<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
----------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------------ to ----------------------
Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ ------
Number of shares of registrant's common stock outstanding as of
April 27, 1998 - 40,032,346
<PAGE>
Part I - Financial Information
------------------------------
Item 1. Financial Statements
- -----------------------------
Armstrong World Industries, Inc. and Subsidiaries
Consolidated Statements of Earnings
-----------------------------------
(amounts in millions except for per-share data and percentages)
Unaudited
Three months
ended March 31
--------------
1998 1997
---- ----
NET SALES $543.1 $518.3
Cost of goods sold 362.7 347.0
Selling, general and administrative expense 104.0 100.3
Equity (earnings) from affiliates (0.7) (3.8)
------- -------
Operating income 77.1 74.8
Interest expense 6.6 6.3
Other (income) expenses, net (1.0) 0.2
------- -------
Earnings before income taxes (a) 71.5 68.3
Income taxes 25.0 22.8
------- ------
NET EARNINGS $ 46.5 $ 45.5
====== ======
Net earnings per share of common stock: (b)
Basic $ 1.17 $ 1.11
Diluted $ 1.15 $ 1.10
Average number of common shares outstanding:
Basic 39.8 40.9
Diluted 40.5 41.3
Return on average common shareholders' equity 21.9% 22.3%
(a) Depreciation and amortization charged against earnings before income taxes
amounted to $32.2 million in the three months ended March 31, 1998, and
$32.3 million in the three months ended March 31, 1997.
(b) The following table provides a reconciliation of the numerator and
denominators of the basic and diluted per share calculations for net
earnings.
For the period ended March 31, 1998
-----------------------------------
Per-Share
Earnings Shares Amount
-------- ------ ------
Basic Earnings per Share
- ------------------------
Net earnings $46.5 39.8 $1.17
Dilutive options 0.7
Diluted Earnings per Share ---
- --------------------------
Net earnings available for common $46.5 40.5 $1.15
====
For the period ended March 31, 1997
-----------------------------------
Per-Share
Earnings Shares Amount
-------- ------ ------
Basic Earnings per Share
- ------------------------
Net earnings $45.5 40.9 $1.11
Dilutive options 0.4
Diluted Earnings per Share ---
- --------------------------
Net earnings available for common $45.5 41.3 $1.10
====
See accompanying footnotes to the financial statements beginning on page 7.
2
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
<TABLE>
<CAPTION>
Unaudited
Assets March 31, 1998 December 31, 1997
------ -------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48.9 $ 57.9
Accounts receivable less allowance 293.0 252.6
Inventories:
Finished goods 145.9 149.4
Work in process 21.5 19.9
Raw materials and supplies 50.5 50.8
-------- --------
Total inventories 217.9 220.1
Income tax benefits 22.5 25.9
Other current assets 35.8 43.5
------- -------
Total current assets 618.1 600.0
Property, plant, and equipment 1,990.8 1,976.5
Less accumulated depreciation and amortization 1,022.5 1,004.3
-------- ----------
Net property, plant and equipment 968.3 972.2
Insurance for asbestos-related liabilities (a) 291.6 291.6
Investment in affiliates (b) 173.4 174.9
Other noncurrent assets 357.2 336.8
-------- --------
Total assets $2,408.6 $2,375.5
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 135.7 $ 84.1
Current installments of long-term debt 3.5 14.5
Accounts payable and accrued expenses 333.5 339.9
Income taxes 39.4 33.0
-------- --------
Total current liabilities 512.1 471.5
Long-term debt 223.8 223.1
ESOP loan guarantee 201.8 201.8
Postretirement and postemployment benefits 248.7 248.0
Asbestos-related liabilities (a) 149.9 179.7
Other long-term liabilities 171.6 172.1
Deferred income taxes 56.2 53.7
Minority interest in subsidiaries 14.5 15.0
--------- --------
Total noncurrent liabilities 1,066.5 1,093.4
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 169.0 169.5
Reduction for ESOP loan guarantee (205.8) (207.7)
Retained earnings 1,369.0 1,339.6
Other comprehensive income (14.5) (16.2)
Treasury stock (539.6) (526.5)
-------- --------
Total shareholders' equity 830.0 810.6
-------- --------
Total liabilities and shareholders' equity $2,408.6 $2,375.5
======== ========
</TABLE>
(a) The asbestos-related liability in the amount of $149.9 million in long-
term liabilities and $80.0 million in current accrued expenses represents
the minimum liability and defense cost to resolve personal injury claims
pending against the Company as of the end of the first quarter 1998. The
insurance asset in the amount of $291.6 million reflects the Company's
belief in the availability of insurance in an amount covering these
liabilities and recovery of $61.7 million for current payments of
asbestos-related claims.
