FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of registrant's common stock outstanding as of
July 31, 1998 - 40,014,968
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
-----------------------------------
(amounts in millions except for per-share data and percentages)
Unaudited
Three months Six months
ended June 30 ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $555.6 $577.4 $1,098.7 $1,095.7
Cost of goods sold 361.8 378.2 724.5 725.2
Selling, general and administrative expense 105.5 100.4 209.5 200.7
Equity (earnings) loss from affiliates (a) (4.6) 0.9 (5.3) (2.9)
-------- ------- -------- ---------
Operating income 92.9 97.9 170.0 172.7
Interest expense 7.0 7.4 13.6 13.7
Other (income) expenses, net 0.6 (0.1) (0.4) 0.1
------- ------- -------- --------
Earnings before income taxes (b) 85.3 90.6 156.8 158.9
Income taxes 29.2 31.7 54.2 54.5
------- ------ -------- --------
NET EARNINGS $ 56.1 $ 58.9 $ 102.6 $ 104.4
====== ====== ======== ========
Net earnings per share of common stock: (c)
Basic $ 1.41 $ 1.45 $ 2.58 $ 2.56
Diluted $ 1.38 $ 1.43 $ 2.53 $ 2.53
Average number of common shares outstanding:
Basic 39.7 40.7 39.8 40.8
Diluted 40.5 41.1 40.5 41.4
Return on average common shareholders' equity 25.8% 28.3% 23.7% 25.1%
(a) For the three months and six months ended June 30, 1997, equity
(earnings) loss from affiliates included the Company's share of a
one-time charge incurred by Dal-Tile International Inc. of $5.5
million for uncollectible receivables and overstocked inventories.
On an after-tax basis, the charge was $5.1 million or 13 cents per
share.
(b) Depreciation and amortization charged against earnings before income
taxes amounted to $32.0 million and $64.2 million in the three
months and six months ended June 30, 1998, and $32.7 million and
$65.0 million in the three months and six months ended June 30,
1997.
(c) The following tables provide a reconciliation of the numerator and
denominators of the basic and diluted per share calculation for net
earnings.
Three months ended Three months ended
June 30, 1998 June 30, 1997
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Per-Share Per-Share
Earnings Shares Amounts Earnings Shares Amounts
-------- ------ ------- -------- ------ -------
Basic Earnings per Share:
Net earnings $56.1 39.7 $1.41 $58.9 40.7 $1.45
Dilutive options 0.8 0.4
--- ---
Diluted Earnings per
Share:
Net earnings $56.1 40.5 $1.38 $58.9 41.1 $1.43
==== ====
Six months ended Six months ended
June 30, 1998 June 30, 1997
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Per-Share Per-Share
Earnings Shares Amounts Earnings Shares Amounts
-------- ------ ------- -------- ------ -------
Basic Earnings per Share:
Net earnings $102.6 39.8 $2.58 $104.4 40.8 $2.56
Dilutive options 0.7 0.6
--- ---
Diluted Earnings per
Share:
Net earnings $102.6 40.5 $2.53 $104.4 41.4 $2.53
==== ====
See accompanying footnotes to the financial statements beginning on page 7.
2
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
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(amounts in millions)
Unaudited
Assets June 30, 1998 December 31, 1997
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Current assets:
Cash and cash equivalents $ 62.9 $ 57.9
Accounts receivable less allowance 281.7 252.6
Inventories:
Finished goods 142.1 149.4
Work in process 21.8 19.9
Raw materials and supplies 49.5 50.8
-------- --------
Total inventories 213.4 220.1
Income tax benefits 21.5 25.9
Other current assets 42.7 43.5
-------- --------
Total current assets 622.2 600.0
Property, plant, and equipment 2,008.7 1,976.5
Less accumulated depreciation and amortization 1,043.3 1,004.3
-------- --------
Net property, plant and equipment 965.4 972.2
Insurance for asbestos-related liabilities (a) 281.6 291.6
Investment in affiliates (b) 175.0 174.9
Other noncurrent assets 391.6 336.8
-------- --------
Total assets $2,435.8 $2,375.5
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 165.5 $ 84.1
Current installments of long-term debt 1.0 14.5
Accounts payable and accrued expenses (a) 321.3 339.9
Income taxes 43.1 33.0
-------- --------
Total current liabilities 530.9 471.5
Long-term debt 224.3 223.1
ESOP loan guarantee 190.5 201.8
Postretirement and postemployment benefits 246.9 248.0
Asbestos-related liabilities (a) 130.2 179.7
Other long-term liabilities 177.2 172.1
Deferred income taxes 61.4 53.7
Minority interest in subsidiaries 14.0 15.0
-------- ---------
Total noncurrent liabilities 1,044.5 1,093.4
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 169.5 169.5
Reduction for ESOP loan guarantee (202.9) (207.7)
Retained earnings 1,406.3 1,339.6
Other comprehensive income (16.4) (16.2)
Treasury stock (548.0) (526.5)
-------- --------
Total shareholders' equity 860.4 810.6
-------- --------
Total liabilities and shareholders' equity $2,435.8 $2,375.5
======== ========
(a) An asbestos-related liability in the amount of $210.2 million is composed
of $130.2 million in long-term liabilities and $80.0 million in current
accrued expenses and represents the minimum liability and defense cost to
resolve personal injury claims currently pending and expected to be filed
through 2003. An insurance asset in the amount of $281.6 million reflects
the Company's belief in the availability of insurance in an amount
covering these liabilities, as well as recovery of $71.4 million for
prior payments of asbestos-related claims.
(b) Investment in affiliates was primarily composed of a 34.4 percent
ownership of Dal-Tile International Inc. ("Dal-Tile") as of June 30,
1998, and a 50.0 percent interest in WAVE, a joint venture with
Worthington Industries. As described on page 11, the Company is pursuing
the disposition of its investment in Dal-Tile.
See accompanying footnotes to the financial statements beginning on page 7.
