-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ILucSYte7Bk+jNiYVeotmYK+ZU31NvolRmBxWDQj9vYG27Vf0M6Ra3LLi5bUju2M uzIAKxYYFFUyBI64ZC5Ebw== 0000950109-94-002082.txt : 19941121 0000950109-94-002082.hdr.sgml : 19941121 ACCESSION NUMBER: 0000950109-94-002082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMSTRONG WORLD INDUSTRIES INC CENTRAL INDEX KEY: 0000007431 STANDARD INDUSTRIAL CLASSIFICATION: 3089 IRS NUMBER: 230366390 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02116 FILM NUMBER: 94559489 BUSINESS ADDRESS: STREET 1: P O BOX 3001 CITY: LANCASTER STATE: PA ZIP: 17604 BUSINESS PHONE: 7173970611 MAIL ADDRESS: STREET 1: P.O. BOX 3001 CITY: LANCASTER STATE: PA ZIP: 17604 FORMER COMPANY: FORMER CONFORMED NAME: ARMSTRONG CORK CO DATE OF NAME CHANGE: 19800611 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994 ----------------------------------------------- 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 ------------------------------------------------------- Armstrong World Industries, Inc. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-0366390 ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 -------------------------- 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 registrant's common stock outstanding as of October 31, 1994 - 37,542,083 Part I - Financial Information ------------------------------ Item 1. Financial Statements - - ------ -------------------- Operating results for the third quarter of 1994 and first nine months of 1994, compared with the corresponding periods of 1993 included in this report, are unaudited. In the opinion of the Company, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Three months' and nine months' results are not necessarily indicative of annual earnings. Armstrong World Industries, Inc., and Subsidiaries Consolidated Statements of Earnings ----------------------------------- (amounts in millions except for per-share data) Unaudited
Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1994 1993 1994 1993 ---- ---- ---- ---- NET SALES $715.3 $660.1 $2,047.3 $1,901.0 Cost of goods sold 478.1 462.2 1,386.5 1,360.1 ------ ------ -------- -------- Gross profit 237.2 197.9 660.8 540.9 Selling & administrative expense 133.9 125.2 399.3 382.0 Interest expense 7.1 9.3 22.6 29.1 Other expense (income), net 3.8 1.4 (.8) 2.4 ------ ------ -------- -------- Earnings before income taxes(a)(b)(c) 92.4 62.0 239.7 127.4 Income taxes 30.8 19.7 76.8 41.9 ------ ------ -------- -------- NET EARNINGS (b)(c) $ 61.6 $ 42.3 $ 162.9 $ 85.5 ====== ====== ======== ======== Net earnings per share of common stock: (b)(c)(d) Primary $ 1.54 $ 1.04 $ 4.03 $ 2.01 Fully Diluted $ 1.37 $ .93 $ 3.60 $ 1.83 Dividends paid per common share $ .32 $ .30 $ .94 $ .90 Average number of common shares outstanding: Primary 37.8 37.5 37.8 37.5 Fully Diluted 43.5 43.2 43.4 43.1
See page 3 for explanation of references (a), (b), (c) and (d). Also see accompanying footnotes to the financial statements beginning on page 8. 2 (a) Depreciation and amortization charged against earnings before income taxes amounted to $32.1 million and $95.5 million in the three months and nine months ended September 30, 1994, respectively, and $31.9 million and $96.8 million in the three months and nine months ended September 30, 1993, respectively. (b) For the three months and nine months ended September 30, 1994, net earnings include a gain of $14.6 million before tax ($9.5 million after tax). This gain resulted from recent actions taken by the Company to qualify long-term disabled employees for primary coverage under Medicare, reducing the Company's health-care liability. (c) For the nine months ended September 30, 1994, net earnings include first- quarter gains of $5.9 million before tax ($2.6 million after tax), resulting from the sale of the Company's majority interest in BEGA/US, Inc. and $6.5 million after-tax resulting from the resolution of prior year tax audits. (d) Primary earnings per share for "net earnings" are determined by dividing the earnings, after deducting preferred dividends (net of tax benefit on unallocated shares), by the average number of common shares outstanding and shares issuable under stock options, if dilutive. Fully diluted earnings per share include the shares of common stock outstanding, as calculated above, and the adjustments to common shares and earnings required to portray the convertible preferred shares on an "if converted" basis unless the effect is antidilutive. 3 Armstrong World Industries, Inc., and Subsidiaries Consolidated Balance Sheets --------------------------- (amounts in millions)
Unaudited Assets September 30, 1994 December 31, 1993 ------ ------------------- ------------------ Current assets: Cash and cash equivalents $ 20.3 $ 9.1 Accounts receivable (less allowance for discounts and losses: 1994-$44.2; 1993 - $37.5) 360.9 283.5 Inventories: Finished goods $ 169.7 $ 176.8 Work in process 35.9 34.5 Raw materials and supplies 77.3 74.9 -------- -------- Total inventories 282.9 286.2 Income tax benefits 34.9 36.8 Other current assets 4.4 24.8 -------- -------- Total current assets 703.4 640.4 Property, plant, and equipment 2,156.3 2,045.8 Less accumulated depreciation and amortization 1,095.6 1,006.7 -------- -------- Net property, plant, and equipment 1,060.7 1,039.1 Insurance for asbestos-related liabilities(a) 217.0 -- Other noncurrent assets 293.2 249.8 -------- -------- Total assets $2,274.3 $1,929.3 ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $ 37.6 $ 105.4 Current installments of long-term debt .3 5.8 Accounts payable and accrued expenses 308.7 293.3 Income taxes 56.3 31.8 -------- -------- Total current liabilities 402.9 436.3 Long-term debt 257.1 256.8 ESOP loan guarantee 250.0 253.9 Postretirement and postemployment benefits 261.2 283.7 Asbestos-related liabilities (a) 217.0 -- Other long-term liabilities 131.6 99.6 Deferred income taxes 33.2 18.8 Minority interest in subsidiaries 8.1 10.7 -------- -------- Total noncurrent liabilities 1,158.2 923.5 Shareholders' equity: Convertible preferred stock at redemption value $ 261.6 $ 263.9 Common stock 51.9 51.9 Capital in excess of par value 38.5 29.7 Reduction for ESOP loan guarantee (236.7) (241.8) Retained earnings 1,048.3 927.7 Foreign currency translation (b) 8.1 (3.4) Treasury stock (458.5) (458.5) -------- -------- Total shareholders' equity 713.2 569.5 -------- -------- Total liabilities and shareholders' equity $2,274.3 $1,929.3 ======== ========
See page 5 for explanation of references (a) and (b). Also see accompanying footnotes to the financial statements beginning on page 8. 4 (a) The asbestos-related liability in the amount of $217.0 million represents the estimated liability and defense cost to resolve approximately 76,000 personal injury claims pending against the Company as of the end of the third quarter 1994. The insurance asset in the amount of $217.0 million reflects the Company's belief in the availability of insurance in an amount covering the liability. See footnote No. 2 beginning on page 8 for additional details. (b) Foreign currency translation, reported as a separate component of shareholders' equity, is detailed as follows:
1994 ---- (millions) Beginning balance December 31, 1993 $(3.4) Nine months' translation adjustments and hedging of foreign investments 11.1 Allocated income taxes .4 ----- Ending balance September 30, 1994 $ 8.1 =====
5 Armstrong World Industries, Inc., and Subsidiaries Consolidated Statements of Cash Flows ------------------------------------- (amounts in millions) Unaudited
Nine Months Ended September 30 1994 1993 --------- -------- Cash flows from operating activities: Net earnings $162.9 $ 85.5 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 95.5 96.8 Deferred income taxes 15.7 6.7 Restructing activities (17.3) (25.5) Changes in operating assets and liabilities net of effect of restructuring: (Increase) in receivables (71.4) (37.9) Decrease in inventories 5.8 26.5 Decrease in other current assets 22.4 21.0 (Increase) in other noncurrent assets (38.1) (16.6) Increase in accounts payable, accrued expenses, and income taxes payable 49.3 26.9 Increase in other long-term liabilities 1.3 9.0 Other, net (13.4) (5.1) ------ ----- Net cash provided by operating activities 212.7 187.3 ------ ------ Cash flows from investing activities: Purchases of property, plant, and equipment (96.7) (75.3) Proceeds from sale of business and assets 10.9 11.6 ------ ------ Net cash used for investing activities (85.8) (63.7) ------ ------ Cash flows from financing activities: (Decrease) in short-term debt (70.0) (74.8) Issuance of long-term debt .6 -- Reduction of long-term debt (5.5) (.2) Cash dividends paid (44.7) (43.0) Other, net 2.6 (5.5) ------- ------ Net cash used for financing activities (117.0) (123.5) Effect of exchange rate changes on cash and cash equivalents 1.3 (.5) ------ ------ Net increase (decrease) in cash and cash equivalents $ 11.2 $ (.4) ====== ====== Cash and cash equivalents at beginning of period $ 9.1 $ 15.2 ====== ====== Cash and cash equivalents at end of period $ 20.3 $ 14.8 ====== ====== - - -------------------------------------------------------------------------------------- Supplemental Cash Flow Information: Interest paid $ 16.8 $ 21.0 Income taxes paid $ 35.1 $ 13.0 - - -------------------------------------------------------------------------------------
