Exhibit 99
Table of Contents
For the Fiscal Year Ended December 31, 1995
a. Business
b. Market for Registrant's Common Equity and Related Stockholder
Matters
c. Selected Financial Data
d. Management's Discussion and Analysis of Financial Condition
and Results of Operations
e. Financial Statements and Supplementary Data
(i) Consolidated Statements of Earnings for the years
ended December 31, 1995, 1994 and 1993;
(ii) Consolidated Balance Sheet as of December 31, 1995 and
1994;
(iii) Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993;
(iv) Consolidated Statements of Shareholders Equity for the
years ended December 31, 1995, 1994 and 1993;
(v) Notes to Consolidated Financial Statements
(vi) Fourth Quarter 1995 Compared with Fourth Quarter 1994
(vii) Independent Auditor's Report
f. Depreciation Rates Schedule
g. Valuation and Qualifying Reserves of Accounts Receivable
Schedule
Item 1. Business
Armstrong World Industries, Inc. is a Pennsylvania corporation incorporated in
1891. The Company is a manufacturer of interior furnishings, including floor
coverings, and building products which are sold primarily for use in the
furnishing, refurbishing, repair, modernization and construction of residential,
commercial and institutional buildings. It also manufactures various industrial
and other products. In late 1995, Armstrong sold its furniture business and
combined its ceramic tile business with Dal-Tile International Inc.
("Dal-Tile"), retaining a minority equity interest in the combined company.
Unless the context indicates otherwise, the term "Company" means Armstrong World
Industries, Inc. and its consolidated subsidiaries.
The company's businesses include four reportable segments: floor coverings,
building products, industry products and ceramic tile.
at December 31 (millions) 1995 1994 1993
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Net trade sales:
Floor coverings $1,053.9 $1,063.5 $ 980.6
Building products 682.2 630.0 586.7
Industry products 348.8 312.2 297.7
Ceramic tile 240.1 220.3 210.7
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Total net sales $2,325.0 $2,226.0 $2,075.7
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Operating income (loss): (Note 1)
Floor coverings $ 145.0 $ 189.6 $ 156.6
Building products 92.2 86.8 18.8
Industry Products 9.3 41.2 27.2
Ceramic tile (Note 2) (168.4) 0.8 (44.3)
Unallocated corporate expense (34.0) (23.8) (59.8)
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Total operating income $ 44.1 $ 294.6 $ 98.5
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Depreciation and amortization:
Floor coverings $ 47.9 $ 49.2 $ 48.2
Building products 36.8 34.5 34.1
Industry products 19.3 17.6 14.6
Ceramic tile 13.5 13.8 14.9
Corporate 5.6 5.6 5.2
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Total depreciation
and amortization $ 123.1 $ 120.7 $ 117.0
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Capital additions: (Note 3)
Floor coverings $ 77.3 $ 56.7 $ 39.7
Building products 49.2 31.5 24.2
Industry products 45.0 22.6 22.1
Ceramic tile 9.6 20.4 19.8
Corporate 6.3 3.0 1.8
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Total capital additions $ 187.4 $ 134.2 $ 107.6
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Identifiable assets:
Floor coverings $ 583.2 $ 575.7 $ 541.2
Building products 513.5 478.1 483.0
Industry products 301.8 234.8 207.9
Ceramic tile 135.8 290.1 276.3
Discontinued business -- 182.1 175.4
Corporate 615.5 398.2 185.4
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Total assets $2,149.8 $2,159.0 $1,869.2
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Note 1:
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Restructuring charges in
operating income (millions) 1995 1994 1993
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Floor coverings $ 25.0 -- $ 8.4
Building products 6.3 -- 13.7
Industry products 31.4 -- 12.9
Ceramic tile -- -- 19.3
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Unallocated corporate expense 9.1 -- 35.0
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Total restructuring charges
in operating income $ 71.8 -- $ 89.3
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Note 2: 1995 operating income includes a $177.2 million loss due to the ceramic
tile business combination.
Note 3: 1995 capital additions for industry segments include property, plant and
equipment from acquisitions of $15.6 million.
DISCONTINUED OPERATIONS
On December 29, 1995, the company sold the stock of its furniture subsidiary,
Thomasville Furniture Industries, Inc., to INTERCO Incorporated for $331.2
million. INTERCO assumed $8.0 million of Thomasville interest-bearing debt. The
company recorded a gain of $83.9 million after tax on the sale. Certain
liabilities related to terminated benefit plans of approximately $11.3 million
were retained by the company. Thomasville and its subsidiaries recorded sales of
approximately $550.2 million in 1995, $526.8 million in 1994 and $449.7 million
in 1993.
Operating statement categories, except where otherwise indicated, have been
restated to exclude the effects of this discontinued business.
CERAMIC TILE BUSINESS COMBINATION
On December 29, 1995, the company entered into a business combination with
Dal-Tile International Inc. The transaction was accounted for at fair value and
involved the exchange of $27.6 million and the company's ceramic tile
operations, consisting primarily of the stock of American Olean Tile Company, a
wholly-owned subsidiary, for ownership of 37% of the shares of Dal-Tile. The
company's investment in Dal-Tile exceeds the underlying equity in net assets by
$123.9 million which will be amortized over a period of 30 years. The after-tax
loss on the transaction was $116.8 million.
The summarized financial information for ceramic tile operations is presented
below.
(millions) 1995 1994 1993
Net Sales $240.1 $220.3 $210.7
Operating income (loss)/1/ 8.8 .8 (44.3)
Assets/2/ 269.8 290.1 276.3
Liabilities/2/ 17.3 19.6 24.4
Note 1: Excludes 1995 loss of $177.2 million due to ceramic tile business
combination.
Note 2: 1995 balances were as of December 29, 1995, immediately prior to the
ceramic tile business combination.
EQUITY EARNINGS FROM AFFILIATES
Equity earnings from affiliates represent earnings from the 50% interest in the
WAVE joint venture with Worthington Industries. Previously these earnings had
been included in selling, general and administrative expenses.
Narrative Description of Business
The Company manufactures and sells interior furnishings, including floor
coverings and building products, and makes and markets a variety of specialty
products for the building, automotive, textile, and other industries. The
Company's activities extend worldwide.
Floor Coverings
The Company is a prominent manufacturer of floor coverings for the interiors of
homes and commercial and institutional buildings, with a broad range of
resilient flooring together with adhesives, installation and maintenance
materials and accessories. Resilient flooring, in both sheet and tile form, is
made in a wide variety of types, designs, and colors. Included are types of
flooring that offer such
features as ease of installation, reduced maintenance (no-wax), and cushioning
for greater underfoot comfort. Floor covering products are sold to the
commercial and residential market segments through wholesalers, retailers, and
contractors, and to the hotel/motel and manufactured homes industries.
Building Products
A major producer of ceiling materials in the United States and abroad, the
Company markets both residential and architectural ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs; most
provide noise reduction and incorporate Company-designed features intended to
permit ease of installation. These residential ceiling products are sold through
wholesalers and retailers. Architectural ceiling systems, designed for use in
shopping centers, offices, schools, hospitals, and other commercial and
institutional structures, are available in numerous colors, performance
characteristics and designs and offer characteristics such as acoustical
control, rated fire protection, and aesthetic appeal. Architectural ceiling
materials and accessories, along with acoustical wall panels, are sold by the
Company to ceiling systems contractors and to resale distributors. Grid products
are manufactured and sold through a joint venture with Worthington Industries.
Industry Products
The Company, including a number of its subsidiaries, makes and sells a variety
of specialty products for the building, automotive, textile and other
industries. These products include flexible pipe insulation sold for use in
construction and in original equipment manufacture; gasket materials for new
equipment and replacement use in the automotive, farm equipment, appliance, and
other industries; textile mill supplies including cots and aprons sold to
equipment manufacturers and textile mills and adhesives. Industry products are
sold, depending on type and ultimate use, to original equipment manufacturers,
contractors, wholesalers, fabricators and end users. In 1995, the Company
announced its intention to discuss with potential buyers the possible sale of
its textile products operation.
Ceramic Tile
Ceramic tile for floors, walls and countertops, together with adhesives,
installation and maintenance materials and accessories are sold through home
centers and sales and service centers operated by Dal-Tile following a business
combination of the Company's ceramic tile operations with Dal-Tile in late 1995.
-----------------------------------
The principal raw materials used in the manufacture of the Company's
products are synthetic resins, plasticizers, latex, mineral fibers and fillers,
clays, starches, perlite, and pigments and inks. In addition, the Company uses a
wide variety of other raw materials. Most raw materials are purchased from
sources outside of the Company. The Company also purchases significant amounts
of packaging materials for the containment and shipment of its various products.
During 1995, despite raw material cost increases, especially for plasticizers,
resins, and paper, adequate supplies of raw materials were available to all of
the Company's industry segments.
Customers' orders for the Company's products are mostly for immediate shipment.
Thus, in each industry segment, the Company has implemented inventory systems,
including its "just in time" inventory system, pursuant to which orders are
promptly filled out of inventory on hand or the product is manufactured to meet
the delivery date specified in the order. As a result, there historically has
been no material backlog in any industry segment.
The competitive position of the Company has been enhanced by patents on products
and processes developed or perfected within the Company or obtained through
acquisition. Although the Company considers that, in the aggregate, its patents
constitute a valuable asset, it does not regard any industry segment as being
materially dependent upon any single patent or any group of related patents.
There is significant competition in all the industry segments in which the
Company does business. Competition in each industry segment includes numerous
active companies (domestic and foreign), with emphasis on price, product
performance and service. In addition, with the exception of industrial and
other products and services, product styling is a significant method of
competition in the Company's industry segments. Increasing domestic competition
from foreign producers is apparent in certain industry segments and actions
continue to be taken to meet this competition.
The Company invested $187.4 million in 1995, $134.2 million in 1994, and $107.6
million in 1993 for additions to its property, plant and equipment.
Research and development activities are important and necessary in assisting the
Company to carry on and improve its business. Principal research and
development functions include the development of new products and processes and
the improvement of existing products and processes.
The Company spent $57.9 million in 1995, $53.1 million in 1994, and $58.0
million in 1993 on research and development activities worldwide for the
continuing businesses.
ENVIRONMENTAL MATTERS
In 1995, the company incurred capital expenditures of approximately $5.9 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1996 and 1997. The company
does not anticipate that it will incur significant capital expenditures in order
to meet the new requirements of the Clean Air Act of 1990 and the final
implementing regulations promulgated by various state agencies.
As with many industrial companies, Armstrong is involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), and similar
state laws at approximately 16 sites. In most cases, Armstrong is one of many
potentially responsible parties ("PRPs") who have voluntarily agreed to jointly
fund the required investigation and remediation of each site. With regard to
some sites, however, Armstrong disputes the liability, the proposed remedy or
the proposed cost allocation. Armstrong is alleged to have contributed a
significant volume of waste material at a former municipal landfill site in
Volney, New York. There, Armstrong, along with the county and other PRPs at the
site, have voluntarily performed a supplemental study to evaluate the USEPA's
proposed remedy at the site. Discussions with the USEPA are continuing regarding
the appropriate remedy to be implemented. A former county landfill site in
Buckingham County, Virginia, is also alleged to have received material from a
former subsidiary, Thomasville Furniture Industries, Inc. ("Thomasville"). In
September 1995, the USEPA ordered Thomasville to implement the remedy identified
in the September 1994, Record of Decision ("ROD"), the cost of which has been
estimated by Thomasville to be approximately $2.2 million. Pursuant to the terms
of the company's December 29, 1995, sale of Thomasville to INTERCO Incorporated,
Armstrong has provided to the USEPA a guarantee of the performance by
Thomasville of the required remedial work and has also entered into a cost-
sharing agreement with INTERCO for future costs relating to the site. Armstrong
may also have rights of contribution or reimbursement from other parties or
coverage under applicable insurance policies. The company is also remediating
environmental contamination resulting from past industrial activity at certain
of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior company experience
in remediation of contaminated sites. Although current law imposes joint and
several liability on all parties at any Superfund site, Armstrong's contribution
to the remediation of these sites is expected to be limited by the number of
other companies also identified as potentially liable for site costs. As a
result, the company's estimated liability reflects only the company's expected
share. In determining the probability of contribution, the company considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters. The estimated
liabilities do not take into account any claims for recoveries from insurance or
third parties.
Reserves at December 31, 1995, were for potential environmental liabilities that
the company considers probable and for which a reasonable estimate of the
potential liability could be made. Where existing data is sufficient to estimate
the amount of the liability, that estimate has been used; where only a range of
probable liability is available and no amount within that range is more likely
than any other, the lower end of the range has been used. As a result, the
company has accrued, before agreed-to insurance coverage, $8.0 million to
reflect its estimated undiscounted liability for environmental remediation. As
assessments and remediation activities progress at each individual site, these
liabilities are reviewed to reflect additional information as it becomes
available.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental
remediation costs, the company believes that any sum it may have to pay in
connection with environmental matters in excess of the amounts noted above would
not have a material adverse effect on its financial condition, liquidity or
results of operations.
As of December 31, 1995, the Company had approximately 10,820 active
employees, of whom approximately 3,615 are located outside the United States.
Year-end employment in 1995 was below the level at the end of 1994 primarily as
the result of the sale of the furniture business, the ceramic tile business
combination and various restructuring activities. About 65% of the Company's
approximately 4,380 hourly or salaried production and maintenance employees in
the United States are represented by labor unions.
GEOGRAPHIC AREAS
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Geographic areas
at December 31 (millions) 1995 1994 1993
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Net trade sales:
United States $1,586.4 $1,564.0 $1,461.0
Europe 558.7 483.4 456.6
Other foreign 179.9 178.6 158.1
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Interarea transfers:
United States 101.1 95.0 76.0
Europe 13.8 8.7 6.0
Other foreign 32.1 26.1 21.9
Eliminations (147.0) (129.8) (103.9)
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Total net sales $2,325.0 $2,226.0 $2,075.7
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Operating income:
United States $ 7.7 $ 235.5 $ 116.6
(See Note 2 on page 3)
Europe 62.6 75.3 31.7
Other foreign 7.8 7.6 10.0
Unallocated corporate expense (34.0) (23.8) (59.8)
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Total operating income $ 44.1 $ 294.6 $ 98.5
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Identifiable assets:
United States $1,044.5 $1,130.1 $1,098.5
Europe 406.7 376.5 347.0
Other foreign 83.4 72.6 63.2
Discontinued business -- 182.1 175.4
Corporate 615.5 398.2 185.4
Eliminations (0.3) (0.5) (0.3)
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Total assets $2,149.8 $2,159.0 $1,869.2
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United States net trade sales include export sales to non-affiliated customers
of $32.1 million in 1995, $26.1 million in 1994 and $20.7 million in 1993.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain and Switzerland. Operations in Australia,
Canada, The People's Republic of China, Hong Kong, Indonesia, Japan, Korea,
Singapore and Thailand are in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates marketing
exported products are accounted for by methods that approximate arm's-length
transactions, after considering the costs incurred by the selling company and
the return on assets employed of both the selling unit and the purchasing unit.
Operating income of a geographic area includes income accruing from sales to
affiliates.
The Company's foreign operations are subject to foreign government legislation
involving restrictions on investments (including transfers thereof), tariff
restrictions, personnel administration, and other actions by foreign
governments. In addition, consolidated earnings are subject to both U.S. and
foreign tax laws with respect to earnings of foreign subsidiaries, and to the
effects of currency fluctuations.
PART II
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Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
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The Company's Common Stock is traded on the New York Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of
February 9, 1996, there were approximately 7,120 holders of record of the
Company's Common Stock.
Quarterly financial information (millions except for per-share data) First Second Third Fourth Total year
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1995* Net sales $558.8 $596.8 $611.8 $557.6 $2,325.0
Gross profit 183.1 194.6 203.6 162.6 743.9
Earnings (loss) from continuing businesses 26.5 47.4 14.4 (74.7) 13.6
Net earnings 34.4 52.7 19.4 16.8 123.3
Per share of common stock:**
Primary: Earnings (loss) from continuing businesses 0.61 1.17 0.29 (2.09) (0.02)
Net earnings 0.82 1.31 0.42 0.35 2.90
Fully diluted: Earnings (loss) from continuing businesses 0.57 1.05 0.28 (2.09) (0.02)
Net earnings 0.75 1.18 0.40 0.34 2.67
Dividends per share of common stock 0.32 0.36 0.36 0.36 1.40
Price range of common stock -- low 38 3/8 43 50 1/4 52 7/8 38 3/8
Price range of common stock -- high 48 1/2 52 60 1/2 64 1/8 64 1/8
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1994* Net sales $514.0 $565.8 $582.3 $563.9 $2,226.0
Gross profit 165.9 196.0 206.1 174.1 742.1
Earnings from continuing businesses 42.5 48.7 56.6 39.4 187.2
Net earnings 48.0 53.3 61.6 47.5 210.4
Per share of common stock:**
Primary: Earnings from continuing businesses 1.03 1.19 1.41 0.93 4.60
Net earnings 1.17 1.31 1.54 1.17 5.22
Fully diluted: Earnings from continuing businesses 0.93 1.07 1.25 0.85 4.10
Net earnings 1.06 1.18 1.37 1.04 4.64
Dividends per share of common stock 0.30 0.32 0.32 0.32 1.26
Price range of common stock -- low 49 3/8 43 3/8 43 36 36
Price range of common stock -- high 57 1/2 57 1/4 53 7/8 46 5/8 57 1/2
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* 1994 and the first, second and third quarters of 1995 have been restated for
the results of the discontinued furniture business.
**The sum of the quarterly earnings per-share data does not always equal the
total year amounts due to changes in the average shares outstanding and, for
fully diluted data, the exclusion of the antidilutive effect in certain
quarters.
