ARMSTRONG WORLD INDUSTRIES INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

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.

(Exact name of registrant as specified in its charter)

Pennsylvania		333-32530		23-3033414
(State or other jurisdiction of incorporation or organization)		Commission file number		(I.R.S. Employer Identification No.)

P. O. Box 3001, Lancaster, Pennsylvania		17604
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code

ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania		1-2116		23-0366390
(State or other jurisdiction of incorporation or organization)		Commission file number		(I.R.S. Employer Identification No.)

P. O. Box 3001, Lancaster, Pennsylvania		17604
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code

Armstrong World Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Number of shares of Armstrong Holdings, Inc.’s common stock outstanding as of October 15, 2002 - 40,677,392.

TABLE OF CONTENTS

SECTION		PAGES
Cautionary Factors		3 – 4

PART I—FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements
	Armstrong Holdings, Inc., and Subsidiaries	5 – 26
	Independent Accountants’ Review Report	27
	Armstrong World Industries, Inc., and Subsidiaries	28 – 49

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50 – 62

Item 4.	Controls and Procedures	63

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	64 – 69

Item 6.	Exhibits and Reports on Form 8-K	70

Signatures		71

Certifications		72 – 75

Cautionary Factors That May Affect Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

The disclosures and analysis in this report contain some forward-looking statements. This discussion about those statements is provided in accordance with the Private Securities Litigation Reform Act of 1995.

Forward-looking statements give current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with discussions of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, 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 made in this report and in any other public statements may turn out to be incorrect. They can be affected by inaccurate assumptions we may 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 Forms 10-Q, 8-K, 10-K or other reports filed with the SEC. Other factors besides those listed here could also adversely affect our businesses.

These are some of the factors that could potentially cause actual results to differ materially from expected and historical results:

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-possession credit facility (the “DIP Facility”).

Claims of undetermined merit and amount which have been asserted against us for various legal matters, including AWI’s asbestos related litigation. For more information on these matters, see the discussion of Legal Proceedings in Part II, Item 1 in this report.

Business Environment

Changes in demand for public and private commercial and residential building construction and renovation, laws and regulations, foreign currency and interest rates, inflation or other related factors affecting our businesses. Despite our efforts to foresee and plan for the effects of changes in these circumstances, we can not predict their impact with certainty. 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 Armstrong Holdings, Inc. 2001 Form 10-K.

Business combinations among our competitors or suppliers, which could affect our competitive position in any of our business units. Similarly, combinations or alliances among our major customers could increase their purchasing power in dealing with us. If we should enter into one or more business combinations, our business, finances and capital structure could be affected.

The level of success of our new product introductions and those of our competitors.

The extent to which we successfully achieve integration of and synergies from acquisitions as well as the impact of divestitures, restructuring and other unusual items that may result from evolving business strategies and organizational restructuring.

Business decisions and business conditions that affect our major customers and distribution networks. For example, a significant portion of our revenue in North America comes from sales to major home center retailers.

Increased retail trade consolidation, especially in markets such as the United States, could make us more dependent upon key retailers whose relative bargaining strength may increase.

Changes in the policies of our retail trade customers, such as inventory shifts or fluctuations, limitations on access to shelf space and other conditions. Many of our customers, particularly our high-volume retail trade customers have engaged in accelerated efforts to reduce inventory levels and change inventory delivery requirements.

Various worldwide economic and political factors, changes in the competitive structures of the markets, credit risks in emerging markets, variations in residential and commercial construction 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.

Changes in intellectual property legal protections and remedies, trade regulations, tariff classifications or duty rates, and procedures and actions affecting production, pricing and marketing of products, intergovernmental disputes, possible nationalization and unstable governments and legal systems.

Changes in exchange rates can significantly affect our reported results from one period to the next.

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, transportation disruptions and/or business decisions made by our suppliers.

Raw material price increases (for example price increases in hardwood lumber, limestone or petroleum-based raw materials such as plasticizers or PVCs), energy cost increases (for example price increases in natural gas), and changes in distribution and product mix.

PART 1—FINANCIAL INFORMATION

Item 1—Financial Statements

ARMSTRONG HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Net sales	$	846.0		$	804.9		$	2,418.8		$	2,399.0
Cost of goods sold		640.4			605.7			1,811.4			1,782.1

Gross profit		205.6			199.2			607.4			616.9
Selling, general and administrative expenses		160.0			150.2			474.9			450.0
Charge for asbestos liability, net		—			16.0			—			22.0
Restructuring and reorganization charges (reversals), net		(0.6	)		(1.1	)		2.1			3.0
Goodwill amortization		—			5.7			—			17.1
Equity (earnings) from affiliates, net		(6.2	)		(4.5	)		(18.1	)		(13.5	)

Operating income		52.4			32.9			148.5			138.3
Interest expense (unrecorded contractual interest of $24.9, $25.0, $74.4, and $74.7)		3.7			3.3			10.5			10.2
Other non-operating expense		0.8			3.6			2.4			8.7
Other non-operating income		(1.2	)		(2.3	)		(3.4	)		(8.1	)
Chapter 11 reorganization costs, net		6.6			3.7			19.1			6.2

Earnings from continuing operations before income taxes and cumulative effect of a change in accounting principle		42.5			24.6			119.9			121.3
Income tax expense		13.1			10.3			40.9			47.3


Earnings from continuing operations before cumulative effect of a change in accounting principle		29.4			14.3			79.0			74.0
Cumulative effect of a change in accounting principle, net of tax of $2.2		—			—			(593.8	)		—

Earnings (loss) from continuing operations	$	29.4		$	14.3		$	(514.8	)	$	74.0

Net loss on sale of discontinued business, net of tax of $0.0		—			(0.2	)		—			(1.1	)
Net loss on expected disposal of discontinued operations, net of tax of $0.0		—			—			—			(3.3	)
Net reversal of income on discontinued operations no longer to be disposed, net of tax of $10.7		—			27.1			—			24.0

Earnings from discontinued operations		—			26.9			—			19.6

Net earnings (loss)	$	29.4		$	41.2		$	(514.8	)	$	93.6


Earnings per share of common stock, continuing operations before cumulative effect of a change in accounting principle:
Basic	$	0.73		$	0.35		$	1.95		$	1.83
Diluted	$	0.72		$	0.35		$	1.94		$	1.81
Loss per share of common stock, cumulative effect of a change inaccounting principle:
Basic	$	—		$	—		$	(14.66	)	$	—
Diluted	$	—		$	—		$	(14.66	)	$	—
Earnings per share of common stock, discontinued operations:
Basic	$	—		$	0.66		$	—		$	0.49
Diluted	$	—		$	0.66		$	—		$	0.48
Net earnings (loss) per share of common stock:
Basic	$	0.73		$	1.02		$	(12.71	)	$	2.32
Diluted	$	0.72		$	1.01		$	(12.71	)	$	2.29
Average number of common shares outstanding:
Basic		40.5			40.5			40.5			40.4
Diluted		40.7			40.8			40.7			40.8

See accompanying notes to condensed consolidated financial statements beginning on page 9.

ARMSTRONG HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in millions except share data)

	September 30, 2002		December 31, 2001
	Unaudited
ASSETS
Current assets:
Cash and cash equivalents	$	369.9	$	277.4
Accounts and notes receivable, net		403.3		316.5
Inventories, net		429.3		443.1
Deferred income taxes		14.0

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