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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, 1996
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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 _______________________
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 ($70.50 per share)
on the New York Stock Exchange on February 10, 1997, was approximately $2.2
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, 1997, as having sole or shared voting
power over 5% or more of the outstanding Common Stock of registrant as of
December 31, 1996. As of February 10, 1997, the number of shares outstanding of
registrant's Common Stock was 40,968,157. This amount includes the 5,057,382
shares of Common Stock as of December 31, 1996, held by Mellon Bank, N.A., as
Trustee for the employee stock ownership accounts of the Company's Retirement
Savings and Stock Ownership Plan.
Documents Incorporated by Reference
Portions of the Proxy Statement dated March 17, 1997, relative to the
April 28, 1997, annual meeting of the shareholders of registrant (the "Company's
1997 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.
INDUSTRY SEGMENTS
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at December 31 (millions) 1996 1995 1994
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Net trade sales:
Floor coverings $1,091.8 $1,053.9 $1,063.5
Building products 718.4 682.2 630.0
Industry products 346.2 348.8 312.2
Ceramic tile -- 240.1 220.3
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Total net sales $2,156.4 $2,325.0 $2,226.0
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Operating income (loss): (Note 1)
Floor coverings $ 146.9 $ 145.0 $ 189.6
Building products 95.1 92.2 86.8
Industry products 40.1 9.3 41.2
Ceramic tile (Note 2) 9.9 (168.4) 0.8
Unallocated corporate expense (36.1) (34.0) (23.8)
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Total operating income $ 255.9 $ 44.1 $ 294.6
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Depreciation and amortization:
Floor coverings $ 53.9 $ 47.9 $ 49.2
Building products 37.0 36.8 34.5
Industry products 19.1 19.3 17.6
Ceramic tile 4.3 13.5 13.8
Corporate 9.4 5.6 5.6
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Total depreciation
and amortization $ 123.7 $ 123.1 $ 120.7
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Capital additions: (Note 3)
Floor coverings $ 117.7 $ 77.3 $ 56.7
Building products 67.7 49.2 31.5
Industry products 22.5 45.0 22.6
Ceramic tile -- 9.6 20.4
Corporate 12.8 6.3 3.0
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Total capital additions $ 220.7 $ 187.4 $ 134.2
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Identifiable assets:
Floor coverings $ 687.9 $ 583.2 $ 575.7
Building products 541.1 513.5 478.1
Industry products 272.8 301.8 234.8
Ceramic tile 168.7 135.8 290.1
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
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Total assets $2,135.6 $2,149.8 $2,159.0
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Note 1:
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Restructuring charges in
operating income (millions) 1996 1995 1994
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Floor coverings $ 14.5 $ 25.0 --
Building products 8.3 6.3 --
Industry products 4.0 31.4 --
Ceramic tile -- -- --
Unallocated corporate expense 19.7 9.1 --
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Total restructuring charges
in operating income $ 46.5 $ 71.8 --
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Note 2: 1995 operating income includes a $177.2 million loss due to the ceramic
tile business combination. See "Equity Earnings From Affiliates" (see below).
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 in cash. INTERCO also assumed $8.0 million of Thomasville's
interest-bearing debt. The company recorded a gain on the sale of $83.9 million
after tax. 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 and $526.8
million in 1994.
EQUITY EARNINGS FROM AFFILIATES
Equity earnings from affiliates for 1996 were primarily comprised of the
company's after-tax share of the net income of the Dal-Tile International Inc.
business combination and the amortization of the excess of the company's
investment in Dal-Tile over the underlying equity in net assets, and the 50%
interest in the WAVE joint venture with Worthington Industries. Results in 1995
and 1994 reflect only the 50% interest in the WAVE joint venture.
In 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 in cash 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 exceeded 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.
In August 1996, Dal-Tile issued new shares in a public offering decreasing the
company's ownership share from 37% to 33%.
Armstrong's ownership of the combined Dal-Tile is accounted for under the equity
method. The summarized historical financial information for ceramic tile
operations is presented below.
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(millions) 1995 1994
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Net sales $240.1 $220.3
Operating income/(1)/ 8.8 0.8
Assets/(2)/ 269.8 290.1
Liabilities/(2)/ 17.3 19.6
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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.
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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,
together with laminate flooring, 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, including large home centers,
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, including large home centers. 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, manufactures and markets 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. Industry products are sold, depending
on type and ultimate use, to original equipment manufacturers, contractors,
wholesalers, fabricators and end users.
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Ceramic Tile
Ceramic tile for floors, walls and countertops, together with adhesives,
installation and maintenance materials and accessories are sold through home
centers, independent distributors and sales service centers operated by
Dal-Tile.
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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 1996, 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 $220.7 million in 1996, $171.8 million in 1995, and $134.2
million in 1994 for additions to the property, plant and equipment of its
continuing businesses.
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.
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The Company spent $59.3 million in 1996, $57.9 million in 1995, and $53.1
million in 1994 on research and development activities worldwide for the
continuing businesses.
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ENVIRONMENTAL MATTERS
In 1996, the company incurred capital expenditures of approximately $3.0 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1997 and 1998. The company
does not anticipate that it will incur significant capital expenditures in order
to meet the requirements of the Clean Air Act of 1990 and the final implementing
regulations promulgated by various state agencies.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 18 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
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, 1996, 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, although the recording of future costs may be material to earnings
in such future period.
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As of December 31, 1996, the Company had approximately 10,580 active employees,
of whom approximately 3,540 are located outside the United States. Year-end
employment in 1996 was below the level at the end of 1995 primarily as the
result of various restructuring activities. About 62% of the Company's
approximately 4,540 hourly or salaried production and maintenance employees in
the United States are represented by labor unions.
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Geographic Areas
GEOGRAPHIC AREAS
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at December 31 (millions) 1996 1995 1994
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Net trade sales:
United States $1,419.2 $1,586.4 $1,564.0
Europe 548.4 558.7 483.4
Other foreign 188.8 179.9 178.6
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Interarea transfers:
United States 105.0 101.1 95.0
Europe 13.2 13.8 8.7
Other foreign 30.4 32.1 26.1
Eliminations (148.6) (147.0) (129.8)
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Total net sales $2,156.4 $2,325.0 $2,226.0
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Operating income:
United States $ 202.7 $ 7.7 $ 235.5
(See Note 2 on page 3)
Europe 79.3 62.6 75.3
Other foreign 10.0 7.8 7.6
Unallocated corporate expense (36.1) (34.0) (23.8)
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Total operating income $ 255.9 $ 44.1 $ 294.6
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Identifiable assets:
United States $1,180.1 $1,044.5 $1,130.1
Europe 383.7 406.7 376.5
Other foreign 107.3 83.4 72.6
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
Eliminations (0.6) (0.3) (0.5)
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Total assets $2,135.6 $2,149.8 $2,159.0
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United States net trade sales include export sales to non-affiliated customers
of $34.0 million in 1996, $32.1 million in 1995 and $26.1 million in 1994. Also
included in United States net trade sales were ceramic tile operations sales of
$240.1 million and $220.3 million in 1995 and 1994, respectively.
