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 June 30, 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
July 31, 2001 - 40,800,542
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 Six Months Ended
June 30 June 30
------- -------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $748.6 $791.9 $1,465.1 $1,527.2
Cost of goods sold 551.2 564.0 1,089.3 1,091.5
------ ------ -------- --------
Gross profit 197.4 227.9 375.8 435.7
Selling, general and administrative expenses 133.1 121.2 263.8 260.3
Charge for asbestos liability, net 6.0 236.0 6.0 236.0
Restructuring and reorganization charges (reversals), net (1.3) - 4.1 -
Goodwill amortization 5.7 6.0 11.4 12.0
Equity (earnings) from affiliates, net (4.6) (4.5) (9.0) (9.2)
------ ------ -------- --------
Operating income (loss) 58.5 (130.8) 99.5 (63.4)
Interest expense (unrecorded contractual interest of $21.5, $0.0, $42.9, and $0.0) 3.2 27.9 6.3 53.8
Other (income) expense, net 2.6 (5.4) (1.3) (4.8)
------ ------ -------- --------
Earnings (loss) from continuing operations before Chapter 11 reorganization (income)
costs and income tax expense (benefit) 52.7 (153.3) 94.5 (112.4)
Chapter 11 reorganization (income) costs, net (0.5) - 2.5 -
------ ------ -------- --------
Earnings (loss) from continuing operations before income tax expense (benefit) 53.2 (153.3) 92.0 (112.4)
Income tax expense (benefit) 20.2 (50.7) 35.4 (34.8)
------ ------ -------- --------
Earnings (loss) from continuing operations $33.0 ($102.6) $56.6 ($77.6)
------ ------ -------- --------
Income from discontinued operations, net of tax of $2.5 and $5.4 - 3.7 - 9.4
Gain (loss) on sale of discontinued operations, net of tax of $0.0, $41.9, $0.0,
and $41.9 (0.9) 106.4 (0.9) 106.4
Net loss on expected disposal of discontinued operations, net of tax of $0.0 - - (3.3) -
------ ------ -------- --------
Earnings (loss) from discontinued operations (0.9) 110.1 (4.2) 115.8
------ ------ -------- --------
Net earnings $ 32.1 $ 7.5 $ 52.4 $ 38.2
====== ====== ======== ========
Earnings (loss) per share of common stock, continuing operations:
Basic $ 0.82 $(2.55) $ 1.40 $ (1.94)
Diluted $ 0.81 $(2.55) $ 1.38 $ (1.94)
Earnings per share of common stock, discontinued operations:
Basic $ - $ 0.09 $ - $ 0.23
Diluted $ - $ 0.09 $ - $ 0.23
Earnings (loss) per share of common stock, sale of discontinued operations:
Basic $(0.02) $ 2.65 $ (0.02) $ 2.65
Diluted $(0.02) $ 2.65 $ (0.02) $ 2.65
Loss per share of common stock, expected disposal of discontinued operations:
Basic $ - $ - $ (0.08) $ -
Diluted $ - $ - $ (0.08) $ -
Net earnings per share of common stock:
Basic $ 0.79 $ 0.19 $ 1.30 $ 0.95
Diluted $ 0.78 $ 0.19 $ 1.28 $ 0.95
Average number of common shares outstanding:
Basic 40.4 40.2 40.4 40.1
Diluted 40.9 40.3 40.9 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 June 30, 2001 December 31, 2000
------ ------------- -----------------
Current assets:
Cash and cash equivalents $ 177.5 $ 156.5
Accounts and notes receivable, net 362.4 316.5
Inventories, net 396.4 340.2
Deferred income taxes 10.6 9.8
Net assets of discontinued operations 57.3 48.6
Other current assets 85.1 72.4
--------- ---------
Total current assets 1,089.3 944.0
Property, plant and equipment, less accumulated depreciation and
amortization of $1,039.5 and $1,006.4, respectively 1,216.8 1,253.5
Insurance receivable for asbestos-related liabilities, noncurrent 208.1 236.1
Investment in affiliates 36.7 37.3
Goodwill, net 832.0 846.0
Other intangibles, net 89.7 91.9
Deferred income tax assets, noncurrent 4.8 22.5
Other noncurrent assets 466.3 443.3
--------- ---------
Total assets $ 3,943.7 $ 3,874.6
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 11.1 $ 16.6
Current installments of long-term debt 4.7 8.1
Accounts payable and accrued expenses 292.0 238.0
Income taxes 46.2 28.5
--------- ---------
Total current liabilities 354.0 291.2
--------- ---------
Liabilities subject to compromise 2,360.0 2,385.2
Long-term debt, less current installments 51.5 56.8
Postretirement and postemployment benefit liabilities 244.0 243.6
Pension benefit liabilities 144.9 154.7
Other long-term liabilities 68.9 71.1
Minority interest in subsidiaries 7.9 6.9
--------- ---------
Total noncurrent liabilities 2,877.2 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 166.4 162.2
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,203.9 1,151.5
Accumulated other comprehensive loss (54.5) (45.2)
Treasury stock (513.0) (513.1)
--------- ---------
Total shareholders' equity 712.5 665.1
--------- ---------
Total liabilities and shareholders' equity $ 3,943.7 $ 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 June 30 $ 51.9 $ 51.9
--------- ---------
Capital in excess of par value:
- -------------------------------
Balance at beginning of year $ 162.2 $ 176.4
Stock issuances and other 4.2 4.3
Contribution of treasury stock to ESOP - (5.3)
--------- ---------
Balance at June 30 $ 166.4 $ 175.4
--------- ---------
Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $ (142.2) $ (190.3)
Principal paid - 13.2
Loans to ESOP - (7.3)
Contribution of treasury stock to ESOP - (4.1)
Accrued compensation - 3.1
--------- ---------
Balance at June 30 $ (142.2) $ (185.4)
--------- ---------
Retained earnings:
- ------------------
Balance at beginning of year $1,151.5 $ 1,196.2
Net earnings for six months 52.4 $52.4 38.2 $38.2
Tax benefit on dividends paid on unallocated ESOP common shares - 0.7
--------- ---------
Total $1,203.9 $ 1,235.1
Less common stock dividends - 38.6
--------- ---------
Balance at June 30 $1,203.9 $ 1,196.5
--------- ---------
Accumulated other comprehensive income (loss):
- ----------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5)
Foreign currency translation adjustments (10.5) (2.1)
Derivative gain, net (1.4) -
Investment impairment 2.0 -
Unrealized loss on available for sale securities - (2.5)
Minimum pension liability adjustments 0.6 (2.1)
--------- ---------
Total other comprehensive (loss) (9.3) (9.3) (6.7) (6.7)
--------- ----- --------- -----
Balance at June 30 $ (54.5) $ (23.2)
--------- ---------
Comprehensive income $ 43.1 $31.5
- -------------------- ====== =====
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 513.1 $ 538.5
Stock issuance activity, net (0.1) (0.6)
Contribution of treasury stock to ESOP - (9.4)
--------- ---------
Balance at June 30 $ 513.0 $ 528.5
--------- ---------
Total shareholders' equity $ 712.5 $ 686.7
========= =========
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
Six Months Ended
June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 52.4 $38.2
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization, continuing operations 75.0 77.6
