FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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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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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
April 26, 1996 - 36,888,090
Part I - Financial Information
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Item 1. Financial Statements
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Operating results for the first quarter of 1996, compared with the corresponding
period of 1995 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 months' results are not necessarily indicative of
annual earnings.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
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(amounts in millions except for per-share data)
Unaudited
Three Months Ended
March 31
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1996 1995(a)
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NET SALES $ 501.2 $ 502.2
Cost of goods sold 344.5 335.5
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Gross profit 156.7 166.7
Selling, general & administrative expenses 101.7 105.1
Equity (earnings) from affiliates (2.7) (3.7)
Restructuring charges -- 15.6
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Operating income 57.7 49.7
Interest expense 6.3 8.0
Other expense (income), net (3.1) .4
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Earnings from continuing businesses before
income taxes(b) 54.5 41.3
Income taxes 18.2 14.8
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EARNINGS FROM CONTINUING BUSINESSES (c) $ 36.3 $ 26.5
Earnings from discontinued business, net
of income taxes -- 7.9
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NET EARNINGS $ 36.3 $ 34.4
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Net earnings per share of common stock:
Primary:(d)
Earnings from continuing businesses $ .88 $ .61
Earnings from discontinued business -- .21
Net earnings $ .88 $ .82
Fully Diluted:(d)
Earnings from continuing businesses $ .81 $ .57
Earnings from discontinued business -- .18
Net earnings $ .81 $ .75
Dividends paid per common share $ .36 $ .32
Average number of common shares outstanding:
Primary 37.5 37.5
Fully Diluted 42.8 43.1
See page 3 for explanation of (a), (b), (c) and (d). Also see accompanying
footnotes to the financial statements beginning on page 8.
2
(a) Prior year was restated for the effects of the discontinued furniture
business and the formation of the ceramic tile business combination.
(b) Depreciation and amortization charged against earnings from continuing
businesses before income taxes amounted to $30.8 million in the three
months ended March 31, 1996, and $29.5 million in the three months ended
March 31, 1995.
(c) Earnings from continuing businesses for the three months ended March 31,
1995, include $10.1 million, or 24 cents per share on a fully diluted
basis, of restructuring charges resulting from plans to close a plant in
Braintree, Massachusetts.
(d) 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 March 31, 1996 December 31, 1995
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Current assets:
Cash and cash equivalents $ 118.5 $ 256.9
Accounts receivable less allowance 255.2 217.9
Inventories:
Finished goods $ 117.9 $ 119.9
Work in process 27.1 24.0
Raw materials and supplies 41.6 51.6
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Total inventories 186.6 195.5
Income tax benefits 29.5 26.9
Other current assets 29.7 25.5
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Total current assets 619.5 722.7
Property, plant, and equipment 1,885.2 1,854.1
Less accumulated depreciation
and amortization 992.5 975.9
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Net property, plant, and equipment 892.7 878.2
Insurance for asbestos-related
liabilities(a) 151.0 166.0
Investment in affiliates 164.8 162.1
Other noncurrent assets 249.4 220.8
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Total assets $2,077.4 $2,149.8
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Liabilities and Shareholders' Equity
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Current liabilities:
Short-term debt $ 24.6 $ 22.0
Current installments of long-term debt 5.1 40.1
Accounts payable and accrued expenses 266.7 297.4
Income taxes 26.5 16.4
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Total current liabilities 322.9 375.9
Long-term debt 188.4 188.3
ESOP loan guarantee 234.7 234.7
Postretirement and postemployment benefits 244.0 242.8
Asbestos-related liabilities (a) 151.0 166.0
Other long-term liabilities 145.8 140.6
Deferred income taxes 14.5 16.5
Minority interest in subsidiaries 10.1 10.0
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Total noncurrent liabilities 988.5 998.9
Shareholders' equity:
Convertible preferred stock at
redemption value $ 244.2 $ 258.9
Common stock 51.9 51.9
Capital in excess of par value 51.0 49.3
Reduction for ESOP loan guarantee (224.1) (225.1)
Retained earnings 1,156.8 1,133.8
Foreign currency translation (b) 13.7 18.0
Treasury stock (527.5) (511.8)
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Total shareholders' equity 766.0 775.0
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Total liabilities and shareholders'
equity $2,077.4 $2,149.8
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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 $151.0 million represents
the estimated liability and defense cost to resolve approximately 56,000
personal injury claims pending against the Company as of the end of the