"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.
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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 46 manufacturing plants in 12 countries; 23 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 17 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 15 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 1996 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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Asbestos-Related Litigation
The Company is one of many defendants in pending lawsuits and claims involving,
as of December 31, 1996, approximately 43,600 individuals alleging personal
injury from exposure to asbestos. This number includes approximately
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19,500 lawsuits and claims from the approximately 87,000 individuals who opted
out of the settlement class action (Georgine v. Amchem) referred to below. About
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18,400 claims from purported settlement class members were received as of
December 31, 1996, although many do not qualify at this time for payment.
Nearly all the personal injury suits and claims, except Georgine claims, seek
general and punitive damages arising from alleged exposures, at various times,
from World War II onward, to asbestos-containing products. Claims against the
Company generally involve allegations of negligence, strict liability, breach of
warranty and conspiracy with respect to its involvement with insulation
products. 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 first exposure to asbestos. Nearly
all suits name many defendants, 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 has decreased during the past several
years in substantial part due to the Georgine settlement class action, 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 and future personal injury claims. The Judicial Panel for
Multidistrict Litigation ordered the transfer of all pending federal cases to
the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. The
Company has supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
Court. State court cases have not been directly affected by the transfer. The
transferee Court 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 claims.
Georgine Settlement Class Action
Georgine v. Amchem is a settlement class action filed in the Eastern District of
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Pennsylvania on January 15, 1993, that includes essentially all future
asbestos-related personal injury claims against members, including the Company,
of the Center for Claims Resolution ("Center") referred to below. It is designed
to establish a non-litigation system for the resolution of such claims against
Center members. Other companies may be able to join the class action later. The
settlement 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
-11-
claims after they 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 burden of
asbestos-related litigation on the courts. Each member of the Center is
obligated for its own fixed share of compensation and fees. Potential claimants
who neither filed a prior lawsuit against Center members nor filed an exclusion
request 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
medical category (including amounts paid even more promptly under simplified
payment procedures) are established for an initial period of ten years. Case
flow caps may be increased if they were substantially 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. Approximately
87,000 individuals have filed exclusion requests and have thus opted out of the
settlement. Such opt outs are not claims but are reservations of rights possibly
to bring claims in the future. The settlement will become final only after
certain issues, including insurance coverage, are resolved and appeals are
exhausted, a process which could take several years. The Center members stated
their intention to resolve over a five-year period the claims pending when the
class action was filed, and a significant number have been settled or are in
negotiations.
The Center members are seeking agreement from insurance carriers or a binding
judgment against them that the class action settlement will not jeopardize
existing insurance coverage; the class action is contingent upon such an
agreement or judgment. For carriers that do not agree, this matter will proceed
through alternative dispute resolution (for carriers that subscribed to the
Wellington Agreement referred to below), or through litigation.
On May 10, 1996, a three-judge panel of the U.S. Court of Appeals for the Third
Circuit issued an adverse decision in an appeal from the preliminary injunction
by the District Court that enjoined members of the Georgine class from
proceeding against Center members in the tort system. The Court of Appeals
decision ruled against maintaining the settlement class action, ordered that the
preliminary injunction be vacated, and ordered decertification of the class. The
Court ruled broadly that the case does not meet the requirements for class
certification under Federal Rule of Civil Procedure 23, concluding that a class
action cannot be certified for purposes of settlement unless it can be certified
for full-scale litigation. The Company believes that the Court erred in several
important respects. The Company believes that the Court's ruling was not
consistent with rulings of several other courts that have considered Rule 23
issues in comparable cases. In particular, the recent ruling in the Ahearn case
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by the Fifth Circuit Court of Appeals reached a contrary conclusion on a central
Rule 23 issue in Georgine.
On November 1, 1996, the U.S. Supreme Court accepted the Center's petition for
certiorari and the appeal was argued on February 18, 1997. A decision from the
Supreme Court is likely by July 1997. The preliminary injunction will remain
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in place while the case is pending in the Supreme Court. The Center's counsel
believes there to be substantial grounds for the Supreme Court to reverse the
Court of Appeals' decision.
The Company remains optimistic that a form of future claimants settlement class
action may ultimately be approved, although the courts may not uphold the
Georgine settlement class action, and may not uphold the companion insurance
action or, even if upheld, there is a potential that judicial action might
result in substantive modification of this settlement.
If the final resolution by the Supreme Court is not favorable to the Center
members, the District Court's injunction will likely be lifted and a large
number of lawsuits might be filed within a short time against the Center
members, resulting in a likely increase in the number of subsequent pending
cases in the tort system against the Company. In due course, the consequences
from lifting the injunction could result in presently undeterminable, but likely
higher, liability and defense costs under a claims resolution mechanism
alternative to Georgine which the Company believes would likely be negotiated.
Even if the appeal to the Supreme Court is successful, various issues remain to
be resolved and the potential exists that those issues will cause the class
action ultimately not to succeed or to be substantially modified. Similarly, the
potential exists that the companion insurance action will not be successful.
Insurance Carriers/Wellington Agreement
The Company's primary and excess insurance carriers have provided defense and
indemnity coverage for asbestos-related personal injury claims, and the primary
insurers are providing defense coverage for property damage claims.
Various insurance carriers provide products and non-products coverages for the
Company's asbestos-related personal injury claims and product coverage for
property damage claims. Most policies providing products coverage for personal
injury claims have been exhausted. The insurance carriers that currently provide
coverage or whose policies have provided or are believed to provide personal
injury products and non-products or property damage coverages are 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
provided $25 million of bodily injury products coverage, is insolvent; the
Company is pursuing claims with
-13-
the state guaranty associations. The gap in coverage created by the Midland
insolvency was 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.
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 that 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.
The Wellington Agreement also provided for the establishment of the Asbestos
Claims Facility to evaluate, settle, pay and defend all personal injury claims
against member companies. Liability payments and allocated expenses were
allocated by formula to each member. The Facility was dissolved when certain
members raised concerns about their share of liability payments and allocated
expenses and certain insurers raised concerns about defense costs and Facility
operating expenses.