Depreciation and amortization, discontinued operations - 5.7
(Gain) loss on sale of businesses 0.9 (148.3)
Loss on expected disposal of discontinued operations 3.3 -
Deferred income taxes 16.9 (14.1)
Equity earnings from affiliates, net (9.0) (9.2)
Chapter 11 reorganization costs, net 2.5 -
Chapter 11 reorganization payments (6.6) -
Restructuring and reorganization charges 4.1 -
Restructuring and reorganization payments (6.6) (2.2)
Recoveries (payments) for asbestos-related claims, net 16.0 (67.3)
Charge for asbestos liability, net 6.0 236.0
Decrease in net assets of businesses held for sale - 2.2
(Increase)/decrease in net assets of discontinued operations (8.7) 16.5
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring and dispositions
Increase in receivables (55.1) (62.0)
Increase in inventories (67.8) (27.7)
Increase in other current assets (9.2) (8.1)
Increase in other noncurrent assets (34.0) (18.8)
Increase/(decrease) in accounts payable and accrued expenses 67.9 (71.4)
Increase in income taxes payable 17.7 12.0
Decrease in other long-term liabilities (2.0) (0.3)
Other, net 10.5 5.6
------- ------
Net cash provided by (used for) operating activities 74.2 (35.6)
------- ------
Cash flows used for investing activities:
Purchases of property, plant and equipment, continuing operations (42.3) (60.5)
Purchases of property, plant and equipment, discontinued operations (2.8) (8.1)
Investment in computer software (4.2) (5.5)
Acquisitions, net of cash acquired - (8.8)
Distributions from equity affiliates 9.0 6.6
Purchase of outstanding minority interest (5.4) -
Proceeds from the sale of assets 0.4 3.1
Proceeds from the sale of businesses - 238.4
------- ------
Net cash provided by (used for) investing activities (45.3) 165.2
------- ------
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (3.1) 50.2
Payments of long-term debt (1.6) (148.7)
Cash dividends paid - (38.6)
Purchase of common stock for the treasury, net (0.1) (1.3)
Other, net (0.8) -
------- ------
Net cash used for financing activities (5.6) (138.4)
------- ------
Effect of exchange rate changes on cash and cash equivalents (2.3) (0.7)
------- ------
Net increase/(decrease) in cash and cash equivalents $21.0 ($9.5)
Cash and cash equivalents at beginning of year $ 156.5 $ 17.2
------- ------
Cash and cash equivalents at end of period $ 177.5 $ 7.7
======== =====
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. See Note 12 for discussion of the financial
statement differences between Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.
Operating results for the second 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. On June 12, 2001, negotiations with this investor were
terminated. However, AHI still plans to complete the disposition of this segment
in the first quarter of 2002. Accordingly, this segment is classified as a
discontinued operation. Prior year balances and results have been reclassified
to reflect the net assets and results of discontinued operations.
Starting with 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 $34.3 million of second
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 second 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 $7.6 million in the second 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 second quarters of the wood products segment ended on June 30, 2001 and July
1, 2000. No events occurred between June 30, 2000 and July 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 Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
6
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.
Three creditors' committees, one representing personal injury asbestos
claimants, one representing property damage 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. The deadline for
claims from the U. S. Internal Revenue Service has been extended to December 31,
2001.
Financing
- ---------
On May 31, 2001, AWI reduced the amount of its debtor-in-possession credit
facility (the "DIP Facility") from $300 million to $200 million. As of June 30,
2001, AWI had no outstanding debt borrowings under the DIP Facility and AWI had
$110.6 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 5 for detail of the liabilities subject to compromise at June 30, 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.
7
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 the following Chapter 11
reorganization activities in the second quarter and first six months of 2001:
Three Months Ended Six Months Ended
(amounts in millions) June 30, 2001 June 30, 2001
- --------------------- ------------- -------------
Professional fees $ 6.1 $ 11.9
Interest income, post petition (1.0) (2.7)
Reductions to prepetition liabilities (0.1) (2.0)
Termination of prepetition lease obligation (5.9) (5.9)
Other expenses directly related to bankruptcy, net 0.4 1.2
------ -----
Total Chapter 11 reorganization costs (income), net $ (0.5) $ 2.5
======= =====
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.
Termination of prepetition lease obligation represents the reversal of an
accrual for future lease payments for office space in the U.S. that AWI will not
pay due to the termination of the lease contract. This amount was previously
accrued in the third quarter of 2000 as part of a restructuring charge when the
decision to vacate the premises was made.
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.
8
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. On June 12, 2001, negotiations with this investor were
terminated. However, AHI still plans to complete the disposition of this segment
in the first quarter of 2002. Accordingly, this segment is classified as a
discontinued operation.
Prior year balances and results have been reclassified to reflect the net assets
and results of this segment as 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
negotiations.
The following comprises the net assets of discontinued operations as of June 30,
2001 and December 31, 2000
(amounts in millions) June 30, 2001 December 31, 2000
------------- -----------------
Cash $ 3.0 $ 2.6
Accounts receivable, net 47.0 52.5
Inventories, net 63.8 59.7
Property plant and equipment, net 62.2 67.5
Short-term and long-term debt (17.4) (29.8)
Accounts payable and accrued expenses (43.8) (54.0)
Pension liabilities (3.3) (3.3)
Other, net (16.4) (12.1)
Adjustment to net realizable value (37.8) (34.5)
------ -------
Net assets of discontinued operations $ 57.3 $ 48.6
====== =======
During the second quarter of 2001, AHI recorded a pretax loss of $0.9 million
related to its May 31, 2000 divestiture of its Insulation Products segment,
which was previously reported as a discontinued operation. This loss resulted
from certain post-closing adjustments.
