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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
ARMSTRONG HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 333-32530 23-3033414
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(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock ($1 par value) New York Stock Exchange, Inc. (a)
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (b)
ARMSTRONG WORLD INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 1-2116 23-0366390
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(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (b)
7.45% Senior Quarterly Interest Bonds
Due 2038
(a) All Classes
(b) Common Stock and Preferred Stock
Purchase Rights only
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
The aggregate market value of the Common Stock of Armstrong Holdings, Inc. held
by non-affiliates based on the closing price ($3.92 per share) on the New York
Stock Exchange on February 16, 2001, was approximately $149.5 million. As of
February 16, 2001, the number of shares outstanding of registrant's Common Stock
was 40,831,200. This amount includes the 2,339,917 shares of Common Stock as of
December 31, 2000, held by The Chase Manhattan Bank, as Trustee for the employee
stock ownership accounts of the Company's Retirement Savings and Stock Ownership
Plan.
Documents Incorporated by Reference
- -----------------------------------
None
2
PART I
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Item 1. Business
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Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells interior finishings,
most notably floor coverings and ceiling systems, around the world. Armstrong
products are sold primarily for use in the finishing, refurbishing and repair of
residential, commercial and institutional buildings. Armstrong also designs,
manufactures and sells kitchen and bathroom cabinets.
Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the publicly-held
parent holding company of Armstrong. AHI became the parent company of Armstrong
on May 1, 2000, following AWI shareholder approval of a plan of exchange under
which each share of AWI was automatically exchanged for one share of AHI. AHI
was formed for purposes of the share exchange and holds no other significant
assets or operations apart from AWI and AWI's subsidiaries. Stock certificates
that formerly represented shares of AWI were automatically converted into
certificates representing the same number of shares of AHI. The publicly-held
debt of AWI was not affected in the transaction. The following discussion of
Armstrong's business is applicable to AHI and AWI.
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief ("the Filing") under Chapter 11 of the U.S.
Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The
Chapter 11 cases are being jointly administered under case numbers 00-4469,
00-4470, and 00-4471 (the "Chapter 11 Cases").
AHI, and Armstrong's other subsidiaries, including Triangle Pacific Corp., WAVE
(Armstrong's ceiling grid systems joint venture with Worthington Industries),
Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries
were not a part of the Filing.
Like other companies involved in asbestos litigation, AWI has tried a number of
different approaches to managing its asbestos liability, including negotiating
broad-based settlements of claims and supporting efforts to find a legislative
resolution. The number of new claims filed and the cost to settle claims,
however, continued to escalate. In addition, liquidity concerns increased when
Owens Corning Fiberglass filed for Chapter 11 protection on October 5, 2000.
This hurt AWI's ability to obtain ongoing financing on acceptable terms. These
were the principal factors which led to the decision to make the Filing.
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing. In addition, as a
debtor-in-possession, AWI has the right, subject to the Court's approval, to
assume or reject any executory contracts and unexpired leases in existence at
the date of the Filing. Parties having claims as a result of any such rejection
may file claims with the Court which will be dealt with as part of the Chapter
11 Cases.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Cases.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and along with AWI's operating subsidiaries are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Cases could take a significant period of time.
3
Financing
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The Court has approved a $300 million debtor-in-possession credit facility
provided by a bank group led by The Chase Manhattan Bank (the "DIP Facility").
AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs. As of
February 28, 2001, AWI had $96.3 million of cash and cash equivalents in
addition to cash held by its non-debtor subsidiaries. Borrowings under the DIP
facility, if any, will constitute superpriority administrative expense claims in
the Chapter 11 Cases.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2000.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 29 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization items. Accordingly, AWI recorded a total of $103.3 million as
Reorganization Costs in December 2000, consisting of:
($ millions)
------------
Adjustment of net debt and debt issue costs to expected amount of allowed claim $ 42.0
ESOP related expenses 58.8
Professional fees 2.6
Interest income, post petition (0.3)
Other expenses directly related to bankruptcy, net 0.2
------
Total Chapter 11 reorganization costs $103.3
======
To record prepetition debt at the face value or the amount of the expected
allowed claims, AWI adjusted the amount of net debt and debt issue costs and
recorded a pre-tax expense of $42.0 million.
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. As described more
fully in Note 19, Armstrong has not permitted further employee contributions to
the ESOP. Therefore, it is expected that the ESOP will no longer have the
ability to repay Armstrong money it previously borrowed. In addition, a $15.5
million expense was recorded related to interest and tax penalty guarantees owed
to ESOP bondholders caused by the default on the ESOP bonds.
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
Discontinued Operations
- -----------------------
On May 31, 2000, Armstrong completed its sale of 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 $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.84 per share.
4
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001 entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. The proposed sale, while subject to certain
approvals, including that of the Court, is expected to close in June 2001.
Accordingly this segment has been classified as a discontinued operation in the
accompanying consolidated financial statements. Prior year balances and results
have been reclassified to reflect the net assets and results of discontinued
operations. Based on the expected net realizable value of the business,
Armstrong recorded a pretax net loss of $30.3 million in the fourth quarter of
2000, $19.5 million net of tax benefit.
Industry Segments
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Financial Information about Industry Segments
- ---------------------------------------------
See Item 8, Note 3 to Consolidated Financial Statements for financial
information on Armstrong's reportable industry segments.
Narrative Description of Business
- ---------------------------------
Armstrong designs, manufactures and sells interior finishings, most notably
floor coverings and ceiling systems around the world. Armstrong products are
sold primarily for use in the finishing, refurbishing and repair of residential,
commercial and institutional buildings. Armstrong also designs, manufactures and
sells kitchen and bathroom cabinets.
Floor Coverings
- ---------------
Armstrong is a worldwide manufacturer of a broad range of resilient floor
coverings for the interiors of homes and commercial and institutional buildings,
which are sold with adhesives, installation and maintenance materials and
accessories. Resilient flooring, in both sheet and tile forms, together with
laminate flooring and linoleum, are sold in a wide variety of types, designs,
and colors. Included are types of flooring that offer such features as ease of
installation, reduced maintenance (no-wax), and cushioning for greater underfoot
comfort. Floor covering products are sold to commercial, residential and
institutional customers through wholesalers, retailers (including large home
centers and buying groups), contractors, and to the hotel/motel and manufactured
homes industries.
