<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of registrant's common stock outstanding as of
April 30, 1994 - 37,481,307.
<PAGE>
(FORM 10-Q)
Part I - Financial Information
------------------------------
Item 1. Financial Statements
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Operating results for the first quarter of 1994, compared with the corresponding
period of 1993 included in this report, are unaudited.
In the opinion of the Company, all adjustments of a normal, recurring nature
have been included to provide a fair statement of the results for the reporting
periods presented. Three months' results are not necessarily indicative of
annual earnings.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
-----------------------------------
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
NET SALES $642.7 $611.9
Cost of goods sold 445.0 452.8
------ ------
Gross profit 197.7 159.1
Selling & administrative expense 130.9 129.5
------ ------
Earnings before other income (expense)
and income taxes 66.8 29.6
Interest expense (7.5) (10.0)
Other income (expense), net 6.3 (2.0)
------ ------
Earnings before income taxes (a) 65.6 17.6
Income taxes 17.6 6.3
------ ------
NET EARNINGS (b) $ 48.0 $ 11.3
====== ======
Net earnings per share of common stock:(b)(c)
Primary $ 1.17 $ .21
Fully Diluted $ 1.06 $ .21
Dividends paid per common share $ .30 $ .30
Average number of common shares outstanding:
Primary 37.9 37.3
Fully Diluted 43.4 43.2
</TABLE>
See page 3 for explanation of references (a), (b) and (c). Also see
accompanying footnotes to the financial statements beginning on page 8.
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(FORM 10-Q)
(a) Depreciation and amortization charged against earnings before income taxes
amounted to $30.8 million in the three months ended March 31, 1994, and
$32.7 million in the three months ended March 31, 1993.
(b) 1994 net earnings include $9.1 million, or $.21 per share on a fully
diluted basis, of gains resulting from the resolution of tax audits and
sale of the Company's majority interest in BEGA/US, Inc.
(c) Primary earnings per share for "net earnings" are determined by dividing
the earnings, after deducting preferred dividends (net of tax benefit on
unallocated shares), by the average number of common shares outstanding and
shares issuable under stock options, if dilutive. Fully diluted earnings
per share include the shares of common stock outstanding, as calculated
above, and the adjustments to common shares and earnings required to
portray the convertible preferred shares on an "if converted" basis unless
the effect is antidilutive.
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(FORM 10-Q)
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
<TABLE>
<CAPTION>
Unaudited
Assets March 31, 1994 December 31, 1993
- - ------ --------------- ------------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 11.6 $ 9.1
Accounts receivable, less allowance 345.7 283.5
Inventories:
Finished goods $ 178.8 $ 176.8
Work in process 36.5 34.5
Raw materials and supplies 70.1 74.9
-------- --------
Total inventories 285.4 286.2
Income tax benefits 34.2 36.8
Other current assets 15.1 24.8
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Total current assets 692.0 640.4
Property, plant, and equipment 2,070.7 2,045.8
Less accumulated depreciation
and amortization 1,035.6 1,006.7
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Net property, plant, and equipment 1,035.1 1,039.1
Insurance for asbestos-related
liabilities (a) 226.4 --
Other noncurrent assets 272.0 249.8
-------- --------
Total assets $2,225.5 $1,929.3
======== ========
Liabilities and Shareholders' Equity
- - ------------------------------------------
Current liabilities:
Short-term debt $ 106.1 $ 105.4
Current installments of long-term debt .8 5.8
Accounts payable and accrued expenses 303.7 293.3
Income taxes 43.9 31.8
-------- --------
Total current liabilities 454.5 436.3
Long-term debt 256.9 256.8
ESOP loan guarantee 253.9 253.9
Postretirement and postemployment benefits 285.4 283.7
Asbestos-related liabilities (a) 226.4 --
Other long-term liabilities 108.2 99.6
Deferred income taxes 19.7 18.8
Minority interest in subsidiaries 7.1 10.7
-------- --------
Total noncurrent liabilities 1,157.6 923.5
Shareholders' equity:
Convertible preferred stock at
redemption value $ 262.9 $ 263.9
Common stock 51.9 51.9
Capital in excess of par value 35.3 29.7
Reduction for ESOP loan guarantee (240.7) (241.8)
Retained earnings 964.5 927.7
Foreign currency translation (b) (1.8) (3.4)
Treasury stock (458.7) (458.5)
-------- --------
Total shareholders' equity 613.4 569.5
-------- --------
Total liabilities and shareholders' equity $2,225.5 $1,929.3
======== ========
</TABLE>
See next page for explanation of references (a) and (b).
Also see accompanying footnotes to the financial statements beginning on page 8.
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(FORM 10-Q)
(a) The asbestos-related liability in the amount of $226.4 million represents
the estimated liability and defense cost to resolve approximately 72,000
personal injury claims pending against the Company as of the end of the first
quarter 1994. The insurance asset in the amount of $226.4 million reflects the
Company's belief in the availability of insurance in an amount covering the
liability. See footnote No. 2 beginning on page 8 for additional details.
