FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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ARMSTRONG HOLDINGS, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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ARMSTRONG WORLD INDUSTRIES, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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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
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Number of shares of Armstrong Holdings, Inc.'s common stock outstanding as of
April 15, 2002 - 40,696,857
TABLE OF CONTENTS
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SECTION PAGES
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Cautionary Factors.........................................................3 - 4
PART I - FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements
Armstrong Holdings, Inc. and Subsidiaries.................5 - 22
Independent Accountants' Review Report........................23
Armstrong World Industries, Inc. and Subsidiaries........24 - 40
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................41 - 50
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.............................................51 - 55
Item 6. Exhibits and Reports on Form 8-K...................................56
Signatures ...................................................................57
2
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, we 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 we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
We undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise. However, you should
consult any further disclosures we make on related subjects in 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 our 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 our businesses.
... Factors relating to Armstrong World Industries, Inc.'s ("AWI") Chapter 11
Filing, such as: the possible disruption of relationships with creditors,
customers, suppliers and employees; the ultimate size of AWI's
asbestos-related and other liabilities; the ability to confirm and
implement a plan of reorganization; the availability of financing and
refinancing for both AWI and its subsidiaries that are not parties to its
Chapter 11 Filing; and AWI's ability to comply with covenants in its
debtor-in-possession credit facility (the "DIP Facility").
... Claims of undetermined merit and amount have been asserted against us 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 our revenues and earnings are exposed to changes in foreign
currency exchange rates. Where practical, we try to reduce these effects by
matching local currency revenues with costs and local currency assets with
liabilities. We also manage foreign exchange risk with foreign currency
forward contracts.
... Notwithstanding our efforts to foresee and plan for the effects of changes
in fiscal circumstances, we cannot predict with certainty all changes in
currency and interest rates, inflation or other related factors affecting
our businesses. For example, an economic downturn may lead our customers to
delay or cancel construction plans. For more information on these matters,
see the discussion of Market Risk in Item 7A of Armstrong Holdings, Inc.
2001 Form 10-K.
3
... International operations could be affected by changes in intellectual
property legal protections and remedies, trade regulations, and procedures
and actions affecting production, pricing and marketing of products, as
well as by unstable governments and legal systems, intergovernmental
disputes and possible nationalization.
... Business combinations among our competitors or suppliers could affect our
competitive position in the hard surface floor covering, textile and sports
flooring, wood flooring, ceiling system and wood cabinet businesses.
Similarly, combinations or alliances among our major customers could
increase their purchasing power in dealing with us. And, of course, if we
should enter into one or more business combinations, our business, finances
and capital structure could be affected.
... Growth in costs and expenses, raw material price increases (for example
increases in wood prices or in petroleum-based raw materials such as
plasticizers or PVCs), energy cost increases, changes in distribution and
product mix, and the impact of divestitures, restructuring and other
unusual items that could result from evolving business strategies and
organizational restructuring could affect future results.
... Revenues and earnings could be affected by various worldwide economic and
political factors, including improved efficiencies in the European flooring
market, variations in residential and commercial building rates, and
economic growth rates in various areas of the world in which we do
business. These factors could affect the end-use markets for our products
in various parts of the world.
... Revenues and earnings could be affected by the extent to which we
successfully achieve integration of and synergies from acquisitions.
... Availability of raw materials, energy, water and sourced products due to
changes in business and legal conditions that impact our suppliers,
including environmental conditions, laws and regulations, litigation
involving our suppliers and/or business decisions made by our suppliers
could affect future results.
... Revenues and earnings could be affected by business decisions and business
conditions that impact our major customers and distribution network.
4
Part 1 - Financial Information
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Item 1 - Financial Statements
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Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions, except per share amounts)
Unaudited
Three Months Ended
March 31,
2002 2001
---- ----
Net sales $ 747.6 $ 779.9
Cost of goods sold 553.4 582.4
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Gross profit 194.2 197.5
Selling, general and administrative expenses 158.6 147.5
Restructuring and reorganization charges, net 0.5 5.4
Goodwill amortization -- 5.7
Equity (earnings) from affiliates, net (5.4) (4.4)
---------- ----------
Operating income 40.5 43.3
Interest expense (unrecorded contractual interest of $21.4 and $21.4) 3.5 3.4
Other (income), net (0.5) (3.8)
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Income from continuing operations before Chapter 11 reorganization costs
and income tax expense 37.5 43.7
Chapter 11 reorganization costs, net 6.2 3.0
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Earnings from continuing operations before income tax expense 31.3 40.7
Income tax expense 9.4 15.5
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Earnings from continuing operations $ 21.9 $ 25.2
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Net loss on expected disposal of discontinued operations, net of tax of $0.0 -- (3.3)
Net reversal of income on discontinued operations no longer to be disposed,
net of tax of $0.3 -- (1.6)
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Loss from discontinued operations -- (4.9)
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Net earnings $ 21.9 $ 20.3
========== ==========
Earnings per share of common stock, continuing operations:
Basic $ 0.54 $ 0.62
Diluted $ 0.54 $ 0.62
Loss per share of common stock, discontinued operations:
Basic $ -- $ (0.12)
Diluted $ -- $ (0.12)
Net earnings per share of common stock:
Basic $ 0.54 $ 0.50
Diluted $ 0.54 $ 0.50
Average number of common shares outstanding:
Basic 40.5 40.4
Diluted 40.7 40.8
See accompanying notes to condensed consolidated financial statements beginning
on page 9.
5
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions except share data)
Unaudited
Assets March 31, 2002 December 31, 2001
------ -------------- -----------------
Current assets:
Cash and cash equivalents $ 261.7 $ 277.4
Accounts and notes receivable, net 357.9 316.5
Inventories, net 465.3 443.1
Deferred income taxes 11.5 11.5
Other current assets 65.8 65.8
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Total current assets 1,162.2 1,114.3
Property, plant and equipment, less accumulated depreciation and
amortization of $1,174.8 and $1,143.3, respectively 1,257.1 1,278.6
Insurance receivable for asbestos-related liabilities, noncurrent 190.1 192.1
Prepaid pension costs 401.8 391.1
Investment in affiliates 42.0 39.6
Goodwill, net 815.7 822.8
Other intangibles, net 96.3 94.1
Other noncurrent assets 103.1 101.8
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Total assets $ 4,068.3 $ 4,034.4
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 23.0 $ 18.9
Current installments of long-term debt 5.8 6.1
Accounts payable and accrued expenses 293.7 298.6
Income taxes 52.7 40.8
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Total current liabilities 375.2 364.4
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Liabilities subject to compromise 2,358.6 2,357.6
Long-term debt, less current installments 48.5 50.3
Postretirement and postemployment benefit liabilities 243.3 242.7
Pension benefit liabilities 146.8 147.2
Other long-term liabilities 85.8 84.6
Deferred income taxes 18.4 18.4
Minority interest in subsidiaries 8.9 8.8
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Total noncurrent liabilities 2,910.3 2,909.6
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 167.4 166.8
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,266.2 1,244.3
Accumulated other comprehensive loss (47.2) (47.1)
Less common stock in treasury, at cost
2002 - 11,181,872 shares; 2001 - 11,176,617 shares (513.3) (513.3)
---------- ----------
Total shareholders' equity 782.8 760.4
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Total liabilities and shareholders' equity $ 4,068.3 $ 4,034.4
========== ==========
See accompanying notes to condensed consolidated financial statements beginning
on page 9.
6
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(amounts in millions except per share data)
Unaudited
2002 2001
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Common stock, $1 par value:
- --------------------------
Balance at beginning of year and March 31 $ 51.9 $ 51.9
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Capital in excess of par value:
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Balance at beginning of year $ 166.8 $ 162.2
Stock issuances and other 0.6 4.1
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Balance at March 31 $ 167.4 $ 166.3
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Reduction for ESOP loan guarantee:
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Balance at beginning of year and March 31 $ (142.2) $ (142.2)
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Retained earnings:
- -----------------
Balance at beginning of year $ 1,244.3 $ 1,151.5
Net earnings for the three months 21.9 $ 21.9 20.3 $ 20.3
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Balance at March 31 $ 1,266.2 $ 1,171.8
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Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year $ (47.1) $ (45.2)
Foreign currency translation adjustments (2.6) (1.3)
Derivative gain, net 3.0 0.7
Minimum pension liability adjustments (0.5) 1.9
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Total other comprehensive income (loss) (0.1) (0.1) 1.3 1.3
---------- ------- ---------- --------
Balance at March 31 $ (47.2) $ (43.9)
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Comprehensive income (loss) $ 21.8 $ 21.6
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Less treasury stock at cost:
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Balance at beginning of year $ 513.3 $ 513.1
Stock issuance activity, net - (0.1)
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Balance at March 31 $ 513.3 $ 513.0
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Total shareholders' equity $ 782.8 $ 690.9
========== =========
See accompanying notes to condensed consolidated financial statements beginning
on page 9.
