FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-2116
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ARMSTRONG WORLD INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock ($1 par value) New York Stock Exchange, Inc. (a)
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (b)
9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (b)
7.45% Senior Quarterly Interest
Bonds Due 2038
(a) All Classes
(b) Common Stock and Preferred Stock
Purchase Rights only
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
The aggregate market value of the Common Stock of registrant held by non-
affiliates of the registrant based on the closing price ($20.00 per share) on
the New York Stock Exchange on February 18, 2000, was approximately $0.7
billion. As of February 18, 2000, the number of shares outstanding of
registrant's Common Stock was 40,217,225. This amount includes the 2,467,759
shares of Common Stock as of December 31, 1999, held by Chase Manhattan Bank, as
Trustee for the employee stock ownership accounts of the Company's Retirement
Savings and Stock Ownership Plan.
Documents Incorporated by Reference
Portions of the Proxy Statement dated March 22, 2000, relative to the May 1,
2000, annual meeting of the shareholders of registrant (the "Company's 2000
Proxy Statement") have been incorporated by reference into Part III of this Form
10-K Report.
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PART I
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Item 1. Business
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Armstrong World Industries, Inc. (Armstrong, which may be referred to as we, us
or our) is a Pennsylvania corporation incorporated in 1891. We design,
manufacture and sell interior finishings, most notably floor coverings and
ceiling systems, around the world. Our products are sold primarily for use in
the finishing, refurbishing and repair of residential, commercial and
institutional buildings. We also design, manufacture and sell other products,
including kitchen and bathroom cabinets and pipe insulation.
Industry Segments
Financial Information About Industry Segments
See Item 8, Note 2 to Consolidated Financial Statements for financial
information on our reportable industry segments.
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Narrative Description of Business
Armstrong designs, manufactures and sells interior finishings, including floor
coverings, building products (primarily ceiling systems), wood products
(primarily wood flooring and cabinets), and insulation products for the building
and other industries. Our activities extend worldwide.
Floor Coverings
We are a worldwide manufacturer of floor coverings for the interiors of homes
and commercial and institutional buildings, with a broad range of resilient
flooring together with adhesives, installation and maintenance materials and
accessories. Resilient flooring, in both sheet and tile forms, together with
laminate flooring and linoleum, is made in a wide variety of types, designs, and
colors. Included are types of flooring that offer such features as ease of
installation, reduced maintenance (no-wax), and cushioning for greater underfoot
comfort. Floor covering products are sold to the commercial, residential and
institutional market segments through wholesalers, retailers (including large
home centers and buying groups), contractors, and to the hotel/motel and
manufactured homes industries.
Building Products
As a major producer of ceiling materials in the United States and abroad, we
market both residential and commercial ceiling systems. Ceiling materials for
the home are offered in a variety of types and designs. Most provide noise
reduction and incorporate features intended to permit ease of installation.
These residential ceiling products are sold through wholesalers and retailers
(including large home centers). Commercial
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suspended ceiling systems, designed for use in shopping centers, offices,
schools, hospitals, and other commercial and institutional settings, are
available in numerous colors, performance characteristics and designs and offer
characteristics such as acoustical control, accessibility to the plenum (the
area above the ceiling), rated fire protection, and aesthetic appeal. We sell
commercial ceiling materials and accessories, along with acoustical wall panels,
to ceiling systems contractors and to resale distributors. Framework (grid) for
our suspension ceiling systems products are manufactured and sold through a
joint venture with Worthington Industries.
Wood Products
Armstrong, through our Triangle Pacific subsidiary, manufactures and
sells hardwood flooring and other flooring, kitchen and bathroom cabinets and
related products. These products are used primarily in residential new
construction and remodeling, with some commercial applications such as retail
stores and restaurants. Flooring sales are generally made through independent
wholesale flooring distributors and retailers (including large home centers and
buying groups). Cabinets are sold through both independent or company owned
distributors.
Insulation Products
We manufacture insulation products for the technical insulation market.
Insulation products are made in a wide variety of types and designs to satisfy
various industrial and commercial applications with the majority of the products
comprising closed cell flexible foams. A broad range of cladding and other
related materials for the insulation contracting market are also produced.
Insulation products are sold primarily throughout Europe and North America, with
growing markets in Asia and South America.
All Other
During most of 1999, the "All Other" category in our financial reports included
business units making a variety of specialty products for the automotive,
textile and other industries worldwide. Gasket materials were manufactured for
new and replacement use in the automotive, farm equipment, appliance, small
engine, compressor and other industries. On June 30, 1999, we sold the gaskets
operation, retaining a 35% interest in the business. Since the divestiture, we
have accounted for the gaskets business under the equity method within the "All
Other" segment. Textile products include parts and equipment sold to textile
equipment manufacturers and textile mills. On September 30, 1999, we sold that
business. From 1996 to 1998, we owned an equity interest in Dal-Tile
International, Inc. which manufactured and sold ceramic tile products.
Major Customers
Our businesses principally sell our products through building products
distributors, who re-sell our products to retailers, builders, contractors,
installers and others. We also sell a significant portion of our products to
home center chains and industry buying groups. For example, during 1999, we
sold approximately $348 million of products to The Home Depot, Inc. These sales
included floor coverings, building products, wood products and insulation
products.
Raw Materials
Raw materials essential to our businesses are purchased worldwide in the
ordinary course of business from numerous suppliers. The principal raw materials
used by the Floor Coverings business include synthetic resins, plasticizers,
PVC, latex, linseed oil, limestone, films, pigments and inks. The principal raw
materials used by the Building Products business include mineral fibers and
fillers, clays, starches, newspaper and perlite, as well as steel used in the
ceiling grid manufacturing process. The principal raw materials used by the Wood
Products business include oak lumber, veneer, acrylics, plywood, particleboard
and fiberboard. The principal raw materials used by the Insulation business are
rubber, fillers like antimontryoxid and foaming agents. We also purchase
significant amounts of packaging materials for all of our products. In general,
adequate supplies of raw materials were available to all of our businesses. No
serious shortages or delays were encountered in 1999, and none are expected in
2000. We cannot guarantee that a significant shortage of one raw material or
another will not occur, however.
Customers' orders for our products are typically for immediate shipment. Thus,
in each business group, we keep sufficient inventory on hand to satisfy orders,
or manufacture product to meet delivery dates specified in orders. As a result,
there historically has been no material backlog in any industry segment.
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Patents and Intellectual Property Rights
Patent protection is important to our business in the United States and other
markets. Our competitive position has been enhanced by U.S and foreign patents
on products and processes developed or perfected within Armstrong or obtained
through acquisition or license. In addition, we also benefit from our trade
secrets for certain products and processes.
Patent protection extends for varying periods according to the date of patent
filing or grant and the legal term of a patent in the various countries where
patent protection is obtained. The actual protection afforded by a patent,
which can vary from country to country, depends upon the type of patent, the
scope of its coverage, and the availability of legal remedies in the country.
Although we consider that, in the aggregate, our patents and trade secrets
constitute a valuable asset of material importance to our business, we do not
regard any of our businesses as being materially dependent upon any single
patent or trade secret, or any group of related patents or trade secrets.
Our products are sold around the world under numerous brand-name trademarks we
consider in the aggregate to be of material importance. Certain of our
trademarks, including without limitation house marks Armstrong, Bruce, Hartco,
Robbins, and DLW, and product line marks Armaflex, Cirrus, Corlon, Execlon,
Henry, Medintech, Natural Reflections, Solarian, ToughGuard, Traffic Zone,
Ultima and WearMaster are important to our business because of their
significant brand name recognition. Trademark protection continues in some
countries as long as the mark is used; in other countries, as long as it is
registered. Registrations are generally for fixed, but renewable, terms.
Competition
There is strong competition in all of the industry segments in which we do
business. Competition in each industry segment and each geographic area where
we do business includes numerous companies. Principal methods of competition
include price, product performance and service. In addition, with the exception
of insulation, product styling is a significant component of competition in our
industry segments. Increasing competition in the U.S. from worldwide producers
is apparent in our businesses. There is currently excess production capacity in
various geographic markets, which tends to increase price competition.
Research & Development
Research and development activities are important and necessary in helping us to
improve our products. Principal research and development functions include the
development and improvement of products and manufacturing processes.
We spent $58.5 in 1999, $46.0 million in 1998 and $47.8 million in 1997 on
research and development activities worldwide for our continuing businesses.
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Environmental Matters
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by federal, state and local environmental laws. These laws relate
to the discharge of materials or otherwise relate to the protection of the
environment. Armstrong has made, and intends to continue to make, necessary
expenditures for compliance with applicable laws. Armstrong incurred capital
expenditures of approximately $5.5 million in 1999, $6.7 million in 1998 and
$1.2 million in 1997 for environmental compliance and control facilities and
anticipates annual expenditures for those purposes to continue within this range
for the years 2000 and 2001. Armstrong does not anticipate that it will incur
significant capital expenditures in order to meet the requirements of the Clean
Air Act of 1990 and the final implementing regulations promulgated by various
state agencies. Until all new regulatory requirements are known, uncertainty
will remain regarding future estimates of capital expenditures.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have voluntarily agreed to jointly fund the required investigation and
remediation of each site. With regard to some sites, however, Armstrong disputes
the liability, the proposed remedy or the proposed cost allocation among the
PRPs. Armstrong may also have rights of contribution or reimbursement from other
parties or coverage under applicable insurance policies. Armstrong is also
remediating environmental contamination resulting from past industrial activity
at certain of its current and former plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior company experience
in remediation of contaminated sites. Although current law imposes joint and
several liability on all parties at any Superfund site, Armstrong's contribution
to the remediation of these sites is expected to be limited by the number of
other companies also identified as potentially liable for site costs. As a
result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters.
Liabilities of $14.7 million at December 31, 1999, and $18.3 million at December
31, 1998, were for potential environmental liabilities that Armstrong considers
probable and for which a reasonable estimate of the probable liability could be
made. Where existing data is sufficient to estimate the amount of the liability,
that estimate has been used; where only a range of probable liability is
available and no amount within that range is more likely than any other, the
lower end of the range has been used. As assessments and remediation activities
progress at each individual site, these liabilities are reviewed to reflect
additional information as it becomes available.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
Employees
As of December 31, 1999, we had approximately 18,300 employees around the world,
of whom approximately 6,600 are located outside of the United States. About 57%
of our approximately 12,400 hourly or salaried production and maintenance
employees in the United States are represented by labor unions.
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Geographic Areas
See Item 8, Note 2 to Consolidated Financial Statements for financial
information by geographic areas.
Our non-U.S. operations are subject to local government legislation involving
restrictions on and transfers of investments, tariff restrictions, personnel
administration, and other actions by foreign governments. In addition,
consolidated earnings are subject to both U.S. and non-U.S. tax laws where those
earnings originated outside of the U.S., and to the effects of currency
fluctuations.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
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(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
Our disclosure and analysis in this report and in our 1999 Annual Report to
Shareholders contain some forward-looking statements. Forward-looking
statements give our current expectations or forecasts of future events. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts. They use words such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe," and other words and terms of
similar meaning in connection with discussions of future operating or financial
performance. In particular, these include statements relating to future
actions, prospective products, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies such
as legal proceedings, and financial results. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public.
Any or all of our forward-looking statements in this report, in the 1999 Annual
Report and in any other public statements we make may turn out to be wrong.
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They can be affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Consequently, no forward-looking statement can
be guaranteed. Actual future results may vary materially.
We undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise. However, you should
consult any further disclosures we make on related subjects in our 10-Q, 8-K,
10-K or other reports filed with the SEC. Also note that we provide the
following cautionary discussion of risks and uncertainties relevant to our
businesses. These are some of the factors that we think could potentially cause
our actual results to differ materially from expected and historical results.
Other factors besides those listed here could also adversely affect us. This
discussion is provided in accordance with the Private Securities Litigation
Reform Act of 1995.
. Claims have been brought against us and our subsidiaries for various legal,
environmental and tax matters. In particular, claims have been brought
against us for alleged asbestos related personal injury and property damage.
The ultimate outcome and impact of these claims could differ from the amounts
recorded as liabilities on our balance sheet. Resolution of these cases
affects cash flows, and future increases in the recorded liability could
affect future results of operations. For more information on these matters,
see the discussion of Legal Proceedings in Item 3 in this report.
. Balancing investment to create future growth with the constraints of a price
competitive market is a challenge. Our investments in research and
development for future products could exceed corresponding sales growth.
. Revenues and earnings could be affected by the level of success of new
product introductions, as well as potential impacts from announced and
potential future price increases for our exisiting products.
. Much of our revenues and earnings are exposed to changes in foreign
exchange rates. Almost one third of our revenues arise from international
operations, and we expect that revenues and net income in 2000 will be
affected by changes in exchange rates.
Where practical, we try to reduce these effects by matching local currency
revenues with costs and local currency assets with liabilities. We also
manage foreign exchange risk with foreign currency forward contracts, and
with purchased foreign currency options.
We are subject to interest rate risk on our debt. However, we monitor
interest rate trends and try to minimize the impact of rate changes. Due to
our major acquisitions in 1998, and even after our debt reduction
accomplishments since completion of the acquisitions, our debt level is
higher than in prior years, and a good portion of it is financed through
short term borrowings. A significant increase in interest rates would
increase our borrowing costs.
Notwithstanding our efforts to foresee and plan for the effects of
changes in fiscal circumstances, we cannot predict with certainty all
changes in currency and interest rates, inflation or other related
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factors affecting our businesses. For more information on these matters,
see the discussion of Market Risk in Item 7A of this report.
. International operations could be affected by changes in intellectual
property legal protections and remedies, trade regulations, and procedures
and actions affecting production, pricing and marketing of products, as
well as by unstable governments and legal systems, intergovernmental
disputes and possible nationalization.
. Business combinations among our competitors could affect our competitive
position in the hard surface floor covering, ceiling system and wood
products businesses. Similarly, combinations or alliances among our major
customers could increase their purchasing power in dealing with us. And, of
course, if we ourselves should enter into one or more business
combinations, our business, finances and capital structure could be
affected.
. Growth in costs and expenses, raw material price increases (for example
increases in wood prices or in petroleum-based raw materials such as
plasticizers or PVCs), energy cost increases, changes in distribution and
product mix, and the impact of divestitures, restructuring and other
unusual items that could result from evolving business strategies, and
organizational restructuring could affect future results.
. Revenues and earnings could be affected by various worldwide economic and
political factors, including variations in residential and commercial
building rates and economic growth rates in various areas of the world in
which we do business. These factors could affect the end-use markets for
our products in various parts of the world.
. Revenues and earnings could be affected by the extent to which we
successfully realize savings from the continued integration of our 1998
acquisitions of Triangle Pacific and DLW.
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Item 2. Properties
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Our world headquarters are in Lancaster, Pennsylvania. We own a 100 acre,
multi-building campus comprising the site of our corporate headquarters, most
operational headquarters, and our R&D operations. Altogether, our headquarters
operations occupy over 986,000 square feet of floor space.
We produce and market our products and services throughout the world, owning and
operating 58 manufacturing plants in 15 countries. Thirty-eight of these
facilities are located throughout the United States. We also have an interest
through joint ventures in 15 additional plants in 7 countries.
Floor covering products and adhesives are produced at 24 plants, with principal
manufacturing facilities located in Pennsylvania, Illinois, Oklahoma, the U.K.,
and Germany. Building products are produced at 21 plants with principal
facilities in Georgia, the Florida-Alabama Gulf Coast area, Pennsylvania, the
U.K., and China. Wood products are produced at 16 plants, with principal
facilities located in West Virginia, Tennessee and Pennsylvania. Insulation
products are produced at 12 plants with principal facilities located in North
Carolina and Germany.
Sales offices are leased and owned worldwide, and leased facilities are utilized
to supplement Armstrong's owned warehousing facilities.
Productive capacity and the extent of utilization of our facilities are
difficult to quantify with certainty because in any one facility, maximum
capacity and utilization vary periodically depending upon the product that is
being manufactured, and individual facilities manufacture multiple products. In
this context, we estimate that the production facilities in each industry
segment were effectively utilized during 1999 at 80% to 90% of overall
productive capacity. Remaining productive capacity is sufficient to meet
expected customer demands. We believe that our various facilities are adequate
and suitable. Additional incremental investments in plant facilities are made as
appropriate to balance capacity with anticipated demand, improve quality and
service, and reduce costs.
Item 3. Legal Proceedings
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ASBESTOS-RELATED LITIGATION
Armstrong is a defendant in personal injury claims and property damage claims
related to asbestos containing products.
PERSONAL INJURY CLAIMS
Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against Armstrong, which can involve allegations of negligence,
strict liability, breach of warranty and conspiracy, primarily relate to
Armstrong's involvement with asbestos-containing insulation products. Armstrong
discontinued the sale of all such insulation products in 1969. In addition,
other Armstrong products, such as gasket materials, have been named in some
litigation. Claims may arise many years after first exposure to asbestos in
light of the long latency period (up to 40 years) for asbestos-related injury.
Product identification and determining exposure periods are difficult and
uncertain. Armstrong believes that many current plaintiffs are unimpaired.
Armstrong is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals.
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Over the long history of asbestos litigation involving hundreds of companies,
attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. Armstrong supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims filed in state courts have not been directly affected by the
transfer.
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
("Center")
The Facility was established to evaluate, settle, pay and defend all personal
injury claims against member companies. Resolution and defense costs were
allocated by formula. The Facility subsequently dissolved, and the Center was
created in October 1988 by 21 former Facility members, including Armstrong. At
December 31, 1999 there were 19 members of the Center. In January 2000,
membership was reduced to 16 members. Insurance carriers, while not members, are
represented ex officio on the Center's governing board and have agreed annually
to provide a portion of the Center's operational costs. The Center adopted many
of the conceptual features of the Facility and has addressed the claims in a
manner consistent with the prompt, fair resolution of meritorious claims.
Resolution and defense costs are allocated by formula to each of the member
companies; adjustments over time have resulted in some increased share for
Armstrong.
Amchem Settlement Class Action
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including Armstrong. It was designed to establish a
nonlitigation system for the resolution of those claims, and offered a method
for prompt compensation to claimants who were occupationally exposed to asbestos
if they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees; expedite compensation to claimants with
qualifying claims; and relieve the courts of the burden of handling future
claims.
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The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on September 25, 1997, holding that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system.
Post Amchem Claim Developments
Armstrong is a defendant in approximately 175,600 pending personal injury claims
as of December 31, 1999. During 1999, the Center received and verified
approximately 51,000 claims naming Armstrong as a defendant (of which
approximately 10,200 were received and verified in the fourth quarter).
Armstrong continues to seek broad-based settlements of claims through the
Center. The Center has recently reached agreements with several law firms that
cover approximately 82,000 claims (or 41% of current claims) some of which are
currently pending and some of which have yet to be filed. These agreements
typically provide for multiyear payments for settlement of current claims and
establish specific medical and other criteria for the settlement of future
claims as well as annual limits on the number of claims that can be filed by
these firms. These agreements also establish fixed settlement values for
different asbestos-related medical conditions which are subject to periodic
renegotiation over a period of 2 to 5 years. The plaintiff law firms are
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provide
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center can terminate an agreement with an individual law firm if a
significant number of that firm's clients elect not to participate under the
agreement. Negotiations with additional plaintiff law firms engaged in
asbestos-related litigation that would resolve a substantial portion of the
remaining pending claims are ongoing. The ultimate success and timing of those
negotiations is uncertain.
Asbestos-Related Liability
In continually evaluating its estimated asbestos liability, Armstrong reviews,
among other things, its recent and historical settlement amounts, the incidence
of past and recent claims, the mix of the injuries and occupations of the
plaintiffs, the number of cases pending against it and the status and results of
broad-based settlement discussions. Based on this review, Armstrong has
estimated its share of liability to defend and resolve probable asbestos-related
personal injury claims. This estimate is highly uncertain due to the limitations
of the available data and the difficulty of forecasting with any certainty the
numerous variables that can affect the range of the liability. Armstrong will
continue to study the variables in light of additional information in order to
identify trends that may become evident and to assess their impact on the range
of liability that is probable and estimable.
In the fourth quarter of 1999, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $425.4 million. The revision
in the estimated liability is attributable to many factors. The actual number of
claims received in 1999 was higher than anticipated. Although we expect the
number of claims to decrease in future years, we now expect that the total
number of claims received will be higher than previously anticipated. Further,
the Center has recently settled with some law firms at amounts higher than our
original estimates pursuant to our broad-based settlement plan. In consideration
of these factors, management has concluded that an increase in the estimated
probable liability is required. Armstrong's estimate of such liability that is
probable and estimable through 2005 ranges from $681.5 million to $1,337.9
million as of December 31, 1999. The range of probable and estimable liability
reflects uncertainties in the number of future claims that will be filed, the
outcome of the broad-based settlement negotiations and Armstrong's overall
effective share of the Center's liabilities. Armstrong has concluded that no
amount within that range is more likely than any other, and therefore has
reflected $681.5 million as a liability in the consolidated financial statements
in accordance with generally accepted accounting principles. Of this amount,
management expects to incur asbestos liability payments of approximately $175.0
million over the next 12 months and has reflected $175.0 million as a current
liability.
Armstrong's estimated range of liability is primarily based on known claims
and an estimate of future claims that are likely to occur and can be reasonably
estimated through 2005. This estimated range of liability assumes that the
number of new claims filed annually will be less than the number filed in 1999.
For claims that may be filed beyond 2005, management believes that the level of
uncertainty is too great to provide for reasonable estimation of the number of
future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the estimated range of liability.
Although some settlements have already been reached, Armstrong is currently
uncertain as to the ultimate success and timing of the remaining broad-based
settlement discussions. However, if those discussions are unsuccessful or if
unfavorable claims experiences continue, significant changes in the assumptions
used in the estimate of Armstrong's liability may result. Those changes, if any,
could lead to increases in the recorded liability. Because of the uncertainties
related to the number of claims, the ultimate settlement amounts, and similar
matters, it is extremely difficult to obtain reasonable estimates of the amount
of the ultimate liability. As additional experience is gained regarding claims
and such settlement discussions or other new information becomes available
regarding the potential liability, Armstrong will reassess its potential
liability and revise the estimates as appropriate.
Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims, net
of any potential insurance recoveries, will not have a material after-tax effect
on the financial condition of Armstrong or its liquidity, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
Codefendant Bankruptcies
Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
Letters of Credit
As of December 31, 1999, Armstrong entered into $36.2 million of letters of
credit to meet minimum collateral requirements established by the Center.
Property Damage Litigation
Armstrong is also one of many defendants in five pending claims as of December
31, 1999, that were filed by public and private building owners. These cases
present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures, for
removal and replacement of such products. Armstrong vigorously denies the
validity of the allegations against it in these claims. These claims are not
handled by the Center. Insurance coverage has been resolved and is expected to
cover almost all costs of these claims.
-13-
Insurance Coverage
During relevant time periods, Armstrong purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., a former
subsidiary of Armstrong. Armstrong and ACandS agreed to share certain coverage
on a first-come first-served basis and to reserve for ACandS a certain amount of
excess coverage.
Wellington Agreement
In 1985, Armstrong and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled disputes concerning
personal injury insurance coverage with signatory carriers. It provides broad
coverage for both defense and indemnity and applies to both products hazard and
nonproducts (general liability) coverages. Armstrong has resolved most
asbestos-related personal injury products hazard coverage matters with its
solvent carriers through the Wellington Agreement or other settlements.
Insurance Recovery Proceedings
A substantial portion of Armstrong's primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims
including, among others, those that involve alleged exposure during Armstrong's
installation of asbestos materials. An alternative dispute resolution ("ADR")
procedure under the Wellington Agreement is under way against certain carriers
to determine the percentage of resolved and unresolved claims that are
nonproducts claims, to establish the entitlement to that coverage and to
determine whether and how much reinstatement of prematurely exhausted products
hazard insurance is warranted. The nonproducts coverage potentially available is
substantial and includes defense costs in addition to limits. The carriers have
raised various defenses, including waiver, laches, statutes of limitations and
contractual defenses. One primary carrier alleges that it is no longer bound by
the Wellington Agreement, and another alleges that Armstrong agreed to limit its
claims for nonproducts coverage against that carrier when the Wellington
Agreement was signed. The ADR process is in the trial phase of binding
arbitration. One insurer has taken the position that it is entitled to litigate
in court certain issues in the ADR proceeding. During 1999, Armstrong received
preliminary decisions in the initial phases of the trial proceeding of the ADR
which were generally favorable to Armstrong on a number of issues related to
insurance coverage. Because of the continuing ADR process and the possibilities
for further proceedings on certain matters, Armstrong has not yet completely
determined the financial implications of the decisions. Armstrong has entered
into settlements with a number of the carriers resolving coverage issues.
-14-
Other proceedings against non-Wellington carriers may become necessary.
Insurance Asset
As with its estimated asbestos-related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $296.0 million is recorded as of December 31, 1999. Approximately
$58.7 million was received in 1999 pursuant to existing settlements. The asset
was also increased by $90.0 million in the fourth quarter of 1999 primarily as a
result of insurance coverage in place related to the increase in the probable
and estimable liability and recent settlements with certain carriers. Of the
total insurance asset amount, approximately $78.3 million represents partial
settlement for previous claims which will be paid in a fixed and determinable
flow and is reported at its net present value discounted at 6.70%. The total
amount recorded reflects Armstrong's belief in the availability of insurance in
this amount, based upon Armstrong's success in insurance recoveries, recent
settlement agreements that provide that coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. This insurance is either
available through settlement or probable of recovery through negotiation,
litigation or resolution of the ADR process that is in the trial phase of
binding arbitration. Depending on further progress of the ADR, and activities
such as settlement discussions with insurance carriers party to the ADR and
those not party to the ADR, Armstrong may revise its estimate and additional
insurance assets may be recorded in a future period. Of the $296.0 million
asset, $26.0 million has been recorded as a current asset reflecting
management's estimate of the minimum insurance payments to be received in the
next 12 months. However, the actual amount of payments to be received in the
next 12 months could increase depending upon the nature and result of settlement
discussions. Management estimates that the timing of future cash payments for
the remainder of the recorded asset may extend beyond 10 years.
Cash Flow Impact
Armstrong paid $173.0 million for asbestos-related claims in 1999 compared to
$101.5 million in 1998. Armstrong received $58.7 million in asbestos-related
insurance recoveries in 1999 compared with $27.1 million in 1998. Armstrong
currently expects to pay approximately $95.0 million to $115.0 million for
asbestos-related claims and expenses in 2000, net of expected insurance
recoveries and taxes.
CONCLUSION
In the fourth quarter of 1999, Armstrong recorded a net pretax charge of $335.4
million. This charge is the net of an increase in its estimated asbestos-related
liability of $425.4 million and a $90.0 million increase in related insurance
recoveries.
While some successful broad-based settlements have been reached with
plaintiff law firms, Armstrong is uncertain as to the timing and number of any
additional settlements to be reached.
Since many uncertainties exist surrounding asbestos litigation, Armstrong
will continue to evaluate its asbestos-related estimated liability and
corresponding estimated insurance recoveries asset as well as the underlying
assumptions used to derive these amounts. The recorded liability and asset
reflect the most recent available information as of this filing. However, it is
reasonably possible that Armstrong's total exposure to personal injury claims
may be greater than the recorded liability, and, accordingly future charges to
income may be necessary. While Armstrong believes that potential future charges
may be material to the periods in which they are taken, Armstrong does not
believe the charges will have a material adverse effect on its financial
position or liquidity.
-15-
ENVIRONMENTAL MATTERS
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by federal, state and local environmental laws. These laws relate
to the discharge of materials or otherwise relate to the protection of the
environment. Armstrong has made, and intends to continue to make, necessary
expenditures for compliance with applicable laws. Armstrong incurred capital
expenditures of approximately $5.5 million in 1999, $6.7 million in 1998 and
$1.2 million in 1997 for environmental compliance and control facilities and
anticipates annual expenditures for those purposes to continue within this range
for the years 2000 and 2001. Armstrong does not anticipate that it will incur
significant capital expenditures in order to meet the requirements of the Clean
Air Act of 1990 and the final implementing regulations promulgated by various
state agencies. Until all new regulatory requirements are known, uncertainty
will remain regarding future estimates of capital expenditures.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have voluntarily agreed to jointly fund the required investigation and
remediation of each site. With regard to some sites, however, Armstrong disputes
the liability, the proposed remedy or the proposed cost allocation among the
PRPs. Armstrong may also have rights of contribution or reimbursement from other
parties or coverage under applicable insurance policies. Armstrong is also
remediating environmental contamination resulting from past industrial activity
at certain of its current and former plant sites.
Estimates of future liability are based on an evaluation of currently
available facts regarding each individual site and consider factors including
existing technology, presently enacted laws and regulations and prior company
experience in remediation of contaminated sites. Although current law imposes
joint and several liability on all parties at any Superfund site, Armstrong's
contribution to the remediation of these sites is expected to be limited by the
number of other companies also identified as potentially liable for site costs.
As a result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters.
Liabilities of $14.7 million at December 31, 1999, and $18.3 million at
December 31, 1998, were for potential environmental liabilities that Armstrong
considers probable and for which a reasonable estimate of the probable liability
could be made. Where existing data is sufficient to estimate the amount of the
liability, that estimate has been used; where only a range of probable liability
is available and no amount within that range is more likely than any other, the
lower end of the range has been used. As assessments and remediation activities
progress at each individual site, these liabilities are reviewed to reflect
additional information as it becomes available.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.
Actual costs to be incurred at identified sites in the future may vary from
the estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
-16-
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
Armstrong's Common Stock is traded on the New York Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of
March 1, 2000, there were approximately 6,500 holders of record of Armstrong's
Common Stock.
During 1999, Armstrong issued a total of 2,400 shares of restricted Common Stock
to nonemployee directors of Armstrong pursuant to Armstrong's Restricted Stock
Plan for Nonemployee Directors. Given the small number of persons to whom these
shares were issued, applicable restrictions on transfer and the information
regarding Armstrong possessed by the directors, these shares were issued without
registration in reliance on Section 4(2) of the Securities Act of 1933, as
amended.
- -------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total year
- -------------------------------------------------------------------------------------------------------------------------
Dividends per share of common stock 0.48 0.48 0.48 0.48 1.92
Price range of common stock--high 64 5/16 59 11/16 60 7/8 45 1/8 64 5/16
Price range of common stock--low 44 5/8 45 44 1/8 29 29
- --------------------------------------------------------------------------------------------------------------------------
Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88
Price range of common stock--high 87 7/8 90 68 3/8 70 1/4 90
Price range of common stock--low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16
- --------------------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data
- ---------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except for per-share data) For year 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Net sales 3,443.8 2,746.2 2,198.7 2,156.4 2,325.0
Cost of goods sold 2,290.3 1,838.6 1,461.7 1,459.9 1,581.1
Total selling, general and administrative expenses and
goodwill amortization 708.5 532.7 385.3 413.2 457.0
Equity (earnings) loss from affiliates, net (16.8) (13.8) 29.7 (19.1) (6.2)
Reorganization and restructuring charges (reversals) (1.4) 74.6 -- 46.5 71.8
Charge for asbestos liability, net 335.4 274.2 -- -- --
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- -- -- -- 177.2
Operating income (loss) 127.8 39.9 322.0 255.9 44.1
Interest expense 105.2 62.2 28.0 22.6 34.0
Other expense (income), net (6.6) (1.7) (2.2) (6.9) 1.9
Earnings (loss) from continuing businesses before
income taxes 29.2 (20.6) 296.2 240.2 8.2
Income tax expense (benefit) 14.9 (11.3) 111.2 75.4 (5.4)
Earnings (loss) from continuing businesses 14.3 (9.3) 185.0 164.8 13.6
As a percentage of sales 0.4% -0.3% 8.4% 7.6% 0.6%
As a percentage of average monthly assets (a) 0.3% -0.3% 9.0% 8.5% 0.7%
Earnings (loss) from continuing businesses
-17-
applicable to common stock (b) 14.3 (9.3) 185.0 158.0 (0.7)
Per common share -- basic (c) 0.36 (0.23) 4.55 4.04 (0.02)
Per common share -- diluted (c) 0.36 (0.23) 4.50 3.82 (0.02)
Net earnings (loss) 14.3 (9.3) 185.0 155.9 123.3
As a percentage of sales 0.4% -0.3% 8.4% 7.2% 5.3%
Net earnings (loss) applicable to common stock (b) 14.3 (9.3) 185.0 149.1 109.0
As a percentage of average shareholders' equity 1.8% -1.2% 22.3% 19.6% 15.0%
Per common share -- basic (c) 0.36 (0.23) 4.55 3.81 2.94
Per common share -- diluted (c) 0.36 (0.23) 4.50 3.61 2.68
Dividends declared per share of common stock 1.92 1.88 1.72 1.56 1.40
Capital expenditures 195.2 184.3 160.5 228.0 182.7
Aggregate cost of acquisitions 3.8 1,175.7 4.2 -- 20.7
Total depreciation and amortization 169.2 142.7 132.7 123.7 123.1
Average number of employees -- continuing businesses 18,419 13,881 10,643 10,572 13,433
Average number of common shares outstanding (millions) 39.9 39.8 40.6 39.1 37.1
- --------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital -- continuing businesses 244.9 367.8 128.5 243.5 346.8
Net property, plant and equipment -- continuing businesses 1,439.1 1,502.0 972.2 964.0 878.2
Total assets 4,164.5 4,273.2 2,375.5 2,135.6 2,149.8
Net long-term debt 1,412.9 1,562.8 223.1 219.4 188.3
Total debt as a percentage of total capital (d) 71.2 73.1% 39.2% 37.2% 38.5%
Shareholders' equity 679.2 709.7 810.6 790.0 775.0
Book value per share of common stock 16.87 17.57 20.20 19.19 20.10
Number of shareholders (e) 6,515 6,868 7,137 7,424 7,084
Common shares outstanding (millions) 40.3 39.8 40.1 41.2 36.9
Market value per common share 33 3/8 60 5/16 74 3/4 69 1/2 62
- --------------------------------------------------------------------------------------------------------------------------
Notes:
(a) Assets exclude insurance recoveries for asbestos-related liabilities.
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated preferred shares.
(c) See definition of basic and diluted earnings per share on page 39.
(d) Total debt includes short-term debt, current installments of long-term debt,
long-term debt and ESOP loan guarantee. Total capital includes total debt
and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 6,000 to 6,500 employees for years 1988 through 1996.
-18-
From 1996 to July 1998, ceramic tile results were reported under the equity
method, whereas prior to 1996, ceramic tile operations were reported on a
consolidated or line item basis. From July 1998 to November 1998, ceramic tile
operations were reported under the cost method.
Beginning in 1998, consolidated results include Armstrong's acquisitions of
Triangle Pacific and DLW.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- --------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
1999 COMPARED WITH 1998
DIVESTITURES
On May 28, 1999, Armstrong sold DLW Aktiengesellschaft's ("DLW") furniture
business for total cash proceeds of $38.1 million. Armstrong acquired this
business as part of the acquisition of DLW in the third quarter of 1998 and had
classified the business as held for sale. There was no gain or loss on the
transaction.
-19-
On June 22, 1999, Armstrong sold its interest in the assets of Martin
Surfacing, Inc. Armstrong acquired this interest as part of its acquisition of
DLW during the third quarter of 1998. There was no material gain or loss on the
transaction.
On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial
Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of
investors including Citicorp Venture Capital Ltd. and the management of AISI for
a cash purchase price of approximately $36.1 million. The sale resulted in a
gain of approximately $6.0 million, or $0.15 per share, which was recorded in
other income.
On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a pretax loss
of $5.0 million ($3.2 million after tax, or $0.08 per diluted share) which was
recorded in other income.
-20-
FINANCING
On March 16, 1999, Armstrong filed a shelf registration statement for $1 billion
of combined debt and equity securities. On May 19, 1999, Armstrong completed an
offering under the shelf registration statement of $200 million aggregate
principal amount of 7.45% Senior Notes due 2029. The net proceeds from this
offering were used to repay other indebtedness of Armstrong.
On October 21, 1999, Armstrong renewed a bank credit facility for $450
million that expires in 364 days and cancelled a $300 million line of credit
which was due to expire in 2001. Armstrong also has a $450 million line of
credit which expires in 2003. There were no borrowings under these facilities at
December 31, 1999.
FINANCIAL CONDITION
As shown on the Consolidated Balance Sheets on page 36, Armstrong had cash and
cash equivalents of $35.6 million at December 31, 1999, compared with $38.2
million recorded at the end of 1998. The ratio of current assets to current
liabilities was 1.31 to 1 as of December 31, 1999, compared with 1.49 to 1 as of
December 31, 1998.
Long-term debt, excluding Armstrong's guarantee of an ESOP loan, decreased
$149.9 million in 1999. At December 31, 1999, long-term debt of $1,412.9
million, or 60.0 percent of total capital, compared with $1,562.8 million, or
59.3 percent of total capital, at the end of 1998. At December 31, 1999, and
December 31, 1998, ratios of total debt (including Armstrong's guarantee of an
ESOP loan) as a percent of total capital were 71.2 percent and 73.1 percent,
respectively.
As shown on the Consolidated Statements of Cash Flows on page 37, net cash
provided by operating activities for the year ended December 31, 1999, was
$344.2 million compared with $240.8 million in 1998. The increase is due to
changes in working capital components, primarily an increase in accounts payable
and accrued expenses.
Net cash used for investing activities was $62.0 million for the year ended
December 31, 1999, compared with $1,198.3 million in 1998. The decrease was
primarily due to expenditures for acquisitions in 1998 and the proceeds from the
sales of businesses in 1999.
Net cash used for financing activities was $281.9 million for the year ended
December 31, 1999, compared with net cash provided by financing activities of
$937.3 million in 1998. The decrease was primarily due to the $202.1 million net
reduction of debt during 1999 compared to the $1,039.5 million net increase in
debt during 1998.
On October 15, 1999, Armstrong's ceiling grid joint venture with Worthington
Industries, WAVE, made a $25 million payment to each partner. Armstrong applied
the proceeds to debt reduction.
-21-
Armstrong is constantly evaluating its various business units and may from
time to time dispose of, or restructure, those units. Armstrong is currently at
different levels of divestiture discussions and evaluations related to three of
its business units: insulation, floor installation products and its European
carpet business. The anticipated after-tax proceeds from these divestitures is
estimated to be $350 million to $450 million. See Divestitures section for
discussion of businesses sold during 1999.
[GRAPH]
-22-
ASBESTOS-RELATED LITIGATION
Armstrong is involved in significant asbestos-related litigation which is
described more fully in Note 26 on pages 52-54 and which should be read in
connection with this discussion and analysis. Armstrong is a defendant in
approximately 175,600 pending personal injury claims as of December 31, 1999.
During 1999, the Center for Claims Resolution ("Center") received and verified
approximately 51,000 claims naming Armstrong as a defendant (of which
approximately 10,200 were received and verified in the fourth quarter).
Armstrong continues to seek broad-based settlements of claims through the
Center. The Center has recently reached agreements with several law firms that
cover approximately 82,000 claims (or 41% of current claims) some of which are
currently pending, and some of which have yet to be filed. These agreements
typically provide for multiyear payments for settlement of current claims and
establish specific medical and other criteria for the settlement of future
claims as well as annual limits on the number of claims that can be filed by
these firms. These agreements also establish specific settlement values for
different asbestos-related medical conditions which are subject to periodic
renegotiation over a period of 2 to 5 years. The plaintiff law firms are
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provide
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center can terminate an agreement with an individual law firm if a
significant number of that firm's clients elect not to participate under the
agreement. Negotiations with additional plaintiff law firms engaged in
asbestos-related litigation that would resolve a substantial portion of the
remaining pending claims are ongoing. The ultimate success and timing of those
negotiations is uncertain.
In continually evaluating its estimated asbestos liability, Armstrong
reviews, among other things, its recent and historical settlement amounts, the
incidence of past and recent claims, the mix of the injuries and occupations of
the plaintiffs, the number of cases pending against it and the status and
results of broad-based settlement discussions. Based on this review, Armstrong
has estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate is highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that can affect the range of the liability.
Armstrong will continue to study the variables in light of additional
information in order to identify trends that may become evident and to assess
their impact on the range of liability that is probable and estimable.
In the fourth quarter of 1999, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $425.4 million. The revision
in the estimated liability is attributable to many factors. The actual number of
claims received in 1999 was higher than anticipated. Although we expect the
number of claims to decrease in future years, we now expect that the total
number of claims received will be higher than previously anticipated. Further,
the Center has recently settled with some law firms at amounts higher than our
original estimates pursuant to our broad-based settlement plan. In consideration
of these factors, management has concluded that an increase in the estimated
probable liability is required. Armstrong's estimate of such liability that is
probable and estimable through 2005 ranges from $681.5 million to $1,337.9
million as of December 31, 1999. The range of probable and estimable liability
reflects uncertainties in the number of future claims that will be filed, the
outcome of the broad-based settlement negotiations and Armstrong's overall
effective share of the Center's liabilities. Armstrong has concluded that no
amount within that range is more likely than any other, and therefore has
reflected $681.5 million as a liability in the consolidated financial statements
in accordance with generally accepted accounting principles. Of this amount,
management expects to incur asbestos liability payments of approximately $175.0
million over the next 12 months and has reflected $175.0 million as a current
liability.
Armstrong's estimated range of liability is primarily based on known claims
and an estimate of future claims that are likely to occur and can be reasonably
estimated through 2005. This estimated range of liability assumes that the
number of new claims filed annually will be less than the number filed in 1999.
For claims that may be filed beyond 2005, management believes that the level of
uncertainty is too great to provide for reasonable estimation of the number of
future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the estimated range of liability. Because of
the uncertainties related to the number of claims, the ultimate settlement
amounts, and similar matters, it is extremely difficult to obtain reasonable
estimates of the amount of the ultimate liability. As additional experience is
gained regarding claims and such settlement discussions or other new information
becomes available regarding the potential liability, Armstrong will reassess its
potential liability and revise the estimates as appropriate.
Although some settlements have already been reached, Armstrong is currently
uncertain as to the ultimate success and timing of the remaining broad-based
settlement discussions. However, if those discussions are unsuccessful or if
unfavorable claims experiences continue, significant changes in the assumptions
used in the estimate of Armstrong's liability may result. Those changes, if any,
could lead to increases in the recorded liability.
Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims, net
of any potential insurance recoveries, will not have a material after-tax effect
on the financial condition of Armstrong or its liquidity, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
As with its estimated asbestos-related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $296.0 million is recorded as of December 31, 1999. Approximately
$58.7 million was received in 1999 pursuant to existing settlements. The asset
was also increased by $90.0 million in the fourth quarter of 1999 primarily as a
result of insurance coverage in place related to the increase in the probable
and estimable liability and recent settlements with certain carriers. Of the
total insurance asset amount, approximately $78.3 million represents partial
settlement for previous claims which will be paid in a fixed and determinable
flow and is reported at its net present value discounted at 6.70%. The total
amount recorded reflects Armstrong's belief in the availability of insurance in
this amount, based upon Armstrong's success in insurance recoveries, recent
settlement agreements that provide that coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. This insurance is either
available through settlement or probable of recovery through negotiation,
litigation or resolution of the Alternative Dispute Resolution ("ADR") process
that is in the trial phase of binding arbitration. Depending on further progress
of the ADR, and activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, Armstrong may revise
its estimate and additional insurance assets may be recorded in a future period.
Of the $296.0 million asset, $26.0 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months. However, the actual amount of payments to be
received in the next 12 months could increase depending upon the nature and
result of settlement discussions. Management estimates that the timing of future
cash payments for the remainder of the recorded asset may extend beyond 10
years.