(b) Foreign currency translation, reported as a separate component of
shareholders' equity, is detailed as follows:
<TABLE>
<CAPTION>
1994
----
(millions)
<S> <C>
Beginning balance December 31, 1993 $(3.4)
Three months translation adjustments and
hedging of foreign investments 1.6
-----
Ending balance March 31, 1994 $(1.8)
=====
</TABLE>
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(FORM 10-Q)
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31
1994 1993
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 48.0 $ 11.3
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 30.8 32.7
Deferred income taxes 1.7 .9
Restructuring activities (6.5) (15.6)
Changes in operating assets and liabilities net of
effect of restructuring:
(Increase) in receivables (63.6) (38.0)
(Increase) decrease in inventories (1.3) 7.9
Decrease in other current assets 7.3 19.0
(Increase) in other noncurrent assets (16.6) (3.7)
Increase in accounts payable and
accrued expenses 32.9 1.2
Increase in other long-term liabilities 7.0 4.1
Other, net (11.3) (8.1)
------ ------
Net cash provided by operating activities 28.4 11.7
------ ------
Cash flows from investing activities:
Purchases of property, plant, and equipment (23.5) (20.7)
Proceeds from sale of business and assets 10.2 8.0
------ ------
Net cash used for investing activities (13.3) (12.7)
------ ------
Cash flows from financing activities:
Increase (decrease) in short-term debt (.2) 3.9
Reduction of long-term debt (5.0) --
Cash dividends paid (11.2) (11.1)
Other, net 3.9 (1.6)
------ ------
Net cash used for financing activities (12.5) (8.8)
Effect of exchange rate changes on cash and cash
equivalents (.1) .2
------ ------
Net increase (decrease) in cash and cash equivalents $ 2.5 $ (9.6)
====== ======
Cash and cash equivalents at beginning of period $ 9.1 $ 15.2
====== ======
Cash and cash equivalents at end of period $ 11.6 $ 5.6
====== ======
</TABLE>
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Supplemental Cash Flow Information:
<TABLE>
<S> <C> <C>
Interest paid $ 4.3 $ 3.2
Income taxes paid $ 4.0 $ 2.8
</TABLE>
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See accompanying footnotes to the financial statements beginning on page 8.
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(FORM 10-Q)
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1994 1993
---- ----
<S> <C> <C>
Net trade sales:
- - ---------------
Floor coverings $287.4 $271.0
Building products 151.5 144.9
Furniture 128.7 115.3
Industry products 75.1 80.7
------ ------
Total net sales $642.7 $611.9
====== ======
Operating profit:
- - ----------------
Floor coverings $ 37.7 $ 20.6
Building products(a) 26.5 6.9
Furniture 9.7 6.1
Industry products 12.7 13.0
------ ------
Total operating profit $ 86.6 $ 46.6
General corporate expense (21.0) (29.0)
------ ------
Net earnings before income taxes $ 65.6 $ 17.6
====== ======
</TABLE>
(a) 1994 operating profit includes $5.9 million before-tax gain from sale of
the Company's majority interest in BEGA/US, Inc.
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<PAGE>
(FORM 10-Q)
Note 1. The accompanying consolidated financial statements have been reviewed
- - ------
by the Company's independent public accountants, KPMG Peat Marwick, in
accordance with the established professional standards and procedures for such
limited review.
Note 2.
- - ------
The Company is named as one of many defendants in pending lawsuits and claims
involving, as of March 31, 1994, approximately 71,500 individuals alleging
personal injury from exposure to asbestos or asbestos-containing products. (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
referred to below. It is expected that the changed process will provide more
current tracking of outstanding claims. The reconciliation between the two
systems continues. Claim numbers in this note have been received from the
Center.) Nearly all the personal injury suits and claims allege general and
punitive damages arising from alleged exposures, during a period of years,
commencing during World War II onward into the 1970s, to asbestos-containing
insulation products used, manufactured or sold by the companies involved in the
asbestos-related litigation. Claims against the Company generally involve
allegations of negligence, strict liability, breach of warranty and conspiracy
with other defendants in connection with alleged exposure generally to asbestos-
containing insulation products; the Company discontinued the sale of all such
products in 1969. The first asbestos-related lawsuit was filed against the
Company in 1970, and such lawsuits and claims continue to be filed against the
Company. 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 include a number of defendants (including both
members of the Center and other companies), and well over 100 different
companies are reportedly involved as defendants in the litigation. A
significant number of suits in which the Company does not believe it should be
involved have been filed by persons engaged in vehicle tire production, aspects
of the construction industry and the steel industry. The Company believes that
a large number of the plaintiffs filing suit are unimpaired individuals.
Although 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, and while the number of pending cases reflects a decrease during the
past year, 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 judges both individually and collectively to
finding a comprehensive solution to the large number of pending as well as
potential future asbestos-related personal injury claims. Discussions have been
undertaken by attorneys for plaintiffs and defendants to devise methods or
procedures for the comprehensive treatment of asbestos-related personal injury
suits and claims. The Judicial Panel for Multi-district Litigation ordered the
transfer of all federal cases not in trial to a single court, the Eastern
District Court of Pennsylvania in Philadelphia, for pretrial purposes. The
Company has supported such action. The Court to which the cases have been
assigned has been instrumental in having the parties settle large numbers of
cases in various jurisdictions and has been receptive to different approaches to
the resolution of asbestos-related personal injury claims. A national class
action was filed in the Eastern District of Texas; it was not certified and the
cases involved were also transferred to the Eastern District Court of
Pennsylvania for pretrial purposes. Periodically, this Court returns certain
cases for trial to the courts from which the cases were originally
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(FORM 10-Q)
transferred, although the issue of punitive damages is retained by the Eastern
District Court.
A settlement class action which includes essentially all future asbestos-related
personal injury claims against members of the Center for Claims Resolution was
filed in Philadelphia, in the Federal District Court for the Eastern District of
Pennsylvania on January 15, 1993. The proposed settlement class action was
negotiated by the Center and two leading plaintiffs' law firms. The settlement
class action is designed to establish a non-litigation system for the resolution
of essentially all future asbestos-related personal injury claims against the
Center members including this Company. Other defendant companies which are not
Center members may be able to join the class action later. The class action
proposes a voluntary settlement that offers a method for prompt compensation to
claimants who were occupationally exposed to asbestos if they are impaired by
such exposure. Claimants must meet certain exposure and medical criteria to
receive compensation which is derived from historical settlement data. Under
limited circumstances and in limited numbers, qualifying claimants may choose to
litigate certain claims in court or through alternative dispute resolution,
rather than accept an offered settlement amount, after their claims are
processed within the system. No punitive damages will be paid under the
proposed settlement. The settlement is designed to minimize transactional
costs, including attorneys fees, and to relieve the courts of the burden of
handling future asbestos-related personal injury claims. Each member of the
Center has an obligation for its own fixed share in this proposed settlement.
