<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2000
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 April 27, 2000 -
40,255,499
1
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Part I - Financial Information
------------------------------
Item 1 - Financial Statements
- -----------------------------
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 30
--------
2000 1999
---- ----
<S> <C> <C>
Net sales $773.3 $772.8
Cost of goods sold 537.0 519.1
------ ------
Gross profit 236.3 253.7
Selling, general and administrative expense 165.7 157.8
Goodwill amortization 6.1 6.1
Equity (earnings) from affiliates (4.7) (3.9)
------ ------
Operating income 69.2 93.7
Interest expense 25.9 26.7
Other (income) expenses, net 0.6 (0.6)
------ ------
Earnings from continuing operations before income taxes 42.7 67.6
Income taxes 16.7 26.4
------ ------
Earnings from continuing operations $ 26.0 $ 41.2
Earnings from discontinued operations, net of
income tax of $2.1 million in 2000 and $3.1 million in 1999 4.7 7.1
------ ------
Net earnings $ 30.7 $ 48.3
====== ======
Earnings per share of common stock, continuing operations:
Basic $ 0.65 $ 1.03
Diluted $ 0.65 $ 1.02
Earnings per share of common stock, discontinued operations:
Basic $ 0.12 $ 0.18
Diluted $ 0.11 $ 0.18
Net earnings per share of common stock:
Basic $ 0.77 $ 1.21
Diluted $ 0.76 $ 1.20
Average number of common shares outstanding:
Basic 40.1 39.8
Diluted 40.3 40.2
</TABLE>
See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 6.
2
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Assets March 31, 2000 December 31, 1999
------ -------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19.2 $ 26.6
Accounts receivable less allowance 429.3 403.4
Inventories:
Finished goods 273.3 257.9
Work in process 43.1 42.4
Raw materials and supplies 158.1 154.6
-------- --------
Total gross inventories 474.5 454.9
Less LIFO and other reserves 49.3 48.0
-------- --------
Total inventories 425.2 406.9
Deferred income taxes 40.6 40.6
Net assets of discontinued operations 103.9 93.5
Other current assets 79.7 86.7
-------- --------
Total current assets 1,097.9 1,057.7
Property, plant, and equipment 2,475.3 2,481.1
Less accumulated depreciation and amortization 1,138.0 1,123.6
-------- --------
Net property, plant and equipment 1,337.3 1,357.5
Insurance for asbestos-related liabilities, noncurrent 270.0 270.0
Investment in affiliates 32.3 34.2
Goodwill, net 922.0 935.1
Other intangibles, net 54.0 54.9
Other noncurrent assets 390.2 374.4
-------- --------
Total assets $4,103.7 $4,083.8
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 229.9 $ 64.7
Current installments of long-term debt 31.2 36.1
Accounts payable and accrued expenses 575.8 636.2
Income taxes 3.3 2.1
-------- --------
Total current liabilities 840.2 739.1
Long-term debt, less current installments 1,359.7 1,412.9
Employee Stock Ownership Plan (ESOP) loan guarantee 155.3 155.3
Postretirement and postemployment benefit liabilities 245.4 244.5
Pension benefit liabilities 161.6 166.2
Asbestos-related long-term liabilities 470.0 506.5
Other long-term liabilities 101.2 105.4
Deferred income taxes 65.0 62.9
Minority interest in subsidiaries 9.9 11.8
-------- --------
Total noncurrent liabilities 2,568.1 2,665.5
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 180.6 176.4
Reduction for ESOP loan guarantee (185.4) (190.3)
Retained earnings 1,207.9 1,196.2
Accumulated other comprehensive loss (21.7) (16.5)
Treasury stock (537.9) (538.5)
-------- --------
Total shareholders' equity 695.4 679.2
-------- --------
Total liabilities and shareholders' equity $4,103.7 $4,083.8
======== ========
</TABLE>
See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 6.
3
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Common stock, $1 par value:
- ---------------------------
Balance at beginning of year & March 31 $ 51.9 $ 51.9
-------- --------
Capital in excess of par value:
- -------------------------------
Balance at beginning of year $ 176.4 $ 173.0
Stock issuances and other 4.2 0.6
-------- --------
Balance at March 31 $ 180.6 $ 173.6
-------- --------
Reduction for ESOP loan guarantee:
- ----------------------------------
Balance at beginning of year $ (190.3) $ (199.1)
Accrued compensation 4.9 3.5
-------- --------
Balance at March 31 $ (185.4) $ (195.6)
-------- --------
Retained earnings:
- ------------------
Balance at beginning of year $1,196.2 $1,257.0
Net earnings 30.7 $ 30.7 48.3 $ 48.3
Tax benefit on dividends paid on
unallocated common shares 0.3 0.4
-------- --------
Total $1,227.2 $1,305.7
Less common stock dividends 19.3 19.2
-------- --------
Balance at March 31 $1,207.9 $1,286.5
-------- --------
Accumulated other comprehensive income (loss):
- ----------------------------------------------
Balance at beginning of year $ (16.5) $ (25.4)
Foreign currency translation adjustments and
hedging activities (5.2) 1.1
Minimum pension liability adjustments - (2.2)
-------- --------
Total other comprehensive income (5.2) (5.2) (1.1) (1.1)
-------- ------ -------- ------
Balance at March 31 $ (21.7) $ (26.5)
-------- --------
Comprehensive income $ 25.5 $ 47.2
- -------------------- ====== ======
Less treasury stock at cost:
- ----------------------------
Balance at beginning of year $ 538.5 $ 547.7
Stock purchases - 0.4
Stock issuance activity, net (0.6) (1.0)
-------- --------
Balance at March 31 $ 537.9 $ 547.1
-------- --------
Total shareholders' equity $ 695.4 $ 742.8
======== ========
</TABLE>
See accompanying footnotes to the unaudited condensed consolidated financial
statements beginning on page 6.