first quarter 1996. The insurance asset in the amount of $151.0 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:
1996
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(millions)
Balance at beginning of year $18.0
Three months' translation adjustments and
hedging of foreign investments (4.3)
Allocated income taxes --
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Balance at March 31, 1996 $13.7
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5
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
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(amounts in millions)
Unaudited
Three Months Ended
March 31
1996 1995(a)
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Cash flows from operating activities:
Net earnings $ 36.3 $ 34.4
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization, excluding
furniture and ceramic tile 29.7 26.2
Depreciation and amortization for furniture
and ceramic tile 1.1 6.6
Deferred income taxes 1.0 (0.5)
Loss from restructuring activities -- 15.6
Restructuring payments (9.5) (3.0)
(Increase) in net assets of discontinued
business -- (2.8)
Changes in operating assets and liabilities net of
effect of discontinued business, restructuring
and dispositions:
(Increase) in receivables (33.1) (37.0)
(Increase) decrease in inventories 7.4 (16.5)
(Increase) in other current assets (7.7) (2.0)
(Increase) decrease in investment in affiliates (3.8) 1.7
(Increase) in other noncurrent assets (25.5) (11.1)
(Decrease) in accounts payable and
accrued expenses (14.2) (27.4)
Increase in income taxes payable 11.3 10.8
Increase in other long-term liabilities 8.3 6.4
Other, net (3.8) 5.0
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Net cash (used for) provided by operating activities (2.5) 6.4
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Cash flows from investing activities:
Purchases of property, plant, and equipment (48.4) (31.5)
Purchases of property, plant and equipment for
furniture and ceramic tile -- (4.6)
Other, net (1.7) (1.6)
Acquisitions -- (14.0)
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Net cash used for investing activities (50.1) (51.7)
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Cash flows from financing activities:
Increase in short-term debt 3.0 97.0
Reduction of long-term debt (35.0) (34.4)
Cash dividends paid (13.4) (11.9)
Preferred stock redemption (18.4) (1.2)
Purchase of common stock for the treasury (18.3) (11.0)
Proceeds from exercised stock options 1.8 3.1
Other, net (5.2) (3.6)
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Net cash (used for) provided by financing activities (85.5) 38.0
Effect of exchange rate changes on cash and cash
equivalents (.3) .3
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Net (decrease) in cash and cash equivalents $(138.4) $ (7.0)
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Cash and cash equivalents at beginning of period $ 256.9 $ 12.0
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Cash and cash equivalents at end of period $ 118.5 $ 5.0
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Supplemental Cash Flow Information:
Interest paid $ 1.7 $ 1.1
Income taxes paid $ 10.9 $ 9.6
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(a) Prior year restated for the effects of the discontinued furniture business
and the formation of the ceramic tile business combination.
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
Ended March 31
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1996 1995(a)
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Net trade sales:
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Floor coverings $240.0 $241.7
Building products 175.1 171.1
Industry products 86.1 89.4
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Total net sales $501.2 $502.2
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Operating income (loss):
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Floor coverings $ 26.7 $ 32.4
Building products 25.8 26.1
Industry products(b) 10.0 (1.7)
Ceramic Tile(c) 0.9 2.2
Unallocated corporate
expense (5.7) (9.3)
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Total operating income $ 57.7 $ 49.7
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(a) Prior year restated for the effects of the discontinued furniture business
and the formation of the ceramic tile business combination.
(b) For the three months ended March 31, 1995, operating income includes
restructuring charges of $15.6 million.
(c) Ceramic tile segment results represent the Company's 37 percent after-tax
share of the operating income of the Dal-Tile business combination and the
amortization of the excess of the Company's investment in Dal-Tile over the
underlying equity in net assets. Prior year's results reflect the before-
tax operating income of the Ceramic Tile Operations.
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 March 31, 1996, in approximately 56,000 pending
personal injury asbestos claims and lawsuits, and 29 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
(but 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 of Pennsylvania for pretrial purposes. 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, including
the Company, was filed on January 15, 1993, in the Eastern District of
Pennsylvania. The court has tentatively approved the settlement, although it
will not become final until certain issues, including insurance coverage for
class members' claims, are resolved, and appeals are exhausted, which could take
several years.
An Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement")
provides for settlement of insurance coverage for personal injury claims with
certain primary carriers and excess carriers. Settlement agreements that
complement the Wellington Agreement have been signed with one primary carrier
and certain excess carriers. Litigation that was undertaken by the Company in
California for insurance coverage for asbestos-related personal injury and
property damage lawsuits and claims is now on appeal from favorable final
decisions of the trial court and the California Court of Appeal. The case was
returned to the Court of Appeal by the California Supreme Court for additional
review in light of a favorable Supreme Court decision in another case. The
Court of Appeal has again ruled in favor of the Company. This litigation did
not encompass coverage for nonproducts claims that is included in the Company's
primary policies and certain excess policies. This additional coverage is
substantial. The Company is pursuing the nonproducts coverage through
alternative dispute resolution proceedings involving the primary and certain
excess carriers pursuant to the Wellington Agreement.
The Company believes that an estimated $151 million in liability and defense
costs recorded on its balance sheet will be incurred to resolve approximately
56,000 asbestos-related personal injury claims against the Company as of March
31, 1996. An insurance asset in the amount of $151 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.
8
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 March 31, 1996, approximately 56,000 individuals alleging personal injury
from exposure to asbestos. Included in the above number are approximately
14,200 lawsuits and claims from the approximately 87,000 individuals who have
opted out of the settlement class action referred to below. About 15,600 claims
from purported settlement class members were received as of March 31, 1996. Of
those claims, many do not qualify at this time 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 (the "Center"),
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, which
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 years, 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 resolve 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 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
9
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 if they were substantially
exceeded during the previous 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 issues related to
insurance coverage, are resolved and appeals are exhausted. This process could
take 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 of claims have been
finally or tentatively 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; 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, 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 or modify 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 follows:
Reliance Insurance Company; Aetna Casualty and Surety Company; 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
Insurance Company; 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, is
insolvent; 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.
10
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 that 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. 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 member, 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 was created in October 1988 by Armstrong and 20
other companies, all of which were former members of the Facility. Insurance
carriers did not become members of the Center, although a number of carriers
signed an agreement to provide approximately 70% of the financial support for
the Center's operational costs during its first year of operation; 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' 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 caused a
slight increase in the Company's share and subsequent share adjustments also
resulted in an increased liability share for the Company in certain areas. 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, and the allocated shares
of liability payments and defense costs of the Center were recalculated,
resulting in 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 eighth 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 at the time 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
11
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 29 pending lawsuits and
claims, including one class action, as of March 31, 1996, brought by 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 previously installed asbestos-containing resilient
flooring. Among the lawsuits that have been resolved are four class actions
that 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. In three of these class actions, the courts have given
final approval and dismissed the actions with prejudice. In the college and
universities class action, a settlement has been reached with the class
representative and is subject to a fairness hearing. 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, litigation against them (with several exceptions) has been stayed
or restricted. Due to the uncertainties involved, the long-term effect of these
proceedings on the litigation cannot be predicted.
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. The California Court of Appeal
substantially upheld the trial court, and the insurance carriers petitioned the
California Supreme Court for review of various coverage issues. The California
Supreme Court referred the case back to the Court of Appeal to reconsider its
opinion in light of a recent Supreme Court decision in another case. In a
subsequent second opinion the Court of Appeal also ruled in the Company's favor.
The insurance carriers may petition the California Supreme Court for further
review.
Based upon the trial court's favorable final decisions, 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 complementary to the
Wellington Agreement. The parties also agreed that a
12
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 or otherwise decided between the Company and the insurance
carrier.
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 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 primary carrier 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. Accordingly, the Company is initiating 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 coverage rights under some
of the Company's insurance policies for certain insurance periods, 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 the disputes with
its 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
13
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 $151 million in liability and defense costs recorded
on the balance sheet will be incurred to resolve an estimated 56,000 asbestos-
related personal injury claims pending against the Company as of March 31, 1996.
