<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
---------------------------------------------------
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
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock ($1 par value) New York Stock Exchange, Inc.
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (a)
9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (a)
(a) Common Stock and Preferred
Stock Purchase Rights only
<PAGE>
The following Item is being filed to correct a transposed number appearing on
page 33 in the first line of the Quarterly Financial Information table wherein
the 1996 Net Sales number for the fourth quarter incorrectly appeared as $258.6.
The correct number is $528.6.
<PAGE>
Item 8. Financial Statements and Supplementary Data
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<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION
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Quarterly financial information (millions except for per-share data) First Second Third Fourth Total year
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<S> <C> <C> <C> <C> <C>
1996 Net sales $501.2 $563.2 $563.4 $528.6 $2,156.4
Gross profit 156.7 198.4 178.4 163.0 696.5
Earnings from continuing business 36.3 30.6 44.2 53.7 164.8
Net earnings 36.3 30.6 35.8 53.2 155.9
Per share of common stock:*
Primary: Earnings from continuing businesses 0.88 0.73 1.06 1.28 3.97
Net earnings 0.88 0.73 0.86 1.27 3.76
Fully diluted: Earnings from continuing businesses 0.81 0.68 1.06 1.28 3.81
Net earnings 0.81 0.68 0.86 1.27 3.60
Dividends per share of common stock 0.36 0.40 0.40 0.40 1.56
Price range of common stock--high 64 1/2 61 5/8 65 1/2 75 1/4 75 1/4
price range of common stock--low 57 7/8 53 1/2 51 7/8 61 3/4 51 7/8
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1995 Net sales $558.8 $596.8 $611.8 $557.6 $2,325.0
Gross profit 183.1 194.6 203.6 162.6 743.9
Earnings (loss) from continuing business 26.5 47.4 14.4 (74.7) 13.6
Net earnings 34.4 52.7 19.4 16.8 123.3
Per share of common stock:*
Primary: Earnings (loss) from continuing businesses 0.61 1.17 0.29 (2.09) (0.02)
Net earnings 0.82 1.31 0.42 0.35 2.90
Fully diluted: Earnings (loss) from continuing businesses 0.57 1.05 0.28 (2.09) (0.02)
Net earnings 0.75 1.18 0.40 0.34 2.67
Dividends per share of common stock 0.32 0.36 0.36 0.36 1.40
Price range of common stock--high 48 1/2 52 60 1/2 64 1/8 64 1/8
price range of common stock--low 38 3/8 43 50 1/4 52 7/8 38 3/8
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</TABLE>
*The sum of the quarterly earnings per-share data does not always equal the
total year amounts due to changes in the average shares outstanding and, for
fully diluted data, the exclusion of the antidilutive effect in certain
quarters.
CONSOLIDATED STATEMENTS OF EARNINGS
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<TABLE>
<CAPTION>
Millions except for per-share data Years ended December 31 1996 1995 1994
==========================================================================================================================
<S> <C> <C> <C>
Net sales $2,156.4 $2,325.0 $2,226.0
Cost of goods sold 1,459.9 1,581.1 1,483.9
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 696.5 743.9 742.1
Selling, general and administrative expenses 413.2 457.0 449.2
Equity (earnings) from affiliates (19.1) (6.2) (1.7)
Restructuring charges 46.5 71.8 --
Loss from ceramic tile business combination -- 177.2 --
- --------------------------------------------------------------------------------------------------------------------------
Operating income 255.9 44.1 294.6
Interest expense 22.6 34.0 28.3
Other expense (income), net (6.9) 1.9 0.5
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Earnings from continuing businesses before income taxes 240.2 8.2 265.8
Income taxes 75.4 (5.4) 78.6
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Earnings from continuing businesses 164.8 13.6 187.2
- --------------------------------------------------------------------------------------------------------------------------
Discontinued business:
Earnings from operations of Thomasville Furniture Industries, Inc.
(less income taxes of $13.9 in 1995 and $15.5 in 1994) -- 25.8 23.2
Gain on disposal of discontinued business
(less income taxes of $53.4) -- 83.9 --
- --------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary loss 164.8 123.3 210.4
Extraordinary loss, less income taxes of $0.7 (8.9) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 155.9 $ 123.3 $ 210.4
- ------------------------------------------------------------------------------============================================
Dividends paid on Series A convertible preferred stock 8.8 18.8 19.0
Tax benefit on dividends paid on unallocated preferred shares 2.0 4.5 4.9
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Net earnings applicable to common stock $ 149.1 $ 109.0 $ 196.3
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Per share of common stock (See note on page 37-51):
Primary:
Earnings (loss) from continuing businesses $ 3.97 $ (0.02) $ 4.60
Earnings from discontinued business -- 0.68 0.62
Gain on sale of discontinued business -- 2.24 --
Earnings before extraordinary loss 3.97 2.90 5.22
Extraordinary loss (0.21) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3.76 $ 2.90 $ 5.22
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Fully diluted:
Earnings (loss) from continuing businesses $ 3.81 $ (0.02) $ 4.10
Earnings from discontinued business -- 0.60 0.54
Gain on sale of discontinued business -- 1.96 --
Earnings before extraordinary loss 3.81 2.67 4.64
Extraordinary loss (0.21) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3.60 $ 2.67 $ 4.64
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</TABLE>
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 33 -
<PAGE>
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
Millions except for numbers of shares and per-share data As of December 31 1996 1995
==========================================================================================================================
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 65.4 $ 256.9
Accounts and notes receivable
(less allowance for discounts and losses: 1996--$34.9; 1995--$29.0) 216.7 217.9
Inventories 205.7 195.5
Income tax benefits 49.4 26.9
Other current assets 27.3 25.5
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 564.5 722.7
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Property, plant and equipment
(less accumulated depreciation and amortization: 1996--$974.9; 1995--$975.9) 964.0 878.2
Insurance for asbestos-related liabilities 141.6 166.0
Investment in affiliates 204.3 162.1
Other noncurrent assets 261.2 220.8
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Total assets $2,135.6 $2,149.8
- ------------------------------------------------------------------------------------------------==========================
Liabilities and shareholders' equity
Current liabilities:
Short-term debt 14.5 22.0
Current installments of long-term debt 13.7 40.1
Accounts payable and accrued expenses 273.3 297.4
Income taxes 19.5 16.4
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Total current liabilities 321.0 375.9
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Long-term debt 219.4 188.3
Employee Stock Ownership Plan (ESOP) loan guarantee 221.3 234.7
Deferred income taxes 30.5 16.5
Postretirement and postemployment benefit liabilities 247.6 244.5
Asbestos-related liabilities 141.6 166.0
Other long-term liabilities 151.9 138.9
Minority interest in subsidiaries 12.3 10.0
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Total noncurrent liabilities 1,024.6 998.9
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Shareholders' equity:
Class A preferred stock. Authorized 20 million shares;
issued 5,654,450 shares of Series A convertible preferred stock;
outstanding: 1996--0 shares; 1995--5,421,998 shares;
cumulative retired: 1996--5,654,450 shares; 1995--232,452 shares -- 258.9
Common stock, $1 par value per share.
Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9
Capital in excess of par value 162.1 49.3
Reduction for ESOP loan guarantee (217.4) (225.1)
Retained earnings 1,222.6 1,133.8
Foreign currency translation 17.3 18.0
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1,236.5 1,286.8
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Less common stock in treasury, at cost:
1996--10,714,572 shares; 1995--15,014,098 shares 446.5 511.8
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 790.0 775.0
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Total liabilities and shareholders' equity $2,135.6 $2,149.8
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</TABLE>
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
Millions Years ended December 31 1996 1995 1994
==========================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 155.9 $ 123.3 $ 210.4
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization excluding furniture 123.7 123.1 120.7
Depreciation and amortization for furniture -- 13.0 12.7
Deferred income taxes 11.2 (8.7) 14.6
Equity change in affiliates (18.2) (6.3) (0.9)
Gain on sale of discontinued businesses -- (83.9) --
Loss on ceramic tile business combination net of taxes -- 116.8 --
Loss from restructuring activities 46.5 71.8 --
Restructuring payments (37.4) (18.3) (20.2)
(Increase) decrease in net assets of discontinued business -- 2.3 (4.4)
Extraordinary loss 8.9 -- --
Changes in operating assets and liabilities net of
effect of discontinued business, restructuring and dispositions:
(Increase) decrease in receivables 3.6 6.9 (18.8)
(Increase) in inventories (11.5) (34.3) (6.8)
(Increase) decrease in other current assets (22.8) 9.8 (3.6)
(Increase) in other noncurrent assets (57.4) (23.4) (18.9)
Increase (decrease) in accounts payable and accrued expenses (3.2) (37.0) 32.1
Increase (decrease) in income taxes payable 2.5 (8.2) (10.1)
Increase (decrease) in other long-term liabilities 15.2 20.0 (5.3)
Other, net 3.9 3.1 3.7
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 220.9 270.0 305.2
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment excluding furniture (220.7) (171.8) (134.2)
Purchases of property, plant and equipment for furniture -- (14.3) (14.1)
Investment in computer software (7.3) (10.9) (4.3)
Proceeds from sale of land, facilities and discontinued businesses 3.6 342.6 12.8
Acquisitions -- (20.7) --
Investment in affiliates (15.4) (27.6) --
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (239.8) 97.3 (139.8)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt (7.1) 3.2 (89.6)
Issuance of long-term debt 40.8 -- --
Reduction of long-term debt (40.0) (20.1) (5.7)
Cash dividends paid (70.1) (70.8) (66.2)
Purchase of common stock for the treasury (79.6) (41.3) (10.6)
Preferred stock redemption (21.4) (2.9) --
Proceeds from exercised stock options 6.2 7.0 8.4
Other, net (0.6) 2.3 (0.8)
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Net cash used for financing activities (171.8) (122.6) (164.5)
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Effect of exchange rate changes on cash and cash equivalents (0.8) 0.2 2.0
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Net increase (decrease) in cash and cash equivalents $ (191.5) $ 244.9 $ 2.9
- ------------------------------------------------------------------------------============================================
Cash and cash equivalents at beginning of year $ 256.9 $ 12.0 $ 9.1
- ------------------------------------------------------------------------------============================================
Cash and cash equivalents at end of year $ 65.4 $ 256.9 $ 12.0
- ------------------------------------------------------------------------------============================================
Supplemental cash flow information
Interest paid $ 20.7 $ 29.6 $ 31.9
Income taxes paid $ 65.5 $ 76.9 $ 62.0
- ------------------------------------------------------------------------------============================================
</TABLE>
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 35 -
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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<TABLE>
<CAPTION>
Millions except for per-share data Years ended December 31 1996 1995 1994
==========================================================================================================================
<S> <C> <C> <C>
Series A convertible preferred stock:
Balance at beginning of year $ 258.9 $ 261.6 $ 263.9
Conversion of preferred stock to common (241.5) -- --
Shares retired (17.4) (2.7) (2.3)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ -- $ 258.9 $ 261.6
- --------------------------------------------------------------------------------------------------------------------------
Common stock, $1 par value:
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
- --------------------------------------------------------------------------------------------------------------------------
Capital in excess of par value:
Balance at beginning of year $ 49.3 $ 39.3 $ 29.7
Gain in investment in affiliates 14.5 -- --
Minimum pension liability adjustments (7.4) -- --
Conversion of preferred stock to common 102.4 -- --
Stock issuances 3.3 10.0 9.6
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 162.1 $ 49.3 $ 39.3
- --------------------------------------------------------------------------------------------------------------------------
Reduction for ESOP loan guarantee:
Balance at beginning of year $ (225.1) $ (233.9) $ (241.8)
Principal paid 13.4 10.7 8.4
Loans to ESOP (4.2) -- --
Accrued compensation (1.5) (1.9) (0.5)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (217.4) $ (225.1) $ (233.9)
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $1,133.8 $1,076.8 $ 927.7
Net earnings for year 155.9 123.3 210.4
Tax benefit on dividends paid on unallocated common shares 1.0 -- --
Tax benefit on dividends paid on unallocated preferred shares 2.0 4.5 4.9
- --------------------------------------------------------------------------------------------------------------------------
Total $1,292.7 $1,204.6 $1,143.0
- --------------------------------------------------------------------------------------------------------------------------
Less dividends:
Preferred stock
$3.462 per share $ 8.9 $ 18.8 $ 19.0
Common stock
$1.56 per share in 1996; 61.2
$1.40 per share in 1995; 52.0
$1.26 per share in 1994; 47.2
- --------------------------------------------------------------------------------------------------------------------------
Total dividends $ 70.1 $ 70.8 $ 66.2
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,222.6 $1,133.8 $1,076.8
- --------------------------------------------------------------------------------------------------------------------------
Foreign currency translation:
Balance at beginning of year $ 18.0 $ 8.3 $ (3.4)
Translation adjustments and hedging activities (4.4) 10.9 11.7
Allocated income taxes 3.7 (1.2) --
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 17.3 $ 18.0 $ 8.3
- --------------------------------------------------------------------------------------------------------------------------
Less treasury stock at cost:
Balance at beginning of year $ 511.8 $ 468.9 $ 458.5
Stock purchases 81.5 41.3 10.6
Conversion of preferred stock to common (139.1) -- --
Stock issuance activity, net (7.7) 1.6 (0.2)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 446.5 $ 511.8 $ 468.9
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 790.0 $ 775.0 $ 735.1
==========================================================================================================================
</TABLE>
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 36 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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The 1995 and 1994 consolidated financial statements have been restated from the
1995 annual report to include the historical results of the ceramic tile
operations on an operating or consolidated line item basis rather than under the
equity method.
Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Actual results may differ from these estimates.
Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of the parent Armstrong World
Industries, Inc., and its domestic and foreign subsidiaries. All significant
intercompany transactions have been eliminated from the consolidated statements.
Earnings per Common Share. In the third quarter, the employee stock ownership
- -------------------------
plan (ESOP) and retirement savings plan were merged resulting in the conversion
of convertible preferred shares into common stock. Primary earnings per share
for "Earnings from continuing businesses" and for "Net earnings" in 1996 are
determined by dividing the earnings, after deducting preferred dividends (net of
tax benefits on unallocated shares), by the average number of common shares
outstanding, including the converted shares from the conversion date forward.
Fully diluted earnings per share for 1996 include the shares of common stock
outstanding and the adjustments to common shares and earnings required to
portray the convertible preferred shares on an "if converted" basis prior to
conversion. The earnings per share calculation for 1996 reflects different
levels of shares for primary and fully diluted calculations since the converted
shares are only included in the weighted average common shares outstanding from
the conversion date forward.
Advertising Costs. The company's practice is to expense the costs of advertising
- -----------------
as they are incurred.
Postretirement Benefits. The company has plans that provide for medical and life
- -----------------------
insurance benefits to certain eligible employees when they retire from active
service. Generally, the company's practice is to fund the actuarially determined
current service costs and the amounts necessary to amortize prior service
obligations over periods ranging up to 30 years, but not in excess of the full
funding limitations.
Taxes. Deferred tax assets and liabilities are recognized using enacted tax
- -----
rates for expected future tax consequences of events recognized in the financial
statements or tax returns. The tax benefit for dividends paid on unallocated
shares of stock held by the ESOP was recognized in shareholders' equity.
Cash and Cash Equivalents. Short-term investments, substantially all of which
- -------------------------
have maturities of three months or less when purchased, are considered to be
cash equivalents and are carried at cost or less, generally approximating market
value.
Inventories. Inventories are valued at the lower of cost or market.
- -----------
Approximately 57% of 1996's inventories are valued using the last in, first out
(LIFO) method. Other inventories are generally determined on a first in, first
out (FIFO) method.
Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost, with accumulated depreciation and amortization deducted to
arrive at net book value. Depreciation charges for financial reporting purposes
are determined generally on the straight-line basis at rates calculated to
provide for the retirement of assets at the end of their useful lives.
Accelerated depreciation is generally used for tax purposes. When assets are
disposed of or retired, their costs and related depreciation are removed from
the books, and any resulting gains or losses are reflected in "Selling, general
and administrative expenses."
Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
Effective January 1, 1996, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
impairment losses be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The adoption of this standard did not have a
material impact on the company's operating results, cash flows or financial
position.
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods up to 31 years. On a periodic basis, the
company estimates the future undiscounted cash flows of the businesses to which
goodwill relates in order to ensure that the carrying value of goodwill has not
been impaired.
Financial Instruments. The company uses financial instruments to diversify or
- ---------------------
offset the effect of currency and interest rate variability.
The company may enter into foreign currency forward contracts and options to
offset the effect of exchange rate changes on cash flow exposures denominated in
foreign currencies. The exposures include firm commitments and anticipated
events encompassing sales, royalties, service fees, dividends and intercompany
loans.
Realized and unrealized gains and losses on contracts are marked to market and
recognized in the consolidated statements of earnings. Unrealized gains and
losses on foreign currency options (which consist primarily of purchased options
that are designated as effective hedges) as well as option premium expense are
deferred and included in the statements of earnings as part of the underlying
transactions. Realized and unrealized gains and losses on foreign currency
contracts used to hedge intercompany transactions having the character of
long-term investments are included in the foreign currency translation component
of shareholders' equity.
The company may enter into interest rate swap agreements to alter the interest
rate risk profile of outstanding debt, thus altering the company's exposure to
changes in interest rates. In these swaps, the company agrees to exchange, at
specified intervals, the difference between fixed and variable interest
amounts calculated by reference to a notional principal amount. Any differences
paid or received on interest rate swap agreements are recognized as adjustments
to interest rate expense over the life of the swap.
The company continuously monitors developments in the capital markets and only
enters into currency and swap transactions with established counterparties
having investment-grade ratings. The exposure to individual counterparties is
limited, and thus the company considers the risk of counterparty default to be
negligible.
- 37 -
<PAGE>
Stock Compensation. On January 1, 1996, the company adopted SFAS No. 123,
- ------------------
"Accounting for Stock-Based Compensation," which permits entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied.
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NATURE OF OPERATIONS
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<TABLE>
<CAPTION>
INDUSTRY SEGMENTS
- -------------------------------------------------------------------------
at December 31 (millions) 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net trade sales:
Floor coverings $1,091.8 $1,053.9 $1,063.5
Building products 718.4 682.2 630.0
Industry products 346.2 348.8 312.2
Ceramic tile -- 240.1 220.3
- -------------------------------------------------------------------------
Total net sales $2,156.4 $2,325.0 $2,226.0
- ------------------------------------------===============================
Operating income (loss): (Note 1)
Floor coverings $ 146.9 $ 145.0 $ 189.6
Building products 95.1 92.2 86.8
Industry products 40.1 9.3 41.2
Ceramic tile (Note 2) 9.9 (168.4) 0.8
Unallocated corporate expense (36.1) (34.0) (23.8)
- -------------------------------------------------------------------------
Total operating income $ 255.9 $ 44.1 $ 294.6
- ------------------------------------------===============================
Depreciation and amortization:
Floor coverings $ 53.9 $ 47.9 $ 49.2
Building products 37.0 36.8 34.5
Industry products 19.1 19.3 17.6
Ceramic tile 4.3 13.5 13.8
Corporate 9.4 5.6 5.6
- -------------------------------------------------------------------------
Total depreciation
and amortization $ 123.7 $ 123.1 $ 120.7
- ------------------------------------------===============================
Capital additions: (Note 3)
Floor coverings $ 117.7 $ 77.3 $ 56.7
Building products 67.7 49.2 31.5
Industry products 22.5 45.0 22.6
Ceramic tile -- 9.6 20.4
Corporate 12.8 6.3 3.0
- -------------------------------------------------------------------------
Total capital additions $ 220.7 $ 187.4 $ 134.2
- ------------------------------------------===============================
Identifiable assets:
Floor coverings $ 687.9 $ 583.2 $ 575.7
Building products 541.1 513.5 478.1
Industry products 272.8 301.8 234.8
Ceramic tile 168.7 135.8 290.1
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
- -------------------------------------------------------------------------
Total assets $2,135.6 $2,149.8 $2,159.0
- ------------------------------------------===============================
Note 1:
- -------------------------------------------------------------------------
Restructuring charges in
operating income (millions) 1996 1995 1994
- -------------------------------------------------------------------------
Floor coverings $14.5 $25.0 --
Building products 8.3 6.3 --
Industry products 4.0 31.4 --
Ceramic tile -- -- --
Unallocated corporate expense 19.7 9.1 --
- -------------------------------------------------------------------------
Total restructuring charges
in operating income $46.5 $71.8 --
- ---------------------------------------------============================
</TABLE>
Note 2: 1995 operating income includes a $177.2 million loss due to the ceramic
tile business combination. See "Equity Earnings From Affiliates" on page 39.