Building Products
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As a major producer of ceiling materials in the United States and abroad,
Armstrong markets both residential and commercial ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs. Most
provide noise reduction and incorporate features intended to permit ease of
installation. These residential ceiling products are sold through wholesalers
and retailers (including large home centers). Commercial suspended ceiling
systems, designed for use in shopping centers, offices, schools, hospitals, and
other commercial and institutional settings, are available in numerous colors,
performance characteristics and designs and offer characteristics such as
acoustical control, accessibility to the plenum (the area above the ceiling),
rated fire protection, and aesthetic appeal. Armstrong sells commercial ceiling
materials and accessories to ceiling systems contractors and to resale
distributors. Framework (grid) products for Armstrong suspension ceiling systems
products are manufactured through a joint venture with Worthington Industries
and are sold by Armstrong.
Wood Products
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Armstrong's Triangle Pacific subsidiary manufactures and sells hardwood flooring
and other flooring, kitchen and bathroom cabinetry and related products.
Armstrong also distributes laminate flooring products. These products are used
primarily in residential new construction and remodeling, with some commercial
applications such as stores and restaurants. Flooring sales are generally made
through independent wholesale flooring distributors and retailers (including
large home centers and buying groups). Cabinets are sold through both
independent and Armstrong-owned distributors.
Major Customers
- ---------------
Armstrong businesses principally sell products through building products
distributors, who re-sell our products to retailers, builders, contractors,
installers and others. Armstrong also sells a significant portion of our
products to home center chains and industry buying groups. For example, for
2000, Armstrong sales by all operations to The Home Depot, Inc. totaled
approximately $373.2 million compared to approximately $344.8 million and $296.0
million in 1999 and 1998, respectively. No other customer accounted for more
than 10% of Armstrong's revenue.
5
Raw Materials
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Raw materials essential to Armstrong businesses are purchased worldwide in the
ordinary course of business from numerous suppliers. The principal raw materials
used by the Floor Coverings business include synthetic resins, plasticizers,
PVC, latex, linseed oil, limestone, films, pigments and inks. The principal raw
materials used by the Building Products business include mineral fibers and
fillers, clays, starches, newspaper and perlite, as well as steel used in the
ceiling grid manufacturing process. The principal raw materials used by the Wood
Products business include oak lumber, veneer, acrylics, plywood, particleboard
and fiberboard. Armstrong also purchases significant amounts of packaging
materials for all products and uses substantial amounts of energy such as
electricity and natural gas in our manufacturing operations. In general,
adequate supplies of raw materials were available to all of Armstrong's
businesses. Although prices for petroleum-based raw materials and energy were
markedly higher in 2000, no serious shortages were encountered in 2000, and none
are expected in 2001. Armstrong cannot guarantee that a significant shortage of
one raw material or another will not occur, however.
Armstrong's California resilient tile manufacturing plant experienced serious
disruptions into January 2001 due to the electric power supply shortage in that
state. Armstrong rejected a lower-rate contract we had been operating under,
which allowed for limited power cut-offs. Although Armstrong will now pay a
slightly higher rate, we expect our plant will be less exposed to electric power
shutdowns provided the state as a whole obtains adequate power supplies.
Otherwise, production from this plant may have to be shifted to other
facilities, resulting in undetermined capital expense and transportation costs.
Customers' orders for Armstrong products are typically for immediate shipment.
Thus, in each business group, Armstrong keeps sufficient inventory on hand to
satisfy orders, or manufacture product to meet delivery dates specified in
orders. As a result, there historically has been no material backlog in any
industry segment.
Patents and Intellectual Property Rights
- ----------------------------------------
Patent protection is important to Armstrong's business in the United States and
other markets. Armstrong's competitive position has been enhanced by U.S. and
foreign patents on products and processes developed or perfected within
Armstrong or obtained through acquisition or license. In addition, Armstrong
also benefits from our trade secrets for certain products and processes.
Patent protection extends for varying periods according to the date of patent
filing or grant and the legal term of a patent in the various countries where
patent protection is obtained. The actual protection afforded by a patent, which
can vary from country to country, depends upon the type of patent, the scope of
its coverage, and the availability of legal remedies in the country. Although
Armstrong considers that, in the aggregate, our patents and trade secrets
constitute a valuable asset of material importance to their business, they do
not regard any of their businesses as being materially dependent upon any single
patent or trade secret, or any group of related patents or trade secrets.
Armstrong products are sold around the world under numerous brand-name
trademarks that are considered in the aggregate to be of material importance.
Certain of Armstrong trademarks, including without limitation, house marks
Armstrong, Bruce, Hartco, Robbins, and DLW, and product line marks Cirrus,
Corlon, Cortega, Designer Solarian, Exelon, Fundamentals, I-Ceilings, Medintech,
Natural Inspirations, ToughGuard, Traffic Zone and Ultima are important to
Armstrong's business because of their significant brand name recognition.
Trademark protection continues in some countries as long as the mark is used, in
other countries, as long as it is registered. Registrations are generally for
fixed, but renewable, terms.
Competition
- -----------
There is strong competition in all of the industry segments in which Armstrong
does business. Competition in each industry segment and each geographic area
where Armstrong does business includes numerous companies. Principal methods of
competition include price, product performance and service. In addition, product
styling is a significant component of competition. Increasing competition in the
U.S. from worldwide producers is apparent in Armstrong's businesses. There is
currently excess production capacity in many geographic markets, which tends to
increase price competition.
6
Research & Development
- ----------------------
Research and development ("R&D") activities are important and necessary in
helping Armstrong improve its products. Principal research and development
functions include the development and improvement of products and manufacturing
processes.
Armstrong spent $60.0 million in 2000, $46.4 in 1999 and $36.7 million in 1998
on research and development activities worldwide.
Environmental Matters
- ---------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $6.2
million in 2000, $5.5 million in 1999 and $6.7 million in 1998 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other federal and
state environmental laws continue to change. Until all new regulatory
requirements are known, Armstrong cannot predict with certainty future capital
expenditures associated with compliance with environmental requirements.
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")
which have potential liability for the required investigation and remediation of
each site, and which in some cases, have agreed to jointly fund that required
investigation and remediation. 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
has also been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. Armstrong's payments
and remediation work on these sites is under review in light of the Chapter 11
Filing.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction with the site, existing technology,
presently enacted laws and regulations and prior company experience in
remediating contaminated sites. Although current law imposes joint and several
liability on all parties at any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Cases also may
affect the ultimate amount of such contributions.
Liabilities of $13.5 million at December 31, 2000 and $13.2 million at December
31, 1999 were 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 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
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the December
31, 2000 environmental liabilities are classified as prepetition liabilities
subject to compromise. As a general rule, such prepetition liabilities that do
not preserve company assets are addressed in the context of the Chapter 11
Cases.
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 anticipated to be recovered through negotiation
or litigation.
