<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
------------------------------------------------
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
-----------------------------
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
October 31, 1995 - 36,850,245
"This amendment is being filed solely to correct the number of shares of
registrant's common stock outstanding as set forth above."
<PAGE>
(FORM 10-Q)
Part I - Financial Information
------------------------------
Item 1. Financial Statements
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Operating results for the third quarter and first nine months of 1995, compared
with the corresponding periods of 1994 included in this report, are unaudited.
In the opinion of the Company, all adjustments of a normal recurring nature have
been included to provide a fair statement of the results for the reporting
periods presented. Three and nine months' results are not necessarily indicative
of annual earnings.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Operations
-------------------------------------
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
1995 1994(a) 1995 1994(a)
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $744.8 $715.3 $2,175.8 $2,047.3
Cost of goods sold 516.0 483.5 1,512.9 1,402.5
------ ------ -------- --------
Gross profit 228.8 231.8 662.9 644.8
Selling, general & administrative
expenses 134.5 130.6 402.1 380.9
Restructuring charges 56.8 -- 72.4 --
------ ------ -------- --------
Operating income 37.5 101.2 188.4 263.9
Interest expense 8.4 7.2 25.3 22.7
Other expense (income), net 1.1 1.6 2.2 1.5
------ ------ -------- --------
Earnings before income taxes(b) 28.0 92.4 160.9 239.7
Income taxes 8.6 30.8 54.4 76.8
------ ------ -------- --------
NET EARNINGS (c)(d)(e) $ 19.4 $ 61.6 $ 106.5 $ 162.9
====== ====== ======== ========
Net earnings per share of common
stock:(f)
Primary $ .42 $ 1.54 $ 2.55 $ 4.03
Fully Diluted $ .40 $ 1.37 $ 2.33 $ 3.60
Dividends paid per common share $ .36 $ .32 $ 1.04 $ .94
Average number of common shares
and common equivalent shares
outstanding:
Primary 37.4 37.8 37.6 37.8
Fully Diluted 42.8 43.4 43.0 43.4
</TABLE>
See page 3 for explanation of (a), (b), (c), (d), (e) and (f). Also see
accompanying footnotes to the financial statements beginning on page 8.
2
<PAGE>
(FORM 10-Q)
(a) 1994 has been reformatted and certain expenses have been reclassified to
conform with data published in the 1994 Armstrong annual report.
(b) Depreciation and amortization charged against earnings before income taxes
amounted to $34.8 million and $101.2 million in the three months and nine months
ended September 30, 1995, respectively, and $32.1 million and $95.5 million in
the three months and nine months ended September 30, 1994.
(c) Net earnings include restructuring charges for the three months and nine
months ended September 30, 1995, of $36.7 million and $46.8 million,
respectively. The charges relate largely to reorganization and salaried and
hourly employee reductions in both North American and European organizations and
the plans to close a plant in Braintree, Massachusetts.
(d) Net earnings for the nine months ended September 30, 1994, include $9.1
million of gains resulting from the resolution of tax audits and sale of the
company's majority interest in BEGA/US, Inc.
(e) Net earnings for the three months and nine months ended September 30, 1994,
include a gain of $9.5 million after tax. This gain related to actions taken by
the company to qualify long-term employees for primary coverage under Medicare,
reducing the company's health care liability.
(f) 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>
(FORM 10-Q)
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
<TABLE>
<CAPTION>
Unaudited
Assets September 30, 1995 December 31, 1994
------ ------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18.4 $ 12.0
Accounts receivable less allowance 359.0 320.0
Inventories:
Finished goods $ 219.6 $ 179.1
Work in process 36.7 35.5
Raw materials and supplies 79.6 78.9
-------- --------
Total inventories 335.9 293.5
Income tax benefits 43.9 35.9
Other current assets 29.5 29.6
-------- --------
Total current assets 786.7 691.0
Property, plant, and equipment 2,315.0 2,168.7
Less accumulated depreciation
and amortization 1,206.8 1,098.8
-------- --------
Net property, plant, and equipment 1,108.2 1,069.9
Insurance for asbestos-related
liabilities(a) 184.0 198.0
Other noncurrent assets 277.0 273.6
-------- --------
Total assets $2,355.9 $2,232.5
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 63.7 $ 17.9
Current installments of long-term debt 59.0 19.5
Accounts payable and accrued expenses 363.2 327.4
Income taxes 25.2 22.5
-------- --------
Total current liabilities 511.1 387.3
Long-term debt 197.4 237.2
ESOP loan guarantee 240.4 245.5
Postretirement and postemployment benefits 271.1 270.4
Asbestos-related liabilities (a) 184.0 198.0
Other long-term liabilities 132.1 118.3
Deferred income taxes 25.8 32.1
Minority interest in subsidiaries 10.5 8.6
-------- --------
Total noncurrent liabilities 1,061.3 1,110.1
Shareholders' equity:
Convertible preferred stock at
redemption value $ 258.9 $ 261.6
Common stock 51.9 51.9
Capital in excess of par value 46.9 39.3
Reduction for ESOP loan guarantee (228.2) (233.9)
Retained earnings 1,137.4 1,076.8
Foreign currency translation (b) 20.2 8.3
Treasury stock (503.6) (468.9)
-------- --------
Total shareholders' equity 783.5 735.1
-------- --------
Total liabilities and shareholders'
equity $2,355.9 $2,232.5
======== ========
</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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(FORM 10-Q)
(a) The asbestos-related liability in the amount of $184.0 million represents
the estimated liability and defense cost to resolve approximately 65,000
personal injury claims pending against the Company as of the end of the third
quarter 1995. The insurance asset in the amount of $184.0 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>
1995
----
(millions)
<S> <C>
Balance at beginning of year $ 8.3
Nine months' translation adjustments and
hedging of foreign investments 12.7
Allocated income taxes (.8)
-----
Balance at September 30, 1995 $20.2
=====
</TABLE>
5
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(FORM 10-Q)
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1995 1994
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 106.5 $ 162.9
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 101.2 95.5
Deferred income taxes (5.2) 15.7
Loss from restructuring activities 72.4 --
Restructuring payments (9.2) (17.3)
Changes in operating assets and liabilities net of
effect of restructuring and acquisitions:
(Increase) in receivables (34.6) (71.4)
(Increase) decrease in inventories (37.9) 5.8
(Increase) decrease in other current assets (3.5) 22.4
(Increase) in other noncurrent assets (24.2) (35.9)
Increase in accounts payable, accrued
expenses, income taxes payable 7.5 49.3
Increase in other long-term liabilities 9.2 1.3
Other, net (8.8) (13.4)
------- ------
Net cash provided by operating activities 173.4 214.9
------- ------
Cash flows from investing activities:
Purchases of property, plant, and equipment (117.3) (96.7)
Investment in computer software (8.6) (2.2)
Proceeds from sale of land and facilities 6.9 10.9
Acquisitions (14.0) --
------- ------
Net cash used for investing activities (133.0) (88.0)
------- ------
Cash flows from financing activities:
Increase (decrease) in short-term debt 43.9 (70.0)
Issuance of long-term debt -- .6
Reduction of long-term debt (.1) (5.5)
Cash dividends paid (48.1) (44.7)
Purchase of common stock for the treasury (33.2) --
Proceeds from exercised stock options 5.2 8.2
Other, net (3.5) (5.6)
------ -------
Net cash used for financing activities (35.8) (117.0)
Effect of exchange rate changes on cash and cash
equivalents 1.8 1.3
------ -------
Net increase in cash and cash equivalents $ 6.4 $ 11.2
====== =======
Cash and cash equivalents at beginning of period $ 12.0 $ 9.1
====== =======
Cash and cash equivalents at end of period $ 18.4 $ 20.3
====== =======
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Supplemental Cash Flow Information:
Interest paid $ 16.4 $ 16.8
Income taxes paid $ 62.7 $ 35.1
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</TABLE>
See accompanying footnotes to the financial statements beginning on page 8.