Note 4. ACQUISITIONS
- --------------------
On May 15, 2001, Armstrong Enterprises, Inc., an indirect subsidiary of AHI,
entered into an agreement with Skanska A.B. to purchase Skanska's 49% minority
equity interest in Armstrong World Industries A.B. The purchase price of $5.0
million was allocated to goodwill.
Note 5. 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 June 30, 2001 and December 31, 2000 are as
follows:
(amounts in millions) June 30, December 31,
2001 2000
---- ----
Debt (at face value) $ 1,400.7 $ 1,400.4
Asbestos-related liability 690.6 690.6
Prepetition trade payables 53.9 60.1
Prepetition other payables and accrued interest 57.1 76.4
ESOP loan guarantee 157.7 157.7
--------- ---------
Total liabilities subject to compromise $ 2,360.0 $ 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.
9
Note 6. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions) Three months Six months
ended June 30 ended June 30
Net sales to external customers 2001 2000 2001 2000
- ------------------------------- ------- ------- ------- ----------
Floor coverings $ 308.3 $ 340.0 $ 599.4 $ 656.5
Building products 206.5 203.0 422.9 401.9
Wood products 233.8 248.9 442.8 468.8
------- ------- --------- ---------
Total sales to external customers $ 748.6 $ 791.9 $ 1,465.1 $ 1,527.2
======= ======= ========= =========
Three months Six months
ended June 30 ended June 30
Segment operating income (loss) 2001 200 2001 2000
- ------------------------------- ------- -------- ------- -------
Floor coverings $ 27.8 $ 44.7 $ 48.0 $ 72.7
Building products 25.7 31.2 44.2 56.9
Wood products 14.1 29.2 23.8 47.1
All other 0.5 (0.1) 0.5 0.1
------- -------- ------- ---------
Total segment operating income 68.1 105.0 116.5 176.8
Charge for asbestos liability, net (6.0) (236.0) (6.0) (236.0)
Unallocated corporate income (expense) (3.6) 0.2 (11.0) (4.2)
------- -------- ------- ---------
Total consolidated operating income (loss) $ 58.5 $ (130.8) $ 99.5 $ (63.4)
======= ========= ======= =========
June 30, December 31,
Segment assets 2001 2000
- -------------- --------- -----------
Floor coverings $ 937.3 $ 897.6
Building products 539.9 568.5
Wood products 1,402.2 1,358.6
All other 16.5 16.3
--------- -----------
Total segment assets 2,895.9 2,841.0
Assets not assigned to business units 1,047.8 1,033.6
--------- -----------
Total consolidated assets $ 3,943.7 $ 3,874.6
========= ===========
Prior year amounts for floor coverings, all other, and assets not assigned to
business units have been reclassified to reflect the reallocation of certain
assets.
Note 7. INVENTORY
- ------------------
(amounts in millions) June 30, 2001 December 31, 2000
------------- -----------------
Finished goods $ 255.0 $ 208.9
Goods in process 39.1 39.6
Raw materials and supplies 155.4 143.5
Less LIFO and other reserves (53.1) (51.8)
------- -------
Total inventories, net $ 396.4 $ 340.2
======= =======
Note 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals which are reported within accounts payable and accrued expenses, for
the first six months of 2001 and 2000:
Beginning Cash Ending
(amounts in millions) balance payments Charges Reversals Other balance
------- -------- ------- --------- ----- -------
2001 $21.4 ($6.6) $3.8 ($1.3) ($6.7) $ 10.6
2000 12.1 (2.2) - - (0.6) 9.3
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
10
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.
In the second quarter of 2001, a $1.1 million reversal was recorded related to a
formerly occupied building for which AHI no longer believes it will incur any
additional costs. In addition, $0.2 million of the remaining accrual for the
first quarter 2001 reorganization was reversed, comprising certain severance
accruals that were no longer necessary as certain individuals remained employed
by AHI.
The amount in "other" is primarily related to the termination of an operating
lease for an office facility in the U.S. These lease costs were previously
accrued in the third quarter of 2000 as part of the restructuring charge when
the decision to vacate the premises was made. The $5.9 million reversal is
recorded as a reduction of Chapter 11 reorganization costs in accordance with
SOP 90-7. See Note 2 for further discussion. The remaining amount in "other" is
related to foreign currency translation.
Most of the remaining balance at June 30, 2001 relates to terminated employees
with extended payouts, the majority of which will be paid during 2001, and a
noncancelable operating lease, which extends through 2017.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Six Months Ended
June 30
2001 2000
----- ------
Interest paid $ 1.5 $ 53.5
Income taxes paid, net $ 1.7 $ 17.1
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 personal injury 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
11
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 June 30, 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 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
June 30, 2001 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. A separate
creditors' committee representing the interests of property damage asbestos
claimants has been appointed in the Chapter 11 Case.
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
12
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 and initial motions were heard in 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. Additionally, one of the
insurance carriers has been experiencing financial difficulties and was placed
under an order of rehabilitation by a state insurance department during the
second quarter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as
of December 31, 2000. The reduction is due to cash receipts during the second
quarter of 2001 and management's current assessment of probable insurance
recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3
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 $84 million of the $246.3 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 $246.3 million asset, $38.2 million has been
recorded as a current asset as of June 30, 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 six months of 2001. In the first six months
of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0
million in asbestos-related insurance recoveries during the first six months of
2001 compared to $27.7 million during the first six months of 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. In the second quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.0 million for cash receipts and by $6.0 million for
management's current assessment of probable insurance recoveries. The $6.0
million reduction was recorded as a charge for asbestos liability, net in the
accompanying condensed consolidated statement of earnings. 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
13
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 June 30, 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 June 30, 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 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 - 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. The
diluted earnings per share calculations for 2000 use the basic number of shares
due to the loss on continuing operations.
14
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 June 30, 2001, and the related
condensed consolidated statements of earnings for the three and six-month
periods ended June 30, 2001 and 2000, and the condensed consolidated statements
of cash flows and shareholders' equity for the six-month periods ended June 30,
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 auditing standards generally accepted in the United States of America, 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 States 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 resulting 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.
