 360: Property, Plant and Equipment. The amendments in this guidance change the requirements for reporting discontinued operations. Under the new accounting pronouncementsguidance a disposal of a component of an entity or a group of components is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance is effective prospectively for disposals that occur within annual periods beginning on or after December 15, 2014. We do not expect a material impact to our financial condition, results of operations or cash flows from the adoption of this guidance.

In May 2014, the FASB issued ASU 2014-09“Revenue from Contracts with Customers”. The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, duringJanuary 1, 2017. Early application is not permitted, but the fiscal yearstandard permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method and are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.

In June 2014, the FASB issued ASU 2014-12“Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” which have hadis part of ASC 718: Compensation-Stock Compensation. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. The guidance is effective for annual periods beginning after December 15, 2015. The guidance can be applied prospectively for all awards granted or are expectedmodified after the effective date or retrospectively to haveall awards with performance targets outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We do not expect a material impact on our financial condition, results of operation or cash flows from the Consolidatedadoption of this guidance.

Management’s Discussion and Analysis of Financial Statements. For a discussionCondition and Results of new accounting pronouncements, see Note 2 to our Consolidated Financial Statements.Operations

RESULTS OF OPERATIONS

Unless otherwise indicated, net sales in these results of operations are reported based upon the location where the sale was made. Please refer to Notes 3 and 54 to the Consolidated Financial Statements for a reconciliation of segment operating income to consolidated earnings from continuing operations before income taxes and additional financial information related to discontinued operations.

2014 COMPARED TO 2013

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)

The decrease in consolidated net sales was driven by the unfavorable impact of foreign exchange of approximately $19 million. Lower volumes of $100 million were more than offset by $106 million of favorable price and mix.

The decrease in net sales in the Americas was driven by lower volumes, which were only partially offset by improvements in price and mix.

The increase in net sales in the EMEA region was driven primarily by improvements in price, partially offset by the impact of unfavorable mix.

Excluding unfavorable foreign exchange impact of approximately $6 million, net sales in the Pacific Rim increased 9% as improvements in volumes and price were partially offset by unfavorable mix.

Cost of goods sold was 76.8% of net sales in 2014, compared to 76.5% in 2013. Compared to the prior year, lower manufacturing costs were more than offset by higher input costs. The comparison was impacted by approximately $15 million of charges in 2014 associated with the closure of our Thomastown, Australia resilient flooring plant and the closure of our Kunshan, China engineered wood flooring plant, and approximately $4 million of charges primarily associated with cost reduction actions in the Resilient Flooring business in Australia in 2013.

SG&A expenses in 2014 were $398.5 million, or 15.8% of net sales, compared to $386.9 million, or 15.3% of net sales, in 2013. The increase was primarily due to higher promotional spending in both flooring businesses. See Reportable Segment Results for additional information.

Equity earnings from our WAVE joint venture were $65.1 million in 2014, compared to $59.4 million in 2013. See Note 9 to the Consolidated Financial Statements for further information.

Interest expense was $46.0 million in 2014, compared to $68.7 million in 2013. The decrease was due to the write-off of unamortized debt financing costs associated with the refinancing of our senior credit facility that occurred during the first quarter of 2013 (see Liquidity for further information).

Income tax expense was $83.2 million and $71.4 million in 2014 and 2013, respectively. The effective tax rate for 2014 was 44.9% as compared to a rate of 35.9% for 2013. The effective tax rate for 2014 was higher than 2013 primarily due to higher unbenefitted foreign operating losses, lower income in foreign subsidiaries with profits, and an increase in the state valuation allowance for NOLs.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As reported in Note 14 to the Consolidated Financial Statements, our foreign operations recorded losses before income taxes of $29.7 million in 2014 compared with income of $12.5 million in 2013. The 2014 losses are related to the expenses incurred in Russia associated with the new manufacturing plant and China and Western Europe losses due to slowing markets. While we believe we will continue to incur overall foreign losses in 2015, we do not believe this indicates a long-term trend.

Total other comprehensive income (“OCI”) was a $123.9 million loss for 2014 compared to income of $99.8 million for 2013. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. Amounts in 2014 were driven primarily by changes in the exchange rate of the Euro, the British pound and the Australian dollar. Amounts in 2013 were driven primarily by changes in the exchange rate of the Australian dollar. Derivative gain/loss represents the mark to market value adjustments of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI. The period changes are primarily due to the mark to market changes related to our natural gas hedges in 2014 and our interest rate swap derivatives in 2013. Pension and postretirement adjustments represent actuarial gains and losses related to our defined-benefit pension and postretirement plans. The amounts in all periods primarily related to the U.S. pension plans.

REPORTABLE SEGMENT RESULTS

Building Products

(dollar amounts in millions)

The improvement in Building Products net sales was driven by $46 million of favorable price and mix which more than offset the unfavorable impact of foreign exchange of approximately $10 million and lower volumes of $6 million.

Net sales in the Americas increased driven by favorable mix and price which more than offset the impact of lower volumes.

Net sales in EMEA markets increased driven by improvements in price which more than offset the impact of unfavorable mix.