4
<PAGE>
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 30.7 $ 48.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 39.5 39.7
Depreciation and amortization, discontinued operations 2.5 2.7
Deferred income taxes 5.0 12.1
Equity earnings from affiliates (4.7) (3.9)
Reorganization and restructuring payments (1.8) (9.4)
Payments for asbestos-related claims, net of recoveries (36.5) (35.4)
Increase in net assets of discontinued operations (10.4) (6.8)
Changes in operating assets and liabilities net of effects of reorganization,
restructuring and dispositions:
Increase in receivables (34.5) (53.2)
Increase in inventories (25.8) (22.5)
Decrease in other current assets 14.8 22.8
Increase in other noncurrent assets (19.9) (25.0)
Decrease in accounts payable and accrued expenses (44.4) (16.1)
Increase in income taxes payable 1.3 44.6
Increase in other long-term liabilities 6.6 15.7
Other, net 3.0 2.0
------ ------
Net cash provided by (used by) operating activities (74.6) 15.6
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment, continuing operations (29.3) (35.0)
Purchases of property, plant and equipment, discontinued operations (1.5) (1.4)
Investment in computer software (1.8) (3.0)
Distributions from equity affiliates 5.0 2.8
Proceeds from the sale of assets 2.3 -
------ ------
Net cash used for investing activities (25.3) (36.6)
------ ------
Cash flows from financing activities:
Increase in short-term debt, net 117.6 47.1
Payments of long-term debt (4.3) (3.7)
Cash dividends paid (19.3) (19.2)
Purchase of common stock for the treasury, net (1.3) (0.4)
Proceeds from exercised stock options 0.1 0.4
Other, net 1.5 (1.2)
------ ------
Net cash provided by financing activities 94.3 23.0
------ ------
Effect of exchange rate changes on cash and cash equivalents (1.8) (1.7)
------ ------
Net increase (decrease) in cash and cash equivalents ($7.4) $ 0.3
Cash and cash equivalents at beginning of period $ 26.6 $ 27.0
------ ------
Cash and cash equivalents at end of period $ 19.2 $ 27.3
====== ======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements beginning on page 6.
5
<PAGE>
Note 1. Operating results for the first quarter of 2000, compared with the
- ------
corresponding period of 1999 included in this report, are unaudited. However,
these results have been reviewed by Armstrong's independent public accountants
in accordance with established professional standards and procedures for a
limited review of interim financial information. Armstrong announced an
agreement to sell its Insulation Products segment on April 28, 2000 (see Note
2). Accordingly, the accompanying condensed consolidated financial statements
reflect this business as a discontinued operation. Prior periods have been
restated.
The accounting policies used in preparing these statements are the same as those
used in preparing Armstrong's consolidated financial statements for the year
ended December 31, 1999. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in Armstrong's annual report and Form 10-K for the fiscal
year ended December 31, 1999. 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. Quarterly results are not
necessarily indicative of annual earnings. The first quarters of the wood
products segment ended on April 1, 2000 and April 3, 1999. No events occurred
between March 31 and these dates materially affecting Armstrong's financial
position or results of operations.
Note 2. DISCONTINUED OPERATIONS
- -------------------------------
On April 27, 2000, Armstrong entered into an agreement to sell all of the
entities, assets and certain liabilities comprising its Insulation Products
segment to Orion Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of
the Dutch investment firm Gilde Investment Management N.V. for $280 million,
subject to closing adjustments. The consideration includes approximately $250
million cash and $30 million in notes receivable. The notes receivable will be
discounted to their fair market value of approximately $15.6 million. The
consideration is primarily denominated in Euros and is subject to currency
translation adjustments until closing. The transaction is expected to close by
late May and result in an after tax gain of approximately $100 million, or $2.48
per share in Armstrong's second quarter.
