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, 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
July 26, 1996 - 36,459,038
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 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 and six 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 Six Months Ended
June 30 June 30
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1996 1995(a) 1996 1995(a)
-------- -------- -------- --------
$ 563.2 $ 536.0 $1,064.4 $1,038.2
NET SALES
Cost of goods sold 364.8 358.1 709.3 693.6
-------- -------- -------- --------
Gross profit 198.4 177.9 355.1 344.6
Selling, general & administrative
expenses 104.6 99.3 206.3 204.4
Equity (earnings) from
affiliates(b) (3.4) (2.2) (6.1) (5.9)
Restructuring charges 46.5 -- 46.5 15.6
-------- -------- -------- --------
Operating income 50.7 80.8 108.4 130.5
Interest expense 6.2 8.9 12.5 16.9
Other expense (income), net (1.2) 0.6 (4.3) 1.0
-------- -------- -------- --------
Earnings from continuing business
before income taxes(c) 45.7 71.3 100.2 112.6
Income taxes 15.1 23.9 33.3 38.7
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EARNINGS FROM CONTINUING
BUSINESS(d) $ 30.6 $ 47.4 $ 66.9 $ 73.9
Earnings from discontinued
business, net of income
taxes -- 5.3 -- 13.2
-------- -------- -------- --------
NET EARNINGS $ 30.6 $ 52.7 $ 66.9 $ 87.1
======== ======== ======== ========
Net earnings per share of common
stock:
Primary(e)
Earnings from continuing
businesses $ .73 $ 1.17 $ 1.61 $ 1.78
Earnings from discontinued
business -- .14 -- .35
Net earnings $ .73 $ 1.31 $ 1.61 $ 2.13
Fully Diluted:(e)
Earnings from continuing
businesses $ .68 $ 1.05 $ 1.48 $ 1.62
Earnings from discontinued
business -- .13 -- .31
Net earnings $ .68 $ 1.18 $ 1.48 $ 1.93
Dividends paid per common
share $ .40 $ .36 $ .76 $ .68
Average number of common shares
and common equivalent shares
outstanding:
Primary 37.2 37.6 37.3 37.6
Fully Diluted 42.3 43.0 42.5 43.0
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) Prior year was restated for the effects of the discontinued furniture
business and the formation of the ceramic tile business combination.
(b) Equity earnings from affiliates for 1996 is primarily comprised of results
from the 37 percent ownership of Dal-Tile International, Inc. ("Dal-Tile")
and the 50 percent interest in the WAVE joint venture with Worthington
Industries. Prior year's results reflect the before-tax operating income
of the ceramic tile operations and the 50 percent interest in the WAVE
joint venture.
(c) Depreciation and amortization charged against earnings from continuing
businesses before income taxes amounted to $30.3 million and $61.1 million
in the three months and six months ended June 30, 1996, and $30.4 million
and $59.9 million in the three months and six months ended June 30, 1995.
(d) Earnings from continuing businesses include restructuring charges of $29.6
million after-tax for the three months and six months ended June 30, 1996.
For the six month period ending June 30, 1995, restructuring charges of
$10.1 million after-tax were incurred.
(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, 1996 December 31, 1995
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Current assets:
Cash and cash equivalents $ 82.9 $ 256.9
Accounts receivable less allowance 258.4 217.9
Inventories:
Finished goods $ 128.7 $ 119.9
Work in process 25.9 24.0
Raw materials and supplies 42.8 51.6
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Total inventories 197.4 195.5
Income tax benefits 36.8 26.9
Other current assets 24.9 25.5
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Total current assets 600.4 722.7
Property, plant, and equipment 1,921.3 1,854.1
Less accumulated depreciation
and amortization 1,008.7 975.9
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Net property, plant, and equipment 912.6 878.2
Insurance for asbestos-related
liabilities(a) 144.8 166.0
Investment in affiliates (b) 165.7 162.1
Other noncurrent assets 242.1 220.8
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Total assets $2,065.6 $2,149.8
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Liabilities and Shareholders' Equity
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Current liabilities:
Short-term debt $ 15.1 $ 22.0
Current installments of long-term debt 0.1 40.1
Accounts payable and accrued expenses 282.4 297.4
Income taxes 30.4 16.4
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Total current liabilities 328.0 375.9
Long-term debt 188.5 188.3
ESOP loan guarantee 228.4 234.7
Postretirement and postemployment benefits 244.1 242.8
Asbestos-related liabilities (a) 144.8 166.0
Other long-term liabilities 143.3 140.6
Deferred income taxes 10.6 16.5
Minority interest in subsidiaries 12.7 10.0
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Total noncurrent liabilities 972.4 998.9
Shareholders' equity:
Convertible preferred stock at
redemption value $ 244.2 $ 258.9
Common stock 51.9 51.9
Capital in excess of par value 52.6 49.3
Reduction for ESOP loan guarantee (220.2) (225.1)
Retained earnings 1,165.7 1,133.8
Foreign currency translation (c) 13.0 18.0
Treasury stock (542.0) (511.8)
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Total shareholders' equity 765.2 775.0
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Total liabilities and shareholders'
equity $2,065.6 $2,149.8
======== ========
See page 5 for explanation of references (a), (b) and (c). Also see accompanying
footnotes to the financial statements beginning on page 8.