Net sales in the Pacific Rim increased as volume, mix and price all improved.

Operating income increased slightly driven by the benefits of price and mix of $11 million and higher earnings from WAVE of $6 million, which offset the impact of lower volumes of $5 million, higher manufacturing and input costs of $7 million and higher SG&A expenses of $3 million. The increase in manufacturing costs was primarily associated with the construction of our plant in Russia.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Resilient Flooring

(dollar amounts in millions)

The decline in Resilient Flooring net sales was driven by $24 million of lower volume and the unfavorable impact from foreign exchange of $6 million which more than offset favorable price and mix of $13 million.

Net sales in the Americas decreased as improvements in mix were unable to offset commercial and residential volume declines.

Net sales in the Pacific Rim increased as strong volume growth in China and India was partially offset by market driven sales declines in Australia.

Operating income declined primarily due to the margin impact of lower volumes of $10 million and higher SG&A expenses of $8 million driven by higher promotional and marketing expense. These negative impacts were only partially offset by positive mix and price of $2 million and lower manufacturing and input costs of $8 million as strong productivity more than offset higher input costs. The comparison was also impacted by approximately $6 million of charges in 2014 associated with the closure of our Thomastown, Australia resilient flooring plant and $4 million of charges in 2013 associated with cost reduction actions in Australia.

Wood Flooring

(dollar amounts in millions)

The decrease in Wood Flooring net sales was driven primarily by lower volumes of $69 million which more than offset favorable price and mix of $47 million. Volume declines reflected sales lost to competition.

The decline in operating income was driven by approximately $9 million of charges primarily associated with the closure of our Kunshan, China engineered wood flooring plant and a non-cash impairment charge of $10 million to reduce the carrying value of a Wood Flooring trademark to its estimated fair value. Gross profit improved driven by the benefit of price and mix of $55 million which more than offset the impact of lower volumes of $27 million, higher SG&A expenses of $3 million and higher manufacturing and input costs of $24 million, as improvements in productivity were more than offset by higher lumber costs.

Unallocated Corporate

Unallocated corporate expense of $72.3 million decreased from $73.3 million in the prior year, due to lower incentive compensation expense offset by increased spending on outside professional services and higher foreign and domestic pension expenses.

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow

Operating activities for 2014 provided $208.8 million of cash, compared to $213.7 million of cash provided in 2013. The decrease was primarily due to changes in working capital, partially offset by higher cash earnings. The working capital change was primarily driven by accounts payable and accrued expenses due to timing of payments.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net cash used for investing activities was $149.3 million for 2014, compared to $145.8 million in 2013. This change was primarily due to increased purchases of property, plant and equipment, partially offset by higher distributions received from our WAVE joint venture.

Net cash provided by financing activities was $3.3 million for 2014, compared to $263.7 million used during 2013. Net cash provided in 2014 was driven by proceeds from exercised stock options and excess tax benefits from share-based awards, partially offset by payments of long-term debt. Net cash used in 2013 included the $261.4 million repurchase of common stock, including associated fees.

Liquidity

Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal cash flow needs, since cash flow is generally lower during the first and fourth quarters of our fiscal year. In March 2013, we refinanced our $1.3 billion senior credit facility. The amended facility is composed of a $250 million revolving credit facility (with a $150 million sublimit for letters of credit), a $550 million Term Loan A and a $475 million Term Loan B. The terms of the facility resulted in a lower interest rate spread (2.5% vs. 3.0%) than our previous facility. We also extended the maturity of Term Loan A from November 2015 to March 2018 and of Term Loan B from March 2018 to March 2020, and we amended our year end leverage tests (see below). Per the terms of the underlying agreement, this senior credit facility is secured by U.S. personal property, the capital stock of material U.S. subsidiaries and a pledge of 65% of the stock of our material first tier foreign subsidiaries.

Under the amended senior credit facility we are subject to year-end leverage tests that may trigger mandatory prepayments. If our ratio of consolidated funded indebtedness minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (“Consolidated Net Leverage Ratio”) is greater than 3.5 to 1.0, the prepayment amount would be 50% of fiscal year Consolidated Excess Cash Flow. These annual payments would be made in the first quarter of the following year. No payment will be required in 2015.

In connection with the refinancing, we incurred $8 million for bank, legal, and other fees, of which $7 million was capitalized and is being amortized into interest expense over the life of the loans. Additionally, we wrote off $19 million of unamortized debt financing costs in the first quarter of 2013 related to our previous credit facility to interest expense.

The amended senior credit facility includes two financial covenants that require the ratio of consolidated EBITDA to consolidated cash interest expense minus cash consolidated interest income to be greater than or equal to 3.0 to 1.0 and requires the Consolidated Net Leverage Ratio to be 4.0 to 1.0 after December 31, 2013 through March 31, 2015 and 3.75 to 1.0 after March 31, 2015. During 2014, we were in compliance with all covenants of the senior credit facility.

