-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SswnpAVKpcwERCiDn6Yk7O0TZ3MJThYwnLCLTA0WCPw+nMcl+zYl6n5rb4qIU1Vj dK/p49x1/6+BMrxaCXmA1w== 0000950109-98-005146.txt : 19981118 0000950109-98-005146.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950109-98-005146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMSTRONG WORLD INDUSTRIES INC CENTRAL INDEX KEY: 0000007431 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 230366390 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02116 FILM NUMBER: 98752537 BUSINESS ADDRESS: STREET 1: P O BOX 3001 STREET 2: 313 W LIBERTY ST 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, 1998 ------------------------------------------ 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 30, 1998 - 40,027,331 1 Part I - Financial Information ------------------------------ Item 1. Financial Statements - ------- -------------------- Armstrong World Industries, Inc., and Subsidiaries Consolidated Statements of Earnings ----------------------------------- (amounts in millions except for per-share data and percentages) Unaudited
Three months(a)(b) Nine months(a)(b) ended September 30 ended September 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- NET SALES $821.6 $575.6 $1,920.3 $1,671.3 Cost of goods sold 549.7 380.0 1,274.2 1,105.2 Selling, general and administrative expense 148.7 91.1 357.3 291.4 Goodwill amortization 4.3 0.2 5.2 0.6 Equity (earnings) loss from affiliates (c) (5.0) 27.2 (10.3) 24.3 ------ ------ -------- -------- Operating income 123.9 77.1 293.9 249.8 Interest expense 22.7 7.4 36.3 21.1 Other expenses, net 5.1 0.6 4.7 0.7 ------ ------ -------- -------- Earnings before income taxes 96.1 69.1 252.9 228.0 Income taxes 34.6 35.3 88.8 89.8 ------ ------ -------- -------- NET EARNINGS $ 61.5 $ 33.8 $ 164.1 $ 138.2 ====== ====== ======== ======== Net earnings per share of common stock: (d) Basic $ 1.55 $ 0.83 $ 4.12 $ 3.39 Diluted $ 1.53 $ 0.82 $ 4.06 $ 3.35 Average number of common shares outstanding: Basic 39.8 40.7 39.8 40.8 Diluted 40.2 41.1 40.4 41.2 Return on average common shareholders' equity 26.7% 16.3% 24.4% 22.1%
(a) Financial results include depreciation and amortization charges of $36.2 million and $100.4 million in the three months and nine months ended September 30, 1998, and $33.2 million and $98.2 million in the three months and nine months ended September 30, 1997. (b) Financial results for the three and nine months ended September 30, 1998, included $231.2 million in sales and $17.5 million in operating income from the Triangle Pacific Corporation and DLW AG acquisitions. See note 2 on page 9. (c) For the three months and nine months ended September 30, 1997, equity (earnings) loss from affiliates included a charge of $24.2 million, or $0.59 per share, reflecting the Company's proportion of restructuring charges of Dal-Tile. The nine months ended September 30, 1997, included in addition a charge of $5.5 million, or $0.13 per share, reflecting the Company's share of a one-time charge incurred by Dal-Tile for uncollectible receivables and overstocked inventories. On July 1, 1998, the Company settled its sale of 10.35 million shares of Dal-Tile International Inc. ("Dal-Tile") reducing the Company's ownership interest in Dal-Tile to 15.0 percent. In accordance with generally accepted accounting principles, this investment was accounted for on a cost basis from July 1, 1998. (d) The following tables provide a reconciliation of the numerator and denominator of the basic and diluted per share calculation for net earnings.
Three months ended Three months ended September 30, 1998 September 30, 1997 ------------------ ------------------ Per-Share Per-Share Earnings Shares Amounts Earnings Shares Amounts -------- ------ ------- -------- ------ ------- Basic Earnings per Share: - ------------------------- Net earnings $61.5 39.8 $1.55 $33.8 40.7 $0.83 Diluted Earnings per Share: - --------------------------- Dilutive options 0.4 0.4 ---- ---- Net earnings $61.5 40.2 $1.53 $33.8 41.1 $0.82 ==== ====
2
Nine months ended Nine months ended September 30, 1998 September 30, 1997 ------------------ ------------------ Per-Share Per-Share Earnings Shares Amounts Earnings Shares Amounts -------- -------- ------- -------- ------ ------- Basic Earnings per Share: - ------------------------- Net earnings $164.1 39.8 $4.12 $138.2 40.8 $3.39 Diluted Earnings per Share: - --------------------------- Dilutive options 0.6 0.4 --- --- Net earnings $164.1 40.4 $4.06 $138.2 41.2 $3.35 ==== ====
See accompanying footnotes to the consolidated financial statements beginning on page 9. 3 Armstrong World Industries, Inc., and Subsidiaries Consolidated Balance Sheets --------------------------- (amounts in millions)
Unaudited (a) Assets September 30, 1998 December 31, 1997 ------ ------------------ ----------------- Current assets: Cash and cash equivalents $ 91.0 $ 57.9 Accounts receivable less allowances 505.7 252.6 Inventories: Finished goods 271.3 149.4 Work in process 60.8 19.9 Raw materials and supplies 153.8 50.8 -------- -------- Total inventories 485.9 220.1 Income tax benefits 22.0 25.9 Net assets of business held for sale 59.7 -- Other current assets 57.3 43.5 -------- -------- Total current assets 1,221.6 600.0 Property, plant, and equipment 2,506.3 1,976.5 Less accumulated depreciation and amortization 1,074.7 1,004.3 -------- -------- Net property, plant and equipment 1,431.6 972.2 Insurance for asbestos-related liabilities (b) 275.0 291.6 Investment in affiliates (c) 116.0 174.9 Goodwill and other intangibles 993.0 60.3 Other noncurrent assets 338.0 276.5 -------- -------- Total assets $4,375.2 $2,375.5 ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $ 986.0 $ 84.1 Current installments of long-term debt 27.2 14.5 Accounts payable and accrued expenses (b) 573.1 339.9 Income taxes 68.7 33.0 -------- -------- Total current liabilities 1,655.0 471.5 Long-term debt 810.1 223.1 ESOP loan guarantee 190.5 201.8 Postretirement and postemployment benefits 245.1 248.0 Asbestos-related liabilities (b) 92.0 179.7 Other long-term liabilities 319.4 172.1 Deferred income taxes 110.2 53.7 Minority interest in subsidiaries 27.1 15.0 -------- -------- Total noncurrent liabilities 1,794.4 1,093.4 Shareholders' equity: Common stock 51.9 51.9 Capital in excess of par value 171.7 169.5 Reduction for ESOP loan guarantee (201.0) (207.7) Retained earnings 1,448.9 1,339.6 Other comprehensive income 2.0 (16.2) Treasury stock (547.7) (526.5) -------- -------- Total shareholders' equity 925.8 810.6 Total liabilities and shareholders' equity $4,375.2 $2,375.5 ======== ========
(a) The consolidated balance sheet as of September 30, 1998, included the consolidated balance sheets of Triangle Pacific and DLW as of that date. See note 2 on page 9. (b) An asbestos-related liability in the amount of $172.0 million, composed of $92.0 million in long-term liabilities and $80.0 million in current accrued expenses, represents the minimum liability and defense cost to resolve personal injury claims currently pending and expected to be filed through 2003. An insurance asset in the amount of $275.0 million reflects the Company's belief in the availability of insurance in an amount covering both these liabilities, and $103.0 million for reimbursement of prior payments of asbestos-related claims. (c) On July 1, 1998, the Company settled its sale of 10.35 million shares of Dal-Tile, reducing the Company's ownership interest in Dal-Tile to 15.0 percent. In accordance with generally accepted accounting principles, this investment was accounted for on a cost basis from July 1, 1998. Investment in affiliates was primarily composed of the 15.0 percent ownership of Dal-Tile as of September 30, 1998, and a 50.0 percent interest in WAVE, a joint venture with Worthington Industries. See accompanying footnotes to the consolidated financial statements beginning on page 9. 4 Armstrong World Industries, Inc., and Subsidiaries Consolidated Statements of Shareholders' Equity ----------------------------------------------- (amounts in millions) Unaudited
1998 1997 ------------------- -------------------- Common stock, $1 par value: - --------------------------- Balance at beginning of year & September 30 $ 51.9 $ 51.9 -------- -------- Capital in excess of par value: - ------------------------------- Balance at beginning of year $ 169.5 $169.5 Stock issuances and other 2.2 0.8 -------- -------- Balance at September 30 $ 171.7 $ 170.3 -------- -------- Reduction for ESOP loan guarantee: - ---------------------------------- Balance at beginning of year $ (207.7) $ (217.4) Principal paid 11.3 9.3 Loans to ESOP (5.3) (2.2) Accrued compensation 0.7 0.5 -------- -------- Balance at September 30 $ (201.0) $ (209.8) -------- -------- Retained earnings: - ------------------ Balance at beginning of year $1,339.6 $1,222.6 Net earnings 164.1 $164.1 138.2 $138.2 Tax benefit on dividends paid on unallocated common shares 1.3 1.3 -------- -------- Total $1,505.0 $1,362.1 Less common stock dividends 56.1 52.2 -------- -------- Balance at September 30 $1,448.9 $1,309.9 -------- -------- Other comprehensive income (a): - ------------------------------- Balance at beginning of year $ (16.2) $ 9.9 Foreign currency translation adjustments and hedging activities 1.1 (19.1) Unrealized gain on available for sale securities (b) 12.6 0.0 Minimum pension liability adjustments 4.5 0.0 -------- -------- Total other comprehensive income 18.2 18.2 (19.1) (19.1) -------- ------ -------- ------ Balance at September 30 $ 2.0 $ (9.2) -------- -------- Comprehensive income (b) $182.3 $119.1 - -------------------- ====== ====== Less treasury stock at cost: - ---------------------------- Balance at beginning of year $ 526.5 $ 446.5 Stock purchases 31.2 54.4 Stock issuance activity, net (10.0) (7.7) -------- -------- Balance at September 30 547.7 493.2 -------- -------- Total shareholders' equity $ 925.8 $ 819.9 ======== ========
