(Mark One) |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
SECTION | PAGES | |||||||
3 | ||||||||
4 - 25 | ||||||||
26 -35 | ||||||||
36 | ||||||||
36 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
38 | ||||||||
39 | ||||||||
Exhibit 15 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
3
Three | Three | |||||||||||||||
Months | Months | Six Months | Six Months | |||||||||||||
Ended June | Ended June | Ended June | Ended June | |||||||||||||
30, 2011 | 30, 2010 | 30, 2011 | 30, 2010 | |||||||||||||
Net sales |
$ | 748.6 | $ | 724.8 | $ | 1,433.8 | $ | 1,383.7 | ||||||||
Cost of goods sold |
563.9 | 554.4 | 1,088.4 | 1,067.5 | ||||||||||||
Gross profit |
184.7 | 170.4 | 345.4 | 316.2 | ||||||||||||
Selling, general and administrative expenses |
122.2 | 131.8 | 242.3 | 275.3 | ||||||||||||
Restructuring charges, net |
2.4 | | 7.3 | | ||||||||||||
Equity earnings from joint venture |
(12.6 | ) | (14.3 | ) | (29.0 | ) | (25.4 | ) | ||||||||
Operating income |
72.7 | 52.9 | 124.8 | 66.3 | ||||||||||||
Interest expense |
11.5 | 4.0 | 26.3 | 7.9 | ||||||||||||
Other non-operating expense |
0.8 | 0.3 | 1.1 | 0.3 | ||||||||||||
Other non-operating (income) |
(0.8 | ) | (0.8 | ) | (1.4 | ) | (1.5 | ) | ||||||||
Earnings before income taxes |
61.2 | 49.4 | 98.8 | 59.6 | ||||||||||||
Income tax expense |
23.3 | 22.6 | 47.4 | 52.2 | ||||||||||||
Net earnings |
$ | 37.9 | $ | 26.8 | $ | 51.4 | $ | 7.4 | ||||||||
Net earnings per share of common stock |
||||||||||||||||
Basic |
$ | 0.64 | $ | 0.47 | $ | 0.88 | $ | 0.13 | ||||||||
Diluted |
$ | 0.64 | $ | 0.46 | $ | 0.87 | $ | 0.13 | ||||||||
Average number of common shares outstanding: |
||||||||||||||||
Basic |
58.3 | 57.6 | 58.2 | 57.6 | ||||||||||||
Diluted |
58.9 | 58.1 | 58.8 | 58.1 |
4
Unaudited | ||||||||
June 30, 2011 | December 31, 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 304.6 | $ | 315.8 | ||||
Accounts and notes receivable, net |
309.1 | 229.5 | ||||||
Inventories, net |
437.9 | 398.5 | ||||||
Deferred income taxes |
20.9 | 20.9 | ||||||
Income tax receivable |
24.9 | 20.7 | ||||||
Other current assets |
50.2 | 35.3 | ||||||
Total current assets |
1,147.6 | 1,020.7 | ||||||
Property, plant and equipment, less accumulated depreciation
and amortization of $526.0 and $482.8, respectively |
855.6 | 854.9 | ||||||
Prepaid pension costs |
156.7 | 130.7 | ||||||
Investment in joint venture |
194.7 | 188.6 | ||||||
Intangible assets, net |
551.9 | 556.1 | ||||||
Restricted cash |
26.4 | 30.0 | ||||||
Deferred income taxes |
45.0 | 45.0 | ||||||
Other noncurrent assets |
93.2 | 96.4 | ||||||
Total assets |
$ | 3,071.1 | $ | 2,922.4 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Short-term debt |
$ | 0.1 | $ | 25.0 | ||||
Current installments of long-term debt |
8.0 | 10.3 | ||||||
Accounts payable and accrued expenses |
385.4 | 340.3 | ||||||
Income tax payable |
| 4.9 | ||||||
Deferred income taxes |
2.4 | 2.4 | ||||||
Total current liabilities |
395.9 | 382.9 | ||||||
Long-term debt, less current installments |
838.2 | 839.6 | ||||||
Postretirement and postemployment benefit liabilities |
276.1 | 277.9 | ||||||
Pension benefit liabilities |
214.1 | 202.1 | ||||||
Other long-term liabilities |
74.8 | 70.3 | ||||||
Income tax payable |
35.0 | 34.7 | ||||||
Deferred income taxes |
64.8 | 24.1 | ||||||
Total noncurrent liabilities |
1,503.0 | 1,448.7 | ||||||
Shareholders equity: |
||||||||
Common stock, $0.01 par value per share, authorized 200
million shares; issued 58,375,567 shares in 2011 and
58,070,807 shares in 2010 |
0.6 | 0.6 | ||||||
Capital in excess of par value |
1,461.7 | 1,451.2 | ||||||
Retained earnings (accumulated deficit) |
16.1 | (35.3 | ) | |||||
Accumulated other comprehensive (loss) |
(306.2 | ) | (325.7 | ) | ||||
Total shareholders equity |
1,172.2 | 1,090.8 | ||||||
Total liabilities and shareholders equity |
$ | 3,071.1 | $ | 2,922.4 | ||||
5
Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
Total | AWI Shareholders | Non-Controlling Interest | ||||||||||||||||||||||
Common stock: |
||||||||||||||||||||||||
Balance at beginning of year and June 30 |
$ | 0.6 | $ | 0.6 | | |||||||||||||||||||
Capital in excess of par value: |
||||||||||||||||||||||||
Balance at beginning of year |
$ | 1,451.2 | $ | 1,451.2 | | |||||||||||||||||||
Share-based employee compensation |
10.5 | 10.5 | | |||||||||||||||||||||
Balance at June 30 |
$ | 1,461.7 | $ | 1,461.7 | | |||||||||||||||||||
Retained earnings (accumulated deficit): |
||||||||||||||||||||||||
Balance at beginning of year |
$ | (35.3 | ) | $ | (35.3 | ) | | |||||||||||||||||
Net earnings for period |
51.4 | $ | 51.4 | 51.4 | $ | 51.4 | | |||||||||||||||||
Balance at June 30 |
$ | 16.1 | $ | 16.1 | | |||||||||||||||||||
Accumulated other comprehensive income
(loss): |
||||||||||||||||||||||||
Balance at beginning of year |
