<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
---------------------------------------------------------
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.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
- --------------------------------------------------------------------------------
(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 July 31, 1999 -
40,062,940
<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 Six months
ended June 30 ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 883.0 $ 555.6 $ 1,712.1 $ 1,098.7
Cost of goods sold 575.7 361.8 1,129.5 724.5
Selling, general and administrative expense 173.2 105.2 342.4 208.8
Goodwill amortization 6.0 0.3 12.1 0.7
Equity earnings from affiliates (4.0) (4.6) (7.9) (5.3)
--------- --------- ----------- -----------
Operating income 132.1 92.9 236.0 170.0
Interest expense 26.4 7.0 53.1 13.6
Other (income) expenses, net (7.3) 0.6 (7.9) (0.4)
--------- --------- ----------- -----------
Earnings before income taxes 113.0 85.3 190.8 156.8
Income taxes 40.2 29.2 69.7 54.2
--------- --------- ----------- -----------
NET EARNINGS $ 72.8 $ 56.1 $ 121.1 $ 102.6
========= ========= =========== ===========
Net earnings per share of common stock:
Basic $ 1.83 $ 1.41 $ 3.04 $ 2.58
Diluted $ 1.81 $ 1.38 $ 3.01 $ 2.53
Average number of common shares outstanding:
Basic 39.8 39.7 39.8 39.8
Diluted 40.2 40.5 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 June 30, 1999 December 31, 1998
------ ------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 56.9 $ 38.2
Accounts receivable less allowance 481.2 440.4
Inventories:
Finished goods 246.1 251.2
Work in process 50.0 51.5
Raw materials and supplies 140.1 162.4
------ ------
Total inventories 436.2 465.1
Income tax benefits 50.3 52.5
Net assets of businesses held for sale 4.5 55.9
Other current assets 63.4 69.0
---- --------
Total current assets 1,092.5 1,121.1
Property, plant, and equipment 2,738.1 2,623.9
Less accumulated depreciation and amortization 1,318.2 1,121.9
------- --------
Net property, plant and equipment 1,419.9 1,502.0
Insurance for asbestos-related liabilities 191.0 248.8
Investment in affiliates 57.4 41.8
Goodwill, net 946.0 965.4
Other intangibles, net 58.5 63.2
Other noncurrent assets 361.6 330.9
-------- -------
Total assets $4,126.9 $4,273.2
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 40.8 $ 149.9
Current installments of long-term debt 55.5 32.9
Accounts payable and accrued expenses 542.0 544.8
Income taxes 75.0 25.7
------ --------
Total current liabilities 713.3 753.3
Long-term debt, less current installments 1,524.9 1,562.8
Employee Stock Ownership Plan (ESOP) loan guarantee 167.4 178.6
Postretirement and postemployment benefit liabilities 247.0 249.0
Pension benefit liabilities 215.1 235.5
Asbestos-related liabilities 229.9 344.8
Other long-term liabilities 115.1 115.8
Deferred income taxes 98.8 107.6
Minority interest in subsidiaries 12.5 16.1
---- --------
Total noncurrent liabilities 2,610.7 2,810.2
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 175.2 173.0
Reduction for ESOP loan guarantee (189.5) (199.1)
Retained earnings 1,340.6 1,257.0
Accumulated other comprehensive loss (29.1) (25.4)
Treasury stock (546.2) (547.7)
--------- --------
Total shareholders' equity 802.9 709.7
--------- --------
Total liabilities and shareholders' equity $4,126.9 $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 & June 30 $ 51.9 $ 51.9
-------- ---------
Capital in excess of par value:
- ------------------------------
Balance at beginning of year $ 173.0 $ 169.5
Stock issuances and other 2.2 0.0
-------- ---------
Balance at June 30 $ 175.2 $ 169.5
-------- ---------
Reduction for ESOP loan guarantee:
- ---------------------------------
Balance at beginning of year $ (199.1) $ (207.7)
Principal paid 11.2 11.3
Loans to ESOP (0.8) (5.9)
Accrued compensation (0.8) (0.6)
-------- ---------
Balance at June 30 $ (189.5) $ (202.9)
-------- ---------
Retained earnings:
- -----------------
Balance at beginning of year $1,257.0 $ 1,339.6
Net earnings 121.1 $121.1 102.6 $102.6
Tax benefit on dividends paid on
unallocated common shares 0.9 0.9
-------- ---------
Total $1,379.0 $ 1,443.1
Less common stock dividends 38.4 36.8
-------- ---------
Balance at June 30 $1,340.6 $ 1,406.3
-------- ---------
Accumulated other comprehensive
- -------------------------------
income (loss)
------------
Balance at beginning of year $ (25.4) $ (16.2)
Foreign currency translation
adjustments and hedging activities (5.0) (5.5)
Minimum pension liability adjustments 1.3 5.3
-------- ---------
Total other comprehensive income (loss) (3.7) (3.7) (0.2) (0.2)
-------- ---- --------- -----
Balance at June 30 $ (29.1) $ (16.4)
-------- ---------
Comprehensive income $117.4 $102.4
- -------------------- ====== ======
Less treasury stock at cost:
- ---------------------------
Balance at beginning of year $ 547.7 $ 526.5
Stock purchases 0.7 30.9
Stock issuance activity, net (2.2) (9.4)
-------- ---------
Balance at June 30 $ 546.2 $ 548.0
-------- ---------
Total shareholders' equity $ 802.9 $ 860.4
======== =========
</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--Unaudited
------------------------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $121.1 $ 102.6
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 83.3 64.2
Gain on sale of business (7.5) --
Deferred income taxes 2.5 11.4
Equity change in affiliates (0.8) (2.3)
Reorganization and restructuring payments (12.8) (3.1)
Payments for asbestos-related claims, net of recoveries (17.0) (31.5)
Changes in operating assets and liabilities net of
effects of restructuring and dispositions:
Increase in receivables (66.7) (30.2)
Decrease (increase) in inventories (7.1) 6.1
Decrease in other current assets 29.4 5.0
Increase in other noncurrent assets (34.6) (49.2)
(Decrease) increase in accounts payable
and accrued expenses 5.0 (20.2)
Increase in income taxes payable 49.1 15.3
Increase in other long-term liabilities 11.2 1.9
Other, net 1.1 (5.7)
---- -----
Net cash provided by operating activities 156.2 64.3
----- ----
Cash flows from investing activities:
Purchases of property, plant and equipment (73.0) (52.6)
Investment in computer software (5.2) (12.2)
Proceeds from sales of businesses 78.4 --
Proceeds from the sale of property, plant and equipment 3.4 1.5
Other, net (0.2) --
----- -------
Net cash provided by (used for) investing activities 3.4 (63.3)
---- ------
Cash flows from financing activities:
(Decrease) increase in short-term debt (99.1) 80.1
Issuance of long-term debt -- 14.4
Payments of long-term debt (5.7) (27.2)
Cash dividends paid (38.4) (36.8)
Purchase of common stock for the treasury, net (0.7) (30.9)
Proceeds from exercised stock options 1.2 7.4
Other, net -- (0.2)
----- -----
Net cash provided by (used for) financing activities (142.7) 6.8
------- ---
Effect of exchange rate changes on cash and cash
equivalents 1.8 (2.8)
----- -----
Net decrease in cash and cash equivalents $18.7 $ 5.0
----- -----
Cash and cash equivalents at beginning of period $38.2 $57.9
----- -----
Cash and cash equivalents at end of period $56.9 $62.9
===== =====
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
beginning on page 6.