See accompanying footnotes to the financial statements beginning on page 8. 6 Armstrong World Industries, Inc., and Subsidiaries Industry Segment Financial Data ------------------------------- (amounts in millions) Unaudited
Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------ 1994 1993 1994 1993 ------ ------ -------- -------- Net trade sales: - - -------------------------- Floor coverings $335.3 $322.9 $ 961.0 $ 897.3 Building products 166.5 156.3 472.2 445.4 Furniture 133.0 108.3 385.2 331.6 Industry products 80.5 72.6 228.9 226.7 ------ ------ -------- -------- Total net sales $715.3 $660.1 $2,047.3 $1,901.0 ====== ====== ======== ======== Operating profit: - - -------------------------- Floor coverings $ 54.1 $ 52.7 $ 156.3 $ 116.9 Building products(a) 26.7 15.9 77.1 32.9 Furniture 8.7 6.0 26.5 17.0 Industry products 13.9 11.3 36.3 34.8 ------ ------ -------- -------- Total operating profit 103.4 85.9 296.2 201.6 General corporate expense(b) (11.0) (23.9) (56.5) (74.2) ------ ------ -------- -------- Earnings before income taxes $ 92.4 $ 62.0 $ 239.7 $ 127.4 ====== ====== ======== ========
(a) For the nine months ended September 30, 1994, operating profit includes a first-quarter $5.9 million before-tax gain from the sale of the Company's majority interest in BEGA/US, Inc. (b) For the three months and nine months ended September 30, 1994, general corporate expense includes a before-tax gain of $14.6 million. This gain resulted from recent actions taken by the Company to qualify long-term disabled employees for primary coverage under Medicare, reducing the Company's health-care liability. 7 Note 1. The accompanying consolidated financial statements have been - - ------ reviewed by the Company's independent public accountants, KPMG Peat Marwick LLP, in accordance with the established professional standards and procedures for such limited review. Note 2. - - ------ The Company is named as one of many defendants in pending lawsuits and claims involving, as of September 30, 1994, approximately 76,000 individuals alleging personal injury from exposure to asbestos or asbestos-containing products. These pending claims and lawsuits include claims filed through January 24, 1994, (the close of the opt out period in the settlement class action referred to below) and which have not been fully resolved as of September 30, 1994, and also include claims filed after January 24, 1994, where the claimant has filed an appropriate opt out form in the settlement class action. Claims filed under the settlement class action are not counted as pending claims. (In late 1993, the Company revised its claims handling procedures to provide for individual claim information to be supplied by the Center for Claims Resolution referred to below. It is expected that the changed process will provide more current tracking of outstanding claims. The reconciliation between the two systems continues. Claim numbers in this note have been received from the Center and its consultants.) Nearly all the personal injury suits and claims allege general and punitive damages arising from alleged exposures, during a period of years, commencing during World War II onward into the 1970s, to asbestos-containing insulation products used, manufactured or sold by the companies involved in the asbestos-related litigation. Claims against the Company generally involve allegations of negligence, strict liability, breach of warranty and conspiracy with other defendants in connection with alleged exposure generally to asbestos- containing insulation products; the Company discontinued the sale of all such products in 1969. The first asbestos-related lawsuit was filed against the Company in 1970, and such lawsuits and claims continue to be filed against the Company. The claims generally allege that injury may be determined many years (up to 40 years) after alleged exposure to asbestos or asbestos-containing products. Nearly all suits include a number of defendants (including both members of the Center and other companies), and well over 100 different companies are reportedly involved as defendants in the litigation. A significant number of suits in which the Company does not believe it should be involved have been filed by persons engaged in vehicle tire production, aspects of the construction industry, and the steel industry. The Company believes that a large number of the plaintiffs filing suit are unimpaired individuals. Although a large number of suits and claims have either been put on inactive lists, settled, dismissed or otherwise resolved, and the Company is generally involved in all stages of claims resolution and litigation, including trials and appeals, and while the number of pending cases reflects a decrease during the past year, neither the rate of future dispositions nor the number of future potential unasserted claims can be reasonably predicted at this time. Attention has been given by various judges both individually and collectively to finding a comprehensive solution to the large number of pending as well as potential future asbestos-related personal injury claims. Discussions have been undertaken by attorneys for plaintiffs and defendants to devise methods or procedures for the comprehensive treatment of asbestos-related personal injury suits and claims. The Judicial Panel for Multi-district Litigation ordered the transfer of all federal cases not in trial to a single court, the Eastern District Court of Pennsylvania in Philadelphia, for pretrial purposes. The Company has supported such action. The Court to which the cases have been assigned has been instrumental in having the parties settle large numbers of cases in various jurisdictions and has been receptive to different approaches to the resolution of asbestos-related personal injury claims. A national class action was filed in the Eastern District of Texas; it was not certified and the cases involved were also transferred to the Eastern District Court of Pennsylvania for pretrial purposes. Periodically, this Court returns certain cases for trial to the courts from which the cases were originally 8 transferred, although the issue of punitive damages is retained by the Eastern District Court. A settlement class action which includes essentially all future asbestos-related personal injury claims against members of the Center for Claims Resolution was filed in Philadelphia, in the Federal District Court for the Eastern District of Pennsylvania, on January 15, 1993. The proposed settlement class action was negotiated by the Center and two leading plaintiffs' law firms. The settlement class action is designed to establish a non-litigation system for the resolution of essentially all future asbestos-related personal injury claims against the Center members including this Company. Other defendant companies which are not Center members may be able to join the class action later. The class action proposes a voluntary settlement that offers a method for prompt compensation to claimants who were occupationally exposed to asbestos if they are impaired by such exposure. Claimants must meet certain exposure and medical criteria to receive compensation which is derived from the Center's historical settlement data. Under limited circumstances and in limited numbers, qualifying claimants may choose to litigate certain claims in court or through alternative dispute resolution, rather than accept an offered settlement amount, after their claims are processed within the system. No punitive damages will be paid under the proposed settlement. The settlement is designed to minimize transactional costs, including attorneys fees, and to relieve the courts of the burden of handling future asbestos-related personal