$ | (325.7 | ) | $ | (325.7 | ) | | |||||||||||||||||
Foreign currency translation adjustments |
15.4 | 15.4 | | |||||||||||||||||||||
Derivative (loss), net |
(2.4 | ) | (2.4 | ) | | |||||||||||||||||||
Pension and postretirement adjustments |
6.5 | 6.5 | | |||||||||||||||||||||
Total other comprehensive income |
19.5 | 19.5 | 19.5 | 19.5 | | | ||||||||||||||||||
Balance at June 30 |
$ | (306.2 | ) | $ | (306.2 | ) | | |||||||||||||||||
Comprehensive income |
$ | 70.9 | $ | 70.9 | | |||||||||||||||||||
Total shareholders equity |
$ | 1,172.2 | $ | 1,172.2 | | |||||||||||||||||||
Six Months Ended June 30, 2010 | ||||||||||||||||||||||||
Total | AWI Shareholders | Non-Controlling Interest | ||||||||||||||||||||||
Non-Controlling Interest: |
||||||||||||||||||||||||
Balance at beginning of year |
$ | 8.6 | | $ | 8.6 | |||||||||||||||||||
Non-controlling interest purchase |
(8.6 | ) | | (8.6 | ) | |||||||||||||||||||
Balance at June 30 |
| | | |||||||||||||||||||||
Common stock: |
||||||||||||||||||||||||
Balance at beginning of year and June 30 |
$ | 0.6 | $ | 0.6 | | |||||||||||||||||||
Capital in excess of par value: |
||||||||||||||||||||||||
Balance at beginning of year |
$ | 2,052.1 | $ | 2,052.1 | | |||||||||||||||||||
Share-based employee compensation |
4.1 | 4.1 | | |||||||||||||||||||||
Non-controlling interest purchase |
(3.5 | ) | (3.5 | ) | ||||||||||||||||||||
Balance at June 30 |
$ | 2,052.7 | $ | 2,052.7 | | |||||||||||||||||||
Retained earnings: |
||||||||||||||||||||||||
Balance at beginning of year |
$ | 144.4 | $ | 144.4 | | |||||||||||||||||||
Net earnings for period |
7.4 | $ | 7.4 | 7.4 | $ | 7.4 | | |||||||||||||||||
Balance at June 30 |
$ | 151.8 | $ | 151.8 | | |||||||||||||||||||
Accumulated other comprehensive income
(loss): |
||||||||||||||||||||||||
Balance at beginning of year |
$ | (297.8 | ) | $ | (297.8 | ) | | |||||||||||||||||
Foreign currency translation adjustments |
(29.4 | ) | (29.4 | ) | | |||||||||||||||||||
Derivative gain, net |
2.7 | 2.7 | | |||||||||||||||||||||
Non-controlling interest purchase |
1.1 | 1.1 | | |||||||||||||||||||||
Pension and postretirement adjustments |
0.4 | 0.4 | | |||||||||||||||||||||
Total other comprehensive (loss) |
(25.2 | ) | (25.2 | ) | (25.2 | ) | (25.2 | ) | | | ||||||||||||||
Balance at June 30 |
$ | (323.0 | ) | $ | (323.0 | ) | | |||||||||||||||||
Comprehensive (loss) |
$ | (17.8 | ) | $ | (17.8 | ) | | |||||||||||||||||
Total shareholders equity |
$ | 1,882.1 | $ | 1,882.1 | | |||||||||||||||||||
6
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 51.4 | $ | 7.4 | ||||
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
61.8 | 56.4 | ||||||
Fixed asset impairment |
| 8.2 | ||||||
Deferred income taxes |
39.0 | 51.7 | ||||||
Share-based compensation |
6.0 | 1.5 | ||||||
Gain on sale of fixed assets |
(0.3 | ) | (2.1 | ) | ||||
Equity earnings from joint venture |
(29.0 | ) | (25.4 | ) | ||||
U.S. pension credit |
(13.0 | ) | (25.4 | ) | ||||
Restructuring charges, net |
7.3 | | ||||||
Restructuring payments |
(14.0 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Receivables |
(71.8 | ) | (62.9 | ) | ||||
Inventories |
(29.5 | ) | 19.8 | |||||
Other current assets |
(8.3 | ) | | |||||
Other noncurrent assets |
4.8 | (3.1 | ) | |||||
Accounts payable and accrued expenses |
43.9 | 54.4 | ||||||
Income taxes payable |
(8.4 | ) | (8.5 | ) | ||||
Other long-term liabilities |
(2.9 | ) | (17.0 | ) | ||||
Other, net |
(4.9 | ) | 1.2 | |||||
Net cash provided by operating activities |
32.1 | 56.2 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(49.7 | ) | (31.8 | ) | ||||
Restricted cash |
3.6 | | ||||||
Return of investment from joint venture |
23.0 | 24.0 | ||||||
Proceeds from the sale of assets |
0.4 | 10.5 | ||||||
Net cash (used for) provided by investing activities |
(22.7 | ) | 2.7 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving credit facility and other debt |
0.1 | 1.1 | ||||||
Payments on revolving credit facility and other debt |
(25.0 | ) | | |||||
Issuance of long-term debt |
| 4.4 | ||||||
Payments of long-term debt |
(3.8 | ) | (19.5 | ) | ||||
Financing costs |
(7.8 | ) | | |||||
Proceeds from exercised stock options |
6.8 | 3.6 | ||||||
Purchase of non-controlling interest |
| (7.8 | ) | |||||
Net cash (used for) financing activities |
(29.7 | ) | (18.2 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
9.1 | (10.3 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(11.2 | ) | 30.4 | |||||
Cash and cash equivalents at beginning of year |
315.8 | 569.5 | ||||||
Cash and cash equivalents at end of period |
$ | 304.6 | $ | 599.9 | ||||
7
8
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Net sales to external customers | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Building Products |
$ | 305.0 | $ | 284.4 | $ | 611.9 | $ | 552.3 | ||||||||
Resilient Flooring |