5
<PAGE>
Note 1. Operating results for the second quarter and first six months of 1999
- ------
compared with the corresponding periods of 1998 included in this report are
unaudited. However, these results have been reviewed by the Company's
independent public accountants in accordance with 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 and six months' results are not
necessarily indicative of annual earnings. The second fiscal quarter of Triangle
Pacific, acquired in 1998, ended on July 3, 1999. No events occurred between
June 30 and July 3 at Triangle Pacific materially affecting the Company's
financial position or results of operations.
Note 2. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions)
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
Net sales to external customers 1999 1998 1999 1998
- ------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Floor coverings $ 402.3 $ 286.3 $ 778.5 $ 562.6
Building products 182.1 187.3 371.8 375.5
Wood products 218.9 0.0 405.9 0.0
Insulation products 55.7 57.6 112.0 111.6
All other 24.0 24.4 43.9 49.0
------ ------ ------ ------
Total sales to external customers $ 883.0 $ 555.6 $1,712.1 $1,098.7
======= ======= ======== ========
Segment operating income (a)
- ----------------------------
Floor coverings $ 59.0 $ 48.3 $105.7 $ 85.1
Building products 31.0 30.3 60.7 56.6
Wood products 30.0 0.0 48.5 0.0
Insulation products 11.3 11.2 21.5 21.2
All other 3.2 4.3 5.1 5.1
---- ----- ----- -----
Total segment operating income $134.5 $ 94.1 $241.5 $168.0
====== ====== ====== ======
June 30 December 31
Segment assets (a)(b) 1999 1998
- --------------------- ---- ----
Floor coverings $ 1,321.3 $1,373.2
Building products 554.6 550.1
Wood products 1,445.8 1,370.8
Insulation products 167.8 174.6
All other 22.7 67.9
----- ------
Total segment assets $ 3,512.2 $3,536.6
========= ========
</TABLE>
(a) The table below provides a reconciliation of segment information to total
consolidated information.
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
Operating income 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total segment operating income $134.5 $ 94.1 $ 241.5 $ 168.0
Unallocated corporate (expense) income (2.4) (1.2) (5.5) 2.0
------ ------- ----- -----
Total consolidated operating income $132.1 $92.9 $236.0 $170.0
====== ===== ====== ======
</TABLE>
6
<PAGE>
June 30 December 31
Assets 1999 1998
---- ----
Total segment assets $3,512.2 $ 3,536.6
Assets not assigned to business units 614.7 736.6
----- -------
Total consolidated assets $4,126.9 $4,273.2
======== ========
(b) The Company restated the components of segment assets at December 31, 1998,
reflecting a change in the composition of reportable segments.
Note 3. DIVESTITURES
- --------------------
On June 22, 1999, the Company sold its interest in the assets of Martin
Surfacing, Inc. The Company acquired this interest as part of its acquisition of
DLW Aktiengesellschaft ("DLW"), during the third quarter of 1998. There was no
gain or loss on the transaction after consideration of purchase price
allocations.
On June 30, 1999 the Company sold 65 percent of its ownership in Armstrong
Industrial Specialties, Inc. ("AISI"), its gasket products subsidiary, to a
group of investors including Citicorp Venture Capital Ltd. and the management of
AISI for a cash purchase price of approximately $36.1 million. The sale resulted
in a pretax and an after tax gain in Armstrong's second quarter of approximately
$7.5 million, or $0.19 per share. The pretax and after tax gains are the same
due to the realization of capital loss carryforwards. The amount of gain differs
slightly from the $8.3 million estimated gain reported in the Company's 8-K
filing of July 14, 1999 due to some post-closing adjustments.
Note 4. FINANCING
- -----------------
On March 16, 1999, the Company filed a shelf registration statement for $1
billion of combined debt and equity securities.
On May 19, 1999, the Company completed an offering under the shelf registration
statement of $200 million aggregate principal amount of 7.45% Senior Notes due
2029. The net proceeds from this offering were used to repay short-term
indebtedness of the Company.
Note 5. ACQUISITIONS
- --------------------
During the third quarter of 1998, the Company acquired Triangle Pacific Corp.
and DLW, a portion of which was classified as held for resale. The Company has
yet to complete the final purchase price adjustments. On May 28, 1999, the
Company sold DLW's furniture business for total cash proceeds of $38.1 million.
The following table reflects the adjustments to the carrying value of the DLW
businesses held for resale relating to interest allocation, profits, cash flows
and the sale in the relevant businesses:
(amounts in millions)
Carrying value at December 31, 1998 $55.9
Interest allocated January 1 - June 30, 1999 1.0
Adjustment to estimated sales proceeds (9.1)
Effect of exchange rate change (4.9)
Losses excluded from consolidated earnings (0.6)
Cash flows funded by parent 0.3
Proceeds from sale (38.1)
------
Carrying value at June 30, 1999 $4.5
====
Note 6. REORGANIZATION AND RESTRUCTURING ACTIVITIES
- ---------------------------------------------------
Severance payments charged against reorganization and restructuring accruals
were $12.8 million in the first six months of 1999 relating to the elimination
of positions. As of June 30, 1999, $9.6 million remained in these accruals
7
<PAGE>
primarily related to severance, most of which is expected to be paid by year
end.
