FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of registrant's common stock outstanding as of November 1,
1996 - 41,288,389
Part I - Financial Information
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Item 1. Financial Statements
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
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(amounts in millions except for per-share data)
Unaudited
Three months Nine months
ended September 30 ended September 30
------------------ ------------------
1996 1995(a) (b) 1996 1995(a) (b)
---- ---- ---- ----
NET SALES (c) $563.4 $611.8 $1,627.8 $1,767.4
Cost of goods sold 385.0 408.2 1,094.3 1,186.1
------ ------ -------- --------
Gross profit 178.4 203.6 533.5 581.3
Selling, general and administrative
expenses 115.7 119.0 322.0 353.9
Equity (earnings) from affiliates (5.4) (1.4) (11.5) (4.7)
Restructuring charges -- 56.2 46.5 71.8
------ ------ -------- --------
Operating income (c) 68.1 29.8 176.5 160.3
Interest expense 6.8 8.4 19.3 25.3
Other (income) expense, net (.4) 1.2 (4.7) 2.2
------ ------ -------- --------
Earnings from continuing businesses
before income taxes 61.7 20.2 161.9 132.8
Income taxes 17.5 5.8 50.8 44.5
------ ------ -------- --------
EARNINGS FROM CONTINUING
BUSINESSES (d)(e) $ 44.2 $ 14.4 $ 111.1 $ 88.3
Earnings from discontinued business,
net of income taxes -- 5.0 -- 18.2
------ ------ -------- --------
EARNINGS BEFORE EXTRAORDINARY LOSS $ 44.2 $ 19.4 $ 111.1 $ 106.5
Extraordinary loss, net of
income taxes (f) (8.4) -- (8.4) --
------ ------ -------- ------
NET EARNINGS $ 35.8 $ 19.4 $ 102.7 $ 106.5
====== ====== ======== ========
Per share of common stock: (g)
Primary:
Earnings from continuing
businesses $ 1.06 $ .29 $ 2.67 $ 2.06
Earnings from discontinued
business -- .13 -- .49
Earnings before
extraordinary loss $ 1.06 $ .42 $ 2.67 $ 2.55
Extraordinary loss (.20) -- (.20) --
Net earnings $ .86 $ .42 $ 2.47 $ 2.55
Fully diluted:
Earnings from continuing
businesses $ 1.06 $ .28 $ 2.54 $ 1.90
Earnings from discontinued
business -- .12 -- .43
Earnings before
extraordinary loss $ 1.06 $ .40 $ 2.54 $ 2.33
Extraordinary loss (.20) -- (.20) --
Net earnings $ .86 $ .40 $ 2.34 $ 2.33
Average number of common shares outstanding:
Primary 41.9 37.4 38.9 37.6
Fully diluted 41.9 42.8 42.4 43.0
See page 3 for explanation of references (a), (b), (c), (d), (e), (f), and (g).
Also see accompanying notes to the financial statements beginning on page 8.
2
(a) Prior year was restated for the effects of the discontinued furniture
business.
(b) In December 1995, the Company entered into a business combination of
Armstrong's ceramic tile operations with Dal-Tile International, Inc.
Beginning in 1996, earnings from the ceramic tile business combination
are reported as equity earnings from affiliates; prior to the
combination, the ceramic tile operations were consolidated. Both years
reflect the 50 percent interest in the WAVE joint venture.
The following table summarizes the 1995 ceramic tile results included in
the Consolidated Statements of Earnings ($ millions):
Three months Nine months
ended Sept. 30 ended Sept. 30
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Net Sales $62.8 $180.2
Cost of goods sold 43.9 128.1
Selling, general and
administrative expenses 15.2 45.9
(c) For the three months and nine months ended September 30, 1996, sales were
reduced by $14.1 million for floor products that Armstrong requested be
returned by floor covering wholesalers due to a potential discoloration
issue. The following table lists the detail associated with discoloration
of a limited portion of flooring products resulting in a charge to
operating income of $34.0 million ($0.53 per share).
Net Sales $14.1
Cost of goods sold 5.9
Selling, general and
administrative expenses 14.0
----
Total $34.0
(d) Depreciation and amortization charged against earnings from continuing
businesses before income taxes amounted to $30.2 million and $91.3
million in the three months and nine months ended September 30, 1996, and
$31.6 million and $91.5 million in the three months and nine months ended
September 30, 1995.
