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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, 1995
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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 ($60.25 per share) on
the New York Stock Exchange on February 9, 1996, was approximately $1.9 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, 1996, as having sole or shared voting power
over 5% or more of the outstanding Common Stock of registrant as of December 31,
1995.
This amount does not include the 5,421,998 shares of Series A ESOP Convertible
Preferred Stock as of December 31, 1995, which vote with the Common Stock as if
converted and have an aggregate liquidation preference of $258,900,404, held by
Mellon Bank, N.A., as Trustee of the Company's Employee Stock Ownership Plan.
As of February 9, 1996, the number of shares outstanding of registrant's Common
Stock was 37,108,552.
Documents Incorporated by Reference
Portions of the Proxy Statement dated March 18, 1996, relative to the
April 29, 1996, annual meeting of the shareholders of registrant (the "Company's
1996 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, and building products 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 1995, Armstrong sold its furniture business and
combined its ceramic tile business with Dal-Tile International Inc. ("Dal-
Tile"), retaining a minority equity interest in the combined company. Unless
the context indicates otherwise, the term "Company" means Armstrong World
Industries, Inc. and its consolidated subsidiaries.
Industry Segments
The company's businesses include four reportable segments: floor coverings,
building products, industry products and ceramic tile.
at December 31 (millions) 1995 1994 1993
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Net trade sales:
Floor coverings $1,053.9 $1,063.5 $ 980.6
Building products 682.2 630.0 586.7
Industry products 348.8 312.2 297.7
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Total net sales $2,084.9 $2,005.7 $1,865.0
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Operating income (loss): (Note 1)
Floor coverings $ 145.0 $ 189.6 $ 156.6
Building products 92.2 86.8 18.8
Industry products 9.3 41.2 27.2
Ceramic tile (Note 2) (168.4) 0.8 (44.3)
Unallocated corporate expense (34.0) (23.8) (59.8)
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Total operating income $ 44.1 $ 294.6 $ 98.5
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Depreciation and amortization:
Floor coverings $ 47.9 $ 49.2 $ 48.2
Building products 36.8 34.5 34.1
Industry products 19.3 17.6 14.6
Corporate 5.6 5.6 5.2
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Total depreciation
and amortization $ 109.6 $ 106.9 $ 102.1
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Capital additions: (Note 3)
Floor coverings $ 77.3 $ 56.7 $ 39.7
Building products 49.2 31.5 24.2
Industry products 45.0 22.6 22.1
Corporate 6.3 3.0 1.8
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Total capital additions $ 177.8 $ 113.8 $ 87.8
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Identifiable assets:
Floor coverings $ 583.2 $ 575.7 $ 541.2
Building products 513.5 478.1 483.0
Industry products 301.8 234.8 207.9
Ceramic tile 135.8 270.5 251.9
Discontinued business -- 182.1 175.4
Corporate 615.5 398.2 185.4
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Total assets $2,149.8 $2,139.4 $1,844.8
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Note 1:
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Restructuring charges in
operating income (millions) 1995 1994 1993
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Floor coverings $ 25.0 -- $ 8.4
Building products 6.3 -- 13.7
Industry products 31.4 -- 12.9
Ceramic tile -- -- 19.3
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Unallocated corporate expense 9.1 -- 35.0
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Total restructuring charges
in operating income $ 71.8 -- $ 89.3
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Note 2: 1995 operating income includes a $177.2 million loss due to the ceramic
tile business combination.
Note 3: 1995 capital additions for industry segments include property, plant and
equipment from acquisitions of $15.6 million.
DISCONTINUED OPERATIONS
On December 29, 1995, the company sold the stock of its furniture subsidiary,
Thomasville Furniture Industries, Inc., to INTERCO Incorporated for $331.2
million. INTERCO assumed $8.0 million of Thomasville interest-bearing debt. The
company recorded a gain of $83.9 million after tax on the sale. Certain
liabilities related to terminated benefit plans of approximately $11.3 million
were retained by the company. Thomasville and its subsidiaries recorded sales of
approximately $550.2 million in 1995, $526.8 million in 1994 and $449.7 million
in 1993.
Operating statement categories, except where otherwise indicated, have been
restated to exclude the effects of this discontinued business.
EQUITY EARNINGS FROM AFFILIATES
On December 29, 1995, the company entered into a business combination with Dal-
Tile International Inc. The transaction was accounted for at fair value and
involved the exchange of $27.6 million and the stock of the ceramic tile
operations, consisting primarily of American Olean Tile Company, a wholly-owned
subsidiary, for ownership of 37% of the shares of Dal-Tile. The company's
investment in Dal-Tile exceeds the underlying equity in net assets by $123.9
million which will be amortized over a period of 30 years. The after-tax loss on
the transaction was $116.8 million.
Results from ceramic tile operations, which were previously reported on a
consolidated basis, were restated and included in "Equity Earnings from
Affiliates." Going forward, Armstrong's 37% ownership of the combined Dal-Tile
will be accounted for under the equity method. The summarized financial
information for ceramic tile operations is presented below.
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(millions) 1995 1994 1993
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Net sales $240.0 $220.2 $210.7
Operating income (loss)/1/ 8.8 .8 (44.3)
Assets/2/ 269.8 290.1 276.3
Liabilities/2/ 17.3 19.6 24.4
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Note 1: Excludes 1995 loss of $177.2 million due to ceramic tile business
combination.
Note 2: 1995 balances were as of December 29, 1995, immediately prior to the
ceramic tile business combination.
Also included in equity earnings from affiliates are earnings from the 50%
interest in the WAVE joint venture with Worthington Industries. Previously these
earnings had been included in selling, general and administrative expenses.
-3-
Narrative Description of Business
The Company manufactures and sells interior furnishings, including floor
coverings and building products, 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 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. 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.
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
materials and accessories, along with acoustical wall panels, are sold by the
Company to ceiling systems contractors and to resale distributors. Grid
products are manufactured and sold through a joint venture with Worthington
Industries.
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 and adhesives. Industry products are
sold, depending on type and ultimate use, to original equipment manufacturers,
contractors, wholesalers, fabricators and end users. In 1995, the Company
announced its intention to discuss with potential buyers the possible sale of
its textile products operation.
Ceramic Tile
Ceramic tile for floors, walls and countertops, together with adhesives,
installation and maintenance materials and accessories are sold through home
centers and sales and service centers operated by Dal-Tile following a business
combination of the Company's ceramic tile operations with Dal-Tile in late 1995.
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The principal raw materials used in the manufacture of the Company's products
are synthetic resins, 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 1995, despite raw material cost increases, especially for plasticizers,
resins, and paper, 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.
The Company invested $162.2 million in 1995, $113.8 million in 1994, and $87.8
million in 1993 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.
The Company spent $56.2 million in 1995, $51.4 million in 1994, and $56.1
million in 1993 on research and development activities worldwide for the
continuing businesses.
ENVIRONMENTAL MATTERS
In 1995, the company incurred capital expenditures of approximately $1.9 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1996 and 1997. The company
does not anticipate that it will incur significant capital expenditures in order
to meet the new requirements of the Clean Air Act of 1990 and the final
implementing regulations promulgated by various state agencies.
As with many industrial companies, Armstrong is involved in proceedings under
the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), and similar state laws at approximately 16 sites. In most cases,
Armstrong is one of many potentially responsible parties ("PRPs") who have
voluntarily agreed to jointly fund the required investigation and remediation of
each site. With regard to some sites, however, Armstrong disputes the liability,
the proposed remedy or the proposed cost allocation. Armstrong is alleged to
have contributed a significant volume of waste material at a former municipal
landfill site in Volney, New York. There, Armstrong, along with the county and
other PRPs at the site, have voluntarily performed a supplemental study to
evaluate the USEPA's proposed remedy at the site. Discussions with the USEPA are
continuing regarding the appropriate remedy to be implemented. A former county
landfill site in Buckingham County, Virginia, is also alleged to have received
material from a former subsidiary, Thomasville Furniture Industries, Inc.