injury claims. Each member of the Center has an obligation for its own fixed share in this proposed settlement. The Federal District Court has ruled that claimants who neither filed a lawsuit against the Company or other members of the Center for Claims Resolution for asbestos-related personal injury nor filed exclusion request forms to opt out of the settlement class action by January 24, 1994, are subject to the terms of the class action. The settlement class action does not include claims deemed otherwise not covered by the class action settlement, or claims for asbestos- related property damage. Agreed upon annual case flow caps and agreed upon compensation ranges for each compensable medical category including amounts paid even more promptly under the simplified payment procedures, have been established for an initial period of ten years. Case flow caps may be increased during the second five-year period depending upon case flow during the first five-year period. The case flow figures and annual compensation levels are subject to renegotiation after the initial ten-year period. On August 16, 1994, the Court approved the settlement, and notification has been provided to potential class members who were offered the opportunity to opt out by January 24, 1994. The Center had reserved the right to withdraw from the program if an excessive number of individuals opted out. The Center determined that there was not an excessive number of opt outs and decided to proceed with the settlement class action. The opt outs are not asbestos-related claims as such but reservations of rights to possibly bring court actions in the future. The opt outs are currently the subject of a motion before the Court that questions the validity of most of the opt outs and seeks a second notice process again to determine whether or not they wish to remain in the class action. Therefore, the total number of effective opt outs cannot be determined at this time. The settlement will become final only after certain issues, including insurance coverage for class members' claims, are resolved and appeals are exhausted. The Center members have stated their intention to resolve over a five-year period the asbestos-related personal injury claims pending prior to the date the settlement class action was filed. A significant number of these pending claims have been settled with a number of plaintiffs' counsel and a number of these claims are currently the subject of settlement negotiations, in both instances, based upon the Center's historical data. The Company is seeking agreement from its involved insurance carriers or a binding judgment against them that the settlement class action will not jeopardize existing insurance coverage, and the settlement is contingent upon such an agreement or judgment. With respect to carriers that do not agree, this matter will be resolved either by alternative dispute resolution procedures, in the case of carriers that subscribed to the Wellington 9 Agreement referred to below, or by litigation, in the case of carriers that did not subscribe to the Wellington Agreement. The Company believes that the future claimants settlement class action will receive final approval. However, the potential exists that an appellate court will reject the settlement class action and that the above-referenced companion insurance action will not be successful. A few state judges and federal judges have undertaken to consolidate numbers of asbestos-related personal injury cases for trial. The Company has generally opposed as unfair the consolidation of numerous cases for trial. In 1992 in Baltimore, Maryland, the Center for Claims Resolution referred to herein settled during trial on behalf of the Company and other Center members certain asbestos- related personal injury claims. In most of the approximately 8,500 cases consolidated for trial, Armstrong was a named defendant. The multiphase Baltimore trial dealt with various issues including the individual claims of six plaintiffs, as well as product defect and negligence, and whether and on what basis punitive damages should be awarded. The Center for Claims Resolution is periodically drawing upon the Company's insurance assets to pay the settled individual claims. In 1983, three of the Company's four primary insurers entered into an Interim Agreement with the Company to provide defense and indemnity coverage on an interim basis for asbestos-related personal injury claims and for the defense of asbestos-related property damage claims which are described below. One primary insurer did not enter into the Interim Agreement, but did subscribe to the Wellington Agreement as noted below. The Interim Agreement was superseded by the Wellington Agreement with respect to the coverage issues for asbestos- related personal injury claims. The one primary insurer of the four primary carriers that did not subscribe to the Wellington Agreement subsequently entered into a separate agreement with the Company resolving coverage issues for asbestos-related property damage claims and for asbestos-related personal injury claims which complements the Wellington Agreement. All of the Company's primary insurers are paying for the defense of asbestos-related property damage claims in accordance with the provisions of the Interim Agreement pending the final resolution on appeal of the coverage issues for asbestos-related property damage claims in the California insurance litigation referenced later in this note. The Company's insurance carriers providing coverage for asbestos-related claims are as follows: Reliance Insurance, Aetna Casualty and Surety Company and Liberty Mutual Insurance Companies are primary insurers that have subscribed to the Wellington Agreement. Travelers Insurance Company is a primary insurer that entered into a settlement agreement which complements Wellington. The excess insurers which subscribed to Wellington are Aetna Insurance Company, Fireman's Fund Insurance Company, Insurance Company of North America, Lloyds of London and various London market companies, Fidelity and Casualty Insurance Company, First State Insurance Company and U.S. Fire Insurance Company. Home Insurance Company and Travelers Insurance Company are excess insurers which entered into settlement agreements for coverage of personal injury claims which complement Wellington, and Great American is an excess insurer which also entered into a settlement agreement with the Company. The Company also entered into a settlement agreement with American Home Assurance Company and National Union Fire Insurance Company (known as the AIG Companies) which complements the Wellington Agreement. Other excess insurers against whom the Company has received a favorable trial and appellate court decision in the California insurance litigation described below are: Central National Insurance Company, Interstate Insurance Company, Puritan Insurance Company, CNA Insurance Company and Commercial Union Insurance Company. Midland Insurance Company, an excess carrier, which insured the Company with $25 million of bodily injury products coverage, became insolvent during the trial. The Company is pursuing claims with the state guaranty associations on account of the Midland insolvency and is currently exploring how the gaps in coverage caused by Midland's insolvency can be otherwise addressed by payments from the Company's other insurance carriers. Certain 10 companies in the London block of coverage and certain carriers providing coverage at the excess level for property damage claims only have also become insolvent. In addition to the aforementioned insurance carriers, certain insurance carriers which were not included in the Company's California insurance litigation described later herein also provide insurance for asbestos-related property damage claims. The Company along with 52 other companies (defendants in the asbestos-related litigation and certain of their insurers) signed the 1985 Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement"). This Agreement provided for a final settlement of nearly all disputes concerning insurance for asbestos- related personal injury claims between the Company and three of its primary insurers and seven of its excess insurers which also subscribed to the Wellington Agreement. The one primary insurer that did not sign the Wellington Agreement had earlier entered into the Interim Agreement with the Company and had paid into the Wellington Asbestos Claims Facility (the "Facility"). The Wellington Agreement provides for those