FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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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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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock ($1 par value) New York Stock Exchange, Inc.
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (a)
9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (a)
(a) Common Stock and Preferred
Stock Purchase Rights only
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock of registrant held by non-
affiliates of the registrant based on the closing price ($46.00 per share) on
the New York Stock Exchange on February 6, 1995, was approximately $1.7.
billion. For the purposes of determining this amount only, registrant has
defined affiliates as including (a) the executive officers named in Item 10 of
this 10-K Report, (b) all directors of registrant, and (c) each shareholder that
has informed registrant by February 14, 1995, as having sole or shared voting
power over 5% or more of the outstanding Common Stock of registrant as of
December 31, 1994.
This amount does not include the 5,478,416 shares of Series A ESOP Convertible
Preferred Stock as of December 31, 1994, which vote with the Common Stock as if
converted and have an aggregate liquidation preference of $261,594,364, held by
Mellon Bank, N.A., as Trustee of the Company's Employee Stock Ownership Plan.
As of February 6, 1995, the number of shares outstanding of registrant's Common
Stock was 37,278,732.
Documents Incorporated by Reference
Portions of the Proxy Statement dated March 20, 1995, relative to the April 24,
1995, annual meeting of the shareholders of registrant (the "Company's 1995
Proxy Statement") have been incorporated by reference into Part III of this Form
10-K Report.
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PART I
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Item 1. Business
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Armstrong World Industries, Inc. is a Pennsylvania corporation incorporated in
1891. The Company is a manufacturer of interior furnishings, including floor
coverings, building products and furniture, which are sold primarily for use in
the furnishing, refurbishing, repair, modernization and construction of
residential, commercial and institutional buildings. It also manufactures
various industrial and other products. Unless the context indicates otherwise,
the term "Company" means Armstrong World Industries, Inc. and its consolidated
subsidiaries.
Industry Segments
The company operates worldwide in four reportable segments: floor coverings,
building products, furniture and industry products. Floor coverings sales
include resilient floors, ceramic tile and accessories.
Industry segments
at December 31 (millions) 1994 1993 1992
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Net trade sales:
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Floor coverings $1,283.7 $1,191.3 $1,134.9
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Building products 630.0 586.7 656.7
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Furniture 526.8 449.7 438.4
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Industry products 312.2 297.7 319.8
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Total net sales $2,752.7 $2,525.4 $2,549.8
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Operating income (loss): (See Note 1 on page 36 & Note 3 below)
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Floor coverings $ 190.4 $ 112.4 $ 12.6
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Building products 86.8 18.8 (19.3)
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Furniture 38.6 24.1 5.8
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Industry products 41.2 27.2 29.7
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Unallocated corporate expense (23.8) (59.8) (54.9)
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Total operating income (loss) $ 333.2 $ 122.7 $ (26.1)
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Depreciation and amortization:
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Floor coverings $ 63.0 $ 63.2 $ 67.8
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Building products 34.5 34.1 37.6
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Furniture 12.7 12.9 13.5
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Industry products 17.6 14.6 12.8
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Corporate 5.6 5.2 5.2
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Total depreciation
and amortization $ 133.4 $ 130.0 $ 136.9
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Capital additions: (See Note 2 on page 36)
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Floor coverings $ 77.1 $ 59.5 $ 48.0
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Building products 31.5 24.2 25.9
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Furniture 14.1 10.0 8.3
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Industry products 22.6 22.1 31.4
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Corporate 3.0 1.8 2.2
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Total capital additions $ 148.3 $ 117.6 $ 115.8
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Identifiable assets: (See Note 2 on page 36)
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Floor coverings $ 866.4 $ 818.4 $ 847.0
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Building products 478.1 483.0 500.3
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Furniture 245.2 234.6 238.7
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Industry products 234.8 207.9 197.0
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Corporate 408.0 185.4 226.8
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Total assets $2,232.5 $1,929.3 $2,009.8
Note 3:
Restructuring charges
in operating income (loss) (millions) 1994 1993 1992
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Floor coverings -- $ 27.7 $ 80.8
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Building products -- 13.7 35.0
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Furniture -- .6 4.8
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Industry products -- 12.9 12.5
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Unallocated corporate expense -- 35.0 32.4
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Total restructuring charges
in operating income (loss) -- $ 89.9 $ 165.5
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Narrative Description of Business
The Company manufactures and sells interior furnishings, including floor
coverings (resilient flooring and all ceramic tile), building products, and
furniture, and makes and markets a variety of specialty products for the
building, automotive, textile, and other industries. The Company's activities
extend worldwide.
Floor Coverings
The Company is a prominent manufacturer of floor coverings for the interiors of
homes and commercial and institutional buildings, with a broad range of
resilient flooring, ceramic tile for floors, walls and countertops, together
with adhesives, installation and maintenance materials and accessories.
Resilient flooring, in both sheet and tile form, is made in a wide variety of
types, designs, and colors. Included are types of flooring that offer such
features as ease of installation, reduced maintenance (no-wax), and cushioning
for greater underfoot comfort. Ceramic products include glazed wall and floor
tile and marble (a portion of which is imported) and glazed and unglazed ceramic
mosaic tile, all featuring a range of designs and colors, as well as quarry
tile, natural stone and related installation products. Floor covering products
are sold to the commercial and residential market segments through wholesalers,
retailers, and contractors, and to the hotel/motel and manufactured homes
industries. Ceramic products also are sold through sales service centers
operated by American Olean Tile Company, Inc. ("American Olean"), a wholly-owned
subsidiary which manufactures and markets ceramic tile.
Building Products
A major producer of ceiling materials in the United States and abroad, the
Company markets both residential and architectural ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs; most
provide noise reduction and incorporate Company-designed features intended to
permit ease of installation. These residential ceiling products are sold
through wholesalers and retailers. Architectural ceiling systems, designed for
use in shopping centers, offices, schools, hospitals, and other commercial and
institutional structures, are available in numerous colors, performance
characteristics and designs and offer characteristics such as acoustical
control, rated fire protection, and aesthetic appeal. Architectural ceiling
materials and accessories, along with acoustical wall panels, are sold by the
Company to ceiling systems contractors and to resale distributors.
Furniture
A wholly-owned subsidiary, Thomasville Furniture Industries, Inc., and its
subsidiaries manufacture and market traditional and contemporary wood and--by a
Thomasville subsidiary--upholstered furniture for use in dining rooms, bedrooms,
living rooms, hotels/motels and other residential and commercial interior areas.
Thomasville furniture is sold to retailers, contract accounts and government
agencies. Thomasville also manufactures both assembled and ready-to-assemble
furniture which is sold to retailers, wholesalers and contract accounts under
the Armstrong name. In addition, it sells a line of imported furniture made by
other producers.
Industry Products
The Company, including a number of its subsidiaries, makes and sells a variety
of specialty products for the building, automotive, textile and other
industries. These products include flexible pipe insulation sold for use in
construction and in original equipment manufacture; gasket materials for new
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equipment and replacement use in the automotive, farm equipment, appliance, and
other industries; textile mill supplies including cots and aprons sold to
equipment manufacturers and textile mills; adhesives; and certain cork products.
Industry products are sold, depending on type and ultimate use, to original
equipment manufacturers, contractors, wholesalers, fabricators and end users.
___________________________________
The principal raw materials used in the manufacture of the Company's products
are synthetic resins, lumber, plasticizers, latex, mineral fibers and fillers,
clays, starches, perlite, and pigments and inks. In addition, the Company uses
a wide variety of other raw materials. Most raw materials are purchased from
sources outside of the Company. The Company also purchases significant amounts
of packaging materials for the containment and shipment of its various products.
During 1994, adequate supplies of raw materials were available to all of the
Company's industry segments.
Customers' orders for the Company's products are mostly for immediate shipment.
Thus, in each industry segment, the Company has implemented inventory systems,
including its "just in time" inventory system, pursuant to which orders are
promptly filled out of inventory on hand or the product is manufactured to meet
the delivery date specified in the order. As a result, there historically has
been no material backlog in any industry segment.
The competitive position of the Company has been enhanced by patents on
products and processes developed or perfected within the Company or obtained
through acquisition. Although the Company considers that, in the aggregate, its
patents constitute a valuable asset, it does not regard any industry segment as
being materially dependent upon any single patent or any group of related
patents.
There is significant competition in all the industry segments in which the
Company does business. Competition in each industry segment includes numerous
active companies (domestic and foreign), with emphasis on price, product
performance and service. In addition, with the exception of industrial and
other products and services, product styling is a significant method of
competition in the Company's industry segments. Increasing domestic competition
from foreign producers is apparent in certain industry segments and actions
continue to be taken to meet this competition.
The Company invested $148.3 million in 1994, $117.6 million in 1993, and $115.8
million in 1992 for additions to its property, plant and equipment.
Research and development activities are important and necessary in assisting the
Company to carry on and improve its business. Principal research and
development functions include the development of new products and processes and
the improvement of existing products and processes. Research and development
activities are conducted principally at the Company's Innovation Center in
Lancaster, Pennsylvania.
The Company spent $57.4 million in 1994, $63.0 million in 1993, and $64.9
million in 1992 on research and development activities worldwide for the
continuing businesses.
The Company will incur capital expenditures in order to meet the new
requirements of the Clean Air Act of 1990 and is awaiting the final promulgation
of implementing regulations by various state agencies to determine the magnitude
of additional costs and the time period over which they will be incurred. In
1994, the Company incurred capital expenditures of approximately $1.9 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1995 and 1996.
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As with many industrial companies, the Company is involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), and similar state laws at approximately 23 sites. In most cases,
the Company is one of many potentially responsible parties ("PRPs") who have
voluntarily agreed to jointly fund the required investigation and remediation of
each site. With regard to some sites, however, the Company disputes either
liability or the proposed cost allocation. Sites where the Company is alleged
to have contributed a significant volume of waste material include a former
municipal landfill site in Volney, New York; and a former county landfill site
in Buckingham County, Virginia, which is alleged to have received material from
Thomasville Furniture Industries, Inc. Armstrong may also have rights of
contribution or reimbursement from other parties or coverage under applicable
insurance policies. The Company is also remediating environmental contamination
resulting from past industrial activity at certain of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations, and prior Company experience
in remediation of contaminated sites. Although current law imposes joint and
several liability on all parties at any Superfund site, the Company's
contribution to the remediation of these sites is expected to be limited by the
number of other companies which have also been identified as potentially liable
for site costs. As a result, the Company's estimated liability reflects only
the Company's expected share. In determining the probability of contribution,
the Company considers the solvency of the parties, whether responsibility is
being disputed, the terms of any existing agreements, and experience regarding
similar matters. The estimated liabilities do not take into account any claims
for recoveries from insurance or third parties.
Because of uncertainties associated with remediation activities and
technologies, regulatory interpretations, and the allocation of those costs
among various other parties, the Company has accrued, before agreed-to insurance
coverages, $10.4 million to reflect its estimated undiscounted liability for
environmental remediation. As assessments and remediation activities progress
at each individual site, these liabilities are reviewed to reflect additional
information as it becomes available.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the Company 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
materially adverse effect on its financial condition liquidity or results of
operations.
As of December 31, 1994, the Company had approximately 20,600 active employees,
of whom approximately 4,070 are located outside the United States. Year-end
employment in 1994 was below the level at the end of 1993. About 36% of the
Company's approximately 11,760 hourly-paid employees in the United States are
represented by labor unions. In the fall of 1995, the Company will negotiate at
the Lancaster Plant with the United Rubber Workers representing approximately
1,325 production employees and the International Association of Machinists and
Aerospace Workers representing approximately 235 maintenance employees.
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Geographic areas
United States net trade sales include export sales to non-affiliated
customers of $40.9 million in 1994, $27.0 million in 1993 and $24.4 million
in 1992.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Spain and Switzerland. Operations in Australia,
Canada, China, Hong Kong, Indonesia, Japan, Korea, Singapore and Thailand are
in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates
marketing exported products are accounted for by methods that approximate
arm's-length transactions, after considering the costs incurred by the
selling company and the return on assets employed of both the selling unit
and the purchasing unit. Operating income of a geographic area includes
income accruing from sales to affiliates.
Geographic areas
at December 31 (millions) 1994 1993 1992
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Net trade sales:
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United States $2,090.7 $1,910.7 $1,841.5
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Europe 483.4 456.6 544.5
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Other foreign 178.6 158.1 163.8
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Interarea transfers:
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United States 95.1 76.1 69.9
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Europe 8.7 6.0 4.0
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Other foreign 26.1 21.9 18.5
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Eliminations (129.9) (104.0) (92.4)
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Total net sales $2,752.7 $2,525.4 $2,549.8
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Operating income (loss): (Note 1)
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United States $ 274.1 $ 140.8 $ 10.9
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Europe 75.3 31.7 22.5
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Other foreign 7.6 10.0 (4.6)
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Unallocated corporate expense (23.8) (59.8) (54.9)
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Total operating income (loss) $ 333.2 $ 122.7 $ (26.1)
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Identifiable assets: (Note 2)
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United States $1,375.9 $1,334.0 $1,362.2
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Europe 376.5 347.0 362.5
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Other foreign 72.6 63.2 64.9
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Corporate 408.0 185.4 226.8
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Eliminations (.5) (.3) (6.6)
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Total assets $2,232.5 $1,929.3 $2,009.8
Note 1: Certain expenses, principally employee benefit costs, that were
previously unallocated are included in operating income for the respective
geographical area and industry segments in 1994. Years 1993 and 1992 were
restated to conform to current year presentation.
Note 2: Identifiable assets for geographic areas and industry segments
exclude cash, marketable securities and assets of a corporate nature. Capital
additions for industry segments include property, plant and equipment from
acquisitions.
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The Company's foreign operations are subject to foreign government legislation
involving restrictions on investments (including transfers thereof), tariff
restrictions, personnel administration, and other actions by foreign
governments. In addition, consolidated earnings are subject to both U.S. and
foreign tax laws with respect to earnings of foreign subsidiaries, and to the
effects of currency fluctuations.
Item 2. Properties
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The Company produces and markets its products and services throughout the world,
operating 74 manufacturing plants in 11 countries, 56 of which are located
throughout the United States. Additionally, affiliates operate eight plants in
four countries.
Floor covering products are produced at 23 plants with principal manufacturing
facilities located in Lancaster and Lansdale, Pennsylvania. American Olean owns
or leases various quarries throughout the United States for the supply of clays
and shale. Under a long-term lease, a quarry in Newfoundland, Canada, also
supplies a raw material important to American Olean's manufacture of glazed tile
at a proven reserve level of approximately 50 years at current production
levels. Building products are produced at 12 plants with principal facilities
in Macon, Georgia, the Florida-Alabama Gulf Coast area and Marietta,
Pennsylvania. Furniture is manufactured at 28 plants, 14 of which are located
at Thomasville, North Carolina. Insulating materials, textile mill supplies,
fiber gasket materials, adhesives and other products for industry are
manufactured at 15 plants with principal manufacturing facilities at Munster,
Germany, Braintree, Massachusetts and Fulton, New York.
Numerous sales offices are leased worldwide, and leased facilities are utilized
for American Olean's distribution centers and to supplement the Company's owned
warehousing facilities.
Productive capacity and extent of utilization of the Company's facilities are
difficult to quantify with certainty because in any one facility maximum
capacity and utilization varies periodically depending upon the product that is
being manufactured and individual facilities manufacture more than one type of
product. In this context, the Company estimates that the production facilities
in each of its industry segments were effectively utilized during 1994 at 80% to
90% of overall productive capacity in meeting market conditions. Remaining
productive capacity is sufficient to meet expected customer demands.
The Company believes its various facilities are adequate and suitable.
Additional incremental investments in plant facilities are being made as
appropriate to balance capacity with anticipated demand, improve quality and
service, and reduce costs.
Item 3. Legal Proceedings
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OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS - The full report on the
Asbestos-Related Litigation immediately follows this summary.
The company is involved, as of December 31, 1994, in approximately 73,000
pending personal injury asbestos claims and lawsuits and 51 pending lawsuits and
claims alleging damages to buildings caused by asbestos-containing products.
The Company's insurance carriers provide coverage for both personal injury and
property damage claims. The personal injury claims only (not property damage
claims) are processed for payment through the Center for Claims Resolution (the
"Center"). Personal injury claims in the federal courts have been transferred
by the Judicial Panel for Multidistrict Litigation to the Eastern District Court
for pretrial purposes. Pending state
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court cases have not been directly affected by the transfer. A settlement class
action which includes essentially all future asbestos-related personal injury
claims against Center members was filed in the Federal District Court for the
Eastern District of Pennsylvania. The court has tentatively approved the
settlement although the settlement will become final only after certain issues,
including insurance coverage for class members' claims are resolved and appeals
are exhausted which could take up to several years.
An Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement")
provides for a settlement of insurance coverage for personal injury claims with
certain primary carriers and excess carriers. Settlement agreements which
complement Wellington have been signed with one primary carrier and certain
excess carriers. Insurance coverage litigation that was initiated by the
Company in California with respect to asbestos-related personal injury and
property damage lawsuits and claims is on appeal before the California Supreme
Court from favorable final decisions received from the trial court that were
substantially upheld by the California Court of Appeal. The California
litigation did not encompass coverage for non-products claims. Coverage for
non-products claims is included in the Company's primary policies and certain
excess policies. This additional coverage is substantial. Negotiations are
underway with several primary carriers to resolve the coverage issues, but no
agreement has been reached. If the non-products coverage issues are not
resolved through negotiation, the Company is entitled to pursue alternative
dispute resolution proceedings against the primary and certain excess carriers
pursuant to the Wellington Agreement.
The Company believes that an estimated $198 million in liability and defense
costs recorded on its 1994 balance sheet will be incurred to resolve
approximately 73,000 asbestos-related personal injury claims against the Company
as of December 31, 1994. An insurance asset in the amount of $198 million
recorded on the balance sheet reflects the Company's belief in the availability
of insurance in this amount to cover the liability for these pending claims. The
Company also projects the maximum cost in the settlement class action as a
reasonably possible additional liability of $245 million for a ten-year period;
a portion of such additional projected liability may not be covered by the
Company's ultimately applicable insurance recovery. Although subject to
uncertainties and limitations, the Company also believes it is probable that
substantially all of the expenses and liability payments associated with the
asbestos-related property damage claims will be covered by insurance.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the settlements with other insurance carriers, the results of the
trial phase and the intermediate appellate stage of the California insurance
coverage litigation, the remaining reserve, the establishment of the Center, the
proposed settlement class action, and its experience, the Company believes the
asbestos-related lawsuits and claims against the Company would not be material
either to the financial condition of the Company or to its liquidity although
the net effect of any future liabilities recorded in excess of insurance assets
could be material to earnings in a future period.
The full report on the asbestos-related litigation is set forth below:
Asbestos-Related Litigation
The Company is named as one of many defendants in pending lawsuits and claims
involving, as of December 31, 1994, approximately 73,000 individuals alleging
personal injury from exposure to asbestos or asbestos-containing products.
Included in the above number are approximately 14,300 lawsuits and claims which
appear not to be covered by the settlement class action referred to
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below that were received by the Company in 1994. This compares with 24,036 in
1993. About 5,000 claims that may involve the Company were received in 1994
under the settlement class action, but the vast majority of these claims have
not been evaluated to date as meeting the payment criteria under the settlement
agreement. (In late 1993, the Company revised its claims handling procedures to
provide for individual claim information to be supplied by the Center for Claims
Resolution, referred to below. It is expected that the changed process will
provide more current tracking of outstanding claims. The reconciliation between
the two systems continues. Claim numbers in this note have been received from
the Center and its consultants.) Nearly all the personal injury suits and
claims seek general and punitive damages arising from alleged exposures, during
a period of years, commencing during World War II onward into the 1970s, to
asbestos-containing insulation products used, manufactured or sold by the
companies involved in the asbestos-related litigation. Claims against the
Company generally involve allegations of negligence, strict liability, breach of
warranty and conspiracy with other defendants in connection with alleged
exposure generally to asbestos-containing insulation products; the Company
discontinued the sale of all such products in 1969. The first asbestos-related
lawsuit was filed against the Company in 1970, and such lawsuits and claims
continue to be filed against the Company. The claims generally allege that
injury may be determined many years (up to 40 years) after alleged exposure to
asbestos or asbestos-containing products. Nearly all suits include a number of
defendants (including both members of the Center and other companies), and well
over 100 different companies are reportedly involved as defendants in the
litigation. A significant number of suits in which the Company does not believe
it should be involved have been filed by persons engaged in vehicle tire
production, aspects of the construction industry, and the steel industry. The
Company believes that a large number of the plaintiffs filing suit are
unimpaired individuals. Although a large number of suits and claims have either
been put on inactive lists, settled, dismissed or otherwise resolved, and the
Company is generally involved in all stages of claims resolution and litigation,
including trials and appeals, and while the number of pending cases reflects a
decrease during the past year, neither the rate of future dispositions nor the
number of future potential unasserted claims can be reasonably predicted at this
time.
Attention has been given by various parties both individually and collectively
to securing a comprehensive solution to the large number of pending as well as
potential future asbestos-related personal injury claims. Discussions have been
undertaken by attorneys for plaintiffs and defendants to devise methods or
procedures for the comprehensive treatment of asbestos-related personal injury
suits and claims. The Judicial Panel for Multidistrict Litigation ordered the
transfer of all pending federal cases to a single court, the Eastern District
Court of Pennsylvania in Philadelphia, for pretrial purposes. The Company has
supported such action. Some of these cases are periodically released for trial.
Pending state court cases have not been directly affected by the transfer. The
Court to which the cases have been assigned has been instrumental in having the
parties settle large numbers of cases in various jurisdictions and has been
receptive to different approaches to the resolution of asbestos-related personal
injury claims. A national class action was filed in the Eastern District of
Texas; it was not certified and the cases involved were also transferred to the
Eastern District Court of Pennsylvania for pretrial purposes. Periodically,
this Court returns certain cases for trial to the courts from which the cases
were originally transferred, although the issue of punitive damages is retained
by the Eastern District Court.
Settlement Class Action
A settlement class action which includes essentially all future asbestos-related
personal injury claims against members of the Center for Claims Resolution (the
"Center") was filed in Philadelphia, in the Federal District
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Court for the Eastern District of Pennsylvania, on January 15, 1993. These
proceedings are before the same judge to whom the federal cases were transferred
under the Multidistrict Litigation order referred to above. The proposed
settlement class action was negotiated by the Center and two leading plaintiffs'
law firms. The settlement class action is designed to establish a non-
litigation system for the resolution of essentially all future asbestos-related
personal injury claims against the Center members including this Company. Other
defendant companies which are not Center members may be able to join the class
action later. The class action proposes a voluntary settlement that offers a
method for prompt compensation to claimants who were occupationally exposed to
asbestos if they are impaired by such exposure. Claimants must meet certain
exposure and medical criteria to receive compensation which is derived from
historical settlement data. Under limited circumstances and in limited numbers,
qualifying claimants may choose to litigate certain claims in court or through
alternative dispute resolution, rather than accept an offered settlement amount,
after their claims are processed within the system. No punitive damages will be
paid under the proposed settlement. The settlement is designed to minimize
transactional costs, including attorneys fees, and to relieve the courts of the
burden of handling future asbestos-related personal injury claims. Each member
of the Center has an obligation for its own fixed share in this proposed
settlement. The Federal District Court has ruled that claimants who neither
filed a lawsuit against the Company or other members of the Center for Claims
Resolution for asbestos-related personal injury nor filed exclusion request
forms to opt out of the settlement class action by January 24, 1994, are subject
to the terms of the class action. The settlement class action does not include
claims deemed otherwise not covered by the class action settlement, or claims
for asbestos-related property damage. Agreed upon annual case flow caps and
agreed upon compensation ranges for each compensable medical category including
amounts paid even more promptly under the simplified payment procedures, have
been established for an initial period of ten years. Case flow caps may be
increased during the second five-year period depending upon case flow during the
first five-year period. The case flow figures and annual compensation levels
are subject to renegotiation after the initial ten-year period. On August 16,
1994, the Court tentatively approved the settlement, and notification has been
provided to potential class members who were offered the opportunity to opt out
by January 24, 1994. The Center had reserved the right to withdraw from the
program if an excessive number of individuals opted out. The Center determined
that there was not an excessive number of opt outs and decided to proceed with
the settlement class action. The opt outs are not asbestos-related claims as
such but rather are reservations of rights to possibly bring court actions in
the future. Most of the opt outs were the subject of a motion before the Court
that questioned their validity and sought a second notice period to determine
whether or not they wished to remain outside the class action. The Court
recently ruled on the motion and has ordered a new notice period for the opt
outs. Therefore, the total number of effective opt outs cannot be determined at
this time. The settlement will become final only after certain issues,
including insurance coverage for class members' claims, are resolved and appeals
are exhausted. This process could take up to several years. The Center members
have stated their intention to resolve over a five-year period the asbestos-
related personal injury claims pending prior to the date the settlement class
action was filed. A significant number of these pending claims have been
settled with a number of plaintiffs' counsel and a number of these claims are
currently the subject of settlement negotiations, in both instances, based upon
historical averages.
