<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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of registrant's common stock outstanding as of July 28, 1997
- - 40,747,912
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2
Part I - Financial Information
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Item 1. Financial Statements
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
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(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 577.4 $ 563.2 $1,095.7 $1,064.4
Cost of goods sold 378.2 364.8 725.2 709.3
Selling, general and administrative expense 100.4 104.6 200.7 206.3
Equity (earnings) loss from affiliates 0.9 (3.4) (2.9) (6.1)
Restructuring charges -- 46.5 -- 46.5
---- ---- ----- -----
Operating income 97.9 50.7 172.7 108.4
Interest expense 7.4 6.2 13.7 12.5
Other (income) expenses, net (0.1) (1.2) 0.1 (4.3)
---- ---- --- ----
Earnings before income taxes (a) 90.6 45.7 158.9 100.2
Income taxes 31.7 15.1 54.5 33.3
---- ---- ---- ----
NET EARNINGS(b) $ 58.9 $ 30.6 $ 104.4 $ 66.9
======== ======== ======== ========
Net earnings per share of common stock (c)
Primary $ 1.43 $ 0.73 $ 2.53 $ 1.61
Fully Diluted $ 1.43 $ 0.68 $ 2.53 $ 1.48
Average number of common shares outstanding:
Primary 41.3 37.2 41.4 37.3
Fully diluted 41.3 42.3 41.4 42.5
Return on average common shareholders' equity 28.3% 14.6% 25.1% 16.2%
</TABLE>
(a) Depreciation and amortization charged against earnings before income
taxes amounted to $32.7 million and $65.0 million in the three months and
six months ended June 30, 1997, and $30.3 million and $61.1 million in
the three months and six months ended June 30, 1996.
(b) Net earnings included:
(i) The Company's share of the one-time charge
incurred by Dal-Tile for uncollectible receivables and overstocked
inventories of $5.1 million after-tax, or 13 cents per share for the
three months and six months ended June 30, 1997.
(ii) Restructuring charges of $29.6 million after-tax for the three
months and six months ended June 30, 1996.
(c) In 1996, primary earnings per share for "net earnings" were determined by
dividing the earnings, after deducting preferred dividends (net of tax
benefit on unallocated ESOP shares), by the average number of common
shares outstanding and shares issuable under stock options, if dilutive.
Fully diluted earnings per share included the shares of common stock
outstanding, as calculated above, and the adjustments to common shares
and earnings required to portray the ESOP convertible preferred shares on
an "if converted" basis unless the effect was antidilutive. During July
1996, the Employee Stock Ownership Plan (ESOP) and Retirement Savings
Plan were merged resulting in the elimination of convertible preferred
shares and an increase of common shares outstanding by 5.1 million.
See accompanying footnotes to the financial statements beginning on page 7.
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3
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions)
<TABLE>
<CAPTION>
Unaudited
Assets June 30, 1997 December 31, 1996
------ ------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 51.0 $ 65.4
Accounts receivable less allowance 281.0 216.7
Inventories:
Finished goods $ 157.8 $ 143.7
Work in process 23.3 20.1
Raw materials and supplies 52.6 41.9
---- ----
Total inventories 233.7 205.7
Income tax benefits 29.9 49.4
Other current assets 30.6 27.3
---- ----
Total current assets 626.2 564.5
Property, plant and equipment 1,986.8 1,938.9
Less accumulated depreciation and amortization 1,018.7 974.9
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Net property, plant and equipment 968.1 964.0
Insurance for asbestos-related liabilities (a) 133.4 141.6
Investment in affiliates (b) 215.3 204.3
Other noncurrent assets 285.1 261.2
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Total assets $2,228.1 $2,135.6
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 60.3 $ 14.5
Current installments of long-term debt 27.2 13.7
Accounts payable and accrued expenses 258.1 273.3
Income taxes 30.7 19.5
---- ----
Total current liabilities 376.3 321.0
Long-term debt 227.1 219.4
ESOP loan guarantee 212.0 221.3
Postretirement and postemployment benefits 248.7 247.6
Asbestos-related liabilities (a) 133.4 141.6
Other long-term liabilities 154.9 151.9
Deferred income taxes 37.3 30.5
Minority interest in subsidiaries 18.1 12.3
---- ----
Total noncurrent liabilities 1,031.5 1,024.6
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 162.1 162.1
Reduction for ESOP loan guarantee (212.6) (217.4)
Retained earnings 1,293.7 1,222.6
Foreign currency translation (c) 4.6 17.3
Treasury stock (479.4) (446.5)
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Total shareholders' equity 820.3 790.0
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Total liabilities and shareholders' equity $2,228.1 $2,135.6
======== ========
</TABLE>
See page 4 for explanation of references (a), (b) and (c). Also see accompanying
footnotes to the financial statements beginning on page 7.
<PAGE>
4
(a) The asbestos-related liability in the amount of $133.4 million represents
the estimated liability and defense cost to resolve approximately 37,000
personal injury claims pending against the Company as of the end of the
second quarter 1997. The insurance asset in the amount of $133.4 million
reflects the Company's belief in the availability of insurance in an
amount covering the liability. See Note 2 beginning on page 7 for
additional details.
(b) Investment in affiliates is primarily comprised of the 34.4 percent
ownership of Dal-Tile as of June 30, 1997, and the 50.0 percent interest
in the WAVE joint venture.