7
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 21.9 $ 20.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 32.4 38.4
Loss on expected disposal of discontinued operations - 3.3
Deferred income taxes - 7.6
Equity (earnings) from affiliates, net (5.4) (4.4)
Chapter 11 reorganization costs, net 6.2 3.0
Chapter 11 reorganization payments (4.7) (0.6)
Restructuring and reorganization charges, net 0.5 5.4
Restructuring and reorganization payments (0.7) (4.3)
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions
Increase in receivables (42.2) (58.1)
Increase in inventories (17.1) (34.7)
(Increase)/decrease in other current assets 2.0 (3.0)
Increase in other noncurrent assets and prepaid pension costs (12.9) (10.4)
Increase/(decrease) in accounts payable and accrued expenses (4.3) 32.0
Increase in income taxes payable 11.9 2.9
Increase in other long-term liabilities 2.9 6.0
Other, net 6.9 2.2
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Net cash (used for) provided by operating activities (2.6) 5.6
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment and computer software (21.4) (22.9)
Distributions from equity affiliates 3.0 5.0
Proceeds from the sale of assets 3.2 0.6
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Net cash used for investing activities (15.2) (17.3)
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Cash flows from financing activities:
Increase/(decrease) in short-term debt, net 4.1 (10.3)
Payments of long-term debt (0.5) (3.2)
Other, net (1.1) 4.7
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Net cash provided by (used for) financing activities 2.5 (8.8)
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Effect of exchange rate changes on cash and cash equivalents (0.4) (1.7)
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Net decrease in cash and cash equivalents $ (15.7) $ (22.2)
Cash and cash equivalents at beginning of year 277.4 159.1
-------- --------
Cash and cash equivalents at end of period $ 261.7 $ 136.9
======== ========
See accompanying notes to condensed consolidated financial statements beginning
on page 9.
8
Armstrong Holdings Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION
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Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells flooring products
(resilient, wood, carpeting and sports flooring) as well as ceiling systems,
around the world. Armstrong products are sold primarily for use in the
finishing, refurbishing and repair of residential, commercial and institutional
buildings. Armstrong also designs, manufactures and sells kitchen and bathroom
cabinets to single and multi family home builders and remodelers.
Armstrong Holdings, Inc. (which together with its subsidiaries is referred to
here as "AHI") is the publicly held parent holding company of Armstrong.
Armstrong Holdings, Inc. 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 Armstrong Holdings, Inc.
Armstrong Holdings, Inc. 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 Armstrong
Holdings, Inc. The publicly held debt of AWI was not affected in the
transaction.
Operating results for the first quarter of 2002 and the corresponding period of
2001 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. Certain prior year
amounts have been reclassified to conform to the current year presentation.
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
new 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. See Note 5 for further information.
In accordance with the Emerging Issues Task Force ("EITF") Issue No. 00-025,
"Vendor Income Statement Characterization of Consideration from a Vendor to a
Retailer," effective January 1, 2002, AHI has reclassified $0.5 million from
selling, general and administrative expenses to a reduction of net sales for the
first quarter of 2001.
Effective January 1, 2002, AHI adopted Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"), related to the
nonamortization of goodwill and certain intangibles. AHI expects to finalize its
adoption in the second quarter of 2002. See Note 7.
Effective January 1, 2002, AHI adopted Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144")
which provides guidance on the accounting for the impairment or disposal of
long-lived assets. AHI's current results of operations or financial position
have not been affected.
9
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, 2001. 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, 2001. In the
opinion of management, all adjustments of a normal recurring nature have been
included to provide a fair statement of the results for the reporting periods
presented. Quarterly results are not necessarily indicative of annual earnings.
The first quarters of the Wood Flooring and Cabinets segments ended on March 30,
2002 and March 31, 2001. No events occurred between March 30, 2002 and March 31,
2002 materially affecting AHI's financial position or results of operations.
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 asbestos personal injury
claimants, one representing asbestos property damage 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.
AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. 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 or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.
AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.
Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain specified claims. A bar date is the date by which claims
against AWI must be filed if the claimants wish to participate in any
distribution from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002, which AWI
expects will be extended to June 28,
10
2002, and for claims from several environmental agencies until the second
quarter of 2002. In March 2002, the Court ruled that the time to file claims
related to asbestos property damage would not be further extended, but allowed
certain alleged holders of asbestos property damage claims to file a class proof
of claim against AWI. The Court set schedules to determine whether the proposed
class should be certified and whether asbestos-containing resilient floor
covering products give rise to property damage liability. A bar date for
asbestos-related personal injury claims has not been set.
Approximately 4,500 proofs of claim (including late-filed claims) totaling
approximately $6.0 billion alleging a right to payment from AWI were filed with
the Court in response to the August 31, 2001 bar date, which are discussed
below. AWI continues to investigate claims to determine their validity. The
Court will ultimately determine liability amounts that will be allowed as part
of the Chapter 11 process.
In its ongoing review of the filed claims, AWI already identified and
successfully objected to approximately 1,100 claims totaling $1.5 billion. These
claims were, primarily, duplicate filings, claims that were subsequently amended
or claims that are not related to AWI. The Court disallowed these claims with
prejudice.
In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.8 billion are pending with the Court 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 stated above, the bar date of August 31,
2001 did not apply to 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 10 of the condensed consolidated financial statements.
Approximately 600 proofs of claim totaling approximately $0.9 billion alleging
asbestos-related property damage are pending with the Court. Most of these
claims are new to AWI and many were submitted with insufficient documentation to
assess their validity. AWI petitioned the Court to disallow approximately 50
claims totaling approximately $0.5 billion. The Court denied AWI's motion and
will address the validity of these claims at a future date. AWI expects to
continue vigorously defending any asserted asbestos-related property damage
claims in the Court. 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 Court. AWI's history of
property damage litigation prior to the Chapter 11 filing is described in Note
10 of the condensed consolidated financial statements.
Approximately 1,800 claims totaling approximately $1.8 billion alleging a right
to payment for financing, environmental, trade debt and other claims are pending
with the Court. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities. AWI continues to investigate the
claims to determine their validity.
AWI continues to evaluate claims filed in the Chapter 11 Case. AWI has recorded
liability amounts for those claims that can be reasonably estimated and for
which it believes are probable of being allowed by the Court. At this time, it
is impossible to reasonably estimate the value of all the claims that will
ultimately be allowed by the Court. However, it is likely the value of the
claims ultimately allowed by the Court will be in excess of amounts presently
recorded by AWI and will be material to AWI's financial position and the results
of its operations. However, AWI is not able to determine a 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 March 31, 2002, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$177.6 million of cash and cash equivalents,
11
excluding cash held by its non-debtor subsidiaries. As of March 31, 2002, AWI
had approximately $9.9 million in letters of credit which were issued pursuant
to the DIP Facility. Borrowings are limited to an adjusted amount of
receivables, inventories and PP&E. 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, and obligations to
reimburse draws upon the letters of credit constitute superpriority
administrative expense claims in the Chapter 11 Case. The DIP Facility is
scheduled to expire on December 6, 2002.
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.
This guidance is implemented 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 3 for detail of the liabilities subject to compromise at March 31, 2002 and
December 31, 2001. 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 estimated liability for personal injury asbestos claims is
also recorded in liabilities subject to compromise. See Note 10 for further
discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the first quarter of 2002 and 2001:
Three Months Ended Three Months Ended
(amounts in millions) March 31, 2002 March 31, 2001
- --------------------- -------------------- ---------------------
Professional fees $ 6.9 $ 5.8
Interest income, post petition (0.8) (1.7)
Reductions to prepetition liabilities - (1.9)
Other expense directly related to bankruptcy, net 0.1 0.8
-------- ---------
Total Chapter 11 reorganization costs, net $ 6.2 $ 3.0
======== =========
Professional fees represent legal and financial advisory fees and 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.
12
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. 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 balance sheet. Liabilities that may be
affected by a plan of reorganization are recorded at the amount of the expected
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of AHI
subsidiaries not covered by the Filing remain classified on the condensed
consolidated balance sheet based upon maturity date. AWI's asbestos liability is
also recorded in liabilities subject to compromise. Prior to its Chapter 11
Filing, AWI estimated its probable asbestos-related personal injury liability
based upon a variety of factors including historical settlement amounts, the
incidence of past 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. AWI believes its previous range of probable
and estimable liability is more uncertain now than before. There are significant
differences in the way the asbestos-related personal injury claims may be
addressed under the bankruptcy process when compared to the tort system.
Accordingly, AWI currently is unable to estimate its ultimate liability in the
context of its Chapter 11 Case. Although not estimable, it is likely that the
actual liability will 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. See Note 10 for further discussion of AWI's asbestos liability.
Liabilities subject to compromise at March 31, 2002 and December 31, 2001 are as
follows:
(amounts in millions) March 31, December 31,
2002 2001
------------ -------------
Debt (at face value) $ 1,400.7 $ 1,400.7
Asbestos-related liability 690.6 690.6
Prepetition trade payables 53.5 52.2
Prepetition other payables and accrued interest 56.1 56.4
ESOP loan guarantee 157.7 157.7
------------ -------------
Total liabilities subject to compromise $ 2,358.6 $ 2,357.6
============ =============
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 4. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions)
Three Months
Ended March 31,
Net sales to external customers 2002 2001
- ------------------------------- ------------ ------------
Resilient Flooring $ 280.9 $ 291.1
Building Products 195.5 216.1
Wood Flooring 160.9 154.9
Cabinets 56.3 54.1
Textiles & Sports Flooring 54.0 63.7
------------ ------------
Total sales to external customers $ 747.6 $ 779.9
============ ============
13
Three Months Ended March 31,
Segment operating income (loss) 2002 2001
- ------------------------------- ----------- -----------
Resilient Flooring $ 18.8 $ 20.2
Building Products 22.7 18.5
Wood Flooring 8.7 5.2
Cabinets 3.2 4.5
Textiles & Sports Flooring (1.9) 2.3
All Other 0.6 --
----------- -----------
Total segment operating income 52.1 50.7
Unallocated Corporate expense (11.6) (7.4)
----------- -----------
Total consolidated operating income $ 40.5 $ 43.3
=========== ===========
March 31, December 31,
Segment assets 2002 2001
- -------------- ------------- -------------
Resilient Flooring $ 883.1 $ 867.6
Building Products 528.4 527.0
Wood Flooring 1,262.3 1,260.6
Cabinets 113.3 108.0
Textiles & Sports Flooring 169.2 162.9
All Other 17.0 16.3
------------- -------------
Total segment assets 2,973.3 2,942.4
Assets not assigned to segments 1,095.0 1,092.0
------------- -------------
Total consolidated assets $ 4,068.3 $ 4,034.4
============= =============
NOTE 5. 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
new 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.