Note 3: 1995 capital additions for industry segments include property, plant and
equipment from acquisitions of $15.6 million.
The floor coverings segment includes resilient flooring, adhesives, installation
and maintenance materials and accessories sold to U.S. commercial and
residential segments through wholesalers, retailers and contractors. The
Corporate Retail Accounts division provides marketing services and sales to home
centers, which have become an important part of the company's business. To
improve logistical cost-effectiveness, 14 independent regional distribution
centers are being established to service these customers (five of the centers
were in place by the end of 1996). To reduce interchannel conflict, segmented
resilient flooring products were introduced to allow exclusive sales in these
different markets. Raw materials, especially plasticizers and resins, are a
significant cost of resilient flooring products. The company has no influence on
the worldwide market of these materials and is subject to cost changes.
The building products segment manufactures both residential and architectural
ceiling systems. Grid products, manufactured through the joint venture with
Worthington Industries (WAVE), have become a more important part of this
business worldwide. Earnings from this joint venture are included in this
segment's operating income. The major sales activity in this segment is in
architectural ceiling systems for commercial and institutional structures which
are sold to contractors and resale distributors worldwide, with European sales
having a significant impact. Ceiling systems for the residential home segment
are sold through wholesalers and retailers, mainly in the United States. Through
a joint venture with a Chinese partner, production began in late 1996 in
Shanghai to manufacture ceilings and suspension systems for the Pacific area.
The industry products segment makes a variety of specialty products for the
building, automotive, textile and other industries worldwide. The majority of
sales in this segment are flexible pipe insulation used in construction and in
original equipment manufacturing. These sales are primarily in Europe, with
Germany having the largest concentration due to its regulatory requirements. The
major product costs for insulation are raw materials and labor. Strong
competition exists in insulation since there are minimal barriers to entry into
this market. Gasket materials are sold for new and replacement use in the
automotive, construction and farm equipment, appliance, small engine and
compressor industries. The automotive and diesel build rates are the most
sensitive market drivers for these products. Other products in the industry
products segment are textile mill supplies, including cots and aprons sold to
equipment manufacturers and textile mills. In 1995, the company announced its
intentions to discuss with potential buyers the possible sale of the textile
products operation.
The ceramic tile products segment includes ceramic tile sold through home
centers, company-owned sales service centers and independent distributors.
Ceramic tile products face significant competition from foreign suppliers.
Starting in 1996, this segment's results are reported as "Equity Earnings from
Affiliates" (see page 39) and are included in operating income.
- 38 -
<PAGE>
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
at December 31 (millions) 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net trade sales:
United States $1,419.2 $1,586.4 $1,564.0
Europe 548.4 558.7 483.4
Other foreign 188.8 179.9 178.6
- ------------------------------------------------------------------------
Interarea transfers:
United States 105.0 101.1 95.0
Europe 13.2 13.8 8.7
Other foreign 30.4 32.1 26.1
Eliminations (148.6) (147.0) (129.8)
- ------------------------------------------------------------------------
Total net sales $2,156.4 $2,325.0 $2,226.0
- -----------------------------------------===============================
Operating income:
United States $ 202.7 $ 7.7 $ 235.5
(See Note 2 on page 35)
Europe 79.3 62.6 75.3
Other foreign 10.0 7.8 7.6
Unallocated corporate expense (36.1) (34.0) (23.8)
- ------------------------------------------------------------------------
Total operating income $ 255.9 $ 44.1 $ 294.6
- -----------------------------------------===============================
Identifiable assets:
United States $1,180.1 $1,044.5 $1,130.1
Europe 383.7 406.7 376.5
Other foreign 107.3 83.4 72.6
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
Eliminations (0.6) (0.3) (0.5)
- ------------------------------------------------------------------------
Total assets $2,135.6 $2,149.8 $2,159.0
- -----------------------------------------===============================
</TABLE>
United States net trade sales include export sales to non-affiliated customers
of $34.0 million in 1996, $32.1 million in 1995 and $26.1 million in 1994. Also
included in United States net trade sales were ceramic tile operations sales of
$240.1 million and $220.3 million in 1995 and 1994, respectively.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain and Switzerland. Operations in Australia,
Canada, The People's Republic of China, Hong Kong, Indonesia, Japan, Korea,
Singapore and Thailand are in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates marketing
exported products are accounted for by methods that approximate arm's-length
transactions, after considering the costs incurred by the selling company and
the return on assets employed of both the selling unit and the purchasing unit.
Operating income of a geographic area includes income accruing from sales to
affiliates.
- --------------------------------------------------------------------------------
OPERATING STATEMENT ITEMS
- --------------------------------------------------------------------------------
NET SALES
Net sales in 1996 totaled $2,156.4 million, 7.2% below the 1995 total of
$2,325.0 million and 3.1% below the 1994 total of $2,226.0 million. Sales are
not reported in 1996 for the ceramic tile segment in which Armstrong has a
minority interest. Prior to 1996, ceramic tile segment sales were consolidated
with total company results. Ceramic tile net sales for 1995 and 1994 were $240.1
million and $220.3 million, respectively.
EARNINGS FROM CONTINUING BUSINESSES
Earnings from continuing businesses were $164.8 million in 1996 compared with
$13.6 million in 1995 and $187.2 million in 1994. 1995 earnings included the
$116.8 million after-tax loss for the ceramic tile business combination
mentioned above. Included in the earnings for 1996 and 1995 were after-tax
restructuring charges of $29.6 million and $46.6 million, respectively.
DISCONTINUED OPERATIONS
On December 29, 1995, the company sold the stock of its furniture subsidiary,
Thomasville Furniture Industries, Inc., to INTERCO Incorporated for $331.2
million in cash. INTERCO also assumed $8.0 million of Thomasville's
interest-bearing debt. The company recorded a gain on the sale of $83.9 million
after tax. Certain liabilities related to terminated benefit plans of
approximately $11.3 million were retained by the company. Thomasville and its
subsidiaries recorded sales of approximately $550.2 million in 1995 and $526.8
million in 1994.
NET EARNINGS
Net earnings were $155.9 million for 1996 compared with $123.3 million and
$210.4 million in 1995 and 1994, respectively.
EQUITY EARNINGS FROM AFFILIATES
Equity earnings from affiliates for 1996 were primarily comprised of the
company's after-tax share of the net income of the Dal-Tile International Inc.
business combination and the amortization of the excess of the company's
investment in Dal-Tile over the underlying equity in net assets, and the 50%
interest in the WAVE joint venture with Worthington Industries. Results in 1995
and 1994 reflect only the 50% interest in the WAVE joint venture.
In 1995, the company entered into a business combination with Dal-Tile
International Inc. The transaction was accounted for at fair value and involved
the exchange of $27.6 million in cash and the stock of the ceramic tile
operations, consisting primarily of American Olean Tile Company, a wholly owned
subsidiary, for ownership of 37% of the shares of Dal-Tile. The company's
investment in Dal-Tile exceeded the underlying equity in net assets by $123.9
million which will be amortized over a period of 30 years. The after-tax loss on
the transaction was $116.8 million.
In August 1996, Dal-Tile issued new shares in a public offering decreasing the
company's ownership share from 37% to 33%.
Armstrong's ownership of the combined Dal-Tile is accounted for under the equity
method. The summarized historical financial information for ceramic tile
operations is presented below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Net sales $240.1 $220.3
Operating income/(1)/ 8.8 0.8
Assets/(2)/ 269.8 290.1
Liabilities/(2)/ 17.3 19.6
- -------------------------------------------------------------
</TABLE>
Note 1: Excludes 1995 loss of $177.2 million due to ceramic tile business
combination.
Note 2: 1995 balances were as of December 29, 1995, immediately prior to the
ceramic tile business combination.
- 39 -
<PAGE>
RESTRUCTURING CHARGES
Restructuring charges amounted to $46.5 million in 1996 and $71.8 million in
1995.
The second-quarter 1996 restructuring charge related primarily to the
reorganization of corporate and business unit staff positions; realignment and
consolidation of the Armstrong and W.W. Henry installation products businesses;
restructuring of production processes in the Munster, Germany, ceilings
facility; early retirement opportunities for employees in the Fulton, New York,
gasket and specialty paper products facility; and write-down of assets. These
actions affected approximately 500 employees, about two-thirds of whom were in
staff positions. The charges were estimated to be evenly split between cash
payments and noncash charges. The majority of the cash outflow was expected to
occur within the following 12 months. It was anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years. The 1995 restructuring charges related primarily to the
closure of a plant in Braintree, Massachusetts, and for severance of 670
employees in the North American flooring business and the European industry
products and building products businesses.
Actual severance payments charged against restructuring reserves were $32.1
million in 1996 relating to the elimination of 724 positions, of which 323
terminations occurred since the beginning of 1996. As of December 31, 1996,
$50.3 million of reserves remained for restructuring actions.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Depreciation $108.6 $114.9 $113.0
Amortization 15.1 8.2 7.7
- -------------------------------------------------------------
Total $123.7 $123.1 $120.7
- --------------------------------=============================
</TABLE>
The increase in amortization of intangible assets relates principally to the
amortization of $4.1 million of the excess of the company's 1995 investment in
the ceramic tile business combination over its underlying equity in net assets.