Armstrong paid $173.0 million for asbestos-related claims in 1999 compared to
$101.5 million in 1998. Armstrong received $58.7 million in asbestos-related
insurance recoveries in 1999 compared with $27.1 million in 1998. Armstrong
currently expects to pay approximately $95.0 million to $115.0 million for
asbestos-related claims and expenses in 2000, net of expected insurance
recoveries and taxes.
Since many uncertainties exist surrounding asbestos litigation, Armstrong
will continue to evaluate its asbestos-related estimated liability and
corresponding estimated insurance recoveries asset as well as the underlying
assumptions used to derive these amounts. The recorded liability and asset
reflect the most recent available information as of this filing. However, it is
reasonably possible that Armstrong's total exposure to personal injury claims
may be greater than the recorded liability and, accordingly, future charges to
income may be necessary. While Armstrong believes that potential future charges
may be material to the periods in which they are taken, Armstrong does not
believe the charges will have a material adverse effect on its financial
position or liquidity.
-23-
CONSOLIDATED RESULTS
Net sales in 1999 of $3.44 billion were 25.4% higher when compared with net
sales of $2.75 billion in 1998. Triangle Pacific contributed $822.6 million and
$346.0 million of sales in 1999 and 1998 respectively, while DLW contributed
$513.1 million and $193.0 million during the same periods.
Excluding these recent acquisitions, Armstrong sales of $2,108.1 million were
$99.1 million, or 4.5%, below prior year of which $45.4 million related to the
absence of gasket and textile sales, following the sale of those units in 1999.
Floor coverings sales decreased 4.0%; Insulation products sales declined 1.9%;
and Building products sales were down 0.6%. Further excluding the impact of the
gaskets and textiles divestitures, Americas sales growth of 1.1% was offset by
the European sales decline of 11.1% and the Pacific Area sales decline of 1.9%.
Armstrong reported net earnings of $14.3 million, or $0.36 per share,
compared to a net loss of $9.3 million, or $0.23 per share in 1998. The 1999 and
1998 results include net after-tax charges of $218.0 million and $178.2 million,
respectively, for increases in the estimated liability for asbestos-related
claims, and the 1998 results include after-tax charges of $48.5 million for
reorganization charges.
Cost of goods sold in 1999 was 66.5% of sales, lower than cost of goods sold
of 67.0% in 1998. Excluding the effect of recent acquisitions, Armstrong's cost
of goods sold was 63.5% in 1999 compared to 65.9% in 1998, due to cost
reductions, manufacturing efficiencies and lower raw material costs.
Selling, general and administrative (SG&A) expenses in 1999 were $683.0
million, or 19.8% of sales. In 1998, SG&A expenses were $522.0 million, or 19.0%
of sales.
Equity earnings from affiliates of $16.8 million improved $3.0 million
reflecting primarily an improvement in the WAVE grid joint venture and the
equity method accounting of AISI for the post sale period in 1999.
Goodwill amortization was $25.5 million for 1999 compared to $10.7 million in
1998 due to a full year of amortization related to the Triangle Pacific and DLW
acquisitions.
Interest expense of $105.2 million in 1999 was higher than interest expense
of $62.2 million in 1998 due to higher levels of short- and long-term debt due
to a full year of acquisition related debt.
Other income includes a gain of $6.0 million on the divestiture of 65% of
AISI and a loss of $5.0 million on the divestiture of Textile Products. Other
income also reflects proceeds from the settlement of various legal actions
totaling $3 million and a gain of $2.6 million resulting from the receipt of
cash and stock in connection with the demutualization of an insurance company
with whom Armstrong has company-owned life insurance policies and other items.
Armstrong's 1999 effective tax rate, excluding the effects of the asbestos
charge, was 36.3% which was affected by nondeductible goodwill amortization.
Armstrong's 1998 tax benefit was generated by the charge for the increase in
asbestos liability, cost reduction and reorganization charges, and a tax benefit
associated with the gain on the sale of the Dal-Tile shares, partially offset by
the nondeductibility of goodwill.
-24-
INDUSTRY SEGMENT RESULTS
FLOOR COVERINGS
Worldwide floor coverings sales in 1999 of $1,593.0 million included sales of
$513.1 million from DLW. Excluding DLW, sales were $1,079.9 million, or 4.0%
below last year. Sales in the Americas were essentially flat versus 1998 as
increased sales of commercial tile, installation products, and laminate were
almost offset by declines of residential tile and residential and commercial
sheet. The residential sheet decline was primarily due to lower sales in the
manufactured homes channel and Canada. Sales in the traditional retail channel
increased on higher unit volumes and improved product mix resulting from the
success of new product introductions. Both residential and commercial channels
experienced competitive pricing pressures during the year. European sales were
24.3% below prior year reflecting weak economic conditions and residential
pricing pressure resulting from excess capacity and the lack of business in
Russia. Pacific area sales were 2.0% ahead of last year.
[GRAPH]
[GRAPH]
Operating income of $217.4 million in 1999 compared to $176.5 million in
1998, excluding reorganization charges and reversals. Higher operating margins
were primarily due to implementation of actions related to the 1998 cost
reduction activities, lower raw material and other costs, an improved mix of
residential sheet products. Additionally, operating results include $4.8 million
for insurance settlements for past product claims, net of inventory write-offs
mostly offset by $3.3 million of costs associated with changes in the production
location for some product lines. The impact of changes in employee compensation
policies resulted in a net benefit of $3.0 million.
Outlook
Sales in 2000 are expected to increase modestly due to a better mix and new
products in the Americas in sheet flooring and laminates. European sales are
anticipated to be slightly higher than 1999 due to some economic recovery.
Operating income should remain stable as significant raw material price
increases will offset most of the sales increases.
BUILDING PRODUCTS
Building products sales of $752.1 million compared to $756.8 million in 1998 as
strong performance from the U.S. commercial business was offset by lower
European sales and price pressure across most markets.
Operating income of $119.7 million compared to $116.6 million in 1998,
excluding reorganization charges and reversals. The operating income increase
reflected the impact of 1998 cost reduction activities and lower raw material
and other costs. Results from Armstrong's WAVE grid joint venture with
Worthington Industries continue to be strong, showing a 13% improvement over
1998.
Outlook
Sales in 2000 are expected to increase modestly in the Americas and Europe
primarily due to anticipated volume and price increases. Operating income should
increase in 2000 as higher volume offsets increasing manufacturing and SG&A
costs.
WOOD PRODUCTS
Wood products sales of $822.6 million compared to $346.0 million in 1998. The
increase is primarily due to a full year's sales in 1999 compared with about 5
months of sales in 1998 following the acquisition of Triangle Pacific.
Operating income of $85.0 million compared to $38.6 million from the date of
acquisition in 1998.
On a comparable basis, sales and operating income for Triangle Pacific in
1999 were approximately 14.5% and 16.1% above the respective amounts reported by
Triangle Pacific in 1998.
Outlook
Sales in 2000 are expected to increase significantly through a combination of
volume and price increases. Although it is anticipated that lumber cost
increases will exceed sales price increases, operating income should increase
from the leveraging of sales over indirect operating costs.
-25-
INSULATION PRODUCTS
Sales of $225.7 million decreased from $230.0 million in 1998. Sales in Europe
declined 5.5% while the Americas increased 11.6%. Operating income of $45.7
million decreased from $46.3 million in 1998, excluding reorganization charges,
primarily due to lower sales.
Outlook
Modest sales volume growth is expected despite continuing price pressure.
Operating income should remain close to the 1999 amount as the overall margins
will be negatively impacted by lower prices and inflationary cost increases.
Armstrong continues to pursue divestiture strategies for this business.
ALL OTHER
Sales reported in this segment comprise gasket materials and textile mill
supplies. As discussed previously, Armstrong sold the textiles business and 65%
of the gaskets business during 1999. Sales of $50.4 million decreased 47%
compared to 1998. Operating income of $6.0 million compared with $9.1 million in
1998, excluding reorganization charges.
GEOGRAPHIC AREAS
Net sales in the Americas in 1999 were $2.39 billion, compared to $1.92 billion
recorded in 1998. The increase in sales to customers in the United States and
Canada was primarily due to a full year of Triangle Pacific sales. Net sales in
Europe in 1999 were $905.8 million, compared to $699.3 million in 1998.
Additional sales from DLW were somewhat offset by lower sales to Eastern Europe.
Sales to the Pacific area and other foreign countries of $143.1 million were
higher than sales of $124.9 million in 1998.
Long-lived assets in the Americas in 1999 were $1.00 billion compared to
$1.01 billion in 1998. Long-lived assets in Europe in 1999 were $401.3 million
compared to $451.7 million in 1998. The decrease primarily relates to currency
exchange rate effects on German assets. Long-lived assets in the Pacific area in
1999 were $41.3 million compared to $41.2 million in 1998.
MARKET RISK
Armstrong is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices that could impact its results of
operations and financial condition. Armstrong uses financial instruments,
including fixed and variable rate debt, as well as swap, forward and option
contracts to finance its operations and to hedge interest rate, currency and
commodity exposures. Swap, forward and option contracts are entered into for
periods consistent with underlying exposure and do not constitute positions
independent of those exposures. Armstrong uses derivative financial instruments
as risk management tools and not for speculative trading purposes. In addition,
derivative financial instruments are entered into with a diversified group of
major financial institutions in order to manage Armstrong's exposure to
nonperformance on such instruments.
-26-
INTEREST RATE SENSITIVITY
The table below provides information about Armstrong's long-term debt
obligations as of December 31, 1999, and December 31, 1998. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. Weighted average variable rates are based on implied forward
rates in the yield curve at the reporting date. The information is presented in
U.S. dollar equivalents, which is Armstrong's reporting currency.
- ---------------------------------------------------------------------------------------
Expected
maturity date After
($ millions) 1999 2000 2001 2002 2003 2004 2004 Total
- ---------------------------------------------------------------------------------------
As of December 31, 1999
- ---------------------------------------------------------------------------------------
Long-term debt:
Fixed rate -- $31.1 $8.7 $0.8 $202.1 $1.3 $729.5 $973.5
Avg. interest
rate -- 7.73% 8.66% 7.23% 6.36% 3.51% 7.48% 7.26%
- ---------------------------------------------------------------------------------------
Variable rate -- $5.0 $2.0 -- $450.0 -- $18.5 $475.5
Avg. interest
rate -- 7.65% 7.65% -- 6.20% -- 4.89% 6.17%
- ---------------------------------------------------------------------------------------
Expected
maturity date After
($ millions) 1999 2000 2001 2002 2003 2003 Total
- ---------------------------------------------------------------------------------------
As of December 31, 1998
- ---------------------------------------------------------------------------------------
Long-term debt:
Fixed rate $28.9 $46.2 $ 29.7 $5.5 $206.5 $507.9 $824.7
Avg. interest
rate 5.19% 6.38% 5.46% 6.42% 6.36% 7.50% 6.99%
- ---------------------------------------------------------------------------------------
Variable rate $ 4.0 $ 5.0 $302.0 -- $450.0 $ 10.0 $771.0
Avg. interest
rate 7.0% 7.0% 5.71% -- 5.90% 4.00% 5.81%
- ---------------------------------------------------------------------------------------
Armstrong manages its ratio of fixed to floating rate debt with the objective
of achieving a mix that management believes is appropriate. To manage this mix
in a cost effective manner, Armstrong, from time to time, enters into interest
rate swap agreements, in which it agrees to exchange various combinations of
fixed and/or variable interest rates based on agreed-upon notional amounts. In
order to maintain the ratio of fixed to floating rate debt which management
believes is appropriate, Armstrong entered into $150 million of interest rate
swaps during 1999. Armstrong receives fixed rates and pays floating rates on
these swaps. Details of outstanding swaps as of December 31, 1999 are as
follows:
- --------------------------------------------------------------------------------
Maturity Date Notional Pays Receives Market
($ millions) Amount Value
- --------------------------------------------------------------------------------
Aug. 15, 2005 $100.0 3 mo. LIBOR 6.26% ($3.5)
Aug. 15, 2003 50.0 3 mo. LIBOR 6.54% ($0.6)
- --------------------------------------------------------------------------------
Total $150.0 3 mo. LIBOR 6.35% ($4.1)
- --------------------------------------------------------------------------------
EXCHANGE RATE SENSITIVITY
Armstrong manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. To a large extent, Armstrong's global manufacturing and
sales provide a natural hedge of foreign currency exchange rate movement, as
foreign currency revenues are offset by foreign currency expenses. At December
31, 1999, Armstrong's major foreign currency exposures are to the Canadian
dollar, the Euro and the British pound.
Armstrong uses foreign currency forward exchange contracts and purchased
options to reduce its exposure to the risk that the eventual net cash inflows
and outflows, resulting from the sale of product to foreign customers and
purchases from foreign suppliers, will be adversely affected by changes in
exchange rates. These derivative instruments are used for firmly committed or
forecasted transactions. These transactions allow Armstrong to further reduce
its overall exposure to exchange rate movements, since the gains and losses on
these contracts offset losses and gains on the transactions being hedged.
Armstrong also uses foreign currency forward exchange contracts to hedge
exposures created by cross-currency inter-company loans.
The table below details Armstrong's outstanding currency instruments, all of
which mature before December 2000.
- --------------------------------------------------------------------------------
Notional Amount (millions) December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Forward Contracts $ 309.8 $ 507.5
Purchased Options 8.3 --
- --------------------------------------------------------------------------------
Fair Value (millions)
- --------------------------------------------------------------------------------
Forward Contracts $8.9 $6.4
Purchased Options 0.2 --
- --------------------------------------------------------------------------------
-27-
COMMODITY PRICE SENSITIVITY
Armstrong purchases natural gas for use in the manufacture of ceiling tiles and,
as a result, is exposed to movements in the price of natural gas. Armstrong has
a policy of minimizing cost volatility by purchasing natural gas swap contracts.
The table below provides information about Armstrong's natural gas swap
contracts that are sensitive to changes in commodity prices. Notional amounts
are in millions of Btu's (MMBtu) and weighted average contract prices. All
contracts mature in or before December 2000.
- --------------------------------------------------------------------------------
On Balance Sheet Commodity
Related Derivatives 1999 2000 Total
- --------------------------------------------------------------------------------
As of December 31, 1999
- --------------------------------------------------------------------------------
Swap contracts (long):
Contract amounts (MMBtu) -- 950,000 950,000
Weighted average price ($/MMBtu) -- $2.43 $2.43
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
Swap contracts (long):
Contract amounts (MMBtu) 2,350,000 250,000 2,600,000
Weighted average price ($/MMBtu) $2.15 $2.41 $2.17
- --------------------------------------------------------------------------------
YEAR 2000 ACTIVITIES
As described in the Form 10-Q for the quarter ended September 30, 1999,
Armstrong had developed plans to address potential exposures of its computer
systems related to the year 2000. Since entering the year 2000, Armstrong has
not experienced any significant disruptions to its business nor is it aware of
any significant year 2000-related disruptions impacting its customers and
suppliers. Furthermore, Armstrong did not experience any material impact on
inventories at calendar year end. Armstrong will continue to monitor its systems
and operations until it is reasonably assured that no significant business
interruptions will occur as a result of any year 2000 issues.
Total costs of the year 2000 project were $19.8 million with no significant
additional expense expected in 2000.
-28-
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement established
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In May 1999, the FASB delayed the effective date of
this statement to fiscal quarters of fiscal years beginning after June 15, 2000.
Armstrong is currently analyzing the impact of this statement but the adoption
of this statement is not expected to materially impact Armstrong's consolidated
results, financial condition or long-term liquidity.
Beginning in the first quarter of 1999, Armstrong adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities." The adoption of
this statement did not materially impact Armstrong's consolidated results,
financial condition or long-term liquidity.
1998 COMPARED WITH 1997
ACQUISITIONS
On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp.
("Triangle Pacific"). Triangle Pacific is a leading U.S. manufacturer of
hardwood flooring and other flooring and related products and a substantial
manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under
the purchase method of accounting, included the purchase of outstanding shares
of common stock of Triangle Pacific at $55.50 per share which, plus acquisition
costs, resulted in a total purchase price of $911.5 million. The purchase price
was allocated to tangible and identifiable intangible assets acquired and
liabilities assumed based on fair market value at the date of acquisition. The
balance of $831.1 million was recorded as goodwill and is being amortized over
forty years on a straight-line basis. During 1999, purchase price adjustments
increased goodwill by $5.3 million.
Effective August 31, 1998, Armstrong acquired approximately 93% of the total
share capital of DLW Aktiengesellschaft ("DLW"), a leading flooring manufacturer
in Germany. The acquisition, recorded under the purchase method of accounting,
included the purchase of 93% of the total share capital of DLW which, plus
acquisition costs, resulted in a total purchase price of $289.9 million. During
1999, Armstrong increased its ownership percentage of DLW to approximately 96%.
A portion of the purchase price has been allocated to assets acquired and
liabilities assumed based on fair market value at the date of acquisition, while
the balance of $117.2 million was recorded as goodwill and is being amortized
over forty years on a straight-line basis. During 1999, purchase price
adjustments increased goodwill by $5.2 million. In this purchase price
allocation, $49.6 million was allocated to the estimable net realizable value of
DLW's furniture business and of a carpet manufacturing business in the
Netherlands which Armstrong identified as businesses held for sale. Earnings in
these businesses, which have been excluded from Armstrong's operating results,
were $0.4 million in 1998. Interest costs of $1.1 million were allocated to
these businesses in 1998.
The operating results of these acquired businesses have been included in the
Consolidated Statements of Earnings from the dates of acquisition. Triangle
Pacific results are included in Armstrong's wood products segment and DLW
results are included in Armstrong's floor coverings segment.
-29-
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows on page 37, net cash
provided by operating activities for the year ended December 31, 1998, was
$240.8 million compared with $240.4 million in 1997.
Net cash used for investing activities was $1,198.3 million for the year
ended December 31, 1998, compared with $146.6 million in 1997. The increase was
primarily due to expenditures for acquisitions and was partially offset by the
sale of Armstrong's investment in Dal-Tile.
Net cash provided by financing activities was $937.3 million for the year
ended December 31, 1998, primarily due to the commercial paper issuance and the
three public debt offerings mentioned above. In the prior year, net cash used
for financing activities, including a net reduction in debt and the repurchase
of common shares, was $98.6 million.
Under plans approved by Armstrong's Board of Directors for the repurchase of
5.5 million shares of common stock, Armstrong had repurchased approximately
4,017,000 shares through June 30, 1998. In June 1998, Armstrong halted open
market purchases of its common shares upon the announcement of its intent to
purchase Triangle Pacific and DLW.
-30-
CONSOLIDATED RESULTS
Net sales in 1998 of $2.75 billion were 24.9% higher when compared with net
sales of $2.20 billion in 1997. Triangle Pacific contributed $346.0 million of
sales and DLW $193.0 million of sales to Armstrong's business sales figure
before acquisitions of $2.21 billion.
Sales were affected unfavorably by economic developments in emerging markets.
For Armstrong's business before acquisitions, sales increased less than 1% in
each of floor coverings, building products and insulation products. Pacific area
sales were 13.5% below 1997, although insulation products increased both
domestic sales and exports from its Panyu, China, plant. In Europe, despite a
cessation of sales to Russia in August by all business units, floor coverings
increased sales to other customers including those in Eastern Europe. In total,
emerging market turmoil reduced 1998 sales by an estimated $14.7 million versus
last year, with over three-quarters of this total from lower Russian sales.
Armstrong reported a net loss of $9.3 million, or $0.23 per share, including
losses of $1.2 million related to Triangle Pacific and $2.8 million related to
DLW as well as after-tax charges of $178.2 million for an increase in the
estimated liability for asbestos-related claims and $48.5 million for cost
savings and reorganization. These results compare to net earnings of $185.0
million, or $4.50 per diluted share, in 1997.
Cost of goods sold in 1998 was 67.0% of sales, higher than cost of goods sold
of 66.5% in 1997. The change reflected required purchase price accounting
adjustments related to Triangle Pacific and DLW. Armstrong's pre-acquisition
business had a cost of goods sold of 65.9% in 1998 due to manufacturing
efficiencies and lower raw material costs. The cost of goods sold also benefited
from several efficiency and policy savings related to the implementation of the
SAP Corporate Enterprise System, including a change in vacation policy resulting
in a $5.2 million benefit in the fourth quarter.
Selling, general and administrative (SG&A) expenses in 1998 were $522.0
million, or 19% of sales, primarily reflecting higher advertising costs. In
1997, SG&A expenses were $383.5 million, or 17.4% of sales.
In the fourth-quarter 1998, a noncash pretax charge of $274.2 million, or
$178.2 million after tax, was recorded for an increase in the estimated
liability for asbestos-related claims. This change primarily arose from a
greater-than-anticipated increase in personal injury filings since the Amchem
class settlement was invalidated in 1997, Armstrong's assessment of future
claims and recent settlements with plaintiffs' counsels. Armstrong also
recognized cost reduction and reorganization charges of $65.6 million, or $42.6
million after tax. This charge encompassed severance and enhanced retirement
benefits related to the termination of more than 650 positions, approximately
75% of which were salaried positions. In addition, Armstrong recorded an
estimated loss of $9.0 million related to redundant flooring products machinery
and equipment held for disposal. Reorganization actions include corporate and
business unit staff reductions reflecting reorganization of engineering,
research and development and product styling and design; realignment of support
activities in connection with implementation of a new corporate logistics and
financial software system; changes to production processes in Armstrong's
Lancaster flooring plant; and elimination of redundant positions in formation of
a new combined business organization for Floor Products, Corporate Retail
Accounts and Installation Products. Approximately $28.6 million of the pretax
amount is for cash expenditures for severance which will occur over the next 12
months. The remainder is a noncash charge for enhanced retirement benefits.