Center for Claims Resolution
Following the dissolution of the Facility, the Center 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 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. The Center
has revised the formula for shares of liability payments and defense costs over
time and has defended the members' interests and addressed the claims in a
manner consistent with the prompt, fair resolution of meritorious claims. The
share adjustments have resulted in some increased liability share for the
Company. In the settlement class action, each member will pay its own fixed
share of every claim. If a member withdraws, the shares of remaining members
will not change. The Center members have reached agreement annually with the
insurers relating to the
-14-
continuing operation of the Center and expect that the insurers will provide
funding for the Center's operating expenses for its ninth year of operation. The
Center processes pending claims as well as future claims in the settlement class
action.
An increase in the utilization of the Company's insurance 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. A substantial portion of the
insurance asset involves non-products insurance which is in alternate dispute
resolution. While the Company is seeking resolution of key issues in the
alternate dispute resolution process during 1997, a shortfall may develop
between available insurance and amounts necessary to pay claims, and that
shortfall may occur in the third quarter of 1997 or earlier, depending on the
timing of availability of certain coverages. The Company does not believe that
such shortfall would be material either to the financial condition of the
Company or to its liquidity. 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 ultimately successful,
projections of the rate of disposition of future cases may be possible.
Property Damage Litigation
The Company is also one of many defendants in a total of 11 pending lawsuits and
claims as of December 31, 1996, 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. The claims 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. The
Company vigorously denies the validity of the allegations against it 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 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
-15-
uncertainties involved, the long-term effect of these proceedings on the
litigation cannot be predicted.
California Insurance Coverage Lawsuit
The trial court issued final decisions in various phases in the insurance
lawsuit filed by the Company in California, 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 decision
established favorable defense and indemnity coverage for property damage claims
holding that coverage would be in effect during the period of installation and
during any subsequent period in which a release of fibers occurred. The
California appellate courts substantially upheld the trial court, and that
insurance coverage litigation is now concluded. The Company has resolved
personal injury products coverage matters with all of its solvent carriers
except one small excess carrier.
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 or otherwise decided between the Company and the
insurance carrier.
Non-Products Insurance Coverage
Non-products insurance coverage is included in the Company's primary and a
number of excess policies for certain types of claims. The settlement agreement
referenced above with a primary carrier included a provision for non-products
claims. Non-products claims include among other things those claims that may
have arisen out of exposure during installation of asbestos materials.
Negotiations have been undertaken with the Company's primary insurance carriers
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 such claims is substantial, and at the primary level, includes defense
costs in addition to limits. All the carriers raise various reasons why they
should not pay their coverage obligations, including contractual defenses,
waiver, laches and statutes of limitations. One primary carrier alleges that it
is no longer bound by the Wellington Agreement, and another alleges that the
Company agreed to limit its claims for non-products coverage against that
carrier at the time the Wellington Agreement was signed.
-16-
The Company has initiated an alternative dispute resolution proceeding against
the carriers. This proceeding is in the mediation phase. If coverage is not
mutually resolved during that phase with the help of a neutral party, the
proceeding moves to binding arbitration. Other proceedings against several non-
Wellington carriers may become necessary.
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 reserves for ACandS,
Inc. a certain amount of insurance from the joint policies solely for its own
use for asbestos-related claims.
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 an Interim Agreement, the 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 reduced for that portion associated with
personal injury suits and claims. In an insurance settlement on March 31, 1989,
the Company received $11.0 million, of which approximately $4.4 million was
credited to income and nearly all of the balance was recorded as an increase to
its reserve. Costs of litigation against insurance carriers and other legal
costs indirectly related to asbestos litigation will be expensed outside the
reserve.
Conclusions
- -----------
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, nor
whether, if needed, an alternative to the Georgine settlement vehicle may
ultimately emerge, or the ultimate liability if such alternative does not
emerge, or the scope of its non-products coverage ultimately deemed available.
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 $141.6 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 43,600
asbestos-related personal injury claims pending against the Company as of
December 31, 1996. In addition to the currently estimated pending claims and
claims filed by those who have opted out of the settlement class action,
-17-
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 claims ultimately may be filed by claimants who have opted out of the
class action or who are determined not to be subject to the settlement class
action, or if the preliminary injunction is vacated, the number of claims that
then would not be subject to the class action constraints.
An insurance asset in the amount of $141.6 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. A substantial portion of the insurance asset
involves non-products insurance which is in alternative dispute resolution.
While the Company is seeking resolution of the key issues in the alternative
dispute resolution process during 1997, a shortfall may develop between
available insurance and amounts necessary to pay claims that may occur in the
third quarter of 1997 or possibly in the second quarter, depending on the timing
of the availability of certain coverages. The Company believes such shortfall
would not be material either to the financial condition of the Company or to its
liquidity. The Company also notes that, based on maximum mathematical
projections covering a ten-year period from 1994 to 2004, its estimated cost in
Georgine reflects a reasonably possible additional liability of $245 million. If
Georgine is not ultimately approved, the Company believes that a claims
resolution mechanism alternative to the Georgine settlement will likely be
negotiated, albeit at a likely higher liability and defense costs. 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 ten-year maximum mathematical
projection or in the cost of an alternative settlement format, 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 insurance coverage settlement agreement and through coverage from
the outcome of the California 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, settlements with other insurance carriers, the results of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld, an alternative
-18-
to Georgine would be negotiated, 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.
-19-
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. 91-5613).
-------------------------------------------
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
-20-
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 $19 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. Also denied was a motion by TINS
before the District Court to rescind an earlier 1984 agreement of settlement.
TINS has appealed this later decision to the Circuit Court, and a hearing will
likely be held on this issue during the first half of 1997. If the denial of the
motion were reversed on appeal, TINS could possibly be entitled to litigate
claims that had been resolved by means of the settlement agreement.
-----------------------------
-21-
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
- ------------------------------------
The information appearing in Item 10 hereof under the caption "Executive
Officers of the Registrant" is incorporated by reference herein.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
-------
The Company's Common Stock is traded on the New York Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of
February 10, 1997, there were approximately 7,396 holders of record of the
Company's Common Stock.
First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------------------
1996
Dividends per share of common stock 0.36 0.40 0.40 0.40
Price range of common stock--high 64 1/2 61 5/8 65 1/2 75 1/4
Price range of common stock--low 57 7/8 53 1/2 51 7/8 61 3/4
- ----------------------------------------------------------------------------------------------------------------------------
1995
Dividends per share of common stock 0.32 0.36 0.36 0.36
Price range of common stock--high 48 1/2 52 60 1/2 64 1/8
Price range of common stock--low 38 3/8 43 50 1/4 52 7/8
- ----------------------------------------------------------------------------------------------------------------------------
Total year
- ------------------------------------------------------------------------------------
1996
Dividends per share of common stock 1.56
Price range of common stock--high 75 1/4
Price range of common stock--low 51 7/8
- ------------------------------------------------------------------------------------
1995
Dividends per share of common stock 1.40
Price range of common stock--high 64 1/8
Price range of common stock--low 38 3/8
- ------------------------------------------------------------------------------------
During 1996, the Company issued a total of 1,400 shares of Common Stock to
nonemployee directors of the Company pursuant to the Company's Restricted Stock
Plan for Nonemployee Directors. Given the small number of persons to whom these
shares were issued, applicable restrictions on transfer and the information
regarding the Company possessed by the directors, these shares were issued
without registration in reliance on Section 4(2) of the Securities Act of 1933,
as amended.