6
<PAGE>
(FORM 10-Q)
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------- -------------------------
1995 1994(b) 1995 1994(b)
---- -------- ---- ----
<S> <C> <C> <C> <C>
Net trade sales:
- ---------------
Floor coverings $345.3 $335.3 $ 982.1 $ 961.0
Building products 178.8 166.5 519.5 472.2
Furniture 133.0 133.0 408.3 385.2
Industry products 87.7 80.5 265.9 228.9
------ ------ ------- -------
Total net sales $744.8 $715.3 $2,175.8 $2,047.3
====== ====== ======= =======
Operating income:(a)
- -----------------
Floor coverings $ 32.5 $ 50.7 $116.1 $ 145.9
Building products(c) 21.0 24.3 72.4 69.9
Furniture 7.8 8.2 28.1 25.1
Industry products (4.5) 12.7 3.6 32.9
Unallocated corporate
expense(d) (19.3) 5.3 (31.8) (9.9)
------ ------ ------ ------
Total operating income $ 37.5 $101.2 $ 188.4 $ 263.9
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
--------------------- ------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
(a) Restructuring charges
included in operating income:
Floor coverings $(25.0) -- $(25.0) --
Building products (6.3) -- (6.3) --
Furniture (.6) -- (.6) --
Industry products (15.8) -- (31.4) --
Unallocated corporate
expense (9.1) -- (9.1) --
------ ------
Total restructuring charges
in operating income $(56.8) -- $(72.4) --
====== ======
</TABLE>
(b) Certain 1994 expenses, principally employee benefit costs, that were
previously unallocated are included in operating income for the respective
industry segments to conform with data published in the 1994 Armstrong
annual report.
(c) For the nine months ended September 30, 1994, operating income includes a
$5.9 million before-tax gain from sale of the company's majority interest
in BEGA/US, Inc.
(d) For the three months and nine months ended September 30, 1994, operating
income includes a gain of $14.6 million before tax related to actions taken
by the company to qualify long-term disabled employees for primary coverage
under Medicare, reducing the company's health care liability.
7
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(FORM 10-Q)
Note 1. The accompanying consolidated financial statements have been
- ------
reviewed by the Company's independent public accountants, KPMG Peat Marwick LLP,
in accordance with the established professional standards and procedures for
such limited review.
Note 2.
- ------
OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
The full report on the Asbestos-Related Litigation immediately follows this
summary.
The Company is involved, as of September 30, 1995, in approximately 65,000
pending personal injury asbestos claims and lawsuits, and 46 pending claims and
lawsuits involving asbestos-containing products in buildings. The Company's
insurance carriers provide coverage for both types of claims. The personal
injury claims only (not property damage claims) are handled by the Center for
Claims Resolution (the "Center"). Personal injury claims in the federal courts
have been transferred by the Judicial Panel for Multidistrict Litigation to the
Eastern District Court of Pennsylvania for pretrial purposes. Pending state
court cases have not been directly affected by the transfer. A settlement class
action that includes essentially all future personal injury claims against
Center members was filed in the Federal District Court for the Eastern District
of Pennsylvania. The court has tentatively approved the settlement although the
settlement will become final only after certain issues, including insurance
coverage for class members' claims are resolved, and appeals are exhausted,
which could take up to several years.
An Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement")
provides for a settlement of insurance coverage for personal injury claims with
certain primary carriers and excess carriers. Settlement agreements which
complement Wellington have been signed with one primary carrier and certain
excess carriers. Litigation that was initiated by the Company in California for
insurance coverage for asbestos-related personal injury and property damage
lawsuits and claims is on appeal before the California Supreme Court from
favorable final decisions in the trial court and by the California Court of
Appeal. The California litigation did not encompass coverage for non-products
claims that is included in the Company's primary policies and certain excess
policies. This additional coverage is substantial and negotiations are underway
with several primary carriers. If the non-products coverage issues are not
resolved through negotiation, the Company can pursue alternative dispute
resolution proceedings against the primary and certain excess carriers pursuant
to the Wellington Agreement.
The Company believes that an estimated $184 million in liability and defense
costs recorded on its balance sheet will be incurred to resolve approximately
65,000 asbestos-related personal injury claims against the Company as of
September 30, 1995. An insurance asset in the amount of $184 million
recorded on the balance sheet reflects the Company's belief in the availability
of insurance in this amount to cover the liability for these pending claims.
The Company also projects the maximum cost in the settlement class action as a
reasonably possible additional liability of $245 million for a ten-year period;
a portion of such additional projected liability may not be covered by the
Company's ultimately applicable insurance recovery. Although subject to
uncertainties and limitations, the Company also believes it is probable that
substantially all of the expenses and liability payments associated with the
asbestos-related property damage claims will be covered by insurance.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the settlements with other insurance carriers, the results of the
trial phase and the intermediate appellate stage of the
8
<PAGE>
(FORM 10-Q)
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the proposed settlement class action, and its
experience, the Company believes the asbestos-related lawsuits and claims
against the Company would not be material either to the financial condition of
the Company or to its liquidity although the net effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in a future period.
