<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 June 30, 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 _______________________
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 29, 1994 - 37,526,370
<PAGE>
Part I - Financial Information
------------------------------
Item 1. Financial Statements
- - ------ --------------------
Operating results for the second quarter of 1994 and first six months of 1994,
compared with the corresponding periods 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' and six months' results are not necessarily
indicative of annual earnings.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
-----------------------------------
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
----------------- -------------------
1994 1993 1994 1993
------ ------ -------- --------
<S> <C> <C> <C> <C>
NET SALES $689.3 $629.0 $1,332.0 $1,240.9
Cost of goods sold 463.4 445.1 908.4 897.9
------ ------ -------- --------
Gross profit 225.9 183.9 423.6 343.0
Selling & administrative expense 134.5 127.3 265.4 256.8
------ ------ -------- --------
Earnings before other income
(expense) and income taxes 91.4 56.6 158.2 86.2
Interest expense (8.0) (9.8) (15.5) (19.8)
Other income (expense), net (1.7) 1.0 4.6 (1.0)
------ ------ -------- --------
Earnings before income taxes (a) 81.7 47.8 147.3 65.4
Income taxes 28.4 15.9 46.0 22.2
------ ------ -------- --------
NET EARNINGS (b) $ 53.3 $ 31.9 $ 101.3 $ 43.2
====== ====== ======== ========
Net earnings per share of common
stock: (b)(c)
Primary $ 1.31 $ .76 $ 2.49 $ .97
Fully Diluted $ 1.18 $ .68 $ 2.23 $ .89
Dividends paid per common share $ .32 $ .30 $ .62 $ .60
Average number of common shares
outstanding:
Primary 37.9 37.2 37.8 37.2
Fully Diluted 43.4 43.2 43.3 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.
2
<PAGE>
(a) Depreciation and amortization charged against earnings before income taxes
amounted to $32.7 million and $63.5 million in the three months and six
months ended June 30, 1994, respectively, and $32.2 million and $64.9
million in the three months and six months ended June 30, 1993,
respectively.
(b) For the first quarter 1994 and the six months ended June 30, 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.
3
<PAGE>
<TABLE>
<CAPTION>
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
Unaudited
Assets June 30, 1994 December 31, 1993
------ ------------------ -------------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 16.2 $ 9.1
Accounts receivable, less allowance 345.9 283.5
Inventories:
Finished goods $ 181.6 $ 176.8
Work in process 37.5 34.5
Raw materials and supplies 74.5 74.9
-------- --------
Total inventories 293.6 286.2
Income tax benefits 34.3 36.8
Other current assets 5.0 24.8
-------- --------
Total current assets 695.0 640.4
Property, plant, and equipment 2,120.8 2,045.8
Less accumulated depreciation
and amortization 1,071.1 1,006.7
-------- --------
Net property, plant, and equipment 1,049.7 1,039.1
Insurance for asbestos-related
liabilities(a) 231.0 --
Other noncurrent assets 281.3 249.8
-------- --------
Total assets $2,257.0 $1,929.3
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 90.6 $ 105.4
Current installments of long-term debt .6 5.8
Accounts payable and accrued expenses 287.1 293.3
Income taxes 45.3 31.8
-------- --------
Total current liabilities 423.6 436.3
Long-term debt 257.0 256.8
ESOP loan guarantee 250.0 253.9
Postretirement and postemployment benefits 287.2 283.7
Asbestos-related liabilities (a) 231.0 --
Other long-term liabilities 117.7 99.6
Deferred income taxes 22.6 18.8
Minority interest in subsidiaries 7.6 10.7
-------- --------
Total noncurrent liabilities 1,173.1 923.5
Shareholders' equity:
Convertible preferred stock at
redemption value $ 262.9 $ 263.9
Common stock 51.9 51.9
Capital in excess of par value 37.7 29.7
Reduction for ESOP loan guarantee (237.9) (241.8)
Retained earnings 998.7 927.7
Foreign currency translation (b) 5.5 (3.4)
Treasury stock (458.5) (458.5)
-------- --------
Total shareholders' equity 660.3 569.5
-------- --------
Total liabilities and shareholders'
equity $2,257.0 $1,929.3
======== ========
</TABLE>
See page 5 for explanation of references (a) and (b)
Also see accompanying footnotes to the financial statements beginning on page 8.
4
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(a) The asbestos-related liability in the amount of $231.0 million represents
the estimated liability and defense cost to resolve approximately 77,000
personal injury claims pending against the Company as of the end of the second
quarter 1994. The insurance asset in the amount of $231.0 million reflects the
Company's belief in the availability of insurance in an amount covering the
liability. See footnote No. 2 beginning on page 8 for additional details.