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 asbestos-related personal injury claims are subject to
the settlement class action. In addition to the currently estimated pending
claims and claims filed by those who have opted out of the settlement class
action, 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 who have
opted out of the class action or by claimants determined not to be subject to
the settlement class action.
An insurance asset in the amount of $151 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
----------------------------------------------------------------
14
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.
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.
15
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 filed an appeal with
the U.S. Court of Appeals for the Third Circuit. On October 11, 1995, the case
was argued before a panel of the U.S. Court of Appeals for the Third Circuit,
and on October 20, 1995, the court issued a Judgment Order affirming the 1994
district court verdict in favor of the Company. On November 2, 1995, TINS filed
a Petition for Rehearing by the same panel which was denied on December 5, 1995.
On January 24, 1996, TINS filed a motion seeking further appellate review by the
Circuit Court; that motion has been denied. Also denied was a motion by TINS
before the District Court to rescind an earlier 1984 agreement of settlement.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Financial Condition
- -------------------
As shown on the Consolidated Statements of Cash Flows (see page 6), net cash
required by changes in operating assets and liabilities was $2.5 million more
than the net cash provided by operating activities. Cash totaling $135.6
million was used for purchases of property, plant and equipment, payment of cash
dividends, purchase of preferred and common stock and reduction of long-term
debt. This total cash requirement of $138.1 million was provided by using part
of the $256.9 million cash balance available at the beginning of the year which
included the proceeds from the sale of Thomasville Furniture Industries, Inc.,
in December 1995.
Working capital was $296.6 million as of March 31, 1996, $50.2 million lower
than the $346.8 million recorded at year-end 1995. The reduction in working
capital resulted primarily from the $138.4 million decrease in cash and short-
term investments with an additional $19.0 million due to increases in income
taxes payable and decreases in inventories. Partially offsetting the decreases
in working capital were a $44.1 million for higher levels of accounts receivable
and other assets, a $32.4 million reduction of short-term debt and current
installments of long-term debt, and a $30.7 million decrease in accounts payable
and accrued expenses. The increase in receivables of $37.3 million was due to
higher sales late in the quarter. The decrease in accounts payable and accrued
expense was largely attributable to the payment of the 1995 incentive bonus.
The ratio of current assets to current liabilities was 1.92 to 1 as of March 31,
1996, and remained unchanged from December 31, 1995.
Long-term debt of $188.4 million, excluding the company's guarantee of the ESOP
loan, remained about the same as December 31, 1995. At March 31, 1996, long-
term debt represented 15.5 percent of total capital compared with 14.9 percent
at the end of 1995. The March 31, 1996 and 1995 year-end ratios of total debt
(including the Company's financing of the ESOP loan) as a percent of total
capital were 37.2 percent and 38.5 percent, respectively.
Under the ongoing 2.5 million common share repurchase plan, the Company
repurchased approximately 1,341,000 shares through March 31, 1996, including
289,000 repurchased in the first quarter of this year. The ESOP Trustee
converted 307,000 shares of ESOP preferred stock into common stock for employees
of Thomasville Furniture Industries, Inc. which the Company then repurchased at
market price. Total cash used for these first-quarter purchases was $36.7
million.
A corporate organizational effectiveness study to improve decision-making and
efficiency has been completed which will eliminate non-value added corporate
activities and reduce organizational levels. Implementation of the new corporate
organizational structure will result in the elimination of approximately 150
corporate staff positions. However, due to attrition, transfers and open
positions that were left unfilled, fewer than 100 employees will be affected. In
addition, the Company is integrating the separate installation products
businesses at W. W. Henry and the Floor Division. As a result of these
actions, a restructuring charge will be recorded in the second quarter of 1996.
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 the
second quarter results. As previously announced, the Company continues to
discuss with potential buyers the sale of the textile products operation.
16
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
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 $151 million in liability and
defense costs recorded on the March 31, 1996, balance sheet will be incurred to
resolve an estimated 56,000 asbestos-related personal injury claims pending
against the Company as of March 31, 1996. 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 $151 million recorded on the March 31, 1996,
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.
17
Reference is made to the litigation involving The Industry Network System, Inc.
(TINS), discussed on pages 15 and 16.