SELECTED OPERATING EXPENSES
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Maintenance and repair costs $105.3 $120.2 $117.5
Research and development costs 59.3 57.9 53.1
Advertising costs 18.4 25.5 29.6
- -------------------------------------------------------------
<CAPTION>
OTHER EXPENSE (INCOME), NET
- -------------------------------------------------------------
(millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income $(6.5) $(3.3) $(3.7)
Foreign exchange, net loss 1.2 2.6 2.6
Postretirement liability
transition obligation -- 1.6 --
Environmental recoveries
discontinued businesses (2.8) -- --
Minority interest 0.3 0.6 1.8
Other 0.9 0.4 (0.2)
- -------------------------------------------------------------
Total $(6.9) $ 1.9 $ 0.5
- -------------------------------------------------------------
</TABLE>
EMPLOYEE COMPENSATION
Employee compensation and the average number of employees are presented in the
table below. Restructuring charges for severance costs and early retirement
incentives have been excluded.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Employee compensation
cost summary (millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Wages and salaries $509.7 $589.2 $585.9
Payroll taxes 51.5 61.7 54.8
Pension credits (16.1) (12.1) (13.3)
Insurance and other benefit costs 50.7 58.7 46.3
Stock-based compensation 5.8 0.8 0.1
- -------------------------------------------------------------
Total $601.6 $698.3 $673.8
- --------------------------------=============================
Average number of employees 10,572 13,433 13,784
- -------------------------------------------------------------
</TABLE>
PENSION COSTS
The company and a number of its subsidiaries have pension plans covering
substantially all employees. Benefits from the principal plan are based on the
employee's compensation and years of service.
The company also had defined-contribution pension plans for eligible employees
at certain of its U.S. subsidiaries, such as the Employee Stock Ownership Plan
(ESOP) described on page 42.
Funding requirements, in accordance with provisions of the Internal Revenue
Code, are determined independently of expense using an expected long-term rate
of return on assets of 8.67%. The company's principal plan was subject to the
full funding limitation in 1996, 1995 and 1994, and the company made no
contribution to that plan in any of those years.
The total pension cost or credit from all plans is presented in the table below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Total pension
(credit) cost (millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
U.S. defined-benefit plans:
Net pension credit $(39.9) $(26.5) $(29.1)
Early retirement incentives 10.1 28.7 --
Net curtailment gain -- (1.2) --
Defined contribution plans 9.9 4.2 4.3
Net pension cost of non-U.S.
defined-benefit plans 8.5 8.1 8.6
Other funded and unfunded
pension costs 5.4 3.3 2.9
- -------------------------------------------------------------
Total pension (credit) cost $ (6.0) $ 16.6 $(13.3)
- --------------------------------=============================
</TABLE>
In 1995, the company recognized a $1.6 million curtailment gain from the sale of
furniture and a $0.4 million curtailment loss from the ceramic tile business
combination.
- 40 -
<PAGE>
The net credit for U.S. defined-benefit pension plans was determined using the
assumptions presented in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Net credit for U.S. defined-benefit
pension plans (millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Assumptions:
Discount rate 7.00% 8.00% 7.00%
Rate of increase in future
compensation levels 4.25% 5.25% 4.75%
Expected long-term rate of
return on assets 8.75% 8.75% 8.25%
- --------------------------------------------------------------
Actual (return) loss on assets $(124.2) $(406.7) $ 93.6
Less amount deferred 10.4 313.0 (182.5)
- --------------------------------------------------------------
Expected return on assets $(113.8) $(93.7) $(88.9)
Net amortization and other (9.4) (9.3) (9.5)
Service cost--benefits earned
during the year 17.2 16.7 17.9
Interest on the projected benefit
obligation 66.1 59.8 51.4
- --------------------------------------------------------------
Net pension credit $ (39.9) $ (26.5) $ (29.1)
- --------------------------------------------------------------
</TABLE>
The funded status of the company's U.S. defined-benefit pension plans at the end
of 1996 and 1995 is presented in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Funded status of U.S. defined-benefit
pension plans (millions) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Assumptions:
Discount rate 7.25% 7.00%
Compensation rate 4.50% 4.25%
- ---------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ (824.4) $ (726.7)
- ---------------------------------------------------------------------
Accumulated benefit obligation $ (899.4) $ (802.4)
- ---------------------------------------------------------------------
Projected benefit obligation for
services rendered to date $ (981.2) $ (901.2)
Plan assets at fair value $ 1,501.9 $1,446.6
Plan assets in excess of projected
benefit obligation $ 520.7 $545.4
Unrecognized transition asset (33.9) (40.3)
Unrecognized prior service cost 99.9 81.8
Unrecognized net gain--experience
different from assumptions (462.6) (491.8)
Provision for restructuring charges (9.1) (9.9)
- ---------------------------------------------------------------------
Prepaid pension cost $ 115.0 $ 85.2
- ------------------------------------------------=====================
</TABLE>
The plan assets, stated at estimated fair value as of December 31, are primarily
listed stocks and bonds.
The company has pension plans covering employees in a number of foreign
countries that utilize assumptions that are consistent with, but not identical
to, those of the U.S. plans.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Net cost for non-U.S. defined-benefit
pension plans (millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Actual (return) loss on assets $(8.4) $(11.2) $ 1.8
Less amount deferred 2.5 5.9 (6.1)
- -------------------------------------------------------------
Expected return on assets $(5.9) $(5.3) $(4.3)
Net amortization and other 0.5 0.4 0.6
Service cost--benefits earned
during the year 5.3 4.9 5.2
Interest on the projected benefit
obligation 8.6 8.1 7.1
- -------------------------------------------------------------
Net pension cost $ 8.5 $ 8.1 $ 8.6
- ---------------------------------============================
</TABLE>
The funded status of the non-U.S. defined-benefit pension plans at the end of
1996 and 1995 is presented in the following table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Funded status of non-U.S. defined-benefit
pension plans (millions) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(112.8) $(103.0)
- -------------------------------------------------------------------
Accumulated benefit obligation $(117.2) $(107.6)
- -------------------------------------------------------------------
Projected benefit obligation for services
rendered to date $(125.5) $(115.8)
- -------------------------------------------------------------------
Plan assets at fair value 84.5 71.4
- -------------------------------------------------------------------
Projected benefit obligation greater than
plan assets $ (41.0) $(44.4)
Unrecognized transition obligation 2.4 3.3
Unrecognized prior service cost 5.1 3.4
Unrecognized net gain--experience
different from assumptions (16.9) (13.4)
Adjustment required to recognize
minimum liability (0.6) (0.4)
- -------------------------------------------------------------------
Accrued pension cost $ (51.0) $ (51.5)
- ------------------------------------------------===================
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
AND POSTEMPLOYMENT BENEFITS
The company has postretirement benefit plans that provide for medical and life
insurance benefits to certain eligible employees, worldwide, when they retire
from active service. The company funds these benefit costs primarily on a
pay-as-you-go basis, with the retiree paying a portion of the cost for health
care benefits through deductibles and contributions.
The company announced in 1989 and 1990 a 15-year phaseout of its cost of health
care benefits for certain future retirees. These future retirees include parent
company nonunion employees and some union employees. Shares of ESOP common stock
are scheduled to be allocated to these employees, based on employee age and
years to expected retirement, to help offset future postretirement medical
costs. In addition, they may enroll in a voluntary portion of the ESOP to
purchase additional shares.
The postretirement benefit costs were determined using the assumptions presented
in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Periodic postretirement
benefit costs (millions) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions:
Discount rate 7.00% 8.25% 7.75%
Rate of increase in future
compensation levels 4.25% 5.25% 4.75%
- ---------------------------------------------------------------------
Service cost of benefits earned
during the year $ 3.7 $ 2.8 $ 3.0
Interest cost on accumulated
postretirement benefit obligation 17.0 17.1 16.5
Net amortization and other 0.5 (0.8) (0.8)
Periodic postretirement benefit cost $21.2 $19.1 $18.7
- -----------------------------------------============================
</TABLE>
- 41 -
<PAGE>
The status of the company's postretirement benefit plans at the end of 1996 and
1995 is presented in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Status of postretirement
benefit plans (millions) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Assumptions:
Discount rate 7.25% 7.00%
Compensation rate 4.50% 4.25%
- ---------------------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $164.9 $161.5
Fully eligible active plan participants 14.7 17.2
Other active plan participants 67.5 67.9
- ---------------------------------------------------------------------------
Total APBO $247.1 $246.6
- ---------------------------------------------------------------------------
Unrecognized prior service credit 7.8 7.3
Unrecognized net loss (37.9) (40.7)
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost $217.0 $213.2
- -----------------------------------------------------======================
</TABLE>
The assumed health care cost trend rate used to measure the APBO was 11% in
1995, decreasing 1% per year to an ultimate rate of 6% by the year 2000. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, if the health care cost trend rate assumptions were
increased by 1%, the APBO as of December 31, 1996, would be increased by $23.6
million. The effect of this change on the total of service and interest costs
for 1996 would be an increase of $2.4 million.
The company provides certain postemployment benefits to former or inactive
employees and their dependents during the period following employment but before
retirement.
Postemployment benefit expense totaled $3.1 million in 1996, which included a
$2.9 million credit resulting from favorable actuarial experience with regard to
assumed plan retirement and mortality rates. In 1995, the company recorded a
postemployment benefit expense of $3.2 million, which included a $4.1 million
credit from the transfer of the payment responsibility for certain disability
benefits to the company's defined-benefit pension plan. In 1994, the company
recorded a postemployment benefit credit of $12.2 million, which included a
$14.6 million gain related to the qualification in 1994 of long-term disabled
employees for primary medical coverage under Medicare.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In 1989, Armstrong established an Employee Stock Ownership Plan (ESOP) that
borrowed $270 million from banks and insurance companies, repayable over 15
years and guaranteed by the company. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by the
company. In 1996, the ESOP was merged with the Retirement Savings Plan to form
the new Retirement Savings and Stock Ownership Plan (RSSOP).