Management believes that anticipated savings from the reorganization should
permit recovery of these charges in approximately two years. Severance payments
of $10.4 million in 1998 were made for the elimination of 209 positions related
to 1996 and 1998 restructuring and reorganization actions.
Interest expense of $62.2 million in 1998 was higher than interest expense of
$28.0 million in 1997 due to higher levels of short- and long-term debt used to
finance acquisitions.
Armstrong's 1998 tax benefit was generated by the charge for the increase in
asbestos liability, cost reduction and reorganization charges, and a tax benefit
associated with the gain on the sale of the Dal-Tile shares, partially offset by
the nondeductibility of goodwill in Armstrong's reported earnings.
INDUSTRY SEGMENT RESULTS
FLOOR COVERINGS
Worldwide floor coverings sales in 1998 of $1,317.6 million included sales of
$193.0 million from DLW. Excluding DLW, flooring sales grew over 2% in the
Americas due to strong laminate sales that more than offset a decline to
residential vinyl markets. Sales through the home center channel continued to
capture significant volume with sales increases of 16.6% over 1997. In Europe
and the Pacific area, sales were down 8%. Sales for installation products rose
3.8% over 1997.
Operating income of $176.5 million in 1998, which excluded cost reduction and
reorganization charges of $53.5 million and included a loss related to DLW of
$0.7 million, compared to $186.5 million in 1997. Lower operating margins were
due to pricing pressure in North America, an unfavorable product mix, and higher
advertising expenses only partially offset by lower raw material and other
costs. The cost reduction and reorganization charges of $53.5 million relate to
reductions of hourly and salaried staff in the U.S. and foreign operations and
changes to production processes in Armstrong's Lancaster flooring plant.
-31-
BUILDING PRODUCTS
Building products sales of $756.8 million were slightly higher than the $754.5
million in 1997, as strong sales in the U.S. commercial segments and a favorable
mix were offset by weakness in emerging markets, principally Russia and the
Pacific area, down 29.4% compared to 1997.
Operating income of $116.6 million, which excluded cost reduction and
reorganization charges of $10.1 million, compared to $122.3 million in 1997. The
operating income decline reflected weaker performance by the business's metal
and soft fiber joint ventures in Europe and lower volumes to emerging markets,
partially offset by lower raw material and other costs. Results from Armstrong's
WAVE grid joint venture with Worthington Industries continue to be strong,
showing an 11% improvement over 1997. The cost reduction and reorganization
charges of $10.1 million relate to reductions of hourly and salaried staff in
the U.S. and foreign operations.
WOOD PRODUCTS
This segment contributed $346.0 million to sales for the period from July 22,
1998, from which time Triangle Pacific's results were consolidated in
Armstrong's financial statements. Sales for Triangle Pacific in 1998, although
approximately 11% ahead of sales reported by Triangle Pacific in the comparable
period in 1997, reflected competitive pricing pressures created by falling
lumber prices and imported products.
Operating income from the date of consolidation of $38.6 million included the
amortization of acquisition goodwill and the costs of nonrecurring purchase
price adjustments related to inventory. On a comparable basis, operating income
for Triangle Pacific in 1998 was approximately 35% above operating income
reported by Triangle Pacific in 1997.
INSULATION PRODUCTS
Sales of $230.0 million increased from $228.4 million in 1997. Sales in Europe
and the U.S. were level. Despite difficulties in the Pacific area, sales
increased from last year due to strong performance from the business's Panyu,
China, plant. Operating income of $46.3 million increased from $45.4 million in
1997, excluding cost reduction and reorganization charges of $0.2 million,
primarily due to cost cutting and SG&A expense reductions.
ALL OTHER
Sales reported in this segment comprise gasket materials and textile mill
supplies. Sales of $95.8 million decreased 4% compared to 1997. The major
influence on gasket products sales was the General Motors strike. Textile sales
declined due to slow sales to European textile machinery manufacturers.
Operating income reported in this segment comprises operating income from gasket
and textile products and ceramic tile. Operating income of $9.1 million
excluding cost reduction and reorganization charges of $1.9 million compared
with a loss of $2.6 million in 1997 reflecting the absence of losses from
Dal-Tile.
GEOGRAPHIC AREAS
Net sales in the Americas in 1998 were $1.92 billion, compared to $1.52 billion
recorded in 1997. The increase in sales to customers in the United States and
Canada was primarily due to the addition of Triangle Pacific sales. For
Armstrong's pre-acquisition business, sales growth continued to be strong in the
U.S. home center channel. Net sales in Europe in 1998 were $699.3 million,
compared to $548.5 million in 1997. Additional sales from DLW were somewhat
offset by lower sales to Eastern Europe, most notably Russia. Sales to
Scandinavian countries have continued to grow, reflecting increased sales from
the Swedish flooring and ceiling joint ventures. Sales to the Pacific area and
other foreign countries of $124.9 million were slightly below sales of $132.1
million in 1997.
Long-lived assets in the Americas in 1998 were $1.01 billion compared to
$0.77 billion in 1997. This increase reflects additional assets from the
acquisition of Triangle Pacific. Long-lived assets in Europe in 1998 were $451.7
million compared to $163.1 million in 1997. This increase reflects additional
assets from the acquisition of DLW. Long-lived assets in the Pacific area in
1998 were $41.2 million compared to $42.2 million in 1997.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
(See pages 26 to 28 under Item 7 above.)
-32-
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedule
The following consolidated financial statements are filed as part of this Annual
Report on Form 10-K:
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Earnings for the Years Ended December 31, 1999,
1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998, and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended December
31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule II - Valuation and Qualifying Reserves
The following additional financial data should be read in conjunction with the
financial statements. Schedules not included with this additional data have been
omitted because they are not applicable or the required information is presented
in the financial statements or the financial review.
-33-
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
(millions except for per-share data) First Second Third Fourth Total year
- ----------------------------------------------------------------------------------------------------------------------------------
1999 Net sales $ 829.1 $ 883.0 $ 903.8 $ 827.9 $3,443.8
Gross profit 275.3 307.3 315.4 255.5 1,153.5
Net earnings (loss) 48.3 72.8 71.7 (178.5) 14.3
Per share of common stock:
Basic: Net earnings (loss) 1.21 1.83 1.80 (4.46) 0.36
Diluted: Net earnings (loss) 1.20 1.81 1.78 (4.46) 0.36
Dividends per share of common stock 0.48 0.48 0.48 0.48 1.92
Price range of common stock--high 64 5/16 59 11/16 60 7/8 45 1/8 64 5/16
Price range of common stock--low 44 5/8 45 44 1/8 29 29
- -----------------------------------------------------------------------------------------------------------------------------------
1998 Net sales $ 543.1 $ 555.6 $ 821.6 $ 825.9 $2,746.2
Gross profit 180.4 193.8 271.9 261.5 907.6
Net earnings (loss) 46.5 56.1 61.5 (173.4) (9.3)
Per share of common stock:
Basic: Net earnings (loss) 1.17 1.41 1.55 (4.36) (0.23)
Diluted: Net earnings (loss) 1.15 1.38 1.53 (4.36) (0.23)
Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88
Price range of common stock--high 87 7/8 90 68 3/8 70 1/4 90
Price range of common stock--low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Note: The sum of the quarterly earnings per-share data does not equal the total
year amounts due to changes in the average shares outstanding and, for diluted
data, the exclusion of the antidilutive effect in certain quarters. The increase
in sales and net earnings from the second to the third quarter in 1998 reflects
the Triangle Pacific and DLW acquisitions.
FOURTH QUARTER 1999 COMPARED
WITH FOURTH QUARTER 1998
Net sales of $827.9 million increased from sales of $825.9 million in the fourth
quarter of 1998. Excluding the divestitures of the gaskets and textiles
businesses, sales increased 3.5%. Wood products sales increased 15.7%. Floor
coverings sales increased 1.8% as strong growth in sales to the Americas was
offset by slower sales to emerging markets and competitive price pressures in
Western Europe. Building products sales decreased 2.3% due to weaker unit volume
in all major channels and lower pricing due to competitive pressures.
An operating loss of $251.6 million compared to an operating loss of $254.0
million in the fourth quarter of 1998. Noncash pretax net charges of $335.4
million and $274.2 million were recorded in the fourth quarter of 1999 and 1998,
respectively, for increases in the estimated liability net of the corresponding
insurance asset for asbestos-related claims. An additional 1998 pretax charge of
$74.6 million related primarily to reorganization of corporate and business unit
staff positions. In 1999, $1.4 million of the 1998 pretax charge was reversed,
related to severance accruals that were no longer necessary.
For the fourth quarter, the cost of goods sold was 69.1% of sales compared to
68.3% in 1998. Excluding the acquisitions, Armstrong's cost of goods sold was
65.0% of sales, or 2.8 percentage points better than 1998, driven primarily by
significant cost reductions in floor coverings and building products primarily
arising from 1998's cost reduction activities.
Other income includes a $1.5 million reduction of the gain on the second
quarter sale of the gaskets business and a $0.7 million reduction of the loss on
the third quarter sale of Textile Products. Other income also reflects proceeds
from the settlement of various legal actions totaling $3 million, net of other
items.
Armstrong's effective tax rate in the fourth quarter of 1999 was (35.3)%
compared to an effective tax rate of (36.6)% in the fourth quarter of 1998.
A net loss of $178.5 million or $4.46 per diluted share compared to a net
loss of $173.4 million or $4.36 per diluted share in fourth quarter 1998.
-34-
CONSOLIDATED STATEMENTS OF EARNINGS
Millions except for per-share data Years ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Net sales $3,443.8 $2,746.2 $2,198.7
Cost of goods sold 2,290.3 1,838.6 1,461.7
- ---------------------------------------------------------------------------------------------------
Gross profit 1,153.5 907.6 737.0
Selling, general and administrative expenses 683.0 522.0 383.5
Equity (earnings) loss from affiliates, net (16.8) (13.8) 29.7
Reorganization charges (reversals) (1.4) 74.6 --
Charge for asbestos liability, net 335.4 274.2 --
Goodwill amortization 25.5 10.7 1.8
- ---------------------------------------------------------------------------------------------------
Operating income 127.8 39.9 322.0
Interest expense 105.2 62.2 28.0
Other income, net (6.6) (1.7) (2.2)
- ---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 29.2 (20.6) 296.2
Income tax expense (benefit) 14.9 (11.3) 111.2
- ---------------------------------------------------------------------------------------------------
Net earnings (loss) $ 14.3 $ (9.3) $ 185.0
===================================================================================================
Net earnings (loss) per share of common stock:
Basic $ 0.36 $ (0.23) $ 4.55
===================================================================================================
Diluted $ 0.36 $ (0.23) $ 4.50
===================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral
part of these statements.
-35-
CONSOLIDATED BALANCE SHEETS
Millions except for numbers of shares and per-share data As of December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 35.6 $ 38.2
Accounts and notes receivable
(less allowance for discounts and losses: 1999--$47.9; 1998--$49.8) 436.0 440.4
Inventories 429.7 465.1
Deferred income taxes 40.6 43.2
Net assets of businesses held for sale 2.2 55.9
Other current assets 85.8 78.3
- ---------------------------------------------------------------------------------------------------------
Total current assets 1,029.9 1,121.1
- ---------------------------------------------------------------------------------------------------------
Property, plant and equipment
(less accumulated depreciation and amortization: 1999--$1,213.0; 1998--$1,121.9) 1,439.1 1,502.0
Insurance for asbestos-related liabilities, noncurrent 270.0 248.8
Investment in affiliates 34.2 41.8
Goodwill, net 935.1 965.4
Other intangibles, net 56.6 63.2
Other noncurrent assets 399.6 330.9
- ---------------------------------------------------------------------------------------------------------
Total assets $4,164.5 $4,273.2
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 70.9 $ 149.9
Current installments of long-term debt 36.1 32.9
Accounts payable and accrued expenses 670.7 544.8
Income taxes 7.3 25.7
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 785.0 753.3
- ---------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 1,412.9 1,562.8
Employee Stock Ownership Plan (ESOP) loan guarantee 155.3 178.6
Deferred income taxes 62.0 107.6
Postretirement and postemployment benefit liabilities 245.2 249.0
Pension benefit liabilities 200.2 235.5
Asbestos-related long-term liabilities, noncurrent 506.5 344.8
Other long-term liabilities 106.4 115.8
Minority interest in subsidiaries 11.8 16.1
- ---------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 2,700.3 2,810.2
- ---------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $1 par value per share
Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9
Capital in excess of par value 176.4 173.0
Reduction for ESOP loan guarantee (190.3) (199.1)
Retained earnings 1,196.2 1,257.0
Accumulated other comprehensive loss (16.5) (25.4)
- ---------------------------------------------------------------------------------------------------------
1,217.7 1,257.4
- ---------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost:
1999--11,628,705 shares; 1998--11,856,721 shares 538.5 547.7
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 679.2 709.7
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,164.5 $4,273.2
=========================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral
part of these statements.
-36-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions Years ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 14.3 $ (9.3) $ 185.0
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 169.2 142.7 132.7
Deferred income taxes (38.3) (27.9) 24.2
Equity (earnings) loss from affiliates, net (16.8) (13.8) 29.7
Gain on sale of business, net (1.0) -- --
Gain on sale of investment in affiliates -- (12.8) --
Reorganization charges (reversals) (1.4) 74.6 --
Reorganization and restructuring payments (16.9) (11.2) (18.6)
Payments for asbestos-related claims, net of recoveries (114.4) (74.4) (41.4)
Charge for asbestos liability 335.4 274.2 --
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions:
(Increase) decrease in receivables (22.1) 3.5 (40.8)
(Increase) decrease in inventories (9.9) 44.4 (12.8)
(Increase) decrease in other current assets 29.3 (28.2) 10.5
Increase in other noncurrent assets (54.4) (112.0) (69.0)
Increase (decrease) in accounts payable and accrued expenses 86.7 (19.4) 16.6
Increase (decrease) in income taxes payable (18.5) (2.7) 11.5
Increase in other long-term liabilities 12.1 26.0 23.2
Other, net (9.1) (12.9) (10.4)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 344.2 240.8 240.4
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (183.6) (159.7) (141.7)
Investment in computer software (11.6) (24.6) (18.8)
Proceeds from sales of businesses 88.3 -- --
Proceeds from sale of land and facilities 7.9 2.7 24.3
Acquisitions, net of cash acquired (3.8) (1,175.7) (4.2)
Distributions from equity affiliates 40.8 11.4 6.2
Investment in affiliates -- 147.6 (12.4)
- -----------------------------------------------------------------------------------------------------
Net cash used for investing activities (62.0) (1,198.3) (146.6)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt (69.7) 24.2 69.3
Issuance of long-term debt 200.0 1,293.9 7.2
Reduction of long-term debt (332.4) (278.6) (17.0)
Cash dividends paid (76.9) (75.3) (70.0)
Purchase of common stock for the treasury, net (1.3) (31.8) (89.2)
Proceeds from exercised stock options 1.2 7.9 7.9
Other, net (2.8) (3.0) (6.8)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (281.9) 937.3 (98.6)
- -----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2.9) 0.5 (2.7)
- -----------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents $ (2.6) $ (19.7) $ (7.5)
=====================================================================================================
Cash and cash equivalents at beginning of year $ 38.2 $ 57.9 $ 65.4
=====================================================================================================
Cash and cash equivalents at end of year $ 35.6 $ 38.2 $ 57.9
=====================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral
part of these statements.
-37-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Millions except for per-share data Years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, $1 PAR VALUE:
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
==================================================================================================================================
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year $ 173.0 $ 169.5 $ 169.5
Stock issuances and other 3.4 3.5 --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 176.4 $ 173.0 $ 169.5
==================================================================================================================================
REDUCTION FOR ESOP LOAN GUARANTEE:
Balance at beginning of year $ (199.1) $ (207.7) $ (217.4)
Principal paid 23.3 23.2 19.6
Loans to ESOP (12.8) (10.1) (5.5)
Interest on loans to ESOP (1.3) (0.8) (0.3)
Accrued compensation (0.4) (3.7) (4.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (190.3) $ (199.1) $ (207.7)
==================================================================================================================================
RETAINED EARNINGS:
Balance at beginning of year $1,257.0 $1,339.6 $1,222.6
Net earnings (loss) for year 14.3 $14.3 (9.3) $ (9.3) 185.0 $185.0
Tax benefit on dividends paid on
unallocated ESOP common shares 1.8 2.0 2.0
- ----------------------------------------------------------------------------------------------------------------------------------
Less: Common stock dividends (per share):
$1.92 in 1999; $1.88 in 1998; $1.72 in 1997 76.9 75.3 70.0
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,196.2 $1,257.0 $1,339.6
==================================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS):
Balance at beginning of year $ (25.4) $ (16.2) $ 9.9
Foreign currency translation adjustments
and hedging activities (3.4) (7.0) (19.1)
Minimum pension liability adjustments 12.3 (2.2) (7.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 8.9 $ 8.9 (9.2) $ (9.2) (26.1) $(26.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (16.5) $ (25.4) $ (16.2)
==================================================================================================================================
COMPREHENSIVE INCOME (LOSS) $23.2 $(18.5) $158.9
- ----------------------------------------------------------------------------------------------------------------------------------
LESS TREASURY STOCK AT COST:
Balance at beginning of year $ 547.7 $ 526.5 $ 446.5
Stock purchases 1.3 31.8 89.2
Stock issuance activity, net (10.5) (10.6) (9.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 538.5 $ 547.7 $ 526.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 679.2 $ 709.7 $ 810.6
==================================================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral
part of these statements.
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Actual results may differ from these estimates.
Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of the parent Armstrong World
Industries, Inc., and its domestic and foreign subsidiaries. All significant
intercompany transactions have been eliminated from the consolidated financial
statements. Certain prior year amounts have been reclassified to conform with
the current year presentation.
Revenue Recognition. Armstrong records revenue from the sale of products and the
- -------------------
related accounts receivable as title transfers, generally on the date of
shipment. Provision is made for estimated applicable discounts and losses.
Earnings per Common Share. Basic earnings per share are computed by dividing the
- -------------------------
earnings by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per common share reflect the potential
dilution of securities that could share in earnings.
Advertising Costs. Armstrong recognizes advertising expenses as they are
- -----------------
incurred.
Pension and Postretirement Benefits. Armstrong has plans that provide for
- -----------------------------------
pension, medical and life insurance benefits to certain eligible employees when
they retire from active service. Generally, Armstrong's practice is to fund the
actuarially determined current service costs and the amounts necessary to
amortize prior service obligations over periods ranging up to 30 years, but not
in excess of the funding limitations.
Taxes. Deferred tax assets and liabilities are recognized using enacted tax
- -----
rates for expected future tax consequences of events recognized in the financial
statements or tax returns. The tax benefit for dividends paid on unallocated
shares of stock held by an ESOP is recognized in shareholders' equity.
Cash and Cash Equivalents. Short-term investments that have maturities of three
- -------------------------
months or less when purchased are considered to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market.
- -----------
Approximately 43% of inventories at December 31, 1999 are valued using the last
in, first out (LIFO) method. Other inventories are determined on a first in,
first out (FIFO) method.
Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost less accumulated depreciation and amortization. Depreciation
charges for financial reporting purposes are determined on the straight-line
basis at rates calculated to provide for the retirement of assets at the end of
their useful lives as follows: buildings, 20 to 40 years; machinery and
equipment, 3 to 15 years. Impairment losses are recorded when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. When assets are
disposed of or retired, their costs and related depreciation are removed from
the books, and any resulting gains or losses normally are reflected in "Selling,
general and administrative expenses."
Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
Capitalized interest was $4.3 million in 1999, $5.8 million in 1998 and $1.8
million in 1997.
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis. Goodwill is amortized over periods up to 40 years while
other intangibles are amortized over periods up to 7 years. On a periodic basis,
Armstrong estimates the future undiscounted cash flows of the businesses to
which goodwill relates in order to ensure that the carrying value of goodwill
and other intangibles has not been impaired.
Financial Instruments and Derivatives. Armstrong uses derivatives and other
- -------------------------------------
financial instruments to diversify or offset the effect of currency, interest
rate and commodity price variability.
Armstrong may enter into foreign currency forward contracts to offset the
effect of exchange rate changes on cash flow exposures denominated in foreign
currencies. Such exposures include firm commitments with third parties and
intercompany financial transactions.
Realized gains and losses on contracts are recognized in the Consolidated
Statements of Earnings. Unrealized gains and losses on foreign currency options
that are designated as effective hedges as well as option premium expense are
deferred and included in the statements of earnings as part of the underlying
transactions. Unrealized gains and losses on foreign currency contracts used to
hedge intercompany transactions having the character of long-term investments
are included in other comprehensive income.
Armstrong may enter into interest rate swap agreements to alter the interest
rate risk profile of outstanding debt, thus altering Armstrong's exposure to
changes in interest rates. In these swaps, Armstrong agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to a notional principal amount. Any differences paid or
received on interest rate swap agreements, when terminated, are recognized as
adjustments to interest expense over the life of associated debt.
Armstrong continuously monitors developments in the capital markets and only
enters into currency and swap transactions with established counterparties
having investment-grade ratings. Exposure to individual counterparties is
controlled, and thus Armstrong considers the risk of counterparty default to be
negligible.