3
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholders' Equity
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(amounts in millions)
Unaudited
1998 1997
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Common stock, $1 par value:
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Balance at beginning of year & June 30 $ 51.9 $ 51.9
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Capital in excess of par value:
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Balance at beginning of year & June 30 $ 169.5 $ 169.5
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Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $(207.7) $(217.4)
Principal paid 11.3 9.3
Loans to ESOP (5.9) (2.2)
Accrued compensation (0.6) (2.3)
---- ----
Balance at June 30 $(202.9) $(212.6)
-------- --------
Retained earnings:
- ------------------
Balance at beginning of year $1,339.6 $1,222.6
Net earnings 102.6 $102.6 104.4 $104.4
Tax benefit on dividends paid on
unallocated common shares 0.9 1.0
--- ---
Total $1,443.1 $1,328.0
Less common stock dividends 36.8 34.3
---- ----
Balance at June 30 $1,406.3 $1,293.7
-------- --------
Other comprehensive income (a):
- -------------------------------
Balance at beginning of year $ (16.2) $ 9.9
Foreign currency translation adjustments and
hedging activities (5.5) (12.7)
Minimum pension liability adjustments 5.3 0.0
--- ---
Total other comprehensive income (0.2) (0.2) (12.7) (12.7)
----- ----- ------ ------
Balance at June 30 $ (16.4) $ (2.8)
-------- ---------
Comprehensive income $102.4 $91.7
- -------------------- ====== =====
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 526.5 $ 446.5
Stock purchases 30.9 38.3
Stock issuance activity, net (9.4) (5.4)
----- -----
Balance at June 30 $ 548.0 $ 479.4
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Total shareholders' equity $ 860.4 $ 820.3
======= ========
(a) Related tax effects allocated to each component of other comprehensive
income as of June 30, 1998:
Before-Tax Tax After-Tax
(Expense)
Amount or benefit Amount
------ ---------- ------
Foreign currency translation adjustments and $ (5.5) $ 0.0 $ (5.5)
hedging activities
Minimum pension liability adjustment (2.2) 7.5 5.3
----- --- ---
Other comprehensive income $ (7.7) $ 7.5 $ (0.2)
======== ====== =======
See accompanying footnotes to the financial statements beginning on page 7.
4
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows--Unaudited
------------------------------------------------
(amounts in millions)
Unaudited
Six Months Ended
June 30
-----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 102.6 $ 104.4
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 64.2 65.0
Deferred income taxes 11.4 8.9
Equity change in affiliates (2.3) (0.8)
Restructuring payments (3.1) (14.5)
Payments for asbestos-related claims, net of recoveries (31.5) --
Changes in operating assets and liabilities net of effect of
restructuring and acquisitions:
(Increase) in receivables (30.2) (64.2)
Decrease (increase) in inventories 6.1 (24.2)
Decrease in other current assets 5.0 15.3
(Increase) in other noncurrent assets (49.2) (26.0)
(Decrease) increase in accounts payable
and accrued expenses (20.2) 3.5
Increase in income taxes payable 15.3 12.2
Increase in other long-term liabilities 1.9 9.1
Other, net (5.7) (0.9)
---- ----
Net cash provided by operating activities 64.3 87.8
---- ----
Cash flows from investing activities:
Purchases of property, plant and equipment (52.6) (63.7)
Investment in computer software (12.2) (5.7)
Acquisitions and investments in joint ventures -- (16.6)
Proceeds from the sale of land and facilities/
divestitures 1.5 5.8
--- ---
Net cash (used for) investing activities (63.3) (80.2)
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Cash flows from financing activities:
Increase in short-term debt 80.1 43.5
Issuance of long-term debt 14.4 7.2
Reduction of long-term debt (27.2) --
Cash dividends paid (36.8) (34.3)
Purchase of common stock for the treasury (30.9) (38.3)
Proceeds from exercised stock options 7.4 4.2
Other, net (0.2) 0.2
---- ---
Net cash provided by (used for) financing activities 6.8 (17.5)
--- -----
Effect of exchange rate changes on cash and cash
equivalents (2.8) (4.5)
---- ----
Net increase (decrease) in cash and cash equivalents $ 5.0 $(14.4)
===== ======
Cash and cash equivalents at beginning of period $57.9 $ 65.4
===== ======
Cash and cash equivalents at end of period $62.9 $ 51.0
===== ======
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Supplemental cash flow information:
Interest paid $ 13.2 $ 11.0
Income taxes paid $ 25.7 $ 19.1
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See accompanying notes to the financial statements beginning on page 7.
5
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
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(amounts in millions)
Unaudited
Three Months Six months
ended June 30 ended June 30
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1998 1997 1998 1997
---- ---- ---- ----
Net trade sales:
- ---------------
Floor coverings $ 286.3 $ 303.1 $ 562.6 $ 555.5
Building products 187.3 190.0 375.5 372.0
Industry products 82.0 84.3 160.6 168.2
---- ---- ----- -----
Total net sales $ 555.6 $ 577.4 $1,098.7 $1,095.7
======== ======== ======== ========
Operating income (loss):
- -----------------------
Floor coverings $ 48.3 $ 56.1 $ 85.1 $ 89.1
Building products 30.3 30.8 56.6 60.1
Industry products 14.1 14.0 27.1 25.2
Ceramic tile (a) 1.4 (4.2) (0.8) (3.5)
Unallocated corporate (expense) (1.2) 1.2 2.0 1.8
--- --- --- --------
Total operating income $ 92.9 $ 97.9 $ 170.0 $ 172.7
======== ======== ======== ========
(a) For the three months and six months ended June 30, 1997, the ceramic tile
industry segment included the Company's share of a one-time charge incurred by
Dal-Tile for uncollectible receivables and overstocked inventories of $5.5
million.
6
Note 1. Operating results for the second quarter and first six months of 1998
- ------
compared with the corresponding periods of 1997 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
established professional standards and procedures for a limited review.
The accounting policies used in preparing these statements are the same as those
used in preparing the Company's consolidated financial statements for the year
ended December 31, 1997. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report and Form 10-K for the
fiscal year ended December 31, 1997. In addition, beginning with the
first-quarter 1998, the Company has adopted Statement of Accounting Standards
No. 130, "Reporting Comprehensive Income," which requires that all items
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. 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 six months' results are
not necessarily indicative of annual earnings.