4
(a) The asbestos-related liability in the amount of $144.8 million represents
the estimated liability and defense cost to resolve approximately 47,000
personal injury claims pending against the Company as of the end of the second
quarter 1996. The insurance asset in the amount of $144.8 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) Investment in affiliates is primarily comprised of the 37 percent ownership
of Dal-Tile and the 50 percent interest in the WAVE joint venture.
(c) 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
Six months' translation adjustments and
hedging of foreign investments (5.2)
Allocated income taxes 0.2
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Balance at June 30, 1996 $13.0
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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
1996 1995
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Cash flows from operating activities:
Net earnings $ 66.9 $ 87.1
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization, excluding
furniture and ceramic tile 59.0 53.3
Depreciation and amortization for furniture
and ceramic tile 2.1 13.1
Deferred income taxes (2.2) 1.1
Loss from restructuring activities 46.5 15.6
Restructuring payments (18.8) (6.3)
(Increase) in net assets of discontinued
businesses -- (5.5)
Changes in operating assets and liabilities net of
effect of discontinued business, restructuring
and dispositions:
(Increase) in receivables (31.1) (28.8)
(Increase) in inventories (4.1) (24.9)
(Increase) in other current assets (10.1) (18.7)
(Increase) in investment in affiliates (5.6) (1.5)
(Increase) in other noncurrent assets (31.8) (19.4)
(Decrease) in accounts payable and
accrued expenses (12.2) (18.7)
Increase in income taxes payable 14.7 6.7
Increase in other long-term liabilities 7.5 4.8
Other, net (4.6) (9.1)
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Net cash provided by operating activities 76.2 48.8
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Cash flows from investing activities:
Purchases of property, plant, and equipment (110.0) (65.7)
Purchases of property, plant and equipment for
furniture and ceramic tile -- (9.7)
Investment in computer software (3.7) (6.2)
Acquisitions -- (14.0)
Proceeds from sale of land and facilities 0.4 0.7
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Net cash used for investing activities (113.3) (94.9)
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Cash flows from financing activities:
(Decrease) increase in short-term debt (6.4) 97.6
Reduction of long-term debt (40.0) (0.2)
Cash dividends paid (37.0) (34.8)
Preferred stock redemption (18.4) --
Purchase of common stock for the treasury (32.9) (16.0)
Proceeds from exercised stock options 2.6 5.9
Other, net (4.2) (2.6)
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Net cash (used for) provided by financing activities (136.3) 49.9
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Effect of exchange rate changes on cash and cash
equivalents (0.6) 1.1
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Net (decrease) increase in cash and cash equivalents $ (174.0) $ 4.9
========= ========
Cash and cash equivalents at beginning of period $ 256.9 $ 12.0
========= ========
Cash and cash equivalents at end of period $ 82.9 $ 16.9
========= ========
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Supplemental Cash Flow Information:
Interest paid $ 11.0 $ 14.4
Income taxes paid $ 32.8 $ 17.6
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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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1996 1995(b) 1996 1995(b)
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Net trade sales:
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Floor coverings $ 300.2 $ 277.6 $ 540.2 $ 519.3
Building products 179.4 169.6 354.5 340.7
Industry products 83.6 88.8 169.7 178.2
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Total net sales $ 563.2 $ 536.0 $1,064.4 $1,038.2
======== ======== ======== ========
Operating income:(a)
- ----------------
Floor coverings $ 48.0 $ 48.6 $ 74.7 $ 81.0
Building products 18.7 25.3 44.5 51.4
Industry products 5.0 9.8 15.0 8.1
Ceramic tile(c) 1.1 0.3 2.0 2.5
Unallocated corporate
expense (22.1) (3.2) (27.8) (12.5)
-------- -------- -------- --------
Total operating income $ 50.7 $ 80.8 $ 108.4 $ 130.5
======== ======== ======== ========
(a)Restructuring charges included
in operating income:
Floor coverings $ 14.5 $ - $ 14.5 $ --
Building products 8.3 - 8.3 --
Industry products 4.0 - 4.0 15.6
Ceramic tile -- - -- --
Unallocated corporate
expense 19.7 - 19.7 --
-------- -------- -------- --------
Total restructuring charges
in operating income $ 46.5 $ - $ 46.5 $ 15.6
======== ======== ======== ========
(b) Prior year restated for the effects of the discontinued business and the
formation of the ceramic tile business combination.