(b) Investment in affiliates is primarily composed of a 34.4 percent
ownership of Dal-Tile International Inc. as of March 31, 1998, and a 50.0
percent interest in the WAVE joint venture. As described on page 11, the
Company is pursuing the disposition of its investment in Dal-Tile.
See accompanying footnotes to the financial statements beginning on page 7.
3
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
1998 1997
------------ --------
<S> <C> <C>
Common stock, $1 par value:
- ---------------------------
Balance at beginning of year & March 31 $ 51.9 $ 51.9
------- --------
Capital in excess of par value:
- -------------------------------
Balance at beginning of year $ 169.5 $ 169.5
Stock issuances and other (0.5) (0.1)
----- -----
Balance at March 31 $ 169.0 $ 169.4
------- --------
Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $(207.7) $(217.4)
Accrued compensation 1.9 2.4
--- ---
Balance at March 31 $(205.8) $(215.0)
-------- --------
Retained earnings:
- ------------------
Balance at beginning of year $1,339.6 $1,222.6
Net earnings 46.5 $46.5 45.5 $45.5
Tax benefit on dividends paid on
unallocated common shares 0.5 0.2
--- ---
Total $1,386.6 $1,268.3
Less common stock dividends 17.6 16.4
---- ----
Balance at March 31 $1,369.0 $1,251.9
-------- --------
Other comprehensive income (a):
- -------------------------------
Balance at beginning of year $ (16.2) $ 9.9
Foreign currency translation adjustments and
hedging activities (4.3) (12.3)
Minimum pension liability adjustments 6.0 0.0
--- ---
Total other comprehensive income 1.7 1.7 (12.3) (12.3)
--- --- ------ ------
Balance at March 31 $ (14.5) $ (2.4)
-------- ---------
Comprehensive income: $48.2 $33.2
- --------------------- ===== =====
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 526.5 $ 446.5
Stock purchases 19.7 31.3
Stock issuance activity, net (6.6) (3.1)
----- -----
Balance at March 31 $ 539.6 $ 474.7
------- --------
Total shareholders' equity $ 830.0 $ 781.1
======= ========
</TABLE>
(a) Related tax effects allocated to each component of other comprehensive
income as of March 31, 1998:
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net-of Tax
Amount or benefit Amount
------ ---------- ------
<S> <C> <C> <C>
Foreign currency translation adjustments and $ (4.3) $ 0.0 $ (4.3)
hedging activities
Minimum pension liability adjustment (1.1) 7.1 6.0
----- --- ---
Other comprehensive income $ (5.4) $ 7.1 $ 1.7
======== ====== ======
</TABLE>
See accompanying footnotes to the financial statements beginning on page 7.
4
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows--Unaudited
------------------------------------------------
(amounts in millions)
Unaudited
Three Months Ended
March 31
------------------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 46.5 $ 45.5
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 32.2 32.3
Deferred income taxes 5.1 3.8
Equity change in affiliates 0.4 (4.6)
Restructuring payments (2.5) (10.1)
Payments for asbestos-related claims (21.9) --
Changes in operating assets and liabilities net
of effect of restructuring and acquisitions:
(Increase) in receivables (41.3) (63.5)
Decrease (increase) in inventories 1.9 (23.6)
Decrease in other current assets 11.1 10.9
(Increase) in other noncurrent assets (21.3) (14.1)
(Decrease) increase in accounts payable
and accrued expenses (8.7) 14.0
Increase in income taxes payable 11.6 7.6
Increase in other long-term liabilities 0.5 6.4
Other, net 2.9 1.8
------ -------
Net cash provided by operating activities 16.5 6.4
------ -------
Cash flows from investing activities:
Purchases of property, plant and equipment (26.2) (28.4)
Investment in computer software (4.2) (1.8)
Acquisitions and investment in joint ventures -- (6.3)
------ -------
Net cash (used for) investing activities (30.4) (36.5)
------ -------
Cash flows from financing activities:
Increase in short-term debt 50.5 35.5
Issuance of long-term debt 14.4 7.2
Reduction of long-term debt (24.7) --
Cash dividends paid (17.6) (16.4)
Purchase of common stock for the treasury (19.7) (31.3)
Proceeds from exercised stock options 4.3 2.0
Other, net (1.2) 0.5
------ -------
Net cash provided by (used for) financing activities 6.0 (2.5)
------ -------
Effect of exchange rate changes on cash and cash
equivalents (1.1) (1.0)
------ -------
Net (decrease) in cash and cash equivalents $(9.0) $(33.6)
------ -------
Cash and cash equivalents at beginning of period $57.9 $ 65.4
------ -------
Cash and cash equivalents at end of period $48.9 $ 31.8
------ -------
- -----------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 2.4 0.7
Income taxes paid $ 7.6 $ 4.3
- -----------------------------------------------------------------------------
See accompanying notes to the financial statements beginning on page 7.