7
Actual costs to be incurred at identified sites may vary from the 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.
Employees
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As of December 31, 2000, we had approximately 15,400 employees around the world,
of whom approximately 3,800 are located outside of the United States. About 51%
of the approximately 8,900 hourly or salaried production and maintenance
employees in the United States are represented by labor unions.
Armstrong experienced a brief work stoppage at one of its Wood Products plants
in 2000. Otherwise, Armstrong's employee and labor relations remained good. In
the fall of 2001, Armstrong anticipates beginning negotiations on a new
collective bargaining agreement with the International Association of Machinists
and Aerospace Workers at its Lancaster, Pennsylvania plant.
Geographic Areas
- ----------------
See Item 8, Note 3 to Consolidated Financial Statements for financial
information by geographic areas.
Armstrong's non-U.S. operations are subject to local government laws concerning
restrictions on and transfers of investments, tariffs, personnel administration,
and other matters. In addition, consolidated earnings that originate outside the
U.S. are subject to both U.S. and non-U.S. tax laws and to certain exchange and
currency controls and the effects of currency fluctuations.
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
The disclosures and analysis in this report contain some forward-looking
statements. This discussion about those statements is provided in accordance
with the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with discussions of future operating
or financial performance. In particular, these include statements relating to
future actions, prospective products, future performance or results of current
and anticipated products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results. From time to time, Armstrong
and/or AHI may also provide oral or written forward-looking statements in other
materials released to the public.
Any or all of the forward-looking statements in this report and in any other
public statements made may turn out to be wrong. They can be affected by
inaccurate assumptions Armstrong and/or AHI might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
Armstrong and/or AHI undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, you should consult any further disclosures made by Armstrong and/or AHI
on related subjects in 10-Q, 8-K, 10-K or other reports filed with the SEC. Also
note the following cautionary discussion of risks and uncertainties relevant to
Armstrong businesses. These are some of the factors that could potentially cause
actual results to differ materially from expected and historical results. Other
factors besides those listed here could also adversely affect Armstrong and/or
AHI.
. Factors relating to AWI's Chapter 11 Filing, such as: the possible
disruption of relationships with creditors, customers, suppliers and
employees; the ultimate size of AWI's asbestos-related and other
liabilities; the ability to confirm and implement a plan of reorganization;
the availability of financing and refinancing for both AWI and its
subsidiaries that are not parties to its Chapter 11 Filing; and AWI's
ability to comply with covenants in its debtor in possession credit
facility.
8
. Claims of undetermined merit and amount have been asserted against
Armstrong and its subsidiaries for various legal, environmental and tax
matters, including AWI's asbestos related litigation. For more information
on these matters, see the discussion of Legal Proceedings in Item 3 in this
report.
. Balancing investment to create future growth in the constraints of a
price-competitive market is a challenge.
. Revenues and earnings can be affected by the level of success of new
product introductions.
. Much of Armstrong's revenues and earnings are exposed to changes in foreign
currency exchange rates. Where practical, Armstrong tries to reduce these
effects by matching local currency revenues with costs and local currency
assets with liabilities. Armstrong also manages foreign exchange risk with
foreign currency forward contracts and with purchased foreign currency
options.
. Notwithstanding Armstrong's efforts to foresee and plan for the effects of
changes in fiscal circumstances, Armstrong cannot predict with certainty
all changes in currency and interest rates, inflation or other related
factors affecting Armstrong businesses. For more information on these
matters, see the discussion of Market Risk in Item 7A of this report.
. International operations could be affected by changes in intellectual
property legal protections and remedies, trade regulations, and procedures
and actions affecting production, pricing and marketing of products, as
well as by unstable governments and legal systems, intergovernmental
disputes and possible nationalization.
. Business combinations among Armstrong's competitors or suppliers could
affect Armstrong's competitive position in the hard surface floor covering,
ceiling system and wood products businesses. Similarly, combinations or
alliances among Armstrong's major customers could increase their purchasing
power in dealing with Armstrong. And, of course, if Armstrong should enter
into one or more business combinations, Armstrong's business, finances and
capital structure could be affected.
. Growth in costs and expenses, raw material price increases (for example
increases in wood prices or in petroleum-based raw materials such as
plasticizers or PVCs), energy cost increases, changes in distribution and
product mix, and the impact of divestitures, restructuring and other
unusual items that could result from evolving business strategies and
organizational restructuring could affect future results.
. Revenues and earnings could be affected by various worldwide economic and
political factors, including improved efficiencies in the European flooring
market and variations in residential and commercial building rates and
economic growth rates in various areas of the world in which we do
business. These factors could affect the end-use markets for Armstrong
products in various parts of the world.
. Revenues and earnings could be affected by the extent to which Armstrong
successfully achieves integration of and synergies from acquisitions.
. Availability of raw materials due to changes in business conditions that
impact Armstrong's suppliers, including environmental conditions, laws and
regulations and/or business decisions made by Armstrong's suppliers could
affect future results.
. Revenues and earnings could be affected by business conditions that impact
Armstrong's major customers and/or business decisions made by Armstrong's
major customers.
Financial Information Filed With the Court
- ------------------------------------------
As previously disclosed, on December 6, 2000, AWI and two of its subsidiaries
(collectively, the "Debtors") filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware ("the Court").
9
Armstrong reports its operating results and financial statements on a
consolidated basis. These public reports are available through the U.S.
Securities and Exchange Commission and other sources, and are also provided free
of charge to investors who contact Armstrong. However, under applicable
bankruptcy law, AWI is now required to file periodically with the Court various
documents, including certain financial information on an unconsolidated basis.
This information includes statements, schedules, and monthly operating reports
in forms prescribed by Federal Bankruptcy Law.
Armstrong cautions that such materials are prepared according to requirements
under Federal Bankruptcy Law. While they accurately provide then-current
information required under Bankruptcy Law, they are nonetheless unconsolidated,
unaudited, and are prepared in a format different from that used in Armstrong's
consolidated financial statements filed under the securities laws. Accordingly,
Armstrong believes the substance and format do not allow meaningful comparison
with Armstrong's regular publicly-disclosed consolidated financial statements.
The materials filed with the Court are not prepared for the purpose of providing
a basis for an investment decision relating to the stock of AHI or the debt
securities of AWI, or for comparison with other financial information filed with
the SEC.
Notwithstanding, most of the Debtors' filings with the Court are available to
the public at the office of the Clerk of the Bankruptcy Court. Those filings may
also be obtained through private document retrieval services. Armstrong
undertakes no obligation to make any further public announcement with respect to
the documents filed with the Court or any matters referred to in them.