The net assets of the Insulation Products segment are comprised of the
following:
March 31, December 31,
2000 1999
---- ----
Cash $ 6.9 $ 9.0
Accounts receivable, net 33.6 32.6
Inventories, net 21.3 22.8
Property plant and equipment, net 78.7 81.6
Short-term debt (6.4) (6.2)
Accounts payable and accrued expenses (23.5) (34.5)
Pension liabilities (32.5) (34.0)
Other, net 25.8 22.2
------- ------
Net assets of discontinued operations $ 103.9 $ 93.5
======= ======
Note 3. INDUSTRY SEGMENTS
- -------------------------
(amounts in millions)
Three months
ended March 31
Net sales to external customers 2000 1999
- ------------------------------- ------ ------
Floor coverings $368.5 $376.2
Building products 188.5 189.7
Wood products 216.3 187.0
All other 0.0 19.9
------ ------
Total sales to external customers $773.3 $772.8
====== ======
6
<PAGE>
Three months
ended March 31
2000 1999
---- ----
Segment operating income
- ------------------------
Floor coverings $ 29.7 $ 46.7
Building products 25.7 29.7
Wood products 17.9 18.5
All other 0.2 1.9
------ ------
Total segment operating income 73.5 96.8
Unallocated corporate expense (4.3) (3.1)
------ ------
Total consolidated operating income $ 69.2 $ 93.7
====== ======
March 31 December 31
Segment assets 2000 1999
- -------------- ---- ----
Floor coverings $1,465.1 $1,477.6
Building products 510.8 535.1
Wood products 1,331.7 1,308.0
All other 16.1 16.0
-------- --------
Total segment assets 3,323.7 3,336.7
Assets not assigned to business units 780.0 747.1
-------- --------
Total consolidated assets $4,103.7 $4,083.8
======== ========
Note 4. REORGANIZATION AND RESTRUCTURING ACTIVITIES
- ---------------------------------------------------
The following table summarizes activity in the reorganization and restructuring
accruals for the first quarter of 2000 and 1999:
Beginning Cash Ending
(amounts in millions) balance payments Other balance
------- --------- ------ -------
2000 $12.1 ($1.8) ($0.2) $10.1
1999 30.6 (9.4) (0.1) 21.1
The amount in "other" is primarily related to foreign currency translations.
Substantially all of the remaining balance at March 31, 2000 relates to
terminated employees with extended payouts, most of which will be paid during
2000, and a noncancelable operating lease.
Note 5. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------
(amounts in millions) Three Months Ended
March 31
2000 1999
----- -----
Interest paid $25.5 $26.5
Income taxes paid (refunded), net $10.2 $(5.3)
Note 6. EARNINGS PER SHARE
- --------------------------
The difference between the average number of basic and diluted common shares
outstanding is due to contingently issuable shares and the effect of dilutive
stock options.
Note 7. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
- ------------------------------------------------------
Personal Injury Litigation
Armstrong is involved in significant asbestos-related litigation which is
described more fully under the heading "Legal Proceedings" in Item 1 of Part II
of this report which should be read in conjunction with this discussion and
analysis. Armstrong is a defendant in approximately 172,200 pending personal
injury claims
7
<PAGE>
as of March 31, 2000. During the first quarter of 2000, the Center for Claims
Resolution ("Center") received and verified approximately 13,000 claims naming
Armstrong as a defendant.
Asbestos-Related Liability
In continually evaluating its estimated asbestos-related liability, Armstrong
reviews, among other things, its recent and historical settlement amounts, the
incidence of past and recent claims, the mix of the injuries and occupations of
the plaintiffs, the number of cases pending against it and the status and
results of broad-based settlement discussions. Based on this review, Armstrong
has estimated its share of liability to defend and resolve probable asbestos-
related personal injury claims. This estimate is highly uncertain due to the
limitations of the available data and the difficulty of forecasting with any
certainty the numerous variables that can affect the range of the liability.
Armstrong will continue to study the variables in light of additional
information in order to identify trends that may become evident and to assess
their impact on the range of liability that is probable and estimable.
Armstrong's estimation of its asbestos-related liability that is probable and
estimable through 2005 ranges from $645.0 million to $1,301.4 million as of
March 31, 2000. The range of probable and estimable liability reflects
uncertainty in the number of future claims that will be filed and the cost to
settle those claims, which may be influenced by a number of factors, including
the outcome of the ongoing broad-based settlement negotiations and Armstrong's
overall effective share of the ("Center's") liabilities. Armstrong has
concluded that no amount within that range is more likely than any other, and
therefore has reflected $645.0 million as a liability in the consolidated
financial statements in accordance with generally accepted accounting
principles. Of this amount, management expects to incur asbestos liability
payments of approximately $175.0 million over the next 12 months and has
reflected such amount as a current liability.
Armstrong's estimated range of liability is primarily based on known claims and
an estimate of future claims that are likely to occur and can be reasonably
estimated through 2005. This estimated range of liability assumes that the
number of new claims filed annually will be less than the number filed in 1999.
For claims that may be filed beyond 2005, 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 estimated range of 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. As additional experience is
gained regarding claims and such settlement discussions or other new information
becomes available regarding the potential liability, Armstrong will reassess its
potential liability and revise the estimates as appropriate.
Although some settlements have already been reached, Armstrong is currently
uncertain as to the ultimate success and timing of the remaining broad-based
settlement discussions. However, if those discussions are unsuccessful or if
unfavorable claims experiences occur, significant changes in the assumptions
used in the estimate of Armstrong's liability may result. Those changes, if any,
could lead to increases in the recorded liability.
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 Armstrong 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 Asset
As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $296.0 million is recorded as of March 31, 2000. No amounts were
received in the first quarter of 2000 pursuant to existing settlements. Of the
total amount, approximately $87.9 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 6.50%. The total amount
recorded reflects Armstrong's belief in the availability of insurance in this
amount, based upon Armstrong'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
8
<PAGE>
through settlement or probable of recovery through negotiation, litigation or
resolution of the ADR process that is in the trial phase of binding arbitration.