Based on the expected net realizable value of the business determined during the
negotiations to sell the business, AHI recorded a pretax net loss of $34.5
million in the fourth quarter of 2000, $23.8 million net of tax benefit. AHI
also 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) was reversed in the third quarter of 2001 and recorded as
part of earnings from discontinued operations. Additionally, the segment's net
income of $1.6 million for the first quarter of 2001 was reclassified into
earnings from continuing operations for that period.
14
NOTE 6. INVENTORY
- -----------------
(amounts in millions) March 31, 2002 December 31, 2001
- --------------------- -------------- -----------------
Finished goods $ 292.8 $ 269.6
Goods in process 54.0 45.8
Raw materials and supplies 179.7 182.9
Less LIFO and other reserves (61.2) (55.2)
------------- -------------
Total inventories, net $ 465.3 $ 443.1
============= =============
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
- --------------------------------------
Effective January 1, 2002, AHI adopted Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"), which requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. 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 2002. FAS 142 also requires that
intangible assets with determinable 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."
As of January 1, 2002, AHI had unamortized goodwill of $822.8 million, of which
$717.2 million was attributable to the Wood Flooring segment. Based on
preliminary assessments of the impact of adopting FAS 142, AHI believes that a
significant portion of the Wood Flooring segment goodwill will be considered
impaired under the new accounting standard. AHI has not yet determined the
amount of any impairment, but expects to complete its analysis in the second
quarter of 2002. Due to the complexity, timing and scale of the process, AHI is
currently unable to precisely determine the amount of the goodwill impairment
charge. However, due to additional valuation information received and analysis
performed, AHI currently expects the impairment charge to be in excess of $500
million.
15
As of January 1, 2002, AHI had unamortized identifiable intangible assets of
$94.1 million. The following table details amounts related to AHI's intangible
assets as of March 31, 2002.
March 31, 2002
---------------------------------
(amounts in millions) Gross Carrying Accumulated
Amount Amortization
--------------- --------------
Amortized intangible assets
- ---------------------------
Computer software $ 89.2 $ (30.8)
Land use rights and other 3.6 (0.7)
--------------- -------------
Total $ 92.8 $ (31.5)
--------------- =============
Unamortized intangible assets
- -----------------------------
Trademarks and brand names $ 35.0
---------------
Total intangible assets $ 127.8
===============
Aggregate Amortization Expense
- ------------------------------
For the three months ended March 31, 2002 $ 3.1
The annual amortization expense expected for the years 2002 through 2006 is as
follows:
(amounts in millions)
2002 $ 13.6 2005 $ 9.5
2003 13.0 2006 6.0
2004 11.1
Comparison to prior year "As Adjusted"
- --------------------------------------
The following table presents prior year reported amounts adjusted to eliminate
the effect of goodwill and certain identifiable intangible asset amortization in
accordance with FAS 142.
Three Months
Ended March 31,
2002 2001
--------- ---------
(in millions except for per share amounts)
Reported net income $ 21.9 $ 20.3
Add back: Goodwill amortization - 5.7
Add back: Trademark and brand names amortization - 0.2
-------- --------
Adjusted net income $ 21.9 $ 26.2
======== ========
Basic net earnings per share:
Reported net income $ 0.54 $ 0.50
Goodwill amortization - 0.14
Trademark and brand names amortization - 0.01
-------- --------
Adjusted net income $ 0.54 $ 0.65
======== ========
Diluted net earnings per share:
Reported net income $ 0.54 $ 0.50
Goodwill amortization - 0.14
Trademark and brand names amortization - 0.00
-------- --------
Adjusted net income $ 0.54 $ 0.64
======== ========
16
NOTE 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals for the first three months of 2002 and 2001:
(amounts in millions) Beginning Cash Ending
Balance Payments Charges Other Balance
--------- -------- ------- -------- -------
2002 $ 8.9 $ (0.7) $ 0.5 $ (0.1) $ 8.6
2001 22.2 (4.3) 3.8 (0.6) 21.1
A $0.5 million pretax restructuring charge was recorded in the first quarter of
2002. The charge related to severance benefits for eleven employees in the
Textiles and Sports Flooring segment, to reflect staffing needs for current
business conditions and continued efforts initiated in the fourth quarter of
2001.
A $5.4 million pretax restructuring charge was recorded in the first quarter of
2001. The charge related to severance and enhanced retirement benefits for more
than 50 corporate and line-of-business salaried staff positions, to reflect
staffing needs for current business conditions. Of the $5.4 million, $1.6
million represented a non-cash charge for enhanced retirement benefits, which is
accounted for as a reduction of the prepaid pension asset.
The amount in "other" is primarily related to foreign currency translation.
Substantially all of the remaining balance of the restructuring accrual as of
March 31, 2002 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 fourth quarter of 2002.
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Three Months Ended
March 31,
2002 2001
-------- --------
Interest paid $ 2.0 $ 1.2
Income taxes paid (refunded), net $ 0.5 $ (0.4)
NOTE 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- -------------------------------------------------------
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2001 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 final resolution
of its asbestos liability.
Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury 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 payments called for under these settlements will be
determined in its Chapter 11 Case.
17
Due to the Filing, holders of asbestos-related personal injury 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-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury 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-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the
Chapter 11 Case.
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-related personal injury 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 had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. 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 personal injury liability balance recorded at March
31, 2002 and December 31, 2001 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will 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-related personal
injury 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. Recently, Judge Alfred M. Wolin of the Federal District Court for the
District of New Jersey, who is also presiding over AWI's Chapter 11 Case,
indicated he would determine these matters. Judge Wolin has not yet ruled on
these matters.
18
Asbestos-Related 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 previous claims that were resolved prior
to the Filing resulted in aggregate indemnity obligations of less than $10
million. To date, all payments of these obligations have been 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. In March 2002, the Court allowed
certain alleged holders of asbestos property damage claims to file a class proof
of claim against AWI. The Court set schedules to determine whether the proposed
class should be certified and whether asbestos-containing resilient floor
covering products give rise to property damage liability. Consistent with prior
periods and due to increased uncertainty, AWI has not recorded any liability
related to these claims as of December 31, 2001. See Note 2 for further
discussion of the property damage claims in response to the August 31, 2001
claims bar date in 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. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. 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.
Another insurer (Century Indemnity Company), who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI assumes the agreement; (3) declare that the insurer is entitled to
indemnification from AWI against any liabilities that the insurer may incur in
certain unrelated litigation in which the insurer is involved; and (4) enjoin
the disposition of funds previously paid by the insurer to the trust pending an
adjudication of the insurer's rights. AWI believes it is highly unlikely the
insurer will prevail in this matter.
19
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of March 31, 2002 and December 31, 2001. Of the
total recorded asset at December 31, 2001, approximately $49.5 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. 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 (the former AWI insulation
contracting subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $82 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. Of the $214.1 million asset, $24.0 million has been recorded as a
current asset as of March 31, 2002 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
increase 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 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 2002 or 2001. AWI did not receive any
asbestos-related insurance recoveries during the first quarter of 2002 or 2001.
During the pendency of the Chapter 11 Case, AWI does not expect to make any
further cash payments for asbestos-related claims, but AWI expects to 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. 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. Although not
estimable, it is likely that AWI's total exposure to asbestos-related personal
injury claims will be significantly higher than the recorded liability. Any
adjustment to the estimated liability or insurance asset could be material to
the financial statements.
NOTE 11. ENVIRONMENTAL LIABILITIES
- ----------------------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong anticipates that annual expenditures for those purposes
will not change materially from recent experience. Armstrong does not anticipate
that it will incur significant capital expenditures in order to meet the
requirements of the Clean Air Act of 1990 and the final implementing regulations
promulgated by various state agencies. However, applicable requirements under
the Clean Air Act and other federal and state environmental laws
20
continue to change. Until all new regulatory requirements are known, Armstrong
cannot predict with certainty future capital expenditures associated with
compliance with environmental requirements.
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")
which have potential liability for the required investigation and remediation of
each site, and which in some cases, have agreed to jointly fund that required
investigation and remediation. 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 former plant sites. AWI's payments and
remediation work on such sites for which AWI is the potentially responsible
party is under review in light of the Chapter 11 Filing. The bar date for claims
from several environmental agencies has been extended into the second quarter of
2002.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction with the site, existing technology,
presently enacted laws and regulations and prior company experience in
remediating contaminated sites. Although current law imposes joint and several
liability on all parties at any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Case also may
affect the ultimate amount of such contributions.
Liabilities of $16.2 million at March 31, 2002 and $16.6 million at December 31,
2001 were for potential environmental liabilities that Armstrong considers
probable and for which a reasonable estimate of the probable liability could be
made. Where existing data is sufficient to estimate the 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
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the March 31,
2002 and December 31, 2001 environmental liabilities are classified as
prepetition liabilities subject to compromise. As a general rule, such
prepetition liabilities that do not preserve company assets are addressed in the
Chapter 11 Case.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, or liquidity, although the
recording of future costs may be material to earnings in such future period.