(a) Related tax effects allocated to each component of other comprehensive income as of September 30, 1998:
Before- Tax After-Tax Tax (Expense) Amount or benefit Amount ------ ---------- ------ Foreign currency translation adjustments and hedging activities $ 1.1 $0.0 $ 1.1 Unrealized gain on available for sale securities (c) 13.5 (0.9) 12.6 Minimum pension liability adjustment (3.4) 7.9 4.5 ----- ---- ----- Other comprehensive income $11.2 $7.0 $18.2
(b) Comprehensive income for the three months ended September 1998 and 1997 was $79.9 million and $27.4 million, respectively. (c) On July 1, 1998, the Company settled its sale of 10.35 million shares of Dal-Tile, reducing the Company's ownership interest in Dal-Tile to 15.0 percent. The investment in the remaining Dal-Tile shares is accounted for as "available for sale" securities and therefore will be adjusted to market value through comprehensive income. See accompanying footnotes to the consolidated financial statements beginning on page 9. 5 Armstrong World Industries, Inc., and Subsidiaries Consolidated Statements of Cash Flows--Unaudited ------------------------------------------------ (amounts in millions) Unaudited
Nine Months Ended September 30 ----------------- 1998 1997 ---- ---- Cash flows from operating activities: Net earnings $ 164.1 $138.2 Adjustments to reconcile net earnings to net cash (used for)/provided by operating activities: Depreciation and amortization 100.4 98.2 Deferred income taxes 17.1 14.0 Equity change in affiliates (7.0) 31.5 Gain on sale of investment in affiliates (6.5) -- Restructuring payments (3.9) (17.0) Payments for asbestos-related claims, net of recoveries (63.3) (21.8) Changes in operating assets and liabilities net of effect of restructuring and acquisitions: (Increase) in receivables (89.4) (81.6) Decrease (increase) in inventories 32.1 (7.3) Decrease in other current assets 9.9 8.9 (Increase) in other noncurrent assets (64.2) (48.3) Increase in accounts payable and accrued expenses 20.1 14.1 Increase in income taxes payable 34.8 27.7 Increase in other long-term liabilities 11.4 16.6 Other, net (0.7) (1.2) -------- ------ Net cash provided by operating activities 154.9 172.0 Cash flows from investing activities: Purchases of property, plant and equipment (85.7) (97.1) Investment in computer software (16.7) (10.3) Acquisitions, net of cash acquired (1,152.6) (4.2) Sale/(purchase) of Dal-Tile shares, net 83.5 (12.4) Proceeds from the sale of land and facilities and divestitures 1.8 17.0 -------- ------ Net cash (used for) investing activities (1,169.7) (107.0) Cash flows from financing activities: Increase in short-term debt 858.0 39.0 Increase in long-term debt 543.9 7.2 Reduction of long-term debt (277.6) -- Cash dividends paid (56.1) (52.2) Purchase of common stock for the treasury (31.2) (53.4) Proceeds from exercised stock options 7.5 6.0 Other, net 0.6 0.2 -------- ------ Net cash provided by (used for) financing activities 1,045.1 (53.2) Effect of exchange rate changes on cash and cash equivalents 2.8 (6.9) -------- ----- Net increase (decrease) in cash and cash equivalents $ 33.1 $ 4.9 ======== ===== Cash and cash equivalents at beginning of period $ 57.9 $65.4 ======== ===== Cash and cash equivalents at end of period $ 91.0 $70.3 ======== ===== - ---------------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $24.7 $12.6 Income taxes paid $28.9 $34.7 - ----------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities: During the third quarter 1998, the Company acquired Triangle Pacific and DLW (see Note 2 on acquisitions). In conjunction with the acquisitions, assets acquired and liabilities assumed were as follows (millions): Triangle Pacific Acquisition - -----------------------------
Estimated fair value of assets acquired $515.0 Goodwill 797.4 Cash paid for stock plus transaction costs (907.5) Debt assumed (273.1) ------ Other liabilities assumed $131.8 ====== DLW Acquisition - --------------- Estimated fair value of assets acquired $569.5 Goodwill 76.7 Cash paid for stock plus transaction costs (269.0) Debt assumed (100.9) ------ Other liabilities assumed $276.3 ======
6 The purchase price allocation for these acquisitions is preliminary and further refinements are likely to be made based on the completion of final valuation studies. In 1997, the Company purchased 51 percent of Holmsund and 60 percent of the Parafon joint venture. In conjunction with the acquisitions, assets acquired and liabilities assumed were as follows (millions): Fair value of assets acquired $32.6 Cash paid for the capital stock (4.2) Minority interest (2.8) Debt Assumed (17.6) ----- Other long-term liabilities assumed $ 8.0 See accompanying notes to the consolidated financial statements beginning on page 9. 7 Armstrong World Industries, Inc., and Subsidiaries Industry Segment Financial Data ------------------------------- (amounts in millions) Unaudited
Three Months Nine months ended September 30 ended September 30 --------------------- --------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net trade sales: - ---------------- Floor coverings (a) $ 375.0 $ 300.0 $ 937.6 $ 855.5 Building products 196.7 194.9 572.2 566.9 Industry products 82.6 80.7 243.2 248.9 Wood products (b) 167.3 0.0 167.3 0.0 ----- --- ----- --- Total net sales $ 821.6 $ 575.6 $1,920.3 $1,671.3 ========= ======== ======== ======== Operating income (loss): - ------------------------ Floor coverings (a) $ 57.9 $ 56.9 $ 143.0 $ 146.0 Building products 31.9 33.4 88.5 93.5 Industry products 15.6 16.4 42.7 41.6 Wood products (b) 17.3 0.0 17.3 0.0 Ceramic tile (c) 0.6 (30.5) (0.2) (34.0) Unallocated corporate (expense) 0.6 0.9 2.6 2.7 --- --- --- --- Total operating income $ 123.9 $ 77.1 $ 293.9 $ 249.8 ========= ======== ======== ========
(a) For the three months and nine months ended September 30, 1998, Floor coverings included $63.9 million in sales and $0.2 million in operating income from the DLW acquisition reflecting results from the effective date of the acquisition, August 31, 1998. (b) For the three months and nine months ended September 30, 1998, Wood products reflects $167.3 million in sales and $17.3 million in operating income from Triangle Pacific Corp.'s wood flooring and cabinets businesses from the date of acquisition on July 22, 1998. (c) For the three months and nine months ended September 30, 1997, the ceramic tile segment included the Company's share of a Dal-Tile restructuring charges of $24.2 million. The nine months ended September 30, 1997, also included the Company's share of a one-time charge incurred by Dal-Tile for uncollectible receivables and overstocked inventories of $5.5 million. 8 Note 1. Operating results for the third quarter and first nine months of 1998 - ------- compared with the corresponding periods of 1997 included in this report are unaudited. However, these results have been reviewed by the Company's independent public accountants, KPMG Peat Marwick LLP, in accordance with established professional standards and procedures for a limited review. The accounting policies used in preparing these statements are the same as those used in preparing the Company's consolidated financial statements for the year ended December 31, 1997. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report and Form 10-K for the fiscal year ended December 31, 1997. In addition, beginning with the first-quarter 1998, the Company has adopted Statement of Accounting Standards No. 130, "Reporting Comprehensive Income," which requires that all items recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In the opinion of management, all adjustments of a normal, recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Three and nine months' results are not necessarily indicative of annual earnings. Note 2. - ------- Acquisitions: - ------------- On July 22, 1998, the Company completed its acquisition of all of the outstanding common stock of Triangle Pacific Corporation, referred to as "Triangle Pacific," a Delaware corporation. Triangle Pacific is a leading U.S. manufacturer of hardwood flooring and other flooring and related products and a substantial manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under the purchase method of accounting, included the purchase of all of the outstanding shares of common stock of Triangle Pacific at $55.50 per share which, plus acquisition costs, resulted in a total purchase price of $907.5 million. The purchase price has been allocated to the assets acquired and the liabilities assumed based on estimated fair market value at the date of acquisition. The balance of the purchase price, $797.4 million, was recorded as goodwill and is being amortized over forty years on a straight-line basis. For the year ended January 2, 1998, Triangle Pacific had total sales of $652.9 million and net income of $31.8 million. At July 3, 1998, Triangle Pacific had total assets of $610.9 million. Effective August 31, 1998, the Company acquired approximately 93% of the total share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized under the laws of the Federal Republic of Germany. DLW is a leading flooring manufacturer in Germany. The acquisition, recorded under the purchase method of accounting, included the purchase of 93% of the total share capital of DLW which, plus acquisition costs, resulted in a total purchase price of $269.0 million. The purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair market value at the dates of acquisition. In the preliminary purchase price allocation, $59.7 million has been allocated to the estimable net realizable value of DLW's furniture business, which the Company has identified as a business held for sale. The disposal will occur in the first half of 1999. The results of operations from the furniture business are not material to the consolidated financial results of the Company. The balance of the purchase price, $76.7 million, was recorded as goodwill and is being amortized over forty years on a straight-line basis. For the year ended December 31, 1997, DLW reported total sales of DM 1,184 million (approximately $680 million) and net income of DM 13.6 million (approximately $7.6 million). At August 31, 1998, DLW reported total assets of DM778.1 million (approximately $440 million). The operating results of these acquired businesses have been included in the Consolidated Statements of Earnings from the dates of acquisition. The purchase price allocation for these acquisitions is preliminary and further refinements are likely to be made based on the completion of final valuation studies. The following table reflects unaudited pro forma combined results of the Company, Triangle Pacific and DLW as if the acquisitions had taken place at the beginning of fiscal 1997 and 1998:
(in millions) Three months ended Nine months ended September 30 September 30 ------------ ------------ 1997 1998 1997 1998 ---- ---- ---- ---- Net sales $887.8 $921.7 $2,552.8 $2,658.8 Net earnings $ 28.9 $ 56.5 $ 111.0 $ 133.9 Net earnings per diluted share $ 0.70 $ 1.41 $ 2.69 $ 3.31
In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual combined results of operations might have been if the acquisitions had been effective at the beginning of fiscal 1997 and 1998. Note 3. - ------- 9 OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS Personal Injury Litigation The Company is one of many defendants in approximately 147,000 pending claims as of September 30, 1998, alleging personal injury from exposure to asbestos. The increase of approximately 64,000 claims during the first three quarters of 1998 is largely due to the inclusion of cases that had been subject to an injunction related to the Georgine Settlement Class Action ("Georgine") described below, and those that had been filed in the tort system against other defendants (and not against the Center for Claims Resolution ("Center") members) while Georgine was pending. Nearly all claims seek general and punitive damages arising from alleged exposures, at various times from World War II onward, to asbestos-containing products. Claims against the Company generally involve allegations of negligence, strict liability, breach of warranty and conspiracy with respect to its involvement with asbestos-containing insulation products. The Company discontinued the sale of all such products in 1969. The claims also allege that injury may be determined up to 40 years after first exposure to asbestos. Nearly all suits name many defendants, and over 100 different companies are reportedly involved. The Company believes that many current plaintiffs are unimpaired. A large number of claims have been settled, dismissed, put on inactive lists or otherwise resolved, and the Company generally is involved in all stages of claims resolution and litigation, including individual trials, consolidated trials and appeals. Neither the rate of future filings and resolutions nor the total number of future claims can be predicted at this time with certainty. Attention has been given by various parties to securing a comprehensive resolution of the litigation. In 1991, the Judicial Panel for Multidistrict Litigation ordered the transfer of federal cases to the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. The Company supported this transfer. Some cases are periodically released for trial, although the issue of punitive damages is retained by the transferee court. That court has been instrumental in having the parties resolve large numbers of cases in various jurisdictions and has been receptive to different approaches to the resolution of claims. Claims in state courts have not been directly affected by the transfer, although most recent cases have been filed in state courts. Georgine Settlement Class Action Georgine v. Amchem was a settlement class action filed in the Eastern District - ------------------ of Pennsylvania on January 15, 1993, that included essentially all future personal injury claims against members of the Center, including the Company. It was designed to establish a nonlitigation system for the resolution of such claims, and offered a method for prompt compensation to claimants who were occupationally exposed to asbestos if they met certain exposure and medical criteria. Compensation amounts were derived from historical settlement data and no punitive damages were to be paid. The settlement was designed to, among other things, minimize transactional costs including attorneys' fees, expedite compensation to claimants with qualifying claims, and relieve the courts of the burden of handling future claims. Based on mathematical projections covering a ten-year period starting in 1994, the Company estimated a maximum liability of $245 million in Georgine. The District Court, after exhaustive discovery and testimony, approved the settlement class action and issued a preliminary injunction that barred class members from pursuing claims against Center members in the tort system. The U.S. Court of Appeals for the Third Circuit reversed that decision, and the reversal was sustained by the U.S. Supreme Court on June 25, 1997, which held that the settlement class did not meet the requirements for class certification under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a loss of the bar against the filing of claims in the tort system. Following these developments, the Company is exploring alternatives to the Georgine settlement and believes an alternative claims resolution mechanism is likely to emerge, but the liability is likely to be higher than the projection in Georgine. Asbestos-Related Liability During the last half of 1997, the Company assessed the impact of the June 1997 Supreme Court ruling on its projected asbestos resolution and defense costs. In doing so, the Company reviewed, among other things, its historical settlement amounts, the incidence of past claims, the mix of the injuries and occupations of the plaintiffs, the number of cases pending against it, the Georgine projection and the Company's experience. Subject to the uncertainties, limitations and other factors referred to above and 10 based upon its experience, the Company has recorded $172.0 million on the balance sheet as an estimated minimum liability to defend and resolve probable and estimable asbestos-related personal injury claims currently pending and reasonably expected to be filed through 2003. This is management's best estimate of the minimum liability, although potential future costs for claims could range up to an additional $387 million resulting in an estimated maximum liability of approximately $559 million. Because of the uncertainties related to asbestos litigation, it is not possible to estimate the number of personal injury claims that may be filed after 2003 or their defense and resolution costs. Therefore, the Company's estimated liability does not include costs for personal injury claims that may be filed after 2003, although it is likely there will be such additional claims. Management believes that potential additional costs for claims to be filed through 2003 and those filed thereafter, net of insurance recoveries, will not have a material after-tax effect on the financial condition or liquidity of the Company, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. Property Damage Litigation The Company is one of many defendants in eight pending claims as of September 30, 1998, brought by public and private building owners. These claims include allegations of damage to buildings caused by asbestos-containing products and generally seek