The Company is seeking agreement from its involved insurance carriers or a
binding judgment against them that the settlement class action will not
jeopardize existing insurance coverage, and the settlement is contingent upon
such an agreement or judgment. With respect to carriers that do not agree, this
matter will be resolved either by alternative dispute resolution
- 11 -
procedures, in the case of carriers that subscribed to the Wellington Agreement
referred to below, or by litigation, in the case of carriers that did not
subscribe to the Wellington Agreement.
The Company believes that the future claimants settlement class action will
receive final approval. However, the potential exists that an appellate court
will reject the settlement class action and that the above-referenced companion
insurance action will not be successful.
A few state and federal judges have undertaken to consolidate numbers of
asbestos-related personal injury cases for trial. The Company has generally
opposed as unfair the consolidation of numerous cases for trial. The Company
recently commenced trial in Baltimore, Maryland, in one such consolidation in
which common issues involved with an initial group of ten plaintiffs will bind
the parties in the remaining approximately 170 cases.
Insurance Carriers/Wellington Agreement
In 1983, three of the Company's four primary insurers entered into an Interim
Agreement with the Company to provide defense and indemnity coverage on an
interim basis for asbestos-related personal injury claims and for the defense of
asbestos-related property damage claims which are described below. One primary
insurer did not enter into the Interim Agreement, but did subscribe to the
Wellington Agreement as noted below. The Interim Agreement was superseded by
the Wellington Agreement with respect to the coverage issues for asbestos-
related personal injury claims. The one primary insurer of the four primary
carriers that did not subscribe to the Wellington Agreement subsequently entered
into a separate agreement with the Company resolving coverage issues for
asbestos-related property damage claims and for asbestos-related personal injury
claims which complements the Wellington Agreement. All of the Company's primary
insurers are paying for the defense of asbestos-related property damage claims
in accordance with the provisions of the Interim Agreement pending the final
resolution on appeal of the coverage issues for asbestos-related property damage
claims in the California insurance litigation referenced later in this note.
The Company's insurance carriers providing coverage for asbestos-related claims
are as follows: Reliance Insurance, Aetna Casualty and Surety Company and
Liberty Mutual Insurance Companies are primary insurers that have subscribed to
the Wellington Agreement. Travelers Insurance Company is a primary insurer that
entered into a settlement agreement which complements Wellington. The excess
insurers which subscribed to Wellington are Aetna Insurance Company, Fireman's
Fund Insurance Company, Insurance Company of North America, Lloyds of London and
various London market companies, Fidelity and Casualty Insurance Company, First
State Insurance Company and U.S. Fire Insurance Company. Home Insurance Company
and Travelers Insurance Company are excess insurers which entered into
settlement agreements for coverage of personal injury claims which complement
Wellington, and Great American is an excess insurer which also entered into a
settlement agreement with the Company. The Company also entered into a
settlement agreement with American Home Assurance Company and National Union
Fire Insurance Company (known as the AIG Companies) and recently with CNA
Insurance Company which complements the Wellington Agreement. Other excess
insurers which remain as defendants against whom the Company has received a
favorable trial and appellate court decision in the California insurance
litigation described below are: Central National Insurance Company, Interstate
Insurance Company, Puritan Insurance Company, and Commercial Union Insurance
Company. Midland Insurance Company, an excess carrier, which insured the
Company with $25 million of bodily injury products coverage, became insolvent
during the trial. The Company is pursuing claims with the state guaranty
associations on account of the Midland insolvency. The gap in coverage created
by the Midland Insurance Company insolvency will be covered by other insurance.
Certain companies in the
- 12 -
London block of coverage and certain carriers providing coverage at the excess
level for property damage claims only have also become insolvent. In addition
to the aforementioned insurance carriers, certain insurance carriers which were
not included in the Company's California insurance litigation described later
herein also provide insurance for asbestos-related property damage claims.
The Company along with 52 other companies (defendants in the asbestos-related
litigation and certain of their insurers) signed the 1985 Agreement Concerning
Asbestos-Related Claims (the "Wellington Agreement"). This Agreement provided
for a final settlement of nearly all disputes concerning insurance for asbestos-
related personal injury claims between the Company and three of its primary
insurers and seven of its excess insurers which also subscribed to the
Wellington Agreement. The one primary insurer that did not sign the Wellington
Agreement had earlier entered into the Interim Agreement with the Company and
had paid into the Wellington Asbestos Claims Facility (the "Facility"). The
Wellington Agreement provides for those insurers to indemnify the Company up to
the policy limits for claims that trigger policies in the insurance coverage
period, and nearly all claims against the Company fall within the coverage
period; both defense and indemnity are paid under the policies and there are no
deductibles under the applicable Company policies. The Wellington Agreement
addresses both products and non-products insurance coverage. One of the
Company's larger excess insurance carriers entered into a settlement agreement
in 1986 with the Company under which payments also were made through the
Facility and are now being paid through the Center for Claims Resolution
referenced below in this note. Coverage for asbestos-related property damage
claims was not included in the settlement, and the agreement provides that
either party may reinstitute a lawsuit in the event the coverage issues for
property damage claims are not amicably resolved.
The Wellington Agreement also provided for the establishment of the Facility to
evaluate, settle, pay and defend all pending and future asbestos-related
personal injury claims against those companies which subscribed to the
Agreement. The insurance coverage designated by the Company for coverage in the
Facility consists of all relevant insurance policies issued to the Company from
1942 through 1976. Liability payments and allocated expenses with respect to
each claim filed against Wellington Agreement subscribers who were defendants in
the underlying asbestos-related personal injury litigation were allocated on a
formula percentage basis to each such defendant, including the Company. The
Facility, which has been dissolved, over time was negatively impacted by
concerns raised by certain subscribers relating to their share of liability
payments and allocated expenses and by certain insurer concerns with respect to
defense costs and Facility operating expenses. As a result of seven subscribing
companies giving notice that they wished to withdraw their cases from the
Facility, a majority of the insurers and the company subscribing members agreed
to dissolve the ongoing operation of the Facility as of October 3, 1988 and the
Facility has now been fully dissolved. Except for eliminating the future
availability of an insurer-paid special defense fund benefit linked to the
existence of the Facility, a benefit not deemed material to the Company, the
dissolution of the Facility essentially did not affect the Company's overall
Wellington Agreement insurance settlement, which stood on its own separate from
the Facility. The relinquishment of the insurer-paid special defense fund
benefit was a condition of insurer support for the creation of the Center and
its expected benefits.
Center for Claims Resolution
A new asbestos-related personal injury claims handling organization known as the
Center for Claims Resolution (the "Center") was created in October 1988 by
Armstrong and 20 other companies, all of which were former members of the
Facility. Insurance carriers are not members of the Center, although certain of
the insurance carriers for those members that joined the Center signed an
- 13 -
agreement to provide approximately 70% of the financial support for the Center's
operational costs during its first year of existence; they also are represented
ex officio on the Center's governing board. The Center adopted many of the
conceptual features of the Facility, and the members' insurers generally provide
coverage under the Wellington Agreement terms. The Center has operated under a
revised concept of allocated shares of liability payments and defense costs for
its members based primarily on historical experience and has defended the
members' interests and addressed the claims in a manner consistent with the
prompt, fair resolution of meritorious claims. In late 1991, the Center sharing
formula was revised to provide that members will pay only on claims in which the
member is a named defendant. This change has caused a slight increase in the
Company's share, but has enhanced the Company's case management focus. Future
claim payments by the Center pursuant to the settlement class action will
require each member to pay its own fixed share of every claim.
A large share member earlier withdrew from the Center. Accordingly, the
allocated shares of liability payments and defense costs of the Center were
recalculated with the remaining members' shares being increased. Under the
class action settlement resolution, if a member withdraws from the Center or the
settlement, the shares of those remaining members would not be increased. It is
expected that the Center members will reach an agreement with the insurers
relating to the continuing operation of the Center and that the insurers will
fund the Center's operating expenses for its seventh year of operation. With
the filing of the settlement class action, the Center will continue to process
pending claims and is handling the program for processing future claims.
Consistent with the Center's objective of prompt resolution of meritorious
claims, and to establish the Center's credibility after the cessation of the
Facility and for other strategic reasons, a planned increase in claims
resolution by the Center was implemented during the first two years. This
increased the rate of utilization of Company insurance for claims resolution,
offset in part by savings in defense costs. During the first three years, the
rate of claims resolution had about trebled from the prior two years of
experience. An increase in the utilization of the Company's insurance also has
occured as a result of the class action settlement due to the commitment to
attempt to resolve pending claims within five years. Aside from the commitments
under the class action settlement, no forecast can be made for future years
regarding either the rate of claims, the rate of pending and future claims
resolution by the Center, or the rate of utilization of Company insurance. If
the settlement class action is finalized and all appeals are exhausted,
projections of the rate of disposition of future cases may be made and the rate
of insurance usage will be accelerated as an effort is made to resolve both
outstanding cases and to address future claims.
Property Damage Litigation
The Company is also one of many defendants in a total of 51 pending lawsuits and
claims, including class actions, as of December 31, 1994, brought by public and
private entities, including public school districts and public and private
building owners. These lawsuits and claims include allegations of damage to
buildings caused by asbestos-containing products and generally claim
compensatory and punitive damages and equitable relief, including reimbursement
of expenditures, for removal and replacement of such products. They appear to
be aimed at friable (easily crumbled) asbestos-containing products, although
allegations in some suits encompass all asbestos-containing products, including
allegations with respect to asbestos-containing resilient floor covering
materials. Among the lawsuits that have been resolved are four class actions
which had been certified, each involving a distinct class of building owner:
public and private schools; Michigan state public and private schools; colleges
and universities, and private property owners who leased
- 14 -
facilities to the federal government. The settlements reached with the class
representatives for three of the four classes are subject to a fairness hearing.
The Court in the Michigan class action has given final approval to that
settlement. The Company vigorously denies the validity of the allegations
against it contained in these suits and claims. Increasing defense costs, paid
by the Company's insurance carriers either under reservation or settlement
arrangement, will be incurred. As a consequence of the California insurance
litigation discussed elsewhere in this note, the Company believes that it is
probable that costs of the property damage litigation that are being paid by the
Company's insurance carriers under reservation of rights will not be subject to
recoupment. These suits and claims were not handled by the former Facility nor
are they being handled by the Center.
Certain co-defendant companies in the asbestos-related litigation have filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. As a
consequence, this litigation with respect to these co-defendants (with several
exceptions) has been stayed or otherwise impacted by the restrictions placed on
proceeding against these co-defendants. Due to the uncertainties involved, the
long-term effect of these Chapter 11 proceedings on the litigation cannot be
predicted.
California Insurance Coverage Lawsuit
The Company concluded in early 1989 the trial phase of a coordinated lawsuit in
a California state court to resolve a dispute concerning certain of its
insurance carriers' obligations with respect to insurance coverage for alleged
personal injury and property damage asbestos-related lawsuits and claims. The
trial court issued favorable final decisions in important phases of the trial
relating to coverage for personal injury and property damage lawsuits and
claims. The Company earlier dismissed from the asbestos-related personal injury
coverage portion of the litigation those insurance carriers which had subscribed
to the Wellington Agreement, and the excess carriers which entered into
settlement agreements with the Company which complement Wellington also have
been dismissed.
As indicated above, the California trial court issued final decisions in various
phases in the insurance lawsuit. One decision concluded that the trigger of
insurance coverage for asbestos-related personal injury claims was continuous
from exposure through death or filing of a claim. The court also found that a
triggered insurance policy should respond with full indemnification up to
exhaustion of the policy limits. The court concluded that any defense
obligation ceases upon exhaustion of policy limits. Although not as
comprehensive, another important decision in the trial established a favorable
defense and indemnity coverage result for asbestos-related property damage
claims; the final decision holds that, in the event the Company is held liable
for an underlying property damage claim, the Company would have coverage under
policies in effect during the period of installation and during any subsequent
period in which a release of fibers occurred. Appeals were filed from the trial
court's final decision by those carriers still in the litigation and the
California Court of Appeal has substantially upheld the trial court's final
decisions. The insurance carriers have petitioned the California Supreme Court
to hear the various asbestos-related personal injury and property damage
coverage issues. The California Supreme Court has accepted review pending its
review of related issues in another California case. Based upon the trial
court's favorable final decisions in important phases of the trial relating to
coverage for asbestos-related personal injury and property damage lawsuits and
claims, including the favorable decision by the California Court of Appeal, and
a review of the coverage issues by its trial counsel, the Company believes that
it has a substantial legal basis for sustaining its right to defense and
indemnification. After concluding the last phase of the trial against one of
its primary carriers, which is also an
- 15 -
excess carrier, the Company and the carrier reached a settlement agreement on
March 31, 1989. Under the terms of the settlement agreement, coverage is
provided for asbestos-related bodily injury and property damage claims generally
consistent with the interim rulings of the California trial court and
complements the coverage framework established by the Wellington Agreement. The
parties also agreed that a certain minimum and maximum percentage of indemnity
and allocated expenses incurred with respect to asbestos-related personal injury
claims would be deemed allocable to non-products claims coverage and that the
percentage amount would be negotiated between the Company and the insurance
carrier. These negotiations continue.
The Company also settled both asbestos-related personal injury and property
damage coverage issues with a small excess carrier and in 1991 settled those
same issues with a larger excess carrier. In these settlements, the Company and
the insurers agreed to abide by the final judgment of the trial court in the
California insurance litigation with respect to coverage for asbestos-related
claims. In 1994, the Company also settled coverage issues for asbestos-related
claims with a significant excess carrier.
Non-Products Insurance Coverage
Non-products insurance coverage is included in the Company's primary insurance
policies and certain excess policies for non-products claims. The settlement
agreement referenced above with one primary carrier included an amount for non-
products claims. Non-products claims include claims that may have arisen out of
exposure during installation of asbestos materials or before control of such
materials has been relinquished. Negotiations have been undertaken with the
Company's primary insurance carriers and are currently underway with several of
them to categorize the percentage of previously resolved and yet to be resolved
asbestos-related personal injury claims as non-products claims and to establish
the entitlement to such coverage. The additional coverage potentially available
to pay claims categorized as non-products is substantial, and at the primary
level, includes defense costs in addition to limits. No agreement has been
reached with the primary carriers on the amount of non-products coverage
attributable to claims that have been disposed of or the type of claims that
should be covered by non-products insurance. One of the primary carriers
alleges that it is no longer bound by the Wellington Agreement and one primary
carrier seemingly takes the view that the Company verbally waived certain rights
regarding non-products coverage against that carrier at the time the Wellington
Agreement was signed. All the carriers presumably raise various reasons why
they should not pay their coverage obligations. The Company is entitled to
pursue alternative dispute resolution proceedings against the primary and
certain excess carriers to resolve the non-products coverage issues.
ACandS, Inc., a former subsidiary of the Company, which for certain insurance
periods has coverage rights under some of the Company's insurance policies, and
has accessed such coverage on the same basis as the Company, was a subscriber to
the Wellington Agreement, but is not a subscriber to the Center. The Company
and ACandS, Inc., have negotiated a settlement agreement which reserves for
ACandS, Inc., a certain amount of insurance from the joint policies reserved
solely for its own use in the payment of defense and indemnity costs for
asbestos-related claims.
Conclusions
Based upon the Company's experience with this litigation and its disputes with
insurance carriers, a reserve was recorded in June 1983 to cover estimated
potential liability and settlement costs and legal and administrative costs not
covered under the Interim Agreement, cost of litigation against the Company's
insurance carriers, and other factors involved in the litigation which are
referred to herein about which uncertainties exist. As a result of
- 16 -
the Wellington Agreement, the reserve was earlier reduced for that portion
associated with pending personal injury suits and claims. As a result of the
March 31, 1989, settlement referenced above, the Company received
$11.0 million, of which approximately $4.4 million was credited to income with
nearly all of the balance being recorded as an increase to its reserve for
potential liabilities and other costs and uncertainties associated with the
asbestos-related litigation. Future costs of litigation against the Company's
insurance carriers and other legal costs indirectly related to the litigation
will be expensed outside the reserve.
The Company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
Company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
flow caps to be negotiated after the initial ten-year period for the settlement
class action or the compensation levels to be negotiated for such claims or the
scope of its non-products coverage ultimately deemed available or the ultimate
conclusion of the California insurance coverage litigation.
Beginning with the first quarter 1994, the Company's balance sheet reflected a
liability--"Asbestos-Related Liabilities" and an asset--"Insurance for Asbestos-
Related Liabilities." This accounting presentation is required by the
Securities and Exchange Commission's Staff Accounting Bulletin No. 92 which
states that liabilities and assets related to contingencies should be evaluated
and recorded separately pursuant to Financial Accounting Standards Board
Interpretation No. 39 unless a contractual "right of setoff" exists. Prior to
the first quarter 1994, the Company had set off such amounts for financial
reporting.
In accordance with the foregoing accounting presentation and subject to the
uncertainties and limitations referred to in this note and based upon its
experience and other factors also referred to in this note, the Company believes
that the estimated $198 million in liability and defense costs recorded on the
balance sheet will be incurred to resolve an estimated 73,000 asbestos-related
personal injury claims pending against the Company as of December 31, 1994.
These claims include claims that were filed for the period from January 1, 1994,
to January 24, 1994, and which previously were treated as potentially included
within the settlement class action, and claims filed by claimants who have been
identified as having filed exclusion request forms to opt out of the settlement
class action. A ruling has been received from the Court that has established
January 24, 1994, as the date after which any asbestos-related personal injury
claims filed by non-opt-out claimants against the Company or other members of
the Center for Claims Resolution are subject to the settlement class action. In
addition to the currently estimated pending claims and any claims filed by
individuals deemed to have opted out of the settlement class action, any claims
otherwise determined not to be subject to the settlement class action, will be
resolved outside the settlement class action. The Company does not know how many
such claims ultimately may be filed by claimants deemed to have opted out of the
class action or by claimants otherwise determined not to be subject to the
settlement class action.
An insurance asset in the amount of $198 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation. The Company also notes that, based on maximum
mathematical projections covering a ten-year period from 1994 to 2004, its
estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such
- 17 -
additional liability may not be covered by the Company's ultimately applicable
insurance recovery. However, the Company believes that any after-tax impact on
the difference between the aggregate of the estimated liability for pending
cases and the estimated cost for the ten-year maximum mathematical projection,
and the probable insurance recovery, would not be material either to the
financial condition of the Company or to its liquidity, although it could be
material to earnings if it is determined in a future period to be appropriate to
record a reserve for this difference. The period in which such a reserve may be
recorded and the amount of any reserve that may be appropriate cannot be
determined at this time. Subject to the uncertainties and limitations referred
to elsewhere in this note and based upon its experience and other factors
referred to above, the Company believes it is probable that substantially all of
the expenses and any liability payments associated with the asbestos-related
property damage claims will be paid under an existing interim agreement, by
insurance coverage settlement agreements and through additional coverage
reasonably anticipated from the outcome of the insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the trial phase and the intermediate appellate stage of the California
insurance coverage litigation, the remaining reserve, the establishment of the
Center, the proposed settlement class action, and its experience, the Company
believes the asbestos-related lawsuits and claims against the Company would not
be material either to the financial condition of the Company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
_______________________________
TINS Litigation
In 1984, suit was filed against the Company in the U. S. District Court for the
District of New Jersey (the "Court") by The Industry Network System, Inc.
(TINS), a producer of video magazines in cassette form, and Elliot Fineman, a
consultant (Fineman and The Industry Network System, Inc. v. Armstrong World
----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
- --------------------------------------
things, that the Company had improperly interfered with a tentative contract
which TINS had with an independent distributor of the Company's flooring
products and further claimed that the Company used its alleged monopoly power in
resilient floor coverings to obtain a monopoly in the video magazine market for
floor covering retailers in violation of federal antitrust laws. The Company
denied all allegations. On April 19, 1991, the jury rendered a verdict in the
case, which as entered by the court in its order of judgment, awarded the
plaintiffs the alternative, after all post-trial motions and appeals were
completed, of either their total tort claim damages (including punitive
damages), certain pre-judgment interest, and post-judgment interest or their
trebled antitrust claim damages, post-judgment interest and attorneys fees. The
higher amount awarded to the plaintiffs as a result of these actions totaled
$224 million in tort claim damages and pre-judgment interest, including $200
million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
- 18 -
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the
plaintiff's appeal of these rulings, the Court of Appeals sustained the
U. S. District Court's decision granting the Company a new trial, but overturned
in certain respects the District Court's grant of judgment for the Company
notwithstanding the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments, reversed the trial judge's
judgment for Armstrong on TINS' claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS' claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS' claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS' alleged breach of contract claim.
The Court of Appeals, in affirming the trial court's new trial order, agreed
that the trial court did not abuse its discretion in determining that the jury's
verdict was "clearly against the weight of the evidence" and that a new trial
was required due to the misconduct of plaintiffs' counsel.
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The Company
was informed on February 22, 1993, that the Supreme Court denied its Petition.
After the case was remanded by the Third Circuit Court of Appeals in
Philadelphia to the U.S. District Court in Newark, New Jersey, a new trial
commenced on April 26, 1994. TINS claimed damages in the form of lost profits
ranging from approximately $17 million to approximately $56 million. Plaintiff
also claimed punitive damages in conjunction with its request for tort damages.
Other damages sought included reimbursement of attorneys' fees and interest,
including prejudgment interest.
On August 19, 1994, the jury returned a verdict in favor of the Company finding
that the Company had not caused damages to TINS. The court subsequently entered
judgment in the Company's favor based upon the verdict. TINS' motion for a new
trial based upon alleged inaccurate jury instructions and alleged improper
evidentiary rulings during the trial was denied and TINS has filed a Notice of
Intent to Appeal with the U.S. Court of Appeals for the Third Circuit.
_____________________________
- 19 -
Environmental Remediation
Thomasville Furniture Industries, Inc. and seven other parties have been
identified by the U. S. Environmental Protection Agency ("USEPA") as Potentially
Responsible Parties ("PRPs") to fund the cost of remediating environmental
conditions at the Buckingham County (Virginia) Landfill, a former waste disposal
site which has been listed as a federal Superfund site. After review of
investigative studies to determine the nature and extent of contamination and
identify various remediation alternatives, USEPA issued its Proposed Remedial
Action Plan in May 1993 proposing a $21 million clean-up cost. In November
1993, USEPA issued a revised plan which recommended a reduced $3.5 million
alternative, subject to additional costs depending on test results. In
September 1994, USEPA issued a Record of Decision in the matter providing two
alternative remedies for the site. Both options provide for limited capping and
long-term groundwater monitoring, as well as limited source control and
groundwater treatment in the event monitoring demonstrates contaminant
migration. The PRPs' consultants current estimate for the cost of required
remediation at the site is approximately $2.2 million, subject to additional
costs depending on long-term monitoring results. USEPA's current estimate,
however, is $4.34 million. Discussions with USEPA are continuing regarding
finalization of the appropriate remedial plan.
