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 September 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
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(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
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(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
November 1, 2001 - 40,748,268
1
Part 1 - Financial Information
------------------------------
Item 1 - Financial Statements
- -----------------------------
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions, except per share amounts)
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 804.7 $ 864.1 $ 2,398.9 $ 2,527.8
Cost of goods sold 605.8 632.7 1,782.7 1,816.3
--------- --------- --------- ---------
Gross profit 198.9 231.4 616.2 711.5
Selling, general and administrative expenses 149.9 146.5 449.3 446.9
Charge for asbestos liability, net 16.0 -- 22.0 236.0
Restructuring and reorganization charges (reversals), net (1.1) 15.7 3.0 15.7
Goodwill amortization 5.7 5.9 17.1 18.2
Equity (earnings) from affiliates, net (4.5) (4.9) (13.5) (14.1)
--------- --------- --------- ---------
Operating income 32.9 68.2 138.3 8.8
Interest expense (unrecorded contractual interest of $21.6, $0.0,
$64.5, and $0.0) 3.3 26.0 10.2 79.8
Other (income) expense, net 1.3 (61.6) 0.6 (67.0)
--------- --------- --------- ---------
Earnings (loss) from continuing operations before Chapter 11 reorganization
costs and income tax expense (benefit) 28.3 103.8 127.5 (4.0)
Chapter 11 reorganization costs, net 3.7 -- 6.2 --
--------- --------- --------- ---------
Earnings (loss) from continuing operations before income tax expense (benefit) 24.6 103.8 121.3 (4.0)
Income tax expense (benefit) 10.3 31.8 47.3 (0.8)
--------- --------- --------- ---------
Earnings (loss) from continuing operations $ 14.3 $ 72.0 $ 74.0 $ (3.2)
--------- --------- --------- ---------
Income from discontinued operations, net of tax of $3.2 -- -- -- 7.0
Gain (loss) on sale of discontinued operations, net of tax of $0.0, $0.9,
$0.0, and $42.8 (0.2) 2.3 (1.1) 108.7
Reversal of loss on expected disposal of discontinued operations, net of
tax of $10.7 27.1 -- 24.0 --
Net loss on expected disposal of discontinued operations, net of tax of $0.0 -- -- (3.3) --
--------- --------- --------- ---------
Earnings from discontinued operations 26.9 2.3 19.6 115.7
--------- --------- --------- ---------
Net earnings $ 41.2 $ 74.3 $ 93.6 $ 112.5
========= ========= ========= =========
Earnings (loss) per share of common stock, continuing operations:
Basic $ 0.35 $ 1.79 $ 1.83 $ (0.08)
Diluted $ 0.35 $ 1.77 $ 1.81 $ (0.08)
Earnings per share of common stock, discontinued operations:
Basic $ 0.66 $ 0.06 $ 0.49 $ 2.88
Diluted $ 0.66 $ 0.06 $ 0.48 $ 2.88
Net earnings per share of common stock:
Basic $ 1.02 $ 1.84 $ 2.32 $ 2.80
Diluted $ 1.01 $ 1.83 $ 2.29 $ 2.80
Average number of common shares outstanding:
Basic 40.5 40.3 40.4 40.2
Diluted 40.8 40.7 40.8 40.4
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 September 30, 2001 December 31, 2000
------ ------------------ -----------------
Current assets:
Cash and cash equivalents $ 255.5 $ 159.1
Accounts and notes receivable, net 392.9 369.0
Inventories, net 481.2 399.9
Deferred income taxes 11.9 10.0
Other current assets 66.8 84.0
---------- ----------
Total current assets 1,208.3 1,022.0
Property, plant and equipment, less accumulated depreciation and
amortization of $1,165.5 and $1,091.0, respectively 1,286.0 1,321.0
Insurance receivable for asbestos-related liabilities, noncurrent 192.1 236.1
Investment in affiliates 36.8 37.3
Goodwill, net 833.6 846.0
Other intangibles, net 88.6 92.7
Deferred income tax assets, noncurrent -- 6.8
Other noncurrent assets 481.3 443.3
---------- ----------
Total assets $ 4,126.7 $ 4,005.2
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 28.6 $ 35.9
Current installments of long-term debt 5.1 8.1
Accounts payable and accrued expenses 338.9 292.0
Income taxes 60.6 30.7
Accrued loss on expected disposal of discontinued operations -- 34.5
---------- ----------
Total current liabilities 433.2 401.2
---------- ----------
Liabilities subject to compromise 2,358.2 2,385.2
Long-term debt, less current installments 53.3 67.3
Postretirement and postemployment benefit liabilities 243.3 244.8
Pension benefit liabilities 159.2 156.8
Other long-term liabilities 83.1 77.9
Deferred income taxes 19.7 --
Minority interest in subsidiaries 8.8 6.9
---------- ----------
Total noncurrent liabilities 2,925.6 2,938.9
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 168.3 162.2
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,245.1 1,151.5
Accumulated other comprehensive loss (42.0) (45.2)
Treasury stock (513.2) (513.1)
---------- ----------
Total shareholders' equity 767.9 665.1
---------- ----------
Total liabilities and shareholders' equity $ 4,126.7 $ 4,005.2
========== ==========
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 September 30 $ 51.9 $ 51.9
---------- ----------
Capital in excess of par value:
- ------------------------------
Balance at beginning of year $ 162.2 $ 176.4
Stock issuances and other 6.1 (4.2)
Contribution of treasury stock to ESOP -- (5.3)
---------- ----------
Balance at September 30 $ 168.3 $ 166.9
---------- ----------
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 -- 8.0
---------- ----------
Balance at September 30 $ (142.2) $ (180.5)
---------- ----------
Retained earnings:
- -----------------
Balance at beginning of year $ 1,151.5 $ 1,196.2
Net earnings for nine months 93.6 $ 93.6 112.5 $ 112.5
Tax benefit on dividends paid on unallocated ESOP common shares -- 0.7
---------- ----------
Total $ 1,245.1 $ 1,309.4
Less common stock dividends -- 58.1
---------- ----------
Balance at September 30 $ 1,245.1 $ 1,251.3
---------- ----------
Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5)
Foreign currency translation adjustments 5.6 (13.5)
Derivative loss, net (3.6) --
Investment impairment 2.0 --
Unrealized loss on available for sale securities -- (2.5)
Minimum pension liability adjustments (0.8) (3.2)
---------- ----------
Total other comprehensive income (loss) 3.2 3.2 (19.2) (19.2)
---------- ---------- ---------- ---------
Balance at September 30 $ (42.0) $ (35.7)
---------- ----------
Comprehensive income $ 96.8 $ 93.3
- -------------------- ========== =========
Less treasury stock at cost:
- ---------------------------
Balance at beginning of year $ 513.1 $ 538.5
Stock purchases 0.2 1.4
Stock issuance activity, net (0.1) (11.9)
Contribution of treasury stock to ESOP -- (9.4)
---------- ----------
Balance at September 30 $ 513.2 $ 518.6
---------- ----------
Total shareholders' equity $ 767.9 $ 735.3
========== ==========
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
Nine Months Ended
September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 93.6 $ 112.5
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 114.5 125.7
Depreciation and amortization, discontinued operations -- 3.9
(Gain) loss on sale of businesses 0.9 (211.3)
Reversal of loss on expected disposal of discontinued operations (31.4) --
Deferred income taxes 24.6 1.6
Equity earnings from affiliates, net (13.5) (14.1)
Chapter 11 reorganization costs, net 6.2 --
Chapter 11 reorganization payments (9.9) --
Restructuring and reorganization charges 3.0 --
Restructuring and reorganization payments (9.3) (2.9)
Impairment of long-lived assets 8.4 --
Recoveries (payments) for asbestos-related claims, net 32.2 (131.0)
Charge for asbestos liability, net 22.0 236.0
Increase in net assets of businesses held for sale -- (0.3)
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring and dispositions
Increase in receivables (26.6) (67.5)
Increase in inventories (83.9) (30.2)
(Increase) decrease in other current assets 9.7 (11.1)
Increase in other noncurrent assets (49.3) (44.0)
Increase in accounts payable and accrued expenses 49.0 4.9
Increase in income taxes payable 28.6 29.1
Increase (decrease) in other long-term liabilities 7.0 (8.7)
Other, net 8.9 24.4
-------- --------
Net cash provided by operating activities 184.7 17.0
-------- --------
Cash flows used for investing activities:
Purchases of property, plant and equipment, continuing operations (71.3) (107.8)
Purchases of property, plant and equipment, discontinued operations -- (2.8)
Investment in computer software (8.4) (8.5)
Acquisitions, net of cash acquired -- (6.5)
Distributions from equity affiliates 13.5 11.1
Purchase of outstanding minority interest (5.6) --
Proceeds from the sale of assets 5.7 3.3
Proceeds from the sale of businesses -- 329.3
-------- --------
Net cash provided by (used for) investing activities (66.1) 218.1
-------- --------
Cash flows from financing activities:
Decrease in short-term debt, net (6.8) (42.8)
Payments of long-term debt (11.4) (127.2)
Cash dividends paid -- (58.1)
Purchase of common stock for the treasury, net (0.2) (1.4)
Proceeds from exercised stock options -- 0.1
Other, net (3.1) 5.9
-------- --------
Net cash used for financing activities (21.5) (223.5)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (0.7) (4.6)
-------- --------
Net increase in cash and cash equivalents $ 96.4 $ 7.0
Cash and cash equivalents at beginning of year 159.1 26.6
-------- --------
Cash and cash equivalents at end of period $ 255.5 $ 33.6
======== ========
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 11 for discussion of the
financial statement differences between Armstrong Holdings, Inc. and Armstrong
World Industries, Inc.