(b) Foreign currency translation, reported as a separate component of
shareholders' equity, is detailed as follows:
<TABLE>
<CAPTION>
1994
----
(millions)
<S> <C>
Beginning balance December 31, 1993 $(3.4)
Six months' translation adjustments and
hedging of foreign investments 9.2
Allocated income taxes (.3)
-----
Ending balance June 30, 1994 $ 5.5
=====
</TABLE>
5
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
June 30
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $101.3 $ 43.2
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 63.5 64.9
Deferred income taxes 4.8 3.9
Restructing activities (12.2) (22.5)
Changes in operating assets and liabilities net of
effect of restructuring:
(Increase) in receivables (59.3) (37.3)
(Increase) decrease in inventories (7.0) 8.7
Decrease in other current assets 14.7 21.9
(Increase) in other noncurrent assets (37.3) (10.1)
Increase (decrease) in accounts payable,
accrued expenses, and income taxes payable 20.2 (.2)
Increase in other long-term liabilities 24.1 6.3
Other, net (6.6) (5.2)
------ ------
Net cash provided by operating activities 106.2 73.6
------ ------
Cash flows from investing activities:
Purchases of property, plant, and equipment (60.5) (47.4)
Proceeds from sale of business and assets 10.1 8.2
------ ------
Net cash used for investing activities (50.4) (39.2)
------ ------
Cash flows from financing activities:
(Decrease) in short-term debt (16.6) (2.3)
Issuance of long-term debt .6 --
Reduction of long-term debt (5.2) (.2)
Cash dividends paid (32.7) (31.9)
Other, net 4.7 (3.8)
------ ------
Net cash used for financing activities (49.2) (38.2)
Effect of exchange rate changes on cash and cash
equivalents .5 (.5)
------ ------
Net increase (decrease) in cash and cash equivalents $ 7.1 $(4.3)
====== ======
Cash and cash equivalents at beginning of period $ 9.1 $15.2
====== ======
Cash and cash equivalents at end of period $16.2 $10.9
====== ======
- - ---------------------------------------------------------------------------
Supplemental Cash Flow Information:
Interest paid $14.6 $18.1
Income taxes paid $25.1 $ 5.3
- - ---------------------------------------------------------------------------
</TABLE>
See accompanying footnotes to the financial statements beginning on page 8.
6
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three months Six Months
ended June 30 ended June 30
-------------- ------------------
1994 1993 1994 1993
------ ------ -------- --------
<S> <C> <C> <C> <C>
Net trade sales:
- - ----------------
Floor coverings $338.3 $303.4 $ 625.7 $ 574.4
Building products 154.2 144.2 305.7 289.1
Furniture 123.5 108.0 252.2 223.3
Industry products 73.3 73.4 148.4 154.1
------ ------ -------- --------
Total net sales $689.3 $629.0 $1,332.0 $1,240.9
====== ====== ======== ========
Operating profit:
- - -----------------
Floor coverings $ 64.5 $ 43.6 $ 102.2 $ 64.2
Building products(a) 23.9 10.1 50.4 17.0
Furniture 8.1 4.9 17.8 11.0
Industry products 9.7 10.5 22.4 23.5
------ ------ -------- --------
Total operating profit $106.2 $ 69.1 $ 192.8 $ 115.7
General corporate expense (24.5) (21.3) (45.5) (50.3)
------ ------ -------- --------
Earnings before income taxes $ 81.7 $ 47.8 $ 147.3 $ 65.4
====== ====== ======== ========
</TABLE>
(a) For the first quarter and the six months ended June 30, 1994, operating
profit includes $5.9 million before-tax gain from the sale of the Company's
majority interest in BEGA/US, Inc.
7
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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 June 30, 1994, approximately 77,000 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 and its consultants.) 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 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
8
<PAGE>
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.
It is believed that claimants who neither filed a lawsuit against the Company or
other members of the Center for Claims Resolution for asbestos-related personal
injury nor filed exclusion request forms to opt out of the settlement class
action by January 24, 1994, may be subject to the terms of the class action. A
ruling by the Court, however, will establish the date after which any non-opt-
out claims filed are subject to the settlement class action. In addition to the
foregoing, the settlement class action does not include 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 determined that there was not an
excessive number of opt outs and decided to 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
concluded the final fairness hearing which began on February 22, 1994, and final
oral arguments were heard 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.
The Company is seeking agreement from its involved insurance carriers or a
binding judgment against them that the settlement class action will not
jeopardize existing insurance coverage, and the settlement is contingent upon
such an agreement or judgment. With respect to carriers that do not agree, this
matter will be resolved either by alternative dispute resolution 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
9
<PAGE>
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 and 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 (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 bodily injury products
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.
10
<PAGE>
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 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
11
<PAGE>
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 of
every claim.
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 has
occured 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, 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 cases and to
address future claims.
The Company is also one of many defendants in a total of 56 pending lawsuits and
claims, including class actions, as of June 30, 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.
12
<PAGE>
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
settlement agreements with the Company which complement 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 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 has 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 insurance coverage is available under the Wellington Agreement
13
<PAGE>
(and the previously-referenced settlement agreement with one primary carrier)
for non-products 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 yet to be resolved
asbestos-related personal injury claims as non-products claims and to establish
the entitlement to such coverage. The additional coverage potentially available
to pay claims categorized as non-products, 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.
ACandS, Inc., a former subsidiary of the Company, which for certain insurance
periods has coverage rights under some of the Company's insurance policies, and
has accessed such coverage on the same basis as the Company, was a subscriber to
the Wellington Agreement, but is 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 own 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
liability--"Asbestos-Related Liabilities" and an asset--"Insurance for Asbestos-
Related Liabilities." This accounting presentation change is
14
<PAGE>
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. Prior to the first quarter 1994, the Company had set off such amounts
for financial reporting.