Note 2.
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OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
Personal Injury Litigation
The Company is one of many defendants in approximately 133,000 pending claims as
of June 30, 1998, alleging personal injury from exposure to asbestos. The
increase of approximately 50,000 claims during the first half of 1998 is
primarily due to the inclusion of cases that had been subject to an injunction
related to the Georgine Settlement Class Action ("Georgine") described below,
and those that had been filed in the tort system against other defendants (and
not against the Center for Claims Resolution ("Center") members) while Georgine
was pending.
Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times from World War II onward, to asbestos-containing
products. Claims against the company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The Company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined up to 40 years after first exposure to asbestos. Nearly
all suits name many defendants, and over 100 different companies are reportedly
involved. The Company believes that many current plaintiffs are unimpaired. A
large number of claims have been settled, dismissed, put on inactive lists or
otherwise resolved, and the Company generally is involved in all stages of
claims resolution and litigation, including individual trials, consolidated
trials and appeals. Neither the rate of future filings and resolutions nor the
total number of future claims can be predicted at this time with certainty.
Attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. The Company supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That 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 claims. Claims in state courts have not been directly affected by the
transfer, although most recent cases have been filed in state courts.
Georgine Settlement Class Action
Georgine v. Amchem was a settlement class action filed in the Eastern District
- ------------------
of Pennsylvania on January 15, 1993, that included essentially all future
personal injury claims against members of the Center, including the Company. It
was designed to establish a nonlitigation system for the resolution of such
claims, and offered a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they met certain exposure and medical
criteria. Compensation amounts were derived from historical settlement data and
no punitive damages were to be paid. The settlement was designed to, among other
things, minimize transactional costs including attorneys' fees, expedite
compensation to claimants with qualifying claims, and relieve the courts of the
burden of handling future claims. Based on mathematical projections covering a
ten-year period starting in 1994, the Company estimated a maximum liability of
$245 million in Georgine.
7
The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on June 25, 1997, which held that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system. Following these
developments, the Company is exploring alternatives to the Georgine settlement
and believes an alternative claims resolution mechanism is likely to emerge, but
the liability is likely to be higher than the projection in Georgine.
Asbestos-Related Liability
During the last half of 1997, the Company assessed the impact of the June 1997
Supreme Court ruling on its projected asbestos resolution and defense costs. In
doing so, the Company reviewed, among other things, its historical settlement
amounts, the incidence of past claims, the mix of the injuries and occupations
of the plaintiffs, the number of cases pending against it, the Georgine
projection and the Company's experience. Subject to the uncertainties,
limitations and other factors referred to above and based upon its experience,
the Company has recorded $210.2 million on the balance sheet as an estimated
minimum liability to defend and resolve probable and estimable asbestos-related
personal injury claims currently pending and reasonably expected to be filed
through 2003. This is management's best estimate of the minimum liability,
although potential future costs for claims could range up to an additional $387
million resulting in an estimated maximum liability of approximately $597
million. Because of the uncertainties related to asbestos litigation, it is not
possible to estimate the number of personal injury claims that may be filed
after 2003 or their defense and resolution costs. Therefore, the Company's
estimated liability does not include costs for personal injury claims that may
be filed after 2003, although it is likely there will be such additional claims.
Management believes that potential additional costs for claims to be filed
through 2003 and those filed thereafter, net of insurance recoveries, will not
have a material after-tax effect on the financial condition or liquidity of the
Company, although the net after-tax effect of any future liabilities recorded in
excess of insurance assets could be material to earnings in a future period.
Property Damage Litigation
The Company is one of many defendants in eight pending claims as of June 30,
1998, brought by public and private building owners. These claims include
allegations of damage to buildings caused by asbestos-containing products and
generally seek compensatory and punitive damages and equitable relief, including
reimbursement of expenditures for removal and replacement of such products. The
claims appear to be aimed at friable (easily crumbled) asbestos-containing
products, although allegations encompass all asbestos-containing products,
including previously installed asbestos-containing resilient flooring. Among the
lawsuits that have been resolved are four class actions which involve public and
private schools, Michigan state public and private schools, colleges and
universities, and private property owners who leased facilities to the federal
government. The Company vigorously denies the validity of the allegations
against it in these claims. These suits and claims are not handled by the
Center. Insurance coverage has been resolved and is expected to cover almost all
costs of these claims.
Codefendant Bankruptcies
Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on asbestos-related
litigation cannot be predicted.
Insurance Coverage
The Company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product hazard coverage for property damage claims. Certain policies also
provide coverage to ACandS, Inc., a former subsidiary of the Company. The
Company and ACandS, Inc. share certain limits that both have accessed and also
have entered into an agreement that reserved for ACandS, Inc. a certain amount
of excess insurance.
8
California Insurance Coverage Lawsuit
Trial court decisions in the insurance lawsuit filed by the Company in
California held that the trigger of coverage for personal injury claims was
continuous from exposure through death or filing of a claim, that a triggered
insurance policy should respond with full indemnification up to policy limits,
and 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, providing coverage during the
period of installation and any subsequent period in which a release of fibers
occurred. The California appellate courts substantially upheld the trial court,
and that insurance coverage litigation is now concluded. The Company has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to below, or other
settlements. In 1989, a settlement with a carrier having both primary and excess
coverages provided for certain minimum and maximum percentages of costs for
personal injury claims to be allocated to nonproducts (general liability)
coverage, the percentage to be determined by negotiation or in alternative
dispute resolution ("ADR").
The insurance carriers that provided personal injury products hazard,
nonproducts or property damage coverages are as follows: Reliance Insurance
Company; Aetna (now Travelers) Casualty and Surety Company; Liberty Mutual
Insurance Company; 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
provided $25 million of personal injury coverage, certain London companies, and
certain excess carriers providing only property damage coverage are insolvent.
The Company is pursuing claims against insolvents in a number of forums.