Item 2. Properties
- -------------------
Armstrong and AHI world headquarters are in Lancaster, Pennsylvania. Armstrong
owns a 100-acre, multi-building campus comprising the site of our corporate
headquarters, most operational headquarters, and our U.S. R&D operations and
marketing and service headquarters. Altogether, our headquarters operations
occupy over 986,000 square feet of floor space.
We produce and market Armstrong products and services throughout the world,
owning and operating 44 manufacturing plants in 14 countries. Thirty-three of
these facilities are located throughout the United States. In addition,
Armstrong has an interest through joint ventures in 7 additional plants in 7
countries.
Floor covering products and adhesives are produced at 14 plants, with principal
manufacturing facilities located in Pennsylvania, Illinois, Oklahoma, the U.K.,
and Germany. Building products are produced at 15 plants with principal
facilities in Georgia, the Florida-Alabama Gulf Coast area, Pennsylvania, the
U.K., and China. Wood products are produced at 16 plants, with principal
facilities located in West Virginia, Tennessee and Pennsylvania.
Sales offices are leased and owned worldwide, and leased facilities are utilized
to supplement Armstrong's owned warehousing facilities.
Productive capacity and the extent of utilization of Armstrong facilities are
difficult to quantify with certainty because in any one facility, maximum
capacity and utilization vary periodically depending upon the product that is
being manufactured, and individual facilities manufacture multiple products. In
this context, we estimate that the production facilities in each industry
segment were effectively utilized during 2000 at 80% to 90% of overall
productive capacity. Remaining productive capacity is sufficient to meet
expected customer demands. Armstrong believes that our various facilities are
adequate and suitable. Additional incremental investments in plant facilities
are made as appropriate to balance capacity with anticipated demand, improve
quality and service, and reduce costs.
Item 3. Legal Proceedings
- --------------------------
Asbestos-related Litigation
- ---------------------------
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Item 1 for further discussion.
10
Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.
Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.
In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.
Personal Injury Litigation
- --------------------------
Nearly all the asbestos-related personal injury lawsuits brought against AWI
relate to alleged exposure to asbestos-containing high-temperature insulation
products. The majority of these claims seek compensatory and punitive damages.
Claims may arise many years after first exposure to asbestos in light of the
decades long latency period for asbestos-related injury. Product identification
and determining exposure periods are difficult and uncertain. Over the long
history of asbestos litigation involving hundreds of companies, various parties
have tried to secure 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. AWI 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 from various jurisdictions and has been receptive to different
approaches to the resolution of claims. Claims filed in state courts have not
been directly affected by the transfer.
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 AWI. It was designed to establish a
nonlitigation system for the resolution of those 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 September 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.
11
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
- ----------------------------------------------------------------------
("Center")
- ----------
The Facility was established in 1985 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 AWI. At the
time of the Filing, there were 16 members of the Center, including AWI.
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 among the member companies; adjustments over time due to
the departure of some members and other factors resulted in some increased share
for AWI.
As a result of the Filing, AWI is no longer an active participant in the Center.
The extent and amount of AWI liabilities as a result of its participation in the
Center have not been determined, but will be determined in AWI's Chapter 11
Case.
Number of Claims
- ----------------
The number of claims naming AWI as a defendant ranged from about 16,400 to
31,100 per year during the period from 1989 to 1997. However, subsequent to this
time and up to the Filing, claim filings significantly surpassed this average as
approximately 87,500 and 50,700 claims were filed in 1998 and 1999 respectively.
AWI had expected the number of claims to decline in 2000. However, during the
first eleven months of 2000 prior to the Filing, the Center received and
verified approximately 53,000 claims. Claims from major, established law firms
did decline, but this decline was more than offset by claims from new or
previously low-volume law firms.
Before filing under the Bankruptcy Code, AWI pursued broad-based settlements of
claims through the Center. The Center had reached Strategic Settlement Program
("SSP") agreements with law firms that covered approximately 130,000 claims that
named AWI as a defendant, including agreements with 17 law firms covering
approximately 36,800 claims during the first eleven months of 2000. These
agreements typically provided for multiyear payments for settlement of current
claims and established 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 established fixed settlement values for
different asbestos-related medical conditions which were subject to periodic
re-negotiation over a period of 2 to 5 years. The plaintiff law firms were
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provided
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 could terminate an agreement with an individual law firm if
a significant number of that firm's clients elect not to participate under the
agreement. For some agreements, the component of the agreement that covered
future claims was subject to re-negotiation if members left the Center. As a
result of the Filing, AWI's obligations with respect to these settlements will
be determined in the context of its Chapter 11 Case.
Fourth Quarter 2000 Events
- --------------------------
On October 5, 2000, Owens Corning Fiberglass ("OCF"), a manufacturer of
insulation, filed for protection under Chapter 11 of the Bankruptcy Code to
address its asbestos liability. This filing adversely impacted AWI's
negotiations to obtain a 364-day credit facility which were underway at the
time. This credit facility was to replace an existing $450 million credit
facility that expired on October 19, 2000. Following the OCF filing, the
potential participants in the new credit facility decided to reevaluate their
credit exposures to AWI, primarily due to AWI's asbestos liability. AWI could
not reach agreement on a new facility with acceptable terms. The existing $450
million credit facility expired on October 19, 2000.
Additionally, AWI was concerned that a possible upward bias in the settlement
demands of asbestos plaintiffs would occur given the exit from the tort system
of OCF, an important defendant in asbestos litigation.
As set forth above, AWI filed for relief under Chapter 11 of the Bankruptcy Code
on December 6, 2000. As a result, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from filing new lawsuits against
AWI. In addition, AWI ceased making payments with respect to asbestos claims,
including payments pursuant to the outstanding SSP agreements. A separate
creditors committee representing the interests of asbestos claimants has been
appointed in the Chapter 11 Cases.
12
As a result of the Filing, AWI's present and future asbestos liability will be
addressed in the Chapter 11 Case rather than through the Center and a multitude
of lawsuits in different jurisdictions throughout the U.S. AWI believes that the
Chapter 11 process provides it with the opportunity to change its approach to
its asbestos liability and comprehensively address that liability in one forum.
It is anticipated that all present and future asbestos claims will be resolved
in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, 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,
AWI estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate was highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that could affect the range of the
liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The balance at December 31, 2000 is $690.6 million. It is reasonably
possible, however, that the actual liability could be significantly higher than
the recorded liability. As the Chapter 11 Cases proceed there should be more
clarity as to the extent of the liability to be addressed in the Chapter 11
Cases.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 that were filed by public and private building owners. These
cases present allegations of damage to the plaintiffs' 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. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Coverage
- ------------------
During relevant time periods, AWI purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., the former
subsidiary of AWI discussed above under "Background". AWI 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.