("Thomasville"). In September 1995, the USEPA ordered Thomasville to implement
the remedy identified in the September 1994, Record of Decision ("ROD"), the
cost of which has been estimated by Thomasville to be approximately $2.2
million. Pursuant to the terms of the company's December 29, 1995, sale of
Thomasville to INTERCO Incorporated, Armstrong has provided to the USEPA a
guarantee of the performance by Thomasville of the required remedial work and
has also entered into a cost-sharing agreement with INTERCO for future costs
relating to the site. 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, Armstrong's contribution
to the remediation of these sites is expected to be limited by the number of
other companies also identified as potentially liable for site costs. As a
result, 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.
Reserves at December 31, 1995, were for potential environmental liabilities that
the company considers probable and for which a reasonable estimate of the
potential liability could be made. Where existing data is sufficient to estimate
the amount of the liability, that estimate has been used; where only a range of
probable liability is available and no amount within that range is more likely
than any other, the lower end of the range has been used. As a result, the
company has accrued, before agreed-to insurance coverage, $8.0 million to
reflect its estimated undiscounted 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.
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
material adverse effect on its financial condition, liquidity or results of
operations.
-5-
As of December 31, 1995, the Company had approximately 10,820 active employees,
of whom approximately 3,615 are located outside the United States. Year-end
employment in 1995 was below the level at the end of 1994 primarily as the
result of the sale of the furniture business, the ceramic tile business
combination and various restructuring activities. About 65% of the Company's
approximately 4,380 hourly or salaried production and maintenance employees in
the United States are represented by labor unions.
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GEOGRAPHIC AREAS
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Geographic areas
at December 31 (millions) 1995 1994 1993
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Net trade sales:
United States $1,346.3 $1,343.7 $1,250.3
Europe 558.7 483.4 456.6
Other foreign 179.9 178.6 158.1
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Interarea transfers:
United States 101.1 94.7 75.8
Europe 13.8 8.7 6.0
Other foreign 32.1 26.1 21.9
Eliminations (147.0) (129.5) (103.7)
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Total net sales $2,084.9 $2,005.7 $1,865.0
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Operating income:
United States $ 7.7 $ 235.5 $ 116.6
(See Note 2 on page 3)
Europe 62.6 75.3 31.7
Other foreign 7.8 7.6 10.0
Unallocated corporate expense (34.0) (23.8) (59.8)
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Total operating income $ 44.1 $ 294.6 $ 98.5
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Identifiable assets:
United States $1,044.5 $1,110.5 $1,074.1
Europe 406.7 376.5 347.0
Other foreign 83.4 72.6 63.2
Discontinued business -- 182.1 175.4
Corporate 615.5 398.2 185.4
Eliminations (0.3) (0.5) (0.3)
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Total assets $2,149.8 $2,139.4 $1,844.8
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United States net trade sales include export sales to non-affiliated customers
of $30.8 million in 1995, $24.9 million in 1994 and $19.8 million in 1993.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain and Switzerland. Operations in Australia,
Canada, The People's Republic of 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 income of a geographic area includes income accruing from sales to
affiliates.
-7-
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
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The Company produces and markets its products and services throughout the world,
operating 48 manufacturing plants in 12 countries; 25 of these plants are
located throughout the United States. Additionally, affiliates operate eight
plants in three countries.
Floor covering products and adhesives are produced at 18 plants with principal
manufacturing facilities located in Lancaster, Pennsylvania, and Stillwater,
Oklahoma. Building products are produced at 14 plants with principal facilities
in Macon, Georgia, the Florida-Alabama Gulf Coast area and Marietta,
Pennsylvania. Insulating materials, textile mill supplies, fiber gasket
materials and specialty papers and other products for industry are manufactured
at 16 plants with principal manufacturing facilities at Munster, Germany, and
Fulton, New York.
Numerous sales offices are leased worldwide, and leased facilities are utilized
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 1995 at 80% to
90% of overall productive capacity in meeting market conditions. Remaining
productive capacity is sufficient to meet expected customer demands.
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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OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS - The full report on the
Asbestos-Related Litigation immediately follows this summary.
The Company is involved, as of December 31, 1995, in approximately 59,000
pending personal injury asbestos claims and lawsuits, and 32 pending claims and
lawsuits involving asbestos-containing products in buildings. The Company's
insurance carriers provide coverage for both types of claims. The personal
injury claims (but not property damage claims) are handled by the Center for
Claims Resolution (the "Center"). Personal injury claims in the federal courts
have been transferred by the Judicial Panel for Multidistrict Litigation to the
Eastern District of Pennsylvania for pretrial purposes. State court cases have
not been directly affected by the transfer. A settlement class action that
includes essentially all future personal injury claims against Center members
was filed on January 15, 1993, in the Eastern District of Pennsylvania. The
court has tentatively approved the settlement, although it will not become final
until certain issues, including insurance coverage for class members' claims,
are resolved, and appeals are exhausted, which could take several years.
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An Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement")
provides for settlement of insurance coverage for personal injury claims with
certain primary carriers and excess carriers. Settlement agreements that
complement the Wellington Agreement have been signed with one primary carrier
and certain excess carriers. Litigation that was undertaken by the Company in
California for insurance coverage for asbestos-related personal injury and
property damage lawsuits and claims is now on appeal from favorable final
decisions of the trial court and the California Court of Appeal. The case has
been returned to the Court of Appeal by the California Supreme Court for
additional review in light of a recent favorable Supreme Court decision in
another case. This litigation did not encompass coverage for non-products
claims that is included in the Company's primary policies and certain excess
policies. This additional coverage is substantial and negotiations are underway
with several primary carriers. If non-products coverage issues are not resolved
through negotiation, the Company can pursue alternative dispute resolution
proceedings against the primary and certain excess carriers pursuant to the
Wellington Agreement.
The Company believes that an estimated $166 million in liability and defense
costs recorded on its balance sheet will be incurred to resolve approximately
59,000 asbestos-related personal injury claims against the Company as of
December 31, 1995. An insurance asset in the amount of $166 million recorded on
the balance sheet reflects the Company's belief in the availability of insurance
in this amount to cover the liability for these pending claims. The Company
also projects the maximum cost in the settlement class action as a reasonably
possible additional liability of $245 million for a ten-year period; a portion
of such additional projected liability may not be covered by the Company's
ultimately applicable insurance recovery. Although subject to uncertainties and
limitations, the Company also believes it is probable that substantially all of
the expenses and liability payments associated with the asbestos-related
property damage claims will be covered by insurance.
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 settlements with other insurance carriers, the results of the
trial phase and the intermediate appellate stage 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 would not be material
either to the financial condition of the Company or to its liquidity, although
the net effect of any future liabilities recorded in excess of insurance assets
could be material to earnings in a future period.
The full report on the asbestos-related litigation is set forth below:
Asbestos-Related Litigation
The Company is one of many defendants in pending lawsuits and claims involving,
as of December 31, 1995, approximately 59,000 individuals alleging personal
injury from exposure to asbestos. Included in the above number are
approximately 12,800 lawsuits and claims from the approximately 87,000
individuals who have opted out of the settlement class action referred to below.
About 14,300 claims from purported settlement class members were received as of
December 31, 1995. Of those claims, many do not qualify at this time for
payment. (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 (the "Center"), referred to below. It is expected that this process
will provide more current tracking of outstanding claims. The reconciliation
between the two systems continues. Claim numbers in this note have been
received from the Center and its consultants.)
-9-
Nearly all the personal injury suits and claims, except those claims covered by
the settlement class action, seek general and punitive damages arising from
alleged exposures, during various times, from World War II onward, to asbestos-
containing insulation products used, manufactured or sold by the companies
involved in the asbestos-related litigation. These claims against the Company
generally involve allegations of negligence, strict liability, breach of
warranty and conspiracy. The Company discontinued the sale of all asbestos-
containing insulation products in 1969. 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 name many defendants
(including both members of the Center and other companies), and over 100
different companies are reportedly involved. The Company believes that many
current plaintiffs are unimpaired. A few state and federal judges have
consolidated numbers of asbestos-related personal injury cases for trial, which
the Company has generally opposed as unfair. 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. 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 parties to securing a comprehensive
resolution of pending as well as potential future asbestos-related personal
injury claims. The Judicial Panel for Multidistrict Litigation ordered the
transfer of all pending federal cases to a single court, the Eastern District of
Pennsylvania in Philadelphia, for pretrial purposes. The Company has supported
such action. Some of these cases are periodically released for trial, although
the issue of punitive damages is retained by the Eastern District Court. State
court cases have not been directly affected by the transfer. The Court in the
Eastern District has been instrumental in having the parties resolve large
numbers of cases in various jurisdictions and has been receptive to different
approaches to the resolution of asbestos-related personal injury claims.
