FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
ARMSTRONG HOLDINGS, INC.
------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 333-32530 23-3033414
- --------------------------------------------------------------------------------
(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
----------------------------
ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 1-2116 23-0366390
- --------------------------------------------------------------------------------
(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
-----------------------------
Armstrong World Industries, Inc. meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the
filing of this form in the reduced disclosure format permitted by such
Instructions.
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_____
------
Number of shares of Armstrong Holdings, Inc.'s common stock outstanding as of
April 30, 2001 - 40,818,066
1
Part 1 - Financial Information
------------------------------
Item 1 - Financial Statements
- -----------------------------
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions, except per share amounts)
Unaudited
Three Months Ended
March 31
------------------
2001 2000
------- -------
Net sales $ 716.5 $ 735.3
Cost of goods sold 538.1 527.5
------- -------
Gross profit 178.4 207.8
Selling, general and administrative expenses 130.7 139.1
Restructuring and reorganization charges 5.4 -
Goodwill amortization 5.7 6.0
Equity (earnings) from affiliates, net (4.4) (4.7)
------- -------
Operating income 41.0 67.4
Interest expense (unrecorded contractual interest of $21.4 in 2001) 3.1 25.9
Other (income) expense, net (3.9) 0.6
------- -------
Earnings from continuing operations before Chapter 11 reorganization costs
and income tax expense 41.8 40.9
Chapter 11 reorganization costs, net 3.0 -
------- -------
Earnings from continuing operations before income tax expense 38.8 40.9
Income tax expense 15.2 15.9
------- -------
Earnings from continuing operations $ 23.6 $ 25.0
------- -------
Income from discontinued operations, net of tax of $2.9 - 5.7
Net loss on expected disposal of discontinued operations, net of tax of $0.0 (3.3) -
------- -------
Earnings (loss) from discontinued operations (3.3) 5.7
------- -------
Net earnings $ 20.3 $ 30.7
======= =======
Earnings per share of common stock, continuing operations:
Basic $ 0.58 $ 0.62
Diluted $ 0.58 $ 0.62
Earnings per share of common stock, discontinued operations:
Basic $ - $ 0.14
Diluted $ - $ 0.14
Loss per share of common stock, loss on expected disposal of discontinued
operations:
Basic $ (0.08) $ -
Diluted $ (0.08) $ -
Net earnings per share of common stock:
Basic $ 0.50 $ 0.77
Diluted $ 0.50 $ 0.76
Average number of common shares outstanding:
Basic 40.4 40.1
Diluted 40.8 40.3
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 6.
2
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions except share data)
Unaudited
Assets March 31, 2001 December 31, 2000
------ -------------- -----------------
Current assets:
Cash and cash equivalents $134.1 $156.5
Accounts and notes receivable, net 373.8 316.5
Inventories, net 363.2 340.2
Deferred income taxes 9.5 9.8
Net assets of discontinued operations 48.4 48.6
Other current assets 84.3 72.4
---------- ----------
Total current assets 1,013.3 944.0
Property, plant and equipment, less accumulated depreciation and
amortization of $1,021.6 and $1,006.4, respectively 1,233.4 1,253.5
Insurance receivable for asbestos-related liabilities, noncurrent 230.1 236.1
Investment in affiliates 36.4 37.3
Goodwill, net 836.0 846.0
Other intangibles, net 90.1 91.9
Deferred income tax assets, noncurrent 14.5 22.5
Other noncurrent assets 455.5 443.3
---------- ----------
Total assets $3,909.3 $3,874.6
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $11.3 $16.6
Current installments of long-term debt 6.9 8.1
Accounts payable and accrued expenses 266.9 238.0
Income taxes 36.8 28.5
---------- ----------
Total current liabilities 321.9 291.2
---------- ----------
Liabilities subject to compromise 2,375.5 2,385.2
Long-term debt, less current installments 54.7 56.8
Postretirement and postemployment benefit liabilities 243.9 243.6
Pension benefit liabilities 149.0 154.7
Other long-term liabilities 68.0 71.1
Minority interest in subsidiaries 7.0 6.9
---------- ----------
Total noncurrent liabilities 2,898.1 2,918.3
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 166.3 162.2
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,171.8 1,151.5
Accumulated other comprehensive loss (45.5) (45.2)
Treasury stock (513.0) (513.1)
---------- ----------
Total shareholders' equity 689.3 665.1
---------- ----------
Total liabilities and shareholders' equity $3,909.3 $3,874.6
========== ==========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 6.
3
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(amounts in millions except per share data)
Unaudited
2001 2000
---- ----
Common stock, $1 par value:
- --------------------------
Balance at beginning of year and March 31 $ 51.9 $ 51.9
-------- --------
Capital in excess of par value:
- ------------------------------
Balance at beginning of year $ 162.2 $ 176.4
Stock issuances and other 4.1 4.2
-------- --------
Balance at March 31 $ 166.3 $ 180.6
-------- --------
Reduction for ESOP loan guarantee:
- ---------------------------------
Balance at beginning of year $ (142.2) $ (190.3)
Accrued compensation - 4.9
-------- --------
Balance at March 31 $ (142.2) $ (185.4)
-------- --------
Retained earnings:
- -----------------
Balance at beginning of year $1,151.5 $1,196.2
Net earnings for three months 20.3 $ 20.3 30.7 $ 30.7
Tax benefit on dividends paid on unallocated ESOP common shares - 0.3
-------- --------
Total $1,171.8 $1,227.2
Less common stock dividends - 19.3
-------- --------
Balance at March 31 $1,171.8 $1,207.9
-------- --------
Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5)
Foreign currency translation adjustments (2.9) (5.2)
Derivative gain, net 0.7 -
Minimum pension liability adjustments 1.9 -
-------- --------
Total other comprehensive (loss) (0.3) (0.3) (5.2) (5.2)
-------- --------
Balance at March 31 $ (45.5) $ (21.7)
-------- --------
Comprehensive income $ 20.0 $ 25.5
- -------------------- ======= =======
Less treasury stock at cost:
- ---------------------------
Balance at beginning of year $ 513.1 $ 538.5
Stock issuance activity, net (0.1) (0.6)
-------- --------
Balance at March 31 $ 513.0 $ 537.9
-------- --------
Total shareholders' equity $ 689.3 $ 695.4
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 6.
4
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Three Months Ended
March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $20.3 $30.7
Adjustments to reconcile net earnings to net cash
used for operating activities:
Depreciation and amortization, continuing operations 37.3 38.6
Depreciation and amortization, discontinued operations - 3.4
Loss on expected disposal of discontinued operations 3.3 -
Deferred income taxes 8.3 5.0
Equity earnings from affiliates, net (4.4) (4.7)
Chapter 11 reorganization costs, net 3.0 -
Chapter 11 reorganization costs paid (0.6) -
Restructuring and reorganization charges 5.4 -
Restructuring and reorganization payments (4.3) (1.8)
Payments for asbestos-related claims, net of recoveries - (36.5)
Decrease in net assets of discontinued operations 0.2 3.1
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring and dispositions
Increase in receivables (63.5) (42.6)
Increase in inventories (30.3) (23.3)
(Increase)/decrease in other current assets (6.4) 15.0
Increase in other noncurrent assets (13.1) (20.1)
Increase/(decrease) in accounts payable and accrued expenses 37.6 (55.0)
Increase in income taxes payable 6.6 1.3
Increase/(decrease) in other long-term liabilities (2.8) 16.0
Other, net 2.8 (1.1)
-------- -------
Net cash used for operating activities (0.6) (72.0)
-------- -------
Cash flows used for investing activities;
Purchases of property, plant and equipment, continuing operations (19.9) (28.1)
Purchases of property, plant and equipment, discontinued operations (1.1) (2.7)
Investment in computer software (1.9) (1.8)
Distributions from equity affiliates 5.0 5.0
Other, net 0.5 2.3
-------- -------
Net cash used for operating activities (17.4) (25.3)
-------- -------
Cash flows from financing activities;
Increase/(decrease) in short-term debt, net (4.3) 117.6
Payments of long-term debt (3.2) (4.3)
Cash dividends paid - (19.3)
Purchase of common stock for the treasury, net - (1.3)
Proceeds from exercised stock options - 0.1
Other, net 4.6 1.5
-------- -------
Net cash provided by (used for) financing activites (2.9) 94.3
-------- -------
Effect of exchange rate changes on cash and cash equivalents (1.5) (1.8)
-------- -------
Net decrease in cash and cash equivalents ($22.4) ($4.8)
Cash and cash equivalents at beginning of year $156.5 $17.2
-------- -------
Cash and cash equivalents at end of period $134.1 $12.4
======== =======
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 6.
5
Note 1. BASIS OF PRESENTATION
- -----------------------------
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the
publicly-held parent holding company of Armstrong. AHI became the parent company
of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of
exchange under which each share of AWI was automatically exchanged for one share
of AHI. AHI was formed for purposes of the share exchange and holds no other
significant assets or operations apart from AWI and AWI's subsidiaries. Stock
certificates that formerly represented shares of AWI were automatically
converted into certificates representing the same number of shares of AHI. The
publicly-held debt of AWI was not affected in the transaction.
The accompanying condensed consolidated financial statements contain the
financial results of AHI. Financial statements of Armstrong are shown due to the
existence of publicly-traded debt. Since AHI was not a publicly traded company
and had no operations prior to May 1, 2000, the first quarter of 2000 results of
operations and financial condition of Armstrong are used for comparative
purposes. See Note 12 for discussion of the financial statement differences
between Armstrong Holdings, Inc. and Armstrong World Industries, Inc.
Operating results for the first quarter of 2001, compared with the corresponding
period of 2000 included in this report, are unaudited. However, these condensed
consolidated financial statements have been reviewed by AHI's independent public
accountants in accordance with established professional standards and procedures
for a limited review of interim financial information.
In February 2001, AHI determined to permanently exit the Textiles and Sports
Flooring segment and on February 20, 2001 entered into negotiations to sell
substantially all of the businesses comprising this segment to a private equity
investor based in Europe. Starting with the fourth quarter of 2000, this segment
has been classified as a discontinued operation. Prior year balances and results
have been reclassified to reflect the net assets and results of discontinued
operations.