Operating results for the third 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. Based on these events, the segment was classified as a
discontinued operation starting with the fourth quarter of 2000. On June 12,
2001, negotiations with this investor were terminated. During the third quarter
of 2001, AHI terminated its plans to permanently exit this segment. This
decision was based on the difficulty encountered in selling the business and a
recent review of the business, industry and overall economy conducted by new
senior management. Accordingly, this segment is no longer classified as a
discontinued operation and amounts have been reclassified into operations as
required by Emerging Issues Task Force ("EITF") Issue No. 90-16 - "Accounting
for Discontinued Operations Subsequently Retained". See Note 3 for further
discussion.
Starting with the fourth quarter of 2000, AHI applied the provisions of EITF
Issue No. 00-010, "Accounting for Shipping and Handling Fees and Costs".
Consequently, approximately $36.8 million of third quarter 2000 ($107.6 million
for the first nine months of 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 third quarter of 2000 ($0.9 million for the first nine months 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 $8.0 million
in the third quarter of 2000 ($22.0 million for the first nine months 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 third quarters of the wood products segment ended on September 29, 2001 and
September 30, 2000. No events occurred between September 29, 2001 and September
30, 2001 materially affecting AHI's financial position or results of operations.
6
Note 2. CHAPTER 11 REORGANIZATION
- ---------------------------------
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 April 5, 2002,
and this date may be further extended by the Court.
Bar Date for Filing Claims
- --------------------------
Earlier this year, the Bankruptcy Court granted AWI's motion to establish August
31, 2001 as the bar date for all claims against AWI except for those arising
from asbestos-related personal injury assertions. A bar date is the date by
which claims against AWI must be filed if the claimants wish to receive any
distribution from the Chapter 11 proceedings. The Bankruptcy Court later
extended the bar date for claims from the U.S. Internal Revenue Service until
December 31, 2001 and claims from several environmental agencies until the
fourth quarter of 2001. Further, the Court allowed the time to file claims
related to asbestos property damage to continue beyond August 31, 2001 and has
yet to rule on an end date for these claims. A bar date for asbestos-related
personal injury claims has not been set.
Approximately 4,000 proofs of claim totaling approximately $5.7 billion alleging
a right to payment from AWI were filed in response to the August 31, 2001 bar
date. AWI is investigating these claims to determine their validity.
In its initial review of the filed claims, AWI has identified approximately 900
claims totaling $1.4 billion that it believes should be disallowed by the
Bankruptcy Court. These claims appear to be duplicate filings, amendments to
previously filed claims or claims that are not related to AWI. AWI has filed a
motion to dismiss these claims. While the Bankruptcy Court will ultimately
determine liability amounts, if any, that will be allowed as part of the Chapter
11 process, management believes that the possibility of these claims being
allowed is remote.
In addition to the categories of claims described above, AWI has also received
approximately 1,000 proofs of claim totaling approximately $1.8 billion that are
associated with asbestos-related personal injury litigation, including direct
personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWI's participation in the Center for
Claims Resolution ("the Center").. As the bar date of
7
August 31, 2001 did not pertain to direct asbestos-related personal injury
claims, AWI will address all asbestos-related claims in the future within the
Chapter 11 process. See further discussion regarding AWI's liability for
asbestos-related matters in Note 9.
AWI also received approximately 100 proofs of claim totaling approximately $0.6
billion alleging a right to payment because of asbestos-related property damage.
Most of these claims are new to AWI, many of which were submitted without any or
with insufficient documentation to assess their validity. AWI expects to
vigorously defend any asserted asbestos-related property damage claims in the
Bankruptcy Court. Further, AWI believes that it has a significant amount of
existing insurance coverage available for asbestos-related property damage
liability, with the amount ultimately available dependent upon, among other
things, the profile of the claims that may be allowed by the Bankruptcy Court.
AWI's history of property damage litigation prior to the Chapter 11 filing is
described in Note 9.
AWI received approximately 2,000 claims totaling approximately $1.9 billion
alleging a right to payment for financing, environmental, trade debt and other
claims. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities.
AWI will require several months to complete its evaluation of the claims
submitted by the August 31, 2001 bar date. AWI has recorded liability amounts
for those claims it believes to be probable of being allowed by the Court. At
this time, it is impossible to assess precisely which claims will ultimately be
allowed by the Bankruptcy Court. It is reasonably possible the amount of claims
ultimately allowed by the Court in excess of amounts presently recorded by AWI
could be material to AWI's financial position and the results of its operations.
However, it is not possible to determine a reasonable range of possible
liability with any reasonable degree of accuracy, due to the uncertainties of
the Chapter 11 process, the in-progress state of AWI's investigation of
submitted claims and the lack of documentation submitted in support of many
claims.
Financing
- ---------
As of September 30, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$168.4 million of cash and cash equivalents in addition to cash held by its non-
debtor subsidiaries. AWI believes that the DIP Facility, together with cash
generated from operations, will be more than adequate to address its liquidity
needs. Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Case.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
AHI has implemented this guidance in the accompanying condensed consolidated
financial statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at September 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 9 for further discussion
of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the third quarter and first nine months of 2001:
8
Three Months Ended Nine Months Ended
(amounts in millions) September 30, 2001 September 30, 2001
- --------------------- ------------------ ------------------
Professional fees $ 5.3 $17.2
Interest income, post petition (1.3) (4.0)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net (0.3) 0.9
----- -----
Total Chapter 11 reorganization costs, net $ 3.7 $ 6.2
===== =====
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, 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. Based on these events, the segment was classified as a
discontinued operation starting with the fourth quarter of 2000. On June 12,
2001, negotiations with this investor were terminated. During the third quarter
of 2001, AHI terminated its plans to permanently exit this segment. This
decision was based on the difficulty encountered in selling the business and a
recent review of the business, industry and overall economy conducted by new
senior management. Accordingly, this segment is no longer classified as a
discontinued operation and amounts have been reclassified into operations as
required by EITF Issue No. 90-16 - "Accounting for Discontinued Operations
Subsequently Retained". All prior periods have been reclassified to conform to
the current presentation.
The following financial information pertains to the Textiles and Sports Flooring
segment as of and for the year ended December 31, 2000.
(amounts in millions)
Total revenues $277.0
Total operating income 0.9
Total assets 200.3
Total liabilities 142.6
The following financial information pertains to the Textiles and Sports Flooring
segment for the periods ended September 30.
9
Three Months Nine Months
Ended September 30 Ended September 30
(amounts in millions) 2001 2000 2001 2000
---- ---- ---- ----
Total revenues $72.1 $68.9 $200.9 $205.1
Total operating income (loss) (7.2) (2.6) (1.3) 1.1
Based on the expected net realizable value of the business determined during the
negotiations to sell the business, AHI had recorded a pretax net loss of $30.3
million in the fourth quarter of 2000 (net of a $4.2 million gain on the sale of
a component of this segment that was classified as a business held for sale),
$19.5 million net of tax benefit. AHI also had recorded an additional net loss
of $3.3 million in the first quarter of 2001, as a result of price adjustments
resulting from the negotiations. Concurrent with the decision to no longer
classify the business as a discontinued operation, the remaining accrued loss of
$37.8 million ($27.1 million net of tax) has been reversed in the third quarter
of 2001 and is recorded as part of earnings from discontinued operations.
Additionally, the segment's net income for the first and second quarter of 2001
has been reclassified into income from continuing operations for those periods.
During the third quarter of 2001, AHI concluded there were indicators of
impairment related to certain assets in this segment, and accordingly, an
impairment evaluation was conducted at the end of the third quarter under the
guidelines of SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". This evaluation led to an
impairment charge of $8.4 million, representing the excess of book value over
estimated fair value which was determined using a net discounted cash flows
approach. The charge was included in cost of sales. The impairment was related
to property, plant and equipment that produce certain products for which AHI
anticipates lower demand in the future. Additionally, an inventory write-down of
$2.1 million was also recorded in the third quarter of 2001 within cost of sales
related to certain products that will no longer be sold.
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $106.4 million, or $2.64 per share
in Armstrong's second quarter. An after tax gain on sale of $2.3 million
recorded in the third quarter of 2000 related to certain accrual and post-
closing adjustments. During the second quarter of 2001, AHI recorded a pretax
loss of $0.9 million related to its divestiture of its Insulation Products
segment. This loss resulted from certain post-closing adjustments.