In April 1996, the Company increased the five-year revolving line of credit from
$200 million to $300 million which now includes 11 banks. The line of credit is
for general corporate purposes, including as a backstop 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
- --------------------
First-quarter net sales of $501.2 million were about level with the $502.2
million of a year ago. Sales for the first 10 weeks of the year were negatively
affected by the weakness in North American residential sheet flooring and by the
winter weather impact on the building and industry products segments. Higher
sales to home center customers and higher sales in European flooring and Asian
building products offset most of the previously mentioned decreases.
First-quarter earnings from continuing businesses were $36.3 million compared
with $26.5 million recorded last year. 1995 first-quarter results included a
$10.1 million after-tax restructuring charge. This year's earnings were
impacted by several first-quarter events, primarily the adverse weather effects
on energy costs, production and shipping as well as plant startup costs.
Earnings per share from continuing businesses were 88 cents per share on a
primary basis and 81 cents on a fully diluted basis compared with 61 cents on a
primary basis and 57 cents on a fully diluted basis for the first quarter of
1995 which included restructuring charges of 27 cents on a primary basis and 24
cents on a fully diluted basis.
Net earnings for the first-quarter 1996 were $36.3 million compared with $34.4
million for the same period in 1995. First-quarter 1995 net earnings included
$7.9 million of after-tax earnings from the discontinued operations of
Thomasville Furniture Industries, Inc. Net earnings per share of common stock
were 88 cents per share on a primary basis and 81 cents on a fully diluted basis
compared with 82 cents on a primary basis and 75 cents on a fully diluted basis
for the first quarter of 1995.
In the first quarter of 1996, the effective tax rate was 33.3 percent, a
decrease from the 35.9 percent of the first quarter of 1995. The primary
reasons for the rate decline were a tax benefit on foreign-source income and the
difference in the reporting for this year's ceramic tile operating income that
was reported on an equity accounting basis (after-tax) versus last year's
ceramic tile operating income that was reported on a before tax basis.
Industry Segment Results
- ------------------------
First-quarter sales in the Company's worldwide segments were slightly lower than
a year ago with decreases in the floor coverings and industry products segments
and an increase in the building products segment. The U.S. residential end-use
market segment remained weak in the first quarter while sales to the home center
and commercial market segments were solid. From a geographic perspective, sales
were higher in the Pacific area, about level in North America, and lower in
Europe.
In the floor coverings segment, sales were 0.7 percent lower than 1995's first
quarter and operating income was down 17.4 percent. While sales in Europe and
to U.S. home centers serviced through the Corporate Retail Accounts Division
were well above 1995's first quarter and sales of commercial products continued
strong, they were more than offset by a decline in sales of U.S. residential
sheet flooring products. This decline and the resulting adverse mix effect on
margins were the primary causes of the lower profits. In addition, the segment
incurred increased promotional costs and a charge of $1.5 million related to the
bankruptcy of a customer. On the positive side, raw material costs continued to
be lower than a year ago, following the trend started in the second half of
1995. Other positive factors were improved productivity and lower manufacturing
period and non-manufacturing expenses.
18
The building products segment recorded an increase in sales of 2.3 percent when
compared with 1995's first quarter with small increases in North America and
Europe and significant increases in the Pacific Area. In Europe, some late-
quarter softness was seen, notably in France and Germany. In North America,
sales were affected by energy curtailments which decreased production levels.
However order rates increased over prior levels. Operating income decreased 1.3
percent from the first quarter of 1995, significantly impacted by higher energy
costs, production slowdowns from energy curtailments and other weather-related
interruptions at North American plants. In addition, there were startup costs
of about $1 million for the new European metal ceilings venture.
Industry products sales, which decreased 3.7 percent when compared with 1995's
first quarter, continued to be impacted by a weaker European market. Operating
income in the first quarter of 1996 was $10.0 million compared with an operating
loss of $1.7 million in the first quarter of 1995, which included a $15.6
million restructuring charge. Insulation products recorded lower profits,
affected by adverse weather conditions, a softer economy, notably in Germany,
and heavy price competition. Sales for the gasket and specialty paper business
increased while operating income was lower because of higher energy prices and a
weaker automotive market. Textile products showed a sales decline from the
first quarter of 1995 and continued to show a small operating loss. As
previously announced, the Company intends to sell the textile business.