In the fourth quarter of 2000, AHI applied the provisions of Emerging Issues
Task Force ("EITF") Issue No. 00-010, "Accounting for Shipping and Handling Fees
and Costs". Consequently, approximately $31.7 million of first quarter 2000
shipping and handling costs have been reclassified from net sales to cost of
goods sold. This change had no effect on gross margins or retained earnings as
of any date.
In accordance with EITF Issue No. 00-014, "Accounting for Certain Sales
Incentives", AHI reclassified certain sales incentives from Selling, General and
Administrative ("SG&A") expense to net sales (reducing both) by $0.3 million in
the first quarter of 2000. In accordance with EITF Issue No. 00-022, "Accounting
for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to Be Delivered in the Future,"
AHI reclassified sales volume incentives from SG&A expense to net sales
(reducing both) by $6.7 million in the first quarter of 2000.
The accounting policies used in preparing these statements are the same as those
used in preparing AHI's consolidated financial statements for the year ended
December 31, 2000. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in AHI's Form 10-K for the fiscal year ended December 31, 2000. In the
opinion of management, all adjustments of a normal recurring nature have been
included to provide a fair statement of the results for the reporting periods
presented. Quarterly results are not necessarily indicative of annual earnings.
The first quarters of the wood products segment ended on March 31, 2001 and
April 1, 2000. No events occurred between March 31, 2000 and April 1, 2000
materially affecting AHI's financial position or results of operations.
Note 2. CHAPTER 11 REORGANIZATION
- ---------------------------------
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief ("the Filing") under Chapter 11 of the U.S.
Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The
6
Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-
4470, and 00-4471 (the "Chapter 11 Case").
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing unless
specifically authorized by the Court. In addition, as a debtor-in-possession,
AWI has the right, subject to the Court's approval, to assume or reject any
executory contracts and unexpired leases in existence at the date of the Filing.
Parties having claims as a result of any such rejection may file claims with the
Court which will be dealt with as part of the Chapter 11 Case.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and, along with AWI's operating subsidiaries, are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 5, 2001,
and this date may be further extended by the Court.
Bar Date for Filing Claims
- --------------------------
In connection with the Chapter 11 Cases, the Court has set August 31, 2001 as
the last date by which holders of prepetition claims against the Debtors must
file their claims. Any holder of a claim that is required to file a claim by
such deadline and does not do so will be barred from asserting such claim
against any of the Debtors and will not participate in any distribution in any
of the Chapter 11 Cases on account of such claim. This deadline to file claims
does not apply to asbestos-related personal injury claims (other than a claim
for contribution, indemnity, reimbursement, or subrogation). A bar date for
asbestos-related personal injury claims has not been set.
Financing
- ---------
As of March 31, 2001, AWI had no outstanding debt borrowings under its $300
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$87.5 million of cash and cash equivalents in addition to cash held by its
non-debtor subsidiaries. AWI believes that the DIP Facility, together with cash
generated from operations, will be more than adequate to address its liquidity
needs. Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Case.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
AHI has implemented this guidance in the accompanying condensed consolidated
financial statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at March 31, 2001 and
December 31, 2000. Liabilities that may be affected by a plan of reorganization
are recorded at the expected amount of the allowed claims, even if they may be
settled for lesser amounts. Substantially all of AWI's prepetition debt, now in
default, is recorded at face value and is classified within liabilities subject
to compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the condensed consolidated balance sheet based upon
maturity date. AWI's
7
asbestos liability is also recorded in liabilities subject to compromise. See
Note 10 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs. Accordingly, AWI recorded a total of $3.0 million as
Chapter 11 reorganization costs in the first three months of 2001, consisting
of:
($ millions)
------------
Professional fees $ 5.8
Interest income, post petition (1.7)
Reductions to prepetition liabilities (1.9)
Other expenses directly related to bankruptcy, net 0.8
--------
Total Chapter 11 reorganization costs, net $3.0
====
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the condensed consolidated financial
statements.
Note 3. DISCONTINUED OPERATIONS
- -------------------------------
In February 2001, AHI determined to permanently exit the Textiles and Sports
Flooring segment and on February 20, 2001 entered into negotiations to sell
substantially all of the businesses comprising this segment to a private equity
investor based in Europe. Negotiations are still ongoing with the private equity
investor at this time. AHI expects to conclude negotiations sometime in the
second quarter of 2001 and will then be able to establish a likely closing date.
Starting with the fourth quarter of 2000, this segment has been classified as a
discontinued operation. Prior year balances and results have been reclassified
to reflect the net assets and results of discontinued operations. Based on the
expected net realizable value of the business, AHI recorded a pretax net loss of
$30.3 million in the fourth quarter of 2000, $19.5 million net of tax benefit.
AHI also recorded an additional loss of $3.3 million (with no tax benefit) in
the first quarter of 2001, as a result of price adjustments resulting from the
ongoing negotiations.
8
The following comprises the net assets of discontinued operations as of March
31, 2001 and December 31, 2000
(amounts in millions) March 31, 2001 December 31, 2000
-------------- -----------------
Cash $ 2.8 $ 2.6
Accounts receivable, net 46.3 52.5
Inventories, net 64.1 59.7
Property plant and equipment, net 63.0 67.5
Short-term and long-term debt (23.2) (29.8)
Accounts payable and accrued expenses (47.6) (54.0)
Pension liabilities (3.3) (3.3)
Other, net (15.9) (12.1)
Adjustment to net realizable value (37.8) (34.5)
------ ------
Net assets of discontinued operations $ 48.4 $ 48.6
====== =======
Note 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the condensed consolidated balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
expected amount of the allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of AHI subsidiaries not covered by the Filing remain
classified on the condensed consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 10 for further discussion of AWI's asbestos liability.
Liabilities subject to compromise at March 31, 2001 and December 31, 2000 are as
follows:
(amounts in millions) March 31, December 31,
2001 2000
---- ----
Debt (at face value) $ 1,400.7 $ 1,400.4
Asbestos-related liability 690.6 690.6
Prepetition trade payables 54.1 60.1
Prepetition other payables and accrued interest 72.4 76.4
ESOP loan guarantee 157.7 157.7
----- -----
Total liabilities subject to compromise $ 2,375.5 $ 2,385.2
========= =========
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Note 5. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions) Three months
ended March 31
Net sales to external customers 2001 2000
- ------------------------------- ---- ----
Floor coverings $291.1 $316.5
Building products 216.4 198.9
Wood products 209.0 219.9
----- -----
Total sales to external customers $ 716.5 $ 735.3
======= =======
Three months
ended March 31
Segment operating income (loss) 2001 2000
- ------------------------------- ---- ----
Floor coverings $20.2 $28.0
Building products 18.5 25.7
Wood products 9.7 17.9
All other - 0.2
------- ------
Total segment operating income 48.4 71.8
Unallocated corporate (expense) (7.4) (4.4)
--------- -----
Total consolidated operating income $ 41.0 $ 67.4
======= ======
9
March 31, December 31,
Segment assets 2001 2000
- -------------- ---- ----
Floor coverings $1,023.7 $981.0
Building products 557.3 568.5
Wood products 1,366.4 1,358.6
All other 16.1 16.1
------- --------
Total segment assets 2,963.5 2,924.2
Assets not assigned to business units 945.8 950.4
------- -----
Total consolidated assets $ 3,909.3 $ 3,874.6
========= =========
Note 6. INVENTORY
- ------------------
(amounts in millions) March 31, 2001 December 31, 2000
- --------------------- -------------- -----------------
Finished goods $ 231.2 $ 208.9
Goods in process 41.4 39.6
Raw materials and supplies 144.3 143.5
Less LIFO and other reserves (53.7) (51.8)
------ ------
Total inventories, net $ 363.2 $ 340.2
======= =======
Note 7. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals for the first three months of 2001 and 2000:
Beginning Cash Ending
(amounts in millions) balance payments Charges Other balance
------- -------- ------- ----- -------
2001 $21.4 ($4.3) $3.8 ($0.6) $20.3
2000 12.1 (1.8) - (0.2) 10.1
A $5.4 million pretax restructuring charge was recorded in the first quarter of
2001. The charge related to severance and enhanced retirement benefits for more
than 50 corporate and line-of-business salaried staff positions, as a result of
streamlining the organization, to reflect staffing needs for current business
conditions. This streamlining is expected to result in lower selling, general
and administrative expenses of approximately $4.9 million per year. Of the $5.4
million, $1.6 million represented a non-cash charge for enhanced retirement
benefits, which is accounted for as a reduction of the prepaid pension
asset.
The amount in "other" is primarily related to foreign currency translation.
Most of the remaining balance at March 31, 2001 relates to terminated employees
with extended payouts, the majority of which will be paid during 2001, and two
noncancelable operating leases, which extend through 2005 and 2017.
Note 8. DERIVATIVE FINANCIAL INSTRUMENTS
- ----------------------------------------
Effective January 1, 2001, AHI adopted Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), as
amended, which requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting FAS
133 as of January 1, 2001 was not material to AHI's financial statements.
AHI 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. AHI 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. AHI
continuously monitors developments in the capital markets and only enters into
currency and swap transactions with established counter-parties having
investment-grade ratings. Swap, forward and option contracts are entered into
for periods consistent with underlying exposure and do not constitute positions
independent of those exposures. AHI uses derivative financial instruments as
risk management tools and not for speculative trading purposes.
10
Interest Rate Risk - Due to AWI's Chapter 11 Filing, all affected debt has been
- ------------------
classified as liabilities subject to compromise. All such debt will be addressed
in the context of the Chapter 11 Case and during the pendency thereof, AWI does
not expect to pay any principal, interest or other payments in respect thereof.
However, AHI also has post-petition debt and debt of entities that were not a
part of the Chapter 11 filing. AHI managed its ratio of fixed to floating rate
debt with the objective of achieving a mix that management believed to be
appropriate. To manage this mix in a cost-effective manner, AHI, from time to
time, entered into interest rate swap agreements, in which it agreed to exchange
various combinations of fixed and/or variable interest rates based on
agreed-upon notional amounts. At December 31, 2000, AHI maintained a $20 million
interest rate swap. AHI received a fixed rate and paid a floating rate on this
swap. This interest rate swap agreement was terminated by the counter-party on
February 26, 2001. This agreement was classified as a fair value hedge, and its
impact on reported earnings was a $0.6 million gain in the first quarter of
2001, which was recorded within Chapter 11 reorganization costs.