Spent finishing materials from Thomasville's Virginia furniture plants at
Appomattox and Brookneal allegedly comprise a significant portion of the waste
presently believed to have been taken to the site by a now defunct disposal firm
in the late 1970s. Accordingly, Thomasville could be called upon to fund a
significant portion of the eventual remedial costs. Because neither a final
remedial design nor an appropriate cost allocation among the PRPs has been
completed, the total cost to Thomasville cannot be determined at this time.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
- -------------------------------------
The information appearing in Item 10 hereof under the caption "Executive
Officers of the Registrant" is incorporated by reference herein.
PART II
--------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
-------
The Company's Common Stock is traded on the New York Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of
February 6, 1995, there were approximately 7,443 holders of record of the
Company's Common Stock.
Total
Quarterly financial information (millions except for per-share data) First Second Third Fourth year
====================================================================================================================================
1994
====================================================================================================================================
Net sales $642.7 $689.3 $715.3 $705.4 $2,752.7
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit* 192.4 220.6 231.9 203.1 848.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 48.0 53.3 61.6 47.5 210.4
- ------------------------------------------------------------------------------------------------------------------------------------
Per share of common stock:**
- ------------------------------------------------------------------------------------------------------------------------------------
Primary 1.17 1.31 1.54 1.17 5.22
- ------------------------------------------------------------------------------------------------------------------------------------
Fully diluted 1.06 1.18 1.37 1.04 4.64
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends per share of common stock .30 .32 .32 .32 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--low 49 3/8 43 3/8 43 36 36
- ------------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--high 57 1/2 57 1/4 53 7/8 46 5/8 57 1/2
====================================================================================================================================
1993
====================================================================================================================================
Net sales $611.9 $629.0 $660.1 $624.4 $2,525.4
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit* 154.9 179.6 193.7 178.0 706.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 11.3 31.9 42.3 (22.0) 63.5
- ------------------------------------------------------------------------------------------------------------------------------------
Per share of common stock:**
- ------------------------------------------------------------------------------------------------------------------------------------
Primary .21 .76 1.04 (.68) 1.32
- ------------------------------------------------------------------------------------------------------------------------------------
Fully diluted .21 .68 .93 (.68) 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends per share of common stock .30 .30 .30 .30 1.20
- ------------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--low 28 7/8 29 3/8 30 1/4 40 1/4 28 7/8
- ------------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--high 33 1/8 34 3/4 42 1/2 55 1/4 55 1/4
====================================================================================================================================
*Gross profit has been restated to reflect certain reclassification of
expenses for years 1994 and 1993.
**The sum of the quarterly earnings (loss) per-share data does not always
equal the total year amounts due to changes in the average shares outstanding
and, for fully diluted data, the exclusion of the antidilutive effect in
certain quarters.
- 20 -
Item 6. Selected Financial Data
- ---------------------------------
- --------------------------------------------------------------------------------
NINE - YEAR SUMMARY
- --------------------------------------------------------------------------------
($ millions except for
per-share data) FOR YEAR 1994 1993 1992 1991 1990 1989 1988 1987 1986
====================================================================================================================================
Net sales 2,752.7 2,525.4 2,549.8 2,439.3 2,518.8 2,488.7 2,261.2 1,969.6 1,602.3
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Cost of goods sold 1,904.7 1,819.2 1,903.8 1,814.4 1,830.5 1,776.8 1,621.2 1,390.7 1,125.3
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses 514.8 493.6 506.6 474.4 461.5 437.1 383.2 333.2 279.8
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges -- 89.9 165.5 12.8 6.8 5.9 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Gain from sales of woodlands -- -- -- -- (60.4) (9.5) (1.9) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 333.2 122.7 (26.1) 137.7 280.4 278.4 258.7 245.7 197.2
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 28.3 38.0 41.6 45.8 37.5 40.5 25.8 11.5 5.4
- ------------------------------------------------------------------------------------------------------------------------------------
Other expense (income), net .4 (6.0) (7.3) (8.4) 19.8 (5.7) (13.1) (4.3) (3.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
businesses before income taxes 304.5 90.7 (60.4) 100.3 223.1 243.6 246.0 238.5 194.8
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes 94.1 27.2 (.5) 39.7 76.7 85.9 92.4 97.4 82.6
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
businesses 210.4 63.5 (59.9) 60.6 146.4 157.7 153.6 141.1 112.2
- ------------------------------------------------------------------------------------------------------------------------------------
As a percentage of sales 7.6% 2.5% (2.3)% 2.5% 5.8% 6.3% 6.8% 7.2% 7.0%
- ------------------------------------------------------------------------------------------------------------------------------------
As a percentage of average
monthly assets (a) 10.5% 3.2% (2.8)% 2.9% 7.1% 8.3% 10.2% 11.6% 11.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
businesses applicable to
common stock (b) 196.3 49.6 (73.7) 41.2 126.9 148.0 153.2 140.7 111.8
- ------------------------------------------------------------------------------------------------------------------------------------
Per common share--primary 5.22 1.32 (1.98) 1.11 3.26 3.26 3.31 2.98 2.33
- ------------------------------------------------------------------------------------------------------------------------------------
Per common share--fully
diluted (c) 4.64 1.26 (1.98) 1.11 2.99 3.11 3.31 2.98 2.33
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 210.4 63.5 (227.7) 48.2 141.0 187.6 162.7 150.4 122.4
- ------------------------------------------------------------------------------------------------------------------------------------
As a percentage of sales 7.6% 2.5% (8.9)% 2.0% 5.6% 7.5% 7.2% 7.6% 7.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable
to common stock (b) 196.3 49.6 (241.5) 28.8 121.5 177.9 162.3 150.0 122.0
- ------------------------------------------------------------------------------------------------------------------------------------
As a percentage of average
shareholders' equity 31.3% 9.0% (33.9)% 3.3% 13.0% 17.9% 17.0% 17.6% 16.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Per common share--primary 5.22 1.32 (6.49) .77 3.12 3.92 3.51 3.18 2.54
- ------------------------------------------------------------------------------------------------------------------------------------
Per common share--fully
diluted (c) 4.64 1.26 (6.49) .77 2.86 3.72 3.51 3.18 2.54
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share
of common stock 1.26 1.20 1.20 1.19 1.135 1.045 .975 .885 .7325
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases of property, plant
and equipment 148.3 117.6 115.8 133.8 195.1 231.0 198.7 183.0 139.8
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate cost of acquisitions -- -- 4.2 -- 16.1 -- 355.8 71.5 53.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total depreciation and
amortization 133.4 130.0 136.9 135.7 130.1 134.0 109.2 91.4 74.3
- ------------------------------------------------------------------------------------------------------------------------------------
Average number of employees--
continuing businesses 20,583 21,682 23,500 24,066 25,014 25,349 22,801 21,020 18,916
- ------------------------------------------------------------------------------------------------------------------------------------
Average number of common
shares outstanding 37.5 37.2 37.1 37.1 38.8 45.4 46.2 47.2 48.1
====================================================================================================================================
YEAR-END POSITION
====================================================================================================================================
Working capital 303.7 204.1 167.1 238.9 181.8 323.5 139.0 255.3 327.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and
equipment 1,069.9 1,039.1 1,072.0 1,152.9 1,147.4 1,059.2 1,040.2 760.7 603.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 2,232.5 1,929.3 2,009.8 2,149.9 2,146.3 2,033.0 2,097.7 1,602.5 1,298.2
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt 237.2 256.8 266.6 301.4 233.2 181.3 185.9 67.7 58.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt as a percentage of
total capital (d) 41.4% 52.2% 57.2% 46.9% 45.7% 36.1% 35.9% 22.8% 16.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 735.1 569.5 569.2 885.5 899.2 976.5 1,021.8 913.8 813.0
- ------------------------------------------------------------------------------------------------------------------------------------
Book value per share of
common stock 18.97 14.71 14.87 23.55 24.07 23.04 21.86 19.53 16.85
- ------------------------------------------------------------------------------------------------------------------------------------
Number of shareholders (e) (f) 7,473 7,962 8,611 8,896 9,110 9,322 10,355 9,418 9,621
- ------------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding 37.5 37.2 37.1 37.1 37.1 42.3 46.3 46.2 47.5
- ------------------------------------------------------------------------------------------------------------------------------------
Market value per common share 38 1/2 53 1/4 31 7/8 29 1/4 25 37 1/4 35 32 1/4 29 7/8
- ------------------------------------------------------------------------------------------------------------------------------------
Notes:
(a) Assets exclude insurance for asbestos-related liabilities.
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated shares.
(c) See italicized definition of fully diluted earnings per share on page 28.
(d) Total debt includes short-term debt, current installments of long-term
debt, long-term debt and ESOP loan guarantee. Total capital includes total
debt and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 4,300 to 4,700 employees for years 1988 through 1994.
(f) Includes, for 1987 and 1986, a trustee who was the shareholder of record on
behalf of approximately 11,000 employees who obtained beneficial ownership
through the Armstrong Stock Ownership Plan, which was terminated at the end
of 1987.
- 21 -
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
----------------------
- --------------------------------------------------------------------------------
1994 compared with 1993
- --------------------------------------------------------------------------------
Financial condition
As shown on the Consolidated Statement of Cash Flows (see page 31), net cash
provided by operating activities in 1994 was $300.9 million, which was more than
sufficient to cover working capital requirements; payment of dividends; the
payment for restructuring activities and the investment in property, plant and
equipment. The remaining cash, including proceeds from stock options exercised
and the cash proceeds from the sale of assets and the company's majority
investment in BEGA/US, Inc., was used to reduce debt by $95.3 million and to
repurchase shares of the company's common stock for the treasury.
In November 1994, the Board of Directors authorized the company to repurchase
up to 2.5 million shares of its common stock, either in the open market or in
negotiated transactions. The timing and number of shares repurchased depends on
a combination of market conditions, other investment opportunities and continued
cash flow strength. As of December 31, 1994, the company had repurchased 270,000
shares with a cash outlay of $10.6 million.
Working capital was $303.7 million as of December 31, 1994, $99.6 million
higher than the $204.1 million at year-end 1993. The primary reasons for the
increase in working capital were the $73.8 million repayment of short-term debt
and the $36.5 million increase in accounts receivable resulting from higher
sales levels. Modest increases in other assets including inventories and lower
levels of income taxes payable also increased working capital by $22.3 million.
Partially offsetting the working capital increase were higher levels of accounts
payable and accrued expenses totaling $33 million.
The company's 1994 year-end ratio of current assets to current liabilities
was 1.78 to 1 compared with a ratio of 1.47 to 1 reported in 1993. The major
reason for the ratio increase was the $73.8 million reduction of short-term
debt.
Long-term debt, excluding the company's guarantee of the ESOP loan, was
reduced by $19.6 million in 1994. At year-end 1994, long-term debt of $237.2
million represented 19% of total capital compared with 22% at the end of 1993.
The 1994 and 1993 year-end ratio of total debt as a percent of total capital was
41.4% and 52.2%, respectively.
During the first quarter of 1994, the company terminated, prior to maturity,
a notional amount $25 million interest rate swap and, in the second quarter of
1994, a notional amount $15 million interest rate swap matured. During the
fourth quarter of 1993, the company terminated, prior to maturity, two notional
amount $50 million interest rate swaps and foreign currency swaps of French
francs 182.4 million and Belgian francs 270 million. The company's management of
foreign currency and interest rate exposures resulted in a loss of $1.7 million
in 1994 compared with a gain in 1993 of $1.9 million. As of December 31, 1994,
the company had no outstanding interest rate or currency swaps.
The company is involved in significant asbestos-related litigation which is
described more fully on pages 43-45 and which should be read in connection with
this discussion and analysis. The company does not know how many claims will be
filed against it in the future, nor the details thereof or of pending suits not
fully reviewed, nor the expense and any liability that may ultimately result
therefrom, nor does the company know whether the settlement class action will
ultimately succeed, the number of individuals who will ultimately be deemed to
have opted out or who could file claims outside the settlement class action, nor
the annual claims caps to be negotiated after the initial 10-year period for the
settlement class action or the compensation levels to be negotiated for such
claims, nor the scope of its nonproducts coverage ultimately deemed available or
the ultimate conclusion of the California insurance coverage litigation. Subject
to the foregoing and based upon its experience and other factors also referred
to above, the company believes that the estimated $198 million in liability and
defense costs recorded on the 1994 balance sheet will be incurred to resolve an
estimated 73,000 asbestos-related personal injury claims pending against the
company as of December 31, 1994. These claims include those that were filed for
the period from January 1, 1994, to January 24, 1994, and which were previously
treated as potentially included within the settlement class action, and those
claims filed by claimants who have been identified as having filed exclusion
request forms to opt out of the settlement class action. A ruling from the Court
established January 24, 1994, as the date after which any asbestos-related
personal injury claims filed by non-opt-out claimants against the company or
other members of the Center for Claims Resolution are subject to the settlement
class action. In addition to the currently estimated pending claims and any
claims filed by individuals deemed to have opted out of the settlement class
action, any claims otherwise determined not to be subject to the settlement
class action will be resolved outside the settlement class action. The company
does not know how many such claims ultimately may be filed by claimants deemed
to have opted out of the class action or
- 22 -
by claimants otherwise determined not to be subject to the settlement class
action.
An insurance asset in the amount of $198 million recorded on the 1994 balance
sheet reflects the company's belief in the availability of insurance in this
amount to cover the liability in like amount referred to above. Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. The company also notes that, based
on maximum mathematical projections covering a 10-year period from 1994 to 2004,
its estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability may
not be covered by the company's ultimately applicable insurance recovery.
However, the company believes that any after-tax impact on the difference
between the aggregate of the estimated liability for pending cases and the
estimated cost for the 10-year maximum mathematical projection, and the probable
insurance recovery, would not be material either to the financial condition of
the company or to its liquidity, although it could be material to earnings if it
is determined in a future period to be appropriate to record a reserve for this
difference. The period in which such a reserve may be recorded and the amount of
any reserve that may be appropriate cannot be determined at this time. Subject
to the uncertainties and limitations referred to above and based upon its
experience and other factors, the company believes it is probable that
substantially all of the expenses and any liability payments associated with the
asbestos-related property damage claims will be paid under an existing interim
agreement, by insurance coverage settlement agreements and through additional
coverage reasonably anticipated from the outcome of the insurance litigation.
Even though uncertainties still remain as to the potential number of
unasserted claims, liability resulting therefrom and the ultimate scope of its
insurance coverage, after consideration of the factors involved, including the
Wellington Agreement, the referenced settlements with other insurance carriers,
the results of the trial phase and the intermediate appellate stage of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the proposed settlement class action and its
experience, the company believes the asbestos-related lawsuits and claims
against the company would not be material either to the financial condition of
the company or to its liquidity, although as stated above, the net effect of any
future liabilities recorded in excess of insurance assets could be material to
earnings in such future period.
Reference is made to the litigation involving The Industry Network System,
Inc. (TINS), discussed on page 46. In 1994, the jury returned a verdict finding
that the company had not caused damages to TINS, and the court subsequently
entered judgment in the company's favor. TINS' motion for a new trial was
denied. TINS has filed a notice of intent to appeal with the U.S. Court of
Appeals for the Third Circuit.
Reference is also made to environmental matters as discussed on pages 39, 40
and 46. The company believes any sum it may have to pay in connection with
environmental matters in excess of amounts accrued would not have a material
adverse affect on its financial condition, liquidity or results of operations.
In February 1995, Armstrong arranged a $200 million, five-year revolving line
of credit with 10 banks. The line of credit is for general corporate purposes,
including a backstop for commercial paper notes. This replaced $245 million of
short-term bilateral lines of credit with eight banks.
Should a need develop for additional financing, it is management's opinion
that the company has sufficient financial strength to warrant the required
support from lending institutions and financial markets.
Consolidated results
Record net sales in 1994 of $2.75 billion were 9% higher than the 1993 sales
of $2.53 billion. Armstrong's U.S. residential markets reflected continued
strength in 1994, while European area economic conditions improved in 1994
causing a rebound in sales opportunity. On a worldwide basis, the commercial and
institutional end-use markets also improved, favorably affecting sales
opportunity. Armstrong took advantage of this opportunity and increased sales in
nearly every one of its businesses. The introduction of new products, primarily
for the residential markets, also helped to increase sales in 1994.
Record net earnings were $210.4 million compared with net earnings of $63.5
million in 1993. The 1993 earnings included restructuring charges of $60.0
million after tax. Net earnings per common share were $5.22 on a primary basis
and $4.64 on a fully diluted basis compared with $1.32 and $1.26, respectively,
for 1993.
Armstrong's measure of return on average monthly assets was 10.5% for 1994
compared with 3.2% for 1993. Average monthly assets exclude the insurance for
asbestos-related liabilities. The return on common shareholders' equity in 1994
was 31.3% compared with 9.0% in 1993.
Cost of goods sold as a percent of sales was 69.2% for the year, the lowest
level for more than a quarter of a century, which compares favorably to 1993's
cost of goods sold of 72.0%. The continuing reduction in cost of goods sold
reflects the positive influence of the prior two years' restructuring programs,
productivity improvement in all our businesses, sales price increases in a
number of our businesses, some product mix improvement and the introduction of
new products, primarily in our residential businesses. During 1994, $12.0
million of the $14.6 million before-tax gain from a reduction in Armstrong's
health-care liability for employees on long-term disability also lowered the
cost of goods sold. The reduction resulted from actions taken by the company to
qualify these employees for primary coverage under Medicare.
- 23 -
Selling, general and administrative expenses represent 18.7% of sales, down
from the 19.5% reported for 1993 with overall expenses increasing 4.3% when
comparing 1994 with those of 1993. Higher costs for the use of consultants in
improving the company's global competitiveness and for special incentive awards
to motivate superior performance were partially offset by the previously
mentioned gain from the reduction in the health-care liability and a gain from
the sale of Armstrong's majority interest in BEGA/US, Inc.
No restructuring charges were recorded in 1994. However, 1993 results
included $89.9 million before tax of restructuring charges associated with
Armstrong initiatives to enhance its global competitiveness. These costs were
primarily associated with eliminating approximately 950 employee positions in
the U.S. and Europe. More than half of the amounts accrued at the end of 1993
were used with much of the remaining accrual to be utilized in 1995.
Interest expense was significantly reduced in 1994 compared with last year
and was the result of lower debt levels.
The effective tax rate for 1994 was 30.9% compared with 30.0% in 1993. The
current year tax rate was helped by a gain of $6.5 million from the reversal of
previously accrued tax expense following resolution of the company's 1988, 1989
and 1990 tax audits, the positive effect of about $5.4 million of tax benefits
related to taxes on foreign income and state income taxes as a result of the
realization of previously unrecognized deferred tax assets and lower withholding
taxes on foreign dividends. In addition, the company utilized excess foreign tax
credits during 1994. The 1993 tax rate reflected the company's higher use of
foreign tax credits, reductions of deferred taxes resulting from some countries
lowering their statutory tax rates and lower foreign tax rates, which more than
offset the 1% increase in the U.S. statutory tax rate.
Geographic area results (see page 7)
United States--Sales increased by more than 9% while operating income was
nearly double when compared with 1993. The primary end-use markets--residential,
which reflected continued strength from the prior year, and
commercial/institutional that became stronger during 1994--had a positive effect
on this area. Even though interest rates were raised six times during 1994, they
had very little effect on 1994's results. During 1994, both single family
housing starts and sales of existing single family homes rose close to 5%.
Nonresidential new construction grew at a rate of over 8% in 1994. The long-term
effect of higher interest rates may slow future sales growth in these market
segments.
Higher sales occurred primarily in the furniture and floor coverings
segments. As in past years, higher sales levels continued through the national
home centers and mass merchandisers channel. New product introductions for the
residential end-use markets also provided additional sales.
While the higher sales levels were a key factor, the significant
restructuring actions of the past two years also played a major part in
increasing operating income mainly in the building products segment and the
ceramic tile portion of the floor coverings segment. Sales price increases
occurred in most of the U.S. businesses and had a positive effect on operating
income.
Export sales of Armstrong products from the U.S. to trade customers increased
$14 million, or 51%, compared with 1993.
Europe--During mid-1994, the economic conditions began to improve and helped
Armstrong's end-use markets. For the year, sales increased nearly 6% and
operating income improved by 138%. All the company's European businesses
recorded year-to-year sales increases. Operating income was helped significantly
by improved productivity--much of it related to restructuring actions taken in
1992 and 1993. The results in the European insulation products business were
adversely affected by increased competitive pricing and higher than usual
obsolescence of equipment.
Other foreign--Sales in 1994 reversed a four-year declining trend and
increased by 13% compared with 1993. Operating income declined by $2.4 million,
or 24%, reflecting the competitive pricing and higher expenses needed to
penetrate the Chinese and other Far East markets and a shift in product mix
towards lower margin commodity products.
Industry segment results (see page 3)
Floor coverings--Worldwide sales were 8% higher in 1994, with operating
income increasing by 69% from 1993 levels. The 1993 operating income included
almost $28 million of restructuring charges with three-fourths of the charges
related to ceramic tile and the remainder to resilient flooring.
The resilient flooring portion of the segment recorded strong sales growth in
both North America and Europe. The U.S. resilient flooring business continued to
benefit in 1994 from higher sales of existing homes, new residential
construction and continued strength in the commercial construction and
remodeling markets. This was accomplished even in light of the numerous interest
rate increases throughout 1994. Successful new product introductions in the
second half of 1994 helped to improve sales. The ceramic tile portion recorded
sales increases in both the commercial and residential parts of the business
with the residential part reflecting the highest growth.
The year-to-year improvement in operating income was almost equally divided
between resilient flooring, ceramic tile and the absence of restructuring
charges in 1994. Ceramic tile recorded a significant operating loss in 1993 that
was reversed in 1994 with a small operating income. The major restructuring
actions of the past two years, primarily in manufacturing, some sales price
increases, some unit volume
- 24 -
increases and the continued development of the residential market were key
factors for this turnaround. In the resilient flooring portion of the segment,
operating income improvement was the result of higher sales volume, some sales
price increases and manufacturing productivity improvements. Offsetting some of
the effects of these positive items were higher raw material costs that became
more notable in the second half of the year. Sales prices were increased as of
January 1995 to offset the rise in raw material prices.
Capital expenditures increased by about one-third over those of 1993. The
expenditures continue to be concentrated on improving manufacturing
productivity, increasing capacity and developing business systems.
Building products--During 1994, commercial and institutional end-use markets
continued to provide more opportunity. Sales grew more than 7% with North
American sales growing faster than those of the European area. The Pacific area
recorded the highest percentage growth with new business in China being a
factor.
Operating income, excluding the effects of restructuring charges in 1993,
recorded the fastest growth of any segment--up 167% over 1993. While higher
sales levels and sales price increases had a positive impact on operating
income, the prior two years' restructuring actions dramatically reduced
manufacturing costs and had the most significant impact on results.
Capital expenditures were increased about one-third over those of the past
two years and were directed at higher productivity levels and improving
capacity. 1994 expenditures were about the same as depreciation levels.
Furniture--This segment had the highest year-to-year sales growth, an
increase of 17%. All areas of this business--Thomasville wood, Armstrong retail,
upholstered furniture, RTA and contract--had significant increases, with the
latter three businesses' increase in percentage in the 30s and the first two in
the teens. Again in 1994, U.S. consumer household durable goods spending
increased.
Operating income increased by 56%, excluding the impact of the 1993
restructuring charges. Operating margins of 7.3% were the highest in the past
four years. The higher profitability was the result of higher sales, improved
sales pricing and new product introductions partially offset by some increased
raw material costs.
Capital expenditures, which exceeded depreciation levels, increased in 1994
with a large portion providing more capacity for upholstered furniture.
Industry products--Sales increased by 5% while operating income improved only
3% when the 1993 restructuring charges of nearly $13 million are excluded. This
segment is highly influenced by its European orientation and the rebound in that
area's economies that started in the second half of 1994.
The insulation business, the largest portion of this segment, recorded sales
growth of about 5% while operating income was slightly higher than 1993. During
1994, this business lowered sales prices to meet intense European competition,
recorded higher than usual obsolescence of equipment and incurred some start-up
costs for its new manufacturing facility in Panyu, China.