In accordance with the foregoing accounting presentation 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 $231 million in liability and defense costs recorded on the
balance sheet will be incurred to resolve an estimated 77,000 asbestos-related
personal injury claims pending against the Company as of June 30, 1994. These
claims include claims that were filed for the period from January 1, 1994, to
January 24, 1994, and which previously were treated as potentially included
within the settlement class action, and claims filed by claimants who have been
identified as having filed exclusion request forms to opt out of the settlement
class action. A ruling from the Court establishing the date after which any
asbestos-related personal injury claims filed by non-opt-out claimants against
the Company or other members of the Center for Claims Resolution are subject to
the settlement class action is expected sometime in the near future. In
addition to the currently estimated pending claims and any claims filed by
individuals deemed to have opted out of the settlement class action, any claims
otherwise determined not to be subject to the settlement class action, will be
resolved outside the settlement class action. The Company does not know how
many such claims ultimately may be filed by claimants deemed to have opted out
of the class action or by claimants otherwise determined not to be subject to
the settlement class action.
An insurance asset in the amount of $231 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
15
<PAGE>
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 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.
16
<PAGE>
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The Company
was informed on February 22, 1993, that the Supreme Court denied its Petition.
After the case was remanded by the Third Circuit Court of Appeals in
Philadelphia to the U.S. District Court in Newark, New Jersey, a new trial
commenced on April 26, 1994, and is currently in progress. The jury is currently
expected to begin its deliberations August 17-19. TINS is claiming damages in
the form of lost profits; its two expert witnesses have testified to lost
profits ranging from approximately $19 million to approximately $56 million.
Under the antitrust laws, proven damages are trebled. In addition, plaintiff is
claiming punitive damages in conjunction with its request for tort damages.
Other damages which are being 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
- - -------------------
The total cash generated during the second quarter and first half of 1994 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. 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.
17
<PAGE>
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
June 30, 1994, the Company had no exposure for interest rate swaps or currency
swaps.
Working capital was $271.4 million as of June 30, $33.9 million higher than the
$237.5 million recorded at the end of the first quarter of 1994, and $67.3
million higher than the $204.1 million recorded at year-end 1993. Accounts
receivable increased $62.4 million for the first half with $62.2 of the increase
in the first quarter. The principal reason for the increase was the higher
level of sales. Inventories increased modestly reflecting the return to
targeted service level positions for resilient flooring. The lower short-term
debt and current installments of long-term debt, a modest reduction in accounts
payable and accrued expenses, and higher levels of cash also increased working
capital. Partially offsetting the working capital increase were higher levels
of income taxes payable and reductions in other current assets.
The ratio of current assets to current liabilities was 1.64 to 1 as of
June 30, 1994, and 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 47.5 percent as
of June 30, 1994, compared with 50.2 percent as of March 31, 1994, and 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 15 and which should be read in connection with this discussion and
analysis.
Beginning with the first quarter 1994, the Company's balance sheet reflected a
new liability--"Asbestos-related liabilities" and a new 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. The
asbestos-related liability in the amount of $231.0 million represents the
estimated liability and defense cost to resolve approximately 77,000 personal
injury claims pending against the company as of the end of the second quarter.
The insurance asset in the amount of $231.0 million reflects the Company's
belief in the availability of insurance in an amount covering the liability.
Such insurance has either been agreed upon or is probable of recovery through
negotiation, alternative dispute resolution or litigation. In addition, the
Company notes that, based on maximum mathematical projections covering the next
10 years, its estimated cost in a proposed future claimants class action
settlement reflects a reasonably possible additional liability of $245 million.
A portion of such additional liability may not be covered by the Company's
ultimate applicable insurance recovery, which includes both substantial amounts
of non-products insurance, as well as products insurance. However, the company
believes that any after-tax impact of the difference between the aggregate of
the liability for pending cases and the liability for the referenced maximum
mathematical projection during the next 10 years, 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 in the period
recorded.
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 and 17 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
18
<PAGE>
approximately $245 million from 8 banks. The Company's foreign subsidiaries
have approximately $158 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
- - --------------------
Second-quarter 1994 net sales of $689.3 million established a new record for any
quarter in the Company's history, an increase of almost 10 percent over second-
quarter 1993 sales of $629.0 million. Market conditions in the second quarter
continued to improve in the United States and Canada while Europe began to show
some small improvement. Strong U.S. activity in the residential end-use markets
and even stronger demand from the nonresidential end-use markets for both new
construction and remodeling projects were the major factors contributing to the
higher sales.
Second-quarter 1994 net earnings were $53.3 million compared with $31.9 million
for the same period in 1993, a 67 percent increase. The second quarter results
were highlighted by the strong performance of the floor coverings segment. Net
earnings per share of common stock for the second quarter were $1.31 on a
primary basis and $1.18 on a fully diluted basis. Comparative 1993 earnings
per share were 76 cents on a primary basis and 68 cents on a fully diluted
basis. The Company's cost profile continues to be favorably affected by lower
manufacturing costs and higher productivity levels. Also, price increases in
most U.S. business segments contributed to the improved 1994 earnings
performance. Quarterly results for both years were affected by hedges on
foreign currency transactions--a $.8 million loss in 1994 compared with a $1.3
million gain in 1993.