Wellington Agreement
In 1985, the Company and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled nearly all disputes
concerning personal injury insurance coverage with most of the Company's
carriers, provided broad coverage for both defense and indemnity and addressed
both products hazard and non-products (general liability) coverages.
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
The Wellington Agreement established the Facility to evaluate, settle, pay and
defend all personal injury claims against member companies. Resolution and
defense costs were allocated by formula. The Facility subsequently dissolved,
and the Center was created in October 1988 by 21 former Facility members,
including the Company. Insurance carriers, while not members, are represented ex
officio on the Center's governing board and have agreed annually to provide a
portion of the Center's operational costs. The Center adopted many of the
conceptual features of the Facility and has addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. Resolution
and defense costs are allocated by formula; adjustments over time have resulted
in some increased share for the Company.
Insurance Recovery Proceedings
A substantial portion of the Company's primary and excess insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others those that involve exposure during installation of asbestos
materials. The Wellington Agreement and the 1989 settlement agreement referred
to above have provisions for such coverage. An ADR process under the Wellington
Agreement is under way against certain carriers to determine the percentage of
resolved and unresolved claims that are nonproducts claims, to establish the
entitlement to such coverage and to determine whether and to what extent
reinstatement of prematurely exhausted products hazard insurance is warranted.
The nonproducts coverage potentially available is substantial and, for some
policies, includes defense costs in addition to limits. The carriers have raised
various defenses to the Company's claims, including waivers, laches, statutes of
limitations and contractual defenses. One primary carrier alleges that it is no
longer bound by the Wellington Agreement, and another alleges that the Company
agreed to limit its claims for nonproducts coverage against that carrier when
the Wellington Agreement was signed. The ADR process is in the trial phase of
binding arbitration. An agreement has recently been reached with two carriers to
settle the ADR with respect to them. Other proceedings against non-Wellington
carriers may become necessary.
9
An insurance asset in the amount of $281.6 million is recorded on the balance
sheet and reflects the Company's belief in the availability of insurance in this
amount through negotiation or litigation based upon the Company's success in
insurance recoveries, settlement agreements that provide such coverage,
recoveries of nonproducts coverage by other companies, the opinion of outside
counsel, and the recent agreement with two carriers in the ADR. A substantial
portion of the insurance asset is involved in the aforementioned ADR, which the
Company believes may be resolved in 1998 or later. A shortfall has developed
between currently available insurance and amounts necessary for resolution and
defense costs. This shortfall was $71.4 million as of June 30, 1998. The
recovery of insurance assets to cover the shortfall will depend upon the
resolution of the ADR and other disputes with the insurance carriers. The
Company does not believe that any after-tax effect of the shortfall will be
material either to the financial condition of the Company or to its liquidity.
Conclusions
The Company does not know how many claims will be filed against it in the
future, nor the details thereof, nor of pending suits not fully reviewed, nor
the defense and resolution costs that may ultimately result therefrom, nor
whether an alternative to the Georgine settlement vehicle may emerge, nor the
scope of its insurance coverage ultimately deemed available.
The Company has assessed the impact of the recent Supreme Court ruling on its
projected asbestos resolution and defense costs. Subject to the uncertainties,
limitations and other factors referred to above and based upon its experience,
the Company has recorded on the balance sheet $210.2 million as a minimum
estimated liability to defend and resolve probable and estimable
asbestos-related personal injury claims currently pending and to be filed
through 2003. This is management's best estimate of the minimum liability,
although potential future costs for these claims could range up to an additional
$387 million or an estimated maximum liability of approximately $597 million.
Because of the uncertainties related to asbestos litigation, it is not possible
to estimate the number or cost of personal injury claims that may be filed after
2003. Therefore, the Company's estimated liability does not include costs for
personal injury claims that may be filed after 2003, although it is likely there
will be such additional claims. Management believes that the potential
additional costs for claims to be filed through 2003 and those filed thereafter,
net of insurance recoveries, will not have a material after-tax effect on the
financial condition of the Company or its liquidity, although the net after-tax
effect of any future liabilities recorded in excess of insurance assets could be
material to earnings in a future period.
An insurance asset in the amount of $281.6 million is recorded on the balance
sheet and reflects the Company's belief in the availability of insurance in this
amount based upon the Company's success in insurance recoveries, settlement
agreements that provide such coverage, nonproducts recoveries by other
companies, the opinion of outside counsel, and the recent agreement with two
carriers in the ADR. Such insurance is probable of recovery through negotiation
or litigation. A substantial portion of the insurance asset is in ADR, which the
Company believes may be resolved in 1998 or later. A shortfall has developed
between currently available insurance and amounts necessary for resolution and
defense costs. This shortfall was $71.4 million as of June 30, 1998. The
recovery of insurance assets to cover the shortfall will depend upon the
resolution of the ADR and other disputes with insurance carriers. The Company
does not believe that after-tax effect of the shortfall will be material either
to the financial condition or liquidity of the Company.
The Company believes that a claims resolution mechanism alternative to the
Georgine settlement will eventually emerge, but the liability is likely to be
higher than the projection in Georgine.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the Company believes it is
probable that substantially all of the defense and resolution costs of property
damage claims will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and other settlements with insurance carriers, the results of the
California insurance coverage litigation, the establishment of the Center, the
likelihood that an alternative to the Georgine settlement will eventually
emerge, and its experience, the Company believes asbestos-related claims against
the Company will not be material either to the financial condition or liquidity
of the Company, although the net after-tax effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in a future
period.
10
Note 3.
- -------
SUBSEQUENT EVENTS
Sale of Dal-Tile Stock:
- -----------------------
The Company previously announced its intention to dispose of its investment in
Dal-Tile. On July 1, 1998, Armstrong settled its sale of 10.35 million shares of
Dal-Tile at $8.50 per share before commissions and fees. Armstrong will report a
gain on the sale of approximately $7 million in its third quarter 1998 results.
The sale reduced Armstrong's ownership interest in Dal-Tile to 15.0 percent, and
in accordance with generally accepted accounting principles, this remaining
interest will be accounted for on a cost basis with no equity income recorded
going forward.