Item 6. Selected Financial Data ---------------------------------
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(Dollars in millions except for per-share data)
For year 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
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Net sales 2,325.0 2,226.0 2,075.7 2,111.4 2,021.4 2,082.4 2,050.4 1,843.4 1,608.7 1,295.0
Cost of goods sold 1,581.1 1,483.9 1,453.7 1,536.1 1,473.7 1,469.8 1,423.2 1,287.6 1,112.0 889.2
Total selling, general and
administrative expenses 457.0 449.2 435.6 446.6 415.1 404.0 380.7 331.3 288.8 240.3
Equity (earnings) loss
from affiliates (6.2) (1.7) (1.4) (0.2) -- -- -- -- -- --
Restructuring charges 71.8 -- 89.3 160.8 12.5 6.8 5.9 -- -- --
Loss from ceramic tile
business formation/(gain)
from sales of woodlands 177.2 -- -- -- -- (60.4) (9.5) (1.9) -- --
Operating income (loss) 44.1 294.6 98.5 (31.9) 120.1 262.2 250.1 226.4 207.9 165.5
Interest expense 34.0 28.3 38.0 41.6 45.8 37.5 40.5 25.8 11.5 5.4
Other expense (income), net 1.9 0.5 (6.1) (7.2) (8.5) 19.7 (5.7) (13.1) (4.3) (3.1)
Earnings (loss) from
continuing businesses
before income taxes 8.2 265.8 66.6 (66.3) 82.8 205.0 215.3 213.7 200.7 163.2
Income taxes (5.4) 78.6 17.6 (2.9) 32.7 69.5 74.6 79.4 82.2 70.0
Earnings (loss) from
continuing businesses 13.6 187.2 49.0 (63.4) 50.1 135.5 140.7 134.3 118.5 93.2
As a percentage of sales 0.6% 8.4% 2.4% -3.0% 2.5% 6.5% 6.9% 7.3% 7.4% 7.2%
As a percentage of average
monthly assets (a) .7% 10.7% 2.8% -3.3% 2.7% 7.5% 8.6% 10.4% 11.3% 10.8%
Earnings (loss) from
continuing businesses
applicable to common stock (b) (0.7) 173.1 35.1 (77.2) 30.7 116.0 131.0 133.9 118.0 92.8
Per common share -- primary (0.02) 4.60 0.93 (2.07) 0.83 2.98 2.88 2.90 2.50 1.93
Per common share --
fully diluted (c) (0.02) 4.10 0.92 (2.07) 0.83 2.74 2.76 2.90 2.50 1.93
Net earnings (loss) 123.3 210.4 63.5 (227.7) 48.2 141.0 187.6 162.7 150.4 122.4
As a percentage of sales 5.3% 9.5% 3.1% -10.8% 2.4% 6.8% 9.1% 8.8% 9.3% 9.4%
Net earnings (loss)
applicable to common
stock (b) 109.0 196.3 49.6 (241.5) 28.8 121.5 177.9 162.3 150.0 122.0
As a percentage of average
shareholders' equity 15.0% 31.3% 9.0% -33.9% 3.3% 13.0% 17.9% 17.0% 17.6% 16.0%
Per common share -- primary 2.90 5.22 1.32 (6.49) 0.77 3.12 3.92 3.51 3.18 2.54
Per common share --
fully diluted (c) 2.67 4.64 1.26 (6.49) 0.77 2.86 3.72 3.51 3.18 2.54
Dividends declared per
share of common stock 1.40 1.26 1.20 1.20 1.19 1.135 1.045 0.975 0.885 0.7325
Purchases of property,
plant and equipment 171.8 134.2 107.6 107.5 127.1 184.2 215.0 165.8 156.7 119.1
Aggregate cost of acquisitions 20.7 -- -- 4.2 -- 16.1 -- 355.8 71.5 53.1
Total depreciation and
amortization 123.1 120.7 117.0 123.4 122.1 116.5 121.6 99.4 83.6 67.6
Average number of
employees -- continuing
businesses 13,433 13,784 14,796 16,045 16,438 16,926 17,167 15,016 14,036 12,953
Average number of common
shares outstanding 37.1 37.5 37.2 37.1 37.1 38.8 45.4 46.2 47.2 48.1
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Year-end position
Working capital--
continuing businesses 346.8 384.4 279.3 239.8 353.8 305.2 449.4 260.6 345.3 401.5
Net property, plant and
equipment--
continuing businesses 878.2 966.4 937.6 967.2 1,042.8 1,032.7 944.0 930.4 674.1 534.7
Total assets 2,149.8 2,159.0 1,869.2 1,944.3 2,125.7 2,124.4 2,008.9 2,073.1 1,574.9 1,277.5
Long-term debt 188.3 237.2 256.8 266.6 301.4 233.2 181.3 185.9 67.7 58.8
Total debt as a percentage
of total capital (d) 38.5% 41.4% 52.2% 57.2% 46.9% 45.7% 36.1% 35.9% 22.8% 16.9%
Shareholders' equity 775.0 735.1 569.5 569.2 885.5 899.2 976.5 1,021.8 913.8 813.0
Book value per share of
common stock 19.83 18.97 14.71 14.87 23.55 24.07 23.04 21.86 19.53 16.85
Number of shareholders (e) (f) 7,084 7,473 7,963 8,611 8,896 9,110 9,322 10,355 9,418 9,621
Common shares outstanding 37.4 37.5 37.2 37.1 37.1 37.1 42.3 46.3 46.2 47.5
Market value per common share 62 38 1/2 53 1/4 31 7/8 29 1/4 25 37 1/4 35 32 1/4 29 7/8
====================================================================================================================================
Notes:
(a) Assets exclude insurance for asbestos-related liabilities.
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated shares.
(c) See italicized definition of fully diluted earnings per share on page 20.
(d) Total debt includes short-term debt, current installments of long-term
debt, long-term debt and ESOP loan guarantee. Total capital includes total
debt and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 4,200 to 4,700 employees for years 1988 through 1995.
(f) Includes, for 1987 and 1986, a trustee who was the shareholder of
record on behalf of approximately 11,000 employees who obtained
beneficial ownership through the Armstrong Stock Ownership Plan,
which was terminated at the end of 1987.
Certain selected financial data above have been restated for the effects of the
discontinued furniture business.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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1995 COMPARED WITH 1994
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FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 21), net cash
provided by operating activities was sufficient to cover payment of dividends
and the investment in plant, property and equipment. The remaining cash,
combined with increases in short-term debt, cash proceeds from the exercised
stock options and sale of assets, was used to cover the repurchase of shares of
the company's common stock for the treasury, the increase in cash and cash
equivalents, acquisitions, reduction of long-term debt and purchase of computer
software. Acquisitions in 1995 included a gasket materials and specialty paper
manufacturing facility in New York and a metal ceilings production plant in
England.
In December, the company completed two major transactions. First, the company
sold its interests in Thomasville Furniture Industries, Inc., a wholly-owned
subsidiary, to INTERCO International Inc. The purchase price of $331.2 million
included INTERCO's assumption of approximately $8 million of Thomasville debt.
An after-tax gain of $83.9 million, or $1.96 per share on a fully diluted basis,
was recorded on the sale.
Second, the company entered into a business combination with Dal-Tile
International Inc. Armstrong exchanged $27.6 million and the stock of its
ceramic tile operations, consisting primarily of American Olean Tile Company, a
wholly-owned subsidiary, for 37% ownership of the combined company. The
after-tax loss on the transaction was $116.8 million, or $2.73 per share on a
fully diluted basis.
During the third quarter, the company sold the champagne cork business in Spain
and announced its intention to discuss with potential buyers the possible sale
of the textile products operation. The divestiture of the champagne cork
business does not have a significant impact on financial results.
These actions show the company's commitment to focus its efforts in its core
businesses and to divest businesses that do not earn in excess of their cost of
capital. The company will use the net proceeds from these transactions to expand
its core businesses internally (with capital expenditures to strengthen the
businesses) and externally (with acquisitions to expand their size and scope),
and to continue with its program of repurchasing shares of common stock.
In November 1994, the Board of Directors authorized the company to repurchase up
to 2.5 million shares of its common stock, either in the open market or in
negotiated transactions. During 1995, the company repurchased 782,110 shares
with a cash outlay of $40.6 million. Since the inception of the program, the
company has repurchased 1,052,110 shares with a total cash outlay of $51.1
million as of December 31, 1995.
Working capital was $346.8 million as of December 31, 1995, $37.6 million lower
than the $384.4 million recorded at year-end 1994. The reduction in working
capital resulted primarily from the $79.6 million net reduction in current
assets and liabilities after the change to equity-based accounting for the
ceramic tile business combination completed December 29, 1995. Also
contributing to the reduction in working capital were higher levels of accrued
expenses, primarily as a result of accruals for restructuring actions, and
higher current installments on long-term debt. The affect of the ceramic tile
business combination and higher short-term liabilities was partially offset by
the increase in cash resulting from the sale of Thomasville, a
decrease in receivables and a decrease in inventories. The majority of the
change in receivables was due to the transfer of American Olean Tile receivables
to Dal-Tile as a part of the business combination. Although inventories
decreased by $33.2 million, without the affects of the business combination,
inventories would have increased $30.9 million, primarily due to the building of
finished stock for anticipated service level requirements. Included in these
increases was approximately $8.0 million due to the translation of foreign
currency receivables and inventories to U.S. dollars.
The 1995 year-end ratio of current assets to current liabilities was 1.92 to 1
compared with a ratio of 2.11 to 1 reported in 1994. Excluding the ceramic tile
business combination, the ratio remained unchanged when compared with last year.
Long-term debt, excluding the company's guarantee of the ESOP loan, was reduced
by $48.9 million in 1995. At December 31, 1995, long-term debt of $188.3 million
represented 14.9% of total capital compared with 18.9% at the end of 1994. The
1995 and 1994 year-end ratio of total debt (including the company's guarantee of
the ESOP loan) as a percent of total capital was 38.5% and 41.4%, respectively.
In February 1995, Armstrong arranged a $200 million, five-year revolving line of
credit with 10 banks. The line of credit is for general corporate purposes,
including use as a backstop for commercial paper notes. This replaced $245
million of short-term bilateral lines of credit with eight banks.
Should a need develop for additional financing, it is management's opinion that
the company has sufficient financial strength to warrant the required support
from lending institutions and capital markets.
The company is involved in significant asbestos-related litigation which is
described more fully on pages 21 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 $166 million in liability and
defense costs recorded on the 1995 balance sheet will be incurred to resolve an
estimated 59,000 asbestos-related personal injury claims pending against the
company as of December 31, 1995. These claims include those that were filed for
the period from January 1, 1994, to January 24, 1994, and which were previously
treated as potentially included within the settlement class action, and those
claims filed by claimants who have been identified as having filed exclusion
request forms to opt out of the settlement class action. A ruling from the Court
established January 24, 1994, as the date after which any asbestos-related
personal injury claims filed by non-opt-out claimants against the company or
other members of the Center for Claims Resolution are subject to the settlement
class action. In addition to the currently estimated pending claims and any
claims filed by individuals deemed to have opted out of the settlement class
action, any claims otherwise determined not to be subject to the settlement
class action will be resolved outside the settlement class action. The company
does
not know how many such claims ultimately may be filed by claimants deemed to
have opted out of the class action or by claimants otherwise determined not to
be subject to the settlement class action.
An insurance asset in the amount of $166 million recorded on the 1995 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, and the proposed settlement class action and its experience, the company
believes the asbestos-related lawsuits and claims against the company would not
be material either to the financial condition of the company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
Reference is made to the litigation involving The Industry Network System, Inc.
(TINS), discussed on page 21. In 1994, the jury returned a verdict finding that
the company had not caused damages to TINS, and the court subsequently entered
judgment in the company's favor. TINS' motion for a new trial was denied. TINS
filed an appeal with the U.S. Court of Appeals for the Third Circuit which
issued a judgment in favor of the company. TINS' Petition for Rehearing by the
same panel was denied in December 1995. On January 24, 1996, TINS filed a motion
seeking further appellate review by the Circuit Court.
Reference is also made to environmental matters as discussed on page 21. The
company believes any sum it may have to pay in connection with environmental
matters in excess of amounts accrued would not have a material adverse affect on
its financial condition, liquidity or results of operations.
CONSOLIDATED RESULTS
Net sales of $2.33 billion on a continuing business basis were once again an
all-time sales record for any year in the company's history. These results were
4% higher than the $2.23 billion recorded in 1994. The growth was largely due to
increased sales in both the global, particularly European, non-residential and
U.S. home center market segments. In keeping with one of the company's four key
strategies, 1995 saw the introduction of new products. The resilient flooring
business announced new floor products, primarily for the residential segment, at
its convention in December. Building Products Operations introduced a new high
style, high performance ceiling line, called Ultima, targeted to the
nonresidential segment. New glazed wall and floor tile products were introduced
by the ceramic tile operations. Sales dollars for 1995 included American Olean
Tile Company. However, as a result of the ceramic tile business combination,
beginning in 1996 Armstrong's share in Dal-Tile results will not be included in
net sales but will be included in operating income in accordance with equity
method accounting.
Earnings from continuing businesses before income taxes were $8.2 million, a
decrease from the $265.8 million in 1994. The earnings decline was attributable
to restructuring charges of $71.8 million and the loss of $177.2 million related
to the business combination of Armstrong's ceramic tile operations with Dal-Tile
International Inc.
Net earnings for the year were $123.3 million, compared with $210.4 million in
1994. Net earnings per share of common stock for 1995 were $2.90 on a primary
basis and $2.67 on a fully diluted basis. In 1994, net earnings per share of
common stock were $5.22 on a primary basis and $4.64 on a fully diluted basis.
1995's net earnings included $25.8 million of after-tax earnings from the
discontinued operations of Thomasville Furniture Industries, Inc., and $83.9
million of the after-tax gain from its sale. 1994's net earnings included $18.6
million in after-tax gains resulting from the resolution of tax audits, the sale
of its majority interest in a subsidiary and the reduction of the company's
estimated health care liability.
The company's level of performance in Economic Value Added (EVA) as measured by
return on capital was 14% in 1995, exceeding the company's 12% cost of capital.
Cost of goods sold in 1995 was 68.0% of sales, slightly higher than the 66.7%
recorded in 1994. This increase largely reflects start-up costs in the new
insulation products facility in Mebane, North Carolina, and the impact of
unfavorable sales mixes in residential flooring sales in North America. Included
in the 1994 cost of goods sold was a one-time gain of $12.2 million reflecting a
reduction in the company's estimated health care liability for employees on
long-term disability.
Selling, general and administrative (SG&A) costs in 1995 were 1.7% higher than
1994. The increased costs resulted from the translation of foreign currency
expenses to U.S. dollars at higher exchange rates. Excluding these adjustments,
expenses would have decreased by 1%.
Results for 1995 included restructuring charges of $71.8 million before tax or
$46.6 million after tax, or $1.09 per share on a fully diluted basis. In the
first quarter of 1995, the company announced plans to close a plant in
Braintree, Massachusetts. The before-tax restructuring charge of $15.6 million
includes costs accrued for the elimination of about 223 salaried and hourly
employee positions, for the obsolescence of equipment and for other costs to be
incurred after operations cease. Cash outlays will be about one-third of the
total charges with the majority of the cash outlay occurring in early 1996. The
plant ceased
operations on February 1, 1996.
In the third quarter, the company recorded a restructuring charge of $56.2
million before tax or $36.5 million after tax related to the company's ongoing
efforts to streamline the organization and enable the businesses to be the best-
cost suppliers in their markets. The restructuring charges primarily relate to
severance and early retirement incentives for approximately 670 employees, half
of whom are hourly and the other half are salaried. Nearly 40% of the $56.2
million charge was related to the North American resilient flooring business,
while another 40% was related to the European Operations, primarily in its
industry products and building products segments. The balance was related to
corporate and other operating segments. The charges are estimated to be evenly
split between cash payments throughout 1996 and noncash charges, primarily to
cover retirement-related expenses. It is anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years.
The company's interest expense increased due to higher debt levels during the
year and charges related to deferred compensation plans.
Armstrong's effective tax rate for 1995, excluding the tax benefit on the loss
related to the ceramic tile business combination, was 30.6% compared with a
29.6% rate in 1994.
GEOGRAPHIC AREA RESULTS
UNITED STATES
Sales increased slightly while operating income decreased when compared with
1994. Higher sales levels were generated through the national home center and
mass merchandiser channels, but lower levels were returned by the professionally
installed resilient flooring segment. Sales price increases occurred in most of
the U.S. businesses; however, operating income was impacted by the loss on the
ceramic tile business combination, restructuring charges, higher raw material
prices and start-up costs of the North Carolina insulation products facility.
1994 operating income included a one-time gain through the reduction in the
company's estimated health care liability for employees on long-term disability.
Export sales of Armstrong products to trade customers increased $6.0 million, or
23.7%, compared with 1994.
An organizational effectiveness study to review the company's staff support
activities will be completed in first-quarter 1996 and implemented by late 1996.
EUROPE
During 1995, economic conditions continued to improve and helped Armstrong's
end-use markets. For the year, sales increased 15.6%. All the company's European
businesses recorded year-to-year sales increases with the building products
segment being the most significant. Operating income decreased by nearly 17%,
impacted by restructuring charges. Partially offsetting these charges was
improved productivity -- much of it related to restructuring actions taken in
1993. The results in the European insulation products business continued to be
adversely affected by competitive pricing. An organizational effectiveness study
was completed in 1995 to align the staff with the global business units.
OTHER FOREIGN
Sales in 1995 increased slightly when compared with 1994, assisted by an
increase in building products sales in China. Operating income also increased
slightly, but reflected continued competitive pricing and higher expenses needed
to expand to China and other Far East markets. The company continues to extend
its investments in the Pacific area with the start of construction of a building
products manufacturing facility in Shanghai, China, to take advantage of this
area's market opportunity.
INDUSTRY SEGMENT RESULTS
FLOOR COVERINGS
The floor coverings segment sales decreased less than 1% from 1994. Higher home
center and nonresidental sales volume was offset by lower sales in U.S.
professionally installed residential sheet flooring. Operating income decreased
23.5% compared with 1994. Operating income included a restructuring charge of
$25.0 million, 90% of which related to elimination of employee positions in
North America. Operating income was favorably impacted by expense reductions and
higher selling prices, introduced early in 1995, that partially offset higher,
but downward trending, raw material prices. European sales growth and
profitability remained strong in this segment, with both hitting record levels.
Capital expenditures in this segment increased by $20.6 million and were
directed toward modernization of equipment, manufacturing capacity and operating
efficiencies.
Outlook
The company expects sales throughout the home center channels to remain strong
despite the current overall weakness in the retail market segments. In this
channel, The Home Depot, Lowes and Menard Inc. are important customers of our
resilient floor products. Lower or stabilized raw material prices and operating
efficiencies gained through restructuring activities should be positive factors
on operating income. Floor Products Operations has introduced a new brand
strategy targeted at three distinct market opportunities. The Armstrong and
Solarian brands will be used for sheet and tile floors at the "good" and
"better" price points while the new VIOS brand is an innovative line of upscale
sheet flooring products in the "best" category. Also recently introduced is the
Quest Program, offering independent flooring specialty retailers incentives to
strengthen their relationship with Armstrong. The second part of this program is
a unique display and merchandising system designed especially for that market.
