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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, 1993
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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:
Name of each exchange on
Title of each class which registered
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Common Stock ($1 par value) New York Stock Exchange, Inc.
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (a)
9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (a)
(a) Common Stock and Preferred
Stock Purchase Rights only
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock of registrant held by non-
affiliates of the registrant based on the closing price ($56.625 per share) on
the New York Stock Exchange on January 28, 1994, was approximately $1.8 billion.
For the purposes of determining this amount only, registrant has defined
affiliates as including (a) the executive officers named in Item 10 of this 10-K
Report, (b) all directors of registrant, and (c) each shareholder that has
informed registrant by February 14, 1994, as having sole or shared voting power
over 5% or more of the outstanding Common Stock of registrant as of December 31,
1993.
This amount does not include the 5,527,692 shares of Series A ESOP Convertible
Preferred Stock as of December 31, 1993, which vote with the Common Stock as if
converted and have an aggregate liquidation preference of $263,947,293, held by
Mellon Bank, N.A., as Trustee of the Company's Employee Stock Ownership Plan.
As of January 28, 1994, the number of shares outstanding of registrant's Common
Stock was 37,252,580.
Documents Incorporated by Reference
Portions of the Proxy Statement dated March 14, 1994, relative to the April 25,
1994, annual meeting of the shareholders of registrant (the "Company's 1994
Proxy Statement") have been incorporated by reference into Part III of this
Form 10-K Report.
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PART I
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Item 1. Business
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Armstrong World Industries, Inc. is a Pennsylvania corporation incorporated in
1891. The Company is a manufacturer of interior furnishings, including floor
coverings, building products and furniture, which are sold primarily for use in
the furnishing, refurbishing, repair, modernization and construction of
residential, commercial and institutional buildings. It also manufactures
various industrial and other products. In late 1989, most of the assets
(primarily inventory and plant, property and equipment) of the Company's carpet
operations and the Company's subsidiary, Applied Color Systems, Inc., were
divested. Unless the context indicates otherwise, the term "Company" means
Armstrong World Industries, Inc. and its consolidated subsidiaries.
Industry Segments
The company operates worldwide in four reportable segments: floor coverings,
building products, furniture, and industry products. Floor coverings sales
include resilient floors, ceramic tile, and accessories.
Industry segments
at December 31 (millions) 1993 1992 1991
=========================================================================
Net trade sales:
=========================================================================
Floor coverings $1,191.3 $1,134.9 $1,058.0
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Building products 586.7 656.7 676.3
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Furniture 449.7 438.4 417.9
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Industry products 297.7 319.8 287.1
=========================================================================
Total net sales $2,525.4 $2,549.8 $2,439.3
=========================================================================
Operating profit (Note 2):
=========================================================================
Floor coverings $ 129.8 $ 30.2 $ 84.6
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Building products 30.5 (7.3) 46.7
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Furniture 26.6 10.3 18.2
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Industry products 32.8 35.4 43.1
=========================================================================
Total operating profit $ 219.7 $ 68.6 $ 192.6
=========================================================================
Depreciation and
amortization:
=========================================================================
Floor coverings $ 61.0 $ 65.5 $ 67.0
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Building products 33.1 37.1 35.1
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Furniture 12.9 13.5 13.6
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Industry products 13.1 11.6 11.4
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Corporate $ 9.9 9.2 8.2
=========================================================================
Total depreciation
and amortization $ 130.0 $ 136.9 $ 135.3
=========================================================================
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Capital additions (See Note 1 on
page 8):
=========================================================================
Floor coverings $ 59.1 $ 48.7 $ 61.0
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Building products 23.8 25.4 39.1
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Furniture 10.0 8.3 6.7
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Industry products 20.7 29.3 21.6
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Corporate 4.0 4.1 5.3
=========================================================================
Total capital additions $ 117.6 $ 115.8 $ 133.7
=========================================================================
Identifiable assets (See Note 1 on
page 8):
=========================================================================
Floor coverings $ 808.0 $ 835.6 $ 915.1
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Building products 475.2 491.6 556.0
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Furniture 234.6 238.7 239.7
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Industry products 203.8 192.9 188.6
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Corporate 207.7 251.0 250.5
=========================================================================
Total assets $1,929.3 $2,009.8 $2,149.9
Note 2:
Restructuring charges
in operating profit (millions) 1993 1992 1991
=========================================================================
Floor coverings $27.7 $ 80.8 $ 3.0
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Building products 13.7 35.0 4.3
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Furniture .6 4.8 .3
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Industry products 12.9 12.5 2.2
=========================================================================
Total restructuring charges
in operating profit $54.9 $133.1 $ 9.8
=========================================================================
Narrative Description of Business
The Company manufactures and sells interior furnishings, including floor
coverings (resilient flooring and all ceramic tile), building products, and
furniture, and makes and markets a variety of specialty products for the
building, automotive, textile, and other industries. The Company's activities
extend worldwide.
Floor Coverings
The Company is a prominent manufacturer of floor coverings for the interiors of
homes and commercial and institutional buildings, with a broad range of
resilient flooring, ceramic tile for floors, walls and countertops, together
with adhesives, installation and maintenance materials and accessories.
Resilient flooring, in both sheet and tile form, is made 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. Ceramic products include glazed wall and floor
tile and marble (a portion of which is imported) and glazed and unglazed ceramic
mosaic tile, all featuring a range of designs and colors, as well as quarry
tile, natural stone and related installation products. Floor covering products
are sold to the commercial and residential market segments through wholesalers,
retailers, and contractors, and to the hotel/motel and manufactured homes
industries. Ceramic products also are sold through sales service centers
operated by American Olean Tile Company, Inc. ("American Olean"), a wholly-owned
subsidiary which manufactures and markets ceramic tile.
Building Products
A major producer of ceiling materials in the United States and abroad, the
Company markets both residential and architectural ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs; most
provide noise reduction and incorporate Company-designed features intended to
permit ease of installation. These residential ceiling products are sold
through wholesalers and retailers. Architectural ceiling systems, designed for
use in shopping centers, offices, schools, hospitals, and other commercial and
institutional structures, are available in numerous colors, performance
characteristics and designs and offer characteristics such as acoustical
control, rated fire protection, and aesthetic appeal. Architectural ceiling
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materials and accessories, along with acoustical wall panels, are sold by the
Company to ceiling systems contractors and to resale distributors.
Furniture
A wholly-owned subsidiary, Thomasville Furniture Industries, Inc., and its
subsidiaries manufacture and market traditional and contemporary wood and
upholstered furniture for use in dining rooms, bedrooms, living rooms,
hotels/motels and other residential and commercial interior areas. Thomasville
furniture is sold to retailers, contract accounts and government agencies.
Thomasville also manufactures both assembled and ready-to-assemble furniture
which is sold to retailers, wholesalers and contract accounts under the
Armstrong name. In addition, it sells a line of imported furniture made by other
producers.
Industry Products
The Company, including a number of its subsidiaries, makes and sells a variety
of specialty products for the building, automotive, textile and other
industries. These products include flexible pipe insulation sold for use in
construction and in original equipment manufacture; gasket materials for new
equipment and replacement use in the automotive, farm equipment, appliance, and
other industries; textile mill supplies including cots and aprons sold to
equipment manufacturers and textile mills; adhesives; and certain cork products.
Industry products are sold, depending on type and ultimate use, to original
equipment manufacturers, contractors, wholesalers, fabricators and end users.
-----------------------------------
The principal raw materials used in the manufacture of the Company's products
are synthetic resins, lumber, plasticizers, latex, mineral fibers and fillers,
clays, starches, perlite, and pigments and inks. In addition, the Company uses
a wide variety of other raw materials. Most raw materials are purchased from
sources outside of the Company. The Company also purchases significant amounts
of packaging materials for the containment and shipment of its various products.
During 1993, adequate supplies of raw materials were available to all of the
Company's industry segments.
Customers' orders for the Company's products are mostly for immediate shipment.
Thus, in each industry segment, the Company has implemented inventory systems,
including its "just in time" inventory system, pursuant to which orders are
promptly filled out of inventory on hand or the product is manufactured to meet
the delivery date specified in the order. As a result, there historically has
been no material backlog in any industry segment.
The competitive position of the Company has been enhanced by patents on
products and processes developed or perfected within the Company or obtained
through acquisition. Although the Company considers that, in the aggregate, its
patents constitute a valuable asset, it does not regard any industry segment as
being materially dependent upon any single patent or any group of related
patents.
There is significant competition in all the industry segments in which the
Company does business. Competition in each industry segment includes numerous
active companies (domestic and foreign), with emphasis on price, product
performance and service. In addition, with the exception of industrial and
other products and services, product styling is a significant method of
competition in the Company's industry segments. Increasing domestic competition
from foreign producers is apparent in certain industry segments and actions
continue to be taken to meet this competition.
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The Company invested $117.6 million in 1993, $115.8 million in 1992, and $133.8
million in 1991 for additions to its property, plant and equipment.
Research and development activities are important and necessary in assisting the
Company to carry on and improve its business. Principal research and
development functions include the development of new products and processes and
the improvement of existing products and processes. Research and development
activities are conducted principally at the Company's Innovation Center in
Lancaster, Pennsylvania.
The Company spent $59.5 million in 1993, $60.3 million in 1992, and $55.6
million in 1991 on research and development activities worldwide for the
continuing businesses.
The Company will incur capital expenditures in order to meet the new
requirements of the Clean Air Act of 1990 and is awaiting the final promulgation
of implementing regulations by various state agencies to determine the magnitude
of additional costs and the time period over which they will be incurred. In
1993, the Company incurred capital expenditures of approximately $2.6 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1994 and 1995.