compensatory and punitive damages and equitable relief, including reimbursement of expenditures for removal and replacement of such products. The claims appear to be aimed at friable (easily crumbled) asbestos-containing products, although allegations encompass all asbestos-containing products, including previously installed asbestos-containing resilient flooring. Among the lawsuits that have been resolved are four class actions which involve public and private schools, Michigan state public and private schools, colleges and universities, and private property owners who leased facilities to the federal government. The Company vigorously denies the validity of the allegations against it in these claims. These suits and claims are not handled by the Center. Insurance coverage has been resolved and is expected to cover almost all costs of these claims. Codefendant Bankruptcies Certain codefendant companies have filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. Due to the uncertainties involved, the long-term effect of these proceedings on asbestos-related litigation cannot be predicted. Insurance Coverage The Company's primary and excess insurance policies provide product hazard and nonproducts (general liability) coverages for personal injury claims, and product hazard coverage for property damage claims. Certain policies also provide coverage to ACandS, Inc., a former subsidiary of the Company. The Company and ACandS, Inc. share certain limits that both have accessed and also have entered into an agreement that reserved for ACandS, Inc. a certain amount of excess insurance. California Insurance Coverage Lawsuit Trial court decisions in the insurance lawsuit filed by the Company in California held that the trigger of coverage for personal injury claims was continuous from exposure through death or filing of a claim, that a triggered insurance policy should respond with full indemnification up to policy limits, and that any defense obligation ceases upon exhaustion of policy limits. Although not as comprehensive, another decision established favorable defense and indemnity coverage for property damage claims, providing coverage during the period of installation and any subsequent period in which a release of fibers occurred. The California appellate courts substantially upheld the trial court, and that insurance coverage litigation is now concluded. The Company has resolved most personal injury products hazard coverage matters with its solvent carriers through the Wellington Agreement, referred to below, or other settlements. In 1989, a settlement with a carrier having both primary and excess coverages provided for certain minimum and maximum percentages of costs for personal injury claims to be allocated to nonproducts (general liability) coverage, the percentage to be determined by negotiation or in alternative dispute resolution ("ADR"). The insurance carriers that provided personal injury products hazard, nonproducts or property damage coverages are as follows: Reliance Insurance Company; Aetna (now Travelers) Casualty and Surety Company; Liberty Mutual Insurance Company; Travelers Insurance Company; Fireman's Fund Insurance Company; Insurance Company of North America; Lloyds of London; various London market companies; Fidelity and Casualty 11 Insurance Company; First State Insurance Company; U.S. Fire Insurance Company; Home Insurance Company; Great American Insurance Company; American Home Assurance Company and National Union Fire Insurance Company (known as the AIG Companies); Central National Insurance Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial Union Insurance Company. Midland Insurance Company, an excess carrier that provided $25 million of personal injury coverage, certain London companies, and certain excess carriers providing only property damage coverage are insolvent. The Company is pursuing claims against insolvents in a number of forums. Wellington Agreement In 1985, the Company and 52 other companies (asbestos defendants and insurers) signed the Wellington Agreement. This Agreement settled nearly all disputes concerning personal injury insurance coverage with most of the Company's carriers, provided broad coverage for both defense and indemnity and addressed both products hazard and non-products (general liability) coverages. Asbestos Claims Facility ("Facility") and Center for Claims Resolution The Wellington Agreement established the Facility to evaluate, settle, pay and defend all personal injury claims against member companies. Resolution and defense costs were allocated by formula. The Facility subsequently dissolved, and the Center was created in October 1988 by 21 former Facility members, including the Company. Insurance carriers, while not members, are represented ex officio on the Center's governing board and have agreed annually to provide a portion of the Center's operational costs. The Center adopted many of the conceptual features of the Facility and has addressed the claims in a manner consistent with the prompt, fair resolution of meritorious claims. Resolution and defense costs are allocated by formula; adjustments over time have resulted in some increased share for the Company. Insurance Recovery Proceedings A substantial portion of the Company's primary and excess insurance asset is nonproducts (general liability) insurance for personal injury claims, including among others those that involve exposure during installation of asbestos materials. The Wellington Agreement and the 1989 settlement agreement referred to above have provisions for such coverage. An ADR process under the Wellington Agreement is under way against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to such coverage and to determine whether and to what extent reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and, for some policies, includes defense costs in addition to limits. The carriers have raised various defenses to the Company's claims, including waivers, laches, statutes of limitations and contractual defenses. One primary carrier alleges that it is no longer bound by the Wellington Agreement, and another alleges that the Company agreed to limit its claims for nonproducts coverage against that carrier when the Wellington Agreement was signed. The ADR process is in the trial phase of binding arbitration. An agreement has recently been reached with two carriers to settle the ADR with respect to them. Other proceedings against non-Wellington carriers may become necessary. An insurance asset in the amount of $275.0 million is recorded on the balance sheet and reflects the Company's belief in the availability of insurance in this amount through negotiation or litigation based upon the Company's success in insurance recoveries, settlement agreements that provide such coverage, recoveries of nonproducts coverage by other companies, the opinion of outside counsel, and the recent agreement with two carriers in the ADR. A substantial portion of the insurance asset is involved in the aforementioned ADR, which the Company believes may be resolved in 1998 or later. A shortfall has developed between currently available insurance and amounts necessary for resolution and defense costs. This shortfall was $103.0 million as of September 30, 1998. The recovery of insurance assets to cover the shortfall will depend upon the resolution of the ADR and other disputes with the insurance carriers. The Company does not believe that any after-tax effect of the shortfall will be material either to the financial condition of the Company or to its liquidity. Conclusions The Company does not know how many claims will be filed against it in the future, nor the details thereof, nor of pending suits not fully reviewed, nor the defense and resolution costs that may ultimately result therefrom, nor whether an alternative to the Georgine settlement vehicle may emerge, nor the scope of its insurance coverage ultimately deemed available. 