Note 7. OTHER COMPREHENSIVE INCOME (LOSS)
- -----------------------------------------
Related tax effects allocated to each component of other comprehensive income
(loss) as of June 30, 1999
Before Net of
Tax Tax Tax
(amounts in millions) Amount Expense Amount
------ ------- ------
Foreign currency translation adjustments
and hedging activities $(5.0) 0.0 $(5.0)
Minimum pension liability adjustment 2.0 (0.7) 1.3
--- ----- ---
Other comprehensive income (loss) $(3.0) $(0.7) $(3.7)
====== ====== ======
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Six months ended
June 30
1999 1998
---- ----
Interest paid $ 51.1 $ 13.2
Income taxes paid, net $ 11.1 $ 25.7
Note 9. EARNINGS PER SHARE
- --------------------------
(amounts in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1999 June 30, 1998
Per share Per share
Basic earnings per share Earnings Shares Amount Earnings Shares Amount
- ------------------------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 72.8 39.8 $ 1.83 $ 56.1 39.7 $ 1.41
Dilutive options 0.4 0.8
--- ---
Diluted earnings per share
- --------------------------
Net earnings available
for common $ 72.8 40.2 $ 1.81 $ 56.1 40.5 $ 1.38
==== ====
Six months ended Six months ended
June 30, 1999 June 30, 1998
Per share Per share
Basic earnings per share Earnings Shares Amount Earnings Shares Amount
- ------------------------ -------- ------ ------ -------- ------ ------
Net earnings $ 121.1 39.8 $ 3.04 $ 102.6 39.8 $ 2.58
Dilutive options 0.4 0.7
--- ---
Diluted earnings per share
- --------------------------
Net earnings available
for common $ 121.1 40.2 $ 3.01 $ 102.6 40.5 $ 2.53
==== ====
</TABLE>
Note 10. SUBSEQUENT EVENT
- -------------------------
On July 29, 1999, the Company signed a definitive agreement to sell its Textile
Products Operations to Day International Group, Inc. The closing of the
transaction is expected to occur by year end. Consummation of the sale will
occur after completion of due diligence inquiries by the buyer and the Company
expects to incur a small after-tax loss from the sale. The textile operation
employs about 224 people with facilities in Munster, Germany and Greenville,
South Carolina.
8
<PAGE>
Note 11. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- -------------------------------------------------------
Personal Injury Litigation
The Company is one of many defendants in approximately 167,400 pending claims as
of June 30, 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 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
9
<PAGE>
certainty the numerous variables that can affect the range of the liability. In
the first and second quarters of 1999, 11,380 and 17,277 claims, respectively,
were filed. Based on this claims experience in 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. In particular,
the number of new cases filed in 1999 is larger than the Company anticipated.
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 probable liability as it
receives additional information, including claims experience, which may result
in the Company's estimate of the liability described below increasing.
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 $349.9 million to $738.5 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $349.9 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.
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 have
provisions for such coverage. An ADR process under the Wellington Agreement is
10
<PAGE>
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 completely
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 $207.0 million is recorded as an asset in
the consolidated financial statements filed in this report. Of this amount,
approximately $21.0 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 $207.0 million asset, $16.0
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.
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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 June 30, 1999, and the related consolidated
statements of earnings for the three and six month periods ended June 30, 1999
and 1998, and the consolidated statements of cash flows and shareholders' equity
for the six-month periods ended June 30, 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
July 29, 1999
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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 $56.9 million at June 30, 1999. Working capital was
$379.2 million as of June 30, 1999, $11.4 million higher than the $367.8 million
recorded at the end of 1998. The ratio of current assets to current liabilities
was 1.53 to 1 as of June 30, 1999, compared with 1.49 to 1 as of December 31,
1998. The increase in this ratio from December 31, 1998, was primarily due to
lower short-term debt balances.
Long-term debt, excluding the Company's guarantee of an ESOP loan, decreased
slightly in the first six months of 1999. At June 30, 1999, long-term debt of
$1,524.9 million, or 58.8 percent of total capital, compared with $1,562.8
million, or 59.3 percent of total capital, at the end of 1998. At June 30, 1999,
and December 31, 1998 ratios of total debt (including the Company's guarantee of
the ESOP loan) as a percent of total capital were 69.0 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 six months ended June 30, 1999, was
$156.2 million compared with $64.3 million for the comparable period in 1998.
The increase was due to several items including higher net income, higher
depreciation and amortization, lower net payments for asbestos-related claims, a
decrease in assets of businesses held for sale and an increase in income taxes
payable.
Net cash provided by investing activities was $3.4 million for the six months
ended June 30, 1999, compared with net cash used for investing activities $63.3
million for the six months ended June 30, 1998. The increase was primarily due
to the proceeds from the sales of businesses in 1999.
Net cash used for financing activities was $142.7 million for the six months
ended June 30, 1999 compared with net cash provided by financing activities of
$6.8 million for the six months ended June 30, 1998. The decrease was primarily
due to the $104.8 million net reduction of debt during the first six months of
1999 compared to the $67.3 million net increase in debt during the same period
in 1998.
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. On May 19, 1999, the Company completed an offering
under the shelf registration statement of $200 million aggregate principal
amount of 7.45% Senior Notes due 2029. The net proceeds from this offering were
used to repay short-term indebtedness of the Company. 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 Nomaco (USA)/NMC (Belgium) and Thermaflex
(Netherlands). Efforts to complete the formation of the joint venture are
currently in process, including obtaining appropriate regulatory approval. On
May 28, 1999, the Company sold its interest in the assets of DLW
Aktiengesellschaft's ("DLW") furniture business, which was recorded as a
business held for sale. On June 22, 1999, the Company sold its interest in the
assets of Martin Surfacing, Inc. The Company acquired this interest as part of
its acquisition of DLW, during the third quarter of 1998. On June 30, 1999, the
Company sold 65% of its ownership in Armstrong Industrial Specialties, Inc.
("AISI"), its gasket products subsidiary, to a group of investors including
Citicorp Venture Capital Ltd. and the management of AISI. On July 29, 1999, the
Company signed a definitive agreement to sell its Textile Products Operations to
Day International Group, Inc. The closing of the
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<PAGE>
transaction is expected to occur by year end. Consummation of the sale will
occur after completion of due diligence inquiries by the buyer.