As with many industrial companies, the Company is involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), and similar state laws at approximately 21 sites. In most cases,
the Company is one of many potentially responsible parties ("PRPs") who have
voluntarily agreed to jointly fund the required investigation and remediation of
each site. With regard to some sites, however, the Company disputes either
liability or the proposed cost allocation. Sites where the Company is alleged
to have contributed a significant volume of waste material include a former
municipal landfill site in Volney, New York; and a former county landfill site
in Buckingham County, Virginia, which is alleged to have received material from
Thomasville Furniture Industries, Inc. Armstrong may also have rights of
contribution or reimbursement from other parties or coverage under applicable
insurance policies. The Company is also remediating environmental contamination
resulting from past industrial activity at certain of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations, and prior Company experience
in remediation of contaminated sites. Although current law imposes joint and
several liability on all parties at any Superfund site, the Company's
contribution to the remediation of these sites is expected to be limited by the
number of other companies which have also been identified as potentially liable
for site costs. As a result, the Company's estimated liability reflects only
the Company's expected share. In determining the probability of contribution,
the Company considers the solvency of the parties, whether responsibility is
being disputed, the terms of any existing agreements, and experience regarding
similar matters. The estimated liabilities do not take into account any claims
for recoveries from insurance or third parties, unless a coverage commitment has
been provided by the insurer.
Because of uncertainties associated with remediation activities and
technologies, regulatory interpretations, and the allocation of those costs
among various other parties, the Company has accrued $4.9 million to reflect its
estimated liability for environmental remediation. As assessments and
remediation activities progress at each individual site, these liabilities are
reviewed to reflect additional information as it becomes available.
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Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the Company believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
materially adverse effect on its financial condition liquidity or results of
operations.
As of December 31, 1993, the Company had approximately 21,000 active employees,
of whom approximately 4,150 are located outside the United States. Year-end
employment in 1993 was below the level at the end of 1992. About 38% of the
Company's approximately 11,950 hourly-paid employees in the United States are
represented by labor unions.
Geographic Areas
United States net trade sales include export sales to non-affiliated customers
of $27.0 million in 1993, $24.4 million in 1992, and $29.3 million in 1991.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Spain, and Switzerland. Operations in Australia,
Canada, China, Hong Kong, Indonesia, Japan, Korea, Singapore, and Thailand are
in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates
marketing exported products are accounted for by methods that approximate
arm's-length transactions, after considering the costs incurred by the selling
company and the return on assets employed of both the selling unit and the
purchasing unit. Operating profits of a geographic area include profits
accruing from sales to affiliates.
Geographic areas
at December 31 (millions) 1993 1992 1991
=========================================================================
Net trade sales:
=========================================================================
United States $1,910.7 $1,841.5 $1,761.7
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Europe 456.6 544.5 508.5
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Other foreign 158.1 163.8 169.1
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Total foreign 614.7 708.3 677.6
=========================================================================
Inter-area transfers:
=========================================================================
United States 76.1 69.9 65.5
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Europe 6.0 4.0 3.9
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Other foreign 21.9 18.5 9.9
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Eliminations (104.0) (92.4) (79.3)
=========================================================================
Total net sales $2,525.4 $2,549.8 $2,439.3
=========================================================================
Operating profit:
=========================================================================
United States $ 178.0 $ 50.7 $ 131.5
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Europe 31.7 22.5 51.8
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Other foreign 10.0 (4.6) 9.3
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Total foreign 41.7 17.9 61.1
=========================================================================
Total operating profit $ 219.7 $ 68.6 $ 192.6
=========================================================================
Identifiable assets (Note 1):
=========================================================================
United States $1,311.7 $1,338.0 $1,435.5
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Europe 347.0 362.5 398.5
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Other foreign 63.2 64.9 74.9
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Corporate 207.7 251.0 250.5
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Eliminations (.3) (6.6) (9.5)
=========================================================================
Total assets $1,929.3 $2,009.8 $2,149.9
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Reconciliation (millions) 1993 1992 1991
=========================================================================
Operating profit $219.7 $ 68.6 $ 192.6
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Corporate expense, net (91.0) (87.4) (46.5)
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Interest expense (38.0) (41.6) (45.8)
=========================================================================
Earnings (loss) from
continuing businesses
before income taxes $ 90.7 $(60.4) $ 100.3
Note 1: Identifiable assets for geographic areas and industry segments
exclude cash, marketable securities, and assets of a corporate nature.
Capital additions for industry segments include property, plant, and equipment
from acquisitions.
The Company's foreign operations are subject to foreign government legislation
involving restrictions on investments (including transfers thereof), tariff
restrictions, personnel administration, and other actions by foreign
governments. In addition, consolidated earnings are subject to both U.S. and
foreign tax laws with respect to earnings of foreign subsidiaries, and to the
effects of currency fluctuations.
Item 2. Properties
- -------------------
The Company produces and markets its products and services throughout the world,
operating 73 manufacturing plants in 11 countries, 56 of which are located
throughout the United States. Additionally, affiliates operate eight plants in
four countries.
Floor covering products are produced at 23 plants with principal manufacturing
facilities located in Lancaster and Lansdale, Pennsylvania. American Olean owns
or leases various quarries throughout the United States for the supply of clays
and shale. Under a long-term lease, a quarry in Newfoundland, Canada, also
supplies a raw material important to American Olean's manufacture of glazed tile
at a proven reserve level of approximately 50 years at current production
levels. Building products are produced at 13 plants with principal facilities
in Macon, Georgia, the Florida-Alabama Gulf Coast area and Marietta,
Pennsylvania. Furniture is manufactured at 27 plants, 14 of which are located
at Thomasville, North Carolina. Insulating materials, textile mill supplies,
fiber gasket materials, adhesives and other products for industry are
manufactured at 14 plants with principal manufacturing facilities at Munster,
Germany, Braintree, Massachusetts and Fulton, New York.
Numerous sales offices are leased worldwide, and leased facilities are utilized
for American Olean's distribution centers and to supplement the Company's owned
warehousing facilities.
Productive capacity and extent of utilization of the Company's facilities are
difficult to quantify with certainty because in any one facility maximum
capacity and utilization varies periodically depending upon the product that is
being manufactured and individual facilities manufacture more than one type of
product. In this context, the Company estimates that the production facilities
in each of its industry segments were effectively utilized during 1993 at 80% to
90% of overall productive capacity in meeting market conditions. Remaining
productive capacity is sufficient to meet expected customer demands.
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The Company believes its various facilities are adequate and suitable.
Additional incremental investments in plant facilities are being made as
appropriate to balance capacity with anticipated demand, improve quality and
service, and reduce costs.
Item 3. Legal Proceedings
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The Company is named as one of many defendants in pending lawsuits and claims
involving, as of February 28, 1994, approximately 72,125 individuals alleging
personal injury from exposure to asbestos or asbestos-containing products. (In
late 1993, the Company revised its claims handling procedures to provide for
individual claim information to be supplied by the Center for Claims Resolution
referred to below. The claim numbers have been received from the Center. A
reconciliation is underway to match the Company claims with the Center's and the
reconciliation will continue until completion. Since the reported data will be
more current under the revised claims handling procedure, the data reflects a
decrease from the past year in the number of outstanding claims.) A total of
about 24,036 lawsuits and claims were received by the Company in 1993, compared
with 28,997 in 1992. Nearly all the personal injury suits and claims allege
general and punitive damages arising from alleged exposures, during a period of
years, commencing during World War II onward into the 1970s, to asbestos-
containing insulation products used, manufactured or sold by the companies
involved in the asbestos-related litigation. Claims against the Company
generally involve allegations of negligence, strict liability, breach of
warranty and conspiracy with other defendants in connection with alleged
exposure generally to asbestos-containing insulation products; the Company
discontinued the sale of all such products in 1969. The first asbestos-related
lawsuit was filed against the Company in 1970, and such lawsuits and claims
continue to be filed against the Company. The claims generally allege that
injury may be determined many years (up to 40 years) after alleged exposure to
asbestos or asbestos-containing products. Nearly all suits include a number of
defendants (including both members of the Center and other companies), and well
over 100 different companies are reportedly involved as defendants in the
litigation. A significant number of suits in which the Company does not believe
it should be involved have been filed by persons engaged in vehicle tire
production, aspects of the construction industry, and the steel industry. The
Company believes that a large number of the plaintiffs filing suit are
unimpaired individuals. Although a large number of suits and claims have either
been put on inactive lists, settled, dismissed or otherwise resolved, and the
Company is generally involved in all stages of claims resolution and litigation,
including trials and appeals, and while the number of pending cases reflects a
decrease during the past year, neither the rate of future dispositions nor the
number of future potential unasserted claims can be reasonably predicted at this
time.
Attention has been given by various judges both individually and collectively to
finding a comprehensive solution to the large number of pending as well as
potential future asbestos-related personal injury claims. Discussions have been
undertaken by attorneys for plaintiffs and defendants to devise methods or
procedures for the comprehensive treatment of asbestos-related personal injury
suits and claims. The Judicial Panel for Multi-district Litigation ordered the
transfer of all federal cases not in trial to a single court, the Eastern
District Court of Pennsylvania in Philadelphia, for pretrial purposes. The
Company has supported such action. The Court to which the cases have been
assigned has been instrumental in having the parties settle large numbers of
cases in various jurisdictions and has been receptive to different approaches to
the resolution of asbestos-related personal injury claims. A national class
action was filed in the Eastern District of Texas; it was not certified and the
cases involved were also transferred to the Eastern District Court of
Pennsylvania for pretrial purposes. Periodically, this Court returns certain
cases for trial to the courts from which the cases were originally transferred,
although the issue of punitive damages is retained by the Eastern District
Court.