(e) Earnings from continuing businesses for the nine months ended September
30, 1996, include restructuring charges of $29.6 million after-tax, or
$0.70 per share on a fully diluted basis. For the three months and nine
months ended September 30, 1995, restructuring charges after tax were
$36.5 million and $46.6 million respectively, or $0.86 per share and
$1.09 per share on a fully diluted basis.
(f) In August 1996, Dal-Tile International Inc., in which the Company has a
33 percent equity interest, refinanced all of its existing debt
resulting in an extraordinary loss. The Company's share of the
extraordinary loss on an equity basis was $8.4 million after-tax, or
$0.20 per share.
(g) During July 1996, the Employee Stock Ownership Plan (ESOP) and Retirement
Savings Plan were merged resulting in the elimination of convertible
preferred shares and an increase of common shares outstanding by
5,057,382. The third quarter 1996 earnings per share calculation was
based on the weighted average of common and common equivalent shares
outstanding and included the shares issued upon conversion of the
convertible preferred shares. The primary earnings per share for the
1996 nine month period was determined by dividing the earnings after
deducting year-to-date preferred dividends (net of tax benefits on
unallocated shares), by the average number of common shares
outstanding, including the converted shares from the conversion date
forward. The fully diluted earnings per share for the 1996 nine month
period included the adjustment to common shares and earnings required
to portray the convertible preferred shares on an "if converted" basis
prior to conversion.
3
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
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(amounts in millions)
Unaudited
Assets September 30, 1996 December 31, 1995
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Current assets:
Cash and cash equivalents $ 78.7 $ 256.9
Accounts receivable less allowance 265.7 217.9
Inventories:
Finished goods $ 131.2 $ 119.9
Work in process 26.7 24.0
Raw materials and supplies 38.9 51.6
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Total inventories 196.8 195.5
Income tax benefits 34.8 26.9
Other current assets 24.7 25.5
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Total current assets 600.7 722.7
Property, plant, and equipment 1,937.6 1,854.1
Less accumulated depreciation and amortization 1,006.8 975.9
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Net property, plant and equipment 930.8 878.2
Insurance for asbestos-related liabilities (a) 141.2 166.0
Investment in affiliates (b) 191.9 162.1
Other noncurrent assets 251.8 220.8
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Total assets $2,116.4 $2,149.8
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Liabilities and Shareholders' Equity
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Current liabilities
Short-term debt $ 8.3 $ 22.0
Current installments of long-term debt -- 40.1
Accounts payable and accrued expenses 300.2 297.4
Income taxes 28.4 16.4
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Total current liabilities 336.9 375.9
Long-term debt 214.9 188.3
ESOP loan guarantee 228.4 234.7
Postretirement and postemployment benefits 246.1 242.8
Asbestos-related liabilities (a) 141.2 166.0
Other long-term liabilities 146.8 140.6
Deferred income taxes 12.9 16.5
Minority interest in subsidiaries 12.5 10.0
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Total noncurrent liabilities 1,002.8 998.9
Shareholders' equity:
Convertible preferred stock at redemption value(c) $ -- $ 258.9
Common stock 51.9 51.9
Capital in excess of par value 176.6 49.3
Reduction for ESOP loan guarantee (216.6) (225.1)
Retained earnings 1,185.5 1,133.8
Foreign currency translation (d) 8.9 18.0
Treasury stock(c) (429.6) (511.8)
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Total shareholders' equity 776.7 775.0
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Total liabilities and shareholders' equity $2,116.4 $2,149.8
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See page 5 for explanation of references (a), (b), (c)and (d). Also see
accompanying footnotes to the financial statements beginning on page 8.
4
(a) The asbestos-related liability in the amount of $141.2 million represents
the estimated liability and defense cost to resolve approximately 45,000
personal injury claims pending against the Company as of the end of the
third quarter 1996. The insurance asset in the amount of $141.2 million
reflects the Company's belief in the availability of insurance in an
amount covering the liability. See Note 2 beginning on page 8 for
additional details.