The full report on the asbestos-related litigation is set forth below:
Asbestos-Related Litigation
The Company is one of many defendants in pending lawsuits and claims involving,
as of September 30, 1995, approximately 65,000 individuals alleging personal
injury from exposure to asbestos. Included in the above number are
approximately 14,500 lawsuits and claims from individuals who are included
in the approximately 87,000 individuals who have opted out of the settlement
class action referred to below. About 10,000 claims from purported settlement
class members have been received as of September 30, 1995. Most of these claims
have been evaluated as to whether they meet the class action criteria. Of
those claims, many do not qualify at this time for payment. (In late 1993, the
Company revised its claims handling procedures to provide for individual claim
information to be supplied by the Center for Claims Resolution, referred to
below. It is expected that this process will provide more current tracking of
outstanding claims. The reconciliation between the two systems continues. Claim
numbers in this note have been received from the Center and its consultants.)
Nearly all the personal injury suits and claims, except those claims covered by
the settlement class action, seek general and punitive damages arising from
alleged exposures, during various times, from World War II onward, to asbestos-
containing insulation products used, manufactured or sold by the companies
involved in the asbestos-related litigation. These claims against the Company
generally involve allegations of negligence, strict liability, breach of
warranty and conspiracy. The Company discontinued the sale of all asbestos-
containing insulation products in 1969. The claims generally allege that injury
may be determined many years (up to 40 years) after alleged exposure to asbestos
or asbestos-containing products. Nearly all suits name many defendants
(including both members of the Center and other companies), and over 100
different companies are reportedly involved. The Company believes that many
current plaintiffs are unimpaired. A few state and federal judges have
consolidated numbers of asbestos-related personal injury cases for trial, a
process that the Company has generally opposed as unfair. A large number of
suits and claims have either been put on inactive lists, settled, dismissed or
otherwise resolved, and the Company is generally involved in all stages of
claims resolution and litigation, including trials and appeals. While the
number of pending cases reflects a decrease during the past 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 parties to securing a comprehensive
resolution of pending as well as potential future asbestos-related personal
injury claims. The Judicial Panel for Multidistrict Litigation ordered the
transfer of all pending federal cases to a single court, the Eastern District of
Pennsylvania in Philadelphia, for pretrial purposes. The Company has supported
such action. Some of these cases are periodically released for trial, although
the issue of punitive damages is retained by the Eastern District Court. State
court cases have not been directly affected by the transfer. The Court in the
Eastern District has been instrumental in having the parties settle large
numbers of cases in various jurisdictions and has been receptive to different
approaches to the resolution of asbestos-related personal injury claims.
Settlement Class Action
9
<PAGE>
(FORM 10-Q)
A settlement class action that includes essentially all future asbestos-related
personal injury claims against members of the Center was filed in the Eastern
District of Pennsylvania, on January 15, 1993. The settlement class action is
designed to establish a non-litigation system for the resolution of essentially
all future asbestos-related personal injury claims against the Center members
including the Company. Other companies that are not Center members may be able
to join the class action later. The class action proposes a voluntary
settlement that offers a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they meet certain exposure and medical
criteria. Compensation amounts are derived from historical settlement data.
Under limited circumstances and in limited numbers, qualifying claimants may
choose to arbitrate or litigate certain claims after their claims are processed
within the system. No punitive damages will be paid under the proposed
settlement. The settlement is designed to minimize transactional costs,
including attorneys fees, and to relieve the courts of the burden of handling
future claims. Each member of the Center has an obligation for its own fixed
share in this proposed settlement. The District Court has ruled that claimants
who neither filed a lawsuit against the members of the Center nor filed an
exclusion request form are subject to the class action. The class action does
not include claims deemed otherwise not covered by the class action settlement,
or claims for property damage. Annual case flow caps and compensation ranges for
each compensable medical category including amounts paid even more promptly
under the simplified payment procedures, have been established for an initial
period of ten years. Case flow caps may be increased if they were substantially
exceeded during the previous five-year period. The case flow figures and annual
compensation levels are subject to renegotiation after the initial ten-year
period. On August 16, 1994, the Court tentatively approved the settlement, and
notification has been provided to class members. Approximately 87,000
individuals have opted out. The opt outs are not claims as such but rather are
reservations of rights to possibly bring claims in the future. The settlement
will become final only after certain issues, including insurance coverage, are
resolved and appeals are exhausted. This process could take up to several years.
The Center members have stated their intention to resolve over a five-year
period the personal injury claims that were pending when the settlement class
action was filed. A significant number of claims have been settled or are
currently the subject of negotiations.
The Company is seeking agreement from its insurance carriers or a binding
judgment against them that the class action will not jeopardize existing
insurance coverage; and the class action is contingent upon such an agreement or
judgment. With respect to carriers that do not agree, this matter will be
resolved either by alternative dispute resolution, in the case of carriers that
subscribed to the Wellington Agreement referred to below, or else by litigation.
The Company believes that the future claimants settlement class action will
receive final approval. However, the potential exists that an appellate court
will reject the settlement class action or that the above-referenced companion
insurance action will not be successful.
Insurance Carriers/Wellington Agreement
The Company's insurance carriers provide defense and indemnity coverage for
asbestos-related personal injury claims. All of the Company's primary insurers
are paying for the defense of property damage claims. Three of the four
carriers are paying for the defense under an Interim Agreement pending the final
resolution of the coverage issues for property damage claims in the California
insurance litigation. The remaining carrier entered into a separate agreement
with the Company resolving coverage issues for both personal injury and property
damage claims.
Various insurance carriers provide products and nonproducts coverage for the
Company's asbestos-related personal injury claims and product coverage for
10
<PAGE>
(FORM 10-Q)
property damage claims. Certain policies providing products coverage for
personal injury claims have been exhausted. A list of the insurance carriers
that currently provide coverage or whose policies have made available or provide
personal injury, nonproducts or property damage coverages is as follows:
Reliance Insurance Company; Aetna Casualty and Surety Company; Liberty
Mutual Insurance Companies; Travelers Insurance Company; Fireman's Fund
Insurance Company; Insurance Company of North America; Lloyds of London; various
London market companies; Fidelity and Casualty Insurance Company; First State
Insurance Company; U.S. Fire Insurance Company; Home Insurance Company; Great
American Insurance Company; American Home Assurance Company and National Union
Fire Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier, that
insured the Company for $25 million of bodily injury products coverage, became
insolvent for which the Company is pursuing claims with the state guaranty
associations. The gap in coverage created by the Midland Insurance Company
insolvency will be covered by other insurance. Certain companies in the London
block of coverage and certain carriers providing coverage at the excess level
for property damage claims only have also become insolvent. In addition,
certain insurance carriers that were not in the Company's California insurance
litigation also provide insurance for asbestos-related property damage claims.