On July 31, 1996, the trustee of the ESOP converted the preferred stock held by
the trust into approximately 5.1 million shares of common stock at a one-for-one
ratio. In December 1996, the trustee borrowed $4.2 million at 5.9% from the
company. The loan was made to ensure that the financial arrangements provided to
employees remain consistent with the original intent of the ESOP.
The number of shares released for allocation to participant accounts is based on
the proportion of principal and interest paid to the total amount of debt
service remaining to be paid over the life of the borrowings. Through December
31, 1996, the ESOP had allocated to participants a total of 2,245,230 shares and
retired 597,068 shares.
The ESOP currently covers parent company nonunion employees, some union
employees and employees of domestic subsidiaries.
The company's guarantee of the ESOP loan has been recorded as a long-term
obligation and as a reduction of shareholders' equity on its consolidated
balance sheet.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Details of ESOP debt service
payments (millions) 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred dividends paid $ 8.9 $18.8 $19.0
Common stock dividends paid 4.0 -- --
Employee contributions 5.3 6.7 6.2
Company contributions 11.0 6.2 4.9
Company loan to ESOP 4.2 -- --
- ---------------------------------------------------------------------------
Debt service payments made
by ESOP trustee $33.4 $31.7 $30.1
- ---------------------------------------====================================
</TABLE>
The company recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $9.4 million in 1996, $3.5 million in 1995 and $3.6 million
in 1994. These costs were partially offset by savings realized from changes to
company-sponsored health care benefits and elimination of the contribution-
matching feature in the company-sponsored voluntary retirement savings plan.
TAXES
Taxes totaled $140.4 million in 1996, $71.7 million in 1995 and $150.4 million
in 1994.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Details of taxes (millions) 1996 1995 1994
- ---------------------------------------------------------------------------
Earnings (loss) from continuing businesses before income taxes:
<S> <C> <C> <C>
Domestic $176.5 $(28.7) $262.7
Foreign 87.6 68.0 52.1
Eliminations (23.9) (31.1) (49.0)
- ---------------------------------------------------------------------------
Total $240.2 $ 8.2 $265.8
- ---------------------------------------------------------------------------
Income tax provision (benefit):
Current:
Federal $ 36.2 $(19.7) $ 12.8
Foreign 33.4 23.4 25.9
State 1.4 (0.2) 5.0
- ---------------------------------------------------------------------------
Total current 71.0 3.5 43.7
- ---------------------------------------------------------------------------
Deferred:
Federal 4.9 (6.2) 41.4
Foreign (0.5) (2.7) (2.2)
State -- -- (4.3)
- ---------------------------------------------------------------------------
Total deferred 4.4 (8.9) 34.9
- ---------------------------------------------------------------------------
Total income taxes 75.4 (5.4) 78.6
Payroll taxes 50.3 61.5 54.8
Property, franchise and capital
stock taxes 14.7 15.6 17.0
- ---------------------------------------------------------------------------
Total taxes $140.4 $ 71.7 $150.4
- --------------------------------------=====================================
</TABLE>
- 42 -
<PAGE>
At December 31, 1996, unremitted earnings of subsidiaries outside the United
States were $125.2 million (at December 31, 1996, balance sheet exchange rates)
on which no U.S. taxes have been provided. If such earnings were to be remitted
without offsetting tax credits in the United States, withholding taxes would be
$9.4 million. The company's intention, however, is to reinvest those earnings
permanently or to repatriate them only when it is tax effective to do so.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Reconciliation to
U.S. statutory tax rate (millions) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $84.1 $ 2.9 $93.0
State income taxes 0.9 -- (1.5)
(Benefit) on ESOP dividend (1.5) (2.1) (1.7)
Tax (benefit) on foreign and
foreign-source income 6.2 (7.7) (1.4)
Utilization of excess foreign
tax credit (6.5) -- (5.4)
Equity in earnings of affiliates (4.2) -- --
Reversal of prior year provisions -- -- (6.5)
Insurance programs (1.2) -- --
Other items (2.4) (0.1) 2.1
Loss from ceramic tile business
combination -- 1.6 --
- -----------------------------------------------------------------------------
Tax (benefit) expense at effective rate $75.4 $(5.4) $78.6
- -----------------------------------------====================================
</TABLE>
EXTRAORDINARY LOSS
In 1996, Dal-Tile refinanced all of its existing debt resulting in an
extraordinary loss. The company's share of the extraordinary loss was $8.9
million after tax, or $0.21 per share.
- --------------------------------------------------------------------------------
BALANCE SHEET ITEMS
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased to $65.4 million at the end of 1996 from
$256.9 million at the end of 1995. The large cash balance at the end of 1995 was
primarily due to the cash proceeds received from the sale of Thomasville
Furniture Industries, Inc., in December 1995. Most of the 1996 beginning cash
balance covered the decrease of debt, repurchase of shares of company stock,
payment of dividends, redemption of preferred stock, purchase of computer
software and additional investment in Dal-Tile. Operating and other factors
associated with the decrease in cash and cash equivalents are detailed in the
Consolidated Statements of Cash Flows on page 35.
RECEIVABLES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Accounts and notes
receivable (millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Customers' receivables $214.7 $213.4
Customers' notes 18.4 21.3
Miscellaneous receivables 18.5 12.2
- -----------------------------------------------------------------------------
251.6 246.9
- -----------------------------------------------------------------------------
Less allowance for discounts and losses 34.9 29.0
- -----------------------------------------------------------------------------
Net $216.7 $217.9
- ---------------------------------------------------==========================
</TABLE>
Generally, the company sells its products to select, preapproved groups of
customers which include flooring and building material distributors, ceiling
systems contractors, regional and national mass merchandisers, home centers and
original equipment manufacturers. The businesses of these customers are directly
affected by changes in economic and market conditions. The company considers
these factors and the financial condition of each customer when establishing its
allowance for losses from doubtful accounts.
The carrying amount of the receivables approximates fair value because of the
short maturity of these items. Trade receivables are recorded in gross billed
amounts as of date of shipment. Provision is made for estimated applicable
discounts and losses.
INVENTORIES
Inventories were $205.7 million in 1996, $10.2 million higher than at the end of
1995. The increase was primarily due to higher inventory levels for the
introduction of the new laminate flooring product.
Approximately 57% in 1996 and 51% in 1995 of the company's total inventory was
valued on a LIFO (last-in, first-out) basis. Inventory values were lower than
would have been reported on a total FIFO (first-in, first-out) basis, by $60.6
million at the end of 1996 and $62.4 million at year-end 1995.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Inventories (millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Finished goods $143.7 $119.9
Goods in process 20.1 24.0
Raw materials and supplies 41.9 51.6
- -----------------------------------------------------------------------------
Total $205.7 $195.5
- ---------------------------------------------------==========================
</TABLE>
INCOME TAX BENEFITS
Income tax benefits were $49.4 million in 1996 and $26.9 million in 1995. The
increase was primarily due to prepayment of income taxes. Of these amounts,
deferred tax benefits were $26.9 million in 1996 and $26.4 million in 1995.
OTHER CURRENT ASSETS
Other current assets were $27.3 million in 1996, an increase of $1.8 million
from the $25.5 million in 1995.
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 24.4 $ 25.6
Buildings 409.2 390.6
Machinery and equipment 1,344.8 1,313.7
Construction in progress 160.5 124.2
- -----------------------------------------------------------------------------
1,938.9 1,854.1
- -----------------------------------------------------------------------------
Less accumulated depreciation
and amortization 974.9 975.9
- -----------------------------------------------------------------------------
Net $ 964.0 $ 878.2
- -------------------------------------------------============================
</TABLE>
The $84.8 million increase in gross book value to $1,938.9 million at the end of
1996 included $220.7 million for capital additions and a $122.2 million
reduction from sales, retirements, dispositions and other changes.
The unexpended cost of approved capital appropriations amounted to $62.6 million
at year-end 1996, substantially all of which is scheduled to be expended during
1997.
- 43 -
<PAGE>
INSURANCE FOR ASBESTOS-RELATED LIABILITIES
Insurance for asbestos-related liabilities was $141.6 million reflecting the
company's belief in the ultimate availability of insurance in an amount to cover
the estimated potential liability of a like amount (see page 46). Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. See discussion on pages 48-51.
OTHER NONCURRENT ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Goodwill and other intangibles $ 46.1 $ 50.2
Pension-related assets 158.3 108.4
Other 56.8 62.2
- -----------------------------------------------------------------------------
Total $261.2 $220.8
- ---------------------------------------------------==========================
</TABLE>
Other noncurrent assets increased $40.4 million in 1996. Goodwill and other
intangibles decreased $4.1 million reflecting lower spending levels in computer
software systems and acquired intangibles from acquisitions. The $49.9 million
increase in pension-related assets reflects the net pension credit of $39.9
million and an increase in the assets of the deferred compensation plans.
Noncurrent assets are carried at the lower of cost or market or under the equity
method of accounting.
INVESTMENTS IN AFFILIATES
Investments in affiliates were $204.3 million in 1996, an increase of $42.2
million, reflecting the December 29, 1995, ceramic tile business combination
with Dal-Tile International Inc. whereby the company acquired a 37% interest in
Dal-Tile in exchange for the stock of the company's ceramic tile operations and
$27.6 million in cash. Also included in investments in affiliates is the 50%
interest in the WAVE joint venture.
In August Dal-Tile issued new shares in a public offering and used part of the
proceeds from the offering to refinance all of its existing debt. Although the
company's ownership share declined to 33% from 37%, Dal-Tile's net assets
increased, adding to the overall value of the company's investment. In 1996 the
company purchased an additional $15.4 million of Dal-Tile shares through open
market trades and as a part of the initial public offering.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Payables, trade and other $158.2 $168.3
Employment costs 49.7 51.2
Restructuring costs 27.6 40.1
Other 37.8 37.8
- -----------------------------------------------------------------------------
Total $273.3 $297.4
- ---------------------------------------------------==========================
</TABLE>
The carrying amount of accounts payable and accrued expenses approximates fair
value because of the short maturity of these items.