5
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
Three Months
ended March 31
----------------
1998 1997
---- ----
Net trade sales:
- ----------------
Floor coverings $ 276.3 $ 252.4
Building products 188.2 182.0
Industry products 78.6 83.9
-------- --------
Total net sales $ 543.1 $ 518.3
======== ========
Operating income (loss):
- ------------------------
Floor coverings $ 36.8 $ 33.0
Building products 26.3 29.3
Industry products 13.0 11.2
Ceramic tile (2.2) 0.7
Unallocated corporate 3.2 0.6
-------- --------
Total operating income $ 77.1 $ 74.8
======== ========
6
<PAGE>
Note 1. Operating results for the first quarter of 1998, as well as for the
- ------
corresponding period of 1997 included in this report are unaudited. However,
these results have been reviewed by the Company's independent public
accountants, KPMG Peat Marwick LLP, in accordance with the established
professional standards and procedures for a limited review.
The accounting policies used in preparing these statements are the same as those
used in preparing the Company's consolidated financial statements for the year
ended December 31, 1997. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report and Form 10-K for the
fiscal year ended December 31, 1997. In addition, beginning with the first-
quarter 1998, the Company has adopted Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income," which requires that all items that are
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. In the opinion of management, all adjustments of a
normal recurring nature have been included to provide a fair statement of the
results for the reporting periods presented. Three months' results are not
necessarily indicative of annual earnings.
Note 2.
- ------
OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
Personal Injury Litigation
The Company is one of many defendants in approximately 110,500 pending claims as
of March 31, 1998, alleging personal injury from exposure to asbestos. The
increase in the number of claims during the first quarter of 1998 is primarily
due to the inclusion of cases that had been subject to an injunction related to
the Georgine Settlement Class Action ("Georgine"), described below, and those
that had been filed in the tort system against other defendants (and not against
the Center for Claims Resolution ("Center") members) while Georgine was pending.
Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times from World War II onward, to asbestos-containing
products. Claims against the company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The Company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined many years (up to 40 years) after first exposure to
asbestos. Nearly all suits name many defendants, and over 100 different
companies are reportedly involved. The Company believes that many current
plaintiffs are unimpaired. A large number of claims have been settled,
dismissed, put on inactive lists or otherwise resolved, and the Company
generally is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals. Neither the rate
of future filings and resolutions nor the total number of future claims can be
predicted at this time with a high degree of certainty.
Attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. The Company supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims in state courts have not been directly affected by the
transfer, although most recent cases have been filed in state courts.
Georgine Settlement Class Action
Georgine v. Amchem was a settlement class action filed in the Eastern District
- ------------------
of Pennsylvania, on January 15, 1993, that included essentially all future
personal injury claims against members of the Center, including the Company. It
was designed to establish a nonlitigation system for the resolution of such
claims, and offered a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they met certain exposure and medical
criteria. Compensation amounts were derived from historical settlement data and
no punitive damages were to be paid. The settlement was designed to, among other
things, minimize transactional costs, including attorneys' fees, expedite
compensation to claimants with qualifying claims, and relieve the courts of the
burden of handling future claims. Based on mathematical projections covering a
ten-year period starting in 1994, the Company estimated a maximum liability of
$245 million in Georgine.
7
<PAGE>
The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on June 25, 1997, which held that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system. Following
these developments, the Company is exploring alternatives to the Georgine
settlement and believes an alternative claims resolution mechanism is likely to
emerge, but the liability is likely to be higher than the projection in
Georgine.
Asbestos-Related Liability
During the last half of 1997, the Company assessed the impact of the June 1997
Supreme Court ruling on its projected asbestos resolution and defense costs. In
doing so, the Company reviewed, among other things, its historical settlement
amounts, the incidence of past claims, the mix of the injuries and occupations
of the plaintiffs, the number of cases pending against it, the Georgine
projection and its experience. Subject to the uncertainties, limitations and
other factors referred to above and based upon its experience, the Company has
recorded $229.9 million on the balance sheet as an estimated minimum liability
to defend and resolve probable and estimable asbestos-related personal injury
claims currently pending and to be filed through 2003. This is management's best
estimate of the minimum liability, although potential future costs for claims
could range up to an additional $387 million resulting in an estimated maximum
liability of approximately $617 million. Because of the uncertainties related to
asbestos litigation, it is not possible to estimate the number of personal
injury claims that may be filed after 2003 or their defense and resolution
costs. Therefore, the Company's estimated liability does not include costs for
personal injury claims that may be filed after 2003, although it is likely there
will be such additional claims. Management believes that potential additional
costs for claims to be filed through 2003 and those filed thereafter, net of
insurance recoveries, will not have a material after-tax effect on the financial
condition of the Company or its liquidity, although the net after-tax effect of
any future liabilities recorded in excess of insurance assets could be material
to earnings in a future period.