-22-
Item 6. Selected Financial Data
- --------------------------------
(Dollars in millions except for per-share data). For year 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales 2,156.4 2,325.0 2,226.0 2,075.7
Cost of goods sold 1,459.9 1,581.1 1,483.9 1,453.7
Total selling, general and administrative expenses 413.2 457.0 449.2 435.6
Equity (earnings) loss from affiliates (19.1) (6.2) (1.7) (1.4)
Restructuring charges 46.5 71.8 -- 89.3
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- 177.2 -- --
Operating income (loss) 255.9 44.1 294.6 98.5
Interest expense 22.6 34.0 28.3 38.0
Other expense (income), net (6.9) 1.9 0.5 (6.1)
Earnings (loss) from continuing businesses before
income taxes 240.2 8.2 265.8 66.6
Income taxes 75.4 (5.4) 78.6 17.6
Earnings (loss) from continuing businesses 164.8 13.6 187.2 49.0
As a percentage of sales 7.6% 0.6% 8.4% 2.4%
As a percentage of average monthly assets (a) 8.5% 0.7% 10.7% 2.8%
Earnings (loss) from continuing businesses
applicable to common stock (b) 158.0 (0.7) 173.1 35.1
Per common share--primary 3.97 (0.02) 4.60 0.93
Per common share--fully diluted (c) 3.81 (0.02) 4.10 0.92
Net earnings (loss) 155.9 123.3 210.4 63.5
As a percentage of sales 7.2% 5.3% 9.5% 3.1%
Net earnings (loss) applicable to common stock (b) 149.1 109.0 196.3 49.6
As a percentage of average shareholders' equity 19.6% 15.0% 31.3% 9.0%
Per common share--primary 3.76 2.90 5.22 1.32
Per common share--fully diluted (c) 3.60 2.67 4.64 1.26
Dividends declared per share of common stock 1.56 1.40 1.26 1.20
Purchases of property, plant and equipment 220.7 171.8 134.2 107.6
Aggregate cost of acquisitions -- 20.7 -- --
Total depreciation and amortization 123.7 123.1 120.7 117.0
Average number of employees--continuing businesses 10,572 13,433 13,784 14,796
Average number of common shares outstanding 39.1 37.1 37.5 37.2
- -----------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 243.5 346.8 384.4 279.3
Net property, plant and equipment--continuing businesses 964.0 878.2 966.4 937.6
Total assets 2,135.6 2,149.8 2,159.0 1,869.2
Long-term debt 219.4 188.3 237.2 256.8
Total debt as a percentage of total capital (d) 37.2% 38.5% 41.4% 52.2%
Shareholders' equity 790.0 775.0 735.1 569.5
Book value per share of common stock 19.19 20.10 18.97 14.71
Number of shareholders (e) (f) 7,424 7,084 7,473 7,963
Common shares outstanding 41.2 36.9 37.2 37.2
Market value per common share 69 1/2 62 38 1/2 53 1/4
- -------------------------------------------------------------======================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except for per-share data) For year 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------
Net sales 2,111.4 2,021.4 2,082.4 2,050.4
Cost of goods sold 1,536.1 1,473.7 1,469.8 1,423.2
Total selling, general and administrative expenses 446.6 415.1 404.0 380.7
Equity (earnings) loss from affiliates (0.2) -- -- --
Restructuring charges 160.8 12.5 6.8 5.9
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- -- (60.4) (9.5)
Operating income (loss) (31.9) 120.1 262.2 250.1
Interest expense 41.6 45.8 37.5 40.5
Other expense (income), net (7.2) (8.5) 19.7 (5.7)
Earnings (loss) from continuing businesses before
income taxes (66.3) 82.8 205.0 215.3
Income taxes (2.9) 32.7 69.5 74.6
Earnings (loss) from continuing businesses (63.4) 50.1 135.5 140.7
As a percentage of sales -3.0% 2.5% 6.5% 6.9%
As a percentage of average monthly assets (a) -3.3% 2.7% 7.5% 8.6%
Earnings (loss) from continuing businesses
applicable to common stock (b) (77.2) 30.7 116.0 131.0
Per common share--primary (2.07) 0.83 2.98 2.88
Per common share--fully diluted (c) (2.07) 0.83 2.74 2.76
Net earnings (loss) (227.7) 48.2 141.0 187.6
As a percentage of sales -10.8% 2.4% 6.8% 9.1%
Net earnings (loss) applicable to common stock (b) (241.5) 28.8 121.5 177.9
As a percentage of average shareholders' equity -33.9% 3.3% 13.0% 17.9%
Per common share--primary (6.49) 0.77 3.12 3.92
Per common share--fully diluted (c) (6.49) 0.77 2.86 3.72
Dividends declared per share of common stock 1.20 1.19 1.135 1.045
Purchases of property, plant and equipment 107.5 127.1 184.2 215.0
Aggregate cost of acquisitions 4.2 -- 16.1 --
Total depreciation and amortization 123.4 122.1 116.5 121.6
Average number of employees--continuing businesses 16,045 16,438 16,926 17,167
Average number of common shares outstanding 37.1 37.1 38.8 45.4
- ------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 239.8 353.8 305.2 449.4
Net property, plant and equipment--continuing businesses 967.2 1,042.8 1,032.7 944.0
Total assets 1,944.3 2,125.7 2,124.4 2,008.9
Long-term debt 266.6 301.4 233.2 181.3
Total debt as a percentage of total capital (d) 57.2% 46.9% 45.7% 36.1%
Shareholders' equity 569.2 885.5 899.2 976.5
Book value per share of common stock 14.87 23.55 24.07 23.04
Number of shareholders (e) (f) 8,611 8,896 9,110 9,322
Common shares outstanding 37.1 37.1 37.1 42.3
Market value per common share 31 7/8 29 1/4 25 37 1/4
========================================================================================================================
(Dollars in millions except for per-share data) For year 1988 1987 1986
- ----------------------------------------------------------------------------------------------------------
Net sales 1,843.4 1,608.7 1,295.0
Cost of goods sold 1,287.6 1,112.0 889.2
Total selling, general and administrative expenses 331.3 288.8 240.3
Equity (earnings) loss from affiliates -- -- --
Restructuring charges -- -- --
Loss from ceramic tile business formation/
(gain) from sales of woodlands (1.9) -- --
Operating income (loss) 226.4 207.9 165.5
Interest expense 25.8 11.5 5.4
Other expense (income), net (13.1) (4.3) (3.1)
Earnings (loss) from continuing businesses before
income taxes 213.7 200.7 163.2
Income taxes 79.4 82.2 70.0
Earnings (loss) from continuing businesses 134.3 118.5 93.2
As a percentage of sales 7.3% 7.4% 7.2%
As a percentage of average monthly assets (a) 10.4% 11.3% 10.8%
Earnings (loss) from continuing businesses
applicable to common stock (b) 133.9 118.0 92.8
Per common share--primary 2.90 2.50 1.93
Per common share--fully diluted (c) 2.90 2.50 1.93
Net earnings (loss) 162.7 150.4 122.4
As a percentage of sales 8.8% 9.3% 9.4%
Net earnings (loss) applicable to common stock (b) 162.3 150.0 122.0
As a percentage of average shareholders' equity 17.0% 17.6% 16.0%
Per common share--primary 3.51 3.18 2.54
Per common share--fully diluted (c) 3.51 3.18 2.54
Dividends declared per share of common stock 0.975 0.885 0.7325
Purchases of property, plant and equipment 165.8 156.7 119.1