Settlement Class Action
A settlement class action that includes essentially all future asbestos-related
personal injury claims against members of the Center was filed in the Eastern
District of Pennsylvania, on January 15, 1993. 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 the Company. Other companies that 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 meet certain exposure and medical
criteria. Compensation amounts are derived from historical settlement data.
Under limited circumstances and in limited numbers, qualifying claimants may
choose to arbitrate or litigate certain claims 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 claims. Each member of the Center has an obligation for its own fixed
share in this proposed settlement. The District Court has ruled that claimants
who neither filed a lawsuit against the members of the Center nor filed an
exclusion request form are subject to the class action. The class action does
not include claims deemed otherwise not covered by the class action settlement,
or claims for property damage. Annual case flow caps and 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 if they were substantially
-10-
exceeded during the previous five-year period. The case flow figures and annual
compensation levels are subject to renegotiation after the initial ten-year
period. On August 16, 1994, the Court tentatively approved the settlement, and
notification has been provided to class members. Approximately 87,000
individuals have opted out. The opt outs are not claims as such but rather are
reservations of rights to possibly bring claims in the future. The settlement
will become final only after certain issues, including issues related to
insurance coverage, are resolved and appeals are exhausted. This process could
take several years. The Center members have stated their intention to resolve
over a five-year period the personal injury claims that were pending when the
settlement class action was filed. A significant number of claims have been
finally or tentatively settled or are currently the subject of negotiations.
The Company is seeking agreement from its insurance carriers or a binding
judgment against them that the class action will not jeopardize existing
insurance coverage; the class action is contingent upon such an agreement or
judgment. With respect to carriers that do not agree, this matter will be
resolved either by alternative dispute resolution, in the case of carriers that
subscribed to the Wellington Agreement, or else by litigation.
The Company believes that the future claimants settlement class action will
receive final approval. However, the potential exists that an appellate court
will reject or modify the settlement class action or that the above-referenced
companion insurance action will not be successful.
Insurance Carriers/Wellington Agreement
The Company's insurance carriers provide defense and indemnity coverage for
asbestos-related personal injury claims. All of the Company's primary insurers
are paying for the defense of property damage claims. Three of the four
carriers are paying for the defense under an Interim Agreement pending the final
resolution of the coverage issues for property damage claims in the California
insurance litigation. The remaining carrier entered into a separate agreement
with the Company resolving coverage issues for both personal injury and property
damage claims.
Various insurance carriers provide products and nonproducts coverage for the
Company's asbestos-related personal injury claims and product coverage for
property damage claims. Certain policies providing products coverage for
personal injury claims have been exhausted. A list of the insurance carriers
that currently provide coverage or whose policies have made available or provide
personal injury, nonproducts or property damage coverages is as follows:
Reliance Insurance Company; Aetna Casualty and Surety Company; Liberty Mutual
Insurance Companies; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier, that
insured the Company for $25 million of bodily injury products coverage, is
insolvent; the Company is pursuing claims with the state guaranty associations.
The gap in coverage created by the Midland Insurance Company insolvency will be
covered by other insurance. 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, certain insurance carriers
that were not in the Company's California insurance litigation also provide
insurance for asbestos-related property damage claims.
-11-
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 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 insurance 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. 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.
The Wellington Agreement also provided for the establishment of the Facility to
evaluate, settle, pay and defend all personal injury claims against member
companies. The insurance coverage designated by the Company for coverage in the
Facility consisted of all relevant insurance policies issued to the Company from
1942 through 1976. Liability payments and allocated expenses were allocated by
formula to each member, including the Company. The Facility, now dissolved, was
negatively impacted by concerns of certain members about their share of
liability payments and allocated expenses and by certain insurer concerns about
defense costs and Facility operating expenses.
Center for Claims Resolution
A new asbestos-related personal injury claims handling organization known as the
Center for Claims Resolution was created in October 1988 by Armstrong and 20
other companies, all of which were former members of the Facility. Insurance
carriers did not become members of the Center, although a number of carriers
signed an agreement to provide approximately 70% of the financial support for
the Center's operational costs during its first year of operation; 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 formula for shares of liability payments and defense costs 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 caused a
slight increase in the Company's share and subsequent share adjustments also
resulted in an increased liability share for the Company in certain areas. In
the settlement class action, each member will pay its own fixed share of every
claim.
A large share member earlier withdrew from the Center, and the allocated shares
of liability payments and defense costs of the Center were recalculated,
resulting in the remaining members' shares being increased. Under the class
action settlement resolution, if a member withdraws, the shares of remaining
members will not be increased. The Center members have reached an agreement
annually with the insurers relating to the continuing operation of the Center
and expect that the insurers will provide funding for the Center's operating
expenses for its eighth year of operation. The Center
-12-
will continue to process pending claims as well as future claims in the
settlement class action.
An increase in the utilization of the Company's insurance also has occurred as a
result of the class action settlement and the commitment at the time to attempt
to resolve pending claims within five years. Aside from the class action
settlement, no forecast can be made for future years regarding either the rate
of claims, 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
finalized and all appeals are exhausted, projections of the rate of disposition
of future cases may be made.
Property Damage Litigation
The Company is also one of many defendants in a total of 32 pending lawsuits and
claims, including one class action, as of December 31, 1995, brought by 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 previously installed asbestos-containing resilient
flooring. Among the lawsuits that have been resolved are four class actions
that had been certified, each involving a distinct class of building owner:
public and private schools; Michigan state public and private schools; colleges
and universities, and private property owners who leased facilities to the
federal government. In three of these class actions, the courts have given
final approval and dismissed the actions with prejudice. In the college and
universities class action, a settlement has been reached with the class
representative and is subject to a fairness hearing. 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, litigation against them (with several exceptions) has been stayed
or restricted. Due to the uncertainties involved, the long-term effect of these
proceedings on the litigation cannot be predicted.
California Insurance Coverage Lawsuit
The California trial court issued final decisions in various phases in the
insurance lawsuit including a decision that the trigger of coverage for 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
-13-
occurred. The California Court of Appeal has substantially upheld the trial
court. The insurance carriers petitioned the California Supreme Court to hear
the various asbestos-related personal injury and property damage coverage
issues. The California Supreme Court accepted review pending its review of
related issues in another case. It ruled in favor of the insured company in
that case, and then referred the Company's case back to the Court of Appeal for
further review in light of that decision. Based upon the trial court's
favorable final decisions, 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 complementary to 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. In 1994, the Company also settled coverage issues for asbestos-related
claims with a significant excess carrier.
Non-Products Insurance Coverage
Non-products insurance coverage is included in the Company's primary insurance
policies and certain excess policies for non-products claims. The settlement
agreement referenced above with one primary carrier included an amount for non-
products claims. 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 yet to be resolved
asbestos-related personal injury claims as non-products claims and to establish
the entitlement to such coverage. The additional coverage potentially available
to pay claims categorized as non-products 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 primary carrier 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 various 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, has coverage rights under some
of the Company's insurance policies for certain insurance periods, and has
accessed such coverage on the same basis as the Company. It was a subscriber to
the Wellington Agreement, but is not a member of the Center. The Company and
ACandS, Inc., have negotiated a settlement agreement which
-14-
reserves for ACandS, Inc. a certain amount of insurance from the joint policies
solely for its own use for asbestos-related claims.
Conclusions
Based upon the Company's experience with this litigation and the disputes with
its 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 that 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, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
flow caps to be negotiated after the initial ten-year period for the settlement
class action or the compensation levels to be negotiated for such claims or the
scope of its non-products coverage ultimately deemed available or the ultimate
conclusion of the California insurance coverage litigation.
