<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, 1999
-------------------------------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 Columbia Avenue, Lancaster, Pennsylvania 17603
- --------------------------------------------------------------------------------
(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 26, 1999 - 40,037,788
<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)
Unaudited
<TABLE>
<CAPTION>
Three months
ended March 31
--------------
1999 1998
---- ----
<S> <C> <C>
NET SALES $ 829.1 $ 543.1
Cost of goods sold 553.8 362.7
Selling, general and administrative expense 169.2 103.6
Goodwill amortization 6.1 0.4
Equity earnings from affiliates (3.9) (0.7)
-------- --------
Operating income 103.9 77.1
Interest expense 26.7 6.6
Other income, net (0.6) (1.0)
-------- --------
Earnings before income taxes 77.8 71.5
Income taxes 29.5 25.0
-------- --------
NET EARNINGS $ 48.3 $ 46.5
======== ========
Net earnings per share of common stock:
Basic $ 1.21 $ 1.17
Diluted $ 1.20 $ 1.15
Average number of common shares outstanding:
Basic 39.8 39.8
Diluted 40.2 40.5
</TABLE>
See accompanying footnotes to the unaudited consolidated financial statements
beginning on page 6.
2
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
---------------------------
(amounts in millions)
<TABLE>
<CAPTION>
Unaudited
Assets March 31, 1999 December 31, 1998
------ -------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36.6 $ 38.2
Accounts receivable less allowance 477.1 440.4
Inventories:
Finished goods 260.0 251.2
Work in process 53.9 51.5
Raw materials and supplies 151.7 162.4
-------- --------
Total inventories 465.6 465.1
Income tax benefits 48.0 52.5
Net assets of businesses held for sale 47.5 55.9
Other current assets 86.3 69.0
-------- --------
Total current assets 1,161.1 1,121.1
Property, plant, and equipment 2,609.2 2,623.9
Less accumulated depreciation and amortization 1,128.0 1,121.9
-------- --------
Net property, plant and equipment 1,481.2 1,502.0
Insurance for asbestos-related liabilities 234.8 248.8
Investment in affiliates 43.7 41.8
Goodwill, net 958.4 965.4
Other intangibles, net 60.1 63.2
Other noncurrent assets 342.9 330.9
-------- --------
Total assets $4,282.2 $4,273.2
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt 188.8 $ 149.9
Current installments of long-term debt 32.6 32.9
Accounts payable and accrued expenses 536.0 544.8
Income taxes 52.0 25.7
-------- --------
Total current liabilities 809.4 753.3
Long-term debt, less current installments 1,554.0 1,562.8
Employee Stock Ownership Plan (ESOP) loan guarantee 178.6 178.6
Postretirement and postemployment benefit liabilities 250.6 249.0
Pension benefit liabilities 234.2 235.5
Asbestos-related liabilities 269.4 344.8
Other long-term liabilities 115.1 115.8
Deferred income taxes 112.8 107.6
Minority interest in subsidiaries 15.3 16.1
-------- --------
Total noncurrent liabilities 2,730.0 2,810.2
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 173.6 173.0
Reduction for ESOP loan guarantee (195.6) (199.1)
Retained earnings 1,286.5 1,257.0
Accumulated other comprehensive loss (26.5) (25.4)
Treasury stock (547.1) (547.7)
-------- --------
Total shareholders' equity 742.8 709.7
-------- --------
Total liabilities and shareholders' equity $4,282.2 $4,273.2
======== ========
</TABLE>
See accompanying footnotes to the unaudited consolidated financial statements
beginning on page 6.
3
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C> <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 $ 173.0 $ 169.5
Stock issuances and other 0.6 (0.5)
-------- --------
Balance at March 31 $ 173.6 $ 169.0
-------- --------
Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $ (199.1) $ (207.7)
Accrued compensation 3.5 1.9
-------- --------
Balance at March 31 $ (195.6) $ (205.8)
-------- --------
Retained earnings:
- ------------------
Balance at beginning of year $1,257.0 $1,339.6
Net earnings 48.3 $ 48.3 46.5 $ 46.5
Tax benefit on dividends paid on
unallocated common shares 0.4 0.5
-------- --------
Total $1,305.7 $1,386.6
Less common stock dividends 19.2 17.6
-------- --------
Balance at March 31 $1,286.5 $1,369.0
-------- --------
Other comprehensive income (loss):
- ----------------------------------
Balance at beginning of year $ (25.4) $ (16.2)
Foreign currency translation adjustments and
hedging activities 1.1 (4.3)
Minimum pension liability adjustments (2.2) 6.0
-------- --------
Total other comprehensive income (1.1) (1.1) 1.7 1.7
-------- -------- -------- --------
Balance at March 31 $ (26.5) $ (14.5)
-------- --------
Comprehensive income: $ 47.2 $ 48.2
- --------------------- ======== ========
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 547.7 $ 526.5
Stock purchases 0.4 19.7
Stock issuance activity, net (1.0) (6.6)
-------- --------
Balance at March 31 547.1 $ 539.6
-------- --------
Total shareholders' equity $ 742.8 $ 830.0
======== ========
</TABLE>
See accompanying footnotes to the unaudited consolidated financial statements
beginning on page 6.