274.7 | 276.0 | 509.4 | 508.6 | ||||||||||||
Wood Flooring |
133.6 | 127.2 | 244.6 | 251.5 | ||||||||||||
Cabinets |
35.3 | 37.2 | 67.9 | 71.3 | ||||||||||||
Total net sales to external customers |
$ | 748.6 | $ | 724.8 | $ | 1,433.8 | $ | 1,383.7 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Segment operating income (loss) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Building Products |
$ | 57.1 | $ | 53.0 | $ | 118.6 | $ | 95.7 | ||||||||
Resilient Flooring |
11.3 | 10.0 | 10.0 | 4.8 | ||||||||||||
Wood Flooring |
13.4 | 1.1 | 16.9 | (0.5 | ) | |||||||||||
Cabinets |
0.8 | (0.4 | ) | | (4.3 | ) | ||||||||||
Unallocated Corporate (expense) |
(9.9 | ) | (10.8 | ) | (20.7 | ) | (29.4 | ) | ||||||||
Total consolidated operating income |
$ | 72.7 | $ | 52.9 | $ | 124.8 | $ | 66.3 | ||||||||
9
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total consolidated operating income |
$ | 72.7 | $ | 52.9 | $ | 124.8 | $ | 66.3 | ||||||||
Interest expense |
11.5 | 4.0 | 26.3 | 7.9 | ||||||||||||
Other non-operating expense |
0.8 | 0.3 | 1.1 | 0.3 | ||||||||||||
Other non-operating income |
(0.8 | ) | (0.8 | ) | (1.4 | ) | (1.5 | ) | ||||||||
Earnings before income taxes |
$ | 61.2 | $ | 49.4 | $ | 98.8 | $ | 59.6 | ||||||||
June 30, | December 31, | |||||||
Segment assets | 2011 | 2010 | ||||||
Building Products |
$ | 992.8 | $ | 931.4 | ||||
Resilient Flooring |
647.3 | 582.6 | ||||||
Wood Flooring |
351.0 | 340.7 | ||||||
Cabinets |
49.4 | 47.9 | ||||||
Total segment assets |
2,040.5 | 1,902.6 | ||||||
Assets not assigned to segments |
1,030.6 | 1,019.8 | ||||||
Total consolidated assets |
$ | 3,071.1 | $ | 2,922.4 | ||||
10
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Customer receivables |
$ | 344.0 | $ | 265.1 | ||||
Customer notes |
1.8 | 2.0 | ||||||
Miscellaneous receivables |
7.5 | 5.5 | ||||||
Less allowance for warranties, discounts and losses |
(44.2 | ) | (43.1 | ) | ||||
Accounts and notes receivable, net |
$ | 309.1 | $ | 229.5 | ||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 304.9 | $ | 277.7 | ||||
Goods in process |
30.3 | 26.7 | ||||||
Raw materials and supplies |
129.8 | 119.9 | ||||||
Less LIFO and other reserves |
(27.1 | ) | (25.8 | ) | ||||
Total inventories, net |
$ | 437.9 | $ | 398.5 | ||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Prepaid expenses |
$ | 33.1 | $ | 28.7 | ||||
Assets held for sale |
8.5 | 2.5 | ||||||
Other |
8.6 | 4.1 | ||||||
Total other current assets |
$ | 50.2 | $ | 35.3 | ||||
11
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 86.6 | $ | 92.2 | $ | 185.1 | $ | 169.4 | ||||||||
Gross profit |
36.8 | 39.5 | 80.1 | 72.4 | ||||||||||||
Net earnings |
28.5 | 31.6 | 63.9 | 56.8 |
June 30, 2011 | December 31, 2010 | |||||||||||||||||||
Gross | Gross | |||||||||||||||||||
Estimated | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
Useful Life | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Amortizing intangible assets |
||||||||||||||||||||
Customer relationships |
20 years | $ | 170.7 | $ | 40.6 | $ | 170.7 | $ | 36.3 | |||||||||||
Developed technology |
15 years | 80.7 | 25.5 | 80.8 | 22.9 | |||||||||||||||
Other |
Various | 14.7 | 0.9 | 11.8 | 0.7 | |||||||||||||||
Total |
$ | 266.1 | $ | 67.0 | $ | 263.3 | $ | 59.9 | ||||||||||||
Non-amortizing intangible assets |
||||||||||||||||||||
Trademarks and brand names |
Indefinite | 352.8 | 352.7 | |||||||||||||||||
Total other intangible assets |
$ | 618.9 | $ | 616.0 | ||||||||||||||||
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
Amortization expense |
$ | 7.1 | $ | 7.1 | ||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Payables, trade and other |
$ | 227.5 | $ | 169.5 | ||||
Employment costs |
99.5 | 109.9 | ||||||
Restructuring accruals |
8.5 | 14.5 | ||||||
Other accrued expenses |
49.9 | 46.4 | ||||||
Total accounts payable and accrued expenses |
$ | 385.4 | $ | 340.3 | ||||
12
Three | ||||||||||||
Months | Six Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
Action Title | 2011 | 2011 | Segment | |||||||||
Floor Products Europe |
$ | 2.2 | $ | 5.3 | Resilient Flooring | |||||||
Beaver Falls plant |
(0.3 | ) | 1.3 | Building Products | ||||||||
North America SG&A |
0.5 | 0.9 | Unallocated Corporate, Resilient Flooring, Building Products | |||||||||
Other initiatives |
| (0.2 | ) | |||||||||
Total |
$ | 2.4 | $ | 7.3 | ||||||||
13
Severance and Related Costs | ||||||||||||||||||||
Floor | North | |||||||||||||||||||
Products | Beaver Falls | America | Other | |||||||||||||||||
Europe | Plant | SG&A | Initiatives | Total | ||||||||||||||||
December 31, 2010 |
$ | 6.1 | $ | 1.9 | $ | 4.7 | $ | 1.8 | $ | 14.5 | ||||||||||
Net charges/(reversals) |
5.3 | 1.3 | 0.9 | (0.2 | ) | 7.3 | ||||||||||||||
Cash payments |
(5.2 | ) | (2.2 | ) | (5.0 | ) | (1.6 | ) | (14.0 | ) | ||||||||||
Other |
0.7 | | | | 0.7 | |||||||||||||||
June 30, 2011 |
