FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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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 _______________________
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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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of registrant's common stock outstanding as of
July 31, 1995 - 37,156,689
Part I - Financial Information
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Item 1. Financial Statements
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Operating results for the second quarter and first six months of 1995, compared
with the corresponding periods of 1994 included in this report, are unaudited.
In the opinion of the Company, all adjustments of a normal recurring nature have
been included to provide a fair statement of the results for the reporting
periods presented. Three and six months' results are not necessarily indicative
of annual earnings.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Operations
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(amounts in millions except for per-share data)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
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1995 1994(a) 1995 1994(a)
---- ---- ---- -----
NET SALES $731.4 $689.3 $1,431.0 $1,332.0
Cost of goods sold 510.3 468.7 996.9 919.0
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Gross profit 221.1 220.6 434.1 413.0
Selling, general & administrative
expenses 132.0 131.0 267.6 250.3
Restructuring charges -- -- 15.6 --
------ ------ -------- --------
Operating income 89.1 89.6 150.9 162.7
Interest expense 8.9 8.0 16.9 15.5
Other expense (income), net .8 (.1) 1.1 (.1)
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Earnings before income taxes(b) 79.4 81.7 132.9 147.3
Income taxes 26.7 28.4 45.8 46.0
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NET EARNINGS (c)(d) $ 52.7 $ 53.3 $ 87.1 $ 101.3
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Net earnings per share of common
stock:(e)
Primary $ 1.31 $ 1.31 $ 2.13 $ 2.49
Fully Diluted $ 1.18 $ 1.18 $ 1.93 $ 2.23
Dividends paid per common share $ .36 $ .32 $ .68 $ .62
Average number of common shares
and common equivalent shares
outstanding:
Primary 37.6 37.9 37.6 37.8
Fully Diluted 43.0 43.4 43.0 43.3
See page 3 for explanation of (a), (b), (c), (d) and (e). Also see accompanying
footnotes to the financial statements beginning on page 8.
2
(a) 1994 has been reformatted and certain expenses have been reclassified to
conform with data published in the 1994 Armstrong annual report.
(b) Depreciation and amortization charged against earnings before income taxes
amounted to $33.6 million and $66.4 million in the three months and six months
ended June 30, 1995, respectively, and $32.7 million and $63.5 million in the
three months and six months ended June 30, 1994.
(c) Net earnings for the six months ended June 30, 1995, include $10.1 million
of restructuring charges resulting from plans to close a plant in Braintree,
Massachusetts.
(d) Net earnings for the six months ended June 30, 1994, include $9.1 million of
gains resulting from the resolution of tax audits and sale of the company's
majority interest in Bega/US, Inc.
(e) Primary earnings per share for "net earnings" are determined by dividing the
earnings, after deducting preferred dividends (net of tax benefit on unallocated
shares), by the average number of common shares outstanding and shares issuable
under stock options, if dilutive. Fully diluted earnings per share include the
shares of common stock outstanding, as calculated above, and the adjustments to
common shares and earnings required to portray the convertible preferred shares
on an "if converted" basis unless the effect is antidilutive.
3
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
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(amounts in millions)
Unaudited
Assets June 30, 1995 December 31, 1994
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Current assets:
Cash and cash equivalents $ 16.9 $ 12.0
Accounts receivable less allowance 356.5 320.0
Inventories:
Finished goods $ 217.5 $ 179.1
Work in process 39.5 35.5
Raw materials and supplies 80.4 78.9
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Total inventories 337.4 293.5
Income tax benefits 53.4 35.9
Other current assets 28.7 29.6
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Total current assets 792.9 691.0
Property, plant, and equipment 2,278.0 2,168.7
Less accumulated depreciation
and amortization 1,170.6 1,098.8
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Net property, plant, and equipment 1,107.4 1,069.9
Insurance for asbestos-related
liabilities(a) 172.0 198.0
Other noncurrent assets 293.6 273.6
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Total assets $2,365.9 $2,232.5
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Liabilities and Shareholders' Equity
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Current liabilities:
Short-term debt $ 117.5 $ 17.9
Current installments of long-term debt 59.2 19.5
Accounts payable and accrued expenses 319.9 327.4
Income taxes 28.6 22.5
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Total current liabilities 525.2 387.3
Long-term debt 197.3 237.2
ESOP loan guarantee 240.4 245.5
Postretirement and postemployment benefits 272.9 270.4
Asbestos-related liabilities (a) 172.0 198.0
Other long-term liabilities 129.9 118.3
Deferred income taxes 32.3 32.1
Minority interest in subsidiaries 10.0 8.6
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Total noncurrent liabilities 1,054.8 1,110.1
Shareholders' equity:
Convertible preferred stock at
redemption value $ 260.3 $ 261.6
Common stock 51.9 51.9
Capital in excess of par value 43.2 39.3
Reduction for ESOP loan guarantee (229.2) (233.9)
Retained earnings 1,131.4 1,076.8
Foreign currency translation (b) 13.6 8.3
Treasury stock (485.3) (468.9)
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Total shareholders' equity 785.9 735.1
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Total liabilities and shareholders'
equity $2,365.9 $2,232.5
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See page 5 for explanation of references (a) and (b).