(c) Foreign currency translation, reported as a separate component of
shareholders' equity, is detailed as follows:
<TABLE>
<S> <C>
Balance at beginning of year $17.3
Six months' translation adjustments and
hedging of foreign investments (12.7)
Allocated income taxes --
-----
Balance at June 30, 1997 $ 4.6
=====
</TABLE>
<PAGE>
5
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows--Unaudited
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(amounts in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 104.4 $ 66.9
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 65.0 61.1
Deferred income taxes 8.9 (2.2)
Equity change in affiliates (0.8) (5.6)
Loss from restructuring activities -- 46.5
Restructuring payments (14.5) (18.8)
Changes in operating assets and liabilities net of
effect of restructuring and acquisitions:
(Increase) in receivables (64.2) (31.1)
(Increase) in inventories (24.2) (4.1)
Decrease (increase) in other current assets 15.3 (10.1)
(Increase) in other noncurrent assets (26.0) (31.8)
Increase (decrease) in accounts payable
and accrued expenses 3.5 (12.2)
Increase in income taxes payable 12.2 14.7
Increase in other long-term liabilities 9.1 7.5
Other, net (0.9) (4.6)
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Net cash provided by operating activities 87.8 76.2
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Cash flows from investing activities:
Purchases of property, plant and equipment (63.7) (110.0)
Investment in computer software (5.7) (3.7)
Acquisitions and investment in joint ventures (16.6) --
Proceeds from the sale of land and facilities/divestitures 5.8 0.4
--- ---
Net cash (used for) investing activities (80.2) (113.3)
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Cash flows from financing activities:
Increase (decrease) in short-term debt, net 43.5 (6.4)
Issuance of long-term debt 7.2 --
Reduction of long-term debt -- (40.0)
Cash dividends paid (34.3) (37.0)
Preferred stock redemption -- (18.4)
Purchase of common stock for the treasury (37.8) (32.9)
Proceeds from exercised stock options 4.2 2.6
Other, net (0.3) (4.2)
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Net cash (used for) financing activities (17.5) (136.3)
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Effect of exchange rate changes on cash and cash equivalents (4.5) (0.6)
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Net (decrease) in cash and cash equivalents $(14.4) $(174.0)
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Cash and cash equivalents at beginning of period $ 65.4 $ 256.9
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Cash and cash equivalents at end of period $ 51.0 $ 82.9
------ -------
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Supplemental cash flow information:
Interest paid $ 11.0 $ 11.0
Income taxes paid $ 19.1 $ 32.8
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</TABLE>
Supplemental schedule of non-cash investing and financing activities:
The Company purchased 51 percent of the capital stock of Holmsund Golv AB in
March 1997 for $0.8 million and 60 percent of the capital stock of the Parafon
AB ceilings joint venture in April 1997 for $3.4 million. In conjunction with
the acquisitions, assets acquired and liabilities assumed were as follows
(millions):
<TABLE>
<S> <C>
Fair value of assets acquired $32.6
Cash paid for the capital stock 4.2
Minority interest 2.8
Debt assumed 17.6
----
Other long-term liabilities assumed $ 8.0
=====
</TABLE>
See accompanying notes to the financial statements beginning on page 7.
<PAGE>
6
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
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(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months Six months
ended June 30 ended June 30
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1997 1996 1997 1996
---- ---- ---- ----
Net trade sales:
- ---------------
<S> <C> <C> <C> <C>
Floor coverings $ 303.1 $ 300.2 $ 555.5 $ 540.2
Building products 190.0 179.4 372.0 354.5
Industry products 84.3 83.6 168.2 169.7
---- ---- ----- -----
Total net sales $ 577.4 $ 563.2 $1,095.7 $1,064.4
======== ======== ======== ========
<CAPTION>
Operating income:(1)
- ----------------
<S> <C> <C> <C> <C>
Floor coverings $ 56.1 $ 48.0 $ 89.1 $ 74.7
Building products 30.8 18.7 60.1 44.5
Industry products 14.0 5.0 25.2 15.0
Ceramic tile (4.2) 1.1 (3.5) 2.0
Unallocated corporate (expense) 1.2 (22.1) 1.8 (27.8)
--- ----- --- -----
Total operating income $ 97.9 $ 50.7 $ 172.7 $ 108.4
======== ======== ======== ========
<CAPTION>
(1) Restructuring and one-time charges
----------------------------------
included in operating income:
- ----------------------------
<S> <C> <C> <C> <C>
Floor coverings $ -- $ 14.5 $ -- $ 14.5
Building products -- 8.3 -- 8.3
Industry products -- 4.0 -- 4.0
Ceramic tile (a) 5.5 -- 5.5 --
Unallocated corporate expense -- 19.7 -- 19.7
---- ---- ---- ----
Total restructing and one-time
charges in operating income $ 5.5 $ 46.5 $ 5.5 $ 46.5
======== ======== ======= ========
</TABLE>
(a) The ceramic tile pre-tax charge reflects the Company's 34.4 percent share of
a Dal-Tile one-time charge for uncollectible receivables and overstocked
inventories.
<PAGE>
7
Note 1. Operating results for the second quarter and first six months of 1997,
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compared with the corresponding periods of 1996 included in this report, are
unaudited. However, these results have been reviewed by the Company's
independent public accountants, KPMG Peat Marwick LLP, in accordance with the
established professional standards and procedures for a limited review.
The accounting policies used in preparing these statements are the same as those
used in preparing the Company's consolidated financial statements for the year
ended December 31, 1996. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report and Form 10-K for the
fiscal year ended December 31, 1996. In the opinion of management, all
adjustments of a normal recurring nature have been included to provide a fair
statement of the results for the reporting periods presented. Three and six
months' results are not necessarily indicative of annual earnings.
Note 2.
