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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, 2001
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
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Common Stock ($1 par value) New York Stock Exchange, Inc.
Preferred Stock Purchase Rights
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
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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
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9-3/4% Debentures Due 2008 New York Stock Exchange, Inc.
7.45% Senior Quarterly Interest Bonds Due 2038
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 ($3.40 per share) on the New York
Stock Exchange (trading symbol ACK) on February 15, 2002, was approximately
$117.2 million. As of February 15, 2002, the number of shares outstanding of
registrant's Common Stock was 40,702,072. This amount includes the 1,911,533
shares of Common Stock as of December 31, 2001, held by JPMorgan Chase Bank, as
Trustee for the employee stock ownership accounts of the Company's Retirement
Savings and Stock Ownership Plan.
Documents Incorporated by Reference
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None
2
TABLE OF CONTENTS
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SECTION PAGES
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Cautionary Factors ...................................................................... 4 - 5
PART I
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Item 1. Business ................................................................................ 6 - 13
Item 2. Properties .............................................................................. 14
Item 3. Legal Proceedings ....................................................................... 14 - 17
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 18
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............... 19
Item 6. Selected Financial Data ................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 21 - 38
Item 7a. Quantitative and Qualitative Disclosure about Market Risk ............................... 39 - 40
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Schedules ...................................... 41
Quarterly Financial Information .................................................. 42 - 43
Armstrong Holdings, Inc. and Subsidiaries ........................................ 44 - 81
Armstrong World Industries, Inc. and Subsidiaries ................................ 82 - 118
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 119
PART III
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Item 10. Directors and Executive Officers ........................................................ 120 - 123
Item 11. Executive Compensation .................................................................. 124 - 130
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 130 - 131
Item 13. Certain Relationships and Related Transactions .......................................... 131
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................... 132 - 139
3
Cautionary Factors That May Affect Future Results
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(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, we 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 we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
We 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 we make 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 our 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 our businesses.
. Factors relating to Armstrong World Industries, Inc.'s ("AWI") 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-possesion credit facility (the "DIP Facility").
. Claims of undetermined merit and amount have been asserted against us 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 our revenues and earnings are exposed to changes in foreign
currency exchange rates. Where practical, we try to reduce these effects by
matching local currency revenues with costs and local currency assets with
liabilities. We also manage foreign exchange risk with foreign currency
forward contracts and with purchased foreign currency options.
. Notwithstanding our efforts to foresee and plan for the effects of changes
in fiscal circumstances, we cannot predict with certainty all changes in
currency and interest rates, inflation or other related factors affecting
our businesses. For example, an economic downturn may lead our customers to
delay or cancel construction plans. 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 our competitors or suppliers could affect our
competitive position in the hard surface floor covering, textile and sports
flooring, wood flooring, ceiling system and wood cabinet businesses.
Similarly, combinations or alliances among our major customers could
increase their purchasing power in dealing with us. And, of course, if we
should enter into one or more business combinations, our business, finances
and capital structure could be affected.
4
. 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, 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 our products
in various parts of the world.
. Revenues and earnings could be affected by the extent to which we
successfully achieve integration of and synergies from acquisitions.
. Availability of raw materials, energy, water and sourced products due to
changes in business and legal conditions that impact our suppliers,
including environmental conditions, laws and regulations, litigation
involving our suppliers and/or business decisions made by our suppliers
could affect future results.
. Revenues and earnings could be affected by business decisions and business
conditions that impact our major customers and distribution network.
5
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 flooring products
(resilient, wood, carpeting and sports flooring), as well as 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
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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. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
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 unless
specifically authorized by the Court. 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 Case.
Three creditors' committees, one representing asbestos personal injury
claimants, one representing asbestos property damage claimants, and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. 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 Case.
During the fourth quarter of 2001, U.S. Third Circuit Court of Appeals assigned
U.S. District Judge Alfred M. Wolin of New Jersey to preside over the Chapter 11
Case in the District of Delaware. Judge Wolin also presides over four other
asbestos-related Chapter 11 cases pending in the District of Delaware. Judge
Wolin retained issues relating to asbestos personal injury claims and referred
other asbestos-related issues and bankruptcy-related matters to U.S. Bankruptcy
Judge Randall J. Newsome.
AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. 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 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 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.
6
AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.
Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain specified claims. A bar date is the date by which claims
against AWI must be filed if the claimants wish to participate in any
distribution from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002 and for
claims from several environmental agencies until the second quarter of 2002. In
March 2002, the Court ruled that the time to file claims related to asbestos
property damage would not be further extended, but allowed certain alleged
holders of asbestos property damage claims to file a class proof of claim
against AWI. Upon such filing, the Court will later determine whether the
proposed class should be certified. A bar date for asbestos-related personal
injury claims has not been set.
Approximately 4,400 proofs of claim totaling approximately $6.0 billion alleging
a right to payment from AWI were filed with the Court in response to the August
31, 2001 bar date, which are discussed below. AWI continues to investigate
claims to determine their validity. The Court will ultimately determine
liability amounts that will be allowed as part of the Chapter 11 process
In its ongoing review of the filed claims, AWI already identified and
successfully objected to approximately 900 claims totaling $1.4 billion. These
claims were, primarily, duplicate filings, amendments to previously filed claims
or claims that are not related to AWI. The Court disallowed these claims with
prejudice in January 2002.
In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.9 billion were filed with the Court that are
associated with asbestos-related personal injury litigation, including direct
personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWI's participation in the Center for
Claims Resolution ("the Center"). As stated above, the bar date of August 31,
2001 did not apply to asbestos-related personal injury claims. AWI will address
all asbestos-related claims in the future within the Chapter 11 process. See
further discussion regarding AWI's liability for asbestos-related matters in
Item 3.
Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage were filed with the Court. Most of these claims
are new to AWI and many were submitted with insufficient documentation to assess
their validity. AWI has petitioned the Court to disallow approximately 50 claims
totaling approximately $0.5 billion. AWI expects to continue vigorously
defending any asserted asbestos-related property damage claims in the Court. AWI
believes that it has a significant amount of existing insurance coverage
available for asbestos-related property damage liability, with the amount
ultimately available dependent upon, among other things, the profile of the
claims that may be allowed by the Court. AWI's history of property damage
litigation prior to the Chapter 11 filing is described in Item 3.
Approximately 2,000 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims were filed
with the Court. AWI has identified approximately 200 of these claims totaling
approximately $20 million that it believes should be disallowed by the Court.
For these categories of claims, AWI has previously recorded approximately $1.6
billion in liabilities. AWI continues to investigate the claims to determine
their validity.
AWI continues to evaluate claims. AWI has recorded liability amounts for those
claims that can be reasonably estimated and for which it believes are probable
of being allowed by the Court. At this time, it is impossible to reasonably
estimate the value of all the claims that will ultimately be allowed by the
Court. However, it is likely the value of the claims ultimately allowed by the
Court will be in excess of amounts presently recorded by AWI and will be
material to AWI's financial position and the results of its operations. However,
AWI is not able to determine a range of possible liability with any reasonable
degree of accuracy, due to the uncertainties of the Chapter 11 process, the
in-progress state of AWI's investigation of submitted claims and the lack of
documentation submitted in support of many claims.
7
Financing
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As of December 31, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$193.8 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of December 31, 2001, AWI had approximately $8.4
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute superpriority administrative expense
claims in the Chapter 11 Case. The DIP Facility is scheduled to expire on
December 6, 2002.
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.
This guidance is implemented in the accompanying consolidated 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 in the Consolidated Financial Statements for detail of the liabilities
subject to compromise at December 31, 2001 and 2000. Liabilities that may be
affected by a plan of reorganization are recorded at the expected amount of the
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 estimated liability for personal
injury asbestos claims is also recorded in liabilities subject to compromise.
See Item 3 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 costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the fourth quarter and full year of 2001:
Three Months Ended Year Ended
(millions) December 31, 2001 December 31, 2001
- ---------- -------------------- -------------------
Professional fees $ 7.3 $ 24.5
Interest income, post petition (1.1) (5.1)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net 0.1 1.0
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Total Chapter 11 reorganization costs, net $ 6.3 $ 12.5
======= =======
Professional fees represent legal and financial advisory fees and 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.
Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.
Termination of prepetition lease obligation represents the reversal of an
accrual for future lease payments for office space in the U.S. that AWI will not
pay due to the rejection of the lease contract in the Chapter 11 Case. This
amount was previously accrued in the third quarter of 2000 as part of a
restructuring charge when the decision to vacate the premises was made.
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 consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.
8
Discontinued Operations
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In February 2001, AHI 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. Based on these events, the segment was classified as a
discontinued operation starting with the fourth quarter of 2000. On June 12,
2001, negotiations with this investor were terminated. During the third quarter
of 2001, AHI terminated its plans to permanently exit this segment. This
decision was based on the difficulty encountered in selling the business and a
new review of the business, industry and overall economy conducted by new senior
management. Accordingly, this segment is no longer classified as a discontinued
operation and amounts have been reclassified into operations as required by
Emerging Issues Task Force ("EITF") Issue No. 90-16 - "Accounting for
Discontinued Operations Subsequently Retained". All previous periods have been
reclassified to conform to the current presentation.
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 $2.86 per share
in 2000.
See Note 6 in the Consolidated Financial Statements for further discussion of
discontinued operations.
Industry Segments
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Financial Information about Industry Segments
- ---------------------------------------------
See Note 3 in the Consolidated Financial Statements for financial information on
Armstrong's reportable industry segments.
Narrative Description of Business
- ---------------------------------
Armstrong conducts its business through the following business segments:
Resilient Flooring
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Armstrong is a worldwide manufacturer of a broad range of resilient floor
coverings for 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.
Resilient flooring 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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The Building Products segment includes commercial and residential ceiling
systems. 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. Ceiling materials for the home
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). Framework (grid) products for
Armstrong suspension ceiling systems products are manufactured through a joint
venture with Worthington Industries and are sold by both Armstrong and the joint
venture.
Wood Flooring
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The Wood Flooring segment manufactures and distributes wood and other flooring
products. The Wood Flooring segment 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.
Wood Flooring sales are generally made through independent wholesale flooring
distributors and retailers (including large home centers and buying groups)
under the brand names Bruce, Hartco and Robbins.
Cabinets
- --------
The Cabinets segment manufactures kitchen and bathroom cabinetry and related
products, which are used primarily in residential new construction and
remodeling. Cabinets are sold through both independent and Armstrong-owned
distributors under the brand names Bruce and IXL.
9
Textiles & Sports Flooring
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The Textiles and Sports Flooring business segment manufactures carpeting and
sports flooring products that are mainly sold in Europe. The carpeting products
consist principally of carpet tiles and broadloom used in commercial
applications as well as the leisure and travel industry. The sports flooring
products include artificial turf surfaces and indoor gymnasium floors. Both
product groups are sold through wholesalers, retailers and contractors.
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, in 2001,
Armstrong sales to The Home Depot, Inc. totaled approximately $340.8 million
compared to approximately $373.2 million and $344.8 million in 2000 and 1999,
respectively. No other customer accounted for more than 10% of Armstrong's
revenue.