$ | 6.9 | $ | 1.0 | $ | 0.6 | $ | | $ | 8.5 | ||||||||||
14
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Earnings before income taxes |
$ | 61.2 | $ | 49.4 | $ | 98.8 | $ | 59.6 | ||||||||
Income tax expense |
23.3 | 22.6 | 47.4 | 52.2 | ||||||||||||
Effective tax rate |
38.1 | % | 45.7 | % | 48.0 | % | 87.6 | % |
15
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. defined-benefit plans: |
||||||||||||||||
Pension benefits |
||||||||||||||||
Service cost of benefits earned during the period |
$ | 3.9 | $ | 4.1 | $ | 7.8 | $ | 8.2 | ||||||||
Interest cost on projected benefit obligation |
23.1 | 24.1 | 46.1 | 48.2 | ||||||||||||
Expected return on plan assets |
(38.1 | ) | (41.7 | ) | (76.2 | ) | (83.5 | ) | ||||||||
Amortization of prior service cost |
0.4 | 0.4 | 0.9 | 0.9 | ||||||||||||
Amortization of net actuarial loss |
4.8 | 1.0 | 9.6 | 2.1 | ||||||||||||
Net periodic pension (credit) |
$ | (5.9 | ) | $ | (12.1 | ) | $ | (11.8 | ) | $ | (24.1 | ) | ||||
Retiree health and life insurance benefits |
||||||||||||||||
Service cost of benefits earned during the period |
$ | 0.6 | $ | 0.6 | $ | 1.2 | $ | 1.2 | ||||||||
Interest cost on projected benefit obligation |
3.6 | 3.7 | 7.2 | 7.4 | ||||||||||||
Amortization of net actuarial (gain) |
(0.7 | ) | (1.6 | ) | (1.4 | ) | (3.2 | ) | ||||||||
Net periodic postretirement benefit cost |
$ | 3.5 | $ | 2.7 | $ | 7.0 | $ | 5.4 | ||||||||
Non-U.S. defined-benefit pension plans |
||||||||||||||||
Service cost of benefits earned during the period |
$ | 1.0 | $ | 1.3 | $ | 1.8 | $ | 2.7 | ||||||||
Interest cost on projected benefit obligation |
4.5 | 4.5 | 8.9 | 9.1 | ||||||||||||
Expected return on plan assets |
(3.3 | ) | (3.3 | ) | (6.6 | ) | (6.7 | ) | ||||||||
Amortization of net actuarial loss |
| 0.1 | 0.1 | 0.2 | ||||||||||||
Net periodic pension cost |
$ | 2.2 | $ | 2.6 | $ | 4.2 | $ | 5.3 | ||||||||
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
amount | Fair Value | amount | Fair Value | |||||||||||||
Liabilities, net: |
||||||||||||||||
Total debt, including current portion |
$ | (846.3 | ) | $ | (843.2 | ) | $ | (874.9 | ) | $ | (882.8 | ) | ||||
Foreign currency contract obligations |
(2.4 | ) | (2.4 | ) | (7.0 | ) | (7.0 | ) | ||||||||
Natural gas contracts |
(3.0 | ) | (3.0 | ) | (5.5 | ) | (5.5 | ) | ||||||||
Interest rate swap contracts |
(6.7 | ) | (6.7 | ) | | |
16
June 30, 2011 | December 31, 2010 | |||||||||||||||
Fair value based on | Fair value based on | |||||||||||||||
Quoted, | Other | Quoted, | Other | |||||||||||||
active | observable | active | observable | |||||||||||||
markets | inputs | markets | inputs | |||||||||||||
Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||
Liabilities, net: |
||||||||||||||||
Foreign currency contract obligations |
$ | (2.4 | ) | | $ | (7.0 | ) | | ||||||||
Natural gas contracts |
| $ | (3.0 | ) | | $ | (5.5 | ) | ||||||||
Interest rate swap contracts |
| (6.7 | ) | | |
17
18
Liability Derivatives | ||||||||||||
Fair Value | Fair Value | |||||||||||
Balance Sheet | June 30, | December | ||||||||||
Location | 2011 | 31, 2010 | ||||||||||
Derivatives designated as hedging instruments |
||||||||||||
Natural gas commodity contracts |
Accounts payable and accrued expenses | $ | 3.0 | $ | 5.5 | |||||||
Foreign exchange contracts |
Accounts payable and accrued expenses | 2.7 | 2.4 | |||||||||
Interest Rate Swaps |
Other long-term liabilities | 6.7 | | |||||||||
Total derivatives designated as hedging instruments |
$ | 12.4 | $ | 7.9 | ||||||||
Derivatives not designated as hedging instruments |
||||||||||||
Foreign exchange contracts |
Accounts payable and accrued expenses | $ | 0.4 | $ | 4.6 | |||||||
Total derivative liabilities not designated as
hedging instruments |
$ | 0.4 | $ | 4.6 | ||||||||
19
Amount of (Loss) Recognized in Other | ||||||||
Comprehensive Income (OCI) (Effective | ||||||||
Portion) (a) | ||||||||
For the Six Months | For the Six Months | |||||||
Ended June 30, | Ended June 30, | |||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | ||||||
Natural gas commodity contracts |
$ | (2.9 | ) | $ | (4.4 | ) | ||
Foreign exchange contracts purchases and sales |
(1.9 | ) | (0.2 | ) | ||||
Interest rate swap contracts |
(6.7 | ) | | |||||
Total |
$ | (11.5 | ) | $ | (4.6 | ) | ||
(a) | As of June 30, 2011 the amount of existing gains/ (losses) in Accumulated OCI expected to be recognized in earnings over the next twelve months is $(4.5) million. |
(Loss) Reclassified from Accumulated OCI into Income | ||||||||||||||||||||
(Effective Portion) | ||||||||||||||||||||
For the Three Months | For the Six Months Ended | |||||||||||||||||||
Derivatives in Cash | Ended June 30, | June 30, | ||||||||||||||||||
Flow Hedging Relationships | Location | 2011 | 2010 | 2011 | 2010 | |||||||||||||||
Natural gas commodity
contracts |