Recent Events:
- --------------
On June 5, 1998, Armstrong announced its intention to commence, through an
indirect wholly-owned subsidiary, a cash tender offer for all of the outstanding
shares of DLW Aktiengesellschaft ("DLW"). DLW, which is headquartered in
Bietigheim-Bissingen, Germany, is the leading flooring manufacturer in Germany
and the third largest flooring manufacturer in Europe. As of May 31, 1998, there
were approximately 1.41 million shares of capital stock of DLW outstanding. The
tender offer for DLW at DM350 per share ($194 per share) commenced on July 8,
1998, and will run through August 19, 1998. Consummation of the offer is subject
to a number of conditions, including the condition that at least 75 percent of
DLW's outstanding shares tender into the offer, as well as receipt of certain
regulatory approvals, which have been obtained. As of August 12, 1998, the
percentage ownership condition had not yet been met. The transaction has already
received the unanimous support of the Management Board of DLW as well as the
approval of two of DLW's major shareholders who hold 23.36 percent of DLW's
outstanding shares. For the year ended December 31, 1997, DLW had total sales of
DM1,184 million (approximately $680 million) and net income of DM13.6 million
(approximately $7.6 million). At December 31, 1997, DLW had total assets of
DM788.7 million (approximately $438.2 million).
On June 13, 1998, the Company announced that it had entered into an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of June 12, 1998, by and
among Triangle Pacific Corp. ("Triangle Pacific"), a Delaware corporation,
Armstrong and Sapling Acquisition, Inc. ("Sapling"), a Delaware corporation and
a wholly-owned subsidiary of the Company. Triangle Pacific is a leading U.S.
manufacturer of hardwood flooring and other flooring and related products and a
substantial manufacturer of kitchen and bathroom cabinets. Pursuant to the
Merger Agreement, the Company commenced a cash tender offer on June 19, 1998,
for all of the outstanding shares of common stock of Triangle Pacific at $55.50
per share. At the expiration of the tender offer on July 17, 1998, approximately
14,000,000 shares (or approximately 95 percent of the total shares outstanding)
were validly tendered and not withdrawn pursuant to the offer (excluding 181,647
shares subject to guarantees of delivery), and Armstrong accepted all of those
shares for payment. All shares of Triangle Pacific not tendered and purchased
pursuant to the offer or otherwise owned by Armstrong were converted into the
right to receive $55.50 per share in cash. On July 24, 1998, Armstrong completed
the merger with Triangle Pacific. For the year ended January 2, 1998, Triangle
Pacific had total sales of $652.9 million and net income of $31.8 million. At
April 3, 1998, Triangle Pacific had total assets of $575.8 million.
Financing
- ---------
On July 13, 1998, the Company entered into a new commercial paper program (the
"CP Program") and subsequently issued approximately $1.0 billion of commercial
paper. The commercial paper is secured by lines of credit under a new bank
credit facility, has maturities of up to 364 days and bears interest at rates
between approximately 5.5% and 6.0%. On August 11, 1998, the Company completed
an offering of $200,000,000 of 6.35% Senior Notes due 2003 and a concurrent
offering of $150,000,000 of 6.5% Senior Notes due 2005. The Company intends to
use the proceeds from the issuance of the Notes to repay outstanding commercial
paper.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
As shown on the Consolidated Balance Sheet (see page 3), the Company had cash
and cash equivalents of $62.9 million at June 30, 1998. Working capital was
$91.3 million as of June 30, 1998, $37.2 million lower than the $128.5 million
recorded at the end of 1997. The ratio of current assets to current liabilities
was 1.17 to 1 as of June 30, 1998, compared with 1.27 to 1 as of December 31,
1997. The decrease in this ratio from
11
December 31, 1997, was primarily due to higher levels of short-term debt used to
finance higher levels of receivables and other general corporate purposes.
Long-term debt, excluding the Company's guarantee of an ESOP loan, increased
slightly in the first six months of 1998. At June 30, 1998, long-term debt of
$224.3 million, or 15.6 percent of total capital, compared with $223.1 million,
or 16.7 percent of total capital, at the end of 1997. For the periods ended June
30, 1998, and December 31, 1997 ratios of total debt (including the Company's
guarantee of the ESOP loan) as a percent of total capital were 40.3 percent and
39.2 percent, respectively.
As shown on the Consolidated Statements of Cash Flows (see page 5), net cash
provided by operating activities for the six months ended June 30, 1998, was
$64.3 million compared with $87.8 million for the comparable period in 1997. The
decrease was due to several items including payments for asbestos-related
claims, increases in noncurrent assets and decreases in accounts payable.
Net cash used for investing activities was $63.3 million for the six months
ended June 30, 1998, compared with $80.2 million in 1997. The decrease was
primarily due to the absence of expenditures for acquisitions and investments in
joint ventures in 1998 in contrast to 1997.
Net cash provided by financing activities was $6.8 million for the six months
ended June 30, 1998 compared with net cash used for financing activities of
$17.5 million for the six months ended June 30, 1997.
Under the plans approved by the Company's Board of Directors for the repurchase
of 5.5 million shares of common stock, the Company has repurchased approximately
4,017,000 shares through June 30, 1998, including 355,000 repurchased in the
first six months of 1998.
It is management's opinion that the Company has sufficient financial strength to
warrant the required support from lending institutions and financial markets.
Sale of Dal-Tile Stock:
- -----------------------
The Company previously announced its intention to dispose of its investment in
Dal-Tile. On July 1, 1998, Armstrong settled its sale of 10.35 million shares of
Dal-Tile at $8.50 per share before commissions and fees. Armstrong will report a
gain on the sale of approximately $7 million in its third quarter 1998 results.
The sale reduced Armstrong's ownership interest in Dal-Tile to 15.0 percent, and
in accordance with generally accepted accounting principles, this remaining
interest will be accounted for on a cost basis with no equity income recorded
going forward.