Note 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the condensed consolidated balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
expected amount of the allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of AHI subsidiaries not covered by the Filing remain
classified on the condensed consolidated balance sheet based upon maturity date.
AWI's asbestos-related liability is also recorded in liabilities subject to
compromise. See Note 9 for further discussion of AWI's asbestos-related
liability. See Note 2 for further discussion of claims received at the August
31, 2001 bar date.
Liabilities subject to compromise at September 30, 2001 and December 31, 2000
are as follows:
(amounts in millions) September 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 52.1 60.1
Prepetition other payables and accrued interest 57.1 76.4
ESOP loan guarantee 157.7 157.7
-------- --------
Total liabilities subject to compromise $2,358.2 $2,385.2
======== ========
10
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Note 5. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions) Three months Nine months
ended September 30 ended September 30
Net sales to external customers 2001 2000 2001 2000
- ------------------------------- ---- ---- ---- ----
Floor coverings $303.3 $349.1 $ 902.7 $1,005.6
Building products 215.1 225.9 638.3 628.1
Wood products 214.2 220.2 657.0 689.0
Textiles and sports flooring 72.1 68.9 200.9 205.1
------ ------ -------- --------
Total sales to external customers $804.7 $864.1 $2,398.9 $2,527.8
====== ====== ======== ========
Three months Nine months
ended September 30 ended September 30
Segment operating income (loss) 2001 2000 2001 2000
- --------------------------------------- ---- ---- ---- ----
Floor coverings $ 29.1 $ 35.2 $ 77.1 $ 108.2
Building products 31.1 35.4 75.3 92.3
Wood products (1.8) 18.5 22.0 65.6
Textiles and sports flooring (7.2) (2.6) (1.3) 1.1
All other 0.2 0.4 0.7 0.5
------ ------ -------- --------
Total segment operating income 51.4 86.9 173.8 267.7
Charge for asbestos liability, net (16.0) - (22.0) (236.0)
Unallocated corporate (expense) (2.5) (18.7) (13.5) (22.9)
------ ------ -------- --------
Total consolidated operating income $ 32.9 $ 68.2 $ 138.3 $ 8.8
====== ====== ======== ========
September 30, December 31,
Segment assets 2001 2000
- -------------- ---- --------
Floor coverings $ 949.7 $ 897.6
Building products 544.4 568.5
Wood products 1,400.4 1,358.7
Textiles and sports flooring 191.7 200.3
All other 16.7 16.3
-------- --------
Total segment assets 3,102.9 3,041.4
Assets not assigned to business units 1,023.8 963.8
-------- --------
Total consolidated assets $4,126.7 $4,005.2
======== ========
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 6. INVENTORY
- ------------------
(amounts in millions) September 30, 2001 December 31, 2000
------------------ -----------------
Finished goods $290.1 $244.7
Goods in process 53.3 49.0
Raw materials and supplies 190.4 158.0
Less LIFO and other reserves (52.6) (51.8)
------ ------
Total inventories, net $481.2 $399.9
====== ======
Note 7. 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 nine months of 2001 and 2000:
Beginning Cash Ending
(amounts in millions) balance payments Charges Reversals Other balance
------- -------- ------- --------- ------ -------
2001 $22.2 ($9.3) $ 4.1 ($2.7) ($6.2) $ 8.1
2000 12.1 (2.9) 15.7 - (1.0) 23.9
11
A $5.4 million pre-tax 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.
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.
In the third quarter of 2001, a $1.4 million reversal was recorded related to
certain severance and benefit accruals that were no longer necessary and a $0.3
million pre-tax charge was recorded for additional severance payments (bringing
the total 2001 charge reflected in the table above to $4.1 million).
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 lease was rejected as part of
the Chapter 11 process. Accordingly, 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.
A $17.0 million pre-tax reorganization charge was recorded in the third quarter
of 2000, of which $8.6 million related to severance and enhanced retirement
benefits for more than 180 positions (approximately 66% related to salaried
positions) within the European Flooring business. Reorganization actions include
staff reductions due to the elimination of administrative positions, the
consolidation and closing of sales offices in Europe and the closure of the Team
Valley, England commercial tile plant. The remaining portion of the
reorganization charge primarily related to the remaining payments on a
noncancelable operating lease for an office facility in the U.S. The employees
who occupied this office facility were relocated to the corporate headquarters.
Armstrong also recorded a $12.2 million charge to cost of goods sold in the
third quarter of 2000 for write-downs of inventory and production-line assets
that were not categorized as reorganization costs related to the European
reorganization efforts. The inventory write-downs were related to changes in
product offerings while the write-downs of production-line assets primarily
related to changes in production facilities and product offerings.
Most of the remaining balance at September 30, 2001 relates to a noncancelable
operating lease, which extends through 2017 and severance for terminated
employees with extended payouts, the majority of which will be paid by the
second quarter of 2002.
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Nine Months Ended
September 30
2001 2000
---- ----
Interest paid $ 3.0 $76.3
Income taxes paid, net 2.1 11.1
12
Note 9. 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.
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 September 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.
13
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
- --------------------------
Over the years, AWI was one of many defendants in asbestos-related property
damage claims that were filed by public and private building owners, with six
claims pending as of June 30, 2001. The claims that were resolved resulted in
aggregate payments of less than $10 million and were entirely covered by
insurance. The pending 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 stayed due to the Filing. Consistent with prior
periods and due to increased uncertainty, AWI has not recorded any liability
related to these claims as of September 30, 2001. See Note 2 for further
discussion of the property damage claims received by the general claims bar date
of the Chapter 11 Case. 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 first quarter of
2001, a new trial judge was selected for the ADR. 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, Reliance Insurance Company, was
placed under an order of rehabilitation by a state insurance department during
May 2001 and an order of liquidation during October 2001.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of September 30, 2001 compared to $268.3
million as of December 31, 2000. The reduction is due to cash receipts during
the second and third quarters of 2001 and management's current assessment of
probable insurance recoveries, which included the order of liquidation for
Reliance Insurance Company. Of the total recorded asset at September 30, 2001,
approximately $48.4 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
14
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 $83 million of the $214.1 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 $214.1 million asset, $22.0 million has been
recorded as a current asset as of September 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 nine months of 2001. In the first nine
months of 2000, AWI paid $158.7 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during the first
nine months of 2001 compared to $27.7 million during the first nine 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 third quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.2 million for cash receipts and by $16.0 million for
management's current assessment of probable insurance recoveries. The $16.0
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 financial statements.
Note 10. - ENVIRONMENTAL LIABILITIES
- ------------------------------------
Liabilities of $15.5 million were recorded at September 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 September 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
15
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, or liquidity, although the recording of
future costs may be material to earnings in such future periods.
Note 11 - 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 12 - EARNINGS PER SHARE
- ----------------------------
On November 7 2001, Armstrong announced a reorganization to consolidate the
operations of its Floor Coverings organization with its Wood Products flooring
organization. This consolidation is intended to create one integrated flooring
business. Chan Galbato, currently President and CEO of Armstrong Flooring
Products, will head the new organization. Frank Riddick, currently Armstrong's
President and Chief Operating Officer as well as President and CEO of Armstrong
Wood Products, will resign from his positions effective immediately. Costs
associated with this reorganization will be incurred over the next several
quarters.
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 the first nine months of 2000 use
the basic number of shares due to the loss on continuing operations.
16
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 September 30, 2001, and the
related condensed consolidated statements of earnings for the three and nine-
month periods ended September 30, 2001 and 2000, and the condensed consolidated
statements of cash flows and shareholders' equity for the nine-month periods
ended September 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 9 of the condensed consolidated financial
statements, raise uncertainty 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
November 5, 2001
17
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(amounts in millions)
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $804.7 $864.1 $2,398.9 $2,527.8
Cost of goods sold 605.8 632.7 1,782.7 1,816.3
------ ------ -------- --------
Gross profit 198.9 231.4 616.2 711.5
Selling, general and administrative expenses 149.9 146.5 449.3 446.4
Charge for asbestos liability, net 16.0 - 22.0 236.0
Restructuring and reorganization charges (reversals), net (1.1) 15.7 3.0 15.7
Goodwill amortization 5.7 5.9 17.1 18.2
Equity (earnings) from affiliates, net (4.5) (4.9) (13.5) (14.1)
------ ------ -------- --------
Operating income 32.9 68.2 138.3 9.3
Interest expense (unrecorded contractual interest of $21.6, $0.0, $64.5, and $0.0) 3.3 26.0 10.2 79.8
Other (income) expense, net 1.3 (61.6) 0.6 (67.0)
------ ------ -------- --------
Earnings (loss) from continuing operations before Chapter 11 reorganization
costs and income tax expense (benefit) 28.3 103.8 127.5 (3.5)
Chapter 11 reorganization costs, net 3.7 - 6.2 -
------ ------ -------- --------
Earnings (loss) from continuing operations before income tax expense (benefit) 24.6 103.8 121.3 (3.5)
Income tax expense (benefit) 10.3 31.8 47.3 (0.6)
------ ------ -------- --------
Earnings (loss) from continuing operations $ 14.3 $ 72.0 $ 74.0 $ (2.9)
------ ------ -------- --------
Income from discontinued operations, net of tax of $0.0 and $3.2 - - - 7.0
Gain (loss) on sale of discontinued operations, net of tax of $0.0, $0.9, $0.0, and $42.8 (0.2) 2.3 (1.1) 108.7
Reversal of expected loss on disposal of discontinued operations 27.1 24.0
Net loss on expected disposal of discontinued operations, net of tax of $0.0 - - (3.3) -
------ ------ -------- --------
Earnings from discontinued operations 26.9 2.3 19.6 115.7
------ ------ -------- --------
Net earnings $ 41.2 $ 74.3 $ 93.6 $ 112.8
------ ------ -------- --------
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 22.