Subject to the uncertainties and limitations referred to in this note and based
upon its experience and other factors also referred to in this note, the Company
believes that the estimated $166 million in liability and defense costs recorded
on the balance sheet will be incurred to resolve an estimated 59,000 asbestos-
related personal injury claims pending against the Company as of December 31,
1995. These claims include those that were filed for the period from January 1,
1994, to January 24, 1994, and which were previously treated as potentially
included within the settlement class action, and those claims filed by claimants
who have been identified as having filed exclusion request forms to opt out of
the settlement class action. A ruling from the Court established January 24,
1994, as the date after which asbestos-related personal injury claims are
subject to the settlement class action. In addition to the currently estimated
pending claims and claims filed by those who have opted out of the settlement
class action, claims otherwise determined not to be subject to the settlement
class action will be resolved outside the settlement class action. The Company
does not know how many such claims ultimately may be filed by claimants who have
opted out of the class action or by claimants determined not to be subject to
the settlement class action.
An insurance asset in the amount of $166 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation. The Company also notes that, based on maximum
mathematical projections covering a ten-year period from 1994 to 2004, its
estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability
may not be covered by the Company's ultimately applicable insurance recovery.
However, the Company believes that any after-tax impact on the difference
between the aggregate of the estimated liability for pending
-15-
cases and the estimated cost for the ten-year maximum mathematical projection,
and the probable insurance recovery, would not be material either to the
financial condition of the Company or to its liquidity, although it could be
material to earnings if it is determined in a future period to be appropriate to
record a reserve for this difference. The period in which such a reserve may be
recorded and the amount of any reserve that may be appropriate cannot be
determined at this time. Subject to the uncertainties and limitations referred
to elsewhere in this note and based upon its experience and other factors
referred to above, the Company believes it is probable that substantially all of
the expenses and any liability payments associated with the asbestos-related
property damage claims will be paid under an existing interim agreement, by
insurance coverage settlement agreements and through additional coverage
reasonably anticipated from the outcome of the insurance litigation.
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 intermediate appellate stage 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 would not
be material either to the financial condition of the Company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
_______________________________
TINS Litigation
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, Inc.
(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. On April 19, 1991, 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-
-------------------------------------------
-16-
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' claim for an alleged violation of Section 1 of
the Sherman Act; reversed the trial judge's judgment in favor of Armstrong on
TINS' claim for tortious interference; reversed the trial judge's judgment in
favor of Armstrong on TINS' claim for punitive damages; and reversed the trial
judge's ruling that had dismissed TINS' alleged breach of contract claim.
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, 1993, that the Supreme Court denied its Petition.
After the case was remanded by the Third Circuit Court of Appeals in
Philadelphia to the U.S. District Court in Newark, New Jersey, a new trial
commenced on April 26, 1994. TINS claimed damages in the form of lost profits
ranging from approximately $17 million to approximately $56 million. Plaintiff
also claimed punitive damages in conjunction with its request for tort damages.
Other damages sought included reimbursement of attorneys' fees and interest,
including prejudgment interest.
On August 19, 1994, the jury returned a verdict in favor of the Company finding
that the Company had not caused damages to TINS. The court subsequently entered
judgment in the Company's favor based upon the verdict. TINS' motion for a new
trial based upon alleged inaccurate jury instructions and alleged improper
evidentiary rulings during the trial was denied and TINS filed an appeal with
the U.S. Court of Appeals for the Third Circuit. On October 11, 1995, the case
was argued before a panel of the U.S. Court of Appeals for the Third Circuit,
and on October 20, 1995, the court issued a Judgment Order affirming the 1994
District Court verdict in favor of the Company. On November 2, 1995, TINS filed
a Petition for Rehearing by the same panel which was denied on December 5, 1995.
On January 24, 1996, TINS filed a motion seeking further appellate review by the
Circuit Court; that motion has been denied.
_____________________________
-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
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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
February 9, 1996, there were approximately 7,120 holders of record of the
Company's Common Stock.
Quarterly financial information (millions except for per-share data) First Second Third Fourth Total year
- ----------------------------------------------------------------------------------------------------------------------------------
1995* Net sales $502.2 $536.0 $549.0 $497.7 $2,084.9
Gross profit 166.7 177.9 184.6 146.0 675.2
Earnings (loss) from continuing businesses 26.5 47.4 14.4 (74.7) 13.6
Net earnings 34.4 52.7 19.4 16.8 123.3
Per share of common stock:**
Primary: Earnings (loss) from continuing businesses 0.61 1.17 0.29 (2.09) (0.02)
Net earnings 0.82 1.31 0.42 0.35 2.90
Fully diluted: Earnings (loss) from continuing businesses 0.57 1.05 0.28 (2.09) (0.02)
Net earnings 0.75 1.18 0.40 0.34 2.67
Dividends per share of common stock 0.32 0.36 0.36 0.36 1.40
Price range of common stock -- low 38 3/8 43 50 1/4 52 7/8 38 3/8
Price range of common stock -- high 48 1/2 52 60 1/2 64 1/8 64 1/8
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1994* Net sales $461.1 $508.6 $525.6 $510.4 $2,005.7
Gross profit 153.9 180.6 190.9 154.8 680.2
Earnings from continuing businesses 42.5 48.7 56.6 39.4 187.2
Net earnings 48.0 53.3 61.6 47.5 210.4
Per share of common stock:**
Primary: Earnings from continuing businesses 1.03 1.19 1.41 0.93 4.60
Net earnings 1.17 1.31 1.54 1.17 5.22
Fully diluted: Earnings from continuing businesses 0.93 1.07 1.25 0.85 4.10
Net earnings 1.06 1.18 1.37 1.04 4.64
Dividends per share of common stock 0.30 0.32 0.32 0.32 1.26
Price range of common stock -- low 49 3/8 43 3/8 43 36 36
Price range of common stock -- high 57 1/2 57 1/4 53 7/8 46 5/8 57 1/2
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* 1994 and the first, second and third quarters of 1995 have been restated for
the results of the discontinued business and formation of the ceramic tile
business combination.
**The sum of the quarterly earnings per-share data does not always equal the
total year amounts due to changes in the average shares outstanding and, for
fully diluted data, the exclusion of the antidilutive effect in certain
quarters.