Early results from these programs have shown order rates beyond initial high
expectations. In late 1995, the company announced that it was entering a
strategic alliance with the F. Egger Company of Austria to manufacture and
market laminate flooring products. Laminate flooring is made of decorative
melamine laminate compressed with a wood-based product and kraft paper for
balance. The European area has an aggressive sales plan for Eastern Europe and
Russia while Western and Central Europe will be target opportunities for growth
in sales of commercial sheet flooring. The W.W. Henry Company, a wholly-owned
subsidiary, has also focused its efforts on customer service through the
updating of its installation and adhesives products and packaging.
BUILDING PRODUCTS
The announcement in October that Building Products Operations was the first
building materials manufacturer and marketer to win a Malcolm Baldrige National
Quality Award demonstrates Building Products commitment to business excellence.
All geographic areas in the building products segment contributed to the 8%
sales increase with about one-third of the increase due to the
translation of foreign currencies to a weaker U.S. dollar. The European and
Pacific areas continued to show the strongest growth. Sales were assisted by the
worldwide introduction of Ultima, a high performance, high style ceiling.
Operating income of $92.2 million included a restructuring charge of $6.3
million mainly related to administrative functions in the European operations.
Sales growth, primarily in the worldwide commercial markets, higher selling
prices and continuing cost reduction efforts were positive factors on operating
income. WAVE, the grid system joint venture with Worthington Industries, has
been highly successful in both North America and Europe and is delivering an
excellent rate of return. Capital expenditures in this segment, which increased
by $17.7 million, are directed at increasing capacity through productivity
improvements.
Outlook
This segment continues to expect sales increases in the Pacific area and is
investing in the area with the construction of a building products manufacturing
facility in the People's Republic of China with plant completion scheduled in
late 1996. The company expects that the introduction of additional RH90 ceiling
products in early 1996 will continue to build the momentum in Europe and Asia.
The company has entered the European metal ceilings business with the
acquisition, in late 1995, of the metal ceiling production and marketing
business from Cape PLC of England.
INDUSTRY PRODUCTS
The industry products segment's sales grew by almost 12%, but the weaker U.S.
dollar accounted for two-thirds of the increase. Operating income, which
decreased significantly, includes a $31.4 million restructuring charge related
to the closing of the Braintree, Massachusetts, plant and elimination of
employee positions in Europe. Operating income for insulation products, the
largest business in this segment, was essentially flat year-on-year with gains
on translations of foreign currencies to U.S. dollars offset by the
restructuring charges. Also adversely affecting operating income was the need to
meet competitive European pricing and the start-up costs of $6.1 million for the
new Mebane, North Carolina, insulation products plant. In 1995, the Gasket and
Specialty Paper Operations became the first U.S. producer of soft gasket
material to obtain an ISO 9001 registration. Gasket and specialty paper products
sales increased from 1994 because of the acquisition in March of a gasket and
specialty paper manufacturing facility in Beaver Falls, New York. However,
operating income was impacted by lower automotive and diesel market sales and
higher raw material costs. Effective in 1996, this business will be a wholly-
owned subsidiary company, Armstrong Industrial Specialties, Inc. In the third
quarter, the company divested the champagne cork business in Spain. The textile
products business is still generating a modest operating loss, but lower than
the amount recorded in 1994.
Outlook
This business segment is using its technical advantage and attractive pricing to
enhance its market position. In early 1996, the Mebane insulation products plant
will begin operations. This plant provides a lower cost structure and logistical
advancements over the Braintree facility. These improvements, along with the
introduction of new products, are part of management's strategy for the
expansion of this business's global markets. Sales in Europe, the largest
geographic area in terms of sales, have been increasing during 1995 and the
trend is expected to continue.
Early in 1996, Armstrong Industrial Specialties, Inc., will distribute gasket
materials through a new tiered system to service customers of all sizes. In the
third quarter of 1995, the company announced its decision to discuss with
potential buyers the possible sale of the textile products operation.
CERAMIC TILE
The ceramic tile segment recorded sales increases in both the commercial and
residential market segments of the business with the residential segment
continuing to reflect the highest growth.
In December 1995, the company entered into a business combination with Dal-Tile
International Inc. to strengthen its position in the worldwide market. The
before-tax loss from this business combination was $177.2 million.
Excluding this loss, the ceramic tile segment's operating income improved
significantly over 1994 aided by new product offerings including glazed floor
and wall tile products targeted at opening price points.
Outlook
Armstrong retains a 37% interest in the new Dal-Tile International Inc. entity.
The company expects this business combination to result in improved levels of
customer service through the more efficient use of the manufacturing and
distribution resources of both companies. The synergies of the combination
should improve profitability in this segment. However, the amount and timing of
these synergies are dependent on the integration of the two businesses.
- --------------------------------------------------------------------------------
1994 COMPARED WITH 1993
- --------------------------------------------------------------------------------
Results for 1994 and 1993 have been restated to reflect changes due to the
discontinued furniture business.
FINANCIAL CONDITION
As shown on the Consolidated Statement of Cash Flows (see page 21), net cash
provided by operating activities in 1994 was $305.2 million, which was more than
sufficient to cover working capital requirements; payment of dividends; the
payment for restructuring activities and the investment in property, plant and
equipment. The remaining cash, including proceeds from stock options exercised
and the cash proceeds from the sale of assets and the company's majority
investment in BEGA/US, Inc., was used to reduce debt by $95.3 million and to
repurchase shares of the company's common stock for the treasury.
Working capital was $384.4 million as of December 31, 1994, $105.1 million
higher than the $279.3 million at year-end 1993. The primary reasons for the
increase in working capital were the $73.8 million repayment of short-term debt
and the $22.8 million increase in accounts receivable resulting from higher
sales levels. Modest increases in other assets including inventories and lower
levels of income taxes payable also increased working capital by $31.2 million.
Partially offsetting the increase were higher levels of accounts payable and
accrued expenses totaling $22.7 million.
The company's 1994 year-end ratio of current assets to current liabilities was
2.11 to 1 compared with a ratio of 1.69 to 1 reported in 1993. The major reason
for the ratio increase was the $73.8 million reduction of short-term debt.
Long-term debt, excluding the company's guarantee of the ESOP loan, was reduced
by $19.6 million in 1994. At year-end 1994, long-term debt of $237.2 million
represented 18.9% of total capital compared with 21.6% at the end of 1993. The
1994 and 1993 year-end ratio of total debt as a percent of total capital was
41.4% and 52.2%, respectively.
During the first quarter of 1994, the company terminated, prior to maturity, a
notional amount $25 million interest rate swap and, in the second quarter of
1994, a notional amount $15 million interest rate swap matured. During the
fourth quarter of 1993, the company terminated, prior to maturity, two notional
amount $50 million interest rate swaps and foreign currency swaps of French
francs 182.4 million and Belgian francs 270 million. The company's management of
foreign currency and interest rate exposures resulted in a loss of $1.7 million
in 1994 compared with a gain in 1993 of $1.9 million. As of December 31, 1994,
the company had no outstanding interest rate or currency swaps.
CONSOLIDATED RESULTS
Record net sales in 1994 of $2.23 billion were 7% higher than the 1993 sales of
$2.08 billion. Armstrong's U.S. residential markets reflected continued strength
in 1994, while European area economic conditions improved in 1994 causing a
rebound in sales opportunity. On a worldwide basis, the commercial and
institutional end-use market segments also improved, favorably affecting sales
opportunity. Armstrong took advantage of this opportunity and increased sales in
nearly every one of its businesses. The introduction of new products, primarily
for the residential market segments, also helped to increase sales in 1994.
Record net earnings were $210.4 million compared with net earnings of $63.5
million in 1993. The 1993 earnings included restructuring charges of $53.6
million after tax. Net earnings per common share were $5.22 on a primary basis
and $4.64 on a fully diluted basis compared with $1.32 and $1.26, respectively,
for 1993.
Armstrong's measure of return on average monthly assets was 10.7% for 1994
compared with 2.8% for 1993. Average monthly assets exclude the insurance for
asbestos-related liabilities. The return on common shareholders' equity in 1994
was 31.3% compared with 9.0% in 1993.
Cost of goods sold as a percent of sales was 66.7% for the year, the lowest
level for more than a quarter of a century, which compares favorably to 1993's
cost of goods sold of 70.0%. The continuing reduction in cost of goods sold
reflects the positive influence of the prior two years' restructuring programs,
productivity improvement in all our businesses, sales price increases in a
number of our businesses, some product mix improvement and the introduction of
new products, primarily in our residential businesses. During 1994, $12.2
million of the $14.6 million before-tax gain from a reduction in Armstrong's
health care liability for employees on long-term disability also lowered the
cost of goods sold. The reduction resulted from actions taken by the company to
qualify these employees for primary coverage under Medicare.
Selling, general and administrative expenses represent 20.2% of sales, down from
the 21.0% reported for 1993 with overall expenses increasing 3.1% when comparing
1994 with those of 1993. Higher expenses for the use of consultants in improving
the company's global competitiveness and for special incentive awards to
motivate superior performance were partially offset by the previously mentioned
gain from the reduction in the health care liability and a gain from the sale of
Armstrong's majority interest in BEGA/US, Inc.
No restructuring charges were recorded in 1994. However, 1993 results included
$89.3 million before tax of restructuring charges associated with Armstrong
initiatives to enhance its global competitiveness. These costs were primarily
associated with eliminating approximately 950 employee positions in the U.S. and
Europe. More than half of the amounts accrued at the end of 1993 were used with
much of the remaining accrual to be utilized in 1995.
Interest expense was significantly reduced in 1994 compared with 1993 and was
the result of lower debt levels.
The effective tax rate for 1994 was 30.9% compared with 30.0% in 1993. The
current year tax rate was helped by a gain from the reversal of previously
accrued tax expense following resolution of the company's 1988, 1989 and 1990
tax audits, the positive effect of tax benefits related to taxes on foreign
income and state income taxes through the realization of previously unrecognized
deferred tax assets and lower withholding taxes on foreign dividends. In
addition, the company utilized excess foreign tax credits during 1994. The 1993
tax rate reflected the company's higher use of foreign tax credits, reductions
of deferred taxes resulting from some countries lowering their statutory tax
rates and lower foreign tax rates, which more than offset the 1% increase in the
U.S. statutory tax rate.
GEOGRAPHIC AREA RESULTS
UNITED STATES
Sales increased by more than 7% while operating income was more than doubled
when compared with 1993. The primary end-use market segments -- residential,
which reflected continued strength from the prior year, and commercial/
institutional which became stronger during 1994 -- had a positive effect on this
area. Even though interest rates were raised six times during 1994, they had
very little effect on 1994's results. During 1994, both single family housing
starts and sales of existing single family homes rose close to 5%.
Nonresidential new construction grew at a rate of over 8% in 1994. The long-term
effect of higher interest rates may slow future sales growth in these market
segments.
Higher sales occurred primarily in the floor coverings segment. As in past
years, higher sales levels continued through the national home centers and mass
merchandisers channel. New product introductions for the residential end-use
markets also provided additional sales.
While the higher sales levels were a key factor, the significant restructuring
actions of the past two years also played a major part in increasing operating
income mainly in the building products segment and the ceramic tile segment.
Sales price increases occurred in most of the U.S. businesses and had a positive
effect on operating income.
Export sales of Armstrong products to trade customers increased $5.1 million, or
over 25%, compared with 1993.
EUROPE
During mid-1994, economic conditions began to improve and helped Armstrong's
end-use markets. For the year, sales increased nearly 6% and operating income
improved by 138%. All the company's European businesses recorded year-to-year
sales increases. Operating income was helped significantly by improved
productivity -- much of it related to restructuring actions taken in 1992 and
1993. The results in the European insulation products business were adversely
affected by increased competitive pricing and higher than usual obsolescence of
equipment.
OTHER FOREIGN
Sales in 1994 reversed a four-year declining trend and increased by 13% compared
with 1993. Operating income declined by $2.4 million, or 24%, reflecting the
competitive pricing and higher expenses needed to penetrate the Chinese and
other Far East markets and a shift in product mix towards lower margin commodity
products.
INDUSTRY SEGMENT RESULTS
FLOOR COVERINGS
Worldwide sales were 8% higher in 1994, with operating income increasing by 21%
from 1993 levels. The 1993 operating income included $8.4 million of
restructuring charges.
The resilient flooring portion of the segment recorded strong sales growth in
both North America and Europe. The U.S. resilient flooring business continued to
benefit in 1994 from higher sales of existing homes, new residential
construction and continued strength in the commercial construction and
remodeling market segments. This was accomplished even in light of the numerous
interest rate increases throughout 1994. Successful new product introductions in
the second half of 1994 helped to improve sales.
The major restructuring actions of the past two years, primarily in
manufacturing, some sales price increases, some unit volume increases and the
continued development of the residential business were key factors for this
turnaround. In the resilient flooring portion of the segment, operating income
improvement was the result of higher sales volume, some sales price increases
and manufacturing productivity improvements. Offsetting some of the effects of
these positive items were higher raw material costs that became more notable in
the second half of the year. Sales prices were increased as of January 1995 to
offset the rise in raw material prices.
Capital expenditures increased 43% over those of 1993. The expenditures continue
to be concentrated on improving manufacturing productivity, increasing capacity
and developing business systems.
BUILDING PRODUCTS
During 1994, commercial and institutional end-use market segments continued to
provide more opportunity. Sales grew more than 7% with North American sales
growing faster than those of the European area. The Pacific area recorded the
highest percentage growth with new business in China being a factor.
Operating income, excluding the effects of restructuring charges in 1993,
recorded the fastest growth of any segment -- up 167% over 1993. While higher
sales levels and sales price increases had a positive impact on operating
income, the prior two years' restructuring actions dramatically reduced
manufacturing costs and had the most significant impact on results.
Capital expenditures were increased about one-third over those of the past two
years and were directed at higher productivity levels and improving capacity.
1994 expenditures were about the same as depreciation levels.
INDUSTRY PRODUCTS
Sales increased by 5% while operating income improved only 3% when the 1993
restructuring charges of nearly $13 million are excluded. This segment is highly
influenced by its European orientation and the rebound in that area's economies
that started in the second half of 1994.
The insulation business, the largest portion of this segment, recorded sales
growth of about 5% while operating income was slightly higher than 1993. During
1994, this business lowered sales prices to meet intense European competition,
recorded higher than usual obsolescence of equipment and incurred some start-up
costs for its new manufacturing facility in Panyu, China.
The gasket materials business grew sales by 18% and pushed operating income 32%
higher. This business was favorably affected by the strong automotive markets in
1994.
The textile mill supply business saw its 1994 sales decline by 4% due to soft
end-use markets worldwide and strong competitive pressures. A small operating
loss was recorded for 1994 as this business continues to reengineer its
operations.
Capital expenditures were slightly higher in 1994 than 1993, but continue to
exceed depreciation. A significant portion of the expenditures were in the
insulation products business.
CERAMIC TILE
The ceramic tile segment recorded sales increases in both the commercial and
residential parts of the business with the residential part reflecting the
highest growth.
Ceramic tile recorded a significant operating loss in 1993 that was reversed in
1994 with a small operating income primarily generated through reduction of
production costs.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
- ---------------------------------------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1995 1994* 1993*
- -----------------------------------------------------------------------------------------------------------------
Net sales $2,325.0 $2,226.0 $2,075.7
Cost of goods sold 1,581.1 1,483.9 1,453.7
- -----------------------------------------------------------------------------------------------------------------
Gross profit 743.9 742.1 622.0
Selling, general and administrative expenses 457.0 449.2 435.6
Equity (earnings) loss from affiliates (6.2) (1.7) (1.4)
Restructuring charges 71.8 -- 89.3
Loss from ceramic tile business combination 177.2 -- --
- -----------------------------------------------------------------------------------------------------------------
Operating income 44.1 294.6 98.5
Interest expense 34.0 28.3 38.0
Other expense (income), net 1.9 0.5 (6.1)
- -----------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses before income taxes 8.2 265.8 66.6
Income taxes (5.4) 78.6 17.6
- -----------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses 13.6 187.2 49.0
- -----------------------------------------------------------------------------------------------------------------
Discontinued business:
Earnings from operations of Thomasville Furniture Industries, Inc.
(less income taxes of $13.9 in 1995, $15.5 in 1994, $9.6 in 1993) 25.8 23.2 14.5
Gain on disposal of discontinued business
(less income taxes of $53.4) 83.9 -- --
- -----------------------------------------------------------------------------------------------------------------
Net earnings $ 123.3 $ 210.4 $ 63.5
- --------------------------------------------------------------------------------=================================
Dividends paid on Series A convertible preferred stock 18.8 19.0 19.2
Tax benefit on dividends paid on unallocated preferred shares 4.5 4.9 5.3
- -----------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 109.0 $ 196.3 $49.6
- --------------------------------------------------------------------------------=================================
Per share of common stock:
Primary:
Earnings (loss) from continuing businesses (See note on pg. 21)$ (0.02) $ 4.60 $0.93
Earnings from discontinued business 0.68 0.62 0.39
Gain on sale of discontinued business 2.24 -- --
- -----------------------------------------------------------------------------------------------------------------
Net earnings $ 2.90 $ 5.22 $ 1.32
- ---------------------------------------------------------------------------------================================
Fully diluted:
Earnings (loss) from continuing businesses (See note on pg. 21) $ (0.02) $ 4.10 $0.92
Earnings from discontinued business 0.60 0.54 0.34
Gain on sale of discontinued business 1.96 -- --
- ------------------------------------------------------------------------------------------------------------------
Net earnings $ 2.67 $ 4.64 $ 1.26
- ---------------------------------------------------------------------------------=================================
*Restated for the effects of the discontinued furniture business.
The Notes to Consolidated Financial Statements, page 21 is an integral part of
these statements.
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------
Millions except for numbers of shares and per-share data As of December 31 1995 1994*
- -------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 256.9 $ 12.0
Accounts and notes receivable
(less allowance for discounts and losses: 1995--$29.0; 1994--$30.4) 217.9 249.0
Inventories 195.5 228.7
Income tax benefits 26.9 35.9
Net assets of discontinued business -- 182.1
Other current assets 25.5 23.9
- -------------------------------------------------------------------------------------------------------------
Total current assets 722.7 731.6
- -------------------------------------------------------------------------------------------------------------
Property, plant and equipment
(less accumulated depreciation and amortization: 1995--$975.9; 1994--$965.7) 878.2 966.4
Insurance for asbestos-related liabilities 166.0 198.0
Investment in affiliates 162.1 38.7
Other noncurrent assets 220.8 224.3
- -------------------------------------------------------------------------------------------------------------
Total assets $2,149.8 $2,159.0
- ----------------------------------------------------------------------------------------=====================
Liabilities and shareholders' equity
Current liabilities:
Short-term debt 22.0 17.9
Current installments of long-term debt 40.1 19.5
Accounts payable and accrued expenses 297.4 287.3
Income taxes 16.4 22.5
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 375.9 347.2
- -------------------------------------------------------------------------------------------------------------
Long-term debt 188.3 237.2
Employee Stock Ownership Plan (ESOP)
loan guarantee 234.7 245.5
Deferred income taxes 16.5 32.1
Postretirement and postemployment
benefit liabilities 242.8 242.5
Asbestos-related liabilities 166.0 198.0
Other long-term liabilities 140.6 112.8
Minority interest in subsidiaries 10.0 8.6
- -------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 998.9 1,076.7
- -------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Class A preferred stock. Authorized 20 million shares;
issued 5,654,450 shares of Series A convertible preferred
stock; outstanding: 1995--5,421,998 shares; 1994--5,478,416 shares;
retired: 1995--232,452 shares;1994--176,034 shares 258.9 261.6
Common stock, $1 par value per share.
Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9
Capital in excess of par value 49.3 39.3
Reduction for ESOP loan guarantee (225.1) (233.9)
Retained earnings 1,133.8 1,076.8
Foreign currency translation 18.0 8.3
- -------------------------------------------------------------------------------------------------------------
1,286.8 1,204.0
- -------------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost:
1995--15,014,098 shares; 1994--14,602,132 shares 511.8 468.9
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 775.0 735.1
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,149.8 $2,159.0
- ----------------------------------------------------------------------------------------=====================
*Restated for the effects of the discontinued furniture business. The Notes to
Consolidated Financial Statements, page 21 is an integral part of these
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Millions Years ended December 31 1995 1994* 1993*
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 123.3 $ 210.4 $ 63.5
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization excluding furniture 123.1 120.7 117.0
Depreciation and amortization for furniture 13.0 12.7 13.0
Deferred income taxes (8.7) 14.6 (1.3)
Gain on sale of discontinued businesses (83.9) -- --
Loss on ceramic tile business combination net of taxes 116.8 -- --
Loss from restructuring activities 71.8 -- 89.3
Restructuring payments (18.3) (20.2) (38.7)
(Increase) decrease in net assets of discontinued business 2.3 (4.4) (4.4)
Changes in operating assets and liabilities net of
effect of discontinued business,
restructuring and dispositions:
(Increase) decrease in receivables 6.9 (18.8) 15.8
(Increase) decrease in inventories (34.3) (6.8) 28.3
(Increase) decrease in other current assets 9.8 (3.6) 12.7
(Increase) in investment in affiliates (6.3) (0.9) (5.2)
(Increase) in other noncurrent assets (23.4) (18.9) (37.5)
Increase (decrease) in accounts payable and accrued expenses (37.0) 32.1 16.2
Increase (decrease) in income taxes payable (8.2) (10.1) 11.3
Increase (decrease) in other long-term liabilities 20.0 (5.3) 22.7
Other, net 3.1 3.7 (8.6)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 270.0 305.2 294.1
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment excluding furniture (171.8) (134.2) (107.6)
Purchases of property, plant and equipment for furniture (14.3) (14.1) (10.0)
Investment in computer software (10.9) (4.3) (2.9)
Proceeds from sale of land, facilities and discontinued businesses 342.6 12.8 10.3
Acquisitions (20.7) -- --
Investment in ceramic tile business combination (27.6) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 97.3 (139.8) (110.2)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt 3.2 (89.6) (114.9)
Reduction of long-term debt (20.1) (5.7) (9.2)
Cash dividends paid (70.8) (66.2) (63.8)
Purchase of common stock for the treasury (41.3) (10.6) (0.1)
Proceeds from exercised stock options 7.0 8.4 4.9
Other, net (0.6) (0.8) (7.6)
- -------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (122.6) (164.5) (190.7)
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 0.2 2.0 0.7
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 244.9 $ 2.9 $ (6.1)
- -----------------------------------------------------------------------------------================================
Cash and cash equivalents at beginning of year $ 12.0 $ 9.1 $ 15.2
- -----------------------------------------------------------------------------------================================
Cash and cash equivalents at end of year $ 256.9 $ 12.0 $ 9.1
- -----------------------------------------------------------------------------------================================
Supplemental cash flow information
Interest paid $ 29.6 $ 31.9 $ 33.8
Income taxes paid $ 76.9 $ 62.0 $ 15.8
- -----------------------------------------------------------------------------------================================
*Restated for the effects of the discontinued furniture business. The Notes to
Consolidated Financial Statements, page 21 is an integral part of these
statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1995 1994* 1993*
- -----------------------------------------------------------------------------------------------------------------------
Series A convertible preferred stock:
Balance at beginning of year $ 261.6 $ 263.9 $ 266.4
Shares retired 2.7 2.3 2.5
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 258.9 $ 261.6 $ 263.9
- -----------------------------------------------------------------------------------------------------------------------
Common stock, $1 par value:
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
- -----------------------------------------------------------------------------------------------------------------------
Capital in excess of par value:
Balance at beginning of year $ 39.3 $ 29.7 $ 26.1
Stock issuances 10.0 9.6 3.6
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 49.3 $ 39.3 $ 29.7
- -----------------------------------------------------------------------------------------------------------------------
Reduction for ESOP loan guarantee:
Balance at beginning of year $ (233.9) $ (241.8) $ (249.2)
Principal paid 10.7 8.4 6.3
Accrued compensation (1.9) (.5) 1.1
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (225.1) $ (233.9) $(241.8)
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $ 1,076.8 $ 927.7 $ 922.7
Net earnings for year 123.3 210.4 63.5
Tax benefit on dividends paid on unallocated preferred shares 4.5 4.9 5.3
- -----------------------------------------------------------------------------------------------------------------------
Total $1,204.6 $1,143.0 $ 991.5
- -----------------------------------------------------------------------------------------------------------------------
Less dividends:
Preferred stock $3.462 per share $ 18.8 $ 19.0 $ 19.2
Common stock
$1.40 per share in 1995; 52.0
$1.26 per share in 1994; 47.2
$1.20 per share in 1993; 44.6
Total dividends $ 70.8 $ 66.2 $ 63.8
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,133.8 $1,076.8 $ 927.7
- -----------------------------------------------------------------------------------------------------------------------
Foreign currency translation:
Balance at beginning of year $ 8.3 $ (3.4) $ 8.6
Translation adjustments and hedging activities 10.9 11.7 (12.5)
Allocated income taxes (1.2) -- .5
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 18.0 $ 8.3 $ (3.4)
- -----------------------------------------------------------------------------------------------------------------------
Less treasury stock at cost:
Balance at beginning of year $ 468.9 $ 458.5 $ 457.3
Stock purchases 41.3 10.6 .1
Stock issuance activity, net 1.6 (.2) 1.1
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 511.8 $ 468.9 $ 458.5
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 775.0 $ 735.1 $ 569.5
- ------------------------------------------------------------------------------=========================================
The Notes to Consolidated Financial Statements, page 21 is an integral part of
these statements.
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements
- ------------------------------------------------------------------------------
The consolidated financial statements and accompanying data in this report
include the accounts of the parent Armstrong World Industries, Inc., and its
domestic and foreign subsidiaries. These financial statements are prepared in
accordance with generally accepted accounting principles and include management
estimates and judgments, where appropriate. Actual results may differ from these
estimates. All significant intercompany transactions have been eliminated from
the consolidated statements. Prior years have been restated to reflect changes
due to the discontinued business as described on page 21.
- --------------------------------------------------------------------------------
Nature of Operations
- --------------------------------------------------------------------------------
The floor coverings segment includes resilient flooring, adhesives, installation
and maintenance materials and accessories sold to U.S. commercial and
residential segments through wholesalers, retailers and contractors. The
Corporate Retail Accounts division provides marketing services to home centers
which have become an important part of the company's business. To improve
logistical cost-effectiveness, 15 independent regional distribution centers are
being established to service these customers. To reduce interchannel conflict,
segmented resilient flooring products have been introduced to allow exclusive
sales in these different markets. Raw materials, especially plasticizers and
resins, are a significant cost of resilient flooring products. The company has
no influence on and is subject to cost changes in the worldwide market of these
materials.
The building products segment manufactures both residential and architectural
ceiling systems. Grid products, manufactured and sold through the joint venture
with Worthington Industries (WAVE), have become a more important part of this
business worldwide. Earnings from this joint venture are included in this
segment's operating income. The major sales activity in this segment is in
architectural ceiling systems for commercial and institutional structures which
are sold to contractors and resale distributors worldwide, with European sales
having a significant impact. Ceiling systems for the residential home segment
are sold through wholesalers and retailers, mainly in the United States. During
1995, the business experienced raw material price increases which recently have
shown signs of softening.
The industry products segment makes a variety of specialty products for the
building, automotive, textile and other industries worldwide. The majority of
sales in this segment are flexible pipe insulation used in construction and in
original equipment manufacturers. These sales are primarily in Europe, with
Germany having the largest concentration due to its regulatory requirements. The
major product costs for insulation are raw materials and labor. Strong
competition exists in insulation since there are minimal barriers to entry into
this market. Gasket materials are sold for new and replacement use in the
automotive, construction and farm equipment, appliance, small engine and
compressor industries. The automotive and diesel build rates are the most
sensitive market drivers for these products. This business also supplies backing
for Armstrong's resilient flooring products. Other products in the industry
products segment are textile mill supplies, including cots and aprons sold to
equipment manufacturers and textile mills, and adhesives. In 1995, the company
announced its intentions to discuss with potential buyers the possible sale of
the textile products operation.
The ceramic tile products segment, reported in previous years with the floor
coverings segment, includes ceramic tile sold through home centers and sales
service centers. Ceramic tile products face significant competition from foreign
suppliers.
INDUSTRY SEGMENTS
- --------------------------------------------------------------------
Industry segments
at December 31 (millions) 1995 1994 1993
- --------------------------------------------------------------------
Net trade sales:
Floor coverings $1,053.9 $1,063.5 $ 980.6
Building products 682.2 630.0 586.7
Industry products 348.8 312.2 297.7
Ceramic tile 240.1 220.3 210.7
- --------------------------------------------------------------------
Total net sales $2,325.0 $2,226.0 $2,075.7
- -------------------------------------===============================
Operating income (loss): (Note 1)
Floor coverings $ 145.0 $ 189.6 $ 156.6
Building products 92.2 86.8 18.8
Industry products 9.3 41.2 27.2
Ceramic tile (Note 2) (168.4) 0.8 (44.3)
Unallocated corporate expense (34.0) (23.8) (59.8)
- --------------------------------------------------------------------
Total operating income $ 44.1 $ 294.6 $ 98.5
- -------------------------------------===============================
Depreciation and amortization:
Floor coverings $ 47.9 $ 49.2 $ 48.2
Building products 36.8 34.5 34.1
Industry products 19.3 17.6 14.6
Ceramic tile 13.5 13.8 14.9
Corporate 5.6 5.6 5.2
- --------------------------------------------------------------------
Total depreciation
and amortization $ 123.1 $ 120.7 $ 117.0
- -------------------------------------===============================
Capital additions: (Note 3)
Floor coverings $ 77.3 $ 56.7 $ 39.7
Building products 49.2 31.5 24.2
Industry products 45.0 22.6 22.1
Ceramic tile 9.6 20.4 19.8
Corporate 6.3 3.0 1.8
- --------------------------------------------------------------------
Total capital additions $ 187.4 $ 134.2 $ 107.6
- -------------------------------------===============================
Identifiable assets:
Floor coverings $ 583.2 $ 575.7 $ 541.2
Building products 513.5 478.1 483.0
Industry products 301.8 234.8 207.9
Ceramic tile 135.8 290.1 276.3
Discontinued business -- 182.1 175.4
Corporate 615.5 398.2 185.4
- --------------------------------------------------------------------
Total assets $2,149.8 $2,159.0 $1,869.2
- -------------------------------------===============================
Note 1:
- --------------------------------------------------------------------
Restructuring charges in
operating income (millions) 1995 1994 1993
- --------------------------------------------------------------------
Floor coverings $ 25.0 -- $ 8.4
Building products 6.3 -- 13.7
Industry products 31.4 -- 12.9
Ceramic tile -- -- 19.3
- --------------------------------------------------------------------
Unallocated corporate expense 9.1 -- 35.0
- --------------------------------------------------------------------
Total restructuring charges
in operating income $ 71.8 -- $ 89.3
- -------------------------------------===============================
Note 2: 1995 operating income includes a $177.2 million loss due to the
ceramic tile business combination.
Note 3: 1995 capital additions for industry segments include property, plant and
equipment from acquisitions of $15.6 million.
GEOGRAPHIC AREAS
- ------------------------------------------------------------------
Geographic areas
at December 31 (millions) 1995 1994 1993
- ------------------------------------------------------------------
Net trade sales:
United States $1,586.4 $1,564.0 $1,461.0
Europe 558.7 483.4 456.6
Other foreign 179.9 178.6 158.1
- ------------------------------------------------------------------
Interarea transfers:
United States 101.1 95.0 76.0
Europe 13.8 8.7 6.0
Other foreign 32.1 26.1 21.9
Eliminations (147.0) (129.8) (103.9)
- ------------------------------------------------------------------
Total net sales $2,325.0 $2,226.0 $2,075.7
- -----------------------------------===============================
Operating income:
United States $ 7.7 $ 235.5 $ 116.6
(See Note 2 on page 21)
Europe 62.6 75.3 31.7
Other foreign 7.8 7.6 10.0
Unallocated corporate expense (34.0) (23.8) (59.8)
- ------------------------------------------------------------------
Total operating income $ 44.1 $ 294.6 $ 98.5
- -----------------------------------===============================
Identifiable assets:
United States $1,044.5 $1,130.1 $1,098.5
Europe 406.7 376.5 347.0
Other foreign 83.4 72.6 63.2
Discontinued business -- 182.1 175.4
Corporate 615.5 398.2 185.4
Eliminations (0.3) (0.5) (0.3)
- ------------------------------------------------------------------
Total assets $2,149.8 $2,159.0 $1,869.2
- -----------------------------------===============================
United States net trade sales include export sales to non-affiliated customers
of $32.1 million in 1995, $26.1 million in 1994 and $20.7 million in 1993.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain and Switzerland. Operations in Australia,
Canada, The People's Republic of China, Hong Kong, Indonesia, Japan, Korea,
Singapore and Thailand are in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates marketing
exported products are accounted for by methods that approximate arm's-length
transactions, after considering the costs incurred by the selling company and
the return on assets employed of both the selling unit and the purchasing unit.
Operating income of a geographic area includes income accruing from sales to
affiliates.
- --------------------------------------------------------------------------------
OPERATING STATEMENT ITEMS
- --------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
On December 29, 1995, the company sold the stock of its furniture subsidiary,
Thomasville Furniture Industries, Inc., to INTERCO Incorporated for $331.2
million. INTERCO assumed $8.0 million of Thomasville interest-bearing debt. The
company recorded a gain of $83.9 million after tax on the sale. Certain
liabilities related to terminated benefit plans of approximately $11.3 million
were retained by the company. Thomasville and its subsidiaries recorded sales of
approximately $550.2 million in 1995, $526.8 million in 1994 and $449.7 million
in 1993.
Operating statement categories, except where otherwise indicated, have been
restated to exclude the effects of this discontinued business.
CERAMIC TILE BUSINESS COMBINATION
On December 29, 1995, the company entered into a business combination with Dal-
Tile International Inc. The transaction was accounted for at fair value and
involved the exchange of $27.6 million and the company's ceramic tile
operations, consisting primarily of the stock of American Olean Tile Company, a
wholly-owned subsidiary, for ownership of 37% of the shares of Dal-Tile. The
company's investment in Dal-Tile exceeds the underlying equity in net assets by
$123.9 million which will be amortized over a period of 30 years. The after-tax
loss on the transaction was $116.8 million.
EQUITY EARNINGS FROM AFFILIATES
Equity earnings from affiliates represent earnings from the 50% interest in the
WAVE joint venture with Worthington Industries. Previously these earnings had
been included in selling, general and administrative expenses.
NET SALES
Net sales in 1995 totaled $2,325.0 million, 4.4% above the 1994 total of
$2,226.0 million. 1994 sales were 7.2% above the 1993 total of $2,075.7 million.
The amounts reported as net sales are the total sales billed during the year
less the sales value of goods returned, trade discounts and customers'
allowances and freight costs incurred in delivering products to customers.
EARNINGS FROM CONTINUING BUSINESSES
Earnings from continuing businesses were $13.6 million in 1995 compared with
$187.2 million in 1994 and $49.0 million in 1993. 1995 earnings included the
$116.8 million after-tax loss for the ceramic tile business combination
mentioned above. Included in the earnings for 1995 and 1993 were after-tax
restructuring charges of $46.4 million and $59.6 million, respectively.
NET EARNINGS
Net earnings were $123.3 million for 1995 compared with earnings of $210.4
million and $63.5 million for years 1994 and 1993 respectively.
EARNINGS PER COMMON SHARE
Earnings per common share are presented on the Consolidated Statements of
Earnings on page 20.
Primary earnings (loss) per share for "Earnings (loss) from continuing
businesses" and for "Net earnings" are determined by dividing the earnings
(loss), after deducting preferred dividends (net of tax benefits on unallocated
shares), by the average number of common shares outstanding and shares issuable
under stock options, if dilutive.
Fully diluted earnings (loss) per share include the shares of common stock
outstanding and the adjustments to common shares and earnings (loss) required to
portray the convertible preferred shares on an "if converted" basis unless the
effect is antidilutive.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $57.9 million in 1995, $53.1 million in 1994
and $58.0 million in 1993.
ADVERTISING COSTS
Advertising costs were $25.5 million in 1995, $29.6 million in 1994 and $32.0
million in 1993.
The company's practice is to expense the costs of advertising as they are
incurred.
MAINTENANCE AND REPAIR COSTS
Maintenance and repair costs were $120.2 million in 1995, $117.5 million in 1994
and $115.9 million in 1993.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization amounted to $123.1 million in 1995, $120.7 million
in 1994 and $117.0 million in 1993.
These amounts include amortization of intangible assets of $8.2 million in 1995,
$7.7 million in 1994 and $8.4 million in 1993.
Depreciation charges for financial reporting purposes are determined generally
on the straight-line basis at rates calculated to provide for the retirement of
assets at the end of their useful lives. Accelerated depreciation is generally
used for tax purposes. When assets are disposed of or retired, their costs and
related depreciation are removed from the books, and any resulting gains or
losses are reflected in "Selling, general and administrative expenses."
Intangibles are amortized over periods ranging from 2 to 40 years.