Depending on further progress of the ADR, and activities such as settlement
discussions with insurance carriers party to the ADR and those not party to the
ADR, Armstrong may revise its estimate and additional insurance assets may be
recorded in a future period. Of the $296.0 million asset, $26.0 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 could increase dependent
upon 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.
NOTE 8. - ENVIRONMENTAL LIABILITIES
- -----------------------------------
Liabilities of $15.9 million and $14.7 million were recorded at March 31, 2000
and December 31, 1999, respectively, for potential environmental liabilities
that Armstrong considers probable and for which a reasonable estimate of the
probable liability could be made. Where existing data is sufficient to estimate
the amount of the liability, that estimate has been used; where only a range of
probable liability is available and no amount within that range is more likely
than any other, the lower end of the range has been used. As assessments and
remediation activities progress at each individual site, these liabilities are
reviewed to reflect additional information as it becomes available.
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 in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.
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, Armstrong 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.
9
<PAGE>
Independent Auditors' Review Report
-----------------------------------
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc., and subsidiaries as of March 31, 2000, and the related
condensed consolidated statements of earnings, cash flows and shareholders'
equity for the three-month periods ended March 31, 2000 and 1999. These
condensed consolidated financial statements are the responsibility of
Armstrong'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, 1999, 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, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG LLP
Philadelphia, Pennsylvania
April 28, 2000
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
As shown on the condensed Consolidated Balance Sheets (see page 3), Armstrong
had cash and cash equivalents of $19.2 million at March 31, 2000. Working
capital was $257.7 million as of March 31, 2000, $60.9 million lower than the
$318.6 million recorded at the end of 1999. The ratio of current assets to
current liabilities was 1.31 to 1 as of March 31, 2000, compared with 1.43 to 1
as of December 31, 1999. The decreases from December 31, 1999 were due to higher
short-term debt partially offset by lower accrued expenses, primarily due to
annual incentive bonus payments made in the first quarter of 2000.
Long-term debt, excluding Armstrong's guarantee of an ESOP loan, decreased in
the first quarter of 2000. At March 31, 2000, long-term debt of $1,359.7
million, or 55.0 percent of total capital, compared with $1,412.9 million, or
60.2 percent of total capital, at the end of 1999. At March 31, 2000, and
December 31, 1999 ratios of total debt (including Armstrong's guarantee of the
ESOP loan) as a percent of total capital were 71.9 percent and 71.1 percent,
respectively.
As shown on the condensed Consolidated Statements of Cash Flows (see page 5),
net cash used for operating activities for the three months ended March 31,
2000, was $74.6 million compared with net cash provided by operating activities
of $15.6 million for the comparable period in 1999. The decrease was due to
several items including lower net income, income taxes paid in the first quarter
of 2000 compared to a net income tax refund in the first quarter of 1999 and a
decrease in accrued expenses, primarily due to annual incentive bonus payments
made in the first quarter of 2000.
Net cash used for investing activities was $25.3 million for the three months
ended March 31, 2000, compared with $36.6 million for the three months ended
March 31, 1999. The decrease was primarily due to lower capital spending and the
proceeds from the sales of assets in 2000.
Net cash provided by financing activities was $94.3 million for the three months
ended March 31, 2000 compared with $23.0 million for the three months ended
March 31, 1999. The increase was primarily due to the $113.3 million net
increase in debt during the first quarter of 2000 compared to the $43.4 million
net increase in debt during the same period in 1999.
Armstrong is constantly evaluating its various business units and may from time
to time dispose of, or restructure, those units. On April 27, 2000, Armstrong
entered into an agreement to sell all of the entities, assets and certain
liabilities comprising its Insulation Products segment to Orion Einundvierzigste
Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch investment firm Gilde
Investment Management N.V. for $280 million, subject to closing adjustments. The
consideration includes approximately $250 million cash and $30 million in notes
receivable. The notes receivable will be discounted to their fair market value
of approximately $15.6 million. The consideration is primarily denominated in
Euros and is subject to currency translation adjustments until closing. The
transaction is expected to close by late May and result in an after tax gain of
approximately $100 million, or $2.48 per share in Armstrong's second quarter.
Armstrong is also currently in divestiture discussions and evaluations related
to its floor installation products division and its European carpet business.
Asbestos-Related Litigation
- ---------------------------
Armstrong is involved in significant asbestos-related litigation which is
described more fully under the heading "Legal Proceedings" in Item 1 of Part II
of this report which should be read in conjunction with this discussion and
analysis. Armstrong is a defendant in approximately 172,200 pending personal
injury claims as of March 31, 2000. During the first quarter of 2000, the
Center for Claims Resolution ("Center") received and verified approximately
13,000 claims naming Armstrong as a defendant.