INCOME TAXES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Payable--current $19.3 $15.0
Deferred--current 0.2 1.4
- -----------------------------------------------------------------------------
Total $19.5 $16.4
- ----------------------------------------------------=========================
</TABLE>
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the following
table. Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Deferred income taxes (millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Postretirement and postemployment benefits $ (87.0) $ (82.6)
Restructuring benefits (13.6) (13.4)
Asbestos-related liabilities (49.4) (58.1)
Capital loss carry forward (22.1) --
Other (65.8) (64.6)
Valuation allowance 22.1 --
- -----------------------------------------------------------------------------
Net deferred assets $(215.8) $(218.7)
- -----------------------------------------------------------------------------
Accumulated depreciation $ 95.6 $ 90.7
Pension costs 38.2 35.8
Insurance for asbestos-related liabilities 49.4 58.1
Other 36.4 25.6
- -----------------------------------------------------------------------------
Total deferred income tax liabilities $ 219.6 $ 210.2
- -----------------------------------------------------------------------------
Net deferred income tax liabilities (assets) $ 3.8 $ (8.5)
- -----------------------------------------------------------------------------
Less net income tax (benefits)--current (26.7) (25.0)
Deferred income taxes--long term $ 30.5 $ 16.5
- --------------------------------------------------===========================
</TABLE>
DEBT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
(millions) 1996 rate 1995 rate
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term debt:
Commercial paper $ -- -- $ -- --
Foreign banks 14.5 6.81% 22.0 7.27%
- -----------------------------------------------------------------------------
Total short-term debt $ 14.5 6.81% $ 22.0 7.27%
- -----------------------------------------------------------------------------
Long-term debt:
93/4% debentures
due 2008 $125.0 9.75% $125.0 9.75%
Medium-term notes
8.75-9% due
1997-2001 52.8 8.93% 92.8 8.74%
Bank loan due 1999 $ 21.0 4.79% -- --
Industrial
development bonds 19.5 5.25% 8.5 5.35%
Other 14.8 8.57% 2.1 12.29%
- -----------------------------------------------------------------------------
Total long-term debt $233.1 8.67% $228.4 9.20%
- -----------------------------------------------------------------------------
Less current installments 13.7 8.91% 40.1 8.50%
- -----------------------------------------------------------------------------
Net long-term debt $219.4 8.65% $188.3 9.35%
- -----------------------------================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $18.2 2001 $ 7.5
1999 25.0 2002 --
2000 21.9
- -----------------------------------------------------------------------------
</TABLE>
The December 31, 1996, carrying amounts of short-term debt and current
installments of long-term debt approximate fair value because of the short
maturity of these items.
- 44 -
<PAGE>
The estimated fair value of net long-term debt was $252.8 million and $234.9
million at December 31, 1996 and 1995, respectively. The fair value estimates of
long-term debt were based upon quotes from major financial institutions, taking
into consideration current rates offered to the company for debt of the same
remaining maturities.
The 9 3/4% debentures and the medium-term notes are not redeemable until
maturity and have no sinking-fund requirements.
The bank loan has a favorable variable interest rate and may be prepaid prior to
maturity.
The industrial development bonds mature in 2004 and 2024 with interest rates
typical of their type.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had a
carrying value of $2.2 million at December 31, 1996.
In April 1996, Armstrong increased the five-year revolving line of credit for
general corporate purposes from $200.0 million to $300.0 million. In addition,
the company's foreign subsidiaries have approximately $141.3 million of unused
short-term lines of credit available from banks. Some credit lines are subject
to an annual commitment fee.
The company can borrow from its banks generally at rates approximating the
lowest available to commercial borrowers and can issue short-term commercial
paper notes supported by the lines of credit.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
The company uses foreign currency forward contracts and options to reduce the
risk that future cash flows from transactions in foreign currencies will be
negatively impacted by changes in exchange rates.
The following table shows anticipated net cash flows for goods, services and
financing transactions for the next 12 months:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Foreign currency Commercial Financing Net Net
exposure (millions)/1/ exposure exposure hedge position
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British pound $ (6.2) $(34.2) $ 34.2 $ (6.2)
Canadian dollar 47.7 (0.0) (2.2) 45.5
French franc (25.9) 2.6 (2.6) (25.9)
German mark (39.0) 33.2 (33.2) (39.0)
Italian lira 14.3 2.5 (2.5) 14.3
Spanish peseta 7.0 2.7 (2.7) 7.0
- -----------------------------------------------------------------------------
</TABLE>
Note 1: A positive amount indicates the company is a net receiver of this
currency, while a negative amount indicates the company is a net payer.
The company policy allows hedges of cash flow exposures up to one year. The
table below summarizes the company's foreign currency forward contracts and
options by currency at December 31, 1996. Foreign currency amounts are
translated at exchange rates as of December 31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Foreign currency
contracts (millions) Forward contracts Option contracts
- -----------------------------------------------------------------------------
Sold Bought Sold Bought
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British pound $ 1.3 $35.5 $ -- $ --
Canadian dollar 6.2 4.0 -- --
French franc 6.4 3.8 -- --
German mark 46.6 13.4 -- --
Italian lira 2.5 -- -- --
Spanish peseta 2.7 -- -- --
- -----------------------------------------------------------------------------
</TABLE>
The foreign currency hedges are straightforward contracts that have no embedded
options or other terms that involve a higher level of complexity or risk. The
company does not hold or issue financial instruments for trading purposes.
The realized and unrealized gains and losses relating to the company's
management of foreign currency and interest rate exposures are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Foreign currency Interest rate
Gain (loss) (millions) hedging/1/ swaps
- -----------------------------------------------------------------------------
Year 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Income statement:
Realized $(1.1) $ --
Unrealized (0.9) --
On balance sheet 1.9 --
Off balance sheet -- --
- -----------------------------------------------------------------------------
Total $(0.1) $ --
- ----------------------------------------------===============================
Year 1995
- -----------------------------------------------------------------------------
Income statement:
Realized $(3.5) $ --
Unrealized 0.5 --
On balance sheet 0.3 --
Off balance sheet -- --
- -----------------------------------------------------------------------------
Total $(2.7) $ --
- ----------------------------------------------===============================
Year 1994
- -----------------------------------------------------------------------------
Income statement:
Realized $(3.2) $ 0.2
Unrealized 0.4 --
On balance sheet 0.9 --
Off balance sheet -- --
- -----------------------------------------------------------------------------
Total $(1.9) $0.2
- ----------------------------------------------===============================
</TABLE>
Note 1: Excludes the offsetting effect of interest rate differentials on
underlying intercompany transactions being hedged of $0.6 million in 1996, $0.1
million in 1995 and $0.6 million in 1994.
The company had no interest rate hedging agreements on December 31, 1995 and
1996.
As of December 31, 1996, the company had provided $178.1 million in standby
letters of credit and financial guarantees. The company does not normally
provide collateral or other security to support these instruments.
- 45 -
<PAGE>
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were $151.9 million in 1996, an increase of $13.0
million from $138.9 million in 1995. Increases of $3.0 million for
pension-related liabilities and $9.6 million for deferred compensation were the
primary causes for the increase. Also included in other long-term liabilities
were amounts for workers' compensation, vacation accrual, a reserve for
estimated environmental-remediation liabilities (see "Environmental Matters" on
this page) and a $4.7 million residual reserve for the estimated potential
liability primarily associated with claims pending in the company's
asbestos-related litigation.
Based upon the company's experience with the asbestos-related litigation--as
well as the Wellington Agreement, other settlement agreements with certain of
the company's insurance carriers and an earlier interim agreement with several
primary carriers--the residual reserve of $4.7 million is intended to cover
potential liability and settlement costs that are not covered by insurance,
legal and administrative costs not covered under the agreements and certain
other factors that have been involved in the litigation about which
uncertainties exist. Future costs of litigation against the company's insurance
carriers and other legal costs indirectly related to the litigation, expected to
be modest, will be expensed outside the reserve. Amounts, primarily insurance
litigation costs, estimated to be payable within one year are included under
current liabilities.
This reserve does not address any unanticipated reduction in expected insurance
coverage that might result in the future related to pending lawsuits and claims
nor any potential shortfall in such coverage for claims that are subject to the
settlement class action referred to on pages 45-48.
The fair value of other long-term liabilities was estimated to be $141.4 million
at December 31, 1996, and $128.9 million at December 31, 1995, using a
discounted cash flow approach at discount rates of 6.5% in 1996 and 5.8% in
1995.
ASBESTOS-RELATED LIABILITIES
Asbestos-related liabilities of $141.6 million represent the estimated potential
liability and defense cost to resolve approximately 43,600 personal injury
claims pending against the company as of December 31, 1996. The company has
recorded an insurance asset (see page 44) in the amount of $141.6 million for
coverage of these claims. See discussion on pages 48-51.
ENVIRONMENTAL MATTERS
In 1996, the company incurred capital expenditures of approximately $3.0 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1997 and 1998. The company
does not anticipate that it will incur significant capital expenditures in order
to meet the requirements of the Clean Air Act of 1990 and the final implementing
regulations promulgated by various state agencies.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 18 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have voluntarily agreed to jointly fund the required investigation and
remediation of each site. With regard to some sites, however, Armstrong disputes
the liability, the proposed remedy or the proposed cost allocation. Armstrong
may also have rights of contribution or reimbursement from other parties or
coverage under applicable insurance policies. The company is also remediating
environmental contamination resulting from past industrial activity at certain
of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior company experience
in remediation of contaminated sites. Although current law imposes joint and
several liability on all parties at any Superfund site, Armstrong's contribution
to the remediation of these sites is expected to be limited by the number of
other companies also identified as potentially liable for site costs. As a
result, the company's estimated liability reflects only the company's expected
share. In determining the probability of contribution, the company considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters. The estimated
liabilities do not take into account any claims for recoveries from insurance or
third parties.