(b) Investment in affiliates is primarily comprised of the 33 percent
ownership of Dal-Tile and the 50 percent interest in the WAVE joint
venture.
(c) On July 31, the Company issued treasury stock to the trustee of the
Employee Stock Ownership Plan (ESOP) in the conversion of the preferred
stock, valued at $241.5 million, held by the trust.
(d) Foreign currency translation, reported as a separate component of
shareholders' equity, is detailed as follows:
Balance at beginning of year $18.0
Nine months' translation adjustments and
hedging of foreign investments (9.2)
Allocated income taxes .1
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Balance at September 30, 1996 $ 8.9
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5
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
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(amounts in millions)
Unaudited
Nine Months Ended
September 30
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1996 1995
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Cash flows from operating activities:
Net earnings $102.7 $106.5
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization, excluding furniture 91.3 91.5
Depreciation and amortization for furniture -- 9.7
Deferred income taxes 0.8 (5.2)
Loss from restructuring activities 46.5 72.4
Restructuring payments (30.9) (9.2)
Decrease in net assets of discontinued business -- 3.6
Changes in operating assets and liabilities net of
effect of discontinued business, restructuring
and dispositions:
(Increase) in receivables (34.9) (32.2)
(Increase) in inventories (3.3) (38.1)
(Increase) in other current assets (4.6) (3.8)
(Increase) in investment in affiliates (1.2) (3.3)
(Increase) in other noncurrent assets (43.7) (13.2)
Increase in accounts payable and accrued expenses 11.4 3.6
Increase in income taxes payable 12.2 3.6
Increase in other long-term liabilities 13.1 4.9
Other, net (2.8) (8.8)
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Net cash provided by operating activities 156.6 182.0
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Cash flows from investing activities:
Purchases of property, plant and equipment (157.2) (107.2)
Purchases of property, plant and equipment
for furniture -- (10.1)
Investment in computer software (5.0) (17.2)
Acquisitions -- (14.0)
Proceeds from sale of land and facilities 1.4 6.9
Investment in joint ventures (10.0) --
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Net cash (used for) investing activities (170.8) (141.6)
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Cash flows from financing activities:
(Decrease) increase in short-term debt (13.2) 43.9
Issuance of long-term debt 26.3 --
Reduction of long-term debt (40.0) (0.1)
Cash dividends paid (53.5) (48.1)
Preferred stock redemption (21.4) --
Purchase of common stock for the treasury (61.3) (33.2)
Proceeds from exercised stock options 3.9 5.2
Other, net (4.2) (3.5)
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Net cash (used for) financing activities (163.4) (35.8)
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Effect of exchange rate changes on cash and cash
equivalents (0.6) 1.8
---- ---
Net (decrease) increase in cash and cash equivalents $(178.2) $ 6.4
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Cash and cash equivalents at beginning of period $ 256.9 $ 12.0
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Cash and cash equivalents at end of period $ 78.7 $ 18.4
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Supplemental cash flow information:
Interest paid $ 11.6 $ 16.4
Income taxes paid $ 56.7 $ 62.7
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See accompanying notes to the financial statements beginning on page 8.
6
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
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(amounts in millions)
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
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1996 1995(a) 1996 1995(a)
---- ---- ---- ----
Net trade sales:
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Floor coverings (b) $282.0 $282.5 $ 822.2 $ 801.8
Building products 188.1 178.8 542.6 519.5
Industry products 93.3 87.7 263.0 265.9
Ceramic tile (c) 62.8 -- 180.2
------ ------ -------- --------
Total net sales $563.4 $611.8 $1,627.8 $1,767.4
====== ====== ======== ========
Operating income: (d)
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Floor coverings (b) $ 26.6 $ 28.9 $ 101.3 $ 109.9
Building products 28.9 21.0 73.4 72.4
Industry products (e) 15.2 (4.5) 30.2 3.6
Ceramic tile (c) 3.2 3.7 5.2 6.2
Unallocated corporate expense (5.8) (19.3) (33.6) (31.8)
------ ------ -------- --------
Total operating income $ 68.1 $ 29.8 $ 176.5 $ 160.3
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(a) Prior year was restated for the effects of the discontinued furniture
business.
