SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
ARMSTRONG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Pennsylvania | 000-50408 | 23-3033414 | ||
| (State or other jurisdiction of incorporation or organization) |
Commission file number |
(I.R.S. Employer Identification No.) |
| P. O. Box 3001, Lancaster, Pennsylvania | 17604 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (717) 397-0611
ARMSTRONG WORLD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
| Pennsylvania | 1-2116 | 23-0366390 | ||
| (State or other jurisdiction of incorporation or organization) |
Commission file number |
(I.R.S. Employer Identification No.) |
| P. O. Box 3001, Lancaster, Pennsylvania | 17604 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (717) 397-0611
Armstrong World Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Number of shares of Armstrong Holdings, Inc.’s common stock outstanding as of April 19, 2004 - 40,668,892.
| SECTION |
PAGES | |||
| 3 – 5 | ||||
| PART I – FINANCIAL INFORMATION |
||||
| Item 1. |
Condensed Consolidated Financial Statements |
|||
| 6 – 30 | ||||
| 31 | ||||
| 32 – 56 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
57 – 69 | ||
| Item 3. |
70 | |||
| Item 4. |
70 | |||
| PART II – OTHER INFORMATION |
||||
| Item 1. |
71 | |||
| Item 4. |
71 | |||
| Item 5. |
72 – 73 | |||
| Item 6. |
74 – 80 | |||
| 81 | ||||
Cautionary Factors That May Affect Future Results
This report and other written reports and oral statements made from time to time by the company may contain cautionary or “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.
These statements can be identified by the use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words of similar meaning. In particular, these include statements relating to intentions, beliefs or current expectations concerning, among other things, future performance, results of operations, the outcome of contingencies such as legal proceedings, and financial conditions. Forward-looking statements give current expectations or forecasts of future events. They do not relate strictly to historical or current facts.
Any or all of the forward-looking statements made in this report and in any other public statements may turn out to be incorrect. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that actual future results of operations may vary materially from forward-looking statements. Any forward-looking statements made in this report speak only as of the date of such statement. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. However, you should consult any further disclosures we make on related subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the Securities and Exchange Commission.
It is not possible to predict or identify all factors that could potentially cause actual results to differ materially from expected and historical results. Some such factors are:
Chapter 11
| • | Factors relating to Armstrong World Industries, Inc.’s (“AWI”) Chapter 11 Filing, such as: the possible disruption of relationships with creditors, customers, suppliers and employees; the ultimate size of AWI’s asbestos-related and other liabilities; the ability to confirm and implement a plan of reorganization; the availability of financing and refinancing for both AWI and its subsidiaries that are not parties to its Chapter 11 Filing; legislation that might affect AWI’s liabilities; and AWI’s ability to comply with covenants in its debtor-in-possession credit facility (the “DIP Facility”). |
| • | Factors relating to AWI’s emergence from bankruptcy, such as emergence-related costs and AWI’s debt service costs for debt to be issued pursuant to the plan of reorganization. Debt service costs will affect net income and cash flow. |
| • | Covenants in the agreements governing our anticipated, emergence-related debt may impose restrictions that limit operating and financial flexibility. |
Business Environment
| • | Our business is cyclical in nature and is affected by the same economic factors that affect the residential, office, commercial and institutional renovation and construction industries in general, such as the availability of credit, consumer confidence, changes in interest rates, governmental budgets and general economic conditions. Despite our efforts to foresee and plan for the effects of changes in these circumstances, we cannot predict their impact with certainty. For example, economic weakness can lead customers to delay or cancel construction plans or could lead to further industry overcapacity. For more information on these matters, see the discussion of Market Risk in Item 7A of our 2003 Form 10-K. |
3
| • | The major markets for our products, particularly in the renovation and construction industries, are highly competitive. Business combinations among our competitors or suppliers could affect our competitive position in any of our business units. Competition from foreign competitors who have lower cost structures than we have is a threat in the flooring business. Similarly, combinations or alliances among our major customers could increase their purchasing power in dealing with us. If we should enter into one or more business combinations, our business, finances and capital structure could be affected. |
| • | The level of success of our new product introductions, as well as new patents, and those of our competitors will impact our competitive position. |
| • | The extent to which we successfully achieve integration of and synergies from acquisitions as well as the impact of divestitures, plant closings, including the ability to derive cost savings, and other unusual items that may result from evolving business strategies and organizational restructuring. |
Sales Environment