Cost of goods sold | $ | (1.3 | ) | $ | (2.0 | ) | $ | (3.8 | ) | $ | (5.6 | ) | |||||||
Foreign exchange contracts
purchases and
sales |
Cost of goods sold | (1.3 | ) | (1.8 | ) | (2.1 | ) | (3.0 | ) | |||||||||||
Total |
$ | (2.6 | ) | $ | (3.8 | ) | $ | (5.9 | ) | $ | (8.6 | ) | ||||||||
Location of Gain (Loss) | ||
Recognized in Income on | ||
Derivative (Ineffective | ||
Derivatives in Cash Flow Hedging Relationships | Portion) (a) | |
Natural gas commodity contracts |
Cost of goods sold | |
Foreign exchange contracts purchases and sales |
SG&A expense | |
Interest rate swap contracts |
Interest expense |
(a) | The amount of gain (loss) recognized in income related to the ineffective portion of the hedging relationships was immaterial for the three months and six months ended June 30, 2011 and June 30, 2010. No gains or losses are excluded from the assessment of the hedge effectiveness. |
20
2011 | 2010 | |||||||
Balance at January 1 |
$ | 11.9 | $ | 14.1 | ||||
Reductions for payments |
(7.4 | ) | (8.9 | ) | ||||
Current year warranty accruals |
8.1 | 8.6 | ||||||
Preexisting warranty accrual changes |
(0.1 | ) | (0.2 | ) | ||||
Effects of foreign exchange translation |
0.3 | (0.4 | ) | |||||
Balance at June 30 |
$ | 12.8 | $ | 13.2 | ||||
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Interest paid |
$ | 21.7 | $ | 4.4 | ||||
Income taxes paid, net |
$ | 16.7 | $ | 9.0 |
21
22
23
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net earnings |
$ | 37.9 | $ | 26.8 | $ | 51.4 | $ | 7.4 | ||||||||
Net earnings
allocated to
non-vested share
awards |
(0.3 | ) | | (0.4 | ) | | ||||||||||
Net earnings
attributable to
common shares |
$ | 37.6 | $ | 26.8 | $ | 51.0 | $ | 7.4 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
millions of shares | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Basic shares outstanding |
58.3 | 57.6 | 58.2 | 57.6 | ||||||||||||
Dilutive effect of stock option awards |
0.6 | 0.5 | 0.6 | 0.5 | ||||||||||||
Diluted shares outstanding |
58.9 | 58.1 | 58.8 | 58.1 | ||||||||||||
24
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
26
| According to the U.S. Census Bureau, in the second quarter of 2011 housing starts in the U.S. residential market fell 4.4% compared to the second quarter of 2010 to 0.58 million units. Housing completions in the U.S. declined 30.3% year over year in the second quarter of 2011 with approximately 0.54 million units completed. The National Association of Realtors indicated that sales of existing homes declined 12.7% year over year to 4.86 million units in the second quarter of 2011. | ||
| According to the U.S. Census Bureau, for the value of new construction put in place, the rate of decline in the North American key commercial market, in nominal dollar terms, was 6% in the second quarter of 2011 compared to the same period in 2010. Construction activity in the office, healthcare, retail and education segments declined 12%, 1%, 4% and 6%, respectively, in the second quarter of 2011 year over year. | ||
| Markets in Western European countries generally experienced continued declines, while Eastern European markets grew. | ||
| Overall the Pacific Rim experienced growth with strong markets in China and India, partially offset by declines in Australia as a result of reduced government stimulus spending. |
| Building Products announced price increases for ceiling tile and grid in the Americas effective February 2011, again for grid effective April 2011, and additional increases for ceiling tiles and grid effective in August 2011. In Europe we announced price increases for ceiling tile effective March 2011, for grid effective April 2011, and again for ceiling tiles effective August 2011. We also announced price increases in Asia for both ceiling tile and grid effective March 2011. | ||
| Resilient Flooring announced a price increase in Europe effective January 2011, in the Americas effective February 2011, again in the Americas effective June 2011, and again in Europe effective July 2011. |
27
| Cabinets announced a price increase effective February 2011. |
28
2011 | 2010 | Change is Favorable | ||||||||||
Three months ended June 30 |
||||||||||||
Net sales: |
||||||||||||
Americas |
$ | 533.4 | $ | 525.2 | 1.6 | % | ||||||
Europe |
155.6 | 147.6 | 5.4 | % | ||||||||
Pacific Rim |
59.6 | 52.0 | 14.6 | % | ||||||||
Total consolidated net sales |
$ | 748.6 | $ | 724.8 | 3.3 | % | ||||||
Operating income |
$ | 72.7 | $ | 52.9 | 37.4 | % | ||||||
Six months ended June 30 |
||||||||||||
Net sales: |
||||||||||||
Americas |
$ | 1,023.6 | $ | 996.4 | 2.7 | % | ||||||
Europe |
301.9 | 296.3 | 1.9 | % | ||||||||
Pacific Rim |
108.3 | 91.0 | 19.0 | % | ||||||||
Total consolidated net sales |
$ | 1,433.8 | $ | 1,383.7 | 3.6 | % | ||||||
Operating income |
$ | 124.8 | $ | 66.3 | 88.2 | % |
29
2011 | 2010 | Change is Favorable | ||||||||||
Three months ended June 30 |