4
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 48.3 $ 46.5
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 42.4 32.2
Deferred income taxes 12.3 5.1
Equity change in affiliates (1.1) 0.4
Reorganization and restructuring payments (9.4) (2.5)
Payments for asbestos-related claims,
net of recoveries (35.4) (21.9)
Changes in operating assets and liabilities net of
effects of discontinued businesses, reorganizations
and dispositions:
(Increase) in receivables (54.9) (41.3)
Decrease (increase) in inventories (21.4) 1.9
Decrease in other current assets 14.4 11.1
(Increase) in other noncurrent assets (22.1) (21.3)
(Decrease) in accounts payable
and accrued expenses (7.6) (8.7)
Increase in income taxes payable 35.8 11.6
Increase in other long-term liabilities 13.1 0.5
Other, net 1.9 2.9
------- -------
Net cash provided by operating activities 16.3 16.5
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (36.4) (26.2)
Investment in computer software (3.0) (4.2)
------- -------
Net cash used for investing activities (39.4) (30.4)
------- -------
Cash flows from financing activities:
Increase in short-term debt 47.1 50.5
Issuance of long-term debt -- 14.4
Payments of long-term debt (3.7) (24.7)
Cash dividends paid (19.2) (17.6)
Purchase of common stock for the treasury, net (0.4) (19.7)
Proceeds from exercised stock options 0.4 4.3
Other, net (1.0) (1.2)
------- -------
Net cash provided by financing activities 23.2 6.0
------- -------
Effect of exchange rate changes on cash and cash
equivalents (1.7) (1.1)
------- -------
Net decrease in cash and cash equivalents $ (1.6) $ (9.0)
------- -------
Cash and cash equivalents at beginning of period $ 38.2 $ 57.9
------- -------
Cash and cash equivalents at end of period $ 36.6 $ 48.9
------- -------
</TABLE>
See accompanying footnotes to the unaudited consolidated financial statements
beginning on page 6.
5
<PAGE>
Note 1. Operating results for the first quarter of 1999, as well as for the
- ------
corresponding period of 1998 included in this report, are unaudited. However,
these results have been reviewed by the Company's independent public
accountants, KPMG LLP, in accordance with the established professional standards
and procedures for a limited review of interim financial information.
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, 1998. 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, 1998. In addition, beginning with the first
quarter of 1999, the Company has adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities." The adoption of this statement did not
materially impact the Company's consolidated results, financial condition or
long-term liquidity. 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. The fiscal quarter of Triangle Pacific, acquired
in 1998, ended on April 3, 1999. No events occurred between March 31 and April 3
at Triangle Pacific materially affecting the Company's financial position or
results of operations.
Note 2.
- ------
INDUSTRY SEGMENTS
Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months
ended March 31
--------------
1999 1998
---- ----
<S> <C> <C>
Net sales to external customers
- -------------------------------
Floor coverings $ 376.2 $ 276.3
Building products 189.7 188.2
Wood products 187.0 0.0
Insulation products 56.3 54.0
All other 19.9 24.6
------- -------
Total sales to external customers $ 829.1 $ 543.1
======= =======
Segment operating income (a):
- ----------------------------
Floor coverings $ 46.7 $ 36.8
Building products 29.7 26.3
Wood products 18.5 0.0
Insulation products 10.2 10.0
All other 1.9 0.8
------- -------
Total segment operating income $ 107.0 $ 73.9
======= =======
<CAPTION>
March 31 December 31
Segment Assets (a)(b): 1999 1998
-------- --------
<S> <C> <C>
Floor coverings $1,394.2 $1,373.2
Building products 566.6 550.1
Wood products 1,395.4 1,370.8
Insulation products 170.0 174.6
All other 63.8 67.9
-------- --------
Total segment assets $3,590.0 $3,536.6
======== ========
</TABLE>
(a) The table below provides a reconciliation of segment information to total
consolidated information.
6
<PAGE>
<TABLE>
<CAPTION>
Three Months
ended March 31
--------------
1999 1998
---- ----
<S> <C> <C>
Operating income:
Total segment operating income $ 107.0 $ 73.9
Unallocated corporate (expense) income (3.1) 3.2
------- -------
Total consolidated operating income $ 103.9 $ 77.1
======= =======
<CAPTION>
March 31 December 31
Assets (b): 1999 1998
---- ----
<S> <C> <C>
Total segment assets $3,590.6 $3,536.6
Assets not assigned to business units 692.2 736.6
-------- --------
Total consolidated assets $4,282.2 $4,273.2
======== ========
</TABLE>
(b) The Company restated the components of segment assets at December 31, 1998,
reflecting a change in the composition of reportable segments.
Note 3.
- ------
ACQUISITIONS
During the third quarter of 1998, the Company acquired Triangle Pacific Corp.
and DLW Aktiengesellschaft ("DLW"), a portion of which is held for resale. The
Company has yet to complete final purchase price adjustments. The following
table reflects the adjustment to the carrying value of the DLW businesses held
for resale relating to interest allocation, profits and cash flows in the
relevant businesses.
<TABLE>
<S> <C>
(amounts in millions)
Carrying value at December 31, 1998 $55.9
Interest allocated January 1 - March 31, 1999 0.6
Adjustment to estimated sales proceeds (4.4)
Effect of exchange rate change (4.0)
Profits excluded from consolidated earnings 0.1
Cash flows funded by parent (0.7)
-----
Carrying value at March 31, 1998 $47.5
=====
</TABLE>
Note 4.