The Revolving Credit and Term Loan A portions are currently priced at a spread of 2.50% over LIBOR and the Term Loan B portion is priced at 2.50% over LIBOR with a 1.00% LIBOR floor for its entire term. The Term Loan A and Term Loan B were both fully drawn and are currently priced on a variable interest rate basis.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table summarizes our interest rate swaps (dollar amounts in millions):

These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. The unpaid balances of Term Loan A, the Revolving Credit Facility and Term Loan B of the credit facility may be prepaid without penalty at the maturity of their respective interest reset periods. Any amounts prepaid on the Term Loan A or Term Loan B may not be re-borrowed. As of December 31, 2014, there was no outstanding balance on the revolving credit facility.

Due to the significant decline in the value of the Russian Ruble, particularly during the fourth quarter of 2014, we received $30.0 million in cash as a result of settling Russian Ruble forward contracts utilized to hedge the currency impact associated with intercompany loans to our Russian subsidiary. Our exposure to changes in the Ruble due to the intercompany loans is unhedged at December 31, 2014.

As of December 31, 2014, we had $185.3 million of cash and cash equivalents, $98.6 million in the U.S. and $86.7 million in various foreign jurisdictions.

In March 2012, our Board of Directors declared a special cash dividend in the amount of $8.55 per share, or $508 million in the aggregate, of which $502.9 million was paid on April 10, 2012. Additional payments of $3.7 million have been made through December 31, 2014, with most of the outstanding balance to be paid in the first quarter of 2015. The remaining dividends will be paid when the underlying employee awards vest, while vested director awards will be paid upon the Director’s separation from service on the Board of Directors. The dividend was recorded as a reduction of retained earnings to the extent that retained earnings were available at the dividend declaration date. Dividends in excess of the retained earnings were recorded as a reduction in capital in excess of par value.

On December 18, 2014, we amended and increased our $75 million Accounts Receivable Securitization Facility with the Bank of Nova Scotia, under which AWI and its subsidiary, Armstrong Hardwood Flooring Company, sell their U.S. receivables to Armstrong Receivables Company LLC (“ARC”), a Delaware entity that is consolidated in these financial statements. The facility now reflects a seasonality clause changing to $100 million from March through September, and $90 million from October through February. The maturity date has been extended from March 2016 to December 2017. As of December 31, 2014, there was no outstanding balance on the accounts receivable securitization facility.

On December 31, 2014, we had outstanding letters of credit totaling $67.3 million, of which $7.8 million was issued under the revolving credit facility, $59.3 million was issued under the securitization facility, and $0.2 million was issued by other banks of international subsidiaries. Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

These lines of credit are uncommitted, and poor operating results or credit concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have historically been able to maintain and, as needed, replace credit facilities to support our foreign operations.

Since 2009, our Board of Directors has approved the construction of five manufacturing plants. These include a U.S. mineral wool plant to supply our Building Products plants, mineral fiber ceiling plants in Russia and China, and two resilient flooring plants in China. In July 2013, our Board of Directors approved the expansion of our Lancaster, PA flooring plant to include the manufacture of luxury vinyl tile. Total spending for these projects is currently projected to be approximately $380 million. As of December 31, 2014, we have completed construction of the mineral wool plant and three plants in China. Through December 31, 2014, we have incurred approximately $348 million related to these projects. The majority of the remaining spending for the plant in Russia and the Lancaster plant expansion will be incurred in 2015.

During the third quarter of 2013, the Asbestos PI Trust and TPG together sold 12,057,382 of their remaining shares in a secondary public offering. In connection with this transaction, we paid $261.4 million, including associated fees, to buy-back 5,057,382 shares, which we currently hold in treasury. The treasury share purchase was funded by existing cash, borrowings under our credit facility and our securitization facility. Funds borrowed to complete this transaction were repaid by the end of the third quarter of 2013.

We believe that cash on hand and cash generated from operations, together with lines of credit, availability under our securitization facility and the availability under our $250 million revolving credit facility, will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

2013 COMPARED TO 2012

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)

The increase in consolidated net sales was driven by $75$84 million of higher volume and $53$50 million of favorable price and mix. Sales comparisons were also negatively impacted by unfavorable foreign exchange of $6 million and $26 million due to our sale of the Patriot wood flooring distribution business which occurred in the third quarter of 2012.

The increase in net sales in the Americas was driven primarily by higher volumes in the wood business, and improvements in price and mix. Sales were negatively impacted by the sale of the Patriot wood flooring distribution business.

The increase in net sales in the EMEA region was driven primarily by favorable foreign exchange impact of approximately $11$5 million and favorable mix, which were only partially offset by lower volumes.

Excluding unfavorable foreign exchange impact of $7 million, net sales in the Pacific Rim increased 2% as improvements in volumes and price were partially offset by unfavorable mix.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cost of goods sold was 77.1%76.5% of net sales in 2013, compared to 75.8%75.5% in 2012. The increase was primarily due to raw material inflation, particularly lumber, increased production costs in the wood flooring segment, and plant start-up costs associated with our investments in China and Russia. The comparison was impacted by approximately $16$4 million associated with cost reduction actions in the Resilient Flooring business in Europe and Australia in 2013, and approximately $21 million of costs associated with the closure of our Mobile, AL Building Products facility in 2012.