(b) For the three months and nine months ended September 30, 1996, sales were
reduced by $14.1 million to allow for customer returns associated with
discoloration of a limited portion of flooring products and operating
income was reduced by $34.0 million.
(c) The ceramic tile segment 1996 results represent the Company's after-tax
share of the net 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. Sales are not reported
in 1996 for the ceramic tile segment in accordance with generally accepted
accounting principles for business combinations of this nature.
(d) Restructuring charges in
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operating income:
----------------
Three Months Ended Nine Months Ended
September 30 September 30
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1996 1995(a) 1996 1995(a)
---- ---- ---- ----
Floor coverings $ -- $ 25.0 $ 14.5 $ 25.0
Building products -- 6.3 8.3 6.3
Industry products -- 15.8 4.0 31.4
Ceramic tile -- -- -- --
Unallocated corporate expense -- 9.1 19.7 9.1
------ ------ ------- --------
Total restructuring charges in
operating income $ -- $ 56.2 $ 46.5 $ 71.8
====== ====== ======= ========
(e) For the three months and nine months ended September 30, 1996, operating
income includes a $2.3 million gain resulting from the sale of the
Braintree, Massachusetts, manufacturing facility.
7
Note 1. Operating results for the third quarter and first nine months of 1996,
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compared with the corresponding period of 1995 included in this report, are
unaudited. However, these results have been reviewed by the Company's
independent public accountants, KPMG Peat Marwick LLP, in accordance with the
established professional standards and procedures for a limited review.
In the opinion of management, 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 nine months' results are not necessarily indicative
of annual earnings.
Note 2.
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OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
The full report on the Asbestos-Related Litigation immediately follows this
summary.
The Company is involved, as of September 30, 1996, in approximately 45,000
pending personal injury asbestos claims and lawsuits, and 12 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 (Georgine
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v. Amchem) that includes essentially all future personal injury claims against
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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 Center's request to the Supreme Court to hear the appeal of the Circuit
Court's decision has been granted (styled Amchem v. Windsor). 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 has now been concluded in the Company's
favor. 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
non-products coverage through alternative dispute resolution proceedings
involving the primary and certain excess carriers pursuant to the Wellington
Agreement. The proceedings are in the mediation phase and if coverage is not
mutually resolved during that phase with the help of a neutral party, the
Company and its insurers with whom it has not achieved resolution will proceed
to binding arbitration. Other proceedings may become necessary against several
non-Wellington excess carriers.
The Company believes that an estimated $141.2 million in liability and defense
costs recorded on its balance sheet will be incurred to resolve approximately
45,000 asbestos-related personal injury claims against the Company as of
September 30, 1996. An insurance asset in the amount of $141.2 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 Georgine 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. A substantial portion of
the insurance asset involves non-products insurance which is in alternative
dispute resolution.
8
While the Company has reason to believe that the alternative dispute resolution
process will be completed during 1997, a shortfall may develop between available
insurance and amounts necessary to pay claims, that may occur as early as the
third quarter of 1997; the Company believes such shortfall would not be material
either to the financial condition of the Company or to its liquidity.
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
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 September 30, 1996, approximately 45,000 individuals alleging personal
injury from exposure to asbestos. Included in the above number are approximately
18,000 lawsuits and claims from the approximately 87,000 individuals who opted
out Georgine. About 18,200 claims from purported settlement class members were
received as of September 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 Georgine claims, 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 has decreased 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 transferee 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 transferee court.
State court cases have not been directly affected by the transfer. The
transferee court 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.
9
Georgine Settlement Class Action
Georgine v. Amchem is a settlement class action that includes essentially all
- ------------------
future asbestos-related personal injury claims against members of the Center
that was filed in the Eastern District of Pennsylvania, on January 15, 1993. It
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 settlement 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 ruled that potential claimants who neither filed a lawsuit against 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
District Court tentatively approved the settlement, and notification was
provided to class members. Approximately 87,000 individuals opted out; opt outs
are not claims as such but rather are reservations of rights possibly to 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 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 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's petition for rehearing before the Third Circuit en banc was denied.
On November 1, 1996, the U.S. Supreme Court accepted the Center's petition for
certiorari and, accordingly, the appeal will proceed through briefing to
argument and a likely decision by July 1997. The preliminary injunction will
remain in place while the case is pending in the Supreme Court.