The Company's effective tax rate for the second quarter of 1994 was 34.8
percent, slightly higher than the 33.3 percent recorded in the comparable period
of 1993. The tax rate increase was caused by the higher federal statutory tax
rate and a higher overall tax rate on foreign source income.
For the first half of 1994, record sales of $1.33 billion were recorded, a 7
percent increase over the $1.24 billion reported for 1993. Net earnings were
$101.3 million in the first half of 1994 compared with $43.2 million for the
same period of 1993, an increase of $58.1 million, or 134 percent in net
earnings. Net earnings per share of common stock for the first half of 1994
were $2.49 on a primary basis and $2.23 on a fully diluted basis compared with
97 cents and 89 cents, respectively, in 1993. Excluding the gains from the sale
of woodlands in 1990, the 1994 first half and second quarter net earnings were
the highest on record.
Cost of goods sold, when expressed as a percent of sales, during the second
quarter and first six months of 1994 were 67.2 percent and 68.2 percent,
respectively. These percentages were 70.8 percent and 72.4 percent,
respectively, in the comparable periods of 1993. The 1994 earnings improvement
reflects some higher sales prices, a lower cost structure primarily resulting
from the positive effects of the Company's two major restructuring programs
undertaken in the past two years, and the resulting leverage from the higher
level of sales activity.
First six months 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. The Company's interest expense for the first six months of
1994 was lower than the comparable period of 1993 by $4.3 million, or 22
percent. The higher net earnings recorded for all periods since the second
quarter of 1993 allowed the Company to significantly lower its short-term debt,
resulting in lower interest expense for 1994.
The Company's effective tax rate for the first half of 1994 was 31.2 percent,
19
<PAGE>
a decline from the 33.9 percent recorded for the similar period in 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, during the first quarter of 1994, of tax expense
previously accrued.
Industry Segment Results
- - ------------------------
Three of the Company's worldwide industry segments--floor coverings (which
includes resilient flooring and ceramic tile), building products and furniture
registered second quarter sales and operating profit increases when compared
with the second quarter of 1993. The fourth segment, industry products,
recorded declines in both sales and operating profits.
The floor coverings segment recorded a 48 percent increase in operating profit
on a 12 percent improvement in sales for the second quarter of 1994 as compared
with the second quarter of 1993. The resilient flooring portion of the segment
established new sales and operating profit records during the second quarter as
compared with any previous quarter. The improvement was driven by the U.S.
business and aided by a gradual recovery in the European market. The ceramic
tile portion continued to show sales growth and recorded an operating profit in
the quarter. Approximately 30 percent of the segment's operating profit
improvement is attributed to the profit swing in ceramic tile.
The building products segment recorded another strong quarter producing a sales
increase of 7 percent and more than doubling the operating profit. The
nonresidential ceilings portion of the segment showed double-digit sales
improvement in the United States--this portion was adversely affected by the
slowdown in new construction in previous years. In Europe, while sales were
essentially even with 1993 levels, reflecting economic conditions, profit
margins continued to be substantially higher due to the Company's cost reduction
measures. Operating profit for the first half of 1994 exceeded that of the
total year 1993.
Furniture segment sales set a new second quarter record registering a 14 percent
increase compared with the second quarter of 1993. The sales improvement was
driven by the contract, upholstery and ready-to-assemble businesses. Operating
profit grew by 65 percent with each area of the business achieving improved
results versus second quarter 1993.
The industry products segment sales were almost level with those of the second
quarter of 1993, while operating profit declined by 8 percent. The largest part
of this segment, insulation products, recorded sales and operating profit
essentially even with those of last year. Gasket products sales reached a new
record high in the second quarter pushing 18 percent ahead of the first half of
1993 and improving profits for the half by 26 percent. Textile products sales
are behind last year both for the second quarter and the first half primarily
due to a shortfall in the North America market.
20
<PAGE>
Independent Accountants' Report
-------------------------------
The Board of Directors
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of June 30, 1994, and the related condensed
consolidated statements of earnings for the three-month and six-month periods
ended June 30, 1994, and 1993, and the condensed consolidated statements of cash
flows for the six-month periods then ended. 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
August 9, 1994
21
<PAGE>
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 25, 1994. The vote
on each matter presented to shareholders was as follows:
1. Election of Directors:
For Withheld
J. Phillip Samper 36,695,796 77,934
Van C. Campbell 36,786,740 17,304
Ursula F. Fairbairn 36,796,393 10,869
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:
Exhibits
--------
No. 3(a)Copy of the Company's Bylaws, as amended through April 25,
1994.
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.
22
<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: August 12, 1994
23
<PAGE>
Exhibit Index
-------------
Exhibit No.
- - -----------
No. 3(a)Copy of the Company's Bylaws, as amended through April 25, 1994.
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
24
<PAGE>
Exhibit No. 3(a)
Bylaws
of
Armstrong
ARMSTRONG WORLD INDUSTRIES, INC.
LANCASTER, PENNSYLVANIA
EFFECTIVE APRIL 25, 1994
_____________________________________________________________________________
ARTICLE I
Office
The principal office of the Company shall be in Lancaster, Pennsylvania.