(c) Ceramic tile segment's 1996 results represent the Company's 37 percent
after-tax share of the operating income from the Company's investment in
Dal-Tile 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 June 30, 1996, in approximately 47,000 pending
personal injury asbestos claims and lawsuits, and 14 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 District Court tentatively approved the settlement, but the
Circuit Court of Appeals rejected the class certification. The matter will be
appealed to the Supreme Court. Assuming the class action is ultimately allowed,
certain other issues, including insurance coverage for class members' claims,
are to be resolved in the future, and all appeals on those issues exhausted.
This 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 non-products claims that is included in the Company's
primary policies and certain excess policies; the additional insurance 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 $144.8 million in liability and defense
costs recorded on its balance sheet will be incurred to resolve approximately
47,000 asbestos-related personal injury claims against the Company as of June
30, 1996. An insurance asset in the amount of $144.8 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 potential 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 Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld an alternative to Georgine
would be negotiated, 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, 1996, approximately 47,000 individuals alleging personal injury
from exposure to asbestos. Included in the above number are approximately
17,000 lawsuits and claims from the approximately 87,000 individuals who have
opted out of the settlement class action referred to below. About 17,300 claims
from purported settlement class members were received as of June 30, 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. This process has provided 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 (Georgine v. Amchem) 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
9
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; a subsequent decision on appeal as discussed below puts that ruling in
substantial question. 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, a process which 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.
On May 10, 1996, a three-judge panel of the U.S. Court of Appeals for the Third
Circuit issued an adverse decision in an appeal from the preliminary injunction
by the District Court enjoining members of the Georgine settlement class from
litigating asbestos-related personal injury claims in the tort system. The
appeal was brought by certain intervenors who opposed the class action. The
Court of Appeals decision--which will not become effective until that Court
issues its mandate--ruled against maintaining the settlement class action,
ordered that the preliminary injunction issued by the District Court (which
prohibits class members from litigating against Center defendants in the tort
system) be vacated, and ordered the District Court to decertify the class. The
Court ruled broadly that the case does not meet the requirements for class
certification under Federal Rule of Civil Procedure 23, concluding that a class
action cannot be certified for purposes of settlement unless it can be certified
for full-scale litigation. The Company believes that the Court erred in several
important respects. The Center petitioned for rehearing before the Third Circuit
en banc and that petition was denied. The Circuit Court has issued an order
stating that its mandate will not issue until August 16, 1996, meaning that the
preliminary injunction will remain in force at least until that time. The
Center members intend to file a petition for Certiorari with the U.S. Supreme
Court by that date, at which time the injunction will be automatically continued
until disposition of the case by the Supreme Court.
The Circuit Court recognized that the issues in the class action are of
significant importance. The opinion begins, "Every decade presents a few great
cases that force the judicial system to choose between forging a solution to a
major social problem on the one hand, and preserving its institutional values on
the other. This is such a case." The Center's counsel believes there are
substantial and substantive grounds for the Supreme Court to review the
decision. In addition to this case being of significant importance, the Circuit
Court's ruling is not consistent with rulings of several other circuit courts
that have considered Rule 23 issues in comparable cases. In particular, the
recent ruling in the Ahearn case by the Circuit Court of Appeals for the Fifth
------
Circuit, contrary to the Third Circuit, reached the conclusion that class
actions may be certified for purposes of settlement without also being certified
for purposes of full-scale litigation.