The gasket materials business grew sales by 18% and pushed operating income
32% higher. This business was favorably affected by the strong automotive
markets in 1994.
The textile mill supply business saw its 1994 sales decline by 4% due to soft
end-use markets on a worldwide basis and strong competitive pressures. A small
operating loss was recorded for 1994 as this business continues to reengineer
its operations.
Capital expenditures were slightly higher in 1994 than 1993, but continue to
exceed depreciation. A significant portion of the expenditures were in the
insulation products business.
In the first quarter of 1995, the company announced the planned closing of
the Braintree, Massachusetts, manufacturing facility that produces elastomeric
pipe insulation, specialty gasket materials and textile spinning accessories.
This plant is to phase out operations by the end of 1995. There will be a
nonrecurring charge to first-quarter 1995 financial results of an after-tax
amount substantially less than 1% of the company's total assets as of December
31, 1994, or in the range of $10 million to $15 million after tax. The company
expects to maintain uninterrupted service to its customers during the planned
transition period. The insulation products business would plan to continue to
make a full range of products at other locations within the United States. The
gasket products business would consolidate its operations at its Fulton, New
York, plant. Textile manufacturing operations would be integrated into the
existing Greenville, South Carolina, facility.
- --------------------------------------------------------------------------------
1994 compared with 1993
- --------------------------------------------------------------------------------
Financial condition
As shown on the Consolidated Statements of Cash Flows, net cash provided by
operating activities in 1993 was $291.2 million which was more than sufficient
to cover investments in property, plant and equipment and dividends. The excess
cash, plus cash proceeds from the sale of assets and the decrease in cash and
cash equivalents, was used to reduce debt by $124.1 million.
For 1993, the company recorded an $89.9 million charge before tax ($60.0
million after tax) for restructuring resulting from 1993 decisions associated
with major process improvements and significant organizational changes.
Approximately 80% of the before-tax losses related to charges for severance
and special retirement incentives
- 25 -
associated with the elimination of approximately 950 employee positions, and
approximately one-third of the before-tax loss represented future cash outlays.
For 1992, the company recorded a $165.5 million before-tax restructuring charge
which included severance pay and special retirement incentives associated with
the elimination of approximately 1,440 employee positions. The operating cash
savings, resulting from restructuring actions taken during 1993 and 1992, more
than offset the 1993 cash outlay of $39.3 million for restructuring.
During the fourth quarter of 1993, the company terminated, prior to maturity,
interest rate swaps totaling $100 million and currency swaps totaling $37.2
million.
Working capital was $204.1 million as of December 31, 1993--$37.0 million
higher than the $167.1 million at year-end 1992. The primary reason for the
increase in working capital was the repayment of short-term debt. Accounts
receivable and inventories declined $19.1 million and $33.2 million,
respectively, both reflecting reductions in most business units with half of
the reductions attributed to the European building products business.
A financing arrangement of a foreign subsidiary's principal pension plan,
whereby the subsidiary became self-insured for its pension obligations, resulted
in recording a noncurrent asset and long-term liability of $37.7 million.
The company's 1993 year-end ratio of current assets to current liabilities
was 1.47 to 1 compared with 1.31 to 1 ratio reported in 1992. Long-term debt,
excluding the company's guarantee of the ESOP loan, was reduced by $9.8 million
in 1993. The 1993 and 1992 year-end ratio of total debt as a percent of total
capital was 52.2% and 57.2%, respectively.
Consolidated results
Net sales in 1993 of $2.53 billion decreased 1.0% compared with 1992 sales of
$2.55 billion. The weaker European exchange rates were a key factor in the sales
decline. Translating foreign currency sales to U.S. dollars at 1992 exchange
rates would have resulted in a year-to-year sales increase of 1.9%. Armstrong's
residential markets were very positive in the U.S., but weakness in the European
economies and lackluster commercial markets worldwide reduced the overall
opportunity. While sales in the first two quarters of 1993 were lower than the
comparable 1992 quarters, third- and fourth-quarter sales exceeded those of the
prior year.
Net earnings were $63.5 million compared with a net loss in 1992 of $227.7
million. Net earnings per common share were $1.32 on a primary basis and $1.26
on a fully diluted basis. The net loss per share of common stock was $6.49 on
both a primary and fully diluted basis for 1992.
The return on common shareholders' equity in 1993 was 9.0% compared with a
negative 33.9% in 1992.
The 1992 loss reflects charges of $167.8 million after tax related to the
company's adoption, retroactive to January 1, 1992, of SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions;" and SFAS 112,
"Employers' Accounting for Postemployment Benefits." The computation of SFAS 112
was refined during 1993 with the net loss in 1992 reduced and restated by $6.5
million, or 18 cents per share. The restated 1992 net loss from continuing
businesses totaled $59.9 million, or a $1.98 loss per share of common stock.
The effective tax rate for 1993 was 30.0%. This reflects the company's higher
use of foreign tax credits, reductions of deferred taxes because some foreign
countries reduced their statutory tax rates and lower foreign tax rates, which
more than offset the 1% increase in the U.S. statutory tax rate. The net loss
from 1992 included an effective tax benefit rate of only 1.0%, primarily because
some of the restructuring charges did not provide tax benefits. The company also
adopted SFAS 109, "Accounting for Income Taxes," resulting in tax benefits of
$5.5 million for 1992 being credited directly to retained earnings rather than
to income taxes on the consolidated statement of earnings.
Restructuring charges for 1993, totaling $89.9 million before tax, were
included in the earnings from continuing businesses and were associated with
Armstrong initiatives to enhance its global competitiveness. These costs were
primarily associated with the elimination of employee positions in the U.S. and
Europe. For the full year 1992, restructuring charges totaled $165.5 million
before tax and related to the closing of four major manufacturing plants; the
scaling back of operations in certain other plants in the U.S. and abroad;
accruals for costs associated with the elimination of positions throughout the
rest of the company; as well as write-downs of the value of land, buildings,
equipment and intangible assets of the company. Cash outlays for the 1993
restructuring charges occurred in 1994 and should be fully recovered within two
to three years.
The cost of goods sold for 1993, when expressed as a percent of sales, was
72.0%--the lowest level for the last four years--and compared favorably with
1992's cost of goods sold of 74.7%. These lower costs reflected the positive
effects of the 1992 restructuring activities, productivity gains, some pricing
increases and product mix enhancements.
Interest expense was favorably affected by lower debt levels and lower
interest accruals for tax obligations. Other income and expense in 1993 included
interest income of $3.9 million resulting from currency and interest rate swap
activities which included closing out some interest rate swaps in anticipation
of interest rate increases. Partially offsetting these positive effects was a
small foreign exchange loss in 1993 compared with a small foreign exchange gain
in 1992.
Geographic area results (see page 7)
United States--Sales increased by nearly 4% from 1992 levels. The 1992 net
sales included five months of the building products segment's grid sales that
were made prior to the
- 26 -
formation of the Armstrong and Worthington Industries joint venture (WAVE)
effective June 1, 1992. Removing these sales from 1992 would result in an
additional 1% increase in the year-to-year sales comparison. Operating income
jumped more than tenfold when comparing 1993 with 1992. The continuing economic
recovery provided increased opportunity in our end-use markets. During 1993,
single family housing starts increased 6% and the sale of existing single family
homes rose nearly 8%. Nonresidential new construction appeared to be close to
the bottom of its cycle.
A major source of higher sales in 1993 was the significant increase in
business channeled through home centers and mass merchandisers. These sales,
coupled with the stronger resilient flooring business, were major factors in
generating significantly higher operating income. The furniture and ceramic
tile businesses also generated higher sales, while sales in the building
products and textile products businesses were lower. The operating income
improvements were also driven by the 1992 restructuring activities that
resulted in lower manufacturing costs in most domestic businesses, by some
higher sales levels and by continuing productivity improvements.
Operating income for both years included significant restructuring charges.
The 1993 and 1992 restructuring charges totaled about $37 million and $98
million, respectively. The 1993 restructuring charges were primarily
attributable to position eliminations. The 1992 restructuring charges included
closing two plants, the write-down of fixed assets and the elimination of
employee positions.
Export sales of Armstrong products from the U.S. to trade customers increased
nearly $3 million, or 11%, compared with 1992.
Europe--The 1993 European economic environment continued to be weak in both
the commercial and residential markets; however, the British market offered some
improvement for Armstrong products. Net sales decreased 16%, but two-thirds of
the decline reflected the weakening of European currencies. Excluding the impact
of the strong U.S. dollar, insulation products was the only business in Europe
that recorded a year-to-year sales increase. The European building products
business relies entirely on commercial construction and had the largest decline,
nearly 12%. Even with lower sales, operating income for Europe improved 41%.
This improvement was primarily the result of lower costs caused by restructuring
actions taken in the latter part of 1992, including the closing of the Ghlin,
Belgium, ceilings manufacturing facility.
Other foreign--Sales in 1993 declined nearly 4% from those of 1992. Operating
income was recorded for 1993 compared with an operating loss in 1992. The 1992
operating loss resulted from restructuring charges associated with the closing
of the Gatineau, Canada, ceilings manufacturing plant. The overall sales decline
was a result of lower sales of resilient flooring in Japan and Southeast Asia
that were partially offset by higher sales of flooring in Australia and Canada
and of building products in the Pacific Rim. Excluding the impact of the
restructuring charges in 1992, operating income for 1993 increased in the year-
to-year comparison.
Industry segment results (see page 3)
Floor coverings--Worldwide sales were 5% higher in 1993 than in 1992, with
operating income increasing eightfold from 1992 levels. The operating income
included restructuring charges in 1993 of almost $28 million compared with
nearly $81 million in 1992. Almost three-fourths of the 1993 restructuring
charges related to ceramic tile with the remainder recorded in resilient
flooring. Nearly all of the 1992 restructuring charges related to ceramic tile.
Sales in the resilient flooring portion increased in North America but were
lower in the European and Pacific areas. The North American increase was driven
by sales in the U.S. market with strong growth through home centers and mass
merchandisers as well as modest growth through wholesalers. The U.S. resilient
flooring business was also helped by higher sales of existing homes and new
housing construction. Ceramic tile recorded a modest sales increase primarily
because of its residential business. The commercial institutional market segment
for ceramic tile continued to be weak, providing little sales growth in 1993
compared with 1992.
Operating income, excluding the effects of restructuring charges, increased
50%. Resilient flooring operating income improved because of the higher sales
levels and significantly lower manufacturing costs achieved by process
improvement and productivity gains. Ceramic tile continued to record a loss in
1993 as it did in 1992, but the losses were less in each of the 1993 quarters
when compared with 1992. The ceramic tile business was adversely affected by
very competitive pricing and a shift in product mix to lower margin products.
Capital investments for 1993 were higher than those of 1992 with
concentration of those expenditures on improving and maintaining manufacturing
processes and in generating additional capacity from existing equipment.
Building products--On a worldwide basis, market conditions did not improve in
the commercial construction markets in 1993. The North American sales comparison
reflects a decline because the first five months of 1992 included grid that was
sold prior to the formation of the WAVE joint venture. The European markets,
with the exception of the United Kingdom, were weaker in 1993. European sales
declined by nearly 22%, of which half was caused by weaker European currencies.
The 1993 operating income included restructuring charges of nearly $14
million, while the 1992 operating loss included $35 million of restructuring
charges. This segment lowered its cost structure significantly as a result of
restructuring actions
- 27 -
taken in 1992 that included the closing of two manufacturing facilities and
productivity improvements that were attained in 1993. Even with lower sales and
competitive pricing early in 1993, the lower cost structure that was put in
place, coupled with some higher sales prices in the second half of 1993,
permitted this segment to increase operating income.
Capital investments in 1993 were about the same as 1992, but both years'
expenditures were lower than depreciation levels.
Furniture--Operating results for this segment were positive--1993 sales
nearly 3% higher than those of 1992 and operating income more than 300% higher
than the prior year. Both years contained restructuring charges that were less
than $1 million in 1993 and nearly $5 million in 1992. Exclusive of
restructuring charges, this segment recorded operating income that was 133%
higher than the prior year.
U.S. consumer household durable goods spending increased in 1993, and modest
sales increases were recorded in the Thomasville wood and upholstery business
that more than offset declines in the Armstrong retail, ready-to-assemble
furniture and the contract businesses.
The operating income improvement was driven by higher sales volume, lower
costs resulting from the 1992 restructuring program and improved productivity.
Higher lumber costs had a negative impact on 1992 operating results and
continued to increase throughout much of 1993 but were offset by increased sales
prices. Capital expenditures in 1993 increased modestly over those of 1992.
Industry products--Almost three-quarters of the sales of this segment
generally occur in European markets, which in 1993 remained in recession,
limiting growth opportunities. Worldwide sales declined nearly 7%, with the
stronger U.S. dollar accounting for 95% of the decline. Operating income
declined by slightly more than 8%, with restructuring charges of almost $13
million in each year.
The insulation business continued to be the most significant portion of this
segment. Excluding the negative effect of currency translation, sales grew
modestly while operating income recorded a small decline. The German market
remained relatively strong for this business while markets in the other European
countries were adversely affected by weak economies. Sales in North America and
the Pacific Rim recorded a small increase in 1993. While the insulation business
restructuring programs did lower costs, they were not able to offset the impact
of the lower sales and competitive pricing pressures.
The gasket materials business recorded slightly lower sales with a small
decline in operating income from 1992 levels. The textile mill supplies business
recorded significantly lower sales that were driven by the worldwide recession
in the textile industry. This business, while lowering its cost structure, was
unable to offset the impact of the significantly lower sales worldwide.
Capital expenditures were reduced by about one-third from 1992 levels but
were almost 40% greater than annual depreciation levels. The capital investments
continued, generally, to support future growth of this segment.
- 28 -
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
FINANCIAL STATEMENTS AND REVIEW * ARMSTRONG WORLD INDUSTRIES, INC., AND
SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Financial Review, pages 32-46, is an integral part of these statements.
Millions except for per-share data Years ended December 31 1994 1993 1992
==================================================================================================================
Net sales $2,752.7 $2,525.4 $2,549.8
- ------------------------------------------------------------------------------------------------------------------
Cost of goods sold 1,904.7 1,819.2 1,903.8
- ------------------------------------------------------------------------------------------------------------------
Gross profit 848.0 706.2 646.0
- ------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 514.8 493.6 506.6
- ------------------------------------------------------------------------------------------------------------------
Restructuring charges -- 89.9 165.5
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) 333.2 122.7 (26.1)
- ------------------------------------------------------------------------------------------------------------------
Interest expense 28.3 38.0 41.6
- ------------------------------------------------------------------------------------------------------------------
Other expense (income), net .4 (6.0) (7.3)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 304.5 90.7 (60.4)
- ------------------------------------------------------------------------------------------------------------------
Income taxes 94.1 27.2 (.5)
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting changes 210.4 63.5 (59.9)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting for:
- ------------------------------------------------------------------------------------------------------------------
Postretirement benefits, net of income tax benefit of $84.9 -- -- (135.4)
- ------------------------------------------------------------------------------------------------------------------
Postemployment benefits, net of income tax benefit of $20.9 -- -- (32.4)
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 210.4 $ 63.5 $ (227.7)
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
Dividends paid on Series A convertible preferred stock 19.0 19.2 19.3
- ------------------------------------------------------------------------------------------------------------------
Tax benefit on dividends paid on unallocated preferred shares 4.9 5.3 5.5
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to common stock $ 196.3 $ 49.6 $ (241.5)
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
Per share of common stock:
- ------------------------------------------------------------------------------------------------------------------
Primary:
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting changes $ 5.22 $ 1.32 $ (1.98)
- ------------------------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting for:
- ------------------------------------------------------------------------------------------------------------------
Postretirement benefits -- -- (3.64)
- ------------------------------------------------------------------------------------------------------------------
Postemployment benefits -- -- (.87)
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 5.22 $ 1.32 $ (6.49)
==================================================================================================================
Fully diluted:
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting changes $ 4.64 $ 1.26 $ (1.98)
- ------------------------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting for:
- ------------------------------------------------------------------------------------------------------------------
Postretirement benefits -- -- (3.64)
- ------------------------------------------------------------------------------------------------------------------
Postemployment benefits -- -- (.87)
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 4.64 $ 1.26 $ (6.49)
==================================================================================================================
- 29 -
FINANCIAL STATEMENTS AND REVIEW * ARMSTRONG WORLD INDUSTRIES, INC., AND
SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
The Financial Review, pages 32-46, is an integral part of these statements.
Millions except for numbers of shares and per-share data As of December 31 1994 1993
================================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------------------
Current assets:
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 12.0 $ 9.1
- --------------------------------------------------------------------------------------------------------------------------------
Accounts and notes receivable
- --------------------------------------------------------------------------------------------------------------------------------
(less allowance for discounts and losses: 1994--$42.3; 1993--$37.5) 320.0 283.5
- --------------------------------------------------------------------------------------------------------------------------------
Inventories 293.5 286.2
- --------------------------------------------------------------------------------------------------------------------------------
Income tax benefits 35.9 36.8
- --------------------------------------------------------------------------------------------------------------------------------
Other current assets 29.6 24.8
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 691.0 640.4
- --------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment
- --------------------------------------------------------------------------------------------------------------------------------
(less accumulated depreciation and amortization: 1994--$1,098.8; 1993--$1,006.7) 1,069.9 1,039.1
- --------------------------------------------------------------------------------------------------------------------------------
Insurance for asbestos-related liabilities 198.0 --
- --------------------------------------------------------------------------------------------------------------------------------
Other noncurrent assets 273.6 249.8
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $2,232.5 $1,929.3
================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
- --------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
- --------------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 17.9 $ 105.4
- --------------------------------------------------------------------------------------------------------------------------------
Current installments of long-term debt 19.5 5.8
- --------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses 327.4 293.3
- --------------------------------------------------------------------------------------------------------------------------------
Income taxes 22.5 31.8
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 387.3 436.3
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt 237.2 256.8
- --------------------------------------------------------------------------------------------------------------------------------
Employee Stock Ownership Plan (ESOP) loan guarantee 245.5 253.9
- --------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 32.1 18.8
- --------------------------------------------------------------------------------------------------------------------------------
Postretirement and postemployment benefit liabilities 270.4 283.7
- --------------------------------------------------------------------------------------------------------------------------------
Asbestos-related liabilities 198.0 --
- --------------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 118.3 99.6
- --------------------------------------------------------------------------------------------------------------------------------
Minority interest in subsidiaries 8.6 10.7
- --------------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 1,110.1 923.5
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
- --------------------------------------------------------------------------------------------------------------------------------
Class A preferred stock. Authorized 20 million shares;
- --------------------------------------------------------------------------------------------------------------------------------
issued 5,654,450 shares of Series A convertible preferred stock;
- --------------------------------------------------------------------------------------------------------------------------------
outstanding: 1994--5,478,416 shares; 1993--5,527,692 shares;
- --------------------------------------------------------------------------------------------------------------------------------
retired: 1994--176,034 shares; 1993--126,758 shares 261.6 263.9
- --------------------------------------------------------------------------------------------------------------------------------
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 39.3 29.7
- --------------------------------------------------------------------------------------------------------------------------------
Reduction for ESOP loan guarantee (233.9) (241.8)
- --------------------------------------------------------------------------------------------------------------------------------
Retained earnings 1,076.8 927.7
- --------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation 8.3 (3.4)
- --------------------------------------------------------------------------------------------------------------------------------
1,204.0 1,028.0
- --------------------------------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost: 1994--14,602,132 shares; 1993--14,656,488 shares 468.9 458.5
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 735.1 569.5
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,232.5 $1,929.3
================================================================================================================================
- 30 -
FINANCIAL STATEMENTS AND REVIEW * ARMSTRONG WORLD INDUSTRIES, INC., AND
SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
The Financial Review, pages 32-46, is an integral part of these statements.
Millions Years ended December 31 1994 1993 1992
================================================================================================================
Cash flows from operating activities:
- ----------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 210.4 $ 63.5 $(227.7)
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings (loss) to net cash
- ----------------------------------------------------------------------------------------------------------------
provided by operating activities:
- ----------------------------------------------------------------------------------------------------------------
Depreciation and amortization 133.4 130.0 136.9
- ----------------------------------------------------------------------------------------------------------------
Deferred income taxes 14.6 (1.3) (36.6)
- ----------------------------------------------------------------------------------------------------------------
Loss from restructuring activities -- 89.9 165.5
- ----------------------------------------------------------------------------------------------------------------
Restructuring payments (20.6) (39.3) (9.4)
- ----------------------------------------------------------------------------------------------------------------
Loss from cumulative effect of changes in accounting -- -- 167.8
- ----------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities net of
- ----------------------------------------------------------------------------------------------------------------
effect of accounting changes, restructuring and dispositions:
- ----------------------------------------------------------------------------------------------------------------
(Increase) decrease in receivables (32.5) 18.3 (11.9)
- ----------------------------------------------------------------------------------------------------------------
(Increase) decrease in inventories (4.4) 28.4 (1.3)
- ----------------------------------------------------------------------------------------------------------------
(Increase) decrease in other current assets (4.9) 10.8 10.2
- ----------------------------------------------------------------------------------------------------------------
(Increase) in other noncurrent assets (23.5) (45.3) (27.0)
- ----------------------------------------------------------------------------------------------------------------
Increase in accounts payable and accrued expenses 38.1 18.0 7.9
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in income taxes payable (10.1) 11.3 1.4
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in other long-term liabilities (3.3) 15.5 16.5
- ----------------------------------------------------------------------------------------------------------------
Other, net 3.7 (8.6) (5.5)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 300.9 291.2 186.8
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- ----------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (148.3) (117.6) (115.8)
- ----------------------------------------------------------------------------------------------------------------
Proceeds from sale of land and facilities 12.8 10.3 5.5
- ----------------------------------------------------------------------------------------------------------------
Investment in joint ventures -- -- (4.2)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (135.5) (107.3) (114.5)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in short-term debt (89.6) (114.9) 25.5
- ----------------------------------------------------------------------------------------------------------------
Reduction of long-term debt (5.7) (9.2) (30.6)
- ----------------------------------------------------------------------------------------------------------------
Cash dividends paid (66.2) (63.8) (63.8)
- ----------------------------------------------------------------------------------------------------------------
Purchase of common stock for the treasury (10.6) (.1) --
- ----------------------------------------------------------------------------------------------------------------
Proceeds from exercised stock options 8.4 4.9 .4
- ----------------------------------------------------------------------------------------------------------------
Other, net (.8) (7.6) 6.1
- ----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (164.5) (190.7) (62.4)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 2.0 .7 (2.9)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 2.9 $ (6.1) $ 7.0
================================================================================================================
Cash and cash equivalents at beginning of year $ 9.1 $ 15.2 $ 8.2
================================================================================================================
Cash and cash equivalents at end of year $ 12.0 $ 9.1 $ 15.2
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Supplemental cash flow information
- ----------------------------------------------------------------------------------------------------------------
Interest paid $ 31.9 $ 33.8 $ 39.9
- ----------------------------------------------------------------------------------------------------------------
Income taxes paid $ 62.0 $ 15.8 $ 31.0
- ----------------------------------------------------------------------------------------------------------------
================================================================================================================
- 31 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
The consolidated financial statements and the accompanying data in this
report include the accounts of the parent Armstrong World Industries, Inc., and
its domestic and foreign subsidiaries. All significant intercompany transactions
have been eliminated from the consolidated statements.
To assist in understanding this financial review, the accounting policies and
principles used are printed in italics.
- --------------------------------------------------------------------------------
OPERATING STATEMENT ITEMS
- --------------------------------------------------------------------------------
Statements of operations have been reformatted and certain expenses have been
reclassified compared to previously published data for 1994. Also, certain 1994
expenses, principally associated with employee benefits and previously
unallocated, are included in operating income for the respective geographical
area and industry segments. All prior year data has been restated to conform to
the new presentation.
Net sales in 1994 totaled $2,752.7 million, 9.0% above the 1993 total of
$2,525.4 million. 1993 sales were 1.0% below the 1992 total of $2,549.8 million.