/s/ KPMG LLP
Philadelphia, Pennsylvania
August 3, 2001
15
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(amounts in millions)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $748.6 $791.9 $1,465.1 $1,527.2
Cost of goods sold 551.2 564.0 1,089.3 1,091.5
------ ------ -------- --------
Gross profit 197.4 227.9 375.8 435.7
Selling, general and administrative expenses 133.1 120.7 263.8 259.8
Charge for asbestos liability, net 6.0 236.0 6.0 236.0
Restructuring and reorganization charges (reversals), net (1.3) - 4.1 -
Goodwill amortization 5.7 6.0 11.4 12.0
Equity (earnings) from affiliates, net (4.6) (4.5) (9.0) (9.2)
------ ------ -------- --------
Operating income (loss) 58.5 (130.3) 99.5 (62.9)
Interest expense (unrecorded contractual interest of $21.5, $0.0, $42.9, and $0.0) 3.2 27.9 6.3 53.8
Other (income) expense, net 2.6 (5.4) (1.3) (4.8)
------ ------ -------- --------
Earnings (loss) from continuing operations before Chapter 11 reorganization (income)
costs and income tax expense (benefit) 52.7 (152.8) 94.5 (111.9)
Chapter 11 reorganization (income) costs, net (0.5) - 2.5 -
------ ------ -------- --------
Earnings (loss) from continuing operations before income tax expense (benefit) 53.2 (152.8) 92.0 (111.9)
Income tax expense (benefit) 20.2 (50.5) 35.4 (34.6)
------ ------ -------- --------
Earnings (loss) from continuing operations $33.0 ($102.3) $56.6 ($77.3)
------ ------ -------- --------
Income from discontinued operations, net of tax of $2.5 and $5.4 - 3.7 - 9.4
Gain (loss) on sale of discontinued operations, net of tax of $0.0, $41.9, $0.0, and
$41.9 (0.9) 106.4 (0.9) 106.4
Net loss on expected disposal of discontinued operations, net of tax of $0.0 - - (3.3) -
------ ------ -------- --------
Earnings (loss) from discontinued operations (0.9) 110.1 (4.2) 115.8
------ ------ -------- --------
Net earnings $32.1 $7.8 $52.4 $38.5
====== ====== ======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 20.
16
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions except share data)
Unaudited
Assets June 30, 2001 December 31, 2000
------ ------------- -----------------
Current assets:
Cash and cash equivalents $ 177.5 $ 156.5
Accounts and notes receivable, net 362.4 316.5
Inventories, net 396.4 340.2
Deferred income taxes 10.6 9.8
Net assets of discontinued operations 57.3 48.6
Other current assets 85.1 72.3
-------- --------
Total current assets 1,089.3 943.9
Property, plant and equipment, less accumulated depreciation and
amortization of $1,039.5 and $1,006.4, respectively 1,216.8 1,253.5
Insurance receivable for asbestos-related liabilities, noncurrent 208.1 236.1
Investment in affiliates 36.7 37.3
Goodwill, net 832.0 846.0
Other intangibles, net 89.7 91.9
Deferred income tax assets, noncurrent 4.8 22.5
Other noncurrent assets 466.3 443.3
-------- --------
Total assets $3,943.7 $3,874.5
========= ========
Liabilities and Shareholder's Equity
------------------------------------
Current liabilities:
Short-term debt $11.1 $ 16.6
Current installments of long-term debt 4.7 8.1
Accounts payable and accrued expenses 292.0 238.0
Short-term amounts due to affiliates 4.4 -
Income taxes 47.7 30.0
-------- --------
Total current liabilities 359.9 292.7
-------- --------
Liabilities subject to compromise 2,365.0 2,390.2
Long-term debt, less current installments 51.5 56.8
Postretirement and postemployment benefit liabilities 244.0 243.6
Pension benefit liabilities 144.9 154.7
Other long-term liabilities 68.9 71.1
Minority interest in subsidiaries 7.9 6.9
-------- --------
Total noncurrent liabilities 2,882.2 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 1,201.5 1,149.1
Accumulated other comprehensive loss (54.5) (45.2)
Treasury stock (528.5) (528.5)
-------- --------
Total shareholder's equity 701.6 658.5
-------- --------
Total liabilities and shareholder's equity $3,943.7 $3,874.5
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 20.
17
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 June 30 $ 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
Contribution of treasury stock to ESOP - (5.3)
-------- --------
Balance at June 30 $ 173.4 $ 175.3
-------- --------
Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $ (142.2) $ (190.3)
Principal paid - 13.2
Loans to ESOP - (7.3)
Contribution of treasury stock to ESOP - (4.1)
Accrued compensation - 3.1
-------- --------
Balance at June 30 $ (142.2) $ (185.4)
-------- --------
Retained earnings:
- ------------------
Balance at beginning of year $1,149.1 $1,196.2
Net earnings for six months 52.4 $52.4 38.5 $ 38.5
Tax benefit on dividends paid on unallocated ESOP common shares - 0.7
-------- --------
Total $1,201.5 $1,235.4
Less rights redemptions - 2.0
Less common stock dividends - 38.6
-------- --------
Balance at June 30 $1,201.5 $1,194.8
-------- --------
Accumulated other comprehensive income (loss):
- ----------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5)
Foreign currency translation adjustments (10.5) (2.1)
Derivative gain, net (1.4) -
Investment impairment 2.0 -
Unrealized loss on available for sale securities - (2.5)
Minimum pension liability adjustments 0.6 (2.1)
-------- --------
Total other comprehensive (loss) (9.3) (9.3) (6.7) (6.7)
-------- ----- -------- -----
Balance at June 30 $ (54.5) $ (23.2)
-------- --------
Comprehensive income $43.1 $ 31.8
- -------------------- ===== ======
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 528.5 $ 538.5
Stock issuance activity, net - (0.6)
Contribution of treasury stock to ESOP - (9.4)
-------- --------
Balance at June 30 $ 528.5 $ 528.5
-------- --------
Total shareholder's equity $ 701.6 $ 684.9
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 20.