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 in each business include:
Business Principal Raw Materials
- -------------------------- --------------------------------------------------
Resilient Flooring Synthetic resins, plasticizers, PVC, latex,
linseed oil, limestone, films, pigments and inks
Building Products Mineral fibers and fillers, clays, starches,
newspaper, and perlite, as well as steel used in
the production of metal ceilings and manufacturing
of ceiling grids
Wood Flooring Lumber, veneer, acrylics, and plywood
Cabinets Lumber, veneer, plywood, particleboard and
fiberboard
Textiles and Sports Yarn, latex, bitumen and wool
Flooring
Armstrong also purchases significant amounts of packaging materials for all
products and uses substantial amounts of energy such as electricity and natural
gas and water in our manufacturing operations. In general, adequate supplies of
raw materials were available to all of Armstrong's businesses. Armstrong cannot
guarantee that a significant shortage of one raw material or another will not
occur, however.
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 manufactures product to meet delivery dates specified in
orders. As a result, there historically has been no material backlog in any
industry segment.
Patent 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.
10
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 Ceramaguard,
Cirrus, Corlon, Cortega, Designer Solarian, Excelon, Fundamentals, i-Ceilings,
Medintech, Minatone, Natural Inspirations, Second Look, Swiftlock, ToughGuard,
Traffic Zone, Travertone 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. Over recent
years, there has continued to be excess production capacity in many geographic
markets, which tends to increase price competition.
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 $56.3 million in 2001, $60.3 million in 2000 and $48.9 million
in 1999 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 $8.4
million in 2001, $6.2 million in 2000 and $5.5 million in 1999 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. AWI's payments and
remediation work on such sites for which AWI is the potentially responsible
party is under review in light of the Chapter 11 Filing. The bar date for claims
from several environmental agencies has been extended into the second quarter of
2002.
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 Case also may
affect the ultimate amount of such contributions.
11
Liabilities of $16.6 million at December 31, 2001 and $15.4 million at December
31, 2000 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, 2001 and 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
Chapter 11 Case.
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.
Employees
- ---------
As of December 31, 2001, we had approximately 16,700 full and part-time
employees around the world, of whom approximately 5,100 are located outside of
the United States. About 52% of the approximately 8,500 hourly or salaried
production and maintenance employees in the United States are represented by
labor unions.
Armstrong employee and labor relations remained good in 2001. In the fall of
2001, Armstrong concluded negotiation of a collective bargaining agreement with
the International Association of Machinists and Aerospace Workers at its
Lancaster, Pennsylvania plant. Throughout 2002, Armstrong will begin individual
negotiations of several collective bargaining agreements covering most of its
other represented locations.
Geographic Areas
- ----------------
See Note 3 in the 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, to certain exchange and
currency controls, and to the effects of currency fluctuations.
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").
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.
12
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.
13
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 50 manufacturing plants in 15 countries. Twenty-nine of
these facilities are located throughout the United States. In addition,
Armstrong has an interest through joint ventures in 9 additional plants in 5
countries.
Number of
Business Segment Plants Location of Principal Facilities
- ---------------- ----------- -----------------------------------------
Resilient Flooring 14 California, Illinois, Oklahoma, Pennsylvania,
Canada, Germany, Sweden and the U.K.
Building Products 15 Alabama, Florida, Georgia, Oregon, Pennsylvania,
China, France, Germany and the U.K.
Wood Flooring 13 Arkansas, Tennessee, Texas and West Virginia
Cabinets 3 Nebraska, Pennsylvania and Tennessee
Textiles and 5 Belgium, Germany and The Netherlands
Sports Flooring
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.
Armstrong believes its facilities have sufficient productive capacity to meet
its current and anticipated future needs. Armstrong believes that its 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 final resolution
of its asbestos liability.
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
14
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.
Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury claims through the Center for
Claims Resolution (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. As a result of the Filing, AWI's
obligations with respect to payments called for under these settlements will be
determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos-related personal injury claims are stayed
from continuing to prosecute pending litigation and from commencing new lawsuits
against AWI. In addition, AWI ceased making payments with respect to
asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed in the
Chapter 11 Case.
AWI's present and future asbestos liability will be addressed in its 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 comprehensively address its asbestos-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.
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 cost 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-related personal injury 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 had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. 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 asbestos-related personal injury liability balance recorded at
December 31, 2001 and December 31, 2000 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability.
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-related personal
injury 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. On March 28, 2001,
the surety filed an amended complaint in the Court seeking similar relief. The
Center has filed a motion to dismiss the amended complaint. The Court has not
yet ruled on the Center's motion or the complaint. In addition, on April 27,
2001, AWI filed a complaint and a motion with the Court seeking an order, among
other things, enjoining the Center from drawing on the bond or, in the event the
Center is permitted to draw on the bond, requiring that the proceeds of any such
draw be deposited into a Court-approved account subject to further order of the
Court. Recently, Judge Alfred M. Wolin of the Federal District Court
15
for the District of New Jersey, who is also presiding over AWI's Chapter 11
Case, indicated he would determine these matters. Judge Wolin has not yet ruled
on these matters.