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 Georgine v. Amchem ("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 $349.9 million to $738.5 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $349.9 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.
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 and
second quarters of 1999, 11,380 and 17,277 claims, respectively, were filed.
Based on this claims experience in 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. In particular, the
number of new cases filed in 1999 is larger than the Company anticipated. 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 probable liability as it receives
additional information, including claims experience, which may result in the
Company's estimate of the liability described below increasing.
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
14
<PAGE>
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 $207.0 million is recorded as an asset in
the consolidated financial statements filed in this report. Of this amount,
approximately $21.0 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 percent. 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 $207.0 million asset, $16.0
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
- --------------------
Second-quarter net sales of $883.0 million were 58.9 percent higher compared to
net sales of $555.6 million in the second quarter of 1998. The growth reflects
the acquisitions of Triangle Pacific ($218.9 million) and DLW ($124.1 million).
Net sales by the Company's preacquisition businesses were $540.0 million, which
were $15.6 million, or 2.8 percent below prior year as floor coverings and
building products decreased 2.8 percent. Excluding the effect of foreign
currency translation, net sales in the preacquisition businesses were down 1.9
percent from the same period of 1998.
Second-quarter net earnings of $72.8 million increased 29.8 percent from 1998's
second-quarter net earnings of $56.1 million. The second-quarter 1999 results
include an after-tax gain of $7.5 million from the sale of 65 percent of the
Company's interest in AISI that was recorded in other income. Exclusive of this
gain on sale, the second-quarter earnings would have been $65.3 million, or an
increase of 16.4 percent. Net earnings per diluted share were $1.81 ($1.62
15
<PAGE>
excluding the gain on sale of AISI) compared with $1.38 per diluted share for
the second quarter of 1998. Net earnings per basic share were $1.83 ($1.64
excluding the gain on sale of AISI) compared with $1.41 per basic share for the
second quarter of 1998.
The cost of goods sold in the second quarter was 65.2 percent of net sales,
equal to the second quarter of 1998. Excluding Triangle Pacific and DLW,
Armstrong's base business cost of goods sold was 62.8 percent, or 2.3 percentage
points better than 1998, driven primarily by significant cost reductions,
including lower raw material costs, in floor coverings and building products, a
change in employee compensation policies which resulted in a $5.0 million
benefit, partially offset by $3.3 million of costs associated with changes in
the production location for some product lines. Although the Company has
experienced lower prices for some of its raw materials costs, the Company
anticipates some pricing pressure on certain raw materials in upcoming quarters.
Second-quarter SG&A expenses were 19.6 percent of net sales compared to 18.9
percent of net sales in last year's second quarter. The percentage increase is
primarily due to the decrease in preacquisition business net sales.
Goodwill amortization was $6.0 million in the second quarter of 1999 compared
with $0.3 million in the second quarter of 1998. This increase related to the
acquisitions of Triangle Pacific and DLW. Interest expense was $26.4 million in
the second quarter of 1999 compared with $7.0 million in the second quarter of
1998. This increase was due to additional long-term debt used to finance the
acquisitions.
First-half 1999 net sales were $1,712.1 million, 55.8 percent higher than last
year's first-half net sales of $1,098.7 million. The growth reflects the
acquisitions of Triangle Pacific ($405.9 million) and DLW ($245.5 million). Net
sales by the Company's preacquisition businesses were $1,060.7 million, which
were $38.0 million, or 3.5 percent below prior year as floor coverings decreased
5.3 percent and building products decreased 1.0 percent.
First-half net earnings of $121.1 million increased 18.0 percent from 1998's
first-half net earnings of $102.6 million. The first-half 1999 results include
an after-tax gain of $7.5 million from the sale of 65 percent of the Company's
interest in AISI that was recorded in other income. Exclusive of this gain on
sale, the first-half earnings would have been $113.6 million, or an increase of
10.7 percent. Net earnings per diluted share were $3.01 ($2.82 excluding the
gain on sale of AISI) compared with $2.53 per diluted share for the first half
of 1998. Net earnings per basic share were $3.04 ($2.85 excluding the gain on
sale of AISI) compared with $2.58 per basic share for the first half of 1998.
For the second quarter of 1999, the Company's effective tax rate was 35.6
percent compared with 34.2 percent in the same period of 1998. The 1999
first-half effective tax rate was 36.5 percent compared with 34.6 percent in the
same period of 1998. The increases in the effective tax rates are due to the
increase in non-deductible goodwill amortization related to the acquisitions of
Triangle Pacific and DLW, partially offset by the realization of capital losses
carried forward available to offset the gain on the divestiture of AISI.
Industry Segment Results:
- ------------------------
Floor coverings net sales of $402.3 million in the second quarter included
$124.1 million from DLW. Excluding DLW, net sales were $278.2 million, or 2.8
percent below last year. Net sales in the Americas were flat as residential
sheet mix improvements and record second quarter commercial tile net sales
offset volume loss in residential tile. In Europe, net sales were down 21.9
percent primarily due to lower net sales to Eastern Europe and Russia and
competitive pricing and lower volumes in Western Europe. Pacific Rim net sales
increased 3.3 percent. Second-quarter operating income of $59.0 million included
$8.8 million from DLW. Excluding DLW, Armstrong's base business operating income
of $50.2 million was 18.0 percent of net sales compared to $48.3 million or 16.9
percent of net sales in 1998. The operating margin improvement, excluding DLW,
was primarily due to 1998 cost reduction activities and lower raw material and
other costs, an improved mix of residential sheet products and a change in
employee compensation policies which resulted in a
16
<PAGE>
$3.0 million benefit, partially offset by $3.3 million of costs associated with
changes in the production location for some product lines.
Building products net sales of $182.1 million decreased 2.8 percent from $187.3
million in the second quarter of 1998. Americas net sales were 1.8 percent
higher as residential unit volume and commercial net sales mix increases more
than offset competitive pricing pressure. Net sales to Russia and Central Europe
were down 27.7 percent compared to second quarter 1998, or approximately $2.3
million. Pacific Rim net sales declined 16.5 percent reflecting the weak
economic situation in Asia versus a year ago. Operating income of $31.0 million
increased $0.7 million over 1998 as cost improvements more than offset the
decline in net sales. Operating margin of 17.0 percent of net sales compared
favorably with 16.2 percent in 1998 primarily as a result of cost reduction
activities announced in the fourth quarter of 1998 and lower raw material and
other costs as well as a change in employee compensation policies which resulted
in a $2.0 million benefit.