Property Damage Litigation
The Company is also one of many defendants in eight pending claims as of March
31, 1998, brought by public and private building owners. These claims include
allegations of damage to buildings caused by asbestos-containing products and
generally seek compensatory and punitive damages and equitable relief, including
reimbursement of expenditures, for removal and replacement of such products. The
claims appear to be aimed at friable (easily crumbled) asbestos-containing
products, although allegations encompass all asbestos-containing products,
including previously installed asbestos-containing resilient flooring. Among the
lawsuits that have been resolved are four class actions which involve public and
private schools, Michigan state public and private schools, colleges and
universities, and private property owners who leased facilities to the federal
government. The Company vigorously denies the validity of the allegations
against it in these claims. These suits and claims are not handled by the
Center. Insurance coverage has been resolved and is expected to cover almost all
costs of these claims.
Codefendant Bankruptcies
Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
Insurance Coverage
The Company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product hazard coverage for property damage claims. Certain policies also
provide coverage to ACandS, Inc., a former subsidiary of the Company. The
company and ACandS, Inc., share certain limits that both have accessed and also
have entered into an agreement that reserved for ACandS, Inc., a certain amount
of excess insurance.
8
<PAGE>
California Insurance Coverage Lawsuit
Trial court decisions in the insurance lawsuit filed by the Company in
California held that the trigger of coverage for personal injury claims was
continuous from exposure through death or filing of a claim, that a triggered
insurance policy should respond with full indemnification up to policy limits,
and that any defense obligation ceases upon exhaustion of policy limits.
Although not as comprehensive, another decision established favorable defense
and indemnity coverage for property damage claims, providing coverage during the
period of installation and any subsequent period in which a release of fibers
occurred. The California appellate courts substantially upheld the trial court,
and that insurance coverage litigation is now concluded. The Company has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to below, or other
settlements. In 1989, a settlement with a carrier having both primary and excess
coverages provided for certain minimum and maximum percentages of costs for
personal injury claims to be allocated to nonproducts (general liability)
coverage, the percentage to be determined by negotiation or in alternative
dispute resolution ("ADR").
The insurance carriers that provided personal injury products hazard,
nonproducts or property damage coverages are as follows: Reliance Insurance
Company; Aetna (now Travelers) Casualty and Surety Company; Liberty Mutual
Insurance Company; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier that
provided $25 million of personal injury coverage, certain London companies, and
certain excess carriers providing only property damage coverage are insolvent.
The Company is pursuing claims against insolvents in a number of forums.
Wellington Agreement
In 1985, the Company and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled nearly all disputes
concerning personal injury insurance coverage with most of the company's
carriers, provided broad coverage for both defense and indemnity and addressed
both products hazard and non-products (general liability) coverages.
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
The Wellington Agreement established the Facility to evaluate, settle, pay and
defend all personal injury claims against member companies. Resolution and
defense costs were allocated by formula. The Facility subsequently dissolved,
and the Center was created in October 1988 by 21 former Facility members,
including the Company. Insurance carriers, while not members, are represented ex
officio on the Center's governing board and have agreed annually to provide a
portion of the Center's operational costs. The Center adopted many of the
conceptual features of the Facility and has addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. Resolution
and defense costs are allocated by formula; adjustments over time have resulted
in some increased share for the company.
Insurance Recovery Proceedings
A substantial portion of the Company's primary and excess insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others those that involve exposure during installation of asbestos
materials. The Wellington Agreement and the 1989 settlement agreement referred
to above have provisions for such coverage. An ADR process under the Wellington
Agreement is underway against certain carriers to determine the percentage of
resolved and unresolved claims that are nonproducts claims, to establish the
entitlement to such coverage and to determine whether and how much reinstatement
of prematurely exhausted products hazard insurance is warranted. The nonproducts
coverage potentially available is substantial and, for some policies, includes
defense costs in addition to limits. The carriers have raised various defenses
to our claims, including waivers, laches, statutes of limitations and
contractual defenses. One primary carrier alleges that it is no longer bound by
the Wellington Agreement, and another alleges that the Company agreed to limit
its claims for nonproducts coverage against that carrier when the Wellington
Agreement was signed. The ADR process is in the trial phase of binding
arbitration. An agreement in principle, subject to execution of a final written
agreement, has recently been reached with two carriers to settle the ADR with
respect to them. Other proceedings against non-Wellington carriers may become
necessary.
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the Company's belief in the availability of insurance in this
amount,
9
<PAGE>
based upon the Company's success in insurance recoveries, settlement agreements
that provide such coverage, recoveries of nonproducts coverage by other
companies, the opinion of outside counsel, and the recent agreement in principle
with regard to two carriers in the ADR. Such insurance is probable of
recovery through negotiation or litigation. A substantial portion of the
insurance asset is involved in the aforementioned ADR, which the Company
believes may be resolved in 1998 or later. A shortfall has developed between
available insurance and amounts necessary for resolution and defense costs. This
shortfall was $61.7 million as of March 31, 1998. The recovery of insurance
assets to cover the shortfall will depend upon the resolution of the ADR and
other disputes with the insurance carriers. The Company does not believe that
any after-tax effect of the shortfall will be material either to the financial
condition of the Company or to its liquidity.