Also see accompanying footnotes to the financial statements beginning on
page 8.
4
(a) The asbestos-related liability in the amount of $172.0 million represents
the estimated liability and defense cost to resolve approximately 65,000
personal injury claims pending against the Company as of the end of the second
quarter 1995. The insurance asset in the amount of $172.0 million reflects the
Company's belief in the availability of insurance in an amount covering the
liability. See footnote No. 2 beginning on page 8 for additional details.
(b) Foreign currency translation, reported as a separate component of
shareholders' equity, is detailed as follows:
1995
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(millions)
Beginning balance December 31, 1994 $ 8.3
Six months' translation adjustments and
hedging of foreign investments 5.6
Allocated income taxes (.3)
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Ending balance June 30, 1995 $13.6
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5
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
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(amounts in millions)
Unaudited
Six Months Ended
June 30
1995 1994
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Cash flows from operating activities:
Net earnings $ 87.1 $101.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 66.4 63.5
Deferred income taxes 1.1 4.8
Loss from restructuring activities 15.6 --
Restructuring payments (6.3) (12.2)
Changes in operating assets and liabilities net of
effect of restructuring and acquisitions:
(Increase) in receivables (31.7) (59.3)
(Increase) in inventories (38.9) (7.0)
(Increase)decrease in other current assets (19.0) 14.7
(Increase) in other noncurrent assets (22.0) (37.3)
Increase (decrease) in accounts payable,
accrued expenses, income taxes payable (8.0) 20.2
Increase in other long-term liabilities 7.4 24.1
Other, net (9.1) (6.6)
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Net cash provided by operating activities 42.6 106.2
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Cash flows from investing activities:
Purchases of property, plant, and equipment (75.4) (60.5)
Proceeds from sale of land and facilities .7 10.1
Acquisitions (14.0) --
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Net cash used for investing activities (88.7) (50.4)
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Cash flows from financing activities:
Increase (decrease) in short-term debt 97.6 (16.6)
Issuance of long-term debt -- .6
Reduction of long-term debt (.2) (5.2)
Cash dividends paid (34.8) (32.7)
Purchase of common stock for the treasury (16.0) --
Proceeds from exercised stock options 5.9 7.3
Other, net (2.6) (2.6)
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Net cash (used for) provided by financing activities 49.9 (49.2)
Effect of exchange rate changes on cash and cash
equivalents 1.1 .5
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Net increase in cash and cash equivalents $ 4.9 $ 7.1
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Cash and cash equivalents at beginning of period
$ 12.0 $ 9.1
Cash and cash equivalents at end of period ====== ======
$ 16.9 $ 16.2
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Supplemental Cash Flow Information:
Interest paid $ 7.9 $ 14.6
Income taxes paid $ 17.6 $ 25.1
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See accompanying footnotes to the financial statements beginning on page 8.