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OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
Personal Injury Litigation
The Company is one of many defendants in approximately 37,000 pending claims as
of June 30, 1997, alleging personal injury from exposure to asbestos.
Although the Georgine Class Action, described below, is no longer in effect,
approximately 5,000 Georgine claims that had been processed may be
administratively resolved for the Company by the Center for Claims Resolution
("Center"). The Company anticipates a significant number of new claims as a
result of the loss of the Georgine injunction, including approximately 30,000
that were filed against the Company but were subject to the injunction, as well
as those filed in the tort system against other defendants (and not against
Center members) while Georgine was pending.
Nearly all the claims, except those in Georgine, seek general and punitive
damages arising from alleged exposures, at various times, from World War II
onward, to asbestos-containing products. Claims against the Company generally
involve allegations of negligence, strict liability, breach of warranty and
conspiracy with respect to its involvement with asbestos-containing insulation
products. The Company discontinued the sale of all such products in 1969. The
claims also allege that injury may be determined many years (up to 40 years)
after first exposure to asbestos. Nearly all suits name many defendants, and
over 100 different companies are reportedly involved. The Company believes that
many current plaintiffs are unimpaired. Some courts have consolidated groups of
cases for trial, which the Company has generally opposed as unfair. A large
number of claims have 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. The number of
pending cases has decreased during the past several years in substantial part
due to Georgine, and with the loss of Georgine, that number is expected to
increase. Neither the rate of future dispositions nor the number of future
potential unasserted claims can reasonably be predicted at this time.
Attention has been given by various parties to securing a comprehensive
resolution of pending and future claims. In 1991, the Judicial Panel for
Multidistrict Litigation ordered the transfer of all pending federal cases to
the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. The
Company supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
Court. That Court has been instrumental in having the parties resolve large
numbers of cases in various jurisdictions and has been receptive to different
approaches to the resolution of claims. Personal injury claims filed in state
courts have not been directly affected by the transfer, although most recent
cases have been filed in state courts.
Georgine Settlement Class Action
Georgine v. Amchem was a settlement class action that included essentially all
- ------------------
future personal injury claims against members of the Center, including the
Company. It was filed in the Eastern District of Pennsylvania, on January 15,
1993, along with a joint motion for conditional class certification. It was
designed to establish a non-litigation system for the resolution of such claims,
and offered a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they met certain exposure and medical
criteria. Compensation amounts were derived from historical settlement data.
No punitive damages were to be paid under the proposed settlement. The
settlement was designed to, among other things,
<PAGE>
8
minimize transactional costs, including attorneys fees, expedite compensation to
claimants with qualifying claims, and to relieve the courts of the burden of
handling future claims.
The District Court, after exhaustive discovery and testimony, approved the
settlement class action, but the U.S. Court of Appeals for the Third Circuit
reversed that decision, and the reversal was sustained by the U.S. Supreme Court
in a decision issued on June 25, 1997. The Supreme Court upheld the Court of
Appeals' ruling that the settlement class did not meet the requirements for
class certification under Federal Rule of Civil Procedure 23. The preliminary
injunction which remained in place while the case was pending in the Supreme
Court, was vacated on July 21, 1997, resulting in immediate reinstatement of the
filed and enjoined cases and loss of the bar against filing of claims in the
tort system by formerly enjoined class members. In due course, the consequences
from the loss of the injunction will result in presently undeterminable, but
likely higher, liability and defense costs. The Company believes that an
alternative claims resolution mechanism is likely eventually to emerge.
Insurance Coverage/Wellington Agreement
The Company's primary and excess insurance carriers have provided product hazard
defense and indemnity coverage for personal injury claims, and are providing
similar coverage for property damage claims.
Various insurance contracts also provide for non-products (general liability)
coverage for personal injury claims. Most products hazard coverage for personal
injury claims has been exhausted. The insurance carriers that currently provide
coverage or whose policies have provided or are believed to provide personal
injury products and non-products or property damage coverages are as follows:
Reliance Insurance Company; Aetna Casualty and Surety Company; Liberty Mutual
Insurance Companies; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier that
provided $25 million of personal injury products hazard coverage, is insolvent.
Certain London companies and certain excess carriers for property damage claims
only are also insolvent. The Company is pursuing claims against insolvents in a
number of forums.
The Company and 52 other companies (defendants in the litigation and certain of
their insurers) signed the 1985 Agreement Concerning Asbestos-Related Claims
("Wellington Agreement"). This Agreement provided for a final settlement of
nearly all disputes concerning insurance for personal injury claims between the
Company and three primary and seven excess insurers. The other primary insurer
agreed to pay into the Wellington Asbestos Claims Facility ("Facility"). The
Wellington Agreement provided coverage for claims that trigger policies in the
insurance coverage period; both defense and indemnity are covered and there are
no deductibles in the coverage period. The Wellington Agreement addresses both
products hazard and non-products (general liability) coverages.
The Wellington Agreement also provided for the establishment of the Facility to
evaluate, settle, pay and defend all personal injury claims against member
companies. Liability payments and allocated expenses were allocated by formula
to each member. The Facility was dissolved when certain members raised concerns
about their share of liability payments and allocated expenses and certain
insurers raised concerns about defense costs and Facility operating expenses.
Center for Claims Resolution
Following dissolution of the Facility, the Center was created in October 1988 by
21 former members of the Facility, including the Company. Insurance carriers
did not become members, although a number signed an agreement to provide
approximately 70% of the Center's operational costs during its first year of
operation; they are represented ex officio on the Center's governing board. The
Center adopted many of the conceptual features of the Facility, and the insurers
generally provide coverage under the Wellington Agreement. The Center has
revised the formula for shares of liability payments and defense costs over time
and has defended the members' interests and addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. An increase
in the utilization of the Company's insurance occurred as a result of Georgine
and the commitment at the time to attempt to resolve pending claims within five
years. The share adjustments have resulted in some increased liability share
for the Company. The Center members annually have
<PAGE>
9
reached agreement 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 tenth year of operation.