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
defense and resolution costs that may ultimately result therefrom, nor whether
an alternative to the Georgine settlement vehicle may emerge, nor the scope of
its insurance coverage ultimately deemed available.
The Company has assessed the impact of the recent Supreme Court ruling on its
projected asbestos resolution and defense costs. Subject to the uncertainties,
limitations and other factors referred to above and based upon its experience,
the Company has recorded on the balance sheet $229.9 million as a minimum
estimated liability to defend and resolve probable and estimable asbestos-
related personal injury claims currently pending and to be filed through 2003.
This is management's best estimate of the minimum liability, although potential
future costs for these claims could range up to an additional $387 million or an
estimated maximum liability of approximately $617 million. Because of the
uncertainties related to asbestos litigation, it is not possible to estimate the
number or cost of personal injury claims that may be filed after 2003.
Therefore, the Company's estimated liability does not include costs for personal
injury claims that may be filed after 2003, although it is likely there will be
such additional claims. Management believes that the potential additional costs
for claims to be filed through 2003 and those filed thereafter, net of insurance
recoveries, will not have a material after-tax effect on the financial condition
of the Company or its liquidity, although the net after-tax effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in a future period.
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the Company's belief in the availability of insurance in this
amount based upon the Company's success in insurance recoveries, settlement
agreements that provide such coverage, nonproducts recoveries by other
companies, the opinion of outside counsel, and the recent agreement in principle
with regard to two carriers in the ADR. Such insurance is probable of recovery
through negotiation or litigation. A substantial portion of the insurance asset
is in ADR, which the Company believes may be resolved in 1998 or later. A
shortfall has developed between available insurance and amounts necessary for
resolution and defense costs. This shortfall was $61.7 million as of March 31,
1998. The recovery of insurance assets to cover the shortfall will depend upon
the resolution of the ADR and other disputes with insurance carriers. The
Company does not believe that after-tax effect of the shortfall will be material
either to the financial condition of the Company or to its liquidity.
The Company believes that a claims resolution mechanism alternative to the
Georgine settlement will eventually emerge, but the liability is likely to be
higher than the projection in Georgine.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the Company believes it is
probable that substantially all of the defense and resolution costs of property
damage claims will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and other settlements with insurance carriers, the results of the
California insurance coverage litigation, the establishment of the Center, the
likelihood that an alternative to the Georgine settlement will eventually
emerge, and its experience, the Company believes asbestos-related claims against
the Company will not be material either to the financial condition of the
Company or to its liquidity, although the net after-tax effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in such future period.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
As shown on the Consolidated Balance Sheet (see page 3), the Company had cash
and cash equivalents of $48.9 million at March 31, 1998. Working capital was
$106.0 million as of March 31, 1998, $22.5 million lower than the $128.5 million
recorded at the end of 1997. The ratio of current assets to current liabilities
was 1.21 to 1 as of March 31, 1998, compared with 1.27 to 1 as of December 31,
1997. The ratio decrease from December 31, 1997, was primarily due to higher
levels of short-term debt used to finance higher levels of receivables.
Long-term debt, excluding the Company's guarantee of the ESOP loan, increased
slightly in the first three months of 1998. At March 31, 1998, long-term debt
of $223.8 million, or 16.0 percent of total capital, compared with $223.1
million, or 16.7 percent of total capital, at the end of 1997. For the periods
ended March 31, 1998, and December 31, 1997 ratios of total debt (including the
Company's financing of the ESOP loan) as a percent of total capital were 40.5
percent and 39.2 percent, respectively.
As shown on the Consolidated Statements of Cash Flows (see page 5), net cash
provided by operating activities for the three months ended March 31, 1998, was
$16.5 million compared with $6.4 million for the comparable period in 1997. The
increase was primarily due to lower working capital requirements and
restructuring payments, which were partially offset by a shortfall between
currently available insurance and amounts necessary to pay asbestos-related
claims.
Net cash used for investing activities was $30.4 million for the three months
ended March 31, 1998, compared with $36.5 million in 1997. The decrease of $6.1
million was primarily due to lower expenditures for acquisitions and no
investments in joint ventures in 1998.
Net cash provided by financing activities was $6.0 million for the three months
ended March 31, 1998 compared with net cash used for financing activities of
$2.5 million for the three months ended March 31, 1997.
Under the plans approved by the Company's Board of Directors for the repurchase
of 5.5 million shares of common stock, the Company has repurchased approximately
3,888,000 shares through March 31, 1998, including 227,000 repurchased in the
first three months of 1998.