-18-
Item 6. Selected Financial Data
- ---------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except for per-share data)
For year 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales 2,084.9 2,005.7 1,865.0 1,912.0 1,828.7 1,865.3 1,832.7 1,790.7 1,608.7 1,295.0
Cost of goods sold 1,409.7 1,325.5 1,286.5 1,378.4 1,316.6 1,315.5 1,273.3 1,253.7 1,112.0 889.2
Total selling, general and
administrative expenses 397.1 388.1 347.8 296.9 341.1 340.6 303.8 309.0 288.8 240.3
Equity (earnings) loss
from affiliates (15.0) (2.5) 42.9 107.8 38.4 0.6 9.1 3.5 -- --
Restructuring charges 71.8 -- 89.3 160.8 12.5 6.8 5.9 -- -- --
Loss from ceramic tile
business formation/(gain)
from sales of woodlands 177.2 -- -- -- -- (60.4) (9.5) (1.9) -- --
Operating income (loss) 44.1 294.6 98.5 (31.9) 120.1 262.2 250.1 226.4 207.9 165.5
Interest expense 34.0 28.3 38.0 41.6 45.8 37.5 40.5 25.8 11.5 5.4
Other expense (income), net 1.9 0.5 (6.1) (7.2) (8.5) 19.7 (5.7) (13.1) (4.3) (3.1)
Earnings (loss) from
continuing businesses
before income taxes 8.2 265.8 66.6 (66.3) 82.8 205.0 215.3 213.7 200.7 163.2
Income taxes (5.4) 78.6 17.6 (2.9) 32.7 69.5 74.6 79.4 82.2 70.0
Earnings (loss) from
continuing businesses 13.6 187.2 49.0 (63.4) 50.1 135.5 140.7 134.3 118.5 93.2
As a percentage of sales 0.7% 9.3% 2.6% -3.3% 2.7% 7.3% 7.7% 7.5% 7.4% 7.2%
As a percentage of average
monthly assets (a) .9% 12.7% 3.4% -4.1% 3.3% 9.4% 11.1% 11.2% 11.3% 10.8%
Earnings (loss) from
continuing businesses
applicable to common stock (b) (0.7) 173.1 35.1 (77.2) 30.7 116.0 131.0 133.9 118.0 92.8
Per common share -- primary (0.02) 4.60 0.93 (2.07) 0.83 2.98 2.88 2.90 2.50 1.93
Per common share --
fully diluted (c) (0.02) 4.10 0.92 (2.07) 0.83 2.74 2.76 2.90 2.50 1.93
Net earnings (loss) 123.3 210.4 63.5 (227.7) 48.2 141.0 187.6 162.7 150.4 122.4
As a percentage of sales 5.9% 10.5% 3.4% -11.9% 2.6% 7.6% 10.2% 9.1% 9.3% 9.4%
Net earnings (loss)
applicable to common
stock (b) 109.0 196.3 49.6 (241.5) 28.8 121.5 177.9 162.3 150.0 122.0
As a percentage of average
shareholders' equity 15.0% 31.3% 9.0% -33.9% 3.3% 13.0% 17.9% 17.0% 17.6% 16.0%
Per common share -- primary 2.90 5.22 1.32 (6.49) 0.77 3.12 3.92 3.51 3.18 2.54
Per common share --
fully diluted (c) 2.67 4.64 1.26 (6.49) 0.77 2.86 3.72 3.51 3.18 2.54
Dividends declared per
share of common stock 1.40 1.26 1.20 1.20 1.19 1.135 1.045 0.975 0.885 0.7325
Purchases of property,
plant and equipment 162.2 113.8 87.8 98.6 116.9 160.2 200.9 163.2 156.7 119.1
Aggregate cost of acquisitions 20.7 -- -- 4.2 -- 16.1 -- 355.8 71.5 53.1
Total depreciation and
amortization 109.6 106.9 102.1 106.4 103.9 100.3 102.0 94.8 83.6 67.6
Average number of
employees -- continuing
businesses 11,365 11,612 12,413 13,448 13,714 14,017 14,056 14,224 14,036 12,953
Average number of common
shares outstanding 37.1 37.5 37.2 37.1 37.1 38.8 45.4 46.2 47.2 48.1
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Year-end position
Working capital--
continuing businesses 346.8 304.8 213.2 171.6 277.3 218.6 364.6 178.0 345.3 401.5
Net property, plant and equipment--
continuing businesses 878.2 807.9 786.0 810.0 855.2 837.2 760.3 743.3 674.1 534.7
Total assets 2,149.8 2,139.4 1,844.8 1,922.3 2,109.4 2,105.4 1,992.3 2,057.8 1,574.9 1,277.5
Long-term debt 188.3 237.2 256.8 266.6 301.4 233.2 181.3 185.9 67.7 58.8
Total debt as a percentage
of total capital (d) 38.5% 41.4% 52.2% 57.2% 46.9% 45.7% 36.1% 35.9% 22.8% 16.9%
Shareholders' equity 775.0 735.1 569.5 569.2 885.5 899.2 976.5 1,021.8 913.8 813.0
Book value per share of
common stock 19.83 18.97 14.71 14.87 23.55 24.07 23.04 21.86 19.53 16.85
Number of shareholders (e) (f) 7,084 7,473 7,963 8,611 8,896 9,110 9,322 10,355 9,418 9,621
Common shares outstanding 37.4 37.5 37.2 37.1 37.1 37.1 42.3 46.3 46.2 47.5
Market value per common share 62 38 1/2 53 1/4 31 7/8 29 1/4 25 37 1/4 35 32 1/4 29 7/8
===================================================================================================================================
Notes:
(a) Assets exclude insurance for asbestos-related liabilities.
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated shares.
(c) See italicized definition of fully diluted earnings per share on page 20.
(d) Total debt includes short-term debt, current installments of long-term
debt, long-term debt and ESOP loan guarantee. Total capital includes total
debt and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 4,200 to 4,700 employees for years 1988 through 1995.
(f) 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.
Certain selected financial data above has been restated for the effects of the
discontinued business and formation of the ceramic tile business combination.
-19-
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
---------------------
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1995 COMPARED WITH 1994
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FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 21), net cash
provided by operating activities was sufficient to cover payment of dividends
and the investment in plant, property and equipment. The remaining cash,
combined with increases in short-term debt, cash proceeds from the exercised
stock options and sale of assets, was used to cover the repurchase of shares of
the company's common stock for the treasury, the increase in cash and cash
equivalents, acquisitions, reduction of long-term debt and purchase of computer
software. Acquisitions in 1995 included a gasket materials and specialty paper
manufacturing facility in New York and a metal ceilings production plant in
England.
In December, the company completed two major transactions. First, the company
sold its interests in Thomasville Furniture Industries, Inc., a wholly-owned
subsidiary, to INTERCO International Inc. The purchase price of $331.2 million
included INTERCO's assumption of approximately $8 million of Thomasville debt.
An after-tax gain of $83.9 million, or $1.96 per share on a fully diluted basis,
was recorded on the sale.
Second, the company entered into a business combination with Dal-Tile
International Inc. Armstrong exchanged $27.6 million and the stock of its
ceramic tile operations, consisting primarily of American Olean Tile Company, a
wholly-owned subsidiary, for 37% ownership of the combined company. The after-
tax loss on the transaction was $116.8 million, or $2.73 per share on a fully
diluted basis.
During the third quarter, the company sold the champagne cork business in Spain
and announced its intention to discuss with potential buyers the possible sale
of the textile products operation. The divestiture of the champagne cork
business does not have a significant impact on financial results.
These actions show the company's commitment to focus its efforts in its core
businesses and to divest businesses that do not earn in excess of their cost of
capital. The company will use the net proceeds from these transactions to expand
its core businesses internally (with capital expenditures to strengthen the
businesses) and externally (with acquisitions to expand their size and scope),
and to continue with its program of repurchasing shares of common stock.
In November 1994, the Board of Directors authorized the company to repurchase up
to 2.5 million shares of its common stock, either in the open market or in
negotiated transactions. During 1995, the company repurchased 782,110 shares
with a cash outlay of $40.6 million. Since the inception of the program, the
company has repurchased 1,052,110 shares with a total cash outlay of $51.1
million as of December 31, 1995.
Working capital was $346.8 million as of December 31, 1995, $42.0 million higher
than the $304.8 million recorded at year-end 1994. The increase in working
capital results primarily from the increase in cash resulting from the sale of
Thomasville and the increase in inventory levels. Partially offsetting the
working capital increase were higher levels of accrued expenses, primarily as a
result of accruals for restructuring actions and higher current installments on
long-term debt. The $30.9 million increase in inventories was the result of the
building of finished stock for anticipated service level requirements. Included
in these increases were approximately $8.0 million due to translation of foreign
currency receivables and inventories to U.S. dollars at higher exchange rates.
The 1995 year-end ratio of current assets to current liabilities of 1.92 to 1 as
of December 31, 1995, remained unchanged when compared with last year.
Long-term debt, excluding the company's guarantee of the ESOP loan, was reduced
by $48.9 million in 1995. At December 31, 1995, long-term debt of $188.3 million
represented 14.9% of total capital compared with 18.9% at the end of 1994. The
1995 and 1994 year-end ratio of total debt (including the company's guarantee of
the ESOP loan) as a percent of total capital was 38.5% and 41.4%, respectively.
In February 1995, Armstrong arranged a $200 million, five-year revolving line of
credit with 10 banks. The line of credit is for general corporate purposes,
including use as a backstop for commercial paper notes. This replaced $245
million of short-term bilateral lines of credit with eight banks.
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 capital markets.