6
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
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(amounts in millions)
Unaudited
Three Months Six Months
Ended June 30 Ended June 30
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1995 1994(a) 1995 1994(a)
---- ------- ---- -------
Net trade sales:
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Floor coverings $338.6 $338.3 $ 636.8 $ 625.7
Building products 169.6 154.2 340.7 305.7
Furniture 134.4 123.5 275.3 252.2
Industry products 88.8 73.3 178.2 148.4
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Total net sales $731.4 $689.3 $1,431.0 $1,332.0
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Operating income:
----------------
Floor coverings $ 49.1 $ 61.0 $ 83.6 $ 95.2
Building products(b) 25.3 21.5 51.4 45.6
Furniture 8.1 7.7 20.3 16.9
Industry products(c) 9.8 8.6 8.1 20.2
Unallocated corporate
expense (3.2) (9.2) (12.5) (15.2)
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Total operating income $ 89.1 $ 89.6 $ 150.9 $ 162.7
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(a) Certain 1994 expenses, principally employee benefit costs, that were
previously unallocated are included in operating income for the respective
industry segments to conform with data published in the 1994 Armstrong
annual report.
(b) For the six months ended June 30, 1994, operating income includes a $5.9
million gain from the sale of the company's majority interest in Bega/US,
Inc.
(c) For the six months ended June 30, 1995, operating income includes
restructuring charges of $15.6 million.
7
Note 1. The accompanying consolidated financial statements have been
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reviewed by the Company's independent public accountants, KPMG Peat Marwick LLP,
in accordance with the established professional standards and procedures for
such limited review.
Note 2.
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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 June 30, 1995, in approximately 65,000 pending
personal injury asbestos claims and lawsuits, and 47 pending claims and lawsuits
involving asbestos-containing products in buildings. The Company's insurance
carriers provide coverage for both types of claims. The personal injury claims
only (not property damage claims) are handled by 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 of Pennsylvania for pretrial purposes. Pending state
court cases have not been directly affected by the transfer. A settlement class
action that includes essentially all future 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. Litigation that was initiated by the Company in California for
insurance coverage for asbestos-related personal injury and property damage
lawsuits and claims is on appeal before the California Supreme Court from
favorable final decisions in the trial court and by the California Court of
Appeal. The California litigation did not encompass coverage for non-products
claims that is included in the Company's primary policies and certain excess
policies. This additional coverage is substantial and negotiations are underway
with several primary carriers. If the non-products coverage issues are not
resolved through negotiation, the Company can pursue alternative dispute
resolution proceedings against the primary and certain excess carriers pursuant
to the Wellington Agreement.
The Company believes that an estimated $172 million in liability and defense
costs recorded on its balance sheet will be incurred to resolve approximately
65,000 asbestos-related personal injury claims against the Company as of June
30, 1995. An insurance asset in the amount of $172 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
8
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 one of many defendants in pending lawsuits and claims involving,
as of June 30, 1995, approximately 65,000 individuals alleging personal injury
from exposure to asbestos. Included in the above number are approximately
14,000 lawsuits and claims from individuals who are included in the
approximately 87,000 individuals who have opted out of the settlement class
action referred to below. About 9,000 claims from class members have been
received as of June 30, 1995. Most of these claims have not been evaluated as
to whether they meet the class action criteria. Of the claims that have been
evaluated, many do not qualify for payment. (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 this 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, except those claims covered by the settlement
class action, seek general and punitive damages arising from alleged exposures,
during various times, from World War II onward, to asbestos-containing
insulation products used, manufactured or sold by the companies involved in the
asbestos-related litigation. These claims against the Company generally involve
allegations of negligence, strict liability, breach of warranty and conspiracy.
The Company discontinued the sale of all asbestos-containing insulation products
in 1969. 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 name many defendants (including both members of the
Center and other companies), and over 100 different companies are reportedly
involved. The Company believes that many current plaintiffs are unimpaired. A
few state and federal judges have consolidated numbers of asbestos-related
personal injury cases for trial, a process that the Company has generally
opposed as unfair. 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. 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 to securing a comprehensive
resolution of pending as well as potential future asbestos-related personal
injury claims. The Judicial Panel for Multidistrict Litigation ordered the
transfer of all pending federal cases to a single court, the Eastern District of
Pennsylvania in Philadelphia, for pretrial purposes. The Company has supported
such action. Some of these cases are periodically released for trial, although
the issue of punitive damages is retained by the Eastern District Court. State
court cases have not been directly affected by the transfer. The Court in the
Eastern District 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.