Currency Rate Risk - AHI 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, AHI's global manufacturing
and sales provide a natural hedge of foreign currency exchange rate movement, as
foreign currency expenses generally offset foreign currency revenues. At March
31, 2001, AHI's major foreign currency exposures are to the Canadian dollar, the
euro and the British pound.
AHI has used 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 forecasted transactions and are
classified as cash flow hedges. These transactions allow AHI 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. Gains
and losses on these instruments are deferred in other comprehensive income until
the underlying transaction is recognized in earnings. The net fair value of
these instruments at March 31, 2001 was a $1.0 million asset, all of which is
expected to be charged to earnings in the next twelve months. The earnings
impact is reported in either net sales or cost of goods sold to match the
underlying transaction being hedged. The earnings impact of these hedges was
immaterial during the first quarter of 2001.
AHI also uses foreign currency forward exchange contracts to hedge exposures
created by cross-currency inter-company loans. The underlying inter-company
loans are classified as short-term and translation adjustments related to these
loans are recorded in other income. The related derivative contracts are
classified as fair value hedges and the offsetting gains and losses on these
contracts are also recorded in other income. The fair value of these instruments
at March 31, 2001 was a $2.7 million asset, all of which is expected to be
charged to earnings in the next twelve months. The earnings impact of these
hedges, recorded in other income, was a $7.3 million gain during the first
quarter of 2001 which substantially offsets the first quarter 2001 translation
adjustment of the underlying inter-company loans.
Commodity Price Risk - AHI purchases natural gas for use in the manufacture of
- --------------------
many of its products and, as a result, is exposed to movements in the price of
natural gas. AHI has a policy of minimizing cost volatility by purchasing
natural gas forward and option contracts. These market instruments are
designated as cash flow hedges. The mark-to-market gain or loss on qualifying
hedges is included in other comprehensive income to the extent effective, and
reclassified into cost of goods sold in the period during which the underlying
products are sold. The mark-to-market gains or losses on ineffective portions of
hedges are recognized in cost of products sold immediately. The fair value of
these instruments at March 31, 2001 was a $2.0 million asset, all of which is
expected to be charged to earnings in the next twelve months. The earnings
impact of these hedges, recorded in cost of goods sold, was a $2.2 million
expense during the first quarter of 2001. The earnings impact of the ineffective
portion of these hedges was immaterial during the first quarter of 2001.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Three Months Ended
March 31
2001 2000
---- ----
Interest paid $ 0.7 $ 25.3
Income taxes paid (refunded), net ($ 0.4) $ 9.9
11
Note 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- -------------------------------------------------------
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2000 Form 10-K filing for additional information.
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Note 2 for further discussion.
Asbestos Claims
- ---------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of claims through the Center for Claims Resolution (the "Center").
The Center had reached Strategic Settlement Program ("SSP") agreements with law
firms that covered approximately 130,000 claims that named AWI as a defendant.
As a result of the Filing, AWI's obligations with respect to these settlements
will be determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against AWI. In
addition, AWI ceased making payments with respect to asbestos claims, including
payments pursuant to the outstanding SSP agreements. A separate creditors'
committee representing the interests of asbestos claimants has been appointed in
the Chapter 11 Case.
AWI's present and future asbestos liability will be addressed in its Chapter 11
Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos
liability in one forum. It is anticipated that all present and future asbestos
claims will be resolved in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, 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,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The asbestos-related liability balance recorded at March 31, 2001 and
December 31, 2000 is $690.6 million, which is recorded in liabilities subject to
compromise. It is reasonably possible, however, that the actual liability could
be significantly higher than the recorded liability. As the Chapter 11 Case
proceeds there should be more clarity as to the extent of the liability.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of
12
the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted. On March 28, 2001, the surety filed an
amended complaint in the Court seeking similar relief. The Center has filed a
motion to dismiss the amended complaint. The Court has not yet ruled on the
Center's motion or the complaint. In addition, on April 27, 2001, AWI filed a
complaint and a motion with the Court seeking an order, among other things,
enjoining the Center from drawing on the bond or, in the event the Center is
permitted to draw on the bond, requiring that the proceeds of any such draw be
deposited into a Court-approved account subject to further order of the Court.
The Court has not yet ruled on these matters.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 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. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI'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 AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such 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.
During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR which were generally favorable to AWI on a number of
issues related to insurance coverage. However, during the third quarter of 2000,
it was determined that a new trial judge should be selected for the ADR. A new
trial judge has been selected but the new judge is not scheduled to hear motions
until June 2001. It is uncertain at this time if the new proceedings will have
any impact on the preliminary decisions of the initial phases of the ADR.
One of the carriers has been experiencing financial difficulties, which could
affect its ability to pay any ultimate judgment. AWI will continue to assess
this situation and will adjust its recorded asset when and if it determines that
the insurance receivable related to this carrier is no longer probable of
recovery.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of March 31, 2001 and December 31, 2000. Of the
total recorded asset at March 31, 2001, approximately $78.2 million represents
partial settlement for previous claims that will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.50%.
The total amount recorded reflects AWI's belief in the availability of insurance
in this amount, based upon AWI's success in insurance recoveries, recent
settlement agreements that provide such coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. Such 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, activities such
as settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the final determination of coverage shared with ACandS (a
former AWI subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $85 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly
13
related to the amount of the liability and could decrease if the final amount of
the liability decreases. Of the $268.3 million asset, $38.2 million has been
recorded as a current asset as of March 31, 2001 reflecting management's
estimate of the minimum insurance payments to be received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in the first quarter of 2001. In the first quarter of
2000, AWI paid $36.5 million for asbestos-related claims. AWI did not receive
any asbestos-related insurance recoveries during the first quarter of 2001 or
2000. During the pendency of the Chapter 11 Case, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation, the impact of the ADR proceedings on the insurance
asset and the financial condition of AWI's insurance carriers. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims or its previously recorded insurance asset. AWI will continue to review
its asbestos-related liability periodically, although it is likely that no
changes will be made to the liability until later in the Chapter 11 Case as
significant developments arise. It is reasonably possible that AWI's total
exposure to asbestos-related personal injury claims may be significantly
different than the recorded liability. Any adjustment to the estimated liability
or insurance asset could be material to the results of operations in the period
recorded.
Note 11. ENVIRONMENTAL LIABILITIES
- ----------------------------------
Liabilities of $13.1 million and $13.5 million were recorded at March 31, 2001
and December 31, 2000, respectively, for potential environmental liabilities
that AHI 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. Due to the
Chapter 11 Filing, $6.4 million of the March 31, 2001 and December 31, 2000
environmental liabilities are classified as prepetition liabilities subject to
compromise. 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 condensed 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 may vary from estimates, given
the inherent uncertainties in evaluating environmental liabilities. Subject to
the imprecision in estimating environmental remediation costs, AHI 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 periods.
Note 12. DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- ------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the condensed consolidated financial statements is
primarily due to transactions related to the formation of Armstrong Holdings,
Inc. and stock activity.
14
Note 13. SUBSEQUENT EVENT
On April 18, 2001, the Court approved AWI's motion to reject a lease for office
space that AWI had previously occupied as a tenant. However, the landlord has
filed a motion to alter or amend the order approving AWI's rejection of the
lease and revoke such approval. The Court has not rendered any decision with
respect to the landlord's motion. AHI had recorded a liability for this lease as
part of the third quarter 2000 restructuring actions and the remaining balance
as of March 31, 2001 was $7.6 million. Any reversal of this liability arising as
a result of rejecting the lease under Chapter 11 proceedings will be recorded in
Chapter 11 reorganization costs.
Note 14. EARNINGS PER SHARE
The difference between the average number of basic and diluted common shares
outstanding is due to contingently issuable shares and the effect of dilutive
stock options. Earnings per share components may not add due to rounding.
15
Independent Accountant's Review Report
--------------------------------------
The Board of Directors and Shareholders
Armstrong Holdings, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Armstrong Holdings, Inc., and subsidiaries as of March 31, 2001, and the related
condensed consolidated statements of earnings, cash flows and shareholders'
equity for the three-month periods ended March 31, 2001 and 2000. These
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the condensed consolidated financial statements, three of the Company's
domestic subsidiaries, including Armstrong World Industries, Inc., the Company's
major operating subsidiary, filed separate voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code in the United State Bankruptcy
Court on December 6, 2000. Armstrong World Industries, Inc. has also defaulted
on certain debt obligations. Although these operating subsidiaries are currently
operating their businesses as debtors-in-possession under the jurisdiction of
the Bankruptcy Court, the continuation of their businesses as going concerns is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
Bankruptcy Court. The filing under Chapter 11 and the resulting increased
uncertainty regarding the Company's potential asbestos liabilities, as discussed
in Note 10 of the condensed consolidated financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Armstrong Holdings, Inc., and subsidiaries as of December 31, 2000, and the
related consolidated statements of earnings, cash flows and shareholders' equity
for the year then ended (not presented herein); and in our report dated February
26, 2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2000, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Our report dated February 26, 2001, on the consolidated financial statements of
Armstrong Holdings, Inc., and subsidiaries as of and for the year ended December
31, 2000, also contains an explanatory paragraph that states that the filing
under Chapter 11 and the increased uncertainty regarding the Company's potential
asbestos liability raise substantial doubt about the Company's ability to
continue as a going concern. The condensed consolidated balance sheet as of
December 31, 2000, does not include any adjustments that might result from the
outcome of these uncertainties.