The Company along with 52 other companies (defendants in the asbestos-related
litigation and certain of their insurers) signed the 1985 Agreement Concerning
Asbestos-Related Claims (the "Wellington Agreement"). This Agreement provided
for a final settlement of nearly all disputes concerning insurance for asbestos-
related personal injury claims between the Company and three of its primary
insurers and seven of its excess insurers 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 insurance coverage. One of the
Company's larger excess insurance carriers entered into a settlement agreement
in 1986 with the Company under which payments also were made through the
Facility and are now being paid through the Center 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.
The Wellington Agreement also provided for the establishment of the Facility to
evaluate, settle, pay and defend all personal injury claims against member
companies. The insurance coverage designated by the Company for coverage in the
Facility consisted of all relevant insurance policies issued to the Company from
1942 through 1976. Liability payments and allocated expenses were allocated by
formula to each defendant, including the Company. The Facility, now dissolved,
was negatively impacted by concerns of certain members about their share of
liability payments and allocated expenses and by certain insurer concerns about
defense costs and Facility operating expenses.
Center for Claims Resolution
A new asbestos-related personal injury claims handling organization known as the
Center for Claims Resolution (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 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
11
<PAGE>
(FORM 10-Q)
board. The Center adopted many of the conceptual features of the Facility, and
the members' insurers generally provide coverage under the Wellington Agreement
terms. The Center has operated under a revised formula for shares of liability
payments and defense costs and has defended the members' interests and addressed
the claims in a manner consistent with the prompt, fair resolution of
meritorious claims. In late 1991, the Center sharing formula was revised to
provide that members will pay only on claims in which the member is a named
defendant. At that time, this change caused a slight increase in the
Company's share,. Subsequent share adjustments by the Center have resulted in
an increased liability share for the Company in certain areas. In the
settlement class action, each member will pay its own fixed share of every
claim.
A large share member earlier withdrew from the Center. 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, the shares of remaining
members will not be increased. The Center members have reached an agreement
annually with the insurers relating to the continuing operation of the Center
and expect that the insurers will provide funding for the Center's operating
expenses for its eighth year of operation. The Center will continue to process
pending claims as well as future claims in the settlement class action.
An increase in the utilization of the Company's insurance also has occurred as a
result of the class action settlement and the commitment to attempt to resolve
pending claims within five years. Aside from the class action settlement, no
forecast can be made for future years regarding either the rate of claims, the
rate of pending and future claims resolution by the Center, or the rate of
utilization of Company insurance. If the settlement class action is finalized
and all appeals are exhausted, projections of the rate of disposition of future
cases may be made.
Property Damage Litigation
The Company is also one of many defendants in a total of 46 pending lawsuits
and claims, including one class action, as of September 30, 1995, brought
by public and private building owners. These lawsuits and claims include
allegations of damage to buildings caused by asbestos-containing products and
generally claim compensatory and punitive damages and equitable relief,
including reimbursement of expenditures, for removal and replacement of such
products. 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. Among the lawsuits that have been resolved
are four class actions which had been certified, each involving a distinct class
of building owner: public and private schools; Michigan state public and private
schools; colleges and universities, and private property owners who leased
facilities to the federal government. In three of these class actions, the
courts have given final approval and dismissed the actions with prejudice. In
the college and universities class action, a settlement has been reached with
the class representatives and is subject to a fairness hearing. The Company
vigorously denies the validity of the allegations against it contained in these
suits and claims. Increasing defense costs, paid by the Company's insurance
carriers either under reservation or settlement arrangement, will be incurred.
As a consequence of the California insurance litigation discussed elsewhere in
this note, the Company believes that it is probable that costs of the property
damage litigation that are being paid by the Company's insurance carriers under
reservation of rights will not be subject to recoupment. These suits and claims
were not handled by the former Facility nor are they being
12
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handled by the Center.
Certain co-defendant companies in the asbestos-related litigation have filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. As a
consequence, this litigation with respect to these co-defendants (with several
exceptions) has been stayed or otherwise impacted by the restrictions placed on
proceeding against these co-defendants. Due to the uncertainties involved, the
long-term effect of these Chapter 11 proceedings on the litigation cannot be
predicted.
California Insurance Coverage Lawsuit
The California trial court issued final decisions in various phases in the
insurance lawsuit including a decision that the trigger of coverage for personal
injury claims was continuous from exposure through death or filing of a claim.
The court also found that a triggered insurance policy should respond with full
indemnification up to exhaustion of the policy limits. The court concluded that
any defense obligation ceases upon exhaustion of policy limits. Although not as
comprehensive, another important decision in the trial established a favorable
defense and indemnity coverage result for asbestos-related property damage
claims; the final decision holds that, in the event the Company is held liable
for an underlying property damage claim, the Company would have coverage under
policies in effect during the period of installation and during any subsequent
period in which a release of fibers occurred. 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 accepted review pending its review
of related issues in another California case. The California Supreme Court
recently ruled favorably to the insured company on the issues in that other case
but has taken no action with respect to the Company's lawsuit. 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. In 1994, the Company also settled coverage issues for asbestos-related
claims with a significant excess carrier.
Non-Products Insurance Coverage
Non-products insurance coverage is included in the Company's primary insurance
policies and certain excess policies for non-products claims. The settlement
agreement referenced above with one primary carrier included an amount for non-
products claims. Non-products claims include claims that may have arisen
13
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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 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 various 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, has for certain insurance
periods coverage rights under some of the Company's insurance policies, and has
accessed such coverage on the same basis as the Company. It was a subscriber to
the Wellington Agreement, but is not a member of the Center. The Company and
ACandS, Inc., have negotiated a settlement agreement which reserves for ACandS,
Inc. a certain amount of insurance from the joint policies solely for its own
use for asbestos-related claims.
Conclusions
Based upon the Company's experience with this litigation and 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 that are
referred to herein about which uncertainties exist. As a result of the
Wellington Agreement, the reserve was earlier reduced for that portion
associated with pending personal injury suits and claims. As a result of the
March 31, 1989, settlement referenced above, the Company received $11.0 million,
of which approximately $4.4 million was credited to income with nearly all of
the balance being recorded as an increase to its reserve for potential
liabilities and other costs and uncertainties associated with the asbestos-
related litigation. Future costs of litigation against the Company's insurance
carriers and other legal costs indirectly related to the litigation will be
expensed outside the reserve.