RESTRUCTURING CHARGES
Restructuring charges amounted to $71.8 million in 1995 and $89.3 million in
1993.
In the first quarter of 1995, the company announced a planned closing of an
Industry Products manufacturing plant located in Braintree, Massachusetts. This
plant phased out operations in early 1996. Accordingly, there was a nonrecurring
charge to the first-quarter 1995 financial results of $15.6 million before tax.
The charge was primarily related to severance pay and pension costs accrued for
the elimination of about 223 salaried and hourly employee positions. Cash
outlays will be about one third of the total charges with the majority of the
cash outlay occurring in early 1996.
In the third quarter of 1995, the company recorded a $56.2 million charge before
tax for restructuring resulting from the company's ongoing efforts to streamline
the organization and enhance operating efficiencies. The restructuring charges
primarily relate to severance and early retirement incentives for approximately
670 employees, half of whom are hourly and half are salaried. Nearly 40% of the
charge was related to the North American resilient flooring business, while
another 40% was related to European Operations. The balance was related to
corporate and other operating segments. The charges are estimated to be evenly
split between cash payments throughout 1996 and noncash charges, primarily to
cover retirement-related expenses. It is anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years.
Actual severance payments charged against the restructuring reserves for 1995
totaled $15.5 million. These charges relate to the elimination of approximately
300 positions during 1995. Also, an additional 300 positions were eliminated
during 1995 through special retirement incentives.
The 1993 charges were primarily the result of severance payments and special
retirement incentives associated with the elimination
of employee positions. At the end of 1995, $15.6 million related to this
liability remained in the reserve.
OTHER EXPENSE (INCOME), NET
- ---------------------------------------------------------------
(millions) 1995 1994 1993
- ---------------------------------------------------------------
Interest and dividend income $(3.3) $(3.7) $(7.5)
Foreign exchange, net loss 2.6 2.6 .5
Postretirement liability
transition obligation 1.6 -- --
Minority interest 0.6 1.8 2.1
Other 0.4 (0.2) (1.2)
- ---------------------------------------------------------------
Total $ 1.9 $ 0.5 $(6.1)
- ---------------------------------------========================
EMPLOYEE COMPENSATION
Employee compensation and average number of employees are presented in the table
below. Restructuring charges for severance costs and early retirement incentives
and all data related to the furniture segment has been excluded.
- ---------------------------------------------------------------------
Employee compensation
cost summary (millions) 1995 1994 1993
- ---------------------------------------------------------------------
Wages and salaries $ 591.0 $ 587.7 $ 564.1
Payroll taxes 61.7 54.8 56.0
Pension credits (11.3) (13.2) (6.9)
Insurance and other benefit costs 58.7 46.3 63.8
- ---------------------------------------------------------------------
Total $700.1 $ 675.6 $ 677.0
- ------------------------------------------===========================
Average number of employees 13,433 13,784 14,796
- ---------------------------------------------------------------------
PENSION COSTS
The company and a number of its subsidiaries have pension plans covering
substantially all employees. Benefits from the principal plan are based on the
employee's compensation and years of service.
Generally, the company's practice is to fund the actuarially determined current
service costs and the amounts necessary to amortize prior service obligations
over periods ranging up to 30 years, but not in excess of the full funding
limitation.
Funding requirements, in accordance with provisions of the Internal Revenue
Code, are determined independently of expense using an expected long-term rate
of return on assets of 8.67%. The company's principal plan was subject to the
full funding limitation in 1995, 1994 and 1993, and the company made no
contribution to that plan in any of these years. Contributions of $0.8 million
in 1993 were made to defined-benefit plans of company subsidiaries. No
contributions were made in 1995 and 1994.
The total pension cost or credit from all plans is presented in the table below.
- --------------------------------------------------------------
Total pension
(credit) cost (millions) 1995 1994 1993
- --------------------------------------------------------------
U.S. defined-benefit plans:
Net pension credit $(26.5) $(29.1) $(19.2)
Early retirement incentives 28.7 -- 38.0
Net curtailment gain (1.2) -- --
- --------------------------------------------------------------
Defined contribution plans 4.2 4.3 4.4
- --------------------------------------------------------------
Net pension cost of non-U.S.
defined-benefit plans 8.1 8.6 6.1
- --------------------------------------------------------------
Other funded and unfunded
pension costs 4.1 3.0 1.8
- --------------------------------------------------------------
Total pension (credit) cost $ 17.4 $ (13.2) $ 31.1
- ----------------------------------============================
In 1995, the company recognized a $1.6 million curtailment gain from the sale
of its furniture subsidiary and a $0.4 million curtailment loss from the ceramic
tile business combination.
The net credit for U.S. defined-benefit pension plans is presented in the table
below.
- -------------------------------------------------------------------
Net credit for U.S. defined-benefit
pension plans (millions) 1995 1994 1993
- -------------------------------------------------------------------
Assumptions:
Discount rate 8.00% 7.00% 7.25%
Rate of increase in future
compensation levels 5.25% 4.75% 4.75%
Expected long-term rate of
return on assets 8.75% 8.25% 8.25%
- -------------------------------------------------------------------
Actual (return) loss on assets $(406.7) $ 93.6 $(230.1)
Less amount deferred 313.0 (182.5) 152.3
- -------------------------------------------------------------------
Expected return on assets $ (93.7) $ (88.9) $ (77.8)
Net amortization and other (9.3) (9.5) (7.0)
Service cost -- benefits earned
during the year 16.7 17.9 17.3
Interest on the projected benefit
obligation 59.8 51.4 48.3
- -------------------------------------------------------------------
Net pension credit $ (26.5) $ (29.1) $ (19.2)
- ---------------------------------------============================
The company has defined-contribution pension plans for eligible employees at
certain of its U.S. subsidiaries, such as the Employee Stock Ownership Plan
(ESOP) described on page 21. The costs of all such plans totaled $4.2 million
in 1995, $4.3 million in 1994 and $4.4 million in 1993.
The funded status of the company's U.S. defined-benefit pension plans is
presented in the following table.
- -----------------------------------------------------------------------
Funded status of U.S. defined-benefit
pension plans (millions) 1995 1994
- -----------------------------------------------------------------------
Assumptions:
Discount rate 7.00% 8.00%
Compensation rate 4.25% 5.25%
- -----------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ (726.7) $ (657.7)
- -----------------------------------------------------------------------
Accumulated benefit obligation $ (802.4) $ (700.6)
- -----------------------------------------------------------------------
Projected benefit obligation for
services rendered to date $ (901.2) $ (774.8)
- -----------------------------------------------------------------------
Plan assets at fair value $1,446.6 $1,099.1
- -----------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation $ 545.4 $ 324.3
Unrecognized transition asset (40.3) (46.6)
Unrecognized prior service cost 81.8 102.8
Unrecognized net gain -- experience
different from assumptions (491.8) (285.4)
Provision for restructuring charges (9.9) (8.9)
- -----------------------------------------------------------------------
Prepaid pension cost $ 85.2 $ 86.2
- ---------------------------------------------------====================
The plan assets, stated at estimated fair value as of December 31, are
primarily listed stocks, bonds and investments with a major insurance company.
The company has pension plans covering employees in a number of foreign
countries that utilize assumptions that are consistent with, but not identical
to, those of the U.S. plans.
- -------------------------------------------------------------------------------
Net cost for non-U.S. defined-benefit
pension plans (millions) 1995 1994 1993
- -------------------------------------------------------------------------------
Actual (return) loss on assets $ (11.2) $ 1.8 $(14.3)
Less amount deferred 5.9 (6.1) 8.0
- -------------------------------------------------------------------------------
Expected return on assets $ (5.3) $ (4.3) $ (6.3)
Net amortization and other .4 .6 .5
Service cost -- benefits earned
during the year 4.9 5.2 5.2
Interest on the projected benefit
obligation 8.1 7.1 6.7
- -------------------------------------------------------------------------------
Net pension cost $ 8.1 $ 8.6 $ 6.1
- ----------------------------------------------------===========================
The following table presents the funded status of the non-U.S. defined-benefit
pension plans at December 31.
- -------------------------------------------------------------------------------
Funded status of non-U.S. defined-benefit
pension plans (millions) 1995 1994
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(103.0) $(87.1)
- -------------------------------------------------------------------------------
Accumulated benefit obligation $(107.6) $(91.5)
- -------------------------------------------------------------------------------
Projected benefit obligation for services
rendered to date $(115.8) $(99.5)
- -------------------------------------------------------------------------------
Plan assets at fair value 71.4 58.0
- -------------------------------------------------------------------------------
Projected benefit obligation greater than
plan assets $ (44.4) $(41.5)
Unrecognized transition obligation 3.3 3.2
Unrecognized prior service cost 3.4 3.5
Unrecognized net gain -- experience
different from assumptions (13.4) (9.5)
Adjustment required to recognize
minimum liability (.4) (.4)
- -------------------------------------------------------------------------------
Accrued pension cost $ (51.5) $(44.7)
- --------------------------------------------------------------=================
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS
The company has plans that provide for medical and life insurance benefits to
certain eligible employees, worldwide, when they retire from active service. The
company funds these benefit costs primarily on a pay-as-you-go basis, with the
retiree paying a portion of the cost for health care benefits through
deductibles and contributions.
The company announced in 1989 - 90 a 15-year phaseout of its cost of health care
benefits for certain future retirees. These future retirees include parent
company nonunion employees and some union employees. Shares of ESOP convertible
preferred stock are scheduled to be allocated to these employees, based on
employee age and years to expected retirement. In addition, they may enroll in a
voluntary portion of the ESOP to purchase additional shares.
Total retiree health care and life insurance expense was $19.1 million in 1995,
$18.7 million in 1994 and $18.5 million in 1993.
- -------------------------------------------------------------------------------
Periodic postretirement
benefit costs (millions) 1995 1994 1993
- -------------------------------------------------------------------------------
Assumptions:
Discount rate 8.25% 7.75% 8.25%
Rate of increase in future
compensation levels 5.25% 4.75% 4.75%
- -------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 2.8 $ 3.0 $ 3.0
- -------------------------------------------------------------------------------
Interest cost on accumulated
postretirement benefit obligation 17.1 16.5 16.3
- -------------------------------------------------------------------------------
Amortization of prior service credit (.8) (.8) (.8)
- -------------------------------------------------------------------------------
Periodic postretirement benefit cost $ 19.1 $ 18.7 $18.5
- ------------------------------------------------------=========================
The following table sets forth the status of the company's postretirement
benefit plans at December 31.
- -----------------------------------------------------------------------
Status of postretirement
benefit plans (millions) 1995 1994
- -----------------------------------------------------------------------
Assumptions:
Discount rate 7.00% 8.25%
Compensation rate 4.25% 5.25%
- -----------------------------------------------------------------------
Retirees $161.5 $141.2
Fully eligible active plan participants 17.2 27.8
Other active plan participants 67.9 39.5
- -----------------------------------------------------------------------
Total accumulated postretirement
benefit obligation (APBO) $246.6 $208.5
- -----------------------------------------------------------------------
Unrecognized prior service credit 7.3 8.1
Unrecognized net loss (40.7) (6.9)
- -----------------------------------------------------------------------
Accrued postretirement benefit cost $213.2 $209.7
- ------------------------------------------------------=================
The assumed health care cost trend rate used to measure the APBO was 12% in
1994, decreasing 1% per year to an ultimate rate of 6% by the year 2000. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, if the health care cost trend rate assumptions were
increased by 1%, the APBO as of December 31, 1995, would be increased by $22.9
million. The effect of this change on the total of service and interest costs
for 1995 would be an increase of $2.3 million.
The company provides certain postemployment benefits to former or inactive
employees and their dependents during the period following employment but before
retirement.
In 1995, the company recorded a postemployment benefit expense of $3.2 million,
which included a $4.1 million credit from the transfer of the payment
responsibility for certain disability benefits to the company's defined-benefit
pension plan. In 1994, the company recorded a postemployment benefit credit of
$12.2 million, which included a $14.6 million gain related to the qualification
in 1994 of long-term disabled employees for primary medical coverage under
Medicare. The company recorded $4.0 million of postemployment benefit expense in
1993.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In 1989, Armstrong established an ESOP that borrowed $270 million from banks and
insurance companies, repayable over 15 years and guaranteed by the company. The
ESOP used the proceeds to purchase 5,654,450 shares of a new series of
convertible preferred stock issued by the company. The number of preferred
shares released for allocation to participant accounts is based on the
proportion of principal and interest paid to the total amount of debt service
remaining to be paid over the life of the borrowings. Through December 31, 1995,
the ESOP allocated to participants 1,940,004 shares and retired 232,452 shares.
The preferred stock has a minimum conversion value of $47.75 per share with an
annual dividend of $3.462.
The ESOP currently covers parent company nonunion employees, some union
employees and those employees of major domestic subsidiaries.
The company's guarantee of the ESOP loan has been recorded as a long-term
obligation and as a reduction of shareholders' equity on its consolidated
balance sheet.
- ---------------------------------------------------
Details of ESOP debt service
payments (millions) 1995 1994 1993
- ---------------------------------------------------
Preferred dividends paid $18.8 $19.0 $19.2
Employee contributions 6.7 6.2 5.9
Company contributions 6.2 4.9 3.5
- ---------------------------------------------------
Debt service payments made
by ESOP trustee $31.7 $30.1 $28.6
- --------------------------------===================
The company recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $3.5 million in 1995, $3.6 million in 1994 and $3.7 million
in 1993. Costs for all years continue to be offset by savings from changes to
company-sponsored health care benefits and elimination of a contribution-
matching feature in the company-sponsored voluntary retirement savings plan.
TAXES
Taxes totaled $71.7 million in 1995, $150.4 million in 1994 and $89.6 million in
1993.
Deferred tax assets and liabilities are recognized using enacted tax rates for
the expected future tax consequences of events that have been recognized in the
financial statements or tax returns. The tax benefit for dividends paid on
unallocated shares of stock held by the ESOP is recognized in shareholders'
equity (see page 21).
- -------------------------------------------------------------------------------
Details of taxes (millions) 1995 1994 1993
- -------------------------------------------------------------------------------
Earnings (loss) from continuing businesses before
income taxes:
Domestic $(28.7) $262.7 $ 61.6
Foreign 68.0 52.1 29.3
Eliminations (31.1) (49.0) (24.3)
- -------------------------------------------------------------------------------
Total $ 8.2 $265.8 $ 66.6
- -------------------------------------------------------------------------------
Income tax provision (benefit):
Current:
Federal $(19.7) $ 12.8 $ 15.5
Foreign 23.4 25.9 10.6
State (0.2) 5.0 3.7
- -------------------------------------------------------------------------------
Total current 3.5 43.7 29.8
- -------------------------------------------------------------------------------
Deferred:
Federal (6.2) 41.4 (11.0)
Foreign (2.7) (2.2) (1.2)
State -- (4.3) --
- -------------------------------------------------------------------------------
Total deferred (8.9) 34.9 (12.2)
- -------------------------------------------------------------------------------
Total income taxes (5.4) 78.6 17.6
Payroll taxes 61.5 54.8 55.8
Property, franchise and capital
stock taxes 15.6 17.0 16.2
- -------------------------------------------------------------------------------
Total taxes $ 71.7 $150.4 $ 89.6
- ------------------------------------------------------=========================
At December 31, 1995, unremitted earnings of subsidiaries outside the United
States were $135.6 million (at current balance sheet exchange rates) on which no
U.S. taxes have been provided. If such earnings were to be remitted without
offsetting tax credits in the United States, withholding taxes would be $12.5
million. The company's intention, however, is to permanently reinvest those
earnings or to repatriate them only when it is tax effective to do so.
- -----------------------------------------------------------------
Reconciliation to
U.S. statutory tax rate (millions) 1995 1994 1993
- -----------------------------------------------------------------
Tax expense at statutory rate $ 2.9 $93.0 $23.3
State income taxes -- (1.5) 1.2
(Benefit) on ESOP dividend (2.1) (1.7) (1.4)
(Benefit) on foreign and
foreign-source income (7.7) (1.4) (8.0)
Utilization of excess foreign
tax credit -- (5.4) --
Reversal of prior year provisions -- (6.5) --
Other items 0.1 2.1 0.9
Restructuring charges (0.2) -- 1.6
Loss from ceramic tile business
combination 1.6 -- --
- -----------------------------------------------------------------
Tax (benefit) expense at effective rate $(5.4) $78.6 $17.6
- -------------------------------------------=======================
- -------------------------------------------------------------------------------
BALANCE SHEET ITEMS
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to $256.9 million at the end of 1995 from
$12.0 million at the end of 1994. Operating and other factors associated with
the increase in cash and cash equivalents are detailed in the Consolidated
Statements of Cash Flows on page 21.
Short-term investments, substantially all of which have maturities of three
months or less when purchased, are considered to be cash equivalents and are
carried at cost or less, generally approximating market value.
RECEIVABLES
Receivables decreased $31.1 million in 1995, with the majority of the change due
to the transfer of American Olean Tile receivables to Dal-Tile International
Inc. as a part of the business combination. Lower sales in the last quarter of
1995, when compared with 1994, more than offset the $4.9 million effect of
translating foreign currency receivables to U.S. dollars at higher exchange
rates.
- -------------------------------------------------------------------
Accounts and notes
receivable (millions) 1995 1994
- -------------------------------------------------------------------
Customers' receivables $213.4 $249.8
Customers' notes 21.3 19.3
Miscellaneous receivables 12.2 10.3
- -------------------------------------------------------------------
246.9 279.4
- -------------------------------------------------------------------
Less allowance for discounts and losses 29.0 30.4
- -------------------------------------------------------------------
Net $217.9 $249.0
- -----------------------------------------------------==============
Generally, the company sells its products to select, preapproved groups of
customers which include flooring and building material distributors, ceiling
systems contractors, regional and national mass merchandisers, home centers and
original equipment manufacturers. The businesses of these customers are directly
affected by changes in economic and market conditions. The company considers
these factors and the financial condition of each customer when establishing its
allowance for losses from doubtful accounts.
The carrying amount of the receivables approximates fair value because of the
short maturity of these items.
Trade receivables are recorded in gross billed amounts as of date of shipment.
Provision is made for estimated applicable discounts and losses.
INVENTORIES
Although inventories decreased by $33.2 million in 1995, without the affect of
the ceramic tile business combination, inventories would have increased $30.9
million. The higher inventory levels in the floor coverings industry products
segments were primarily due to increasing inventory levels for insulation
products in order to ensure customer service while starting up new production
facilities at Mebane, North Carolina, and the softening of sales in the floor
industry segment. The translation of foreign currency inventories to U.S.
dollars at higher exchange rates increased inventories by $3.1 million.