Settlement Class Action
A settlement class action that includes essentially all future asbestos-related
personal injury claims against members of the Center was filed in the Eastern
District of Pennsylvania, on January 15, 1993. The settlement class
9
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 the Company. Other companies that 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 meet certain exposure and
medical criteria. Compensation amounts are derived from historical settlement
data. Under limited circumstances and in limited numbers, qualifying claimants
may choose to arbitrate or litigate certain claims 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 claims. Each member of the Center has an obligation for its own
fixed share in this proposed settlement. The District Court has ruled that
claimants who neither filed a lawsuit against the members of the Center nor
filed an exclusion request form are subject to the class action. The class
action does not include claims deemed otherwise not covered by the class action
settlement, or claims for property damage. Annual case flow caps and
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 class members. Approximately 87,000 individuals have opted out. The
opt outs are not claims as such but rather are reservations of rights to
possibly bring claims in the future. The settlement will become final only
after certain issues, including insurance coverage, 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 personal
injury claims that were pending when the settlement class action was filed. A
significant number have been settled or are currently the subject of
negotiations.
The Company is seeking agreement from its insurance carriers or a binding
judgment against them that the class action will not jeopardize existing
insurance coverage; and the class action 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 carriers that
subscribed to the Wellington Agreement referred to below, or else by litigation.
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 or that the above-referenced companion
insurance action will not be successful.
Insurance Carriers/Wellington Agreement
The Company's insurance carriers provide defense and indemnity coverage for
asbestos-related personal injury claims. All of the Company's primary insurers
are paying for the defense of property damage claims. Three of the four
carriers are paying for the defense under an Interim Agreement pending the final
resolution of the coverage issues for property damage claims in the California
insurance litigation. The remaining carrier entered into a separate agreement
with the Company resolving coverage issues for both personal injury and property
damage claims.
Various insurance carriers provide products and nonproducts coverage for the
Company's asbestos-related personal injury claims and product coverage for
property damage claims. Certain policies providing products coverage for
personal injury claims have been exhausted. A list of the insurance carriers
that currently provide coverage or whose policies have made available or provide
personal injury, nonproducts or property damage coverages is as
10
follows: Reliance Insurance; Aetna Casualty and Surety Company and Liberty
Mutual Insurance Companies; Travelers Insurance Company; Fireman's Fund
Insurance Company; Insurance Company of North America; Lloyds of London; various
London market companies; Fidelity and Casualty Insurance Company; First State
Insurance Company; U.S. Fire Insurance Company; Home Insurance Company; Great
American; American Home Assurance Company and National Union Fire Insurance
Company (known as the AIG Companies); Central National Insurance Company;
Interstate Insurance Company; Puritan Insurance Company; and Commercial Union
Insurance Company. Midland Insurance Company, an excess carrier, that insured
the Company for $25 million of bodily injury products coverage, became insolvent
for which the Company is pursuing claims with the state guaranty associations.
The gap in coverage created by the Midland Insurance Company insolvency will be
covered by other insurance. Certain companies in the London block of coverage
and certain carriers providing coverage at the excess level for property damage
claims only have also become insolvent. In addition, certain insurance carriers
that were not in the Company's California insurance litigation 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 personal injury claims against member
companies. The insurance coverage designated by the Company for coverage in the
Facility consisted of all relevant insurance policies issued to the Company from
1942 through 1976. Liability payments and allocated expenses were allocated by
formula to each defendant, including the Company. The Facility, now dissolved,
was negatively impacted by concerns of certain members about their share of
liability payments and allocated expenses and by certain insurer concerns about
defense costs and Facility operating expenses.
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 signed an 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 formula for shares of liability
payments and defense costs and has defended the members'
11
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. In the settlement
class action, each member will 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, the shares of
remaining members will not be increased. The Center members have reached an
agreement annually with the insurers relating to the continuing operation of the
Center and expect that the insurers will provide funding for the Center's
operating expenses for its seventh year of operation. The Center will continue
to process pending claims as well as future claims in the settlement class
action.
An increase in the utilization of the Company's insurance also has occurred as a
result of the class action settlement and the commitment to attempt to resolve
pending claims within five years. Aside from 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.
Property Damage Litigation
The Company is also one of many defendants in a total of 47 pending lawsuits and
claims, including class actions, as of June 30, 1995, 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 facilities to the
federal government. The settlements reached with the class representatives for
two of the four classes are subject to a fairness hearing. The Courts in the
Michigan class action and the class action involving leased facilities have
given final approval to those settlements. 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.