The settlement by its terms applies to claimants who had not, as of
January 15, 1993, the date the settlement class action was filed, filed
suit against the Company or other members of the Center for Claims Resolution
for asbestos-related personal injury, and who did not opt out of the class. A
ruling by the Court, however, will establish the date after which any
claims filed are subject to the settlement class action. The settlement class
action does not include claims brought by individuals who opted out of the
class, claims deemed otherwise not covered by the class action settlement, or
claims for asbestos-related property damage. Agreed upon annual case flow caps
and agreed upon 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 during the second five-year period depending upon
case flow during the first five-year period. The case flow figures and annual
compensation levels are subject to renegotiation after the initial ten-year
period. The Court has preliminarily approved the settlement, and notification
has been provided to potential class members who were offered the opportunity
to opt out by January 24, 1994. The Center had reserved the right to withdraw
from the program if an excessive number of individuals opted out. The Center
has determined that there is not an excessive number of opt-outs and will
proceed with the settlement class action. The opt-outs are not asbestos-
related claims as such but reservations of rights to possibly bring court
actions in the future. The opt-outs are currently the subject of a motion
before the Court which questions the validity of most of the opt-outs and
seeks a second notice process again to determine whether or not they wish to
remain in the class action. Therefore, the total number of effective opt-outs
cannot be determined at this time. The Court has concluded the final fairness
hearing which began on February 22, 1994, and final oral arguments are
scheduled on the fairness of the class action on May 23, 1994. The settlement
will become final only after it has been approved by the Federal District
Court and the federal appellate courts. The Center members have stated their
intention to resolve over a five-year period the asbestos-related personal
injury claims pending prior to the date the settlement class action was filed.
A significant number of these pending claims have been settled with a number
of plaintiffs' counsel and a number of these claims are currently the subject
of settlement negotiations, in both instances, based upon historical averages.
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(FORM 10-Q)
The Company is seeking agreement from its involved insurance carriers or a
binding judgement against them that the settlement class action will not
jeopardize existing insurance coverage, and the settlement is contingent upon
such an agreement or judgement. With respect to carriers that do not agree,
this matter will be resolved either by alternative dispute resolution
procedures, in the case of carriers that subscribed to the Wellington
Agreement referred to below, or by litigation, in the case of carriers that
did not subscribe to the Wellington Agreement.
The Company believes that the future claimants settlement class action will be
approved. However, the potential exists that either the Federal District Court
or an appellate court will reject the settlement class action and that the
above-referenced companion insurance action will not be successful.
A few state judges and federal judges have undertaken to consolidate numbers of
asbestos-related personal injury cases for trial. The Company has generally
opposed as unfair the consolidation of numerous cases for trial. In 1992 in
Baltimore, Maryland, the Center for Claims Resolution referred to herein settled
during trial on behalf of the Company and other Center members certain asbestos-
related personal injury claims. In most of the approximately 8,500 cases
consolidated for trial, Armstrong was a named defendant. The multiphase
Baltimore trial dealt with various issues including the individual claims of six
plaintiffs, as well as product defect and negligence, and whether and on what
basis punitive damages should be awarded. The Center for Claims Resolution is
periodically drawing upon the Company's insurance assets to pay the settled
individual claims.
In 1983, three of the Company's four primary insurers entered into an Interim
Agreement with the Company to provide defense and indemnity coverage on an
interim basis for asbestos-related personal injury claims and for the defense of
asbestos-related property damage claims which are described below. One primary
insurer did not enter into the Interim Agreement, but did subscribe to the
Wellington Agreement as noted below. The Interim Agreement was superseded by
the Wellington Agreement with respect to the coverage issues for asbestos-
related personal injury claims. The one primary insurer of the four primary
carriers that did not subscribe to the Wellington Agreement subsequently entered
into a separate agreement with the Company resolving coverage issues for
asbestos-related property damage claims and for asbestos-related personal injury
claims which complements the Wellington Agreement. All of the Company's primary
insurers are paying for the defense of asbestos-related property damage claims
in accordance with the provisions of the Interim Agreement pending the final
resolution on appeal of the coverage issues for asbestos-related property damage
claims in the California insurance litigation referenced later in this note.
The Company's insurance carriers providing coverage for asbestos-related claims
are as follows: Reliance Insurance, Aetna Casualty & Surety Company and
Liberty Mutual Insurance Companies are primary insurers that have subscribed
to the Wellington Agreement. Travelers Insurance Company is a primary insurer
that entered into a settlement agreement which complements Wellington. The
excess insurers which subscribed to Wellington are Aetna Insurance Company,
Fireman's Fund Insurance Company, Insurance Company of North America, Lloyds
of London and various London market companies, Fidelity and Casualty Insurance
Company, First State Insurance Company and U.S. Fire Insurance Company. Home
Insurance Company and Travelers Insurance Company are excess insurers which
entered into settlement agreements for coverage of personal injury claims
which complement Wellington, and Great American is an excess insurer which
also entered into a settlement agreement with the Company. The Company also
entered into a settlement agreement with American Home Assurance Company and
National Union Fire Insurance Company
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(FORM-Q)
(known as the AIG Companies) which complements the Wellington Agreement. Other
excess insurers against whom the Company has received a favorable trial and
appellate court decision in the California insurance litigation described below
are: Central National Insurance Company, Interstate Insurance Company, Puritan
Insurance Company, CNA Insurance Company and Commercial Union Insurance Company.
Midland Insurance Company, an excess carrier, which insured the Company with $25
million of coverage, became insolvent during the trial. The Company is pursuing
claims with the state guaranty associations on account of the Midland insolvency
and is currently exploring how the Midland Insurance Company insolvency gaps can
be otherwise addressed by payments from the Company's other insurance carriers.
Certain companies in the London block of coverage and certain carriers providing
coverage at the excess level for property damage claims only have also become
insolvent. In addition to the aforementioned insurance carriers, certain
insurance carriers which were not included in the Company's California insurance
litigation described later herein 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 which also 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 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 for Claims Resolution referenced below in this
note. 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. In 1987, an excess insurer also made, under reservation of
rights, certain payments which were processed through the Facility. These
payments were made under reservation because no settlement of the outstanding
coverage issues has been effected with that carrier.