21
NOTE 12. DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- ------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the condensed consolidated financial statements is
primarily due to stock activity and intercompany transactions.
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.
22
Independent Accountants' 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 ("the Company") as of March 31, 2002,
and the related condensed consolidated statements of earnings, cash flows and
shareholders' equity for the three-month periods ended March 31, 2002 and 2001.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
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, 2001, 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
22, 2002, 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, 2001, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Our report dated February 22, 2002, on the consolidated financial statements of
Armstrong Holdings, Inc., and subsidiaries as of and for the year ended December
31, 2001, contains an explanatory paragraph that states that 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, and that the filing under Chapter
11 and the increased uncertainty regarding the Company's potential asbestos
liability raise substantial doubt about the Company's ability to continue as a
going concern. The condensed consolidated balance sheet as of December 31, 2001,
does not include any adjustments that might result from the outcome of these
uncertainties.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 29, 2002
23
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions, except per share amounts)
Unaudited
Three Months Ended
March 31,
2002 2001
---- ----
Net sales $ 747.6 $ 779.9
Cost of goods sold 553.4 582.4
-------- --------
Gross profit 194.2 197.5
Selling, general and administrative expenses 158.6 147.5
Restructuring and reorganization charges, net 0.5 5.4
Goodwill amortization - 5.7
Equity (earnings) from affiliates, net (5.4) (4.4)
-------- --------
Operating income 40.5 43.3
Interest expense (unrecorded contractual interest of $21.4 and $21.4) 3.5 3.4
Other (income), net (0.5) (3.8)
-------- --------
Income from continuing operations before Chapter 11 reorganization costs
and income tax expense 37.5 43.7
Chapter 11 reorganization costs, net 6.2 3.0
-------- --------
Earnings from continuing operations before income tax expense 31.3 40.7
Income tax expense 9.4 15.5
-------- --------
Earnings from continuing operations $ 21.9 $ 25.2
-------- --------
Net loss on expected disposal of discontinued operations, net of tax of $0.0 - (3.3)
Net reversal of income on discontinued operations no longer to be disposed,
net of tax of $0.3 - (1.6)
-------- --------
Loss from discontinued operations - (4.9)
-------- --------
Net earnings $ 21.9 $ 20.3
======== ========
See accompanying notes to condensed consolidated financial statements beginning
on page 28.
24
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions except share data)
Unaudited
Assets March 31, 2002 December 31, 2001
------ -------------- -----------------
Current assets:
Cash and cash equivalents $ 261.7 $ 277.4
Accounts and notes receivable, net 357.9 316.5
Inventories, net 465.3 443.1
Deferred income taxes 11.5 11.5
Other current assets 65.8 65.8
---------- ----------
Total current assets 1,162.2 1,114.3
Property, plant and equipment, less accumulated depreciation and
amortization of $1,174.8 and $1,143.3, respectively 1,257.1 1,278.6
Insurance receivable for asbestos-related liabilities, noncurrent 190.1 192.1
Prepaid pension costs 401.8 391.1
Investment in affiliates 42.0 39.6
Goodwill, net 815.7 822.8
Other intangibles, net 96.3 94.1
Other noncurrent assets 103.1 101.8
---------- ----------
Total assets $ 4,068.3 $ 4,034.4
========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Short-term debt $ 23.0 $ 18.9
Current installments of long-term debt 5.8 6.1
Accounts payable and accrued expenses 293.7 298.6
Short-term amounts due to affiliates 9.0 8.4
Income taxes 52.9 41.0
---------- ----------
Total current liabilities 384.4 373.0
---------- ----------
Liabilities subject to compromise 2,363.2 2,362.2
Long-term debt, less current installments 48.5 50.3
Postretirement and postemployment benefit liabilities 243.3 242.7
Pension benefit liabilities 146.8 147.2
Other long-term liabilities 85.8 84.6
Deferred income taxes 18.4 18.4
Minority interest in subsidiaries 8.9 8.8
---------- ----------
Total noncurrent liabilities 2,914.9 2,914.2
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 173.2 173.2
Reduction for ESOP loan guarantee (142.2) (142.2)
Retained earnings 1,261.8 1,239.9
Accumulated other comprehensive loss (47.2) (47.1)
Less common stock in treasury, at cost
2002 and 2001 - 11,393,170 shares (528.5) (528.5)
---------- ----------
Total shareholder's equity 769.0 747.2
---------- ----------
Total liabilities and shareholder's equity $ 4,068.3 $ 4,034.4
========== ==========
See accompanying notes to condensed consolidated financial statements beginning
on page 28.
25
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholder's Equity
(amounts in millions except per share data)
Unaudited
2002 2001
---- ----
Common stock, $1 par value:
- --------------------------
Balance at beginning of year and March 31 $ 51.9 $ 51.9
---------- ----------
Capital in excess of par value:
- ------------------------------
Balance at beginning of year and March 31 $ 173.2 $ 173.4
---------- ----------
Reduction for ESOP loan guarantee:
- ---------------------------------
Balance at beginning of year and March 31 $ (142.2) $ (142.2)
---------- ----------
Retained earnings:
- -----------------
Balance at beginning of year $ 1,239.9 $ 1,147.1
Net earnings for the three months 21.9 $ 21.9 20.3 $ 20.3
---------- ----------
Balance at March 31 $ 1,261.8 $ 1,167.4
---------- ----------
Accumulated other comprehensive income (loss):
- ---------------------------------------------
Balance at beginning of year $ (47.1) $ (45.2)
Foreign currency translation adjustments (2.6) (1.3)
Derivative gain, net 3.0 0.7
Minimum pension liability adjustments (0.5) 1.9
---------- ----------
Total other comprehensive income (loss) (0.1) (0.1) 1.3 1.3
---------- ------ ---------- ------
Balance at March 31 $ (47.2) $ (43.9)
---------- ----------
Comprehensive income (loss) $ 21.8 $ 21.6
- --------------------------- ====== ======
Less treasury stock at cost:
- ---------------------------
Balance at beginning of year and March 31 $ 528.5 $ 528.5
---------- ----------
Total shareholder's equity $ 769.0 $ 678.1
========== ==========
See accompanying notes to condensed consolidated financial statements beginning
on page 28.
26
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 21.9 $ 20.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 32.4 38.4
Loss on expected disposal of discontinued operations - 3.3
Deferred income taxes - 7.6
Equity (earnings) from affiliates, net (5.4) (4.4)
Chapter 11 reorganization costs, net 6.2 3.0
Chapter 11 reorganization payments (4.7) (0.6)
Restructuring and reorganization charges, net 0.5 5.4
Restructuring and reorganization payments (0.7) (4.3)
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions
Increase in receivables (42.2) (58.1)
Increase in inventories (17.1) (34.7)
(Increase)/decrease in other current assets 2.0 (3.0)
Increase in other noncurrent assets and prepaid pension costs (12.9) (10.4)
Increase/(decrease) in accounts payable and accrued expenses (4.3) 32.0
Increase in income taxes payable 11.9 2.9
Increase in other long-term liabilities 2.9 6.0
Other, net 6.9 2.2
-------- --------
Net cash (used for) provided by operating activities (2.6) 5.6
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment and computer software (21.4) (22.9)
Distributions from equity affiliates 3.0 5.0
Proceeds from the sale of assets 3.2 0.6
-------- --------
Net cash used for investing activities (15.2) (17.3)
-------- --------
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net 4.1 (10.3)
Payments of long-term debt (0.5) (3.2)
Other, net (1.1) 4.7
-------- --------
Net cash provided by (used for) financing activities 2.5 (8.8)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (0.4) (1.7)
-------- --------
Net decrease in cash and cash equivalents $ (15.7) $ (22.2)
Cash and cash equivalents at beginning of year 277.4 159.1
-------- --------
Cash and cash equivalents at end of period $ 261.7 $ 136.9
======== ========
See accompanying notes to condensed consolidated financial statements beginning
on page 28.
27
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells flooring products
(resilient, wood, carpeting and sports flooring) as well as ceiling systems,
around the world. Armstrong products are sold primarily for use in the
finishing, refurbishing and repair of residential, commercial and institutional
buildings. Armstrong also designs, manufactures and sells kitchen and bathroom
cabinets to single and multi family home builders and remodelers.
Armstrong Holdings, Inc. (which together with its subsidiaries is referred to
here as "AHI") is the publicly held parent holding company of Armstrong.
Armstrong Holdings, Inc. 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 Armstrong Holdings, Inc.
Armstrong Holdings, Inc. 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 Armstrong
Holdings, Inc. The publicly held debt of AWI was not affected in the
transaction.
Operating results for the first quarter of 2002 and the corresponding period of
2001 included in this report are unaudited. Certain prior year amounts have been
reclassified to conform to the current year presentation.
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 new 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. See Note 5 for further information.
In accordance with the Emerging Issues Task Force ("EITF") Issue No. 00-025,
"Vendor Income Statement Characterization of Consideration from a Vendor to a
Retailer," effective January 1, 2002, Armstrong has reclassified $0.5 million
from selling, general and administrative expenses to a reduction of net sales
for the first quarter of 2001.
Effective January 1, 2002, Armstrong adopted Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("FAS 142"), related to the
nonamortization of goodwill and certain intangibles. Armstrong expects to
finalize its adoption in the second quarter of 2002. See Note 7.
Effective January 1, 2002, Armstrong adopted Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144") which provides guidance on the accounting for the impairment or disposal
of long-lived assets. Armstrong's current results of operations or financial
position have not been affected.