insurers to indemnify the Company up to the policy limits for claims that trigger policies in the insurance coverage period, and nearly all claims against the Company fall within the coverage period; both defense and indemnity are paid under the policies and there are no deductibles under the applicable Company policies. The Wellington Agreement addresses both products and non-products coverage. One of the Company's larger excess insurance carriers entered into a settlement agreement in 1986 with the Company under which payments also were made through the Facility and are now being paid through the Center for Claims Resolution referenced below in this note. Coverage for asbestos-related property damage claims was not included in the settlement, and the agreement provides that either party may reinstitute a lawsuit in the event the coverage issues for property damage claims are not amicably resolved. In 1987, an excess insurer also made, under reservation of rights, certain payments which were processed through the Facility. These payments were made under reservation because no settlement of the outstanding coverage issues has been effected with that carrier. The Wellington Agreement also provided for the establishment of the Facility to evaluate, settle, pay and defend all pending and future asbestos-related personal injury claims against those companies which subscribed to the Agreement. The insurance coverage designated by the Company for coverage in the Facility consists of all relevant insurance policies issued to the Company from 1942 through 1976. Liability payments and allocated expenses with respect to each claim filed against Wellington Agreement subscribers who were defendants in the underlying asbestos-related personal injury litigation were allocated on a formula percentage basis to each such defendant, including the Company. The Facility, which has dissolved, over time was negatively impacted by concerns raised by certain subscribers relating to their share of liability payments and allocated expenses and by certain insurer concerns with respect to defense costs and Facility operating expenses. As a result of seven subscribing companies giving notice that they wished to withdraw their cases from the Facility, a majority of the insurers and the company subscribing members agreed to dissolve the ongoing operation of the Facility as of October 3, 1988 and the Facility has now been fully dissolved. Except for eliminating the future availability of an insurer-paid special defense fund benefit linked to the existence of the Facility, a benefit not deemed material to the Company, the dissolution of the Facility essentially did not affect the Company's overall Wellington Agreement insurance settlement, which stood on its own separate from the Facility. The relinquishment of the insurer-paid special defense fund benefit was a condition of insurer support for the creation of the Center and its expected benefits. A new asbestos-related personal injury claims handling organization known as the Center for Claims Resolution (the "Center") was created in October 1988 by Armstrong and 20 other companies, all of which were former members of the Facility. Insurance carriers are not members of the Center, although certain of the insurance carriers for those members that joined the Center signed an agreement to provide approximately 70% of the financial support for the 11 Center's operational costs during its first year of existence; they also are represented ex officio on the Center's governing board. The Center adopted many of the conceptual features of the Facility, and the members' insurers generally provide coverage under the Wellington Agreement terms. The Center has operated under a revised concept of allocated shares of liability payments and defense costs for its members based primarily on historical experience and has defended the members' interests and addressed the claims in a manner consistent with the prompt, fair resolution of meritorious claims. In late 1991, the Center sharing formula was revised to provide that members will pay only on claims in which the member is a named defendant. This change has caused a slight increase in the Company's share, but has enhanced the Company's case management focus. Future claim payments by the Center pursuant to the settlement class action will require each member to pay its own fixed share of every claim. A large share member earlier withdrew from the Center. Accordingly, the allocated shares of liability payments and defense costs of the Center were recalculated with the remaining members' shares being increased. Under the class action settlement resolution, if a member withdraws from the Center or the settlement, the shares of those remaining members would not be increased. It is expected that the Center members will reach an agreement with the insurers relating to the continuing operation of the Center and that the insurers will fund the Center's operating expenses for its seventh year of operation. With the filing of the settlement class action, the Center will continue to process pending claims and is handling the program for processing future claims. Consistent with the Center's objective of prompt resolution of meritorious claims, and to establish the Center's credibility after the cessation of the Facility and for other strategic reasons, a planned increase in claims resolution by the Center was implemented during the first two years. This increased the rate of utilization of Company insurance for claims resolution, offset in part by savings in defense costs. During the first three years, the rate of claims resolution had about trebled from the prior two years of experience. An increase in the utilization of the Company's insurance also has occured as a result of the class action settlement due to the commitment to attempt to resolve pending claims within five years. Aside from the commitments under the class action settlement, no forecast can be made for future years regarding either the rate of claims, the rate of pending and future claims resolution by the Center, or the rate of utilization of Company insurance. If the settlement class action is finalized and all appeals are exhausted, projections of the rate of disposition of future cases may be made and the rate of insurance usage will be accelerated as an effort is made to resolve both outstanding cases and to address future claims. The Company is also one of many defendants in a total of 53 pending lawsuits and claims, including class actions, as of September 30, 1994, brought by public and private entities, including public school districts and public and private building owners. These lawsuits and claims include allegations of damage to buildings caused by asbestos-containing products and generally claim compensatory and punitive damages and equitable relief, including reimbursement of expenditures, for removal and replacement of such products. They appear to be aimed at friable (easily crumbled) asbestos-containing products, although allegations in some suits encompass all asbestos-containing products, including allegations with respect to asbestos-containing resilient floor covering materials. Class actions have been certified involving four distinct classes of building owners: public and private schools; Michigan state public and private schools; colleges and universities, and private property owners who leased facilities to the federal government. Subject to fairness hearings, resolution has been reached with the class representatives for each of these four classes. The Company vigorously denies the validity of the allegations against it contained in these suits and claims. Increasing defense costs, paid by the Company's insurance carriers either under reservation or settlement arrangement, will be incurred. As a consequence of the California insurance litigation discussed elsewhere in this note, the 12 Company believes that it is probable that costs of the property damage litigation that are being paid by the Company's insurance carriers under reservation of rights will not be subject to recoupment. These suits and claims were not handled by the former Facility nor are they being handled by the Center. Certain co-defendant companies in the asbestos-related litigation have filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, this litigation with respect to these co-defendants (with several exceptions) has been stayed or otherwise impacted by the restrictions placed on proceeding against these co-defendants. Due