18
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions except share data)
Unaudited
Assets September 30, 2001 December 31, 2000
------ ------------------ -----------------
Current assets:
Cash and cash equivalents $ 255.5 $ 159.1
Accounts and notes receivable, net 392.9 369.0
Inventories, net 481.2 399.9
Deferred income taxes 11.9 10.0
Other current assets 66.8 84.0
-------- ---------
Total current assets 1,208.3 1,022.0
Property, plant and equipment, less accumulated depreciation and
amortization of $1,165.5 and $1,091.0, respectively 1,286.0 1,321.0
Insurance receivable for asbestos-related liabilities, noncurrent 192.1 236.1
Investment in affiliates 36.8 37.3
Goodwill, net 833.6 846.0
Other intangibles, net 88.6 92.7
Deferred income tax assets, noncurrent - 6.8
Other noncurrent assets 481.3 443.3
-------- ---------
Total assets $4,126.7 $ 4,005.2
======== =========
Liabilities and Shareholder's Equity
------------------------------------
Current liabilities:
Short-term debt $ 28.6 $ 35.9
Current installments of long-term debt 5.1 8.1
Accounts payable and accrued expenses 338.9 292.0
Short-term amounts due to affiliates 8.2 2.4
Income taxes 62.3 32.2
Accrued loss on expected disposal of discontinued operations - 34.5
-------- ---------
Total current liabilities 443.1 405.1
-------- ---------
Liabilities subject to compromise 2,362.9 2,389.9
Long-term debt, less current installments 53.3 67.3
Postretirement and postemployment benefit liabilities 243.3 244.8
Pension benefit liabilities 159.2 156.8
Other long-term liabilities 83.1 77.9
Deferred income taxes 19.7 -
Minority interest in subsidiaries 8.8 6.9
-------- ---------
Total noncurrent liabilities 2,930.3 2,943.6
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 1,240.7 1,147.1
Accumulated other comprehensive loss (42.0) (45.2)
Treasury stock (528.5) (528.5)
-------- ---------
Total shareholder's equity 753.3 656.5
-------- ---------
Total liabilities and shareholder's equity $4,126.7 $ 4,005.2
======== =========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 22.
19
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 September 30 $ 51.9 $ 51.9
--------- ---------
Capital in excess of par value:
- -------------------------------
Balance at beginning of year $ 173.4 $ 176.4
Stock issuances and other - 4.7
Contribution of treasury stock to ESOP - (5.3)
--------- ---------
Balance at September 30 $ 173.4 $ 175.8
--------- ---------
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 - 8.0
--------- ---------
Balance at September 30 $ (142.2) $ (180.5)
--------- ---------
Retained earnings:
- ------------------
Balance at beginning of year $ 1,149.1 $ 1,196.2
Net earnings for nine months 93.6 $ 93.6 112.8 $112.8
Adjustment for prior period intercompany dividend (2.0) -
Tax benefit on dividends paid on unallocated ESOP common shares - 0.7
--------- ---------
Total $ 1,240.7 $ 1,309.7
Less rights redemptions - 2.0
Less common stock dividends - 60.1
--------- ---------
Balance at September 30 $ 1,240.7 $ 1,247.6
--------- ---------
Accumulated other comprehensive income (loss):
- ----------------------------------------------
Balance at beginning of year $ (45.2) $ (16.5)
Foreign currency translation adjustments 5.6 (13.5)
Derivative loss, net (3.6) -
Investment impairment 2.0 -
Unrealized loss on available for sale securities - (2.5)
Minimum pension liability adjustments (0.8) (3.2)
--------- ---------
Total other comprehensive (loss) 3.2 3.2 (19.2) (19.2)
--------- --------- --------- ------
Balance at September 30 $ (42.0) $ (35.7)
--------- ---------
Comprehensive income $ 96.8 $ 93.6
- -------------------- ========= ======
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 528.5 $ 538.5
Stock purchases - -
Stock issuance activity, net - (0.6)
Contribution of treasury stock to ESOP - (9.4)
--------- ---------
Balance at September 30 $ 528.5 $ 528.5
--------- ---------
Total shareholder's equity $ 753.3 $ 730.6
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 22.
20
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Nine Months Ended
September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 93.6 $ 112.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 114.5 125.7
Depreciation and amortization, discontinued operations - 3.9
(Gain) loss on sale of businesses 0.9 (211.3)
Reversal of los on expected disposal of discontinued operations (31.4) -
Deferred income taxes 24.6 1.6
Equity earnings from affiliates, net (13.5) (14.1)
Chapter 11 reorganization costs, net 6.2 -
Chapter 11 reorganization payments (9.9) -
Restructuring and reorganization charges 3.0 -
Restructuring and reorganization payments (9.3) (2.9)
Impairment of long-lived assets 8.4 -
Recoveries (payments) for asbestos-related claims, net 32.2 (131.0)
Charge for asbestos liability, net 22.0 236.0
Increase in net assets of businesses held for sale - (0.3)
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring and dispositions
Increase in receivables (26.6) (67.5)
Increase in inventories (83.9) (30.2)
(Increase) decrease in other current assets 9.7 (11.1)
Increase in other noncurrent assets (49.3) (44.0)
Increase in accounts payable and accrued expenses 49.0 4.9
Increase in income taxes payable 28.6 29.1
Increase (decrease) in other long-term liabilities 7.0 (8.7)
Other, net 8.9 24.1
------- -------
Net cash provided by operating activities 184.7 17.0
------- -------
Cash flows used for investing activities:
Purchases of property, plant and equipment, continuing operations (71.3) (107.8)
Purchases of property, plant and equipment, discontinued operations - (2.8)
Investment in computer software (8.4) (8.5)
Acquisitions, net of cash acquired - (6.5)
Distributions from equity affiliates 13.5 11.1
Purchase of outstanding minority interest (5.6) -
Proceeds from the sale of assets 5.7 3.3
Proceeds from the sale of businesses - 329.3
------- -------
Net cash provided by (used for) investing activities (66.1) 218.1
------- -------
Cash flows from financing activities:
Decrease in short-term debt, net (6.8) (42.8)
Payments of long-term debt (11.4) (127.2)
Cash dividends paid - (58.1)
Purchase of common stock for the treasury, net (0.2) (1.4)
Proceeds from exercised stock options - 0.1
Other, net (3.1) 5.9
------- -------
Net cash used for financing activities (21.5) (223.5)
------- -------
Effect of exchange rate changes on cash and cash equivalents (0.7) (4.6)
------- -------
Net increase in cash and cash equivalents $ 96.4 $ 7.0
Cash and cash equivalents at beginning of year 159.1 26.6
------- -------
Cash and cash equivalents at end of period $ 255.5 $ 33.6
======= =======
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 22.
21
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 11 for discussion of the
financial statement differences between Armstrong Holdings, Inc. and Armstrong
World Industries, Inc.
Operating results for the third 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. Based on these events, the segment was
classified as a discontinued operation starting with the fourth quarter of 2000.
On June 12, 2001, negotiations with this investor were terminated. During the
third quarter of 2001, Armstrong terminated its plans to permanently exit this
segment. This decision was based on the difficulty encountered in selling the
business and a recent review of the business, industry and overall economy
conducted by new senior management. Accordingly, this segment is no longer
classified as a discontinued operation and amounts have been reclassified into
operations as required by Emerging Issues Task Force ("EITF") Issue No. 90-16 -
"Accounting for Discontinued Operations Subsequently Retained". See Note 3 for
further discussion.
Starting with the fourth quarter of 2000, Armstrong applied the provisions of
EITF Issue No. 00-010, "Accounting for Shipping and Handling Fees and Costs".
Consequently, approximately $36.8 million of third quarter 2000 ($107.6 million
for the first nine months of 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 third quarter of 2000($0.9 million for the first nine months 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 $8.0
million in the third quarter of 2000 ($22.0 million for the first nine months 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 third quarters of the wood products segment
ended on September 29, 2001 and September 30, 2000. No events occurred between
September 29, 2001 and September 30, 2001 materially affecting Armstrong's
financial position or results of operations.
22
Note 2. CHAPTER 11 REORGANIZATION
- ---------------------------------
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 April 5, 2002,
and this date may be further extended by the Court.