10
The Company remains optimistic that a future claimants settlement class action
may ultimately be approved; however, as noted above, the courts may not uphold
the settlement class action, and may not uphold the companion insurance action
or, even if upheld, there is a potential that judicial action might result in
substantive modification to the settlement.
Despite efforts to reverse the Circuit Court's decision, the District Court's
injunction precluding class members from litigating against the Center
defendants in the tort system may be lifted if the appeal to the Supreme Court
is unsuccessful. If the injunction is lifted, a large number of new asbestos-
related personal injury lawsuits might be filed within a short period of time
against the Center members, including the Company. If the appeal to the Supreme
Court is not ultimately successful, despite the pendency of the injunction, the
Company believes that the number of subsequent pending cases in the tort system
against the Company would likely increase absent successful negotiation of an
alternative settlement arrangement comparable to Georgine. In due course, the
consequences from a lifting of the injunction could result in presently
undeterminable, but likely higher, liability and defense costs under a claims
resolution mechanism alternative to the Georgine settlement which the Company
believes would likely be negotiated.
Even if the appeal to the Supreme Court is successful, various issues remain to
be resolved in the class action and the potential exists that those issues will
cause the class action ultimately not to succeed or to be substantially
modified. Similarly, the potential exists 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.
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
11
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
An 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 class action is
ultimately successful, projections of the rate of disposition
12
of future cases may be made.
Property Damage Litigation
The Company is also one of many defendants in a total of 14 pending lawsuits and
claims, including one class action, as of June 30, 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 have petitioned 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
13
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 has initiated 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,
14
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, nor
whether an alternative to the Georgine settlement vehicle may ultimately emerge,
or the ultimate liability if such alternative does not emerge, 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 $144.8 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 47,000
asbestos-related personal injury claims pending against the Company as of June
30, 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. If the preliminary injunction is
ultimately vacated, such claims would not be subject to the class action
constraints.
An insurance asset in the amount of $144.8 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. If the Georgine class action is not
ultimately approved, the Company believes that a claims resolution mechanism
alternative to the Georgine settlement will likely be negotiated, albeit at a
likely higher liability and defense costs. 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 or in
the cost of an alternative settlement format, 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 Georgine settlement class action and the likelihood that if Georgine
is not ultimately upheld, an alternative to Georgine would be negotiated, and
its experience, the Company believes the
15
asbestos-related lawsuits and claims against the Company would not be material
either to the financial condition of the Company or to its liquidity, although
as stated above, the net effect of any future liabilities recorded in excess of
insurance assets could be material to earnings in such future period.
_____________________________
TINS Litigation
In 1984, suit was filed against the Company in the U. S. District Court for the
District of New Jersey (the "Court") by The Industry Network System, Inc.
(TINS), a producer of video magazines in cassette form, and Elliot Fineman, a
consultant (Fineman and The Industry Network System, Inc. v. Armstrong World
----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
- ----------------
things, that the Company had improperly interfered with a tentative contract
which TINS had with an independent distributor of the Company's flooring
products and further claimed that the Company used its alleged monopoly power in
resilient floor coverings to obtain a monopoly in the video magazine market for
floor covering retailers in violation of federal antitrust laws. The Company
denied all allegations. On April 19, 1991, the jury rendered a verdict in the
case, which as entered by the court in its order of judgment, awarded the
plaintiffs the alternative, after all post-trial motions and appeals were
completed, of either their total tort claim damages (including punitive
damages), certain pre-judgment interest, and post-judgment interest or their
trebled antitrust claim damages, post-judgment interest and attorneys fees. The
higher amount awarded to the plaintiffs as a result of these actions totaled
$224 million in tort claim damages and pre-judgment interest, including $200
million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
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.
16
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 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.
TINS has appealed this later decision to the Circuit Court.
Note 3.