KPMG LLP
Philadelphia, Pennsylvania
May 4, 2001
16
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(amounts in millions)
Unaudited
Three Months Ended
March 31
--------
2001 2000
---- ----
Net sales $716.5 $735.3
Cost of goods sold 538.1 527.5
-------- --------
Gross profit 178.4 207.8
Selling, general and administrative expenses 130.7 139.1
Restructuring and reorganization charges 5.4 -
Goodwill amortization 5.7 6.0
Equity (earnings) from affiliates, net (4.4) (4.7)
-------- --------
Operating income 41.0 67.4
Interest expense (unrecorded contractual interest of $21.4 in 2001) 3.1 25.9
Other (income) expense, net (3.9) 0.6
-------- --------
Earnings from continuing operations before Chapter 11 reorganization costs
and income tax expense 41.8 40.9
Chapter 11 reorganization costs, net 3.0 -
-------- --------
Earnings from continuing operations before income tax expense 38.8 40.9
Income tax expense 15.2 15.9
-------- --------
Earnings from continuing operations $23.6 $25.0
-------- --------
Income from discontinued operations, net of tax of $2.9 - 5.7
Net (loss) on expected disposal of discontinued operations, net of tax of $0.0 (3.3) -
-------- --------
Earnings (loss) from discontinued operations (3.3) 5.7
-------- --------
Net earnings $20.3 $30.7
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 21.
17
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions except share data)
Unaudited
Assets March 31, 2001 December 31, 2000
------ -------------- -----------------
Current assets:
Cash and cash equivalents $134.1 $156.5
Accounts and notes receivable, net 373.8 316.5
Inventories, net 363.2 340.2
Deferred income taxes 9.5 9.8
Net assets of discontinued operations 48.4 48.6
Other current assets 84.3 72.3
---------- ----------
Total current assets 1,013.3 943.9
Property, plant and equipment, less accumulated depreciation and
amortization of $1,021.6 and $1,006.4, respectively 1,233.4 1,253.5
Insurance receivable for asbestos-related liabilities, noncurrent 230.1 236.1
Investment in affiliates 36.4 37.3
Goodwill, net 836.0 846.0
Other intangibles, net 90.1 91.9
Deferred income tax assets, noncurrent 14.5 22.5
Other noncurrent assets 455.5 443.3
---------- ----------
Total assets $3,909.3 $3,874.5
========== ==========
Liabilities and Shareholder's Equity
------------------------------------
Current liabilities:
Short-term debt $11.3 $16.6
Current installments of long-term debt 6.9 8.1
Accounts payable and accrued expenses 266.9 238.0
Short-term amounts due to affiliates 4.3 -
Income taxes 38.3 30.0
---------- ----------
Total current liabilities 327.7 292.7
---------- ----------
Liabilities subject to compromise 2,380.5 2,390.2
Long-term debt, less current installments 54.7 56.8
Postretirement and postemployment benefit liabilities 243.9 243.6
Pension benefit liabilities 149.0 154.7
Other long-term liabilities 68.0 71.1
Minority interest in subsidiaries 7.0 6.9
---------- ----------
Total noncurrent liabilities 2,903.1 2,923.3
Shareholder's 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 173.4 173.4
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,169.4 1,149.1
Accumulated other comprehensive loss (45.5) (45.2)
Treasury stock (528.5) (528.5)
---------- ----------
Total shareholder's equity 678.5 658.5
---------- ----------
Total liabilities and shareholder's equity $3,909.3 $3,874.5
========== ==========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 21.
18
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholder's Equity
(amounts in millions except per share data)
Unaudited
2001 2000
---- ----
Common stock, $1 par value:
- ---------------------------
Balance at beginning of year and March 31 $ 51.9 $ 51.9
--------- ---------
Capital in excess of par value:
- -------------------------------
Balance at beginning of year $ 173.4 $ 176.4
Stock issuances and other - 4.2
--------- ---------
Balance at March 31 $ 173.4 $ 180.6
--------- ---------
Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $ (142.2) $ (190.3)
Accrued compensation - 4.9
--------- ---------
Balance at March 31 $ (142.2) (185.4)
--------- ---------
Retained earnings:
- ------------------
Balance at beginning of year $1,149.1 $1,196.2
Net earnings for three months 20.3 $ 20.3 30.7 $ 30.7
Tax benefit on dividends paid on unallocated ESOP common shares - 0.3
--------- ---------
Total $1,169.4 $1,227.2
Less common stock dividends - 19.3
--------- ---------
Balance at March 31 $1,169.4 $1,207.9
--------- ---------
Accumulated other comprehensive income (loss):
- ----------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5)
Foreign currency translation adjustments (2.9) (5.2)
Derivative gain, net 0.7 -
Minimum pension liability adjustments 1.9 -
--------- ---------
Total other comprehensive (loss) (0.3) (0.3) (5.2) (5.2)
--------- -------- --------- --------
Balance at March 31 $ (45.5) $ (21.7)
--------- ---------
Comprehensive income $ 20.0 $ 25.5
- -------------------- ======== ========
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 528.5 $ 538.5
Stock issuance activity, net - (0.6)
--------- ---------
Balance at March 31 $ 528.5 $ 537.9
--------- ---------
Total shareholder's equity $ 678.5 $ 695.4
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 21.
19
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Three Months Ended
March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $20.3 $30.7
Adjustments to reconcile net earnings to net cash
used for operating activities:
Depreciation and amortization, continuing operations 37.3 38.6
Depreciation and amortization, discontinued operations - 3.4
Loss on expected disposal of discontinued operations 3.3 -
Deferred income taxes 8.3 5.0
Equity earnings from affiliates, net (4.4) (4.7)
Chapter 11 reorganization costs, net 3.0 -
Chapter 11 reorganization costs paid (0.6) -
Restructuring and reorganization charges 5.4 -
Restructuring and reorganization payments (4.3) (1.8)
Payments for asbestos-related claims, net of recoveries - (36.5)
Decrease in net assets of discontinued operations 0.2 3.1
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring and dispositions
Increase in receivables (63.5) (42.6)
Increase in inventories (30.3) (23.3)
(Increase)/decrease in other current assets (6.4) 15.0
Increase in other noncurrent assets (13.1) (20.1)
Increase/(decrease) in accounts payable and accrued expenses 37.6 (55.0)
Increase in income taxes payable 6.6 1.3
Increase/(decrease) in other long-term liabilities (2.8) 16.0
Other, net 2.8 (1.1)
-------- --------
Net cash used for operating activities (0.6) (72.0)
-------- --------
Cash flows used for investing activities:
Purchases of property, plant and equipment, continuing operations (19.9) (28.1)
Purchases of property, plant and equipment, discontinued operations (1.1) (2.7)
Investment in computer software (1.9) (1.8)
Distributions from equity affiliates 5.0 5.0
Proceeds from the sale of assets 0.5 2.3
-------- --------
Net cash used for investing activities (17.4) (25.3)
-------- --------
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (4.3) 117.6
Payments of long-term debt (3.2) (4.3)
Cash dividends paid - (19.3)
Purchase of common stock for the treasury, net - (1.3)
Proceeds from exercised stock options - 0.1
Other, net 4.6 1.5
-------- --------
Net cash provided by (used for) financing activities (2.9) 94.3
-------- --------
Effect of exchange rate changes on cash and cash equivalents (1.5) (1.8)
-------- --------
Net decrease in cash and cash equivalents ($22.4) ($4.8)
Cash and cash equivalents at beginning of year $156.5 $17.2
-------- --------
Cash and cash equivalents at end of period $134.1 $12.4
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 21.
20
Note 1. BASIS OF PRESENTATION
- -----------------------------
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the
publicly-held parent holding company of Armstrong. AHI became the parent company
of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of
exchange under which each share of AWI was automatically exchanged for one share
of AHI. AHI was formed for purposes of the share exchange and holds no other
significant assets or operations apart from AWI and AWI's subsidiaries. Stock
certificates that formerly represented shares of AWI were automatically
converted into certificates representing the same number of shares of AHI. The
publicly-held debt of AWI was not affected in the transaction.
The accompanying condensed consolidated financial statements contain the
financial results of Armstrong. Financial statements of Armstrong are shown due
to the existence of publicly-traded debt. See Note 12 for discussion of the
financial statement differences between Armstrong Holdings, Inc. and Armstrong
World Industries, Inc.
Operating results for the first quarter of 2001, compared with the corresponding
period of 2000 included in this report, are unaudited.
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001 entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. Starting with the fourth quarter of 2000, this
segment has been classified as a discontinued operation. Prior year balances and
results have been reclassified to reflect the net assets and results of
discontinued operations.
In the fourth quarter of 2000, Armstrong applied the provisions of Emerging
Issues Task Force ("EITF") Issue No. 00-010, "Accounting for Shipping and
Handling Fees and Costs". Consequently, approximately $31.7 million of first
quarter 2000 shipping and handling costs have been reclassified from net sales
to cost of goods sold. This change had no effect on gross margins or retained
earnings as of any date.
In accordance with EITF Issue No. 00-014, "Accounting for Certain Sales
Incentives", Armstrong reclassified certain sales incentives from Selling,
General and Administrative ("SG&A") expense to net sales (reducing both) by $0.3
million in the first quarter of 2000. In accordance with EITF Issue No. 00-022,
"Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future," Armstrong reclassified sales volume incentives from SG&A expense to
net sales (reducing both) by $6.7 million in the first quarter of 2000.
The accounting policies used in preparing these statements are the same as those
used in preparing Armstrong's consolidated financial statements for the year
ended December 31, 2000. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in Armstrong's Form 10-K for the fiscal year ended
December 31, 2000. In the opinion of management, all adjustments of a normal
recurring nature have been included to provide a fair statement of the results
for the reporting periods presented. Quarterly results are not necessarily
indicative of annual earnings. The first quarters of the wood products segment
ended on March 31, 2001 and April 1, 2000. No events occurred between March 31,
2000 and April 1, 2000 materially affecting Armstrong's financial position or
results of operations.
Note 2. CHAPTER 11 REORGANIZATION
- ---------------------------------
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief ("the Filing") under Chapter 11 of the U.S.
Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
21
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing unless
specifically authorized by the Court. In addition, as a debtor-in-possession,
AWI has the right, subject to the Court's approval, to assume or reject any
executory contracts and unexpired leases in existence at the date of the Filing.
Parties having claims as a result of any such rejection may file claims with the
Court which will be dealt with as part of the Chapter 11 Case.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and, along with AWI's operating subsidiaries, are the only
material asset of Armstrong. Generally, under the provisions of the Bankruptcy
Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan which permits holders of
equity interests to participate. The formulation and implementation of a plan of
reorganization in the Chapter 11 Case could take a significant period of time.