-39-
NOTE 2. NATURE OF OPERATIONS
INDUSTRY SEGMENTS
- ------------------------------------------------------------------------------------------------------------------
For year ended 1999
- ------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- ------------------------------------------------------------------------------------------------------------------
Net sales to external customers $1,593.0 $752.1 $ 822.6 $225.7 $50.4 $3,443.8
Intersegment sales 2.7 -- -- -- 20.7 23.4
Equity (earnings) loss from affiliates 0.1 (16.1) -- -- (0.8) (16.8)
Segment operating income 217.4 119.7 85.0 45.7 6.0 473.8
Reorganization and restructuring reversals (1.1) (0.3) -- -- -- (1.4)
Segment assets 1,477.6 535.1 1,308.0 155.8 16.0 3,492.5
Depreciation and amortization 74.7 34.1 36.1 10.8 2.8 158.5
Equity investment 3.3 14.9 -- -- 16.0 34.2
Capital additions 79.9 45.5 41.5 9.1 2.7 178.7
- ------------------------------------------------------------------------------------------------------------------
For year ended 1998
- ------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- ------------------------------------------------------------------------------------------------------------------
Net sales to external customers $1,317.6 $756.8 $ 346.0 $230.0 $95.8 $2,746.2
Intersegment sales -- -- -- -- 39.5 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- -- 0.2 (13.8)
Segment operating income 176.5 116.6 38.6 46.3 9.1 387.1
Reorganization charges 53.5 10.1 -- 0.2 1.9 65.7
Segment assets 1,359.5 550.1 1,279.0 172.0 67.6 3,428.2
Depreciation and amortization 63.6 39.2 15.3 12.1 7.2 137.4
Equity investment 2.2 39.6 -- -- -- 41.8
Capital additions 93.6 42.5 12.4 11.3 5.9 165.7
- ------------------------------------------------------------------------------------------------------------------
For year ended 1997
- ------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- ------------------------------------------------------------------------------------------------------------------
Net sales to external customers $1,116.0 $754.5 $ -- $228.4 $99.8 $2,198.7
Intersegment sales -- -- -- -- 35.8 35.8
Equity (earnings) loss from affiliates 0.2 (12.9) -- -- 42.4 29.7
Segment operating income (loss) 186.5 122.3 -- 45.4 (2.6) 351.6
Segment assets 713.8 554.9 -- 165.1 219.2 1,653.0
Depreciation and amortization 65.5 37.5 -- 12.0 9.6 124.6
Equity investment 2.5 36.7 -- -- 135.7 174.9
Capital additions 76.6 54.4 -- 13.4 3.1 147.5
- ------------------------------------------------------------------------------------------------------------------
Segment information has been prepared in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Segments were determined based on products and services provided by each
segment. Accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Performance of the segments is
evaluated on operating income before income taxes, excluding reorganization and
restructuring charges, unusual gains and losses, and interest expense. Armstrong
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties at current market prices.
The floor coverings segment includes resilient flooring, adhesives,
installation and maintenance materials and accessories sold to commercial and
residential customers through wholesalers, retailers and contractors. To reduce
interchannel conflict, distinctive resilient flooring products have been
introduced to allow exclusive product offerings by our customers. Raw materials,
especially plasticizers and resins, are a significant cost of resilient flooring
products. Armstrong has no influence on the worldwide market prices of these
materials and thus is subject to cost changes.
The building products segment includes commercial and residential ceiling
systems. Grid products, manufactured through Armstrong's WAVE joint venture with
Worthington Industries, have become an important part of this business
worldwide. Earnings from this joint venture are included in this segment's
operating income and in "Equity Earnings from Affiliates" (see "Equity
Investments" note on page 43). The major sales activity in this segment is
commercial ceiling systems sold to resale distributors and contractors
worldwide, with European sales having a significant impact. Ceiling systems for
the residential home segment are sold through wholesalers and retailers, mainly
in the United States. Through a joint venture with a Chinese partner, a plant in
Shanghai manufactures ceilings for the Pacific area.
The wood products segment is composed of Triangle Pacific Corp., a wholly
owned subsidiary, a leading manufacturer of consumer wood products including
hardwood flooring and cabinets. Products in this segment are used primarily in
residential new construction and remodeling and commercial applications such as
retail stores and restaurants. Approximately 35% of sales are from new
construction which is more cyclical than remodeling activity. Triangle Pacific
manufactures hardwood flooring under the brand names of Bruce, Hartco and
Robbins while cabinets are manufactured under the brand names of Bruce and IXL.
The insulation products segment includes flexible pipe insulation used in
construction and in original equipment manufacturing. Sales are primarily in
Europe, with Germany having the largest concentration due to its regulatory
requirements. Strong competition exists in insulation since there are minimal
barriers to entry into this market.
During most of 1999, "all other" included business units making a variety of
specialty products for the building, automotive, textile and other industries
worldwide. Gasket materials are sold for new and replacement use in automotive,
construction and farm equipment, appliance, small engine and compressor
industries. On June 30, 1999, Armstrong sold 65% of the gaskets business. Since
the divestiture, Armstrong has accounted for the gaskets business under the
equity method within the "all other" segment. Textile mill supplies, including
cots and aprons, are sold to equipment manufacturers and textile mills. On
September 30, 1999, Armstrong sold the textiles business. From 1997 to 1998,
Armstrong owned an equity interest in Dal-Tile International Inc. ("Dal-Tile"),
whose ceramic tile products are sold through home centers, Dal-Tile sales
service centers and independent distributors. In 1998, Armstrong sold its
interest in Dal-Tile.
During 1999, Armstrong recognized revenue of approximately $348 million from
The Home Depot, Inc., from sales in the floor coverings, building products, wood
products and insulation products segments.
-40-
The table below provides a reconciliation of segment information to total
consolidated information.
- --------------------------------------------------------------------------------
(millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Net sales:
Total segment sales $3,443.8 $2,746.2 $2,198.7
Intersegment sales 23.4 39.5 35.8
Elimination of intersegment sales (23.4) (39.5) (35.8)
- --------------------------------------------------------------------------------
Total consolidated sales $3,443.8 $2,746.2 $2,198.7
================================================================================
Operating income:
Total segment operating income $ 473.8 $ 387.1 $ 351.6
Segment reorganization and
restructuring (charges) reversals 1.4 (65.7) --
Corporate reorganization charges -- (8.9) --
Dal-Tile charge -- -- (29.7)
Asbestos liability charge (335.4) (274.2) --
Unallocated corporate (expense) income (12.0) 1.6 0.1
- --------------------------------------------------------------------------------
Total consolidated operating income $ 127.8 $ 39.9 $ 322.0
================================================================================
Assets:
Total assets for reportable segments $3,492.5 $3,428.2 $1,653.0
Assets not assigned to business segments 672.0 845.0 722.5
- --------------------------------------------------------------------------------
Total consolidated assets $4,164.5 $4,273.2 $2,375.5
================================================================================
Other significant items:
Depreciation and amortization expense:
Segment totals $ 158.5 $ 137.4 $ 124.6
Unallocated corporate depreciation
and amortization expense 10.7 5.3 8.1
- --------------------------------------------------------------------------------
Total consolidated depreciation and
amortization expense $ 169.2 $ 142.7 $ 132.7
- --------------------------------------------------------------------------------
Capital additions:
Segment totals $ 178.7 $ 165.7 $ 147.5
Unallocated corporate capital additions 16.5 18.6 13.0
- --------------------------------------------------------------------------------
Total consolidated capital additions $ 195.2 $ 184.3 $ 160.5
================================================================================
GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
Net trade sales (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Americas:
United States $2,246.8 $1,803.2 $1,412.2
Canada 119.0 98.6 89.3
Other Americas 29.1 20.2 16.6
- --------------------------------------------------------------------------------
Total Americas $2,394.9 $1,922.0 $1,518.1
================================================================================
Europe:
Germany $ 291.3 $ 182.5 $ 110.2
England 144.1 142.5 130.3
France 90.1 65.9 53.1
Netherlands 101.4 57.0 33.1
Other Europe 278.9 251.4 221.8
- --------------------------------------------------------------------------------
Total Europe $ 905.8 $ 699.3 $ 548.5
================================================================================
Pacific area:
China $ 33.1 $ 35.5 $ 26.1
Australia 30.1 28.5 30.5
Other Pacific area 79.9 60.9 75.5
- --------------------------------------------------------------------------------
Total Pacific area $ 143.1 $ 124.9 $ 132.1
================================================================================
Total net trade sales $3,443.8 $2,746.2 $2,198.7
================================================================================
Sales are attributed to countries based on location of customer.
- --------------------------------------------------------------------------------
Long-lived assets at December 31 (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Americas:
United States $ 980.3 $ 991.9 $ 746.3
Canada 16.1 17.1 20.5
Other Americas 0.1 0.1 0.1
- --------------------------------------------------------------------------------
Total Americas $ 996.5 $1,009.1 $ 766.9
================================================================================
Europe:
Germany $ 227.0 $ 270.3 $ 47.7
England 52.7 52.7 54.7
Netherlands 45.6 42.3 13.0
Belgium 27.3 34.5 --
France 13.8 15.9 15.1
Sweden 15.2 14.2 11.3
Other Europe 19.7 21.8 21.3
- --------------------------------------------------------------------------------
Total Europe $ 401.3 $ 451.7 $ 163.1
================================================================================
Pacific area:
China $ 33.7 $ 34.0 $ 34.0
Other Pacific area 7.6 7.2 8.2
- --------------------------------------------------------------------------------
Total Pacific area $ 41.3 $ 41.2 $ 42.2
- --------------------------------------------------------------------------------
Total long-lived assets $1,439.1 $1,502.0 $ 972.2
================================================================================
-41-
NOTE 3. ACQUISITIONS
On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp.
("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a leading U.S.
manufacturer of hardwood flooring and other flooring and related products and a
substantial manufacturer of kitchen and bathroom cabinets. The acquisition,
recorded under the purchase method of accounting, resulted in a total purchase
price of $911.5 million. The purchase price was allocated to tangible and
identifiable intangible assets acquired and liabilities assumed based on
estimated fair market value at the date of acquisition. The balance of $831.1
million was recorded as goodwill and is being amortized over forty years on a
straight-line basis. During 1999, purchase price adjustments increased goodwill
by $5.3 million.
Effective August 31, 1998, Armstrong acquired approximately 93% of the total
share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized under
the laws of the Federal Republic of Germany. DLW is a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, resulted in a total purchase price of $289.9 million. During 1999,
Armstrong increased its ownership percentage in DLW to approximately 96%. A
portion of the purchase price was allocated to assets acquired and liabilities
assumed based on the estimated fair market value at the date of acquisition
while the balance of $117.2 million was recorded as goodwill and is being
amortized over forty years on a straight-line basis. During 1999, purchase price
adjustments increased goodwill by $5.2 million. In this purchase price
allocation, $49.6 million was allocated to the estimable net realizable value of
DLW's furniture business and a carpet manufacturing business in the Netherlands,
which Armstrong identified as businesses held for sale. In May 1999, Armstrong
sold the DLW furniture business for $38.1 million. The remaining business held
for sale, a Dutch carpet manufacturing company, remained unsold at December 31,
1999. Armstrong still intends to dispose of this business, but has consolidated
the results of operations from September 1, 1999. The net book value of this
business as of December 31, 1999 is $2.2 million.
The table below reflects the adjustment to the carrying value of the
businesses held for sale relating to interest allocation, profits, cash flow and
the impact of sale proceeds in 1999 and 1998.
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Carrying value at January 1, 1999 and
August 31, 1998 $55.9 $49.6
Interest allocated 1.0 1.1
Adjustment to estimated sales proceeds (9.1) --
Effect of exchange rate change (4.9) 2.8
Losses excluded from consolidated earnings (1.5) (0.4)
Cash flows funded by parent (1.1) 2.8
Proceeds from sale (38.1) --
- --------------------------------------------------------------------------------
Carrying value at December 31 $ 2.2 $55.9
================================================================================
The operating results of these acquired businesses have been included in the
Consolidated Statements of Earnings from the dates of acquisition. Triangle
Pacific's fiscal year ends on the Saturday closest to December 31, which was
January 1, 2000 and January 2, 1999. No events occurred between December 31 and
these dates at Triangle Pacific materially affecting Armstrong's financial
position or results of operations.
The table below reflects unaudited pro forma combined results of Armstrong,
Triangle Pacific and DLW as if the acquisitions had taken place at the beginning
of fiscal 1998 and 1997:
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Net sales $3,479.8 $3,350.0
Net earnings (14.2) 173.2
Net earnings per diluted share (0.36) 4.22
================================================================================
In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what the actual combined results of operations might
have been if the acquisitions had been effective at the beginning of fiscal 1998
and 1997.
NOTE 4. DIVESTITURES
On May 28, 1999, Armstrong sold DLW's furniture business for total cash proceeds
of $38.1 million. Armstrong acquired this business as part of the acquisition of
DLW in the third quarter of 1998 and had classified the business as held for
sale. There was no gain or loss on the transaction.
On June 22, 1999, Armstrong sold its interest in the assets of Martin
Surfacing, Inc. Armstrong acquired this interest as part of its acquisition of
DLW during the third quarter of 1998. There was no material gain or loss on the
transaction.
On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial
Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of
investors including Citicorp Venture Capital Ltd. and the management of AISI for
a cash purchase price of approximately $36.1 million. The sale resulted in a
gain of approximately $6.0 million, or $0.15 per share, which was recorded in
other income.
On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a pretax loss
of $5.0 million ($3.2 million after tax, or $0.08 per diluted share) which was
recorded in other income.
-42-
NOTE 5. REORGANIZATION AND OTHER ACTIONS
In 1998, Armstrong recognized charges of $65.6 million, or $42.6 million after
tax, related to severance and enhanced retirement benefits for more than 650
positions, approximately 75% of which were salaried positions. In addition,
Armstrong recorded an estimated loss of $9.0 million, or $5.9 million after tax,
related to redundant flooring products machinery disposed of in 1999.
Approximately $28.6 million of the charge comprised cash expenditures for
severance. The remainder was a noncash charge for enhanced retirement benefits.
The following table summarizes activity in the reorganization and
restructuring accruals for 1999:
- --------------------------------------------------------------------------------
Beginning Cash Charges Ending
(millions) balance payments (reversals) Other balance
- --------------------------------------------------------------------------------
1999 $30.6 ($16.9) ($1.4) ($0.2) $12.1
1998 12.2 (10.4) 28.6 0.2 30.6
================================================================================
The accrual reversal, which was made in the fourth quarter of 1999, was for
future severance payments that were no longer necessary. The amount in "other"
is primarily related to foreign currency translations.
Substantially all of the remaining balance relates to terminated employees
with extended payouts, most of which will be paid during 2000, and a
noncancelable operating lease.
NOTE 6. EQUITY INVESTMENTS
Investments in affiliates were $34.2 million at December 31, 1999, a decrease of
$7.6 million, reflecting the receipt of $25 million from Armstrong's WAVE joint
venture with Worthington Industries, offset by the equity earnings of
Armstrong's 50% interest in its WAVE joint venture and the remaining 35%
interest in the gaskets business. Armstrong continues to purchase certain raw
materials from the gaskets business under a long-term supply agreement.
Equity earnings from affiliates for 1998 primarily comprised income from a
50% interest in the WAVE joint venture, Armstrong's share of a net loss at
Dal-Tile and amortization of the excess of Armstrong's investment in Dal-Tile
over the underlying equity in net assets. Equity losses from affiliates in 1997
included $8.4 million for Armstrong's share of operating losses incurred by
Dal-Tile; a $29.7 million loss for Armstrong's share of a charge incurred by
Dal-Tile, primarily for uncollectible receivables and overstocked inventories;
and $4.3 million for the amortization of Armstrong's initial investment in
Dal-Tile over the underlying equity in net assets.
NOTE 7. RECEIVABLES
- --------------------------------------------------------------------------------
Accounts and notes receivable (millions) 1999 1998
- --------------------------------------------------------------------------------
Customers' receivables $455.8 $462.9
Customers' notes 13.4 15.5
Miscellaneous receivables 14.7 11.8
- --------------------------------------------------------------------------------
483.9 490.2
- --------------------------------------------------------------------------------
Less allowance for discounts and losses 47.9 49.8
- --------------------------------------------------------------------------------
Net $436.0 $440.4
================================================================================
Generally, Armstrong sells its products to select, preapproved customers
whose businesses are directly affected by changes in economic and market
conditions. Armstrong considers these factors and the financial condition of
each customer when establishing its allowance for losses from doubtful accounts.
-43-
NOTE 8. INVENTORIES
Approximately 43% of Armstrong's total inventory in 1999 and 44% in 1998 were
valued on a LIFO (last-in, first-out) basis. Inventory values were lower than
would have been reported on a total FIFO (first-in, first-out) basis, by $48.3
million at the end of 1999 and $50.5 million at year-end 1998.
- --------------------------------------------------------------------------------
Inventories (millions) 1999 1998
- --------------------------------------------------------------------------------
Finished goods $275.6 $292.9
Goods in process 44.9 52.0
Raw materials and supplies 160.5 176.6
- --------------------------------------------------------------------------------
Less LIFO and other reserves 51.3 56.4
- --------------------------------------------------------------------------------
Total $429.7 $465.1
================================================================================
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Land $ 111.8 $ 111.5
Buildings 616.7 549.8
Machinery and equipment 1,827.2 1,759.5
Construction in progress 96.4 203.1
- --------------------------------------------------------------------------------
2,652.1 2,623.9
- --------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 1,213.0 1,121.9
- --------------------------------------------------------------------------------
Net $1,439.1 $1,502.0
================================================================================
NOTE 10. GOODWILL AND OTHER INTANGIBLES
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Goodwill $985.6 $ 993.4
Less accumulated amortization 50.5 28.0
- --------------------------------------------------------------------------------
Total goodwill $935.1 $ 965.4
================================================================================
Other intangibles $ 79.3 $ 78.7
Less accumulated amortization 22.7 15.5
- --------------------------------------------------------------------------------
Total other intangibles $ 56.6 $ 63.2
================================================================================
Goodwill and other intangibles decreased by $36.9 million, reflecting
scheduled amortization of $35.1 million, final allocations of purchase price
related to Triangle Pacific and DLW and foreign currency translations.
Unamortized computer software costs included in other intangibles were $49.4
million at December 31, 1999, and $47.6 million at December 31, 1998.
-44-
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Payables, trade and other $308.4 $235.2
Asbestos-related claims, current portion (note 26) 175.0 80.0
Employment costs 71.3 82.5
Reorganization and severance payments 12.1 30.6
Other 103.9 116.5
- --------------------------------------------------------------------------------
Total $670.7 $544.8
================================================================================
NOTE 12. DEBT
- --------------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
($ millions) 1999 rate 1998 rate
- --------------------------------------------------------------------------------
Short-term debt:
Commercial paper $ 45.9 6.20% $ 104.1 6.20%
Foreign banks 25.0 5.82% 45.8 5.29%
- --------------------------------------------------------------------------------
Total short-term debt $ 70.9 6.07% $ 149.9 5.92%
- --------------------------------------------------------------------------------
Long-term debt:
Bank loans due 2000-2006 $ 66.5 5.32% $ 91.9 4.96%
Medium-term notes
8.95-9% due 2000-2001 25.6 8.96% 25.6 8.96%
6.35% senior notes due 2003 199.9 6.35% 199.8 6.35%
6.50% senior notes due 2005 149.7 6.50% 149.7 6.50%
9.75% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% senior notes due 2029 199.8 7.45% -- --
7.45% senior quarterly
interest bonds due 2038 180.0 7.45% 180.0 7.45%
Industrial development bonds 29.8 5.27% 31.2 4.67%
Commercial paper, noncurrent 450.0 6.20% 750.0 6.20%
Capital lease obligations 11.4 7.25% 13.3 7.25%
Other 11.3 8.75% 29.2 7.28%
- --------------------------------------------------------------------------------
Total long-term debt $1,449.0 6.90% $1,595.7 6.64%
- --------------------------------------------------------------------------------
Less current installments 36.1 7.72% 32.9 5.54%
- --------------------------------------------------------------------------------
Net long-term debt $1,412.9 6.88% $1,562.8 6.66%
================================================================================
- --------------------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- --------------------------------------------------------------------------------
2001 $10.7 2003 $652.1
2002 0.8 2004 1.3
- --------------------------------------------------------------------------------
On March 16, 1999, Armstrong filed a shelf registration statement for $1
billion of combined debt and equity securities. On May 19, 1999, Armstrong
completed an offering under the shelf registration statement of $200 million
aggregate principal amount of 7.45% senior notes due 2029. The net proceeds from
this offering were used to repay other indebtedness of Armstrong.
On October 21, 1999, Armstrong renewed a bank credit facility for $450
million that expires in 364 days and cancelled a $300 million line of credit
which was due to expire in 2001. Armstrong also has a $450 million line of
credit which expires in 2003. There were no borrowings under these facilities at
December 31, 1999.
The 7.45% senior quarterly interest bonds are callable in 2003 and have no
sinking-fund requirements.
Armstrong's 9.75% debentures, senior notes and medium-term notes are not
redeemable until maturity and have no sinking-fund requirements.
The industrial development bonds mature in 2004, 2009 and 2024.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had a
carrying value of $3.2 million at December 31, 1999, and an effective interest
rate of 13.4%.
Armstrong has two unused credit agreements: a $450 million credit agreement
expiring in October 2000 and a $450 million line of credit expiring in 2003. In
addition, Armstrong's foreign subsidiaries have approximately $188.1 million of
unused short-term lines of credit available from banks. The credit lines are
subject to immaterial annual commitment fees. Armstrong intends to refinance a
portion of its outstanding commercial paper balance on a long-term basis. Such
intent is supported by the long-term line of credit. Accordingly, long-term debt
includes $450 million and $750 million of commercial paper reclassified from
short-term debt at December 31, 1999, and December 31, 1998, respectively.