It is management's opinion that the Company has sufficient financial strength to
warrant the required support from lending institutions and financial markets.
Sale of Dal-Tile Stock
The Company previously announced its intention to dispose of its investment in
Dal-Tile. On April 29, the Company filed a preliminary prospectus supplement
with the Securities and Exchange Commission describing its proposed offering of
up to 8,050,000 (including an over allotment option) Participating Exchangeable
Premium Securities(SM) ("PEPS"), a class of senior unsecured debt which matures
three years from the date of issuance. They are redeemable at maturity in
shares of common stock of Dal-Tile or, at the option of the Company, cash.
Until the PEPS mature, an equivalent number of Dal-Tile shares will be held by
Armstrong. In a concurrent transaction, Armstrong plans to sell up to
10,315,822 (including an over-allotment option) shares of Dal-Tile common stock
in an underwritten public offering. The Dal-Tile common stock is to be offered
pursuant to a registration statement filed by Dal-Tile which is currently under
review by the Securities and Exchange Commission.
Armstrong intends to use the net proceeds from the sale of the PEPS for general
corporate purposes, which may include additions to working capital, refinancing
existing indebtedness, capital expenditures and possible acquisitions.
"Participating Exchangeable Premium Securities" and "PEPS" are service marks of
Morgan Stanley & Co. Incorporated.
Asbestos-Related Litigation
- ---------------------------
The Company is involved in significant asbestos-related litigation which is
described more fully under "Overview of Asbestos-Related Legal Proceedings" on
pages 7-10 and which should be read in connection with this discussion and
analysis.
The Company does not know how many claims will be filed against it in the
future, nor the details thereof, or of pending suits not fully reviewed, nor the
11
<PAGE>
defense and resolution costs that may ultimately result therefrom, nor whether
an alternative to the Georgine settlement vehicle may emerge, nor the scope of
its insurance coverage ultimately deemed available.
The Company has assessed the impact of the June 1997 Supreme Court ruling in the
Georgine case on its projected asbestos resolution and defense costs. Subject to
the uncertainties, limitations and other factors referred to above and based
upon its experience, the Company has recorded on the balance sheet $229.9
million as a minimum estimated liability to defend and resolve probable and
estimable asbestos-related personal injury claims currently pending and to be
filed through 2003. This is management's best estimate of the minimum liability,
although potential future costs for these claims could range up to an additional
$387 million or an estimated maximum liability of approximately $617 million.
Because of the uncertainties related to asbestos litigation, it is not possible
to estimate the number or cost of personal injury claims that may be filed after
2003. Therefore, the Company's estimated liability does not include costs for
personal injury claims that may be filed after 2003, although it is likely there
will be such additional claims. Management believes that the potential
additional costs for claims to be filed through 2003 and those filed thereafter,
net of any potential insurance recoveries, will not have a material after-tax
effect on the financial condition of the Company or its liquidity, although the
net after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the Company's belief in the availability of insurance in this
amount based upon the Company's success in insurance recoveries, settlement
agreements that provide such coverage, the nonproducts recoveries by other
companies, the opinion of outside counsel and the recent agreement in principle
with regard to two carriers in the ADR. Such insurance is probable of recovery
through negotiation or litigation. A substantial portion of the insurance asset
is in ADR, which the Company believes may be resolved in 1998 or later. A
shortfall has developed between available insurance and amounts necessary for
resolution and defense costs. This shortfall was $61.7 million as of March 31,
1998. The recovery of insurance assets to cover the shortfall will depend upon
the resolution of the ADR and other disputes with insurance carriers. The
Company does not believe that after-tax effect of the shortfall will be material
either to the financial condition of the Company or to its liquidity.
The Company believes that a claims resolution mechanism alternative to the
Georgine settlement will eventually emerge, but the liability is likely to be
higher than the projection in Georgine.
Subject to the uncertainties, limitations and other factors previously stated
and based upon its experience, the Company believes it is probable that
substantially all of the defense and resolution costs of property damage claims
will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and other settlements with insurance carriers, the results of the
California insurance coverage litigation, the establishment of the Center, the
likelihood that an alternative to the Georgine settlement will eventually
emerge, and its experience, the Company believes asbestos-related claims against
the Company will not be material either to the financial condition of the
Company or to its liquidity, although the net after-tax effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in such future period.
Tender Offer for Domco Inc.