Armstrong continues to seek broad-based settlements of claims through the
Center. To date, the Center has reached agreements with several law firms that
cover approximately 97,000 claims (or 49% of current claims) some of which are
currently pending and some of which have yet to be filed. These agreements
typically provide for multiyear payments for settlement of current claims and
establish specific medical and other criteria for the settlement of future
claims as well as annual limits on the number of claims that can be
11
<PAGE>
filed by these firms. These agreements also establish fixed settlement values
for different asbestos-related medical conditions which are subject to periodic
re-negotiation over a period of 2 to 5 years. The plaintiff law firms are
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provide
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center can terminate an agreement with an individual law firm if a
significant number of that firm's clients elect not to participate under the
agreement. Negotiations with additional law firms engaged in asbestos-related
litigation that would resolve a substantial portion of the remaining pending
claims are ongoing. The ultimate success and timing of those negotiations is
uncertain.
In continually evaluating its estimated asbestos-related liability, Armstrong
reviews, among other things, its recent and historical settlement amounts, the
incidence of past and recent claims, the mix of the injuries and occupations of
the plaintiffs, the number of cases pending against it and the status and
results of broad-based settlement discussions. Based on this review, Armstrong
has estimated its share of liability to defend and resolve probable asbestos-
related personal injury claims. This estimate is highly uncertain due to the
limitations of the available data and the difficulty of forecasting with any
certainty the numerous variables that can affect the range of the liability.
Armstrong will continue to study the variables in light of additional
information in order to identify trends that may become evident and to assess
their impact on the range of liability that is probable and estimable.
Armstrong's estimation of its asbestos-related liability that is probable and
estimable through 2005 ranges from $645.0 million to $1,301.4 million as of
March 31, 2000. The range of probable and estimable liability reflects
uncertainty in the number of future claims that will be filed and the cost to
settle those claims, which may be influenced by a number of factors, including
the outcome of the ongoing broad-based settlement negotiations and Armstrong's
overall effective share of the Center's liabilities. Armstrong has concluded
that no amount within that range is more likely than any other, and therefore
has reflected $645.0 million as a liability in the consolidated financial
statements in accordance with generally accepted accounting principles. Of this
amount, management expects to incur asbestos liability payments of approximately
$175.0 million over the next 12 months and has reflected such amount as a
current liability.
Armstrong's estimated range of liability is primarily based on known claims and
an estimate of future claims that are likely to occur and can be reasonably
estimated through 2005. This estimated range of liability assumes that the
number of new claims filed annually will be less than the number filed in 1999.
For claims that may be filed beyond 2005, 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 estimated range of 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. As additional experience is
gained regarding claims and such settlement discussions or other new information
becomes available regarding the potential liability, Armstrong will reassess its
potential liability and revise the estimates as appropriate.
Although some settlements have already been reached, Armstrong is currently
uncertain as to the ultimate success and timing of the remaining broad-based
settlement discussions. However, if those discussions are unsuccessful or if
unfavorable claims experiences continue, significant changes in the assumptions
used in the estimate of Armstrong's liability may result. Those changes, if any,
could lead to increases in the recorded liability.
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 Armstrong 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.
As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $296.0 million is recorded as of March 31, 2000. No amounts were
received in the first quarter of 2000 pursuant to existing settlements. Of the
total amount, approximately $87.9 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 6.50%. The total amount
recorded
12
<PAGE>
reflects Armstrong's belief in the availability of insurance in this amount,
based upon Armstrong'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 that is in the trial phase of binding arbitration.
Depending on further progress of the ADR, and activities such as settlement
discussions with insurance carriers party to the ADR and those not party to the
ADR, Armstrong may revise its estimate and additional insurance assets may be
recorded in a future period. Of the $296.0 million asset, $26.0 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 could increase dependent
upon 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.
Armstrong paid $36.5 million for asbestos related claims in the first quarter of
2000 compared to $35.4 million in the first quarter of 1999. Armstrong did not
receive any asbestos-related insurance recoveries during the first quarters of
2000 or 1999. Armstrong currently expects to pay approximately $80.0 million to
$115.0 million for asbestos related claims and expenses in 2000, net of expected
insurance recoveries and taxes.
While some successful broad-based settlements have been reached with plaintiff
law firms, Armstrong is uncertain as to the timing and number of any additional
settlements to be reached.
Since many uncertainties exist surrounding asbestos litigation, Armstrong will
continue to evaluate its asbestos related estimated liability and corresponding
estimated insurance recoveries asset as well as the underlying assumptions used
to record these amounts. The recorded liability and asset reflect management's
best estimate of probable amounts based on current information . However, it is
reasonably possible that Armstrong's total exposure to personal injury claims
may be greater than the recorded liability and accordingly future charges to
income may be necessary. While Armstrong believes that potential future charges
may be material to the periods in which they are taken, Armstrong does not
believe the charges will have a material adverse effect on its financial
position or liquidity.
Consolidated Results
- --------------------
The following discussions of consolidated results are on a continuing operations
basis.
First-quarter net sales of $773.3 million were essentially equal to net sales of
$772.8 million in the first quarter of 1999. Floor coverings sales decreased
2.0%, wood products sales increased 15.7% and gaskets and textiles sales were
absent in 2000 due to the divestiture of these businesses during the second and
third quarters of 1999. Excluding the impact of the two 1999 divestitures, net
sales increased 2.7%.
First-quarter earnings from continuing operations of $26.0 million decreased
36.9 percent from 1999's first-quarter earnings from continuing operations of
$41.2 million. Earnings from continuing operations per diluted share were $0.65
compared with $1.02 per diluted share for the first quarter of 1999. Earnings
from continuing operations per basic share were $0.65 compared with $1.03 per
basic share for the first quarter of 1999.