13
Wellington Agreement
- --------------------
In 1985, AWI 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 and
nonproducts (general liability) coverages. Most of AWI resolutions of
asbestos-related personal injury products hazard coverage matters with its
solvent carriers has been achieved through the Wellington Agreement or other
settlements.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI'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 AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, 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 AWI 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, AWI
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to AWI on a number of issues related to
insurance coverage. However, during the fourth quarter of 2000, a new trial
judge was selected for the ADR. AWI is uncertain at this time as to the impact,
if any, this change will have on the preliminary decisions of the initial phases
of the ADR. Further, management believes that one of the carriers has been
experiencing financial difficulties, which could affect its ability to pay any
ultimate judgment. AWI has not adjusted the recorded asset amount at December
31, 2000 related to this carrier. Because of the continuing ADR process and the
possibilities for appeal on certain matters, AWI has not yet completely
determined the financial implications of the ADR proceedings.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of December 31, 2000. Of the total recorded
asset, approximately $77.2 million represents partial settlement for previous
claims that 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 AWI's
belief in the availability of insurance in this amount, based upon AWI'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, activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS and the financial condition of the
insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $86 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $32.2 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.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Income Statement Charges
- ------------------------
AWI recorded charges to increase its estimate of probable asbestos-related
liability by $236.0 million in the second quarter of 2000, $335.4 million in
1999 and $274.2 million in 1998. Prior to 1998, charges to increase the
liability were effectively offset by corresponding increases in related
insurance recoveries.
14
Cash Flow Impact
- ----------------
AWI paid $226.9 million for asbestos-related claims in the first eleven months
of 2000 compared to $173.0 million in all of 1999. AWI received $27.7 million in
asbestos-related insurance recoveries during 2000 compared to $58.7 million
during 1999. During the pending Chapter 11 cases, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation and the impact of the ADR proceedings on the
insurance asset. Accordingly, AWI is not revising its previously recorded
liability. However, it is reasonably possible that AWI's total exposure to
personal injury asbestos claims may be significantly different than the recorded
liability.
Environmental Matters
- ---------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $6.2
million in 2000, $5.5 million in 1999 and $6.7 million in 1998 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other federal and
state environmental laws continue to change. Until all new regulatory
requirements are known, Armstrong cannot predict with certainty future capital
expenditures associated with compliance with environmental requirements.
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")
which have potential liability for the required investigation and remediation of
each site and who, in some cases, have agreed to jointly fund that required
investigation and remediation. 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
has also been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. Armstrong's payments
and remediation work on these sites is under review in light of the Chapter 11
Filing.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on an evaluation of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction with the site, existing technology,
presently enacted laws and regulations and prior company experience in
remediating contaminated sites. Although current law imposes joint and several
liability on all parties at any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Cases also may
affect the ultimate amount of such contributions.
Liabilities of $13.5 million at December 31, 2000 and $13.2 million at December
31, 1999 were 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 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
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the December
31, 2000 environmental liabilities are classified as prepetition liabilities
subject to compromise. As a general rule, such prepetition liabilities that do
not preserve company assets are addressed in the context of the Chapter 11
Cases.
15
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 anticipated to be recovered through negotiation
or litigation.
Actual costs to be incurred at identified sites may vary from the 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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
16
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
Armstrong Holding's Common Stock is traded on the New York Stock Exchange, Inc.,
the Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As
of March 1, 2001, there were approximately 7,100 holders of record of Armstrong
Holding's Common Stock.
During 2000, Armstrong issued a total of 1,200 shares of restricted Common Stock
to nonemployee directors of Armstrong pursuant to Armstrong's Restricted Stock
Plan for Nonemployee Directors. Given the small number of persons to whom these
shares were issued, applicable restrictions on transfer and the information
regarding Armstrong possessed by the directors, these shares were issued without
registration in reliance on Section 4(2) of the Securities Act of 1933, as
amended.
2000 First Second Third Fourth Total Year
---- ----- ------ ------ ------ ----------
Dividends per share of common stock $0.48 $0.48 $0.48 $0.00 $1.44
Price range of common stock--high $36.81 $20.50 $17.38 $12.19 $36.81
Price range of common stock--low $16.06 $15.30 $11.81 $0.75 $0.75
1999
----
Dividends per share of common stock $0.48 $0.48 $0.48 $0.48 $1.92
Price range of common stock--high $64.31 $59.69 $60.88 $45.13 $64.31
Price range of common stock--low $44.63 $45.00 $44.13 $29.00 $29.00
17
Item 6. Selected Financial Data
- --------------------------------
The following data is presented on a continuing operations basis.