The Wellington Agreement also provided for the establishment of the Facility to
evaluate, settle, pay and defend all pending and future asbestos-related
personal injury claims against those companies which subscribed to the
Agreement. The insurance coverage designated by the Company for coverage in the
Facility consists of all relevant insurance policies issued to the Company from
1942 through 1976. Liability payments and allocated expenses with respect to
each claim filed against Wellington Agreement subscribers who were defendants in
the underlying asbestos-related personal injury litigation were allocated on a
formula percentage basis to each such defendant, including the Company. The
Facility, which has dissolved, over time was negatively impacted by concerns
raised by certain subscribers relating to their share of liability payments and
allocated expenses and by certain insurer concerns with respect to defense costs
and Facility operating expenses. As a result of seven subscribing companies
giving notice that they wished to withdraw their cases from the Facility, a
majority of the insurers and the company subscribing
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<PAGE>
(FORM 10-Q)
members agreed to dissolve the ongoing operation of the Facility as of
October 3, 1988, and the Facility has now been fully dissolved. Except for
eliminating the future availability of an insurer-paid special defense fund
benefit linked to the existence of the Facility, a benefit not deemed material
to the Company, the dissolution of the Facility essentially did not affect the
Company's overall Wellington Agreement insurance settlement, which stood on its
own separate from the Facility. The relinquishment of the insurer-paid special
defense fund benefit was a condition of insurer support for the creation of the
Center and its expected benefits.
A new asbestos-related personal injury claims handling organization known as the
Center for Claims Resolution (the "Center") was created in October 1988 by
Armstrong and 20 other companies, all of which were former members of the
Facility. Insurance carriers are not members of the Center, although certain of
the insurance carriers for those members that joined the Center signed an
agreement to provide approximately 70% of the financial support for the Center's
operational costs during its first year of existence; 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 concept of allocated shares of liability payments and defense costs for
its members based primarily on historical experience 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 has caused a slight increase in the
Company's share, but has enhanced the Company's case management focus. Future
claim payments by the Center pursuant to the proposed settlement class action
will require each member to pay its own fixed share.
A large share member earlier withdrew from the Center. Accordingly, the
allocated shares of liability payments and defense costs of the Center were
recalculated with the remaining members' shares being increased. Under the
class action settlement resolution, if a member withdraws from the Center or the
settlement, the shares of those remaining members would not be increased. It is
expected that the Center members will reach an agreement with the insurers
relating to the continuing operation of the Center and that the insurers will
fund the Center's operating expenses for its sixth year of operation. With the
filing of the settlement class action, the Center will continue to process
pending claims and will handle the program for processing future claims if the
settlement class action is approved by the courts.
Consistent with the Center's objective of prompt resolution of meritorious
claims, and to establish the Center's credibility after the cessation of the
Facility and for other strategic reasons, a planned increase in claims
resolution by the Center was implemented during the first two years. This
increased the rate of utilization of Company insurance for claims resolution,
offset in part by savings in defense costs. During the first three years, the
rate of claims resolution had about trebled from the prior two years of
experience. An increase in the utilization of the Company's insurance also will
occur as a result of the class action settlement due to the commitment to
attempt to resolve pending claims within five years. Aside from the commitments
under the class action settlement, no forecast can be made for future years
regarding either the rate of claims or 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 finally approved, projections of the rate of
disposition of future cases may be made and the rate of insurance usage will be
accelerated as an effort is made to resolve both outstanding
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(FORM 10-Q)
cases and address future claims.
The Company is also one of many defendants in a total of 60 pending lawsuits and
claims, including class actions, as of March 31, 1994, brought by public and
private entities, including public school districts and 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 asbestos-containing resilient floor covering
materials. Class actions have been certified involving four distinct classes of
building owners: public and private schools; Michigan state public and private
schools; colleges and universities, and private property owners who leased
facilities to the federal government. Subject to fairness hearings, resolution
has been reached with the class representatives for the national public and
private schools class action as well as with the class representatives for the
private property owners who leased facilities to the federal government. 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, this litigation with respect to these co-defendants (with several
exceptions) has been stayed or otherwise impacted by the restrictions placed on
proceeding against these co-defendants. Due to the uncertainties involved, the
long-term effect of these Chapter 11 proceedings on the litigation cannot be
predicted.
The Company concluded in early 1989 the trial phase of a coordinated lawsuit in
a California state court to resolve a dispute concerning certain of its
insurance carriers' obligations with respect to insurance coverage for alleged
personal injury and property damage asbestos-related lawsuits and claims. The
trial court issued favorable final decisions in important phases of the trial
relating to coverage for personal injury and property damage lawsuits and
claims. The Company earlier dismissed from the asbestos-related personal injury
coverage portion of the litigation those insurance carriers which had subscribed
to the Wellington Agreement, and the excess carriers which entered into a
settlement agreement with the Company which complements Wellington also have
been dismissed.
As indicated above, the California trial court issued final decisions in various
phases in the insurance lawsuit. One decision concluded that the trigger of
insurance coverage for asbestos-related personal injury claims was continuous
from exposure through death or filing of a claim. The court also found that a
triggered insurance policy should respond with full indemnification up to
exhaustion of the policy limits. The court concluded that any defense
obligation ceases upon exhaustion of policy limits. Although not as
comprehensive, another important decision in the trial established a favorable
defense and indemnity coverage result for asbestos-related property
- 13 -
<PAGE>
(FORM 10-Q)
damage claims; the final decision holds that, in the event the Company is held
liable for an underlying property damage claim, the Company would have coverage
under policies in effect during the period of installation and during any
subsequent period in which a release of fibers occurred. Appeals were filed
from the trial court's final decision by those carriers still in the litigation
and the California Court of Appeal has substantially upheld the trial court's
final decisions. The insurance carriers have petitioned the California Supreme
Court to hear the various asbestos-related personal injury and property damage
coverage issues. The California Supreme Court recently accepted review pending
its review of related issues in another California case. Based upon the trial
court's favorable final decisions in important phases of the trial relating to
coverage for asbestos-related personal injury and property damage lawsuits and
claims, including the favorable decision by the California Court of Appeal, and
a review of the coverage issues by its trial counsel, the Company believes that
it has a substantial legal basis for sustaining its right to defense and
indemnification. After concluding the last phase of the trial against one of
its primary carriers, which is also an excess carrier, the Company and the
carrier reached a settlement agreement on March 31, 1989. Under the terms of
the settlement agreement, coverage is provided for asbestos-related bodily
injury and property damage claims generally consistent with the interim rulings
of the California trial court and complements the coverage framework established
by the Wellington Agreement. The parties also agreed that a certain minimum and
maximum percentage of indemnity and allocated expenses incurred with respect to
asbestos-related personal injury claims would be deemed allocable to non-
products claims coverage and that the percentage amount would be negotiated
between the Company and the insurance carrier. These negotiations continue.