A settlement class action which includes essentially all future asbestos-related
personal injury claims against members of the Center for Claims Resolution was
filed in Philadelphia, in the Federal
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District Court for the Eastern District of Pennsylvania on January 15, 1993.
The proposed settlement class action was negotiated by the Center and two
leading plaintiffs' law firms. The settlement class action is designed to
establish a non-litigation system for the resolution of essentially all future
asbestos-related personal injury claims against the Center members including
this Company. Other defendant companies which are not Center members may be
able to join the class action later. The class action proposes a voluntary
settlement that offers a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they are impaired by such exposure.
Claimants must meet certain exposure and medical criteria to receive
compensation which is derived from historical settlement data. Under limited
circumstances and in limited numbers, qualifying claimants may choose to
litigate certain claims in court or through alternative dispute resolution,
rather than accept an offered settlement amount, after their claims are
processed within the system. No punitive damages will be paid under the
proposed settlement. The settlement is designed to minimize transactional
costs, including attorneys fees, and to relieve the courts of the burden of
handling future asbestos-related personal injury claims. Each member of the
Center has an obligation for its own fixed share in this proposed settlement.
The settlement class action does not include asbestos-related personal injury
claims which were filed before January 15, 1993, or asbestos-related property
damage claims. Agreed upon annual case flow caps and agreed upon compensation
ranges for each compensable medical category including amounts paid even more
promptly under the simplified payment procedures,have been established for an
initial period of ten years. Case flow caps may be increased during the second
five-year period depending upon case flow during the first five-year period.
The case flow figures and annual compensation levels are subject to
renegotiation after the initial 10-year period. The Court has preliminarily
approved the settlement, and notification has been provided to potential class
members who were offered the opportunity to opt out by January 24, 1994. The
Center had reserved the right to withdraw from the program if an excessive
number of individuals opted out. The Center has determined that there is not
an excessive number of opt outs and will proceed with the settlement class
action. The opt outs are not asbestos-related claims as such but reservations
of rights to possibly bring court actions in the future. The opt outs are
currently the subject of a motion before the Court which questions the
validity of most of the opt outs and seeks a further notice process to
determine whether or not they wish to remain in the class action. Therefore,
the total number of effective opt outs cannot be determined at this time. The
Court is holding a final fairness hearing which began on February 22, 1994.
The settlement will become final only after it has been approved by the
Federal District Court and the federal appellate courts. The Center members
have stated their intention to resolve over a five-year period the asbestos-
related personal injury claims pending prior to the date the settlement class
action was filed. A significant number of these pending claims have been
settled with a number of plaintiffs' counsel and a number of these claims are
currently the subject of settlement negotiations, in both instances, based
upon historical averages.
The Company is seeking agreement from its carriers or a ruling from the Court
that the settlement class action will not jeopardize existing insurance
coverage. Certain unresolved insurance coverage issues involving certain Center
members' insurance carriers acceptance of the proposed settlement will be
resolved either by alternative dispute resolution procedures in the case of the
insurance carriers which subscribed to the Wellington Agreement referred to
below, or by litigation against those carriers which did not subscribe to the
Wellington Agreement.
The Company believes that the future claimants settlement class action will be
approved. However, the potential exists that either the Federal District Court
or an appellate court will reject the settlement class action and that the
above-referenced companion insurance action will not be successful.
A few state judges and federal judges have undertaken to consolidate numbers of
asbestos-related personal injury cases for trial. The Company has generally
opposed as unfair the consolidation of numerous cases for trial. In 1992 in
Baltimore, Maryland, the Center for Claims Resolution referred to herein settled
during trial on behalf of the Company and other Center members certain asbestos-
related personal injury claims. In most of the approximately 8,500 cases
consolidated for trial, Armstrong was a named defendant. The multiphase
Baltimore trial dealt with various issues including the individual claims of six
plaintiffs, as well as product defect and negligence, and whether and on what
basis punitive damages should be awarded. The Center for Claims Resolution is
periodically drawing upon the Company's insurance assets to pay the settled
individual claims.
In 1983, three of the Company's four primary insurers entered into an Interim
Agreement with the Company to provide defense and indemnity coverage on an
interim basis for asbestos-related personal injury claims and for the defense of
asbestos-related property damage claims which are described below. One
- 10 -
primary insurer did not enter into the Interim Agreement, but did subscribe to
the Wellington Agreement as noted below. The Interim Agreement was superseded
by the Wellington Agreement with respect to the coverage issues for asbestos-
related personal injury claims. The one primary insurer of the four primary
carriers that did not subscribe to the Wellington Agreement subsequently entered
into a separate agreement with the Company resolving coverage issues for
asbestos-related property damage claims and for asbestos-related personal injury
claims which complements the Wellington Agreement. All of the Company's primary
insurers are paying for the defense of asbestos-related property damage claims
in accordance with the provisions of the Interim Agreement pending the final
resolution on appeal of the coverage issues for asbestos-related property damage
claims in the California insurance litigation referenced later in this note.
The Company's insurance carriers providing coverage for asbestos-related claims
are as follows: Reliance Insurance, Aetna Insurance and Liberty Mutual
Insurance Companies are primary insurers that have subscribed to the Wellington
Agreement. Travelers Insurance Company is a primary insurer that entered into
a settlement agreement which complements Wellington. The excess insurers which
subscribed to Wellington are Aetna Insurance Company, Fireman's Fund Insurance
Company, Insurance Company of North America, Lloyds of London, Fidelity and
Casualty Insurance Company, First State Insurance Company and U.S. Fire
Insurance Company. Home Insurance Company and Travelers Insurance Company are
excess insurers which entered into settlement agreements for coverage of
personal injury claims which complement Wellington, and Great American is an
excess insurer which also entered into a settlement agreement with the Company.
The Company also entered into a settlement agreement with American Home
Assurance Company and National Union Fire Insurance Company (known as the AIG
Companies) which complements the Wellington Agreement. Other excess insurers
against whom the Company has received a favorable trial and appellate court
decision in the California insurance litigation described below are: Central
National Insurance Company, Interstate Insurance Company, Puritan Insurance
Company, CNA Insurance Company and Commercial Union Insurance Company. Midland
Insurance Company, an excess carrier, which insured the Company with $25 million
of coverage, became insolvent during the trial. The Company is pursuing claims
with the state guaranty associations on account of the Midland insolvency and is
currently exploring how the Midland Insurance Company insolvency gaps can be
otherwise addressed by payments from the Company's other insurance carriers.
Certain companies in the London block of coverage and certain carriers providing
coverage at the excess level for property damage claims only have also become
insolvent. In addition to the aforementioned insurance carriers, certain
insurance carriers which were not included in the Company's California insurance
litigation described later herein also provide insurance for asbestos-related
property damage claims.
The Company along with 52 other companies (defendants in the asbestos-related
litigation and certain of their insurers) signed the 1985 Agreement Concerning
Asbestos-Related Claims (the "Wellington Agreement"). This Agreement provided
for a final settlement of nearly all disputes concerning insurance for asbestos-
related personal injury claims between the Company and three of its primary
insurers and seven of its excess insurers which also subscribed to the
Wellington Agreement. The one primary insurer that did not sign the Wellington
Agreement had earlier entered into the Interim Agreement with the Company and
had paid into the Wellington Asbestos Claims Facility (the "Facility"). The
Wellington Agreement provides for those insurers to indemnify the Company up to
the policy limits for claims that trigger policies in the insurance coverage
period, and nearly all claims against the Company fall within the coverage
period; both defense and indemnity are paid under the policies and there are no
deductibles under the applicable Company policies. The Wellington Agreement
addresses both products and non-products coverage. One of the Company's larger
excess insurance carriers entered into a settlement agreement in 1986 with the
Company under which payments also were made through the Facility and are now
being paid through the Center for Claims
- 11 -
Resolution referenced below in this note. Coverage for asbestos-related
property damage claims was not included in the settlement, and the agreement
provides that either party may reinstitute a lawsuit in the event the coverage
issues for property damage claims are not amicably resolved. In 1987, an excess
insurer also made, under reservation of rights, certain payments which were
processed through the Facility. These payments were made under reservation
because no settlement of the outstanding coverage issues has been effected with
that carrier.
The Wellington Agreement also provided for the establishment of the Facility to
evaluate, settle, pay and defend all pending and future asbestos-related
personal injury claims against those companies which subscribed to the
Agreement. The insurance coverage designated by the Company for coverage in the
Facility consists of all relevant insurance policies issued to the Company from
1942 through 1976. Liability payments and allocated expenses with respect to
each claim filed against Wellington Agreement subscribers who were defendants in
the underlying asbestos-related personal injury litigation were allocated on a
formula percentage basis to each such defendant, including the Company. The
Facility, which has dissolved, over time was negatively impacted by concerns
raised by certain subscribers relating to their share of liability payments and
allocated expenses and by certain insurer concerns with respect to defense costs
and Facility operating expenses. As a result of seven subscribing companies
giving notice that they wished to withdraw their cases from the Facility, a
majority of the insurers and the company subscribing members agreed to dissolve
the ongoing operation of the Facility as of October 3, 1988 and the Facility has
now been fully dissolved. Except for eliminating the future availability of an
insurer-paid special defense fund benefit linked to the existence of the
Facility, a benefit not deemed material to the Company, the dissolution of the
Facility essentially did not affect the Company's overall Wellington Agreement
insurance settlement, which stood on its own separate from the Facility. The
relinquishment of the insurer-paid special defense fund benefit was a condition
of insurer support for the creation of the Center and its expected benefits.