to the uncertainties involved, the long-term effect of these Chapter 11 proceedings on the litigation cannot be predicted. The Company concluded in early 1989 the trial phase of a coordinated lawsuit in a California state court to resolve a dispute concerning certain of its insurance carriers' obligations with respect to insurance coverage for alleged personal injury and property damage asbestos-related lawsuits and claims. The trial court issued favorable final decisions in important phases of the trial relating to coverage for personal injury and property damage lawsuits and claims. The Company earlier dismissed from the asbestos-related personal injury coverage portion of the litigation those insurance carriers which had subscribed to the Wellington Agreement, and the excess carriers which entered into settlement agreements with the Company which complement Wellington also have been dismissed. As indicated above, the California trial court issued final decisions in various phases in the insurance lawsuit. One decision concluded that the trigger of insurance coverage for asbestos-related personal injury claims was continuous from exposure through death or filing of a claim. The court also found that a triggered insurance policy should respond with full indemnification up to exhaustion of the policy limits. The court concluded that any defense obligation ceases upon exhaustion of policy limits. Although not as comprehensive, another important decision in the trial established a favorable defense and indemnity coverage result for asbestos-related property damage claims; the final decision holds that, in the event the Company is held liable for an underlying property damage claim, the Company would have coverage under policies in effect during the period of installation and during any subsequent period in which a release of fibers occurred. Appeals were filed from the trial court's final decision by those carriers still in the litigation and the California Court of Appeal has substantially upheld the trial court's final decisions. The insurance carriers have petitioned the California Supreme Court to hear the various asbestos-related personal injury and property damage coverage issues. The California Supreme Court has accepted review pending its review of related issues in another California case. Based upon the trial court's favorable final decisions in important phases of the trial relating to coverage for asbestos-related personal injury and property damage lawsuits and claims, including the favorable decision by the California Court of Appeal, and a review of the coverage issues by its trial counsel, the Company believes that it has a substantial legal basis for sustaining its right to defense and indemnification. After concluding the last phase of the trial against one of its primary carriers, which is also an excess carrier, the Company and the carrier reached a settlement agreement on March 31, 1989. Under the terms of the settlement agreement, coverage is provided for asbestos-related bodily injury and property damage claims generally consistent with the interim rulings of the California trial court and complements the coverage framework established by the Wellington Agreement. The parties also agreed that a certain minimum and maximum percentage of indemnity and allocated expenses incurred with respect to asbestos-related personal injury claims would be deemed allocable to non- products claims coverage and that the percentage amount would be negotiated between the Company and the insurance carrier. These negotiations continue. The Company also settled both asbestos-related personal injury and property damage coverage issues with a small excess carrier and in 1991 settled those 13 same issues with a larger excess carrier. In these settlements, the Company and the insurers agreed to abide by the final judgment of the trial court in the California insurance litigation with respect to coverage for asbestos-related claims. Non-products insurance coverage is available under the Wellington Agreement (and the previously-referenced settlement agreement with one primary carrier) for non-products claims. Certain excess policies also provide non-products coverage. Non-products claims include claims that may have arisen out of exposure during installation of asbestos materials or before control of such materials has been relinquished. Negotiations have been undertaken with the Company's primary insurance carriers and are currently underway with several of them to categorize the percentage of previously resolved and yet to be resolved asbestos-related personal injury claims as non-products claims and to establish the entitlement to such coverage. The additional coverage potentially available to pay claims categorized as non-products, at both the primary and excess levels, is substantial, and at the primary level, includes defense costs in addition to limits. No agreement has been reached with the primary carriers on the amount of non-products coverage attributable to claims that have been disposed of or the type of claims that should be covered by non-products insurance. One of the primary carriers alleges that it is no longer bound by the Wellington Agreement and one primary carrier seemingly takes the view that the Company verbally waived certain rights regarding non-products coverage against that carrier at the time the Wellington Agreement was signed. All the carriers presumably raise other reasons why they should not pay their coverage obligations. The Company is entitled to pursue alternative dispute resolution proceedings against the primary and certain excess carriers to resolve the non- products coverage issues. ACandS, Inc., a former subsidiary of the Company, which for certain insurance periods has coverage rights under some of the Company's insurance policies, and has accessed such coverage on the same basis as the Company, was a subscriber to the Wellington Agreement, but is not a subscriber to the Center. ACandS, Inc. had filed a lawsuit against the Company to partition certain insurance policies and for an accounting. It sought to have a certain amount of insurance from the joint policies reserved solely for its own use in the payment of defense and indemnity costs for asbestos-related claims. The two companies negotiated a settlement of their dispute and signed a settlement agreement. Based upon the Company's experience with this litigation and its disputes with insurance carriers, a reserve was recorded in June 1983 to cover estimated potential liability and settlement costs and legal and administrative costs not covered under the Interim Agreement, cost of litigation against the Company's insurance carriers, and other factors involved in the litigation which are referred to herein about which uncertainties exist. As a result of the Wellington Agreement, the reserve was earlier reduced for that portion associated with pending personal injury suits and claims. As a result of the March 31, 1989, settlement referenced above, the Company received $11.0 million, of which approximately $4.4 million was credited to income with nearly all of the balance being recorded as an increase to its reserve for potential liabilities and other costs and uncertainties associated with the asbestos- related litigation. Future costs of litigation against the Company's insurance carriers and other legal costs indirectly related to the litigation will be expensed outside the reserve. The Company does not know how many claims will be filed against it in the future, nor the details thereof or of pending suits not fully reviewed, nor the expense and any liability that may ultimately result therefrom, nor does the Company know whether the settlement class action will ultimately succeed, 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 then compensation levels to be negotiated for such claims nor the success the Company may have in addressing the Midland 14 Insurance Company insolvency with its other insurers nor the scope of its non- products coverage ultimately deemed available. Beginning with the first quarter 1994, the Company's balance sheet reflects a liability--"Asbestos-Related Liabilities" and an asset--"Insurance for Asbestos- Related Liabilities." This accounting presentation change is required by the Securities and Exchange Commission's Staff Accounting Bulletin No. 92 which states that liabilities and assets related to contingencies should now be evaluated and recorded separately pursuant to Financial Accounting Standards