Approximately 51% in 1995 and 36% in 1994 of the company's total inventory was
valued on a LIFO (last-in, first-out) basis. Such inventory values were lower
than would have been reported on a total FIFO (first-in, first-out) basis, by
$62.4 million at the end of 1995 and $55.5 million at year-end 1994.
- --------------------------------------------------------
Inventories (millions) 1995 1994
- --------------------------------------------------------
Finished goods $119.9 $155.1
Goods in process 24.0 25.5
Raw materials and supplies 51.6 48.1
- --------------------------------------------------------
Total $195.5 $228.7
- ----------------------------------------================
Inventories are valued at the lower of cost or market. Approximately 90 percent
of 1995's domestic inventories are valued using the LIFO method. Other
inventories are generally determined on a FIFO method.
INCOME TAX BENEFITS
Income tax benefits were $26.9 million in 1995 and $35.9 million in 1994. Of
these amounts, deferred tax benefits were $26.4 million in 1995 and $31.7
million in 1994.
OTHER CURRENT ASSETS
Other current assets were $25.5 million in 1995, an increase of $1.6 million
from the $23.9 million in 1994.
- ---------------------------------------------------------------
Property, plant and equipment
- ---------------------------------------------------------------
(millions) 1995 1994
- ---------------------------------------------------------------
Land $ 25.6 $ 28.8
Buildings 390.6 437.4
Machinery and equipment 1,313.7 1,379.6
Construction in progress 124.2 86.3
- ---------------------------------------------------------------
1,854.1 1,932.1
- ---------------------------------------------------------------
Less accumulated depreciation
and amortization 975.9 965.7
- ---------------------------------------------------------------
Net $ 878.2 $ 966.4
- --------------------------------------------===================
The $78.0 million decrease in gross book value to $1,854.1 at the end of 1995
included $221.8 million reduction from the ceramic tile business combination,
$71.4 million reduction from sales, retirements, dispositions and other changes,
and $187.4 million increase for capital additions and acquisitions. Also,
because of translating foreign currency property, plant and equipment into U.S.
dollars at higher exchange rates, 1995 gross book value was higher by $27.2
million and net book value increased by $12.9 million.
The unexpended cost of approved capital appropriations amounted to $169.5
million at year-end 1995, substantially all of which is scheduled to be expended
during 1996.
Property, plant and equipment values are stated at acquisition cost, with
accumulated depreciation and amortization deducted to arrive at net book value.
The Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," is
effective for fiscal years beginning after December 15, 1995. The adoption of
this standard will not have a material impact on the company.
INSURANCE FOR ASBESTOS-RELATED LIABILITIES
Insurance for asbestos-related liabilities was $166.0 million reflecting the
company's belief in the ultimate availability of insurance in an amount to cover
the estimated potential liability of a like amount (see page 21). Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. See discussion on page 21.
Other noncurrent assets
- -------------------------------------------------------
(millions) 1995 1994
- -------------------------------------------------------
Goodwill and other intangibles $ 50.2 $ 63.2
Pension-related assets 108.4 106.7
Other 62.2 54.4
- -------------------------------------------------------
Total $220.8 $224.3
- ---------------------------------------================
Excluding the $19.8 million reduction from the ceramic tile business
combination, other noncurrent assets increased $16.3 million in 1995. Goodwill
and other intangibles increased $6.8 million reflecting higher spending levels
in computer software systems and acquired intangibles from acquisitions. The
$7.8 million increase in the "Other" category was primarily attributed to higher
paid-up insurance policy asset values.
Noncurrent assets are carried at cost or less or under the equity method of
accounting.
INVESTMENTS IN AFFILIATES
Investments in affiliates were $162.1 million in 1995, an increase of $123.4
million, reflecting the ceramic tile business combination with Dal-Tile
International Inc. whereby the company acquired a 37% interest in Dal-Tile in
exchange for the stock of the company's ceramic tile operations and $27.6
million in cash. Also included in investments in affiliates is the 50% interest
in the WAVE joint venture.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------------
(millions) 1995 1994
- ----------------------------------------------------
Payables, trade and other $168.3 $151.1
Employment costs 51.2 72.9
Restructuring costs 40.1 20.3
Other 37.8 43.0
- ----------------------------------------------------
Total $297.4 $287.3
- ------------------------------------================
The carrying amount of accounts payable and accrued expenses approximates fair
value because of the short maturity of these items.
INCOME TAXES
- ----------------------------------------
(millions) 1995 1994
- ----------------------------------------
Payable--current $15.0 $21.4
Deferred--current 1.4 1.1
- ----------------------------------------
Total $16.4 $22.5
- --------------------------==============
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the following
table.
- --------------------------------------------------------------------------------
Deferred income taxes (millions) 1995 1994
- --------------------------------------------------------------------------------
Postretirement and postemployment benefits $ (82.6) $ (95.0)
Restructuring benefits (13.4) (14.7)
Asbestos-related liabilities (58.1) (69.3)
Alternative minimum tax credit -- (5.3)
Other (64.6) (77.8)
- --------------------------------------------------------------------------------
Net deferred assets $(218.7) $(262.1)
- --------------------------------------------------------------------------------
Accumulated depreciation $ 90.7 $ 106.5
Pension costs 35.8 33.1
Insurance for asbestos-related liabilities 58.1 69.3
Other 25.6 54.7
- --------------------------------------------------------------------------------
Total deferred income tax liabilities $ 210.2 $ 263.6
- --------------------------------------------------------------------------------
Net deferred income tax liabilities (assets) $ (8.5) $ 1.5
- --------------------------------------------------------------------------------
Less net income tax (benefits)--current (25.0) (30.6)
Less net income tax (benefits)--noncurrent -- --
Deferred income taxes -- long term $ 16.5 $ 32.1
- --------------------------------------------------------------==================
DEBT
- --------------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
(millions) 1995 rate 1994 rate
- --------------------------------------------------------------------------------
Short-term debt:
Commercial paper $ -- -- $ 3.2 6.00%
Foreign banks 22.0 7.27% 14.7 7.20%
- --------------------------------------------------------------------------------
Total short-term debt $ 22.0 7.27% $ 17.9 6.99%
- --------------------------------------------------------------------------------
Long-term debt:
93/4% debentures
due 2008 $125.0 9.75% $125.0 9.75%
Medium-term notes
8.5 - 9% due
1996 - 2001 92.8 8.74% 111.8 8.75%
Industrial
development bond 8.5 5.35% 17.7 5.66%
Other 2.1 12.29% 2.2 12.25%
- --------------------------------------------------------------------------------
Total long-term debt $228.4 9.20% $256.7 9.05%
- --------------------------------------------------------------------------------
Less current installments 40.1 8.50% 19.5 8.80%
- --------------------------------------------------------------------------------
Net long-term debt $188.3 9.35% $237.2 9.07%
- --------------------------------------------====================================
- --------------------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- --------------------------------------------------------------------------------
1997 $13.7 2000 $ 18.1
1998 13.5 2001 7.5
1999 --
- --------------------------------------------------------------------------------
The December 31, 1995, carrying amounts of short-term debt and current
installments of long-term debt approximate fair value because of the short
maturity of these items.
The estimated fair value of net long-term debt was $234.9 million and $247.2
million at December 31, 1995 and 1994, respectively. The fair value estimates of
long-term debt were based upon quotes from major financial institutions, taking
into consideration
current rates offered to the company for debt of the same remaining maturities.
The 93/4% debentures and the medium-term notes are not redeemable until maturity
and have no sinking-fund requirements.
The industrial development bond matures in 2004 with a variable interest rate
that is reset weekly.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had a
carrying value of $1.9 million at December 31, 1995.
In February 1995, Armstrong arranged a $200 million five-year revolving line of
credit with 10 banks for general corporate purposes. In addition, the company's
foreign subsidiaries have approximately $154.0 million of unused short-term
lines of credit available from banks. The domestic credit lines are subject to
an annual commitment fee.
The company can borrow from its banks generally at rates approximating the
lowest available to commercial borrowers and can issue short-term commercial
paper notes supported by the lines of credit.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
The company selectively uses foreign currency forward and option contracts to
offset the effects of exchange rate changes on cash flow exposures denominated
in foreign currencies. These exposures include firm or anticipated intercompany
trade accounts, royalties, service fees, dividends, intercompany loans and third
party sales or payments. The primary exposures are denominated in European
currencies and the Canadian dollar. The company normally hedges cash flow
exposures up to one year. The company's foreign currency cash flow exposures,
net hedge and unhedged exposures at December 31, 1995, were as follows:
- --------------------------------------------------------------------------------
Foreign currency
exposure (millions)/1/ Gross Net hedge Unhedged
- --------------------------------------------------------------------------------
Canadian dollar $30.0 $15.3 $14.7
Italian lira to French franc 23.0 10.2 12.8
French franc 22.4 22.4 --
German mark 15.0 7.9 7.1
Irish pound to British pound 8.9 -- 8.9
Spanish peseta to French franc 8.0 4.0 4.0
Other 24.0 2.5 21.5
- --------------------------------------------------------------------------------
Total $131.3 $62.3 $69.0
- -----------------------------------------------------===========================
Note 1: The currencies shown are in relation to the U.S. dollar, except as
indicated.
Realized and unrealized gains and losses on contracts that are used to offset
the effects of exchange rate changes on foreign currency cash flows are normally
marked to market and recognized in statements of operations. The foreign
currency options consist primarily of purchased options that are designated as
effective hedges and are deferred and included in income as part of the
underlying transactions.
Realized and unrealized gains and losses on foreign currency contracts used to
hedge intercompany transactions of a long-term investment nature are included in
the foreign currency translation component of shareholders' equity.
The company's foreign currency forward and option contracts by currency at
December 31, 1995, were as follows. All of the contracts mature within 11
months.
- ----------------------------------------------------------------------------
Foreign currency
contracts (millions)/1/ Forward contracts Option contracts
- ----------------------------------------------------------------------------
Sold Bought Sold Bought
- ----------------------------------------------------------------------------
Canadian dollar $ 8.2 $ -- -- $ 7.1
Italian lira to French franc 10.2 -- -- --
French franc 10.4 -- -- 12.0
German mark 29.1 21.2 -- --
Spanish peseta to
French franc -- -- -- 4.0
Other 9.3 6.8 -- --
- ----------------------------------------------------------------------------
Total $67.2 $28.0 -- $23.1
- ----------------------------------------====================================
Note 1: The currencies shown are in relation to the U.S. dollar, except as
indicated, and are converted at year-end market exchange rates.
The company selectively enters into interest rate swap agreements to reduce the
impact of interest rate changes on its debt. The interest rate swap agreements
involve exchanges of fixed or floating rate interest payments without the
exchange of the underlying notional amounts. The notional amounts of such
agreements are used to measure the interest to be paid or received and do not
represent the amount of exposure to loss.
In 1987, the company entered into a seven-year notional $15 million interest
rate swap whereby the company paid interest at the 30-day U.S. commercial paper
rate and received interest at a fixed rate of 10.22%. The swap matured in 1994.
In 1987, the company entered into one 5-year and two 7-year currency interest
rate swaps whereby the company exchanged a total of U.S. $86.3 million for
German marks 90 million, French francs 182.4 million and Belgian francs 270
million to hedge net investment in foreign subsidiaries. The agreements provided
for the company to make fixed interest rate payments of 5.37% for the German
mark swap, 8.88% for the French franc swap and 7.8% for the Belgian franc swap
while receiving interest at the 30-day U.S. commercial paper rate. The swaps
hedged net investment in foreign subsidiaries until 1992, at which time they
were redesignated to hedge foreign currency cash flow exposures. Upon
redesignation, the swaps were marked to market through income. The German mark
swap matured in 1992. The two remaining swaps were terminated prior to maturity
in 1993 due to the appreciation of the foreign currencies and a pretax loss of
$0.7 million was recognized in other income and expense.
In 1992, the company entered into two 3-year notional amount $50 million
interest rate swaps, whereby the company paid interest at the six-month London
Interbank Offered Rate (LIBOR) in arrears and received interest at an average
fixed rate of 6.6%. The swaps were terminated prior to maturity in 1993 due to
rising interest rates and a pretax gain of $2.5 million was recognized in
income.
In 1993, the company entered into a five-year notional amount $25 million
interest rate swap, whereby the company paid interest at the six-month LIBOR and
received interest at a fixed rate of 5.575%. The swap was terminated in 1994 due
to rising interest rates and a pretax loss of $0.1 million was recognized in
income.
The company had no interest rate hedging agreements on December 31, 1995.
The foreign currency hedges and the swap agreements are straightforward "plain
vanilla" contracts that have no imbedded options or other terms that involve a
higher level of complexity or risk. The company does not hold or issue financial
instruments for trading purposes.
The realized and unrealized gains and losses relating to the company's
management of foreign currency and interest rate exposures are shown below on a
disaggregated basis for the years ended December 31, 1995, 1994 and 1993.
- ------------------------------------------------------------------------------
Foreign currency
--------------------------------- Interest
Exposure Net rate
Gain (loss) (millions) effect Contracts/1/ effect/2/ swaps
- ------------------------------------------------------------------------------
Year 1995
- ------------------------------------------------------------------------------
Income statement:
Realized $(1.1) $(2.4) $(3.5) $ --
Unrealized 0.2 0.3 0.5 --
On balance sheet:
Realized 4.4 (4.2) 0.2 --
Unrealized (0.1) 0.2 0.1 --
Off balance sheet -- -- -- --
Total $ 3.4 $(6.1) $(2.7) $ --
- -----------------------------------===========================================
Year 1994
- ------------------------------------------------------------------------------
Income statement:
Realized $ (.7) $(2.5) $(3.2) $ .2
Unrealized -- .4 .4 --
On balance sheet:
Realized 2.1 (5.8) (3.7) --
Unrealized 4.8 (.2) 4.6 --
Off balance sheet -- -- -- --
Total $ 6.2 $(8.1) $(1.9) $ .2
- -----------------------------------===========================================
Year 1993
- ------------------------------------------------------------------------------
Income statement:
Realized $ (.8) $(2.8) $(3.6) $7.0
Unrealized -- (.9) (.9) --
On balance sheet:
Realized -- -- -- --
Unrealized (1.2) .2 (1.0) --
Off balance sheet -- -- -- .4
Total $(2.0) $(3.5) $(5.5) $7.4
- -----------------------------------===========================================
Note 1: The company borrows centrally and enters into foreign currency
intercompany transactions of a long-term investment nature with foreign
subsidiaries. These are fully hedged. Accordingly, gains and losses on these
transactions are fully offset by losses and gains from the related foreign
exchange contracts.
Note 2: Excludes the offsetting effect of interest rate differentials on
underlying intercompany transactions being hedged of $0.1 million in 1995, $0.6
million in 1994 and $0.5 million in 1993.
The company continually monitors the market risk of its foreign currency and
interest rate contracts by marking the positions to market. The counterparties
to these instruments are major international financial institutions and exposure
to any one counterparty is limited. The company uses commercial rating agencies
to evaluate the credit quality of the counterparties, and the company does not
anticipate a loss resulting from any credit risk of these institutions.
As of December 31, 1995, the company had provided $150.8 million in standby
letters of credit and financial guarantees. The company does not normally
provide collateral or other security to support these instruments.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were $140.6 million in 1995, an increase of $27.8
million from $112.8 million in 1994. Increases of $10.0 million for pension-
related liabilities, $9.4 million for deferred compensation and $7.8 million for
idle leases (resulting from 1995 restructuring actions) were the primary causes
for the increase. Also included in other long-term liabilities were amounts for
workers' compensation, vacation
accrual, a reserve for estimated environmental- remediation liabilities (see
"Environmental Matters" on this page) and a reserve for the estimated potential
liability primarily associated with claims pending in the company's asbestos-
related litigation.
Based upon the company's experience with the asbestos-related litigation--as
well as the Wellington Agreement, other settlement agreements with certain of
the company's insurance carriers and an earlier interim agreement with several
primary carriers--a residual reserve amount of $4.7 million is intended to cover
potential liability and settlement costs that are not covered by insurance,
legal and administrative costs not covered under the agreements and certain
other factors that have been involved in the litigation about which
uncertainties exist. Future costs of litigation against the company's insurance
carriers and other legal costs indirectly related to the litigation, expected to
be modest, will be expensed outside the reserve. Amounts, primarily insurance
litigation costs, estimated to be payable within one year are included under
current liabilities.
This reserve does not address any unanticipated reduction in expected insurance
coverage that might result in the future related to pending lawsuits and claims
nor any potential shortfall in such coverage for claims that are subject to the
settlement class action referred to on pages 21.
The fair value of other long-term liabilities was estimated to be $128.9 million
at December 31, 1995, and $104.4 million at December 31, 1994, using a
discounted cash flow approach at discount rates of 5.8% in 1995 and 7.9% in
1994.
ASBESTOS-RELATED LIABILITIES
Asbestos-related liabilities of $166.0 million represent the estimated potential
liability and defense cost to resolve approximately 59,000 personal injury
claims pending against the company as of December 31, 1995. The company has
recorded an insurance asset (see page 21) in the amount of $166.0 million for
coverage of these claims. See discussion on page 21.
ENVIRONMENTAL MATTERS
In 1995, the company incurred capital expenditures of approximately $5.9 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1996 and 1997. The company
does not anticipate that it will incur significant capital expenditures in order
to meet the new requirements of the Clean Air Act of 1990 and the final
implementing regulations promulgated by various state agencies.
As with many industrial companies, Armstrong is involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), and similar state laws at approximately 16 sites. In most cases,
Armstrong is one of many potentially responsible parties ("PRPs") who have
voluntarily agreed to jointly fund the required investigation and remediation of
each site. With regard to some sites, however, Armstrong disputes the liability,
the proposed remedy or the proposed cost allocation. Armstrong is alleged to
have contributed a significant volume of waste material at a former municipal
landfill site in Volney, New York. There, Armstrong, along with the county and
other PRPs at the site, have voluntarily performed a supplemental study to
evaluate the USEPA's proposed remedy at the site. Discussions with the USEPA are
continuing regarding the appropriate remedy to be implemented. A former county
landfill site in Buckingham County, Virginia, is also alleged to have received
material from a former subsidiary, Thomasville Furniture Industries, Inc.