A new asbestos-related personal injury claims handling organization known as the
Center for Claims Resolution (the "Center") was created in October 1988 by
Armstrong and 20 other companies, all of which were former members of the
Facility. Insurance carriers are not members of the Center, although certain of
the insurance carriers for those members that joined the Center signed an
agreement to provide approximately 70% of the financial support for the Center's
operational costs during its first year of existence; they also are represented
ex officio on the Center's governing board. The Center adopted many of the
conceptual features of the Facility, and the members' insurers generally provide
coverage under the Wellington Agreement terms. The Center has operated under a
revised concept of allocated shares of liability payments and defense costs
for its members based primarily on historical experience and has defended the
members' interests and addressed the claims in a manner consistent with the
prompt, fair resolution of meritorious claims. In late 1991, the Center
sharing formula was revised to provide that members will pay only on claims in
which the member is a named defendant. This change has caused a slight
increase in the Company's share, but has enhanced the Company's case
management focus. Future claim payments by the Center pursuant to the proposed
settlement class action will require each member to pay its own fixed share.
A large share member earlier withdrew from the Center. Accordingly, the
allocated shares of liability payments and defense costs of the Center were
recalculated with the remaining members' shares being increased. Under the class
action settlement resolution, if a member withdraws from the Center or the
settlement, the shares of those remaining members would not be increased. It is
expected that the Center members will reach an agreement with the insurers
relating to the continuing operation of the Center and that the insurers' will
fund the Center's operating expenses for its sixth year of operation. With the
filing of the settlement class action, the Center will continue to process
pending claims and will handle the program for processing future claims if the
settlement class action is approved by the courts.
- 12 -
Consistent with the Center's objective of prompt resolution of meritorious
claims, and to establish the Center's credibility after the cessation of the
Facility and for other strategic reasons, a planned increase in claims
resolution by the Center was implemented during the first two years. This
increased the rate of utilization of Company insurance for claims resolution,
offset in part by savings in defense costs. During the first three years, the
rate of claims resolution had about trebled from the prior two years of
experience. An increase in the utilization of the Company's insurance also will
occur as a result of the class action settlement due to the commitment to
attempt to resolve pending claims within five years. Aside from the commitments
under the class action settlement, no forecast can be made for future years
regarding either the rate of claims or the rate of pending and future claims
resolution by the Center or the rate of utilization of Company insurance. If
the settlement class action is finally approved, projections of the rate of
disposition of future cases may be made and the rate of insurance usage will
be accelerated as an effort is made to resolve both outstanding cases and
address future claims.
The Company is also one of many defendants in a total of 73 pending lawsuits and
claims, including class actions, as of February 28, 1994, brought by public and
private entities, including public school districts and public and private
building owners. These lawsuits and claims include allegations of damage to
buildings caused by asbestos-containing products and generally claim
compensatory and punitive damages and equitable relief, including reimbursement
of expenditures, for removal and replacement of such products. They appear to
be aimed at friable (easily crumbled) asbestos-containing products, although
allegations in some suits encompass all asbestos-containing products, including
allegations with respect to asbestos-containing resilient floor covering
materials. Class actions have been certified involving four distinct classes of
building owners: public and private schools; Michigan state public and private
schools; colleges and universities, and private property owners who leased
facilities to the federal government. Subject to fairness hearings, resolution
has been reached with the class representatives for the national public and
private schools class action as well as with the class representatives for the
private property owners who leased facilities to the federal government. The
Company vigorously denies the validity of the allegations against it contained
in these suits and claims. Increasing defense costs, paid by the Company's
insurance carriers either under reservation or settlement arrangement, will be
incurred. As a consequence of the California insurance litigation discussed
elsewhere in this note, the Company believes that it is probable that costs of
the property damage litigation that are being paid by the Company's insurance
carriers under reservation of rights will not be subject to recoupment. These
suits and claims were not handled by the former Facility nor are they being
handled by the Center.
Certain co-defendant companies in the asbestos-related litigation have filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. As a
consequence, this litigation with respect to these co-defendants (with several
exceptions) has been stayed or otherwise impacted by the restrictions placed on
proceeding against these co-defendants. Due to the uncertainties involved, the
long-term effect of these Chapter 11 proceedings on the litigation cannot be
predicted.
The Company concluded in early 1989 the trial phase of a coordinated lawsuit in
a California state court to resolve a dispute concerning certain of its
insurance carriers' obligations with respect to insurance coverage for alleged
- 13 -
personal injury and property damage asbestos-related lawsuits and claims. The
trial court issued favorable final decisions in important phases of the trial
relating to coverage for personal injury and property damage lawsuits and
claims. The Company earlier dismissed from the asbestos-related personal injury
coverage portion of the litigation those insurance carriers which had subscribed
to the Wellington Agreement, and the excess carriers which entered into a
settlement agreement with the Company which complements Wellington also have
been dismissed.
As indicated above, the California trial court issued final decisions in various
phases in the insurance lawsuit. One decision concluded that the trigger of
insurance coverage for asbestos-related personal injury claims was continuous
from exposure through death or filing of a claim. The court also found that a
triggered insurance policy should respond with full indemnification up to
exhaustion of the policy limits. The court concluded that any defense
obligation ceases upon exhaustion of policy limits. Although not as
comprehensive, another important decision in the trial established a favorable
defense and indemnity coverage result for asbestos-related property damage
claims; the final decision holds that, in the event the Company is held liable
for an underlying property damage claim, the Company would have coverage under
policies in effect during the period of installation and during any subsequent
period in which a release of fibers occurred. Appeals were filed from the trial
court's final decision by those carriers still in the litigation and the
California Court of Appeal has substantially upheld the trial court's final
decisions. The insurance carriers have petitioned the California Supreme Court
to hear the various asbestos-related personal injury and property damage
coverage issues. The California Supreme Court recently accepted review pending
its review of related issues in another California case. Based upon the trial
court's favorable final decisions in important phases of the trial relating to
coverage for asbestos-related personal injury and property damage lawsuits and
claims, including the favorable decision by the California Court of Appeal, and
a review of the coverage issues by its trial counsel, the Company believes that
it has a substantial legal basis for sustaining its right to defense and
indemnification. After concluding the last phase of the trial against one of
its primary carriers, which is also an excess carrier, the Company and the
carrier reached a settlement agreement on March 31, 1989. Under the terms of
the settlement agreement, coverage is provided for asbestos-related bodily
injury and property damage claims generally consistent with the interim rulings
of the California trial court and complements the coverage framework established
by the Wellington Agreement. The parties also agreed that a certain minimum and
maximum percentage of indemnity and allocated expenses incurred with respect to
asbestos-related personal injury claims would be deemed allocable to non-
products claims coverage and that the percentage amount would be negotiated
between the Company and the insurance carrier. These negotiations continue.
The Company also settled both asbestos-related personal injury and property
damage coverage issues with a small excess carrier and in 1991 settled those
same issues with a larger excess carrier. In these settlements, the Company and
the insurers agreed to abide by the final judgment of the trial court in the
California insurance litigation with respect to coverage for asbestos-related
claims.
Non-products claims coverage insurance is available under the Wellington
Agreement (and the previously-referenced settlement agreement with one primary
carrier) for such claims. Certain excess policies also provide non-products
coverage. Non-products claims include claims that may have arisen out of
exposure during installation of asbestos materials or before control of such
materials has been relinquished. Negotiations have been undertaken with the
Company's primary insurance carriers and are currently underway with several of
them to categorize the percentage of previously resolved and to be resolved
asbestos-related personal injury claims as non-products claims and to establish
the entitlement to such
- 14 -
coverage. The additional coverage potentially available to pay claims
categorized as non-products, at both the primary and excess levels, is
substantial, and at the primary level, includes defense costs in addition to
limits. No agreement has been reached with the primary carriers on the amount
of non-products coverage attributable to claims that have been disposed of or
the type of claims that should be covered by non-products insurance. One of
the primary carriers alleges that it is no longer bound by the Wellington
Agreement and one primary carrier seemingly takes the view that the Company
verbally waived certain rights regarding non-products coverage against that
carrier at the time the Wellington Agreement was signed. All the carriers
presumably raise other reasons why they should not pay their coverage
obligations. The Company is entitled to pursue alternative dispute resolution
proceedings against the primary and certain excess carriers to resolve the non-
products coverage issues.
ACandS, Inc., a former subsidiary of the Company, which for certain insurance
periods has coverage rights under some insurance policies, and has accessed such
coverage on the same basis as the Company, was a subscriber to the Wellington
Agreement, but was not a subscriber to the Center. ACandS, Inc. had filed a
lawsuit against the Company to partition certain insurance policies and for an
accounting. It sought to have a certain amount of insurance from the joint
policies reserved solely for its use in the payment of defense and indemnity
costs for asbestos-related claims. The two companies have negotiated a
settlement of their dispute and have signed a settlement agreement.
Based upon the Company's experience with this litigation and its disputes with
insurance carriers, a reserve was recorded in June 1983 to cover estimated
potential liability and settlement costs and legal and administrative costs not
covered under the Interim Agreement, cost of litigation against the Company's
insurance carriers, and other factors involved in the litigation which are
referred to herein about which uncertainties exist. As a result of the
Wellington Agreement, the reserve was earlier reduced for that portion
associated with pending personal injury suits and claims. As a result of the
March 31, 1989, settlement referenced above, the Company received $11.0
million, of which approximately $4.4 million was credited to income with nearly
all of the balance being recorded as an increase to its reserve for potential
liabilities and other costs and uncertainties associated with the asbestos-
related litigation. Future costs of litigation against the Company's insurance
carriers and other legal costs indirectly related to the litigation will be
expensed outside the reserve. The Company does not know how many claims will be
filed against it in the future, nor the details thereof or of pending suits not
fully reviewed, nor the expense and any liability that may ultimately result
therefrom, nor does the Company know whether the settlement class action will
ultimately succeed, nor the annual claims flow caps to be negotiated after the
initial 10-year period for the settlement class action or the then compensation
levels to be negotiated for such claims or the success the Company may have in
addressing the Midland Insurance Company insolvency with its other insurers.