In order to maintain the ratio of fixed to floating rate debt which
management believes is appropriate, Armstrong entered into $150 million of
interest rate swaps during 1999. Armstrong receives fixed rates and pays
floating rates on these swaps. Details of outstanding swaps as of December 31,
1999, are as follows:
- --------------------------------------------------------------------------------
Maturity date Notional Market
($ millions) amount Pays Receives value
- --------------------------------------------------------------------------------
Aug. 15, 2005 $100.0 3 mo. LIBOR 6.26% ($3.5)
Aug. 15, 2003 50.0 3 mo. LIBOR 6.54% ($0.6)
- --------------------------------------------------------------------------------
Total $150.0 3 mo. LIBOR 6.35% ($4.1)
================================================================================
-45-
NOTE 13. FINANCIAL INSTRUMENTS
Armstrong does not hold or issue financial instruments for trading purposes. The
estimated fair values of Armstrong's financial instruments are as follows:
- --------------------------------------------------------------------------------
1999 Estimated 1998 Estimated
(In millions at carrying fair carrying fair
December 31) amount value amount value
- --------------------------------------------------------------------------------
Liabilities:
Long-term debt $1,412.9 $1,356.9 $1,562.8 $1,606.1
Off-balance sheet financial
instruments:
Foreign currency
contract obligations -- $ 8.9 -- $ 6.4
Foreign currency options -- 0.2 -- --
Letters of credit/financial
guarantees -- 252.2 -- 244.6
Lines of credit -- 1,088.1 -- 1,458.9
Interest rate swaps -- (4.1) -- --
Natural gas contracts -- -- -- (0.5)
- --------------------------------------------------------------------------------
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, short-term debt and current installments of
long-term debt approximate fair value because of the short-term maturity of
these instruments.
The fair value estimates of long-term debt were based upon quotes from major
financial institutions taking into consideration current rates offered to
Armstrong for debt of the same remaining maturities.
Foreign currency contract obligations and options, as well as interest rate
swaps, are estimated by obtaining quotes from major financial institutions.
Letters of credit, financial guarantees and lines of credit amounts are based
on the estimated cost to settle the obligations.
Natural gas contract amounts are based on estimated cost to settle the
contracts.
NOTE 14. INCOME TAXES
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the table below.
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets except for certain net operating losses and capital loss carryforwards.
Of the $57.7 million in capital loss carryforwards at December 31, 1999, $49.5
million will expire in 2001 and $8.2 million will expire in 2003. Of the $39.8
million in foreign net operating losses, $3.0 million will expire in 2003 and
the remaining $36.8 million will be carried forward indefinitely. Valuation
allowances decreased $4.0 million in 1999 primarily related to utilization of
capital loss carryforwards in connection with the sale of the gaskets business
(see Note 4).
- --------------------------------------------------------------------------------
Deferred income taxes (millions) 1999 1998
- --------------------------------------------------------------------------------
Postretirement and postemployment benefits $ (86.4) $ (87.7)
Reorganization payments (3.3) (24.2)
Asbestos-related liabilities (238.5) (150.3)
Net operating losses (16.0) (25.1)
Capital loss carryforwards (20.2) (21.3)
Other (64.4) (81.0)
- --------------------------------------------------------------------------------
Total deferred tax assets $(428.8) $(389.6)
- --------------------------------------------------------------------------------
Valuation allowance 25.5 29.5
- --------------------------------------------------------------------------------
Net deferred tax assets $(403.3) $(360.1)
- --------------------------------------------------------------------------------
Accumulated depreciation $ 203.6 $ 224.8
Pension costs 69.3 51.3
Insurance for asbestos-related liabilities 103.6 92.7
Other 48.2 55.7
- --------------------------------------------------------------------------------
Total deferred income tax liabilities $ 424.7 $ 424.5
- --------------------------------------------------------------------------------
Net deferred income tax liabilities $ 21.4 $ 64.4
- --------------------------------------------------------------------------------
Deferred tax asset -- current (40.6) (43.2)
- --------------------------------------------------------------------------------
Deferred income tax liability -- long term $ 62.0 $ 107.6
================================================================================
- --------------------------------------------------------------------------------
Details of taxes (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Earnings (loss) before income taxes:
Domestic $55.4 $(57.1) $ 236.4
Foreign 93.3 63.5 92.9
Eliminations (119.5) (27.0) (33.1)
- --------------------------------------------------------------------------------
Total $29.2 $(20.6) $ 296.2
================================================================================
Income tax provision (benefit):
- --------------------------------------------------------------------------------
Current:
Federal $15.8 $ 11.2 $ 46.8
Foreign 22.8 21.7 35.7
State 3.0 1.3 1.5
- --------------------------------------------------------------------------------
Total current 41.6 34.2 84.0
- --------------------------------------------------------------------------------
Deferred:
Federal (36.6) (48.2) 30.9
Foreign 9.4 2.3 (3.7)
State 0.5 0.4 --
- --------------------------------------------------------------------------------
Total deferred (26.7) (45.5) 27.2
- --------------------------------------------------------------------------------
Total income taxes $14.9 $(11.3) $ 111.2
================================================================================
At December 31, 1999, unremitted earnings of subsidiaries outside the United
States were $88.2 million (at December 31, 1999, balance sheet exchange rates)
for which no U.S. taxes have been provided. If such earnings were to be remitted
without offsetting tax credits in the United States, withholding taxes would be
$5.3 million. Armstrong's intention, however, is to reinvest unremitted earnings
permanently or to repatriate them only when it is tax effective to do so.
- --------------------------------------------------------------------------------
Reconciliation to
U.S. statutory tax rate (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Tax expense (benefit) at statutory rate $10.2 $ (7.2) $103.7
State income taxes, net of federal benefit 2.0 1.7 1.0
(Benefit) on ESOP dividend (1.3) (1.2) (0.9)
Tax on foreign and
foreign-source income 2.8 0.6 1.1
Utilization of excess foreign tax credit -- -- (2.9)
Equity in (earnings) loss of affiliates -- (6.2) 9.9
Insurance programs (0.6) (1.0) (0.8)
Goodwill 7.1 3.3 --
Change in valuation allowance (4.0) -- --
Other items (1.3) (1.3) 0.1
- --------------------------------------------------------------------------------
Tax expense (benefit) at effective rate $14.9 $(11.3) $111.2
================================================================================
- --------------------------------------------------------------------------------
Other taxes (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Payroll taxes $88.6 $65.0 $50.7
Property, franchise and capital
stock taxes $24.3 $20.0 $16.6
- --------------------------------------------------------------------------------
-46-
NOTE 15. OTHER LONG-TERM LIABILITIES
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Deferred compensation $ 42.8 $ 38.1
Other 63.6 77.7
- --------------------------------------------------------------------------------
Total other long-term liabilities $106.4 $115.8
================================================================================
NOTE 16. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSSOP)
In 1989, Armstrong established an Employee Stock Ownership Plan (ESOP) that
borrowed $270 million from banks and insurance companies, repayable over 15
years and guaranteed by Armstrong. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by
Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for
salaried employees (a defined-contribution pension plan) to form the Retirement
Savings and Stock Ownership Plan (RSSOP). On July 31, 1996, the trustee of the
ESOP converted the preferred stock held by the trust into approximately 5.1
million shares of common stock at a one-for-one ratio.
The number of shares released for allocation to participant accounts is based
on the proportion of principal and interest paid to the total amount of debt
service remaining to be paid over the life of the borrowings. Through December
31, 1999, the RSSOP had allocated to participants a total of 2,294,000 shares
and retired 1,126,000 shares. During 1999, Armstrong issued 199,000 treasury
shares and the trustee purchased 33,000 shares on the open market as part of
meeting the necessary funding requirements. As of December 31, 1999, there are
approximately 2,467,000 shares in the RSSOP that have yet to be allocated to
participants.
All RSSOP shares are considered outstanding for earnings per share
calculations. Dividends on allocated shares are credited to employee accounts
while dividends on unallocated shares are used to satisfy debt service payments.
The RSSOP currently covers parent company nonunion employees and some union
employees.
Armstrong's guarantee of the ESOP loan has been recorded as a long-term
obligation and as a reduction of shareholders' equity on its Consolidated
Balance Sheets.
- --------------------------------------------------------------------------------
Details of ESOP debt service
payments (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Common stock dividends paid $ 8.9 $ 9.0 $ 8.5
Employee contributions 7.7 9.8 9.7
Company contributions 8.9 11.4 14.7
Company loans to ESOP 12.9 10.1 5.5
- --------------------------------------------------------------------------------
Debt service payments made
by ESOP trustee $38.4 $40.3 $38.4
================================================================================
Armstrong recorded costs for the RSSOP of $13.1 million in 1999, $6.9 million
in 1998 and $10.4 million in 1997.
The trustee borrowed from Armstrong $12.9 million in 1999, $10.1 million in
1998 and $5.5 million in 1997. These loans were made to ensure that the
financial arrangements provided to employees remain consistent with the original
intent of the RSSOP.
-47-
NOTE 17. STOCK-BASED COMPENSATION PLANS
Awards under the 1993 Long-Term Stock Incentive Plan ("1993 Plan") may be in the
form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No
additional shares of common stock may be issued under the 1993 Plan.
During 1999, Armstrong adopted the 1999 Long-Term Incentive Plan ("1999
Plan") which replaced the 1993 Plan. The 1999 Plan is similar to the 1993 Plan
in that it provides for the granting of incentive stock options, nonqualified
stock options, stock appreciation rights, performance restricted shares and
restricted stock awards. The 1999 Plan also incorporates stock awards and cash
incentive awards. No more than 3,250,000 shares of common stock may be issued
under the 1999 Plan, and no more than 300,000 of the shares may be awarded in
the form of performance restricted shares, restricted stock awards or stock
awards. No awards under the 1999 Plan will be granted after April 25, 2009.
Pre-1999 grants made under predecessor plans will be governed under the
provisions of those plans.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options were granted. The options
generally become exercisable in one to three years and expire 10 years from the
date of grant.
- --------------------------------------------------------------------------------
Changes in option shares outstanding
(thousands except for share price) 1999 1998 1997
- --------------------------------------------------------------------------------
Option shares at beginning of year 2,783.7 2,161.3 2,161.4
Options granted 829.7 914.8 286.8
Option shares exercised (54.5) (253.3) (265.5)
Stock appreciation rights exercised (0.2) (3.1) (4.7)
Options cancelled (49.2) (36.0) (16.7)
- --------------------------------------------------------------------------------
Option shares at end of year 3,509.5 2,783.7 2,161.3
Option shares exercisable at end
of year 1,828.0 1,372.0 1,262.1
Shares available for grant 3,307.3 789.7 1,585.5
- --------------------------------------------------------------------------------
Weighted average price per share:
Options outstanding $58.48 $60.41 $54.01
Options exercisable 57.12 52.38 46.88
Options granted 50.70 70.43 69.63
Option shares exercised 36.17 41.68 39.10
- --------------------------------------------------------------------------------
The table below summarizes information about stock options outstanding at
December 31, 1999.
- --------------------------------------------------------------------------------
Stock options outstanding as of 12/31/99
(thousands except for life and share price)
- --------------------------------------------------------------------------------
Options outstanding Options exercisable
---------------------------------------- -------------------------
Range Number Weighted- Weighted- Number Weighted-
of outstanding average average exercisable average
exercise at remaining exercise at exercise
prices 12/31/99 contractual life price 12/31/99 price
- --------------------------------------------------------------------------------
$27-49 516.4 4.5 $40.20 474.4 $39.81
49-53 779.9 9.1 50.98 19.6 51.53
53-60 791.7 5.9 58.48 680.2 58.42
60-70 779.5 7.1 65.55 424.5 65.53
70-86 642.0 8.1 73.69 229.3 73.97
- --------------------------------------------------------------------------------
3,509.5 1,828.0
================================================================================
Performance restricted shares issuable under the 1993 and 1999 plans entitle
certain key executive employees to earn shares of Armstrong's common stock, but
only if the total company or individual business units meet certain
predetermined performance measures during defined performance periods (generally
three years). At the end of performance periods, common stock awarded may carry
additional restriction periods, during which time the shares will be held in
custody by Armstrong until the expiration or termination of restrictions.
Compensation expense will be charged to earnings over the performance period.
Within performance periods at the end of 1999 were 6,280 unvested performance
restricted shares outstanding and 535 accumulated dividend equivalent shares. No
performance restricted share awards were earned based on the performance period
ending December 31, 1999. Within restriction periods at the end of 1999 were
147,513 shares of restricted common stock outstanding based on performance
periods ending prior to 1999 with 16,840 accumulated dividend equivalent shares.
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 21,700 shares of
restricted stock were granted (excluding performance-based awards discussed
above) during 1999. At the end of 1999, there were 122,935 restricted shares of
common stock outstanding with 10,687 accumulated dividend equivalent shares.
In 1996, Armstrong adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net earnings and pro forma earnings per
share disclosures. Had compensation cost for these plans been determined
consistent with SFAS No. 123, Armstrong's net earnings and earnings per share
would have been reduced to the following pro forma amounts.
- --------------------------------------------------------------------------------
(millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Net earnings (loss):
As reported $14.3 $ (9.3) $185.0
Pro forma 7.0 (16.1) 180.7
Basic earnings (loss) per share:
As reported 0.36 (0.23) 4.55
Pro forma 0.18 (0.40) 4.45
Diluted earnings (loss) per share:
As reported 0.36 (0.23) 4.50
Pro forma 0.17 (0.40) 4.39
- --------------------------------------------------------------------------------
The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the assumptions for 1999, 1998 and 1997
presented in the table below. The weighted-average fair value of stock options
granted in 1999 was $9.75.
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rates 6.34% 5.14% 6.21%
Dividend yield 5.75% 3.03% 2.46%
Expected lives 5 years 5 years 5 years
Volatility 28% 28% 19%
- --------------------------------------------------------------------------------
Because the SFAS No. 123 method of accounting has not been applied to grants
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
NOTE 18. EMPLOYEE COMPENSATION
Employee compensation is presented in the table below. Charges for severance
costs and early retirement incentives to terminated employees have been
excluded. The increase in employee compensation is primarily due to the
acquisitions of Triangle Pacific and DLW.
- --------------------------------------------------------------------------------
Employee compensation
cost summary (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Wages and salaries $722.8 $590.4 $494.7
Payroll taxes 88.7 65.0 50.7
Pension credits (29.1) (38.1) (22.2)
Insurance and other benefit costs 64.1 60.0 51.9
Stock-based compensation 4.2 5.0 9.6
- --------------------------------------------------------------------------------
Total $850.7 $682.3 $584.7
================================================================================
-48-
NOTE 19. PENSION AND OTHER BENEFIT PROGRAMS
Armstrong and a number of its subsidiaries have pension plans and postretirement
medical and insurance benefit plans covering eligible employees worldwide.
Armstrong also has defined-contribution pension plans (including the
Retirement Savings and Stock Ownership Plan, as described on page 47) for
eligible employees. Costs for these plans were $13.1 million in 1999, $6.9
million in 1998 and $10.4 million in 1997. Benefits from pension plans, which
cover substantially all employees, are based on an employee's compensation and
years of service. Pension plans are funded by Armstrong. Postretirement benefits
are funded by Armstrong on a pay-as-you-go basis, with the retiree paying a
portion of the cost for health care benefits by means of deductibles and
contributions. Armstrong announced in 1989 and 1990 a 15-year phaseout of its
health care benefits for certain future retirees. These future retirees include
parent company nonunion employees and some union employees. Shares of RSSOP
common stock are scheduled to be allocated to these employees, based on employee
age and years to expected retirement, to help employees offset their future
postretirement medical costs.
The following tables summarize the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and postretirement benefit plans. The plan assets are primarily
stocks, mutual funds and bonds. Included in these assets were 1,426,751 shares
of Armstrong common stock at year-end 1999 and 1998.
- --------------------------------------------------------------------------------
Retiree Health and Life
U.S. defined-benefit Pension Benefits Insurance Benefits
plans (millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Change in benefit
obligation:
Benefit obligation as of
January 1 $1,163.5 $1,078.1 $ 262.5 $ 262.7
Service cost 16.7 17.5 3.2 3.3
Interest cost 76.6 72.6 17.0 17.2
Plan participants' contributions -- -- 2.6 2.3
Acquisition -- 15.1 -- --
Effect of settlements -- -- (4.1) --
Effect of special termination
benefits 1.7 38.1 -- --
Actuarial loss (gain) (96.4) 15.5 (24.9) (1.0)
Benefits paid (82.7) (73.4) (23.0) (22.0)
- --------------------------------------------------------------------------------
Benefit obligation as
of December 31 $1,079.4 $1,163.5 $ 233.3 $ 262.5
================================================================================
Change in plan assets:
Fair value of plan assets as
of January 1 $1,874.9 $1,754.4 -- --
Actual return (loss)
on plan assets (46.7) 180.3 -- --
Acquisition -- 11.4 -- --
Employer contribution 2.8 2.2 $ 20.5 $ 19.7
Plan participants' contributions -- -- 2.6 2.3
Benefits paid (82.7) (73.4) (23.1) (22.0)
- --------------------------------------------------------------------------------
Fair value of plan assets as
of December 31 $1,748.3 $1,874.9 $ 0.0 $ 0.0
================================================================================
Funded status $ 668.9 $ 711.4 $(233.3) $(262.5)
Unrecognized net actuarial
loss (gain) (483.9) (597.4) 23.0 48.8
Unrecognized transition asset (14.5) (20.7) -- --
Unrecognized prior service
cost (benefit) 72.2 82.2 (5.1) (6.0)
- --------------------------------------------------------------------------------
Net amount recognized $ 242.7 $ 175.5 $(215.4) $(219.7)
================================================================================
The funded status of U.S. defined-benefit plans was determined using the
assumptions presented in the table below.
- --------------------------------------------------------------------------------
Retiree Health and Life
Pension Benefits Insurance Benefits
U.S. defined-benefit plans 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Weighted-average
assumption as of
December 31:
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 8.75% 8.75% n/a n/a
Rate of compensation increase 4.25% 3.75% 4.25% 3.75%
- --------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets consist of:
- --------------------------------------------------------------------------------
Retiree Health and Life
Pension Benefits Insurance Benefits
(millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Prepaid benefit costs $264.2 $187.8 -- --
Accrued benefit liability (30.2) (40.2) $(215.4) $(219.7)
Intangible asset 2.0 2.3 -- --
Other comprehensive income 6.7 25.6 -- --
- --------------------------------------------------------------------------------
Net amount recognized $242.7 $175.5 $(215.4) $(219.7)
================================================================================
- --------------------------------------------------------------------------------
U.S. pension plans with benefit obligations Pension Benefits
in excess of assets (millions) 1999 1998
- --------------------------------------------------------------------------------
Retirement benefit equity plan
Projected benefit obligation, December 31 $34.9 $48.4
Accrued benefit obligation, December 31 30.2 40.2
Fair value of plan assets, December 31 -- --
- --------------------------------------------------------------------------------
The components of pension credit are as follows:
- --------------------------------------------------------------------------------
U.S. defined-benefit Pension Benefits
plans (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 16.7 $ 17.5 $ 16.4
Interest cost on projected
benefit obligation 76.6 72.6 72.6
Expected return on plan assets (147.0) (136.2) (122.8)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 10.0 10.0 10.0
Recognized net actuarial gain (17.3) (18.4) (13.6)
- --------------------------------------------------------------------------------
Net periodic pension credit $ (67.2) $ (60.7) $ (43.6)
================================================================================
Costs for other funded and unfunded pension plans were $5.9 million in 1999,
$4.0 million in 1998 and $2.8 million in 1997.
The components of postretirement benefit cost are as follows:
- --------------------------------------------------------------------------------
U.S. defined-benefit Retiree Health and Life Insurance Benefits
plans (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 3.2 $ 3.3 $ 3.3
Interest cost on accumulated
postretirement benefit obligation 17.0 17.2 17.6
Amortization of prior service benefit (0.9) (0.9) (0.9)
Recognized net actuarial loss 0.6 1.3 1.24
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $19.9 $20.9 $21.2
================================================================================
For measurement purposes, a 7% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease 1% per year to an ultimate rate of 6% by the year 2000.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
- --------------------------------------------------------------------------------
U.S. retiree health and life One percentage point
insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 2.2 $ (1.8)
Effect on postretirement benefit obligation 21.0 (17.6)
- --------------------------------------------------------------------------------
Armstrong has pension plans covering employees in a number of foreign
countries that utilize assumptions that are consistent with, but not identical
to, those of the U.S. plans. The following tables summarize the balance sheet
impact as well as the benefit obligations, assets, funded status and rate
assumptions associated with pension benefits.
- --------------------------------------------------------------------------------
Non-U.S. defined-benefit Pension Benefits
plans (millions) 1999 1998
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation as of January 1 $ 325.1 $ 127.4
Service cost 8.4 6.2
Interest cost 18.1 12.3
Plan participants' contributions 1.6 1.4
Acquisition -- 164.6
Divestitures (2.6) --
Effect of settlements -- (0.5)
Effect of special termination benefits 0.3 0.5
Foreign currency translation adjustment (35.6) 12.8
Actuarial loss 0.9 10.2
Benefits paid (15.6) (9.8)
- --------------------------------------------------------------------------------
Benefit obligation as of December 31 $ 300.6 $ 325.1
================================================================================
Change in plan assets:
Fair value of plan assets as of January 1 $ 147.1 $ 95.5
Actual return on plan assets 24.7 16.7
Acquisition -- 35.1
Employer contribution 13.1 6.2
Plan participants' contribution 1.6 1.4
Foreign currency translation adjustment (7.5) 2.0
Benefits paid (15.6) (9.8)
- --------------------------------------------------------------------------------
Fair value of plan assets as of December 31 $ 163.4 $ 147.1
================================================================================
Funded status $ (137.2) $(178.0)
Unrecognized net actuarial gain (34.5) (21.1)
Unrecognized transition obligation 0.6 1.7
Unrecognized prior service cost 4.7 4.9
- --------------------------------------------------------------------------------
Net amount recognized $ (166.4) $(192.5)
================================================================================
Amounts recognized in the Consolidated Balance Sheets consist of:
- --------------------------------------------------------------------------------
Pension Benefits
(millions) 1999 1998
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 3.0 $ 2.2
Accrued benefit liability (169.5) (195.1)
Intangible asset -- 0.2
Other comprehensive income 0.1 0.2
- --------------------------------------------------------------------------------
Net amount recognized $(166.4) $(192.5)
================================================================================
- --------------------------------------------------------------------------------
Non-U.S. pension plans with benefit obligations Pension Benefits
in excess of assets (millions) 1999 1998
- --------------------------------------------------------------------------------
Projected benefit obligation, December 31 $203.8 $192.3
Accrued benefit obligation, December 31 162.2 186.2
Fair value of plan assets, December 31 2.8 0.6
- --------------------------------------------------------------------------------
The components of pension cost are as follows:
- --------------------------------------------------------------------------------
Non-U.S. defined-benefit Pension Benefits
plans (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 8.4 $ 6.2 $ 5.7
Interest cost on projected
benefit obligation 18.1 12.3 8.8
Expected return on plan assets (8.0) (7.4) (6.8)
Amortization of transition obligation 0.2 0.3 0.3
Amortization of prior service cost 0.4 0.4 0.4
Recognized net actuarial gain (0.1) (0.1) (0.2)
- --------------------------------------------------------------------------------
Net periodic pension cost $19.0 $11.7 $ 8.2
================================================================================
The funded status of non-U.S. defined-benefit plans was determined using the
assumptions presented in the table below.