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, 2001. 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,
2001. In the
28
opinion of management, all adjustments of a normal recurring nature have been
included to provide a fair statement of the results for the reporting periods
presented. Quarterly results are not necessarily indicative of annual earnings.
The first quarters of the Wood Flooring and Cabinets segments ended on March 30,
2002 and March 31, 2001. No events occurred between March 30, 2002 and March 31,
2002 materially affecting Armstrong's financial position or results of
operations.
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 asbestos personal injury
claimants, one representing asbestos property damage 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.
AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. 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 or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.
AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.
Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain specified claims. A bar date is the date by which claims
against AWI must be filed if the claimants wish to participate in any
distribution from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002, which AWI
expects will be extended to June 28, 2002, and for claims from several
environmental agencies until the second quarter of 2002. In March 2002, the
Court ruled that the time to file claims related to asbestos property damage
would not be further extended, but allowed certain alleged holders of asbestos
property damage claims to file a class proof of claim against AWI. The Court set
schedules to determine whether the proposed class should be certified
29
and whether asbestos-containing resilient floor covering products give rise to
property damage liability. A bar date for asbestos-related personal injury
claims has not been set.
Approximately 4,500 proofs of claim (including late-filed claims) totaling
approximately $6.0 billion alleging a right to payment from AWI were filed with
the Court in response to the August 31, 2001 bar date, which are discussed
below. AWI continues to investigate claims to determine their validity. The
Court will ultimately determine liability amounts that will be allowed as part
of the Chapter 11 process.
In its ongoing review of the filed claims, AWI already identified and
successfully objected to approximately 1,100 claims totaling $1.5 billion. These
claims were, primarily, duplicate filings, claims that were subsequently amended
or claims that are not related to AWI. The Court disallowed these claims with
prejudice.
In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.8 billion are pending with the Court 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 stated above, the bar date of August 31,
2001 did not apply to 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 10 of the condensed consolidated financial statements.
Approximately 600 proofs of claim totaling approximately $0.9 billion alleging
asbestos-related property damage are pending with the Court. Most of these
claims are new to AWI and many were submitted with insufficient documentation to
assess their validity. AWI petitioned the Court to disallow approximately 50
claims totaling approximately $0.5 billion. The Court denied AWI's motion and
will address the validity of these claims at a future date. AWI expects to
continue vigorously defending any asserted asbestos-related property damage
claims in the Court. 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 Court. AWI's history of
property damage litigation prior to the Chapter 11 filing is described in Note
10 of the condensed consolidated financial statements.
Approximately 1,800 claims totaling approximately $1.8 billion alleging a right
to payment for financing, environmental, trade debt and other claims are pending
with the Court. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities. AWI continues to investigate the
claims to determine their validity.
AWI continues to evaluate claims filed in the Chapter 11 Case. AWI has recorded
liability amounts for those claims that can be reasonably estimated and for
which it believes are probable of being allowed by the Court. At this time, it
is impossible to reasonably estimate the value of all the claims that will
ultimately be allowed by the Court. However, it is likely the value of the
claims ultimately allowed by the Court will be in excess of amounts presently
recorded by AWI and will be material to AWI's financial position and the results
of its operations. However, AWI is not able to determine a 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 March 31, 2002, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$177.6 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of March 31, 2002, AWI had approximately $9.9
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings
30
under the DIP Facility, if any, and obligations to reimburse draws upon the
letters of credit constitute superpriority administrative expense claims in the
Chapter 11 Case. The DIP Facility is scheduled to expire on December 6, 2002.
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.
This guidance is implemented 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 3 for detail of the liabilities subject to compromise at March 31, 2002 and
December 31, 2001. 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 estimated liability for personal injury asbestos claims is
also recorded in liabilities subject to compromise. See Note 10 for further
discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the first quarter of 2002 and 2001:
Three Months Ended Three Months Ended
(amounts in millions) March 31, 2002 March 31, 2001
- --------------------- -------------------- --------------------
Professional fees $ 6.9 $ 5.8
Interest income, post petition (0.8) (1.7)
Reductions to prepetition liabilities - (1.9)
Other expense directly related to bankruptcy, net 0.1 0.8
-------- ---------
Total Chapter 11 reorganization costs, net $ 6.2 $ 3.0
======== =========
Professional fees represent legal and financial advisory fees and 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.
31
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. 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 balance sheet. Liabilities that may be
affected by a plan of reorganization are recorded at the amount of the expected
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of AHI
subsidiaries not covered by the Filing remain classified on the condensed
consolidated balance sheet based upon maturity date. AWI's asbestos liability is
also recorded in liabilities subject to compromise. Prior to its Chapter 11
Filing, AWI estimated its probable asbestos-related personal injury liability
based upon a variety of factors including historical settlement amounts, the
incidence of past 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. AWI believes its previous range of probable
and estimable liability is more uncertain now than before. There are significant
differences in the way the asbestos-related personal injury claims may be
addressed under the bankruptcy process when compared to the tort system.
Accordingly, AWI currently is unable to estimate its ultimate liability in the
context of its Chapter 11 Case. Although not estimable, it is likely that the
actual liability will 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. See Note 10 for further discussion of AWI's asbestos liability.
Liabilities subject to compromise at March 31, 2002 and December 31, 2001 are as
follows:
(amounts in millions) March 31, December 31,
2002 2001
----------- ------------
Debt (at face value) $ 1,400.7 $ 1,400.7
Asbestos-related liability 690.6 690.6
Prepetition trade payables 53.5 52.2
Prepetition other payables and accrued interest 56.1 56.4
Amounts due to affiliates 4.6 4.6
ESOP loan guarantee 157.7 157.7
--------- ---------
Total liabilities subject to compromise $ 2,363.2 $ 2,362.2
========= =========
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
NOTE 4. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions)
Three Months
Ended March 31,
Net sales to external customers 2002 2001
- ------------------------------- ---------- ----------
Resilient Flooring $ 280.9 $ 291.1
Building Products 195.5 216.1
Wood Flooring 160.9 154.9
Cabinets 56.3 54.1
Textiles & Sports Flooring 54.0 63.7
---------- ----------
Total sales to external customers $ 747.6 $ 779.9
========== ==========
32
Three Months Ended March 31,
Segment operating income (loss) 2002 2001
- ------------------------------- ---------- ----------
Resilient Flooring $ 18.8 $ 20.2
Building Products 22.7 18.5
Wood Flooring 8.7 5.2
Cabinets 3.2 4.5
Textiles & Sports Flooring (1.9) 2.3
All Other 0.6 --
---------- ----------
Total segment operating income 52.1 50.7
Unallocated Corporate expense (11.6) (7.4)
---------- ----------
Total consolidated operating income $ 40.5 $ 43.3
========== ==========
March 31, December 31,
Segment assets 2002 2001
- -------------- ------------- -------------
Resilient Flooring $ 883.1 $ 867.6
Building Products 528.4 527.0
Wood Flooring 1,262.3 1,260.6
Cabinets 113.3 108.0
Textiles & Sports Flooring 169.2 162.9
All Other 17.0 16.3
------------- -------------
Total segment assets 2,973.3 2,942.4
Assets not assigned to segments 1,095.0 1,092.0
------------- -------------
Total consolidated assets $ 4,068.3 $ 4,034.4
============= =============
NOTE 5. 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 new 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.
Based on the expected net realizable value of the business determined during the
negotiations to sell the business, Armstrong recorded a pretax net loss of $34.5
million in the fourth quarter of 2000, $23.8 million net of tax benefit.
Armstrong also 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) was reversed in the third quarter of 2001 and recorded as
part of earnings from discontinued operations. Additionally, the segment's net
income of $1.6 million for the first quarter of 2001 was reclassified into
earnings from continuing operations for that period.
33
NOTE 6. INVENTORY
- ------------------
(amounts in millions) March 31, 2002 December 31, 2001
- --------------------- -------------- -----------------
Finished goods $ 292.8 $ 269.6
Goods in process 54.0 45.8
Raw materials and supplies 179.7 182.9
Less LIFO and other reserves (61.2) (55.2)
------------ ------------
Total inventories, net $ 465.3 $ 443.1
============ ============
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
- --------------------------------------
Effective January 1, 2002, Armstrong adopted Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("FAS 142"), which requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. 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 2002. FAS 142 also
requires that intangible assets with determinable 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."
As of January 1, 2002, Armstrong had unamortized goodwill of $822.8 million, of
which $717.2 million was attributable to the Wood Flooring segment. Based on
preliminary assessments of the impact of adopting FAS 142, Armstrong believes
that a significant portion of the Wood Flooring segment goodwill will be
considered impaired under the new accounting standard. Armstrong has not yet
determined the amount of any impairment, but expects to complete its analysis in
the second quarter of 2002. Due to the complexity, timing and scale of the
process, Armstrong is currently unable to precisely determine the amount of the
goodwill impairment charge. However, due to additional valuation information
received and analysis performed, Armstrong currently expects the impairment
charge to be in excess of $500 million.
34
As of January 1, 2002, Armstrong had unamortized identifiable intangible assets
of $94.1 million. The following table details amounts related to Armstrong's
intangible assets as of March 31, 2002.