The cost of goods sold in the first quarter was 69.4 percent of net sales
compared to 67.2 percent of net sales in the first quarter of 1999. This
increase was driven primarily by raw material increases in floor coverings and
wood products. Our current expectations include some additional price increases
for some floor products raw materials with peak pricing occurring in the third
quarter.
First-quarter SG&A expenses were 21.4 percent of net sales compared to 20.4
percent of net sales in last year's first quarter. The percentage increase is
primarily due to higher selling and advertising costs in some business segments,
higher environmental remediation costs plus expenses related to the collection
of some accounts receivable.
Armstrong's effective tax rate for continuing businesses was 39.1 percent for
the first quarter of 2000 and 1999.
13
<PAGE>
Expected sales synergies from the 1998 acquisitions of Triangle Pacific and DLW
have proceeded at a slower pace than originally anticipated. In addition, weak
results from European operations have negatively impacted first quarter 2000
results and Armstrong anticipates this condition continuing through the
remainder of the year.
Industry Segment Results
- ------------------------
Floor coverings net sales were $368.5 million and $376.2 million in the first
quarter of 2000 and 1999, respectively. Sales in the Americas increased 5.7% as
demand for both residential and commercial products increased. European sales
of $131.4 million were 12.3% below 1999 levels as a result of continued market
weakness, lower prices and unfavorable foreign exchange. Pacific area sales
were 23.3% ahead of last year.Operating income of $29.7 million was 8.1% of
sales compared to $46.7 million in the first quarter of 1999, or 12.4% of sales.
The operating margin reduction was driven primarily by higher manufacturing
costs, particularly raw materials, and lower prices driven by competitive
pressure in the Americas and Europe.
Building products net sales of $188.5 million decreased slightly from $189.7
million in the first quarter of 1999. Sales in the Americas increased 6.9%
driven primarily by higher demand in all channels except Latin America. In
Europe, sales decreased 14.1% primarily due to unfavorable foreign exchange and
less favorable product mix. Pacific area sales were virtually flat versus 1999.
Operating income declined $4.0 million to $25.7 million as improved volume and
mix in the Americas was offset by price declines in both the Americas and
Europe, higher manufacturing expense primarily from raw materials and higher
advertising expense in support of the U.S. retail business. Overall operating
margins decreased from 15.7% to 13.6%.
Wood products net sales of $216.3 million in the first quarter of 2000 compared
to net sales of $187.0 million in 1999. Cabinet net sales grew 24.3 percent due
to higher volume. Wood flooring net sales increased 13.0 percent versus 1999
driven primarily by volume growth and improved pricing. Operating margins
declined from 9.9% to 8.3% primarily driven by increased lumber costs.
In the all other segment, net sales and operating income were down $19.9 million
and $1.7 million, respectively due to the absence of the gaskets and textiles
businesses that were sold in the second and third quarters of 1999.
The results of the Insulation Products segment have been shown as a discontinued
business. Earnings from the Insulation business were $4.7 million in 2000
compared to $7.1 million in 1999 primarily due to lower sales.
Cautionary Statements About Future Results
- ------------------------------------------
This discussion is provided under the Private Securities Litigation Reform Act
of 1995. Our disclosures in reports here and in other public comments contain
forward-looking statements. These statements provide our expectations or
forecasts of future eventsand can be identified by the use of words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe,"
"outlook," and others of similar meaning in discussions of future operating or
financial performance. In particular, these include statements relating to
future earnings per share, dividends, financial results, operating results,
prospective products, future performance of current products, future sales or
expenses, and the outcome of contingencies such as legal proceedings.
Any of these forward-looking statements may turn out to be wrong. Actual future
results may vary materially. Consequently, no forward-looking statement can be
guaranteed.
Many factors could cause our actual results to differ materially from those
expected. These factors include:
. our asbestos-related and any other litigation discussed in our filings
with the SEC
. variations in raw material and energy costs, and our success in
achieving manufacturing efficiencies and price increases,
. our success in introducing new products,
. product and price competition caused by factors such as worldwide
excess industry capacity,
. interest, foreign exchange and effective tax rates
14
<PAGE>
. integration of our 1998 acquisitions,
. business combinations among competitors and suppliers,
. the strength of domestic and foreign end-use markets and improved
efficiencies in the European flooring market, and
. impacts to international operations caused by changes in intellectual
property protections and trade regulations, and the political climate
in emerging markets.
This should not be considered to be a complete list of all risks and
uncertainties that might affect our future results. We undertake no obligation
to update any forward-looking statement. Related disclosures in our most recent
report on Form 10-K, in our reports on Form 10-Q and any further disclosures in
subsequent 10-Q, 8-K and 10-K reports should also be consulted.
15
<PAGE>
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
ASBESTOS-RELATED LITIGATION
- ---------------------------
The following is a summary update of asbestos-related litigation; see Note 26 to
the financial statements of Armstrong's 1999 Form 10-K filing for additional
information.
Armstrong is a defendant in personal injury claims and property damage claims
related to asbestos containing products.