All meetings of directors and stockholders shall be held at the principal
office of the Company unless the Board of Directors shall decide otherwise, in
which case such meetings may be held within or without the Commonwealth of
Pennsylvania as the Board may from time to time direct.
ARTICLE II
Stockholder's Meetings
An annual meeting of stockholders shall be held in each calendar year on
such date and at such time as may be fixed by the Board of Directors for the
purpose of electing directors and the transaction of such other business as may
properly come before the meeting.
Special meetings of the stockholders may be called at any time by the
President or the Board of Directors. At any time, upon written request of any
person or persons who have duly called a special meeting, it shall be the duty
of the Secretary to fix the date of the meeting, to be held not more than sixty
days after the receipt of the request, and to give due notice thereof. If the
Secretary shall neglect or refuse to fix the date of the meeting and give notice
thereof, the person or persons calling the meeting may do so.
Special meetings of the holders of No Par Preferred Stock for the purpose
of electing directors may be called as provided in the Articles of
Incorporation, as amended.
Written notice of the place, day, and hour of all meetings of stockholders
and, in the case of a special meeting, of the general nature of the business to
be transacted, shall be given to each stockholder of record entitled to vote at
the particular meeting either personally or by sending a copy of the notice
through the mail, or by telegram, charges prepaid, to the address of the
stockholder appearing on the books of the Company or supplied by him to the
Company for the purpose of notice. Except as otherwise provided by these bylaws
or by law, such notice shall be given at least five days before the date of the
meeting by the President, Vice President, or Secretary. A waiver in writing of
any written notice required to be given, signed by the person entitled to such
notice, whether before or after the time stated, shall be deemed equivalent to
the giving of such notice. Attendance of a person, either in person or by
proxy, at any meeting shall constitute a waiver of notice of such meeting,
except where a person attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting was not lawfully called or
convened.
25
<PAGE>
Nominations of candidates for election to the Board of Directors may be
made by the Board of Directors or by any stockholder of the Company entitled to
notice of, and to vote at, any meeting called for the election of directors.
Nominations, other than those made by or on behalf of the Board of Directors of
the Company, shall be made in writing and shall be received by the Secretary of
the Company not later than (i), with respect to an election of directors to be
held at an annual meeting of stockholders, ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting and (ii), with
respect to an election of directors to be held at a special meeting of
stockholders, the close of business on the tenth (10th) day following the date
on which notice of such meeting is first given to stockholders or public
disclosure of the meeting is made, whichever is earlier. Such notification
shall contain the following information to the extent known to the notifying
stockholder: (a) the name, age, business address, and residence address of each
proposed nominee and of the notifying stockholders; (b) the principal occupation
of each proposed nominee; (c) a representation that the notifying stockholder
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (d) the class and total number of shares of the
Company that are beneficially owned by the notifying stockholders and, if known,
by the proposed nominee; (e) the total number of shares of the Company that will
be voted by the notifying stockholder for each proposed nominee; (f) a
description of all arrangements or understandings between the notifying
stockholders and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the notifying stockholder; (g) such other information regarding each
nominee proposed by such stockholder as would be required to be included in a
proxy statement filed with the Securities and Exchange Commission pursuant to
Rule 14(a) under the Securities Exchange Act of 1934, as amended, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (h) the consent of each nominee to serve as a director of the Company if so
elected. Nominees of the Board of Directors shall, to the extent appropriate,
provide the same information about themselves as in (a) through (h) above to the
Secretary of the Company. The Company may request any proposed nominee to
furnish such other information as may reasonably be required by the Company to
determine the qualifications of the proposed nominee to serve as a director of
the Company. Within fifteen (15) days following the receipt by the Secretary of
a stockholder notice of nomination pursuant hereto, the Board Development and
Nominating Committee shall instruct the Secretary of the Company to advise the
notifying stockholder of any deficiencies in the notice as determined by the
Committee. The notifying stockholder shall cure such deficiencies within
fifteen (15) days of receipt of such notice. No persons shall be eligible for
election as a director of the Company unless nominated in accordance herewith.
Nominations not made in accordance herewith may, in the discretion of the
presiding officer at the meeting and with the advice of the Board Development
and Nominating Committee, be disregarded by the presiding officer and, upon his
or her instructions, all votes cast for each such nominee may be disregarded.
The determinations of the presiding officer at the meeting shall be conclusive
and binding upon all stockholders of the Company for all purposes.
At any meeting of the stockholders, the presence, in person or by proxy, of
stockholders entitled to cast at least a majority of the votes which all
stockholders are entitled to cast upon any matter shall constitute a quorum for
the transaction of business upon such matter, and the stockholders present at a
duly organized meeting can continue to do business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. If a meeting cannot be organized because a quorum has not attended,
those present may, except as otherwise provided by law, adjourn the meeting to
such time and place as they may determine, but in the case of any meeting called
for the election of directors, those who attend the second of such adjourned
meetings, although less than a quorum, shall nevertheless constitute a quorum
for the purpose of electing directors.