- ------
REORGANIZATION AND RESTRUCTURING ACTIVITIES
Severance payments charged against reorganization and restructuring accruals
were $9.4 million in the first three months of 1999 relating to the elimination
of 301 positions. As of March 31, 1999, $13.1 million remained in these accruals
primarily related to severance.
Note 5.
- ------
OTHER COMPREHENSIVE INCOME (LOSS)
Related tax effects allocated to each component of other comprehensive income
(loss) as of March 31, 1999
<TABLE>
<CAPTION>
Before- Tax Net-of
(amounts in millions) Tax (Expense) Tax
Amount or benefit Amount
------- ---------- ------
<S> <C> <C> <C>
Foreign currency translation adjustments and
hedging activities 1.1 0.0 1.1
Minimum pension liability adjustment (3.6) 1.4 (2.2)
--- --- ---
Other comprehensive income (loss) (2.5) 1.4 (1.1)
=== === ===
</TABLE>
<PAGE>
Note 6.
- ------
SUPPLEMENTAL FINANCIAL INFORMATION
Depreciation and amortization charged against earnings before income taxes
amounted to $42.4 million in the three months ended March 31, 1999, and $32.2
million in the three months ended March 31, 1998.
7
<PAGE>
Note 7.
- ------
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three months ended
(amounts in millions) March 31 March 31
1999 1999
-------- --------
<S> <C> <C>
Interest paid $26.5 2.4
Income taxes paid (refunded) $(5.3) $ 7.6
</TABLE>
Note 8.
- ------
EARNINGS PER SHARE
The following table provides a reconciliation of the numerator and denominators
of the basic and diluted per share calculations for net earnings.
<TABLE>
<CAPTION>
(amounts in millions, except per share amounts)
For the period ended March 31, 1999
-----------------------------------
Per-Share
Earnings Shares Amount
-------- ------ ------
<S> <C> <C> <C>
Basic Earnings per Share
- ------------------------
Net earnings $ 48.3 39.8 $ 1.21
Dilutive options 0.4
----
Diluted Earnings per Share
- --------------------------
Net earnings available for common $ 48.3 40.2 $ 1.20
====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
For the period ended March 31, 1999
-----------------------------------
Per-Share
Earnings Shares Amount
-------- ------ ------
<S> <C> <C> <C>
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
====== ==== ======
</TABLE>
Note 9.
- ------
OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
Personal Injury Litigation
The Company is one of many defendants in approximately 164,000 pending claims as
of March 31, 1999, alleging personal injury from exposure to asbestos. These
claims are discussed more fully under the heading "Legal Proceedings" under Item
1 of Part II of this report, which should be read in conjunction with this note.
The Company does not know how many claims will be filed against it in the
future, nor the details thereof, nor of pending suits not fully reviewed, nor
the defense and resolution costs that may ultimately result therefrom, nor
whether an alternative to the Amchem settlement vehicle may emerge, nor the
scope of its insurance coverage ultimately deemed available.
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.
Amchem Settlement Class Action
Georgine v. Amchem ("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 for Claims
Resolution ("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
8
<PAGE>
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.
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, holding 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. The Company
believes that an alternative claims resolution mechanism similar to Amchem is
likely to emerge, but the liability is likely to be higher than the projection
in Amchem.
Post Amchem Claim Filings
During 1998, pending claims increased by 71,000 claims. The Company and its
outside counsel believe the increase in claims filed during 1998 was partially
due to acceleration of pending claims as a result of the Supreme Court's
decision on Amchem and additional claims that had been filed in the tort system
against other defendants (and not against Center members) while Amchem was
pending. The Company continually assesses the assumptions it uses in its
estimate of the range of liability that is probable and estimable. This estimate
is highly uncertain due to the difficulty of forecasting with any certainty the
numerous variables that can affect the range of the liability. In the first
quarter of 1999, 11,380 claims were filed. Based on this claims experience in
the first quarter of 1999, there appear to have been favorable developments with
respect to some assumptions, but in some respects less favorable developments
than anticipated on average for 1999. The Company will continue to study the
variables as experienced in 1999 in order to identify trends that may become
evident and to assess their impact on the range of liability that is probable
and estimable. The Company will evaluate whether any changes are required to its
estimated liability as it receives additional claims experience.
Asbestos-Related Liability
The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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 previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other variables
referred to above and based upon its experience, the Company has estimated its
share of liability to defend and resolve probable asbestos-related personal
injury claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $389.4 million to $778.0 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $389.4 million as a liability in the accompanying
consolidated financial statements. Of this amount, management expects to incur
approximately $120.0 million over the next 12 months and has reflected this
amount as a current liability. This estimate includes an assumption that the
number of new claims filed annually will be less than the number filed in 1998.
The Company believes it can reasonably estimate the number and nature of future
claims that may be filed through 2004. However, for claims that may be filed
beyond that period, management believes that the level of uncertainty is too
great to provide for reasonable estimation of the number of future claims, the
nature of such claims, or the cost to resolve them. Accordingly, it is
reasonably possible that the total exposure to personal injury claims may be
greater than the recorded liability.
Because of the uncertainties related to the number of claims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that are likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed in the
future is subject to an increasing degree of uncertainty each year into the
future. As additional experience is gained regarding claims and settlements or
other new information becomes available regarding the potential liability, the
Company will reassess its potential liability and revise the estimates as
appropriate.
9
<PAGE>
Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims 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.