10
The Court of Appeals 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." In addition to this case being of significant
importance, the Court's ruling was not consistent with rulings of several other
circuit courts of appeals that have considered Rule 23 issues in comparable
cases. In particular, the recent ruling in the Ahearn case by the Fifth Circuit
------
Court of Appeals reached a contrary conclusion on a central Rule 23 issue
addressed by the Third Circuit. The Center's counsel believes there to be
substantial and substantive grounds for the Supreme Court to reverse the Court
of Appeals' decision.
The Company remains optimistic that a future claimants settlement class action
may ultimately be approved, although the courts may not uphold this 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 of this settlement.
Upon final resolution by the Supreme Court, the District Court's injunction may
be lifted, if that appeal 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. The
Company believes that the number of subsequent pending cases in the tort system
against the Company would likely increase. 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
had been paying for defense costs under an Interim Agreement, pending resolution
of the California insurance litigation, which, as discussed elsewhere in this
note, has been resolved in the Company's favor. 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 non-products coverage for the
Company's asbestos-related personal injury claims and product coverage for
property damage claims. Most policies providing products coverage for personal
injury claims have been exhausted. The insurance carriers that currently provide
coverage or whose policies have provided or are believed to provide personal
injury products and non-products or property damage coverages are 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 insolvency is 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
11
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 and subsequent
share adjustments have resulted in an increased liability share for the Company
in certain areas. A large share member earlier withdrew from the Center, and the
shares of liability payments and defense costs of the Center were recalculated,
resulting in the remaining members' shares being increased. In the settlement
class action, each member will pay its own fixed share of every claim. 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 ninth 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. A substantial portion of the
insurance asset
12
involves non-products insurance which is in alternate dispute resolution. While
the Company has reason to believe that the alternate dispute resolution process
will be completed during 1997, a shortfall may develop between available
insurance and amounts necessary to pay claims, and that shortfall may occur as
early as the third quarter of 1997. The Company does not believe that such
shortfall would be material either to the financial condition of the Company or
to its liquidity. 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 possible.
Property Damage Litigation
The Company is also one of many defendants in a total of 12 pending lawsuits and
claims, including one class action, as of September 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, the court has approved a settlement with certain
defendants and has dismissed the action with prejudice as to those parties,
which include the Company. 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 decision established favorable defense and indemnity
coverage for property damage claims holding that coverage would be 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 that insurance coverage litigation is now concluded.
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
13
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 was 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 non-products
coverage. One primary carrier alleges that it is no longer bound by the
Wellington Agreement, and one primary carrier alleges that the Company agreed to
limit its claims for non-products coverage against that carrier at the time the
Wellington Agreement was signed. All the carriers raise various reasons why they
should not pay their coverage obligations, including contractual defenses,
waiver, laches and statutes of limitations. The Company has initiated
alternative dispute resolution proceedings against the primary and certain
excess carriers to resolve the non-products coverage issues. The proceedings are
in the mediation phase and if coverage is not mutually resolved during that
phase with the help of a neutral party, the Company and its insurers with whom
it has not achieved resolution will proceed to binding arbitration. Other
proceedings against several non-Wellington carriers may become necessary.
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
14
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, if
needed, 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.
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 $141.2 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 45,000
asbestos-related personal injury claims pending against the Company as of
September 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 $141.2 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. A substantial portion of the insurance asset
involves non-products insurance which is in alternative dispute resolution.