Aggregate cost of acquisitions 355.8 71.5 53.1
Total depreciation and amortization 99.4 83.6 67.6
Average number of employees--continuing businesses 15,016 14,036 12,953
Average number of common shares outstanding 46.2 47.2 48.1
- ----------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 260.6 345.3 401.5
Net property, plant and equipment--continuing businesses 930.4 674.1 534.7
Total assets 2,073.1 1,574.9 1,277.5
Long-term debt 185.9 67.7 58.8
Total debt as a percentage of total capital (d) 35.9% 22.8% 16.9%
Shareholders' equity 1,021.8 913.8 813.0
Book value per share of common stock 21.86 19.53 16.85
Number of shareholders (e) (f) 10,355 9,418 9,621
Common shares outstanding 46.3 46.2 47.5
Market value per common share 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 preferred shares.
(c) See definition of fully diluted earnings per share on page 37.
(d) Total debt includes short-term debt, current installments of long-term debt,
long-term debt and ESOP loan guarantee. Total capital includes total debt
and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 6,000 to 6,500 employees for years 1988 through 1996.
(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.
Beginning in 1996, ceramic tile results were reported under the equity method,
whereas prior to 1996, ceramic tile operations were reported on a consolidated
or line item basis.
-23-
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
- --------------------------------------------------------------------------------
1996 COMPARED WITH 1995
- --------------------------------------------------------------------------------
The 1995 and 1994 consolidated financial statements have been restated from the
1995 annual report to include the historical results of the ceramic tile
operations on an operating or consolidated line item basis rather than under the
equity method.
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 35), net cash
provided by operating activities and the sale of assets was sufficient to cover
normal working capital requirements, payments related to restructuring
activities and additional investment in plant, property and equipment. Most of
the 1996 beginning cash balance plus proceeds from exercised stock options
covered the reduction of debt, payments of dividends, preferred stock
redemptions, repurchase of shares, purchase of computer software and additional
investment in Dal-Tile International Inc., a company in which Armstrong has a
33% equity investment. The beginning cash balance of $256.9 million included
proceeds from the sale of Thomasville Furniture Industries, Inc., in December
1995.
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Uses of cash flow ($ millions)
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[BAR GRAPH APPEARS HERE]
Working capital was $243.5 million as of December 31, 1996, $103.3 million lower
than the $346.8 million recorded at year-end 1995. The reduction in working
capital over 12 months resulted primarily from the $191.5 million decrease in
cash. Partially offsetting the working capital decrease were increases in
inventories of $10.2 million, income tax benefits of $22.5 million, the $33.9
million decrease in short-term debt and current installments of long-term debt
and the $24.1 million decrease in accounts payable and accrued expenses.
The ratio of current assets to current liabilities was 1.76 to 1 as of December
31, 1996, compared with 1.92 to 1 as of December 31, 1995, primarily due to the
reduced levels of cash.
In the second quarter, the company announced that effective October 1, 1996, the
Employee Stock Ownership Plan (ESOP) and the Retirement Savings Plan (RSP) would
be merged to form the new Retirement Savings and Stock Ownership Plan (RSSOP).
On July 31, the trustee of the ESOP converted the preferred stock held by the
trust into approximately 5.1 million shares of common stock with a book value of
$139.1 million at a one-for-one ratio. The ultimate impact on the company's
results will depend on the level of employee participation in the restructured
plan and the stock price over time.
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Total debt/total debt + equity
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
Long-term debt, excluding the company's guarantee of the ESOP loan, increased
$31.1 million in 1996. The increase was primarily due to a low interest rate
loan for a capital addition at the Kankakee, Illinois, floor tile plant. At
December 31, 1996, long-term debt of $219.4 million represented 17.4% of total
capital compared with 14.9% at the end of 1995. The 1996 and 1995 year-end
ratios of total debt (including the company's financing of the ESOP loan) as a
percent of total capital were 37.2% and 38.5%, respectively.
In July 1996, the Board of Directors authorized the company to repurchase 3.0
million shares of its common stock (in addition to the 2.5 million shares
authorized in 1994), through the open market or through privately negotiated
transactions, bringing the total authorized common share repurchases to 5.5
million shares. The increased stock repurchase authorization will allow greater
flexibility in deploying cash flow and, to the extent that shares can be
repurchased at attractive prices, should increase earnings per share. Since the
inception of the plan, the company has repurchased approximately 2,380,000
shares through December 31, 1996, including approximately 1,328,000 shares
repurchased in 1996. In addition to shares repurchased under the above plan,
approximately 364,600 ESOP shares were repurchased in 1996. By early February
1997, the company had completed the 1994 2.5 million share repurchase plan.
Capital in excess of par value increased $112.8 million from December 31, 1995,
primarily as a result of two transactions. First, the company reissued treasury
stock to the trustee of the ESOP in the conversion of the preferred stock held
by the trust as mentioned above. Capital in excess of par value increased $102.4
million representing the excess of conversion value of the ESOP convertible
shares over the average acquisition cost of the treasury shares. Second, Dal-
Tile issued new shares in a public offering in August and used part of the
proceeds from the public offering to refinance all of its existing debt.
Although Armstrong's ownership share declined to 33% from 37%, Dal-Tile's net
assets increased, adding to the overall carrying
- 24 -
value of Armstrong's investment and resulting in the company recording $14.5
million as additional capital in excess of par value.