12
California Insurance Coverage Lawsuit
The California trial court issued final decisions in various phases in the
insurance lawsuit including a decision that the trigger of coverage for 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 accepted review pending its
review of related issues in another California case. The California Supreme
Court recently ruled favorably to the insured company on the issues in that
other case but has taken no action with respect to the Company's lawsuit. 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 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
13
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, has for certain insurance
periods coverage rights under some of the Company's insurance policies, and has
accessed such coverage on the same basis as the Company. It was a subscriber to
the Wellington Agreement, but is not a member of 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 solely for its own
use 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 that are
referred to herein about which uncertainties exist. As a result of 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.
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 $172 million in liability and defense costs recorded
on the balance sheet will be incurred to resolve an estimated 65,000 asbestos-
related personal injury claims pending against the Company as of June 30, 1995.
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
14
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 $172 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 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
15
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.
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 $19 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 an appeal
with the U.S. Court of Appeals for the Third Circuit.
16
----------------------------
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, the 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Financial Condition
-------------------
Cash provided by operating activities was sufficient to cover normal working
capital requirements and payments related to restructuring activities. The
remaining cash combined with increases in short-term debt and cash proceeds from
exercised stock options covered the payment of dividends, investment in plant,
property and equipment, purchase of a gasket materials and specialty paper
manufacturing facility, repurchase of shares of the Company's common stock for
the treasury and the increases in cash and cash equivalents.
The Company continues to explore ways to reduce costs by rationalizing assets
and enhancing operating efficiencies, particularly in the floor covering
segment. This effort may include restructuring actions to occur during the
second half of 1995. While the charges for these restructuring actions cannot
be determined at this time, they are not expected to have a material adverse
effect on the financial condition or liquidity of the Company; however, they
could be material to quarterly results within the next year.
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. During the first six months of 1995, the Company
repurchased 340,400 shares with a cash outlay of $15.7 million. Since the
inception of the program, the Company has repurchased 610,400 shares with a
total cash outlay of $26.1 million.
Working capital was $267.7 million as of June 30, 1995, $5.0 million lower than
the $272.7 million recorded at the end of the first quarter of 1995 and $36.0
million lower than the $303.7 million recorded at year-end 1994. The primary
reason for the reduction in working capital since year-end was the $139.3
million increase in short-term debt and current installments of long-
17
term debt. Partially offsetting the working capital decrease were higher levels
of accounts receivable, inventories, other assets, and lower levels of accounts
payable and accrued expenses totaling $104.5 million. Higher sales late in the
quarter were the primary reason for the $36.5 million increase in receivables.
The building of anticipated service level requirements was the primary reason
for the $43.9 million increase in inventories. Included in these increases were
approximately $9.1 million due to translation of foreign-currency receivables
and inventories to U.S. dollars at higher exchange rates.
The ratio of current assets to current liabilities was 1.51 to 1 as of June 30,
1995, and 1.58 to 1 as of March 31, 1995, compared with 1.78 to 1 as of December
31, 1994.
Long-term debt, excluding the Company's guarantee of the ESOP loan, was reduced
by $39.9 million in the first six months of 1995. At June 30, 1995, long-term
debt of $197.3 million represented 14.1 percent of total capital compared with
19.0 percent at the end of 1994. The June 30, 1995 and 1994 year-end ratios of
total debt (including the Company's financing of the ESOP loan) as a percent of
total capital were 43.9 percent and 41.4 percent, respectively.
The Company is involved in significant asbestos-related litigation which is
described more fully in Item 1, Note 2 to the financial statements on pages 8
through 15 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
flow 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 $172.0 million in liability and
defense costs recorded on the June 30, 1995, balance sheet will be incurred to
resolve an estimated 65,000 asbestos-related personal injury claims pending
against the Company as of June 30, 1995. 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 by claimants
otherwise determined not to be subject to the settlement class action.
An insurance asset in the amount of $172 million recorded on the balance sheet
as of June 30, 1995, 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
18
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.