The Company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
Company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
flow caps to be negotiated after the initial ten-year period for the settlement
class action or the compensation levels to be negotiated for such claims or the
scope of its non-products coverage ultimately deemed available or the ultimate
conclusion of the California insurance coverage litigation.
Subject to the uncertainties and limitations referred to in this note and based
upon its experience and other factors also referred to in this note, the Company
believes that the estimated $184 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 65,000
asbestos-related personal injury claims pending against the Company as of
September 30, 1995. These claims include those that were filed for the period
from January 1, 1994, to January 24, 1994, and which were previously treated as
potentially included within the settlement class action, and those
14
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claims filed by claimants who have been identified as having filed exclusion
request forms to opt out of the settlement class action. A ruling from the Court
established January 24, 1994, as the date after which any asbestos-related
personal injury claims filed by non-opt-out claimants against the Company or
other members of the Center for Claims Resolution are subject to the settlement
class action. In addition to the currently estimated pending claims and any
claims filed by individuals deemed to have opted out of the settlement class
action, any claims otherwise determined not to be subject to the settlement
class action, will be resolved outside the settlement class action. The Company
does not know how many such claims ultimately may be filed by claimants deemed
to have opted out of the class action or by claimants otherwise determined not
to be subject to the settlement class action.
An insurance asset in the amount of $184 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation. The Company also notes that, based on maximum
mathematical projections covering a ten-year period from 1994 to 2004, its
estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability may
not be covered by the Company's ultimately applicable insurance recovery.
However, the Company believes that any after-tax impact on the difference
between the aggregate of the estimated liability for pending cases and the
estimated cost for the ten-year maximum mathematical projection, and the
probable insurance recovery, would not be material either to the financial
condition of the Company or to its liquidity, although it could be material to
earnings if it is determined in a future period to be appropriate to record a
reserve for this difference. The period in which such a reserve may be recorded
and the amount of any reserve that may be appropriate cannot be determined at
this time. Subject to the uncertainties and limitations referred to elsewhere in
this note and based upon its experience and other factors referred to above, the
Company believes it is probable that substantially all of the expenses and any
liability payments associated with the asbestos-related property damage claims
will be paid under an existing interim agreement, by insurance coverage
settlement agreements and through additional coverage reasonably anticipated
from the outcome of the insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the trial phase and the intermediate appellate stage of the California
insurance coverage litigation, the remaining reserve, the establishment of the
Center, the proposed settlement class action, and its experience, the Company
believes the asbestos-related lawsuits and claims against the Company would not
be material either to the financial condition of the Company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
_____________________________
TINS Litigation
In 1984, suit was filed against the Company in the U. S. District Court for the
District of New Jersey (the "Court") by The Industry Network System, Inc.
(TINS), a producer of video magazines in cassette form, and Elliot Fineman, a
consultant (Fineman and The Industry Network System, Inc. v. Armstrong World
----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
- ----------------
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
15
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in resilient floor coverings to obtain a monopoly in the video magazine market
for floor covering retailers in violation of federal antitrust laws. The Company
denied all allegations. On April 19, 1991, the jury rendered a verdict in the
case, which as entered by the court in its order of judgment, awarded the
plaintiffs the alternative, after all post-trial motions and appeals were
completed, of either their total tort claim damages (including punitive
damages), certain pre-judgment interest, and post-judgment interest or their
trebled antitrust claim damages, post-judgment interest and attorneys fees. The
higher amount awarded to the plaintiffs as a result of these actions totaled
$224 million in tort claim damages and pre-judgment interest, including $200
million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the plaintiff's
appeal of these rulings, the Court of Appeals sustained the U. S. District
Court's decision granting the Company a new trial, but overturned in certain
respects the District Court's grant of judgment for the Company notwithstanding
the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments, reversed the trial judge's
judgment for Armstrong on TINS' claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS' claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS' claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS' alleged breach of contract claim.
The Court of Appeals, in affirming the trial court's new trial order, agreed
that the trial court did not abuse its discretion in determining that the jury's
verdict was "clearly against the weight of the evidence" and that a new trial
was required due to the misconduct of plaintiffs' counsel.
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The Company
was informed on February 22, 1993, that the Supreme Court denied its Petition.
After the case was remanded by the Third Circuit Court of Appeals in
Philadelphia to the U.S. District Court in Newark, New Jersey, a new trial
commenced on April 26, 1994. TINS claimed damages in the form of lost profits
ranging from approximately $19 million to approximately $56 million. Plaintiff
also claimed punitive damages in conjunction with its request for tort damages.
Other damages sought included reimbursement of attorneys' fees
16
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(FORM 10-Q)
and interest, including prejudgment interest.
On August 19, 1994, the jury returned a verdict in favor of the Company finding
that the Company had not caused damages to TINS. The court subsequently entered
judgment in the Company's favor based upon the verdict. TINS motion for a new
trial based upon alleged inaccurate jury instructions and alleged improper
evidentiary rulings during the trial, was denied and TINS filed an appeal with
the U.S. Court of Appeals for the Third Circuit. On October 11, 1995, the case
was argued before a panel of the U.S. Court of Appeals for the Third Circuit,
and on October 20, 1995, the court issued a Judgment Order affirming the 1994
district court verdict in favor of the Company. On November 2, 1995, TINS filed
a Petition for Rehearing by the same panel.
_____________________________
Environmental Remediation
Thomasville Furniture Industries, Inc. and four 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, USEPA issued a revised plan which recommended a reduced $3.5 million
alternative, subject to additional costs depending on test results. In
September 1994, the USEPA issued a Record of Decision ("ROD") in the matter
providing two alternative remedies for the site. Both options provide for
limited capping and long-term groundwater monitoring, as well as limited source
control and groundwater treatment in the event monitoring demonstrates
contaminant migration. On September 29, 1995, the USEPA issued an order to
Thomasville ordering Thomasville to implement the ROD. Concurrent with that
order, USEPA also signed a de minimus settlement with three other PRPs,
resulting in the payment to USEPA of $469,825 to be applied for remediation
costs at the site. Thomasville's consultants current estimate for the cost of
required remediation at the site is approximately $2.2 million, subject to
additional costs depending on long-term monitoring results. The USEPA's current
estimate, however, is $4.34 million.