SG&A expenses in 2013 were $443.7$386.9 million, or 16.3%15.3% of net sales, compared to $418.3$364.9 million, or 16.0%15.0% of net sales, in 2012. The increase was primarily due to emerging market growth initiatives and increased Unallocated Corporate Expenses. See Reportable Segment Results for additional information.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Equity earnings from our WAVE joint venture were $59.4 million in 2013, compared to $55.9 million in 2012. See Note 10 to the Consolidated Financial Statements for further information.

Interest expense was $68.8$68.7 million in 2013, compared to $53.7$53.6 million in 2012. The increase was due to the write-off of unamortized debt financing costs associated with the refinancing of our senior credit facility that occurred during the first quarter of 2013 partially offset by lower interest expense under the amended credit facility (see Liquidity for further information).facility.

Income tax expense was $71.4 million and $76.1$76.0 million in 2013 and 2012, respectively. The effective tax rate for 2013 was 41.5%35.9% as compared to a rate of 34.5%32.4% for 2012. The effective tax rate for 2013 was higher than 2012 primarily due to higher unbenefitted foreign operating losses in 2013 and to the release of foreign tax credit valuation allowance in 2012, partially offset by research and development tax credits covering multiple years, domestic production activities, and mix of income in tax jurisdictions.

As reported in Note 16 to the Consolidated Financial Statements, our foreign operations recorded losses before income taxes of $14.3 million in 2013 compared with income of $31.9 million in 2012. The main driver of these losses were expenses related to the construction of the four international manufacturing plants; three in China and one in Russia. We also incurred higher severance expenses in Europe and Australia during 2013. While we believe we will continue to incur overall foreign losses in 2014, we do not believe this indicates a long-term trend.

Total other comprehensive income (“OCI”) was $99.8 million income for 2013 and $56.4 million loss for 2012, respectively. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. Amounts in 2013 were driven primarily by changes in the exchange rate of the Australian dollar. Amounts in 2012 were driven primarily by changes in the Euro, the Renminbi, the British pound and the Australian dollar. Derivative gain/loss represents the mark to market value adjustments of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI. The period changes are primarily due to the mark to market changes related to our interest rate swap derivatives. Pension and postretirement adjustments represent actuarial gains and losses related to our defined-benefit pension and postretirement plans. The amounts in all periods primarily related to the U.S. pension plans.

REPORTABLE SEGMENT RESULTS

Building Products

(dollar amounts in millions)

The improvement in Building Products net sales was driven by $29 million of favorable price and mix, and higher volumes of $18 million.

Net sales in the Americas increased due to improved price realization and positive mix which more than offset the impact of slightly lower volumes.

Excluding favorable foreign exchange impact of $5 million, net sales in EMEA markets increased 3%, driven by improvements in mix and higher volumes.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Excluding unfavorable foreign exchange impact of $4 million, net sales in the Pacific Rim increased 8%, driven primarily by higher volumes offset by the impact of unfavorable mix.

The increase in operating income was primarily driven by improvements in gross profit, and a reduction in facility closure costs when compared to the prior year. Gross profit increased primarily from the benefits of price and mix of $17 million, and improved volumes of $7 million. Manufacturing costs were flat as improvements in productivity were able to offset costs incurred to support our investments in China and Russia. SG&A expenses increased by $16 million associated with go-to-market investments to support emerging market growth initiatives. During 2013 we recorded higher earnings from WAVE of $4 million. During 2012, we decided to close our Building Products plant in Mobile, AL, and recorded approximately $21 million of accelerated depreciation, impairment and other charges. We subsequently sold that facility during the third

Management’s Discussion and Analysis of Financial Condition and Results of Operations

quarter of 2013 and recorded a pre-tax gain of $3.8$4 million within SG&A expense (inclusive of release of unused environmental liabilities and asset retirement obligations). During 2012, we also incurred approximately $4 million of net costs related to the collective bargaining contract settlement with employees at the Marietta, PA Building Products plant.

Resilient Flooring

(dollar amounts in millions)

The decline in Resilient Flooring net sales was primarily driven by $23$14 million of lower volume which was only partially offset with favorable price and mix$4 million of $4 million.unfavorable foreign exchange.

Net sales in the Americas decreased as improvements in mix were unable to offset commercial and residential volume declines and unfavorable price.

Excluding favorable foreign exchange impact of $6 million, net sales in the European markets decreased 2%, as improvements in mix and price were unable to offset market driven volume declines, especially in the public sector.

Excluding unfavorable foreign exchange impact of $2 million, net sales in the Pacific Rim decreased 7% as market driven sales declines in Australia offset increased sales in China and India.

Operating income declined primarily duewas flat in 2013 compared to increased charges associated with cost reduction initiatives and the margin impact of lower volumes of $9 million. These impacts were partially offset by reductions in SG&A expenses of $4 million and lower2012. Lower input and manufacturing costs of $12 million. Higher$7 million were due to higher productivity which more than offset costs incurred to support investments in China. Our Resilient Flooring business incurred approximately $16SG&A expenses were lower by $2 million. These improvements were offset by the margin impact of lower volumes of $5 million and $4 million associated with cost reduction actions in Europe and Australia during 2013.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Wood Flooring

(dollar amounts in millions)

The increase in Wood Flooring net sales was driven primarily by higher volumes of $80 million, and aided byin addition to favorable price and mix of $20 million. The higher volumes were driven by strong demand from the home center channel and independent distributors. Sales were also negatively impacted by $26 million resulting from our sale of the Patriot wood flooring distribution business in the third quarter of 2012.