In April 1996, the company increased the five-year revolving line of credit with
11 banks from $200 million to $300 million. The line of credit is used for
general corporate purposes and as a backstop for commercial paper notes. On
November 1, the company's shelf registration statement for an additional $250
million of debt and/or equity securities was approved. The total amount of
unissued securities registered with the Securities and Exchange Commission is
now $500 million.
Should a need develop for additional financing, it is management's opinion that
the company has sufficient financial strength to warrant the required support
from lending institutions and financial markets.
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Funds from operations/total debt
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
The company is involved in significant asbestos-related litigation which is
described more fully on pages 48-51 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
(Georgine v. Amchem) 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 10-year period for the settlement class action or the compensation
levels to be negotiated for such claims, nor whether, if needed, an alternative
to the Georgine settlement vehicle may ultimately emerge, or the ultimate
liability if such alternative does not emerge, or the scope of its nonproducts
coverage ultimately deemed available.
Subject to the foregoing and based upon its experience and other factors also
referred to above, the company believes that the estimated $141.6 million in
liability and defense costs recorded on the 1996 balance sheet will be incurred
to resolve an estimated 43,600 asbestos-related personal injury claims pending
against the company as of December 31, 1996.
An insurance asset in the amount of $141.6 million recorded on the 1996 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. A substantial portion of the
insurance asset involves nonproducts insurance which is in alternate dispute
resolution. While the company is seeking resolution of key issues in the
alternate dispute resolution process during 1997, a shortfall may develop
between available insurance and amounts necessary to pay claims as early as the
third quarter of 1997 or possibly in the second quarter depending on the timing
of the availability of certain coverage (the company believes such shortfall
would not be material either to the financial condition of the company or to its
liquidity). 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. If the Georgine settlement class action mechanism is not
ultimately approved, the company believes that a claims resolution mechanism
alternative to the Georgine settlement will likely be negotiated, though at
likely higher liability and defense costs. 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 ten-year maximum mathematical projection or in
the cost of an alternative settlement format, 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 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 as a
result of the outcome of the California 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 California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld, an alternative to Georgine
would be negotiated, 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.
- 25 -
Reference is made to the litigation involving The Industry Network System, Inc.
(TINS), discussed on page 51. In 1994, a 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 subsequently
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 which
denied the motion. Also denied was a motion by TINS before the District Court to
rescind an earlier 1984 agreement of settlement. TINS has appealed this later
decision to the Circuit Court, and it is expected that this appeal will be
argued during the first half of 1997.
Reference is also made to environmental matters as discussed on page 46. The
company believes any sum it may have to pay in connection with environmental
matters in excess of amounts accrued would not have a material adverse effect on
its financial condition, liquidity or results of operations, although the
recording of any future costs may be material to earnings in such future period.
- --------------------------------------------------------------------------------
Book value per share at year-end (dollars)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
CONSOLIDATED RESULTS
Net sales of $2.16 billion were lower when compared with last year's net sales
of $2.33 billion which included $0.24 billion of sales from the ceramic tile
operations. Beginning in 1996, ceramic tile is reported on the equity method;
therefore, a year-to-year sales comparison cannot be made for this industry
segment. Sales growth occurred in the floor coverings and building products
segments. The floor coverings segment sales growth came primarily from
residential and commercial floor tile sold through the U.S. home center channel
and floor sales in Eastern Europe and Russia. In the building products segment,
strong commercial ceiling sales in the latter part of the year offset earlier
servicing problems resulting from severe weather conditions in the first quarter
1996. Industry products sales were adversely affected by competitive pressure in
European insulation products and lower global textile products sales which more
than offset the positive impact of increases in the gasket and specialty paper
business.
Earnings from continuing businesses after income taxes in 1996 were $164.8
million or $3.97 per share on a primary basis and $3.81 per share on a fully
diluted basis and included after-tax charges of $29.6 million for restructuring
and $22.0 million for costs associated with the discoloration of a limited
portion of flooring products. Earnings from continuing businesses after income
taxes in 1995 were $13.6 million and included a $46.6 million charge after tax
for restructuring and a loss of $116.8 million after tax related to the business
combination of Armstrong's ceramic tile operations with Dal-Tile International
Inc.
Net earnings for 1996 were $155.9 million, or $3.76 per share on a primary basis
and $3.60 per share on a fully diluted basis and included the restructuring and
discoloration charges mentioned above plus $8.9 million or $0.21 per share for
the company's portion of an extraordinary loss from Dal-Tile related to the
refinancing of Dal-Tile's outstanding debt. A reduction in Dal-Tile's interest
expense should occur as a result of the debt refinancing. Net earnings in 1995
were $123.3 million or $2.90 per share on a primary basis and $2.67 on a fully
diluted basis and included $25.8 million of after-tax earnings from the
discontinued operations of Thomasville Furniture Industries, Inc., and $83.9
million representing the after-tax gain from its sale.
The company's Economic Value Added (EVA) performance as measured by return on
EVA capital was 14.8% in 1996, exceeding 1995's return on EVA capital of 14.0%
and the company's 12% cost of capital. In 1997, the company's cost of capital
for EVA will be reduced to 11% partially due to lower interest rates and stock
price volatility.
Cost of goods sold in 1996 was 67.7% of sales, slightly lower than the 68.0%
recorded in 1995. The 1996 cost of goods sold included $5.9 million for charges
associated with the floor discoloration issue which were offset by lower raw
material and other manufacturing costs. The cost of goods sold in 1995 included
the impact of start-up costs of approximately $3.1 million related to the
insulation products facility in Mebane, North Carolina.
Selling, general and administrative (SG&A) expenses in 1996 were $413.2 million
which included $14.0 million of expenses related to the discoloration issue. In
1995, SG&A expenses were $457.0 million and included $59.9 million of SG&A
expenses of the ceramic tile operations which was reported on an equity basis in
1996.
The second-quarter 1996 before-tax restructuring charge for continuing
businesses of $46.5 million, or $29.6 million after tax (79 cents per share on a
primary basis and 70 cents per share on a fully diluted basis), related
primarily to the reorganization of corporate and business unit staff positions;
realignment and consolidation of the Armstrong and W.W. Henry installation
products businesses; restructuring of production processes in the Munster,
Germany, ceilings facility; early retirement opportunities for employees in the
Fulton, New York, gasket and specialty paper products facility; and write-down
of assets. These actions affected approximately
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500 employees, about two-thirds of whom were in staff positions. These
restructuring actions continued the company's ongoing efforts to streamline the
organization and enable the businesses to be the best-cost suppliers in their
markets. The charges were estimated to be evenly split between cash payments and
noncash charges. The majority of the cash outflow was expected to occur over 12
months. It was anticipated that ongoing cost reductions and productivity
improvements should permit recovery of the charges in less than two years. In
1995, restructuring charges of $71.8 million before tax or $46.6 million after
tax ($1.09 per share on a fully diluted basis) were recorded. These charges
related primarily to the closure of a plant in Braintree, Massachusetts, and for
severance and early retirement incentives for approximately 670 employees in the
North American resilient flooring business and the European industry products
and building products businesses.