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 has been called upon to implement
the remedy identified by the ROD. Thomasville anticipates, however, that the
remaining PRP at the site will be required to contribute to the final cost of
the remedy.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Financial Condition
- -------------------
Cash provided by operating activities was sufficient to cover normal working
capital requirements, payment of dividends and investment in plant, property and
equipment. The remaining cash combined with increases in short-term debt, cash
proceeds from exercised stock options and sale of assets were used to cover the
repurchase of shares of the Company's common stock for the treasury, acquisition
of a gasket materials and specialty paper manufacturing facility, the increase
in cash and cash equivalents and other sundry investing activities.
17
<PAGE>
(FORM 10-Q)
The Company announced during the third quarter that the Company and Dal-Tile
International Inc. ("Dal-Tile") signed a letter of intent for the proposed
merger of the ceramic tile businesses of American Olean Tile Company, a wholly-
owned subsidiary, with Dal-Tile. In the merger, the Company would become a
significant minority shareholder of the combined companies and may, under
certain circumstances, have the opportunity to increase its holdings in the
future. The current majority owner of Dal-Tile, AEA Investors Inc., its
management and shareholder group, would be the controlling shareholders of the
combined companies following the merger. Completion of the transaction is
subject to the execution of a definitive combination agreement. If an agreement
is reached by year-end, a substantial loss will be recorded on the business
combination.
During the third quarter, the Company sold the champagne cork business in Spain
for an after-tax gain of $0.5 million and announced its intention to discuss
with potential buyers the possible sale of the textile products operation. These
actions are representative of the Company's overall strategy to concentrate its
efforts in its core businesses. The divestiture of the champagne cork business
and potential divestiture of the textile products business does not have a
significant impact on the corporate financial performance of the Company.
In November 1994, the Board of Directors authorized the Company to repurchase up
to 2.5 million shares of its common stock, either in the open market or in
negotiated transactions. During the first nine months of 1995, the Company
repurchased 640,700 shares with a cash outlay of $32.6 million. Since the
inception of the program, the Company has repurchased 910,700 shares with a
total cash outlay of $43.1 million as of September 30, 1995.
Working capital was $275.6 million as of September 30, 1995, $7.9 million higher
than the $267.7 million recorded at June 30, 1995, and $28.1 million lower than
the $303.7 million recorded at year-end 1994. The reduction in working capital
through September 1995 resulted primarily from the $85.3 million increase in
short-term debt and current installments of long-term debt and the $38.5 million
increase in accounts payable, accrued expenses and income taxes payable,
resulting principally from accruals for the 1995 restructuring actions.
Partially offsetting the working capital decrease were higher levels of accounts
receivable, inventories, and other assets including cash totaling $95.7 million.
Higher sales levels for the quarter were the primary reason for the $39.0
million increase in receivables. The $42.4 million increase in inventories was
the result of the building of finished stock for anticipated service level
requirements. Included in these increases were approximately $9.0 million due
to translation of foreign currency receivables and inventories to U.S. dollars
at higher exchange rates.
The ratio of current assets to current liabilities was 1.54 to 1 as of September
30, 1995, and 1.51 to 1 as of June 30, 1995, compared with 1.78 to 1 as of
December 31, 1994.
Long-term debt, excluding the Company's guarantee of the ESOP loan, was reduced
by $39.8 million in the first nine months of 1995. At September 30, 1995, long-
term debt of $197.4 million represented 14.7 percent of total capital compared
with 19.0 percent at the end of 1994. The September 30, 1995 and 1994 year-end
ratio of total debt (including the Company's financing of the ESOP loan) as a
percent of total capital was 41.7 percent and 41.4 percent, respectively.
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 9
through 15 and which should be read in connection with this discussion and
analysis. The Company does not know how many claims will be filed against it in
the future, nor the details thereof or of pending suits not fully reviewed, nor
the expense and any liability that may ultimately result therefrom, nor does the
Company know whether the settlement class action will ultimately succeed, the
number of individuals who will ultimately be deemed to have opted
18
<PAGE>
(FORM 10-Q)
out or who could file claims outside the settlement class action, nor the annual
claims flow caps to be negotiated after the initial 10-year period for the
settlement class action or the compensation levels to be negotiated for such
claims, nor the scope of its nonproducts coverage ultimately deemed available or
the ultimate conclusion of the California insurance coverage litigation.
Subject to the foregoing and based upon its experience and other factors also
referred to above, the Company believes that the estimated $184.0 million in
liability and defense costs recorded on the September 30, 1995, balance sheet
will be incurred to resolve an estimated 65,000 asbestos-related personal injury
claims pending against the Company as of September 30, 1995. These claims
include those that were filed for the period from January 1, 1994, to January
24, 1994, and which were previously treated as potentially included within the
settlement class action, and those claims filed by claimants who have been
identified as having filed exclusion request forms to opt out of the settlement
class action. A ruling from the Court established January 24, 1994, as the date
after which any asbestos-related personal injury claims filed by non-opt-out
claimants against the Company or other members of the Center for Claims
Resolution are subject to the settlement class action. In addition to the
currently estimated pending claims and any claims filed by individuals deemed to
have opted out of the settlement class action, any claims otherwise determined
not to be subject to the settlement class action will be resolved outside the
settlement class action. The Company does not know how many such claims
ultimately may be filed by claimants deemed to have opted out of the class
action or by claimants otherwise determined not to be subject to the settlement
class action.
An insurance asset in the amount of $184.0 million recorded on the balance sheet
as of September 30, 1995, reflects the Company's belief in the availability of
insurance in this amount to cover the liability in like amount referred to
above. Such insurance has either been agreed upon or is probable of recovery
through negotiation, alternative dispute resolution or litigation. The Company
also notes that, based on maximum mathematical projections covering a 10-year
period from 1994 to 2004, its estimated cost in the settlement class action
reflects a reasonably possible additional liability of $245 million. A portion
of such additional liability may not be covered by the Company's ultimately
applicable insurance recovery. However, the Company believes that any after-tax
impact on the difference between the aggregate of the estimated liability for
pending cases and the estimated cost for the 10-year maximum mathematical
projection, and the probable insurance recovery, would not be material either to
the financial condition of the Company or to its liquidity, although it could be
material to earnings if it is determined in a future period to be appropriate to
record a reserve for this difference. The period in which such a reserve may be
recorded and the amount of any reserve that may be appropriate cannot be
determined at this time. Subject to the uncertainties and limitations referred
to above and based upon its experience and other factors, the Company believes
it is probable that substantially all of the expenses and any liability payments
associated with the asbestos-related property damage claims will be paid under
an existing interim agreement, by insurance coverage settlement agreements and
through additional coverage reasonably anticipated from the outcome of the
insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the trial phase and the intermediate appellate stage of the California
insurance coverage litigation, the remaining reserve, the establishment of the
Center, the proposed settlement class action and its experience, the Company
believes the asbestos-related lawsuits and claims against the Company would not
be material either to the financial condition of the Company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
19
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(FORM 10-Q)
Reference is made to the litigation involving The Industry Network System, Inc.