12 The Company continually evaluates the nature and amount of recent claim settlements and their impact on the Company's projected asbestos liability and defense costs. Subject to the uncertainties, limitations and other factors referred to above and based upon its experience, the Company has recorded on the balance sheet $172.0 million as a minimum estimated liability to defend and resolve probable and estimable asbestos-related personal injury claims currently pending and to be filed through 2003. This is management's best estimate of the minimum liability, although potential future costs for these claims could range up to an additional $387 million or an estimated maximum liability of approximately $559 million. Because of the uncertainties related to asbestos litigation, it is not possible to estimate the number or cost of personal injury claims that may be filed after 2003. Therefore, the Company's estimated liability does not include costs for personal injury claims that may be filed after 2003, although it is likely there will be such additional claims. Management believes that the potential additional costs for claims to be filed through 2003 and those filed thereafter, net of insurance recoveries, will not have a material after-tax effect on the financial condition of the Company or its liquidity, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. An insurance asset in the amount of $275.0 million is recorded on the balance sheet and reflects the Company's belief in the availability of insurance in this amount based upon the Company's success in insurance recoveries, settlement agreements that provide such coverage, nonproducts recoveries by other companies, the opinion of outside counsel, and the recent agreement with two carriers in the ADR. Such insurance is probable of recovery through negotiation or litigation. A substantial portion of the insurance asset is in ADR, which the Company believes may be resolved in 1998 or later. A shortfall has developed between currently available insurance and amounts necessary for resolution and defense costs. This shortfall was $103.0 million as of September 30, 1998. The recovery of insurance assets to cover the shortfall will depend upon the resolution of the ADR and other disputes with insurance carriers. The Company does not believe that after-tax effect of the shortfall will be material either to the financial condition or liquidity of the Company. The Company believes that a claims resolution mechanism alternative to the Georgine settlement will eventually emerge, but the liability is likely to be higher than the projection in Georgine. Subject to the uncertainties, limitations and other factors referred to elsewhere in this note and based upon its experience, the Company believes it is probable that substantially all of the defense and resolution costs of property damage claims will be covered by insurance. Even though uncertainties remain as to the potential number of unasserted claims and the liability resulting therefrom, and after consideration of the factors involved, including the ultimate scope of its insurance coverage, the Wellington Agreement and other settlements with insurance carriers, the results of the California insurance coverage litigation, the establishment of the Center, the likelihood that an alternative to the Georgine settlement will eventually emerge, and its experience, the Company believes asbestos-related claims against the Company will not be material either to the financial condition or liquidity of the Company, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. Note 4. - ------- FINANCING On July 13, 1998, the Company entered into a new commercial paper program (the "CP Program") and subsequently issued approximately $1.0 billion of commercial paper. The commercial paper, secured by lines of credit under a new bank credit facility, has maturities of up to 364 days and bears interest at rates between approximately 5.5% and 6.0%. On August 11, 1998, the Company completed an offering of $200,000,000 of 6.35% Senior Notes due 2003 and a concurrent offering of $150,000,000 of 6.5% Senior Notes due 2005. The Company used the proceeds from the issuance of the Notes to repay outstanding commercial paper and for general corporate purposes. Note 5. - ------- SUBSEQUENT EVENTS Activities Related to Domco Inc.: - --------------------------------- On October 6, 1998, the Company declined to extend its offer to purchase all of the outstanding common shares and common share equivalents of Domco Inc. ("Domco"), a Canadian subsidiary of Sommer Allibert, S.A. ("Sommer"). The offer had been 13 conditional upon the valid tender of 51 percent of the outstanding common shares of Domco on a diluted basis. While a number of Domco shares and warrants were tendered, the minimum condition of 51% was not satisfied. The Company's offer, which had been opposed by the board of Domco and its controlling shareholder, was originally made on June 16, 1997, and subsequently extended a number of times. In terminating its offer, Armstrong stated it remains interested in acquiring Domco and will reassess its position after the Quebec Securities Commission renders a decision. The Company has asked the Quebec Securities Commission to determine whether the May 1997 agreement to transfer the control block of Domco to Tarkett Sommer was effected at a premium to market inconsistent with regulations in Quebec applying to such transfers. The Company recognized expenses arising from activities involving Domco and Sommer totaling $12.3 million pretax, $8.0 million after-tax in the third quarter 1998. Financing - --------- On October 28, 1998, the Company completed an offering of $180,000,000 of 7.45% Senior Quarterly Interest Bonds due 2038. The Company intends to use the proceeds from the issuance of the Bonds to repay outstanding commercial paper and for general corporate purposes. On October 29, 1998, the Company completed a new bank credit facility for $900 million with certain banks which is comprised of a $450 million line of credit for 364 days and a $450 million line of credit for five years. This facility replaces the $1.0 billion, 364 day bank credit facility entered into on July 17, 1998. Dal-Tile - -------- Between October 1 and November 12, 1998, the Company sold 193,500 shares of Dal-Tile stock. On November 13 the Company entered into a transaction to sell the remainder of its holdings in Dal-Tile representing 7,822,322 shares. The average price per share for these transactions was $8.18 net of commissions and fees. The Company will recognize a gain from these transactions in the fourth quarter of 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations - ------------- Acquisitions: - ------------- On July 22, 1998, Armstrong completed its acquisition of all of the outstanding common stock of Triangle Pacific. Triangle Pacific is a leading U.S. manufacturer of hardwood flooring and other flooring and related products and a substantial manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under the purchase method of accounting, included the purchase of all of the outstanding shares of common stock of Triangle Pacific at $55.50 per share which, plus acquisition costs, resulted in a total purchase price of $907.5 million. The purchase price has been allocated to the assets acquired and the liabilities assumed based on fair market value at the date of acquisition. The balance of the purchase price, $797.4 million, was recorded as goodwill and is being amortized over forty years on a straight-line basis. For the year ended January 2, 1998, Triangle Pacific had total sales of $652.9 million and net income of $31.8 million. At July 3, 1998, Triangle Pacific had total assets of $610.9 million. Effective August 31, 1998, Armstrong acquired approximately 93% of the total share capital of DLW. DLW is a leading flooring manufacturer in Germany. The acquisition, recorded under the purchase method of accounting, included the purchase of 93% of the total share capital of DLW which, plus acquisition costs, resulted in a total purchase price of $269.0 million. The purchase price has been allocated to the assets acquired and the liabilities assumed based on the fair market value at the dates of acquisition. In the preliminary purchase price allocation, $59.7 million has been allocated to the estimable net realizable value of DLW's furniture business, which the Company has identified as a business held for sale. The disposition will occur in the first half of 1999. The results of operations from the furniture business are not material to the consolidated financial results of the Company. The balance of the purchase price, $76.7 million, was recorded as goodwill and is being amortized over forty years on a straight-line basis. For the year ended December 31, 1997, DLW reported total sales of DM 1,184 million (approximately $680 million) and net income of DM 13.6 million (approximately $7.6 million). At August 31, 1998, DLW reported total assets of DM778.1 million (approximately $440 million). The operating results of these acquired businesses have been included in the Consolidated Statements of Earnings from the dates of acquisition. The purchase price allocation for these acquisitions is preliminary and further refinements are likely to be made based on the completion of final valuation studies. Financial Condition: - -------------------- On July 13, 1998, the Company entered into a new commercial paper program (the "CP Program") and subsequently issued approximately $1.0 billion of commercial paper. The commercial paper, secured by lines of credit under a new bank credit facility, has maturities of up to 364 days and bears interest at rates between approximately 5.5% and 6.0%. On August 11, 1998, the Company completed an offering of $200,000,000 of 6.35% Senior Notes due 2003 and a concurrent offering of $150,000,000 of 6.5% Senior Notes due 2005. The Company used the proceeds from the issuance of the Notes to repay outstanding commercial paper and for general corporate purposes. On July 15, 1998, Standard & Poor's ("S&P") lowered the Company's corporate credit and senior unsecured debt ratings to single `A' minus from single `A' and lowered its commercial paper rating on the Company to `A-2' from `A-1'. At the same time S&P assigned its single `A' minus bank loan rating to