- -------
In July the Company learned that discoloration in a limited portion of its
residential sheet flooring product lines was occurring. The problem has been
traced to a raw material used in varying amounts in production primarily in the
last nine months. The manufacturing process has been corrected to eliminate any
further occurrence of this problem. New production, as available, will be
shipped to customers to meet demand for this product. A portion of the
production of the affected product lines was shipped to retailers and
potentially installed in consumers' homes. The remainder is in the Company's,
wholesalers' or retailers' inventory.
Based on the incidence rate of discoloration claims to date combined with a
projected increase in the incidence rate going forward, a contingency reserve
will be established in the third quarter. The amount of the contingency reserve
and the costs associated with the obsolescence or correction of inventory
containing the aforementioned raw material are dependent on a number of factors,
including the exact amount of product affected, the feasibility and cost of
correcting the discoloration problem and the value of the affected and/or
corrected product, which cannot be determined at this time. Based on
information currently available, the Company believes the ultimate loss would
not be material to the financial condition of the company or to its liquidity,
although the recording of any future liabilities may be material to the earnings
in such future period.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Financial Condition
- -------------------
Cash provided by operating activities supplemented by some of the proceeds from
exercised stock options was sufficient to cover normal working capital
requirements, payments of dividends, reduction of long-term debt and payments
related to restructuring activities. A total of $171.4 million was used for
investment in plant, property and equipment, purchase of preferred and common
shares, reduction of short-term debt and purchase of computer software. This
cash 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 $272.4 million as of June 30, 1996, $24.2 million lower than
the $296.6 million recorded at the end of the first quarter of 1996 and $74.4
million lower than the $346.8 million recorded at year-end 1995. The reduction
in working capital results primarily from the $174.0 million decrease in cash
and short-term investments and the $14.0 million increase in income taxes
payable. Partially offsetting this decrease in cash and increase in income
taxes payable were the $51.7 million for higher levels of accounts receivable,
inventory and other assets, the $46.9 million decrease in short-term debt and
current installments of long-term debt and the $15.0 million decrease in
accounts payable and accrued expenses. Seasonally higher sales levels for 1996
were the primary reason for the $40.5 million increase in receivables.
The ratio of current assets to current liabilities was 1.83 to 1 as of June 30,
1996 compared with 1.92 to 1 as of March 31, 1996 and December 31, 1995,
primarily due to the reduced levels of cash when compared with the end of 1995.
The June 30, 1996 long-term debt of $188.5 million, which excludes the Company's
guarantee of the ESOP loan, represented 15.7 percent of total capital compared
with 14.9 percent at the end of 1995. The June 30, 1996 and 1995 year-end
ratios of total debt (including the Company's guarantee of the ESOP loan) as a
percent of total capital were 36.1 percent and 38.5 percent, respectively.
17
In July 1996, the Company announced that effective October 1, 1996, the Employee
Stock Ownership Plan (ESOP) and the Retirement Savings Plan (RSP) would be
merged to form the new Retirement Savings and Stock Ownership Plan (RSSOP). On
July 31, the trustee of the ESOP converted the preferred stock held by the trust
into approximately 5.1 million shares of common stock at a one-for-one ratio.
The ultimate impact of the conversion and restructuring on the Company's results
will depend on the level of employee participation in the restructured plan and
the stock price over time.
Under the ongoing 2.5 million common share repurchase plan, the Company has
repurchased approximately 1,595,500 shares through June 30, 1996, including
543,100 repurchased in the first six months of this year. In July 1996, the
Board of Directors authorized the Company to repurchase an additional 3.0
million shares of its common stock through the open market or through privately
negotiated transactions. The increased stock repurchase authorization will
allow the Company greater flexibility to quickly deploy our cash flow, and to
the extent shares can be repurchased at attractive prices, should increase
earnings per share. Such stock repurchases are intended to supplement, rather
than supplant, further investment in the Company's core businesses.
The Company is involved in significant asbestos-related litigation which is
described more fully under "Litigation" on pages 8 - 16 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 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, nor whether an alternative to the Georgine
settlement vehicle may ultimately emerge or the ultimate liability if such
alternative does not emerge, 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 $144.8 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 47,000
asbestos-related personal injury claims pending against the Company as of June
30, 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. If the preliminary injunction is
ultimately vacated, such claims would not be subject to the class action
constraints.