The amounts reported as net sales are the total sales billed during the year
less the sales value of goods returned, trade discounts and customers'
allowances and freight costs incurred in delivering products to customers.
Net earnings were $210.4 million for 1994 compared with earnings for 1993 of
$63.5 million and a net loss of $227.7 million for 1992. Included in the
earnings for 1993 and 1992 were restructuring charges after tax of $60.0 million
and $123.8 million, respectively. The 1992 loss also included a $167.8 million
after-tax charge for the cumulative effect of changes in accounting related to
the adoption of Statement of Financial Accounting Standards (SFAS) 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
SFAS 112, "Employers' Accounting for Postemployment Benefits."
Earnings (loss) per common share are presented on the Consolidated Statements
of Operations on page 29.
Primary earnings (loss) per share, for "Net earnings (loss)," are determined
by dividing the earnings (loss), after deducting preferred dividends (net of tax
benefits on unallocated shares), by the average number of common shares
outstanding and shares issuable under stock options, if dilutive.
Fully diluted earnings (loss) per share include the shares of common stock
outstanding and the adjustments to common shares and earnings (loss) required to
portray the convertible preferred shares on an "if converted" basis unless the
effect is antidilutive.
Research and development costs were $57.4 million in 1994, $63.0 million in
1993 and $64.9 million in 1992.
Advertising costs were $39.2 million in 1994, $37.8 million in 1993 and $42.4
million in 1992.
Maintenance and repair costs were $129.0 million in 1994, $126.1 million in
1993 and $137.2 million in 1992.
Depreciation and amortization amounted to $133.4 million in 1994, $130.0
million in 1993 and $136.9 million in 1992.
These amounts include amortization of intangible assets of $8.5 million in
1994, $10.0 million in 1993 and $16.2 million in 1992.
Depreciation charges for financial reporting purposes are determined
generally on the straight-line basis at rates calculated to provide for the
retirement of assets at the end of their useful lives. Accelerated depreciation
is generally used for tax purposes. When assets are disposed of or retired,
their costs and related depreciation are removed from the books, and any
resulting gains or losses are reflected in "Selling, general and administrative
expenses." Intangibles are amortized over periods ranging from 3 to 40 years.
Restructuring charges amounted to $89.9 million in 1993 and $165.5 million in
1992.
The 1993 charges were primarily the result of accruals for severance and
special retirement incentives associated with the elimination of employee
positions.
The 1992 charges related to the company's closing of four major manufacturing
facilities--two in the U.S., one in Canada, one in Belgium--and to the scaling
back of operations in certain other plants in the U.S. and abroad. The provision
also included accruals for costs associated with the elimination of positions
throughout the company, as well as write-downs of the value of land, buildings,
equipment and intangible assets of the company.
In the first quarter of 1995, the company announced a planned closing of an
Industry Products manufacturing plant located in Braintree, Massachusetts. This
plant is to phase out operations by the end of 1995. Accordingly, there will be
a nonrecurring charge to the first-quarter 1995 financial results of an amount
substantially less than 1% of the company's total assets, or in the range of $10
million to $15 million after tax.
Details of other
expense (income), net (millions) 1994 1993 1992
================================================================================
Interest and dividend income $(3.7) $(7.5) $(4.5)
- --------------------------------------------------------------------------------
Foreign exchange, net (gain) loss 2.6 .5 (1.4)
- --------------------------------------------------------------------------------
Minority interest 1.8 2.1 1.9
- --------------------------------------------------------------------------------
Other (.3) (1.1) (3.3)
================================================================================
Total $ .4 $(6.0) $(7.3)
Employee compensation is presented in the table below and excludes
restructuring charges for severance costs and early retirement incentives.
Employee compensation
cost summary (millions) 1994 1993 1992
================================================================================
Wages and salaries $748.7 $709.8 $741.5
- --------------------------------------------------------------------------------
Payroll taxes 67.5 68.2 74.3
- --------------------------------------------------------------------------------
Pension credits (10.2) (3.5) (.7)
- --------------------------------------------------------------------------------
Insurance and other benefit costs 59.6 78.0 87.2
================================================================================
Total $865.6 $852.5 $902.3
Average total employment of 20,583 in 1994 compares with 21,682 in 1993 and
23,500 in 1992.
- 32 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Pension costs
The company and a number of its subsidiaries have pension plans covering
substantially all employees. Benefits from the principal plan are based on the
employee's compensation and years of service.
Generally, the company's practice is to fund the actuarially determined
current service costs and the amounts necessary to amortize prior service
obligations over periods ranging up to 30 years, but not in excess of the full
funding limitation.
Funding requirements are determined independently of expense, using an
expected long-term rate of return on assets of 8.67%. The company's principal
plan is subject to the full funding limitation in 1994, 1993 and 1992, and the
company made no contribution to that plan in any of these years. Contributions
of $.8 million in 1993 and $.6 million in 1992 were made to defined-benefit
plans of company subsidiaries. No contributions were made in 1994.
The total pension cost or credit from all plans is presented in the table
below.
Total pension
(credit) cost (millions) 1994 1993 1992
================================================================================
U.S. defined-benefit plans:
- --------------------------------------------------------------------------------
Net pension credit $(28.0) $(17.4) $(16.2)
- --------------------------------------------------------------------------------
Early retirement incentives -- 38.0 30.0
- --------------------------------------------------------------------------------
Defined contribution plans 6.1 6.0 5.9
- --------------------------------------------------------------------------------
Non-U.S. defined-benefit plans:
- --------------------------------------------------------------------------------
Net pension cost 8.6 6.1 6.1
- --------------------------------------------------------------------------------
Early retirement incentives -- -- 1.3
- --------------------------------------------------------------------------------
Other funded and unfunded
pension costs 3.1 1.8 2.2
================================================================================
Total pension (credit) cost $(10.2) $34.5 $29.3
The net credit for U.S. defined-benefit pension plans is presented in the
table below.
Net credit for U.S. defined-benefit
pension plans (millions) 1994 1993 1992
================================================================================
Actual (return) loss on assets $ 97.1 $(236.9) $ (94.8)
- --------------------------------------------------------------------------------
Less amount deferred (189.7) 155.9 17.8
- --------------------------------------------------------------------------------
Expected return on assets (92.6) (81.0) (77.0)
- --------------------------------------------------------------------------------
Net amortization and other (9.9) (6.9) (6.3)
- --------------------------------------------------------------------------------
Service cost--benefits earned
during the year 19.8 19.1 18.7
- --------------------------------------------------------------------------------
Interest on the projected benefit
obligation 54.7 51.4 48.4
================================================================================
Net pension credit $ (28.0) $ (17.4) $ (16.2)
The company has defined-contribution pension plans for eligible employees at
certain of its U.S. subsidiaries, such as the Employee Stock Ownership Plan
(ESOP) described on page 35. Company contributions and accrued compensation
expense related to the ESOP are included with other plans' contributions and
costs, based on the compensation of each eligible employee. The costs of such
plans totaled $6.1 million in 1994, $6.0 million in 1993 and $5.9 million in
1992.
The funded status of the company's U.S. defined-benefit pension plans is
presented in the following table.
Funded status of U.S. defined-benefit
pension plans (millions) 1994 1993
================================================================================
Actuarial present value of benefit obligations:
Vested benefit obligation $ (657.7) $ (704.0)
================================================================================
Accumulated benefit obligation $ (700.6) $ (743.1)
================================================================================
Projected benefit obligation for
services rendered to date $ (774.8) $ (797.2)
================================================================================
Plan assets at fair value 1,099.1 1,248.2
================================================================================
Plan assets in excess of projected
benefit obligation 324.3 451.0
- --------------------------------------------------------------------------------
Unrecognized transition asset (46.6) (53.0)
- --------------------------------------------------------------------------------
Unrecognized prior service cost 102.8 114.2
- --------------------------------------------------------------------------------
Unrecognized net gain--experience
different from assumptions (285.4) (428.3)
- --------------------------------------------------------------------------------
Provision for restructuring charges (8.9) (27.1)
================================================================================
Prepaid pension cost $ 86.2 $ 56.8
The plan assets at each December 31 are based on measurements from October 31
to December 31. Stated at fair value, they are primarily listed stocks, bonds
and investments with a major insurance company.
Note: Rates used in determining the actuarial present value of the projected
benefit obligation at the end of 1994 and 1993 are: (1) the discount rate or the
assumed rate at which the pension benefits could be effectively settled, 8.00%
in 1994 and 7.00% in 1993; and (2) the compensation rate or the long-term rate
at which compensation is expected to increase as a result of inflation,
promotions, seniority and other factors, 5.25% for 1994 and 4.75% for 1993. The
expected long-term rate of return on assets at December 31, 1994 and 1993 was
8.50% and 8.25%, respectively.
The company has pension plans covering employees in a number of foreign
countries that utilize assumptions that are consistent, but not identical, with
those of the U.S. plans.
Net cost for non-U.S. defined-benefit
pension plans (millions) 1994 1993 1992
================================================================================
Actual (return) loss on assets $ 1.8 $(14.3) $ (9.1)
- --------------------------------------------------------------------------------
Less amount deferred (6.1) 8.0 2.6
- --------------------------------------------------------------------------------
Expected return on assets (4.3) (6.3) (6.5)
- --------------------------------------------------------------------------------
Net amortization and other .6 .5 .5
- --------------------------------------------------------------------------------
Service cost--benefits earned
during the year 5.2 5.2 5.3
- --------------------------------------------------------------------------------
Interest on the projected benefit
obligation 7.1 6.7 6.8
================================================================================
Net pension cost $ 8.6 $ 6.1 $ 6.1
- 33 -
The following table presents the funded status of the non-U.S. defined-
benefit pension plans at December 31.
Funded status of non-U.S. defined-benefit
pension plans (millions) 1994 1993
================================================================================
Actuarial present value of benefit obligations:
Vested benefit obligation $(87.1) $(83.1)
================================================================================
Accumulated benefit obligation $(91.5) $(88.7)
================================================================================
Projected benefit obligation for
services rendered to date $(99.5) $(95.9)
================================================================================
Plan assets at fair value 58.0 58.3
================================================================================
Projected benefit obligation greater
than plan assets (41.5) (37.6)
- --------------------------------------------------------------------------------
Unrecognized transition obligation 3.2 2.9
- --------------------------------------------------------------------------------
Unrecognized prior service cost 3.5 2.8
- --------------------------------------------------------------------------------
Unrecognized net gain--experience
different from assumptions (9.5) (4.9)
- --------------------------------------------------------------------------------
Adjustment required to recognize
minimum liability (.4) (5.3)
================================================================================
Accrued pension cost $(44.7) $(42.1)
Postretirement benefits other than pensions and postemployment benefits
The company has plans that provide for medical and life insurance benefits to
certain eligible employees, worldwide, when they retire from active service. The
company funds these benefit costs primarily on a pay-as-you-go basis, with the
retiree paying a portion of the cost for health-care benefits through
deductibles and contributions.
The company announced in 1989-90 a 15-year phaseout of its cost of health-
care benefits for certain future retirees. These future retirees include parent
company nonunion employees and some union employees. Shares of ESOP convertible
preferred stock (see page 35) are scheduled to be allocated to these employees,
based on employee age and years to expected retirement. In addition, they may
enroll in a voluntary portion of the ESOP to purchase additional shares.
In 1992, the company adopted SFAS 106 and elected to immediately recognize
the cumulative effect of the change in accounting for postretirement benefits of
$220.3 million ($135.4 million after taxes). Under this standard, total retiree
health-care and life insurance expense was $21.4 million in 1994, $21.2 million
in 1993 and $22.3 million in 1992.
Periodic postretirement
benefit costs (millions) 1994 1993 1992
================================================================================
Service cost of benefits earned
during the year $ 3.9 $ 3.9 $ 4.7
================================================================================
Interest cost on accumulated
postretirement benefit obligation 18.3 18.1 17.6
================================================================================
Amortization of prior service credit (.8) (.8) --
================================================================================
Periodic postretirement benefit cost $21.4 $21.2 $22.3
The following table sets forth the status of the company's postretirement
benefit plans at December 31.
Status of postretirement
benefit plans (millions) 1994 1993
================================================================================
Retirees $147.4 $143.3
- --------------------------------------------------------------------------------
Fully eligible active plan participants 31.2 39.9
- --------------------------------------------------------------------------------
Other active plan participants 54.2 64.7
================================================================================
Total accumulated postretirement benefit
obligation (APBO) $232.8 $247.9
================================================================================
Unrecognized prior service credit 8.1 8.8
================================================================================
Unrecognized net loss (4.7) (24.1)
================================================================================
Accrued postretirement benefit cost $236.2 $232.6
The assumed health-care cost trend rate used to measure the APBO was 13% in
1993, decreasing 1% per year to an ultimate rate of 6% by the year 2000. The
health-care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, if the health-care cost trend rate assumptions were
increased by 1%, the APBO as of December 31, 1994, would be increased by $27.5
million. The effect of this change on the total of service and interest costs
for 1994 would be an increase of $3.1 million. The APBO at December 31, 1994,
was determined utilizing a discount rate of 8.25% and a compensation rate of
5.25%. The discount and compensation rates used in determining the APBO at
December 31, 1993, were 7.75% and 4.75%, respectively.
The company provides certain postemployment benefits to eligible parent
company and subsidiary employees. These benefits are provided to former or
inactive employees and their dependents during the period following employment
but before retirement.
In 1992, the company adopted SFAS 112 and elected to immediately recognize
the cumulative effect of the change in accounting for postemployment benefits of
$53.3 million ($32.4 million after tax). In 1994, the company recorded a
postemployment benefit credit of $12.2 million, which included a $14.6 million
gain related to the qualification in 1994 of long-term disabled employees for
primary medical coverage under Medicare. Postemployment benefit expense was $4.6
million in 1993 and $6.3 million in 1992.
- 34 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Employee Stock Ownership Plan (ESOP)
In 1989, Armstrong established an ESOP that borrowed $270 million from banks
and insurance companies, repayable over 15 years and guaranteed by the company.
The ESOP used the proceeds to purchase 5,654,450 shares of a new series of
convertible preferred stock issued by the company. The number of preferred
shares released for allocation to participant accounts is based on the
proportion of principal and interest paid to the total amount of debt service
remaining to be paid over the life of the borrowings. Through December 31, 1994,
the ESOP allocated to participants 1,599,677 shares and retired 176,034 shares.
The preferred stock has a minimum conversion value of $47.75 per share with an
annual dividend of $3.462.
The ESOP currently covers parent company nonunion employees, some union
employees and those employees of major domestic subsidiaries who wish to
participate in the voluntary contribution portion of the plan.
Armstrong used the proceeds from the 1989 sale of preferred stock to
repurchase common stock in 1989 and 1990 for the company treasury.
The company's guarantee of the ESOP loan has been recorded as a long-term
obligation and as a reduction of shareholders' equity on its consolidated
balance sheet.
Details of ESOP debt service
payments (millions) 1994 1993 1992
================================================================================
Preferred dividends paid $19.0 $19.2 $19.3
- --------------------------------------------------------------------------------
Employee contributions 6.2 5.9 5.9
- --------------------------------------------------------------------------------
Company contributions 4.9 3.5 2.2
================================================================================
Debt service payments made
by ESOP trustee $30.1 $28.6 $27.4
The company recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $4.4 million in 1994, $4.5 million in 1993 and $4.4 million
in 1992. Costs for all years continue to be offset by savings from changes to
company-sponsored health-care benefits and elimination of a contribution-
matching feature in the company-sponsored voluntary retirement savings plan.
Taxes totaled $180.9 million in 1994, $113.6 million in 1993 and $92.4
million in 1992.
Deferred tax assets and liabilities are recognized using enacted tax rates
for the expected future tax consequences of events that have been recognized in
the financial statements or tax returns. The tax benefit for dividends paid on
unallocated shares of stock held by the ESOP is recognized in shareholders'
equity (see page 42).
Details of taxes (millions) 1994 1993 1992
================================================================================
Earnings (loss) before
income taxes:
Domestic $301.4 $ 85.7 $(59.2)
- --------------------------------------------------------------------------------
Foreign 52.1 29.3 8.0
- --------------------------------------------------------------------------------
Eliminations (49.0) (24.3) (9.2)
================================================================================
Total $304.5 $ 90.7 $(60.4)
================================================================================
Income taxes:
Payable:
Federal $ 29.5 $ 28.4 $ 20.4
- --------------------------------------------------------------------------------
Foreign 25.9 10.6 16.2
- --------------------------------------------------------------------------------
State 5.0 3.7 3.2
================================================================================
60.4 42.7 39.8
================================================================================
Deferred:
Federal 40.2 (14.3) (37.9)
- --------------------------------------------------------------------------------
Foreign (2.2) (1.2) (2.4)
- --------------------------------------------------------------------------------
State (4.3) -- --
================================================================================
33.7 (15.5) (40.3)
================================================================================
Total income taxes 94.1 27.2 (.5)
- --------------------------------------------------------------------------------
Payroll taxes 67.5 68.2 74.3
- --------------------------------------------------------------------------------
Property, franchise and capital
stock taxes 19.3 18.2 18.6
================================================================================
Total taxes $180.9 $113.6 $92.4
At December 31, 1994, unremitted earnings of subsidiaries outside the United
States were $92.1 million (at current balance sheet exchange rates) on which no
U.S. taxes have been provided. If such earnings were to be remitted without
offsetting tax credits in the United States, withholding taxes would be $10.8
million. The company's intention, however, is to permanently reinvest those
earnings or to repatriate them only when it is tax effective to do so.
Reconciliation to
U.S. statutory tax rate 1994 1993 1992
================================================================================
Statutory tax (benefit) rates 35.0% 35.0% (34.0)%
- --------------------------------------------------------------------------------
State income taxes .1 2.6 3.5
- --------------------------------------------------------------------------------
(Benefit) on ESOP dividend (.6) (1.5) (1.7)
- --------------------------------------------------------------------------------
(Benefit) taxes on foreign and
foreign-source income (.7) (8.8) 3.7
- --------------------------------------------------------------------------------
Utilization of excess foreign
tax credit (1.8) -- --
- --------------------------------------------------------------------------------
Reversal of prior year provisions (2.1) -- --
- --------------------------------------------------------------------------------
Other items 1.0 .9 3.5
- --------------------------------------------------------------------------------
Restructuring charges -- 1.8 24.0
- --------------------------------------------------------------------------------
Effective tax (benefit) rates 30.9% 30.0% (1.0)%
- 35 -
- --------------------------------------------------------------------------------
BALANCE SHEET ITEMS
- --------------------------------------------------------------------------------
Cash and cash equivalents increased to $12.0 million at the end of 1994 from
$9.1 million at the end of 1993. Operating and other factors associated with the
increase in cash and cash equivalents are detailed in the Consolidated
Statements of Cash Flows on page 31.
Short-term investments, substantially all of which have maturities of three
months or less when purchased, are considered to be cash equivalents and are
carried at cost or less, generally approximating market value.
Receivables increased $36.5 million in 1994, with most of the increase
related to higher sales volume during the last quarter of 1994.
Accounts and notes receivable (millions) 1994 1993
================================================================================
Customers' receivables $324.6 $287.0
- --------------------------------------------------------------------------------
Customers' notes 26.9 22.3
- --------------------------------------------------------------------------------
Miscellaneous receivables 10.8 11.7
- --------------------------------------------------------------------------------
362.3 321.0
- --------------------------------------------------------------------------------
Less allowance for discounts and losses 42.3 37.5
================================================================================
Net $320.0 $283.5
Generally, the company sells its products to select, preapproved groups of
customers that include: flooring and building material distributors, ceiling
systems contractors, regional and national mass merchandisers and home centers,
original equipment manufacturers and large furniture retailers. The businesses
of these customers are directly affected by changes in economic and market
conditions. The company considers these factors and the financial condition of
each customer when establishing its allowance for losses from doubtful accounts.
The carrying amount of the receivables approximates fair value because of the
short maturity of these items.
Trade receivables are recorded in gross billed amounts as of date of
shipment. Provision is made for estimated applicable discounts and losses.
Inventories were $7.3 million higher at the end of 1994. The translation of
foreign currency inventories to U.S. dollars at higher exchange rates provided
approximately $4.6 million of the increase.
Approximately 49% in 1994 and 51% in 1993 of the company's total inventory
was valued on a LIFO (last-in, first-out) basis. Such inventory values were
lower than would have been reported on a total FIFO (first-in, first-out) basis,
by $115.4 million at the end of 1994 and $109.7 million at year-end 1993.
Inventories (millions) 1994 1993
- --------------------------------------------------------------------------------
Finished goods $179.1 $176.8
- --------------------------------------------------------------------------------
Goods in process 35.5 34.5
- --------------------------------------------------------------------------------
Raw materials and supplies 78.9 74.9
- --------------------------------------------------------------------------------
Total $293.5 $286.2
Inventories are valued at the lower of cost or market. Approximately two-
thirds of 1994's domestic inventories are valued using the LIFO method. Other
inventories are generally determined on a FIFO method.
Income tax benefits were $35.9 million in 1994 and $36.8 million in 1993. Of
these amounts, deferred tax benefits were $31.7 million in 1994 and $34.1
million in 1993.
Other current assets were $29.6 million in 1994, an increase of $4.8 million
from the $24.8 million in 1993.
Property, plant and equipment (millions) 1994 1993
- --------------------------------------------------------------------------------
Land $ 33.5 $ 32.2
- --------------------------------------------------------------------------------
Buildings 521.8 505.1
- --------------------------------------------------------------------------------
Machinery and equipment 1,523.8 1,446.5
- --------------------------------------------------------------------------------
Construction in progress 89.6 62.0
- --------------------------------------------------------------------------------
2,168.7 2,045.8
- --------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 1,098.8 1,006.7
================================================================================
Net $1,069.9 $1,039.1
The $122.9 million increase in gross book value to $2,168.7 million at the
end of 1994 included $148.3 million for capital additions and a $55.3 million
reduction from sales, retirements, dispositions and other changes. Also, because
of translating foreign currency property, plant and equipment into U.S. dollars
at higher exchange rates, 1994 gross book value was higher by $29.9 million and
net book value increased by $13.9 million.
The unexpended cost of approved capital appropriations amounted to $108.8
million at December 31, 1994, substantially all of which is scheduled to be
expended during 1995.
Property, plant and equipment values are stated at acquisition cost, with
accumulated depreciation and amortization deducted to arrive at net book value.
Insurance for asbestos-related liabilities was $198.0 million reflecting the
company's belief in the availability of insurance in an amount to cover the
estimated liability of a like amount (see page 39). Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation.
Beginning with the first quarter 1994, the company's balance sheet reflected
a new liability--"Asbestos-related liabilities" and a new asset--"Insurance for
asbestos-related liabilities" to conform to FASB Interpretation No. 39. In the
past, the company set off such amounts for financial reporting.
- 36 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Other noncurrent assets (millions) 1994 1993
- --------------------------------------------------------------------------------
Goodwill and other intangibles $ 67.4 $ 68.1
- --------------------------------------------------------------------------------
Pension-related assets 106.7 76.0
- --------------------------------------------------------------------------------
Other 99.5 105.7
================================================================================
Total $273.6 $249.8
Other noncurrent assets increased $23.8 million in 1994. The $30.7 million
increase in pension-related assets and the recording of a $3.9 million
receivable for estimated environmental-remediation activities (see page 39) were
the major factors for the increase. Partially offsetting these increases was the
use of $13.5 million of deferred income tax benefits.
Noncurrent assets are carried at cost or less or under the equity method of
accounting.
Accounts payable and
accrued expenses (millions) 1994 1993
================================================================================
Payables, trade and other $172.1 $145.3
- --------------------------------------------------------------------------------
Employment costs 92.0 55.0
- --------------------------------------------------------------------------------
Restructuring costs 20.3 41.7
- --------------------------------------------------------------------------------
Other 43.0 51.3
================================================================================
Total $327.4 $293.3
The carrying amount of accounts payable and accrued expenses approximates
fair value because of the short maturity of these items.