Currently, AWI has the exclusive right to file a plan of reorganization until
October 5, 2001, and this date may be further extended by the Court.
Bar Date for Filing Claims
- --------------------------
In connection with the Chapter 11 Cases, the Court has set August 31, 2001 as
the last date by which holders of prepetition claims against the Debtors must
file their claims. Any holder of a claim that is required to file a claim by
such deadline and does not do so will be barred from asserting such claim
against any of the Debtors and will not participate in any distribution in any
of the Chapter 11 Cases on account of such claim. This deadline to file claims
does not apply to asbestos-related personal injury claims (other than a claim
for contribution, indemnity, reimbursement, or subrogation). A bar date for
asbestos-related personal injury claims has not been set.
Financing
- ---------
As of March 31, 2001, AWI had no outstanding debt borrowings under its $300
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$87.5 million of cash and cash equivalents in addition to cash held by its
non-debtor subsidiaries. AWI believes that the DIP Facility, together with cash
generated from operations, will be more than adequate to address its liquidity
needs. Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Case.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying condensed
consolidated financial statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at March 31, 2001 and
December 31, 2000. Liabilities that may be affected by a plan of reorganization
are recorded at the expected amount of the allowed claims, even if they may be
settled for lesser amounts. Substantially all of AWI's prepetition debt, now in
default, is recorded at face value and is classified within liabilities subject
to compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the condensed consolidated balance sheet based upon
maturity date. AWI's asbestos liability is also recorded in liabilities subject
to compromise. See Note 10 for further discussion of AWI's asbestos liability.
22
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs. Accordingly, AWI recorded a total of $3.0 million as
Chapter 11 reorganization costs in the first three months of 2001, consisting
of:
($ millions)
------------
Professional fees $ 5.8
Interest income, post petition (1.7)
Reductions to prepetition liabilities (1.9)
Other expenses directly related to bankruptcy, net 0.8
-----
Total Chapter 11 reorganization costs, net $3.0
====
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the condensed consolidated financial
statements.
Note 3. DISCONTINUED OPERATIONS
- -------------------------------
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001 entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. Negotiations are still ongoing with the private
equity investor as this time. Armstrong expects to conclude negotiations
sometime in the second quarter of 2001 and will then be able to establish a
likely closing date. Starting with the fourth quarter of 2000, this segment has
been classified as a discontinued operation. Prior year balances and results
have been reclassified to reflect the net assets and results of discontinued
operations. Based on the expected net realizable value of the business,
Armstrong recorded a pretax net loss of $30.3 million in the fourth quarter of
2000, $19.5 million net of tax benefit. Armstrong also recorded an additional
loss of $3.3 million (with no tax benefit) in the first quarter of 2001, as a
result of price adjustments resulting from the ongoing negotiations.
The following comprises the net assets of discontinued operations as of March
31, 2001 and December 31, 2000.
(amounts in millions) March 31, 2001 December 31, 2000
-------------- -----------------
Cash $ 2.8 $ 2.6
Accounts receivable, net 46.3 52.5
Inventories, net 64.1 59.7
Property plant and equipment, net 63.0 67.5
Short-term and long-term debt (23.2) (29.8)
Accounts payable and accrued expenses (47.6) (54.0)
Pension liabilities (3.3) (3.3)
Other, net (15.9) (12.1)
Adjustment to net realizable value (37.8) (34.5)
------ ------
Net assets of discontinued operations $ 48.4 $ 48.6
====== =======
Note 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the condensed
23
consolidated balance sheet. Liabilities that may be affected by a plan of
reorganization are recorded at the expected amount of the allowed claims, even
if they may be settled for lesser amounts. Substantially all of AWI's
prepetition debt, now in default, is recorded at face value and is classified
within liabilities subject to compromise. Obligations of Armstrong subsidiaries
not covered by the Filing remain classified on the condensed consolidated
balance sheet based upon maturity date. AWI's asbestos liability is also
recorded in liabilities subject to compromise. See Note 10 for further
discussion of AWI's asbestos liability.
Liabilities subject to compromise at March 31, 2001 and December 31, 2000 are as
follows:
(amounts in millions) March 31, December 31,
2001 2000
---- ----
Debt (at face value) $ 1,400.7 $ 1,400.4
Asbestos-related liability 690.6 690.6
Prepetition trade payables 54.1 60.1
Prepetition other payables and accrued interest 72.4 76.4
ESOP loan guarantee 157.7 157.7
Amounts due to affiliates 5.0 5.0
--- ---
Total liabilities subject to compromise $ 2,380.5 $ 2,390.2
========= =========
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Note 5. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions) Three months
ended March 31
Net sales to external customers 2001 2000
- ------------------------------- ---- ----
Floor coverings $291.1 $316.5
Building products 216.4 198.9
Wood products 209.0 219.9
----- -----
Total sales to external customers $ 716.5 $ 735.3
======= =======
Three months
ended March 31
Segment operating income (loss) 2001 2000
- ------------------------------- ---- ----
Floor coverings $20.2 $28.0
Building products 18.5 25.7
Wood products 9.7 17.9
All other - 0.2
------- ------
Total segment operating income 48.4 71.8
Unallocated corporate (expense) (7.4) (4.4)
----- -----
Total consolidated operating income $ 41.0 $ 67.4
======= ======
March 31, December 31,
Segment assets 2001 2000
- -------------- ---- ----
Floor coverings $ 1,023.7 $981.0
Building products 557.3 568.5
Wood products 1,366.4 1,358.6
All other 16.1 16.1
----- --------
Total segment assets 2,963.5 2,924.2
Assets not assigned to business units 945.8 950.3
----- -----
Total consolidated assets $ 3,909.3 $ 3,874.5
========= =========
24
Note 6. INVENTORY
- ------------------
(amounts in millions) March 31, 2001 December 31, 2000
- --------------------- -------------- -----------------
Finished goods $ 231.2 $ 208.9
Goods in process 41.4 39.6
Raw materials and supplies 144.3 143.5
Less LIFO and other reserves (53.7) (51.8)
------ ------
Total inventories, net $ 363.2 $ 340.2
======= =======
Note 7. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals for the first three months of 2001 and 2000:
Beginning Cash Ending
(amounts in millions) balance payments Charges Other balance
------- -------- ------- ----- -------
2001 $21.4 ($4.3) $3.8 ($0.6) $20.3
2000 12.1 (1.8) - (0.2) 10.1
A $5.4 million pretax restructuring charge was recorded in the first quarter of
2001. The charge related to severance and enhanced retirement benefits for more
than 50 corporate and line-of-business salaried staff positions, as a result of
streamlining the organization, to reflect staffing needs for current business
conditions. This streamlining is expected to result in lower selling, general
and administrative expenses of approximately $4.9 million per year. Of the $5.4
million, $1.6 million represented a non-cash charge for enhanced retirement
benefits, which is accounted for as a reduction of the prepaid pension
asset.
The amount in "other" is primarily related to foreign currency translation.
Most of the remaining balance at March 31, 2001 relates to terminated employees
with extended payouts, the majority of which will be paid during 2001, and two
noncancelable operating leases, which extend through 2005 and 2017.
Note 8. DERIVATIVE FINANCIAL INSTRUMENTS
- ----------------------------------------
Effective January 1, 2001, Armstrong adopted Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
as amended, which requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting FAS
133 as of January 1, 2001 was not material to Armstrong's financial statements.
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. Armstrong continuously monitors developments in the capital
markets and only enters into currency and swap transactions with established
counter-parties having investment-grade ratings. 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.
Interest Rate Risk - Due to AWI's Chapter 11 Filing, all affected debt has been
- ------------------
classified as liabilities subject to compromise. All such debt will be addressed
in the context of the Chapter 11 Case and during the pendency thereof, AWI does
not expect to pay any principal, interest or other payments in respect thereof.
However, Armstrong also has post-petition debt and debt of entities that were
not a part of the Chapter 11 filing. Armstrong managed its ratio of fixed to
floating rate debt with the objective of achieving a mix that management
believed to be appropriate. To manage this mix in a cost-effective manner,
Armstrong, from time to time, entered into interest rate swap agreements, in
which it agreed to exchange various combinations of fixed and/or variable
interest rates based on agreed-upon notional amounts. At December 31, 2000,
Armstrong maintained a $20 million interest rate swap. Armstrong received a
fixed
25
rate and paid a floating rate on this swap. This interest rate swap agreement
was terminated by the counter-party on February 26, 2001. This agreement was
classified as a fair value hedge, and its impact on reported earnings was a $0.6
million gain in the first quarter of 2001, which was recorded within Chapter 11
reorganization costs.
Currency Rate Risk - 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 expenses generally offset foreign currency
revenues. At March 31, 2001, Armstrong's major foreign currency exposures are to
the Canadian dollar, the euro and the British pound.
Armstrong has used 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 forecasted
transactions and are classified as cash flow hedges. 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. Gains and losses on these instruments are deferred in
other comprehensive income until the underlying transaction is recognized in
earnings. The net fair value of these instruments at March 31, 2001 was a $1.0
million asset, all of which is expected to be charged to earnings in the next
twelve months. The earnings impact is reported in either net sales or cost of
goods sold to match the underlying transaction being hedged. The earnings impact
of these hedges was immaterial during the first quarter of 2001.
Armstrong also uses foreign currency forward exchange contracts to hedge
exposures created by cross-currency inter-company loans. The underlying
inter-company loans are classified as short-term and translation adjustments
related to these loans are recorded in other income. The related derivative
contracts are classified as fair value hedges and the offsetting gains and
losses on these contracts are also recorded in other income. The fair value of
these instruments at March 31, 2001 was a $2.7 million asset, all of which is
expected to be charged to earnings in the next twelve months. The earnings
impact of these hedges, recorded in other income, was a $7.3 million gain during
the first quarter of 2001 which substantially offsets the first quarter 2001
translation adjustment of the underlying inter-company loans.