On June 16, 1997, the Company commenced an all cash offer to purchase all of the
outstanding common shares and common share equivalents (including convertible
debentures and warrants on an as-if converted basis) of Domco Inc. ("Domco"), a
Canadian subsidiary of Sommer Allibert, S.A. ("Sommer"). The offer is
conditional upon the valid tender of 51% of the outstanding common shares of
Domco on a diluted basis. The offer has been extended and amended on a number
of occasions since then, most recently to increase the bid price per common
share to CDN $26.50 (thereby increasing the aggregate proposed purchase price to
CDN $560 million) and to extend the expiration date of the offer to May 29,
1998. The extension is intended to permit the Quebec Securities Commission to
rule on the issues of whether the merger of Tarkett AG ("Tarkett") with Sommer
constitutes an indirect takeover of Domco and, if so, at a purchase price in
excess of 115% of Domco's per share price without having provided similar value
to Domco's minority shareholders as required by the Quebec Securities Act. The
Company has obtained requisite regulatory approvals from the United States
Federal Trade Commission, the Canadian Minister of Industry and the Competition
Bureau in Canada. Sommer has stated that it does not intend to sell
12
<PAGE>
its shares of Domco to the Company, and Domco's board of directors has rejected
the Company's offer to subscribe for Domco common shares. The Company has
recorded an asset of $10.0 million for costs associated with the Domco
acquisition.
On June 9, 1997, the Company filed a complaint in the United States District
Court for the Eastern District of Pennsylvania alleging that Sommer
(subsequently amended to include Tarkett and Marc Assa, the President du
Directoire of Sommer), had used confidential information provided by the Company
during negotiations regarding the purchase of Sommer's worldwide flooring assets
to structure a proposed transaction with Tarkett in violation of a
confidentiality agreement and exclusivity understanding with the Company
together with a duty to negotiate in good faith. The Company intends to
continue to pursue this litigation to recover damages in a trial scheduled to
begin on September 15, 1998. The ultimate magnitude of the Company's potential
recovery is not known at this time. On April 8, 1998, Sommer filed a
counterclaim against the Company and third-party claims against certain of its
officers. Sommer generally alleges that the Company utilized a consulting firm
to allegedly obtain nonpublic information about Sommer. Sommer is seeking
unspecified damages. The Company and the individual counterclaim defendants are
in the process of responding to the counterclaim and believe the charges are
baseless.
On June 23, 1997, the Company filed a claim, amended on August 11, 1997, in the
Ontario Court (General Division) alleging that Sommer and its representatives on
Domco's board breached their fiduciary duty to Domco and acted in a manner
oppressive to Domco's minority shareholders when they rejected the Company's bid
for Domco. The Company's motion requesting a court injunction to prevent the
takeover of Domco by Tarkett, among other items, was dismissed. The Company is
continuing to pursue this litigation to recover damages from Sommer and Domco's
directors, as well as seeking other relief.
The Company intends to continue to pursue all legal remedies available to it in
the United States and Canada against Sommer, Domco's directors, Tarkett and Marc
Assa.
Consolidated Results
- --------------------
First-quarter net sales of $543.1 million were 4.8 percent higher when compared
with net sales of $518.3 million in the first quarter of 1997. Removing the
currency translation impact of the stronger U.S. dollar, sales would have
increased 6.7 percent. The strongest growth was seen in the U.S. home center
channel where sales rose 23 percent. European area sales, about 26 percent of
total sales, increased 2.6 percent, or 8.3 percent without the translation
impact of a stronger U.S. dollar. This increase was due primarily to
acquisitions in 1997 of flooring and building products businesses. Sales in the
Pacific area, about 4 percent of total sales, declined almost 14 percent, or
nearly 9 percent without the impact of the stronger U.S. dollar.
First-quarter net earnings of $46.5 million increased 2.3 percent from 1997's
first-quarter net earnings of $45.5 million on the strength of results in the
floor coverings and industry products segments. Net earnings per diluted share
were $1.15 compared with $1.10 per diluted share for the first quarter of 1997
while net earnings per basic share were $1.17 compared with $1.11 per basic
share for the first quarter of 1997.
The cost of goods sold in the first quarter was 66.8 percent of sales, slightly
lower than the 67.0 percent in the first quarter of 1997. While manufacturing
costs as a percent of sales remained virtually the same, some lower raw material
costs were realized, primarily in flooring products. The increase in first-
quarter selling, general and administrative expenses reflected additional
spending for new product introductions and the related higher advertising and
promotion expenses to promote brand awareness.
For the first-quarter 1998, the Company's effective tax rate was 34.9 percent
compared with last year's first-quarter effective tax rate of 33.4 percent. The
change reflected the impact of the Company's share of the annualized projected
Dal-Tile earnings.
Industry Segment Results:
- ------------------------
Floor coverings sales of $276.3 million in the first quarter increased 9.5
percent from $252.4 million in the first quarter of 1997. This increase came
primarily from stronger home center channel sales for residential tile and
laminate flooring and higher European sales primarily from acquisitions. First-
quarter operating income of $36.8 million increased almost 12 percent from last
year's $33.0 million in the first quarter and reflected the positive impact of
the higher sales levels and some lower raw material prices.