- --------------------------------------------------------------------------------
Pension Benefits
Non-U.S. defined-benefit plans 1999 1998
- --------------------------------------------------------------------------------
Weighted-average assumption
as of December 31:
Discount rate 6.50% 6.25%
Expected return on plan assets 4.25% 6.25%
Rate of compensation increase 3.75% 3.50%
- --------------------------------------------------------------------------------
-49-
NOTE 20. LEASES
Armstrong rents certain real estate and equipment. Several leases include
options for renewal or purchase and contain clauses for payment of real estate
taxes and insurance. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases. Rental expense
was $21.4 million in 1999, $26.1 million in 1998 and $15.5 million in 1997.
Triangle Pacific leases a plant and related equipment in Beverly, West
Virginia. The lease agreement contains a purchase option of $1 until 2018. As a
result, the present value of the remaining future minimum lease payments is
recorded as a capitalized lease asset and related capitalized lease obligation.
Assets under this capital lease as included in the Consolidated Balance Sheets
are as follows:
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Land $ 3.8 $ 3.8
Building 4.5 4.5
Machinery and equipment 21.5 21.5
- --------------------------------------------------------------------------------
Total assets $29.8 $29.8
================================================================================
Less accumulated amortization 6.2 4.8
- --------------------------------------------------------------------------------
Net assets $23.6 $25.0
================================================================================
Future minimum payments at December 31, 1999, by year and in the aggregate,
having noncancelable lease terms in excess of one year were as follows:
- --------------------------------------------------------------------------------
Scheduled minimum lease payments Capital Operating
(millions) leases leases
- --------------------------------------------------------------------------------
2000 $ 4.3 $10.3
2001 0.8 7.5
2002 0.8 5.5
2003 2.2 4.5
2004 0.6 3.9
Thereafter 2.6 20.0
- --------------------------------------------------------------------------------
Total $11.3 $51.7
- --------------------------------------------------------------------------------
NOTE 21. SHAREHOLDERS' EQUITY
Treasury share changes for 1999, 1998 and 1997 are as follows:
- --------------------------------------------------------------------------------
Years ended
December 31 (thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Common shares
Balance at beginning of year 11,856.7 11,759.5 10,714.6
Stock purchases(1) 33.8 389.5 1,299.2
Stock issuance activity, net (261.8) (292.3) (254.3)
- --------------------------------------------------------------------------------
Balance at end of year 11,628.7 11,856.7 11,759.5
================================================================================
Note 1: Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market purchases of stock through
brokers.
In July 1996, the Board of Directors authorized Armstrong to repurchase 3.0
million shares of its common stock through the open market or through privately
negotiated transactions, bringing the total authorized common share repurchases
to 5.5 million shares. Under the total plan, Armstrong repurchased approximately
4,017,000 shares through December 31, 1998, with a total cash outlay of $248.1
million, including 355,000 repurchased in 1998.
In June 1998, Armstrong halted purchases of its common shares under the
common share repurchase program in connection with its announcement to purchase
Triangle Pacific and DLW.
The balance of each component of accumulated other comprehensive loss as of
December 31, 1999, and December 31, 1998, is presented in the table below.
- --------------------------------------------------------------------------------
(millions) 1999 1998
- --------------------------------------------------------------------------------
Foreign currency translation adjustments
and hedging activities $12.1 $ 8.7
Minimum pension liability adjustments 4.4 16.7
- --------------------------------------------------------------------------------
Total $16.5 $25.4
================================================================================
The related tax effects allocated to each component of other comprehensive
income are presented in the table below.
- --------------------------------------------------------------------------------
Before-Tax Tax After-Tax
(millions) Amount Benefit Amount
- --------------------------------------------------------------------------------
Foreign currency translation
adjustments and hedging activities $ (3.4) $0.0 $(3.4)
Minimum pension liability adjustments 18.9 6.6 12.3
- --------------------------------------------------------------------------------
Total $ 15.5 $6.6 $ 8.9
================================================================================
- --------------------------------------------------------------------------------
Other comprehensive income
reclassification adjustments (millions) 1999 1998
- --------------------------------------------------------------------------------
Unrealized holding gains arising during period -- $ 12.8
Less:
Reclassification adjustment for gains
included in net income -- (12.8)
- --------------------------------------------------------------------------------
Net unrealized gains on securities -- $ 0.0
================================================================================
-50-
NOTE 22. PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1996, the Board of Directors renewed Armstrong's 1986 shareholder rights plan
and in connection therewith declared a distribution of one right for each share
of Armstrong's common stock outstanding on and after January 19, 1996. In
general, the rights become exercisable at $300 per right for a fractional share
of a new series of Class A preferred stock 10 days after a person or group,
other than certain affiliates of Armstrong, either acquires beneficial ownership
of shares representing 20% or more of the voting power of Armstrong or announces
a tender or exchange offer that could result in such person or group
beneficially owning shares representing 28% or more of the voting power of
Armstrong. If thereafter any person or group becomes the beneficial owner of 28%
or more of the voting power of Armstrong or if Armstrong is the surviving
company in a merger with a person or group that owns 20% or more of the voting
power of Armstrong, then each owner of a right (other than such 20% shareholder)
would be entitled to purchase shares of company common stock having a value
equal to twice the exercise price of the right. Should Armstrong be acquired in
a merger or other business combination, or sell 50% or more of its assets or
earnings power, each right would entitle the holder to purchase, at the exercise
price, common shares of the acquirer having a value of twice the exercise price
of the right. The exercise price was determined on the basis of the Board's view
of the long-term value of Armstrong's common stock. The rights have no voting
power nor do they entitle a holder to receive dividends. At Armstrong's option,
the rights are redeemable prior to becoming exercisable at five cents per right.
The rights expire on March 21, 2006.
NOTE 23. SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Selected operating expenses (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Maintenance and repair costs $118.7 $114.0 $107.3
Research and development costs 58.5 46.0 47.8
Advertising costs 49.2 41.2 19.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other expense (income), net (millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest and dividend income $ (2.0) $ (3.3) $ (4.9)
Gain on sale of businesses, net (1.0) -- --
Demutualization proceeds (2.6) -- --
Dal-Tile gain -- (12.8) --
Domco litigation expense -- 12.3 --
Discontinued businesses -- 0.3 0.8
Other (1.0) 1.8 1.9
- --------------------------------------------------------------------------------
Total $ (6.6) $ (1.7) $ (2.2)
================================================================================
NOTE 24. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
(millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest paid $105.1 $ 48.6 $ 23.5
Income taxes paid 50.9 $ 35.3 $ 54.5
- --------------------------------------------------------------------------------
Acquisitions:
Fair value of assets acquired $ 3.8 $1,031.9 $ 32.6
Cost in excess of net assets acquired -- 948.3 --
Less:
Liabilities assumed -- 804.5 28.4
- --------------------------------------------------------------------------------
Cash paid, net of cash acquired $ 3.8 $1,175.7 $ 4.2
- --------------------------------------------------------------------------------
NOTE 25. EARNINGS (LOSS) PER SHARE
The table below provides a reconciliation of the numerators and denominators of
the basic and diluted per share calculations for net earnings (loss).
- --------------------------------------------------------------------------------
Earnings Per-Share
Millions except for per-share data (Loss) Shares Amount
- --------------------------------------------------------------------------------
For the year ended 1999
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net earnings $ 14.3 39.9 $ 0.36
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Dilutive options 0.3
Net earnings $ 14.3 40.2 $ 0.36
================================================================================
For the year ended 1998
- --------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE
Net earnings (loss) $ (9.3) 39.8 $(0.23)
- --------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE
Dilutive options 0.6
Net earnings (loss) $ (9.3) 40.4 $(0.23)1
================================================================================
For the year ended 1997
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net earnings $185.0 40.6 $ 4.55
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Dilutive options 0.4
Net earnings $185.0 41.0 $ 4.50
================================================================================
Note 1: Diluted earnings (loss) per share for 1998 was antidilutive.
-51-
NOTE 26. LITIGATION AND RELATED MATTERS
ASBESTOS-RELATED LITIGATION
Armstrong is a defendant in personal injury claims and property damage claims
related to asbestos containing products.
PERSONAL INJURY CLAIMS
Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against Armstrong, which can involve allegations of negligence,
strict liability, breach of warranty and conspiracy, primarily relate to
Armstrong's involvement with asbestos-containing insulation products. Armstrong
discontinued the sale of all such insulation products in 1969. In addition,
other Armstrong products, such as gasket materials, have been named in some
litigation. Claims may arise many years after first exposure to asbestos in
light of the long latency period (up to 40 years) for asbestos-related injury.
Product identification and determining exposure periods are difficult and
uncertain. Armstrong believes that many current plaintiffs are unimpaired.
Armstrong is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals.
Over the long history of asbestos litigation involving hundreds of companies,
attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. Armstrong supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims filed in state courts have not been directly affected by the
transfer.
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
("Center")
The Facility was established to evaluate, settle, pay and defend all personal
injury claims against member companies. Resolution and defense costs were
allocated by formula. The Facility subsequently dissolved, and the Center was
created in October 1988 by 21 former Facility members, including Armstrong. At
December 31, 1999 there were 19 members of the Center. In January 2000,
membership was reduced to 16 members. Insurance carriers, while not members, are
represented ex officio on the Center's governing board and have agreed annually
to provide a portion of the Center's operational costs. The Center adopted many
of the conceptual features of the Facility and has addressed the claims in a
manner consistent with the prompt, fair resolution of meritorious claims.
Resolution and defense costs are allocated by formula to each of the member
companies; adjustments over time have resulted in some increased share for
Armstrong.
Amchem Settlement Class Action
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including Armstrong. It was designed to establish a
nonlitigation system for the resolution of those claims, and offered a method
for prompt compensation to claimants who were occupationally exposed to asbestos
if they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees; expedite compensation to claimants with
qualifying claims; and relieve the courts of the burden of handling future
claims.
The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on September 25, 1997, holding that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system.
Post Amchem Claim Developments
Armstrong is a defendant in approximately 175,600 pending personal injury claims
as of December 31, 1999. During 1999, the Center received and verified
approximately 51,000 claims naming Armstrong as a defendant (of which
approximately 10,200 were received and verified in the fourth quarter).
Armstrong continues to seek broad-based settlements of claims through the
Center. The Center has recently reached agreements with several law firms that
cover approximately 82,000 claims (or 41% of current claims) some of which are
currently pending and some of which have yet to be filed. These agreements
typically provide for multiyear payments for settlement of current claims and
establish specific medical and other criteria for the settlement of future
claims as well as annual limits on the number of claims that can be filed by
these firms. These agreements also establish fixed settlement values for
different asbestos-related medical conditions which are subject to periodic
renegotiation over a period of 2 to 5 years. The plaintiff law firms are
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provide
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center can terminate an agreement with an individual law firm if a
significant number of that firm's clients elect not to participate under the
agreement. Negotiations with additional plaintiff law firms engaged in
asbestos-related litigation that would resolve a substantial portion of the
remaining pending claims are ongoing. The ultimate success and timing of those
negotiations is uncertain.
Asbestos-Related Liability
In continually evaluating its estimated asbestos liability, Armstrong reviews,
among other things, its recent and historical settlement amounts, the incidence
of past and recent claims, the mix of the injuries and occupations of the
plaintiffs, the number of cases pending against it and the status and results of
broad-based settlement discussions. Based on this review, Armstrong has
estimated its share of liability to defend and resolve probable asbestos-related
personal injury claims. This estimate is highly uncertain due to the limitations
of the available data and the difficulty of forecasting with any certainty the
numerous variables that can affect the range of the liability. Armstrong will
continue to study the variables in light of additional information in order to
identify trends that may become evident and to assess their impact on the range
of liability that is probable and estimable.
In the fourth quarter of 1999, Armstrong recorded a charge to increase its
estimate of probable asbestos-related liability by $425.4 million. The revision
in the estimated liability is attributable to many factors. The actual number of
claims received in 1999 was higher than anticipated. Although we expect the
number of claims to decrease in future years, we now expect that the total
number of claims received will be higher than previously anticipated. Further,
the Center has recently settled with some law firms at amounts higher than our
original estimates pursuant to our broad-based settlement plan. In consideration
of these factors, management has concluded that an increase in the estimated
probable liability is required. Armstrong's estimate of such liability that is
probable and estimable through 2005 ranges from $681.5 million to $1,337.9
million as of December 31, 1999. The range of probable and estimable liability
reflects uncertainties in the number of future claims that will be filed, the
outcome of the broad-based settlement negotiations and Armstrong's overall
effective share of the Center's liabilities. Armstrong has concluded that no
amount within that range is more likely than any other, and therefore has
reflected $681.5 million as a liability in the consolidated financial statements
in accordance with generally accepted accounting principles. Of this amount,
management expects to incur asbestos liability payments of approximately $175.0
million over the next 12 months and has reflected $175.0 million as a current
liability.
Armstrong's estimated range of liability is primarily based on known claims
and an estimate of future claims that are likely to occur and can be reasonably
estimated through 2005. This estimated range of liability assumes that the
number of new claims filed annually will be less than the number filed in 1999.
For claims that may be filed beyond 2005, management believes that the level of
uncertainty is too great to provide for reasonable estimation of the number of
future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the estimated range of liability.
Although some settlements have already been reached, Armstrong is currently
uncertain as to the ultimate success and timing of the remaining broad-based
settlement discussions. However, if those discussions are unsuccessful or if
unfavorable claims experiences continue, significant changes in the assumptions
used in the estimate of Armstrong's liability may result. Those changes, if any,
could lead to increases in the recorded liability. Because of the uncertainties
related to the number of claims, the ultimate settlement amounts, and similar
matters, it is extremely difficult to obtain reasonable estimates of the amount
of the ultimate liability. As additional experience is gained regarding claims
and such settlement discussions or other new information becomes available
regarding the potential liability, Armstrong will reassess its potential
liability and revise the estimates as appropriate.
Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims, net
of any potential insurance recoveries, will not have a material after-tax effect
on the financial condition of Armstrong or its liquidity, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
-52-
Codefendant Bankruptcies
Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
Letters of Credit
As of December 31, 1999, Armstrong entered into $36.2 million of letters of
credit to meet minimum collateral requirements established by the Center.
Property Damage Litigation
Armstrong is also one of many defendants in five pending claims as of December
31, 1999, that were filed by public and private building owners. These cases
present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures, for
removal and replacement of such products. Armstrong vigorously denies the
validity of the allegations against it in these claims. These claims are not
handled by the Center. Insurance coverage has been resolved and is expected to
cover almost all costs of these claims.
Insurance Coverage
During relevant time periods, Armstrong purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., a former
subsidiary of Armstrong. Armstrong and ACandS agreed to share certain coverage
on a first-come first-served basis and to reserve for ACandS a certain amount of
excess coverage.
Wellington Agreement
In 1985, Armstrong and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled disputes concerning
personal injury insurance coverage with signatory carriers. It provides broad
coverage for both defense and indemnity and applies to both products hazard and
nonproducts (general liability) coverages. Armstrong has resolved most
asbestos-related personal injury products hazard coverage matters with its
solvent carriers through the Wellington Agreement or other settlements.
Insurance Recovery Proceedings
A substantial portion of Armstrong's primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims
including, among others, those that involve alleged exposure during Armstrong's
installation of asbestos materials. An alternative dispute resolution ("ADR")
procedure under the Wellington Agreement is under way against certain carriers
to determine the percentage of resolved and unresolved claims that are
nonproducts claims, to establish the entitlement to that coverage and to
determine whether and how much reinstatement of prematurely exhausted products
hazard insurance is warranted. The nonproducts coverage potentially available is
substantial and includes defense costs in addition to limits. The carriers have
raised various defenses, including waiver, laches, statutes of limitations and
contractual defenses. One primary carrier alleges that it is no longer bound by
the Wellington Agreement, and another alleges that Armstrong agreed to limit its
claims for nonproducts coverage against that carrier when the Wellington
Agreement was signed. The ADR process is in the trial phase of binding
arbitration. One insurer has taken the position that it is entitled to litigate
in court certain issues in the ADR proceeding. During 1999, Armstrong received
preliminary decisions in the initial phases of the trial proceeding of the ADR
which were generally favorable to Armstrong on a number of issues related to
insurance coverage. Because of the continuing ADR process and the possibilities
for further proceedings on certain matters, Armstrong has not yet completely
determined the financial implications of the decisions. Armstrong has entered
into settlements with a number of the carriers resolving coverage issues.
Other proceedings against non-Wellington carriers may become necessary.
-53-
Insurance Asset
As with its estimated asbestos-related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $296.0 million is recorded as of December 31, 1999. Approximately
$58.7 million was received in 1999 pursuant to existing settlements. The asset
was also increased by $90.0 million in the fourth quarter of 1999 primarily as a
result of insurance coverage in place related to the increase in the probable
and estimable liability and recent settlements with certain carriers. Of the
total insurance asset amount, approximately $78.3 million represents partial
settlement for previous claims which will be paid in a fixed and determinable
flow and is reported at its net present value discounted at 6.70%. The total
amount recorded reflects Armstrong's belief in the availability of insurance in
this amount, based upon Armstrong's success in insurance recoveries, recent
settlement agreements that provide that coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. This insurance is either
available through settlement or probable of recovery through negotiation,
litigation or resolution of the ADR process that is in the trial phase of
binding arbitration. Depending on further progress of the ADR, and activities
such as settlement discussions with insurance carriers party to the ADR and
those not party to the ADR, Armstrong may revise its estimate and additional
insurance assets may be recorded in a future period. Of the $296.0 million
asset, $26.0 million has been recorded as a current asset reflecting
management's estimate of the minimum insurance payments to be received in the
next 12 months. However, the actual amount of payments to be received in the
next 12 months could increase depending upon the nature and result of settlement
discussions. Management estimates that the timing of future cash payments for
the remainder of the recorded asset may extend beyond 10 years.
Cash Flow Impact
Armstrong paid $173.0 million for asbestos-related claims in 1999 compared to
$101.5 million in 1998. Armstrong received $58.7 million in asbestos-related
insurance recoveries in 1999 compared with $27.1 million in 1998. Armstrong
currently expects to pay approximately $95.0 million to $115.0 million for
asbestos-related claims and expenses in 2000, net of expected insurance
recoveries and taxes.
CONCLUSION
In the fourth quarter of 1999, Armstrong recorded a net pretax charge of $335.4
million. This charge is the net of an increase in its estimated asbestos-related
liability of $425.4 million and a $90.0 million increase in related insurance
recoveries.
While some successful broad-based settlements have been reached with
plaintiff law firms, Armstrong is uncertain as to the timing and number of any
additional settlements to be reached.
Since many uncertainties exist surrounding asbestos litigation, Armstrong
will continue to evaluate its asbestos-related estimated liability and
corresponding estimated insurance recoveries asset as well as the underlying
assumptions used to derive these amounts. The recorded liability and asset
reflect the most recent available information as of this filing. However, it is
reasonably possible that Armstrong's total exposure to personal injury claims
may be greater than the recorded liability, and, accordingly future charges to
income may be necessary. While Armstrong believes that potential future charges
may be material to the periods in which they are taken, Armstrong does not
believe the charges will have a material adverse effect on its financial
position or liquidity.
ENVIRONMENTAL MATTERS
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by federal, state and local environmental laws. These laws relate
to the discharge of materials or otherwise relate to the protection of the
environment. Armstrong has made, and intends to continue to make, necessary
expenditures for compliance with applicable laws. Armstrong incurred capital
expenditures of approximately $5.5 million in 1999, $6.7 million in 1998 and
$1.2 million in 1997 for environmental compliance and control facilities and
anticipates annual expenditures for those purposes to continue within this range
for the years 2000 and 2001. Armstrong does not anticipate that it will incur
significant capital expenditures in order to meet the requirements of the Clean
Air Act of 1990 and the final implementing regulations promulgated by various
state agencies. Until all new regulatory requirements are known, uncertainty
will remain regarding future estimates of capital expenditures.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have voluntarily agreed to jointly fund the required investigation and
remediation of each site. With regard to some sites, however, Armstrong disputes
the liability, the proposed remedy or the proposed cost allocation among the
PRPs. Armstrong may also have rights of contribution or reimbursement from other
parties or coverage under applicable insurance policies. Armstrong is also
remediating environmental contamination resulting from past industrial activity
at certain of its current and former plant sites.
Estimates of future liability are based on an evaluation of currently
available facts regarding each individual site and consider factors including
existing technology, presently enacted laws and regulations and prior company
experience in remediation of contaminated sites. Although current law imposes
joint and several liability on all parties at any Superfund site, Armstrong's
contribution to the remediation of these sites is expected to be limited by the
number of other companies also identified as potentially liable for site costs.
As a result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters.
Liabilities of $14.7 million at December 31, 1999, and $18.3 million at
December 31, 1998, were for potential environmental liabilities that Armstrong
considers probable and for which a reasonable estimate of the probable liability
could be made. Where existing data is sufficient to estimate the amount of the
liability, that estimate has been used; where only a range of probable liability
is available and no amount within that range is more likely than any other, the
lower end of the range has been used. As assessments and remediation activities
progress at each individual site, these liabilities are reviewed to reflect
additional information as it becomes available.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.