A substantial portion of the Company's insurance asset involves non-products
insurance which is in alternate dispute resolution. Although the Company is
seeking resolution of key issues in the alternate dispute resolution process
during 1997, a shortfall has developed between available insurance and amounts
necessary to pay claims beginning in the third quarter of 1997. This shortfall
will be established as a receivable pending resolution of the nonproducts
insurance coverage issues described below. The Company does not believe that
this shortfall will be material either to the financial condition of the Company
or to its liquidity. 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 insurance that may be obtained through the
alternative dispute resolution process.
California Insurance Coverage Lawsuit
The trial court issued final decisions in various phases in the insurance
lawsuit filed by the Company in California, 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 policy limits.
The court concluded that any defense obligation ceases upon exhaustion of policy
limits. Although not as comprehensive, another decision established favorable
defense and indemnity coverage for property damage claims, providing coverage
during the period of installation and any subsequent period in which a release
of fibers occurred. The California appellate courts substantially upheld the
trial court, and that insurance coverage litigation is now concluded. The
Company has resolved personal injury products hazard coverage matters with all
of its solvent carriers except one small excess carrier, as well as all property
damage coverages.
After concluding the last phase of the trial, the Company and a carrier with
primary and excess coverages reached a settlement agreement in 1989. Under that
agreement, coverage was provided for personal injury and property damage claims.
The parties also agreed that a certain minimum and maximum percentage of
indemnity and defense costs for personal injury claims would be allocated to
non-products (general liability) coverage, with the percentage to be negotiated
or determined in an alternative dispute resolution process.
Non-Products Insurance Coverage
Non-products (general liability) insurance coverage for personal injury claims
is included in the Company's primary and a number of excess policies for certain
types of claims. The Wellington Agreement and the 1989 settlement agreement
referred to above include provisions for non-products claims, which include,
among others, those that involve exposure during installation of asbestos
materials. An Alternative Dispute Resolution process under the Wellington
Agreement is underway against certain carriers to determine the percentage of
resolved and unresolved claims that are non-products claims and to establish the
entitlement to such coverage. The additional non-products coverage potentially
available is substantial, and at the primary level, includes defense costs in
addition to limits. All the carriers raise various defenses against coverage,
including contractual defenses, waiver, laches and statutes of limitations. One
primary carrier alleges that it is no longer bound by the Wellington Agreement,
and another alleges that the Company agreed to limit its claims for non-products
coverage against that carrier when the Wellington Agreement was signed. The
Alternative Dispute Resolution process is in the trial phase of binding
arbitration. Other proceedings against several non-Wellington carriers may
become necessary.
ACandS, Inc., a former subsidiary of the Company, has coverage rights under some
of the Company's insurance policies for insurance periods, and has accessed
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., entered into an agreement that reserved for ACandS, Inc.'s use a
certain amount of insurance from the joint policies.
Based upon the Company's experience in this litigation and the disputes with its
insurance carriers, a reserve was recorded in June 1983 to cover then-estimated
potential personal injury liability, legal and administrative costs that were
not covered under the then-existing insurance Interim Agreement, cost of
litigation against insurance carriers, and other factors involved in such
litigation. At the time of the Wellington Agreement, the reserve was reduced by
the portion associated with pending claims. In the 1989 settlement referenced
above, the Company received $11.0 million, of which approximately $6.6 million
was recorded as an increase to
<PAGE>
10
that reserve. Future costs of insurance litigation and other legal costs
indirectly related to the litigation will be expensed outside the reserve.
Certain co-defendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
Property Damage Litigation
The Company is also one of many defendants in 11 pending claims as of June 30,
1997, brought by public and private building owners. These 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. The claims appear to be aimed at friable (easily crumbled) asbestos-
containing products, although allegations encompass all asbestos-containing
products, including previously installed asbestos-containing resilient flooring.
Among the lawsuits that have been resolved are four class actions, 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. The
Company vigorously denies the validity of the allegations against it in these
claims. These suits and claims were not handled by the Facility or the Center.
Defense and indemnity coverage has been resolved in the California insurance
coverage lawsuit.
Conclusions
The Company does not know how many claims will be filed against it in the
future, or the details thereof or of pending suits not fully reviewed, or the
expense and any liability that may ultimately result therefrom, or whether an
alternative to the Georgine settlement vehicle may emerge, or the ultimate
liability if such alternative does not emerge, or the scope of its non-products
coverage ultimately deemed available.
Subject to the uncertainties, limitations and other factors referred to in this
note and based upon its experience, the Company believes that an estimated
$133.4 million in liability and defense costs recorded on the balance sheet will
be incurred to resolve the approximately 37,000 personal injury claims pending
against the Company as of June 30, 1997. It is estimated that approximately
30,000 additional cases filed against the Company but subject to the Georgine
injunction have now become free of the injunction; as to these cases, no
estimate can be made at this time.
An insurance asset in the amount of $133.4 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance is
probable of recovery through negotiation, alternative dispute resolution or
litigation. A substantial portion of the insurance asset involves non-products
insurance which is in alternative dispute resolution. The Company is pursuing
alternative dispute resolution which it believes will not be resolved until 1998
or later. A shortfall has developed between available insurance and amounts
necessary to pay claims, beginning in the third quarter of 1997. This shortfall
will be established as a receivable pending resolution of the nonproducts
insurance coverage issues described below. The Company does not believe that
such shortfall will be material either to the financial condition of the Company
or to its liquidity.