Asbestos-Related property Damage Litigation
- -------------------------------------------
Over the years, AWI was one of many defendants in asbestos-related property
damage claims that were filed by public and private building owners, with six
claims pending as of June 30, 2001. The previous claims that were resolved prior
to the Filing resulted in aggregate indemnity obligations of less than $10
million. To date, all payments of these obligations have been entirely covered
by insurance. The pending 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 stayed due to the Filing. In March 2002, the Court allowed
certain alleged holders of asbestos property damage claims to file a class proof
of claim against AWI. Upon such filing, the Court will later determine whether
the proposed class should be certified. Consistent with prior periods and due to
increased uncertainty, AWI has not recorded any liability related to these
claims as of December 31, 2001. See Item 1 for further discussion of the
property damage claims received by the August 31, 2001 claims bar date in the
Chapter 11 Case. A separate creditors' committee representing the interests of
property damage asbestos claimants has been appointed in the Chapter 11 Case.
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 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.
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 first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. One of the
insurance carriers, Reliance Insurance Company, was placed under an order of
rehabilitation by a state insurance department during May 2001 and an order of
liquidation during October 2001.
Another insurer (Century Indemnity Company), who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI assumes the agreement; (3) declare that the insurer is entitled to
indemnification from AWI against any liabilities that the insurer may incur in
certain unrelated litigation in which the insurer is involved; and (4) enjoin
the disposition of funds previously paid by the insurer to the trust pending an
adjudication of the insurer's rights. AWI believes it is highly unlikely the
insurer will prevail in this matter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of December 31, 2001 compared to $268.3 million
as of December 31, 2000. The reduction is due to cash receipts during the second
and third quarters of 2001 and management's current assessment of probable
insurance recoveries, which included the order of liquidation for Reliance
Insurance Company. Of the total recorded asset at December 31, 2001,
approximately $49.0 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
16
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. 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 (the former AWI
insulation contracting subsidiary that was sold in August 1969) and the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 million of the $214.1 million asset is
determined from agreed coverage in place and is therefore directly related to
the amount of the liability. Of the $214.1 million asset, $22.0 million has been
recorded as a current asset as of December 31, 2001 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
increase 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 recorded asset may extend beyond 10 years.
Cash Flow Impact
- ----------------
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in December 2000 and all of 2001. In the first eleven
months of 2000, AWI paid $226.9 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during 2001
compared to $27.7 million in 2000. During the pendency of the Chapter 11 Case,
AWI does not expect to make any further cash payments for asbestos-related
claims, but AWI expects to 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, the impact of the ADR proceedings on the insurance
asset and the financial condition of AWI's insurance carriers. AWI has not
revised its previously recorded liability for asbestos-related personal injury
claims. During 2001, AWI reduced its previously recorded insurance asset by
$32.2 million for cash receipts and by $22.0 million for management's current
assessment of probable insurance recoveries. The $22.0 million reduction was
recorded as a charge for asbestos liability, net, in the accompanying
consolidated statement of earnings. AWI will continue to review its
asbestos-related liability periodically, although it is likely that no changes
will be made to the liability until later in the Chapter 11 Case as significant
developments arise. Although not estimable, it is likely that AWI's total
exposure to asbestos-related personal injury claims will be significantly higher
than the recorded liability. Any adjustment to the estimated liability or
insurance asset could be material to the financial statements.
Environmental Matters
- ---------------------
See discussion of Environmental Matters under Item 1 of this report.
Other Litigation
- ----------------
About 350 former Armstrong employees that were separated in two divestitures in
2000 have brought a purported class action against the Retirement Committee of
AWI, named and unnamed members of the Retirement Committee, and the Retirement
Savings and Stock Ownership Plan (RSSOP). The case is pending in the United
States District Court (Eastern District of PA). A similar proof of claim has
been filed against AWI in the Chapter 11 Case. Plaintiffs allege breach of
Employee Retirement Income Security Act (ERISA) fiduciary duties and other
violations of ERISA pertaining to losses in their RSSOP accounts, which were
invested in Armstrong common stock. Losses are alleged to be in the range of
several million dollars. AHI believes there are strong substantive defenses to
the allegations.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
AHI's Annual Meeting of Shareholders was held December 10, 2001. The only matter
addressed at the meeting was the election of three directors. The following
three directors whose terms expired at the 2001 annual meeting were re-elected:
Judith R. Haberkorn; James E. Marley; Jerre L. Stead. Continuing directors
include: H. Jesse Arnelle; Donald C. Clark; Michael D. Lockhart; Van C.
Campbell; John A. Krol; David W. Raisbeck; M. Edward Sellers.
The following table shows the voting tallies for each of the nominees:
---------------------------------------------------------------------------------------------------
Director Votes cast for Votes withheld/cast Number of abstentions and
against broker non-votes
---------------------------------------------------------------------------------------------------
Judith R. Haberkorn 29,427,301 968,156 0
---------------------------------------------------------------------------------------------------
James E. Marley 29,443,375 952,082 0
---------------------------------------------------------------------------------------------------
Jerre L. Stead 29,426,391 969,066 0
---------------------------------------------------------------------------------------------------
18
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.
As of February 15, 2002, there were approximately 7,213 holders of record of
Armstrong Holding's Common Stock.
During 2001, Armstrong issued a total of 2,472 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.
2001 First Second Third Fourth Total Year
---- --------- ---------- --------- ---------- --------------
Dividends per share of common stock $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Price range of common stock--high $ 5.69 $ 4.05 $ 3.74 $ 3.80 $ 5.69
Price range of common stock--low $ 2.06 $ 3.20 $ 2.20 $ 2.34 $ 2.06
2000
----
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
The DIP Facility stipulates that AWI will not declare or pay any dividends,
directly or indirectly.
Pursuant to a review of the stock exchange listings of AHI, management concluded
that the listing with the New York Stock Exchange is sufficient to maintain an
effective and liquid market for AHI's securities. On February 25, 2002, the
Board of Directors authorized management to voluntarily de-list AHI's common
stock from the Philadelphia and Pacific stock exchanges.