Subject to the foregoing and based upon its experience and other factors
referred to elsewhere in this note, the Company believes that it is probable
that substantially all of the expenses and any liability payments associated
therewith within the framework of the class action settlement and the initial
ten-year period thereof will be paid--in the case of the personal injury claims,
by agreed-to coverage under the Wellington Agreement and by payments by
nonsubscribing insurers that entered into settlement agreements with the Company
and additional insurance coverage reasonably anticipated from the outcome of the
insurance litigation and from the Company's claims for non-products coverage
both under certain insurance policies covered by the Wellington Agreement and
under certain insurance policies not covered by the Wellington Agreement which
claims have yet to be accepted by the carriers--and in the case of the asbestos-
related property damage claims, under an existing interim agreement, by
insurance coverage settlement agreements and through additional coverage
reasonably anticipated from the outcome of the insurance litigation.
Accordingly, the Company believes that it is probable that charges to expense
associated with such suits and claims should not be significant.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the trial phase and the first level appellate stage
- 15 -
of the California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the proposed settlement class action, and its
experience, the Company believes the asbestos-related lawsuits and claims
against the Company will not have a material adverse effect on its earnings or
financial position.
-------------------------------
In 1984, suit was filed against the Company in the U. S. District Court for the
District of New Jersey (the "Court") by The Industry Network System (TINS), a
producer of video magazines in cassette form, and Elliot Fineman, a consultant
(Fineman and The Industry Network System, Inc. v. Armstrong World Industries,
- -----------------------------------------------------------------------------
Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other things, that
- --------------------------
the Company had improperly interfered with a tentative contract which TINS had
with an independent distributor of the Company's flooring products and further
claimed that the Company used its alleged monopoly power in resilient floor
coverings to obtain a monopoly in the video magazine market for floor covering
retailers in violation of federal antitrust laws. The Company denied all
allegations and continues to do so. On April 19, 1991, after a three-month
trial, the jury rendered a verdict in the case, which as entered by the court in
its order of judgment, awarded the plaintiffs the alternative, after all post-
trial motions and appeals were completed, of either their total tort claim
damages (including punitive damages), certain pre-judgment interest, and post-
judgment interest or their trebled antitrust claim damages, post-judgment
interest and attorneys fees. The higher amount awarded to the plaintiffs as a
result of these actions totaled $224 million in tort claim damages and pre-
judgment interest, including $200 million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the
plaintiff's appeal of these rulings, the Court of Appeals sustained the U. S.
District Court's decision granting the Company a new trial, but overturned in
certain respects the District Court's grant of judgment for the Company
notwithstanding the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments: reversed the trial judge's
judgment for Armstrong on TINS's claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS's claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS's claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS's alleged breach of contract claim.
- 16 -
The Court of Appeals, in affirming the trial court's new trial order, agreed
that the trial court did not abuse its discretion in determining that the jury's
verdict was "clearly against the weight of the evidence" and that a new trial
was required due to the misconduct of plaintiffs' counsel.
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The Company
was informed on February 22 that the Supreme Court denied its Petition. The
case has been remanded by the Third Circuit Court of Appeals in Philadelphia to
the U. S. District Court in Newark, New Jersey, and a new trial has been set for
late April 1994. It is unknown what damage claims TINS will be permitted upon
retrial of the case. But during the first trial, claims for actual damages of
at least $17.5 million were asserted by plaintiffs' expert and even greater
amounts were asserted by Mr. Fineman. Under the antitrust laws, proven damages
are trebled. In addition, plaintiff would likely ask for punitive damages,
companion to its request for tort damages. Other damages which would likely be
sought include reimbursement of attorneys' fees and interest, including
prejudgment interest.
The Company denies all of TINS's claims and accordingly is vigorously defending
the matter. In the event that a jury finds against the Company, such jury
verdict could entail unknown amounts which, if sustained, could have a material
adverse effect on its earnings and financial position.
--------------------
As previously discussed on pages 6 and 7, with regard to a former county
landfill in Buckingham County, Virginia, Thomasville Furniture Industries, Inc.,
and seven other parties have been identified by the U.S. Environmental
Protection Agency ("USEPA") as potentially responsible parties ("PRPs") to fund
the cost of remediating environmental conditions at this federal Superfund site.
After review of investigative studies to determine the nature and extent of
contamination and identify various remediation alternatives, USEPA issued its
Proposed Remedial Action Plan in May 1993 proposing a $21 million clean-up cost.
In November 1993, however, USEPA issued a revised plan which recommended a
reduced $3.5 million alternative, subject to additional costs depending on test
results. The PRPs believe that other alternatives are appropriate and
discussions with USEPA and Virginia State officials continue.
Spent finishing materials from Thomasville's Virginia furniture plants at
Appomattox and Brookneal allegedly comprise a significant portion of the waste
presently believed to have been taken to the site by a now defunct disposal firm
in the late 1970s. Accordingly, Thomasville could be called upon to fund a
significant portion of the eventual remedial costs.
- 17 -
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
- -------------------------------------
The information appearing in Item 10 hereof under the caption "Executive
Officers of the Registrant" is incorporated by reference herein.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
-------
The Company's Common Stock is traded on the New York Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of
January 28, 1994, there were approximately 7,876 holders of record of the
Company's Common Stock.
Total
First Second Third Fourth Year
===========================================================================================================
1993
===========================================================================================================
Dividends per share of common stock .30 .30 .30 .30 1.20
- -----------------------------------------------------------------------------------------------------------
Price range of common stock -- low 28 7/8 29 3/8 30 1/4 40 1/4 28 7/8
- -----------------------------------------------------------------------------------------------------------
Price range of common stock -- high 33 1/8 34 3/4 42 1/2 55 1/4 55 1/4
===========================================================================================================
1992
===========================================================================================================
Dividends per share of common stock .30 .30 .30 .30 1.20
- -----------------------------------------------------------------------------------------------------------
Price range of common stock -- low 26 29 5/8 27 1/2 24 1/2 24 1/2
- -----------------------------------------------------------------------------------------------------------
Price range of common stock -- high 33 7/8 37 1/2 32 3/8 32 3/4 37 1/2
===========================================================================================================
- 18 -
Item 6. Selected Financial Data
- ---------------------------------
- --------------------------------------------------------------------------------
EIGHT - YEAR SUMMARY
- --------------------------------------------------------------------------------
For Year ($ millions except for per-share data) 1993 1992 1991 1990 1989 1988 1987 1986
==================================================================================================================================
Net sales 2,525.4 2,549.8 2,439.3 2,518.8 2,488.7 2,261.2 1,969.6 1,602.3
- ----------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 1,802.3 1,888.7 1,801.1 1,816.6 1,764.0 1,611.0 1,383.6 1,117.5
- ----------------------------------------------------------------------------------------------------------------------------------
Selling and administrative expense 505.0 511.6 468.3 462.6 436.6 392.0 339.0 286.2
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense 38.0 41.6 45.8 37.5 40.5 25.8 11.5 5.4
- ----------------------------------------------------------------------------------------------------------------------------------
Restructuring charges (89.9) (165.5) (12.8) (6.8) (5.9) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Gain from sales of woodlands -- -- -- 60.4 9.5 1.9 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous income (expense) 0.5 (2.8) (11.0) (32.6) (7.6) 11.7 3.0 1.6
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing businesses
before tax 90.7 (60.4) 100.3 223.1 243.6 246.0 238.5 194.8
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes 27.2 (0.5) 39.7 76.7 85.9 92.4 97.4 82.6
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing businesses 63.5 (59.9) 60.6 146.4 157.7 153.6 141.1 112.2
- ----------------------------------------------------------------------------------------------------------------------------------
As a percentage of sales 2.5% (2.3)% 2.5% 5.8% 6.3% 6.8% 7.2% 7.0%
- ----------------------------------------------------------------------------------------------------------------------------------
As a percentage of average monthly
assets 3.2% (2.8)% 2.9% 7.1% 8.3% 10.2% 11.6% 11.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing businesses
applicable to common stock (a) 49.6 (73.7) 41.2 126.9 148.0 153.2 140.7 111.8
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share--primary 1.32 (1.98) 1.11 3.26 3.26 3.31 2.98 2.33
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share--fully diluted (b) 1.26 (1.98) 1.11 2.99 3.11 3.31 2.98 2.33
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 63.5 (227.7) 48.2 141.0 187.6 162.7 150.4 122.4
- ----------------------------------------------------------------------------------------------------------------------------------
As a percentage of sales 2.5% (8.9)% 2.0% 5.6% 7.5% 7.2% 7.6% 7.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to common
stock (a) 49.6 (241.5) 28.8 121.5 177.9 162.3 150.0 122.0
- ----------------------------------------------------------------------------------------------------------------------------------
As a percentage of average
shareholders' equity 9.0% (33.9)% 3.3% 13.0% 17.9% 17.0% 17.6% 16.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share--primary 1.32 (6.49) .77 3.12 3.92 3.51 3.18 2.54
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share--fully diluted (b) 1.26 (6.49) .77 2.86 3.72 3.51 3.18 2.54
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share
of common stock 1.20 1.20 1.19 1.135 1.045 .975 .885 .7325
- ----------------------------------------------------------------------------------------------------------------------------------
Purchases of property, plant,
and equipment 117.6 115.8 133.8 195.1 231.0 198.7 183.0 139.8
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate cost of acquisitions -- 4.2 -- 16.1 -- 355.8 71.5 53.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization 130.0 136.9 135.7 130.1 134.0 109.2 91.4 74.3
- ----------------------------------------------------------------------------------------------------------------------------------
Average number of employees--
continuing businesses 21,682 23,500 24,066 25,014 25,349 22,801 21,020 18,916
- ----------------------------------------------------------------------------------------------------------------------------------
Average number of common
shares outstanding 37.2 37.1 37.1 38.8 45.4 46.2 47.2 48.1
==================================================================================================================================
- 19 -
YEAR-END POSITION
==================================================================================================================================
Working capital 204.1 167.1 238.9 181.8 323.5 139.0 255.3 327.7
- ----------------------------------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 1,039.1 1,072.0 1,152.9 1,147.4 1,059.2 1,040.2 760.7 603.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 1,929.3 2,009.8 2,149.9 2,146.3 2,033.0 2,097.7 1,602.5 1,298.2
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 256.8 266.6 301.4 233.2 181.3 185.9 67.7 58.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt as a percentage of
total capital (c) 52.2% 57.2% 46.9% 45.7% 36.1% 35.9% 22.8% 16.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 569.5 569.2 885.5 899.2 976.5 1,021.8 913.8 813.0
- ----------------------------------------------------------------------------------------------------------------------------------
Book value per share of
common stock 14.71 14.87 23.55 24.07 23.04 21.86 19.53 16.85
- ----------------------------------------------------------------------------------------------------------------------------------
Number of shareholders (d)(e) 7,962 8,611 8,896 9,110 9,322 10,355 9,418 9,621
- ----------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding 37.2 37.1 37.1 37.1 42.3 46.3 46.2 47.5
- ----------------------------------------------------------------------------------------------------------------------------------
Market value per common share 53 1/4 31 7/8 29 1/4 25 37 1/4 35 32 1/4 29 7/8
==================================================================================================================================
Notes:
(a) After deducting preferred dividend requirements and adding the tax benefits
for unallocated shares.