Board Interpretation No. 39 unless a contractual "right of setoff" exists. Prior to the first quarter 1994, the Company had set off such amounts for financial reporting. In accordance with the foregoing accounting presentation and 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 $217 million in liability and defense costs recorded on the balance sheet will be incurred to resolve an estimated 76,000 asbestos-related personal injury claims pending against the Company as of September 30, 1994. These claims include claims that were filed for the period from January 1, 1994, to January 24, 1994, and which previously were treated as potentially included within the settlement class action, and claims filed by claimants who have been identified as having filed exclusion request forms to opt out of the settlement class action. A ruling has been received from the Court establishing January 24, 1994, as the date after which any asbestos-related personal injury claims filed by non-opt-out claimants against the Company or other members of the Center for Claims Resolution are subject to the settlement class action. In addition to the currently estimated pending claims and any claims filed by individuals deemed to have opted out of the settlement class action, any claims otherwise determined not to be subject to the settlement class action, will be resolved outside the settlement class action. The Company does not know how many such claims ultimately may be filed by claimants deemed to have opted out of the class action or by claimants otherwise determined not to be subject to the settlement class action. An insurance asset in the amount of $217 million recorded on the balance sheet reflects the Company's belief in the availability of insurance in this amount to cover the liability in like amount referred to above. Such insurance has either been agreed upon or is probable of recovery through negotiation, alternative dispute resolution or litigation. The Company also notes that, based on maximum mathematical projections covering a ten-year period from 1994 to 2004, its estimated cost in the settlement class action reflects a reasonably possible additional liability of $245 million. A portion of such additional liability may not be covered by the Company's ultimately applicable insurance recovery. However, the Company believes that any after-tax impact on the difference between the aggregate of the estimated liability for pending cases and the estimated cost for the ten-year maximum mathematical projection, and the probable insurance recovery, would not be material either to the financial condition of the Company or to its liquidity, although it could be material to earnings if it is determined in a future period to be appropriate to record a reserve for this difference. The period in which such a reserve may be recorded and the amount of any reserve that may be appropriate cannot be determined at this time. Subject to the uncertainties and limitations referred to elsewhere in this note and based upon its experience and other factors referred to above, the Company believes it is probable that substantially all of the expenses and any liability payments associated with the asbestos-related property damage claims will be paid under an existing interim agreement, by insurance coverage settlement agreements and through additional coverage reasonably anticipated from the outcome of the insurance litigation. Even though uncertainties still remain as to the potential number of unasserted claims, liability resulting therefrom, and the ultimate scope of its insurance coverage, after consideration of the factors involved, including 15 the Wellington Agreement, the referenced settlements with other insurance carriers, the results of the trial phase and the intermediate appellate stage of the California insurance coverage litigation, the remaining reserve, the establishment of the Center, the proposed settlement class action, and its experience, the Company believes the asbestos-related lawsuits and claims against the Company would not be material either to the financial condition of the Company or to its liquidity, although as stated above, the net effect of any future liabilities recorded in excess of insurance assets could be material to earnings in such future period. -------------------------------- 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 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. 16 The Court of Appeals, in affirming the trial court's new trial order, agreed that the trial court did not abuse its discretion in determining that the jury's verdict was "clearly against the weight of the evidence" and that a new trial was required due to the misconduct of plaintiffs' counsel. The foregoing summary of the Third Circuit's opinion is qualified in its entirety by reference thereto. The Court of Appeals granted the Company's motion to stay return of the case to the District Court pending the Company's Petition for Certiorari to the Supreme Court appealing certain antitrust rulings of the Court of Appeals. The Company was informed on February 22, 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 has filed a motion for a new trial based upon alleged inaccurate jury instructions and alleged improper evidentiary rulings during the trial. The Company is opposing such motion and believes it will be denied. ---------------------------------- Thomasville Furniture Industries, Inc. and seven other parties have been identified by the U. S. Environmental Protection Agency ("USEPA") as Potentially Responsible Parties ("PRPs") to fund the cost of remediating environmental conditions at the Buckingham County (Virginia) Landfill, a former waste disposal site which has been listed as a federal Superfund site. After review of investigative studies to determine the nature and extent of contamination and identify various remediation alternatives, USEPA issued its Proposed Remedial Action Plan in May 1993 proposing a $21 million clean-up cost. In November 1993, USEPA issued a revised plan which recommended a reduced $3.5 million alternative, subject to additional costs depending on test results. In September 1994, the USEPA issued a Record of Decision providing two alternative remedies for the site. Both options provide for limited capping and long-term groundwater monitoring, as well as limited source control and groundwater treatment in the event monitoring demonstrates contaminant migration. The PRPs' consultants current estimate for the cost of required remediation at the site is approximately $2.2 million, subject to additional costs depending on long-term monitoring results. The EPA's current estimate, however, is $4.34 million. Discussions with EPA are continuing regarding finalization of the appropriate remedial plan. Spent finishing materials from Thomasville's Virginia furniture plants at Appomattox and Brookneal allegedly comprise a significant portion of the waste presently believed to have been taken to the site by a now defunct disposal firm in the late 1970s. Accordingly, Thomasville could be called upon to fund a significant portion of the eventual remedial costs. Because neither a final remedial design nor an appropriate cost allocation among the PRPs has been completed, the total cost to Thomasville cannot be determined at this time. Item 2. Management's Discussion and Analysis of Financial Condition and - - ------- --------------------------------------------------------------- Results of Operations --------------------- Financial Condition - - ------------------- 17 The total cash generated during the third quarter and first nine months of 1994 was more than sufficient to cover working capital requirements, payment of dividends, the payments for restructuring activities, and the investment in plant, property and equipment. The remaining cash was used to reduce debt and increase cash and cash equivalents. Cash provided by operating activities was supplemented by cash proceeds from the sale of assets and the Company's majority investment in BEGA/US, Inc., a lighting fixture subsidiary, and cash proceeds from the exercise of stock options. During the first quarter of 1994, interest rate swaps totaling $40.0 million matured or were terminated prior to maturity with a small gain. As of September 30, 1994, the Company has no exposure for interest rate or currency swaps. Working capital was $300.5 million as of September 30, 1994, $29.1 million higher than the $271.4 million recorded at the end of the second quarter of 1994, and $96.4 