Income taxes (millions) 1994 1993
================================================================================
Payable--current $21.4 $31.7
- --------------------------------------------------------------------------------
Deferred--current 1.1 .1
================================================================================
Total $22.5 $31.8
Deferred income taxes (millions) 1994 1993
================================================================================
Postretirement and postemployment
benefits $ (95.0) $ (99.6)
- --------------------------------------------------------------------------------
Restructuring benefits (14.7) (31.0)
- --------------------------------------------------------------------------------
Asbestos-related liabilities (69.3) --
- --------------------------------------------------------------------------------
Alternative minimum tax credit (5.3) (20.3)
- --------------------------------------------------------------------------------
Excess foreign tax credit carryforward -- (6.9)
- --------------------------------------------------------------------------------
Other (77.8) (69.6)
- --------------------------------------------------------------------------------
Total gross deferred tax assets $(262.1) $(227.4)
- --------------------------------------------------------------------------------
Less valuation allowance -- 6.9
- --------------------------------------------------------------------------------
Net deferred assets $(262.1) $(220.5)
- --------------------------------------------------------------------------------
Accumulated depreciation $ 106.5 $ 96.2
- --------------------------------------------------------------------------------
Pension costs 33.1 29.4
- --------------------------------------------------------------------------------
Insurance for asbestos-related liabilities 69.3 --
- --------------------------------------------------------------------------------
Other 54.7 66.1
- --------------------------------------------------------------------------------
Total deferred income tax liabilities $ 263.6 $ 191.7
- --------------------------------------------------------------------------------
Net deferred income tax liabilities (assets) $ 1.5 $ (28.8)
- --------------------------------------------------------------------------------
Less net income tax (benefits)--current (30.6) (34.1)
- --------------------------------------------------------------------------------
Less net income tax (benefits)--noncurrent -- (13.5)
================================================================================
Deferred income taxes--long term $ 32.1 $ 18.8
The tax effects of principal temporary differences between the carrying
amounts of assets and liabilities and their tax bases are summarized in the
preceding table.
Average Average
year-end year-end
interest interest
Debt (millions) 1994 rate 1993 rate
============================================================================
Short-term debt:
Commercial paper $ 3.2 6.00% $ 75.5 3.36%
- ----------------------------------------------------------------------------
Foreign banks 14.7 7.20% 29.9 6.81%
- ----------------------------------------------------------------------------
Total short-term debt $ 17.9 6.99% $105.4 4.34%
- ----------------------------------------------------------------------------
Long-term debt:
9 3/4% debentures
due 2008 $125.0 9.75% $125.0 9.75%
- ----------------------------------------------------------------------------
Medium-term notes
8.5-9% due
1995-2001 111.8 8.75% 116.8 8.71%
- ----------------------------------------------------------------------------
Industrial
development
bonds 17.7 5.66% 17.9 3.08%
- ----------------------------------------------------------------------------
Other 2.2 12.25% 2.9 11.25%
- ----------------------------------------------------------------------------
Total long-term debt $256.7 9.05% $262.6 8.88%
- ----------------------------------------------------------------------------
Less current installments 19.5 8.80% 5.8 8.13%
============================================================================
Net long-term debt $237.2 9.07% $256.8 8.85%
Scheduled amortization of long-term debt (millions)
============================================================================
1996 $40.1 1999 $ --
- ----------------------------------------------------------------------------
1997 13.7 2000 18.1
- ----------------------------------------------------------------------------
1998 13.5
The December 31, 1994, carrying amounts of short-term debt and current
installments of long-term debt approximate fair value because of the short
maturity of these items.
The estimated fair value of net long-term debt was $247.2 million and $301.3
million at December 31, 1994 and 1993, respectively. The fair value estimates of
long-term debt were based upon quotes from major financial institutions, taking
into consideration current rates offered to the company for debt of the same
remaining maturities.
The 9 3/4% debentures and the medium-term notes are not redeemable until
maturity and have no sinking-fund requirements.
The industrial development bonds have maturities from 1995 to 2005, and $16.5
million has a variable interest rate that is reset weekly.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had a
carrying value of $1.7 million at December 31, 1994.
- 37 -
In February 1995, Armstrong arranged a $200 million five-year revolving line
of credit with 10 banks for general corporate purposes. In addition, the
company's foreign subsidiaries have approximately $143 million of unused short-
term lines of credit available from banks. The domestic credit lines are
extended on a fee basis.
The company can borrow from its banks generally at rates approximating the
lowest available to commercial borrowers and can issue short-term commercial
paper notes supported by the lines of credit.
Financial instruments with off-balance sheet risks
The company selectively uses foreign currency forward and option contracts to
offset the effects of exchange rate changes on cash flow exposures denominated
in foreign currencies. These exposures include firm or anticipated intercompany
trade accounts, royalties, service fees, dividends, intercompany loans and third
party sales or payments. The primary exposures are denominated in European
currencies and the Canadian dollar. The company normally hedges cash flow
exposures up to one year. The company's foreign currency cash flow exposures,
the net hedge and the unhedged exposure at December 31, 1994, were as follows:
Foreign currency Net
exposure (millions)1 Gross hedge Unhedged
================================================================================
Canadian dollar $ 42.0 $ 36.0 $ 6.0
- --------------------------------------------------------------------------------
German mark 38.0 38.0 --
- --------------------------------------------------------------------------------
British pound 28.3 15.5 12.8
- --------------------------------------------------------------------------------
French franc 25.0 24.3 .7
- --------------------------------------------------------------------------------
Italian lira to
French franc 15.6 10.8 4.8
- --------------------------------------------------------------------------------
French franc to
German mark 12.7 7.7 5.0
- --------------------------------------------------------------------------------
German mark to
British pound 10.0 7.1 2.9
- --------------------------------------------------------------------------------
Other 37.6 20.8 16.8
- --------------------------------------------------------------------------------
Total $209.2 $160.2 $49.0
Note 1: The currencies shown are in relation to the U.S. dollar, except as
indicated.
Realized and unrealized gains and losses on contracts that are used to offset
the effects of exchange rate changes on foreign currency cash flows are normally
marked to market and recognized in statements of operations. The foreign
currency options consist primarily of purchased options that are designated as
effective hedges and are deferred and included in income as part of the
underlying transactions.
Realized and unrealized gains and losses on foreign currency contracts used
to hedge intercompany transactions of a long-term investment nature are included
in the foreign currency translation components of shareholders' equity.
The company's foreign currency forward and option contracts by currency at
December 31, 1994, were as follows. All of the contracts mature within eight
months.
Foreign currency Forward Option
contracts (millions)1 contracts contracts
================================================================================
Sold Bought Sold Bought
- --------------------------------------------------------------------------------
Canadian dollar $ 26.7 $1.4 -- $10.7
- --------------------------------------------------------------------------------
German mark 27.1 3.2 -- 14.1
- --------------------------------------------------------------------------------
British pound 12.4 -- -- 3.1
- --------------------------------------------------------------------------------
French franc 17.6 -- -- 6.7
- --------------------------------------------------------------------------------
Italian lira to
French franc 10.8 -- -- --
- --------------------------------------------------------------------------------
French franc to
German mark 7.7 -- -- --
- --------------------------------------------------------------------------------
German mark to
British pound 7.1 -- -- --
- --------------------------------------------------------------------------------
Other 20.8 -- -- --
- --------------------------------------------------------------------------------
Total $130.2 $4.6 -- $34.6
Note 1: The currencies shown are in relation to the U.S. dollar, except as
indicated, and are converted at year-end market exchange rates.
The company selectively enters into interest rate swap agreements to reduce
the impact of interest rate changes on its debt. The interest rate swap
agreements involve exchanges of fixed or floating rate interest payments without
the exchange of the underlying notional amounts. The notional amounts of such
agreements are used to measure the interest to be paid or received and do not
represent the amount of exposure to loss.
In 1987, the company entered into a seven-year notional $15 million interest
rate swap whereby the company paid interest at the 30-day U.S. commercial paper
rate and received interest at a fixed rate of 10.22%. The swap matured in 1994.
In 1987, the company entered into one five-year and two seven-year currency
interest rate swaps whereby the company exchanged a total of U.S. $86.3 million
for German marks 90 million, French francs 182.4 million and Belgian francs 270
million to hedge net investment in foreign subsidiaries. The agreements provided
for the company to make fixed interest rate payments of 5.37% for the German
mark swap, 8.88% for the French franc swap and 7.8% for the Belgian franc swap
while receiving interest at the 30-day U.S. commercial paper rate. The swaps
hedged net investment in foreign subsidiaries until 1992, at which time they
were redesignated to hedge foreign currency cash flow exposures. Upon
redesignation, the swaps were marked to market through income. The German mark
swap matured in 1992. The two remaining swaps were terminated prior to maturity
in 1993 due to the appreciation of the foreign currencies at a pretax loss of
$.7 million that was recognized in other income and expense.
- 38 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
In 1992, the company entered into two three-year notional amount $50 million
interest rate swaps, whereby the company paid interest at the six-month London
Interbank Offered Rate (LIBOR) in arrears and received interest at an average
fixed rate of 6.6%. The swaps were terminated prior to maturity in 1993 due to a
rising LIBOR at a pretax gain of $2.5 million that was recognized in income.
In 1993, the company entered into a five-year notional amount $25 million
interest rate swap, whereby the company paid interest at the six-month LIBOR and
received interest at a fixed rate of 5.575%. The swap was terminated in 1994 due
to a rising LIBOR at a pretax loss of $.1 million that was recognized in income.
The foreign currency hedges and the swap agreements are straightforward
"plain vanilla" contracts that have no imbedded options or other terms that
involve a higher level of complexity or risk.
The realized and unrealized gains and losses relating to the company's
management of foreign currency and interest rate exposures are shown below on a
disaggregated basis for the years ended December 31, 1994 and 1993.
Foreign currency
---------------------------------- Interest
Gain (loss) Exposure Net rate
(millions) effect Contracts1 effect2 swaps
================================================================================
Year 1994
- --------------------------------------------------------------------------------
Income statement:
Realized $ (.7) $(2.5) $(3.2) $ .2
- --------------------------------------------------------------------------------
Unrealized -- .4 .4 --
- --------------------------------------------------------------------------------
On balance sheet:
Realized 2.1 (5.8) (3.7) --
- --------------------------------------------------------------------------------
Unrealized 4.8 (.2) 4.6 --
- --------------------------------------------------------------------------------
Off balance sheet -- -- -- --
- --------------------------------------------------------------------------------
Total $ 6.2 $(8.1) $(1.9) $ .2
- --------------------------------------------------------------------------------
Year 1993
- --------------------------------------------------------------------------------
Income statement:
Realized $ (.8) $(2.8) $(3.6) $7.0
- --------------------------------------------------------------------------------
Unrealized -- (.9) (.9) --
- --------------------------------------------------------------------------------
On balance sheet:
Realized -- -- -- --
- --------------------------------------------------------------------------------
Unrealized (1.2) .2 (1.0) --
- --------------------------------------------------------------------------------
Off balance sheet -- -- -- .4
- --------------------------------------------------------------------------------
Total $(2.0) $(3.5) $(5.5) $7.4
Note 1: The company borrows centrally and enters into foreign currency
intercompany transactions of a long-term investment nature with foreign
subsidiaries. These are fully hedged. Accordingly, gains and losses on these
transactions are fully offset by losses and gains from the related foreign
exchange contracts.
Note 2: Excludes the offsetting effect of interest rate differentials on
underlying intercompany transactions being hedged of $.6 million in 1994 and
$.5 million in 1993.
The company continually monitors the market risk of its foreign currency and
interest rate contracts by marking the positions to market. The counterparties
to these instruments are major international financial institutions. The company
uses commercial rating agencies to evaluate the credit quality of the
counterparties, and the company does not anticipate a loss resulting from any
credit risk of these institutions.
As of December 31, 1994, the company had provided $96 million in standby
letters of credit and financial guarantees. The company does not normally
provide collateral or other security to support these instruments.
Other long-term liabilities were $118.3 million in 1994 and $99.6 million in
1993 and include amounts for pensions, deferred compensation, workers'
compensation, vacation accrual, a reserve for estimated environmental-
remediation liabilities (see below) and a reserve for the estimated potential
liability primarily associated with claims pending in the company's asbestos-
related litigation.
Based upon the company's experience with this litigation--as well as the
Wellington Agreement, other settlement agreements with certain of the company's
insurance carriers and an earlier interim agreement with several primary
carriers--a residual reserve amount of $3.3 million is intended to cover
potential liability and settlement costs which are not covered by insurance,
legal and administrative costs not covered under the agreements and certain
other factors which have been involved in the litigation about which
uncertainties exist. Future costs of litigation against the company's insurance
carriers and other legal costs indirectly related to the litigation, expected to
be modest, will be expensed outside the reserve. Amounts, primarily insurance
litigation costs, estimated to be payable within one year are included under
current liabilities.
This reserve does not address any unanticipated reduction in expected
insurance coverage which might result in the future related to pending lawsuits
and claims nor any potential shortfall in such coverage for claims which are
subject to the settlement class action referred to on pages 43-45.
The fair value of other long-term liabilities was estimated to be $104.4
million at December 31, 1994, and $87.2 million at December 31, 1993, using a
discounted cash flow approach.
Asbestos-related liabilities of $198.0 million represent the estimated
liability and defense cost to resolve approximately 73,000 personal injury
claims pending against the company as of December 31, 1994. The insurance asset
(see page 36) in the amount of $198.0 million offsets the liability.
Environmental matters
The company will incur capital expenditures in order to meet the new
requirements of the Clean Air Act of 1990 and is awaiting the final promulgation
of implementing regulations by various state agencies to determine the magnitude
of additional costs and the time period over which they will be incurred. In
1994, the company incurred capital expenditures of approximately $1.9 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1995 and 1996.
- 39 -
As with many industrial companies, Armstrong is involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), and similar state laws at approximately 23 sites. In most cases,
Armstrong is one of many potentially responsible parties ("PRPs") who have
voluntarily agreed to jointly fund the required investigation and remediation of
each site. With regard to some sites, however, Armstrong disputes either
liability or the proposed cost allocation. Sites where Armstrong is alleged to
have contributed a significant volume of waste material include a former
municipal landfill site in Volney, New York, and a former county landfill site
in Buckingham County, Virginia, which is alleged to have received material from
Thomasville Furniture Industries, Inc. (see page 46). Armstrong may also have
rights of contribution or reimbursement from other parties or coverage under
applicable insurance policies. The company is also remediating environmental
contamination resulting from past industrial activity at certain of its current
plant sites.
Estimates of future liability are based on an evaluation of currently
available facts regarding each individual site and consider factors including
existing technology, presently enacted laws and regulations and prior company
experience in remediation of contaminated sites. Although current law imposes
joint and several liability on all parties at any Superfund site, Armstrong's
contribution to the remediation of these sites is expected to be limited by the
number of other companies also identified as potentially liable for site costs.
As a result, the company's estimated liability reflects only the company's
expected share. In determining the probability of contribution, the company
considers the solvency of the parties, whether responsibility is being
disputed, the terms of any existing agreements and experience regarding similar
matters. The estimated liabilities do not take into account any claims for
recoveries from insurance or third parties.
Because of uncertainties associated with remediation activities and
technologies, regulatory interpretations and the allocation of those costs among
various other parties, the company has accrued, before agreed-to insurance
coverage, $10.4 million to reflect its estimated undiscounted liability for
environmental remediation. As assessments and remediation activities progress at
each individual site, these liabilities are reviewed to reflect additional
information as it becomes available.
Actual costs to be incurred at identified sites in the future may vary from
the estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the company believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations.
Geographic areas
United States net trade sales include export sales to non-affiliated
customers of $40.9 million in 1994, $27.0 million in 1993 and $24.4 million in
1992.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Spain and Switzerland. Operations in Australia, Canada,
China, Hong Kong, Indonesia, Japan, Korea, Singapore and Thailand are in "Other
foreign."
Transfers between geographic areas and commissions paid to affiliates
marketing exported products are accounted for by methods that approximate arm's-
length transactions, after considering the costs incurred by the selling company
and the return on assets employed of both the selling unit and the purchasing
unit. Operating income of a geographic area includes income accruing from sales
to affiliates.
Geographic areas
at December 31 (millions) 1994 1993 1992
- --------------------------------------------------------------------------------
Net trade sales:
- --------------------------------------------------------------------------------
United States $2,090.7 $1,910.7 $1,841.5
- --------------------------------------------------------------------------------
Europe 483.4 456.6 544.5
- --------------------------------------------------------------------------------
Other foreign 178.6 158.1 163.8
- --------------------------------------------------------------------------------
Interarea transfers:
- --------------------------------------------------------------------------------
United States 95.1 76.1 69.9
- --------------------------------------------------------------------------------
Europe 8.7 6.0 4.0
- --------------------------------------------------------------------------------
Other foreign 26.1 21.9 18.5
- --------------------------------------------------------------------------------
Eliminations (129.9) (104.0) (92.4)
- --------------------------------------------------------------------------------
Total net sales $2,752.7 $2,525.4 $2,549.8
================================================================================
Operating income (loss): (Note 1)
- --------------------------------------------------------------------------------
United States $ 274.1 $ 140.8 $ 10.9
- --------------------------------------------------------------------------------
Europe 75.3 31.7 22.5
- --------------------------------------------------------------------------------
Other foreign 7.6 10.0 (4.6)
- --------------------------------------------------------------------------------
Unallocated corporate expense (23.8) (59.8) (54.9)
- --------------------------------------------------------------------------------
Total operating income (loss) $ 333.2 $ 122.7 $ (26.1)
================================================================================
Identifiable assets: (Note 2)
- --------------------------------------------------------------------------------
United States $1,375.9 $1,334.0 $1,362.2
- --------------------------------------------------------------------------------
Europe 376.5 347.0 362.5
- --------------------------------------------------------------------------------
Other foreign 72.6 63.2 64.9
- --------------------------------------------------------------------------------
Corporate 408.0 185.4 226.8
- --------------------------------------------------------------------------------
Eliminations (.5) (.3) (6.6)
- --------------------------------------------------------------------------------
Total assets $2,232.5 $1,929.3 $2,009.8
Note 1: Certain expenses, principally employee benefit costs, that were
previously unallocated are included in operating income for the respective
geographical area and industry segments in 1994. Years 1993 and 1992 were
restated to conform to current year presentation.
Note 2: Identifiable assets for geographic areas and industry segments exclude
cash, marketable securities and assets of a corporate nature. Capital additions
for industry segments include property, plant and equipment from acquisitions.
- 40 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
Industry segments
The company operates worldwide in four reportable segments: floor coverings,
building products, furniture and industry products. Floor coverings sales
include resilient floors, ceramic tile and accessories.
Industry segments
at December 31 (millions) 1994 1993 1992
- --------------------------------------------------------------------------------
Net trade sales:
- --------------------------------------------------------------------------------
Floor coverings $1,283.7 $1,191.3 $1,134.9
- --------------------------------------------------------------------------------
Building products 630.0 586.7 656.7
- --------------------------------------------------------------------------------
Furniture 526.8 449.7 438.4
- --------------------------------------------------------------------------------
Industry products 312.2 297.7 319.8
================================================================================
Total net sales $2,752.7 $2,525.4 $2,549.8
================================================================================
Operating income (loss): (See Note 1 on page 40 & Note 3 below)
- --------------------------------------------------------------------------------
Floor coverings $ 190.4 $ 112.4 $ 12.6
- --------------------------------------------------------------------------------
Building products 86.8 18.8 (19.3)
- --------------------------------------------------------------------------------
Furniture 38.6 24.1 5.8
- --------------------------------------------------------------------------------
Industry products 41.2 27.2 29.7
- --------------------------------------------------------------------------------
Unallocated corporate expense (23.8) (59.8) (54.9)
================================================================================
Total operating income (loss) $ 333.2 $ 122.7 $ (26.1)
================================================================================
Depreciation and amortization:
- --------------------------------------------------------------------------------
Floor coverings $ 63.0 $ 63.2 $ 67.8
- --------------------------------------------------------------------------------
Building products 34.5 34.1 37.6
- --------------------------------------------------------------------------------
Furniture 12.7 12.9 13.5
- --------------------------------------------------------------------------------
Industry products 17.6 14.6 12.8
- --------------------------------------------------------------------------------
Corporate 5.6 5.2 5.2
================================================================================
Total depreciation
and amortization $ 133.4 $ 130.0 $ 136.9
================================================================================
Capital additions: (See Note 2 on page 40)
- --------------------------------------------------------------------------------
Floor coverings $ 77.1 $ 59.5 $ 48.0
- --------------------------------------------------------------------------------
Building products 31.5 24.2 25.9
- --------------------------------------------------------------------------------
Furniture 14.1 10.0 8.3
- --------------------------------------------------------------------------------
Industry products 22.6 22.1 31.4
- --------------------------------------------------------------------------------
Corporate 3.0 1.8 2.2
================================================================================
Total capital additions $ 148.3 $ 117.6 $ 115.8
================================================================================
Identifiable assets: (See Note 2 on page 40)
- --------------------------------------------------------------------------------
Floor coverings $ 866.4 $ 818.4 $ 847.0
- --------------------------------------------------------------------------------
Building products 478.1 483.0 500.3
- --------------------------------------------------------------------------------
Furniture 245.2 234.6 238.7
- --------------------------------------------------------------------------------
Industry products 234.8 207.9 197.0
- --------------------------------------------------------------------------------
Corporate 408.0 185.4 226.8
================================================================================
Total assets $2,232.5 $1,929.3 $2,009.8
Note 3:
Restructuring charges
in operating income (loss) (millions) 1994 1993 1992
================================================================================
Floor coverings -- $27.7 $ 80.8
- --------------------------------------------------------------------------------
Building products -- 13.7 35.0
- --------------------------------------------------------------------------------
Furniture -- .6 4.8
- --------------------------------------------------------------------------------
Industry products -- 12.9 12.5
- --------------------------------------------------------------------------------
Unallocated corporate expense -- 35.0 32.4
- --------------------------------------------------------------------------------
Total restructuring charges
in operating income (loss) -- $89.9 $165.5
- --------------------------------------------------------------------------------
Stock options
No further options may be granted under the 1984 Long-Term Stock Option Plan
for Key Employees since the 1993 Long-Term Stock Incentive Plan, approved by the
shareholders in April 1993, replaced the 1984 Plan for purposes of granting
additional options.
Awards under the 1993 Long-Term Stock Incentive Plan may be in the form of
stock options, stock appreciation rights in conjunction with stock options,
performance restricted shares and restricted stock awards. No more than
4,300,000 shares of common stock may be issued under the Plan, and no more than
430,000 shares of common stock may be awarded in the form of restricted stock
awards (see page 42). The Plan extends to April 25, 2003. Pre-1993 grants made
under predecessor plans will be governed under the provisions of those plans. At
December 31, 1994, there were 3,691,512 shares available for grant under the
1993 Plan.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options were granted and expire 10
years from the date of grant. The average share price of all options exercised
was $31.20 in 1994, $27.41 in 1993 and $12.34 in 1992.
Changes in option shares outstanding
(thousands except for share price) 1994 1993 1992
================================================================================
Option shares at beginning of year 1,708.4 1,730.7 1,458.5
- --------------------------------------------------------------------------------
Options granted 247.1 245.1 383.9
- --------------------------------------------------------------------------------
1,955.5 1,975.8 1,842.4
- --------------------------------------------------------------------------------
Less: Option shares exercised 323.1 182.2 27.4
- --------------------------------------------------------------------------------
Stock appreciation rights
exercised 8.5 14.0 9.1
- --------------------------------------------------------------------------------
Options canceled 11.8 71.2 75.2
- --------------------------------------------------------------------------------
343.4 267.4 111.7
- --------------------------------------------------------------------------------
Option shares at end of year 1,612.1 1,708.4 1,730.7
- --------------------------------------------------------------------------------
Average share price of options $ 36.82 $ 33.20 $ 32.88
- --------------------------------------------------------------------------------
Option shares exercisable at
end of year 1,367.1 1,464.2 1,349.1
Performance restricted shares issuable under the 1993 Long-Term Stock
Incentive Plan entitle certain key executive employees to earn shares of
Armstrong's common stock, only if the company meets certain predetermined
performance measures during a three-year performance period. At the end of the
performance period, common stock awarded will generally carry an additional
four-year restriction period whereby the shares will be held in custody by the
company until the expiration or termination of the restriction. Compensation
expense will be charged to earnings over the period in which the restrictions
lapse. At the end of 1994, there were 110,132 performance restricted shares
outstanding, with associated potential future common stock awards falling in the
range of zero to 330,396 shares of Armstrong common stock.