The Company also notes that, based on maximum mathematical projections covering
a ten-year period from 1994 to 2004, its estimated cost in Georgine reflected a
reasonably possible additional liability of $245 million. The Company believes
that a claims resolution mechanism alternative to the Georgine settlement will
eventually emerge, albeit at likely higher liability and defense costs than the
earlier maximum mathematical projection in Georgine. A portion of such
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 cost of a claims resolution mechanism alternative to the Georgine
settlement (calculated on a comparable 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, limitations and other
factors referred to elsewhere in this note and based upon its experience, the
Company believes it is probable that substantially all of the expenses and any
liability payments associated with the property damage claims will be paid under
an
<PAGE>
11
insurance coverage settlement agreement and through coverage from the outcome of
the California insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement and settlements with other insurance carriers, the results of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the likelihood that an alternative to the Georgine
settlement will eventually emerge, and its experience, the Company believes the
asbestos-related claims against the Company would not be material either to the
financial condition of the Company or to its liquidity, although as stated
above, the net effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in such future period.
--------------------------
TINS Litigation
In 1984, suit was filed against the Company in the U. S. District Court for the
District of New Jersey (the "Court") by The Industry Network System, Inc.
(TINS), a producer of video magazines in cassette form, and Elliot Fineman, a
consultant (Fineman and The Industry Network System, Inc. v. Armstrong World
----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
- ----------------
things, that the Company had improperly interfered with a tentative contract
which TINS had with an independent distributor of the Company's flooring
products and further claimed that the Company used its alleged monopoly power in
resilient floor coverings to obtain a monopoly in the video magazine market for
floor covering retailers in violation of federal antitrust laws. The Company
denied all allegations. On April 19, 1991, the jury rendered a verdict in the
case, which as entered by the court in its order of judgment, awarded the
plaintiffs the alternative, after all post-trial motions and appeals were
completed, of either their total tort claim damages (including punitive
damages), certain pre-judgment interest, and post-judgment interest or their
trebled antitrust claim damages, post-judgment interest and attorneys fees. The
higher amount awarded to the plaintiffs as a result of these actions totaled
$224 million in tort claim damages and pre-judgment interest, including $200
million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the
plaintiff's appeal of these rulings, the Court of Appeals sustained the U. S.
District Court's decision granting the Company a new trial, but overturned in
certain respects the District Court's grant of judgment for the Company
notwithstanding the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments, reversed the trial judge's
judgment for Armstrong on TINS' claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS' claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS' claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS' alleged breach of contract claim.
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.
<PAGE>
12
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The Company
was informed on February 22, 1993, that the Supreme Court denied its Petition.
After the case was remanded by the Third Circuit Court of Appeals in
Philadelphia to the U.S. District Court in Newark, New Jersey, a new trial
commenced on April 26, 1994. TINS claimed damages in the form of lost profits
ranging from approximately $19 million to approximately $56 million. Plaintiff
also claimed punitive damages in conjunction with its request for tort damages.
Other damages sought included reimbursement of attorneys' fees and interest,
including prejudgment interest.
On August 19, 1994, the jury returned a verdict in favor of the Company finding
that the Company had not caused damages to TINS. The court subsequently entered
judgment in the Company's favor based upon the verdict. TINS motion for a new
trial based upon alleged inaccurate jury instructions and alleged improper
evidentiary rulings during the trial, was denied and TINS filed an appeal with
the U.S. Court of Appeals for the Third Circuit. On October 11, 1995, the case
was argued before a panel of the U.S. Court of Appeals for the Third Circuit,
and on October 20, 1995, the Court issued a Judgment Order affirming the 1994
District Court verdict in favor of the Company. On November 2, 1995, TINS filed
a Petition for Rehearing by the same panel which was denied on December 5, 1995.
On January 24, 1996, TINS filed a motion seeking further appellate review by the
Circuit Court; that motion has been denied. Also denied was a motion by TINS
before the District Court to rescind an earlier 1984 agreement of settlement.
TINS appealed this later decision to the Circuit Court, which further confirmed
the District Court's denial. If the denial of the motion is reversed on appeal,
TINS could possibly be entitled to litigate claims that had been resolved by
means of the settlement agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
As shown on the Consolidated Statements of Cash Flows (see page 5), the Company
had cash and cash equivalents of $51.0 million at June 30, 1997. Cash provided
by operating activities, supplemented by increases in short- and long-term debt,
covered normal working capital requirements, purchases of property, plant, and
equipment, payment of cash dividends and repurchase of shares.
Cash provided by operating activities for the six months ended June 30, 1997 was
$87.8 million compared with $76.2 million for the comparable period of 1996.
The increase is primarily due to the higher level of earnings before non-cash
charges, partially offset by increased working capital requirements. Working
capital was $249.9 million as of June 30, 1997, $17.8 million higher than the
$232.1 million recorded at the end of the first quarter of 1997 and $6.4 million
higher than the $243.5 million recorded at year-end 1996. The ratio of current
assets to current liabilities was 1.66 to 1 as of June 30, 1997 compared with
1.62 to 1 as of March 31, 1997 and 1.76 to 1 as of December 31, 1996. The ratio
decrease from December 31, 1996 is primarily due to higher levels of short-term
debt caused by a delay in international cash repatriation, increased working
capital requirements and acquisition activities. Also contributing to the
working capital ratio decrease were higher seasonal levels of inventories and
receivables, and additional inventories and receivables from this year's
acquisitions of the Holmsund flooring and Parafon ceilings joint ventures and
the startup of the laminate flooring.