Reserves at December 31, 1996, were for potential environmental liabilities that
the company considers probable and for which a reasonable estimate of the
potential liability could be made. Where existing data is sufficient to estimate
the amount of the liability, that estimate has been used; where only a range of
probable liability is available and no amount within that range is more likely
than any other, the lower end of the range has been used. As a result, the
company has accrued, before agreed-to insurance coverage, $8.0 million to
reflect its estimated undiscounted liability for environmental remediation. As
assessments and remediation activities progress at each individual site, these
liabilities are reviewed to reflect additional information as it becomes
available.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the company believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
- 46 -
<PAGE>
STOCK-BASED COMPENSATION PLANS
Awards under the 1993 Long-Term Stock Incentive Plan may be in the form of stock
options, stock appreciation rights in conjunction with stock options,
performance restricted shares and restricted stock awards. No more than
4,300,000 shares of common stock may be issued under the Plan, and no more than
430,000 shares of common stock may be awarded in the form of restricted stock
awards. The Plan extends to April 25, 2003. Pre-1993 grants made under
predecessor plans will be governed under the provisions of those plans.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options were granted. The options
generally become exercisable in one to three years and expire 10 years from the
date of grant.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Changes in option shares outstanding
(thousands except for share price) 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Option shares at beginning of year 1,841.6 1,612.1 1,708.4
Options granted 728.7 642.8 247.1
Option shares exercised (376.7) (390.9) (323.1)
Stock appreciation rights exercised (10.8) (11.5) (8.5)
Options cancelled (21.4) (10.9) (11.8)
Option shares at end of year 2,161.4 1,841.6 1,612.1
Option shares exercisable at end
of year 1,185.8 1,196.7 1,367.1
Shares available for grant 1,914.6 2,838.9 3,691.5
- ------------------------------------------------------------------------
Weighted average price per share:
Options outstanding $50.06 $43.00 $36.82
Options exercisable 41.11 37.93 33.67
Options granted 60.30 52.47 54.39
Option shares exercised 36.27 33.48 31.20
- ------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Stock options outstanding as of 12/31/96
- ------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------ -----------------------
Range Number Weighted- Weighted- Number Weighted-
of outstanding average average exercisable average
exercise at remaining exercise at exercise
prices 12/31/96 option life price 12/31/96 price
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$28-37 453,086 5.4 $31.52 453,086 $31.52
37-46 484,059 6.1 43.64 484,059 43.64
46-55 248,620 7.3 53.64 248,620 53.64
55-64 915,880 9.1 60.57 0 --
64-72 59,800 9.8 66.37 0 --
- ------------------------------------------------------------------------
2,161,445 1,185,765
- -----------=========------------------------------=========-------------
</TABLE>
Performance restricted shares issuable under the 1993 Long-Term Stock Incentive
Plan entitle certain key executive employees to earn shares of Armstrong's
common stock, only if the total company or individual business units meet
certain predetermined performance measures during defined performance periods
(generally three years). Total company performance measures include Armstrong's
total shareholder return relative to the Standard and Poor's 500 group of
companies. At the end of the performance periods, common stock awarded will
carry additional restriction periods (generally three or four years), whereby
the shares will be held in custody by the company until the expiration or
termination of the restrictions. Compensation expense will be charged to
earnings over the period in which the restrictions lapse. At the end of 1996,
there were 121,440 performance restricted shares outstanding, with 3,834
accumulated dividend equivalent shares, and 204,510 shares of restricted common
stock were outstanding with 5,132 accumulated dividend equivalent shares, based
on performance periods ending prior to 1996. No common stock awards will be
issued in 1997 based on the performance period ending December 1996.
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 42,950 shares of
restricted stock were granted (excluding performance based awards discussed
above) during 1996. At the end of 1996, there were 124,339 restricted shares of
common stock outstanding with 3,702 accumulated dividend equivalent shares.
On January 1, 1996, the company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures. Had compensation cost for these plans been
determined consistent with SFAS No. 123, the company's net earnings and earnings
per share (EPS) would have been reduced to the following pro forma amounts.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(millions) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Net earnings: As reported $155.9 $123.3
Pro forma 150.7 121.4
Primary EPS: As reported 3.76 2.90
Pro forma 3.63 2.85
Fully diluted EPS:As reported 3.60 2.67
Pro forma 3.48 2.62
- ------------------------------------------------------------------------
</TABLE>
The fair value of grants was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1996 and
1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rates 6.17% 6.38%
Dividend yield 2.32% 2.39%
Expected lives 5 years 5 years
Volatility 21% 25%
- ------------------------------------------------------------------------
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to grants
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
- 47 -
<PAGE>
TREASURY SHARES
Treasury share changes for 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Years ended
December 31 (thousands) 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares
Balance at beginning of year 15,014.1 14,602.1 14,656.5
Stock purchases/(1)/ 1,357.6 795.7 272.4
Stock issuance activity, net/(2)/ (5,657.1) (383.7) (326.8)
- ------------------------------------------------------------------------
Balance at end of year 10,714.6 15,014.1 14,602.1
- ------------------------------------====================================
</TABLE>
Note 1: Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market purchases of stock through
brokers.
Note 2: 1996 includes 5,057,400 shares issued as a result of conversion of
preferred to common stock.
In July 1996, the Board of Directors authorized the company to repurchase an
additional 3.0 million shares of its common stock through the open market or
through privately negotiated transactions bringing the total authorized common
share repurchases to 5.5 million shares. Under the total plan, Armstrong has
repurchased approximately 2,380,000 shares through December 31, 1996, with a
total cash outlay of $130.7 million, including 1,328,000 repurchased in 1996. In
addition to shares repurchased under the above plan, approximately 364,600 ESOP
shares were repurchased in 1996.
PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1996, the Board of Directors renewed the company's 1986 shareholder rights
plan and in connection therewith declared a distribution of one right for each
share of the company's common stock outstanding on and after January 19, 1996.
In general, the rights become exercisable at $300 per right for a fractional
share of a new series of Class A preferred stock 10 days after a person or
group, other than certain affiliates of the company, either acquires beneficial
ownership of shares representing 20% or more of the voting power of the company
or announces a tender or exchange offer that could result in such person or
group beneficially owning shares representing 28% or more of the voting power of
the company. If thereafter any person or group becomes the beneficial owner of
28% or more of the voting power of the company or if the company is the
surviving company in a merger with a person or group that owns 20% or more of
the voting power of the company, then each owner of a right (other than such 20%
shareholder) would be entitled to purchase shares of company common stock having
a value equal to twice the exercise price of the right. Should the company be
acquired in a merger or other business combination, or sell 50% or more of its
assets or earnings power, each right would entitle the holder to purchase, at
the exercise price, common shares of the acquirer having a value of twice the
exercise price of the right. The exercise price was determined on the basis of
the Board's view of the long-term value of the company's common stock. The
rights have no voting power nor do they entitle a holder to receive dividends.
At the company's option, the rights are redeemable prior to becoming exercisable
at five cents per right. The rights expire on March 21, 2006.
- --------------------------------------------------------------------------------
LITIGATION AND RELATED MATTERS
- --------------------------------------------------------------------------------
ASBESTOS-RELATED LITIGATION
The company is one of many defendants in pending lawsuits and claims involving,
as of December 31, 1996, approximately 43,600 individuals alleging personal
injury from exposure to asbestos-containing products. Included in the above
number are approximately 19,500 lawsuits and claims from the approximately
87,000 individuals who opted out of the settlement class action (Georgine v.
Amchem) referred to below. About 18,400 claims from purported class members were
received as of December 31, 1996. Nearly all the pending personal injury suits
and claims, except Georgine claims, seek general and punitive damages arising
from alleged exposures to asbestos-containing insulation products used,
manufactured or sold by the company. The company discontinued the sale of all
asbestos-containing insulation products in 1969. Although a large number of
suits and claims pending in prior years have been resolved, neither the rate of
future dispositions nor the number of future potential unasserted claims can be
reasonably predicted.
The Judicial Panel for Multidistrict Litigation ordered the transfer of all
pending federal cases to the Eastern District Court in Philadelphia for pretrial
purposes. Periodically some of those cases are released for trial. Pending state
court cases have not been directly affected by the transfer. A few state judges
have consolidated numbers of asbestos-related personal injury cases for trial, a
process the company generally opposes as being unfair.
GEORGINE SETTLEMENT CLASS ACTION
Georgine v. Amchem is a settlement class action that includes essentially all
future asbestos-related personal injury claims against members, including the
company, of the Center for Claims Resolution ("Center") referred to below that
was filed on January 15, 1993, in the Eastern District of Pennsylvania and was
given tentative approval on August 16, 1994. It is designed to establish a
nonlitigation system for the resolution of claims against the Center members.
Other companies may be able to join the class action later. The settlement
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 they 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 burden on the courts. Each member of the Center is obligated for its
own fixed share of compensation and fees. Potential claimants who neither filed
a prior lawsuit against Center members 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
- 48 -
<PAGE>
each medical category (including amounts paid even more promptly under the
simplified payment procedures) are established for an initial period of 10
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 10-year
period. Opt-outs from the settlement class action are not claims as such but
rather are reservation of rights possibly to bring claims in the future. The
settlement will become final only after certain issues, including issues related
to insurance coverage, are resolved and appeals are exhausted, a process which
could take several years. The Center members 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 these pending claims
have been finally or tentatively 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 the insurance
carriers that subscribed to the Wellington Agreement referred to below, or else
by litigation.