The $172 million asbestos-related liability on the June 30, 1995, balance sheet
is $26 million less than the liability recorded on December 31, 1994, as a
result of the resolution of a large number of claims since December 31, 1994, in
accordance with the Center members' intention to resolve personal injury claims
over a five-year period that were pending on January 15, 1993, the date the
settlement class action was filed.
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 pages 17-18. 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 an appeal with the U.S. Court of Appeals for the Third
Circuit.
Reference is also made to an environmental issue as discussed in Note 2 on page
15 to the financial statements included under Item 1 above.
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 support for commercial paper notes. 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
--------------------
Second-quarter net sales of $731 million, an all-time sales record for any
quarter in the company's history, were 6 percent higher than the $689 million
recorded in the similar period of 1994. About one-third of this increase was
because of translating foreign currencies to U.S. dollars at a higher rate.
Sales for the second quarter exceeded those of last year in all major geographic
areas--North America, Europe and the Pacific area--even though North American
residential flooring sales were slightly lower than a year ago. Sales to the
U.S. residential end-use markets were lower due to reduced new-home starts and
lower resale activity of existing homes. These conditions
19
resulted from higher interest rates in the third and fourth quarters of 1994 and
the first quarter of 1995. The European markets continued to be strong for the
company's residential, commercial and industrial products.
The net earnings for the second quarter were $52.7 million, about one percent
lower than the $53.3 million recorded a year ago. Net earnings per share of
common stock were $1.31 on a primary basis and $1.18 on a fully diluted basis
and were identical to last year's second quarter.
Cost of goods sold in the second quarter as a percent to sales was 69.8 percent,
slightly higher than first quarter 1995's 69.6 percent, and higher than the 68.0
percent recorded in second quarter 1994. Higher raw material costs, primarily
in the resilient flooring business, that were not offset by higher selling
prices were the primary reasons for the increase in cost of goods sold as a
percent to sales when compared to 1994. Selling, general and administrative
(SG&A) costs in the second quarter were reduced from first-quarter levels and
were only slightly higher than 1994 levels.
Armstrong's effective tax rate for the second quarter of 1995 was 33.6 percent,
slightly lower than the 34.8 percent recorded in the comparable period of 1994.
The tax rate reduction was caused primarily by higher foreign source income and
a decrease in the provision for state income taxes.
First-half 1995 sales, a record for any first half, were $1.43 billion and
exceeded last year's sales of $1.33 billion by 7 percent. Net earnings for the
first six months were $87.1 million including a first quarter after-tax
restructuring charge of $10.1 million. This compares to last year's first-half
net earnings of $101.3 million which included one-time after-tax gains of $9.1
million related to the sale of its majority interest in a subsidiary and the
resolution of tax audits. Net earnings per share of common stock for the first
half were $ 2.13 on a primary basis and $1.93 on a fully diluted basis.
Cost of goods sold, expressed as a percent to sales, for the first six months
was 69.7 percent as compared with 69.0 percent for the similar period last year.
The higher raw material costs previously mentioned affected both quarters in the
first half. These costs combined with the slowdown in the U.S. resilient
flooring market, that did not allow the recovery of these higher costs through
selling price increases, resulted in a higher cost of goods sold as a percent to
sales. SG&A costs for the first six months increased 7 percent over the
comparable period a year ago. Approximately 30 percent of the SG&A increase was
due to translating foreign currencies to U.S. dollars at higher rates. Higher
SG&A costs generally resulted from investments in new marketing groups to
support the large home centers, investments in integration of computer systems
to support the businesses and normal inflationary costs. The Company is
actively reviewing and evaluating SG&A costs and most likely will announce
restructuring actions to take place in the second half of 1995 to lower the
overall cost structure of the company.
The effective tax rate for the first half of 1995 was 34.4 percent, higher than
the 31.2 percent recorded a year ago. The 1994 effective tax rate was unusually
low due to the Company reaching an agreement with the Internal Revenue Service
concerning its 1988 through 1990 tax years which resulted in the reversal of tax
expense previously accrued.
Industry Segment Results
------------------------
All four of the company's worldwide industry segments--floor coverings (which
includes resilient flooring and ceramic tile), building products, furniture and
industry products--registered sales increases when compared with the second
quarter of 1994. All industry segments except floor coverings recorded higher
operating income in the second quarter compared with a year ago.