("Thomasville"). In September 1995, the USEPA ordered Thomasville to implement
the remedy identified in the September 1994, Record of Decision ("ROD"), the
cost of which has been estimated by Thomasville to be approximately $2.2
million. Pursuant to the terms of the company's December 29, 1995, sale of
Thomasville to INTERCO Incorporated, Armstrong has provided to the USEPA a
guarantee of the performance by Thomasville of the required remedial work and
has also entered into a cost-sharing agreement with INTERCO for future costs
relating to the site. Armstrong may also have rights of contribution or
reimbursement from other parties or coverage under applicable insurance
policies. The company is also remediating environmental contamination resulting
from past industrial activity at certain of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior company experience
in remediation of contaminated sites. Although current law imposes joint and
several liability on all parties at any Superfund site, Armstrong's contribution
to the remediation of these sites is expected to be limited by the number of
other companies also identified as potentially liable for site costs. As a
result, the company's estimated liability reflects only the company's expected
share. In determining the probability of contribution, the company considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters. The estimated
liabilities do not take into account any claims for recoveries from insurance or
third parties.
Reserves at December 31, 1995, were for potential environmental liabilities that
the company considers probable and for which a reasonable estimate of the
potential liability could be made. Where existing data is sufficient to estimate
the amount of the liability, that estimate has been used; where only a range of
probable liability is available and no amount within that range is more likely
than any other, the lower end of the range has been used. As a result, the
company has accrued, before agreed-to insurance coverage, $8.0 million to
reflect its estimated undiscounted liability for environmental remediation. As
assessments and remediation activities progress at each individual site, these
liabilities are reviewed to reflect additional information as it becomes
available.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the company believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations.
STOCK OPTIONS
The 1993 Long-Term Stock Incentive Plan, approved by the shareholders in April
1993, replaces the 1984 Long-Term Stock Option Plan for Key Employees. No
further options will be issued under the 1984 Plan.
Awards under the 1993 Long-Term Stock Incentive Plan may be in the form of stock
options, stock appreciation rights in conjunction with stock options,
performance restricted shares and restricted stock awards. No more than
4,300,000 shares of common stock may be issued under the Plan, and no more than
430,000 shares of common stock may be awarded in the form of restricted stock
awards. The Plan extends to April 25, 2003. Pre-1993 grants made under
predecessor plans will be governed under the
provisions of those plans. At December 31, 1995, there were 2,838,862 shares
available for grant under the 1993 Plan.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options were granted and expire 10
years from the date of grant. The average share price of all options exercised
was $33.48 in 1995, $31.20 in 1994 and $27.41 in 1993.
- ------------------------------------------------------------------
Changes in option shares outstanding
(thousands except for share price) 1995 1994 1993
- ------------------------------------------------------------------
Option shares at beginning of year 1,612.1 1,708.4 1,730.7
Options granted 642.8 247.1 245.1
- ------------------------------------------------------------------
2,254.9 1,955.5 1,975.8
- ------------------------------------------------------------------
Less: Option shares exercised 390.9 323.1 182.2
Stock appreciation rights
exercised 11.5 8.5 14.0
Options canceled 10.9 11.8 71.2
- ------------------------------------------------------------------
413.3 343.4 267.4
- ------------------------------------------------------------------
Option shares at end of year 1,841.6 1,612.1 1,708.4
- ---------------------------------------===========================
Average share price of options $ 43.00 $ 36.82 $ 33.20
Option shares exercisable
at end of year 1,196.7 1,367.1 1,464.2
- ------------------------------------------------------------------
The Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," is effective beginning in 1996. Under SFAS No.
123, employers are encouraged to recognize compensation expense based on the
estimated fair value of employee stock options and other equity instruments at
the date the instruments are granted. However, the statement allows companies to
continue to use the intrinsic value based method under APB Opinion 25, which in
most cases, does not result in a charge to earnings. For 1995, the fair value
based method would have resulted in a charge to earnings of approximately $2
million. The company plans to adopt the additional detailed disclosure
requirements of SFAS No. 123 in 1996.
PERFORMANCE RESTRICTED SHARES
Performance restricted shares issuable under the 1993 Long-Term Stock Incentive
Plan entitle certain key executive employees to earn shares of Armstrong's
common stock, only if the total return of Armstrong stock meets certain
predetermined performance measures during a three-year performance period. At
the end of the performance period, common stock awarded will generally carry an
additional four-year restriction period whereby the shares will be held in
custody by the company until the expiration or termination of the restriction.
Compensation expense will be charged to earnings over the period in which the
restrictions lapse. At the end of 1995, there were 156,510 performance
restricted shares outstanding, with 9,111 accumulated dividend equivalent shares
outstanding. Potential future common stock awards will fall in the range of
210,835 to 491,863 shares of Armstrong common stock. Common stock awards issued
in February 1996, based on the performance period ended December 1995, were
210,835 shares.
RESTRICTED STOCK AWARDS
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 76,400 shares of
restricted stock were granted during 1995. At the end of 1995, there were
168,351 restricted shares of common stock outstanding with 2,646 accumulated
dividend equivalent shares.
TREASURY SHARES
Treasury shares changes for 1995, 1994 and 1993 are as follows:
- ---------------------------------------------------------------
Years ended
December 31 (thousands) 1995 1994 1993
- ---------------------------------------------------------------
Common shares
Balance at beginning of year 14,602.1 14,656.5 14,750.6
Stock purchases/(1)/ 795.7 272.4 2.4
Stock issuance activity, net (383.7) (326.8) (96.5)
- ---------------------------------------------------------------
Balance at end of year 15,014.1 14,602.1 14,656.5
- --------------------------------===============================
/(1)/Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market block purchases of stock
through brokers.
In November 1994, the Board of Directors authorized the company to repurchase up
to 2.5 million shares of its common stock, either in the open market or in
negotiated transactions. During 1995, the company repurchased 782,110 shares
under this program with a cash outlay of $40.6 million. Since the inception of
the program, the company has repurchased 1,052,110 shares with a total cash
outlay of $51.1 million as of December 31, 1995.
PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1986, the Board of Directors declared a distribution of one right for each
share of the company's common stock outstanding on and after March 21, 1986.
Following the two-for-one stock split later in 1986, one-half of one right
attaches to each share of common stock outstanding. In general, the rights
become exercisable at $175 per right for a fractional share of a new series of
Class A preferred stock (which will differ from the Series A Convertible
Preferred Stock issued to the Employee Stock Ownership Plan described on page
21) 10 days after a person or group either acquires beneficial ownership of
shares representing 20% or more of the voting power of the company or announces
a tender or exchange offer that could result in such person or group
beneficially owning shares representing 28% or more of the voting power of the
company. If thereafter any person or group becomes the beneficial owner of 28%
or more of the voting power of the company or if the company is the surviving
company in a merger with a person or group that owns 20% or more of the voting
power of the company, then each owner of a right (other than such 20%
stockholder) would be entitled to purchase shares of common stock having a value
equal to twice the exercise price of the right. Should the company be acquired
in a merger or other business combination, or sell 50% or more of its assets or
earnings power, each right would entitle the holder to purchase, at the exercise
price, common shares of the acquirer having a value of twice the exercise price
of the right. The exercise price was determined on the basis of the Board's view
of the long-term value of the company's common stock. The rights have no voting
power nor do they entitle a holder to receive dividends. At the company's
option, the rights are redeemable prior to becoming exercisable at five cents
per right. The rights expire on March 21, 1996. The Preferred Stock Purchase
Rights Plan has been renewed for a further 10-year period with essentially the
same terms and at an exercise price of $300 per right.
LITIGATION AND RELATED MATTERS
ASBESTOS-RELATED LITIGATION
The company is one of many defendants in pending lawsuits and claims involving,
as of December 31, 1995, approximately 59,000 individuals alleging personal
injury from exposure to
asbestos-containing products. Included in the above number are approximately
12,800 lawsuits and claims from the approximately 87,000 individuals who have
opted out of the settlement class action referred to below. About 14,300 claims
from purported class members have been received as of December 31, 1995. Nearly
all the pending personal injury suits and claims seek compensatory damages and
except for those claims covered by the settlement class action, seek punitive
damages arising from alleged exposures to asbestos- containing insulation
products used, manufactured or sold by the company. The company discontinued the
sale of all asbestos-containing insulation products in 1969. Although a large
number of suits and claims pending in prior years have been resolved, neither
the rate of future dispositions nor the number of future potential unasserted
claims can be reasonably predicted.
The Judicial Panel for Multidistrict Litigation ordered the transfer of all
pending federal cases to the Eastern District Court in Philadelphia for pretrial
purposes. Periodically some of those cases are released for trial. Pending state
court cases have not been directly affected by the transfer. A few state judges
have consolidated numbers of asbestos-related personal injury cases for trial, a
process the company generally opposes as being unfair.
SETTLEMENT CLASS ACTION
A settlement class action which includes essentially all future asbestos-related
personal injury claims against members of the Center for Claims Resolution
("Center") referred to below was filed in Philadelphia on January 15, 1993, in
the Eastern District of Pennsylvania. The settlement class action is designed to
establish a nonlitigation system for the resolution of essentially all future
asbestos-related personal injury claims against the Center members including
this company. Other 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 asbestos-
related personal injury claims. Each member of the Center has an obligation for
its own fixed share in this proposed settlement. The Court has ruled that
claimants who neither filed a lawsuit against Center members 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 10 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 10-year
period. On August 16, 1994, the Court tentatively approved the settlement. The
opt outs from the settlement class action are not claims as such but rather are
reservation 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 up to several years. The Center members have stated their intention to
resolve over a five-year period the personal injury claims that were pending
when the settlement class action was filed. A
significant number of these pending claims have been finally or tentatively
settled with a number of the plaintiffs' counsel.
The company is seeking agreement from its insurance carriers or a binding
judgment against them that the class action will not jeopardize existing
insurance coverage; and the class action is contingent upon such an agreement or
judgment. With respect to carriers that do not agree, this matter will be
resolved either by alternative dispute resolution, in the case of the insurance
carriers that subscribed to the Wellington Agreement referred to below, or else
by litigation.
INSURANCE SETTLEMENTS
The pending personal injury lawsuits and claims against the company are being
paid by insurance proceeds under the 1985 Agreement Concerning Asbestos-Related
Claims (the "Wellington Agreement") and by insurance proceeds from other
insurance settlements noted below. A new claims handling organization, known as
the Center for Claims Resolution, was created in October 1988 by Armstrong and
20 other companies to replace the Wellington Asbestos Claims Facility (the
"Facility"), which has since been dissolved. Generally, the dissolution of the
Facility does not essentially affect the company's overall Wellington Agreement
insurance settlement. That settlement provided for a final resolution of nearly
all disputes concerning insurance for asbestos-related personal injury claims as
between the company and three of its primary insurers and eight of its excess
insurers. The one primary carrier that did not sign the Wellington Agreement
paid into the Wellington Facility and settled with the company in March 1989
nearly all outstanding issues relating to insurance coverage for asbestos-
related personal injury and property damage claims. In addition, one of the
company's large excess-insurance carriers entered into a settlement agreement in
1986 with the company under which payments for personal injury claims were made
through the Wellington Facility, and this carrier continues to make payments for
such claims through the Center for Claims Resolution. Other excess-insurance
carriers also have entered into settlement agreements with the company which
complement Wellington including a settlement in 1994 that was entered into with
a significant excess carrier. ACandS, Inc., a former subsidiary of the company,
which for certain insurance periods has coverage rights under some company
insurance policies, subscribed to the Wellington Agreement but did not become a
member of the Center for Claims Resolution.
One excess carrier (providing $25 million of insurance coverage) and certain
companies in an excess carrier's block of coverage (involving several million
dollars of coverage) have become insolvent. Certain carriers providing excess
level coverage solely for property damage claims also have become insolvent. The
several million dollars of coverage referred to has been paid by company
reserves. The $25 million insolvency gap is being covered by other available
insurance coverage. The company and ACandS, Inc., have negotiated a settlement
agreement which reserves for ACandS, Inc., a certain amount of insurance from
joint policies solely for its use in the payment of costs associated with the
asbestos-related personal injury and property damage claims.
CENTER FOR CLAIMS RESOLUTION
The Center operates under a concept of allocated shares of liability payments
and defense costs for its members based primarily on historical experience, and
it defends the members' interests and addresses pending and future claims in a
manner consistent with the prompt, fair resolution of meritorious claims. In
late 1991, the Center sharing formula was revised to provide that members will
pay only on claims in which the member is a named defendant. At that time, this
change caused a slight
increase in the company's share. Subsequent share adjustments by the Center have
resulted in an increased liability share for the company in certain areas. As to
future claims resolved under the settlement class action, the company has agreed
to a percentage of each resolution payment. Although the Center members and
their participating insurers were not obligated beyond one year, the insurance
companies are expected to commit to the continuous operation of the Center for
an eighth year and to the funding of the Center's operating expenses. With the
filing of the settlement class action, the Center will continue to process
pending claims and will handle the program for processing future asbestos-
related personal injury claims if the class action settlement is finally
approved by the courts. No forecast can be made for future years regarding
either the rate of pending and future claims resolution by the Center or the
rate of utilization of company insurance.
PROPERTY DAMAGE LITIGATION
The company is also one of many defendants in a total of 32 pending lawsuits and
claims, including class actions, as of December 31, 1995, 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. These suits and
claims appear to be aimed at friable (easily crumbled) asbestos-containing
products although allegations in some suits encompass other asbestos-containing
products, including allegations with respect to previously installed asbestos-
containing resilient flooring. The company vigorously denies the validity of the
allegations against it contained in these suits and claims. Increasing defense
costs, paid by the company's insurance carriers either under reservation or
settlement arrangement, will be incurred. These suits and claims are not
encompassed within the Wellington Agreement nor are they being handled by the
Center for Claims Resolution.
INSURANCE COVERAGE SUIT
In 1989, Armstrong concluded the trial phase of a lawsuit in California state
court to resolve disputes concerning certain of its insurance carriers'
obligations with respect to personal injury and property damage liability
coverage, including defense costs, for alleged personal injury and property
damage asbestos-related lawsuits and claims. The Court issued final decisions
generally in the company's favor, and the carriers appealed. The California
Court of Appeal substantially upheld the trial court's final decisions, and the
insurance carriers petitioned the California Supreme Court to hear the asbestos-
related personal injury and property damage coverage issues. The California
Supreme Court accepted review pending its review of related issues in another
California case. The California Supreme Court ruled favorably to the insured
company on the issues in that other case and recently referred the company's
case to the Court of Appeal for further review. Since the company's 1994
settlement with a significant excess carrier, only one excess carrier providing
products coverage for personal injury claims remains in the personal injury
coverage litigation. Based upon the trial court's favorable final decisions in
important phases of the trial relating to coverage for asbestos-related personal
injury and property damage lawsuits and claims, including the favorable decision
by the California Court of Appeal, and a review of the coverage issues by its
counsel, the company believes it has a substantial legal basis for sustaining
its right to defense and indemnification. For the same reasons, the company also
believes that it is probable that claims by the several primary carriers for
recoupment of defense expenses in
the property damage litigation, which the carriers also appealed, will
ultimately not be successful.
NONPRODUCTS INSURANCE COVERAGE
Nonproducts insurance coverage is included in the company's primary insurance
policies and certain excess policies for nonproducts claims. Nonproducts claims
include claims that may have arisen out of exposure during installation of
asbestos materials or before control of such materials has been relinquished.
Negotiations are currently underway with several of the company's primary
carriers to resolve the nonproducts coverage issues and to establish entitlement
to and the amount of such coverage. The additional coverage potentially
available to pay claims categorized as nonproducts is substantial and, at the
primary level, includes defense costs in addition to indemnity limits. The
company is entitled to pursue alternative dispute resolution proceedings against
the primary and certain excess carriers to resolve the nonproducts coverage
issues.
CONCLUSIONS
The company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
caps to be negotiated after the initial 10-year period for the settlement class
action or the compensation levels to be negotiated for such claims, nor the
scope of its nonproducts coverage ultimately deemed available or the ultimate
conclusion of the California insurance coverage litigation. Subject to the
foregoing and based upon its experience and other factors also referred to
above, the company believes that the estimated $166 million in liability and
defense costs recorded on the 1995 balance sheet will be incurred to resolve an
estimated 59,000 asbestos-related personal injury claims pending against the
company as of December 31, 1995. These claims include claims 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 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 $166 million recorded on the 1995 balance
sheet reflects the company's belief in the availability of insurance in this
amount to cover the liability in like amount referred to above. Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. The company also notes that, based
on maximum mathematical projections covering a 10-year period from 1994 to 2004,
its estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability may
not be covered by the company's ultimately applicable insurance recovery.
However, the company believes that any
after-tax impact on the difference between the aggregate of the estimated
liability for pending cases and the estimated cost for the 10-year maximum
mathematical projection, and the probable insurance recovery, would not be
material either to the financial condition of the company or to its liquidity,
although it could be material to earnings if it is determined in a future period
to be appropriate to record a reserve for this difference. The period in which
such a reserve may be recorded and the amount of any reserve that may be
appropriate cannot be determined at this time. Subject to the uncertainties and
limitations referred to above and based upon its experience and other factors,
the company believes it is probable that substantially all of the expenses and
any liability payments associated with the asbestos-related property damage
claims will be paid under an existing interim agreement, by insurance coverage
settlement agreements and through additional coverage reasonably anticipated
from the outcome of the insurance litigation. Even though uncertainties still
remain as to the potential number of unasserted claims, liability resulting
therefrom and the ultimate scope of its insurance coverage, after consideration
of the factors involved, including the Wellington Agreement, the referenced
settlements with other insurance carriers, the results of the trial phase and
the intermediate appellate stage of the California insurance coverage
litigation, the remaining reserve, the establishment of the Center, the
settlement class action, and its experience, the company believes the asbestos-
related lawsuits and claims against the company would not be material either to
the financial condition of the company or to its liquidity, although as stated
above, the net effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in such future period.
Additional details concerning this litigation are set forth in the company's
Form 10K available to any shareholder upon request.
TINS LITIGATION
In October 1992, the U.S. Court of Appeals for the Third Circuit issued its
decision in a lawsuit brought by The Industry Network System, Inc. (TINS), and
its founder, Elliot Fineman. The plaintiffs alleged that in 1984 Armstrong had
engaged in antitrust and tort law violations and breach of contract which
damaged TINS' ability to do business. The Court of Appeals sustained the U.S.
District Court's decision that the April 1991 jury verdict against Armstrong in
the amount of $224 million including $200 million in punitive damages should be
vacated, and that there should be a new trial on all claims remaining after the
appeal. The Court of Appeals sustained the District Court ruling that the jury's
verdict had reflected prejudice and passion due to the improper conduct of
plaintiffs' counsel and was clearly contrary to the weight of the evidence. The
Court of Appeals affirmed or did not disturb the trial court's order dismissing
all of TINS' claims under Section 2 of the Sherman Act for alleged conspiracy,
monopolization and attempt to monopolize and dismissing all of Mr. Fineman's
personal claims. These claims were not the subject of a new trial. However, the
Court of Appeals reversed the trial court's directed verdict for Armstrong on
TINS' claim under Section 1 of the Sherman Act, reversed the summary judgment in
Armstrong's favor on TINS' claim for breach of contract based on a 1984
settlement agreement, and reversed the judgment n.o.v. for Armstrong on TINS'
tortious interference and related punitive damage claims. These claims were the
subject of a new trial.