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.
Non-products claims coverage insurance is available under the Wellington
Agreement (and the previously-referenced settlement agreement with one primary
carrier) for such claims. Certain excess policies also provide non-products
coverage. Non-products claims include claims that may have arisen out of
exposure during installation of asbestos materials or before control of such
materials has been relinquished. Negotiations have been undertaken with the
Company's primary insurance carriers and are currently underway with several of
them to categorize the percentage of previously resolved and 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, at both the primary and excess
levels, is substantial, and at the primary level, includes defense costs in
addition to limits. No agreement has been reached with the primary carriers on
the amount of non-products coverage attributable to claims that have been
disposed of or the type of claims that should be covered by non-products
insurance. One of the primary carriers alleges that it is no longer bound by
the Wellington Agreement and one primary carrier seemingly takes the view that
the Company verbally waived certain rights regarding non-products coverage
against that carrier at the time the Wellington Agreement was signed. All the
carriers presumably raise other reasons why they should not pay their coverage
obligations. The Company is entitled to pursue alternative dispute resolution
proceedings against the primary and certain excess carriers to resolve the non-
products coverage issues.
- 14 -
<PAGE>
(FORM 10-Q)
ACandS, Inc., a former subsidiary of the Company, which for certain insurance
periods has coverage rights under some insurance policies, and has accessed such
coverage on the same basis as the Company, was a subscriber to the Wellington
Agreement, but was not a subscriber to the Center. ACandS, Inc. had filed a
lawsuit against the Company to partition certain insurance policies and for an
accounting. It sought to have a certain amount of insurance from the joint
policies reserved solely for its use in the payment of defense and indemnity
costs for asbestos-related claims. The two companies negotiated a settlement
of their dispute and signed a settlement agreement.
Based upon the Company's experience with this litigation and its disputes with
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 which are
referred to herein about which uncertainties exist. As a result of the
Wellington Agreement, the reserve was earlier reduced for that portion
associated with pending personal injury suits and claims. As a result of the
March 31, 1989, settlement referenced above, the Company received
$11.0 million, of which approximately $4.4 million was credited to income with
nearly all of the balance being recorded as an increase to its reserve for
potential liabilities and other costs and uncertainties associated with the
asbestos-related litigation. Future costs of litigation against the Company's
insurance carriers and other legal costs indirectly related to the litigation
will be expensed outside the reserve.
The Company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
Company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
flow caps to be negotiated after the initial ten-year period for the settlement
class action or the then compensation levels to be negotiated for such claims or
the success the Company may have in addressing the Midland Insurance Company
insolvency with its other insurers or the scope of its non-products coverage
ultimately deemed available.
Beginning with the first quarter 1994, the Company's balance sheet reflects a
$226.4 million liability--"Asbestos-Related Liabilities" and a $226.4 million
asset--"Insurance for Asbestos-Related Liabilities." This accounting
presentation change is required by the Securities and Exchange Commission's
Staff Accounting Bulletin No. 92 which states that liabilities and assets
related to contingencies should now be evaluated and recorded separately
pursuant to Financial Accounting Standards Board Interpretation No. 39 unless a
contractual "right of setoff" exists. In the past, the Company had set off such
amounts for financial reporting.
In accordance with the foregoing accounting presentation change and 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 $226.4 million in liability and defense costs recorded on the
balance sheet will be incurred to resolve an estimated 72,000 asbestos-related
personal injury claims pending against the Company as of March 31, 1994. A
significant number of these claims represent personal injury claims filed after
January 15, 1993, the date the settlement class action was filed in the Federal
District Court; some of these claims may be subject to the terms of the
settlement class action and, therefore, the 72,000 pending claims may be
overstated. A ruling from the Court establishing the
- 15 -
<PAGE>
(FORM 10-Q)
date after which any asbestos-related personal injury claims filed against the
Company or other members of the Center for Claims Resolution are subject to the
settlement class action is expected sometime after the final hearing regarding
the fairness of the settlement class action on May 23, 1994. In addition to
the currently estimated pending claims, any claims filed by individuals deemed
to have opted out of the settlement class action, and any claims otherwise
determined not 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.
An insurance asset in the amount of $226.4 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation. The Company also notes that, based on maximum
mathematical projections covering a ten-year period from 1994 to 2004, its
estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability
may not be covered by the Company's ultimately applicable insurance recovery.