While the Company has reason to believe that the alternative dispute resolution
process will be completed during 1997, a shortfall may develop between available
insurance and amounts necessary to pay claims, and that shortfall may occur as
early as the third quarter of 1997; the Company believes such shortfall would
not be material either to the financial condition of the Company or to its
liquidity. The Company also notes that, based on maximum mathematical
projections covering a ten-year period from 1994 to 2004, its estimated cost in
Georgine reflects a reasonably possible additional liability of $245 million. If
Georgine 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 insurance coverage settlement agreement and through coverage from
the outcome of the California 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
15
Agreement, the referenced settlements with other insurance carriers, the results
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
----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
- -----------------
things, that the Company had improperly interfered with a tentative contract
which TINS had with an independent distributor of the Company's flooring
products and further claimed that the Company used its alleged monopoly power in
resilient floor coverings to obtain a monopoly in the video magazine market for
floor covering retailers in violation of federal antitrust laws. The Company
denied all allegations. On April 19, 1991, the jury rendered a verdict in the
case, which as entered by the court in its order of judgment, awarded the
plaintiffs the alternative, after all post-trial motions and appeals were
completed, of either their total tort claim damages (including punitive
damages), certain pre-judgment interest, and post-judgment interest or their
trebled antitrust claim damages, post-judgment interest and attorneys fees. The
higher amount awarded to the plaintiffs as a result of these actions totaled
$224 million in tort claim damages and pre-judgment interest, including $200
million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the plaintiff's
appeal of these rulings, the Court of Appeals sustained the U. S. District
Court's decision granting the Company a new trial, but overturned in certain
respects the District Court's grant of judgment for the Company notwithstanding
the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments, reversed the trial judge's
judgment for Armstrong on TINS' claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS' claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS' claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS' alleged breach of contract claim.
16
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. If the denial of the
motion were reversed on appeal, TINS could possibly be entitled to litigate
claims that had been resolved by means of the settlement agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
At nine months, cash provided by operating activities and the sale of assets was
sufficient to cover normal working capital requirements, payments related to
restructuring activities and additional investment in plant, property and
equipment. Cash proceeds from exercised stock options, issuance of long-term
debt and $204.4 million of existing cash balances covered the reduction of long
and short-term debt, payments of dividends, preferred stock redemptions,
repurchase of shares, purchase of computer software and additional investment in
Dal-Tile International Inc., the company in which the Company has a 33 percent
equity investment. The $204.4 million of existing cash balances 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 $263.8 million as of September 30, 1996 $8.6 million lower
than the $272.4 million recorded at the end of the second quarter of 1996 and
$83.0 million lower than the $346.8 million recorded at year-end 1995. The
reduction in working capital over nine months results primarily from the $178.2
million decrease in cash and the $14.8 million increase in accounts payable and
accrued expenses and income taxes payable. Partially offsetting the decrease in
cash and increase in payables were the $56.2 million increase in accounts
receivable, inventory and other assets and the $53.8 million decrease in
short-term debt and current installments of long-term debt. Seasonally higher
sales levels for the third quarter 1996 when compared with the fourth quarter
1995 (excluding ceramic tile sales) was the primary reason for the $47.8 million
increase in receivables.
17
The ratio of current assets to current liabilities was 1.78 to 1 as of September
30, 1996 and 1.83 to 1 as of June 30, 1996 compared with 1.92 to 1 as of
December 31, 1995 primarily due to the reduced levels of cash at September 30
when compared with the end of 1995.
Long-term debt, excluding the Company's guarantee of the ESOP loan, increased
$26.6 million in the first nine months of 1996. The increase was primarily due
to borrowings for a capital addition at the Kankakee, Illinois floor tile plant.
At September 30, 1996 long-term debt of $214.9 million represented 17.5 percent
of total capital compared with 14.9 percent at the end of 1995. The September
30, 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 36.8 percent and
38.5 percent, respectively.
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 bringing the total authorized common
share repurchases to 5.5 million shares. Under the total plan, the Company has
repurchased approximately 2,091,000 shares through September 30, 1996, including
approximately 1,038,100 repurchased in the first nine months of this year. In
addition to shares repurchased under the above plan, ESOP shares repurchased
year to date were 364,600.
In the second quarter, 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.
Capital in excess of par value increased $127.3 million from December 31, 1995
primarily as a result of two transactions. First, the Company reissued treasury
stock to the trustee of the ESOP in the conversion of the preferred stock held
by the trust as mentioned above. Capital in excess of par value increased by the
excess of the conversion value of the ESOP convertible shares over the average
acquisition cost of the treasury shares. Second, Dal-Tile issued new shares in a
public offering in August and used part of the proceeds from the public offering
to refinance all of its existing debt. Although Armstrong's ownership share
declined to 33 percent from 37 percent, Dal-Tile's net assets increased, adding
to the overall value of Armstrong's investment by $22.6 million. The Company
recorded its increased equity in Dal-Tile as additional capital in excess of par
value.