(TINS), discussed on pages 15-17. On August 19, 1994, the jury returned a
verdict in favor of the Company finding that the Company had not caused damages
to TINS. The court subsequently entered judgment in the Company's favor based
upon the verdict. TINS motion for a new trial based upon alleged inaccurate
jury instructions and alleged improper evidentiary rulings during the trial was
denied and TINS filed an appeal with the U.S. Court of Appeals for the Third
Circuit. On October 11, 1995, the case was argued before a panel of the U.S.
Court of Appeals for the Third Circuit, and on October 20, 1995, the court
issued a Judgment Order affirming the 1994 district court verdict in favor of
the Company. On November 2, 1995, TINS filed a Petition for Rehearing by the
same panel.
Reference is also made to an environmental issue as discussed in Note 2 on page
17 to the financial statements included under Item 1 above.
In February 1995, Armstrong arranged a $200 million five-year revolving line of
credit with 10 banks. The line of credit is for general corporate purposes,
including support for commercial paper notes. Should a need develop for
additional financing, it is management's opinion that the Company has sufficient
financial strength to warrant the required support from lending institutions and
financial markets.
Consolidated Results
- --------------------
Third-quarter net sales of $745 million were an all-time sales record for any
quarter in the Company's history. These results were four percent higher than
the $715 million recorded in the third-quarter of 1994. About one-third of this
increase was because of translating foreign currencies to U.S. dollars at a
higher rate. The modest growth was largely due to increased sales in both the
global non-residential and U.S. home center end-use markets.
Net earnings for the quarter were $19.4 million for 1995, compared with $61.6
million in the third-quarter 1994. Net earnings per share of common stock for
the third quarter of 1995 were 42 cents on a primary basis and 40 cents on a
fully diluted basis. In 1994, third-quarter net earnings per share of common
stock were $1.54 on primary basis and $1.37 on a fully diluted basis.
During the third quarter, the Company recorded a $56.8 million charge before tax
($36.7 million after tax) for restructuring resulting from the Company's ongoing
efforts to streamline the organization and enhance operating efficiencies. The
restructuring charges primarily relate to severance and early retirement
incentives for approximately 670 employees, half of which are hourly and the
other half are salaried. Nearly 40 percent of the $56.8 million charge was
related to the North American resilient flooring business, while another 40
percent was related to European Operations, primarily in its industry products
and building products segments. The balance was related to corporate and other
operating segments. The charges are estimated to be evenly split between cash
payments over the next fifteen months and non-cash charges, primarily to cover
retirement-related expenses. It is anticipated that ongoing cost reductions and
productivity improvements should permit recovery of these charges in less than
two years. Including the restructuring charges resulting from plans to close a
plant in Braintree, Massachusetts, that was announced in the first quarter, the
1995 charges for restructuring activities are $72.4 million before tax or $46.8
million after tax.
The third-quarter 1994 earnings included a one-time before tax gain of $14.6
million or $9.5 million after tax representing a reduction in the Company's
estimated health care liability for employees on long-term disability. Cost of
goods sold in the third quarter was 69.3 percent of sales--slightly lower than
the 69.8 percent recorded in the second quarter and the 69.6 percent of the
first quarter. This improvement largely reflects higher selling prices, which
are getting closer to offsetting higher, but declining, raw material prices.
While the cost of goods sold percent was higher than last year's third-quarter
figure of 67.6 percent, the 1994 figure included $12
20
<PAGE>
(FORM 10-Q)
million of the $14.6 million one-time gain in the reduction in the Company's
estimated health care liability for employees on long-term disability and
accounted for the difference. Selling, general and administrative (SG&A) costs
in the third quarter were higher than those of the second quarter but lower than
the first quarter. The year-to-year comparison with third quarter 1994 shows
nearly a three percent increase due to the translation of foreign expenses at
higher U.S. dollar translation rates.
Armstrong's effective tax rate for the third quarter was 30.6 percent compared
with the 33.4 percent rate in the same 1994 period (excluding restructuring
charges, the effective tax rate would be 33.8 percent). The tax rate reduction
was primarily due to the lower-based earnings that included third-quarter
restructuring charges.
On September 1, Armstrong announced the signing of a letter of intent with Dal-
Tile International Inc., for a proposed business combination of the American
Olean subsidiary's ceramic tile businesses with Dal-Tile. If an agreement is
reached by year-end, a substantial loss will be recorded on the business
combination.
Net sales recorded through September 30, 1995, were $2.18 billion, more than six
percent higher than last year's sales of $2.05 billion. The translation of
foreign currencies sales into U.S. dollars favorably impacted year-to-date sales
by nearly one-third of the increase.
Net earnings were $106.5 million in 1995 including two after tax restructuring
charges of $10.1 million and $36.7 million taken in the first and third
quarters, respectively. This compares with 1994's nine-month net earnings of
$162.9 million that included $18.6 million after tax gains resulting from the
resolution of tax audits, the sale of its majority interest in a subsidiary and
the reduction of the Company's estimated health care liability. Net earnings
per share of common stock for January through September 1995 were $2.55 on a
primary basis and $2.33 on a fully diluted basis.
Industry Segment Results
- ------------------------
Three of our four industry segments--floor coverings (which includes resilient
flooring and ceramic tile), building products and industry products--increased
sales as compared with the third quarter last year while the fourth segment,
furniture, maintained the same level of sales. All industry segments recorded
lower operating income due to the restructuring charge recorded this quarter.
The unallocated corporate expense of $19.3 million this quarter includes a $9.1
million charge associated with elimination of employee positions and includes
severance pay and retirement costs. Third-quarter 1994 includes a gain of $14.6
million related to a reduction in the Company's estimated health care liability.
The floor coverings segment recorded 3 percent higher sales than in 1994.
Resilient flooring sales were essentially flat, with higher home center and non-
residential volume largely offset by lower sales to other residential channels.
Ceramic tile sales, however, were up nearly 11 percent. The segment's operating
margin was 9.4 percent or 16.7 percent excluding restructuring charges compared
with second quarter's 14.5 percent and 1994's third quarter of 15.1 percent.