On May 10, 1996, a three-judge panel of the U.S. Court of Appeals for the Third
Circuit issued an adverse decision in an appeal from the preliminary injunction
by the District Court enjoining members of the Georgine class from litigating
asbestos-related personal injury claims in the tort system. The appeal was
brought by certain intervenors who opposed the class action. The Court of
Appeals decision-which will not become effective until that Court issues its
mandate-ruled against maintaining the settlement class action, ordered that the
preliminary injunction issued by the District Court be vacated, and ordered the
District Court to decertify the class. The Court ruled broadly that the case
does not meet the requirements for class certification under Federal Rule of
Civil Procedure 23, concluding that a class action cannot be certified for
purposes of settlement unless it can be certified for full-scale litigation. The
company believes that the Court erred in several important respects. The
Center's petition for rehearing before the Third Circuit en banc was denied.
On November 1, 1996, the U.S. Supreme Court accepted the Center's petition for
certiorari and, accordingly, the appeal will proceed through briefing to
argument heard on February 18, 1997, and a likely decision by July 1997. The
preliminary injunction will remain in place while the case is pending in the
Supreme Court.
The company remains optimistic that a future claimants settlement class action
may ultimately be approved, although the courts may not uphold this settlement
class action, and may not uphold the companion insurance action or, even if
upheld, there is a potential that judicial action might result in substantive
modification of this settlement.
If the final resolution by the Supreme Court is not favorable to the Center, the
District Court's injunction will likely be lifted. If the injunction is lifted,
a large number of new asbestos-related personal injury lawsuits might be filed
within a short period of time against the Center members, including the company.
The company believes that the number of subsequent pending cases in the tort
system against the company would likely increase. In due course, the
consequences from a lifting of the injunction could result in presently
undeterminable, but likely higher, liability and defense costs under a claims
resolution mechanism alternative to the Georgine settlement which the company
believes would likely be negotiated.
Even if the appeal to the Supreme Court is successful, various issues remain to
be resolved in the class action, and the potential exists that those issues will
cause the class action ultimately not to succeed or to be substantially
modified. Similarly, the potential exists that the above-referenced companion
insurance action will not be successful.
INSURANCE SETTLEMENTS
Pending personal injury lawsuits and claims are being paid by insurance proceeds
under the 1985 Agreement Concerning Asbestos-Related Claims (the "Wellington
Agreement") and under other insurance settlements noted below. A new claims
handling organization, known as the Center for Claims Resolution (the "Center"),
was created in October 1988 by Armstrong and 20 other companies to replace the
Wellington Asbestos Claims Facility (the "Facility"), which was dissolved.
Generally, the dissolution of the Facility did not affect the company's overall
Wellington Agreement insurance settlement. That settlement provided for final
resolution of nearly all disputes concerning insurance for asbestos-related
personal injury claims as between the company and three of its primary insurers
and eight of its excess insurers. The one primary carrier that did not sign the
Wellington Agreement paid into the Wellington Facility and settled with the
company in March 1989 nearly all outstanding issues of coverage for
asbestos-related personal injury and property damage claims. In addition, other
excess-insurance carriers have entered into settlement agreements with the
company which complement the Wellington Agreement. ACandS, Inc., a former
subsidiary of the company, which has for certain insurance periods coverage
rights under some company insurance policies, subscribed to the Wellington
Agreement but did not become a member of the Center.
One excess carrier (providing $25 million of coverage) and certain companies in
an excess carrier's block of coverage (involving several million dollars of
coverage) have become insolvent. Certain carriers providing excess level
coverage solely for property damage claims also have become insolvent. The
several million dollars of coverage referred to has been paid by company
reserves. The $25 million insolvency gap is being covered by other available
insurance coverage. The company and ACandS, Inc., have negotiated a settlement
agreement that reserves for ACandS, Inc., a certain amount of insurance from
joint policies solely for its use in the payment of costs for asbestos-related
claims.
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CENTER FOR CLAIMS RESOLUTION
The Center operates under a concept of allocated shares of liability payments
and defense costs for its members based primarily on historical and current
experience, and it defends the members' interests and addresses claims in a
manner consistent with the prompt, fair resolution of meritorious claims. The
Center sharing formula has been revised over time. These changes have caused
some increase in the company's share in certain areas. As to claims resolved
under the settlement class action, the company has agreed to a percentage of
each resolution payment. Although the Center members and their participating
insurers were not obligated beyond one year, the insurance companies are
expected to commit to the continuous operation of the Center for a ninth year
and to funding of the Center's operating expenses. With the filing of the
settlement class action, the Center continued to process pending claims and has
handled the program for processing future asbestos-related personal injury
claims. No forecast can be made for future years regarding either the rate of
pending and future claims resolution by the Center or the rate of utilization of
company insurance.
PROPERTY DAMAGE LITIGATION
The company is also one of many defendants in a total of 11 pending lawsuits and
claims, as of December 31, 1996, 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. These suits and claims appear to be
aimed at friable (easily crumbled) asbestos-containing products although
allegations in some suits encompass other asbestos-containing products,
including allegations with respect to previously installed asbestos-containing
resilient flooring. The company vigorously denies the validity of the
allegations against it contained in these suits and claims. Defense costs, paid
by the company's insurance carriers either under reservation or settlement
arrangement, will be incurred. These suits and claims are not encompassed within
the Wellington Agreement nor are they being handled by the Center.
INSURANCE COVERAGE LITIGATION
In 1996, Armstrong concluded a lawsuit in California state court to resolve
disputes concerning certain of its insurance carriers' obligations with respect
to personal injury and property damage liability coverage, including defense
costs, for alleged personal injury and property damage asbestos-related lawsuits
and claims. The Court issued final decisions generally in the company's favor,
and the carriers appealed. The California Court of Appeal substantially upheld
the trial court's final decisions, and the insurance carriers petitioned the
California Supreme Court which ruled favorably for the company. Upon remand, the
Court of Appeal issued its final decision favorable to the company in keeping
with the Supreme Court's ruling.
NONPRODUCTS INSURANCE COVERAGE
Nonproducts insurance coverage is included in the company's primary insurance
policies and certain excess policies for certain claims, including those that
may have arisen out of exposure during installation of asbestos materials or
before control of such materials was relinquished. An alternate dispute
resolution proceeding has been initiated, and negotiations are currently
underway with several of the company's primary carriers to resolve the
nonproducts coverage issues. The additional coverage potentially available to
pay claims categorized as nonproducts is substantial and, at the primary level,
includes defense costs in addition to indemnity limits. The insurance carriers
have raised various reasons why they should not pay their coverage obligations,
including contractual defenses, waiver, laches and the statute of limitations.
CONCLUSIONS
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
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 whether,
if needed, an alternative to the Georgine settlement vehicle may ultimately
emerge, or the ultimate liability if such alternative does not emerge, or the
scope of its nonproducts coverage ultimately deemed available.
Subject to the foregoing and based upon its experience and other factors also
referred to above, the company believes that the estimated $141.6 million in
liability and defense costs recorded on the 1996 balance sheet will be incurred
to resolve an estimated 43,600 asbestos-related personal injury claims pending
against the company as of December 31, 1996. 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 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 $141.6 million recorded on the 1996 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,
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alternative dispute resolution or litigation. A substantial portion of the
insurance asset involves nonproducts insurance which is in alternative dispute
resolution. While the company is seeking resolution of key issues in the
alternative dispute resolution process during 1997, a shortfall may develop
between available insurance and amounts necessary to pay claims, and that
shortfall may occur as early as the third quarter of 1997 or possibly in the
second quarter depending on the timing of the availability of certain coverage;
the company believes such shortfall would not 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 reflects a reasonably possible
additional liability of $245 million. If Georgine is not ultimately approved,
the company believes that a claims resolution mechanism alternative to the
Georgine settlement will likely be negotiated, albeit at a likely higher
liability and defense costs. 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 or in the cost of an
alternative settlement format, 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 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, the referenced settlements with other insurance carriers, the results
of the California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld an alternative to Georgine
would be negotiated, 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.
Additional details concerning this litigation are set forth in the company's
Form 10-K available to any shareholder upon request.
TINS LITIGATION
In October 1992, the U.S. Court of Appeals for the Third Circuit issued its
decision in a lawsuit brought by The Industry Network System, Inc. (TINS), and
its founder, Elliot Fineman. The plaintiffs alleged that in 1984 Armstrong had
engaged in antitrust and tort law violations and breach of contract which
damaged TINS' ability to do business. The Court of Appeals sustained the U.S.
District Court's decision that the April 1991 jury verdict against Armstrong in
the amount of $224 million including $200 million in punitive damages should be
vacated, and that there should be a new trial on all claims remaining after the
appeal. The Court of Appeals sustained the District Court ruling that the jury's
verdict had reflected prejudice and passion due to the improper conduct of
plaintiffs' counsel and was clearly contrary to the weight of the evidence. The
Court of Appeals affirmed or did not disturb the trial court's order dismissing
all of TINS' claims under Section 2 of the Sherman Act for alleged conspiracy,
monopolization and attempt to monopolize and dismissing all of Mr. Fineman's
personal claims. These claims were not the subject of a new trial. However, the
Court of Appeals reversed the trial court's directed verdict for Armstrong on
TINS' claim under Section 1 of the Sherman Act, reversed the summary judgment in
Armstrong's favor on TINS' claim for breach of contract based on a 1984
settlement agreement, and reversed the judgment n.o.v. for Armstrong on TINS'
tortious interference and related punitive damage claims. These claims were the
subject of a new trial.
A second trial of the TINS' litigation began on April 26, 1994, in the Newark,
New Jersey, District Court. TINS asked for damages in a range of $17 to $56
million. A jury found that Armstrong had breached its contract with TINS and had
interfered with TINS' contractual business relationship with an Armstrong
wholesaler but that Armstrong's conduct did not damage TINS and awarded no
compensatory or nominal money damages. Following oral argument on November 14,
1994, TINS' motion for a partial or complete new trial was denied by the
District Court 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 our earlier 1984 agreement of settlement. TINS has appealed this later
decision to the Circuit Court and a hearing will likely be held on this issue
during the first half of 1997. 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.
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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.
Date: April 3, 1997 By: /s/ Bruce A. Leech, Jr.
--------------------------------
Bruce A. Leech, Jr.
Controller