Recent Events:
- --------------
On June 5, 1998, Armstrong announced its intention to commence, through an
indirect wholly-owned subsidiary, a cash tender offer for all of the outstanding
shares of DLW Aktiengesellschaft ("DLW"). DLW, which is headquartered in
Bietigheim-Bissingen, Germany, is the leading flooring manufacturer in Germany
and the third largest flooring manufacturer in Europe. As of May 31, 1998, there
were approximately 1.41 million shares of capital stock of DLW outstanding. The
tender offer for DLW at DM350 per share ($194 per share) commenced on July 8,
1998, and will run through August 19, 1998. Consummation of the offer is subject
to a number of conditions, including the condition that at least 75 percent of
DLW's outstanding shares tender into the offer, as well as receipt of certain
regulatory approvals, which have been obtained. As of August 12, 1998, the
percentage ownership condition had not yet been met. The transaction has already
received the unanimous support of the Management Board of DLW as well as the
approval of two of DLW's major shareholders who hold 23.36 percent of DLW's
outstanding shares. For the year ended December 31, 1997, DLW had total sales of
DM1,184 million (approximately $680 million) and net income of DM13.6 million
(approximately $7.6 million). At December 31, 1997, DLW had total assets of
DM788.7 million (approximately $438.2 million).
On June 13, 1998, the Company announced that it had entered into an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of June 12, 1998, by and
among Triangle Pacific Corp. ("Triangle Pacific"), a Delaware corporation,
Armstrong and Sapling Acquisition, Inc. ("Sapling"), a Delaware corporation and
a wholly-owned subsidiary of the Company. Triangle Pacific is a leading U.S.
manufacturer of hardwood flooring and other flooring and related products and a
substantial manufacturer of kitchen and bathroom cabinets. Pursuant to the
Merger Agreement, the Company commenced a cash tender offer on June 19, 1998,
for all of the outstanding shares of common stock of Triangle Pacific at $55.50
per share. At the expiration of the tender offer on July 17, 1998, approximately
14,000,000 shares (or approximately 95 percent of the total shares outstanding)
were validly tendered and not withdrawn pursuant to the offer (excluding 181,647
shares subject to guarantees of delivery), and Armstrong accepted
12
all of those shares for payment. All shares of Triangle Pacific not tendered and
purchased pursuant to the offer or otherwise owned by Armstrong were converted
into the right to receive $55.50 per share in cash. On July 24, 1998, Armstrong
completed the merger with Triangle Pacific. For the year ended January 2, 1998,
Triangle Pacific had total sales of $652.9 million and net income of $31.8
million. At April 3, 1998, Triangle Pacific had total assets of $575.8 million.
Financing
- ---------
On July 13, 1998, the Company entered into a new commercial paper program (the
"CP Program") and subsequently issued approximately $1.0 billion of commercial
paper. The commercial paper is secured by lines of credit under a new bank
credit facility, has maturities of up to 364 days and bears interest at rates
between approximately 5.5% and 6.0%. On August 11, 1998, the Company completed
an offering of $200,000,000 of 6.35% Senior Notes due 2003 and a concurrent
offering of $150,000,000 of 6.5% Senior Notes due 2005. The Company intends to
use the proceeds from the issuance of the Notes to repay outstanding commercial
paper.
In July, the Company's corporate credit and senior unsecured debt ratings were
reduced by Standard & Poor's from single `A' to single `A' minus, and by Moody's
from A2 to Baa1. The Company's commercial paper rating was reduced by Standard &
Poor's from `A-1' to `A-2', and by Moody's from Prime-1 to Prime-2. The reason
for the ratings changes was an increase in debt expected to be required to fund
the Triangle Pacific and DLW acquisitions described above. It is management's
opinion that the Company has sufficient financial strength to warrant any
required support from lending institutions and financial markets.
Asbestos-Related Litigation
- ---------------------------
The Company is involved in significant asbestos-related litigation which is
described more fully under "Overview of Asbestos-Related Legal Proceedings" on
pages 7-11 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, nor of pending suits not fully reviewed, nor
the defense and resolution costs that may ultimately result therefrom, nor
whether an alternative to the Georgine settlement vehicle may emerge, nor the
scope of its insurance coverage ultimately deemed available.
The Company has assessed the impact of the June 1997 Supreme Court ruling in the
Georgine case on its projected asbestos resolution and defense costs. Subject to
the uncertainties, limitations and other factors referred to above and based
upon its experience, the Company has recorded on its balance sheet $210.2
million as a minimum estimated liability to defend and resolve probable and
estimable asbestos-related personal injury claims currently pending and to be
filed through 2003. This is management's best estimate of the minimum liability,
although potential future costs for these claims could range up to an additional
$387 million or an estimated maximum liability of approximately $597 million.
Because of the uncertainties related to asbestos litigation, it is not possible
to estimate the number or cost of personal injury claims that may be filed after
2003. Therefore, the Company's estimated liability does not include costs for
personal injury claims that may be filed after 2003, although it is likely there
will be such additional claims. Management believes that the potential
additional costs for claims to be filed through 2003 and those filed thereafter,
net of any potential insurance recoveries, will not have a material after-tax
effect on the financial condition or liquidity of the Company, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
An insurance asset in the amount of $281.6 million is recorded on the balance
sheet and reflects the Company's belief in the availability of insurance in this
amount based upon the Company's success in insurance recoveries, settlement
agreements that provide such coverage, nonproducts recoveries by other
companies, the opinion of outside counsel, and the recent agreement with two
carriers in the ADR. Such insurance is probable of recovery through negotiation
or litigation. A substantial portion of the insurance asset is in ADR, which the
Company believes may be resolved in 1998 or later. As of June 30, 1998, a
shortfall has developed of $71.4 million representing the difference between
currently available insurance and amounts necessary for resolution and defense
costs. The recovery of insurance assets to cover the shortfall will depend upon
the resolution of the ADR and other disputes with insurance carriers. The
Company does not believe that after-tax effect of the shortfall will be material
either to the financial condition or liquidity of the Company.