March 31, 2002
-----------------------------
(amounts in millions) Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Amortized intangible assets
- ---------------------------
Computer software $ 89.2 $ (30.8)
Land use rights and other 3.6 (0.7)
------------- ------------
Total $ 92.8 $ (31.5)
------------- ============
Unamortized intangible assets
- -----------------------------
Trademarks and brand names $ 35.0
-------------
Total intangible assets $ 127.8
=============
Aggregate Amortization Expense
- ------------------------------
For the three months ended March 31, 2002 $ 3.1
The annual amortization expense expected for the years 2002 through 2006 is as
follows:
(amounts in millions)
2002 $ 13.6 2005 $ 9.5
2003 13.0 2006 6.0
2004 11.1
Comparison to prior year "As Adjusted"
- --------------------------------------
The following table presents prior year reported amounts adjusted to eliminate
the effect of goodwill and certain identifiable intangible asset amortization in
accordance with FAS 142.
Three Months
Ended March 31,
2002 2001
--------- ---------
(in millions except for per share amounts)
Reported net income $ 21.9 $ 20.3
Add back: Goodwill amortization -- 5.7
Add back: Trademark and brand names amortization -- 0.2
-------- --------
Adjusted net income $ 21.9 $ 26.2
======== ========
35
NOTE 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals for the first three months of 2002 and 2001:
(amounts in millions) Beginning Cash Ending
Balance Payments Charges Other Balance
--------- -------- ------- ----- -------
2002 $ 8.9 $ (0.7) $ 0.5 $ (0.1) $ 8.6
2001 22.2 (4.3) 3.8 (0.6) 21.1
A $0.5 million pretax restructuring charge was recorded in the first quarter of
2002. The charge related to severance benefits for eleven employees in the
Textiles and Sports Flooring segment, to reflect staffing needs for current
business conditions and continued efforts initiated in the fourth quarter of
2001.
A $5.4 million pretax restructuring charge was recorded in the first quarter of
2001. The charge related to severance and enhanced retirement benefits for more
than 50 corporate and line-of-business salaried staff positions, to reflect
staffing needs for current business conditions. Of the $5.4 million, $1.6
million represented a non-cash charge for enhanced retirement benefits, which is
accounted for as a reduction of the prepaid pension asset.
The amount in "other" is primarily related to foreign currency translation.
Substantially all of the remaining balance of the restructuring accrual as of
March 31, 2002 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 fourth quarter of 2002.
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Three Months Ended
March 31,
2002 2001
---------- ----------
Interest paid $ 2.0 $ 1.2
Income taxes paid (refunded), net $ 0.5 $ (0.4)
NOTE 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- -------------------------------------------------------
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2001 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 final resolution
of its asbestos liability.
Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury 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 payments called for under these settlements will be
determined in its Chapter 11 Case.
36
Due to the Filing, holders of asbestos-related personal injury 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-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury 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-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.
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-related personal injury 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 had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. 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 personal injury liability balance recorded at March
31, 2002 and December 31, 2001 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will 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-related personal
injury 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. Recently, Judge Alfred M. Wolin of the Federal District Court for the
District of New Jersey, who is also presiding over AWI's Chapter 11 Case,
indicated he would determine these matters. Judge Wolin has not yet ruled on
these matters.
37
Asbestos-Related 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 previous claims that were resolved prior
to the Filing resulted in aggregate indemnity obligations of less than $10
million. To date, all payments of these obligations have been 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. In March 2002, the Court allowed
certain alleged holders of asbestos property damage claims to file a class proof
of claim against AWI. The Court set schedules to determine whether the proposed
class should be certified and whether asbestos-containing resilient floor
covering products give rise to property damage liability. Consistent with prior
periods and due to increased uncertainty, AWI has not recorded any liability
related to these claims as of December 31, 2001. See Note 2 for further
discussion of the property damage claims in response to the August 31, 2001
claims bar date in 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. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. 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.
Another insurer (Century Indemnity Company), who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI assumes the agreement; (3) declare that the insurer is entitled to
indemnification from AWI against any liabilities that the insurer may incur in
certain unrelated litigation in which the insurer is involved; and (4) enjoin
the disposition of funds previously paid by the insurer to the trust pending an
adjudication of the insurer's rights. AWI believes it is highly unlikely the
insurer will prevail in this matter.
38
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of March 31, 2002 and December 31, 2001. Of the
total recorded asset at December 31, 2001, approximately $49.5 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. 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 (the former AWI insulation
contracting subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $82 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. Of the $214.1 million asset, $24.0 million has been recorded as a
current asset as of March 31, 2002 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
increase 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 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 2002 or 2001. AWI did not receive any
asbestos-related insurance recoveries during the first quarter of 2002 or 2001.
During the pendency of the Chapter 11 Case, AWI does not expect to make any
further cash payments for asbestos-related claims, but AWI expects to 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. 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. Although not
estimable, it is likely that AWI's total exposure to asbestos-related personal
injury claims will be significantly higher than the recorded liability. Any
adjustment to the estimated liability or insurance asset could be material to
the financial statements.
NOTE 11. ENVIRONMENTAL LIABILITIES
- ----------------------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong anticipates that annual expenditures for those purposes
will not change materially from recent experience. Armstrong does not anticipate
that it will incur significant capital expenditures in order to meet the
requirements of the Clean Air Act of 1990 and the final implementing regulations
promulgated by various state agencies. However, applicable requirements under
the Clean Air Act and other federal and state environmental laws
39
continue to change. Until all new regulatory requirements are known, Armstrong
cannot predict with certainty future capital expenditures associated with
compliance with environmental requirements.
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")
which have potential liability for the required investigation and remediation of
each site, and which in some cases, have agreed to jointly fund that required
investigation and remediation. 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 former plant sites. AWI's payments and
remediation work on such sites for which AWI is the potentially responsible
party is under review in light of the Chapter 11 Filing. The bar date for claims
from several environmental agencies has been extended into the second quarter of
2002.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction with the site, existing technology,
presently enacted laws and regulations and prior company experience in
remediating contaminated sites. Although current law imposes joint and several
liability on all parties at any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Case also may
affect the ultimate amount of such contributions.
Liabilities of $16.2 million at March 31, 2002 and $16.6 million at December 31,
2001 were for potential environmental liabilities that Armstrong considers
probable and for which a reasonable estimate of the probable liability could be
made. Where existing data is sufficient to estimate the 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
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the March 31,
2002 and December 31, 2001 environmental liabilities are classified as
prepetition liabilities subject to compromise. As a general rule, such
prepetition liabilities that do not preserve company assets are addressed in the
Chapter 11 Case.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, or liquidity, although the
recording of future costs may be material to earnings in such future period.
NOTE 12. DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- ------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the condensed consolidated financial statements is
primarily due to stock activity and intercompany transactions.
40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis corresponds to AHI financial statements.
Since there are no material differences between the financial statements of AHI
and Armstrong, the following discussion and analysis pertains to both AHI and
Armstrong.
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 asbestos personal injury
claimants, one representing asbestos property damage 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.
AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. 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 or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.
AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.
Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain specified claims. A bar date is the date by which claims
against AWI must be filed if the claimants wish to participate in any
distribution from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002, which AWI
expects will be extended to June 28, 2002, and for claims from several
environmental agencies until the second quarter of 2002. In March 2002, the
Court ruled that the time to file claims related to asbestos property damage
would not be further extended, but allowed certain alleged holders of asbestos
property damage claims to file a class proof of claim against AWI. The Court set
schedules to determine whether the proposed class should be certified
41
and whether asbestos-containing resilient floor covering products give rise to
property damage liability. A bar date for asbestos-related personal injury
claims has not been set.
Approximately 4,500 proofs of claim (including late-filed claims) totaling
approximately $6.0 billion alleging a right to payment from AWI were filed with
the Court in response to the August 31, 2001 bar date, which are discussed
below. AWI continues to investigate claims to determine their validity. The
Court will ultimately determine liability amounts that will be allowed as part
of the Chapter 11 process.
In its ongoing review of the filed claims, AWI already identified and
successfully objected to approximately 1,100 claims totaling $1.5 billion. These
claims were, primarily, duplicate filings, claims that were subsequently amended
or claims that are not related to AWI. The Court disallowed these claims with
prejudice.
In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.8 billion are pending with the Court 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 stated above, the bar date of August 31,
2001 did not apply to 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 10 of the condensed consolidated financial statements.
Approximately 600 proofs of claim totaling approximately $0.9 billion alleging
asbestos-related property damage are pending with the Court. Most of these
claims are new to AWI and many were submitted with insufficient documentation to
assess their validity. AWI petitioned the Court to disallow approximately 50
claims totaling approximately $0.5 billion. The Court denied AWI's motion and
will address the validity of these claims at a future date. AWI expects to
continue vigorously defending any asserted asbestos-related property damage
claims in the Court. 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 Court. AWI's history of
property damage litigation prior to the Chapter 11 filing is described in Note
10 of the condensed consolidated financial statements.
Approximately 1,800 claims totaling approximately $1.8 billion alleging a right
to payment for financing, environmental, trade debt and other claims are pending
with the Court. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities. AWI continues to investigate the
claims to determine their validity.
AWI continues to evaluate claims filed in the Chapter 11 Case. AWI has recorded
liability amounts for those claims that can be reasonably estimated and for
which it believes are probable of being allowed by the Court. At this time, it
is impossible to reasonably estimate the value of all the claims that will
ultimately be allowed by the Court. However, it is likely the value of the
claims ultimately allowed by the Court will be in excess of amounts presently
recorded by AWI and will be material to AWI's financial position and the results
of its operations. However, AWI is not able to determine a 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 March 31, 2002, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$177.6 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of March 31, 2002, AWI had approximately $9.9
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings
42
under the DIP Facility, if any, and obligations to reimburse draws upon the
letters of credit constitute superpriority administrative expense claims in the
Chapter 11 Case. The DIP Facility is scheduled to expire on December 6, 2002.