A second trial of the TINS' litigation began on April 26, 1994, in the Newark,
New Jersey, District Court. TINS asked for damages in a range of $17 to $56
million. A jury found that Armstrong had breached its contract with TINS and had
interfered with TINS' contractual business relationship with an Armstrong
wholesaler but that Armstrong's conduct did not damage TINS and awarded no
compensatory or nominal money damages. Following oral argument on November 14,
1994, TINS' motion for a partial or complete new trial was denied by the
District Court 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.
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been restated to include the
historical results of the ceramic tile operations on an operating or
consolidated line item basis rather than under the equity method.
Item 5.
Quarterly financial information (millions except for per-share data) First Second Third Fourth Total year
- -----------------------------------------------------------------------------------------------------------------------------------
1995* Net sales $558.8 $ 596.8 $ 611.8 $ 557.6 $2,325.0
Gross profit 183.1 194.6 203.6 162.6 743.9
Earnings (loss) from continuing businesses 26.5 47.4 14.4 (74.7) 13.6
Net earnings 34.4 52.7 19.4 16.8 123.3
Per share of common stock:**
Primary: Earnings (loss) from continuing businesses 0.61 1.17 0.29 (2.09) (0.02)
Net earnings 0.82 1.31 0.42 0.35 2.90
Fully diluted: Earnings (loss) from continuing businesses 0.57 1.05 0.28 (2.09) (0.02)
Net earnings 0.75 1.18 0.40 0.34 2.67
Dividends per share of common stock 0.32 0.36 0.36 0.36 1.40
Price range of common stock--low 38 3/8 43 50 1/4 52 7/8 38 3/8
Price range of common stock--high 48 1/2 52 60 1/2 64 1/8 64 1/8
- -----------------------------------------------------------------------------------------------------------------------------------
1994* Net sales $514.0 $ 565.8 $ 582.3 $ 563.9 $2,226.0
Gross profit 165.9 196.0 206.1 174.1 742.1
Earnings from continuing businesses 42.5 48.7 56.6 39.4 187.2
Net earnings 48.0 53.3 61.6 47.5 210.4
Per share of common stock:**
Primary: Earnings from continuing businesses 1.03 1.19 1.41 0.93 4.60
Net earnings 1.17 1.31 1.54 1.17 5.22
Fully diluted: Earnings from continuing businesses 0.93 1.07 1.25 0.85 4.10
Net earnings 1.06 1.18 1.37 1.04 4.64
Dividends per share of common stock 0.30 0.32 0.32 0.32 1.26
Price range of common stock--low 49 3/8 43 3/8 43 36 36
Price range of common stock--high 57 1/2 57 1/4 53 7/8 46 5/8 57 1/2
- -----------------------------------------------------------------------------------------------------------------------------------
*1994 and the first, second and third quarters of 1995 have been restated for
the results of the discontinued business.
**The sum of the quarterly earnings per-share data does not always equal the
total year amounts due to changes in the average shares outstanding and, for
fully diluted data, the exclusion of the antidilutive effect in certain
quarters.
FOURTH QUARTER 1995 COMPARED WITH FOURTH QUARTER 1994
Sales from continuing businesses of $557.6 million decreased 1.1% from the
$563.9 million recorded in 1994 primarily due to the continued weakness in
U.S. residential end-use markets. Sales within North America decreased by
3.5%. The European area continued its growth with a sales increase of 3.3%,
about three fifths of which was due to the translation of foreign
currencies to weaker U.S. dollar.
The loss from continuing businesses was $74.7 million, or $2.09 per share on
both a primary and fully diluted basis, compared with net earnings of $39.4
million in fourth quarter 1994. Fourth-quarter 1994 earnings per share from
continuing businesses were $0.93 on a primary basis and $0.85 on a fully diluted
basis.
Included in the 1995 loss from continuing businesses is an after-tax loss of
$116.8 million ($2.73 per share on a primary basis and $3.13 on a fully diluted
basis) related to the combination of Armstrong's ceramic tile business with Dal-
Tile International Inc. Armstrong received 37% of the combined Dal-Tile stock in
exchange for its ceramic tile operations and $27.6 million in cash.
The loss from continuing businesses resulted from the loss on the business
combination, decreased sales volume and higher cost of goods sold. Cost of goods
sold, when expressed as a percent of sales, increased to 70.8% from the 69.1% of
1994's fourth quarter. This increase reflects the start-up costs for the new
insulation products plant in Mebane, North Carolina, and unfavorable mixes in
U.S. residential flooring sales. Also impacting operating income was lower
unallocated corporate expense due to decreased incentive pay and consulting
expenses.
Operating income decreased in all segments except building products. Operating
income in the floor coverings segment was $35.1 million compared with $41.1
million in 1994. In the resilient flooring part of this segment, operating
income was lower mainly due to decreased sales levels in higher margin,
professionally installed residential sheet products. Worldwide building products
fourth-quarter operating income was $19.8 million compared with 1994 fourth-
quarter income of $16.9 million. This increase was aided by higher sales in
Europe which more than offset the North American activity which flattened with
general economic weakness. Industry products operating income of $5.7 million
declined when compared with the $8.3 million for the similar period in 1994. The
1995 fourth-quarter results were impacted by plant start-up costs and the need
to meet competitive selling prices.
The 1995 fourth-quarter effective tax rate on the loss was 40.1% compared with
23.1% on last year's fourth-quarter earnings. Excluding the tax benefit on the
loss related to the ceramic tile business combination, the 1995 effective tax
rate was 29.7%. Last year's low effective tax rate included tax benefits
related to foreign and state income tax expense that were reduced as a result of
realization of previously unrecognized deferred tax assets and lower withholding
taxes on foreign dividends.
In December 1995, the company sold the stock of Thomasville Furniture
Industries, Inc., to INTERCO Incorporated. As a result of the sale, an after-tax
gain of $83.9 million, or $2.24 per share on primary basis and $1.96 on a fully
diluted basis, was recorded. The fourth-quarter earnings from this discontinued
business were $7.5 million in 1995, or $0.20 per share on a primary basis and
$0.18 on a fully diluted basis. 1994 fourth-quarter Thomasville earnings were
$8.1 million, or $0.22 per share on primary basis and $0.19 on a fully diluted
basis.
Net earnings were $16.8 million in 1995 compared with $47.5 million in 1994. Net
earnings per common share were $0.35 on a primary basis and $0.34 on a fully
diluted basis in the 1995 quarter, compared with 1994's $1.17 on a primary
basis and $1.04 on a fully diluted basis.
Independent auditors' report
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have audited the consolidated financial statements of Armstrong World
Industries, Inc. and its subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the related supplementary information on depreciation rates and
schedule listed in the accompanying index. These consolidated financial
statements and supplementary information and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and supplementary information and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong World
Industries, Inc. and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion the related supplementary information and
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Philadelphia, PA
February 16, 1996, except as to the note entitled
"Restated Consolidated Financial Statements," which
is as of October 8, 1996
Table of Contents
For the Quarterly Period Ended March 31, 1996
a. Financial Statements and accompanying notes
(i) Consolidated Statements of Earnings for the three months ended
March 31, 1996, and March 31, 1995;
(ii) Consolidated Balance Sheets as of March 31, 1996, and December
31, 1995;
(iii)Consolidated Statements of Cash Flows for the three months
ended March 31, 1996, and March 31, 1995;
(iv) Industry Segment Financial Data for the three months ended March
31, 1996, and March 31, 1995;
b. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 1. Financial Statements
- ------ --------------------
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
-----------------------------------
(amounts in millions except for per-share data)
Unaudited
Three Months Ended
March 31
----------------------------------
1996 1995(a)
---- ----
NET SALES $501.2 $558.8
Cost of goods sold 344.5 375.7
------ ------
Gross profit 156.7 183.1
Selling, general &
administrative expenses 101.7 119.3
Equity (earnings) from
affiliates (2.7) (1.5)
Restructuring charges -- 15.6
------ ------
Operating income 57.7 49.7
Interest expense 6.3 8.0
Other expense (income), net (3.1) .4
------ ------
Earnings from continuing
businesses before
income taxes(b) 54.5 41.3
Income taxes 18.2 14.8
------ ------
EARNINGS FROM CONTINUING
BUSINESSES (c) $ 36.3 $ 26.5
Earnings from discontinued
business, net
of income taxes -- 7.9
------ ------
NET EARNINGS $ 36.3 $ 34.4
====== ======
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.
(a) Prior year was restated for the effects of the discontinued furniture
business.
(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.
Armstrong World Industries, Inc., and
Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
Unaudited
Assets March 31, 1996 December 31, 1995
------ -------------- -----------------
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
-------- --------
Total inventories 186.6 195.5
Income tax benefits 29.5 26.9
Other current assets 29.7 25.5
-------- --------
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
-------- --------
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
-------- --------
Total assets $2,077.4 $2,149.8
======== ========
Liabilities and Shareholders' Equity
------------------------------------
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
-------- --------
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
-------- --------
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)
-------- --------
Total shareholders' equity 766.0 775.0
-------- --------
Total liabilities and shareholders'
equity $2,077.4 $2,149.8
======== ========
See page 5 for explanation of references (a) and (b). Also see accompanying
footnotes to the financial statements beginning on page 8.
(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
----
(millions)
Balance at beginning of year $18.0
Three months' translation adjustments and
hedging of foreign investments (4.3)
Allocated income taxes --
-----
Balance at March 31, 1996 $13.7
=====
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
(amounts in millions)
Unaudited
Three Months Ended
March 31
1996 1995(a)
---------- ---------
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 30.8 29.5
Depreciation and amortization for furniture -- 3.3
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) (36.9)
(Increase) decrease in inventories 7.4 (20.7)
(Increase) in other current assets (7.7) (2.0)
(Increase) in investment in affiliates (3.8) (1.5)
(Increase) in other noncurrent assets (25.5) (7.2)
(Decrease) in accounts payable and accrued expenses (14.2) (24.0)
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
------- ------
Net cash (used for) provided by operating activities (2.5) 6.4
------- ------
Cash flows from investing activities:
Purchases of property, plant, and equipment (48.4) (33.3)
Purchases of property, plant and equipment for furniture -- (2.8)
Other, net (1.7) (1.6)
Acquisitions -- (14.0)
------- ------
Net cash used for investing activities (50.1) (51.7)
------- ------
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)
------- ------
Net cash (used for) provided by financing activities (85.5) 38.0
Effect of exchange rate changes on cash and cash equivalents (.3) .3
------- ------
Net (decrease) in cash and cash equivalents $(138.4) $ (7.0)
======= ======
Cash and cash equivalents at beginning of period $ 256.9 $ 12.0
======= ======
Cash and cash equivalents at end of period $ 118.5 $ 5.0
======= ======
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Interest paid $ 1.7 $ 1.1
Income taxes paid $ 10.9 $ 9.6
- ---------------------------------------------------------------------------------------------------------------------------------
a) Prior year restated for the effects of the discontinued furniture business.
See accompanying notes to the financial statements beginning on page 8.
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
(amounts in millions)
Unaudited
Three Months
Ended March 31
----------------
1996 1995(a)
---- -------
Net trade sales:
- ---------------
Floor coverings $240.0 $241.7
Building products 175.1 171.1
Industry products 86.1 89.4
Ceramic tile(b) -- 56.6
------ ------
Total net sales $501.2 $558.8
====== ======
Operating income (loss):
- -----------------------
Floor coverings $ 26.7 $ 32.4
Building products 25.8 26.1
Industry products(c) 10.0 (1.7)
Ceramic Tile(d) 0.9 2.2
Unallocated corporate
expense (5.7) (9.3)
------ ------
Total operating income $ 57.7 $ 49.7
====== ======
(a) Prior year restated for the effects of the discontinued furniture business.
(b) Effective January 1, 1996, the ceramic tile segment sales are not included
in the consolidated results but accounted for under the equity method.
(c) For the three months ended March 31, 1995, operating income includes
restructuring charges of $15.6 million.
(d) 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.
Note 1.
- -------
The accompanying consolidated financial statements have been 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.
- -------
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.
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
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.
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
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
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 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
-----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
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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.
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.
Note 3.
- -------
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been restated to include the
historical results of the ceramic tile operations on an operating or
consolidated line item basis rather than under the equity method.
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.
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.
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 $57.6 million below the $558.8
million of a year ago. The principal reason for the decrease is that beginning
with 1996, Armstrong's share of ceramic tile results is reflected only in
operating income in accordance with the equity method of accounting. Ceramic
tile sales of $56.6 million were realized for the first quarter of 1995. 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.
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 tile segment represent
Armstrong's 37 percent after-tax share of the operating income of the Dal-Tile
business combination on an equity accounting basis while 1995 results are
reported on an operating or consolidated line item basis for ceramic tile
operations. The synergies from this business combination appear to be on track
with expectations.
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, except as
to the note entitled "Restated Consolidated Financial Statements", which is as
of October 8, 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, except as to Note. 3,
which is as of October 8, 1996
Table of Contents
For the Quarterly Period ended June 30, 1996
a. Financial Statements and accompanying notes
(i) Consolidated Statements of Earnings for the six months ended
June 30, 1996, and June 30, 1995;
(ii) Consolidated Balance Sheets as of June 30, 1996, and December
31, 1995;
(iii) Consolidated Statements of Cash Flows for the six months ended
June 30, 1996, and June 30, 1995;
(iv) Industry Segment Financial Data for the six months ended June
30, 1996, and June 30, 1995;
b. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part I - Financial Information
------------------------------
Item 1. Financial Statements
- ------ --------------------
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
-----------------------------------
(amounts in millions except for per-share data)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1996 1995(a) 1996 1995(a)
---- ---- ---- ----
NET SALES $563.2 $596.8 $1,064.4 $1,155.6
Cost of goods sold 364.8 402.2 709.3 777.9
------ ------ -------- --------
Gross profit 198.4 194.6 355.1 377.7
Selling, general & administrative
expenses 104.6 115.6 206.3 234.9
Equity (earnings) from affiliates(b) (3.4) (1.8) (6.1) (3.3)
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
------ ------ -------- --------
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.
(a) Prior year was restated for the effects of the discontinued furniture
business.
(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 $30.5 million
and $60.0 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.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
Unaudited
Assets June 30, 1996 December 31, 1995
------ -------------- ------------------
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
-------- --------
Total inventories 197.4 195.5
Income tax benefits 36.8 26.9
Other current assets 24.9 25.5
-------- --------
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
-------- --------
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
-------- --------
Total assets $2,065.6 $2,149.8
======== ========
Liabilities and Shareholders' Equity
------------------------------------
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
-------- --------
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
-------- --------
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)
-------- --------
Total shareholders' equity 765.2 775.0
-------- --------
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.
(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
----
(millions)
Balance at beginning of year $18.0
Six months' translation adjustments and
hedging of foreign investments (5.2)
Allocated income taxes 0.2
-----
Balance at June 30, 1996 $13.0
=====
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
(amounts in millions)
Unaudited
Six Months Ended
June 30
1996 1995
--------- -------
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 61.1 60.0
Depreciation and amortization for furniture -- 6.4
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) (29.5)
(Increase) in inventories (4.1) (30.0)
(Increase) in other current assets (10.1) (19.0)
(Increase) in investment in affiliates (5.6) (3.3)
(Increase) in other noncurrent assets (31.8) (13.3)
(Decrease) in accounts payable and
accrued expenses (12.2) (16.9)
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)
------- ------
Net cash provided by operating activities 76.2 48.8
------- ------
Cash flows from investing activities:
Purchases of property, plant, and equipment (110.0) (69.2)
Purchases of property, plant and equipment for
furniture -- (6.2)
Investment in computer software (3.7) (6.2)
Acquisitions -- (14.0)
Proceeds from sale of land and facilities 0.4 0.7
------- ------
Net cash used for investing activities (113.3) (94.9)
------- ------
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)
------- ------
Net cash (used for) provided by financing activities (136.3) 49.9
------- ------
Effect of exchange rate changes on cash and cash
equivalents (0.6) 1.1
------- ------
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
======= ======
- ----------------------------------------------------------------------------
Supplemental Cash Flow Information:
Interest paid $ 11.0 $ 14.4
Income taxes paid $ 32.8 $ 17.6
- ---------------------------------------------------------------------------
See accompanying footnotes to the financial statements beginning on page 8.
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
Three Months Six Months
Ended June 30 Ended June 30
---------------- --------------------
1996 1995(a) 1996 1995(a)
------- ------- --------- ---------
Net trade sales:
- ---------------
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
Ceramic tile(b) -- 60.8 -- 117.4
------ ------ -------- --------
Total net sales $563.2 $596.8 $1,064.4 $1,155.6
====== ====== ======== ========
Operating income:(c)
- ----------------
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) Prior year restated for the effects of the discontinued furniture business.
(b) Effective January 1, 1996, the ceramic tile segment sales are not included
in the consolidated results but accounted for under the equity method.
(c) 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
===== ==== ===== =====
(d) 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.
Note 1. The accompanying consolidated financial statements have been
- ------
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.
- ------
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 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 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 reached a contrary conclusion on a
central Rule 23 issue addressed by the Third Circuit.
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
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 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 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, 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 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
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Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
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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.
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
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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.
Note 3.
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RESTATED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been restated to include the
historical results of the ceramic tile operations on an operating or
consolidated line item basis rather than under the equity method.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Financial Condition
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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.
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 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
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Second-quarter net sales of $563.2 million were $33.6 million below the $596.8
million of a year ago. The principal reason for the decrease is that, beginning
with 1996, Armstrong's share of ceramic tile results is reflected in operating
income in accordance with the equity method of accounting. Ceramic tile sales
of $60.8 million were realized for the second quarter of 1995. North American
sales in 1996 have been driven by strength 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 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, a decrease of 8.6 percent over last
year's first-half sales of $1.16 billion. Excluding ceramic tile sales for
1995, sales increased 2.5 percent over last year. 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:
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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.
In the ceramic segment, the $1.1 million of operating profits represented
Armstrong's share of its investment in Dal-Tile International, Inc. on an equity
accounting basis while 1995 results are reported on an operating or consolidated
line item basis for ceramic tile oeprations. 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.
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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.
Independent Accountants' Report
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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, except as
to the note entitled "Restated Consolidated Financial Statements", which is as
of October 8, 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, except as to Note 4.,
which is as of October 8, 1996