| • | We have several key customers and the loss of one of these customers could affect our financial performance. Although builders, dealers and other retailers represent other channels of distribution for our products, the loss of a significant portion of sales from a major customer would have a material adverse impact on our results of operations. |
| • | Business decisions made by our major customers and business conditions that affect our major customers and distribution networks may adversely affect our business. |
| • | Increased retail trade consolidation, especially in markets such as the United States, could make us more dependent upon key retailers whose relative bargaining strength may increase. |
| • | We are affected by changes in the policies and marketing strategies of our retail trade customers, such as inventory shifts or fluctuations, limitations on access to shelf space and other conditions. Many of our customers, particularly major home center retailers, have engaged with us in continuous efforts to reduce their inventory levels and improve delivery fulfillment. |
| • | Profitability can be affected by changes over time in consumer preferences for one type of product versus another. This may create a shift in demand from products with higher margins to those with lower margins or to products we do not sell. |
International
| • | We face political, social and economic risks related to our international operations which can negatively affect our business, operating results, profitability and financial condition. The risk of war and terrorism may adversely affect the economy and the demand for our products. |
| • | Various worldwide economic and political factors, such as changes in the competitive structures of the markets, credit risks in emerging markets, variations in residential and commercial construction rates, and economic growth rates in various areas of the world in which we do business could affect the end-use markets for our products. |
| • | Profitability can be affected by margin erosion to the extent that sales shift to developing markets with lower profitability. |
| • | Changes in intellectual property legal protections and remedies, trade regulations, tariff classifications or duty rates, and procedures and actions affecting production, pricing and marketing of products, intergovernmental disputes, possible nationalization and unstable governments and legal systems could impact our business. |
4
| • | Fluctuations in exchange rates can significantly affect our reported results from one period to the next. Tax inefficiencies and currency exchange controls in repatriating cash flow from non-U.S. subsidiaries could adversely affect us. |
Raw Materials and Sourced Products
| • | The availability of raw materials, energy, water and sourced products due to changes in conditions that impact our suppliers, including environmental conditions, laws and regulations, litigation involving our suppliers, transportation disruptions, force majeure events and/or business decisions made by our suppliers may have an adverse impact on our results of operations. |
| • | We purchase a significant amount of certain raw materials, such as lumber, veneers, PVC resin, plasticizers, mineral fibers and natural gas. Prices of these raw materials, as well as transportation costs, can change dramatically and can have a significant adverse impact on our manufacturing costs. |
Environmental and Safety Regulations
| • | We are subject to a wide variety of increasingly complex and stringent federal, state and local laws and regulations. Changes in regulations that affect our business could lead to significant, unforeseen expenditures. |
Labor Contracts
| • | A significant portion of our employees in production are represented under labor contracts, with a variety of unions both domestic and international, which are generally multi-year in nature and expire at varying dates. Resolution of expiring contracts can never be assured and work stoppages are possible at plants with expired contacts. Should a work stoppage occur, it could have a significant effect to the results of operations, at least during the period of the event. |
Legal Claims
| • | Claims of undetermined merit and amount have been asserted against us for various legal matters, including asbestos-related litigation and claims. We could face potential product liability or warranty claims relating to products we manufacture or distribute. For more information on these matters, see the discussion of Legal Proceedings in Part II, Item 1 in this report. |
5
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Earnings
(amounts in millions, except per share amounts)
Unaudited
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net sales |
$ | 845.0 | $ | 774.9 | ||||
| Cost of goods sold |
661.4 | 608.4 | ||||||
| Gross profit |
183.6 | 166.5 | ||||||
| Selling, general and administrative expenses |
148.4 | 157.3 | ||||||
| Restructuring and reorganization charges, net |
2.0 | 3.2 | ||||||
| Equity (earnings) from affiliates, net |
(6.6 | ) | (5.3 | ) | ||||
| Operating income |
39.8 | 11.3 | ||||||
| Interest expense (unrecorded contractual interest of $21.7 and $24.8) |
2.2 | 2.8 | ||||||
| Other non-operating expense |
1.9 | 1.3 | ||||||
| Other non-operating (income) |
(1.2 | ) | (0.8 | ) | ||||
| Chapter 11 reorganization costs, net |
2.5 | 4.0 | ||||||
| Earnings before income taxes |
34.4 | 4.0 | ||||||
| Income tax expense |
16.7 | 2.1 | ||||||
| Net earnings |
$ | 17.7 | $ | 1.9 | ||||
| Net earnings per share of common stock: |
||||||||
| Basic |
$ | 0.44 | $ | 0.05 | ||||
| Diluted |
$ | 0.43 | $ | 0.05 | ||||
| Average number of common shares outstanding: |
||||||||
| Basic |
40.5 | 40.5 | ||||||
| Diluted |
40.7 | 40.7 | ||||||
See accompanying notes to condensed consolidated financial statements beginning on page 10.