The floor coverings segment sales were generally at the same level as a year
ago. The resilient flooring portion of this segment recorded quarterly sales
about 2 percent lower than the comparable period last year. Within resilient
20
flooring, the residential business declined while the commercial business
recorded higher sales year to year. Ceramic tile sales grew 6 percent.
Operating income declined nearly 20 percent from record quarterly highs of a
year ago. The resilient residential flooring business in the U.S. incurred
higher raw material costs which were not offset by higher selling prices. While
selling prices in the resilient flooring business were increased, temporary
price reductions were initiated in order to increase sales volumes. There are
signs that the higher raw material costs may level out in the third quarter. As
stated in prior announcements, the resilient flooring business will be taking
actions to reduce costs in manufacturing and SG&A expenses during the third
quarter. It is anticipated that a restructuring charge will be announced in the
third quarter.
The building products segment recorded a 10 percent sales growth when compared
to a year ago with all geographic areas contributing higher sales. European
sales accounted for the majority of the increase. Operating profits increased
17 percent over the similar period last year reflecting higher sales that
included increases in selling price, and continued success in reducing costs.
Furniture segment sales were nearly 9 percent higher than a year ago. It
appears that the Thomasville Furniture Division is performing better than the
industry as a whole. Operating income increased nearly 7 percent comparing this
quarter with the same period last year. Operating income was higher because of
increased sales, however, promotional pricing actions and higher costs in
manufacturing and selling expenses to bring new product offerings to market
lowered profitability.
The industry products segment's sales grew more than 21 percent, with the weaker
U.S. dollar accounting for close to half of the increase. The largest business
in this segment, insulation products, increased sales and operating income in
the North American and European geographic areas. The North American area
generated the more significant operating income increase primarily due to higher
sales and increased market share. The gasket and specialty paper products
business recorded higher sales and operating income, aided by the recent
addition of manufacturing capacity, which more than offset the impact of slower
automotive sales. The textile products business, while recording slightly
higher sales, continues to be in a modest operating loss position.
Unallocated corporate expenses for the second quarter were lower than those of
the comparable period a year ago due to lower fees paid to consultants and lower
incentive plan accruals.
21
Independent Accountants' Report
-------------------------------
The Board of Directors
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of June 30, 1995, and the related condensed
consolidated statements of operations for the three-month and six-month periods
ended June 30, 1995 and 1994 and the condensed consolidated statements of cash
flows for the six-month periods then ended. These consolidated financial
statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
an expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Armstrong World Industries, Inc.
and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations and cash flows for the year then ended (not presented
herein); and our report dated February 20, 1995, on those consolidated financial
statements contains an explanatory paragraph that states 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
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1994, is fairly presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
August 4, 1995
22
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of the Security Holders
------- -------------------------------------------------------
The Company held its annual meeting of shareholders on April 24, 1995. The vote
on each matter presented to shareholders was as follows:
1. Election of Directors:
For Withheld
E. Allen Deaver 36,902,819 104,686
James E. Marley 37,029,064 20,522
Jerre L. Stead 37,038,045 14,535
2. Approval of Amendments to the Restricted Stock Plan for Non-Employee
Directors:
For Against Abstain
30,275,659 6,629,749 281,168
3. Proposal to Approve Certain Terms of the Performance Goal Under the
Management Achievement Plan:
For Against Abstain
34,191,714 2,757,511 237,351
4. Shareholder Proposal to Modify the Company's Confidential Voting Policy
For Against Abstain Broker Non Votes
16,460,596 17,773,063 585,436 2,367,481
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report
on Form 10-Q:
Exhibits
--------
No. 3(a) Copy of the Company's Bylaws, as amended, through April 24,
1995.
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
23
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Armstrong World Industries, Inc.
By /s/ L. A. Pulkrabek
-----------------------------------
L. A. Pulkrabek, Senior
Vice President, Secretary and
General Counsel
By /s/ Bruce A. Leech, Jr.
------------------------------------
Bruce A. Leech, Jr., Controller
(Principal Accounting Officer)
Date: August 10, 1995
24
Exhibit Index
-------------
Exhibit No.
-----------
No. 3(a) Copy of the Company's Bylaws, as amended, through April 24, 1995.
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
25