The company is involved in significant asbestos-related litigation which is
described more fully on pages 21 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 whether the settlement class action will
ultimately succeed, the number of individuals who will ultimately be deemed to
have opted out or who could file claims outside the settlement class action, nor
the annual claims caps to be negotiated after the initial 10-year period for the
settlement class action or the compensation levels to be negotiated for such
claims, nor the scope of its nonproducts coverage ultimately deemed available or
the ultimate conclusion of the California insurance coverage litigation. Subject
to the foregoing and based upon its experience and other factors also referred
to above, the company believes that the estimated $166 million in liability and
defense costs recorded on the 1995 balance sheet will be incurred to resolve an
estimated 59,000 asbestos-related personal injury claims pending against the
company as of December 31, 1995. These claims include those that were filed for
the period from January 1, 1994, to January 24, 1994, and which were previously
treated as potentially included within the settlement class action, and those
claims filed by claimants who have been identified as having filed exclusion
request forms to opt out of the settlement class action. A ruling from the Court
established January 24, 1994, as the date after which any asbestos-related
personal injury claims filed by non-opt-out claimants against the company or
other members of the Center for Claims Resolution are subject to the settlement
class action. In addition to the currently estimated pending claims and any
claims filed by individuals deemed to have opted out of the settlement class
action, any claims otherwise determined not to be subject to the settlement
class action will be resolved outside the settlement class action. The company
does not know how many such claims ultimately may be filed by claimants deemed
to have opted out of the class action or by claimants otherwise determined not
to be subject to the settlement class action.
An insurance asset in the amount of $166 million recorded on the 1995 balance
sheet reflects the company's belief in the availability of insurance in this
amount to cover the liability in like amount referred to above. Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. The company also notes that, based
on maximum mathematical projections covering a 10-year period from 1994 to 2004,
its estimated cost in the settlement class action reflects a reasonably possible
additional liability of $245 million. A portion of such additional liability may
not be covered by the company's ultimately applicable insurance recovery.
However, the company believes that any after-tax impact on the difference
between the aggregate of the estimated liability for pending cases and the
estimated cost for the 10-year maximum mathematical projection, and the probable
insurance recovery, would not be material either to the financial condition of
the company or to its liquidity, although it could be material to earnings if it
is determined in a future period to be appropriate to record a reserve for this
difference. The period in which such a reserve may be recorded and the amount of
any reserve that may be appropriate cannot be determined at this time. Subject
to the uncertainties and limitations referred to above and based upon its
experience and other factors, the company believes it is probable that
substantially all of the expenses and any liability payments associated with the
asbestos-related property damage claims will be paid under an existing interim
agreement, by insurance coverage settlement agreements and through additional
coverage reasonably anticipated from the outcome of the insurance litigation.
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 intermediate appellate stage of the California
insurance coverage litigation, the remaining reserve, the establishment of the
Center, and the proposed settlement class action and its experience, the company
believes the asbestos-related lawsuits and claims against the company would not
be material either to the financial condition of the company or to its
liquidity, although as stated above, the net effect of any future liabilities
recorded in excess of insurance assets could be material to earnings in such
future period.
Reference is made to the litigation involving The Industry Network System, Inc.
(TINS), discussed on page 21. In 1994, the jury returned a verdict finding that
the company had not caused damages to TINS, and the court subsequently entered
judgment in the company's favor. TINS' motion for a new trial was denied. TINS
filed an appeal with the U.S. Court of Appeals for the Third Circuit which
issued a judgment in favor of the company. TINS' Petition for Rehearing by the
same panel was denied in December 1995. On January 24, 1996, TINS filed a motion
seeking further appellate review by the Circuit Court.
Reference is also made to environmental matters as discussed on page 21. 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 affect on
its financial condition, liquidity or results of operations.
CONSOLIDATED RESULTS
Net sales of $2.08 billion on a continuing business basis were once again an
all-time sales record for any year in the company's history. These results were
4% higher than the $2.01 billion recorded in 1994. The growth was largely due to
increased sales in both the global, particularly European, non-residential and
U.S. home center market segments. In keeping with one of the company's four key
strategies, 1995 saw the introduction of new products. The resilient flooring
business announced new floor products, primarily for the residential segment, at
its convention in December. Building Products Operations introduced a new high
style, high performance ceiling line, called Ultima, targeted to the
nonresidential segment. New glazed wall and floor tile products were introduced
by the ceramic tile operations.
Earnings from continuing businesses before income taxes were $8.2 million, a
decrease from the $265.8 million in 1994. The earnings decline was attributable
to restructuring charges of $71.8 million and the loss of $177.2 million related
to the business combination of Armstrong's ceramic tile operations with Dal-Tile
International Inc.
Net earnings for the year were $123.3 million, compared with $210.4 million in
1994. Net earnings per share of common stock for 1995 were $2.90 on a primary
basis and $2.67 on a fully diluted basis. In 1994, net earnings per share of
common stock were $5.22 on a primary basis and $4.64 on a fully diluted basis.
1995's net earnings included $25.8 million of after-tax earnings from the
discontinued operations of Thomasville Furniture Industries, Inc., and $83.9
million of the after-tax gain from its sale. 1994's net earnings included $18.6
million in after-tax gains resulting from the resolution of tax audits, the sale
of its majority interest in a subsidiary and the reduction of the company's
estimated health care liability.
The company's level of performance in Economic Value Added (EVA) as measured by
return on capital was 14% in 1995, exceeding the company's 12% cost of capital.
Cost of goods sold in 1995 was 67.6% of sales, slightly higher than the 66.1%
recorded in 1994. This increase largely reflects start-up costs in the new
insulation products facility in Mebane, North Carolina, and the impact of
unfavorable sales mixes in residential flooring sales in North America. Included
in the 1994 cost of goods sold was a one-time gain of $12.2 million reflecting a
reduction in the company's estimated health care liability for employees on
long-term disability.
Selling, general and administrative (SG&A) costs in 1995 were 2.3% higher than
1994. The increased costs resulted from the translation of foreign currency
expenses to U.S. dollars at higher exchange rates. Excluding these adjustments,
expenses would have decreased by 1%.
Results for 1995 included restructuring charges of $71.8 million before tax or
$46.4 million after tax, or $1.09 per share on a fully diluted basis. In the
first quarter of 1995, the company announced plans to close a plant in
Braintree, Massachusetts. The before-tax restructuring charge of $15.6 million
includes costs accrued for the elimination of about 223 salaried and hourly
employee positions, for the obsolescence of equipment and for other costs to be
incurred after operations cease. Cash outlays will be about one-third of the
total charges with the majority of the cash outlay occurring in early 1996. The
plant ceased operations on February 1, 1996.
In the third quarter, the company recorded a restructuring charge of $56.2
million before tax or $36.5 million after tax related to the company's ongoing
efforts to streamline the organization and enable the businesses to be the best-
cost suppliers in their markets. The restructuring charges primarily relate to
severance and early retirement incentives for approximately 670 employees, half
of whom are hourly and the other half are salaried. Nearly 40% of the $56.2
million charge was related to the North American resilient flooring business,
while another 40% was related to the European Operations, primarily in its
industry products and building products segments. The balance was related to
corporate and other operating segments. The charges are estimated to be evenly
split between cash payments throughout 1996 and noncash charges, primarily to
cover retirement-related expenses. It is anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years.
The company's interest expense increased due to higher debt levels during the
year and charges related to deferred compensation plans.
Armstrong's effective tax rate for 1995, excluding the tax benefit on the loss
related to the ceramic tile business combination, was 30.6% compared with a
29.6% rate in 1994.
GEOGRAPHIC AREA RESULTS
UNITED STATES
Sales increased slightly while operating income decreased when compared with
1994. Higher sales levels were generated through the national home center and
mass merchandiser channels, but lower levels were returned by the professionally
installed resilient flooring segment. Sales price increases occurred in most of
the U.S. businesses; however, operating income was impacted by the loss on the
ceramic tile business combination, restructuring charges, higher raw material
prices and start-up costs of the North Carolina insulation products facility.
1994 operating income included a one-time gain through the reduction in the
company's estimated health care liability for employees on long-term disability.
Export sales of Armstrong products to trade customers increased $5.9 million, or
23.7%, compared with 1994.
An organizational effectiveness study to review the company's staff support
activities will be completed in first-quarter 1996 and implemented by late 1996.
EUROPE
During 1995, economic conditions continued to improve and helped Armstrong's
end-use markets. For the year, sales increased 15.6%. All the company's European
businesses recorded year-to-year sales increases with the building products
segment being the most significant. Operating income decreased by nearly 17%,
impacted by restructuring charges. Partially offsetting these charges was
improved productivity -- much of it related to restructuring actions taken in
1993. The results in the European insulation products business continued to be
adversely affected by competitive pricing. An organizational effectiveness study
was completed in 1995 to align the staff with the global business units.