PERSONAL INJURY CLAIMS
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 Armstrong, which can involve allegations of
negligence, strict liability, breach of warranty and conspiracy, primarily
relate to Armstrong's involvement with asbestos-containing insulation products.
Armstrong discontinued the sale of all such insulation products in 1969. In
addition, other Armstrong products, such as gasket materials, have been named in
some litigation. Claims may arise many years after first exposure to asbestos in
light of the long latency period (up to 40 years) for asbestos-related injury.
Product identification and determining exposure periods are difficult and
uncertain. Armstrong believes that many current plaintiffs are unimpaired.
Armstrong is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals.
Armstrong is a defendant in approximately 172,200 pending personal injury claims
as of March 31, 2000. During the first quarter of 2000, the Center for Claims
Resolution ("Center") received and verified approximately 13,000 claims naming
Armstrong as a defendant.
Armstrong continues to seek broad-based settlements of claims through the
Center. To date, the Center has reached agreements with several law firms that
cover approximately 97,000 claims (or 49% of current claims) some of which are
currently pending and some of which have yet to be filed. These agreements
typically provide for multiyear payments for settlement of current claims and
establish specific medical and other criteria for the settlement of future
claims as well as annual limits on the number of claims that can be filed by
these firms. These agreements also establish fixed settlement values for
different asbestos-related medical conditions which are subject to periodic re-
negotiation over a period of 2 to 5 years. The plaintiff law firms are required
to recommend settlements to their clients although future claimants are not
legally obligated to accept the settlements. These agreements also provide for
nominal payments to future claimants who are unimpaired but who are eligible for
additional compensation if they develop a more serious asbestos-related illness.
The Center can terminate an agreement with an individual law firm if a
significant number of that firm's clients elect not to participate under the
agreement. Negotiations with additional law firms engaged in asbestos-related
litigation that would resolve a substantial portion of the remaining pending
claims are ongoing. The ultimate success and timing of those negotiations is
uncertain.
Asbestos-Related Liability
In continually evaluating its estimated asbestos-related liability, Armstrong
reviews, among other things, its recent and historical settlement amounts, the
incidence of past and recent claims, the mix of the injuries and occupations of
the plaintiffs, the number of cases pending against it and the status and
results of broad-based settlement discussions. Based on this review, Armstrong
has estimated its share of liability to defend and resolve probable asbestos-
related personal injury claims. This estimate is highly uncertain due to the
limitations of the available data and the difficulty of forecasting with any
certainty the numerous variables that can affect the range of the liability.
Armstrong will continue to study the variables in light of additional
information in order to identify trends that may become evident and to assess
their impact on the range of liability that is probable and estimable.
Armstrong's estimation of its asbestos-related liability that is probable and
estimable through 2005 ranges from $645.0 million to $1,301.4 million as of
March 31, 2000. The range of probable and estimable liability
16
<PAGE>
reflects uncertainty in the number of future claims that will be filed and the
cost to settle those claims, which may be influenced by a number of factors,
including the outcome of the ongoing broad-based settlement negotiations and
Armstrong's overall effective share of the Center's liabilities. Armstrong has
concluded that no amount within that range is more likely than any other, and
therefore has reflected $645.0 million as a liability in the consolidated
financial statements in accordance with generally accepted accounting
principles. Of this amount, management expects to incur asbestos liability
payments of approximately $175.0 million over the next 12 months and has
reflected such amount as a current liability.
Armstrong's estimated range of liability is primarily based on known claims and
an estimate of future claims that are likely to occur and can be reasonably
estimated through 2005. This estimated range of liability assumes that the
number of new claims filed annually will be less than the number filed in 1999.
For claims that may be filed beyond 2005, 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 estimated range of 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. As additional experience is
gained regarding claims and such settlement discussions or other new information
becomes available regarding the potential liability, Armstrong will reassess its
potential liability and revise the estimates as appropriate.
Although some settlements have already been reached, Armstrong is currently
uncertain as to the ultimate success and timing of the remaining broad-based
settlement discussions. However, if those discussions are unsuccessful or if
unfavorable claims experiences occur, significant changes in the assumptions
used in the estimate of Armstrong's liability may result. Those changes, if any,
could lead to increases in the recorded liability.
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 Armstrong 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.
LETTERS OF CREDIT
As of March 31, 2000, Armstrong has secured $36.2 million of letters of credit
to meet minimum collateral requirements established by the Center.
PROPERTY DAMAGE LITIGATION
Armstrong is also one of many defendants in six pending claims as of March 31,
2000, that were filed by public and private building owners. These cases
present allegations of damage to the plaintiff's 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. Armstrong vigorously denies the validity of the
allegations against it in these claims. These 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
During relevant time periods, Armstrong purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., a former
subsidiary of Armstrong. Armstrong and ACandS agreed to share certain coverage
on a first-come first-served basis and to reserve for ACandS a certain amount of
excess coverage.
Wellington Agreement
In 1985, Armstrong and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled disputes concerning
personal injury insurance coverage with signatory carriers. It provides broad
coverage for both defense and indemnity and applies to both products hazard
17
<PAGE>
and nonproducts (general liability) coverages. Armstrong has resolved most
asbestos-related personal injury products hazard coverage matters with its
solvent carriers through the Wellington Agreement or other settlements.