(b) See definition of fully diluted earnings per share on page 38.
(c) Total debt includes short-term debt, current installments of long-term debt,
long-term debt, and ESOP loan guarantee. Total capital includes total debt
and total shareholders' equity.
(d) Includes one trustee who is the shareholder of record on behalf of
approximately 4,300 employees in 1993, 4,500 employees in 1992, 4,600
employees in 1991, 4,500 employees in 1990, 4,700 employees in 1989, and
4,400 employees in 1988 who have beneficial ownership through the company's
retirement savings plans.
(e) Includes, for 1987 and 1986, a trustee who was the shareholder of record on
behalf of approximately 11,000 employees who obtained beneficial ownership
through the Armstrong Stock Ownership Plan, which was terminated at the end
of 1987.
- 20 -
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
---------------------
1993 compared with 1992
Financial condition
As shown on the Consolidated Statements of Cash Flows, net cash provided by
operating activities in 1993 was $291.2 million which was more than sufficient
to cover investments in property, plant, and equipment and dividends. The excess
cash, plus cash proceeds from the sale of assets and the decrease in cash and
cash equivalents, was used to reduce debt by $124.1 million.
For 1993, the company recorded an $89.9 million charge before tax ($60.0
million after tax) for restructuring resulting from 1993 decisions associated
with major process improvements and significant organizational changes
recommended by the teams of project PATH (a company initiative announced in
August 1993 to strengthen its global competitiveness). Approximately 80% of the
before-tax losses were related to charges for severance and special retirement
incentives associated with the elimination of employee positions, and
approximately one-third of the before-tax loss represented future cash outlays.
Most of the cash outlays are expected to occur in 1994 and to be offset by
operating savings. The operating cash savings, resulting from restructuring
actions taken during 1993 and 1992, more than offset the 1993 cash outlays of
$39.3 million for restructuring.
During the fourth quarter of 1993, the company terminated, prior to maturity,
interest rate swaps totaling $100 million, and currency swaps totaling $37.2
million.
Working capital was $204.1 million as of December 31, 1993--$37.0 million
higher than the $167.1 million at year-end 1992. The primary reason for the
increase in working capital was the repayment of short-term debt. Accounts
receivable and inventories declined $19.1 million and $33.2 million,
respectively, both reflecting reductions in most business units with half of the
reductions attributed to the European building products business.
A financing arrangement of a foreign subsidiary's principal pension plan,
whereby the subsidiary became self-insured for its pension obligations, resulted
in recording a noncurrent asset and long-term liability of $37.7 million (see
page 42).
The company's 1993 year-end ratio of current assets to current liabilities
was 1.47 to 1, compared with 1.31 to 1 ratio reported in 1992. The 1993 and 1992
year-end ratio of total debt to total capital was 52.2% and 57.2%, respectively.
The company is involved in significant asbestos-related litigation which is
described more fully under "Litigation" on pages 60-64 and which should be read
in connection with this discussion and analysis. The company does not know how
many claims will be filed against it in the future, nor the details thereof or
of pending suits not fully reviewed, nor the expense and any liability that may
ultimately result therefrom, nor does the company know the annual claims flow
caps to be negotiated after the initial 10-year period for the settlement class
action or the then compensatory levels to be negotiated for such claims or the
success the company may have in addressing the Midland Insurance Company
insolvency with its other insurers. Subject to the foregoing and based upon its
experience and other factors, the company believes that it is probable that
substantially all of the expenses and any liability payments associated
therewith will be paid--in the case of the personal injury claims, by agreed-to
coverage under the Wellington Agreement and supplemented by payments by non-
subscribing insurers that entered into settlement agreements with the company
and additional insurance coverage reasonably anticipated from the outcome of the
insurance litigation and from the company's claims for non-products coverage
both under certain insurance policies covered by the Wellington Agreement and
under certain insurance policies not covered by the Wellington Agreement which
claims have yet to be accepted by the carriers--and in the case of the asbestos-
related property damage claims, under
- 21 -
an existing interim agreement, by insurance coverage settlement agreements and
through additional coverage reasonably anticipated from the outcome of the
insurance litigation. To the extent that costs of the property damage litigation
are being paid by the company's insurance carriers under reservation of rights,
the company believes that it is probable that such payments will not be
subjected to recoupment. Thus, the company has not recorded any liability for
any defense costs or indemnity relating to these lawsuits other than a reserve
in "Other long-term liabilities" for the estimated potential liability
associated with claims pending and intended to cover potential liability and
settlement costs, legal and administrative costs not covered under the
agreements, and certain other factors which have been involved in the litigation
about which uncertainties exist. Even though uncertainties still remain as to
the potential number of unasserted claims, the liability resulting therefrom,
and the ultimate scope of its insurance coverage, after consideration of the
factors involved, including the Wellington Agreement, the settlements with other
insurance carriers, the results of the trial phase and the first level appellate
stage of the California insurance litigation, the remaining reserve, the
establishment of the Center for Claims Resolution, the proposed settlement class
action, and its experience, the company believes that this litigation will not
have a material adverse effect on its earnings, liquidity, or financial
position.
The accounting treatment for the Company's asbestos-related personal injury
litigation will be affected by changes in accounting practices required by the
Financial Accounting Standards Board Interpretation Number 39 (FIN 39) and the
Securities and Exchange Commission Staff Accounting Bulletin No. 92 (SAB 92).
FIN 39, which is effective beginning in 1994, does not permit offsetting unless
a right of set off exists. Historically, the Company has been following the
practice of offsetting the liability for asserted claims with expected insurance
coverage. The Company intends to reflect the required changes in its first
quarter 1994 Form 10-Q and, therefore, will record a liability for
asbestos-related personal injury claims and an asset for insurance coverage
deemed probable.
Reference is made to the litigation involving The Industry Network System,
Inc. (TINS), discussed on pages 64-65. The company denies all of TINS' claims
and accordingly is vigorously defending the matter. In the event that a jury
finds against the company, such jury verdict could entail unknown amounts
which, if sustained, could have a material adverse effect on its earnings and
financial position.
Reference is also made to environmental issues as discussed on pages 51, 52,
and 61. The company believes any sum it may have to pay in connection with
environmental matters in excess of amounts accrued would not have a material
adverse effect on its financial condition, liquidity, or results of operations.
Long-term debt, excluding the company's guarantee of the ESOP loan, was
reduced by $9.8 million in 1993. At year-end 1993, long-term debt represented
45% of shareholders' equity compared with 47% at the end of 1992.
Should a need develop for additional financing, it is management's opinion
that the company has sufficient financial strength to warrant the required
support from lending institutions and financial markets.
- 22 -
Consolidated results
Net sales in 1993 of $2.53 billion decreased 1.0% compared with 1992 sales of
$2.55 billion. The weaker European exchange rates were a key factor in the sales
decline. Translating foreign currency sales to U.S. dollars at 1992 exchange
rates would have resulted in a year-to-year sales increase of 1.9%. Armstrong's
residential markets were very positive in the U.S., but the weakness in the
European economies and the lackluster commercial markets worldwide reduced the
overall opportunity. While sales in the first two quarters of 1993 were lower
than the comparable 1992 quarters, third and fourth quarter sales did exceed
those of the prior year.
Net earnings were $63.5 million compared with a net loss in 1992 of $227.7
million. Net earnings per common share were $1.32 on a primary basis and $1.26
on a fully diluted basis. The net loss per share of common stock was $6.49 on
both a primary and fully diluted basis for 1992.
The return on common shareholders' equity in 1993 was 9.0% compared with a
negative 33.9% in 1992.