(Dollars in millions except for per-share data) For Year 2000 1999 1998 1997 1996
- -------------------------------------------------------------- ---- ---- ---- ---- ----
Income statement data:
Net sales $3,003.8 $3,048.2 $ 2,496.1 $ 2,056.9 $ 2,012.3
Cost of goods sold 2,197.7 2,080.8 1,718.3 1,410.6 1,397.5
Total selling, general and administrative expenses
and goodwill amortization 570.2 581.7 453.7 340.0 374.0
Equity (earnings) loss from affiliates, net (18.0) (16.8) (13.8) 29.7 (19.1)
Restructuring and reorganization charges (reversals) 18.0 (1.4) 74.4 -- 46.5
Charge for asbestos liability, net 236.0 335.4 274.2 -- --
----- ----- ----- -- --
Operating income (loss) (0.1) 68.5 (10.7) 276.6 213.4
Interest expense 101.6 104.0 61.4 28.0 22.6
Other (income), net (74.6) (6.7) (1.7) (2.2) (6.9)
------ ----- ----- ----- -----
Earnings (loss) from continuing operations before Chapter 11
reorganization costs and income taxes (27.1) (28.8) (70.4) 250.8 197.7
Chapter 11 reorganization costs, net 103.3 -- -- -- --
----- -- -- -- --
Earnings (loss) from continuing operations before
income taxes (130.4) (28.8) (70.4) 250.8 197.7
Income tax expense (benefit) (41.4) (4.8) (24.9) 94.4 61.5
------ ----- ------ ---- ----
Earnings (loss) from continuing operations
applicable to common stock (a) (89.0) (24.0) (45.5) 156.4 136.2
Per common share - basic (b) (2.21) (0.60) (1.14) 3.85 3.48
Per common share - diluted (b) (2.21) (0.60) (1.14) 3.81 3.24
Net earnings (loss) 12.2 14.3 (9.3) 185.0 155.9
Net earnings (loss) applicable to common stock (a) 12.2 14.3 (9.3) 185.0 149.1
Per common share - basic (b) 0.30 0.36 (0.23) 4.55 3.81
Per common share - diluted (b) 0.30 0.36 (0.23) 4.50 3.61
Dividends declared per share of common stock 1.44 1.92 1.88 1.72 1.56
Capital expenditures 148.0 178.1 172.9 147.1 207.6
Aggregate cost of acquisitions 6.5 3.8 1,175.7 4.2 --
Depreciation and amortization 160.9 154.9 129.6 120.7 113.7
Average number of employees 15,472 15,561 13,406 9,280 9,188
Average number of common shares outstanding (millions) 40.2 39.9 39.8 40.6 39.1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance sheet data (December 31):
Working capital $652.8 $328.1 $473.9 $201.3 $215.8
Net property, plant and equipment 1,253.5 1,292.0 1,337.0 885.6 871.8
Total assets 3,874.6 3,981.4 4,086.8 2,296.4 2,049.7
Liabilities subject to compromise 2,385.2 -- -- -- --
Net long-term debt (c) 56.8 1,389.1 1,537.2 223.1 219.4
Total debt as a percentage of total capital (d) 10.9% 70.8% 72.6% 39.1% 36.8%
Shareholders' equity $665.1 $679.2 $709.7 $810.6 $790.0
Book value per share of common stock 16.30 16.87 17.57 20.20 19.19
Number of shareholders (e) 6,899 6,515 6,868 7,137 7,424
Common shares outstanding (millions) 40.8 40.3 39.8 40.1 41.2
Market value per common share $2.06 $33.38 $60.31 $74.75 $69.50
Notes:
Prior period amounts reflect reclassifications to conform with Emerging Issue
Task Force Issue Nos. 00-010 and 00-014 (See Note 2) and are presented on a
continuing operations basis.
(a) After deducting preferred dividend requirements and adding the tax benefits
for unallocated preferred shares.
(b) See definition of basic and diluted earnings per share in Note 2 to the
consolidated financial statements.
(c) 2000 net long-term debt excludes debt subject to compromise.
(d) Total debt includes short-term debt, current installments of long-term
debt, long-term debt and ESOP loan guarantee. Total capital includes total
debt and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 6,000 to 6,500 employees for 1996.
18
From 1996 to July 1998, ceramic tile results were reported under the equity
method, whereas prior to 1996, ceramic tile operations were reported on a
consolidated or line item basis. From July 1998 to November 1998, ceramic tile
operations were reported under the cost method.
Beginning in 1998, consolidated results include Armstrong's acquisitions of
Triangle Pacific and DLW.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis corresponds to AHI financial statements.
Since there are no material differences between the financial statements of AHI
and Armstrong, the following discussion and analysis pertains to both AHI and
Armstrong.
2000 COMPARED WITH 1999
- -----------------------
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief ("the Filing") under Chapter 11 of the U.S.
Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The
Chapter 11 cases are being jointly administered under case numbers 00-4469,
00-4470, and 00-4471 (the "Chapter 11 Cases").
AHI, and Armstrong's other subsidiaries, including Triangle Pacific Corp., WAVE
(Armstrong's ceiling grid systems joint venture with Worthington Industries),
Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries
were not a part of the Filing.
Like other companies involved in asbestos litigation, AWI has tried a number of
different approaches to managing its asbestos liability, including negotiating
broad-based settlements of claims and supporting efforts to find a legislative
resolution. The number of new claims filed and the cost to settle claims,
however, continued to escalate. In addition, liquidity concerns increased when
Owens Corning Fiberglass filed for Chapter 11 protection on October 5, 2000.
This hurt AWI's ability to obtain ongoing financing on acceptable terms. These
were the principal factors which led to the decision to make the Filing.
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing. In addition, as a
debtor-in-possession, AWI has the right, subject to the Court's approval, to
assume or reject any executory contracts and unexpired leases in existence at
the date of the Filing. Parties having claims as a result of any such rejection
may file claims with the Court which will be dealt with as part of the Chapter
11 Cases.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Cases.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and along with AWI's operating subsidiaries are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Cases could take a significant period of time.
Financing
- ---------
The Court has approved a $300 million debtor-in-possession credit facility
provided by a bank group led by The Chase Manhattan Bank (the "DIP Facility").
AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs. As of
February 28, 2001, AWI had $96.3 million of cash and cash equivalents in
addition to cash held by its non-debtor subsidiaries. Borrowings under the DIP
facility, if any, will constitute superpriority administrative expense claims in
the Chapter 11 Cases.
20
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2000.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 29 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as
reorganization items. Accordingly, AWI recorded a total of $103.3 million as
Reorganization Costs in December 2000, consisting of:
($ millions)
----------
Adjustment of net debt and debt issue costs to expected amount
of allowed claim $ 42.0
ESOP related expenses 58.8
Professional fees 2.6
Interest income, post petition (0.3)
Other expenses directly related to bankruptcy, net 0.2
------
Total Chapter 11 reorganization costs $103.3
======
To record prepetition debt at the face value or the amount of the expected
allowed claims, AWI adjusted the amount of net debt and debt issue costs and
recorded a pre-tax expense of $42.0 million.
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. As described more
fully in Note 19, Armstrong has not permitted further employee contributions to
the ESOP. Therefore, it is expected that the ESOP will no longer have the
ability to repay Armstrong money it previously borrowed. In addition, a $15.5
million expense was recorded related to interest and tax penalty guarantees owed
to ESOP bondholders caused by the default on the ESOP bonds.
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
Discontinued Operations
- -----------------------
On May 31, 2000, Armstrong completed its sale of 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 $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.84 per share.
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001 entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. The proposed sale, while subject to certain
approvals, including that of the Court, is expected to close in June 2001.
Accordingly this segment has been classified as a discontinued operation in the
accompanying consolidated financial statements. Prior year balances and results
have been reclassified to reflect
21
the net assets and results of discontinued operations. Based on the expected net
realizable value of the business, Armstrong recorded a pretax net loss of $30.3
million in the fourth quarter of 2000, $19.5 million net of tax benefit.
Other Divestitures
- ------------------
On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in an
after tax gain of $44.1 million ($60.2 million pretax) or $1.09 per share and
was recorded in other income. The financial results of IPG were reported as part
of the floor coverings segment. The proceeds and gain are subject to a post-
closing working capital adjustment, which Armstrong expects to finalize in the
first half of 2001. Under the terms of the agreement and a related supply
agreement, Armstrong agreed to purchase some of its installation products needs
from Ardex for an initial term of eight years, subject to certain minimums for
the first five years after the sale. The agreement also calls for price
adjustments based upon changing market prices for raw materials, labor and
energy costs.