However, the Company believes that any after-tax impact on the difference
between the aggregate of the estimated liability for pending cases and the
estimated cost for the ten-year maximum mathematical projection, and the
probable insurance recovery, would not be material either to the financial
condition of the Company or to its liquidity, although it could be material to
earnings if it is determined in a future period to be appropriate to record a
reserve for this difference. The period in which such a reserve may be recorded
and the amount of any reserve that may be appropriate cannot be determined at
this time. Subject to the uncertainties and limitations referred to elsewhere
in this note and based upon its experience and other factors referred to above,
the Company believes it is probable that substantially all of the expenses and
any liability payments associated with the asbestos-related property damage
claims will be paid under an existing interim agreement, by insurance coverage
settlement agreements and through additional coverage reasonably anticipated
from the outcome of the insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the trial phase and the intermediate appellate stage of the California
insurance coverage litigation, the remaining reserve, the establishment of the
Center, the proposed settlement class action, and its experience, the Company
believes the asbestos-related lawsuits and claims against the Company would not
be material either to the financial condition of the Company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
_____________________________
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
- 16 -
<PAGE>
(FORM 10-Q)
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 and continues to do so. On April 19, 1991, after
a three-month trial, the jury rendered a verdict in the case, which as entered
by the court in its order of judgment, awarded the plaintiffs the alternative,
after all post-trial motions and appeals were completed, of either their total
tort claim damages (including punitive damages), certain pre-judgment interest,
and post-judgment interest or their trebled antitrust claim damages, post-
judgment interest and attorneys fees. The higher amount awarded to the
plaintiffs as a result of these actions totaled $224 million in tort claim
damages and pre-judgment interest, including $200 million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the
plaintiff's appeal of these rulings, the Court of Appeals sustained the
U. S. District Court's decision granting the Company a new trial, but overturned
in certain respects the District Court's grant of judgment for the Company
notwithstanding the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments: reversed the trial judge's
judgment for Armstrong on TINS' claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS' claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS' claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS' alleged breach of contract claim.
The Court of Appeals, in affirming the trial court's new trial order, agreed
that the trial court did not abuse its discretion in determining that the jury's
verdict was "clearly against the weight of the evidence" and that a new trial
was required due to the misconduct of plaintiffs' counsel.
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The
- 17 -
<PAGE>
(FORM 10-Q)
Company was informed on February 22, 1993, that the Supreme Court denied its
Petition. The case has been remanded by the Third Circuit Court of Appeals in
Philadelphia to the U. S. District Court in Newark, New Jersey, and a new trial
commenced on April 26, 1994. It is not fully known what damage claims TINS will
allege upon retrial of the case. But during the first trial, claims for actual
damages of at least $17.5 million were asserted by plaintiffs' expert and even
greater amounts were asserted by Mr. Fineman. TINS now claims damages between
$17 million and $56 million. Under the antitrust laws, proven damages are
trebled. In addition, plaintiff would likely ask for punitive damages,
companion to its request for tort damages. Other damages which would likely be
sought include reimbursement of attorneys' fees and interest, including
prejudgment interest.
The Company denies all of TINS' claims and accordingly is vigorously defending
the matter. In the event that a jury finds against the Company, such jury
verdict could entail unknown amounts which, if sustained, could have a material
adverse effect on its earnings and financial position.
_____________________________
Thomasville Furniture Industries, Inc. and seven other parties have been
identified by the U. S. Environmental Protection Agency ("USEPA") as Potentially
Responsible Parties ("PRPs") to fund the cost of remediating environmental
conditions at the Buckingham County (Virginia) Landfill, a former waste disposal
site which has been listed as a federal Superfund site. After review of
investigative studies to determine the nature and extent of contamination and
identify various remediation alternatives, USEPA issued its Proposed Remedial
Action Plan in May 1993 proposing a $21 million clean-up cost. In November
1993, however, USEPA issued a revised plan which recommended a reduced $3.5
million alternative, subject to additional costs depending on test results. The
PRPs believe that other clean-up alternatives are appropriate and discussions
with USEPA and Virginia State officials continue.
Spent finishing materials from Thomasville's Virginia furniture plants at
Appomattox and Brookneal allegedly comprise a significant portion of the waste
presently believed to have been taken to the site by a now defunct disposal firm
in the late 1970s. Accordingly, Thomasville could be called upon to fund a
significant portion of the eventual remedial costs. Because the clean-up
alternative currently proposed by USEPA is being challenged, and neither a final
remedy nor an appropriate cost allocation has been determined, the total cost to
Thomasville cannot be ascertained at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and
- - ------- ---------------------------------------------------------------
Results of Operations
---------------------
Financial Condition
- - -------------------
Cash provided by operating activities was supplemented by cash proceeds from the
sale of assets and the Company's majority investment in BEGA/US, Inc., a
lighting fixture subsidiary, and cash proceeds from the exercise of stock
options. The total cash generated was more than sufficient to cover working
capital requirements, payment of dividends and investment in plant, property and
equipment. The excess cash was used to reduce debt and increase cash and cash
equivalents.
During the first quarter of 1994, interest rate swaps totaling $40.0 million
matured or were terminated prior to maturity with a small gain. As of
March 31, 1994, the Company had no exposure for interest rate or currency
- 18 -
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(FORM 10-Q)
swaps.
Working capital was $237.5 million as of March 31, 1994, $33.4 million higher
than the $204.1 million recorded at year-end 1993. Accounts receivable
increased $62.2 million because of higher sales levels, primarily during the
latter part of March. A reduction in current installments of long-term debt and
increased cash levels, totaling $7.5 million, also raised working capital.
Partially offsetting the working capital increase were higher levels of accounts
payable, accrued expenses, and income taxes payable totaling $22.5 million and
reductions in other current assets and lower inventory values totaling $13.1
million.
The ratio of current assets to current liabilities was 1.52 to 1 as of
March 31, 1994, compared with 1.47 to 1 as of December 31, 1993. The ratio of
total debt to total capital was 50.2 percent as of March 31, 1994, compared with
52.2 percent as of December 31, 1993.
The Company is involved in significant asbestos-related litigation which is
described more fully in Item 1, Note 2, to the financial statements on pages 8
through 16 and which should be read in connection with this discussion and
analysis.
Beginning with the first quarter 1994, the Company's balance sheet reflects a
$226.4 million liability--"Asbestos-Related Liabilities" and a $226.4 million
asset--"Insurance for Asbestos-Related Liabilities." This accounting
presentation change is required by the Securities and Exchange Commission's
Staff Accounting Bulletin No. 92 which states that liabilities and assets
related to contingencies should now be evaluated and recorded separately
pursuant to Financial Accounting Standards Board Interpretation No. 39 unless a
contractual "right of setoff" exists. In the past, the Company had set off such
amounts for financial reporting.