26
<PAGE>
Except as otherwise provided in the Articles of Incorporation, as amended,
or by law, every stockholder of record shall have the right, at every
stockholders' meeting, to one vote for every share standing in his name on the
books of the Company. In each election of directors, every stockholder entitled
to vote shall have the right to multiply the number of votes to which he may be
entitled by the total number of directors to be elected, and he may cast the
whole number of such votes for one candidate or he may distribute them among any
two or more candidates.
Every stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for him by proxy. Every proxy shall
be executed in writing by the stockholder or by his duly authorized attorney in
fact and filed with the Secretary of the Company.
All questions shall be decided by the vote of the stockholders present, in
person or by proxy, entitled to cast at least a majority of the votes which all
stockholders present are entitled to cast, unless otherwise provided by the
Articles of Incorporation, as amended, or by law.
Elections for directors need not be by ballot except on demand made by a
stockholder at the election and before the voting begins. In advance of any
meeting of stockholders, the Board of Directors may appoint judges of election
who need not be stockholders to act at such meeting or any adjournment thereof,
and if such appointment is not made, the chairman of any such meeting may, and
on request of any stockholder or his proxy shall, make such appointment at the
meeting. The number of judges shall be one or three; and if appointed at a
meeting on request of one or more stockholders or proxies, the majority of the
shares present and entitled to vote shall determine whether one or three judges
are to be appointed. No person who is a candidate for office shall act as a
judge. In case any person appointed as judge fails to appear or fails or
refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting or at the meeting by the
person or officer acting as chairman. On request of the chairman of the meeting
or of any stockholder or his proxy, the judges shall make a report in writing of
any challenge or question or matter determined by them and execute a certificate
of any fact found by them.
ARTICLE III
Directors
SECTION 1. The business and affairs of the Company shall be managed by a
Board of Directors. The directors need not be stockholders of the Company. The
Board shall consist of not less than nine (9) nor more than thirteen (13)
directors, the exact number to be fixed from time to time by the Board of
Directors pursuant to a resolution adopted by a majority vote of the directors
than in office, such number being in addition to any directors that the holders
of any class of preferred stock, voting as a class, may be entitled to elect as
provided in the Articles of Incorporation, as amended, or in a resolution of the
Board establishing any series of preferred stock.
The directors, other than the directors to be elected by the holders of No
Par Preferred Stock, voting as a class, shall be classified in respect to the
time for which they shall severally hold office by dividing them into three
classes, each consisting, as nearly as possible, of one-third of the whole
number of such directors. At each annual meeting, the successors to the class
of directors whose terms expire that year shall be elected to hold office for
the term of three years. Each such director shall hold office for the term for
which he is elected and until his successor shall have been elected and
qualified. Any vacancy in the office of any such directors shall be filled by
an election by the Board for the unexpired term.
Directors to be elected by the holders of No Par Preferred Stock, voting as
a class, shall be elected and hold office as provided in the Articles of
Incorporation, as amended.
27
<PAGE>
SECTION 2. The Board of Directors shall hold an annual meeting, without
notice, immediately following the annual meeting of the stockholders and shall
elect a President, such number of Vice Presidents as the Board may deem
advisable, a Secretary, a Treasurer, a Controller, and such Assistant
Secretaries and Assistant Treasurers as the Board may deem advisable. The Board
may also at its discretion elect a Chairman of the Board. Unless sooner removed
by the Board, all officers shall hold office until the next annual meeting of
the Board and until their successors shall have been elected. The Board shall
also, from time to time, elect such other officers and agents as it deems
advisable.
The President and the Chairman of the Board, if elected, must be selected
from the members of the Board of Directors, but the other officers may but need
not be directors.
Any two or more offices may be held by the same person except the offices
of President and Secretary, but in no case shall the same person act in the same
matter in two such official capacities.
SECTION 3. All vacancies in office shall be filled by the Board of
Directors, and the Board shall have power to define the duties of all officers
and agents and fix their compensation and may remove at its discretion any
officer or agent.
SECTION 4. The Board of Directors shall hold meetings at such times and
places as it may determine. Directors may participate in a meeting of the Board
or a Committee thereof by conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. No notice of regular meetings of the Board need be given. Special
meetings of the Board may be called by the President or a Vice President or the
Secretary or by any two directors by giving written notice at least twenty-four
hours in advance of the time of the meeting to each director, either personally
or by telegram, charges prepaid, or by sending a copy of the notice through the
mail at least two days before the day of the meeting, to the director's address
appearing on the books of the Company or supplied by the director to the Company
for the purpose of notice.
Attendance at any meeting of the Board shall be a waiver of notice thereof.
If all the members of the Board are present at any meeting, no notice shall be
required. A majority of the whole number of the directors shall constitute a
quorum for the transaction of business, but if at any meeting a quorum shall not
be present, the meeting may adjourn from time to time until a quorum shall be
present.
SECTION 5. The Board of Directors shall cause to be sent to the
stockholders, within 120 days after the close of each fiscal year, financial
statements which shall include a balance sheet as of the close of such year,
together with statements of income and surplus for such year, prepared so as to
present fairly its financial condition and results of its operations. Such
financial statements shall have been examined in accordance with generally
accepted auditing standards by a firm of independent certified public
accountants selected by the Board and shall be accompanied by such firm's
opinion as to the fairness of the presentation thereof.