Net cash used for investing activities was $80.2 million for the six months
ended June 30, 1997 compared with $113.3 million in 1996, primarily due to lower
capital expenditures which were partially offset by additional acquisitions and
investments in joint ventures.
Net cash used for financing activities was $17.5 million for the six months
ended June 30, 1997 as cash provided by higher levels of short-term debt and
issuance of long-term debt was offset by cash used for payment of dividends and
repurchase of stock. For the comparable period in 1996, net cash used for
financing activities was $136.3 million as cash was used to reduce long-term
debt and redeem outstanding preferred stock in addition to the payment of
dividends and repurchase of stock. Long-term debt, excluding the Company's
guarantee of the ESOP loan, increased slightly in the first six months of 1997.
At June 30, 1997 long-term debt of $227.1 million, or 16.9 percent of total
capital, compared with $219.4 million, or 17.4 percent of total capital, at the
end of 1996. The June 30, 1997 and 1996 year-end
<PAGE>
13
ratios of total debt (including the Company's financing of the ESOP loan) as a
percent of total capital were 39.1 percent and 37.2 percent, respectively.
Under the board-approved 5.5 million common share repurchase plan, the Company
has repurchased approximately 2,789,000 shares through June 30, 1997, including
409,000 repurchased in the first six months of this year. In addition, 143,000
ESOP shares were purchased since the beginning of the year.
It is management's opinion that the Company has sufficient financial strength to
warrant the required support from lending institutions and financial markets.
The Company is involved in significant asbestos-related litigation which is
described more fully under "Litigation" on pages 7-11 and which should be read
in connection with this discussion and analysis. The Company does not know how
many claims will be filed against it in the future, or the details thereof or of
pending suits not fully reviewed, or the expense and any liability that may
ultimately result therefrom, or whether an alternative to the Georgine
settlement vehicle may emerge, or the ultimate liability if such alternative
does not emerge, or the scope of its non-products coverage ultimately deemed
available.
Subject to the uncertainties, limitations and other factors referred to in this
note and based upon its experience, the Company believes that an estimated
$133.4 million in liability and defense costs recorded on the balance sheet will
be incurred to resolve the approximately 37,000 personal injury claims pending
against the Company as of June 30, 1997. It is estimated that approximately
30,000 additional cases filed against the Company but subject to the Georgine
injunction have now become free of the injunction; as to these cases, no
estimate can be made at this time.
An insurance asset in the amount of $133.4 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance is
probable of recovery through negotiation, alternative dispute resolution or
litigation. A substantial portion of the insurance asset involves non-products
insurance which is in alternative dispute resolution. The Company is pursuing
alternative dispute resolution which it believes will not be resolved until 1998
or later. A shortfall has developed between available insurance and amounts
necessary to pay claims, beginning in the third quarter of 1997. This shortfall
will be established as a receivable pending resolution of the nonproducts
insurance coverage issues described below. The Company does not believe that
such shortfall will be material either to the financial condition of the Company
or to its liquidity.
The Company also notes that, based on maximum mathematical projections covering
a ten-year period from 1994 to 2004, its estimated cost in Georgine reflected a
reasonably possible additional liability of $245 million. The Company believes
that a claims resolution mechanism alternative to the Georgine settlement will
eventually emerge, albeit at likely higher liability and defense costs than the
earlier maximum mathematical projection in Georgine. A portion of such
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 cost of a claims resolution mechanism alternative to the Georgine
settlement (calculated on a comparable 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, limitations and other
factors referred to elsewhere in this note and based upon its experience, the
Company believes it is probable that substantially all of the expenses and any
liability payments associated with the property damage claims will be paid under
an insurance coverage settlement agreement and through coverage from the outcome
of the California insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement and settlements with other insurance carriers, the results of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the likelihood that an alternative to the Georgine
settlement will eventually emerge, and its experience, the Company believes the
asbestos-related 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.
<PAGE>
14
Tender Offer for Domco Inc.
On June 9, 1997, the Company announced its intention to commence an all cash
offer to purchase all the outstanding common shares of Domco Inc., a Canadian
corporation ("Domco") at CDN $23 per share for a total purchase price of CDN
$488 million. The offer includes an offer for Domco's convertible debentures,
warrants and other convertible securities on an equivalent basis. The offer was
initially conditioned upon a minimum of 66-2/3% of the outstanding common shares
on a fully-diluted basis being tendered in the offer by July 14, approval of the
appropriate regulatory authorities and other customary conditions. On July 2,
the Company lowered the minimum condition to 51% of the outstanding shares on a
fully diluted basis and extended the offer to August 15.
Consolidated Results
- --------------------
Second-quarter net sales of $577.4 million were 2.5 percent higher when compared
with net sales of $563.2 million in the second quarter of 1996. The continuing
adverse affect of translating foreign currency to U.S. dollars reduced sales by
about 1.1 percentage points. Second-quarter additions of the European Holmsund
flooring and Parafon soft-fiber ceilings joint ventures, along with sales growth
in laminate flooring and the worldwide non-residential and U.S. home center
businesses, offset the continuing softness in the residential businesses. All
three geographic areas -- Americas, Europe and Pacific -- recorded sales
growth.
Second-quarter net earnings were $58.9 million and included a $5.1 million
after-tax loss (13 cents per share) for the Company's share of the one-time
charge incurred by Dal-Tile International Inc. (in which the Company has a 34.4
percent equity interest) primarily for uncollectible receivables and overstocked
inventories. These results compare with $30.6 million recorded in 1996's second
quarter which included restructuring charges of $29.6 million after tax (70
cents per share on a fully diluted basis). Earnings per share were $1.43
compared with 73 cents per share on a primary basis and 68 cents per share on a
fully diluted basis for the second quarter of 1996.