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 have
entered into an agreement that reserved for ACandS, Inc., a certain amount of
excess insurance.
The insurance carriers that provide personal injury products hazard, nonproducts
or property damage coverages include the following: 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 (now part of AIG); Central National Insurance Company;
Interstate Insurance Company; Puritan Insurance Company; and Commercial Union
Insurance Company. An excess carrier that provided 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.
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 alternative dispute resolution
("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, including waiver, 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. On February 26, 1999, the Company received a
preliminary decision in the initial phase of the trial proceeding of the ADR
which was favorable to the Company on a number of issues related to insurance
coverage. The decision, while favorable, relates to the initial phase of the ADR
proceeding. The Company has not yet determined the financial implications of the
decision. The Company has entered into a settlement with a number of the
carriers resolving its access to coverage.
An insurance asset in the amount of $264.8 million is recorded on the
Consolidated Balance Sheet. Of this amount, approximately $26.0 million
represents partial settlement for previous claims which will be paid in a fixed
and determinable flow and is reported at its net present value discounted at
6.35%. The total amount recorded reflects the Company's belief in the
availability of insurance in this amount, based upon the Company's success in
insurance recoveries, recent settlement agreements that provide such coverage,
the nonproducts recoveries by other companies and the opinion of outside
counsel. Such insurance is either available through settlement or probable of
recovery through negotiation, litigation or resolution of the ADR process which
is in the trial phase of binding arbitration. The Company continually evaluates
the probable insurance asset to be recorded. Depending on further evaluation of
the ADR decision, and activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the Company may revise
its estimate and additional insurance assets may be recorded in a future period.
Of the $264.8 million asset, $30.0 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months. However, the actual amount of payments to be
received in the next 12 months is dependent upon the actual liability incurred
and the nature and result of settlement discussions. Management estimates that
the timing of future cash payments for the remainder of the recorded asset may
extend beyond 10 years.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
As shown on the Consolidated Balance Sheets (see page 3), the Company had cash
and cash equivalents of $36.6 million at March 31, 1999. Working capital was
$351.7 million as of March 31, 1999, $16.1 million lower than the $367.8
million recorded at the end of 1998. The ratio of current assets to current
liabilities was 1.43 to 1 as of March 31, 1999, decreasing slightly from the
1.49 to 1 ratio as of December 31, 1998.
Long-term debt, excluding the Company's guarantee of the ESOP loan, decreased
slightly in the first three months of 1999. At March 31, 1999, long-term debt of
$1,554.0 million, or 57.6 percent of total capital, compared with $1,562.8
million, or 59.3 percent of total capital, at the end of 1998. For the periods
ended March 31, 1999, and December 31, 1998 ratios of total debt (including the
Company's financing of the ESOP loan) as a percent of total capital were 72.5
percent and 73.1 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, 1999, was
$16.3 million compared with $16.5 million for the comparable period in 1998.
Net cash used for investing activities was $39.4 million for the three months
ended March 31, 1999, compared with $30.4 million in 1998. The increase of $9.0
million was primarily due to expenditures for property, plant and equipment for
Triangle Pacific and DLW which were acquired in the third quarter of 1998.
Net cash provided by financing activities was $23.2 million for the three months
ended March 31, 1999. For the three months ended March 31, 1998, net cash
provided by financing activities was $6.0 million. The lower amount of cash from
financing activities in 1998 reflected repurchases of common shares.
On March 16, 1999, a shelf registration statement on Form S-3 was filed with the
Securities and Exchange Commission (declared effective March 24, 1999) pursuant
to which the Company may issue from time to time up to $1.0 billion of debt
and/or equity securities. It is management's opinion that the Company has
sufficient financial strength to warrant the required support from lending
institutions and financial markets.
The Company is constantly evaluating its various business units and may from
time to time dispose of, or restructure, those units. On February 2, 1999, the
Company announced its intent to form a joint venture in the worldwide technical
insulation business with NMC (USA)/Nomaco (Belgium) and Thermaflex
(Netherlands).
Asbestos-Related Litigation
- ---------------------------
The Company is involved in significant asbestos-related litigation which is
described more fully under the heading "Legal Proceedings" under Item 1 of Part
II of this report 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, nor of pending suits not fully reviewed,
nor the defense and resolution costs that may ultimately result therefrom, nor
whether an alternative to the Amchem settlement vehicle (discussed in that Legal
Proceedings item) may emerge, nor the scope of its insurance coverage ultimately
deemed available.
The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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 previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other variables
referred to above and based upon its experience, the Company has estimated its
share of liability to defend and resolve probable asbestos-related personal
injury claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $389.4 million to $778.0 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $389.4 million as a liability in the accompanying
consolidated financial statements. Of this amount, management expects to incur
approximately $120.0 million over the next 12 months and has reflected this
amount as a current liability. This estimate includes an assumption that the
number of new claims filed annually will be less than the number filed in 1998.
The Company believes it can reasonably estimate the number and nature of future
claims that may be filed through 2004.
11
<PAGE>
However, for claims that may be filed beyond that period, management believes
that the level of uncertainty is too great to provide for reasonable estimation
of the number of future claims, the nature of such claims, or the cost to
resolve them. Accordingly, it is reasonably possible that the total exposure to
personal injury claims may be greater than the recorded liability.