In accordance with the foregoing accounting presentation change and subject to
the uncertainties and limitations referred to in Item 1, Note 2, and based upon
its experience and other factors also referred to in Item 1, Note 2, the Company
believes that the estimated $226.4 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 72,000
asbestos-related personal injury claims pending against the Company as of March
31, 1994. A significant number of these claims represent personal injury claims
filed after January 15, 1993, the date the settlement class action was filed in
the Federal District Court; some of these claims may be subject to the terms of
the settlement class action and, therefore, the 72,000 pending claims may be
overstated. A ruling from the Court establishing the date after which any
asbestos-related personal injury claims filed against the Company or other
members of the Center for Claims Resolution are subject to the settlement class
action is expected sometime after the final hearing regarding the fairness of
the settlement class action on May 23, 1994. In addition to the currently
estimated pending claims, any claims filed by individuals deemed to have opted
out of the settlement class action, and any claims otherwise determined not
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.
An insurance asset in the amount of $226.4 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation. The Company also notes that, based on maximum
mathematical projections covering a ten-year
- 19 -
<PAGE>
(FORM 10-Q)
period from 1994 to 2004, its estimated cost in the settlement class action
reflects a reasonably possible additional liability of $245 million. A portion
of such additional liability may not be covered by the Company's ultimately
applicable insurance recovery. However, the Company believes that any after-tax
impact on the difference between the aggregate of the estimated liability for
pending cases and the estimated cost for the ten-year maximum mathematical
projection, and the probable insurance recovery, would not be material either to
the financial condition of the Company or to its liquidity, although it could be
material to earnings if it is determined in a future period to be appropriate to
record a reserve for this difference. The period in which such a reserve may be
recorded and the amount of any reserve that may be appropriate cannot be
determined at this time. Subject to the uncertainties and limitations referred
to elsewhere in Item 1, Note 2, and based upon its experience and other factors
referred to in the Note, the Company believes it is probable that substantially
all of the expenses and any liability payments associated with the asbestos-
related property damage claims will be paid under an existing interim agreement,
by insurance coverage settlement agreements and through additional coverage
reasonably anticipated from the outcome of the insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the trial phase and the intermediate appellate stage of the California
insurance coverage litigation, the remaining reserve, the establishment of the
Center, the proposed settlement class action, and its experience, the Company
believes the asbestos-related lawsuits and claims against the Company would not
be material either to the financial condition of the Company or to its
liquidity, although as stated above the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
Reference is made to the case of Fineman and The Industry Network System, Inc.
---------------------------------------------
v. Armstrong World Industries, Inc. C.A. No. 84-3837 JWB and the environmental
- - -----------------------------------
issues as discussed in Note 2 on pages 16-18 to the financial statements
included under Item 1 above.
Management continues to evaluate short-term and long-term financing
alternatives. Armstrong currently has unused short-term lines of credit of
approximately $245 million from eight banks. In addition, the Company's foreign
subsidiaries have approximately $146 million of unused short-term lines of
credit available from banks. Additionally, the Company has available for
issuance up to $250 million of debt securities under an effective shelf
registration statement. Should a need develop for additional financing, it is
management's opinion that the Company has sufficient financial strength to
warrant the required support from lending institutions and financial markets.
Consolidated Results
- - --------------------
Market conditions in the first quarter improved in the United States and Canada
but remained sluggish in Europe. The Company's U.S. residential businesses
continued to record growth, while the nonresidential businesses experienced
sales increases reflecting a turnaround from prior periods. Net sales for the
first quarter of 1994 established a new first-quarter sales record of $642.7
million and represented an increase of 5.0 percent over first-quarter 1993 sales
of $611.9 million.
Net earnings of $48.0 million were more than four times the $11.3 million
- 20 -
<PAGE>
(FORM 10-Q)
recorded in the comparable period of 1993. Net earnings per share of common
stock were $1.17 on a primary basis and $1.06 on a fully diluted basis, compared
with 21 cents on both a primary and fully diluted basis recorded for the first
quarter of 1993.
First-quarter 1994 results showed the positive effects of the Company's two
major restructuring programs undertaken in the last two years. Cost of goods
sold for the quarter was 69.2 percent of sales, significantly below the
74.0 percent recorded in first-quarter 1993 and lower than fourth-quarter 1993's
70.8 percent. The cost profile continued to be favorably impacted by lower
manufacturing costs and higher productivity levels. Leverage from the higher
sales also helped lower the cost of goods sold percentage. During the first
quarter of 1994, the Company's costs were somewhat negatively impacted by the
adverse weather conditions that occurred in the United States. In addition,
Armstrong increased its pricing in certain segments, but continued pressure
existed on European pricing.
First-quarter 1994 results included a $5.9 million before-tax gain from the sale
of the Company's majority interest in BEGA/US, Inc., a California lighting
fixture subsidiary. First-quarter 1994 results also included a $.4 million loss
related to foreign currency transactions as compared with a $2.6 million loss
for the comparable period of 1993.
The Company's interest expense for the first quarter of 1994 was $2.5 million,
or 25 percent, lower than that of first-quarter 1993. The higher net earnings
recorded in the past four quarters allowed the Company to significantly lower
its short-term debt, resulting in the lower interest expenses.
In the first quarter of 1994, the Company's effective tax rate was 26.8 percent,
significantly lower than the 35.5 percent recorded in the comparable period of
1993. This rate decline was primarily due to the Company reaching an agreement
with the Internal Revenue Service concerning its 1988 through 1990 tax years
which resulted in the reversal of tax expense previously accrued.
Industry Segment Results
- - ------------------------
Sales and operating profits increased in three of the four industry segments--
floor coverings, which includes resilient flooring and ceramic tile; building
products; and furniture--only industry products recorded lower year-to-year
sales and operating profits.
The floor covering segment, which includes worldwide resilient flooring and all
ceramic tile, recorded a sales increase of 6 percent and operating profits were
nearly 83 percent higher than those of first-quarter 1993. Sales increases were
noted throughout all areas of the world but were more significant in the United
States. This segment continued to reflect strength in its residential business,
but sales improvements were also noted in the commercial businesses of both
resilient flooring and ceramic tile. Sales prices were higher in North America
but continued under pressure in the European markets. The restructuring
activities of the past two years continued to provide lower costs and improved
profits for the segment. The ceramic tile portion of this segment is returning
to profitability faster than anticipated.