18
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Six Months Ended
June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $52.4 $38.5
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization, continuing operations 75.0 77.6
Depreciation and amortization, discontinued operations - 5.7
(Gain) loss on sale of businesses 0.9 (148.3)
Loss on expected disposal of discontinued operations 3.3 -
Deferred income taxes 16.9 (14.1)
Equity earnings from affiliates, net (9.0) (9.2)
Chapter 11 reorganization costs, net 2.5 -
Chapter 11 reorganization payments (6.6) -
Restructuring and reorganization charges 4.1 -
Restructuring and reorganization payments (6.6) (2.2)
Recoveries (payments) for asbestos-related claims, net 16.0 (67.3)
Charge for asbestos liability, net 6.0 236.0
Decrease in net assets of businesses held for sale - 2.2
(Increase)/decrease in net assets of discontinued operations (8.7) 16.5
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring and dispositions
Increase in receivables (55.1) (62.0)
Increase in inventories (67.8) (27.7)
Increase in other current assets (9.2) (8.1)
Increase in other noncurrent assets (34.0) (18.8)
Increase/(decrease) in accounts payable and accrued expenses 67.9 (71.4)
Increase in income taxes payable 17.7 11.8
Decrease in other long-term liabilities (2.0) (0.4)
Other, net 10.5 5.6
------ ------
Net cash provided by (used for) operating activities 74.2 (35.6)
------ ------
Cash flows used for investing activities:
Purchases of property, plant and equipment, continuing operations (42.3) (60.5)
Purchases of property, plant and equipment, discontinued operations (2.8) (8.1)
Investment in computer software (4.2) (5.5)
Acquisitions, net of cash acquired - (8.8)
Distributions from equity affiliates 9.0 6.6
Purchase of outstanding minority interest (5.4) -
Proceeds from the sale of assets 0.4 3.1
Proceeds from the sale of businesses - 238.4
------ ------
Net cash provided by (used for) investing activities (45.3) 165.2
------ ------
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (3.1) 50.2
Payments of long-term debt (1.6) (148.7)
Cash dividends paid - (38.6)
Purchase of common stock for the treasury, net - (1.3)
Other, net (0.9) -
------ ------
Net cash used for financing activities (5.6) (138.4)
------ ------
Effect of exchange rate changes on cash and cash equivalents (2.3) (0.7)
------ ------
Net increase/(decrease) in cash and cash equivalents $21.0 ($9.5)
Cash and cash equivalents at beginning of year 156.5 17.2
------ ------
Cash and cash equivalents at end of period $177.5 $7.7
====== ======
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 20.
19
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 second 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. On June 12, 2001, negotiations with this
investor were terminated. However, Armstrong still plans to complete the
disposition of this segment in the first quarter of 2002. Accordingly, this
segment is classified as a discontinued operation. Prior year balances and
results have been reclassified to reflect the net assets and results of
discontinued operations.
Starting with 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 $34.3 million of
second 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 second 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 $7.6 million in the second 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 second quarters of the wood products segment
ended on June 30, 2001 and July 1, 2000. No events occurred between June 30,
2000 and July 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").
20
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.
Three creditors' committees, one representing personal injury asbestos
claimants, one representing property damage 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. The deadline for
claims from the U. S. Internal Revenue Service has been extended to December 31,
2001.
Financing
- ---------
On May 31, 2001, AWI reduced the amount of its debtor-in-possession credit
facility (the "DIP Facility") from $300 million to $200 million. As of June 30,
2001, AWI had no outstanding debt borrowings under the DIP Facility and AWI had
$110.6 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 5 for detail of the liabilities subject to compromise at June 30, 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.
21
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 the following Chapter 11
reorganization activities in the second quarter and first six months of 2001:
Three Months Ended Six Months Ended
(amounts in millions) June 30, 2001 June 30, 2001
- --------------------- ------------- -------------
Professional fees $ 6.1 $11.9
Interest income, post petition (1.0) (2.7)
Reductions to prepetition liabilities (0.1) (2.0)
Termination of prepetition lease obligation (5.9) (5.9)
Other expenses directly related to bankruptcy, net 0.4 1.2
----- ---
Total Chapter 11 reorganization costs (income), net $(0.5) $ 2.5
======= =====
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.
Termination of prepetition lease obligation represents the reversal of an
accrual for future lease payments for office space in the U.S. that AWI will not
pay due to the termination of the lease contract. This amount was previously
accrued in the third quarter of 2000 as part of a restructuring charge when the
decision to vacate the premises was made.
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. On June 12, 2001, negotiations with this
investor were terminated. However, Armstrong still plans to complete the
disposition of this segment in the first quarter of 2002. Accordingly, this
segment is classified as a discontinued operation.
Prior year balances and results have been reclassified to reflect the net assets
and results of this segment as 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 negotiations.
22
The following comprises the net assets of discontinued operations as of June 30,
2001 and December 31, 2000.
(amounts in millions) June 30, 2001 December 31, 2000
------------- -----------------
Cash $ 3.0 $ 2.6
Accounts receivable, net 47.0 52.5
Inventories, net 63.8 59.7
Property plant and equipment, net 62.2 67.5
Short-term and long-term debt (17.4) (29.8)
Accounts payable and accrued expenses (43.8) (54.0)
Pension liabilities (3.3) (3.3)
Other, net (16.4) (12.1)
Adjustment to net realizable value (37.8) (34.5)
------ ------
Net assets of discontinued operations $57.3 $48.6
====== ======
During the second quarter of 2001, Armstrong recorded a pretax loss of $0.9
million related to its May 31, 2000 divestiture of its Insulation Products
segment, which was previously reported as a discontinued operation. This loss
resulted from certain post-closing adjustments.
Note 4. ACQUISITIONS
- --------------------
On May 15, 2001, Armstrong Enterprises, Inc., an indirect subsidiary of
Armstrong, entered into an agreement with Skanska A.B. to purchase Skanska's 49%
minority equity interest in Armstrong World Industries A.B. The purchase price
of $5.0 million was allocated to goodwill.
Note 5. 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 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 June 30, 2001 and December 31, 2000 are as
follows:
(amounts in millions) June 30, December 31,
2001 2000
---- ----
Debt (at face value) $ 1,400.7 $ 1,400.4
Asbestos-related liability 690.6 690.6
Prepetition trade payables 53.9 60.1
Prepetition other payables and accrued interest 57.1 76.4
ESOP loan guarantee 157.7 157.7
Amounts due to affiliates 5.0 5.0
--- ---
Total liabilities subject to compromise $ 2,365.0 $ 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.
23
Note 6. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions) Three months Six months
ended June 30 ended June 30
Net sales to external customers 2001 2000 2001 2000
- ------------------------------- ---- ---- ---- ----
Floor coverings $ 308.3 $ 340.0 $ 599.4 $ 656.5
Building products 206.5 203.0 422.9 401.9
Wood products 233.8 248.9 442.8 468.8
----- ----- ----- -----
Total sales to external customers $ 748.6 $ 791.9 $ 1,465.1 $ 1,527.2
======= ======= ========= =========
Three months Six months
ended June 30 ended June 30
Segment operating income (loss) 2001 2000 2001 2000
- ------------------------------- ---- ---- ---- ----
Floor coverings $ 27.8 $ 44.7 $ 48.0 $ 72.7
Building products 25.7 31.2 44.2 56.9
Wood products 14.1 29.2 23.8 47.1
All other 0.5 (0.1) 0.5 0.1
----- -------- ------ -------
Total segment operating income 68.1 105.0 116.5 176.8
Charge for asbestos liability, net (6.0) (236.0) (6.0) (236.0)
Unallocated corporate income (expense) (3.6) 0.7 (11.0) (3.7)
--------- --- ------ -------
Total consolidated operating income (loss) $ 58.5 $ (130.3) $ 99.5 $ (62.9)
======= ========= ======= =========
June 30, December 31,
Segment assets 2001 2000
- -------------- ---- ----
Floor coverings $ 937.3 $ 897.6
Building products 539.9 568.5
Wood products 1,402.2 1,358.6
All other 16.5 16.3
--------- ---------
Total segment assets 2,895.9 2,841.0
Assets not assigned to business units 1,047.8 1,033.5
--------- ---------
Total consolidated assets $ 3,943.7 $ 3,874.5
========= =========
Prior year amounts for floor coverings, all other, and assets not assigned to
business units have been reclassified to reflect the reallocation of certain
assets.