During 1998, pending claims increased by 71,000 claims. The Company and its
outside counsel believe the increase in claims filed during 1998 was partially
due to acceleration of pending claims as a result of the Supreme Court's
decision on Amchem and additional claims that had been filed in the tort system
against other defendants (and not against Center members) while Amchem was
pending. The Company continually assesses the assumptions it uses in its
estimate of the range of liability that is probable and estimable. This estimate
is highly uncertain due to the difficulty of forecasting with any certainty the
numerous variables that can affect the range of the liability. In the first
quarter of 1999, 11,380 claims were fi1ed. Based on this claims experience in
the first quarter of 1999, there appear to have been favorable developments with
respect to some assumptions, but in some respects less favorable developments
than anticipated on average for 1999. The Company will continue to study the
variables as experienced in 1999 in order to identify trends that may become
evident and to assess their impact on the range of liability that is probable
and estimable. The Company will evaluate whether any changes are required to its
estimated liability as it receives additional claims experience.
Because of the uncertainties related to the number of claims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that are likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed in the
future is subject to an increasing degree of uncertainty each year into the
future. As additional experience is gained regarding claims and settlements or
other new information becomes available regarding the potential liability, the
Company will reassess its potential liability and revise the estimates as
appropriate.
Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims, 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 $264.8 million is recorded on the
Consolidated Balance Sheet. Of this amount, approximately $26.0 million
represents partial settlement for previous claims which will be paid in a fixed
and determinable flow and is reported at its net present value discounted at
6.35%. The total amount recorded reflects the Company's belief in the
availability of insurance in this amount, based upon the Company's success in
insurance recoveries, recent settlement agreements that provide such coverage,
the nonproducts recoveries by other companies and the opinion of outside
counsel. Such insurance is either available through settlement or probable of
recovery through negotiation, litigation or resolution of the ADR process which
is in the trial phase of binding arbitration. The Company continually evaluates
the probable insurance asset to be recorded. Depending on further evaluation of
the ADR decision, and activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the Company may revise
its estimate and additional insurance assets may be recorded in a future period.
Of the $264.8 million asset, $30.0 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months. However, the actual amount of payments to be
received in the next 12 months is dependent upon the actual liability incurred
and the nature and result of settlement discussions. Management estimates that
the timing of future cash payments for the remainder of the recorded asset may
extend beyond 10 years.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the variables
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 Amchem settlement will eventually emerge,
and its experience, the Company believes the asbestos-related claims against the
Company 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.
Consolidated Results
- --------------------
First-quarter net sales of $829.1 million were 52.7 percent higher when compared
with net sales of $543.1 million in first quarter 1998. The growth reflects the
acquisitions of Triangle Pacific ($187.0 million) and DLW ($121.4 million).
Sales by the Company's preacquisition businesses were $520.7 million, which were
$22.4 million, or 4.1 percent, below prior year as floor coverings sales
decreased 7.8 percent and gasket sales decreased 21.6 percent.
First-quarter net earnings were $48.3 million compared with 1998's first-quarter
net earnings of $46.5 million. Net earnings per diluted share were $1.20
compared with $1.15 per diluted share for the first quarter of 1998 while net
earnings per basic share were $1.21 compared with $1.17 per basic share for the
first quarter of 1998. Excluding Triangle Pacific and DLW, acquired in 1998, net
earnings were $49.1 million or $1.22 per diluted share, an increase of 5.6
percent over 1998's net earnings of $46.5 million, or $1.15 per diluted share.
The cost of goods sold in the first quarter was 66.8 percent of sales, the same
as in 1998. Excluding Triangle Pacific and DLW, Armstrong's base business cost
of goods sold was 64.6%, or 2.2 percentage points better than 1998, driven
primarily by significant cost reductions, including lower raw material costs, in
floor coverings and building products.
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<PAGE>
Goodwill amortization was $6.1 million in the first quarter of 1999 compared
with $0.4 million in the first quarter of 1998. This increase related to the
acquisitions of Triangle Pacific and DLW. Interest expense was $26.7 million in
the first quarter of 1999 compared with $6.6 million in the first quarter of
1998. This increase was due to additional long-term debt used to finance the
acquisitions.
For the first-quarter 1999, the Company's effective tax rate of 37.9% was 2.9
percentage points higher than last year and 2.9 percentage points higher than
the statutory rate of 35% primarily due to an increase in non-deductible
goodwill amortization related to the acquisitions of Triangle Pacific and DLW.
Industry Segment Results:
- ------------------------
Floor coverings sales of $376.2 million in the first quarter included sales of
$121.4 million from DLW. Excluding DLW, sales were $254.8 million, or 7.8
percent below last year. Sales in the Americas decreased 5.7 percent primarily
due to the impact of a significant channel inventory build-up from new product
introductions in 1998. In Europe, sales were down 18.5 percent while Pacific Rim
sales declined 23.1 percent due to general economic conditions in these areas.
Operating income of $46.7 million included $4.6 million of income from DLW.
Excluding DLW, Armstrong's base business operating income of $42.1 million was
16.5 percent of sales compared with $36.8 million or 13.3 percent of sales in
1998. The operating margin improvement, excluding DLW, was primarily due to
1998's cost reduction activities and lower raw material and other costs.
Operating results included a gain of approximately $1.2 million resulting from
the settlement of inventory claims net of write-offs of slow moving inventory.