Commodity Price Risk - Armstrong purchases natural gas for use in the
- --------------------
manufacture of many of its products 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 forward and option contracts. These market instruments
are designated as cash flow hedges. The mark-to-market gain or loss on
qualifying hedges is included in other comprehensive income to the extent
effective, and reclassified into cost of goods sold in the period during which
the underlying products are sold. The mark-to-market gains or losses on
ineffective portions of hedges are recognized in cost of products sold
immediately. The fair value of these instruments at March 31, 2001 was a $2.0
million asset, all of which is expected to be charged to earnings in the next
twelve months. The earnings impact of these hedges, recorded in cost of goods
sold, was a $2.2 million expense during the first quarter of 2001. The earnings
impact of the ineffective portion of these hedges was immaterial during the
first quarter of 2001.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Three Months Ended
March 31
2001 2000
---- ----
Interest paid $ 0.7 $ 25.3
Income taxes paid (refunded), net ($ 0.4) $ 9.9
Note 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- -------------------------------------------------------
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2000 Form 10-K filing for additional information.
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of
26
the U.S. Bankruptcy Code to use the court supervised reorganization process to
achieve a fair and final resolution of its asbestos liability. See Note 2 for
further discussion.
Asbestos Claims
- ---------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of claims through the Center for Claims Resolution (the "Center").
The Center had reached Strategic Settlement Program ("SSP") agreements with law
firms that covered approximately 130,000 claims that named AWI as a defendant.
As a result of the Filing, AWI's obligations with respect to these settlements
will be determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against AWI. In
addition, AWI ceased making payments with respect to asbestos claims, including
payments pursuant to the outstanding SSP agreements. A separate creditors'
committee representing the interests of asbestos claimants has been appointed in
the Chapter 11 Case.
AWI's present and future asbestos liability will be addressed in its Chapter 11
Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos
liability in one forum. It is anticipated that all present and future asbestos
claims will be resolved in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, 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,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The asbestos-related liability balance recorded at March 31, 2001 and
December 31, 2000 is $690.6 million, which is recorded in liabilities subject to
compromise. It is reasonably possible, however, that the actual liability could
be significantly higher than the recorded liability. As the Chapter 11 Case
proceeds there should be more clarity as to the extent of the liability.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted. On March 28, 2001, the surety filed an
amended complaint in the Court seeking similar relief. The Center has filed a
motion to dismiss the amended complaint. The Court has not yet ruled on the
Center's motion or on the complaint. In addition, on April 27, 2001, AWI filed a
complaint and a motion with the Court seeking an order, among other things,
enjoining the Center from drawing on the bond or, in the event the Center is
27
permitted to draw on the bond, requiring that the proceeds of any such draw be
deposited into a Court-approved account subject to further order of the Court.
The Court has not yet ruled on these matters.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 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. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI'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 AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such 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.
During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR which were generally favorable to AWI on a number of
issues related to insurance coverage. However, during the third quarter of 2000,
it was determined that a new trial judge should be selected for the ADR. A new
trial judge has been selected but the new judge is not scheduled to hear motions
until June 2001. It is uncertain at this time if the new proceedings will have
any impact on the preliminary decisions of the initial phases of the ADR.
One of the carriers has been experiencing financial difficulties, which could
affect its ability to pay any ultimate judgment. AWI will continue to assess
this situation and will adjust its recorded asset when and if it determines that
the insurance receivable related to this carrier is no longer probable of
recovery.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of March 31, 2001 and December 31, 2000. Of the
total recorded asset at March 31, 2001, approximately $78.2 million represents
partial settlement for previous claims that will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.50%.
The total amount recorded reflects AWI's belief in the availability of insurance
in this amount, based upon AWI's success in insurance recoveries, recent
settlement agreements that provide such coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. Such 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, activities such
as settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the final determination of coverage shared with ACandS (a
former AWI subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $85 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $38.2 million has been recorded as a current asset as
of March 31, 2001 reflecting management's estimate of the minimum insurance
payments to be received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be
28
delayed, pending further clarification as to the asbestos liability. While AWI
believes the Chapter 11 process will strengthen its position on resolving
disputed insurance and may therefore result in higher settlement amounts than
recorded, there has been no change in the recorded amounts due to the
uncertainties created by the Filing. Accordingly, this asset could also change
significantly based upon events which occur in the Court. Management estimates
that the timing of future cash payments for the remainder of the recorded asset
may extend beyond 10 years.
Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in the first quarter of 2001. In the first quarter of
2000, AWI paid $36.5 million for asbestos-related claims. AWI did not receive
any asbestos-related insurance recoveries during the first quarter of 2001 or
2000. During the pendency of the Chapter 11 Case, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation, the impact of the ADR proceedings on the insurance
asset and the financial condition of AWI's insurance carriers. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims or its previously recorded insurance asset. AWI will continue to review
its asbestos-related liability periodically, although it is likely that no
changes will be made to the liability until later in the Chapter 11 Case as
significant developments arise. It is reasonably possible that AWI's total
exposure to asbestos-related personal injury claims may be significantly
different than the recorded liability. Any adjustment to the estimated liability
or insurance asset could be material to the results of operations in the period
recorded.
Note 11. ENVIRONMENTAL LIABILITIES
- ----------------------------------
Liabilities of $13.1 million and $13.5 million were recorded at March 31, 2001
and December 31, 2000, respectively, 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. Due to the
Chapter 11 Filing, $6.4 million of the March 31, 2001 and December 31, 2000
environmental liabilities are classified as prepetition liabilities subject to
compromise. 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 condensed 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 may vary from 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
periods.
Note 12. DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- ------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the condensed consolidated financial statements is
primarily due to transactions related to the formation of Armstrong Holdings,
Inc. and stock activity.
Note 13. SUBSEQUENT EVENT
- -------------------------
On April 18, 2001, the Court approved AWI's motion to reject a lease for office
space that AWI had previously occupied as a tenant. However, the landlord has
filed a motion to alter or amend the order approving AWI's rejection of the
lease and revoke such approval. The Court has not rendered any decision with
respect to the landlord's motion. Armstrong had recorded a liability for
this lease as part of the third quarter 2000 restructuring actions and the
remaining balance as of March 31, 2001 was $7.6 million. Any reversal of this
liability as a result of rejecting the lease under Chapter 11 proceedings will
be recorded in Chapter 11 reorganization costs.
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis correspond to Armstrong Holdings, Inc. See
Notes 1, 2, 3 and 12 to the unaudited condensed consolidated financial
statements for further discussion.
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief ("the Filing") under Chapter 11 of the U.S.
Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
AWI is operating its business and managing its properties as a debtor-in-
possession subject to the provisions of the Bankruptcy Code. Pursuant to the
provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or
obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing unless
specifically authorized by the Court. In addition, as a debtor-in-possession,
AWI has the right, subject to the Court's approval, to assume or reject any
executory contracts and unexpired leases in existence at the date of the Filing.
Parties having claims as a result of any such rejection may file claims with the
Court which will be dealt with as part of the Chapter 11 Case.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Case.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and, along with AWI's operating subsidiaries, are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 5, 2001,
and this date may be further extended by the Court.
Bar Date for Filing Claims
- --------------------------
In connection with the Chapter 11 Cases, the Court has set August 31, 2001 as
the last date by which holders of prepetition claims against the Debtors must
file their claims. Any holder of a claim that is required to file a claim by
such deadline and does not do so will be barred from asserting such claim
against any of the Debtors and will not participate in any distribution in any
of the Chapter 11 Cases on account of such claim. This deadline to file claims
does not apply to asbestos-related personal injury claims (other than a claim
for contribution, indemnity, reimbursement, or subrogation). A bar date for
asbestos-related personal injury claims has not been set.
Financing
- ---------
As of March 31, 2001, AWI had no outstanding debt borrowings under its $300
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$87.5 million of cash and cash equivalents in addition to cash held by its
non-debtor subsidiaries. AWI believes that the DIP Facility, together with cash
generated from operations, will be more than adequate to address its liquidity
needs. Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Case.
30
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying condensed
consolidated financial statements.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
Discontinued Operations
- -----------------------
In February 2001, AHI determined to permanently exit the Textiles and Sports
Flooring segment and on February 20, 2001 entered into negotiations to sell
substantially all of the businesses comprising this segment to a private equity
investor based in Europe. Negotiations are still ongoing with the private equity
investor at this time. AHI expects to conclude negotiations sometime in the
second quarter of 2001 and will then be able to establish a likely closing date.
Starting with the fourth quarter of 2000, this segment has been classified as a
discontinued operation. Prior year balances and results have been reclassified
to reflect the net assets and results of discontinued operations. Based on the
expected net realizable value of the business, AHI recorded a pretax net loss of
$30.3 million in the fourth quarter of 2000, $19.5 million net of tax benefit,
and a further loss of $3.3 million (with no tax benefit) in the first quarter of
2001 as a result of price adjustments resulting from the ongoing negotiations.
Other Divestitures
- ------------------
On July 31, 2000, AHI completed the sale of its Installation Products Group
("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million in
cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $44.1 million ($60.2 million pretax) or $1.09 per share in 2000 and was
recorded in other income. The financial results of IPG were reported as part of
the floor coverings segment. The proceeds and gain are subject to a post-closing
working capital adjustment, which AHI expects to finalize during 2001.
Financial Condition
- -------------------
As shown on the condensed Consolidated Balance Sheets (see page 3), AHI had cash
and cash equivalents of $134.1 million at March 31, 2001. Working capital was
$691.4 million as of March 31, 2001, $38.6 million higher than the $652.8
million recorded at the end of 2000. The ratio of current assets to current
liabilities was 3.15 to 1 as of March 31, 2001, compared with 3.24 to 1 as of
December 31, 2000.
Long-term debt, excluding AHI's guarantee of an ESOP loan and debt subject to
compromise, decreased in the first quarter of 2001. At March 31, 2001, long-term
debt of $54.7 million, or 7.2 percent of total capital, compared with $56.8
million, or 7.6 percent of total capital, at the end of 2000. At March 31, 2001,
and December 31, 2000, the ratios of total debt (excluding debt subject to
compromise) as a percent of total capital were 9.6 percent and 10.9 percent,
respectively. Given the current accounting of liabilities as subject to
compromise, the comparison to historical numbers is not meaningful.