Cost of goods sold in the second quarter was 65.5 percent of sales, slightly
higher than the 64.8 percent in the second quarter of 1996. Continued
productivity improvements were more than offset by some promotional pricing
actions. Second-quarter selling, general and administrative expenses were 17.4
percent of sales compared with 18.6 percent in 1996, reflecting the benefits of
previous cost reduction efforts and the effect of a stronger U.S. dollar in
1997.
Severance payments charged against restructuring reserves were $14.0 million in
the first six months of 1997 relating to the elimination of 323 positions of
which 184 terminations occurred since the beginning of 1997. As of June 30,
1997 $20.6 million remained in this reserve for restructuring actions.
First-half 1997 sales were $1.10 billion, an increase of 2.9 percent over last
year's first-half sales of $1.06 billion. Net earnings for the first six months
were $104.4 million, or $2.53 per share, compared with $66.9 million, or $1.61
per share on a primary basis and $1.48 per share on a fully diluted basis. Last
year's earnings included the previously mentioned after-tax restructuring
charges of $29.6 million (70 cents per share on a fully diluted basis).
Armstrong's effective tax rate for the first half 1997 was 34.3 percent compared
with the 33.4 percent rate in the first quarter 1997. The tax rate increase was
primarily due to lower than anticipated annual earnings from Dal-Tile.
Industry Segment Results:
- ------------------------
Worldwide second-quarter sales in the floor coverings segment increased 1
percent primarily due to the addition of the laminate and Holmsund product lines
and higher sales in U.S. non-residential tile and manufactured homes products.
Residential sheet sales declined, adversely affected by a general weakness in
high-end professionally-installed flooring sold through the retail channel, some
shift toward alternative flooring products and consolidation of the wholesaler
distribution channel with resulting one-time inventory reductions. Sales
through the home center channel continue to increase from last year, however, at
a slower rate. Second-quarter operating income of $56.1 million increased $8.1
million from last year's $48.0 million in the second quarter which included a
$14.5 million restructuring charge. These results reflect a trend towards lower
margin products, some promotional pricing and start-up losses in the new
laminate category.
<PAGE>
15
Second-quarter sales in the building products segment increased almost 6
percent. In the America's, U.S. non-residential sales increased through volume
and price realization while sales declined in the retail segment. Western
European sales continued to decline; however, additional growth came from the
Parafon ceilings joint venture and continued penetration in the Eastern European
area. Second-quarter operating income of $30.8 million increased $12.1 million
from last year's $18.7 million in the second quarter which included an $8.3
million restructuring charge. The majority of the increase in this segment,
excluding the restructuring charge, was in the Americas which benefited from the
non-residential sales increases, lower raw material costs and the increase in
profits realized from the WAVE grid joint venture.
Worldwide industry products segment sales increased almost 1 percent when
compared with 1996's second quarter; however, without the impact of the stronger
U.S. dollar, sales would have increased 6 percent. Operating income of $14.0
million increased $9.0 million from last year's $5.0 million in the second
quarter which included a $4.0 million restructuring charge. The majority of
the increase, excluding the restructuring charge, occurred in Insulation
Products due to higher sales and lower non-manufacturing expenses. Textile
Products continued to report an operating income in 1997 compared with an
operating loss in 1996.
The ceramic tile segment's second-quarter results represent Armstrong's 34.4
percent share of the anticipated after-tax loss of Dal-Tile and the amortization
of Armstrong's initial investment in Dal-Tile over the underlying equity in net
assets of the business combination. This quarter's loss reflects Dal-Tile's
one-time charge, primarily for uncollectible receivables and overstocked
inventories. Armstrong's share of this one-time charge was $5.5 million. In
the third quarter, Armstrong will reflect its share of another Dal-Tile charge
announced August 5, 1997, for a LIFO revaluation and lower than expected
performance results for the second quarter totaling approximately $1.6 million,
or 4 cents per share for Armstrong's share of the deviation.
The second-quarter unallocated corporate net income reflects the continuation of
higher pension credits while 1996's second-quarter unallocated corporate expense
included a $19.7 million restructuring charge and higher incentive award
accruals.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128). This statement introduces new methods for calculating earnings per
share. The adoption of this standard will not impact results from operations,
financial condition, or long-term liquidity, but will require the Company to
restate earnings per share reported in prior periods to conform with this
statement. This Statement is not expected to have a material effect on the
Company's reported earnings per share amounts. The new standard is effective for
periods ending after December 15, 1997.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company plans to adopt this accounting standard on
January 1, 1998, as required. The adoption of this standard will not impact
results from operations, financial condition, or long-term liquidity, but will
require the Company to classify items of other comprehensive income in a
financial statement and display the accumulated balance of other comprehensive
income separately in the equity section of the balance sheet.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt this accounting standard on January 1, 1998, as
required. The adoption of this standard will not impact consolidated results,
financial condition, or long-term liquidity.
This Quarterly Report on Form 10-Q contains certain "forward looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995).