Actual costs to be incurred at identified sites in the future may vary from
the estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
-54-
Independent auditors' report
The Board of Directors and Shareholders,
Armstrong World Industries, Inc.:
We have audited the consolidated financial statements of Armstrong World
Industries, Inc., and subsidiaries as listed in the accompanying index on page
33. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the accompanying
index on page 33. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong World
Industries, Inc., and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 2, 2000
-55-
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- ---------------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
Directors of the Registrant
- ----------------------------
The information appearing in the tabulation in the section captioned "Election
of Directors" on pages 8-11 of the Company's 2000 Proxy Statement is
incorporated by reference herein.
Executive Officers of the Registrant
- -------------------------------------
George A. Lorch -- Age 58; Chairman of the Board since April 25, 1994; and
President (Chief Executive Officer) since September 7, 1993; Member of the
Executive Committee of the Board of Directors since March, 1988; Executive Vice
President, 1988 to 1993; Group Vice President for Carpet Operations, 1983 to
1988.
Marc R. Olivie -- Age 46; President, Worldwide Building Products Operations
since October 15, 1996; and the following positions with Sara Lee Corporation
(branded consumer products): President, Sara Lee Champion Europe, Inc. (Italy),
March 1994-October 1996; Vice President, Corporate Development, Sara Lee/DE
(Netherlands), September 1993-March 1994.
Robert J. Shannon, Jr. -- Age 51, President, Worldwide Floor Products Operations
since February 1, 1997; President Floor Products Operations International
February 1, 1996,-February 1, 1997; President American Olean Tile Company, Inc.
March 1, 1992-December 29, 1995.
Ulrich J. Weimer -- Age 55; President, Armstrong Insulation Products since
February 1, 1996; Managing Director, Armstrong World Industries G.m.b.H. since
December 11, 1995; General Manager, Worldwide Insulation Products Operations,
February 1, 1993-June 1, 1995.
Douglas L. Boles -- Age 42; Executive Vice President, Human Resources since
March 14, 2000; Senior Vice President, Human Resources since March 1, 1996; and
the following positions with PepsiCo (consumer products): Vice President of
Human Resources, Pepsi Foods International Europe Group (U.K.), June 1995-
February 1996; Vice President of Human Resources, Walkers Snack Foods (U.K.),
March 1994-June 1995; Vice President of Human Resources, Snack Ventures Europe
(Netherlands), September 1992-March 1994.
Deborah K. Owen -- Age 48; Senior Vice President, Secretary and General Counsel
since January 1, 1998; Attorney, Law Offices of Deborah K. Owen, Columbia, MD,
September 1996-September 1997; Partner, Arent Fox Kintner Plotkin & Kahn, PLLC,
Washington DC, August 1994-August 1996; Commissioner, Federal Trade Commission,
Washington, DC, October 1989-August 1994.
Frank A. Riddick, III -- Age 43; Executive Vice President and Chief Operating
Officer since March 14, 2000; Senior Vice President, Finance and Chief Financial
Officer since April 1995; Controller FMC Corporation, Chicago, IL (chemicals,
machinery), May 1993-March 1995.
William C. Rodruan -- Age 45; Vice President and Controller since July 26, 1999;
Director, Corporate Transformation and Shared Services from February 1, 1997,
through July 26, 1999; Vice President of Finance, Corporate Retail Accounts from
July 1, 1994 through February 1, 1997.
-56-
E. Follin Smith -- Age 40; Senior Vice President and Chief Financial Officer
since March 14, 2000; Vice President and Treasurer since August 1998; and the
following positions with General Motors Corporation (automobile manufacturer):
Chief Financial Officer, Delphi Chassis Systems, April 1997-July 1998; Assistant
Treasurer, October, 1994-April 1997; Vice President, Finance, General Motors
Acceptance Corporation, May 1994-September 1994; Treasurer, General Motors of
Canada Limited, June 1992-April 1994.
Dr. Bernd F. Pelz -- Age 56; President DLW Aktiengesellschaft since September
1998; Member of the Executive Board, DLW Aktiengesellschaft since April 1990,
and its Chairman since October 1991.
Floyd F. Sherman -- Age 60; President, Wood Products Operations since July 24,
1998; and the following positions with Triangle Pacific Corp.: Chairman of the
Board and Chief Executive Officer since July 1992; President 1981-November 1994.
Stephen E. Stockwell -- Age 54, Senior Vice President Floor Products, Americas,
Residential Sales, since July 28, 1998; President, Corporate Retail Accounts
Division, November 22, 1994 through July 28, 1998; Vice President, Corporate
Retail Accounts, July 1, 1994 through November 22, 1994; General Manager,
Residential Sales, Floor Division, January 26, 1994 through July 1, 1994; Field
Sales Manager, Floor Division, 1988 through 1994.
All information presented above is current as of March 14, 2000. The term of
office for each Executive Officer in his present capacity is one year, and each
such Executive Officer will serve until reelected or until a successor is
elected at the annual meeting of directors which follows the annual
shareholders' meeting. Each Executive Officer has been employed by us in excess
of five continuous years with the exception of Messrs. Olivie, Boles, Riddick,
Pelz, Sherman and Mses. Owen and Smith.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
The information appearing in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 15 of the Company's 2000 Proxy Statement
is incorporated by reference herein.
Item 11. Executive Compensation
- ---------------------------------
The information appearing in the sections captioned "Compensation of Directors"
on page 12 and "Executive Officers' Compensation," (other than the information
contained under the subcaption "Performance Graph") and "Retirement Income Plan
Benefits," on pages 17-22 of the Company's 2000 Proxy Statement is incorporated
by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The information appearing in the sections captioned "Stock Ownership of Certain
Beneficial Owners" on pages 22-23 and "Directors' and Executive Officers' Stock
Ownership" on pages 14-15 of the Company's 2000 Proxy Statement is incorporated
by reference herein.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
The information appearing under the heading "Transactions with Organizations
Affiliated with Directors" appearing on page 23 of the Company's 2000 Proxy
Statement is incorporated by reference herein.
-57-
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
The financial statements and schedule filed as a part of this Annual Report on
Form 10-K are listed in the "Index to Financial Statements and Schedules" on
page 33.
a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
--------
No. 3(a) Registrant's By-laws, as amended, effective September 20, 1999,
are incorporated by reference herein from registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999, wherein they appear as Exhibit 3.
No. 3(b) Registrant's restated Articles of Incorporation, as amended,
are incorporated by reference herein from registrant's 1994
Annual Report on Form 10-K wherein they appear as Exhibit 3(b).
No. 4(a) Registrant's Rights Agreement effective as of March 21, 1996,
between the registrant and Chemical Mellon Shareholder
Services, L.L.C., as Rights Agent, relating to the registrant's
Preferred Stock Purchase Rights is incorporated by reference
herein from registrant's registration statement on Form 8-A/A
dated March 15, 1996, wherein it appeared as Exhibit 4.
American Stock Transfer and Trust Company is the successor
Rights Agent under this Agreement.
No. 4(b) Registrant's Retirement Savings and Stock Ownership Plan
effective as of October 1, 1996, as amended November 5, 1999. *
No. 4(c) Registrant's $450,000,000 Credit Agreement (5-year) dated as of
October 29, 1998, among the registrant, The Chase Manhattan
Bank, as administrative agent, and the banks listed therein, is
incorporated herein by reference from registrant's 1998 Annual
Report on Form 10-K, wherein it appeared as Exhibit 4(f).
No. 4(d) Registrant's Indenture, dated as of August 6, 1996, between the
Registrant and The Chase Manhattan Bank, formerly known as
Chemical Bank, as successor to Mellon Bank, N.A., as Trustee,
is incorporated herein by reference from registrant's
registration statement on Form S-3/A dated August 14, 1996,
wherein it appeared as Exhibit 4.1.
No. 4(e) Copy of portions of the registrant's Board of Directors'
Pricing Committee's resolutions establishing the terms and
conditions of $200,000,000 of 6.35% Senior Notes Due 2003 and
$150,000,000 of 6 1/2% Senior Notes Due 2005, is incorporated
herein by reference from registrant's 1998 Annual Report on
Form 10-K, wherein it appeared as Exhibit 4(h).
No. 4(f) Copy of portions of the registrant's Board of Directors'
Pricing Committee's resolutions establishing the terms and
conditions of $180,000,000 of 7.45% Senior Quarterly Interest
Bonds Due 2038, is
-58-
incorporated herein by reference from registrant's 1998 Annual
Report on Form 10-K, wherein it appeared as Exhibit 4(i).
Registrant agrees to furnish to the Commission upon request
copies of instruments defining the rights of holders of
long-term debt of the registrant and its subsidiaries which are
not filed herewith in accordance with applicable rules of the
Commission because the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis.
No. 10(i)(a) Registrant's Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the
registrant and other companies is incorporated by reference
herein from registrant's 1997 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution, as
amended, among the registrant and other companies.
No. 10(i)(c) Indenture, dated as of March 15, 1988, between the registrant
and Morgan Guaranty Trust Company of New York, as Trustee, as
to which The First National Bank of Chicago is successor
trustee, (relating to the registrant's $125 million 9-3/4%
Debentures due 2008 and Series A Medium Term Notes) is
incorporated herein by reference from registrant's 1995 Annual
Report on Form 10-K wherein it appeared as Exhibit 4(c).
No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between
Registrant and First National Bank of Chicago, as Trustee, is
incorporated herein by reference from the registrant's
Registration Statement on Form S-3 (File No. 333- 74501) dated
March 16, 1999, wherein it appeared as Exhibit 4.3.
No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes due
2029 is incorporated by reference herein from the registrant's
Current Report on Form 8-K which was filed with the Commission
on May 29, 1999, wherein it appeared as Exhibit 4.2.
No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998, among
the registrant, Triangle Pacific Corp., and Sapling
Acquisition, Inc., is incorporated by reference herein from
registrant's Form 8-K filed on June 15, 1998, wherein it
appeared as Exhibit 10.1.
No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by and
among AISI Acquisition Corp. and registrant and Armstrong
Industrial Specialties, Inc. is incorporated by reference
herein from registrant's Current Report on Form 8- K filed on
July 14, 1999, wherein it appeared as Exhibit 1.
No. 10(i)(h) Registrant's $450,000,000 Credit Agreement (364-day) dated as
of October 29, 1998, among the registrant, The Chase Manhattan
Bank as administrative agent, and listed banks, is incorporated
herein by reference from registrant's 1998 Annual Report on
Form 10-K, wherein it appeared as Exhibit 4(e).
-59-
No. 10(i)(i) Amended and Restated Credit Agreement dated as of October 21,
1999, among the registrant, The Chase Manhattan Bank as
administrative agent, and listed banks, which amends Exhibit
10(i)(h) in certain respects.
No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees, as
amended, is incorporated by reference herein from registrant's
1995 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(a). *
No. 10(iii)(b) Form of agreement between DLW and Dr. Bernd F. Pelz, as
amended. *
No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(c).
*
No. 10(iii)(d) Registrant's Management Achievement Plan for Key Executives, as
amended December 13, 1999 *
No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known as
the Excess Benefit Plan), as amended January 1, 2000. *
No. 10(iii)(f) Copy of Registrant's Deferred Compensation Plan, as amended
January 1, 2000. *
No. 10(iii)(g) Registrant's Employment Protection Plan for Salaried Employees
of Armstrong World Industries, Inc., as amended, is
incorporated by reference herein from registrant's 1994 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(g).
*
No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors,
as amended, is incorporated by reference herein from
registrant's 1996 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(h).*
No. 10(iii)(i) Registrant's Severance Pay Plan for Salaried Employees, as
amended July 13, 1998, is incorporated by reference herein from
registrant's 1998 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(i). *
No. 10(iii)(j) Registrant's 1999 Long-Term Stock Incentive Plan*
No. 10(iii)(k) Form of Agreement between the Company and certain of its
Executive Officers, together with a schedule identifying those
executives and the material differences among the agreements to
which each executive is a party. *
No. 10(iii)(l) Form of Indemnification Agreement between the registrant and
each of the registrant's Directors, is incorporated by
reference herein from registrant's 1996 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(l). *
No. 10(iii)(m) Registrant's Bonus Replacement Retirement Plan, dated as of
January 1, 1998, as amended, is incorporated by reference
herein from registrant's 1998 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(m). *
-60-
No. 10(iii)(n) Copy of Employment Agreement between the registrant and George
A. Lorch dated as of December 13, 1999. *
No. 11(a) Computation for basic earnings.
No. 11(b) Computation for diluted earnings per share.
No. 12 Ratio of Earnings to Fixed Charges
No. 21 List of the registrant's domestic and foreign subsidiaries.
No. 23 Consent of Independent Auditors.
No. 24 Powers of Attorney and authorizing resolutions.
No. 27 Financial Data Statement
* Compensatory Plan
-61-
b. The following reports on Form 8-K were filed during the last quarter of
1999:
None.
-62-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Registrant)
By /s/ George A. Lorch
----------------------------
Chairman
Date March 15, 2000
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant:
George A. Lorch Chairman and President
(Principal Executive Officer)
Frank A. Riddick, III Senior Vice President, Finance
(Principal Financial Officer)
William C. Rodruan Vice President and Controller
(Principal Accounting Officer)
H. Jesse Arnelle Director
Van C. Campbell Director
Donald C. Clark Director
Judith R. Haberkorn Director
John A. Krol Director
David M. LeVan Director
James E. Marley Director
David W. Raisbeck Director
Jerre L. Stead Director
By /s/ George A. Lorch
----------------------------------
(George A. Lorch, as
attorney-in-fact and on his own
behalf)
As of March 15, 2000
-63-
SCHEDULE II
-----------
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------
For Years Ended December 31
---------------------------
(amounts in millions)
Provision for Losses 1999 1998 1997
- -------------------- -------- -------- -------
Balance at Beginning of Year $ 18.2 $ 12.8 $ 10.9
Additions Charged to Earnings 12.1 7.2 7.3
Deductions (5.0) (11.4) (5.4)
Balances via acquisitions/(divestitures) (0.1) 9.6 --
------- ------- ------
Balance at End of Year $ 25.2 $ 18.2 $ 12.8
======= ======= ======
- -----------------------------------------------------------------------
Provision for Discounts
- -----------------------
Balance at Beginning of Year $ 31.6 $ 24.7 $ 24.0
Additions Charged to Earnings 112.4 93.3 76.7
Deductions (120.8) (88.8) (76.0)
Balance via acquisitions/(divestitures) (0.5) 2.4 --
------- ------- ------
Balance at End of Year $ 22.7 $ 31.6 $ 24.7
======= ======= ======
- -----------------------------------------------------------------------
Total Provision for Discounts and Losses
- ----------------------------------------
Balance at Beginning of Year $ 49.8 $ 37.5 $ 34.9
Additions Charged to Earnings 124.5 100.5 84.0
Deductions (125.8) (100.2) (81.4)
Balances via acquisitions/(divestitures) (0.6) 12.0 --
------- ------- ------
Balance at End of Year $ 47.9 $ 49.8 $ 37.5
======= ======= ======
-64-
EXHIBIT INDEX
No. 3(a) Registrant's By-laws, as amended, effective September 20,
1999, are incorporated by reference herein from registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999, wherein they appear as Exhibit 3.
No. 3(b) Registrant's restated Articles of Incorporation, as amended,
are incorporated by reference herein from registrant's 1994
Annual Report on Form 10-K wherein they appear as Exhibit 3(b).
No. 4(a) Registrant's Rights Agreement effective as of March 21, 1996,
between the registrant and Chemical Mellon Shareholder
Services, L.L.C., as Rights Agent, relating to the registrant's
Preferred Stock Purchase Rights is incorporated by reference
herein from registrant's registration statement on Form 8-A/A
dated March 15, 1996, wherein it appeared as Exhibit 4.
American Stock Transfer and Trust Company is the successor
Rights Agent under this Agreement.
No. 4(b) Registrant's Retirement Savings and Stock Ownership Plan
effective as of October 1, 1996, as amended November 5, 1999. *
No. 4(c) Registrant's $450,000,000 Credit Agreement (5-year) dated as of
October 29, 1998, among the registrant, The Chase Manhattan
Bank, as administrative agent, and the banks listed therein, is
incorporated herein by reference from registrant's 1998 Annual
Report on Form 10-K, wherein it appeared as Exhibit 4(f).
No. 4(d) Registrant's Indenture, dated as of August 6, 1996, between the
Registrant and The Chase Manhattan Bank, formerly known as
Chemical Bank, as successor to Mellon Bank, N.A., as Trustee,
is incorporated herein by reference from registrant's
registration statement on Form S-3/A dated August 14, 1996,
wherein it appeared as Exhibit 4.1.
No. 4(e) Copy of portions of the registrant's Board of Directors'
Pricing Committee's resolutions establishing the terms and
conditions of $200,000,000 of 6.35% Senior Notes Due 2003 and
$150,000,000 of 6 1/2% Senior Notes Due 2005, is incorporated
herein by reference from registrant's 1998 Annual Report on
Form 10-K, wherein it appeared as Exhibit 4(h).
No. 4(f) Copy of portions of the registrant's Board of Directors'
Pricing Committee's resolutions establishing the terms and
conditions of $180,000,000 of 7.45% Senior Quarterly Interest
Bonds Due 2038, is incorporated herein by reference from
registrant's 1998 Annual Report on Form 10-K, wherein it
appeared as Exhibit 4(i).
Registrant agrees to furnish to the Commission upon request
copies of instruments defining the rights of holders of
long-term debt of the registrant and its subsidiaries which are
not filed herewith in accordance with applicable rules of the
Commission because the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis.
No. 10(i)(a) Registrant's Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the
registrant and other companies is incorporated by reference
herein from registrant's 1997 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution, as
amended, among the registrant and other companies.
No. 10(i)(c) Indenture, dated as of March 15, 1988, between the registrant
and Morgan Guaranty Trust Company of New York, as Trustee, as
to which The First National Bank of Chicago is successor
trustee, (relating to the registrant's $125 million 9-3/4%
Debentures due 2008 and Series A Medium Term Notes) is
incorporated herein by reference from registrant's 1995 Annual
Report on Form 10-K wherein it appeared as Exhibit 4(c).
No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between
Registrant and First National Bank of Chicago, as Trustee, is
incorporated herein by reference from the registrant's
Registration Statement on Form S-3 (File No. 333- 74501) dated
March 16, 1999, wherein it appeared as Exhibit 4.3.
No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes due
2029 is incorporated by reference herein from the registrant's
Current Report on Form 8-K which was filed with the Commission
on May 29, 1999, wherein it appeared as Exhibit 4.2.
No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998, among
the registrant, Triangle Pacific Corp., and Sapling
Acquisition, Inc., is incorporated by reference herein from
registrant's Form 8-K filed on June 15, 1998, wherein it
appeared as Exhibit 10.1.
No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by and
among AISI Acquisition Corp. and registrant and Armstrong
Industrial Specialties, Inc. is incorporated by reference
herein from registrant's Current Report on Form 8- K filed on
July 14, 1999, wherein it appeared as Exhibit 1.
No. 10(i)(h) Registrant's $450,000,000 Credit Agreement (364-day) dated as
of October 29, 1998, among the registrant, The Chase Manhattan
Bank as administrative agent, and listed banks, is incorporated
herein by reference from registrant's 1998 Annual Report on
Form 10-K, wherein it appeared as Exhibit 4(e).
No. 10(i)(i) Amended and Restated Credit Agreement dated as of October 21,
1999, among the registrant, The Chase Manhattan Bank as
administrative agent, and listed banks, which amends Exhibit
10(i)(h) in certain respects.
No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees, as
amended, is incorporated by reference herein from registrant's
1995 Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(a). *
No. 10(iii)(b) Form of agreement between DLW and Dr. Bernd F. Pelz, as
amended. *
No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit
10(iii)(c). *
No. 10(iii)(d) Registrant's Management Achievement Plan for Key Executives, as
amended December 13, 1999 *
No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known as
the Excess Benefit Plan), as amended January 1, 2000. *
No. 10(iii)(f) Copy of Registrant's Deferred Compensation Plan, as amended
January 1, 2000. *
No. 10(iii)(g) Registrant's Employment Protection Plan for Salaried Employees
of Armstrong World Industries, Inc., as amended, is
incorporated by reference herein from registrant's 1994 Annual
Report on Form 10-K wherein it appeared as Exhibit
10(iii)(g). *
No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors,
as amended, is incorporated by reference herein from
registrant's 1996 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(h).*
No. 10(iii)(i) Registrant's Severance Pay Plan for Salaried Employees, as
amended July 13, 1998, is incorporated by reference herein from
registrant's 1998 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(i). *
No. 10(iii)(j) Registrant's 1999 Long-Term Stock Incentive Plan*
No. 10(iii)(k) Form of Agreement between the Company and certain of its
Executive Officers, together with a schedule identifying those
executives and the material differences among the agreements to
which each executive is a party. *
No. 10(iii)(l) Form of Indemnification Agreement between the registrant and
each of the registrant's Directors, is incorporated by
reference herein from registrant's 1996 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(l). *
No. 10(iii)(m) Registrant's Bonus Replacement Retirement Plan, dated as of
January 1, 1998, as amended, is incorporated by reference
herein from registrant's 1998 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(m). *
No. 10(iii)(n) Copy of Employment Agreement between the registrant and George
A. Lorch dated as of December 13, 1999. *
No. 11(a) Computation for basic earnings.
No. 11(b) Computation for diluted earnings per share.
No. 12 Ratio of Earnings to Fixed Charges
No. 21 List of the registrant's domestic and foreign subsidiaries.
No. 23 Consent of Independent Auditors.
No. 24 Powers of Attorney and authorizing resolutions.
No. 27 Financial Data Statement
* Compensatory Plan