Wood Products, comprising Triangle Pacific (acquired in 1998), contributed
$218.9 million to net sales in the second quarter. Net sales were 18.1 percent
ahead of the comparable period in 1998, which was prior to the acquisition by
Armstrong. Cabinet net sales grew 17.2 percent and continued to benefit from
improved net sales mix and continuing cost reductions. Wood flooring net sales
were 18.4 percent ahead of last year but continue to reflect competitive pricing
pressure. Operating margin of 13.7 percent of net sales was above prior year
despite the amortization of acquisition goodwill. Excluding the impact of
goodwill, the operating margin would have been 16.0 percent of net sales versus
12.8 percent of net sales in 1998 on a comparable basis.
Insulation product net sales of $55.7 million declined 3.3 percent from the
prior year as net sales in Europe declined 8.8 percent while net sales in the
Americas increased 9.5 percent. Operating profit of $11.3 million was slightly
ahead of last year as manufacturing cost improvements and SG&A reductions offset
declining net sales.
Net sales of $24.0 million in the All Other segment were 1.6 percent below last
year. Gasket net sales increased 2.4 percent while textile net sales declined
15.4 percent. Operating income declined $1.1 million as the absence of $1.4
million in Dal-Tile income more than offset improved performance at Gaskets and
Textiles.
The increase in unallocated corporate expense of $1.2 million compared to last
year was primarily due to acquisition integration costs partially offset by a
higher pension credit.
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; (d) a desktop
spreadsheet and data base verification service to validate that all internally
written applications are compliant; and (e) contingency planning and event
management by all business units to ensure
17
<PAGE>
business continuity should external year-2000 failures impact customers,
suppliers, utilities, services or financial institutions.
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 all locations
currently in the testing or completion phase. The spreadsheet and database
verification work stream is currently functional and available for use. Finally,
the contingency planning and event management work streams are in the design
phase with completion of both targeted for October 1999.
Total costs of the Year-2000 project worldwide are estimated to be $20.8 million
through 1999. Actual costs through June 1999 were $15.3 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 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. In May 1999, the FASB delayed the effective date of this
Statement to all fiscal quarters of fiscal years beginning after June 15, 2000.
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.
18
<PAGE>
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,
. 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 as 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, in the Company's report
on Form 10-Q filed in May 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.
19
<PAGE>
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
ASBESTOS-RELATED LITIGATION
Personal Injury Litigation
The Company is one of many defendants in approximately 167,400 pending claims as
of June 30, 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
20
<PAGE>
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 and
second quarters of 1999, 11,380 and 17,277 claims, respectively, were filed.
Based on this claims experience in 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. In particular, the
number of new cases filed in 1999 is larger than the Company anticipated. 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 probable liability as it receives
additional information, including claims experience, which may result in the
Company's estimate of the liability described below increasing.
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 $349.9 million to $738.5 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $349.9 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
21
<PAGE>
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 June
30, 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 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
22
<PAGE>
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 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 completely
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 $207.0 million is recorded as an asset in
the consolidated financial statements filed in this report. Of this amount,
approximately $21.0 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
23
<PAGE>
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 $207.0
million asset, $16.0 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 $349.9 million to $738.5 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $349.9 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 and second quarters of 1999,
11,380 and 17,277 claims, respectively, were filed. Based on claims experience
in the first six months of 1999, there appear have been favorable developments
with respect to some assumptions, but in some respects less favorable
developments than anticipated on average for 1999. In particular, the number of
new cases filed in 1999 is larger than the Company had anticipated. 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 probable liability as it receives
additional information, including claims experience, which may result in the
Company's estimate of the liability described below increasing.
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
24
<PAGE>
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 $207.0 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 $17.7 million were recorded at June 30, 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
25
<PAGE>
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.
26
<PAGE>
Item 4. Submission of Matters to a Vote of the Security Holders
- ------- -------------------------------------------------------
The Company held its annual meeting of shareholders on April 26, 1999. The vote
on each matter presented to the shareholders was as follows:
1. Election of Directors
For Withheld
--- --------
Class of 2001:
Judith R. Haberkorn 33,471,238 1,438,961
Class of 2002:
H. Jesse Arnelle 34,518,444 399,349
Donald C. Clark 34,519,824 399,349
George A. Lorch 34,494,281 399,349
In addition, each of the following directors continued in office after the
meeting: Van C. Campbell, John A. Krol, David W. Raisbeck, David M. LeVan, James
E. Marley and Jerre L. Stead.
2. Approval of the 1999 Long Term Incentive Plan
For Against Abstain Broker Non-votes
--- ------- ------- ----------------
25,196,060 7,067,183 589,622 2,057,334
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. 3 The Company's By-laws, as amended effective March 9, 1998
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 May 14, 1999, the registrant filed a current report on Form
8-K announcing its completion of an offering under its existing
shelf registration statement of $200 million aggregate principal
amount of 7.45% Senior Notes due 2029.
(2) On July 14, 1999, the registrant filed a current report on Form
8-K announcing its sale of 65% of its ownership in Armstrong
Industrial Specialties, Inc. ("AISI"), its gasket products
subsidiary, to a group of investors including Citicorp Venture
Capital Ltd. and the management of AISI.
27
<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/ W. C. Rodruan
-------------------------------------------
W. C. Rodruan, Vice President and
Controller (Principal Accounting Officer)
Date: August 12, 1999
28
<PAGE>
Exhibit Index
-------------
Exhibit No.
- -----------
No. 3 The Company's By-laws, as amended effective March 9, 1998
No. 15 Letter re: Unaudited Interim Financial Information
No. 27 Financial Data Schedule
<PAGE>
EXHIBIT NO. 3
Bylaws
of
Armstrong
ARMSTRONG WORLD INDUSTRIES, INC.
LANCASTER, PENNSYLVANIA
EFFECTIVE MARCH 9, 1998
- --------------------------------------------------------------------------------
ARTICLE I
Office
The principal office of the Company shall be in Lancaster,
Pennsylvania.