An insurance asset in the amount of $144.8 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. If the Georgine class action is not
ultimately approved, the Company believes that a resolution mechanism
alternative to the Georgine settlement will likely be negotiated, albeit at a
likely higher liability and defense costs. A portion of such additional
liability may not be covered by the Company's ultimately
18
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 or in the cost of an alternative settlement format, 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 liability 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 Georgine settlement class action and the likelihood that if Georgine
is not ultimately upheld, an alternative to Georgine would be negotiated, 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.
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
- --------------------
Second-quarter net sales of $563.2 million were an all-time record and were 5
percent higher when compared with net sales of $536.0 million in second quarter
of 1995. North American sales were 8 percent higher than a year ago, driven by
strong sales in the home center channel. European sales were adversely impacted
by the strong U.S. dollar relative to European currencies which had a negative
impact on total Company sales growth by about one percentage point.
Second-quarter earnings from continuing businesses of $30.6 million included
restructuring charges of $29.6 million after tax. These earnings compare with
$47.4 million recorded in 1995's second quarter. The primary factors positively
impacting earnings were production efficiencies and lower raw material costs.
Earnings per share from continuing businesses were 73 cents per share on a
primary basis and 68 cents per share on a fully diluted basis compared with
$1.17 per share on a primary basis and $1.05 per share on a fully diluted basis
for the second quarter of 1995.
The after-tax restructuring charge of $29.6 million (79 cents per share on a
primary basis and 70 cents per share on a fully diluted basis) relates primarily
to severance and early retirement incentives for approximately 500 employees,
about two-thirds of whom are in staff positions, as well as for asset write-offs
related to facility closures. The charges are estimated to be evenly split
between cash payments and non-cash charges. The majority of the cash outflow is
expected to occur over the next 12 months. It is anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years. Actual severance
19
payments made in the second quarter and charged against the reserve were $2.0
million and related to 61 positions.
Actual cash payments charged against the restructuring reserves established for
pre-1996 plans were $16.8 million in the first six months of 1996 relating to
the elimination of 291 positions.
Net earnings for the second quarter 1996 were $30.6 million compared with $52.7
million for the same period in 1995. Second quarter 1995 net earnings included
$5.3 million (14 cents per share on a primary basis and 13 cents per share on a
fully diluted basis) of after-tax earnings from the discontinued operations of
Thomasville Furniture Industries, Inc. 1996 second-quarter net earnings per
share of common stock were 73 cents on a primary basis and 68 cents per share on
a fully diluted basis compared with $1.31 on a primary basis and $1.18 on a
fully diluted basis for the second quarter of 1995.
First-half 1996 sales were $1.06 billion, an increase of 2.5 percent over last
year's first-half sales of $1.04 billion. Earnings from continuing businesses
and net earnings for the first six months were $66.9 million ($1.61 per common
share on a primary basis and $1.48 on a fully-diluted basis) including the
second-quarter after-tax restructuring charge of $29.6 million. Last year's
first-half earnings from continuing businesses of $87.1 million, which included
an after-tax restructuring charge of $10.1 million, were $1.78 per common share
on a primary basis and $1.62 on a fully-diluted basis. The first-half 1996 net
earnings decreased 23 percent from 1995's first-half net earnings of $87.1
million ($2.13 per common share on a primary basis and $1.93 on a fully-diluted
basis). 1995's first-half net earnings include $13.2 million from the
discontinued furniture business (35 cents per common share on a primary basis
and 31 cents on a fully-diluted basis).
In July the Company learned that discoloration in a limited portion of its
residential sheet flooring product lines was occurring. The problem has been
traced to a raw material used in varying amounts in production primarily in the
last nine months. The manufacturing process has been corrected to eliminate any
further occurrence of this problem. New production, as available, will be
shipped to customers to meet demand for this product. A portion of the
production of the affected product lines was shipped to retailers and
potentially installed in consumers' homes. The remainder is in the Company's,
wholesalers' or retailers' inventory.