Building products record sales of $189.7 million increased 0.8 percent from
$188.2 million in the first quarter of 1998. Americas sales were 1.4 percent
higher as unit volume increases more than offset competitive pricing pressure
and a less favorable mix. Sales to Russia and Central Europe were down 38.6
percent, or approximately $3.2 million, compared to first quarter 1998 due to
general economic conditions in these areas. Operating income of $29.7 million
increased $3.4 million over 1998 and was driven by the cost reduction activities
announced in the fourth quarter of 1998 in addition to the growth in sales.
Wood products, comprising Triangle Pacific which was acquired in 1998,
contributed $187.0 million to sales in the first quarter and was 8.6 percent
ahead of the comparable period in 1998. Cabinet sales continued to benefit from
improved sales mix and continuing cost reductions. Wood flooring sales were
ahead of last year, but faced competitive pricing pressure primarily in
unfinished strip products. Operating income of $18.5 million was below the
comparable period in 1998 due to amortization of acquisition goodwill.
Insulation products sales of $56.3 million increased 4.3 percent over the same
period in 1998 as sales in the Americas increased 11.6 percent while Pacific Rim
sales improved 36.7 percent. Operating profit of $10.2 million was slightly
ahead of last year as purchasing cost improvements and SG&A reductions offset
declining prices.
Sales of $19.9 million in the All Other segment were down 19.1 percent over the
same period in 1998. Gasket sales fell 21.6 percent reflecting the carryover
impact of a fourth quarter 1998 sales promotion. Textile sales declined 15.2
percent due to continuing weakness in the Asian market. Operating income
improved to $1.9 million as the absence of $2.2 million in Dal-Tile losses more
than offset the effects of lower sales for gaskets and textiles.
Year-2000 Activities:
- --------------------
The Company has continued its investments in hardware and software that is
year-2000 compliant. A fully operational Enterprise Resource Planning system,
implemented in phases over the last 4 years, has eliminated a major portion of
the Company's year-2000 compliance risk by centralizing and replacing business
critical systems including logistics, finance, human resources, payroll, and
procurement. In addition, the Company has converted the remainder of its
software and hardware information technology and non-information technology
systems to minimize any exposure to year-2000 compliance failures, and is
currently in the testing phase of conversion. Parallel work streams or "tracks"
continue to complete the work required to repair or replace non-compliant
systems and monitor the degree of year-2000 compliance by the Company's business
partners including suppliers, customers, financial institutions, and utilities.
The work streams encompass; (a) local projects to repair all internally
developed and supported applications; (b) infrastructure projects to repair or
replace all infrastructure components (e.g., mainframe and client server
computer systems, networks, phone switches and personal computers); (c) remote
projects to repair or replace all remote systems, including plant supported
systems and applications including process line controls, HVAC systems, security
systems, telecommunications systems, and other factory systems; and (d) a
desktop spreadsheet
13
<PAGE>
and data base verification service to validate that all internally written
applications are compliant.
The Year-2000 project includes several phases: an inventory phase to identify
all software and hardware components potentially affected; an assessment phase
to determine if identified components are compliant; a planning phase to
establish plans to bring components into compliance; an execution phase to
carryout actions determined during the planning phase; a testing phase to verify
compliance; and a completion phase to bring the revised component into
production. The local and infrastructure work streams have been substantially
completed and are currently in the testing and completion phases. The remote
work stream is at various phases depending upon the location with most locations
currently in the testing phase, and all locations at or beyond the execution
phase. Finally, the spreadsheet and database verification work stream is
currently functional and available for use.
Total costs of the Year-2000 project worldwide are estimated to be $21.0 million
through 1999. Actual costs through March 1999 were $12.3 million. Management
believes that internally generated funds and existing sources of liquidity are
sufficient to meet expected funding requirements for this project.
The Company is in the process of assessing, through direct contact and letters
of inquiry with key suppliers and customers, the year-2000 compliance status of
customers and suppliers. Responses to these contacts and letters are evaluated
for compliance, the need for follow-up actions, or contingency plans based on
business criticality. The evaluation of responses to date indicates that nearly
all customers and suppliers are aware of and are taking steps to address the
year-2000 issue. Until completion of this process, the Company cannot assess the
potential impact, if any, that year-2000 non-compliance by customers and
suppliers may have on the Company. Management believes the most
reasonably-likely worst case scenario would be that a small number of vendors
who are not critical to the operation of the Company's business will be unable
to supply materials for a short time after January 1, 2000. Moreover, management
is creating contingency plans to prepare for any reasonably-likely worst case
scenarios, including manual operations, selection of alternative suppliers,
early purchase of inventory and additional software repair.
New Accounting Pronouncements
- -----------------------------
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement established
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after September 15, 1999. The adoption of this
standard is not expected to materially impact the Company's consolidated
results, financial condition or long-term liquidity.
Cautionary Statements About Future Results
- ------------------------------------------
This discussion is provided under the Private Securities Litigation Reform Act
of 1995. The Company's disclosures in reports filed with the SEC, including its
1998 Annual Report to Shareholders and other public comments contain certain
written or oral forward-looking statements. Forward-looking statements provide
the Company's expectations or forecasts of future events. These statements may
be identified by the fact that they use words such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe," "outlook," and other words of
similar meaning in discussions of future operating or financial performance. In
particular, these include statements relating to future earnings per share,
dividends, financial results, operating results, prospective products, future
performance of current products, future sales or expenses, and the outcome of
contingencies such as legal proceedings.