13
The Company believes that a claims resolution mechanism alternative to the
Georgine settlement will eventually emerge, but the liability is likely to be
higher than the projection in Georgine.
Subject to the uncertainties, limitations and other factors previously stated
and based upon its experience, the Company believes it is probable that
substantially all of the defense and resolution costs of property damage claims
will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and other settlements with insurance carriers, the results of the
California insurance coverage litigation, the establishment of the Center, the
likelihood that an alternative to the Georgine settlement will eventually
emerge, and its experience, the Company believes asbestos-related claims against
the Company will not be material either to the financial condition or liquidity
of the Company, although the net after-tax effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
Tender Offer for Domco Inc.:
- ----------------------------
On June 16, 1997, the Company commenced an all cash offer to purchase all of the
outstanding common shares and common share equivalents (including convertible
debentures and warrants on an as-if converted basis) of Domco Inc. ("Domco"), a
Canadian subsidiary of Sommer Allibert, S.A. ("Sommer"). The offer is
conditional upon the valid tender of 51 percent of the outstanding common shares
of Domco on a diluted basis. The offer has been extended and amended on a number
of occasions since then, to increase the bid price per common share to CDN
$26.50 (thereby increasing the aggregate proposed purchase price to CDN $560
million) and to extend the expiration date of the offer to September 15, 1998.
The extension is intended to permit the Quebec Securities Commission to rule on
the issues of whether the merger of Tarkett AG ("Tarkett") with Sommer
constitutes an indirect takeover of Domco and, if so, at a purchase price in
excess of 115 percent of Domco's per share price without having provided similar
value to Domco's minority shareholders as required by the Quebec Securities Act.
The Company has obtained requisite regulatory approvals from the United States
Federal Trade Commission, the Canadian Minister of Industry and the Competition
Bureau in Canada. Sommer has stated that it does not intend to sell its shares
of Domco to the Company, and Domco's board of directors has rejected the
Company's offer to subscribe for Domco common shares. The Company has recorded
an asset of $11.1 million for costs associated with the Domco acquisition.
On June 9, 1997, the Company filed a complaint in the United States District
Court for the Eastern District of Pennsylvania alleging that Sommer
(subsequently amended to include Tarkett and Marc Assa, the President du
Directoire of Sommer), had used confidential information provided by the Company
during negotiations regarding the purchase of Sommer's worldwide flooring assets
to structure a proposed transaction with Tarkett in violation of a
confidentiality agreement and exclusivity understanding with the Company
together with a duty to negotiate in good faith. The Company intends to pursue
this litigation to recover damages in a jury trial originally scheduled to
commence on September 15, 1998. However, that date has been continued. The
ultimate magnitude of the Company's potential recovery is not known at this
time. On April 8, 1998, Sommer filed a counterclaim against the Company and
certain of its present and former officers. Sommer generally alleges that the
Company obtained nonpublic information about Sommer. Sommer is seeking
unspecified damages. The Company and the individual counterclaim defendants have
filed a motion to dismiss the counterclaim. That motion is pending before the
Court. The Company believes that the charges are baseless.
On June 23, 1997, the Company filed a claim, amended on August 11, 1997, in the
Ontario Court (General Division) alleging that Sommer and its representatives on
Domco's board breached their fiduciary duty to Domco and acted in a manner
oppressive to Domco's minority shareholders when they rejected the Company's bid
for Domco. The Company's motion requesting a court injunction to prevent the
takeover of Domco by Tarkett, among other items, was dismissed. The Company is
continuing to pursue this litigation to recover damages from Sommer and Domco's
directors, as well as seeking other relief.
The Company intends to continue to pursue all legal remedies available to it in
the United States and Canada against Sommer, Domco's directors, Tarkett and Marc
Assa.
Consolidated Results
- --------------------
Second-quarter net sales of $555.6 million were 3.8 percent lower compared to
net sales of $577.4 million in the second quarter of 1997. Sales were lower by
3.8 percent in the Americas, notably in floor coverings. North American
commercial ceiling sales
14
were 5 percent higher while sales to the U.S. home center channel rose over 7
percent. European area sales declined about 2 percent, but were flat year over
year excluding the effects of currency translation. A decline of almost 15
percent in the Pacific area reflected weak economic conditions in that region.
Second-quarter net earnings of $56.1 million decreased 4.9 percent from 1997's
second-quarter net earnings of $58.9 million, which included an after-tax,
one-time expense of $5.1 million ($0.13 per share) for uncollectible receivables
and excess inventories at Dal-Tile International Inc. in which Armstrong had a
34.4 percent equity interest. The earnings decline year over year reflected the
effect of economic conditions in emerging markets, competitive activity in North
American flooring, and higher corporate expense. Net earnings per diluted share
were $1.38 compared with $1.43 per diluted share for the second quarter of 1997
while net earnings per basic share were $1.41 compared with $1.45 per basic
share for the second quarter of 1997.
The cost of goods sold in the second quarter was 65.1 percent of sales, slightly
lower than the 65.5 percent in the second quarter of 1997. The primary favorable
factor in the improvement was raw material costs, most notably in floor
coverings. Second-quarter SG&A expenses were 19.0 percent of sales, slightly
lower than the 19.2 percent recorded in the first quarter of 1998 but higher
than last year's 17.4 percent in the second quarter primarily due to lower sales
levels and higher advertising costs.
First-half 1998 sales were $1,098.7 million, slightly higher than last year's
first-half sales of $1,095.7 million. Net earnings for the first six months of
$102.6 million were 1.8 percent less than the $104.4 million reported in 1997
which included the previously mentioned Dal-Tile one-time charge of $5.1
million. Net earnings in the first half of 1998 were $2.53 per diluted share,
equal to last year's reported $2.53, while net earnings per basic share in the
first half of 1998 were $2.58 compared with $2.56 per basic share in the first
half of 1997.
For the second-quarter 1998, the Company's effective tax rate was 34.6 percent
compared with 34.3 percent in 1997, while for the quarter the ratios were 34.4
percent and 35.0 percent, respectively.