Acquisitions
- ------------
On May 18, 2000, Armstrong acquired privately-held Switzerland-based Gema
Holding AG ("Gema"), a leading manufacturer and installer of metal ceilings, for
$6 million plus certain contingent consideration not to exceed $25.5 million
based on results over the three year period ending December 31, 2002. Gema, with
annual sales of nearly $50 million, has two manufacturing sites located in
Austria and Switzerland and employs nearly 300 people. The acquisition has been
recorded under the purchase method of accounting. The purchase price has been
allocated to the assets acquired and the liabilities assumed based on the
estimated fair market value at the date of acquisition. Contingent
consideration, when and if paid, will be accounted for as additional purchase
price. The fair market value of tangible and identifiable intangible assets
acquired exceeded the purchase price by $24.2 million and this amount has been
recorded as a reduction of the fair value of property, plant, and equipment.
Financial Condition
- -------------------
As shown on the Consolidated Balance Sheets on page 39, Armstrong had cash and
cash equivalents of $156.5 million at December 31, 2000, compared with $17.2
million at the end of 1999. The ratio of current assets to current liabilities
was 3.24 to 1 as of December 31, 2000, compared with 1.47 to 1 as of December
31, 1999. The increases were primarily related to the Chapter 11 filing.
Long-term debt, excluding Armstrong's guarantee of an ESOP loan and debt subject
to compromise, was $56.8 million, or 7.6 percent of total capital at December
31, 2000, compared with $1,389.1 million, or 59.7 percent of total capital, at
the end of 1999. All outstanding pre-petition long-term debt of entities that
filed for Chapter 11 protection has been classified as liabilities subject to
compromise at December 31, 2000. At December 31, 2000, and December 31, 1999,
ratios of total debt (including Armstrong's guarantee of an ESOP loan and
excluding debt subject to compromise) as a percent of total capital were 10.9
percent and 70.8 percent, respectively. Given the current accounting of
liabilities as subject to compromise, the comparison is not meaningful.
As shown on the Consolidated Statements of Cash Flows on page 41, net cash
provided by operating activities for the year ended December 31, 2000, was $41.8
million compared with $338.1 million in 1999. The decrease was due to several
items including lower net income excluding the gain on sale of businesses and
changes in working capital, primarily accounts payable and accrued expenses.
Net cash provided by investing activities was $179.3 million for the year ended
December 31, 2000, compared with net cash used for investing activities of $62.0
million in 1999. The increase was primarily due to proceeds from the sales of
businesses in 2000.
Net cash used for financing activities was $78.1 million for the year ended
December 31, 2000, compared with $281.9 million in 1999. The decrease was
primarily due to net debt payments of $24.1 million in 2000 compared with net
debt payments of $202.1 million in 1999.
DIP Facility
- ------------
The Court has approved a $300 million debtor-in-possession financing facility to
be provided by a bank group led by the Chase Manhattan Bank. Borrowings under
the DIP Facility constitute superpriority administrative expense claims in the
Chapter 11 Cases. As of December 31, 2000, AWI has borrowed $5.0 million under
the DIP Facility. The DIP Facility expires no later than December 6, 2002 and
borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. Depending on the amount of borrowings, the DIP Facility carries a interest
rate range of either Chase's Alternate Bank Rate plus 50 basis points to 100
basis points or LIBOR plus 150 basis points to 200 basis
22
points. The DIP Facility also contains several covenants including, among other
things, limits on asset sales, capital expenditures and a required ratio of debt
to cash flow. Prior to final Court approval of the DIP Facility, which was
obtained on February 7, 2001, AWI had preliminary available borrowings of $145
million as of December 31, 2000.
Asbestos-related litigation
- ---------------------------
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Item 1 for further discussion.
Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.
Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.
In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.
Personal Injury Litigation
- --------------------------
Nearly all the asbestos-related personal injury lawsuits brought against AWI
relate to alleged exposure to asbestos-containing high-temperature insulation
products. The majority of these claims seek compensatory and punitive damages.
Claims may arise many years after first exposure to asbestos in light of the
decades long latency period for asbestos-related injury. Product identification
and determining exposure periods are difficult and uncertain. Over the long
history of asbestos litigation involving hundreds of companies, various parties
have tried to secure 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. AWI 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 from various jurisdictions and has been receptive to different
approaches to the resolution of claims. Claims filed in state courts have not
been directly affected by the transfer.
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 AWI. It was designed to establish a
nonlitigation system for the resolution of those 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 September 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.
23
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
- ----------------------------------------------------------------------
("Center")
- ----------
The Facility was established in 1985 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 AWI. At the
time of the Filing, there were 16 members of the Center, including AWI.
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 among the member companies; adjustments over time due to
the departure of some members and other factors resulted in some increased share
for AWI.
As a result of the Filing, AWI is no longer an active participant in the Center.
The extent and amount of AWI liabilities as a result of its participation in the
Center have not been determined, but will be determined in AWI's Chapter 11
Case.
Number of Claims
- ----------------
The number of claims naming AWI as a defendant ranged from about 16,400 to
31,100 per year during the period from 1989 to 1997. However, subsequent to this
time and up to the Filing, claim filings significantly surpassed this average as
approximately 87,500 and 50,700 claims were filed in 1998 and 1999 respectively.
AWI had expected the number of claims to decline in 2000. However, during the
first eleven months of 2000 prior to the Filing, the Center received and
verified approximately 53,000 claims. Claims from major, established law firms
did decline, but this decline was more than offset by claims from new or
previously low-volume law firms.
Before filing under the Bankruptcy Code, AWI pursued broad-based settlements of
claims through the Center. The Center had reached Strategic Settlement Program
("SSP") agreements with law firms that covered approximately 130,000 claims that
named AWI as a defendant, including agreements with 17 law firms covering
approximately 36,800 claims during the first eleven months of 2000. These
agreements typically provided for multiyear payments for settlement of current
claims and established 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 established fixed settlement values for
different asbestos-related medical conditions which were subject to periodic
re-negotiation over a period of 2 to 5 years. The plaintiff law firms were
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provided
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 could terminate an agreement with an individual law firm if
a significant number of that firm's clients elect not to participate under the
agreement. For some agreements, the component of the agreement that covered
future claims was subject to re-negotiation if members left the Center. As a
result of the Filing, AWI's obligations with respect to these settlements will
be determined in the context of its Chapter 11 Case.