Bar Date for Filing Claims
- --------------------------
Earlier this year, the Bankruptcy Court granted AWI's motion to establish August
31, 2001 as the bar date for all claims against AWI except for those arising
from asbestos-related personal injury assertions. A bar date is the date by
which claims against AWI must be filed if the claimants wish to receive any
distribution from the Chapter 11 proceedings. The Bankruptcy Court later
extended the bar date for claims from the U.S. Internal Revenue Service until
December 31, 2001 and claims from several environmental agencies until the
fourth quarter of 2001. Further, the Court allowed the time to file claims
related to asbestos property damage to continue beyond August 31, 2001 and has
yet to rule on an end date for these claims. A bar date for asbestos-related
personal injury claims has not been set.
Approximately 4,000 proofs of claim totaling approximately $5.7 billion alleging
a right to payment from AWI were filed in response to the August 31, 2001 bar
date. AWI is investigating these claims to determine their validity.
In its initial review of the filed claims, AWI has identified approximately 900
claims totaling $1.4 billion that it believes should be disallowed by the
Bankruptcy Court. These claims appear to be duplicate filings, amendments to
previously filed claims or claims that are not related to AWI. AWI has filed a
motion to dismiss these claims. While the Bankruptcy Court will ultimately
determine liability amounts, if any, that will be allowed as part of the Chapter
11 process,management believes that the possibility of these claims being
allowed is remote.
In addition to the categories of claims described above, AWI has also received
approximately 1,000 proofs of claim totaling approximately $1.8 billion that are
associated with asbestos-related personal injury litigation, including direct
personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWI's participation in the Center for
Claims Resolution ("the Center").. As the bar date of
23
August 31, 2001 did not pertain to direct asbestos-related personal injury
claims, AWI will address asbestos-related claims in the future within the
Chapter 11 process. See further discussion regarding AWI's liability for
asbestos-related matters in Note 9.
AWI also received approximately 100 proofs of claim totaling approximately $0.6
billion alleging a right to payment because of asbestos-related property damage.
Most of these claims are new to AWI, many of which were submitted without any or
with insufficient documentation to assess their validity. AWI expects to
vigorously defend any asserted asbestos-related property damage claims in the
Bankruptcy Court. Further, AWI believes that it has a significant amount of
existing insurance coverage available for asbestos-related property damage
liability, with the amount ultimately available dependent upon, among other
things, the profile of the claims that may be allowed by the Bankruptcy Court.
AWI's history of property damage litigation prior to the Chapter 11 filing is
described in Note 9.
AWI received approximately 2,000 claims totaling approximately $1.9 billion
alleging a right to payment for financing, environmental, trade debt and other
claims. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities.
AWI will require several months to complete its evaluation of the claims
submitted by the August 31, 2001 bar date. AWI has recorded liability amounts
for those claims it believes to be probable of being allowed by the Court. At
this time, it is impossible to assess precisely which claims will ultimately be
allowed by the Bankruptcy Court. It is reasonably possible the amount of claims
ultimately allowed by the Court in excess of amounts presently recorded by AWI
could be material to AWI's financial position and the results of its operations.
However, it is not possible to determine a reasonable range of possible
liability with any reasonable degree of accuracy, due to the uncertainties of
the Chapter 11 process, the in-progress state of AWI's investigation of
submitted claims and the lack of documentation submitted in support of many
claims.
Financing
- ---------
As of September 30, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$168.4 million of cash and cash equivalents in addition to cash held by its non-
debtor subsidiaries. AWI believes that the DIP Facility, together with cash
generated from operations, will be more than adequate to address its liquidity
needs. Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Case.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
AHI has implemented this guidance in the accompanying condensed consolidated
financial statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at September 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 9 for further discussion
of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the third quarter and first nine months of 2001:
24
Three Months Ended Nine Months Ended
(amounts in millions) September 30, 2001 September 30, 2001
- --------------------- ------------------ ------------------
Professional fees $ 5.3 $17.2
Interest income, post petition (1.3) (4.0)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net (0.3) 0.9
----- -----
Total Chapter 11 reorganization costs, net $ 3.7 $ 6.2
===== =====
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. Based on these events, the segment was
classified as a discontinued operation starting with the fourth quarter of 2000.
On June 12, 2001, negotiations with this investor were terminated. During the
third quarter of 2001, Armstrong terminated its plans to permanently exit this
segment. This decision was based on the difficulty encountered in selling the
business and a recent review of the business, industry and overall economy
conducted by new senior management. Accordingly, this segment is no longer
classified as a discontinued operation and amounts have been reclassified into
operations as required by EITF Issue No. 90-16 - "Accounting for Discontinued
Operations Subsequently Retained". All prior periods have been reclassified to
conform to the current presentation.
The following financial information pertains to the Textiles and Sports Flooring
segment as of and for the year ended December 31, 2000.
(amounts in millions)
Total revenues $277.0
Total operating income 0.9
Total assets 200.3
Total liabilities 142.6
The following financial information pertains to the Textiles and Sports Flooring
segment for the periods ended September 30.
25
Three Months Nine Months
Ended September 30 Ended September 30
(amounts in millions) 2001 2000 2001 2000
---- ---- ------ ------
Total revenues $72.1 $68.9 $200.9 $205.1
Total operating income (loss) (7.2) (2.6) (1.3) 1.1
Based on the expected net realizable value of the business determined during the
negotiations to sell the business, Armstrong had recorded a pretax net loss of
$30.3 million in the fourth quarter of 2000 (net of a $4.2 million gain on the
sale of a component of this segment that was classified as a business held for
sale), $19.5 million net of tax benefit. Armstrong also had recorded an
additional net loss of $3.3 million in the first quarter of 2001, as a result of
price adjustments resulting from the negotiations. Concurrent with the decision
to no longer classify the business as a discontinued operation, the remaining
accrued loss of $37.8 million ($27.1 million net of tax) has been reversed in
the third quarter of 2001 and is recorded as part of earnings from discontinued
operations. Additionally, the segment's net income for the first and second
quarter of 2001 has been reclassified into income from continuing operations for
those periods.
During the third quarter of 2001, AHI concluded there were indicators of
impairment related to certain assets in this segment, and accordingly, an
impairment evaluation was conducted at the end of the third quarter under the
guidelines of SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". This evaluation led to an
impairment charge of $8.4 million, representing the excess of book value over
estimated fair value which was determined using a net discounted cash flows
approach. The charge was included in cost of sales. The impairment was related
to property, plant and equipment that produce certain products for which
Armstrong anticipates lower demand in the future. Additionally, an inventory
write-down of $2.1 million was also recorded in the third quarter of 2001 within
cost of sales related to certain products that will no longer be sold.
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $106.4 million, or $2.64 per share
in Armstrong's second quarter. An after tax gain on sale of $2.3 million
recorded in the third quarter of 2000 related to certain accrual and post-
closing adjustments. During the second quarter of 2001, AHI recorded a pretax
loss of $0.9 million related to its divestiture of its Insulation Products
segment. This loss resulted from certain post-closing adjustments.
Note 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the condensed consolidated balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
expected amount of the allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the condensed consolidated balance sheet based upon
maturity date. AWI's asbestos-related liability is also recorded in liabilities
subject to compromise. See Note 9 for further discussion of AWI's asbestos-
related liability. See Note 2 for further discussion of claims received at the
August 31, 2001 bar date.
Liabilities subject to compromise at September 30, 2001 and December 31, 2000
are as follows:
(amounts in millions) September 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 52.1 60.1
Prepetition other payables and accrued interest 57.1 76.4
ESOP loan guarantee 157.7 157.7
Amounts due affiliates 4.7 4.7
-------- --------
Total liabilities subject to compromise $2,362.9 $2,389.9
======== ========
26
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Note 5. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions) Three months Nine months
ended September 30 ended September 30
Net sales to external customers 2001 2000 2001 2000
- ------------------------------- ---- ---- ---- ----
Floor coverings $303.3 $349.1 $ 902.7 $1,005.6
Building products 215.1 225.9 638.3 628.1
Wood products 214.2 220.2 657.0 689.0
Textiles and sports flooring 72.1 68.9 200.9 205.1
------ ------ -------- --------
Total sales to external customers $804.7 $864.1 $2,398.9 $2,527.8
====== ====== ======== ========
Three months Nine months
ended September 30 ended September 30
Segment operating income (loss) 2001 2000 2001 2000
- ------------------------------- ---- ---- ---- ----
Floor coverings $ 29.1 $ 35.2 $ 77.1 $ 108.2
Building products 31.1 35.4 75.3 92.3
Wood products (1.8) 18.5 22.0 65.6
Textiles and sports flooring (7.2) (2.6) (1.3) 1.1
All other 0.2 0.4 0.7 0.5
------ ------ --------- --------
Total segment operating income 51.4 86.9 173.8 267.7
Charge for asbestos liability, net (16.0) - (22.0) (236.0)
Unallocated corporate (expense) (2.5) (18.7) (13.5) (22.4)
------ ------ --------- --------
Total consolidated operating income $ 32.9 $ 68.2 $ 138.3 $ 9.3
====== ====== ========= ========
September 30, December 31,
Segment assets 2001 2000
- -------------- ---- ----
Floor coverings $ 949.7 $ 897.6
Building products 544.4 568.5
Wood products 1,400.4 1,358.7
Textiles and sports flooring 191.7 200.3
All other 16.7 16.3
--------- --------
Total segment assets 3,102.9 3,041.4
Assets not assigned to business units 1,023.8 963.8
--------- --------
Total consolidated assets $ 4,126.7 $4,005.2
========= ========
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 6. INVENTORY
- ------------------
(amounts in millions) September 30, 2001 December 31, 2000
------------------ -----------------
Finished goods $290.1 $244.7
Goods in process 53.3 49.0
Raw materials and supplies 190.4 158.0
Less LIFO and other reserves (52.6) (51.8)
------ ------
Total inventories, net $481.2 $399.9
====== ======
Note 7. 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 nine months of 2001 and 2000:
Beginning Cash Ending
(amounts in millions) balance payments Charges Reversals Other balance
------- -------- ------- --------- ------ -------
2001 $22.2 ($9.3) $ 4.1 ($2.7) ($6.2) $ 8.1
2000 12.1 (2.9) 15.7 - (1.0) 23.9
27
A $5.4 million pre-tax 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.