As shown on the condensed Consolidated Statements of Cash Flows (see page 5),
net cash used for operating activities for the three months ended March 31,
2001, was $0.6 million compared with net cash used of $72.0 million for the
comparable period in 2000. The decrease was primarily due to the absence of
payments for asbestos-related claims in 2001 as compared to $36.5 million in the
first quarter of 2000, and changes in working capital, primarily accounts
payable and accrued expenses.
Net cash used for investing activities was $17.4 million for the three months
ended March 31, 2001, compared with net cash used of $25.3 million for the three
months ended March 31, 2000. The decrease was primarily due to higher purchases
of property, plant and equipment in 2000 versus 2001.
Net cash used for financing activities was $2.9 million for the three months
ended March 31, 2001 compared with net cash provided by financing activities of
$94.3 million for the three months ended March 31, 2000. The decrease was
primarily due to a $113.3 million net increase in debt in the first three months
of 2000.
31
DIP Facility
- ------------
The Court has approved a $300 million debtor-in-possession financing facility
provided by a bank group led by The Chase Manhattan Bank. Borrowings under the
DIP Facility constitute superpriority administrative expense claims in the
Chapter 11 Cases. As of March 31, 2001, AWI had no debt borrowings under the DIP
Facility compared with borrowings of $5.0 million as of December 31, 2000. The
DIP Facility expires no later than December 6, 2002 and borrowings are limited
to an adjusted amount of receivables, inventories and property, plant and
equipment. Depending on the amount of borrowings, the DIP Facility carries an
interest rate range of either Chase's Alternate Base Rate plus 50 basis points
to 100 basis points or LIBOR plus 150 basis points to 200 basis points. The DIP
Facility also contains several covenants including, among other things, limits
on asset sales, capital expenditures and a required ratio of debt to cash flow.
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2000 Form 10-K filing for additional information.
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Note 2 for further discussion.
Asbestos Claims
- ---------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of claims through the Center for Claims Resolution (the "Center").
The Center had reached Strategic Settlement Program ("SSP") agreements with law
firms that covered approximately 130,000 claims that named AWI as a defendant.
As a result of the Filing, AWI's obligations with respect to these settlements
will be determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against AWI. In
addition, AWI ceased making payments with respect to asbestos claims, including
payments pursuant to the outstanding SSP agreements. A separate creditors'
committee representing the interests of asbestos claimants has been appointed in
the Chapter 11 Case.
AWI's present and future asbestos liability will be addressed in its Chapter 11
Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos
liability in one forum. It is anticipated that all present and future asbestos
claims will be resolved in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, 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,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the
32
increased uncertainty created as a result of the Filing, no change has been made
to the previously recorded liability except to record payments of $68.2 million
against that accrual in October and November 2000. The asbestos-related
liability balance recorded at March 31, 2001 and December 31, 2000 is $690.6
million, which is recorded in liabilities subject to compromise. It is
reasonably possible, however, that the actual liability could be significantly
higher than the recorded liability. As the Chapter 11 Case proceeds there should
be more clarity as to the extent of the liability.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted. On March 28, 2001, the surety filed an
amended complaint in the Court seeking similar relief. The Center has filed a
motion to dismiss the amended complaint. The Court has not yet ruled on the
Center's motion or on the complaint. In addition, on April 27, 2001, AWI filed a
complaint and a motion with the Court seeking an order, among other things,
enjoining the Center from drawing on the bond or, in the event the Center is
permitted to draw on the bond, requiring that the proceeds of any such draw be
deposited into a Court-approved account subject to further order of the Court.
The Court has not yet ruled on these matters.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 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. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI'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 AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such 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.
During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR which were generally favorable to AWI on a number of
issues related to insurance coverage. However, during the third quarter of 2000,
it was determined that a new trial judge should be selected for the ADR. A new
trial judge has been selected but the new judge is not scheduled to hear motions
until June 2001. It is uncertain at this time if the new proceedings will have
any impact on the preliminary decisions of the initial phases of the ADR.
One of the carriers has been experiencing financial difficulties, which could
affect its ability to pay any ultimate judgment. AWI will continue to assess
this situation and will adjust its recorded asset when and if it determines that
the insurance receivable related to this carrier is no longer probable of
recovery.
33
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of March 31, 2001 and December 31, 2000. Of the
total recorded asset at March 31, 2001, approximately $78.2 million represents
partial settlement for previous claims that will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.50%.
The total amount recorded reflects AWI's belief in the availability of insurance
in this amount, based upon AWI's success in insurance recoveries, recent
settlement agreements that provide such coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. Such 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, activities such
as settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the final determination of coverage shared with ACandS (a
former AWI subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $85 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $38.2 million has been recorded as a current asset as
of March 31, 2001 reflecting management's estimate of the minimum insurance
payments to be received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in the first quarter of 2001. In the first quarter of
2000, AWI paid $36.5 million for asbestos-related claims. AWI did not receive
any asbestos-related insurance recoveries during the first quarter of 2001 or
2000. During the pendency of the Chapter 11 Case, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation, the impact of the ADR proceedings on the insurance
asset and the financial condition of AWI's insurance carriers. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims or its previously recorded insurance asset. AWI will continue to review
its asbestos-related liability periodically, although it is likely that no
changes will be made to the liability until later in the Chapter 11 Case as
significant developments arise. It is reasonably possible that AWI's total
exposure to asbestos-related personal injury claims may be significantly
different than the recorded liability. Any adjustment to the estimated liability
or insurance asset could be material to the results of operations in the period
recorded.
Consolidated Results
- --------------------
The following discussions of consolidated results are on a continuing operations
basis.
First-quarter 2001 net sales of $716.5 million from continuing operations were
2.6% lower than in the first quarter of 2000. Excluding the unfavorable effects
of foreign exchange rates, the impact of the IPG divestiture and the Gema
acquisition which substantially offset each other, net sales decreased 1.3%.
Building products sales increased 8.8% primarily due to the second quarter 2000
acquisition of the European metal ceilings subsidiary, Gema. Wood products sales
decreased 5.0%. Sales in the floor coverings segment decreased 8.0%, due mainly
to the IPG divestiture, lower sales volume in the Americas and the impact of
unfavorable foreign exchange rates in Europe.
34
First-quarter 2001 earnings from continuing operations were $23.6 million or
$0.58 per share. The first quarter of 2001 included a pretax restructuring
charge of $5.4 million related to severance and enhanced retirement benefits for
more than 50 corporate and line-of-business salaried staff positions. In
addition, Armstrong recorded $3.0 million of net Chapter 11 reorganization
costs. See Note 2 for details of the Chapter 11 reorganization costs. First
quarter 2000 earnings from continuing operations were $25.0 million, or $0.62
per share.
The cost of goods sold in the first quarter was 75.1% of net sales compared to
71.7% of net sales in the first quarter of 2000. Higher energy costs in building
products and higher raw material costs mainly in floor coverings and wood
products were the primary drivers of the increase.
First-quarter 2001 selling, general and administrative expenses were 18.2
percent of net sales compared to 18.9 percent of net sales in last year's first
quarter due to lower selling expense in all business segments. Also, there were
expenses in the first quarter of 2000 related to environmental remediation and
collection of accounts receivable that did not occur in the first quarter of
2001.
Interest expense of $3.1 million was $22.8 million lower than the amount
recorded in the first quarter of 2000. In accordance with SOP 90-7, Armstrong
did not record $21.4 million of contractual interest expense on prepetition debt
in the first quarter of 2001.
Other income, net of $3.9 million in the first quarter of 2001 compared to other
expense, net of $0.6 million in the first quarter of 2000. The 2001 other income
was primarily due to fair value gains related to foreign currency forward
exchange contracts.
The effective tax rate from continuing operations for the first quarter was
39.2% versus 38.9% for the first quarter of 2000.
Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified US defined benefit plan, established an additional benefit known as
the Employee Stock Ownership Plan (ESOP) Pension Account to partially compensate
active employee and retiree ESOP shareholders for the decline in the market
value of AHI's stock. The effect of this amendment had no material impact to the
financial position or results of operations in 2000, but increased the benefit
obligation by $79.6 million in 2001 and decreased the first quarter 2001 pension
credit by $2.9 million compared to the first quarter of 2000.
Industry Segment Results
- ------------------------
Floor coverings net sales were $291.1 million and $316.5 million in the first
quarter of 2001 and 2000, respectively. Net sales in the Americas decreased 8.1%
compared to the prior year, due to the third quarter 2000 IPG divestiture and
lower sales volume of residential sheet products. European net sales in 2001
were 11.2% below 2000 levels primarily as a result of unfavorable foreign
exchange rates. Excluding the unfavorable effects of foreign exchange rates, net
sales in Europe were 3.9% below last year primarily due to price pressure and
unfavorable mix for cushion vinyl products, as well as a slowdown in the German
construction market. Pacific area net sales in 2001 decreased 2.7% versus the
first quarter of 2000. Operating income in 2001 was $20.2 million compared to
$28.0 million in the first quarter of 2000. The lower earnings are primarily due
to the lower sales volumes and the impact of higher raw material prices, which
were partially offset by operating cost reductions. Included in 2001 operating
income was a $2.2 million inventory obsolescence charge related to residential
sheet products, which Armstrong decided to discontinue during the first quarter,
substantially offset by a $1.8 million volume purchase rebate. In addition, 2001
operating income included $1.9 million of employee severance costs related to
restructuring efforts.
Building products net sales in 2001 of $216.4 million increased from $198.9
million in the first quarter of 2000. Excluding the impact of unfavorable
foreign exchange rates and the Gema acquisition in the second quarter of 2000,
net sales increased 5.7%, due to price and mix improvements in the Americas and
volume growth in Europe. In the Americas, net sales increased 2.9%, due
primarily to higher sales in the commercial channel. In Europe, net sales
increased 23.6%, primarily due to incremental sales from Gema, our metal
ceilings subsidiary acquired during the second quarter of 2000. Pacific area net
sales in 2001 were flat versus 2000. Operating income decreased $7.2 million to
$18.5 million in the first quarter of 2001, due to higher energy costs, which
were partially offset by improved volume and increased prices in the
35
Americas, and earnings from the Gema acquisition. 2001 operating income also
included $1.1 million of employee severance costs related to restructuring
efforts.