The decline in operating income was driven by higher manufacturing and input costs of $64 million, which were only partially offset by the $19 million impact of higher volumes and $12 million impact of improved price and mix. Improvements in price more than offset the dilutive impact of mix driven by increased demand from the builder channel. Increases in manufacturing and input costs were driven by rising lumber costs and higher labor costs as we increased our workforce to respond to increased demand.

Unallocated Corporate

Unallocated corporate expense of $74.6$73.3 million increased from $53.4$53.1 million in the prior year. The increase was impacted by higher foreign and domestic pension expense of $12.7$13 million, increased spending on outside professional services and higher expense associated with employee benefits.

FINANCIAL CONDITION AND LIQUIDITYManagement’s Discussion and Analysis of Financial Condition and Results of Operations

Cash Flow

Operating activities for 2013 provided $213.7 million of cash, compared to $220.0 million of cash provided in 2012. The change was due to lower cash earnings partially offset by changes in working capital. The working capital change was driven by an increase in accounts payable.

Net cash used for investing activities was $145.8 million for 2013, compared to $91.9 million in 2012. This change was primarily due to lower proceeds from divestitures, increased purchases of property, plant and equipment, and lower proceeds from the sale of assets.

Net cash used for financing activities was $263.7 million for 2013, compared to $273.7 million during 2012. Net cash used in 2013 included the $261.4 million re-purchase of common stock, including associated fees. Net cash used in 2012 was impacted by dividend payments of $507.1 million, partially offset by proceeds from the issuance of long-term debt of $250.0 million.

Liquidity

Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal cash flow needs, since cash flow is generally lower during the first and fourth quarters of our fiscal year. On March 15, 2013, we refinanced our $1.3 billion senior credit facility. The amended facility is composed of a $250 million revolving credit facility (with a $150 million sublimit for letters of credit), a $550 million Term Loan A and a $475 million Term Loan B. The terms of the facility resulted in a lower interest rate spread (2.5% vs. 3.0%) than our previous facility. We also extended the maturity of Term Loan A from November 2015 to March 2018 and of Term Loan B from March 2018 to March 2020, and we amended our year end leverage tests (see below). Per the terms of the underlying agreement, this $1.3 billion senior credit facility is secured by U.S. personal property, the capital stock of material U.S. subsidiaries and a pledge of 65% of the stock of our material first tier foreign subsidiaries.

Under the amended senior credit facility, beginning December 31, 2013, we are subject to year-end leverage tests that may trigger mandatory prepayments. If our ratio of consolidated funded indebtedness minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (“Consolidated Net Leverage Ratio”) is greater than 3.5 to 1.0, the prepayment amount would be 50% of fiscal year

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Excess Cash Flow. These annual payments would be made in the first quarter of the following year. No payment will be required in 2014.

In connection with the refinancing, we incurred $8.3 million for bank, legal, and other fees, of which $7.2 million was capitalized and is being amortized into interest expense over the life of the loans. Additionally, we wrote off $18.9 million of unamortized debt financing costs in the first quarter of 2013 related to our previous credit facility to interest expense.

The amended senior credit facility includes two financial covenants that require the ratio of consolidated EBITDA to consolidated cash interest expense minus cash consolidated interest income (“consolidated interest coverage ratio”) to be greater than or equal to 3.0 to 1.0 and requires the Consolidated Net Leverage Ratio to be less than or equal to 4.5 to 1.0 through December 31, 2013, 4.0 to 1.0 after December 31, 2013 through March 31, 2015 and 3.75 to 1.0 after March 31, 2015. During 2013, we were in compliance with all covenants of the previous and amended senior credit facilities.

The Revolving Credit and Term Loan A portions are currently priced at a spread of 2.50% over LIBOR and the Term Loan B portion is priced at 2.50% over LIBOR with a 1.00% LIBOR floor for its entire term. The Term Loan A and Term Loan B were both fully drawn and are currently priced on a variable interest rate basis.

The following table summarizes our interest rate swaps:

These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. The unpaid balances of Term Loan A, the Revolving Credit and Term Loan B of the credit facility may be prepaid without penalty at the maturity of their respective interest reset periods. Any amounts prepaid on the Term Loan A or Term Loan B may not be re-borrowed.

As of December 31, 2013, we had $135.2 million of cash and cash equivalents, $35.5 million in the U.S. and $99.7 million in various foreign jurisdictions.

On March 23, 2012, our Board of Directors declared a special cash dividend in the amount of $8.55 per share, or $508 million in the aggregate, of which $502.9 million was paid on April 10, 2012. Payment of an additional $1.5 million was made during the remainder of 2012, and the remaining $3.4 million of the dividend is expected to be paid when the underlying shares vest. The dividend was funded in part by surplus cash on our balance sheet, and in part by the proceeds of additional debt issued under our Term Loan B.