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.
In the third quarter of 2001, a $1.4 million reversal was recorded related to
certain severance and benefit accruals that were no longer necessary and a $0.3
million pre-tax charge was recorded for additional severance payments (bringing
the total 2001 charge reflected in the table above to $4.1 million).
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 lease was rejected as part of
the Chapter 11 process. Accordingly, 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.
A $17.0 million pre-tax reorganization charge was recorded in the third quarter
of 2000, of which $8.6 million related to severance and enhanced retirement
benefits for more than 180 positions (approximately 66% related to salaried
positions) within the European Flooring business. Reorganization actions include
staff reductions due to the elimination of administrative positions, the
consolidation and closing of sales offices in Europe and the closure of the Team
Valley, England commercial tile plant. The remaining portion of the
reorganization charge primarily related to the remaining payments on a
noncancelable operating lease for an office facility in the U.S. The employees
who occupied this office facility were relocated to the corporate headquarters.
Armstrong also recorded a $12.2 million charge to cost of goods sold in the
third quarter of 2000 for write-downs of inventory and production-line assets
that were not categorized as reorganization costs related to the European
reorganization efforts. The inventory write-downs were related to changes in
product offerings while the write-downs of production-line assets primarily
related to changes in production facilities and product offerings.
Most of the remaining balance at September 30, 2001 relates to a noncancelable
operating lease, which extends through 2017 and severance for terminated
employees with extended payouts, the majority of which will be paid by the
second quarter of 2002.
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Nine Months Ended
September 30
2001 2000
----- -----
Interest paid $ 3.0 $76.3
Income taxes paid, net 2.1 11.1
28
Note 9. 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.
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 September 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.
29
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
- --------------------------
Over the years, AWI was one of many defendants in asbestos-related property
damage claims that were filed by public and private building owners, with six
claims pending as of June 30, 2001. The claims that were resolved resulted in
aggregate payments of less than $10 million and were entirely covered by
insurance. The pending 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 stayed due to the Filing. Consistent with prior
periods and due to increased uncertainty, AWI has not recorded any liability
related to these claims as of September 30, 2001. See Note 2 for further
discussion of the property damage claims received by the general claims bar date
of the Chapter 11 Case. 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 first quarter of
2001, a new trial judge was selected for the ADR. 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, Reliance Insurance Company, was
placed under an order of rehabilitation by a state insurance department during
May 2001 and an order of liquidation during October 2001.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of September 30, 2001 compared to $268.3
million as of December 31, 2000. The reduction is due to cash receipts during
the second and third quarters of 2001 and management's current assessment of
probable insurance recoveries, which included the order of liquidation for
Reliance Insurance Company. Of the total recorded asset at September 30, 2001,
approximately $48.4 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
30
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 $83 million of the $214.1 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 $214.1 million asset, $22.0 million has been
recorded as a current asset as of September 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 nine months of 2001. In the first nine
months of 2000, AWI paid $158.7 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during the first
nine months of 2001 compared to $27.7 million during the first nine 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 third quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.2 million for cash receipts and by $16.0 million for
management's current assessment of probable insurance recoveries. The $16.0
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 financial statements.
Note 10. - ENVIRONMENTAL LIABILITIES
- ------------------------------------
Liabilities of $15.5 million were recorded at September 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 September 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
31
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, or liquidity, although the recording of
future costs may be material to earnings in such future periods.
Note 11 - 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 12 - EARNINGS PER SHARE
- ----------------------------
On November 7 2001, Armstrong announced a reorganization to consolidate the
operations of its Floor Coverings organization with its Wood Products flooring
organization. This consolidation is intended to create one integrated flooring
business. Chan Galbato, currently President and CEO of Armstrong Flooring
Products, will head the new organization. Frank Riddick, currently Armstrong's
President and Chief Operating Officer as well as President and CEO of Armstrong
Wood Products, will resign from his positions effective immediately. Costs
associated with this reorganization will be incurred over the next several
quarters.
32
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 11 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 April 5, 2002,
and this date may be further extended by the Court.
Bar Date for Filing Claims
- --------------------------
Earlier this year, the Bankruptcy Court granted AWI's motion to establish August
31, 2001 as the bar date for all claims against AWI except for those arising
from asbestos-related personal injury assertions. A bar date is the date by
which claims against AWI must be filed if the claimants wish to receive any
distribution from the Chapter 11 proceedings. The Bankruptcy Court later
extended the bar date for claims from the U.S. Internal Revenue Service until
December 31, 2001 and claims from several environmental agencies until the
fourth quarter of 2001. Further, the Court allowed the time to file claims
related to asbestos property damage to continue beyond August 31, 2001 and has
yet to rule on an end date for these claims. A bar date for asbestos-related
personal injury claims has not been set.
Approximately 4,000 proofs of claim totaling approximately $5.7 billion alleging
a right to payment from AWI were filed in response to the August 31, 2001 bar
date. AWI is investigating these claims to determine their validity.
In its initial review of the filed claims, AWI has identified approximately 900
claims totaling $1.4 billion that it believes should be disallowed by the
Bankruptcy Court. These claims appear to be duplicate filings, amendments to
previously filed claims or claims that are not related to AWI. AWI has filed a
motion to dismiss these claims. While the Bankruptcy Court will ultimately
determine liability amounts, if any, that will be allowed as part of the Chapter
11 process, management believes that the possibility of these claims being
allowed is remote.
33
In addition to the categories of claims described above, AWI has also received
approximately 1,000 proofs of claim totaling approximately $1.8 billion that are
associated with asbestos-related personal injury litigation, including direct
personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWI's participation in the Center for
Claims Resolution ("the Center"). As the bar date of August 31, 2001 did not
pertain to direct asbestos-related personal injury claims, AWI will address all
asbestos-related personal injury claims in the future within the Chapter 11
process. See further discussion regarding AWI's liability for asbestos-related
matters in Note 9.
AWI also received approximately 100 proofs of claim totaling approximately $0.6
billion alleging a right to payment because of asbestos-related property damage.
Most of these claims are new to AWI, many of which were submitted without any or
with insufficient documentation to assess their validity. AWI expects to
vigorously defend any asserted asbestos-related property damage claims in the
Bankruptcy Court. Further, AWI believes that it has a significant amount of
existing insurance coverage available for asbestos-related property damage
liability, with the amount ultimately available dependent upon, among other
things, the profile of the claims that may be allowed by the Bankruptcy Court.
AWI's history of property damage litigation prior to the Chapter 11 filing is
described in Note 9.
AWI received approximately 2,000 claims totaling approximately $1.9 billion
alleging a right to payment for financing, environmental, trade debt and other
claims. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities.
AWI will require several months to complete its evaluation of the claims
submitted by the August 31, 2001 bar date. AWI has recorded liability amounts
for those claims it believes to be probable of being allowed by the Court. At
this time, it is impossible to assess precisely which claims will ultimately be
allowed by the Bankruptcy Court. It is reasonably possible the amount of claims
ultimately allowed by the Court in excess of amounts presently recorded by AWI
could be material to AWI's financial position and the results of its operations.
However, it is not possible to determine a reasonable range of possible
liability with any reasonable degree of accuracy, due to the uncertainties of
the Chapter 11 process, the in-progress state of AWI's investigation of
submitted claims and the lack of documentation submitted in support of many
claims.
Financing
- ---------
As of September 30, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$168.4 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.
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. Based on these events, the segment was classified as a
discontinued operation starting with the fourth quarter of 2000. On June 12,
2001, negotiations with this investor were terminated. During the third quarter
of 2001, AHI terminated its plans to permanently exit this segment. This
decision was based on the difficulty encountered in selling the business and a
recent review of the business, industry and overall economy conducted by new
senior management. Accordingly, this segment is no longer classified as a
discontinued operation and amounts have been reclassified into
34
operations as required by EITF Issue No. 90-16 - "Accounting for Discontinued
Operations Subsequently Retained". All prior periods have been reclassified to
conform to the current presentation.