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.
This guidance is implemented 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 3 for detail of the liabilities subject to compromise at March 31, 2002 and
December 31, 2001. 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 estimated liability for personal injury asbestos claims is
also recorded in liabilities subject to compromise. See Note 10 for further
discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the first quarter of 2002 and 2001:
Three Months Ended Three Months Ended
(amounts in millions) March 31, 2002 March 31, 2001
- --------------------- -------------------- --------------------
Professional fees $ 6.9 $ 5.8
Interest income, post petition (0.8) (1.7)
Reductions to prepetition liabilities -- (1.9)
Other expense directly related to bankruptcy, net 0.1 0.8
---------- ----------
Total Chapter 11 reorganization costs, net $ 6.2 $ 3.0
========== ==========
Professional fees represent legal and financial advisory fees and expenses
directly related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the condensed consolidated financial
statements.
43
Financial Condition and Liquidity
- ---------------------------------
As shown on the condensed consolidated balance sheets, Armstrong had cash and
cash equivalents of $261.7 million at March 31, 2002. Working capital was $787.0
million as of March 31, 2002, $37.1 million higher than the $749.9 million
recorded at the end of 2001. The ratio of current assets to current liabilities
was 3.10 to 1 as of March 31, 2002, compared with 3.06 to 1 as of December 31,
2001. The increases were primarily the result of higher accounts receivable and
inventory balances, offset by a decrease in cash and an increase in income taxes
payable.
Long-term debt, excluding debt subject to compromise, was $48.5 million, or 5.6%
of total capital at March 31, 2002, compared with $50.3 million, or 6.0% of
total capital, at the end of 2001. All other outstanding prepetition long-term
debt is owed by entities that filed for Chapter 11 protection, and therefore has
been classified as liabilities subject to compromise at March 31, 2002 and
December 31, 2001.
As shown on the condensed consolidated statements of cash flows, net cash used
for operating activities for the three months ended March 31, 2002, was $2.6
million compared with cash provided by operating activities of $5.6 million for
the comparable period in 2001. The increase in cash used was primarily due to
the net effect of comparatively smaller increases in receivables and inventories
as offset by decreases in accounts payable and accrued expenses.
Net cash used for investing activities was $15.2 million for the three months
ended March 31, 2002, compared with net cash used for investing activities of
$17.3 million for the three months ended March 31, 2001. The decrease was
primarily due to lower purchases of property, plant and equipment and computer
software.
Net cash provided by financing activities was $2.5 million for the three months
ended March 31, 2002 compared with cash used for financing activities of $8.8
million for the three months ended March 31, 2001. The decrease in cash used was
primarily due to increased short-term debt.
AHI's liquidity needs for operations vary throughout the year. Therefore, AHI
retains lines of credit to draw upon as needed to meet these needs. There were
no outstanding borrowings under the DIP Facility as of March 31, 2002 or March
31, 2001.
Asbestos-related Litigation
- ---------------------------
The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrong's 2001 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 final resolution
of its asbestos liability.
Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury 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 payments called for under these settlements will be
determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos-related personal injury 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-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed in the
Chapter 11 Case.
44
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-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.
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-related personal injury 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 had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. 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 personal injury liability balance recorded at March
31, 2002 and December 31, 2001 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will 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-related personal
injury 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. Recently, Judge Alfred M. Wolin of the Federal District Court for the
District of New Jersey, who is also presiding over AWI's Chapter 11 Case,
indicated he would determine these matters. Judge Wolin has not yet ruled on
these matters.
Asbestos-Related 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 previous claims that were resolved prior
to the Filing resulted in aggregate indemnity obligations of less than $10
million. To date, all payments of these obligations have been 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
45
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. In March 2002, the Court allowed certain alleged holders of asbestos
property damage claims to file a class proof of claim against AWI. The Court set
schedules to determine whether the proposed class should be certified and
whether asbestos-containing resilient floor covering products give rise to
property damage liability. Consistent with prior periods and due to increased
uncertainty, AWI has not recorded any liability related to these claims as of
December 31, 2001. See Note 2 for further discussion of the property damage
claims in response to the August 31, 2001 claims bar date in 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. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. 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.
Another insurer (Century Indemnity Company), who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI assumes the agreement; (3) declare that the insurer is entitled to
indemnification from AWI against any liabilities that the insurer may incur in
certain unrelated litigation in which the insurer is involved; and (4) enjoin
the disposition of funds previously paid by the insurer to the trust pending an
adjudication of the insurer's rights. AWI believes it is highly unlikely the
insurer will prevail in this matter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of March 31, 2002 and December 31, 2001. Of the
total recorded asset at December 31, 2001, approximately $49.5 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
46
process. 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 (the former AWI
insulation contracting subsidiary that was sold in August 1969) and the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 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. Of the $214.1 million asset, $24.0 million has been
recorded as a current asset as of March 31, 2002 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
increase 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 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 2002 or 2001. AWI did not receive any
asbestos-related insurance recoveries during the first quarter of 2002 or 2001.
During the pendency of the Chapter 11 Case, AWI does not expect to make any
further cash payments for asbestos-related claims, but AWI expects to 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. 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. Although not
estimable, it is likely that AWI's total exposure to asbestos-related personal
injury claims will be significantly higher than the recorded liability. Any
adjustment to the estimated liability or insurance asset could be material to
the financial statements.
New Accounting Pronouncements
- -----------------------------
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 long-lived asset. The standard
is effective for fiscal years beginning after June 15, 2002. While AHI is
finalizing its review of this statement, adoption of this statement is not
expected to have a material impact on AHI's consolidated results of operations
or financial condition.
47
Consolidated Results
- --------------------
The following discussions of consolidated results are on a continuing operations
basis.
Net sales in the first quarter of 2002 of $747.6 million were 4.1% lower
compared with net sales of $779.9 million in the first quarter of 2001.
Resilient Flooring net sales decreased 3.5%. Building Products net sales
decreased by 9.5%. Wood Flooring net sales increased by 3.9%. Cabinets increased
by 4.1%. Textiles and Sports Flooring decreased 15.2%. Net sales decreased 0.8%,
12.5% and 15.2% in the Americas, Europe, and the Pacific Area, respectively.
Excluding the effect of foreign exchange rates, consolidated net sales decreased
3.0% and Europe net sales decreased 8.6%. (See Industry Segment Results for
further discussion.)
Operating income in the first quarter of 2002 was $40.5 million compared to
$43.3 million in the first quarter of 2001. (See Industry Segment Results for
further discussion.) The first quarter of 2002 was negatively impacted by a $4.9
million decreased pension credit. The first quarter of 2001 includes $5.7
million of goodwill amortization, which, as a result of adopting FAS 142
effective January 1, 2002, is no longer amortizable and has no corresponding
cost in 2002. See Note 7 of the condensed consolidated financial statements for
further discussion of FAS 142.
Cost of goods sold for the first quarter of 2002 was 74.0% of net sales,
compared to 74.7% for the first quarter of 2001. The percent reduction was due
to decreases in raw material and energy costs, partially offset by the impact of
lower sales and higher medical costs. Cost of goods sold in the first quarter of
2002 was negatively impacted by a $2.6 million decreased pension credit, offset
by changes in long-term disability benefit policies for certain employees that
resulted in a benefit of $4.2 million.
Selling, general and administrative ("SG&A") expenses in the first quarter of
2002 were $158.6 million or 21.2% of net sales, compared to $147.5 million or
18.9% of net sales in the first quarter of 2001. The increase in SG&A was
primarily due to higher overall advertising and medical expenses and a $2.3
million decreased pension credit, partially offset by the impact of changes in
long-term disability benefit policies for certain employees that resulted in a
benefit of $1.1 million during the first quarter of 2002. The first quarter 2001
includes $0.2 million of amortization on intangible assets, which, as a result
of adopting FAS 142 effective January 1, 2002, is no longer amortizable and has
no corresponding cost in 2002. See Note 7 of the condensed consolidated
financial statements for further discussion of FAS 142.
Armstrong also recorded net restructuring costs of $0.5 million in the first
quarter of 2002, which included severance benefits for eleven employees in the
Textiles and Sports Flooring segment, as a result of further streamlining of the
organization. This reorganization is expected to result in $0.3 million annual
savings. This charge continued the efforts initiated in the fourth quarter of
2001. Restructuring charges in the first quarter of 2001 were $5.4 million,
relating 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.
Interest expense of $3.5 million in the first quarter of 2002 was slightly
higher than interest expense of $3.4 million in the first quarter of 2001. In
accordance with SOP 90-7, Armstrong did not record contractual interest expense
on prepetition debt after the Chapter 11 filing date. This unrecorded interest
expense was $21.4 million in the first quarters of 2002 and 2001.
Other income, net was $0.5 million in the first quarter of 2002 compared to $3.8
million for the first quarter of 2001. The 2001 other income, net was primarily
due to fair value gains related to foreign currency exchange forward contracts.
Armstrong recorded $6.2 million of Chapter 11 reorganization costs, net in the
first quarter of 2002 compared to $3.0 million in the first quarter of 2001. See
"Proceedings Under Chapter 11" for details of the Chapter 11 reorganization
costs, net.
48
Earnings from continuing operations in the first quarter of 2002 were $21.9
million, or $0.54 per diluted share, compared to adjusted earnings from
continuing operations (excluding $5.9 million of amortization on goodwill and
certain intangible assets) of $31.1 million, or $0.76 per diluted share, in the
first quarter of 2001.