Actual severance payments charged against restructuring reserves were $32.1
million in 1996 relating to the elimination of 724 positions, of which 323
terminations occurred since the beginning of 1996. As of December 31, 1996,
$50.3 million of reserves remained for restructuring actions.
In July, the company learned that discoloration in a limited portion of its
residential sheet flooring product lines was occurring. The problem was traced
to a raw material used in production primarily between September 1995 and July
1996. The manufacturing process was corrected to eliminate any further
occurrence of this problem. New production was shipped to customers to meet
demand for this product. A portion of the production of the affected product
lines was shipped to retailers and potentially installed in consumers' homes.
The remainder was in the company's, wholesalers' or retailers' inventory.
In September, the company recorded charges of $34.0 million before tax or $22.0
million after tax ($0.53 per share) for costs associated with the discoloration
issue. These charges included the write-down to realizable value of the
company's inventory on hand or to be returned from independent wholesalers and
the potential cost of removing and replacing discolored product installed in
consumers' homes. The company will continue to monitor claims levels associated
with these products and may make further adjustments in the reserve based on
experience. Based on information currently available, the company believes that
any additional loss would not be material to the financial condition of the
company or to its liquidity, although the recording of any future liabilities
may be material to earnings in such future period.
Interest expense in 1996 of $22.6 million was lower than 1995's interest expense
of $34.0 million. The primary reasons for the decrease were the lower levels of
short-term debt and lower interest expense requirements on long-term debt.
Armstrong's effective tax rate for continuing businesses in 1996 was 31.4%. In
1995, Armstrong's effective tax benefit for continuing businesses was 65.9%.
Removing the tax effects of the loss on the ceramic tile business combination,
the effective tax rate would have been 29.7%, reflecting tax benefits related to
reduced foreign and state income tax expense.
GEOGRAPHIC AREA RESULTS (see page 39)
UNITED STATES
Net sales in 1996 were $1.42 billion, slightly lower than the $1.59 billion
recorded in 1995 which included $0.24 billion of ceramic tile sales. Sales
through the home center channel had significant year-to-year increases. The
commercial markets for ceilings and the residential and commercial markets for
floor tile continue to show strength. U.S. residential sheet flooring sales were
slightly below 1995.
Operating income of $202.7 million was higher than 1995's operating income of
$7.7 million which included a $177.2 million loss due to the ceramic tile
business combination. An organizational effectiveness study to review the
company's staff support activities was implemented by late 1996, and the
restructuring activities associated with this study had an adverse impact on
operating income of $34.5 million before tax. Operating income was also
negatively affected by the one-time charge of $34.0 million related to the floor
discoloration issue mentioned above. Restructuring activities in 1995 resulted
in $45.5 million before tax charged against operating income. Operating income
for 1996 was positively impacted by higher sales levels in the floor coverings
and building products segments and was leveraged through ongoing cost reduction
efforts.
Export sales of Armstrong products from the U.S. to trade customers of $34.0
million increased nearly $1.9 million, or 6.1%, compared with 1995.
EUROPE
Sales by the European affiliates reflected the soft economy largely offset by
the ability to enter into new market areas such as Eastern Europe and Russia.
Net sales decreased 1.8% to $548.4 million compared with 1995. Insulation sales
were negatively impacted by competitive pressures, although they increased in
the latter half of 1996. Floor Products sales increased from 1995, setting
several quarterly sales records in 1996. Building Products sales increased
slightly, despite softened demand and competitive pressure in the Western
European commercial market segment. Operating income increased 26.8% over 1995,
primarily due to cost savings obtained from prior years' restructuring
activities. Restructuring charges in Europe were $11.0 million and $24.9 million
in 1996 and 1995, respectively. In floor products, increased volume in addition
to productivity improvements have resulted in improved profits in the
residential sheet business. European insulation products operating income has
been positively impacted by its continued efforts to be the best-cost supplier
in the industry.
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OTHER FOREIGN
Sales increased 4.9% over 1995, with ceiling sales in the Pacific Rim providing
a significant part of the growth. Sales growth in Latin America for Building
Products continues a trend established over the past three years. Operating
income increased 28.6% over 1995, with start-up costs for the new ceilings plant
in China totaling $3.8 million offset by lower costs in the Pacific area Floor
Products and Building Products Operations.
INDUSTRY SEGMENT RESULTS (see page 3)
FLOOR COVERINGS
In the floor coverings segment, 1996 net sales of $1.09 billion were slightly
above 1995's $1.05 billion and included a reduction of $14.1 million for
customer returns associated with the discoloration of a limited portion of its
Residential Inlaid Color Sheet Flooring products line. The adverse effect of
these returns and the small decline in the U.S. residential sheet business were
offset by increases in residential sheet flooring sales in Europe, especially
Eastern Europe and Russia, and sales of all products to U.S. home centers. In
the home center channel, which is serviced through the Corporate Retail Accounts
Division, the strategy of segmenting products for the home centers has proven to
be successful. In this channel, The Home Depot and Lowe's are important
customers of our resilient floor products. Laminate flooring, manufactured and
marketed in alliance with the F. Egger Company of Austria, had a good initial
market reaction.
Operating income included a $34.0 million charge associated with the
discoloration issue and a $14.5 million restructuring charge primarily related
to the consolidation of the separate Armstrong and W.W. Henry installation
products businesses and to other reorganizations in the floor products
operations staff. Operating income in 1995 included a restructuring charge of
$25.0 million primarily related to the elimination of positions in North
America. Records were set in both the U.S. residential and commercial tile
businesses. Lower raw material costs and increased manufacturing productivity
had a positive impact on the cost profile of this business. However, operating
income was adversely impacted by start-up costs for laminate flooring. Capital
expenditures in this segment increased $40.4 million to $117.7 million and were
directed toward the rollout of the Quest display and merchandising system and
toward improved manufacturing process effectiveness.