Wood products net sales of $209.0 million in the first quarter of 2001 compared
to net sales of $219.9 million in the first quarter of 2000. Wood flooring net
sales decreased 5.3% versus 2000 primarily due to lower sales to the independent
dealer channel. Cabinet net sales decreased 4.0% due to the softening market.
Operating income declined to $9.7 million in the first quarter of 2001 from
$17.9 million in the first quarter of 2000, due to lower sales volume combined
with higher lumber costs.
Unallocated corporate expense for the first quarter of 2001 of $7.4 million
increased $3.0 million versus the first quarter of 2000, primarily due to $2.4
million of employee severance costs, related to restructuring efforts.
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
The disclosures and analysis in this report contain some forward-looking
statements. This discussion about those statements is provided in accordance
with the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give 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, Armstrong
and/or AHI may also provide oral or written forward-looking statements in other
materials released to the public.
Any or all of the forward-looking statements in this report and in any other
public statements made may turn out to be wrong. They can be affected by
inaccurate assumptions Armstrong and/or AHI might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
Armstrong and/or AHI 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 made by Armstrong and/or AHI
on related subjects in 10-Q, 8-K, 10-K or other reports filed with the SEC. Also
note the following cautionary discussion of risks and uncertainties relevant to
Armstrong businesses. These are some of the factors that could potentially cause
actual results to differ materially from expected and historical results. Other
factors besides those listed here could also adversely affect Armstrong and/or
AHI.
. Factors relating to AWI's Chapter 11 Filing, such as: the possible
disruption of relationships with creditors, customers, suppliers and
employees; the ultimate size of AWI's asbestos-related and other
liabilities; the ability to confirm and implement a plan of reorganization;
the availability of financing and refinancing for both AWI and its
subsidiaries that are not parties to its Chapter 11 Filing; and AWI's
ability to comply with covenants in its debtor in possession credit
facility.
. Claims of undetermined merit and amount have been asserted against
Armstrong and its subsidiaries for various legal, environmental and tax
matters, including AWI's asbestos related litigation. For more information
on these matters, see the discussion of Legal Proceedings in Part II, Item
1 in this report.
. Balancing investment to create future growth in the constraints of a
price-competitive market is a challenge.
. Revenues and earnings can be affected by the level of success of new
product introductions.
. Much of Armstrong's revenues and earnings are exposed to changes in foreign
currency exchange rates. Where practical, Armstrong tries to reduce these
effects by matching local currency revenues
36
with costs and local currency assets with liabilities. Armstrong also
manages foreign exchange risk with foreign currency forward contracts and
with purchased foreign currency options.
. Notwithstanding Armstrong's efforts to foresee and plan for the effects of
changes in fiscal circumstances, Armstrong cannot predict with certainty
all changes in currency and interest rates, inflation or other related
factors affecting Armstrong businesses.
. 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 Armstrong's competitors or suppliers could
affect Armstrong's competitive position in the hard surface floor covering,
ceiling system and wood products businesses. Similarly, combinations or
alliances among Armstrong's major customers could increase their purchasing
power in dealing with Armstrong. And, of course, if Armstrong should enter
into one or more business combinations, Armstrong's 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 improved efficiencies in the European flooring
market and 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 Armstrong
products in various parts of the world.
. Revenues and earnings could be affected by the extent to which Armstrong
successfully achieves integration of and synergies from acquisitions.
. Availability of raw materials due to changes in business conditions that
impact Armstrong's suppliers, including environmental conditions, laws and
regulations and/or business decisions made by Armstrong's suppliers could
affect future results.
. Revenues and earnings could be affected by business conditions that impact
Armstrong's major customers and/or business decisions made by Armstrong's
major customers.
37
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
ASBESTOS-RELATED LITIGATION
- ---------------------------
The following is a summary update of asbestos-related litigation; see Note 29 to
the financial statements of Armstrong's 2000 Form 10-K filing for additional
information.
Armstrong World Industries, Inc. is a defendant in personal injury claims and
property damage claims related to asbestos containing products. In the
discussion in this Item, "Armstrong" means Armstrong World Industries, Inc.
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2000 Form 10-K filing for additional information.
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Note 2 for further discussion.
Asbestos Claims
- ---------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of claims through the Center for Claims Resolution (the "Center").
The Center had reached Strategic Settlement Program ("SSP") agreements with law
firms that covered approximately 130,000 claims that named AWI as a defendant.
As a result of the Filing, AWI's obligations with respect to these settlements
will be determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against AWI. In
addition, AWI ceased making payments with respect to asbestos claims, including
payments pursuant to the outstanding SSP agreements. A separate creditors'
committee representing the interests of asbestos claimants has been appointed in
the Chapter 11 Case.
AWI's present and future asbestos liability will be addressed in its Chapter 11
Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. AWI believes that the Chapter 11 process
provides it with the opportunity to comprehensively address its asbestos
liability in one forum. It is anticipated that all present and future asbestos
claims will be resolved in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, 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,
AWI estimated its cost to defend and resolve probable asbestos-related personal
injury claims. This estimate was highly uncertain due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could affect the range of the liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the
38
increased uncertainty created as a result of the Filing, no change has been made
to the previously recorded liability except to record payments of $68.2 million
against that accrual in October and November 2000. The asbestos-related
liability balance recorded at March 31, 2001 and December 31, 2000 is $690.6
million, which is recorded in liabilities subject to compromise. It is
reasonably possible, however, that the actual liability could be significantly
higher than the recorded liability. As the Chapter 11 Case proceeds there should
be more clarity as to the extent of the liability.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted. On March 28, 2001, the surety filed an
amended complaint in the Court seeking similar relief. The Center has filed a
motion to dismiss the amended complaint. The Court has not yet ruled on the
Center's motion or on the complaint. In addition, on April 27, 2001, AWI filed a
complaint and a motion with the Court seeking an order, among other things,
enjoining the Center from drawing on the bond or, in the event the Center is
permitted to draw on the bond, requiring that the proceeds of any such draw be
deposited into a Court-approved account subject to further order of the Court.
The Court has not yet ruled on these matters.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 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. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI'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 AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure is under way against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such 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.
During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR which were generally favorable to AWI on a number of
issues related to insurance coverage. However, during the third quarter of 2000,
it was determined that a new trial judge should be selected for the ADR. A new
trial judge has been selected but the new judge is not scheduled to hear motions
until June 2001. It is uncertain at this time if the new proceedings will have
any impact on the preliminary decisions of the initial phases of the ADR.
One of the carriers has been experiencing financial difficulties, which could
affect its ability to pay any ultimate judgment. AWI will continue to assess
this situation and will adjust its recorded asset when and if it determines that
the insurance receivable related to this carrier is no longer probable of
recovery.
39
Insurance Asset
- ----------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of March 31, 2001 and December 31, 2000. Of the
total recorded asset at March 31, 2001, approximately $78.2 million represents
partial settlement for previous claims that will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.50%.
The total amount recorded reflects AWI's belief in the availability of insurance
in this amount, based upon AWI's success in insurance recoveries, recent
settlement agreements that provide such coverage, the nonproducts recoveries by
other companies and the opinion of outside counsel. Such 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, activities such
as settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the final determination of coverage shared with ACandS (a
former AWI subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $85 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $38.2 million has been recorded as a current asset as
of March 31, 2001 reflecting management's estimate of the minimum insurance
payments to be received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in the first quarter of 2001. In the first quarter of
2000, AWI paid $36.5 million for asbestos-related claims. AWI did not receive
any asbestos-related insurance recoveries during the first quarter of 2001 or
2000. During the pendency of the Chapter 11 Case, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation, the impact of the ADR proceedings on the insurance
asset and the financial condition of AWI's insurance carriers. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims or its previously recorded insurance asset. AWI will continue to review
its asbestos-related liability periodically, although it is likely that no
changes will be made to the liability until later in the Chapter 11 Case as
significant developments arise. It is reasonably possible that AWI's total
exposure to asbestos-related personal injury claims may be significantly
different than the recorded liability. Any adjustment to the estimated liability
or insurance asset could be material to the results of operations in the period
recorded.
ENVIRONMENTAL MATTERS
- ---------------------
Armstrong's operations are subject to federal, state, local and foreign
environmental laws and regulations. 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 has also been remediating environmental contamination
resulting from past industrial activity at certain of its current and former
plant sites. Armstrong's payments and remediation work on these sites is under
review in light of the Chapter 11 filing.
40
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 Armstrong
experience in remediation of contaminated sites. Although current law may impose
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. The Chapter 11
Cases may also affect the ultimate amount of such contributions.
Liabilities of $13.1 million were recorded at March 31, 2001 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. Due to the Chapter 11 filing, $6.4 million of the March 31,
2001 environmental liabilities are classified as prepetition liabilities subject
to compromise. 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 condensed 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
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 periods.
41
Item 6. - Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report on
Form 10-Q:
Exhibits
--------
No. 10 Amendment to employment agreement between Armstrong Holdings Inc.
and Michael D. Lockhart dated August 7, 2000. *
No. 15 Letter re Unaudited Interim Financial Information
* Compensatory Plan
(b) The following report on Form 8-K was filed during the first quarter of
2001.
A Form 8-K dated March 22, 2001 was filed discussing documents required to
be submitted periodically to the Bankruptcy Court.
42
Signatures
----------
Pursuant to the requirements 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 Holdings, Inc.
Armstrong World Industries, Inc.
By: /s/ Leonard A. Campanaro
--------------------------------------------
Leonard A. Campanaro, Senior Vice President,
Chief Financial Officer
By: /s/ John N. Rigas
-------------------------------------
John N. Rigas, Senior Vice President,
Secretary and General Counsel
By: /s/ William C. Rodruan
-----------------------------------------
William C. Rodruan, Vice President and
Controller (Principal Accounting Officer)
Date: May 8, 2001
43
Exhibit Index
-------------
Exhibit No.
- -----------
No. 10 Amendment to employment agreement between Armstrong Holdings Inc. and
Michael D. Lockhart dated August 7, 2000. *
No. 15 Letter re: Unaudited Interim Financial Information
* Compensatory Plan