In the worldwide building products segment, sales increased 4.5 percent while
operating profits improved significantly--up 282 percent. These results
included the gain on the sale of BEGA/US, Inc., of $5.9 million. The North
American portion of the building products segment experienced a substantial
- 21 -
<PAGE>
(FORM 10-Q)
improvement in the results of its nonresidential business. This segment's cost
structure was lowered significantly as a result of the restructuring activities
of the past two years. The most notable cost structure reduction occurred in
the European business. Profit margins for the building products segment
returned to their highest level since 1990.
The furniture segment recorded sales increases of 11.6 percent while operating
profits increased 60 percent. The improvement in sales was driven by strong
performance in the Thomasville wood and upholstery divisions. The primary
factor for the profit improvement was the sales increase, but lower
manufacturing costs also aided the profitability.
Industry products sales declined nearly 7 percent while operating profits
declined slightly more than 2 percent. About one-half of the sales decline was
a result of the translation of foreign currency sales to U.S. dollars at lower
exchange rates. This segment is comprised primarily of these businesses:
insulation, textile mill supplies, and gasket products. The continued softness
in most European economies and strong competition resulted in lower sales and
operating profits for the insulation business. Even though profit margins were
higher, the lower cost structure was not enough to offset the effects of lower
sales levels. The textile business returned to profitability despite lower
sales, mainly because of restructuring activities taken over the past two years.
The gasket products business recorded its highest quarterly sales and operating
profits ever.
- 22 -
<PAGE>
(FORM 10-Q)
Independent Accountant's Report
-------------------------------
The Board of Directors
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of March 31, 1994, and the related
condensed consolidated statements of earnings and cash flows for the three-month
periods ended March 31, 1994 and 1993. These 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 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, 1993, and the related consolidated
statements of earnings and cash flows for the year then ended (not presented
herein); and our report dated February 14, 1994, on those consolidated financial
statements contains an explanatory paragraph that states the Company is involved
in antitrust litigation, the outcome of which cannot presently be determined.
Accordingly, no provision for any liability that may result has been made in
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1993, is fairly presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK
Philadelphia, Pennsylvania
May 10, 1994
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<PAGE>
(FORM 10-Q)
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- - ------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
Item 5. Other Information
- - ------ -----------------
The Company held its annual meeting of shareholders on April 25, 1994. The vote
on each matter presented to shareholders was as follows:
<TABLE>
<CAPTION>
1. Election of Directors:
For Withheld
<S> <C> <C>
J. Phillip Samper 36,695,796 77,934
Van C. Campbell 36,786,740 17,304
Ursula F. Fairbairn 36,796,393 10,869
</TABLE>
2. Shareholder Proposal for Confidential Voting
For Against Abstain Broker Non-votes
15,419,021 18,384,391 478,184 2,662,296
The Shareholder Proposal for Confidential Voting was not approved
because it failed to receive the requisite majority of the votes
present in person or by proxy at the meeting.
Item 6. Exhibits and Reports on Form 8-K
- - ------ --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report
on Form 10-Q:
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
- 24 -
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Armstrong World Industries, Inc.
By /s/ L. A. Pulkrabek
-----------------------------------
L. A. Pulkrabek, Senior
Vice President, Secretary and
General Counsel
By /s/ Bruce A. Leech, Jr.
------------------------------------
Bruce A. Leech, Jr., Controller
(Principal Accounting Officer)
Date: May 12, 1994
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<PAGE>
(FORM 10-Q)
Exhibit Index
-------------
Exhibit No.
- - -----------
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
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<PAGE>
(FORM 10-Q)
Exhibit No. 11
Computation for Earnings Per Share
For the Three Months Ended March 31, 1994 and 1993
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1994 1993
---- ----
PRIMARY
- - -------
<S> <C> <C>
Common Stock and Common Stock Equivalents
- - -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock options 37.9 37.3
===== =====
Net Earnings Per Share
- - ----------------------
Net earnings $48.0 $11.3
Less:
Dividend requirement on Series A convertible
preferred stock 4.7 4.8
Plus:
Tax benefit on dividends applicable to unallocated
preferred shares 1.2 1.3
----- -----
Net earnings applicable to common stock $44.5 $ 7.8
===== =====
Net earnings per share of common stock $1.17 $ .21
===== =====
FULLY DILUTED
- - -------------
Common Stock and Common Stock Equivalents
- - -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock options 37.9 37.3
Average number of common shares issuable under
the Employee Stock Ownership Plan 5.5 5.9
----- -----
Average number of common and common equivalent
shares outstanding 43.4 43.2
===== =====
Pro Forma Adjustment to Net Earnings
- - ------------------------------------
Net earnings as reported $48.0 $11.3
Less:
Increased contribution to Employee Stock
Ownership Plan assuming conversion of
preferred shares to common 2.0 2.1
Net reduction in tax benefits assuming conversion
of Employee Stock Ownership Plan preferred
shares to common .2 .2
----- -----
Pro Forma Net Earnings $45.8 $ 9.0
===== =====
Fully Diluted Net Earnings per share $1.06 $ .21
===== =====
</TABLE>
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<PAGE>
(FORM 10-Q)
Exhibit No. 15
Armstrong World Industries, Inc.
Lancaster, Pennsylvania
Gentlemen:
RE: Registration Statement Nos. 2-50942; 2-77936; 2-91890;
33-18996; 33-18997; 33-18998; 33-29768; 33-38837; 33-60070
----------------------------------------------------------
With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated
May 10, 1994, related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act, such report is not considered
a part of a Registration Statement prepared or certified by an accountant or a
report prepared or certified by an accountant within the meaning of Sections 7
and 11 of the Act.
Very truly yours,
KPMG PEAT MARWICK
Philadelphia, Pennsylvania
May 10, 1994
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