SECTION 6. The Board of Directors may, by resolution adopted by a majority
of the whole Board, designate one or more committees, each committee to consist
of two or more of the directors of the Company. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. Any such committee to
the extent provided in such resolution shall have and exercise the authority of
the Board in the management of the business and affairs of the Company.
28
<PAGE>
ARTICLE IV
OFFICERS
President
SECTION 1. The President shall be the chief executive officer of the
Company. He shall preside at all meetings of the stockholders and, in the
absence of a Chairman of the Board, at all meetings of the Board of Directors at
which he is present. He shall be ex-officio a member of all standing
committees. He shall have the custody of the corporate seal or may entrust the
same to the Secretary. He shall make reports of the Company's business to the
Board at such times as the Board shall require. He shall perform all the usual
duties incident to the office of President.
Vice-Presidents
SECTION 2. In the absence or disability of the President, his duties
shall be performed by one or more Vice-Presidents designated by the Board of
Directors. They shall perform such other duties as may be assigned to them by
the Board.
Chairman of the Board
SECTION 3. The Chairman of the Board, if elected, shall preside at
all meetings of the Board of Directors at which he is present. He shall perform
such other duties as may be assigned to him by the Board.
Secretary
SECTION 4. The Secretary shall attend the meetings of the
stockholders and Board of Directors and keep minutes thereof in suitable books.
He shall send out notices of all meetings as required by law or these bylaws.
He shall be ex-officio an Assistant Treasurer. He shall perform all the usual
duties incident to the office of Secretary.
Assistant Secretaries
SECTION 5. In the absence or disability of the Secretary, his duties
shall be performed by the Assistant Secretaries. They shall perform such other
duties as may be assigned to them by the Board of Directors.
Treasurer
SECTION 6. The Treasurer shall have custody of funds of the Company
and keep or cause to be kept accurate accounts of all money received or payments
made in books kept for that purpose. He shall deposit all money received by him
in the name and to the credit of the Company in such bank or other place or
places of deposit as the Board of Directors shall designate. He shall be ex-
officio an Assistant Secretary. He shall perform all the usual duties incident
to the office of Treasurer.
Assistant Treasurers
SECTION 7. In the absence or disability of the Treasurer, his duties
shall be performed by the Assistant Treasurers. They shall perform such other
duties as may be assigned to them by the Board of Directors.
Controller
SECTION 8. The Controller shall have general charge of the accounting
of the Company and shall perform all the usual duties incident to the office of
Controller.
29
<PAGE>
Bonds
SECTION 9. Such officers and employees of the Company as the Board of
Directors shall determine shall give bond for the faithful discharge of their
duties in such form and for such amount and with such surety or sureties as the
Board shall require. The expense of procuring such bonds shall be borne by the
Company.
ARTICLE V
Seal
The Company shall have a seal which shall contain the words "Armstrong
World Industries, Inc.," in a circle within which the words "Incorporated Dec.
30, 1891" shall be contained.
ARTICLE VI
Stock Certificates and Transfers
Stock certificates shall be in such form as the Board of Directors may
from time to time determine and shall either be signed by the President or one
of the Vice-Presidents or other officer designated by the Board, and
countersigned by the Treasurer or an Assistant Treasurer and sealed with the
seal of the Company, or, if not so signed and sealed, shall bear the engraved or
printed facsimile signatures of the officers authorized to sign and the engraved
or printed facsimile of the seal of the Company.
The Board of Directors may appoint for any class of stock one or more
incorporated banks or trust companies in the city of New York, New York, or
elsewhere, to act as Registrar or Registrars, and also one or more incorporated
banks or trust companies in the city of New York, New York, or elsewhere, to act
as Transfer Agent or Transfer Agents. No certificate of stock of any class for
which a Transfer Agent and Registrar have been appointed shall be valid or
binding unless countersigned by a Transfer Agent and registered by a Registrar
before issue.
The shares of the capital stock of the Company shall, upon the
surrender and cancellation of the certificate or certificates representing the
same, be transferred upon the books of the Company at the request of the holder
thereof, named in the surrendered certificate or certificates, in person or by
his legal representatives or by his attorney duly authorized by written power of
attorney filed with the Company's Transfer Agent. In case of loss or
destruction of a certificate of stock, another may be issued in lieu thereof in
such manner and upon such terms as the Board shall authorize.
The Board of Directors may fix a time, not more than seventy (70) days
prior to the date of any meeting of the stockholders, or the date fixed for the
payment of any dividend or distribution or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock will be
made or go into effect, as a record date for the determination of the
stockholders entitled to notice of, or to vote at, any such meeting, or entitled
to receive payment of any such dividend or distribution, or to receive any such
allotment of rights, or to exercise the rights in respect to any such change,
conversion, or exchange of capital stock. In such case, only such stockholders
as shall be stockholders of record on the date so fixed shall be entitled to
notice of, or to vote at, such meeting, or to receive payment of such dividend
or distribution, or to receive such allotment of rights, or exercise such
rights, as the case may be, notwithstanding any transfer of stock on the books
of the company after any record date fixed as aforesaid.
ARTICLE VII
Fiscal Year
The fiscal year of the Company shall end on the 31st day of December.