13
<PAGE>
Building products sales of $188.2 million increased 3.4 percent from $182.0
million in the first quarter of 1997; however, without the translation impact of
the stronger U.S. dollar, sales would have increased 5.5 percent. Strength in
the U.S. commercial and retail channels and higher European sales, including new
soft-fiber ceiling products from an acquisition, offset the adverse impact of
lower sales in Southeast Asia. First-quarter operating income of $26.3 million
decreased 10.4 percent from last year's $29.3 million. The major factors in
this decline were losses in metal ceilings, higher SG&A costs and competitive
selling pressures.
Industry products sales of $78.6 million in the first quarter decreased 6.3
percent when compared with 1997's first quarter; however, without the
translation impact of the stronger U.S. dollar, sales would have decreased 1.1
percent. European sales of insulation products continued to be affected by
competitive pricing pressures. Operating income of $13.0 million increased 16.6
percent from last year's $11.2 million. The majority of the increase was
related to lower manufacturing costs in insulation products which offset the
impact of lower sales levels. The gasket and textile products businesses also
realized higher operating income.
Ceramic tile generated an operating loss of $2.2 million in the first quarter,
representing Armstrong's 34.4 percent share of the estimated after-tax loss at
Dal-Tile and the amortization of Armstrong's initial investment in Dal-Tile over
the underlying equity in net assets of the business combination. These results
compared with Armstrong's recognition of operating income of $0.7 million in
1997's first quarter.
First-quarter unallocated corporate net income includes the continuation of
higher pension credits related to pension fund investment performance.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." This statement revises employers'
disclosures about pensions and other postretirement benefit plans but does not
change the measurement or recognition of those plans. It standardizes
disclosure requirements, eliminates unnecessary disclosures and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. This statement supersedes
the disclosure requirements of SFAS No. 87, Employers' Accounting for Pensions,
No. 88, Employers' Accounting for settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. The Company plans
to adopt SFAS No. 131 and SFAS No. 132 beginning with 1998 annual reporting.
In March 1998, the American Institute of Certified Public Accountants (AICPA),
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, (SOP 98-1). This statement is effective
for financial statements for fiscal years beginning after December 15, 1998.
Earlier application is encouraged in fiscal years for which annual financial
statements have not been issued. The Company implemented SOP 98-1 in the first
quarter of 1998. SOP 98-1 will not have a material impact on the Company's
financial condition or results of operations.
This Quarterly Report on Form 10-Q contains certain "forward looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995).
Such forward-looking statements include statements using the words "believe,"
"expect," and "estimate" and similar expressions. Among other things, they
regard the Company's earnings, liquidity, financial condition, financial
resources, and the ultimate outcome of the Company's asbestos-related
litigation. Actual results may differ materially as a result of factors over
which the Company may or may not have any control. Such factors include: (a)
those factors identified in the Notes to the Consolidated Financial Statements
in connection with the Company's asbestos-related litigation and the
availability of insurance coverage therefor, and (b) the strength of domestic
and foreign economies, continued sales growth, continued product development,
competitive advantages, minimizing cost increases, changes from projected
effective tax rates and continued strengthening of the financial markets.
Certain other factors not specifically identified herein may also materially
affect the Company's results. Actual results may differ materially as a result
of the
14
<PAGE>
uncertainties identified or if the factors on which the Company's conclusions
are based do not conform to the Company's expectations.
15
<PAGE>
Independent Accountants' Report
-------------------------------
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have reviewed the consolidated balance sheet of Armstrong World Industries,
Inc. and subsidiaries as of March 31, 1998, and the related consolidated
statements of earnings, the consolidated statements of cash flows and the
consolidated statements of shareholders' equity for the three-month periods
ended March 31, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Armstrong World Industries, Inc.
and subsidiaries as of December 31, 1997, and the related consolidated
statements of earnings, cash flows and shareholders' equity for the year then
ended (not presented herein); and in our report dated February 13, 1998, we have
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1997, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
May 8, 1998
16
<PAGE>
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report on
Form 10-Q:
Exhibits
--------
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
17
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Armstrong World Industries, Inc.
By: /s/ D. K. Owen
-------------------------------
D. K. Owen, Senior Vice President,
Secretary and General Counsel
By: /s/ E. R. Case
-------------------------------
E. R. Case, Vice President and
Controller (Principal Accounting Officer)
Date: May 13, 1998
18
<PAGE>
Exhibit Index
-------------
Exhibit No.
- -----------
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
19
<PAGE>
Armstrong World Industries, Inc.
Lancaster, Pennsylvania
Ladies and Gentlemen:
RE: Registration Statement Nos. 2-50942; 2-77936; 2-91890; 33-18996;
33-18997; 33-18998; 33-29768; 33-38837; 33-60070; 333-6333
With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated May 8,
1998, related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
May 8, 1998
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR MARCH 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 49
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<RECEIVABLES> 330
<ALLOWANCES> 37
<INVENTORY> 218
<CURRENT-ASSETS> 618
<PP&E> 1,991
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0
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