6
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions, except share data)
| Unaudited March 31, 2004 |
December 31, 2003 |
|||||||
| Assets | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 436.1 | $ | 484.3 | ||||
| Accounts and notes receivable, net |
388.4 | 315.4 | ||||||
| Inventories, net |
462.6 | 454.4 | ||||||
| Deferred income taxes |
18.8 | 19.2 | ||||||
| Other current assets |
88.2 | 85.5 | ||||||
| Total current assets |
1,394.1 | 1,358.8 | ||||||
| Property, plant and equipment, less accumulated depreciation and amortization of $1,440.4 and $1,434.8, respectively |
1,243.0 | 1,267.3 | ||||||
| Insurance receivable for asbestos-related liabilities, noncurrent |
95.1 | 95.1 | ||||||
| Prepaid pension costs |
460.7 | 455.1 | ||||||
| Investment in affiliates |
55.6 | 48.9 | ||||||
| Goodwill, net |
241.1 | 244.1 | ||||||
| Other intangibles, net |
76.7 | 79.0 | ||||||
| Deferred income taxes, noncurrent |
988.8 | 988.3 | ||||||
| Other noncurrent assets |
111.0 | 111.2 | ||||||
| Total assets |
$ | 4,666.1 | $ | 4,647.8 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Short-term debt |
$ | 8.8 | $ | 3.9 | ||||
| Current installments of long-term debt |
7.8 | 8.2 | ||||||
| Accounts payable and accrued expenses |
359.0 | 354.2 | ||||||
| Income taxes |
42.1 | 45.9 | ||||||
| Deferred income taxes |
3.3 | 3.3 | ||||||
| Total current liabilities |
421.0 | 415.5 | ||||||
| Liabilities subject to compromise |
4,857.6 | 4,858.5 | ||||||
| Long-term debt, less current installments |
38.0 | 39.4 | ||||||
| Postretirement and postemployment benefit liabilities |
263.4 | 262.3 | ||||||
| Pension benefit liabilities |
212.5 | 216.4 | ||||||
| Other long-term liabilities |
83.9 | 81.2 | ||||||
| Deferred income taxes |
95.0 | 95.0 | ||||||
| Minority interest in subsidiaries |
9.5 | 9.7 | ||||||
| Total noncurrent liabilities |
5,559.9 | 5,562.5 | ||||||
| Shareholders’ equity (deficit): |
||||||||
| Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares |
51.9 | 51.9 | ||||||
| Capital in excess of par value |
167.9 | 167.9 | ||||||
| Reduction for ESOP loan guarantee |
(142.2 | ) | (142.2 | ) | ||||
| Accumulated deficit |
(920.1 | ) | (937.8 | ) | ||||
| Accumulated other comprehensive income |
41.0 | 43.3 | ||||||
| Less common stock in treasury, at cost 2004 and 2003 – 11,210,018 shares |
(513.3 | ) | (513.3 | ) | ||||
| Total shareholders’ (deficit) |
(1,314.8 | ) | (1,330.2 | ) | ||||
| Total liabilities and shareholders’ equity |
$ | 4,666.1 | $ | 4,647.8 | ||||
See accompanying notes to condensed consolidated financial statements beginning on page 10.
7
Armstrong Holdings, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(amounts in millions, except per share amounts)
Unaudited
| 2004 |
2003 | ||||||||||||||
| Common stock, $1 par value: |
|||||||||||||||
| Balance at beginning of year and March 31 |
$ | 51.9 | $ | 51.9 | |||||||||||
| Capital in excess of par value: |
|||||||||||||||
| Balance at beginning of year |
$ | 167.9 | $ | 167.6 | |||||||||||
| Stock issuances and other |
— | 0.5 | |||||||||||||
| Balance at March 31 |
$ | 167.9 | $ | 168.1 | |||||||||||
| Reduction for ESOP loan guarantee: |
|||||||||||||||
| Balance at beginning of year and March 31 |
$ | (142.2 | ) | $ | (142.2 | ) | |||||||||
| Retained earnings (accumulated deficit): |
|||||||||||||||
| Balance at beginning of year |
$ | (937.8 | ) | $ | (898.5 | ) | |||||||||
| Net earnings for period |
17.7 | $ | 17.7 | 1.9 | $ | 1.9 | |||||||||
| Balance at March 31 |
$ | (920.1 | ) | $ | (896.6 | ) | |||||||||
| Accumulated other comprehensive income (loss): |
|||||||||||||||
| Balance at beginning of year |
$ | 43.3 | $ | (12.2 | ) | ||||||||||
| Foreign currency translation adjustments |
(1.9 | ) | 5.9 | ||||||||||||
| Derivative (loss) gain, net |
(0.5 | ) | 0.8 | ||||||||||||
| Minimum pension liability adjustments |
0.1 | (0.2 | |||||||||||||