Based on the expected net realizable value of the business determined during the
negotiations to sell the business, AHI had recorded a pretax net loss of $30.3
million in the fourth quarter of 2000 (net of a $4.2 million gain on sale of a
component of this segment that was classified as a business held for sale),
$19.5 million net of tax benefit. AHI also had recorded an additional net loss
of $3.3 million in the first quarter of 2001, as a result of price adjustments
resulting from the negotiations. Concurrent with the decision to no longer
classify the business as a discontinued operation, the remaining accrued loss of
$37.8 million ($27.1 million net of tax) has been reversed in the third quarter
of 2001 and is recorded as part of earnings from discontinued operations.
Additionally, the segment's net income for the first and second quarter of 2001
has been reclassified into income from continuing operations for those periods.
During the third quarter of 2001, AHI concluded there were indicators of
impairment related to certain assets in this segment, and accordingly, an
impairment evaluation was conducted at the end of the third quarter under the
guidelines of SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". This evaluation led to an
impairment charge of $8.4 million, representing the excess of book value over
estimated fair value which was determined using a net discounted cash flows
approach. The charge was included in cost of sales. The impairment was related
to property, plant and equipment that produces certain products for which AHI
anticipates lower demand in the future. Additionally, an inventory write-down of
$2.1 million was also recorded in the third quarter of 2001 within cost of sales
related to certain products that will no longer be sold.
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $106.4 million, or $2.64 per share
in Armstrong's second quarter. An after tax gain on sale of $2.3 million
recorded in the third quarter of 2000 related to certain accrual and post-
closing adjustments. During the second quarter of 2001, AHI recorded a pretax
loss of $0.9 million related to its 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 pre-tax) 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 $255.5 million at September 30, 2001. Working capital
was $775.1 million as of September 30, 2001, $154.3 million higher than the
$620.8 million recorded at the end of 2000. The ratio of current assets to
current liabilities was 2.79 to 1 as of September 30, 2001, compared with 2.55
to 1 as of December 31, 2000. The increase in the ratio is primarily
attributable to higher cash and inventory partially offset by higher accounts
payable and accrued expenses.
Long-term debt, excluding Armstrong's guarantee of an Employee Stock Ownership
Plan ("ESOP") loan and debt subject to compromise, decreased in the first nine
months of 2001. At September 30, 2001, long-term debt of $53.3 million, or 6.2%
of total capital, compared with $67.3 million, or 8.7% of total capital, at the
end of 2000. At September 30, 2001, and December 31, 2000 ratios of total debt
(excluding debt subject to compromise) as a percent of total capital were 10.2%
and 14.3%, respectively.
As shown on the condensed Consolidated Statements of Cash Flows (see page 5),
net cash provided by operating activities for the nine months ended September
30, 2001, was $184.7 million compared with $17.0 million for the comparable
period in 2000. The increase was primarily due to the absence of asbestos-
related claims payments in 2001.
35
Net cash used for investing activities was $66.1 million for the nine months
ended September 30, 2001, compared with net cash provided by investing
activities of $218.1 million for the nine months ended September 30, 2000. The
decrease was primarily due to the receipt of proceeds from the sale of the
Insulation Products Segment and the IPG in 2000 partially offset by lower
capital spending.
Net cash used for financing activities was $21.5 million for the nine months
ended September 30, 2001 compared with $223.5 million for the nine months ended
September 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 September 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.
36
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 September 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
- --------------------------
Over the years, AWI was one of many defendants in asbestos-related property
damage claims that were filed by public and private building owners, with six
claims pending as of June 30, 2001. The claims that were resolved resulted in
aggregate payments of less than $10 million and were entirely covered by
insurance. The pending 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 stayed due to the Filing. Consistent with prior periods and
due to increased uncertainty, AWI has not recorded any liability related to
these claims as of September 30, 2001. See Note 2 for further discussion of the
property damage claims received by the general claims bar date of the Chapter 11
Case. 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.
37
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 first quarter of
2001, a new trial judge was selected for the ADR. 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, Reliance Insurance Company, was
placed under an order of rehabilitation by a state insurance department during
May 2001 and an order of liquidation during October 2001.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of September 30, 2001 compared to $268.3
million as of December 31, 2000. The reduction is due to cash receipts during
the second and third quarters of 2001 and management's current assessment of
probable insurance recoveries, which included the order of liquidation for
Reliance Insurance Company. Of the total recorded asset at September 30, 2001,
approximately $48.4 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 $83 million of the
$214.1 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 $214.1 million asset, $22.0
million has been recorded as a current asset as of September 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 nine months of 2001. In the first nine
months of 2000, AWI paid $158.7 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during the first
nine months of 2001 compared to $27.7 million during the first nine 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 third quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.2 million for cash receipts and by $16.0 million for
management's current assessment of probable insurance recoveries. The $16.0
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
38
recorded liability. Any adjustment to the estimated liability or insurance asset
could be material to the financial statements.
Consolidated Results
- --------------------
The following discussions of consolidated results are on a continuing operations
basis.
Third-quarter 2001 net sales of $804.7 million were 6.9% lower than in the third
quarter of 2000. Excluding the effects of unfavorable foreign exchange rates and
the impact of the third-quarter 2000 IPG divestiture, net sales decreased 5.7%.
Floor coverings sales decreased 13.1% due mainly to lower sales volume in the
Americas and the IPG divestiture. Building products sales decreased 4.8% due to
lower sales volume in the U.S. commercial market. Wood products sales decreased
2.7% due to lower flooring sales, partially offset by higher cabinet sales.
Textiles and sports flooring sales increased 4.6% primarily from improved
service levels of sports flooring products.
Third-quarter 2001 earnings from continuing operations were $14.3 million or
$0.35 per share, compared to $72.0 million or $1.77 per share in the third
quarter of 2000. An $8.4 million pre-tax charge was recorded in the third
quarter of 2001 related to an impairment evaluation of fixed assets of the
Textiles and Sports Flooring business. Additionally, a $16.0 million non-cash
pre-tax charge was recorded in the third quarter of 2001 related to management's
current assessment of probable asbestos-related insurance asset recoveries.
Economic conditions continued to weaken in the third quarter, particularly in
September, resulting in pricing pressure and lower sales volume. Armstrong
anticipates economic conditons will continue to pressure pricing and sales
volume in the fourth quarter of 2001.
The third-quarter 2000 results included a pre-tax gain of $59.9 million from the
sale of IPG, which was part of the floor coverings segment.
The third quarter of 2000 included a pre-tax reorganization charge of $17.0
million, of which $8.6 million related to severance and enhanced retirement
benefits for more than 180 positions within the European Flooring business.
Reorganization actions included staff reductions due to the elimination of
administrative positions, the consolidation and closing of sales offices in
Europe and the closure of the Team Valley, England commercial tile plant. The
remaining portion of the reorganization charge primarily related to remaining
payments on a noncancelable operating lease for an office facility in the U.S.
In addition, $1.3 million of the remaining accrual for the 1998 reorganization
charge was reversed, comprising certain severance accruals that were no longer
necessary as certain individuals remained employed by Armstrong.
Armstrong also recorded a $12.2 million charge to cost of goods sold in the
third quarter of 2000 for write-downs of inventory and production-line assets
that were not categorized as reorganization costs related to the European
reorganization efforts. The inventory write-downs were related to changes in
product offerings while the write-downs of production-line assets primarily
related to changes in production facilities and product offerings.
In addition, Armstrong recorded $11.2 million within Selling General and
Administrative ("SG&A") expense for CEO and management transition costs during
the third quarter of 2000. The components of this amount included hiring a new
CEO, expenses related to the departure of the prior CEO, covenant agreements
related to non-compete arrangements and other management transition costs.
Armstrong also recorded $2.3 million in the third quarter of 2000 within SG&A
expense for fixed asset impairments related to the decision to vacate office
space in the U.S.
Excluding these items discussed above, earnings from continuing operations for
the third quarter of 2000 would have been $54.5 million, or $1.34 per diluted
share.
The cost of goods sold in the third quarter of 2001 was 75.3% of net sales
compared to 73.2% of net sales in the third quarter of 2000. This increase was
driven primarily by the impairment charge and inventory write-down in the
textiles and sports flooring segment and lower sales in most businesses.
39
Third-quarter 2001 SG&A expenses were 18.6% of net sales compared to 17.0% of
net sales in last year's third quarter. The percentage increase is primarily
due to lower sales volume coupled with higher promotional and selling expenses
in floor coverings and wood products.
Interest expense of $3.3 million was $22.7 million lower than the amount
recorded in the third quarter of 2000. In accordance with SOP 90-7, Armstrong
did not record $21.6 million of contractual interest expense on prepetition debt
in the third quarter of 2001.
Other expense, net of $1.3 million in the third quarter of 2001 compared to
other income, net of $61.6 million in the third quarter of 2000. The third-
quarter 2001 amount includes a $2.0 million impairment charge of a note
receivable related to a previous divestiture. The third-quarter 2000 amount
includes a pre-tax gain of $59.9 million from the sale of the IPG business.