All meetings of directors and stockholders shall be held at the
principal office of the Company unless the Board of Directors shall decide
otherwise, in which case such meetings may be held within or without the
Commonwealth of Pennsylvania as the Board may from time to time direct.
ARTICLE II
Stockholders' Meetings
An annual meeting of stockholders shall be held in each calendar year
on such date and at such time as may be fixed by the Board of Directors for the
purpose of electing directors and the transaction of such other business as may
properly come before the meeting.
Special meetings of the stockholders may be called at any time by the
President or the Board of Directors. At any time, upon written request of any
person or persons who have duly called a special meeting, it shall be the duty
of the Secretary to fix the date of the meeting, to be held not more than sixty
days after the receipt of the request, and to give due notice thereof. If the
Secretary shall neglect or refuse to fix the date of the meeting and give notice
thereof, the person or persons calling the meeting may do so.
Special meetings of the holders of No Par Preferred Stock for the
purpose of electing directors may be called as provided in the Articles of
Incorporation, as amended.
Written notice of the place, day, and hour of all meetings of
stockholders and, in the case of a special meeting, of the general nature of the
business to be transacted, shall be given to each stockholder of record entitled
to vote at the particular meeting either personally or by sending a copy of the
notice through the mail, or by telegram, charges prepaid, to the address of the
stockholder appearing on the books of the Company or supplied by him to the
Company for the purpose of notice. Except as otherwise provided by these bylaws
or by law, such notice shall be given at least five days before the date of the
meeting by the President, Vice President, or Secretary. A waiver in writing of
any written notice required to be given, signed by the person entitled to such
notice, whether before or after the time stated, shall be deemed equivalent to
the giving of such notice. Attendance of a person, either in person or by proxy,
at any meeting shall constitute a waiver of notice of such meeting, except where
a person attends a meeting for the
<PAGE>
express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
Nominations of candidates for election to the Board of Directors may be
made by the Board of Directors or by any stockholder of the Company entitled to
notice of, and to vote at, any meeting called for the election of directors.
Nominations, other than those made by or on behalf of the Board of Directors of
the Company, shall be made in writing and shall be received by the Secretary of
the Company not later than (i), with respect to an election of directors to be
held at an annual meeting of stockholders, ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting and (ii), with
respect to an election of directors to be held at a special meeting of
stockholders, the close of business on the tenth (10th) day following the date
on which notice of such meeting is first given to stockholders or public
disclosure of the meeting is made, whichever is earlier. Such notification shall
contain the following information to the extent known to the notifying
stockholder: (a) the name, age, business address, and residence address of each
proposed nominee and of the notifying stockholder; (b) the principal occupation
of each proposed nominee; (c) a representation that the notifying stockholder
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (d) the class and total number of shares of the
Company that are beneficially owned by the notifying stockholder and, if known,
by the proposed nominee; (e) the total number of shares of the Company that will
be voted by the notifying stockholder for each proposed nominee; (f) a
description of all arrangements or understandings between the notifying
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the notifying stockholder; (g) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed with the Securities and Exchange Commission pursuant to Rule
14(a) under the Securities Exchange Act of 1934, as amended, had the nominee
been nominated, or intended to be nominated, by the Board of Directors; and (h)
the consent of each nominee to serve as a director of the Company if so elected.
Nominees of the Board of Directors shall, to the extent appropriate, provide the
same information about themselves as in (a) through (h) above to the Secretary
of the Company. The Company may request any proposed nominee to furnish such
other information as may reasonably be required by the Company to determine the
qualifications of the proposed nominee to serve as a director of the Company.
Within fifteen (15) days following the receipt by the Secretary of a stockholder
notice of nomination pursuant hereto, the Board Affairs and Governance Committee
shall instruct the Secretary of the Company to advise the notifying stockholder
of any deficiencies in the notice as determined by the Committee. The notifying
stockholder shall cure such deficiencies within fifteen (15) days of receipt of
such notice. No persons shall be eligible for election as a director of the
Company unless nominated in accordance herewith. Nominations not made in
accordance herewith may, in the discretion of the presiding officer at the
meeting and with the advice of the Board Affairs and Governance Committee, be
disregarded by the presiding officer and, upon his or her instructions, all
votes cast for each such nominee may be disregarded. The determinations of the
presiding officer at the meeting shall be conclusive and binding upon all
stockholders of the Company for all purposes.
At any meeting of the stockholders, the presence, in person or by
proxy, of stockholders entitled to cast at least a majority of the votes which
all stockholders are entitled to cast upon any matter shall constitute a quorum
for the transaction of business upon such matter, and the stockholders present
at a duly organized meeting can continue to do business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. If a meeting cannot be organized because a quorum has not attended,
<PAGE>
those present may, except as otherwise provided by law, adjourn the meeting to
such time and place as they may determine, but in the case of any meeting called
for the election of directors, those who attend the second of such adjourned
meetings, although less than a quorum, shall nevertheless constitute a quorum
for the purpose of electing directors.
Except as otherwise provided in the Articles of Incorporation, as
amended, or by law, every stockholder of record shall have the right, at every
stockholders' meeting, to one vote for every share standing in his name on the
books of the Company. In each election of directors, every stockholder entitled
to vote shall have the right to multiply the number of votes to which he may be
entitled by the total number of directors to be elected, and he may cast the
whole number of such votes for one candidate or he may distribute them among any
two or more candidates.
Every stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for him by proxy. Every proxy shall
be executed in writing by the stockholder or by his duly authorized attorney in
fact and filed with the Secretary of the Company.
All questions shall be decided by the vote of the stockholders present,
in person or by proxy, entitled to cast at least a majority of the votes which
all stockholders present are entitled to cast, unless otherwise provided by the
Articles of Incorporation, as amended, or by law.
Elections for directors need not be by ballot except on demand made by
a stockholder at the election and before the voting begins. In advance of any
meeting of stockholders, the Board of Directors may appoint judges of election
who need not be stockholders to act at such meeting or any adjournment thereof,
and if such appointment is not made, the chairman of any such meeting may, and
on request of any stockholder or his proxy shall, make such appointment at the
meeting. The number of judges shall be one or three; and if appointed at a
meeting on request of one or more stockholders or proxies, the majority of the
shares present and entitled to vote shall determine whether one or three judges
are to be appointed. No person who is a candidate for office shall act as a
judge. In case any person appointed as judge fails to appear or fails or refuses
to act, the vacancy may be filled by appointment made by the Board of Directors
in advance of the convening of the meeting or at the meeting by the person or
officer acting as chairman. On request of the chairman of the meeting or of any
stockholder or his proxy, the judges shall make a report in writing of any
challenge or question or matter determined by them and execute a certificate of
any fact found by them.