Any of these forward-looking statements may turn out to be wrong. Actual future
results may vary materially. Consequently, no forward-looking statement can be
guaranteed.
Many factors could cause the Company's actual results to differ materially from
expected historical results. Such factors include:
. the strength of end-use markets for the Company's building products in
North America,
. levels of raw material and energy costs,
. competitive pricing caused by global overcapacity for building
products such as the Company's floors and ceilings,
14
<PAGE>
. economic and political disruptions in emerging markets and developing
countries,
. integration of businesses acquired in 1998, and
. the outcome of the asbestos, environmental and any other legal
proceedings described in the notes to the Company's consolidated
financial statements and/or in the "Legal Proceedings" sections of the
Company's 10-K, 10-Q and 8-K filings with the SEC.
This should not be considered to be a complete list of all potential risks and
uncertainties that might affect our future results. The Company undertakes no
obligation to update any forward-looking statements. The related disclosures in
the Company's report on Form 10-K filed in March 1999, and any further
disclosures the Company makes in subsequent 10-Q, 8-K and 10-K reports to the
SEC should also be consulted.
15
<PAGE>
Independent Auditors' Review 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, 1999, and the related consolidated
statements of earnings, cash flows and shareholders' equity for the three-month
periods ended March 31, 1999 and 1998. 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, 1998, 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 2, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
Philadelphia, Pennsylvania
May 10, 1999
16
<PAGE>
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
ASBESTOS-RELATED LITIGATION
Personal Injury Litigation
The Company is one of many defendants in approximately 164,000 pending claims as
of March 31, 1999, alleging personal injury from exposure to asbestos.
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.
Amchem Settlement Class Action
Georgine v. Amchem ("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 for Claims
Resolution ("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.
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, holding 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. The Company
believes that an alternative claims resolution mechanism similar to Amchem is
likely to emerge, but the liability is likely to be higher than the projection
in Amchem.
Post Amchem Claim Filings
During 1998, pending claims increased by 71,000 claims. The Company and its
outside counsel believe the increase in claims filed during 1998 was partially
due to acceleration of pending claims as a result of the Supreme Court's
decision on Amchem and additional claims that had been filed in the tort system
against other defendants (and not against Center members) while Amchem was
pending. The Company continually assesses the assumptions it uses in its
estimate of the range of liability that is probable and estimable. This estimate
is highly uncertain due to the difficulty of forecasting with any certainty the
numerous variables that can affect the range of the liability. In the first
quarter of 1999, 11,380 claims were fi1ed. Based on this claims experience in
the first quarter of 1999, there appear to have been favorable developments with
respect to some assumptions, but in some respects less favorable developments
than anticipated on average for 1999. The Company will continue to study the
variables as experienced in 1999 in order to identify trends that may become
evident and to assess their impact on the range of liability that is probable
and estimable. The Company will evaluate whether any changes are required to its
estimated liability as it receives additional claims experience.
17
<PAGE>
Asbestos-Related Liability
The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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 previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other variables
referred to above and based upon its experience, the Company has estimated its
share of liability to defend and resolve probable asbestos-related personal
injury claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $389.4 million to $778.0 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $389.4 million as a liability in the consolidated
financial statements filed in this report. Of this amount, management expects to
incur approximately $120.0 million over the next 12 months and has reflected
this amount as a current liability. This estimate includes an assumption that
the number of new claims filed annually will be less than the number filed in
1998. The Company believes it can reasonably estimate the number and nature of
future claims that may be filed through 2004. However for claims that may be
filed beyond that period, management believes that the level of uncertainty is
too great to provide for reasonable estimation of the number of future claims,
the nature of such claims, or the cost to resolve them. Accordingly, it is
reasonably possible that the total exposure to personal injury claims may be
greater than the recorded liability.
Because of the uncertainties related to the number of claims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that are likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed in the
future is subject to an increasing degree of uncertainty each year into the
future. As additional experience is gained regarding claims and settlements or
other new information becomes available regarding the potential liability, the
Company will reassess its potential liability and revise the estimates as
appropriate.
Because, among other things, payment of the liability will extend over many
years, management believes that the potential additional costs for claims, 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.
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.
Property Damage Litigation
The Company is also one of many defendants in eight pending claims as of March
31, 1999, 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.
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.
Insurance Coverage
The Company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product
18
<PAGE>
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 have entered into
an agreement that reserved for ACandS, Inc., a certain amount of excess
insurance.
The insurance carriers that provide personal injury products hazard, nonproducts
or property damage coverages include the following: 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 (now part of AIG); Central National Insurance Company;
Interstate Insurance Company; Puritan Insurance Company; and Commercial Union
Insurance Company. An excess carrier that provided 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 nonproducts (general liability) coverages.
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 above, 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").
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
("Center")
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,
including waiver, 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
19
<PAGE>
Agreement was signed. The ADR process is in the trial phase of binding
arbitration. On February 26, 1999, the Company received a preliminary decision
in the initial phase of the trial proceeding of the ADR which was favorable to
the Company on a number of issues related to insurance coverage. The decision,
while favorable, relates to the initial phase of the ADR proceeding. The Company
has not yet determined the financial implications of the decision. The Company
has entered into a settlement with a number of the carriers resolving its access
to coverage.
Other proceedings against non-Wellington carriers may become necessary.