OTHER FOREIGN
Sales in 1995 increased slightly when compared with 1994, assisted by an
increase in building products sales in China. Operating income also increased
slightly, but reflected continued competitive pricing and higher expenses needed
to expand to China and other Far East markets. The company continues to extend
its investments in the Pacific area with the start of construction of a building
products manufacturing facility in Shanghai, China, to take advantage of this
area's market opportunity.
INDUSTRY SEGMENT RESULTS
FLOOR COVERINGS
The floor coverings segment sales decreased less than 1% from 1994. Higher home
center and nonresidental sales volume was offset by lower sales in U.S.
professionally installed residential sheet flooring. Operating income decreased
23.5% compared with 1994. Operating income included a restructuring charge of
$25.0 million, 90% of which related to elimination of employee positions in
North America. Operating income was favorably impacted by expense reductions and
higher selling prices, introduced early in 1995, that partially offset higher,
but downward trending, raw material prices. European sales growth and
profitability remained strong in this segment, with both hitting record levels.
Capital expenditures in this segment increased by $20.6 million and were
directed toward modernization of equipment, manufacturing capacity and operating
efficiencies.
Outlook
The company expects sales throughout the home center channels to remain strong
despite the current overall weakness in the retail market segments. In this
channel, The Home Depot, Lowes and Menard Inc. are important customers of our
resilient floor products. Lower or stabilized raw material prices and operating
efficiencies gained through restructuring activities should be positive factors
on operating income. Floor Products Operations has introduced a new brand
strategy targeted at three distinct market opportunities. The Armstrong and
Solarian brands will be used for sheet and tile floors at the "good" and
"better" price points while the new VIOS brand is an innovative line of upscale
sheet flooring products in the "best" category. Also recently introduced is the
Quest Program, offering independent flooring specialty retailers incentives to
strengthen their relationship with Armstrong. The second part of this program is
a unique display and merchandising system designed especially for that market.
Early results from these programs have shown order rates beyond initial high
expectations. In late 1995, the company announced that it was entering a
strategic alliance with the F. Egger Company of Austria to manufacture and
market laminate flooring products. Laminate flooring is made of decorative
melamine laminate compressed with a wood-based product and kraft paper for
balance. The European area has an aggressive sales plan for Eastern Europe and
Russia while Western and Central Europe will be target opportunities for growth
in sales of commercial sheet flooring. The W.W. Henry Company, a wholly-owned
subsidiary, has also focused its efforts on customer service through the
updating of its installation and adhesives products and packaging.
BUILDING PRODUCTS
The announcement in October that Building Products Operations was the first
building materials manufacturer and marketer to win a Malcolm Baldrige National
Quality Award demonstrates Building Products commitment to business excellence.
All geographic areas in the building products segment contributed to the 8%
sales increase with about one-third of the increase due to the translation of
foreign currencies to a weaker U.S. dollar. The European and Pacific areas
continued to show the strongest growth. Sales were assisted by the worldwide
introduction of Ultima, a high performance, high style ceiling.
Operating income of $92.2 million included a restructuring charge of $6.3
million mainly related to administrative functions in the European operations.
Sales growth, primarily in the worldwide commercial markets, higher selling
prices and continuing cost reduction efforts were positive factors on operating
income. WAVE, the grid system joint venture with Worthington Industries, has
been highly successful in both North America and Europe and is delivering an
excellent rate of return. Capital expenditures in this segment, which increased
by $17.7 million, are directed at increasing capacity through productivity
improvements.
Outlook
This segment continues to expect sales increases in the Pacific area and is
investing in the area with the construction of a building products manufacturing
facility in the People's Republic of China with plant completion scheduled in
late 1996. The company expects that the introduction of additional RH90 ceiling
products in early 1996 will continue to build the momentum in Europe and Asia.
The company has entered the European metal ceilings business with the
acquisition, in late 1995, of the metal ceiling production and marketing
business from Cape PLC of England.
INDUSTRY PRODUCTS
The industry products segment's sales grew by almost 12%, but the weaker U.S.
dollar accounted for two-thirds of the increase. Operating income, which
decreased significantly, includes a $31.4 million restructuring charge related
to the closing of the Braintree, Massachusetts, plant and elimination of
employee positions in Europe. Operating income for insulation products, the
largest business in this segment, was essentially flat year-on-year with gains
on translations of foreign currencies to U.S. dollars offset by the
restructuring charges. Also adversely affecting operating income was the need to
meet competitive European pricing and the start-up costs of $6.1 million for the
new Mebane, North Carolina, insulation products plant. In 1995, the Gasket and
Specialty Paper Operations became the first U.S. producer of soft gasket
material to obtain an ISO 9001 registration. Gasket and specialty paper products
sales increased from 1994 because of the acquisition in March of a gasket and
specialty paper manufacturing facility in Beaver Falls, New York. However,
operating income was impacted by lower automotive and diesel market sales and
higher raw material costs. Effective in 1996, this business will be a wholly-
owned subsidiary company, Armstrong Industrial Specialties, Inc. In the third
quarter, the company divested the champagne cork business in Spain. The textile
products business is still generating a modest operating loss, but lower than
the amount recorded in 1994.
Outlook
This business segment is using its technical advantage and attractive pricing to
enhance its market position. In early 1996, the Mebane insulation products plant
will begin operations. This plant provides a lower cost structure and logistical
advancements over the Braintree facility. These improvements, along with the
introduction of new products, are part of management's strategy for the
expansion of this business's global markets. Sales in Europe, the largest
geographic area in terms of sales, have been increasing during 1995 and the
trend is expected to continue. Early in 1996, Armstrong Industrial Specialties,
Inc., will distribute gasket materials through a new tiered system to service
customers of all sizes. In the third quarter of 1995, the company announced its
decision to discuss with potential buyers the possible sale of the textile
products operation.
CERAMIC TILE
In December 1995, the company entered into a business combination with Dal-Tile
International Inc. to strengthen its position in the worldwide market. The
before-tax loss from this business combination was $177.2 million.
Excluding this loss, the ceramic tile segment's operating income improved
significantly over 1994 aided by new product offerings including glazed floor
and wall tile products targeted at opening price points.
Outlook
Armstrong retains a 37% interest in the new Dal-Tile International Inc. entity.
The company expects this business combination to result in improved levels of
customer service through the more efficient use of the manufacturing and
distribution resources of both companies. The synergies of the combination
should improve profitability in this segment. However, the amount and timing of
these synergies are dependent on the integration of the two businesses.
- --------------------------------------------------------------------------------
1994 COMPARED WITH 1993
- --------------------------------------------------------------------------------
Results for 1994 and 1993 have been restated to reflect changes due to the
discontinued business and ceramic tile business combination.
FINANCIAL CONDITION
As shown on the Consolidated Statement of Cash Flows (see page 21), net cash
provided by operating activities in 1994 was $305.2 million, which was more than
sufficient to cover working capital requirements; payment of dividends; the
payment for restructuring activities and the investment in property, plant and
equipment. The remaining cash, including proceeds from stock options exercised
and the cash proceeds from the sale of assets and the company's majority
investment in BEGA/US, Inc., was used to reduce debt by $95.3 million and to
repurchase shares of the company's common stock for the treasury.
Working capital was $304.8 million as of December 31, 1994, $91.6 million higher
than the $213.2 million at year-end 1993. The primary reasons for the increase
in working capital were the $73.8 million repayment of short-term debt and the
$24.3 million increase in accounts receivable resulting from higher sales
levels. Modest increases in other assets including inventories and lower levels
of income taxes payable also increased working capital by $21.2 million.
Partially offsetting the increase were higher levels of accounts payable and
accrued expenses totaling $27.7 million.
The company's 1994 year-end ratio of current assets to current liabilities was
1.92 to 1 compared with a ratio of 1.55 to 1 reported in 1993. The major reason
for the ratio increase was the $73.8 million reduction of short-term debt.
Long-term debt, excluding the company's guarantee of the ESOP loan, was reduced
by $19.6 million in 1994. At year-end 1994, long-term debt of $237.2 million
represented 18.9% of total capital compared with 21.6% at the end of 1993. The
1994 and 1993 year-end ratio of total debt as a percent of total capital was
41.4% and 52.2%, respectively.