Such forward-looking statements include statements using the words "believe,"
"expect," and "estimate" and similar expressions. Among other things, they
regard the Company's earnings, liquidity, financial condition, financial
resources, and the ultimate outcome of the Company's asbestos-related
litigation. Actual results may differ materially as a result of factors over
which the Company may or may not have
<PAGE>
16
any control. Such factors include: (a) those factors identified in the Notes to
the Consolidated Financial Statements in connection with the Company's asbestos-
related litigation and the availability of insurance coverage therefor, and (b)
the strength of domestic and foreign economies, continued sales growth,
continued product development, competitive advantages, minimizing cost
increases, and continued strengthening of the financial markets. Certain other
factors not specifically identified herein may also materially affect the
Company's results. Actual results may differ materially as a result of the
uncertainties identified or if the factors on which the Company's conclusions
are based do not conform to the Company's expectations.
<PAGE>
17
Independent Accountants' Report
-------------------------------
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of June 30, 1997, and the related condensed
consolidated statements of earnings for the three month and six-month periods
ended June 30, 1997, and 1996, and the condensed consolidated statements of cash
flows for the six-month periods then ended. These condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
an expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Armstrong World Industries, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of earnings, cash flows and shareholders' equity for the year then
ended (not presented herein); and in our report dated February 14, 1997, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
August 11, 1997
<PAGE>
18
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 28, 1997. The vote
on each matter presented to the shareholders was as follows:
1. Election of Directors
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Van C. Campbell 35,004,961 446,008
J. Phillip Samper 34,992,603 446,008
</TABLE>
In addition, each of the following directors continued in office after the
meeting: H. Jesse Arnelle, Donald C. Clark, George A. Lorch, E. Allen Deaver,
James E. Marley, and Jerre L. Stead.
2. 1993 Long-Term Stock Incentive Plan Amendment
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
32,452,316 2,698,851 293,662
</TABLE>
3. Shareholder Proposal to Modify the Company's Confidential Voting Policy
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
<S> <C> <C> <C>
16,956,112 16,408,868 452,879 1,626,930
</TABLE>
The Shareholder proposal to Modify the Company's Confidential Voting Policy
was not approved because it failed to receive the requisite majority of 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. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter for which
this report is filed:
(1) On June 9, 1997, the registrant filed a current report on Form 8-K
reporting the announcement of its intention to commence an all cash offer
to purchase all the outstanding shares of Domco Inc., a Canadian
corporation, and the commencement of certain litigation in U.S. District
Court for the Eastern District of Pennsylvania.
(2) On June 11, 1997, the registrant filed a current report on Form 8-K
reporting the commencement of certain litigation in the Ontario Court
(General Division), Ontario, Canada.
(3) On July 1, 1997, the registrant filed a current report on Form 8-K
reporting certain developments with respect to certain litigation.
<PAGE>
19
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Armstrong World Industries, Inc.
By: /s/ L. A. Pulkrabek
------------------------------
L. A. Pulkrabek, Senior
Vice President, Secretary and
General Counsel
By: /s/ B. A. Leech, Jr.
-------------------------------
B. A. Leech, Jr., Controller
(Principal Accounting Officer)
Date: August 12, 1997
<PAGE>
20
Exhibit Index
-------------
Exhibit No.
- -----------
No. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
<PAGE>
Exhibit No. 11(a)
COMPUTATION FOR PRIMARY EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock
options 41.3 37.2 41.4 37.3
==== ==== ==== ====
Adjustments to Earnings
- -----------------------
Net Earnings $58.9 $30.6 $104.4 $66.9
Less:
Dividend requirement on Series A
convertible preferred stock -- 4.4 -- 8.8
Plus:
Tax benefit on dividends paid on
unallocated preferred shares -- 1.0 -- 2.0
---- ---- ---- ----
Pro forma earnings available for common
- ----------------------------------------
shareholders $58.9 $27.2 $104.4 $60.1
- ------------ ===== ===== ====== =====
Earnings per share of common stock $1.43 $0.73 $2.53 $1.61
- ---------------------------------- ===== ===== ===== =====
</TABLE>
<PAGE>
Exhibit No. 11(b)
COMPUTATION FOR FULLY DILUTED EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock
options 41.3 37.2 41.4 37.3
Average number of common shares issuable
under the Employee Stock Ownership Plan -- 5.1 -- 5.2
---- ---- ---- ----
Average number of common and common
equivalent shares outstanding 41.3 42.3 41.4 42.5
==== ==== ==== ====
Adjustments to Earnings
- -----------------------
Net Earnings $58.9 $30.6 $104.4 $66.9
Less:
Increased contribution to the Employee
Stock Ownership Plan assuming
conversion of preferred shares to
common -- 1.7 -- 3.2
Net reduction in tax benefits assuming
conversion of the Employee Stock
Ownership Plan preferred shares to
common -- 0.3 -- 0.6
----- ----- ----- -----
Pro forma earnings available for common
- ----------------------------------------
shareholders: $58.9 $28.6 $104.4 $63.1
- ------------- ===== ===== ====== =====
Fully diluted earnings per share of common stock $1.43 $0.68 $2.53 $1.48
- ------------------------------------------------ ===== ===== ====== =====
</TABLE>
<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; 333-6333
With respect to the subject Registration Statement, we acknowledge our awareness
of the incorporation by reference therein of our report dated August 11, 1997,
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
August 11, 1997
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR JUNE 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<PERIOD-END> JUN-30-1997
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<RECEIVABLES> 316
<ALLOWANCES> 35
<INVENTORY> 234
<CURRENT-ASSETS> 626
<PP&E> 1,987
<DEPRECIATION> 1,019
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 2,228
<SALES> 1,096
<TOTAL-REVENUES> 1,096
<CGS> 725
<TOTAL-COSTS> 725
<OTHER-EXPENSES> 198
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<INCOME-PRETAX> 159
<INCOME-TAX> 55
<INCOME-CONTINUING> 104
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 2.53
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