Based on the incidence rate of discoloration claims to date combined with a
projected increase in the incidence rate going forward, a contingency reserve
will be established in the third quarter. The amount of the contingency reserve
and the costs associated with the obsolescence or correction of inventory
containing the aforementioned raw material are dependent on a number of factors,
including the exact amount of product affected, the feasibility and cost of
correcting the discoloration problem and the value of the affected and/or
corrected product, which cannot be determined at this time. Based on information
currently available, the Company believes the ultimate loss would not be
material to the financial condition of the company or to its liquidity, although
the recording of any future liabilities may be material to the earnings in such
future period.
Industry segment results:
- ------------------------
In the floor coverings segment, sales were 8 percent higher than 1995's second
quarter. The primary drivers of sales growth continue to be U.S. residential
and commercial floor tile products and residential sheet flooring in Europe,
especially Eastern Europe and Russia. Operating income included a restructuring
charge of $14.5 million. Two-thirds of this charge, or $9.7 million, resulted
from the elimination of the separate Armstrong and W.W. Henry installation
products businesses, the consolidation of four W.W. Henry plants and the move of
the California-based W.W. Henry headquarters to Lancaster. The remainder is
related to other reorganizations in the floor products operations staff and at
the Armstrong-Nylex joint venture. Operating profits were positively impacted
by improvements in the cost structure from lower manufacturing and raw material
costs.
Worldwide sales in the building products segment increased almost 6 percent when
compared with 1995's second quarter. North American sales rose a significant 13
percent, with growth in both the commercial market segment and the U.S. home
center channel, somewhat offset by lackluster sales in Europe primarily because
of market softness in Germany and France. Operating profits included a $8.3
million restructuring charge, $7.2 million of which related to simplifying
product lines and production processes in the Muenster, Germany, ceilings
facility. The balance of the restructuring charge was associated with building
products operations staff reorganizations and asset write-downs. North American
operating profits remained strong but were slightly lowered by additional costs
for the new metal ceilings business in Europe and plant startup costs in China.
Sales in the industry products segment decreased almost 6 percent when compared
with 1995's second quarter primarily due to the stronger dollar. Operating
profits included a restructuring charge of $4.0 million, the majority of which
related to an early retirement offering to employees of the Fulton, New York
facility. Insulation Products results continued to be impacted by soft market
conditions and competitive pricing. These negative results along with a $1.1
million bad debt were largely offset by improved manufacturing costs. Armstrong
Industrial Specialties, Inc. results have benefited from raw material price
decreases and production efficiencies. This unit's gasket business has been
impacted by softness in the automotive industry while the flooring felt business
has improved.
20
In the ceramic segment, the $1.1 million of operating profits represented
Armstrong's share of its investment in Dal-Tile International, Inc. while 1995's
results reflect the pre-tax profits of the American Olean Tile Company. Higher
sales are occurring in the home center channel for this segment. The business
combination has improved the Company's results by realizing significant
synergies. Dal-Tile is in the process of filing a registration statement for
the purpose of an initial public offering. Some minor dilution to the Company's
37 percent share will occur; however, the Company has subscribed to an
additional stock investment which will partially offset this dilution.
Unallocated corporate expense included a $19.7 million restructuring charge
related to the elimination of approximately 150 corporate staff positions as a
result of the Corporate Organizational Effectiveness Study and for write-offs
related to the closing of excess office space at the Company's Lancaster, Pa.,
headquarters.
This Current Report on Form 10-Q contains forward looking statements (within the
meaning of the Private Securities Litigation Reform Act of 1995) regarding the
Company's earnings, liquidity and financial condition and the likelihood that an
alternative to the Georgine asbestos settlement class action will be negotiated.
--------
Actual results may differ materially as a result of the uncertainties identified
or if the factors on which the Company's conclusions are based do not conform to
the Company's expectations.
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, 1996, and the related condensed
consolidated statements of earnings for the three-month and six-month periods
ended June 30, 1996 and 1995, and the condensed consolidated statements of cash
flows for the six-month periods then ended. 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
August 12, 1996
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 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
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 Form of Agreement Between the Company and Certain of its
Executive Officers, together with a schedule identifying those
executives.
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
(b) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
On May 13, 1996, the registrant filed a current report on Form 8-K to
report certain developments with respect to certain litigation.
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 12, 1996
24
Exhibit Index
-------------
Exhibit No.
- -----------
No. 10 Form of Agreement Between the Company and Certain of its Executive
Officers, together with a schedule identifying those executives.
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
25