the Company's new credit facility and existing multiyear $300 million senior unsecured revolving credit facility. On 14 July 16, 1998, Moody's Investors Service ("Moody's") the Company's corporate credit and senior unsecured debt ratings to Baa1 from A2, assigned a rating of Baa1 to the Company's new credit facility and existing multiyear facility and lowered its commercial paper rating on the Company to P-2 from P-1. Both Moody's and S&P cited factors relating to the acquisitions of Triangle Pacific and DLW as the major reasons for their downgrading. It is management's opinion that the Company has sufficient financial strength to warrant any required support from lending institutions and financial markets. As shown on the Consolidated Balance Sheet (see page 4), the Company had cash and cash equivalents of $91.0 million at September 30, 1998. As a result of the increase in short-term debt from the commercial paper program, working capital at September 30, 1998, was $561.9 million lower than the $128.5 million recorded at the end of 1997. The ratio of current assets to current liabilities was 0.74 to 1 as of September 30, 1998, compared with 1.27 to 1 as of December 31, 1997. The decrease in this ratio from December 31, 1997, was primarily due to higher levels of short-term debt, including the commercial paper mentioned above issued in connection with the financing of the Triangle Pacific and DLW acquisitions and other current asset and liabilities changes from the acquisitions of Triangle Pacific and DLW. Long-term debt, excluding the Company's guarantee of an ESOP loan, increased $587.0 million in the first nine months of 1998 due to the two public debt offerings mentioned above and $180.0 million of commercial paper classified as long-term debt. At September 30, 1998, long-term debt of $810.1 million, or 27.6 percent of total capital, compared with $223.1 million, or 16.7 percent of total capital, at the end of 1997. For the periods ended September 30, 1998, and December 31, 1997 ratios of total debt (including the Company's guarantee of the ESOP loan) as a percent of total capital were 68.5 percent and 39.2 percent, respectively. As shown on the Consolidated Statements of Cash Flows (see page 6), net cash provided by operating activities for the nine months ended September 30, 1998, was $154.9 million compared with $172.0 million for the comparable period in 1997. The decrease was primarily due to increased payments for asbestos-related claims and increases in noncurrent assets. Net cash used for investing activities was $1,169.7 million for the nine months ended September 30, 1998, compared with $107.0 million in 1997. The increase was primarily due to expenditures for acquisitions and partially offset by the reduction of the investment in Dal-Tile. Net cash provided by financing activities was $1,045.1 million for the nine months ended September 30, 1998 primarily due to the commercial paper program and the two public debt offering mentioned above. Net cash used for financing activities, including a net reduction in debt and the repurchase of common shares, was $53.2 million for the nine months ended September 30, 1997. In June the Company halted open market purchases of its common share repurchase program following the announcement of its intent to purchase Triangle Pacific and DLW. The Company is constantly evaluating its various business units and may from time to time dispose or restructure those units. The Company previously announced its intention to dispose of its investment in Dal-Tile. On July 1, 1998, Armstrong settled its sale of 10.35 million shares of Dal-Tile at $8.50 per share before underwriting discounts, commissions and fees. Armstrong reported a gain on the sale of $6.5 million in the third quarter. The sale reduced Armstrong's ownership interest in Dal-Tile to 15.0 percent, and in accordance with generally accepted accounting principles, this remaining interest was accounted for on a cost basis from July 1, 1998. Asbestos-Related Litigation: - ---------------------------- The Company is involved in significant asbestos-related litigation which is described more fully under "Overview of Asbestos-Related Legal Proceedings" on pages 10-13 and which should be read in connection with this discussion and analysis. The Company does not know how many claims will be filed against it in the future, nor the details thereof, nor of pending suits not fully reviewed, nor the defense and resolution costs that may ultimately result therefrom, nor whether an alternative to the Georgine settlement vehicle may emerge, nor the scope of its insurance coverage ultimately deemed available. The Company continually evaluates the nature and amount of recent claim settlements and their impact on the Company's projected asbestos liability and defense costs. Subject to the uncertainties, limitations and other factors referred to above and based upon its experience, the Company has recorded on its balance sheet $172.0 million as a minimum estimated liability to defend and resolve probable and estimable asbestos-related personal injury claims currently pending and to be filed through 2003. This is 15 management's best estimate of the minimum liability, although potential future costs for these claims could range up to an additional $387 million or an estimated maximum liability of approximately $559 million. Because of the uncertainties related to asbestos litigation, it is not possible to estimate the number or cost of personal injury claims that may be filed after 2003. Therefore, the Company's estimated liability does not include costs for personal injury claims that may be filed after 2003, although it is likely there will be such additional claims. Management believes that the potential additional costs for claims to be filed through 2003 and those filed thereafter, net of any potential insurance recoveries, will not have a material after-tax effect on the financial condition or liquidity of the Company, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. An insurance asset in the amount of $275.0 million is recorded on the balance sheet and reflects the Company's belief in the availability of insurance in this amount based upon the Company's success in insurance recoveries, settlement agreements that provide such coverage, nonproducts recoveries by other companies, the opinion of outside counsel, and the recent agreement with two carriers in the ADR. Such insurance is probable of recovery through negotiation or litigation. A substantial portion of the insurance asset is in ADR, which the Company believes may be resolved in 1998 or later. As of September 30, 1998, a shortfall has developed of $103.0 million representing the difference between currently available insurance and amounts necessary for resolution and defense costs. The recovery of insurance assets to cover the shortfall will depend upon the resolution of the ADR and other disputes with insurance carriers. The Company does not believe that after-tax effect of the shortfall will be material either to the financial condition or liquidity of the Company. The Company believes that a claims resolution mechanism alternative to the Georgine settlement will eventually emerge, but the liability is likely to be higher than the projection in Georgine. Subject to the uncertainties, limitations and other factors previously stated and based upon its experience, the Company believes it is probable that substantially all of the defense and resolution costs of property damage claims will be covered by insurance. Even though uncertainties remain as to the potential number of unasserted claims and the liability resulting therefrom, and after consideration of the factors involved, including the ultimate scope of its insurance coverage, the Wellington Agreement and other settlements with insurance carriers, the results of the California insurance coverage litigation, the establishment of the Center, the likelihood that an alternative to the Georgine settlement will eventually emerge, and its experience, the Company believes asbestos-related claims against the Company will not be material either to the financial condition or liquidity of the Company, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in such future period. Activities Related to Domco Inc.: - --------------------------------- On June 16, 1997, the Company commenced an all cash offer to purchase all of the outstanding common shares and common share equivalents (including convertible debentures and warrants on an as-if converted basis) of Domco Inc. ("Domco"), a Canadian subsidiary of Sommer Allibert, S.A. ("Sommer"). The offer was conditioned upon the valid tender of 51 percent of the outstanding common shares of Domco on a diluted basis. The offer was extended several times to increase the bid price per common share to CDN $26.50 (thereby increasing the aggregate proposed purchase price to CDN $560 million) and to extend the expiration date of the offer to October 6, 1998. The Company has declined to extent its offer as described in Note 5 on page 13. The Company has obtained requisite regulatory approvals from the United