Insurance Recovery Proceedings
A substantial portion of Armstrong's primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims,
including among others, those that involve alleged exposure during Armstrong's
installation of asbestos materials. An alternative dispute resolution ("ADR")
procedure under the Wellington Agreement is under way 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 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 Armstrong 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. One insurer has taken the position that it is entitled to
litigate in court certain issues in the ADR proceeding. During 1999, Armstrong
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to Armstrong on a number of issues
related to insurance coverage. Because of the continuing ADR process and the
possibilities for appeal on certain matters, Armstrong has not yet completely
determined the financial implications of the decisions. Armstrong has entered
into settlements with a number of the carriers resolving its coverage issues.
Other proceedings against non-Wellington carriers may become necessary.
Insurance Asset
As with its estimated asbestos related liability, Armstrong continually
evaluates the probable insurance asset to be recorded. An insurance asset in the
amount of $296.0 million is recorded as of March 31, 2000. No amounts were
received in the first quarter of 2000 pursuant to existing settlements. Of the
total amount, approximately $87.9 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 6.50%. The total amount
recorded reflects Armstrong's belief in the availability of insurance in this
amount, based upon Armstrong'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 that is in the trial phase of
binding arbitration. Depending on further progress of the ADR, and activities
such as settlement discussions with insurance carriers party to the ADR and
those not party to the ADR, Armstrong may revise its estimate and additional
insurance assets may be recorded in a future period. Of the $296.0 million
asset, $26.0 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 could increase dependent upon 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.
CASH FLOW IMPACT
Armstrong paid $36.5 million for asbestos related claims in the first quarter of
2000 compared to $35.4 million in the first quarter of 1999. Armstrong did not
receive any asbestos-related insurance recoveries during the first quarters of
2000 or 1999. Armstrong currently expects to pay approximately $80.0 million to
$115.0 million for asbestos related claims and expenses in 2000, net of expected
insurance recoveries and taxes.
CONCLUSION
While some successful broad-based settlements have been reached with plaintiff
law firms, Armstrong is uncertain as to the timing and number of any additional
settlements to be reached.
18
<PAGE>
Since many uncertainties exist surrounding asbestos litigation, Armstrong will
continue to evaluate its asbestos related estimated liability and corresponding
estimated insurance recoveries asset as well as the underlying assumptions used
to record these amounts. The recorded liability and asset reflect management's
best estimate of probable amounts based on current information . However, it is
reasonably possible that Armstrong's total exposure to personal injury claims
may be greater than the recorded liability and accordingly future charges to
income may be necessary. While Armstrong believes that potential future charges
may be material to the periods in which they are taken, Armstrong does not
believe the charges will have a material adverse effect on its financial
position or liquidity.
ENVIRONMENTAL MATTERS
- ---------------------
Armstrong's operations are subject to federal, state, local and foreign
environmental laws and regulations. As with many industrial companies,
Armstrong is currently involved in proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act ("Superfund"), and
similar state laws at approximately 22 sites. In most cases, Armstrong is one
of many potentially responsible parties ("PRPs") who have voluntarily agreed to
jointly fund the required investigation and remediation of each site. With
regard to some sites, however, Armstrong disputes the liability, the proposed
remedy or the proposed cost allocation among the PRPs. Armstrong may also have
rights of contribution or reimbursement from other parties or coverage under
applicable insurance policies. Armstrong 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 Armstrong
experience in remediation of contaminated sites. Although current law may impose
joint and several liability on all parties at any Superfund site, Armstrong's
contribution to the remediation of these sites is expected to be limited by the
number of other companies also identified as potentially liable for site costs.
As a result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters.
Liabilities of $15.9 million were recorded at March 31, 2000 for potential
environmental liabilities that Armstrong considers probable and for which a
reasonable estimate of the probable liability could be made. Where existing data
is sufficient to estimate the amount of the liability, that estimate has been
used; where only a range of probable liability is available and no amount within
that range is more likely than any other, the lower end of the range has been
used. As assessments and remediation activities progress at each individual
site, these liabilities are reviewed to reflect additional information as it
becomes available.
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 in the consolidated financial statements and are either
available through settlement or probable of recovery through negotiation or
litigation.
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, Armstrong 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.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) The following exhibits are filed as a part of the Quarterly Report on
Form 10-Q:
Exhibits
--------
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) A Form 8-K, dated February 2, 2000, was filed discussing the results
of operations for the quarter and year ended December 31, 1999.
20
<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/ Deborah K. Owen
----------------------------------------
Deborah K. Owen, Senior Vice President,
Secretary and General Counsel
By: /s/ William C. Rodruan
----------------------------------------
William C. Rodruan, Vice President and
Controller (Principal Accounting Officer)
Date: May 15, 2000
21
<PAGE>
Exhibit Index
-------------
Exhibit No.
- -----------
No. 15 Letter re: Unaudited Interim Financial Information
No. 27 Financial Data Schedule
22
<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 April
28, 2000, related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
KPMG LLP
Philadelphia, Pennsylvania
May 12, 2000
1
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
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<RECEIVABLES> 474
<ALLOWANCES> 45
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<CURRENT-ASSETS> 1,098
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