Note 7. INVENTORY
- ------------------
(amounts in millions) June 30, 2001 December 31, 2000
------------- -----------------
Finished goods $ 255.0 $ 208.9
Goods in process 39.1 39.6
Raw materials and supplies 155.4 143.5
Less LIFO and other reserves (53.1) (51.8)
------ ------
Total inventories, net $ 396.4 $ 340.2
======= =======
Note 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals, which are reported in accounts payable and accrued expenses, for the
first six months of 2001 and 2000:
Beginning Cash Ending
(amounts in millions) balance payments Charges Reversals Other balance
------- -------- ------- --------- ----- -------
2001 $21.4 ($6.6) $3.8 ($1.3) ($6.7) $10.6
2000 12.1 (2.2) - - (0.6) 9.3
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.
24
In the second quarter of 2001, a $1.1 million reversal was recorded related to a
formerly occupied building for which Armstrong no longer believes it will incur
any additional costs. In addition, $0.2 million of the remaining accrual for the
first quarter 2001 reorganization was reversed, comprising certain severance
accruals that were no longer necessary as certain individuals remained employed
by Armstrong.
The amount in "other" is primarily related to the termination of an operating
lease for an office facility in the U.S. These lease costs were previously
accrued in the third quarter of 2000 as part of the restructuring charge when
the decision to vacate the premises was made. The $5.9 million reversal is
recorded as a reduction of Chapter 11 reorganization costs in accordance with
SOP 90-7. See Note 2 for further discussion. The remaining amount in "other" is
related to foreign currency translation.
Most of the remaining balance at June 30, 2001 relates to terminated employees
with extended payouts, the majority of which will be paid during 2001, and a
noncancelable operating lease, which extends through 2017.
Note 9. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Six Months Ended
June 30
2001 2000
---- ----
Interest paid $ 1.5 $ 53.5
Income taxes paid, net $ 1.7 $ 17.1
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 personal injury 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.
25
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 June 30, 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 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
June 30, 2001 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. A separate
creditors' committee representing the interests of property damage asbestos
claimants has been appointed in the Chapter 11 Case.
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.
26
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 and initial motions were heard in 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. Additionally, one of the
insurance carriers has been experiencing financial difficulties and was placed
under an order of rehabilitation by a state insurance department during the
second quarter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as
of December 31, 2000. The reduction is due to cash receipts during the second
quarter of 2001 and management's current assessment of probable insurance
recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3
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 $84 million of the $246.3 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 $246.3 million asset, $38.2 million has been
recorded as a current asset as of June 30, 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 six months of 2001. In the first six months
of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0
million in asbestos-related insurance recoveries during the first six months of
2001 compared to $27.7 million during the first six months of 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. In the second quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.0 million for cash receipts and by $6.0 million for
management's current assessment of probable insurance recoveries. The $6.0
million reduction was recorded as a charge for asbestos liability, net in the
accompanying condensed consolidated statement of earnings. 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.
27
Note 11. - ENVIRONMENTAL LIABILITIES
- ------------------------------------
Liabilities of $13.1 million and $13.5 million were recorded at June 30, 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 June 30, 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 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.
28
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.
Three creditors' committees, one representing personal injury asbestos
claimants, one representing property damage 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. The deadline for
claims from the U. S. Internal Revenue Service has been extended to December 31,
2001.
Financing
- ---------
On May 31, 2001, AWI reduced the amount of its debtor-in-possession credit
facility (the "DIP Facility") from $300 million to $200 million. As of June 30,
2001, AWI had no outstanding debt borrowings under the DIP Facility and AWI had
$110.6 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.
29
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.
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.
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. On June 12, 2001, negotiations with this investor were
terminated. However, AHI still plans to complete the disposition of this segment
in the first quarter of 2002. Accordingly, this segment is classified as a
discontinued operation.
Prior year balances and results have been reclassified to reflect the net assets
and results of this segment as 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
negotiations.
During the second quarter of 2001, AHI recorded a pretax loss of $0.9 million
related to its May 31, 2000 divestiture of its Insulation Products segment. This
loss resulted from certain post-closing adjustments.
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.
Financial Condition
- -------------------
As shown on the condensed Consolidated Balance Sheets (see page 3), AHI had cash
and cash equivalents of $177.5 million at June 30, 2001. Working capital was
$735.3 million as of June 30, 2001, $82.5 million higher than the $652.8 million
recorded at the end of 2000. The ratio of current assets to current liabilities
was 3.08 to 1 as of June 30, 2001, compared with 3.24 to 1 as of December 31,
2000. The decrease in the ratio is primarily attributable to an increase in
accounts payable and accrued expenses which offset the increase in accounts
receivable and inventory.
Long-term debt, excluding Armstrong's guarantee of an ESOP loan and debt subject
to compromise, decreased in the first half of 2001. At June 30, 2001, long-term
debt of $51.5 million, or 6.6 percent of total capital, compared with $56.8
million, or 7.6 percent of total capital, at the end of 2000. At June 30, 2001,
and December 31, 2000 ratios of total debt (excluding debt subject to
compromise) as a percent of total capital were 8.6 percent and 10.9 percent,
respectively.
As shown on the condensed Consolidated Statements of Cash Flows (see page 5),
net cash provided by operating activities for the six months ended June 30,
2001, was $74.2 million compared with net cash used for operating activities of
$35.6 million for the comparable period in 2000. The increase was primarily due
to the absence of asbestos-related claims payments in 2001 and changes in
accounts payable and accrued expenses.
Net cash used for investing activities was $45.3 million for the six months
ended June 30, 2001, compared with net cash provided by investing activities of
$165.2 million for the six months ended June 30, 2000. The decrease in cash
provided was primarily due to the receipt of proceeds from the sale of the
Insulation Products segment in 2000.