The first-quarter 1996 results for the ceramic segment represent Armstrong's 37
percent after-tax share of the operating income of the Dal-Tile business
combination while 1995 results reflect the before-tax operating income of the
ceramic tile operations. The synergies from this business combination appear to
be on track with expectations.
19
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 March 31, 1996, and the related
condensed consolidated statements of earnings and cash flows for the three-month
periods ended March 31, 1996 and 1995. These condensed 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, 1995, and the related consolidated
statements of earnings, cash flows and shareholders' equity for the year then
ended (not presented herein); and our report dated February 16, 1996, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, 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
May 6, 1996
20
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 5. Other Information
- ------- -----------------
The Company held its annual meeting of shareholders on April 29, 1996. The vote
on each matter presented to shareholders was as follows:
1. Election of Directors:
For Withheld
H. Jesse Arnelle 28,006,661 5,597,939
Donald C. Clark 27,576,254 5,597,939
George A. Lorch 27,998,525 5,597,939
In addition, each of the following directors continued in office after
the meeting: Van C. Campbell, E. Allen Deaver, Ursula F. Fairbairn,
James E. Marley, J. Phillip Samper, and Jerre L. Stead.
2. Shareholder Proposal for Confidential Voting
For Against Abstain Broker Non-Votes
12,155,464 19,535,179 449,701 1,318,075
The Shareholder Proposal for Confidential Voting was not approved
because it failed to receive the requisite majority of votes present
in person or by proxy at the meeting.
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. 10(i)(a)Stock Purchase Agreement dated as of December 21, 1995, by
and among Dal-Tile International Inc., Armstrong Enterprises,
Inc., Armstrong Cork Finance Corporation and Armstrong World
Industries, Inc., is incorporated by reference herein from
registrant's Current Report on Form 8-K filed January 16, 1996,
wherein it appears as Exhibit 2.01.
No. 10(i)(b)Stock Purchase Agreement dated as of November 18, 1995, by
and among Armstrong World Industries, Inc., Armstrong
Enterprises, Inc. and INTERCO INCORPORATED, is incorporated by
reference herein from registrant's Current Report on Form 8-K
filed on January 16, 1996, wherein it appears as Exhibit 2.01.
No. 10(i)(c)Shareholders Agreement dated December 29, 1995, by and among
Dal-Tile International Inc., AEA Investors, Inc., Armstrong
World Industries, Inc., Armstrong Enterprises, Inc. and
Armstrong Cork Finance Corporation is incorporated by reference
herein from Dal-Tile International Inc.'s Annual Report on Form
10-K for the year-ended December 31, 1995, wherein it appears
as Exhibit 10.6.
No. 11(a) Computation of Primary Earnings Per Share
No. 11(b) Computation of Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
On January 16, 1996, the registrant filed a Current Report on Form
21
8-K to report the disposition of its furniture business on December
29, 1995. On January 16, 1996, the registrant filed a second Current
Report on Form 8-K, which was amended by Form 8-K/A filed March 13,
1996, to report the combination of its ceramic tile business with Dal-
Tile International Inc. on December 29, 1995, in exchange for a 37%
interest in Dal-Tile.
22
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: May 10, 1996
23
Exhibit Index
-------------
Exhibit No.
- -----------
No. 10(i)(a)Stock Purchase Agreement dated as of December 21, 1995, by
and among Dal-Tile International Inc., Armstrong Enterprises, Inc.,
Armstrong Cork Finance Corporation and Armstrong World Industries,
Inc., is incorporated by reference herein from registrant's Current
Report on Form 8-K filed January 16, 1996, wherein it appears as
Exhibit 2.01.
No. 10(i)(b)Stock Purchase Agreement dated as of November 18, 1995, by
and among Armstrong World Industries, Inc., Armstrong Enterprises,
Inc. and INTERCO INCORPORATED, is incorporated by reference herein
from registrant's Current Report on Form 8-K filed on January 16,
1996, wherein it appears as Exhibit 2.01.
No. 10(i)(c)Copy of Amendment No. 1 to Credit Agreement dated as of April 9,
1996, providing for an increased credit facility of $300,000,000 and
certain other amendments to 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, which appeared in
Registrant's 1994 Annual Report on Form 10-K as Exhibit 10(i)(c).
No. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
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