19
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following data is presented for continuing operations.
(Dollars in millions except for per-share data) For Year 2001 2000 1999 1998 1997
- -------------------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Income statement data:
Net sales $ 3,135.4 $ 3,249.4 $ 3,322.9 $ 2,592.9 $ 2,115.4
Cost of goods sold 2,361.8 2,384.8 2,290.5 1,805.7 1,498.3
Selling, general and administrative expenses 596.2 597.2 607.8 447.8 309.2
Charge for asbestos liability, net 22.0 236.0 335.4 274.2 --
Restructuring and reorganization charges (reversals), net 9.0 18.8 (1.4) 74.4 --
Goodwill amortization 22.8 23.9 25.5 10.7 1.6
Equity (earnings) loss from affiliates, net (16.5) (18.0) (16.8) (13.8) 29.7
---------- ----------- ---------- ---------- ----------
Operating income (loss) 140.1 6.7 81.9 (6.1) 276.6
Interest expense 13.1 102.9 105.2 62.2 28.0
Other (income), net (1.2) (76.7) (6.6) (1.7) (2.2)
---------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations before
Chapter 11 reorganization costs and income taxes 128.2 (19.5) (16.7) (66.6) 250.8
Chapter 11 reorganization costs, net 12.5 103.3 -- -- --
---------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations before
income taxes 115.7 (122.8) (16.7) (66.6) 250.8
Income tax expense (benefit) 42.5 (37.7) (0.5) (23.6) 94.4
---------- ----------- ---------- ---------- ----------
Earnings (loss) from continuing operations 73.2 (85.1) (16.2) (43.0) 156.4
Per common share - basic (a) 1.81 (2.12) (0.41) (1.08) 3.85
Per common share - diluted (a) 1.79 (2.12) (0.41) (1.08) 3.81
Net earnings (loss) 92.8 12.2 14.3 (9.3) 185.0
Per common share - basic (a) 2.29 0.30 0.36 (0.23) 4.55
Per common share - diluted (a) 2.27 0.30 0.36 (0.23) 4.50
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share of common stock -- 1.44 1.92 1.88 1.72
Capital expenditures 127.8 159.1 186.6 175.0 147.1
Aggregate cost of acquisitions, net of cash acquired 5.6 6.5 3.8 1,175.7 4.2
Depreciation and amortization 156.8 164.4 158.4 131.1 120.7
Average number of employees 16,777 16,456 16,912 13,865 9,280
Average number of common shares outstanding (millions) 40.5 40.2 39.9 39.8 40.6
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data (December 31):
Working capital $ 749.9 $ 610.4 $ 314.6 $ 445.4 $ 201.3
Net property, plant and equipment 1,283.7 1,321.0 1,357.5 1,411.9 885.6
Total assets 4,034.4 4,005.2 4,081.6 4,183.9 2,296.4
Liabilities subject to compromise 2,357.6 2,385.2 -- -- --
Net long-term debt (b) 50.3 56.9 1,412.9 1,562.8 223.1
Total debt as a percentage of total capital (c) 9.0% 14.3% 69.0% 73.0% 39.1%
Shareholders' equity $ 760.4 $ 665.1 $ 679.2 $ 709.7 $ 810.6
Book value per share of common stock 18.68 16.30 16.87 17.57 20.20
Number of shareholders 7,162 6,899 6,515 6,868 7,137
Common shares outstanding (millions) 40.7 40.8 40.3 39.8 40.1
Market value per common share $ 3.41 $ 2.06 $ 33.38 $ 60.31 $ 74.75
Notes:
Prior period amounts reflect reclassifications to conform with Emerging Issue
Task Force Issue Nos. 00-010, 00-014 and 00-022 (see Note 2 in the Consolidated
Financial Statements).
(a) See definition of basic and diluted earnings per share in Note 2 in the
Consolidated Financial Statements.
(b) 2001 and 2000 net long-term debt excludes debt subject to compromise.
(c) Total debt includes short-term debt, current installments of long-term debt
and long-term debt, but excludes debt subject to compromise in 2001 and
2000. Total capital includes total debt and total shareholders' equity.
From 1997 to July 1998, ceramic tile results were reported under the equity
method. 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 (now reported as Wood Flooring and
Cabinets) and DLW (included in Resilient Flooring).
20
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.
2001 COMPARED WITH 2000
- -----------------------
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. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
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 unless
specifically authorized by the Court. 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 Case.
Three creditors' committees, one representing asbestos personal injury
claimants, one representing asbestos property damage claimants, and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Case. 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 Case.
During the fourth quarter of 2001, U.S. Third Circuit Court of Appeals assigned
U.S. District Judge Alfred M. Wolin of New Jersey to preside over the Chapter 11
Case in the District of Delaware. Judge Wolin also presides over four other
asbestos-related Chapter 11 cases pending in the District of Delaware. Judge
Wolin retained issues relating to asbestos personal injury claims and referred
other asbestos-related issues and bankruptcy-related matters to U.S. Bankruptcy
Judge Randall J. Newsome.
AWI intends to address all prepetition claims, including all asbestos-related
claims, in a plan of reorganization in its Chapter 11 Case. At this time, it is
impossible to predict how such a plan will treat such claims and how a plan will
impact the value of shares of common stock of AHI. 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 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 Case could take a significant period of time. Currently, AWI
has the exclusive right to file a plan of reorganization until October 4, 2002,
and this date may be further extended by the Court.
AWI believes that progress is being made in the negotiations with the asbestos
personal injury claimants and the unsecured creditors committees with respect to
reaching resolution of the principal elements of a reorganization plan. However,
it is not possible to predict whether these negotiations will be successful.