||||||||||||
Net sales: |
||||||||||||
Americas |
$ | 181.7 | $ | 177.0 | 2.7 | % | ||||||
Europe |
88.6 | 76.7 | 15.5 | % | ||||||||
Pacific Rim |
34.7 | 30.7 | 13.0 | % | ||||||||
Total segment net sales |
$ | 305.0 | $ | 284.4 | 7.2 | % | ||||||
Operating income |
$ | 57.1 | $ | 53.0 | 7.7 | % | ||||||
Six months ended June 30 |
||||||||||||
Net sales: |
||||||||||||
Americas |
$ | 367.8 | $ | 339.0 | 8.5 | % | ||||||
Europe |
179.3 | 159.6 | 12.3 | % | ||||||||
Pacific Rim |
64.8 | 53.7 | 20.7 | % | ||||||||
Total segment net sales |
$ | 611.9 | $ | 552.3 | 10.8 | % | ||||||
Operating income |
$ | 118.6 | $ | 95.7 | 23.9 | % |
30
Change is Favorable/ | ||||||||||||
2011 | 2010 | (Unfavorable) | ||||||||||
Three months ended June 30 |
||||||||||||
Net sales: |
||||||||||||
Americas |
$ | 182.8 | $ | 183.8 | (0.5 | )% | ||||||
Europe |
67.0 | 70.9 | (5.5 | )% | ||||||||
Pacific Rim |
24.9 | 21.3 | 16.9 | % | ||||||||
Total segment net sales |
$ | 274.7 | $ | 276.0 | (0.5 | )% | ||||||
Operating income |
$ | 11.3 | $ | 10.0 | 13 | % | ||||||
Six months ended June 30 |
||||||||||||
Net sales: |
||||||||||||
Americas |
$ | 343.3 | $ | 334.6 | 2.6 | % | ||||||
Europe |
122.6 | 136.7 | (10.3 | )% | ||||||||
Pacific Rim |
43.5 | 37.3 | 16.6 | % | ||||||||
Total segment net sales |
$ | 509.4 | $ | 508.6 | 0.2 | % | ||||||
Operating income |
$ | 10.0 | $ | 4.8 | Favorable |
31
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Resilient Flooring Europe operating loss |
$ | (6.6 | ) | $ | (7.2 | ) | $ | (18.2 | ) | $ | (14.3 | ) |
Change is Favorable/ | ||||||||||||
2011 | 2010 | (Unfavorable) | ||||||||||
Three months ended June 30
|
||||||||||||
Total segment net sales |
$ | 133.6 | $ | 127.2 | 5.0 | % | ||||||
Operating income |
$ | 13.4 | $ | 1.1 | Favorable | |||||||
Six months ended June 30 |
||||||||||||
Total segment net sales |
$ | 244.6 | $ | 251.5 | (2.7 | )% | ||||||
Operating income (loss) |
$ | 16.9 | $ | (0.5 | ) | Favorable |
Change is Favorable/ | ||||||||||||
2011 | 2010 | (Unfavorable) | ||||||||||
Three months ended June 30 |
||||||||||||
Total segment net sales |
$ | 35.3 | $ | 37.2 | (5.1 | )% | ||||||
Operating income (loss) |
$ | 0.8 | $ | (0.4 | ) | Favorable | ||||||
Six months ended June 30 |
||||||||||||
Total segment net sales |
$ | 67.9 | $ | 71.3 | (4.8 | )% | ||||||
Operating (loss) |
| $ | (4.3 | ) | Favorable |
32
| The applicable margin for borrowings under Term Loan B was reduced (i) to 2.00% from 2.50% with respect to base rate borrowings and (ii) to 3.00% from 3.50% with respect to LIBOR borrowings; | ||
| The minimum interest rate for borrowings under Term Loan B was reduced from 1.50% to 1.00%; and | ||
| The maturity date for Term Loan B was extended from May 23, 2017 to March 10, 2018. Until maturity, quarterly amortization payments on Term Loan B will continue in an amount equal to 0.25% of the original principal amount of Term Loan B |
33
34
As of June 30, 2011 | ||||||||||||
Foreign Financing Arrangements | Limit | Used | Available | |||||||||
Lines of credit available for borrowing |
$ | 23.8 | | $ | 23.8 | |||||||
Lines of credit available for letters of credit |
2.6 | $ | 1.0 | 1.6 | ||||||||
Total |
$ | 26.4 | $ | 1.0 | $ | 25.4 | ||||||
35
(a) | Evaluation of Disclosure Controls and Procedures. The Securities and Exchange Commission defines the term disclosure controls and procedures to mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our principal executive officer and our chief financial officer, as of June 30, 2011, our principal executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms. | |
(b) | Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
36
Total Number of | Maximum | |||||||||||||||
Shares | Number of | |||||||||||||||
Purchased as | Shares that may | |||||||||||||||
Part of Publicly | yet be | |||||||||||||||
Total Number | Average Price | Announced | Purchased under | |||||||||||||
of Shares | Paid per | Plans or | the Plans or | |||||||||||||
Period | Purchased1 | Share | Programs2 | Programs | ||||||||||||
April 1 30, 2011 |
30,758 | $ | 47.03 | | | |||||||||||
May 1 31, 2011 |
| | | | ||||||||||||
June 1 30, 2011 |
15,577 | $ | 46.05 | | | |||||||||||
Total |
46,335 | N/A | N/A |
1 | Shares reacquired through the withholding of shares to pay employee tax obligations upon the exercise of options or vesting of restricted shares previously granted under the 2006 Long Term Incentive Plan. | |
2 | The Company does not have a share buy-back program. |
37
Exhibit No. | Description | |
No. 2 | Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization, as amended by
modifications through May 23, 2006, is incorporated by reference from the 2005 Annual Report
on Form 10-K, wherein it appeared as Exhibit 2.3. |
|
No. 3.1 | Amended and Restated Certificate of Incorporation of Armstrong World Industries, Inc.