Fourth Quarter 2000 Events
- --------------------------
On October 5, 2000, Owens Corning Fiberglass ("OCF"), a manufacturer of
insulation, filed for protection under Chapter 11 of the Bankruptcy Code to
address its asbestos liability. This filing adversely impacted AWI's
negotiations to obtain a 364-day credit facility which were underway at the
time. This credit facility was to replace an existing $450 million credit
facility that expired on October 19, 2000. Following the OCF filing, the
potential participants in the new credit facility decided to reevaluate their
credit exposures to AWI, primarily due to AWI's asbestos liability. AWI could
not reach agreement on a new facility with acceptable terms. The existing $450
million credit facility expired on October 19, 2000.
Additionally, AWI was concerned that a possible upward bias in the settlement
demands of asbestos plaintiffs would occur given the exit from the tort system
of OCF, an important defendant in asbestos litigation.
As set forth above, AWI filed for relief under Chapter 11 of the Bankruptcy Code
on December 6, 2000. As a result, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from filing new lawsuits against
AWI. In addition, AWI ceased making payments with respect to asbestos claims,
including payments pursuant to the outstanding SSP agreements. A separate
creditors committee representing the interests of asbestos claimants has been
appointed in the Chapter 11 Cases.
24
As a result of the Filing, AWI's present and future asbestos liability will be
addressed in the Chapter 11 Case rather than through the Center and a multitude
of lawsuits in different jurisdictions throughout the U.S. AWI believes that the
Chapter 11 process provides it with the opportunity to change its approach to
its asbestos liability and comprehensively address that liability in one forum.
It is anticipated that all present and future asbestos claims will be resolved
in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, 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,
AWI estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate was highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that could affect the range of the
liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The balance at December 31, 2000 is $690.6 million. It is reasonably
possible, however, that the actual liability could be significantly higher than
the recorded liability. As the Chapter 11 Cases proceed there should be more
clarity as to the extent of the liability to be addressed in the Chapter 11
Cases.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 that were filed by public and private building owners. These
cases present allegations of damage to the plaintiffs' 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. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Coverage
- ------------------
During relevant time periods, AWI purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., the former
subsidiary of AWI discussed above under "Background". AWI 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.
25
Wellington Agreement
- --------------------
In 1985, AWI 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 and
nonproducts (general liability) coverages. Most of AWI resolutions of
asbestos-related personal injury products hazard coverage matters with its
solvent carriers has been achieved through the Wellington Agreement or other
settlements.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI'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 AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, 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 AWI 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, AWI
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to AWI on a number of issues related to
insurance coverage. However, during the fourth quarter of 2000, a new trial
judge was selected for the ADR. AWI is uncertain at this time as to the impact,
if any, this change will have on the preliminary decisions of the initial phases
of the ADR. Further, management believes that one of the carriers has been
experiencing financial difficulties, which could affect its ability to pay any
ultimate judgment. AWI has not adjusted the recorded asset amount at December
31, 2000 related to this carrier. Because of the continuing ADR process and the
possibilities for appeal on certain matters, AWI has not yet completely
determined the financial implications of the ADR proceedings.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of December 31, 2000. Of the total recorded
asset, approximately $77.2 million represents partial settlement for previous
claims that 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 AWI's
belief in the availability of insurance in this amount, based upon AWI'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, activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS and the financial condition of the
insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $86 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $32.2 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.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Income Statement Charges
- ------------------------
AWI recorded charges to increase its estimate of probable asbestos-related
liability by $236.0 million in the second quarter of 2000, $335.4 million in
1999 and $274.2 million in 1998. Prior to 1998, charges to increase the
liability were effectively offset by corresponding increases in related
insurance recoveries.
26
Cash Flow Impact
- ----------------
AWI paid $226.9 million for asbestos-related claims in the first eleven months
of 2000 compared to $173.0 million in all of 1999. AWI received $27.7 million in
asbestos-related insurance recoveries during 2000 compared to $58.7 million
during 1999. During the pending Chapter 11 cases, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation and the impact of the ADR proceedings on the
insurance asset. Accordingly, AWI is not revising its previously recorded
liability. However, it is reasonably possible that AWI's total exposure to
personal injury asbestos claims may be significantly different than the recorded
liability.
Consolidated Results
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The following discussions of consolidated results are on a continuing operations
basis.
Net sales in 2000 of $3.00 billion were 1.5% lower when compared with net sales
of $3.05 billion in 1999. Excluding the impact of unfavorable foreign exchange
rates in 2000 and the divestitures of the gasket and textile businesses in 1999,
Armstrong sales were $65.2 million, or 2.2%, above the prior year. Floor
coverings sales decreased 7.5%; Building products sales increased 5.4%; Wood
products sales increased by 7.9%. Further excluding the 1999 divestitures, sales
increased 1.0% in the Americas and declined 3.1% in the Pacific Area. European
sales decreased 3.3% but would have increased 10.4% without the impact of
unfavorable foreign exchange rates.
The loss from continuing operations in 2000 was $89.0 million or $2.21 per
share. This included an after-tax charge of $153.4 million to increase the
estimated liability for asbestos-related claims and an after-tax gain of $44.1
million from the sale of the Installation Products Group ("IPG"), which was part
of the floor coverings segment.
Also included in 2000 was a pre-tax restructuring charge of $19.4 million, of
which $8.6 million related to severance and enhanced retirement benefits for
more than 180 positions (approximately 66% related to salaried positions) within
the European Flooring business. Restructuring actions also included staff
reductions due to the elimination of administrative positions, the consolidation
and closing of sales offices in Europe and the closure of the Team Valley,
England commercial tile plant. $2.6 million of the restructuring charge related
to severance and enhanced retirement benefits for 15 salaried positions due to
cost savings initiatives. These 15 eliminated positions were primarily in the
U.S. The remaining $8.2 million of the restructuring charge primarily related to
the remaining payments on a noncancelable operating lease for an office facility
in the U.S. The employees who occupied this office facility are being relocated
to the corporate headquarters. In addition, $1.4 million of the remaining
accrual for the 1998 restructuring charge was reversed during 2000, comprising
certain severance accruals that were no longer necessary as certain individuals
remained employed by Armstrong. An additional restructuring charge of $5.4
million, covering 54 salaried positions, will be recorded in the first quarter
of 2001 to continue these cost savings initiatives.
Armstrong also recorded $17.6 million to cost of goods sold in 2000 for
write-downs of inventory and production-line assets that were not categorized as
restructuring costs. The inventory write-downs were relat