Therefore, the timing of resolution of the Chapter 11 Case remains highly
uncertain.
Bar Date for Filing Claims
- --------------------------
The Court established August 31, 2001 as the bar date for all claims against AWI
except for certain specified claims. A bar date is the date by which claims
against AWI must be filed if the claimants wish to participate in any
distribution from the Chapter 11 Case. The Court extended the bar date for
claims from the U.S. Internal Revenue Service until March 29, 2002 and for
claims from several environmental agencies until the second quarter of 2002. In
March 2002,
21
the Court ruled that the time to file claims related to asbestos property damage
would not be further extended, but allowed certain alleged holders of asbestos
property damage claims to file a class proof of claim against AWI. Upon such
filing, the Court will later determine whether the proposed class should be
certified. A bar date for asbestos-related personal injury claims has not been
set.
Approximately 4,400 proofs of claim totaling approximately $6.0 billion alleging
a right to payment from AWI were filed with the Court in response to the August
31, 2001 bar date, which are discussed below. AWI continues to investigate
claims to determine their validity. The Court will ultimately determine
liability amounts that will be allowed as part of the Chapter 11 process
In its ongoing review of the filed claims, AWI already identified and
successfully objected to approximately 900 claims totaling $1.4 billion. These
claims were, primarily, duplicate filings, amendments to previously filed claims
or claims that are not related to AWI. The Court disallowed these claims with
prejudice in January 2002.
In addition to the objected claims described above, approximately 1,000 proofs
of claim totaling approximately $1.9 billion were filed with the Court that are
associated with asbestos-related personal injury litigation, including direct
personal injury claims, claims by co-defendants for contribution and
indemnification, and claims relating to AWI's participation in the Center for
Claims Resolution ("the Center"). As stated above, the bar date of August 31,
2001 did not apply to asbestos-related personal injury claims. AWI will address
all asbestos-related claims in the future within the Chapter 11 process. See
further discussion regarding AWI's liability for asbestos-related matters in
Item 3.
Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage were filed with the Court. Most of these claims
are new to AWI and many were submitted with insufficient documentation to assess
their validity. AWI has petitioned the Court to disallow approximately 50 claims
totaling approximately $0.5 billion. AWI expects to continue vigorously
defending any asserted asbestos-related property damage claims in the Court. AWI
believes that it has a significant amount of existing insurance coverage
available for asbestos-related property damage liability, with the amount
ultimately available dependent upon, among other things, the profile of the
claims that may be allowed by the Court. AWI's history of property damage
litigation prior to the Chapter 11 filing is described in Item 3.
Approximately 2,000 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims were filed
with the Court. AWI has identified approximately 200 of these claims totaling
approximately $20 million that it believes should be disallowed by the Court.
For these categories of claims, AWI has previously recorded approximately $1.6
billion in liabilities. AWI continues to investigate the claims to determine
their validity.
AWI continues to evaluate claims. AWI has recorded liability amounts for those
claims that can be reasonably estimated and for which it believes are probable
of being allowed by the Court. At this time, it is impossible to reasonably
estimate the value of all the claims that will ultimately be allowed by the
Court. However, it is likely the value of the claims ultimately allowed by the
Court will be in excess of amounts presently recorded by AWI and will be
material to AWI's financial position and the results of its operations. However,
AWI is not able to determine a range of possible liability with any reasonable
degree of accuracy, due to the uncertainties of the Chapter 11 process, the
in-progress state of AWI's investigation of submitted claims and the lack of
documentation submitted in support of many claims.
Financing
- ---------
As of December 31, 2001, AWI had no outstanding debt borrowings under its $200
million debtor-in-possession credit facility (the "DIP Facility") and AWI had
$193.8 million of cash and cash equivalents, excluding cash held by its
non-debtor subsidiaries. As of December 31, 2001, AWI had approximately $8.4
million in letters of credit which were issued pursuant to the DIP Facility.
Borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs.
Borrowings under the DIP Facility, if any, and obligations to reimburse draws
upon the letters of credit constitute superpriority administrative expense
claims in the Chapter 11 Case. The DIP Facility is scheduled to expire on
December 6, 2002.
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.
This guidance is implemented in the accompanying consolidated financial
statements.
22
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 in the Consolidated Financial Statements for detail of the liabilities
subject to compromise at December 31, 2001 and 2000. Liabilities that may be
affected by a plan of reorganization are recorded at the expected amount of the
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 estimated liability for personal
injury asbestos claims is also recorded in liabilities subject to compromise.
See Item 3 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 costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities in the fourth quarter and full year of 2001:
Three Months Ended Year Ended
(millions) December 31, 2001 December 31, 2001
----------------- -----------------
Professional fees $ 7.3 $ 24.5
Interest income, post petition (1.1) (5.1)
Reductions to prepetition liabilities - (2.0)
Termination of prepetition lease obligation - (5.9)
Other (income) expense directly related to bankruptcy, net 0.1 1.0
------- -------
Total Chapter 11 reorganization costs, net $ 6.3 $ 12.5
======= =======
Professional fees represent legal and financial advisory fees and 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.
Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.
Termination of prepetition lease obligation represents the reversal of an
accrual for future lease payments for office space in the U.S. that AWI will not
pay due to the rejection of the lease contract in the Chapter 11 Case. This
amount was previously accrued in the third quarter of 2000 as part of a
restructuring charge when the decision to vacate the premises was made.
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 consolidated financial statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.