The effective tax rate from continuing operations for the first quarter of 2002
was 30.0% versus 38.1% for the first quarter of 2001. This decrease was related
to a reduction in a valuation allowance provided against deferred taxes on
foreign tax credit carryforwards due to the enhanced ability to claim these
credits and the elimination of the negative tax impact recorded in 2001 on
non-deductible goodwill amortization. These two benefits were offset partially
by an increase for state taxes related primarily to certain benefits recorded in
2001.
Net earnings were $21.9 million, or $0.54 per diluted share for the first
quarter of 2002, compared to adjusted net earnings (excluding $5.9 million of
amortization on goodwill and certain intangible assets) of $26.2 million, or
$0.64 per diluted share in the first quarter of 2001.
Industry Segment Results
- ------------------------
Resilient Flooring
- ------------------
Resilient Flooring net sales were $280.9 million and $291.1 million in the first
quarter 2002 and 2001, respectively. This 3.5% decrease primarily resulted from
an increase in the Americas net sales of 1.1%, offset by decreases due to a soft
European market and unfavorable effects of foreign exchange rates. Excluding the
effects of foreign exchange rates, Resilient Flooring net sales decreased 2.4%.
The Americas increase in net sales was due to higher sales of residential sheet
products, offset by decreases in the remaining product categories. Excluding the
effects of foreign exchange rates, net sales in Europe were 9.4% below the first
quarter of 2001 due to lower sales volume in Germany and Sweden. Pacific Area
net sales decreased $0.8 million versus the 2001 period. Operating income of
$18.8 million in the first quarter of 2002 compared to $20.2 million in the
first quarter of 2001. This decrease was the net effect of lower net sales and
higher medical and advertising expenses, partially offset by lower raw material
costs. The impact of changes in long-term disability benefit policies for
certain employees resulted in a benefit of $3.1 million during the first quarter
of 2002. Operating income in the first quarter of 2001 also included $1.9
million of employee severance costs related to restructuring efforts.
Building Products
- -----------------
Building Products net sales of $195.5 million in the first quarter of 2002
decreased from $216.1 million in the first quarter of 2001 primarily due to
volume declines in commercial construction markets. Operating income increased
$4.2 million to $22.7 million in first quarter of 2002 as lower energy costs
outweighed the impact of the sales volume decline. The impact of changes in
long-term disability benefit policies for certain employees resulted in a
benefit of $1.2 million during the first quarter of 2002. Operating income in
the first quarter of 2001 also included $1.1 million of employee severance costs
related to restructuring efforts.
Wood Flooring
- -------------
Wood Flooring net sales of $160.9 million in the first quarter of 2002 increased
from net sales of $154.9 million in the first quarter of 2001. This 3.9%
increase was driven primarily by increased volume in both independent and large
home center distributors. Operating income of $8.7 million in the first quarter
of 2002 compared to operating income of $5.2 million in the first quarter of
2001. Excluding $4.9 million of goodwill amortization expense recorded in the
first quarter of 2001, operating income would have been $10.1 million. The
decrease in operating income was primarily driven by higher selling and
advertising expenses, partially offset by higher sales and lower lumber costs.
49
Cabinets
- --------
Cabinets net sales of $56.3 million in the first quarter of 2002 increased from
net sales of $54.1 million in the first quarter of 2001 due to a favorable
product mix. Operating income of $3.2 million in the first quarter of 2002
compared to operating income of $4.5 million in the first quarter of 2001. The
decrease was related to higher labor costs, including post retirement benefits.
Textiles and Sports Flooring
- ----------------------------
Textiles and Sports Flooring net sales of $54.0 million decreased in the first
quarter of 2002 compared to $63.7 million in the first quarter of 2001.
Excluding the impact of unfavorable foreign exchange rates, net sales decreased
10.7% primarily due to the weak European market negatively impacting sales
volume. An operating loss of $1.9 million in the first quarter of 2002 was
incurred compared to operating income of $2.3 million in the first quarter of
2001, primarily due to the impact of lower sales volume. Operating income in the
first quarter of 2002 also included $0.5 million of employee severance costs
related to restructuring efforts.
All Other
- ---------
The All Other segment contributed operating income of $0.6 million for the first
quarter of 2002 resulting from the equity investment in Interface Solutions,
Inc. There was no operating income or loss for the comparable period of 2001.
Unallocated Corporate Expense
- -----------------------------
Unallocated corporate expense of $11.6 million in the first quarter of 2002
compared to $7.4 million in the first quarter of 2001. This increase resulted
primarily due to a $4.9 million decreased pension credit and by higher
unallocated administrative expenses. Additionally, the first quarter of 2001
included $2.4 million of employee severance costs related to restructuring
efforts.
50
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 2001 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 final resolution
of its asbestos liability.
Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury 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 payments called for under these settlements will be
determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos-related personal injury 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-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury 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-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.
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-related personal injury 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 had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. 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 personal injury liability balance recorded at March
31, 2002 and December 31, 2001 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the
51
ultimate liability. It is likely, however, that the actual liability will 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-related personal
injury 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. Recently, Judge Alfred M. Wolin of the Federal District Court for the
District of New Jersey, who is also presiding over AWI's Chapter 11 Case,
indicated he would determine these matters. Judge Wolin has not yet ruled on
these matters.
Asbestos-Related 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 previous claims that were resolved prior
to the Filing resulted in aggregate indemnity obligations of less than $10
million. To date, all payments of these obligations have been 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. In March 2002, the Court allowed
certain alleged holders of asbestos property damage claims to file a class proof
of claim against AWI. The Court set schedules to determine whether the proposed
class should be certified and whether asbestos-containing resilient floor
covering products give rise to property damage liability. Consistent with prior
periods and due to increased uncertainty, AWI has not recorded any liability
related to these claims as of December 31, 2001. See Note 2 for further
discussion of the property damage claims in response to the August 31, 2001
claims bar date in 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,
52
during the first quarter of 2001, a new trial judge was selected for the ADR.
The new trial judge conducted hearings in 2001 and determined not to rehear
matters decided by the previous judge. In the first quarter of 2002, the new
trial judge concluded the ADR trial proceeding with findings in favor of AWI on
substantially all key issues. The trial proceeding is subject to an appeal as
part of the ADR process. 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.
Another insurer (Century Indemnity Company), who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI assumes the agreement; (3) declare that the insurer is entitled to
indemnification from AWI against any liabilities that the insurer may incur in
certain unrelated litigation in which the insurer is involved; and (4) enjoin
the disposition of funds previously paid by the insurer to the trust pending an
adjudication of the insurer's rights. AWI believes it is highly unlikely the
insurer will prevail in this matter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of March 31, 2002 and December 31, 2001. Of the
total recorded asset at December 31, 2001, approximately $49.5 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. 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 (the former AWI insulation
contracting subsidiary that was sold in August 1969) and the financial condition
of the insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $82 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. Of the $214.1 million asset, $24.0 million has been recorded as a
current asset as of March 31, 2002 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
increase 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 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 2002 or 2001. AWI did not receive any
asbestos-related insurance recoveries during the first quarter of 2002 or 2001.
During the pendency of the Chapter 11 Case, AWI does not expect to make any
further cash payments for asbestos-related claims, but AWI expects to continue
to receive insurance proceeds under the terms of various settlement agreements.
53
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. 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. Although not
estimable, it is likely that AWI's total exposure to asbestos-related personal
injury claims will be significantly higher than the recorded liability. Any
adjustment to the estimated liability or insurance asset could be material to
the financial statements.
ENVIRONMENTAL MATTERS
- ---------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong anticipates that annual expenditures for those purposes
will not change materially from recent experience. Armstrong does not anticipate
that it will incur significant capital expenditures in order to meet the
requirements of the Clean Air Act of 1990 and the final implementing regulations
promulgated by various state agencies. However, applicable requirements under
the Clean Air Act and other federal and state environmental laws continue to
change. Until all new regulatory requirements are known, Armstrong cannot
predict with certainty future capital expenditures associated with compliance
with environmental requirements.
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")
which have potential liability for the required investigation and remediation of
each site, and which in some cases, have agreed to jointly fund that required
investigation and remediation. 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 former plant sites. AWI's payments and
remediation work on such sites for which AWI is the potentially responsible
party is under review in light of the Chapter 11 Filing. The bar date for claims
from several environmental agencies has been extended into the second quarter of
2002.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction with the site, existing technology,
presently enacted laws and regulations and prior company experience in
remediating contaminated sites. Although current law imposes joint and several
liability on all parties at any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Case also may
affect the ultimate amount of such contributions.
Liabilities of $16.2 million at March 31, 2002 and $16.6 million at December 31,
2001 were for potential environmental liabilities that Armstrong considers
probable and for which a reasonable estimate of the probable liability could be
made. Where existing data is sufficient to estimate the 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
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the March 31,
2002 and December 31, 2001
54
environmental liabilities are classified as prepetition liabilities subject to
compromise. As a general rule, such prepetition liabilities that do not preserve
company assets are addressed in the Chapter 11 Case.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition or liquidity, although the
recording of future costs may be material to earnings in such future period.
55
Item 6. - Exhibits and Reports on Form 8-K
- ------- - --------------------------------
(a) The following exhibits are filed as part of the Quarterly Report on
Form 10-Q:
Exhibits
--------
No. 15 Awareness Letter from Independent Auditors
(b) No reports on Form 8-K were filed in the first quarter of 2002.
56
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: April 30, 2002
57
Exhibit Index
-------------
Exhibit No.
- -----------
No. 15 Awareness Letter from Independent Auditors