million higher than the $204.1 million recorded at year-end 1993. The primary reasons for the increase in working capital since year-end 1993 was the $73.3 million repayment of short-term debt, mainly during the third quarter of 1994, and the increase in accounts receivable resulting from higher sales levels. Accounts receivable increased $77.4 million during the first nine months with $62.2 million occurring in the first quarter. Higher levels of cash also increased working capital. Partially offsetting the working capital increase were higher levels of income taxes payable, a modest increase in accounts payable and accrued expenses and reductions in other current assets. The ratio of current assets to current liabilities was 1.75 to 1 as of September 30, 1994, and 1.64 to 1 as of June 30, 1994, compared with 1.47 to 1 as of December 31, 1993. The ratio of total debt to total capital was 43.3 percent as of September 30, 1994, compared with 47.5 percent as of June 30, 1994, and 52.2 percent as of December 31, 1993. The Company is involved in significant asbestos-related litigation which is described more fully in Item 1, Note 2, to the financial statements on pages 8 through 16 and which should be read in connection with this discussion and analysis. Beginning with the first-quarter 1994, the Company's balance sheet reflects a new liability --"Asbestos-Related Liabilities" and a new asset --"Insurance-- Asbestos-Related Liabilities." This accounting presentation change is required by the Securities and Exchange Commission's Staff Accounting Bulletin No. 92 which states that liabilities and assets related to contingencies should now be evaluated and recorded separately pursuant to Financial Accounting Standards Board Interpretation No. 39 unless a contractual "right of setoff" exists. In the past, the Company had set off such amounts for financial reporting. The asbestos-related liability in the amount of $217.0 million represents the estimated liability and defense cost to resolve approximately 76,000 personal injury claims pending against the Company as of the end of the third quarter. The insurance asset in the amount of $217.0 million reflects the Company's belief in the availability of insurance in an amount covering the liability. Such insurance has either been agreed upon or is probable of recovery through negotiation, alternative dispute resolution or litigation. In addition, the Company notes that, based on maximum mathematical projections covering the 10- year period beginning January 1, 1994, its estimated cost in a proposed future claimants class action settlement reflects a reasonably possible additional liability of $245 million. A portion of such additional liability may not be covered by the Company's ultimate applicable insurance recovery, which includes both substantial amounts of nonproducts insurance, as well as products insurance. However, the Company believes that any after-tax impact of the difference between the aggregate of the liability for pending cases and the liability for the referenced maximum mathematical projection during such 10-year period, 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 18 earnings in the period recorded. Reference is made to the case of Fineman and The Industry Network System, Inc. --------------------------------------------- v. Armstrong World Industries, Inc. C.A. No. 84-3837 JWB, and the environmental - - ----------------------------------- issues as discussed in Note 2 on pages 16 and 17 to the financial statements included under Item 1 above. Management continues to evaluate short-term and long-term financing alternatives. Armstrong currently has unused short-term lines of credit of approximately $245 million from 8 banks. In addition, the Company's foreign subsidiaries have approximately $172 million of unused short-term lines of credit available from banks. Additionally, the Company has available for issuance up to $250 million of debt securities under an effective shelf registration statement. 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. Consolidated Results - - -------------------- Sales for the third quarter were the highest for any quarter in the Company's history. The quarterly sales were $715.3 million or 8.4 percent higher than the $660.1 million recorded for the third quarter 1993. All geographic areas - - --North America, Europe, and the Pacific Rim--had increases. Business conditions in the European area, in particular, have rebounded favorably affecting most of the Company's major businesses, while the commercial- institutional sector continues to improve in most worldwide areas. Third-quarter 1994 net earnings, a record for any third quarter, were $61.6 million compared with $42.3 million for the same period in 1993, a 45 percent increase. The third-quarter earnings included a gain of $9.5 million after tax representing a reduction in the Company's estimated health care liability for long-term disabled employees. The reduction resulted from recent actions taken by the Company to qualify these employees for primary coverage under Medicare. Net earnings per share of common stock in the 1994 third quarter were $1.54 on a primary basis and $1.37 on a fully diluted basis. Comparative 1993 earnings per share were $1.04 on a primary basis and 93 cents on a fully diluted basis. The increased earnings were driven by higher sales, rebounding European businesses, improvements in the non-residential businesses of the Company, and an overall lower cost profile. Partially offsetting these improvements were some higher raw material price increases and incrementally higher costs related to litigation expenses and costs for the use of consultants for the improvement of global competitiveness. Armstrong's effective tax rate for the third quarter of 1994 was 33.4 percent compared with the 31.8 percent recorded in the comparable period of 1993. The third quarter 1994 effective tax rate was higher primarily because of lower use of tax credits related to foreign-source income. The return on average common shareholders' equity for the third quarter of 1994 was 35.0 percent, compared with 26.9 percent for the same period last year. The third quarter 1994 return on average monthly total assets, excluding the insurance for asbestos-related liability, was 12.2 percent compared with 8.6 percent a year ago. For the first nine months of 1994, sales were $2,047.3 million, about an 8 percent increase from the $1,901.0 million for 1993. Net earnings were $162.9 million, an increase of 90 percent when compared with the $85.5 million earned in the 1993 nine-month period. Net earnings per share of common stock for the first nine months of 1994 were $4.03 on a primary basis and $3.60 on a fully diluted basis compared with $2.01 and $1.83, respectively, in 1993. The net earnings for the first nine months were the highest on record for any similar period. 19 Cost of goods sold, when expressed as a percent to net sales, during the third quarter and the first nine months of 1994 were 66.8 percent and 67.7 percent, respectively. These percentages were 70.0 percent and 71.5 percent respectively in the comparable periods of 1993. The improvement reflects some higher sales prices, lower employee costs resulting from the reduction in the previously mentioned health care liability for employees on long-term disability, a lower cost structure resulting from the positive effects of the Company's two major restructuring programs in the past two years, and the higher level of sales activity in all major geographic areas. Partially offsetting this improvement were some higher raw material prices. The first nine-month results included a $5.9 million before-tax gain from the sale of the Company's majority interest in BEGA/US, Inc., a California lighting fixture subsidiary and a $14.6 million before-tax gain related to a reduction in the Company's health care liability for employees on long-term disability. The Company's higher net earnings continues to enable its short-term debt to be lowered, in turn reducing its interest expense. The Company's effective tax rate for the first nine months of 1994 was 32.0 percent, a decline from the 32.9 percent recorded for the similar period in 1993. This rate decline was primarily due to the Company reaching an agreement with the Internal Revenue Service concerning its 1988 through 1990 tax years which resulted in the reversal, during the first quarter of 1994, of $6.5 million of tax expense previously accrued. Partially offsetting the rate decline in 