- 41 -
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 12,000 shares of
restricted stock were granted during 1994, with 256 accumulated dividend
equivalent shares outstanding.
Shareholders' equity changes for 1994, 1993 and 1992 are summarized below:
Years ended December 31
(millions except for per-share data) 1994 1993 1992
- --------------------------------------------------------------------------------
Series A convertible preferred stock:
================================================================================
Balance at beginning of year $ 263.9 $ 266.4 $ 267.7
- --------------------------------------------------------------------------------
Shares retired 2.3 2.5 1.3
- --------------------------------------------------------------------------------
Balance at end of year $ 261.6 $ 263.9 $ 266.4
- --------------------------------------------------------------------------------
Common stock, $1 par value:
- --------------------------------------------------------------------------------
Balance at beginning and end
of year $ 51.9 $ 51.9 $ 51.9
- --------------------------------------------------------------------------------
Capital in excess of par value:
- --------------------------------------------------------------------------------
Balance at beginning of year $ 29.7 $ 26.1 $ 25.8
- --------------------------------------------------------------------------------
Stock issuances 9.6 3.6 .3
- --------------------------------------------------------------------------------
Balance at end of year $ 39.3 $ 29.7 $ 26.1
- --------------------------------------------------------------------------------
Reduction for ESOP loan guarantee:
- --------------------------------------------------------------------------------
Balance at beginning of year $ (241.8) $ (249.2) $ (256.0)
- --------------------------------------------------------------------------------
Principal paid 8.4 6.3 4.5
- --------------------------------------------------------------------------------
Accrued compensation (.5) 1.1 2.3
- --------------------------------------------------------------------------------
Balance at end of year $ (233.9) $ (241.8) $ (249.2)
- --------------------------------------------------------------------------------
Retained earnings:
- --------------------------------------------------------------------------------
Balance at beginning of year $ 927.7 $ 922.7 $1,208.7
- --------------------------------------------------------------------------------
Net earnings (loss) for year 210.4 63.5 (227.7)
- --------------------------------------------------------------------------------
Tax benefit on dividends
paid on unallocated preferred
shares 4.9 5.3 5.5
- --------------------------------------------------------------------------------
Total $1,143.0 $ 991.5 $ 986.5
- --------------------------------------------------------------------------------
Less dividends:
Preferred stock
$3.462 per share $ 19.0 $ 19.2 $ 19.3
- --------------------------------------------------------------------------------
Common stock
$1.26 per share in 1994; 47.2
$1.20 per share in 1993; 44.6
$1.20 per share in 1992 44.5
- --------------------------------------------------------------------------------
Total dividends $ 66.2 $ 63.8 $ 63.8
- --------------------------------------------------------------------------------
Balance at end of year $1,076.8 $ 927.7 $ 922.7
- --------------------------------------------------------------------------------
Foreign currency translation:
- --------------------------------------------------------------------------------
Balance at beginning of year $ (3.4) $ 8.6 $ 44.7
- --------------------------------------------------------------------------------
Translation adjustments and
hedging activities 11.7 (12.5) (37.0)
- --------------------------------------------------------------------------------
Allocated income taxes -- .5 .9
- --------------------------------------------------------------------------------
Balance at end of year $ 8.3 $ (3.4) $ 8.6
- --------------------------------------------------------------------------------
Less treasury stock at cost:
- --------------------------------------------------------------------------------
Balance at beginning of year $ 458.5 $ 457.3 $ 457.3
- --------------------------------------------------------------------------------
Stock purchases 10.6 .1 --
- --------------------------------------------------------------------------------
Stock issuance activity, net (.2) 1.1 --
- --------------------------------------------------------------------------------
Balance at end of year $ 468.9 $ 458.5 $ 457.3
- --------------------------------------------------------------------------------
Total shareholders' equity $ 735.1 $ 569.5 $ 569.2
Treasury shares changes for 1994, 1993 and 1992 are as follows:
Years ended December 31
(thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
Common shares
================================================================================
Balance at beginning of year 14,656.5 14,750.6 14,776.3
- --------------------------------------------------------------------------------
Stock purchases 272.4 2.4 .6
- --------------------------------------------------------------------------------
Stock issuance activity, net (326.8) (96.5) (26.3)
- --------------------------------------------------------------------------------
Balance at end of year 14,602.1 14,656.5 14,750.6
Preferred stock purchase rights plan
In 1986, the Board of Directors declared a distribution of one right for each
share of the company's common stock outstanding on and after March 21, 1986.
Following the two-for-one stock split later in 1986, one-half of one right
attaches to each share of common stock outstanding. In general, the rights
become exercisable at $175 per right for a fractional share of a new series of
Class A preferred stock (which will differ from the Series A Convertible
Preferred Stock issued to the Employee Stock Ownership Plan described on page
35) 10 days after a person or group either acquires beneficial ownership of
shares representing 20% or more of the voting power of the company or announces
a tender or exchange offer that could result in such person or group
beneficially owning shares representing 28% or more of the voting power of the
company. If thereafter any person or group becomes the beneficial owner of 28%
or more of the voting power of the company or if the company is the surviving
company in a merger with a person or group that owns 20% or more of the voting
power of the company, then each owner of a right (other than such 20%
stockholder) would be entitled to purchase shares of common stock having a value
equal to twice the exercise price of the right. Should the company be acquired
in a merger or other business combination, or sell 50% or more of its assets or
earnings power, each right would entitle the holder to purchase, at the exercise
price, common shares of the acquirer having a value of twice the exercise price
of the right. The exercise price was determined on the basis of the Board's view
of the long-term value of the company's common stock. The rights have no voting
power nor do they entitle a holder to receive dividends. At the company's
option, the rights are redeemable prior to becoming exercisable at five cents
per right. The rights expire on March 21, 1996.
- 42 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LITIGATION AND RELATED MATTERS
- --------------------------------------------------------------------------------
Asbestos-related litigation
The company is one of many defendants in pending lawsuits and claims
involving, as of December 31, 1994, approximately 73,000 individuals alleging
personal injury from exposure to asbestos-containing products. Included in the
above number are approximately 14,300 lawsuits and claims which appear not to be
covered by the settlement class action referred to below that were received by
the company in 1994. This compares with 24,036 in 1993. About 5,000 claims which
may involve the company were received in 1994 under the settlement class action,
but the vast majority of these claims have not been evaluated to date as meeting
the payment criteria under the settlement agreement. Nearly all the pending
personal injury suits and claims seek compensatory and punitive damages arising
from alleged exposure to asbestos-containing insulation products used,
manufactured or sold by the company. The company discontinued the sale of all
asbestos-containing insulation products in 1969. Although a large number of
suits and claims pending in prior years have been resolved, neither the rate of
future dispositions nor the number of future potential unasserted claims can be
reasonably predicted.
The Judicial Panel for Multidistrict Litigation has ordered the transfer of
all pending federal cases to the Eastern District Court in Philadelphia for
pretrial purposes. Periodically some of those cases are released for trial.
Pending state court cases have not been directly affected by the transfer.
Settlement class action
A settlement class action which includes essentially all future asbestos-
related personal injury claims against members of the Center for Claims
Resolution (the "Center") referred to below was filed in Philadelphia on January
15, 1993, in Federal District Court for the Eastern District of Pennsylvania.
This is before the same judge handling the cases covered under the Multidistrict
Litigation order referred to above. The settlement class action is designed to
establish a nonlitigation system for the resolution of essentially all future
asbestos-related personal injury claims against the Center members including
this company. Other defendant companies which are not Center members may be able
to join the class action later. The class action proposes a voluntary settlement
that offers a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they are impaired by such exposure.
Claimants must meet certain exposure and medical criteria to receive
compensation which is derived from historical settlement data. Under limited
circumstances and in limited numbers, qualifying claimants may choose to
litigate certain claims in court or through alternative dispute resolution,
rather than accept an offered settlement amount, after their claims are
processed within the system. No punitive damages will be paid under the proposed
settlement. The settlement is designed to minimize transactional costs,
including attorneys' fees, and to relieve the courts of the burden of handling
future asbestos-related personal injury claims. Each member of the Center has an
obligation for its own fixed share in this proposed settlement. The Court has
ruled that claimants who neither filed a lawsuit against the company or other
Center members for asbestos-related personal injury nor filed exclusion request
forms to opt out of the settlement class action by January 24, 1994, are subject
to the terms of the class action. The settlement class action does not include
claims based on nonoccupational exposure or claims for asbestos-related property
damage. Agreed upon annual case flow caps and agreed upon compensation ranges
for each compensable medical category have been established for an initial
period of 10 years. The case flow figures and annual compensation levels are
subject to renegotiation after the initial 10-year period. On August 16, 1994,
the Court tentatively approved the settlement. The settlement will become final
only after appeals have been exhausted; this process could take up to several
years. The Center members also have stated their intention to resolve all of the
pending asbestos-related personal injury claims over a five-year period from the
date the settlement class action was filed. A significant number of these
pending claims have been settled with a number of the plaintiffs' counsel.
The company is seeking agreement from its insurance carriers or a binding
judgment that the settlement class action is covered by existing insurance
coverage; the settlement is contingent upon such an agreement or judgment. With
respect to carriers that do not agree, this matter will be resolved either by
alternative dispute resolution in the case of the insurance carriers which
subscribed to the Wellington Agreement referred to below, or by litigation
against those carriers which did not subscribe to the Wellington Agreement.
A few state judges have been undertaking to consolidate numbers of asbestos-
related personal injury cases for trial. The company generally opposes these
actions as being unfair. The company has commenced trial in Baltimore, Maryland,
in one such consolidation in which common issues involved with an initial 10
plaintiffs will bind the parties in the remainder of the about 170 cases
involved in the consolidation.
Insurance settlements
The pending personal injury lawsuits and claims against the company are being
paid by insurance proceeds under the 1985 Agreement Concerning Asbestos-Related
Claims, the "Wellington Agreement," and by insurance proceeds from other
insurance settlements noted below. A new claims handling organization, known as
the Center for Claims Resolution, was created in October 1988 by Armstrong and
20 other companies to replace the Wellington Asbestos Claims Facility (the
"Facility"), which has since been dissolved. Generally, the dissolution of the
Facility does not essentially affect the company's overall Wellington agreement
- 43 -
insurance settlement. That settlement provided for a final resolution of nearly
all disputes concerning insurance for asbestos-related personal injury claims as
between the company and three of its primary insurers and eight of its excess
insurers. The one primary carrier that did not sign the Wellington Agreement
paid into the Wellington Facility and settled with the company in March 1989
nearly all outstanding issues relating to insurance coverage for asbestos-
related personal injury and property damage claims. In addition, one of the
company's large excess-insurance carriers entered into a settlement agreement in
1986 with the company under which payments for personal injury claims were made
through the Wellington Facility, and this carrier continues to make payments for
such claims through the Center for Claims Resolution. Other excess-insurance
carriers also have entered into settlement agreements with the company which
complement Wellington including a settlement that was recently entered into with
a significant excess carrier. ACandS, Inc., a former subsidiary of the company,
which for certain insurance periods has coverage rights under some company
insurance policies, subscribed to the Wellington Agreement but did not become a
member of the Center for Claims Resolution.
One excess carrier (providing $25 million of insurance coverage) and certain
companies in an excess carrier's block of coverage (involving several million
dollars of coverage) have become insolvent. Certain carriers providing excess
level coverage solely for property damage claims also have become insolvent. The
several million dollars of coverage referred to has been paid by company
reserves. The $25 million insolvency gap has been (or will be) covered by other
available insurance coverage. The company and ACandS, Inc., have negotiated a
settlement agreement which reserves for ACandS, Inc., a certain amount of
insurance from joint policies solely for its use in the payment of costs
associated with the asbestos-related personal injury and property damage claims.
Center for Claims Resolution
The Center for Claims Resolution operates under a concept of allocated shares
of liability payments and defense costs for its members based primarily on
historical experience, and it defends the members' interests and addresses
pending and future claims in a manner consistent with the prompt, fair
resolution of meritorious claims. In late 1991, the Center sharing formula was
revised to provide that members will pay only on claims in which the member is a
named defendant; as to future claims resolved under the settlement class action,
the company has agreed to a percentage of each resolution payment. Although the
Center members and their participating insurers were not obligated beyond one
year, the insurance companies are expected to commit to the continuous operation
of the Center for a seventh year and to the funding of the Center's operating
expenses. With the filing of the settlement class action, the Center will
continue to process pending claims and will handle the program for processing
future asbestos-related personal injury claims if the class action settlement is
approved by the courts. No forecast can be made for future years regarding
either the rate of pending and future claims resolution by the Center or the
rate of utilization of company insurance.
Property damage litigation
The company is also one of many defendants in a total of 51 pending lawsuits
and claims, including class actions, as of December 31, 1994, brought by public
and private entities, including public school districts, public and private
building owners. These lawsuits and claims include allegations of property
damage to buildings caused by asbestos-containing products and generally claim
compensatory and punitive damages and equitable relief, including reimbursement
of expenditures, for removal and replacement of such products. These suits and
claims appear to be aimed at friable (easily crumbled) asbestos-containing
products although allegations in some suits encompass other asbestos-containing
products, including allegations with respect to asbestos-containing resilient
floor tile. The company vigorously denies the validity of the allegations
against it contained in these suits and claims. Increasing defense costs, paid
by the company's insurance carriers either under reservation or settlement
arrangement, will be incurred. These suits and claims are not encompassed within
the Wellington Agreement nor are they being handled by the Center for Claims
Resolution.
Insurance coverage suit
In 1989, Armstrong concluded the trial phase of a lawsuit in California state
court to resolve disputes concerning certain of its insurance carriers'
obligations with respect to personal injury and property damage liability
coverage, including defense costs, for alleged personal injury and property
damage asbestos-related lawsuits and claims. The Court issued final decisions
generally in the company's favor, and the carriers appealed. The California
Court of Appeal has substantially upheld the trial court's final decisions, and
the insurance carriers have petitioned the California Supreme Court to hear the
asbestos-related personal injury and property damage coverage issues. The
California Supreme Court has accepted review pending its review of related
issues in another California case. Since the company's recent settlement with a
significant excess carrier, only one excess carrier providing products coverage
for personal injury claims remains in the personal injury coverage litigation.
Based upon the trial court's favorable final decisions in important phases of
the trial relating to coverage for asbestos-related personal injury and property
damage lawsuits and claims including the favorable decision by the California
Court of Appeal, and a review of the coverage issues by its counsel, the company
believes it has a substantial legal basis for sustaining its right to defense
and indemnification. For the same reasons, the company also believes that it is
probable that claims by the
- 44 -
ARMSTRONG WORLD INDUSTRIES, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
several primary carriers for recoupment of defense expenses in the property
damage litigation, which the carriers also appealed, will ultimately not be
successful.
Nonproducts insurance coverage
Nonproducts insurance coverage is included in the company's primary insurance
policies and certain excess policies for nonproducts claims. Nonproducts claims
include claims that may have arisen out of exposure during installation of
asbestos materials or before control of such material has been relinquished.
Negotiations are currently underway with several of the company's primary
carriers to resolve the nonproducts coverage issues and to establish entitlement
to and the amount of such coverage. The additional coverage potentially
available to pay claims categorized as nonproducts is substantial and, at the
primary level, includes defense costs in addition to limits. The company is
entitled to pursue alternative dispute resolution proceedings against the
primary and certain excess carriers to resolve the nonproducts coverage issues.
Conclusions
The company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
caps to be negotiated after the initial 10-year period for the settlement class
action or the compensation levels to be negotiated for such claims, nor the
scope of its nonproducts coverage ultimately deemed available or the ultimate
conclusion of the California insurance coverage litigation. Subject to the
foregoing and based upon its experience and other factors also referred to
above, the company believes that the estimated $198 million in liability and
defense costs recorded on the 1994 balance sheet will be incurred to resolve an
estimated 73,000 asbestos-related personal injury claims pending against the
company as of December 31, 1994. These claims include claims that were filed for
the period from January 1, 1994, to January 24, 1994, and which previously were
treated as potentially included within the settlement class action, and claims
filed by claimants who have been identified as having filed exclusion request
forms to opt out of the settlement class action. A ruling from the Court
established January 24, 1994, as the date after which any asbestos-related
personal injury claims filed by non-opt-out claimants against the company or
other members of the Center for Claims Resolution are subject to the settlement
class action. In addition to the currently estimated pending claims and any
claims filed by individuals deemed to have opted out of the settlement class
action, any claims otherwise determined not to be subject to the settlement
class action will be resolved outside the settlement class action. The company
does not know how many such claims ultimately may be filed by claimants deemed
to have opted out of the class action or by claimants otherwise determined not
to be subject to the settlement class action.
An insurance asset in the amount of $198 million recorded on the 1994 balance
sheet reflects the company's belief in the availability of insurance in this
amount to cover the liability in like amount referred to above. Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. The company also notes that, based
on maximum mathematical projections covering a 10-year period from 1994 to 2004,
its estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability may
not be covered by the company's ultimately applicable insurance recovery.
However, the company believes that any after-tax impact on the difference
between the aggregate of the estimated liability for pending cases and the
estimated cost for the 10-year maximum mathematical projection, and the probable
insurance recovery, would not be material either to the financial condition of
the company or to its liquidity, although it could be material to earnings if it
is determined in a future period to be appropriate to record a reserve for this
difference. The period in which such a reserve may be recorded and the amount of
any reserve that may be appropriate cannot be determined at this time. Subject
to the uncertainties and limitations referred to above and based upon its
experience and other factors, the company believes it is probable that
substantially all of the expenses and any liability payments associated with the
asbestos-related property damage claims will be paid under an existing interim
agreement, by insurance coverage settlement agreements and through additional
coverage reasonably anticipated from the outcome of the insurance litigation.
Even though uncertainties still remain as to the potential number of
unasserted claims, liability resulting therefrom and the ultimate scope of its
insurance coverage, after consideration of the factors involved, including the
Wellington Agreement, the referenced settlements with other insurance carriers,
the results of the trial phase and the intermediate appellate stage of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the settlement class action, and its experience,
the company believes the asbestos-related lawsuits and claims against the
company would not be material either to the financial condition of the company
or to its liquidity, although as stated above, the net effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in such future period.
_________________________
- 45 -
TINS litigation
In October 1992, the U.S. Court of Appeals for the Third Circuit issued its
decision in a lawsuit brought by The Industry Network System, Inc. (TINS),
and its founder, Elliot Fineman. The plaintiffs alleged that in 1984
Armstrong had engaged in antitrust and tort law violations and breach of
contract which damaged TINS' ability to do business. The Court of Appeals
sustained the U.S. District Court's decision that the April 1991 jury verdict
against Armstrong in the amount of $224 million including $200 million in
punitive damages should be vacated, and that there should be a new trial on
all claims remaining after the appeal. The Court of Appeals sustained the
District Court ruling that the jury's verdict had reflected prejudice and
passion due to the improper conduct of plaintiffs' counsel and was clearly
contrary to the weight of the evidence. The Court of Appeals affirmed or did
not disturb the trial court's order dismissing all of TINS' claims under
Section 2 of the Sherman Act for alleged conspiracy, monopolization and
attempt to monopolize and dismissing all of Mr. Fineman's personal claims.
These claims were not the subject of a new trial. However, the Court of
Appeals reversed the trial court's directed verdict for Armstrong on TINS'
claim under Section 1 of the Sherman Act, reversed the summary judgment in
Armstrong's favor on TINS' claim for breach of contract based on a 1984
settlement agreement, and reversed the judgment n.o.v. for Armstrong on TINS'
tortious interference and related punitive damage claims. These claims were
the subject of a new trial.
A second trial of the TINS' litigation began on April 26, 1994, in the
Newark, New Jersey, District Court. TINS asked for damages in a range of $17 to
$56 million. A jury found that Armstrong had breached its contract with TINS and
had interfered with TINS' contractual business relationship with an Armstrong
wholesaler but that Armstrong's conduct did not damage TINS and awarded no
compensatory or nominal money damages. Following oral argument on November 14,
1994, TINS' motion for a partial or complete new trial was denied by the
District Court. On December 22, 1994, TINS filed a Notice in the U.S. Court of
Appeals for the Third Circuit of its intent to appeal the District Court's
refusal to grant a new trial.
_________________________
Environmental remediation
Thomasville Furniture Industries, Inc. and seven other parties have been
identified by the U.S. Environmental Protection Agency ("USEPA") as Potentially
Responsible Parties ("PRPs") to fund the cost of remediating environmental
conditions at the Buckingham County (Virginia) Landfill, a former waste disposal
site which has been listed as a federal Superfund site. After review of
investigative studies to determine the nature and extent of contamination and
identify various remediation alternatives, USEPA issued its Proposed Remedial
Action Plan in May 1993 proposing a $21 million cleanup cost. In November 1993,
USEPA issued a revised plan which recommended a reduced $3.5 million
alternative, subject to additional costs depending on test results. In September
1994, USEPA issued a Record of Decision in the matter providing two alternative
remedies for the site. Both options provide for limited capping and long-term
groundwater monitoring, as well as limited source control and groundwater
treatment in the event monitoring demonstrates contaminant migration. The PRPs'
consultants current estimate for the cost of required remediation at the site is
approximately $2.2 million, subject to additional costs depending on long-term
monitoring results. The USEPA's current estimate, however, is $4.34 million.
Discussions with USEPA are continuing regarding finalization of the appropriate
remedial plan.
Spent finishing materials from Thomasville's Virginia furniture plants at
Appomattox and Brookneal allegedly comprise a significant portion of the waste
presently believed to have been taken to the site by a now defunct disposal firm
in the late 1970s. Accordingly, Thomasville could be called upon to fund a
significant portion of the eventual remedial costs. Because neither a final
remedial design nor an appropriate cost allocation among the PRPs has been
completed, the total cost to Thomasville cannot be determined at this time.
- 46 -
Independent auditors' report
The Board of Directors and Shareholders,
Armstrong World Industries, Inc.:
We have audited the consolidated financial statements of Armstrong World
Industries, Inc. and its subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the related supplementary information on depreciation rates and
schedule listed in the accompanying index. These consolidated financial
statements and supplementary information and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and supplementary information and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Armstrong
World Industries, Inc., and subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion the related supplementary
information and schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects, the
information set forth therein.
As discussed under litigation in the Financial Review section, the company is
involved in antitrust litigation, the outcome of which cannot presently be
determined. Accordingly, no provision for any liability that may result has been
made in the accompanying consolidated financial statements. Also, as discussed
in the Financial Review section, effective January 1, 1992, the company changed
its methods of accounting to adopt the provisions of the Statement of Financial
Accounting Standards (SFAS) 109, "Accounting for Income Taxes", SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS
112, "Employers' Accounting for Postemployment Benefits".