On March 28, 2013, we amended our $100 million Accounts Receivable Securitization Facility with the Bank of Nova Scotia, under which AWI and its subsidiary, Armstrong Hardwood Flooring Company, sell their U.S. receivables to Armstrong Receivables Company LLC (“ARC”), a Delaware entity that is consolidated in these financial statements. We decreased the facility to $75 million to reduce commitment fees on the unused capacity and extended the maturity date from December 2014 to March 2016.

On December 31, 2013, we had outstanding letters of credit totaling $71.9 million, of which $14.8 million was issued under the revolving credit facility, $56.9 million was issued under the securitization facility, and $0.2 million was issued by other banks of international subsidiaries. Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

These lines of credit are uncommitted, and poor operating results or credit concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have historically been able to maintain and, as needed, replace credit facilities to support our foreign operations.

Since 2009, our Board of Directors has approved the construction of five manufacturing plants. These include a U.S. mineral wool plant to supply our Building Products plants, mineral fiber ceiling plants in Russia and China, and two resilient flooring plants in China. In July 2013, our Board of Directors approved the expansion of our Lancaster, PA flooring plant to include the manufacture of luxury vinyl tile. Total spending for these projects is currently projected to be approximately $375 million. As of December 31, 2013, we have completed construction of the mineral wool plant and three plants in China. Through December 31, 2013, we have incurred approximately $272 million related to these projects. Spending for the final plant, in Russia, will be incurred through 2014, while spending for the Lancaster plant expansion will be incurred through 2015 with the majority of the spending expected to occur in 2014.

During the third quarter of 2013, the Asbestos PI Trust and TPG together sold 12,057,382 of their remaining shares in a secondary public offering. In connection with this transaction, we paid $261.4 million, including associated fees, to buy-back 5,057,382 shares, which we currently hold in treasury. The treasury share purchase was funded by existing cash, borrowings under our credit facility and our securitization facility. Funds borrowed to complete this transaction were repaid by the end of the third quarter.

We believe that cash on hand and cash generated from operations, together with lines of credit, availability under our $75 million securitization facility and the availability under our $250 million revolving credit facility, will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

2012 COMPARED TO 2011

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)

The decline in consolidated net sales was driven by $93 million of lower volume and $48 million of unfavorable foreign exchange impact which were only partially offset with favorable price and mix of $47 million. Sales were also negatively impacted by our sale of the Patriot wood flooring distribution business which occurred in the third quarter of 2012 and negatively impacted sales for the full year 2012 by $11 million when compared to the prior year.

Net sales in the Americas decreased driven primarily by volume declines, which were only partially offset by improvements in price and mix.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Excluding unfavorable foreign exchange impact of $39 million, net sales in the European markets decreased 6%, driven by continued volume declines which were only partially offset by improvements in price.

Excluding unfavorable foreign exchange impact of $6 million, net sales in the Pacific Rim increased 2% as improvements in mix were partially offset by lower volumes.

Cost of goods sold was 75.8% of net sales in 2012, compared to 76.2% for the same period in 2011. The decrease of $90 million was driven by lower sales in 2012 and manufacturing cost reductions of $30 million. The comparison was impacted by $21 million of costs associated with the closure of our Mobile, AL Building Products facility in 2012, $13 million of costs associated with the closure of our Beaver Falls, PA Building Products facility in 2011 and $9 million of costs associated with European Flooring cost reduction actions taken in 2011.

SG&A expenses in 2012 were $418.3 million, or 16% of net sales, compared to $454.0 million, or 17% of net sales, in 2011. The decreases were primarily due to reductions in core SG&A expense of $32 million.

Restructuring charges for severance and related costs of ($0.4) million were recorded in 2012, compared to $9.0 million in 2011. See Note 15 to the Consolidated Financial Statements for further information.

Equity earnings from our WAVE joint venture were $55.9 million in 2012 compared to $54.9 million in 2011. See Note 10 to the Consolidated Financial Statements for further information.

Interest expense was $53.7 million in 2012 compared to $48.5 million in 2011. The increase in interest expense was driven by additional borrowings of $250 million under our senior credit facility in March 2012 (see Liquidity section for further information).

Income tax expense was $76.1 million and $81.0 million in 2012 and 2011, respectively. The effective tax rate for 2012 was 34.5% as compared to a rate of 41.8% for 2011. The effective tax rate for 2012 was lower than 2011 primarily due to the release of foreign tax credit valuation allowance and changes in mix of geographic income and losses.

REPORTABLE SEGMENT RESULTS

Building Products

(dollar amounts in millions)

The decline in Building Products net sales was driven by $31 million of lower volume due to unfavorable market conditions in key geographies and $25 million of unfavorable foreign exchange impact, which were only partially offset with favorable price and mix of $37 million.

Net sales in the Americas increased due to improved price realization and positive mix which more than offset lower volumes.