1994 was the lower use of tax credits related to foreign-source income. Industry Segment Results - - ------------------------ All of Armstrong's industry segments recorded higher sales and operating profits when comparing third quarter 1994 with those of the similar period in 1993. The floor covering segment (which includes resilient flooring and ceramic tile) increased sales by 4 percent when compared with those of the third quarter of 1993, while operating profits were 3 percent higher. This segment continued to show sales growth in both its resilient flooring and ceramic tile businesses. The sales growth in resilient flooring occurred in all areas--North America, Europe and the Pacific Rim. Operating profits showed modest improvement. Ceramic tile recorded their second consecutive quarterly operating profit that was driven by the major restructuring activities of the past two years. In the resilient flooring business, the positive effects of the higher sales were partly offset by some increasing raw material prices and incrementally higher administrative expenses. The building products segment recorded a 67 percent increase in operating profits on a 6 percent improvement in sales for the third quarter of 1994 as compared with the third quarter of 1993. All major markets--North America, Europe, Pacific Rim--recorded higher sales growth reflecting the continuing improvement in the United States non-residential markets and the recovery in the European markets. The higher operating profits provided an operating margin of 16.0 percent, the highest since the first quarter of 1990. The profitability was the result of higher unit sales, some sales price increases, continuing lower manufacturing costs related to the prior years' restructuring programs with some minor offset from recent raw material price increases and freight costs. The furniture segment set a new quarterly sales record in the third quarter with the current quarter 23 percent higher than the third quarter of 1993. This sales increase resulted in operating profits increasing by 44 percent. All three of the furniture businesses, Thomasville Wood, Armstrong Furniture, and Upholstery, recorded higher sales and operating profits for the quarter. The industry products segment sales increased 11 percent in the third quarter 1994 when compared with those of the similar period in 1993. Sales of 20 insulation products and gasket materials were higher than those of 1993 while sales of textile mill supplies were lower. About one-third of the sales increase is due to translating foreign currency sales to U.S. dollars at higher exchange rates. Operating profits for this segment were 23 percent above those of the comparable 1993 period as a result of the higher sales in the insulation and gasket businesses. 21 Independent Accountants' Report ------------------------------- The Board of Directors Armstrong World Industries, Inc.: We have reviewed the condensed consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries as of September 30, 1994, and the related condensed consolidated statements of earnings for the three-month and nine-month periods ended September 30, 1994, and 1993, and the condensed consolidated statements of cash flows for the nine-month periods then ended. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is an expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries as of December 31, 1993, and the related consolidated statements of earnings and cash flows for the year then ended (not presented herein); and our report dated February 14, 1994, on those consolidated financial statements contains an explanatory paragraph that states the Company is involved in antitrust litigation, the outcome of which cannot presently be determined. Accordingly, no provision for any liability that may result has been made in those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1993, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania November 9, 1994 22 Part II - Other Information --------------------------- Item 1. Legal Proceedings - - ------ ----------------- Information required by this item is presented in Note 2 of the notes to the Company's consolidated financial statements included in Part I, Item 1 hereof, and is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K - - ------- -------------------------------- (a) The following exhibits are filed as a part of the Quarterly Report on Form 10-Q: Exhibits -------- No. 11 Statement re Computation for Earnings Per Share No. 15 Letter re Unaudited Interim Financial Information No. 27 Financial Data Schedule (b) The registrant filed a current Report on Form 8-K dated August 16, 1994, to report certain developments with respect to certain litigation. 23 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Armstrong World Industries, Inc. By /s/L. A. Pulkrabek ----------------------------------- L. A. Pulkrabek, Senior Vice President, Secretary and General Counsel By /s/Bruce A. Leech, Jr. ------------------------------------ Bruce A. Leech, Jr., Controller (Principal Accounting Officer) Date: November 11, 1994 24 Exhibit Index ------------- Exhibit No. - - ----------- No. 11 Statement re Computation for Earnings Per Share No. 15 Letter re Unaudited Interim Financial Information No. 27 Financial Data Schedule 25 EX-11 2 STAT RE COMPUTATION EARNINGS PER SHARE Exhibit No. 11 Computation for Earnings Per Share For the Three and Nine Months Ended September 30, 1994 and 1993 (amounts in millions except for per-share data) Unaudited
Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1994 1993 1994 1993 ---- ---- ---- ---- PRIMARY - - ------- Common Stock and Common Stock Equivalents - - ----------------------------------------- Average number of common shares outstanding including shares issuable under stock options 37.8 37.5 37.8 37.5 ===== ===== ====== ===== Net Earnings Per Share - - ---------------------- Net earnings $61.6 $42.3 $162.9 $85.5 Less: Dividend requirement on Series A convertible preferred stock 4.8 4.8 14.3 14.4 Plus: Tax benefit on dividends applicable to unallocated preferred shares 1.3 1.4 3.7 4.0 ----- ----- ------ ----- Net earnings applicable to common stock $58.1 $38.9 $152.3 $75.1 ===== ===== ====== ===== Net earnings per share of common stock $1.54 $1.04 $ 4.03 $2.01 ===== ===== ====== ===== FULLY DILUTED - - ------------- Common Stock and Common Stock Equivalents - - ----------------------------------------- Average number of common shares outstanding including shares issuable under stock options 37.8 37.5 37.8 37.5 Average number of common shares issuable under the Employee Stock Ownership Plan 5.7 5.7 5.6 5.6 ----- ----- ------ ----- Average number of common and common equivalent shares outstanding 43.5 43.2 43.4 43.1 ===== ===== ====== ===== Pro forma Adjustment to Net Earnings - - ------------------------------------ Net earnings as reported $61.6 $42.3 $162.9 $85.5 Less: Increased contribution to Employee Stock Ownership Plan assuming conversion of preferred shares to common 2.0 2.0 5.9 6.1 Net reduction in tax benefits assuming conversion of Employee Stock Ownership Plan preferred shares to common .2 .2 .8 .7 ----- ----- ------ ----- Pro forma net earnings $59.4 $40.1 $156.2 $78.7 ===== ===== ====== ===== Fully diluted net earnings per share $1.37 $ .93 $ 3.60 $1.83 ===== ===== ====== =====
26 EX-15 3 LETTER UNAUDITED INT. FINANCIAL INFORMATION Exhibit No. 15 Armstrong World Industries, Inc. Lancaster, Pennsylvania Gentlemen: RE: Registration Statement Nos. 2-50942; 2-77936; 2-91890; 33-18996; 33-18997; 33-18998; 33-29768; 33-38837; 33-60070 With respect to the subject Registration Statements, we acknowledge our awareness of the incorporation by reference therein of our report dated November 9, 1994, related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act, such report is not considered a part of a Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. Very truly yours, KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania November 9, 1994 27 EX-27 4 ARTICLE 5 FOR 3RD QUARTER
5 This schedule contains summary financial information extracted from the Registrant's Unaudited Consolidated Financial Statements as of and for September 30, 1994, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1994 SEP-30-1994 6,200 14,100 405,100 44,200 282,900 703,400 2,156,300 1,095,600 2,274,300 402,900 0 90,400 0 261,600 361,200 2,274,300 2,047,300 2,047,300 1,386,500 1,785,000 398,500 0 22,600 239,700 76,800 162,900 0 0 0 162,900 4.03 3.60
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