Philadelphia, Pa. KPMG PEAT MARWICK LLP
February 20, 1995
- 47 -
Total
Quarterly financial information (millions except for per-share data) First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $642.7 $689.3 $715.3 $705.4 $2,752.7
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit* 192.4 220.6 231.9 203.1 848.0
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings 48.0 53.3 61.6 47.5 210.4
- ------------------------------------------------------------------------------------------------------------------------------
Per share of common stock:**
- ------------------------------------------------------------------------------------------------------------------------------
Primary 1.17 1.31 1.54 1.17 5.22
- ------------------------------------------------------------------------------------------------------------------------------
Fully diluted 1.06 1.18 1.37 1.04 4.64
- ------------------------------------------------------------------------------------------------------------------------------
Dividends per share of common stock .30 .32 .32 .32 1.26
- ------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--low 49 3/8 43 3/8 43 36 36
- ------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--high 57 1/2 57 1/4 53 7/8 46 5/8 57 1/2
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $611.9 $629.0 $660.1 $624.4 $2,525.4
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit* 154.9 179.6 193.7 178.0 706.2
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings(loss) 11.3 31.9 42.3 (22.0) 63.5
- ------------------------------------------------------------------------------------------------------------------------------
Per share of common stock:**
- ------------------------------------------------------------------------------------------------------------------------------
Primary .21 .76 1.04 (.68) 1.32
- ------------------------------------------------------------------------------------------------------------------------------
Fully diluted .21 .68 .93 (.68) 1.26
- ------------------------------------------------------------------------------------------------------------------------------
Dividends per share of common stock .30 .30 .30 .30 1.20
- ------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--low 28 7/8 29 3/8 30 1/4 40 1/4 28 7/8
- ------------------------------------------------------------------------------------------------------------------------------
Price range of common stock--high 33 1/8 34 3/4 42 1/2 55 1/4 55 1/4
- ------------------------------------------------------------------------------------------------------------------------------
*Gross profit has been restated to reflect certain reclassification of expenses
for years 1994 and 1993.
**The sum of the quarterly earnings (loss) per-share data does not always equal
the total year amounts due to changes in the average shares outstanding and, for
fully diluted data, the exclusion of the antidilutive effect in certain
quarters.
Fourth quarter 1994 compared with fourth quarter 1993
Forth-quarter sales of $705.4 million, a record for any fourth quarter,
increased 13% from the $624.4 million recorded last year on the strength of the
resilient flooring, building products and furniture businesses. Sales within
North America increased by nearly 12%. The European area recorded a sales
increase of nearly 19%--about one-half was due to the translation of foreign
currencies to a weaker U.S. dollar--reflecting a rebound in sales for this area.
Net earnings were $47.5 million, or $1.17 per share on a primary basis and
$1.04 on a fully diluted basis, compared with a net loss of $22.0 million in the
fourth quarter of 1993 when Armstrong incurred significant restructuring charges
totaling $60.0 million. The fourth-quarter 1993 loss per share was 68 cents on
both a primary and fully diluted basis.
The higher earnings level was driven by increased sales volume, some higher
sales prices, improved productivity and a lower effective tax rate. Cost of
goods sold, when expressed as a percent of sales, was reduced to 71.2% from the
71.5% of 1993's fourth quarter. Earnings were negatively affected by higher raw
material costs, primarily in the resilient flooring business, higher than usual
equipment obsolescence in the industry products segment and higher expense
related to a special incentive award to motivate superior financial performance.
The 1994 effective tax rate was 26.6% compared with a tax benefit of 39.9%
last year. The lower current quarter tax rate was primarily because of tax
benefits related to foreign and state income tax expense that was reduced as a
result of realization of previously unrecognized deferred tax assets and lower
withholding taxes on foreign dividends. Last year's fourth quarter included
recovery of deferred taxes resulting from some reduced foreign statutory tax
rates and tax benefits from most of the restructuring charges.
All four of Armstrong's industry segments recorded higher sales compared with
year-ago levels; operating income was higher in all segments except industry
products. Operating income in the floor coverings segment was $44.5 million
compared with $8.6 million last year that included restructuring charges of
$27.7 million. In the resilient flooring portion of this segment, operating
income was higher primarily because of increased sales levels offset in part by
the effects of higher raw material costs. The ceramic tile portion recorded a
significant turnaround with an operating income versus an operating loss last
year. This swing in profitability resulted primarily from the restructuring
actions taken to reduce manufacturing costs and some higher sales
volume. Worldwide building products had higher sales levels in all areas. The
operating income of $16.9 million, compared with a 1993 fourth-quarter loss of
$5.2 million that included a $13.7 million restructuring charge, was aided by
higher sales and benefited from the impact of the two previous years'
restructuring programs that significantly lowered manufacturing costs.
Furniture continued its strong sales growth driving operating income to $13.5
million compared with $8.9 million in the same period of 1993. The Thomasville
wood division provided the strongest sales and income growth for this segment.
Industry products' sales improved with the recovery in the European markets.
Operating income of $8.3 million compared with an operating loss of $3.4 million
for the similar period in 1993 that included a $12.9 million restructuring
charge. The current quarter results were impacted by a higher than usual
equipment obsolescence of $3.7 million in the insulation products and gasket
businesses.
- 48 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
Directors of the Registrant
- ----------------------------
The information appearing in the tabulation in the section captioned "Election
of Directors" on pages 1-5 of the Company's 1995 Proxy Statement is incorporated
by reference herein.
Executive Officers of the Registrant
- -------------------------------------
George A. Lorch* -- Age 53; Chairman of the Board since April 25, 1994; and
President (Chief Executive Officer) since September 7, 1993; Executive Vice
President 1988-1993.
E. Allen Deaver* -- Age 59; Executive Vice President since March 1, 1988.
Henry A. Bradshaw -- Age 59; President, Worldwide Building Products Operations
since November 22, 1994; Group Vice President, Worldwide Building Products
Operations, 1993-1994; Group Vice President, Building Products Operations, 1990-
1993.
Dennis M. Draeger -- Age 54; President, Worldwide Floor Products Operations
since November 22, 1994; Group Vice President, Worldwide Floor Products
Operations 1993-1994; Group Vice President, Floor Products Operations 1988-1993.
Stephen E. Stockwell -- Age 49; President, Corporate Retail Accounts Division
since November 22, 1994; Vice President, Corporate Retail Accounts July 1, 1994,
through November 22, 1994; General Manager, Residential Sales, Floor Division
January 26, 1994 through July 1, 1994; Field Sales Manager, Floor Division,
1988-1994.
Robert J. Shannon, Jr. -- Age 46; President, American Olean Tile Company, Inc.
since March 1, 1992; and the following positions with Armstrong World
Industries, Inc.: General Manager, Worldwide Gasket Products, International and
Industry Product Operations, 1991-1992; Manager, Fiber Products, Industry
Products Division, 1989-1991.
Frederick B. Starr -- Age 62; President, Thomasville Furniture Industries, Inc.
since 1982.
Larry A. Pulkrabek -- Age 55; Senior Vice President, Secretary and General
Counsel since February 1, 1990.
William J. Wimer -- Age 60; Senior Vice President, Finance since January 25,
1993; Senior Vice President, Finance, and Treasurer, 1990-1993.
David J. Feight -- Age 52; Vice President and Director of Business Development
since May 1, 1994; Team Leader PATH process 1993-1994; General Manager Sales and
Marketing, Building Products Operations 1988-1993.
- 49 -
Stephen C. Hendrix -- Age 54; Treasurer since January 25, 1993; and the
following positions with SmithKline Beecham Corporation (Pharmaceuticals,
Consumer Products): Vice President and Treasurer, 1989-1991.
Bruce A. Leech, Jr. -- Age 52; Controller since February 1, 1990.
All information presented above is current as of March 1, 1995. The term of
office for each Executive Officer in his present capacity is one year, and each
such Executive Officer will serve until reelected or until a successor is
elected at the annual meeting of directors which follows the annual
shareholders' meeting. Each Executive Officer has been employed by the Company
in excess of five continuous years with the exception of Mr. Hendrix. Members
of the Executive Committee of the Board of Directors as of March 1, 1995, are
designated by an asterisk(*) following each of their names. The Executive
Committee consists of those Executive Officers who serve as Directors.
Item 11. Executive Compensation
- ---------------------------------
The information appearing in the sections captioned "Compensation Committee
Interlocks and Insider Participation," "Executive Officers' Compensation,"
(other than the information contained under the subcaption "Performance Graph")
and "Retirement Income Plan Benefits," on pages 11-16 of the Company's 1995
Proxy Statement is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The information appearing in the sections captioned "Stock Ownership of Certain
Beneficial Owners" on page 17 and "Directors' and Executive Officers' Security
Ownership" on page 6 of the Company's 1995 Proxy Statement is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
Not applicable.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
The financial statements and schedule filed as a part of this Annual Report on
Form 10-K are listed in the "Index to Financial Statements and Schedules" on
page 31.
- 50 -
a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
- --------
No. 3(a) Copy of registrant's By-laws, as amended effective
February 27, 1995.
No. 3(b) Copy of registrant's restated Articles of Incorporation, as
amended.
No. 4(a) Copy of registrant's Rights Agreement dated as of March 21,
1986, between the registrant and Morgan Guaranty Trust
Company of New York, as Rights Agent, (as to which First
Chicago Trust Company of New York has succeeded as Rights
Agent,) relating to the registrant's Preferred Stock
Purchase Rights.
No. 4(b) Registrant's Employee Stock Ownership Plan ("Share In
Success Plan") as amended, is incorporated by reference
herein from the registrant's 1992 Annual Report on Form 10-K
wherein it appears as Exhibit 4(b).
No. 4(c) Indenture, dated as of March 15, 1988, between the
registrant and Morgan Guaranty Trust Company of New York, as
Trustee, as to which The First National Bank of Chicago is
successor trustee, is incorporated herein by reference from
the registrant's Form 8-K dated February 1, 1991, wherein it
appeared as Exhibit 4.1.
No. 4(d) Copy of registrant's Supplemental Indenture dated as of
October 19, 1990, between the registrant and The First
National Bank of Chicago, as Trustee.
No. 10(i)(a) Agreement Concerning Asbestos-Related Claims dated June 19,
1985, (the "Wellington Agreement") among the registrant and
other companies is incorporated by reference herein from the
registrant's 1993 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution
dated September 23, 1988, among the registrant and other
companies as amended, is incorporated herein by reference
from the registrant's 1992 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(b).
No. 10(i)(c) Copy of Credit Agreement between the registrant, certain
banks listed therein, and Morgan Guaranty Trust Company of
New York, as Agent, dated as of February 7, 1995, providing
for a $200,000,000 credit facility.
No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees,
as amended, is incorporated by reference herein from the
Company's 1991 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(a). *
No. 10(iii)(b) Copy of registrant's Deferred Compensation Plan for
Nonemployee Directors, as amended. *
- 51 -
No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended,
is incorporated by reference herein from the registrant's
1992 Annual Report on Form 10-K wherein it appears as
Exhibit 10(iii)(d). *
No. 10(iii)(d) Copy of registrant's Management Achievement Plan for Key
Executives, as amended. *
No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known
as the Excess Benefit Plan), as amended, is incorporated by
reference herein from the registrant's 1992 Annual Report on
Form 10-K wherein it appears as Exhibit 10(iii)(f). *
No. 10(iii)(f) Copy of Armstrong Deferred Compensation Plan, as amended. *
No. 10(iii)(g) Copy of registrant's Employment Protection Plan for
Salaried Employees of Armstrong World Industries, Inc.,
as amended. *
No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors
is incorporated by reference herein from the registrant's
1995 Proxy Statement wherein it appeared as Exhibit A.
No. 10(iii)(i) Copy of registrant's Severance Pay Plan for Salaried
Employees. *
No. 10(iii)(j) Thomasville Value Plan of Thomasville Furniture Industries,
Inc. *
No. 10(iii)(k) Thomasville Achievement Plan of Thomasville Furniture
Industries, Inc. *
No. 10(iii)(l) Copy of American Olean Turnaround Plan of American Olean
Tile Company, Inc. *
No. 10(iii)(m) Registrant's 1993 Long-Term Stock Incentive Plan is
incorporated by reference herein from the registrant's 1993
Proxy Statement wherein it appeared as Exhibit A. *
No. 11 A statement regarding computation of per share earnings on
both primary and fully diluted bases is set forth in the
Financial Statement Schedules on pages 56 and 57 of this
Annual Report on Form 10-K.
No. 22 List of the registrant's domestic and foreign subsidiaries.
No. 24 Consent of Independent Auditors.
No. 25 Powers of Attorney and authorizing resolutions.
No. 27 Financial Data Statement
No. 28(ii)(a) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994, for the Retirement Savings Plan For
Salaried Employees of Armstrong World Industries, Inc. is
herewith filed with the Commission.
No. 28(ii)(b) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994, for the Retirement Savings Plan For
Hourly-Paid Employees of Armstrong World
* Compensatory Plan.
- 52 -
Industries, Inc. is herewith filed with the Commission.
No. 28(ii)(c) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994, for the Retirement Savings Plan For
Hourly-Paid Employees of Thomasville Furniture, Inc. is
herewith filed with the Commission.
No. 28(ii)(d) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994, for the Armstrong World Industries, Inc.
Employee Stock Ownership Plan ("Share In Success Plan") is
herewith filed with the Commission.
No. 28(ii)(e) Copy of Annual Report on American Olean Tile Company, Inc.
Savings Plan for Production & Maintenance Employees for the
fiscal year ended September 30, 1994, is herewith filed with
the Commission.
No. 28(ii)(f) Copy of Annual Report on American Olean Tile Company, Inc.
Savings Plan for Salaried Employees for the fiscal year
ended September 30, 1994, is herewith filed with the
Commission.
- 53 -
b. During the last quarter of 1994, no reports on Form 8-K were filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Registrant)
By /s/ George A. Lorch
-----------------------------
Chairman
Date March 27, 1995
---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant:
George A. Lorch Chairman and President (Principal Executive
Officer)
William J. Wimer Senior Vice President, Finance
(Principal Financial Officer)
Bruce A. Leech, Jr. Controller
(Principal Accounting Officer)
Van C. Campbell Director
E. Allen Deaver Director
Ursula F. Fairbairn Director By /s/George A. Lorch
Michael C. Jensen Director ----------------------
James E. Marley Director (George A. Lorch as
Robert F. Patton Director attorney-in-fact and
J. Phillip Samper Director on his own behalf)
Jerre L. Stead Director
As of March 27, 1995
- 54 -
ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedules
The following consolidated financial statements and Financial Review are filed
as part of this Annual Report on Form 10-K:
Consolidated Balance Sheet as of December 31, 1994 and 1993
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1993, and 1992
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993, and 1992
The following additional financial data should be read in conjunction with the
financial statements. Schedules not included with this additional data have
been omitted because they are not applicable or the required information is
presented in the financial statements or the financial review.
Additional Financial Data Page No.
------------------------- --------
Supplementary information to financial
review
Computation for Primary Earnings 56
per Share
Computation for Fully Diluted 57
Earnings per Share
Depreciation Rates 58
Schedule II - Valuation and Qualifying Reserves 59
- 55 -
Computation for Primary Earnings Per Share
for Years ended December 31
(Amounts in millions except for per-share data)
1994 1993 1992
---- ---- ----
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock options 37.6 37.7 37.2
==== ==== ====
Earnings (Loss) Per Share Before Cumulative
- -------------------------------------------
Effect of Accounting Changes
----------------------------
Earnings (loss) before cumulative effect of
accounting changes $210.4 $63.5 $ (59.9)
Less:
Dividend requirement on Series A convertible
preferred stock 19.0 19.2 19.3
Plus:
Tax benefit on dividends paid on unallocated
preferred shares 4.9 5.3 5.5
------ ----- -------
Earnings (loss) before cumulative effect of
accounting changes applicable to common stock $196.3 $49.6 $ (73.7)
Earnings (loss) before cumulative effect of
accounting changes per share of common stock $ 5.22 $1.32 $ (1.98)
====== ===== =======
Net Earnings (Loss) Per Share
- -----------------------------
Net earnings (loss) $210.4 $63.5 $(227.7)
Less:
Dividend requirement on Series A convertible
preferred stock 19.0 19.2 19.3
Plus:
Tax benefit on dividends paid on unallocated
preferred shares 4.9 5.3 5.5
------ ----- -------
Net earnings (loss) applicable to common stock $196.3 $49.6 $(241.5)
Net earnings (loss) per share of common stock $ 5.22 $1.32 $ (6.49)
====== ===== =======
- 56 -
Computation for Fully Diluted Earnings Per Share
for Years ended December 31
(Amounts in millions except for per-share data)
1994 1993 1992(a)
---- ---- ----
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock options 37.6 37.7 37.2
Average number of common shares issuable under
the Employee Stock Ownership Plan 5.8 5.6 5.9
---- ---- ----
Average number of common and common equivalent
shares outstanding 43.4 43.3 43.1
==== ==== ====
Pro Forma Adjustment to Earnings (Loss) Before
- ----------------------------------------------
Cumulative Effect of Accounting Changes
---------------------------------------
Earnings (loss) before cumulative effect of
accounting changes as reported $210.4 $63.5 $ (59.9)
Less:
Increased contribution to the Employee Stock
Ownership Plan assuming conversion of
preferred shares to common 7.9 8.2 8.3
Net reduction in tax benefits assuming
conversion of the Employee Stock Ownership
Plan preferred shares to common 1.1 0.9 0.7
------ ----- -------
Pro forma earnings (loss) before cumulative
effect of accounting changes $201.4 $54.4 $ (68.9)
Fully diluted earnings (loss) per share
before cumulative effect of accounting changes $ 4.64 $1.26 $ (1.98)
====== ===== =======
Pro Forma Adjustment to Net Earnings (Loss)
- -------------------------------------------
Net earnings (loss) as reported $210.4 $63.5 $(227.7)
Less:
Increased contribution to the Employee Stock
Ownership Plan assuming conversion of
preferred shares to common 7.9 8.2 8.3
Net reduction in tax benefits assuming conversion
of the Employee Stock Ownership Plan
preferred shares to common 1.1 0.9 0.7
------ ----- -------
Pro forma net earnings (loss) $201.4 $54.4 $(236.7)
Fully diluted net earnings (loss) per share $ 4.64 $1.26 $ (6.49)
====== ===== =======
(a) Fully diluted earnings per share for the year 1992 were antidilutive.
- 57 -
DEPRECIATION RATES
For Years Ended December 31
The approximate average effective rates of depreciation are as follows:
1994 1993 1992
---- ---- ----
% % %
Domestic companies:
Buildings 3.2 3.2 3.2
Machinery and Equipment 6.6 6.8 6.8
Foreign companies:
Buildings 3.3 3.2 3.0
Machinery and Equipment 9.5 8.0 8.2
- 58 -
SCHEDULE II
-----------
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------
For Years Ended December 31
---------------------------
(amounts in millions)
Provision for Losses 1994 1993 1992
- -------------------- ---- ---- ----
Balance at Beginning of Year $19.4 $15.3 $13.3
Additions Charged to Earnings $ 9.1 $12.7 $ 9.4
Deductions (a) $ 8.5 $ 8.6 $ 7.4
Balance at End of Year $20.0 $19.4 $15.3
- ---------------------------------------------------------
Provision for Discounts
- -----------------------
Balance at Beginning of Year $18.1 $16.9 $16.8
Additions Charged to Earnings $84.6 $71.3 $74.1
Deductions (a) $80.4 $70.1 $74.0
Balance at End of Year $22.3 $18.1 $16.9
- ---------------------------------------------------------
Provision for Discounts and Losses
- ----------------------------------
Balance at Beginning of Year $37.5 $32.2 $30.1
Additions Charged to Earnings $93.7 $84.0 $83.5
Deductions (a) $88.9 $78.7 $81.4
Balance at End of Year $42.3 $37.5 $32.2
(a) includes discounts granted and uncollectible receivables, less recoveries
and valuation reserves related to discontinued businesses that have been
classified as other assets
- 59 -
EXHIBIT INDEX
Exhibits
- --------
No. 3(a) Copy of registrant's By-laws, as amended, effective
February 27, 1995.
No. 3(b) Copy of registrant's restated Articles of Incorporation, as
amended.
No. 4(a) Copy of registrant's Rights Agreement dated as of March 21,
1986, between the registrant and Morgan Guaranty Trust
Company of New York, as Rights Agent, (as to which First
Chicago Trust Company of New York has succeeded as Rights
Agent,) relating to the registrant's Preferred Stock
Purchase Rights.
No. 4(b) Registrant's Employee Stock Ownership Plan ("Share In
Success Plan") as amended is incorporated by reference
herein from the registrant's 1992 Annual Report on Form 10-K
wherein it appears as Exhibit 4(b).
No. 4(c) Indenture, dated as of March 15, 1988, between the
registrant and Morgan Guaranty Trust Company of New York, as
Trustee, as to which The First National Bank of Chicago is
successor trustee, is incorporated herein by reference from
the registrant's Form 8-K dated February 1, 1991, wherein it
appeared as Exhibit 4.1.
No. 4(d) Copy of registrant's Supplemental Indenture dated as of
October 19, 1990, between the registrant and The First
National Bank of Chicago, as Trustee.
No. 10(i)(a) Agreement Concerning Asbestos-Related Claims dated June 19,
1985, (the "Wellington Agreement") among the registrant and
other companies is incorporated by reference herein from the
registrant's 1993 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution
dated September 23, 1988, among the registrant and other
companies as amended is incorporated herein by reference
from the registrant's 1992 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(b).
No. 10(i)(c) Copy of Credit Agreement between the registrant, certain
banks listed therein, and Morgan Guaranty Trust Company of
New York, as Agent, dated as of February 7, 1995, providing
for a $200,000,000 credit facility.
No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees,
as amended, is incorporated by reference herein from the
Company's 1991 Annual Report on Form 10-K wherein it
appeared as Exhibit 10 (iii)(a). *
No. 10(iii)(b) Copy of registrant's Deferred Compensation Plan for
Nonemployee Directors, as amended. *
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No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended
is incorporated by reference herein from the registrant's
1992 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(d). *
No. 10(iii)(d) Copy of registrant's Management Achievement Plan for Key
Executives, as amended. *
No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known
as the Excess Benefit Plan), as amended, is incorporated by
reference herein from the registrant's 1992 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(f). *
No. 10(iii)(f) Copy of Armstrong Deferred Compensation Plan, as amended. *
No. 10(iii)(g) Copy of registrant's Employment Protection Plan for
Salaried Employees of Armstrong World Industries, Inc.,
as amended. *
No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors
is incorporated by reference herein from the registrant's
1995 Proxy Statement wherein it appeared as Exhibit A. *
No. 10(iii)(i) Copy of registrant's Severance Pay Plan for Salaried
Employees. *
No. 10(iii)(j) Thomasville Value Plan of Thomasville Furniture Industries,
Inc. *
No. 10(iii)(k) Thomasville Achievement Plan of Thomasville Furniture
Industries, Inc. *
No. 10(iii)(l) Copy of American Olean Turnaround Plan of American Olean
Tile Company, Inc. *
No. 10(iii)(m) Registrant's 1993 Long-Term Stock Incentive Plan is
incorporated by reference herein from the registrant's 1993
Proxy Statement wherein it appears as Exhibit A. *
No. 11 A statement regarding computation of per share earnings on
both primary and fully diluted bases is set forth in the
Financial Statement Schedules on pages 56 and 57 of this
Annual Report on Form 10-K.
No. 22 List of the registrant's domestic and foreign subsidiaries.
No. 24 Consent of Independent Auditors.
No. 25 Powers of Attorney and authorizing resolutions.
No. 27 Financial Data Schedule
No. 28(ii)(a) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994 for the Retirement Savings Plan For
Salaried Employees of Armstrong World Industries, Inc. is
herewith filed with the Commission.
* Compensatory Plan
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No. 28(ii)(b) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994 for the Retirement Savings Plan For
Hourly-Paid Employees of Armstrong World Industries, Inc. is
herewith filed with the Commission.
No. 28(ii)(c) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994 for the Retirement Savings Plan For
Hourly-Paid Employees of Thomasville Furniture, Inc. is
herewith filed with the Commission.
No. 28(ii)(d) Copy of Annual Report on Form 11-K for the fiscal year ended
September 30, 1994 for the Armstrong World Industries, Inc.
Employee Stock Ownership Plan ("Share In Success Plan") is
herewith filed with the Commission.
No. 28(ii)(e) Copy of Annual Report on American Olean Tile Company, Inc.
Savings Plan for Production & Maintenance Employees for the
fiscal year ended September 30, 1994, is herewith filed with
the Commission.
No. 28(ii)(f) Copy of Annual Report on American Olean Tile Company, Inc.
Savings Plan for Salaried Employees for the fiscal year
ended September 30, 1994, is herewith filed with the
Commission.
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