30
Net cash used for financing activities was $5.6 million for the six months ended
June 30, 2001 compared with $138.4 million for the six months ended June 30,
2000. The decrease in cash used was primarily due to a decrease in payments of
debt and no dividend payments in 2001.
DIP Facility
- ------------
The Court previously approved a $300 million debtor-in-possession financing
facility provided by a bank group led by The Chase Manhattan Bank. On May 31,
2001, AWI reduced the amount of the facility to $200 million. Borrowings under
the DIP Facility constitute superpriority administrative expense claims in the
Chapter 11 Cases. As of June 30, 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 personal injury 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.
31
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 June 30, 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 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
June 30, 2001 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. A separate
creditors' committee representing the interests of property damage asbestos
claimants has been appointed in the Chapter 11 Case.
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 and initial motions were heard in 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. Additionally, one of the
insurance carriers has been experiencing financial difficulties and was placed
under an order of rehabilitation by a state insurance department during the
second quarter.
32
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as
of December 31, 2000. The reduction is due to cash receipts during the second
quarter of 2001 and management's current assessment of probable insurance
recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3
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 $84 million of the $246.3 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 $246.3 million asset, $38.2 million has been
recorded as a current asset as of June 30, 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 six months of 2001. In the first six months
of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0
million in asbestos-related insurance recoveries during the first six months of
2001 compared to $27.7 million during the first six months of 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. In the second quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.0 million for cash receipts and by $6.0 million for
management's current assessment of probable insurance recoveries. The $6.0
million reduction was recorded as a charge for asbestos liability, net in the
accompanying condensed consolidated statement of earnings. 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.
Second-quarter 2001 net sales of $748.6 million from+ continuing operations were
5.5% lower than in the second quarter of 2000. Excluding the effects of
unfavorable foreign exchange rates, the impact of the third-quarter 2000 IPG
divestiture and the impact of the second-quarter 2000 Gema acquisition, net
sales
33
decreased 3.7%. Wood products sales decreased 6.1% due to lower volume and
weaker pricing. Floor coverings sales decreased 9.3% due mainly to the IPG
divestiture and lower sales volumes in residential sheet and commercial tile
products. Building products sales increased 1.7% as a result of the Gema
acquisition partially offset by a decline in commercial volume.
Second-quarter 2001 earnings from continuing operations were $33.0 million or
$0.81 per share, compared to 2000's second-quarter loss from continuing
operations of $102.6 million or $2.55 per share. A $6.0 million non-cash pre-tax
charge was recorded in the second quarter of 2001 related to management's
current assessment of probable asbestos-related insurance asset recoveries, A
$236.0 million non-cash pre-tax charge for an increase in the estimate of
probable liability for asbestos-related claims was recorded in the second
quarter of 2000 and resulted in an after-tax net earnings impact of $153.4
million or $3.81 per share. The second-quarter 2000 results also include a
pre-tax gain of $5.2 million or $0.08 per share from the demutualization of an
insurance company with whom AHI had company-owned life insurance policies, which
was recorded in other income. Excluding the asbestos charge and the
demutualization gain, earnings from continuing operations for the second quarter
of 2000 would have been $47.4 million, or $1.18 per share.
The cost of goods sold in the second quarter of 2001 was 73.6 % of net sales
compared to 71.2% of net sales in the second quarter of 2000. This increase was
driven primarily by higher raw material costs, mainly in floor coverings and
wood products, and higher energy costs in building products.
Second-quarter 2001 selling, general and administrative expenses were 17.8
percent of net sales compared to 15.3 percent of net sales in last year's second
quarter. The percentage increase is primarily due to an increase in advertising
expenses and to retention compensation expense in 2001.
Interest expense of $3.2 million was $24.7 million lower than the amount
recorded in the second quarter of 2000. In accordance with SOP 90-7, Armstrong
did not record $21.5 million of contractual interest expense on prepetition debt
in the second quarter of 2001.
Other expense, net of $2.6 million in the second quarter of 2001 compared to
other income, net of $5.4 million in the second quarter of 2000. The 2001 other
expense was primarily due to a $3.2 million non-cash charge resulting from the
impairment of investments. The 2000 other income was primarily due to a gain
from the demutualization of an insurance company with whom AHI had company-owned
life insurance policies.
The effective tax rate from continuing operations was 38.0% and 38.6% for the
second quarter of 2001 and 2000, respectively, excluding the impact of the
asbestos charge in 2000.
First-half 2001 net sales were $1,465.1 million, 4.1 percent lower than last
year's first-half net sales of $1,527.2 million. Excluding the unfavorable
effects of foreign exchange rates, the impact of the IPG divestiture and the
impact of the Gema acquisition, net sales decreased 2.6%.
Interest expense of $6.3 million was $47.5 million lower than the amount
recorded in the first half of 2001. In accordance with SOP 90-7, Armstrong did
not record $42.9 million of contractual interest expense on prepetition debt in
the first half of 2001.
The first-half earnings from continuing operations of $56.6 million or $1.38 per
share compared to 2000's first-half loss from continuing operations of $77.6
million or $1.94 per share. Excluding the asbestos charge and the
demutualization gain, earnings from continuing operations for the first half of
2000 would have been $72.4 million, or $1.80 per share.
Excluding the impact of the asbestos charge in 2000, Armstrong's effective tax
rate for continuing businesses was 38.5% and 38.7% for the first half of 2001
and 2000, respectively.
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 half 2001 pension
credit by $5.8 million compared to the first half of 2000.
34
Industry Segment Results
- ------------------------
The following discussion of industry segment results compares the second quarter
of 2001 with the second quarter of 2000.
Floor coverings net sales were $308.3 million and $340.0 million in 2001 and
2000, respectively. Net sales in the Americas decreased 7.6% from prior year as
a result of the IPG divestiture and lower sales volumes of residential sheet and
commercial tile products. European net sales were 11.2% below 2000 levels as a
result of weaker sales of cushion vinyl products. Excluding the unfavorable
effects of foreign exchange rates net sales in Europe were 4.2% below last year.
Pacific area sales decreased $2.6 million versus 2000. Operating income of $27.8
million in 2001 compared to $44.7 million in 2000. The operating income
reduction was driven primarily by the impact of the IPG divestiture and lower
sales volumes, which were partially offset by operating cost reductions.