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, if needed, 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.
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 $141.2 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 45,000
asbestos-related personal injury claims pending against the Company as of
September 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
18
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 $141.2 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. A substantial portion of the insurance asset
involves non-products insurance which is in alternative dispute resolution.
While the Company has reason to believe that the alternative dispute resolution
process will be completed during 1997, a shortfall may develop between available
insurance and amounts necessary to pay claims, and that shortfall may occur as
early as the third quarter of 1997; the Company believes such shortfall would
not be material either to the financial condition of the Company or to its
liquidity. The Company also notes that, based on maximum mathematical
projections covering a ten-year period from 1994 to 2004, its estimated cost in
Georgine reflects a reasonably possible additional liability of $245 million. If
Georgine 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 insurance coverage settlement agreement and through coverage from
the outcome of the California 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 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 its 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. On November 1, the Company's shelf registration statement for an
additional $250 million of debt and/or equity securities was declared effective.
The total amount of unissued securities registered with the Securities and
Exchange Commission is now $500 million.
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.
19
Consolidated Results
- --------------------
Third-quarter net sales of $563.4 million were adversely affected by $14.1
million of sales returns of floor products that the Company requested be
returned due to a potential discoloration issue. Last year's net sales of $611.8
million in the third quarter included $62.8 million of sales from the ceramic
tile operations.
Third-quarter earnings from continuing businesses were $44.2 million, including
$22.0 million in charges related to the discoloration of a limited portion of
the Company's Residential Inlaid Color Sheet Flooring product lines. Last year's
third-quarter earnings from continuing businesses were $14.4 million, including
$36.5 million in restructuring charges. Third-quarter 1996 earnings per share
from continuing businesses were $1.06 per share compared with 29 cents per share
on a primary basis and 28 cents per share on a fully diluted basis for the third
quarter of 1995.
In July the Company learned that discoloration in a limited portion of its
residential sheet flooring product lines was occurring. The problem was traced
to a raw material used in production between September 1995 and July 1996. The
manufacturing process was corrected to eliminate any further occurrence of this
problem. New production was 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.
In September, the Company recorded charges of $34.0 million before tax or $22.0
million after tax for costs associated with the discoloration issue. These
charges include the writedown to realizable value of the Company's inventory on
hand or to be returned from independent wholesalers and the potential cost of
removing and replacing discolored product installed in consumers' homes. The
Company will continue to monitor claims levels associated with these products
and may make further adjustments in the reserve based on experience. Based on
information currently available, the Company believes the additional 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.
Net earnings for the third quarter 1996 were $35.8 million including the
discoloration charge mentioned above and an extraordinary loss of $8.4 million,
or 20 cents per share, for Armstrong's share of an extraordinary loss from
Dal-Tile. In August, Dal-Tile issued new shares in a public offering. Part of
the proceeds from the public offering were used in a refinancing of all of its
existing debt resulting in an extraordinary loss from early extinguishment of
debt. Third quarter 1995 net earnings were $19.4 million including the
restructuring charge mentioned above and $5.0 million of after-tax earnings from
the discontinued operations of Thomasville Furniture Industries, Inc.
Third-quarter net earnings per share of common stock were 86 cents compared with
42 cents per share on a primary basis and 40 cents per share on a fully diluted
basis for the third quarter of 1995.
Cost of goods sold in the third quarter, which included $5.9 million for charges
associated with the floor discoloration issue, was 68.3 percent of sales
compared with 66.7 percent in the third quarter of 1995.
Net sales recorded through September 30, 1996, were $1.63 billion, or nearly 8
percent lower than last year's sales of $1.78 billion which included $0.18
billion of ceramic tile operations sales.
In the second quarter the Company recorded an 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) related primarily to severance and early retirement
incentives for approximately 500 employees, about two-thirds of whom were staff,
as well as for asset write-offs related to facility closures. The charges were
estimated to be evenly split between cash payments and non-cash charges. The
majority of the cash outflow was expected to occur over the following 12 months.
It was anticipated that ongoing cost reductions and productivity improvements
should permit recovery of these charges in less than two years.