- --------------------------------------------------------------------------------
Net trade sales ($ millions)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
Outlook
The rollout of the Quest merchandising system with retailers was successful,
with the October 1996 introduction in Canada providing additional impetus. The
company believes that this state-of-the-art display system will provide a
competitive advantage in the residential sheet flooring market segment. Laminate
flooring, which was introduced to the U.S. market in late 1996, was introduced
in Canada in early 1997. The company expects that the laminate flooring alliance
with F. Egger Company, along with other business partnerships, should provide
additional growth opportunities and manufacturing capacity for the floor
coverings segment. The company will continue its strategy to increase its brand
recognition through increased advertising. These and other merchandising costs
plus small increases in raw material costs should be offset by the significant
productivity improvements that have been occurring worldwide. In the home center
channel, increases in the number of The Home Depot and Lowe's stores, in
addition to the segmentation strategy, should contribute to sales growth. The
company plans to have 14 independent regional distribution centers established
by the end of 1997 to service these customers. (Five distribution centers were
in place by the end of 1996.)
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Operating income ($ millions)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
BUILDING PRODUCTS
In the building products segment, net sales increased over 5.3% when compared to
1995 with growth primarily in North America and the Pacific Rim. North American
sales increased significantly with the major areas of market strength in the
commercial market segment and the home center channel. Manufacturing has
recovered from the severe weather conditions of early 1996, while inventories
and service levels have stabilized in anticipation of sales growth in 1997.
Operating income increased to $95.1 million, 3.1% over 1995. Operating income in
1996 included an $8.3 million restructuring charge, the majority of which
related to simplifying production processes in the Munster, Germany, ceilings
facility. The balance of the restructuring charge was associated with staff
reorganizations and asset write-downs in Europe. In 1995, operating income was
adversely impacted by a $6.3 million restructuring charge, primarily related to
elimination of
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administrative functions in the European operations. In the earlier part of
1996, operating income had been adversely impacted by weather-related problems
in North America and Europe. During 1996, additional costs were incurred for
integration and start-up of the new metal ceilings products business and the
wet-formed ceiling products plant in China. However, higher sales volume in
1996, improvements in its production processes and reductions in its
nonmanufacturing expenses more than offset these additional costs. Capital
expenditures in this segment increased by $18.5 million to $67.7 million.
Excellent sales and profit growth continued in North America and Europe from
WAVE, the grid system joint venture with Worthington Industries.
Outlook
Economic forecasts indicate continued growth in the U.S. commercial business and
recovery in western and southern Europe. New products play an important part of
the global building products segment. The most recent impact product is Ultima
ceilings which provides exceptional noise reduction, sag resistance and a
durable surface for commercial interiors. In 1996, the company announced its
planned joint venture with Partek Insulation, the foremost producer of rockwool-
based insulation in Finland and Sweden, to manufacture and distribute high-
performance, soft-fiber ceilings throughout Europe. The addition of this
alliance will strengthen the company's Scandinavian distribution business and
enhance its current ceiling line in Europe. The company believes that this new
product line, in addition to the metal ceilings business which will include the
planned joint venture with Hunter Douglas, will provide additional growth
opportunities primarily in Europe and serve as a foundation for growth in other
geographic areas. The ceilings plant in China, aimed at servicing the fast-
growing geographic market, began production in late 1996.
INDUSTRY PRODUCTS
Sales for the industry products segment of $346.2 million in 1996 decreased less
than 1% when compared with 1995's sales of $348.8 million. Sales in 1995
included $7.9 million of an exchange translation benefit when compared to 1996
rates and $4.9 million from the champagne cork business divested in 1995.
Operating income for 1996 was $40.1 million and includes a $4.0 million
restructuring charge, the majority of which related to an early retirement
offering to employees of the Fulton, New York, gasket and specialty paper
products facility. Operating income in 1995 of $9.3 million included a $31.4
million restructuring charge related to the closing of the Braintree,
Massachusetts, plant and elimination of employee positions in Europe. For
insulation products, cost reductions in Europe have enabled the business to
remain competitive through lower selling prices and thus to continue to gain
market share while in the U.S. sales growth was achieved through increased
market share. The Mebane, North Carolina, facility, which became operational in
1996, will provide low-cost manufacturing for the U.S. As a result of these
strategies, operating income for insulation products has increased. Income
increased significantly for Armstrong Industrial Specialties, Inc., especially
in its gaskets business. The textile products business continues to implement
several cost-saving initiatives to reduce its overhead. Despite these changes,
the business continued to generate a small operating loss of approximately $3.0
million due to continued worldwide market softness in the textile industry. In
1995, the company announced its intentions to discuss with potential buyers the
possible sale of the Textile Products Operations. Capital expenditures in the
industry products segment decreased $22.5 million from the higher levels of 1995
when expenditures were made for the construction of two plants and for the
acquisition of another plant.
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Capital additions ($ millions)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
Outlook
It is anticipated that the European insulation market environment will continue
to be price competitive, and further cost-saving actions are planned to achieve
volume increases through becoming the best-cost supplier in the industry. In
addition, this business is continuing to seek profitable growth into new
geographic areas such as Central Europe and Asia. Armstrong Industrial
Specialties plans to take advantage of its implementation of effective logistic
systems to enable on-time, defect-free delivery of its products. The company
believes the market for textile products will stabilize during 1997, at which
time cost reductions in the business will provide a better return. The
evaluation of strategic alternatives, including a possible sale, continues for
this business.
CERAMIC TILE
In the ceramic tile segment, 1996 results represent the company's share of the
after-tax net income of the Dal-Tile business combination reduced by the
amortization of the excess of the company's initial investment in Dal-Tile over
the underlying equity in net assets. Operating income for 1995 reflects the
pre-tax operating income of the ceramic tile operations, primarily the American
Olean Tile Company. Dal-Tile took several initiatives during 1996 to integrate
the business, including the closure of two plants and numerous sales service
centers. Sales growth in 1996 for ceramic tile occurred primarily in the home
center and independent distributor channels.
Outlook
Dal-Tile will continue its efforts to integrate the two businesses and enhance
operating efficiencies and capacity utilization. Continued growth is expected in
the home center channel and independent distributor channel, and planned
capacity expansions should provide a platform to improve Dal-Tile's
- 29 -
market share. Significant interest expense savings are anticipated from the
refinancing of existing debt with proceeds from the initial public offering
completed in 1996.
FOURTH QUARTER 1996 COMPARED WITH FOURTH QUARTER 1995
Sales from continuing businesses of $528.6 million were $29.0 million lower than
1995's fourth-quarter sales of $557.6 million which included $59.9 million of
ceramic tile sales. Sales for the ceramic tile business combination are not
included in the results for 1996 in accordance with the change to equity-based
accounting. Sales increased in all segments other than ceramic tile, assisted
primarily by growth in the following business units: the commercial and
residential floor tile business units, the commercial ceilings business and the
European insulation business.
Earnings from continuing businesses were $53.7 million, or $1.28 per share.
These results compare with 1995's fourth-quarter loss from continuing businesses
of $74.7 million or a loss of $2.09