An insurance asset in the amount of $264.8 million is recorded as an asset in
the consolidated financial statements filed in this report. Of this amount,
approximately $26.0 million represents partial settlement for previous claims
which will be paid in a fixed and determinable flow and is reported at its net
present value discounted at 6.35%. The total amount recorded reflects the
Company's belief in the availability of insurance in this amount, based upon the
Company's success in insurance recoveries, recent settlement agreements that
provide such coverage, the nonproducts recoveries by other companies and the
opinion of outside counsel. Such insurance is either available through
settlement or probable of recovery through negotiation, litigation or resolution
of the ADR process which is in the trial phase of binding arbitration. The
Company continually evaluates the probable insurance asset to be recorded.
Depending on further evaluation of the ADR decision, and activities such as
settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the Company may revise its estimate and additional insurance
assets may be recorded in a future period. Of the $264.8 million asset, $30.0
million has been recorded as a current asset reflecting management's estimate of
the minimum insurance payments to be received in the next 12 months. However,
the actual amount of payments to be received in the next 12 months is dependent
upon the actual liability incurred and the nature and result of settlement
discussions. Management estimates that the timing of future cash payments for
the remainder of the recorded asset may extend beyond 10 years.
Conclusions
The Company does not know how many claims will be filed against it in the
future, nor the details thereof, nor of pending suits not fully reviewed, nor
the defense and resolution costs that may ultimately result therefrom, nor
whether an alternative to the Amchem settlement vehicle may emerge, nor the
scope of its insurance coverage ultimately deemed available.
The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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 previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other variables
referred to above and based upon its experience, the Company has estimated its
share of liability to defend and resolve probable asbestos-related personal
injury claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $389.4 million to $778.0 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $389.4 million as a liability in the consolidated
financial statements filed in this report. Of this amount, management expects to
incur approximately $120.0 million over the next 12 months and has reflected
this amount as a current liability. The Company believes it can reasonably
estimate the number and nature of future claims that may be filed through 2004.
However for claims that may be filed beyond that period, management believes
that the level of uncertainty is too great to provide for reasonable estimation
of the number of future claims, the nature of such claims, or the cost to
resolve them. Accordingly, it is reasonably possible that the total exposure to
personal injury claims may be greater than the recorded liability. The Company
continually assesses the assumptions it uses in its estimate of the range of
liability that is probable and estimable. This estimate is highly uncertain due
to the difficulty of forecasting with any certainty the numerous variables that
can affect the range of the liability. In the first quarter of 1999, another
11,380 claims were filed. Based on the claims experience in the first quarter of
1999, there appear to have been favorable developments with respect to some
assumptions, but in some respects less favorable developments than anticipated
on average for 1999. The Company will continue to study the variables as
experienced in 1999 in order to identify trends that may become evident and to
assess their impact on the range of liability that is probable and estimable.
The Company will evaluate whether any changes are required to its estimated
liability as it receives additional claims experience.
Because of the uncertainties related to asbestos litigation, it is not possible
to precisely estimate the number of personal injury claims that may ultimately
be filed or their cost. It is reasonably possible there will be additional
claims beyond management's estimates. Management believes that the potential
additional costs for such additional claims, 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.
20
<PAGE>
An insurance asset in the amount of $264.8 million is recorded in the
Consolidated financial statements filed in this report 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, and the opinion of
outside counsel. Such insurance is either available through settlement or
probable of recovery through the ADR process, negotiation or litigation.
The Company believes that a claims resolution mechanism alternative to the
Amchem settlement will eventually emerge, but the liability is likely to be
higher than the projection in Amchem.
Subject to the uncertainties, limitations and other variables referred to
elsewhere in this discussion 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 variables
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 Amchem settlement will eventually emerge,
and its experience, the Company believes the asbestos-related claims against the
Company 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.
ENVIRONMENTAL MATTERS
- ---------------------
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations. As with many industrial companies, the
Company is currently involved in proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act ("Superfund"), and
similar state laws at approximately 22 sites. In most cases, the Company 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, the Company disputes the liability, the proposed
remedy or the proposed cost allocation among the PRPs. The Company 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
and former 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 may impose joint and
several liability on all parties at any Superfund site, the Company'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. Such recoveries, where probable, have been
recorded as an asset.
Liabilities of $17.6 million were recorded at March 31, 1999 for potential
environmental liabilities that the Company considers probable and for which a
reasonable estimate of the probable 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 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
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.
21
<PAGE>
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) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
1. On March 2, 1999, the registrant filed a Current Report on
Form 8-K/A amending the Current Report on Form 8-K filed on November 2,
1998, announcing that the registrant had completed an underwritten public
offering of $180 million aggregate principal amount of 7.45 percent Senior
Quarterly Interest Bonds due 2038.
22
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Armstrong World Industries, Inc.
By: /s/ E. R. Case
------------------------------------------
E. R. Case, Vice President and
Controller (Principal Accounting Officer)
Date: May 12, 1999
23
<PAGE>
Exhibit Index
-------------
Exhibit No.
- -----------
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
24
<PAGE>
Armstrong World Industries, Inc.
Lancaster, Pennsylvania
Ladies and Gentlemen:
RE: Registration Statement Nos. 33-74501, 33-91890, 33-18996, 33-29768,
33-18997, 33-65768 and 333-74633.
With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated May 10,
1999, 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 LLP
Philadelphia, Pennsylvania
May 10, 1999
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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STATEMENTS.
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