Excluding unfavorable foreign exchange impact of $20 million, net sales in the European markets decreased 1%, as improvements in price were unable to offset volume declines.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Excluding unfavorable foreign exchange impact of $4 million, net sales in the Pacific Rim increased 1% as improvements in mix were partially offset by lower volumes.

The increase in operating income was primarily driven by improvements in gross profit, partially offset by an increase in facility closure costs. Gross profit increased primarily from the benefits of price and mix of $26 million and reductions in manufacturing and input costs of $10 million, which more than offset volume declines of $17 million. Operating income was negatively impacted by $25 million of severance, impairment, and other charges associated with cost reduction actions in 2012 related to the closure of our Mobile, AL facility and European headcount reductions; and $13 million of severance and other charges associated with cost reduction actions related to the closure of our Beaver Falls, PA facility in 2011.

Resilient Flooring

(dollar amounts in millions)

The decline in Resilient Flooring net sales was driven by $67 million of lower volume and $23 million of unfavorable foreign exchange impact; which were only partially offset with favorable price and mix of $21 million.

Net sales in the Americas decreased as improvements in mix and price gains were unable to offset volume declines driven by lower sales to our national home center channel.

Excluding unfavorable foreign exchange impact of $20 million, net sales in the European markets decreased 14%, as improvements in price were unable to offset market driven volume declines, especially in the public sector.

Excluding unfavorable foreign exchange impact of $2 million, net sales in the Pacific Rim increased 5% as increased sales in China offset market driven sales declines in Australia.

The increase in operating income was driven by improvements in price and mix of $14 million and reductions in manufacturing and input costs and SG&A expenses of $16 million and $23 million, respectively; which more than offset the impact of volume declines of $31 million. The comparison was also impacted by $2 million and $21 million of severance, impairment, restructuring and other charges associated with our cost reduction actions in the European Flooring business in 2012 and 2011, respectively.

Wood Flooring

(dollar amounts in millions)

The decline in Wood Flooring net sales was driven by lower price and mix of $11 million while the divestiture of our Patriot wood flooring distribution business negatively impacted sales by $11 million when

Management’s Discussion and Analysis of Financial Condition and Results of Operations

compared to the prior year. Lower sales to our national home center channel were offset by increased sales to independent distributors.

The decrease in operating income was driven by unfavorable price and mix of $14 million, partially offset by improvements in manufacturing and input costs of $8 million. The operating income impact of the higher sales volume and Patriot divestiture offset each other.

Unallocated Corporate

Unallocated corporate expense of $53.4 million increased from $45.4 million in the prior year. 2012 included a $14 million lower pension credit as compared to 2011. SG&A reductions only partially offset the impact of the pension credit reduction.

OFF-BALANCE SHEET ARRANGEMENTS

No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.

CONTRACTUAL OBLIGATIONS

As part of our normal operations, we enter into numerous contractual obligations that require specific payments during the term of the various agreements. The following table includes amounts ongoing under contractual obligations existing as of December 31, 2013.2014. Only known payments that are dependent solely on the passage of time are included. Obligations under contracts that contain minimum payment amounts are shown at the minimum payment amount. Contracts that contain variable payment structures without minimum payments are excluded. Purchase orders that are entered into in the normal course of business are also excluded because they are generally cancelable and not legally binding. Amounts are presented below based upon the currently scheduled payment terms. Actual future payments may differ from the amounts presented below due to changes in payment terms or events affecting the payments.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This table excludes obligations related to postretirement benefits (retiree health care and life insurance) since we voluntarily provide these benefits. The amount of benefit payments we made in 20132014 was $22.2$20.7 million. See Note 1816 to the Consolidated Financial Statements for additional information regarding future expected cash payments for postretirement benefits.

We have issued financial guarantees to assure payment on behalf of our subsidiaries in the event of default on various debt and lease obligations in the table above. We have not issued any guarantees on behalf of joint-venture or unrelated businesses.

We are party to supply agreements, some of which require the purchase of inventory remaining at the supplier upon termination of the agreement. The last such agreement will expire in 2015. Had these agreements terminated at December 31, 2013,2014, we would have been obligated to purchase approximately $12.8$4.6 million of inventory. Historically, due to production planning, we have not had to purchase material amounts of product at the end of similar contracts. Accordingly, no liability has been recorded for these guarantees.

We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements. Letters of credit are issued to third-party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of our failure to pay our obligations to the beneficiary. This table summarizes the commitments we have available in the U.S. for use as of December 31, 2013.2014. Letters of credit are currently arranged through our revolving credit facility or our securitization facility.

In addition, our foreign subsidiaries had available lines of credit totaling $16.3$5.0 million of which $1.7$0.3 million was available only for letters of credit and guarantees. There were $0.7$0.2 million of letters of credit and guarantees issued under these credit lines as of December 31, 2013,2014, leaving an additional letter of credit availability of $1.0$0.1 million. There were no borrowings under these lines of credit as of December 31, 20132014, leaving $14.6$4.7 million of unused lines of credit available for foreign borrowings.