The effective tax rate from continuing operations was 41.9% and 30.6% for the
third quarter of 2001 and 2000, respectively. Excluding the impact of the gain
on sale of IPG, the reorganization charge and other related expenses in 2000,
the 2000 third quarter effective tax rate was 36.1%. The increase was due to
the impact of lower profit on permanent differences between book and tax.
Net sales for the first nine months of 2001 were $2,398.9 million or 5.1% lower
than net sales of $2,527.8 million during the first nine months of 2000.
Excluding the unfavorable effects of foreign exchange rates and the impact of
the IPG divestiture and the second-quarter 2000 Gema acquisition, net sales
decreased 3.9%.
Interest expense of $10.2 million was $69.6 million lower than the amount
recorded in the first nine months of 2000. In accordance with SOP 90-7,
Armstrong did not record $64.5 million of contractual interest expense on
prepetition debt in the first half of 2001.
Net earnings from continuing operations of $74.0 million or $1.81 per share in
the first nine months of 2001 compared to a net loss from continuing operations
of $3.2 million or $0.08 per share in the first nine months of 2000. Excluding
the third quarter 2000 items described above (gain on the sale of IPG, costs
associated with the reorganization of the European flooring business and CEO and
management transition costs), the second quarter 2000 asbestos charge and a
second quarter demutualization gain, earnings from continuing operations for the
first nine months of 2000 would have been $129.3 million, or $3.20 per diluted
share.
The effective tax rate from continuing businesses was 39.0% and 20.0% for the
first nine months of 2001 and 2000, respectively. Excluding the impact of the
gain on sale of IPG, the reorganization charge and other related expenses in
2000, the 2000 effective tax rate was 37.8%.
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 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 2001 pension credit by $8.7 million during the
first nine months compared to the first half of 2000.
Industry Segment Results
- ------------------------
The following discussion of industry segment results compares the third quarter
of 2001 with the third quarter of 2000.
Floor coverings net sales were $303.3 million and $349.1 million in 2001 and
2000, respectively. Net sales in the Americas decreased 14.0% from prior year as
a result of lower volume of laminate and commercial tile and the IPG
divestiture. Excluding the unfavorable effects of foreign exchange rates, net
sales in Europe were 5.4% below last year as a result of weaker sales of cushion
vinyl and linoleum products. Pacific area sales decreased $1.6 million versus
2000. Operating income of $29.1 million in 2001 compared to $35.2 million in
2000. Excluding expenses associated with reorganizing the European business and
other management changes, operating income was $56.7 million in 2000. The
operating income reduction was driven primarily by lower sales volume and higher
selling and promotional expenses, partially offset by lower raw material and
production costs.
40
Building products net sales of $215.1 million in 2001 decreased from $225.9
million in 2000. Sales in the Americas decreased 5.3% versus 2000 due to lower
sales in the commercial construction market. Excluding the impact of unfavorable
foreign exchange rates, sales in Europe were flat versus 2000. Pacific area
sales decreased $1.8 million versus 2000. Operating income decreased $4.3
million to $31.1 million in 2001 primarily due to lower sales volume.
Wood products net sales of $214.2 million in 2001 compared to net sales of
$220.2 million in 2000. Wood flooring sales decreased 5.4% versus 2000, driven
primarily by lower sales to independent wholesalers offset by higher sales to
the home center market. Cabinet sales increased 8.8% versus 2000 as unit volume
increased to independent distributors. A third quarter operating loss of $1.8
million in 2001 compared to operating income of $18.5 million in 2000. The
decrease was primarily driven by lower sales volume in wood flooring,
competitive pricing pressure and higher selling and promotional expenses.
Textiles and sports flooring net sales of $72.1 million in the third quarter of
2001 were 4.6% higher than last year primarily from improved service levels of
sports flooring products. An operating loss of $7.2 million in the third quarter
of 2001 was incurred compared to an operating loss of $2.6 million in 2000. The
2001 operating loss was due to an $8.4 million fixed asset impairment charge and
a $2.1 million inventory write-down.
Unallocated corporate expense of $2.5 million in 2001 compared to $18.7 million
of expense in 2000. The 2000 expense includes $19.7 million in expenses related
to the CEO transition and other management changes and the decision to vacate an
office facility in the U.S.
Recent Accounting Pronouncements
- --------------------------------
In the third 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 ("FASB") 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 September 30,
2001 as well as all purchase method business combinations completed after
September 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
$17.1 million for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively. Because of the extensive effort needed to
comply with adopting Statements 141 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.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." The statement establishes standards for accounting for
an obligation associated with the retirement of a
41
long-lived asset. The standard is effective for fiscal years beginning after
June 15, 2002. Adoption of this statement is not expected to have a material
impact on the consolidated results of operations or financial condition.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which provides guidance on the
accounting for the impairment or disposal of long-lived assets. This statement
is effective for fiscal years beginning after December 15, 2001. Armstrong is
currently analyzing the impact of this statement.
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.
42
. Notwithstanding Armstrong's efforts to foresee and plan for the effects of
changes in fiscal circumstances, Armstrong cannot predict with certainty all
changes in currency and interest rates, inflation or other related factors
affecting Armstrong businesses.
. International operations could be affected by changes in intellectual
property legal protections and remedies, trade regulations, and procedures
and actions affecting production, pricing and marketing of products, as well
as by unstable governments and legal systems, intergovernmental disputes and
possible nationalization.
. Business combinations among Armstrong's competitors or suppliers could affect
Armstrong's competitive position in the hard surface floor covering, ceiling
system and wood products businesses. Similarly, combinations or alliances
among Armstrong's major customers could increase their purchasing power in
dealing with Armstrong. And, of course, if Armstrong should enter into one or
more business combinations, Armstrong's business, finances and capital
structure could be affected.
. Growth in costs and expenses, raw material price increases (for example
increases in wood prices or in petroleum-based raw materials such as
plasticizers or PVCs), energy cost increases, changes in distribution and
product mix, and the impact of divestitures, restructuring and other unusual
items that could result from evolving business strategies and organizational
restructuring could affect future results.
. Revenues and earnings could be affected by various worldwide economic and
political factors, including improved efficiencies in the European flooring
market and variations in residential and commercial building rates and
economic growth rates in various areas of the world in which we do business.
These factors could affect the end-use markets for Armstrong products in
various parts of the world.
. Revenues and earnings could be affected by the extent to which Armstrong
successfully achieves integration of and synergies from acquisitions.
. Availability of raw materials due to changes in business conditions that
impact Armstrong's suppliers, including environmental conditions, laws and
regulations and/or business decisions made by Armstrong's suppliers could
affect future results.
. Revenues and earnings could be affected by business conditions that impact
Armstrong's major customers/distribution network and/or business decisions
made by Armstrong's major customers/distribution network.
43
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 September 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.
44
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
- --------------------------
Over the years, AWI was one of many defendants in asbestos-related property
damage claims that were filed by public and private building owners, with six
claims pending as of June 30, 2001. The claims that were resolved resulted in
aggregate payments of less than $10 million and were entirely covered by
insurance. The pending 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 stayed due to the Filing. Consistent with prior periods and
due to increased uncertainty, AWI has not recorded any liability related to
these claims as of September 30, 2001. See Note 2 for further discussion of the
property damage claims received by the general claims bar date of the Chapter 11
Case. 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 first quarter of
2001, a new trial judge was selected for the ADR. 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, Reliance Insurance Company, was
placed under an order of rehabilitation by a state insurance department during
May 2001 and an order of liquidation during October 2001.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of September 30, 2001 compared to $268.3
million as of December 31, 2000. The reduction is due to cash receipts during
the second and third quarters of 2001 and management's current assessment of
probable insurance recoveries, which included the order of liquidation for
Reliance Insurance Company. Of the total recorded asset at September 30, 2001,
approximately $48.4 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
45
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 $83 million of the $214.1 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 $214.1 million asset, $22.0 million has been recorded as a current asset as
of September 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 nine months of 2001. In the first nine
months of 2000, AWI paid $158.7 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during the first
nine months of 2001 compared to $27.7 million during the first nine 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 third quarter of 2001, AWI reduced its previously recorded
insurance asset by $16.2 million for cash receipts and by $16.0 million for
management's current assessment of probable insurance recoveries. The $16.0
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 financial statements.
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.
46
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior Armstrong
experience in remediation of contaminated sites. Although current law may impose
joint and several liability on all parties at any Superfund site, Armstrong's
contribution to the remediation of these sites is expected to be limited by the
number of other companies also identified as potentially liable for site costs.
As a result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters. The Chapter 11
Cases may also affect the ultimate amount of such contributions.
Liabilities of $15.5 million were recorded at September 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 September
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, or liquidity, although the
recording of future costs may be material to earnings in such future periods.
47
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. 15 Letter re Unaudited Interim Financial Information
(b) No reports on Form 8-K were filed during the third quarter of 2001.
48
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: November 9, 2001
49
Exhibit Index
-------------
Exhibit No.
- -----------
No. 15 Letter re: Unaudited Interim Financial Information