States Federal Trade Commission, the Canadian Minister of Industry and the Competition Bureau in Canada. Sommer stated that it did not intend to sell its shares of Domco to the Company, and Domco's board of directors has rejected the Company's offer to subscribe for Domco common shares. The Company recognized expenses arising from activities involving Domco and Sommer totaling $12.3 million pretax, $8.0 million after-tax in the third quarter 1998. On June 9, 1997, the Company filed a complaint in the United States District Court for the Eastern District of Pennsylvania alleging that Sommer (subsequently amended to include Tarkett and Marc Assa, the President du Directoire of Sommer), had used confidential information provided by the Company during negotiations regarding the purchase of Sommer's worldwide flooring assets to structure a proposed transaction with Tarkett in violation of a confidentiality agreement and exclusivity understanding with the Company together with a duty to negotiate in good faith. The Company intends to pursue this litigation to recover damages in a jury trial originally scheduled to 16 commence on September 15, 1998. However, the trial date has been continued. The ultimate magnitude of the Company's potential recovery is not known at this time. On April 8, 1998, Sommer filed a counterclaim against the Company and certain of its present and former officers. Sommer generally alleges that the Company obtained nonpublic information about Sommer. Sommer is seeking unspecified damages. The Company and the individual counterclaim defendants have filed a motion to dismiss the counterclaim. That motion is pending before the Court. The Company believes that Sommer's charges are baseless. On June 23, 1997, the Company filed a claim, amended on August 11, 1997, in the Ontario Court (General Division) alleging that Sommer and its representatives on Domco's board breached their fiduciary duty to Domco and acted in a manner oppressive to Domco's minority shareholders when they rejected the Company's bid for Domco. The Company's motion requesting a court injunction to prevent the takeover of Domco by Tarkett, among other items, was dismissed. The Company is continuing to pursue this litigation to recover damages from Sommer and Domco's directors, as well as seeking other relief. The Company intends to continue to pursue all legal remedies available to it in the United States and Canada against Sommer, Domco's directors, Tarkett and Marc Assa. Consolidated Results: - --------------------- Third-quarter net sales of $821.6 million were 43% greater than in the third quarter of 1997. Triangle Pacific contributed $167.3 million of sales and DLW $63.9 million of sales to the Company's pre-acquisition business sales figure of $590.4 million. For the Company's pre-acquisition business, sales growth was 2.6% as floor coverings sales increased 4% and building products sales increased 1%. Home center sales were up nearly 15% over the sales of third quarter 1997. Pacific area sales were 13% below the third quarter of 1997, although insulation products increased both domestic sales and exports from its Panyu, China, plant. In Europe, despite a cessation of sales to Russia in August by all business units, floor coverings made up its Russian volume loss by sales to other customers including those in Eastern Europe, and insulation increased European sales by 5%. In total, emerging market turmoil reduced third quarter sales by an estimated $8.0 million versus the same period last year, with over three-quarters of this total from lost Russian sales. Third-quarter net earnings of $61.5 million, or $1.53 per diluted share, included the results of Triangle Pacific and DLW as well as offsetting one-time items, including the gain on sale of Dal-Tile shares and the write-off of expenses related to activities involving Domco and Sommer. These results compare to reported earnings of $33.8 million, or $0.82 per diluted share, in the third quarter of 1997. For the third quarter of 1998, cost of goods sold was 66.9% of sales compared to 66.0% for the same period in 1997. The slight deterioration reflects the impact of the Triangle Pacific and DLW acquisitions which have lower gross margins than the Company's pre-acquisition business. The Company's pre-acquisition business had a favorable cost of goods sold of 64.1% for the quarter due to manufacturing efficiencies and lower raw material costs excluding energy. Consolidated SG&A expenses were 18.1% of sales and were favorably affected by Triangle Pacific's lower SG&A. The Company's effective tax rate of 36.0% in the third quarter of 1998 was impacted by the non-deductibility of goodwill in the Company's reported earnings, but still compared favorably with an effective rate of 51.1% in the same period in 1997. The unusually high effective rate in 1997 was influenced by equity losses from the Company's investment in Dal-Tile. Sales for the first nine months of 1998 were $1,920.3 million and included $167.3 million in sales from Triangle Pacific and $63.9 million in sales from DLW. Compared to sales of $1,671.3 million in the comparable period in 1997, 1998's result was 15% greater. Excluding the effect of acquisitions sales were 1% higher. Net earnings of $164.1 million for the first nine months of 1998, or $4.06 per diluted share, included the results of Triangle Pacific and DLW as well as the one-time items mentioned above in the third quarter of 1998. Excluding Triangle Pacific and DLW, net earnings were $166.7 million, or $4.13 per diluted share. These results compare to reported earnings of $138.2 million, or $3.35 per diluted share for the same period in 1997. On a reported earnings basis, 1998 net earnings for nine months were 19% above 1997's result. Net earnings per basic share in the first nine months of 1998 were $4.12 compared with $3.39 per basic share in the first half of 1997. Industry Segment Results: - ------------------------- 17 Floor coverings sales in the third quarter of $375.0 million included sales of $63.9 million from DLW. Flooring sales grew 7% in the Americas due to significant promotions and display activity through traditional wholesalers. Sales of residential tile reached record highs and sales of residential sheet were well ahead of the trend for the year. The home center channel continues to capture significant volume with sales increases of 12.5% in the quarter. In Europe, sales were down only 3% notwithstanding a cessation of sales to Russia. Pacific area sales were down 21% due to the continued impact of economic and financial turmoil in that region but make up less than 3% of the segment. Operating income of $57.9 million in the third quarter or 15% of sales compared to $56.9 million or 19% of sales in the third quarter of 1997. Lower operating margins were due to pricing pressure in North America, an unfavorable product mix, and the impact of lower margins at DLW. Building products sales of $196.7 million were 1% above last year's $194.9 million. The third quarter of 1997 was a record quarter due to solid Americas results and growth in Asia and Eastern Europe. Operating margins of 16% compared unfavorably with 17% in 1997 reflecting higher selling expense in Europe in 1998, lower emerging market sales and the unusually strong result in the prior period. Sales of industry products, encompassing insulation, gaskets and textile product businesses, realized a 2% sales increase in the third quarter of 1998 versus 1997. Sales of $82.6 million included an 8% increase in insulation sales with growth in all geographic areas which more than offset sales decreases in gaskets and textiles. Gasket sales to automotive suppliers felt the impact of the General Motors strike earlier this quarter, while textile sales include significant exports to the Pacific area which are being negatively impacted by the ongoing economic and financial turmoil in that region. Despite improvements in profits and margins in insulation, the operating margin for the segment was 19% in the third quarter of 1998 versus 20% in 1997. The Company's new wood products segment contributed $167.3 million to sales in the period from July 22, 1998, at which time Triangle Pacific's results were consolidated in Armstrong's financial statements. Sales were approximately 15% ahead of the comparable period in 1997. Operating margins of 10% were below historical levels of 11% due to the amortization of acquisition goodwill and nonrecurring purchase price accounting adjustments related to inventory. Ceramic tile income of $0.6 million in the third quarter of 1998 represented an adjustment to estimated equity earnings in Dal-Tile from the second quarter of 1998. Following the disposition of a substantial portion of its equity interest in Dal-Tile and the reduction of ownership to 8.02 million shares, or approximately 15 percent of outstanding shares, the Company's investment in Dal-Tile will be accounted for on a cost basis and reporting of the ceramic tile business segment will cease. Year 2000: - ---------- The Company increased its investment in computer software in 1997 and 1998 with projects to develop and