Discontinued Operations
- -----------------------
In February 2001, AHI 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. Based on these events, the segment was classified as a
discontinued operation starting with the fourth quarter of 2000. On June 12,
2001, negotiations with this investor were terminated. During the third quarter
of 2001, AHI terminated its plans to permanently exit this segment. This
decision was based on the difficulty encountered in selling the business and a
new review of the business, industry and overall economy conducted by new senior
management. Accordingly, this segment is no longer classified as a discontinued
operation and amounts have been reclassified into operations as required by
Emerging Issue Task Force ("EITF") Issue No. 90-16 - "Accounting for
Discontinued Operations Subsequently Retained". All prior periods have been
reclassified to conform to the current presentation.
Based on the expected net realizable value of the business determined during the
negotiations to sell the business, AHI had recorded a pretax net loss of $34.5
million in the fourth quarter of 2000, $23.8 million net of tax benefit. AHI
also had recorded an additional net loss of $3.3 million in the first quarter of
2001, as a result of price adjustments
23
resulting from the negotiations. Concurrent with the decision to no longer
classify the business as a discontinued operation, the remaining accrued loss of
$37.8 million ($27.1 million net of tax) was reversed in the third quarter of
2001 and recorded as part of earnings from discontinued operations.
Additionally, the segment's net income of $3.1 million for the first and second
quarter of 2001 was reclassified into earnings from continuing operations for
those periods.
During the third quarter of 2001, AHI concluded there were indicators of
impairment related to certain assets in this segment, and accordingly, an
impairment evaluation was conducted at the end of the third quarter under the
guidelines of SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". This evaluation led to an
impairment charge of $8.4 million, representing the excess of book value over
estimated fair value which was determined using a net discounted cash flows
approach. The charge was included in cost of sales. The impairment was related
to property, plant and equipment that produce certain products for which AHI
anticipates lower demand in the future. Additionally, an inventory write-down of
$2.1 million was recorded in the third quarter of 2001 within cost of sales
related to certain products that will no longer be sold.
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 $2.86 per share
in 2000. During 2001, AHI recorded a pretax loss of $1.1 million related to its
divestiture of its Insulation Products segment. This loss resulted from certain
post-closing adjustments.
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 $1.10 per share and
was recorded in other income. The financial results of IPG were reported as part
of the Resilient Flooring segment. The proceeds and gain are subject to a
post-closing working capital adjustment. 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.
In November 2000, Armstrong sold a component of its Textiles and Sports Flooring
segment. As this divestiture included a business classified as held for sale
since its July 1998 acquisition, Armstrong had been recording the 2000 operating
losses of this business within selling, general and administrative ("SG&A")
expense. The overall 2000 impact was a reduction of SG&A expense of $0.7
million.
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 has
two manufacturing sites located in Austria and Switzerland and employs nearly
300 people. The acquisition was recorded under the purchase method of
accounting. The purchase price was 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 was recorded as a reduction of the fair value of property, plant, and
equipment.
During 2001, AHI spent $5.6 million to purchase some of the remaining minority
interest of already-consolidated entities within the Resilient Flooring segment.
Approximately $5.0 million of the purchase price was allocated to goodwill.
24
Financial Condition and Liquidity
- ---------------------------------
As shown on the Consolidated Balance Sheets, Armstrong had cash and cash
equivalents of $277.4 million at December 31, 2001, compared with $159.1 million
at the end of 2000. The ratio of current assets to current liabilities was 3.06
to 1 as of December 31, 2001, compared with 2.48 to 1 as of December 31, 2000.
The increases were primarily the result of: cash increases, due to no payments
on liabilities subject to compromise in 2001, except approximately $9.7 million
made to certain vendors in negotiated settlements and authorized by the Court
for payment; and $92.3 million less of interest payments during 2001 compared to
2000; and larger inventory balances; and reductions in short-term debt.
Long-term debt, excluding debt subject to compromise, was $50.3 million, or 6.0%
of total capital at December 31, 2001, compared with $56.9 million, or 7.3% of
total capital, at the end of 2000. All other outstanding prepetition long-term
debt is owed by entities that filed for Chapter 11 protection, and therefore has
been classified as liabilities subject to compromise at December 31, 2001 and
2000.
As shown on the Consolidated Statements of Cash Flows, net cash provided by
operating activities for the year ended December 31, 2001, was $272.1 million
compared with $27.8 million in 2000. The increase was primarily due to the
absence of asbestos-related claims payments in 2001.
Net cash used for investing activities was $113.9 million for the year ended
December 31, 2001, compared with cash provided by investing activities of $179.3
million in 2000. The decrease was primarily due to $329.9 million of proceeds
from the sales of businesses in 2000.
Net cash used for financing activities was $37.9 million for the year ended
December 31, 2001, compared with $70.9 million in 2000. The decrease was
primarily due to no dividend payments in 2001, compared with $58.1 million of
dividend payments in 2000, offset by net debt payments of $33.4 million in 2001
compared with net debt payments of $16.9 million in 2000.
AHI's liquidity needs for operations vary throughout the year. Therefore, AHI
retains lines of credit to draw upon as needed to meet these needs. In 2001, the
DIP Facility was available, but was not needed or used.
DIP Facility
- ------------
The Court previously approved a $300 million the DIP Facility provided by a bank
group led by the J P Morgan Chase Bank. During the second quarter of 2001, AWI
reduced the amount of the DIP Facility to $200 million. Borrowings under the DIP
Facility, if any, and obligations to reimburse draws upon the letters of credit
constitute a superpriority administrative expense claim in the Chapter 11 Case.