is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006,
wherein it appeared as Exhibit 3.1. |
|
No. 3.2 | Bylaws of Armstrong World Industries, Inc. as amended, are incorporated by reference
from the Current Report on Form 8-K dated August 5, 2010, wherein they appeared as Exhibit
3.1. |
|
No. 15 | Awareness Letter from Independent Registered Public Accounting Firm. |
|
No. 31.1 | Certification of Chief Executive Officer required by Rule 13a-15(e) or 15d-15(e) of
the Securities Exchange Act. |
|
No. 31.2 | Certification of Chief Financial Officer required by Rule 13a-15(e) or 15d-15(e) of
the Securities Exchange Act. |
|
No. 32.1 | Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section
1350 (furnished herewith). |
|
No. 32.2 | Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section
1350 (furnished herewith). |
|
No. 99.1 | Offer Letter from Armstrong World Industries, Inc. to Mark A. Hershey, is incorporated
by reference on Form 8-K, dated April 27, 2011, wherein it appeared as Exhibit 99.1 |
|
No. 99.2 | Armstrong World Industries, Inc. 2011 Long-Term Incentive Plan is incorporated by
reference on Form DEF 14A, dated April 28, 2011, wherein it appeared as Exhibit A. |
|
No. 99.3 | Armstrong World Industries, Inc. Management Achievement Plan is incorporated by
reference on Form DEF 14A, dated April 28, 2011, wherein it appeared as Exhibit B. |
|
No. 99.4 | Armstrong Non-Employee Directors Compensation Summary is incorporated by reference on
Form 8-K, dated June 13, 2011, wherein it appeared as Exhibit 99.1. |
|
No. 99.5 | 2008 Director Stock Unit Plan, as amended, is incorporated by reference on Form 8-K,
dated June 13, 2011, wherein it appeared as Exhibit 99.2. |
|
No. 101 | Interactive Data Files |
38
Armstrong World Industries, Inc. |
||||
By: | /s/ Thomas B. Mangas | |||
Thomas B. Mangas, Senior Vice President | ||||
and Chief Financial Officer | ||||
By: | /s/ Stephen F. McNamara | |||
Stephen F. McNamara, Vice President and | ||||
Controller (Principal Accounting Officer) |
39
No. 15 | Awareness Letter from Independent Registered Public Accounting Firm. | |
No. 31.1 | Certification of Chief Executive Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. | |
No. 31.2 | Certification of Chief Financial Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. | |
No. 32.1 | Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section 1350. | |
No. 32.2 | Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section 1350. | |
No. 101 | Interactive Data Files |
1) | I have reviewed this quarterly report on Form 10-Q of Armstrong World Industries, Inc.; | |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
/s/ Matthew J. Espe | ||||
Matthew J. Espe | ||||
President and Chief Executive Officer | ||||
1) | I have reviewed this quarterly report on Form 10-Q of Armstrong World Industries, Inc.; | |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
/s/ Thomas B. Mangas | ||||
Thomas B. Mangas | ||||
Senior Vice President and Chief Financial Officer | ||||
/s/ Matthew J. Espe |
Matthew J. Espe |
President and Chief Executive Officer |
Armstrong World Industries, Inc. |
/s/ Thomas B. Mangas |
Thomas B. Mangas |
Senior Vice President and Chief Financial Officer |
Armstrong World Industries, Inc. |
Dated: August 1, 2011 |
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data |
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Condensed Consolidated Balance Sheets | Â | Â |
Property, plant and equipment, accumulated depreciation and amortization | $ 526.0 | $ 482.8 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 200,000,000 | 200,000,000 |
Common stock, shares issued | 58,375,567 | 58,070,807 |
Product Warranties
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2011
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Product Warranties | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Product Warranties | NOTE 17. PRODUCT WARRANTIES
We provide direct customer and end-user warranties for our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. The terms of these warranties vary by product and generally provide for the repair or replacement of the defective product. We collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes the activity for the accrual of product warranties for the first six months of 2011 and 2010:
The warranty provision and related reserve are recorded as a reduction of sales and accounts receivable. |
Document And Entity Information
|
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Jul. 25, 2011
|
|
Document And Entity Information | Â | Â |
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Year Focus | 2011 | Â |
Document Fiscal Period Focus | Q2 | Â |
Entity Registrant Name | ARMSTRONG WORLD INDUSTRIES INC | Â |
Entity Central Index Key | 0000007431 | Â |
Current Fiscal Year End Date | --12-31 | Â |
Entity Filer Category | Accelerated Filer | Â |
Entity Common Stock, Shares Outstanding | Â | 58,379,067 |
Earnings Per Share
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Earnings Per Share | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share | NOTE 20. EARNINGS PER SHARE
Earnings per share components may not add due to rounding.
The following table is a reconciliation of net earnings to net earnings attributable to common shares used in our basic and diluted EPS calculations for the three month and six month periods ended June 30, 2011 and 2010:
The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the three month and six month periods ended June 30, 2011 and 2010:
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Other Current Assets
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Other Current Assets | NOTE 6. OTHER CURRENT ASSETS
In the first quarter of 2011, we reclassified two North American properties to assets held for sale. |
Litigation And Related Matters
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Litigation And Related Matters | Â |
Litigation And Related Matters | NOTE 19. LITIGATION AND RELATED MATTERS
ENVIRONMENTAL MATTERS
Environmental Expenditures
Our manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. Regulatory requirements continually change, therefore we cannot predict with certainty future expenditures associated with compliance with environmental requirements.
Environmental Remediation
Summary
We are actively involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), and similar state "Superfund" laws at several off-site locations. We have also been investigating and/or remediating environmental contamination allegedly resulting from past industrial activity at several current or former plant sites. In a few cases, we are one of several potentially responsible parties ("PRPs") which have potential liability for the required investigation and remediation of each site. In those cases, we have agreed to jointly fund that required investigation and remediation, while preserving our defenses to the liability. We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.
Estimates of our future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site. We consider factors such as our activities associated with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of other parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters, and the effect of our Chapter 11 reorganization upon the validity of the claim.
Specific Events
In August 2010 we entered into a Consent Order with the Oregon Department of Environmental Quality ("ODEQ"), along with Kaiser Gypsum Company, Inc. ("Kaiser"), and Owens Corning Sales LLC ("OC"), with respect to our St. Helens, Oregon ceilings facility, which was previously owned by Kaiser and then OC. The Consent Order, which replaces a previous order of the ODEQ requiring us to investigate and remediate hazardous substances present at the facility, requires that we and Kaiser complete a remedial investigation and feasibility study ("RI/FS") on the portion of the site owned by us. The Consent Order further requires us, Kaiser and OC to conduct an RI/FS in the adjacent Scappoose Bay. Our current estimate of our future liability at the site relates to the investigation work required by the Consent Order and to the cost of possible remedies for certain portions of the property owned by us. However, the RI/FS for the portion of the property owned by us is not yet complete. It is probable that additional corrective action for the portion of the property owned by us will be required. Such corrective action may result in additional costs greater than currently estimated, and may be material. At this time, we are unable to estimate with reasonable certainty the total costs that we may ultimately incur with respect to the Scappoose Bay, although such amounts may be material.