Industry Segment Results:
- -------------------------
Floor coverings sales of $286.3 million in the second quarter decreased 5.6
percent from $303.1 million in the second quarter of 1997. A sales decline in
U.S. residential sheet flooring and in Eastern Europe and Russia was somewhat
offset by increased sales through the home center channel, including strong
laminate sales. Second-quarter operating income of $48.3 million decreased
almost 14 percent from last year's $56.1 million in the second quarter as lower
sales levels were partially offset by lower raw material prices and other
efficiencies.
Building products sales of $187.3 million decreased 1.4 percent from $190.0
million in the second quarter of 1997. Lower North American export sales to Asia
as well as sales of retail products in the Americas were only partially offset
by a 5 percent increase in commercial sales in the Americas. Second-quarter
operating income of $30.3 million decreased 1.6 percent from last year's $30.8
million reflecting lower sales which were somewhat offset by continued cost
cutting efforts and better performance in metal ceilings in Europe.
Industry products sales of $82.0 million in the second quarter decreased 2.7
percent when compared with 1997's second quarter. Insulation products sales were
slightly higher excluding currency translation, but this increase was more than
offset by lower North American gasket sales due to weaker automotive OEM
purchases. Operating income of $14.1 million compared with last year's $14.0
million with continued cost improvements offsetting the sales volume decline.
Ceramic tile income of $1.4 million represented Armstrong's 34.4 percent share
of income anticipated to be earned at Dal-Tile net of the amortization of
Armstrong's initial investment in Dal-Tile in excess of the underlying equity in
net assets of the business combination. These results compared with Armstrong's
recognition of an operating loss of $4.2 million in 1997's second quarter which
included $5.5 million for the Company's share of a one-time charge incurred by
Dal-Tile for uncollectible receivables and overstocked inventories.
The year-to-year increase in unallocated corporate expense of $2.4 million
included higher costs for computer systems, equipment, and facility rentals
partially offset by a higher pension credit related to pension fund investment
performance and lower consulting costs.
New Accounting Pronouncements:
- ------------------------------
15
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." This statement revises employers'
disclosures about pensions and other postretirement benefit plans but does not
change the measurement or recognition of those plans. It standardizes disclosure
requirements, eliminates unnecessary disclosures and requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis. This statement supersedes the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,"
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The Company plans
to adopt SFAS No. 131 and SFAS No. 132 beginning with 1998 annual reporting.
In March 1998, the American Institute of Certified Public Accountants (AICPA),
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, (SOP 98-1). This statement is effective
for financial statements for fiscal years beginning after December 15, 1998.
Earlier application is encouraged in fiscal years for which annual financial
statements have not been issued. The Company implemented SOP 98-1 in the second
quarter of 1998. SOP 98-1 will not have a material impact on the Company's
financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement established accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The adoption of this standard will not
materially impact the Company's consolidated results, financial condition, or
long-term liquidity.
This Quarterly Report on Form 10-Q contains certain "forward looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995).
Such forward-looking statements include statements using the words "believe,"
"expect," and "estimate" and similar expressions. Among other things, they
regard the Company's earnings, liquidity, financial condition, financial
resources, and the ultimate outcome of the Company's asbestos-related
litigation. Actual results may differ materially as a result of factors over
which the Company may or may not have any control. Such factors include: (a)
those factors identified in the Notes to the Consolidated Financial Statements
in connection with the Company's asbestos-related litigation and the
availability of insurance coverage therefor, and (b) the strength of domestic
and foreign economies, continued sales growth, continued product development,
competitive advantages, integration of new businesses, minimizing cost
increases, changes from projected effective tax rates and continued
strengthening of the financial markets. Certain other factors not specifically
identified herein may also materially affect the Company's results. 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.
16
Independent Auditors' Review Report
-----------------------------------
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have reviewed the consolidated balance sheet of Armstrong World Industries,
Inc. and subsidiaries as of June 30, 1998, and the related consolidated
statements of earnings for the three and six month periods ended June 30, 1998
and 1997, and the consolidated statements of cash flows and shareholders' equity
for the six-month periods ended June 30, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
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 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, 1997, and the related consolidated
statements of earnings, cash flows and shareholders' equity for the year then
ended (not presented herein); and in our report dated February 13, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, 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, 1998
17
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of the Security Holders
- ------ -------------------------------------------------------
The Company held its annual meeting of shareholders on April 27, 1998. The vote
on each matter presented to the shareholders was as follows:
1. Election of Directors
For Withheld
--- --------
John A. Krol 35,033,982 415,553
David M. LeVan 35,035,808 415,553
James E. Marley 35,039,930 415,553
David W. Raisbeck 35,034,265 415,553
Jerry L. Stead 35,039,453 415,553
In addition, each of the following directors continued in office after the
meeting: H. Jesse Arnelle, Van C. Campbell, Donald C. Clark and George A. Lorch.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report on
Form 10-Q:
Exhibits
--------
No. 10(i) Credit Agreement among the registrant, certain banks listed
therein, and Morgan Guaranty Company of New York, as
Administrative Agent, dated as of July 17, 1998, providing for
a $1,000,000,000 credit facility.
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
(1) On June 10, 1998, the registrant filed a current report on Form 8-K
announcing its intention to commence a tender offer for all the
outstanding shares of DLW Aktiengesellschaft.
(2) On June 15, 1998, the registrant filed a current report on Form 8-K
setting forth the Agreement and Plan of Merger by and among Triangle
Pacific Corp., Sapling Acquisition, Inc. and the Company.
18
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/ D. K. Owen
-------------------------------
D. K. Owen, Senior Vice President,
Secretary and General Counsel
By: /s/ E. R. Case
-------------------------------
E. R. Case, Vice President and
Controller (Principal Accounting Officer)
Date: August 12, 1998
19
Exhibit Index
-------------
Exhibit No.
- -----------
No. 10(i) Credit Agreement among the registrant, certain banks listed
therein, and Morgan Guaranty Company of New York, as Administrative
Agent, dated as of July 17, 1998, providing for a $1,000,000,000
credit facility.
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
20