The 1992 loss reflects charges of $167.8 million after tax related to the
company's adoption, retroactive to January 1, 1992, of SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions;" and SFAS 112,
"Employers' Accounting for Postemployment Benefits." The computation of SFAS 112
was refined during 1993 with the net loss in 1992 being reduced and restated by
$6.5 million or 18 cents per share. The restated 1992 net loss from continuing
businesses totaled $59.9 million, or a $1.98 loss per share of common stock.
The effective tax rate for 1993 was 30.0%. This reflects the company's higher
use of foreign tax credits, reductions of deferred taxes because some foreign
countries reduced their statutory tax rates, and lower foreign tax rates, which
more than offset the 1% increase in the U.S. statutory tax rate. The net loss
from 1992 included an effective tax benefit rate of only 1.0%, primarily because
some of the restructuring charges did not provide tax benefits. The company also
adopted SFAS 109, "Accounting for Income Taxes," resulting in tax benefits of
$5.5 million for 1992 being credited directly to retained earnings rather than
to income taxes on the consolidated statement of earnings.
Restructuring charges for 1993, totaling $89.9 million before tax, were
included in the earnings from continuing businesses and were associated with
Armstrong initiatives to enhance its global competitiveness. These costs are
primarily associated with the elimination of employee positions in the U.S. and
Europe. For the full year 1992, restructuring charges totaled $165.5 million
before tax and related to the closing of four major manufacturing plants; the
scaling back of operations in certain other plants in the U. S. and abroad;
accruals for costs associated with the elimination of positions throughout the
rest of the company; as well as write-downs of the value of land, buildings,
equipment, and intangible assets of the company. Cash outlays for the 1993
restructuring charges will occur primarily throughout 1994 and should be fully
recovered within two to three years.
- 23 -
The cost of goods sold for 1993, when expressed as a percent of sales, was
71.4%--the lowest level for the last four years--and compares favorably with
1992's cost of goods sold of 74.1%. These lower costs reflect the positive
effects of the 1992 restructuring activities, productivity gains, some pricing
increases, and product mix enhancements.
Interest expense was favorably affected by lower debt levels and lower
interest accruals for tax obligations. Miscellaneous income and expense in 1993
included the positive effects of lower amortization of acquired intangibles as a
result of the 1992 restructuring, profits resulting from the closing out of some
interest rate swaps in anticipation of interest rate increases, and gain on sale
of assets. Partially offsetting these positive effects were some increased
environmental expenses and a small foreign exchange loss in 1993 compared with a
small foreign exchange gain in 1992.
Geographic area results (see pages 7 and 8)
United States--Sales increased by nearly 4% from 1992 levels. The 1992 net
sales included five months of the building products segment's grid sales that
were made prior to the formation of the Armstrong and Worthington Industries
joint venture (WAVE) effective June 1, 1992. Removing these sales from 1992
would result in an additional 1% increase in the year-to-year sales comparison.
Operating profits jumped 251% when comparing 1993 with those of 1992. The
continuing economic recovery provided increased opportunity in our end-use
markets. During 1993, single family housing starts increased 6% and the sale of
existing single family homes rose nearly 8%. Nonresidential new construction
appeared to be close to the bottom of its cycle.
A major source of higher sales in 1993 was the significant increase in
business channeled through national home centers and mass merchandisers. These
sales, coupled with the stronger resilient flooring business, were major factors
in generating significantly higher operating profits. The furniture and ceramic
tile businesses also generated higher sales, while sales in the building
products and textile products businesses were lower. The operating profit
improvements were also driven by the 1992 restructuring activities that resulted
in lower manufacturing costs in most domestic businesses, by some higher sales
levels, and by continuing productivity improvements.
Operating profits for both years included significant restructuring charges.
The 1993 and 1992 restructuring charges total about $37 million and $98 million,
respectively. The 1993 restructuring charges were primarily attributable to
position eliminations. The 1992 restructuring charges included closing two
plants, the write-down of fixed assets, and the elimination of employee
positions.
Export sales of Armstrong products from the U.S. to trade customers increased
nearly $3 million, or 11%, compared with 1992.
Europe--The 1993 European economic environment continued to be weak in both
the commercial and residential markets; however, the British market offered some
improvement for Armstrong products. Net sales decreased 16%, but two-thirds of
the decline reflected the weakening of European currencies. Excluding the impact
of the strong U.S. dollar, insulation products was the only business in Europe
that recorded a year-to-year sales increase. The European building products
business relies entirely on commercial construction and had the largest decline,
nearly 12%. Even with lower sales, operating profits for Europe improved 41%.
This improvement was primarily the result of lower costs caused by restructuring
actions taken in the latter part of 1992, including the closing of the Ghlin,
Belgium, ceilings manufacturing facility.
Other foreign--Sales in 1993 declined nearly 4% from those of 1992. Operating
profits were recorded for 1993 compared with an operating loss in 1992. The 1992
operating loss resulted from restructuring charges associated with the closing
of the Gatineau, Canada, ceilings manufacturing plant. The overall sales decline
was a result of lower sales of resilient flooring in Japan and Southeast Asia
that were partially offset by higher sales of flooring in Australia and Canada
and of building products in the Pacific Rim. Excluding the impact of the
restructuring charges in 1992, operating profit for 1993 increased in the year-
to-year comparison.
Industry segment results (see pages 3 and 4)
Floor coverings--Worldwide sales were 5% higher in 1993 than in 1992, with
operating profits increasing threefold from 1992 levels. The operating profit
included restructuring charges in 1993 of almost $28 million compared with
nearly $81 million in 1992. Almost three-fourths of the 1993 restructuring
charges were related to ceramic tile with the remainder recorded in resilient
flooring. Nearly all of the 1992 restructuring charges related to ceramic tile.
Sales in the resilient flooring portion increased in North America but were
lower in the European and Pacific areas. The North American increase was driven
by sales in the U.S. market with strong growth through national account home
centers and mass merchandisers as well as modest growth through wholesalers. The
U.S. resilient flooring business was also helped by higher sales of existing
homes and new housing construction. Ceramic tile recorded a modest sales
increase primarily because of its residential business. The commercial
institutional market for ceramic tile continued to be weak, providing little
sales growth in 1993 compared with 1992.
- 24 -
Operating profits, excluding the effects of restructuring charges, increased
42%. Resilient flooring operating profits improved because of the higher sales
levels and because of significantly lower manufacturing costs that were achieved
by process improvement and productivity gains. Ceramic tile continued to record
a loss in 1993 as it did in 1992, but the losses were less in each of the 1993
quarters when compared with 1992. The ceramic tile business was adversely
affected by very competitive pricing and a shift in product mix to lower margin
products.
Capital investments for 1993 were higher than those of 1992 with continued
concentration of these expenditures in improving and maintaining the current
manufacturing processes and in generating additional capacity from existing
equipment.
Building products--On a worldwide basis, market conditions did not improve in
the commercial construction markets in 1993. The North American sales
comparison reflects a decline because the first five months of 1992 included
grid that was sold prior to the formation of the WAVE joint venture. The
European markets, with the exception of the United Kingdom, were weaker in 1993.
European sales declined by nearly 22%, of which half was caused by weaker
European currencies.
The 1993 operating profit included restructuring charges of nearly $14
million, while the 1992 operating loss included $35 million of restructuring
charges. This segment lowered its cost structure significantly as a result of
restructuring actions taken in 1992 that included the closing of two
manufacturing facilities and productivity improvements that were attained in
1993. Even with lower sales and competitive pricing early in 1993, the lower
cost structure that was put in place, coupled with some higher sales prices in
the second half of 1993, permitted this segment to increase operating profits.
Capital investments in 1993 were about the same as 1992, but both years'
expenditures were lower than depreciation levels.
Furniture--Operating results for this segment were positive--1993 sales
nearly 3% higher than those of 1992 and operating profits more than 150% higher
than last year. Both years contained restructuring charges that were less than
$1 million in 1993 and nearly $5 million in 1992. Exclusive of restructuring
charges, this segment recorded operating profits that were 80% higher than last
year.
With the U.S. consumer household durable goods spending increasing in 1993,
modest sales increases were recorded in the Thomasville wood and upholstery
business that more than offset declines in the Armstrong retail, ready-to-
assemble furniture, and the contract business.
The operating profit improvement was driven by higher sales volume, lower
costs resulting from the 1992 restructuring program, and improved productivity.
Higher lumber costs had a negative impact on 1992 operating results and
continued to increase throughout much of 1993 but were offset by increased sales
prices. Capital expenditures in 1993 increased modestly over those of 1992.
Industry products--Almost three-quarters of the sales of this segment
generally occur in European markets, which in 1993 remained in recession,
limiting growth opportunities. Worldwide sales declined nearly 7%, with the
stronger U.S. dollar accounting for 95% of the decline. Operating profits
declined by slightly more than 7%, with restructuring charges of almost $13
million in each year.
The insulation business remains the most significant portion of this segment.
Excluding the negative effect of currency translation, sales grew modestly while
operating profits recorded a small decline. The German market remained
relatively strong for this business while markets in the other European
countries were adversely affected by weak economies. Sales in North America and
the Pacific Rim recorded a small increase in 1993. While the insulation business
restructuring programs did lower costs, they were not able to offset the impact
of the lower sales and competitive pricing pressures.
The textile mill supplies business recorded significantly lower sales that
were driven by the worldwide recession in the textile industry. This business,
while lowering its cost structure, was unable to offset the impact of the
significantly lower sales worldwide. The gasket materials business recorded
slightly lower sales, with a small decline in operating profit from 1992 levels.
Capital expenditures were reduced by about one-third from 1992 levels, but
were almost 40% greater than annual depreciation levels. The capital investments
continue generally to support future growth of this segment.