Building products net sales of $206.5 million in 2001 increased from $203.0
million in 2000. Excluding the incremental sales from Gema, sales decreased
2.0%. Americas sales were flat versus 2000 as improved product mix and price
levels offset the effect of lower volume. In Europe, excluding the incremental
sales from Gema and the impact of unfavorable foreign exchange rates, sales
increased 2.5%. Pacific area sales decreased 6.3% versus 2000 as a result of
unfavorable product mix. Operating income decreased $5.5 million to $25.7
million in 2001 primarily due to higher energy costs partially offset by
favorable product mix and price.
Wood products net sales of $233.8 million in 2001 compared to net sales of
$248.9 million in 2000. Cabinet sales were flat versus 2000. Wood flooring sales
decreased 7.5% versus 2000, driven primarily by lower volume and weaker pricing.
Operating income declined to $14.1 million in 2001 from $29.2 million in 2000
primarily driven by lower sales volume combined with higher lumber costs.
Unallocated corporate expense of $3.6 million in 2001 compared to $0.2 million
of income in 2000, primarily due to retention compensation expense in 2001.
Recent Accounting Pronouncements
- --------------------------------
In the second quarter of 2001, the Emerging Issues Task Force ("EITF") released
EITF Issue No. 00-025, "Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer." This pronouncement requires
consideration paid to a reseller or retailer to be shown as a reduction of
revenue unless the vendor receives an identifiable separate benefit and that
benefit's fair value can be reasonably estimated. This pronouncement will be
effective January 1, 2002. AHI is evaluating the effects of implementation, if
any, on its financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations," and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001. Statement
141 also specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. AHI will be required to test goodwill and
intangible assets for impairment in accordance with the provisions of Statement
142 within the first quarter of 2002. Impairment losses, if any, will be
measured as of January 1, 2002 and recognized as the cumulative effect of a
change in accounting principle in the first quarter of 2002. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." AHI is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002.
As of January 1, 2002, AHI expects to have unamortized goodwill of approximately
$820 million and unamortized identifiable intangible assets in the amount of $86
million, all of which will be subject to the transition provisions of Statements
141 and 142. Amortization expense related to goodwill was $23.9 million and
$11.4 million for the year ended December 31, 2000 and the six months ended June
30, 2001, respectively. Because of the extensive effort needed to comply with
adopting Statements 141
35
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on AHI's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
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, distribution
network, 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 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
36
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/distribution network and/or business decisions
made by Armstrong's major customers/distribution network.
37
Part II - Other Information
---------------------------
Item 1. 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 personal injury 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 June 30, 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.
38
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 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
June 30, 2001 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. A separate
creditors' committee representing the interests of property damage asbestos
claimants has been appointed in the Chapter 11 Case.
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 and initial motions were heard in 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. Addtionally, one of the
insurance carriers has been experiencing financial difficulties and was placed
under an order of rehabilitation by a state insurance department during the
second quarter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as
of December 31, 2000. The reduction is due to cash receipts during the second
quarter of 2001 and management's current assessment of probable insurance
recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3
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
39
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 $84 million of the
$246.3 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 $246.3 million asset, $38.2
million has been recorded as a current asset as of June 30, 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 six months of 2001. In the first six months
of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0
million in asbestos-related insurance recoveries during the first six months of
2001 compared to $27.7 million during the first six months of 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. In the second quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.0 million for cash receipts and by $6.0 million for
management's current assessment of probable insurance recoveries. The $6.0
million reduction was recorded as a charge for asbestos liability, net in the
accompanying condensed consolidated statement of earnings. 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.
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.
40
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 June 30, 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 June 30,
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 5. - Other Information
- --------- -----------------
Shareholder Proposals and Director Nominations for 2001 Annual Meeting
- ----------------------------------------------------------------------
Our 2001 Annual Meeting of Shareholders is currently scheduled to be held on
December 10, 2001, which is more than 30 calendar days after the anniversary of
our prior annual meeting. As a result, the deadline for submissions of
shareholder proposals and director nominations relating to the 2001 Annual
Meeting has changed from the dates specified in last year's proxy statement.
If a shareholder intends to present a proposal for action at the 2001 Annual
Meeting and wishes to have such proposal considered for inclusion in the
Company's proxy materials in reliance on Rule 14a-8 under the Securities
Exchange Act of 1934, the proposal must be submitted in writing and received by
the Secretary of the Company by August 22, 2001. Such proposal must also meet
the other requirements of the rules of the Securities and Exchange Commission
relating to shareholders' proposals.
The Company's bylaws establish an advance notice procedure with regard to
certain matters, including shareholder proposals and nominations of individuals
for election to the Board of Directors. In general, notice of a shareholder
proposal or a director nomination for an annual meeting must be received by the
Company within fifteen days after public announcement of the date of the annual
meeting and must contain specified information and conform to certain
requirements, as set forth in the bylaws. Therefore, any shareholder proposal or
nomination for the 2001 annual meeting will need to be received by the Company
by August 22, 2001. If the presiding officer at any shareholders' meeting
determines that a shareholder proposal or director nomination was not made in
accordance with the bylaws, the Company may disregard such proposal or
nomination.
In addition, if a shareholder submits a proposal outside of Rule 14a-8 for the
2001 Annual Meeting and the proposal fails to comply with the advance notice
procedure prescribed by the bylaws, then the Company's proxy may confer
discretionary authority on the persons being appointed as proxies on behalf of
the Board of Directors to vote on the proposal. Proposals and nominations should
be addressed to the Secretary of the Company, John N. Rigas, Armstrong Holdings,
Inc., 2500 Columbia Ave., Lancaster, PA 17603. A shareholder may obtain a copy
of the relevant portions of the Company's bylaws by making a written request to
the Secretary of the Company.
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. 4 Armstrong World Industries, Inc.'s Retirement Savings and Stock
Ownership Plan effective as of October 1, 1996, as amended April
12, 2001.*
No. 10 Employment agreement between Armstrong World Industries, Inc.
and Chan W. Galbato dated May 2, 2001
No. 15 Letter re Unaudited Interim Financial Information
*Compensatory Plan.
(b) No reports on Form 8-K were filed during the second quarter of 2001.
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: August 6, 2001
43
Exhibit Index
-------------
Exhibit No.
- -----------
No. 4 Armstrong World Industries, Inc.'s Retirement Savings and Stock
Ownership Plan effective as of October 1, 1996, as amended April
12, 2001.*
No. 10 Employment agreement between Armstrong World Industries, Inc. and
Chan W. Galbato dated May 2, 2001
No. 15 Letter re: Unaudited Interim Financial Information
*Compensatory Plan.
44