ARTICLE III
Directors
SECTION 1. The business and affairs of the Company shall be managed by
a Board of Directors. The directors need not be stockholders of the Company. The
Board shall consist of not less than eight (8) nor more than eleven (11)
directors, the exact number to be fixed from time to time by the Board of
Directors pursuant to a resolution adopted by a majority vote of the directors
then in office, such number being in addition to any directors that the holders
of any class of preferred stock, voting as a class, may be entitled to elect as
provided in the Articles of Incorporation, as amended, or in a resolution of the
Board establishing any series of preferred stock.
The directors, other than the directors to be elected by the holders of
No Par Preferred Stock, voting as a class, shall be classified in respect to the
time for which they shall severally hold office by dividing them into
<PAGE>
three classes, each consisting, as nearly as possible, of one-third of the whole
number of such directors. At each annual meeting, the successors to the class of
directors whose terms expire that year shall be elected to hold office for the
term of three years. Each such director shall hold office for the term for which
he is elected and until his successor shall have been elected and qualified. Any
vacancy in the office of any such director shall be filled by an election by the
Board for the unexpired term.
Directors to be elected by the holders of No Par Preferred Stock,
voting as a class, shall be elected and hold office as provided in the Articles
of Incorporation, as amended.
SECTION 2. The Board of Directors shall hold an annual meeting, without
notice, immediately following the annual meeting of the stockholders and shall
elect a President, such number of Vice Presidents and Operation or Division
Presidents as the Board may deem advisable, a Secretary, a Treasurer, a
Controller, and such Assistant Secretaries and Assistant Treasurers as the Board
may deem advisable. The Board may also at its discretion elect a Chairman of the
Board. Unless sooner removed by the Board, all officers shall hold office until
the next annual meeting of the Board and until their successors shall have been
elected. The Board shall also, from time to time, elect such other officers and
agents as it deems advisable.
The President and the Chairman of the Board, if elected, must be
selected from the members of the Board of Directors, but the other officers may
but need not be directors.
Any two or more offices may be held by the same person except the
offices of President and Secretary, but in no case shall the same person act in
the same matter in two such official capacities.
SECTION 3. All vacancies in office shall be filled by the Board of
Directors, and the Board shall have power to define the duties of all officers
and agents and fix their compensation and may remove at its discretion any
officer or agent.
SECTION 4. The Board of Directors shall hold meetings at such times and
places as it may determine. Directors may participate in a meeting of the Board
or a Committee thereof by conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. No notice of regular meetings of the Board need be given. Special
meetings of the Board may be called by the President or a Vice President or the
Secretary or by any two directors by giving written notice at least twenty-four
hours in advance of the time of the meeting to each director, either personally
or by telegram, charges prepaid, or by sending a copy of the notice through the
mail at least two days before the day of the meeting, to the director's address
appearing on the books of the Company or supplied by the director to the Company
for the purpose of notice.
Attendance at any meeting of the Board shall be a waiver of notice
thereof. If all the members of the Board are present at any meeting, no notice
shall be required. A majority of the whole number of the directors shall
constitute a quorum for the transaction of business, but if at any meeting a
quorum shall not be present, the meeting may adjourn from time to time until a
quorum shall be present.
SECTION 5. The Board of Directors shall cause to be sent to the
stockholders, within 120 days after the close of each fiscal year, financial
statements which shall include a balance sheet as of the close of such year,
together with statements of income and surplus for such year, prepared so as
<PAGE>
to present fairly its financial condition and results of its operations. Such
financial statements shall have been examined in accordance with generally
accepted auditing standards by a firm of independent certified public
accountants selected by the Board and shall be accompanied by such firm's
opinion as to the fairness of the presentation thereof.
SECTION 6. The Board of Directors may, by resolution adopted by a
majority of the whole Board, designate one or more committees, each committee to
consist of two or more of the directors of the Company. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. Any such
committee to the extent provided in such resolution shall have and exercise the
authority of the Board in the management of the business and affairs of the
Company.
ARTICLE IV
OFFICERS
President
SECTION 1. The President shall be the chief executive officer of the
Company. He shall preside at all meetings of the stockholders and, in the
absence of a Chairman of the Board, at all meetings of the Board of Directors at
which he is present. He shall be ex-officio a member of all standing committees.
He shall have the custody of the corporate seal or may entrust the same to the
Secretary. He shall make reports of the Company's business to the Board at such
times as the Board shall require. He shall perform all the usual duties incident
to the office of President.
Vice Presidents and Operation or Division Presidents
SECTION 2. In the absence or disability of the President, his duties
shall be performed by one or more Vice Presidents or Operation or Division
Presidents designated by the Board of Directors. They shall perform such other
duties as may be assigned to them by the Board.
Chairman of the Board
SECTION 3. The Chairman of the Board, if elected, shall preside at all
meetings of the Board of Directors at which he is present. He shall perform such
other duties as may be assigned to him by the Board.
Secretary
SECTION 4. The Secretary shall attend the meetings of the stockholders
and Board of Directors and keep minutes thereof in suitable books. He shall send
out notices of all meetings as required by law or these bylaws. He shall be
ex-officio an Assistant Treasurer. He shall perform all the usual duties
incident to the office of Secretary.
Assistant Secretaries
SECTION 5. In the absence or disability of the Secretary, his duties
shall be performed by the Assistant Secretaries. They shall perform such other
duties as may be assigned to them by the Board of Directors.
Treasurer
<PAGE>
SECTION 6. The Treasurer shall have custody of funds of the Company and
keep or cause to be kept accurate accounts of all money received or payments
made in books kept for that purpose. He shall deposit all money received by him
in the name and to the credit of the Company in such bank or other place or
places of deposit as the Board of Directors shall designate. He shall be
ex-officio an Assistant Secretary. He shall perform all the usual duties
incident to the office of Treasurer.
Assistant Treasurers
SECTION 7. In the absence or disability of the Treasurer, his duties
shall be performed by the Assistant Treasurers. They shall perform such other
duties as may be assigned to them by the Board of Directors.