implement a new corporate logistics system and a new financial and human resource system. These new systems are year-2000 compliant. In addition, a Year 2000 project, expected to be completed in 1999, is converting the remainder of the Company's software and hardware information technology and non-information technology systems to minimize any exposure to year 2000 compliance failures. Parallel workstreams or "tracks" have been established by the Company to complete the work required to repair or replace non-compliant systems and monitor the degree of year 2000 compliance by Armstrong's business partners. The workstreams encompass (a) local projects to repair all internally developed and supported applications; (b) infrastructure projects to repair or replace all infrastructure components (e.g., mainframe and client server computer systems, networks, phone switches and personal computers); and (c) remote projects to repair or replace all remote systems: plant supported systems - applications, PLC's and other factory systems. The Year 2000 project includes several phases: an inventory phase to identify all software and hardware components potentially affected; an assessment phase to determine if identified components are compliant; a planning phase to establish plans to bring components into compliance; an execution phase to carry out actions determined during the planning phase; a testing phase to verify compliance; and a completion phase to bring the revised component into production. For the local and infrastructure tracks the project is currently in the execution and testing phases. For the remote track, the project is at various phases depending upon the location. However, in the Textile Products business, the project is currently in the planning phase. If Textile Products is not year-2000 compliant by January 1, 2000, the effects will not be material to the overall financial condition of the company. Total costs of the Year 2000 project worldwide are estimated to be $17 million through 1999. Actual costs through September 1998 were $7 million. Management believes 18 internally generated funds and existing sources of liquidity are sufficient to meet expected funding requirements for this project. The Company is in the process of assessing, through letters of inquiry, the Year 2000 compliance of customers and suppliers. Responses to these letters are being evaluated for compliance, the need for follow-up actions, or contingency plans. Until completion of this process, the Company cannot assess the potential impact, if any, that year 2000 noncompliance by customers and suppliers may have on the Company. Management currently believes the most reasonably-likely worst case scenario would be that a small number of vendors, who are not critical to the operation of the company's business, will be unable to supply materials for a short time after January 1, 2000. Moreover, management is considering contingency plans to prepare for any reasonably-likely worst case scenarios, including manual operations, selection of alternative suppliers, early purchase of inventory and additional software repair. New Accounting Pronouncements: - ------------------------------ In September 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pensions and other postretirement benefit plans but does not change the measurement or recognition of those plans. It standardizes disclosure requirements, eliminates unnecessary disclosures and requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. This statement supersedes the disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company plans to adopt SFAS No. 131 and SFAS No. 132 beginning with 1998 annual reporting. In March 1998, the American Institute of Certified Public Accountants (AICPA), issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, (SOP 98-1). This statement is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. The Company implemented SOP 98-1 in the second quarter of 1998. SOP 98-1 did not have a material impact on the Company's financial condition or results of operations. In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement established accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after September 15, 1999. The adoption of this standard is not expected to materially impact the Company's consolidated results, financial condition, or long-term liquidity. This Quarterly Report on Form 10-Q contains certain "forward looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995). Such forward-looking statements include statements using the words "believe," "expect," and "estimate" and similar expressions. Among other things, they regard the Company's earnings, liquidity, financial condition, financial resources, and the ultimate outcome of the Company's asbestos-related litigation. Actual results may differ materially as a result of factors over which the Company may or may not have any control. Such factors include: (a) those factors identified in the Notes to the Consolidated Financial Statements in connection with the Company's asbestos-related litigation and the availability of insurance coverage therefor, and (b) the strength of domestic and foreign economies, continued sales growth, continued product development, competitive advantages, integration of new businesses, minimizing cost increases, changes from projected effective tax rates and continued strengthening of the financial markets. Certain other factors not specifically identified herein may also materially affect the Company's results. Actual results may differ materially as a result of the uncertainties identified or if the factors on which the Company's conclusions are based do not conform to the Company's expectations. 19 Independent Auditors' Review Report ----------------------------------- The Board of Directors and Shareholders Armstrong World Industries, Inc.: We have reviewed the consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries as of September 30, 1998, and the related consolidated statements of earnings for the three and nine-month periods ended September 30, 1998 and 1997, and the consolidated statements of cash flows and shareholders' equity for the nine-month periods ended September 30, 1998 and 1997. These 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 the 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 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, 1997, and the related consolidated statements of earnings, cash flows and shareholders' equity for the year then ended (not presented herein); and in our report dated February 13, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, 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 13, 1998 20 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. 15 Letter re Unaudited Interim Financial Information No. 27 Financial Data Schedule (b) The following reports on Form 8-K were filed during the quarter for which this report is filed: 1. On July 13, 1998, the registrant filed a current report on Form 8-K announcing its intention to commence a tender offer for all the outstanding shares of Triangle Pacific Corporation. 2. On July 28, 1998, the registrant filed a current report on Form 8-K announcing its second quarter 1998 results. 3. On July 30, 1998, the registrant filed a current report on Form 8-K announcing its intention to sell its Senior Notes due 2003 to certain "qualified institutional buyers." 4. On August 12, 1998, the registrant filed a current report on Form 8-K announcing the completion of an underwritten public offering of certain Senior Notes due 2003 and Notes due 2005. 5. On September 8, 1998, the registrant filed a current report on Form 8-K announcing its acquisition through an indirect wholly owned subsidiary of approximately 64 percent of the outstanding shares of DLW Aktiengesellschaft. 21 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/ D. K. Owen ------------------------------------------ D. K. Owen, Senior Vice President, Secretary and General Counsel By: /s/ E. R. Case ------------------------------------------ E. R. Case, Vice President and Controller (Principal Accounting Officer) Date: November 13, 1998 22 Exhibit Index ------------- Exhibit No. - ----------- No. 15 Letter re Unaudited Interim Financial Information No. 27 Financial Data Schedule 23 Exhibit No. 15 Armstrong World Industries, Inc. Lancaster, Pennsylvania Ladies and Gentlemen: RE: Registration Statement Nos. 2-50942; 2-77936; 2-91890; 33-18996; 33-18997; 33-18998; 33-29768; 33-38837; 33-60070; 333-6333; 333-65945 With respect to the subject Registration Statements, we acknowledge our awareness of the incorporation by reference therein of our report dated November 13, 1998, related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of the 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. KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania November 13, 1998 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1997 SEP-30-1998 91 0 551 45 486 1,222 2,506 1,075 4,375 1,655 810 0 0 224 702 4,375 1,920 1,920 1,274 1,274 352 0 36 253 89 164 0 0 0 164 4.12 4.06
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