Actual severance payments charged against restructuring reserves were $27.5
million in the first nine months of 1996 relating to the elimination of 591
positions, of which 312 terminations occurred since the beginning of 1996. As of
September 30, 1996 $73.0 million remained in this reserve for restructuring
actions.
Earnings from continuing businesses for nine months 1996 were $111.1 million
after tax ($2.67 per share on a primary basis and $2.54 per share on a fully
diluted basis) including the second-quarter after-tax restructuring charge of
$29.6 million. For the first nine months of 1995, earnings from continuing
businesses were $88.3 million ($2.06 per share on a primary basis and $1.90 per
share on a fully diluted basis) including $46.8 million of after-tax
restructuring charges taken in the first and third quarters.
Net earnings through the first nine months 1996 were $102.7 million including
the adverse impacts of the discoloration charge and the extraordinary loss of
$8.4 million or 20 cents per share. Last year's net earnings were $106.5 million
which included
20
$46.8 million in after tax restructuring charges and $18.2 million of after-tax
earnings from the discontinued operations of Thomasville Furniture Industries,
Inc. Net earnings through September 30, 1996 were $2.47 per share of a primary
basis and $2.34 per share on a fully diluted basis. These net earnings compare
with 1995's net earnings of $2.55 per share on a primary basis and $2.33 per
share on a fully-diluted basis.
Industry segment results:
- ------------------------
In the floor coverings segment, net sales were level with last year's third
quarter. This year's third quarter sales included a reduction of $14.1 million
to allow for customer returns associated with discoloration of a limited portion
of its Residential Inlaid Color Sheet Flooring products lines. A small decline
in the U.S. residential sheet business was offset by sales increases of
residential tile sold through U.S. home centers, U.S. commercial tile and
residential sheet flooring sales in Europe. Third-quarter operating profits of
$26.6 million which include the $34.0 million charge associated with the
discoloration issue, were 8 percent lower than last year's $28.9 million, which
included a restructuring charge of $25.0 million. The cost profile of this
business continues to be positively impacted by lower raw material and other
manufacturing costs.
In the building products segment, net sales increased over 5 percent when
compared with 1995's third quarter with growth in all geographic areas.
Operating profits increased 37 percent from last year. European and North
American profits remained strong while the Pacific Rim continued to be impacted
by plant startup costs.
Third quarter net sales in the industry products segment increased 6 percent.
Operating profits, which include the gain on sale of the Braintree plant, were
$15.2 million compared with an operating loss of $4.5 million in the third
quarter 1995, which included $15.8 million of restructuring charges. European
insulation products continued its efforts to reduce costs and become the best
cost supplier in the industry. Gasket sales and profits have increased with the
majority of the growth in North America. Textile products' sales have decreased
from last year.
The ceramic tile segment 1996 results represent Armstrong's after-tax share of
the net 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 pre-tax operating profits of the
ceramic tile operations. This segment continues to experience growth through the
home centers and independent distributor channels.
Unallocated corporate expense for the third quarter 1996 decreased by $13.5
million from last year which included $9.1 million in restructuring charges. The
additional $4.4 million decrease resulted from reductions in employee benefit
costs.
This Quarterly 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. Such forward-looking
statements include statements using the words "believe," "expect," and
"estimate" and similar expressions. Actual results may differ materially as a
result of the uncertainties identified or if the factors on which the Company's
conclusions are based do not conform to the Company's expectations.
21
Independent Accountants' Report
-------------------------------
The Board of Directors
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of September 30, 1996, and the related
condensed consolidated statements of earnings for the three-month and nine-month
periods ended September 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the nine-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 have 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
November 12, 1996
22
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report on
Form 10-Q:
Exhibits
--------
No. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) The following report on Form 8-K was filed during the quarter for which
this report is filed:
On July 29, 1996, the registrant filed a current report on Form 8-K
setting forth a description of its capital stock.
23
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Armstrong World Industries, Inc.
By: /s/L. A. Pulkrabek
---------------------------
L. A. Pulkrabek, Senior
Vice President, Secretary and
General Counsel
By: /s/B. A. Leech, Jr.
---------------------------
B. A. Leech, Jr., Controller
(Principal Accounting Officer)
Date: November 13, 1996
24
Exhibit Index
-------------
Exhibit No.
- -----------
No. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
25