On December 31, 2013,2014, we had a $250 million revolving credit facility with a $150 million sublimit for letters of credit, of which $14.8$7.8 million was outstanding. There were no borrowings under the revolving credit facility. Availability under this facility totaled $235.2$242.2 million as of December 31, 2013.2014. We also have the $75$90 million securitization facility which as of December 31, 20132014 had letters of credit outstanding of $56.9$59.3 million and no borrowings against it. Maximum capacity under this facility was $69.8$75.5 million (of which $12.9$16.2 million was available), subject to accounts receivable balances and other collateral adjustments.

In connection with our disposition of certain assets through a variety of unrelated transactions, we have entered into contracts that included various indemnity provisions, some of which are customary for such transactions, while others hold the acquirer of the assets harmless with respect to liabilities relating to such matters as taxes, environmental and other litigation. Some of these provisions include exposure limits, but many do not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under these contractual provisions. For contracts underAs of December 31, 2014, we had no liabilities recorded for which an indemnity claim hashad been received, a liability of $3.4 million has been recorded as of December 31, 2013, which is included in environmental liabilities as disclosed in Note 30 to the Consolidated Financial Statements.received.

Under our sale agreements related to the cabinets business divestiture, we have agreed to indemnify the buyer with respect to a portion of any potential withdrawal liability that may be incurred by the buyer in the event of their withdrawal from the Carpenters Labor-Management Pension Fund. Such indemnities only apply in the event that the sale of assets transaction itself did not trigger withdrawal liability. As of December 31, 2013, we have recorded a liability of $7.2 million relative to this matter. The maximum indemnification liability is $10.0 million. See Note 30 to the Consolidated Financial Statements for additional details.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices that could impact our results of operations, cash flows and financial condition. We use forward swaps and option contracts to hedge these exposures. Forward swap and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. We use derivative financial instruments as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to potential nonperformance on such instruments. We regularly monitor developments in the capital markets.

Counterparty Risk

We only enter into derivative transactions with established counterparties having a credit rating of BBB or better. We monitor counterparty credit default swap levels and credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We do not post nor receive cash collateral with any counterparty for our derivative transactions. As of December 31, 20132014 we had no cash collateral posted or received for any of our derivative transactions. These ISDAs do not contain any credit contingent features other than those contained in our bank credit facility. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible.

Interest Rate Sensitivity

We are subject to interest rate variability on our Term Loan A, Term Loan B, revolving credit facility and other borrowings. A hypothetical increase of one-quarter percentage point in LIBOR interest rates from December 31, 20132014 levels would increase 20142015 interest expense by approximately $0.6$1.2 million. A significant portion of our debt has a 1% LIBOR floor which would not be affected by a one-quarter percentage point move in LIBOR given the current interest rate environment. We also have $1 billion of interest rate swaps outstanding, which fix a portion of our debt. The effectscurrent portion of the interest rate swaps areis included in this calculation.

As of December 31, 2013,2014, we had interest rate swaps outstanding on Term Loan A and on Term Loan B, with notional amounts of $350 million and $650 million, respectively. We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. Interest expense on variable-rate liabilities increases or decreases as a result of interest rate fluctuations. Under the terms of Term Loan A swap, we receive 3-month LIBOR and pay a fixed rate over the hedged period. Under the terms of the Term Loan B swaps, we receive the greater of 3-month LIBOR or the 1% LIBOR Floor and pay a fixed rate over the hedged period. The following table summarizes our interest rate swaps:

These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. The mark-to-market loss was $7.9$9.3 million at December 31, 2013.2014.

The table below provides information about our long-term debt obligations as of December 31, 2013,2014, including payment requirements and related weighted-average interest rates by scheduled maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve and are exclusive of our interest rate swaps.

Exchange Rate Sensitivity

We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement. We use foreign currency forward exchange contracts to reduce our remaining exposure. At December 31, 2013,2014, our major, pre-hedging foreign currency exposures are to the Canadian Dollar, Euro, and Chinese Renminbi. A 10% strengthening of all currencies against the U.S. dollar compared to December 31, 20132014 levels would increase our 20142015 earnings before income taxes by approximately $2.3$0.9 million, including the impact of current foreign currency forward exchange contracts.

We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans.

The table below details our outstanding currency instruments as of December 31, 2013.2014.

Natural Gas Price Sensitivity

We purchase natural gas for use in the manufacture of ceiling tiles and other products, as well as to heat many of our facilities. As a result, we are exposed to fluctuations in the price of natural gas. We have a policy of reducing North American natural gas volatility through derivative instruments, including forward swap contracts, purchased call options and zero-cost collars. As of December 31, 2013,2014, we had contracts to hedge approximately $20.1$14.6 million (notional amounts) of natural gas. All of these contracts mature by December 2014.May 2016. A 10% increase in North American natural gas prices compared to December 31, 20132014 prices would increase our 20142015 expenses by approximately $1$0.4 million including the impact of current hedging contracts. At December 31, 20132014 we had recorded net assetsliabilities of $0.5$3.0 million related to these contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SUPPLEMENTARY DATA

Armstrong World Industries, Inc., and Subsidiaries

Quarterly Financial Information (unaudited)

(dollar amounts in millions, except for per share data)