Controller
SECTION 8. The Controller shall have general charge of the accounting
of the Company and shall perform all the usual duties incident to the office of
Controller.
Bonds
SECTION 9. Such officers and employees of the Company as the Board of
Directors shall determine shall give bond for the faithful discharge of their
duties in such form and for such amount and with such surety or sureties as the
Board shall require. The expense of procuring such bonds shall be borne by the
Company.
ARTICLE V
Seal
The Company shall have a seal which shall contain the words "Armstrong
World Industries, Inc.," in a circle within which the words "Incorporated Dec.
30, 1891" shall be contained.
ARTICLE VI
Stock Certificates and Transfers
Stock certificates shall be in such form as the Board of Directors may
from time to time determine and shall either be signed by the President or one
of the Vice Presidents or other officer designated by the Board, and
countersigned by the Treasurer or an Assistant Treasurer or other officer
designated by the Board and sealed with the seal of the Company, or, if not so
signed and sealed, shall bear the engraved or printed facsimile signatures of
the officers authorized to sign and the engraved or printed facsimile of the
seal of the Company.
The Board of Directors may appoint for any class of stock one or more
incorporated banks or trust companies in the city of New York, New York, or
elsewhere, to act as Registrar or Registrars, and also one or more incorporated
banks or trust companies in the city of New York, New York, or elsewhere, to act
as Transfer Agent or Transfer Agents. No certificate of stock of any class for
which a Transfer Agent and Registrar have been appointed shall be valid or
binding unless countersigned by a Transfer Agent and registered by a Registrar
before issue.
The shares of the capital stock of the Company shall, upon the
surrender and cancellation of the certificate or certificates representing the
same, be
<PAGE>
transferred upon the books of the Company at the request of the holder thereof,
named in the surrendered certificate or certificates, in person or by his legal
representatives or by his attorney duly authorized by written power of attorney
filed with the Company's Transfer Agent. In case of loss or destruction of a
certificate of stock, another may be issued in lieu thereof in such manner and
upon such terms as the Board shall authorize.
The Board of Directors may fix a time, not more than seventy (70) days
prior to the date of any meeting of the stockholders, or the date fixed for the
payment of any dividend or distribution or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock will be
made or go into effect, as a record date for the determination of the
stockholders entitled to notice of, or to vote at, any such meeting, or entitled
to receive payment of any such dividend or distribution, or to receive any such
allotment of rights, or to exercise the rights in respect to any such change,
conversion, or exchange of capital stock. In such case, only such stockholders
as shall be stockholders of record on the date so fixed shall be entitled to
notice of, or to vote at, such meeting, or to receive payment of such dividend
or distribution, or to receive such allotment of rights, or exercise such
rights, as the case may be, notwithstanding any transfer of stock on the books
of the Company after any record date fixed as aforesaid.
ARTICLE VII
Fiscal Year
The fiscal year of the Company shall end on the 31st day of December.
ARTICLE VIII
Amendments
Unless otherwise provided in the Articles of Incorporation, as amended,
these bylaws may be amended by a vote of two-thirds of the members of the Board
of Directors at any regular or special meeting duly convened after notice of
that purpose, subject always to the power of stockholders under law and in
accordance with the Articles of Incorporation, as amended, to change such
action.
ARTICLE IX
Limitation on Directors' Personal Liability;
Indemnification of Directors and Officers
SECTION 1. A director of the Company shall not be personally liable for
monetary damages for any action taken or failure to take any action unless the
director has breached or failed to perform the duties of his or her office under
Section 8363 of the Pennsylvania Directors' Liability Act and such breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness;
provided, however, that the foregoing provision shall not eliminate or limit the
liability of a director (i) for any responsibility or liability of such director
pursuant to any criminal statute, or (ii) for any liability of a director for
the payment of taxes pursuant to local, state or federal law.
SECTION 2. The Company shall indemnify to the full extent authorized or
permitted by law any person made, or threatened to be made, a party to or
otherwise involved in (as a witness or otherwise) an action, suit or proceeding
(whether civil, criminal, administrative or investigative, and
<PAGE>
whether by or in the right of the Company or otherwise) by reason of the fact
that the person is or was a director or officer of the Company or while a
director or officer of the Company, either serves or served as a director,
officer, trustee, employee or agent of any other related enterprise or in
connection with a related employee benefit plan at the request of the Company or
serves or served as a director, officer, trustee, employee or agent of any other
unrelated enterprise at the specific written request of the Company against any
expenses and liability actually incurred including without limitation judgments
and amounts paid or to be paid in settlement of and in actions brought by or in
the right of the Company. Expenses incurred by such a person in defending a
civil or criminal action, suit or proceeding or in enforcing any right under
this Article shall be paid by the Company in advance of the final disposition of
the action, suit or proceeding upon receipt of an undertaking by or on behalf of
such person to repay such amount to the extent it shall ultimately be determined
that such person is not entitled to be indemnified by the Company or, in the
case of a criminal action, the majority of the Board of Directors so determines.
The right to indemnification and advancement of expenses conferred in this
Section shall not be deemed exclusive of any other rights to which any person
indemnified may be entitled under any agreement, vote of stockholders or
directors or otherwise, the Company having the express authority to enter such
agreements as the Board of Directors deems appropriate for the indemnification
of and advancement of expenses, including the creation of a fund therefor or
equivalent guarantee, to present or future directors and officers of the Company
in connection with their service as director or officer of the Company or their
service as director, officer, trustee, employee or agent of any other enterprise
or in connection with an employee benefit plan at the request of the Company.
The right to indemnification and the advancement of expenses provided in this
Section shall be a contract right, shall continue as to a person who has ceased
to serve in the capacities described herein, and shall inure to the benefit of
the heirs, executors and administrators of such person.
SECTION 3. No amendment, alteration or repeal of this Article IX, nor
the adoption of any provision inconsistent with this Article IX, shall adversely
affect any limitation on the personal liability of a director or officer, or the
rights of a director or officer to indemnification and advancement of expenses,
existing at the time of such amendment, modification or repeal, or the adoption
of such an inconsistent provision.
<PAGE>
Exhibit No. 15
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; 333-74633; 333-79093.
With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated July 29,
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
August 11, 1999
<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 JUNE 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
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<PERIOD-END> JUN-30-1999
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