Operating income included a resilient flooring restructuring charge of $25.0
million, 90 percent of which related to elimination of employee positions in
North America. Operating income was favorably impacted by cost reductions,
productivity improvements and higher selling prices introduced earlier this year
that are getting closer to offsetting higher, but downward trending, raw
material prices. Ceramic tile also contributed by recording profits when
compared with last year's break-even performance. The Company continues to
evaluate the proposed business combination of ceramic tile with Dal-Tile to
improve levels of customer service through the more efficient use of the
manufacturing and distribution resources of both companies.
21
<PAGE>
(FORM 10-Q)
All geographic areas in the building products segment contributed to the 7
percent sales increase, with Europe continuing to show the strongest growth.
Third-quarter operating income of $21.0 million included a restructuring charge
of $6.3 million related to the elimination of positions in the European
operations. The operating margin was 11.7 percent or 15.3 percent excluding the
restructuring charges compared with second quarter 1995's 14.9 percent and the
third quarter 1994's 14.6 percent. Sales growth in the non-residential end-use
markets, higher selling prices and continuing cost reduction efforts were
positive factors on operating income.
Although the furniture industry segment sales were level with those of the same
period last year, this segment continues to outperform the industry despite
declining and difficult market conditions. Operating income declined slightly
with the impact of a small restructuring charge but was helped with a slight
decline in certain raw material costs.
The industry products segment's sales grew by 9 percent, but the weaker U.S.
dollar accounted for three-fourths of the increase. The operating loss of $4.5
million includes a $15.8 million restructuring charge related to the elimination
of employee positions in Europe. Insulation Products, the largest business in
this segment, recorded lower profits, primarily due to restructuring charges.
Also adversely affecting operating income was the need to meet competitive
European pricing and the start-up costs of the new Mebane, North Carolina,
insulation plant. While gasket and specialty paper products sales are higher
because of the first quarter asset purchase, the business is still impacted by
lower automotive sales and higher raw material costs. The textile products
business is still generating a modest operating loss, but lower than the amount
recorded in the same period last year.
22
<PAGE>
(FORM 10-Q)
Independent Accountants' Report
-------------------------------
The Board of Directors
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of September 30, 1995, and the related
condensed consolidated statements of operations for the three-month and nine-
month periods ended September 30, 1995 and 1994 and the condensed consolidated
statements of cash flows for the nine-month periods then ended. These
consolidated financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
an expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Armstrong World Industries, Inc.
and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations and cash flows for the year then ended (not presented
herein); and our report dated February 20, 1995, 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, 1994, is fairly presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 8, 1995
23
<PAGE>
(FORM 10-Q)
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report
on Form 10-Q:
Exhibits
--------
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) The registrant filed a current Report on Form 8-K dated
September 1, 1995, to report the signing of a letter of intent for the proposed
merger of the ceramic tile businesses of the American Olean Tile Company, a
wholly owned Armstrong subsidiary, with Dal-Tile International Inc.
24
<PAGE>
(FORM 10-Q)
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: November 13, 1995
25
<PAGE>
(FORM 10-Q)
Exhibit Index
-------------
Exhibit No.
- -----------
No. 11 Statement re Computation for Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
26
<PAGE>
(FORM 10-Q)
Exhibit No. 11
Computation for Earnings Per Share
For the Three and Nine Months Ended September 30, 1995 and 1994
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
- -------
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares
outstanding including shares
issuable under stock options 37.4 37.8 37.6 37.8
==== ==== ==== ====
Net Earnings Per Share
- ----------------------
Net earnings $19.4 $61.6 $106.5 $162.9
Less:
Dividend requirement on Series A
convertible preferred stock 4.7 4.8 14.1 14.3
Plus:
Tax benefit on dividends
applicable to unallocated
preferred shares 1.1 1.3 3.4 3.7
----- ----- ------ ------
Net earnings applicable
to common stock $15.8 $58.1 $ 95.8 $152.3
===== ===== ====== ======
Net earnings per share of common
stock $ .42 $ 1.54 $ 2.55 $ 4.03
====== ====== ======= =======
FULLY DILUTED
- -------------
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares
outstanding including shares
issuable under stock options 37.4 37.8 37.6 37.8
Average number of common shares
issuable under the Employee
Stock Ownership Plan 5.4 5.7 5.4 5.6
----- ----- ------ ------
Average number of common and common
equivalent shares outstanding 42.8 43.5 43.0 43.4
====== ====== ====== ======
Pro forma Adjustment to Net Earnings
- ------------------------------------
Net earnings as reported $19.4 $61.6 $106.5 $162.9
Less:
Increased contribution to Employee
Stock Ownership Plan assuming
conversion of preferred shares
to common 1.8 2.0 5.5 5.9
Net reduction in tax benefits
assuming conversion of Employee
Stock Ownership Plan preferred
shares to common .3 .2 .8 .8
----- ----- ------ ------
Pro forma net earnings $17.3 $59.4 $100.2 $156.2
====== ====== ====== ======
Fully diluted net earnings per
share $ .40 $ 1.37 $ 2.33 $ 3.60
====== ====== ======= =======
</TABLE>
27
<PAGE>
(FORM 10-Q)
Exhibit No. 15
Armstrong World Industries, Inc.
Lancaster, Pennsylvania
Gentlemen:
RE: Registration Statement Nos. 2-50942; 2-77936; 2-91890; 33-18996;
33-18997; 33-18998; 33-29768; 33-38837; 33-60070
With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated
November 8, 1995, 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 LLP
Philadelphia, Pennsylvania
November 8, 1995
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Unaudited Consolidated Financial Statements as of and for September
30, 1995, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 407
<ALLOWANCES> 48
<INVENTORY> 336
<CURRENT-ASSETS> 786
<PP&E> 2,315
<DEPRECIATION> 1,207
<TOTAL-ASSETS> 2,356
<CURRENT-LIABILITIES> 511
<BONDS> 0
<COMMON> 99
0
259
<OTHER-SE> 426
<TOTAL-LIABILITY-AND-EQUITY> 2,356
<SALES> 2,176
<TOTAL-REVENUES> 2,176
<CGS> 1,513
<TOTAL-COSTS> 1,513
<OTHER-EXPENSES> 405
<LOSS-PROVISION> 72
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 161
<INCOME-TAX> 54
<INCOME-CONTINUING> 107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107
<EPS-PRIMARY> 2.55
<EPS-DILUTED> 2.33
</TABLE>