- 25 -
1992 compared with 1991
Financial condition
As shown on the Consolidated Statements of Cash Flows, net cash provided by
operating activities in 1992 was $186.8 million, more than sufficient to cover
investments in property, plant, and equipment, and dividends, and an investment
in a new joint venture. The balance of cash, including cash proceeds from sale
of assets, was used to reduce debt and increase cash and cash equivalents.
During the first quarter of 1992, the company redeemed, for $8.8 million, all
outstanding 8% sinking-fund debentures due in 1996 at face value plus accrued
interest to the date of redemption.
For 1992, the company recorded a $165.5 million charge before tax ($123.8
million after tax) in connection with a restructuring plan designed to
increase the overall profitability of the company by closing four major
plants; scaling back of certain operations; elimination of positions
throughout the company; and write-downs of land, buildings, equipment and
intangible assets. Approximately two-thirds of the before-tax losses were
noncash charges related to the write-down of assets. Cash outlays for
restructuring charges in 1992 were approximately $9.4 million. Most of the
cash outlays are expected to occur in 1993 and to be offset by operating
savings resulting from the restructuring.
During the fourth quarter of 1992, the company adopted three new financial
accounting statements: SFAS 106, SFAS 109 and SFAS 112. Adoption of these
financial accounting statements had no current cash flow impact on the company.
Receivables declined $2.7 million and inventories declined $17.0 million.
Each reflects the translation of foreign currency receivables or inventories to
U.S. dollars at lower exchange rates. Higher sales volume late in the fourth
quarter increased receivables and helped lower inventories. Current income tax
benefits increased $8.1 million, principally because of deferred tax benefits
related to restructuring charges. Other noncurrent assets decreased $53.1
million because of a $30.0 million write-off of intangible assets and a $30.0
million reduction of prepaid pension costs, both attributable to restructuring
activities. Partially offsetting the decreases in noncurrent assets were
investments in the WAVE grid joint venture.
- 26 -
The company's year-end ratio of current assets to current liabilities
declined to approximately 1.3 to 1 from the 1.5 to 1 ratio reported in 1991. The
major cause of the decline is the $47.9 million of accrued expenses associated
with restructuring activities.
The company is involved in significant litigation, which is described more
fully under "Litigation" on pages 60-65 and which should be read in connection
with this discussion and analysis.
Although the company does not know how many claims will be filed against it
in the future, nor the details thereof or of pending suits not fully reviewed,
nor the expense and any liability that may ultimately result therefrom, based
upon its experience and other factors, the company believes that it is probable
that nearly all of the expenses and any liability payments associated therewith
will be paid--in the case of the personal injury claims, by agreed-to coverage
under the Wellington Agreement and supplemented by payments by nonsubscribing
insurers that entered into settlement agreements with the company and additional
insurance coverage reasonably anticipated from the outcome of the insurance
litigation and from the company's claims for non-products coverage, both under
certain insurance policies covered by the Wellington Agreement and under certain
insurance policies not covered by the Wellington Agreement which claims have yet
to be accepted by the carriers--and in the case of the property damage claims,
under an existing interim agreement, by insurance coverage settlement agreements
and through additional coverage reasonably anticipated from the outcome of the
insurance litigation. To the extent that costs of the property damage litigation
are being paid by the company's insurance carriers under reservation of rights,
the company believes that it is probable that such payments will not be
subjected to recoupment. Thus, the company has not recorded any liability for
any defense costs or indemnity relating to these lawsuits other than a reserve
in "Other long-term liabilities" for the estimated potential liability
associated with claims pending intended to cover potential liability and
settlement costs, legal and administrative costs not covered under the
agreements, and certain other factors which have been involved in the litigation
about which uncertainties exist. Even though uncertainties still remain as to
the potential number of unasserted claims, the liability resulting therefrom,
and the ultimate scope of its insurance coverage, after consideration of the
factors involved, including the Wellington Agreement, the settlements with other
insurance carriers, the remaining reserve, the establishment of the Center for
Claims Resolution, the proposed settlement class action, and its experience, the
company believes that this litigation will not have a material adverse effect on
its earnings, liquidity, or financial position.
Reference is made to the litigation involving The Industry Network System,
Inc. (TINS), discussed on pages 64-65. The company denies all of TINS'
claims and accordingly is vigorously defending the matter. In the event that a
jury finds against the company, such jury verdict could entail unknown amounts
which, if sustained, could have a material adverse effect on its earnings and
financial position.
Long-term debt, excluding the company's guarantee of the ESOP loan, was
reduced by $34.8 million in 1992. At year-end 1992, long-term debt represented
47% of shareholders' equity compared with 34% at the end of 1991. The increase
is the result of shareholder equity reductions caused primarily by the
cumulative-effect charges from adoption of accounting statements and
restructuring charges previously discussed.
Should a need develop for additional financing, it is management's opinion
that the company has sufficient financial strength to warrant the required
support from lending institutions and financial markets. In June 1992, the
company's registration statement for $250 million of debt securities was
declared effective.
Consolidated results
Record net sales in 1992 of $2.55 billion increased 4.5% from $2.44 billion
in 1991. Increased sales opportunity was provided by the residential, do-it-
yourself, and industrial markets, while for the fifth consecutive year,
commercial markets remained depressed. European economies continued
- 27 -
to reflect a recessionary environment, which resulted in reduced demands for the
company's products. Sales in each of the 1992 quarters were above those of 1991.
The rate of growth was highest in the first quarter, but was lower during the
last three quarters of the year.
Net losses in 1992 were $227.7 million, compared with net earnings of $48.2
million in 1991. Net losses per share of common stock for 1992 were $6.49 on
both a primary and fully diluted basis compared with 1991 net earnings of 77
cents per share.
The return on common shareholders' equity in 1992 was a negative 33.9%
compared with a positive return of 3.3% in 1991.
The 1992 losses reflect charges of $167.8 million after tax related to the
company's adoption, retroactive to January 1, 1992, of SFAS 106 and SFAS 112.
The 1991 net earnings included a $12.4 million after-tax provision related to
discontinued businesses.
Losses from continuing businesses in 1992 totaled $59.9 million, compared
with earnings from continuing businesses of $60.6 million in 1991. The loss per
share of common stock from continuing businesses was $1.98 on both a primary and
fully diluted basis compared with 1991 earnings per share of $1.11.
The net loss for 1992 included an effective tax benefit rate of 1.0% compared
with 1991's effective tax rate of 39.6%. The reduced 1992 tax benefit rate is
generally because some of the restructuring charges do not provide tax benefits.
In addition, a lower share of foreign countries' earnings resulted in lower tax
rates. The company also adopted SFAS 109 resulting in tax benefits of $5.5
million for 1992 being credited directly to retained earnings rather than to
income taxes on the consolidated statement of earnings. The 1991 effective tax
rate included an increased share of the company's earnings coming from foreign
countries with higher tax rates and a $3.7 million deferred income tax charge
reflecting increases in state income tax rates.
The loss from continuing businesses before income taxes was $60.4 million,
compared to earnings from continuing businesses before income taxes in 1991 of
$100.3 million.
Included in the loss from continuing businesses for the full year 1992 were
restructuring charges of $165.5 million before tax. These restructuring charges
related to the closing of four major manufacturing plants--two in the U.S., one
in Canada, one in Belgium--and to the scaling back of operations in certain
other plants in the U.S. and abroad. Also included were accruals for costs
associated with elimination of positions throughout the company, as well as
write-downs of the value of land, buildings, equipment, and intangible assets of
the company. The cash outlays for the restructuring charges will occur primarily
in 1993 and are expected to be recovered by the savings resulting from the
restructuring. Restructuring charges for 1991 amounted to $8.4 million after
tax.
Lower short-term interest rates favorably affected interest expense.
Miscellaneous income and expense in 1992 included the positive effects of an
insurance reimbursement for certain costs associated with the 1990 takeover
threat, foreign exchange gains, lower amortization of intangibles, and a gain
from the early retirement of certain debt; the 1991 results included foreign
exchange gains of $5.9 million.
The cost of goods sold for 1992, when expressed as a percent of sales, was
74.1% compared with 1991's 73.8%. This higher cost relationship is the result of
the previously mentioned expense accruals required by SFAS 106 and SFAS 112.
Operating results were affected by competitive pricing pressures and higher
fixed costs concurrent with slow sales growth.
- 28 -
Geographic area results (see pages 7 and 8)
United States--Sales increased more than 4% while operating profits declined
61% when compared with 1991. Residential end-use markets improved significantly
in 1992 when compared with 1991. Single family housing starts increased at a
double digit rate while the sales of existing single family homes provided a
more modest increase. New construction put in place for private nonresidential
buildings was significantly lower in 1992 than in 1991.
The 1992 net sales included only five months of the building products
segment's grid sales compared with a full year's sales in 1991 as a result of
the grid joint venture with Worthington Industries effective June 1, 1992.
Results after that date have been recorded on an equity-accounting basis. The
major contributor to increased sales in 1992 was the resilient flooring business
which benefited from significant new product introductions and year-to-year
improvements in the previously mentioned single family housing starts and sales
of existing homes. Most domestic businesses were affected by competitive and
promotional pricing and less favorable product mix. Costs associated with the
expansion of the residential ceramic tile program adversely impacted profit
performance.
The largest decline in operating profit is attributable to the major
restructuring charges recorded during 1992, including the closing of the
Pleasant Garden, N.C., furniture plant, the closing of the Quakertown, Pa.,
quarry-tile ceramic plant, and related accruals for the write-downs of land,
buildings, and equipment, as well as elimination of employee positions.
Export sales of Armstrong products from the U.S. to trade customers declined
$5 million or 17% during 1992 when compared with 1991.
Europe--The 1992 economic environment in Euro