During the first quarter of 1994, the company terminated, prior to maturity, a
notional amount $25 million interest rate swap and, in the second quarter of
1994, a notional amount $15 million interest rate swap matured. During the
fourth quarter of 1993, the company terminated, prior to maturity, two notional
amount $50 million interest rate swaps and foreign currency swaps of French
francs 182.4 million and Belgian francs 270 million. The company's management of
foreign currency and interest rate exposures resulted in a loss of $1.7 million
in 1994 compared with a gain in 1993 of $1.9 million. As of December 31, 1994,
the company had no outstanding interest rate or currency swaps.
CONSOLIDATED RESULTS
Record net sales in 1994 of $2.01 billion were 8% higher than the 1993 sales of
$1.87 billion. Armstrong's U.S. residential markets reflected continued strength
in 1994, while European area economic conditions improved in 1994 causing a
rebound in sales opportunity. On a worldwide basis, the commercial and
institutional end-use market segments also improved, favorably affecting sales
opportunity. Armstrong took advantage of this opportunity and increased sales in
nearly every one of its businesses. The introduction of new products, primarily
for the residential market segments, also helped to increase sales in 1994.
Record net earnings were $210.4 million compared with net earnings of $63.5
million in 1993. The 1993 earnings included restructuring charges of $53.6
million after tax. Net earnings per common share were $5.22 on a primary basis
and $4.64 on a fully diluted basis compared with $1.32 and $1.26, respectively,
for 1993.
Armstrong's measure of return on average monthly assets was 12.7% for 1994
compared with 3.4% for 1993. Average monthly assets exclude the insurance for
asbestos-related liabilities. The return on common shareholders' equity in 1994
was 31.3% compared with 9.0% in 1993.
Cost of goods sold as a percent of sales was 66.1% for the year, the lowest
level for more than a quarter of a century, which compares favorably to 1993's
cost of goods sold of 69.0%. The continuing reduction in cost of goods sold
reflects the positive influence of the prior two years' restructuring programs,
productivity improvement in all our businesses, sales price increases in a
number of our businesses, some product mix improvement and the introduction of
new products, primarily in our residential businesses. During 1994, $12.2
million of the $14.6 million before-tax gain from a reduction in Armstrong's
health care liability for employees on long-term disability also lowered the
cost of goods sold. The reduction resulted from actions taken by the company to
qualify these employees for primary coverage under Medicare.
Selling, general and administrative expenses represent 19.3% of sales, up from
the 18.6% reported for 1993 with overall expenses increasing 4.8% when comparing
1994 with those of 1993. Higher costs for the use of consultants in improving
the company's global competitiveness and for special incentive awards to
motivate superior performance were partially offset by the previously mentioned
gain from the reduction in the health care liability and a gain from the sale of
Armstrong's majority interest in BEGA/US, Inc.
No restructuring charges were recorded in 1994. However, 1993 results included
$89.3 million before tax of restructuring charges associated with Armstrong
initiatives to enhance its global competitiveness. These costs were primarily
associated with eliminating approximately 950 employee positions in the U.S. and
Europe. More than half of the amounts accrued at the end of 1993 were used with
much of the remaining accrual to be utilized in 1995.
Interest expense was significantly reduced in 1994 compared with 1993 and was
the result of lower debt levels.
The effective tax rate for 1994 was 30.9% compared with 30.0% in 1993. The
current year tax rate was helped by a gain from the reversal of previously
accrued tax expense following resolution of the company's 1988, 1989 and 1990
tax audits, the positive effect of tax benefits related to taxes on foreign
income and state income taxes through the realization of previously unrecognized
deferred tax assets and lower withholding taxes on foreign dividends. In
addition, the company utilized excess foreign tax credits during 1994. The 1993
tax rate reflected the company's higher use of foreign tax credits, reductions
of deferred taxes resulting from some countries lowering their statutory tax
rates and lower foreign tax rates, which more than offset the 1% increase in the
U.S. statutory tax rate.
GEOGRAPHIC AREA RESULTS
UNITED STATES
Sales increased by more than 7% while operating income was more than doubled
when compared with 1993. The primary end-use market segments -- residential,
which reflected continued strength from the prior year, and commercial/
institutional which became stronger during 1994 -- had a positive effect on this
area. Even though interest rates were raised six times during 1994, they had
very little effect on 1994's results. During 1994, both single family housing
starts and sales of existing single family homes rose close to 5%.
Nonresidential new construction grew at a rate of over 8% in 1994. The long-term
effect of higher interest rates may slow future sales growth in these market
segments.
Higher sales occurred primarily in the floor coverings segment. As in past
years, higher sales levels continued through the national home centers and mass
merchandisers channel. New product introductions for the residential end-use
markets also provided additional sales.
While the higher sales levels were a key factor, the significant restructuring
actions of the past two years also played a major part in increasing operating
income mainly in the building products segment and the ceramic tile segment.
Sales price increases occurred in most of the U.S. businesses and had a positive
effect on operating income.
Export sales of Armstrong products to trade customers increased $5.1 million, or
over 25%, compared with 1993.
EUROPE
During mid-1994, economic conditions began to improve and helped Armstrong's
end-use markets. For the year, sales increased nearly 6% and operating income
improved by 138%. All the company's European businesses recorded year-to-year
sales increases. Operating income was helped significantly by improved
productivity -- much of it related to restructuring actions taken in 1992 and
1993. The results in the European insulation products business were adversely
affected by increased competitive pricing and higher than usual obsolescence of
equipment.
OTHER FOREIGN
Sales in 1994 reversed a four-year declining trend and increased by 13% compared
with 1993. Operating income declined by $2.4 million, or 24%, reflecting the
competitive pricing and higher expenses needed to penetrate the Chinese and
other Far East markets and a shift in product mix towards lower margin commodity
products.
INDUSTRY SEGMENT RESULTS
FLOOR COVERINGS
Worldwide sales were 8% higher in 1994, with operating income increasing by 21%
from 1993 levels. The 1993 operating income included $8.4 million of
restructuring charges.
The resilient flooring portion of the segment recorded strong sales growth in
both North America and Europe. The U.S. resilient flooring business continued to
benefit in 1994 from higher sales of existing homes, new residential
construction and continued strength in the commercial construction and
remodeling market segments. This was accomplished even in light of the numerous
interest rate increases throughout 1994. Successful new product introductions in
the second half of 1994 helped to improve sales.
The major restructuring actions of the past two years, primarily in
manufacturing, some sales price increases, some unit volume increases and the
continued development of the residential business were key factors for this
turnaround. In the resilient flooring portion of the segment, operating income
improvement was the result of higher sales volume, some sales price increases
and manufacturing productivity improvements. Offsetting some of the effects of
these positive items were higher raw material costs that became more notable in
the second half of the year. Sales prices were increased as of January 1995 to
offset the rise in raw material prices.
Capital expenditures increased 43% over those of 1993. The expenditures continue
to be concentrated on improving manufacturing productivity, increasing capacity
and developing business systems.
BUILDING PRODUCTS
During 1994, commercial and institutional end-use market segments continued to
provide more opportunity. Sales grew more than 7% with North American sales
growing faster than those of the European area. The Pacific area recorded the
highest percentage growth with new business in China being a factor.
Operating income, excluding the effects of restructuring charges in 1993,
recorded the fastest growth of any segment -- up 167% over 1993. While higher
sales levels and sales price increases had a positive impact on operating
income, the prior two years' restructuring actions dramatically reduced
manufacturing costs and had the most significant impact on results.
Capital expenditures were increased about one-third over those of the past two
years and were directed at higher productivity levels and improving capacity.
1994 expenditures were about the same as depreciation levels.
INDUSTRY PRODUCTS
Sales increased by 5% while operating income improved only 3% when the 1993
restructuring charges of nearly $13 million are excluded. This segment is highly
influenced by its European orientation and the rebound in that area's economies
that started in the second half of 1994.
The insulation business, the largest portion of this segment, recorded sales
growth of about 5% while operating income was slightly higher than 1993. During
1994, this business lowered sales prices to meet intense European competition,
recorded higher than usual obsolescence of equipment and incurred some start-up
cos