30
<PAGE>
ARTICLE VIII
Amendments
Unless otherwise provided in the Articles of Incorporation, as
amended, these bylaws may be amended by a vote of two-thirds of the members of
the Board of Directors at any regular or special meeting duly convened after the
notice of that purpose, subject always to the power of stockholders under law
and in accordance with the Articles of Incorporation, as amended, to change such
action.
ARTICLE IX
Limitation on Directors' Personal Liability;
Indemnification of Directors and Officers
SECTION 1. A director of the Company shall not be personally liable
for monetary damages for any action taken or failure to take any action unless
the director has breached or failed to perform the duties of his or her office
under Section 8363 of the Pennsylvania Directors' Liability Act and such breach
or failure to perform constitutes self-dealing, willful misconduct or
recklessness; provided, however, that the foregoing provision shall not
eliminate or limit the liability of a director (i) for any responsibility or
liability of such director pursuant to any criminal statute, or (ii) for any
liability of a director for the payment of taxes pursuant to local, state or
federal law.
SECTION 2. The Company shall indemnify to the full extent authorized
or permitted by law any person made, or threatened to be made, a party to or
otherwise involved in (as a witness or otherwise) an action, suit or proceeding
(whether civil, criminal, administrative or investigative, and whether by or in
the right of the Company or otherwise) by reason of the fact that the person is
or was a director or officer of the Company or while a director or officer of
the Company, either serves or served as a director, officer, trustee, employee
or agent of any other related enterprise or in connection with a related
employee benefit plan at the request of the Company or serves or served as a
director, officer, trustee, employee or agent of any other unrelated enterprise
at the specific written request of the Company against any expenses and
liability actually incurred including without limitation judgments and amounts
paid or to be paid in settlement of and in actions brought by or in the right of
the Company. Expenses incurred by such a person in defending a civil or
criminal action, suit or proceeding or in enforcing any right under this Article
shall be paid by the Company in advance of the final disposition of the action,
suit or proceeding upon receipt of an undertaking by or on behalf of such person
to repay such amount to the extent it shall ultimately be determined that such
person is not entitled to be indemnified by the Company or, in the case of a
criminal action, the majority of the Board of Directors so determines. The
right to indemnification and advancement of expenses conferred in this Section
shall not be deemed exclusive of any other rights to which any person
indemnified may be entitled under any agreement, vote of stockholders or
directors or otherwise, the Company having the express authority to enter such
agreements as the Board of Directors deems appropriate for the indemnification
of and advancement of expenses, including the creation of a fund therefor or
equivalent guarantee, to present or future directors and officers of the Company
in connection with their service as director or officer of the Company or their
service as director, officer, trustee, employee or agent of any other enterprise
or in connection with an employee benefit plan at the request of the Company.
The right to indemnification and the advancement of expenses provided in this
Section shall be a contract right, shall continue as to a person who has ceased
to serve in the capacities described herein, and shall inure to the benefit of
the heirs, executors and administrators of such person.
SECTION 3. No amendment, alteration or repeal of this Article IX, nor
the adoption of any provision inconsistent with this Article IX, shall
31
<PAGE>
Exhibit No. 11
Computation for Earnings Per Share
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------- -----------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY
- - -------
Common Stock and Common Stock Equivalents
- - -----------------------------------------
Average number of common shares
outstanding including shares
issuable under stock options 37.9 37.2 37.8 37.2
====== ====== ====== ======
Net Earnings Per Share
- - ----------------------
Net earnings $ 53.3 $ 31.9 $101.3 $ 43.2
Less:
Dividend requirement on Series A
convertible preferred stock 4.8 4.8 9.5 9.6
Plus:
Tax benefit on dividends
applicable to unallocated
preferred shares 1.2 1.3 2.4 2.6
------ ------ ------ ------
Net earnings applicable
to common stock $ 49.7 $ 28.4 $ 94.2 $ 36.2
====== ====== ====== ======
Net earnings per share of common
stock $ 1.31 $ .76 $ 2.49 $ .97
====== ====== ====== ======
FULLY DILUTED
- - -------------
Common Stock and Common Stock Equivalents
- - -----------------------------------------
Average number of common shares
outstanding including shares
issuable under stock options 37.9 37.2 37.8 37.2
Average number of common shares
issuable under the Employee
Stock Ownership Plan 5.5 6.0 5.5 6.0
------ ------ ------ ------
Average number of common and common
equivalent shares outstanding 43.4 43.2 43.3 43.2
====== ====== ====== ======
Pro forma Adjustment to Net Earnings
- - ------------------------------------
Net earnings as reported $ 53.3 $ 31.9 $101.3 $ 43.2
Less:
Increased contribution to Employee
Stock Ownership Plan assuming
conversion of preferred shares
to common 1.9 2.1 3.9 4.2
Net reduction in tax benefits
assuming conversion of Employee
Stock Ownership Plan preferred
shares to common .4 .2 .6 .4
------ ------ ------ ------
Pro forma net earnings $ 51.0 $ 29.6 $ 96.8 $ 38.6
====== ====== ====== ======
Fully diluted net earnings per
share $ 1.18 $ .68 $ 2.23 $ .89
====== ====== ====== ======
</TABLE>
33
<PAGE>
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
August 9, 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
August 9, 1994
34