As of December 31, 2001, AWI had no borrowings under the DIP Facility, but had
approximately $8.4 million in letters of credit which were issued pursuant to
the DIP Facility. Borrowings are limited to an adjusted amount of receivables,
inventories and PP&E. Depending on the amount of borrowings, the DIP Facility
carries an interest rate range of either J P Morgan Chase's Alternate Bank Rate
plus 50 to 100 basis points or LIBOR plus 150 to 200 basis 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.
The DIP Facility is scheduled to expire on December 6, 2002.
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 final resolution
of its asbestos liability.
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
25
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.
Asbestos-Related Personal Injury Claims
- ---------------------------------------
Before filing for relief under the Bankruptcy Code, AWI pursued broad-based
settlements of asbestos-related personal injury claims through the Center for
Claims Resolution (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. As a result of the Filing, AWI's
obligations with respect to payments called for under these settlements will be
determined in its Chapter 11 Case.
Due to the Filing, holders of asbestos-related personal injury claims are stayed
from continuing to prosecute pending litigation and from commencing new lawsuits
against AWI. In addition, AWI ceased making payments with respect to
asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. A separate creditors' committee representing the
interests of asbestos personal injury claimants has been appointed in the
Chapter 11 Case.
AWI's present and future asbestos liability will be addressed in its 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 comprehensively address its asbestos-related
personal injury liability in one forum. It is anticipated that all present and
future asbestos-related personal injury claims will be resolved in the Chapter
11 Case.
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 cost 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-related personal injury 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 had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. 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 asbestos-related personal injury liability balance recorded at
December 31, 2001 and December 31, 2000 is $690.6 million, which is recorded in
liabilities subject to compromise. Due to the uncertainties created as a result
of the Filing and how the liability may be resolved, it is not possible to
reasonably estimate the ultimate liability. It is likely, however, that the
actual liability will be significantly higher than the recorded liability. As
the Chapter 11 Case proceeds, there should be more clarity as to the extent of
the liability.
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-related personal
injury 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. On March 28, 2001,
the surety filed an amended complaint in the Court seeking similar relief. The
Center has filed a motion to dismiss the amended complaint. The Court has not
yet ruled on the Center's motion or the complaint. In addition, on April 27,
2001, AWI filed a complaint and a motion with the Court seeking an order, among
other things, enjoining the Center from drawing on the bond or, in the event the
26
Center is permitted to draw on the bond, requiring that the proceeds of any such
draw be deposited into a Court-approved account subject to further order of the
Court. Recently, Judge Alfred M. Wolin of the Federal District Court for the
District of New Jersey, who is also presiding over AWI's Chapter 11 Case,
indicated he would determine these matters. Judge Wolin has not yet ruled on
these matters.
Asbestos-Related property Damage Litigation
- ------------------------------------------- Over the years, AWI was one of many
defendants in asbestos-related property damage claims that were filed by public
and private building owners, with six claims pending as of June 30, 2001. The
previous claims that were resolved prior to the Filing resulted in aggregate
indemnity obligations of less than $10 million. To date, all payments of these
obligations have been entirely covered by insurance. The pending 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 stayed due to
the Filing. In March 2002, the Court allowed certain alleged holders of asbestos
property damage claims to file a class proof of claim against AWI. Upon such
filing, the Court will later determine whether the proposed class should be
certified. Consistent with prior periods and due to increased uncertainty, AWI
has not recorded any liability related to these claims as of December 31, 2001.
See Item 1 for further discussion of the property damage claims received by the
August 31, 2001 claims bar date in the Chapter 11 Case. A separate creditors'
committee representing the interests of property damage asbestos claimants has
been appointed in the Chapter 11 Case.
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 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.
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 first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues. The
trial proceeding is subject to an appeal as part of the ADR process. One of the
insurance carriers, Reliance Insurance Company, was placed under an order of
rehabilitation by a state insurance department during May 2001 and an order of
liquidation during October 2001.
Another insurer (Century Indemnity Company), who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to compel assumption or rejection of the agreement; (2) declare
that the insurer need not make its present and future scheduled payments unless
AWI assumes the agreement; (3) declare that the insurer is entitled to
indemnification from AWI against any liabilities that the insurer may incur in
certain unrelated litigation in which the insurer is involved; and (4) enjoin
the disposition of funds previously paid by the insurer to the trust pending an
adjudication of the insurer's rights. AWI believes it is highly unlikely the
insurer will prevail in this matter.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $214.1 million is recorded as of December 31, 2001 compared to $268.3 million
as of December 31, 2000. The reduction is due to cash receipts during the second
and third quarters of 2001 and management's current assessment of probable
insurance recoveries, which included the order of liquidation for Reliance
Insurance Company. Of the total recorded asset at December 31,
27
2001, approximately $49.0 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. 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 (the former AWI
insulation contracting subsidiary that was sold in August 1969) and the
financial condition of the insurers, AWI may revise its estimate of probable
insurance recoveries. Approximately $82 million of the $214.1 million asset is
determined from agreed coverage in place and is therefore directly related to
the amount of the liability. Of the $214.1 million asset, $22.0 million has been
recorded as a current asset as of December 31, 2001 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
increase 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 recorded asset may extend beyond 10 years.
Cash Flow Impact
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As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in December 2000 and all of 2001. In the first eleven
months of 2000, AWI paid $226.9 million for asbestos-related claims. AWI
received $32.2 million in asbestos-related insurance recoveries during 2001
compared to $27.7 million in 2000. During the pendency of the Chapter 11 Case,
AWI does not expect to make any further cash payments for asbestos-related
claims, but AWI expects to continue to receive insurance proceeds under the
terms of various settlement agreements.
Conclusion
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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, the impact of the ADR proceedings on the insurance
asset and the financial condition of