Costs and responsibilities for the RI/FS for certain portions of the St. Helens property owned by us continue to be shared with Kaiser pursuant to an agreement between Kaiser and us. Limited contributions are also being made by ODEQ pursuant to its settlement with OC for OC's liabilities for the property. Contemporaneously with the execution of the Consent Order, we, Kaiser and OC also entered into a cost allocation agreement for the investigation and possible remediation of the Scappoose Bay.
The U.S. Environmental Protection Agency ("EPA") has informed us that it has proposed that two landfills located on a portion of our ceilings facility in Macon, Georgia, along with the former Macon Naval Ordnance Plant landfill adjacent to our property, and portions of Rocky Creek (collectively the "Macon Site") be added to the National Priorities List due to the presence of contaminants, most notably PCBs. In September 2010 we entered into an Administrative Order on Consent for a Removal Action with the EPA to investigate PCB contamination in one of the landfills on our property that will be a portion of the proposed Superfund Site. Our current estimate of our future liability includes costs for work that we agreed to perform under the EPA order. Additionally, we will ultimately incur expenses for closure or some form of remedial action with respect to the landfill. While those amounts are not estimable at this time due to the early stages of the investigation, they may be material. Additionally, it is probable that we will incur field investigation, engineering and oversight costs associated with an RI/FS with respect to the remainder of the proposed Superfund site, including Rocky Creek. We, along with other parties, may also ultimately incur costs in remedying contamination discovered during the RI/FS. At this time, we are not able to estimate with reasonable certainty the amounts we may ultimately incur with respect to those activities, although such amounts may be material
Summary of Financial Position
Liabilities of $8.8 million and $8.3 million at June 30, 2011 and December 31, 2010, respectively, were recorded for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect new information as it becomes available. These liabilities are undiscounted.
The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. It is our policy to record probable recoveries that are either available through settlement or anticipated to be recovered through negotiation or litigation as assets in the Condensed Consolidated Balance Sheets. No amounts were recorded for probable recoveries at June 30, 2011 and December 31, 2010. Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we are unable to estimate with reasonable certainty future costs which may exceed amounts already recognized.
CUSTOMS LITIGATION
In 2002 we began protesting the classification and 6% duty rate then being applied by the U.S. government on imports of our laminate flooring. After administrative denial of several of these protests, we filed a lawsuit against the United States in the U.S. Court of International Trade (New York), challenging the U.S. government's classification and duty rate and its administrative denial of our protests. With the agreement of the U.S. Department of Justice ("DOJ"), Armstrong's case was placed on the reserve calendar pending resolution of two test cases challenging the classification and applicable duty rate of similar laminate flooring. The test cases were decided in 2008 by the U.S. Court of International Trade, which found in favor of the U.S. government. The plaintiffs appealed to the U.S. Court of Appeals for the Federal Circuit. In September 2009 the Court of Appeals reversed the decisions of the Court of International Trade and found that the laminate flooring in the test cases should have been classified differently, and that a 3.2% duty rate should have been applied. Upon expiration of the U.S. government's period to file notice of further appeals, we filed a stipulation request with the DOJ to stipulate that our case covered imports of laminate flooring which were like goods for which the 3.2% duty rate likewise should apply. After review by U.S. Customs and Border Protection ("Customs"), the DOJ agreed to our proposed stipulation, which was approved by the U.S. Court of International Trade in March 2010. The stipulation provided a refund of a portion of duties paid by us on the imported laminate flooring at issue in the case, and further allows us to recover refunds on additional entries of laminate flooring which were properly protested. We have sought refunds on protested imports of laminate flooring from April 2001 through January 2007, when the classification was corrected by statute. We received refunds in 2010 of $9.7 million, $0.2 million of which was received in the first six months of 2010. No significant refunds have been received in 2011 to date, and no significant future refunds are anticipated.
ANTIDUMPING AND COUNTERVAILING DUTY PETITION
On October 21, 2010, a coalition of U.S. producers of multilayered wood flooring (not including Armstrong) filed antidumping ("AD") and countervailing duty ("CVD") petitions regarding multilayered hardwood flooring from China. The AD petition requests that the Department of Commerce impose duties of up to 269% on imports of multilayered hardwood flooring, which it claims is needed to offset unfair pricing from Chinese imports that injure the U.S. industry. The CVD petition requests an unspecified level of duties be imposed on importers to offset alleged unfair subsidies provided by the Chinese government (such as the undervaluation of the Chinese currency, various tax benefits for foreign-invested enterprises, tax and tariff exemptions on imported equipment, and electricity being provided at artificially low rates).
We produce multilayered wood flooring domestically and import multilayered wood flooring from suppliers in China. We also have a plant in China that manufactures multilayered wood flooring for export to the U.S. We are specifically mentioned in the AD and CVD petitions as an importer. Under the U.S. AD and CVD laws, a U.S. importer may be responsible for the payment of any antidumping and countervailing duties.
In March 2011, the U.S. Department of Commerce announced its preliminary determination of countervailing duties on imports of engineered wood flooring from China. The countervailing duty rate that will apply to shipments from our China plant is 2.25% of import value, which is the rate that is expected to apply to most of the companies that cooperated in the investigation. As a result, U.S. Customs will begin collecting a cash deposit (or bond) on imports of engineered wood flooring from China at these preliminary rates. This preliminary determination became effective on April 6, 2011.
Subsequent to the preliminary determination, the World Trade Organization ("WTO") determined that the U.S. cannot impose on Chinese producers both countervailing duties and treatment of China as a non-market economy for antidumping purposes. The WTO decision echoes an earlier decision of the U.S. Court of International Trade which raised questions regarding the U.S. practice. At this time, the specific implications for pending cases such as ours remain unclear.
On May 26, 2011, the Department of Commerce announced its preliminary determination of antidumping duties on imports of engineered wood flooring from China. Initially, the duty rate on shipments from our China plant was set at 10.88% of import value. This rate was expected to apply to most of the companies that cooperated in the investigation. On June 20, 2011, the Department of Commerce modified its earlier finding and reduced the rate to 6.78%, retroactive to May 26, 2011. As a result, U.S. Customs will collect a cash deposit (or bond) on imports of engineered wood flooring from China at these preliminary rates. A final determination in this matter is currently expected in October 2011. At this time, we are unable to predict the outcome of this matter. However, an adverse final determination could impose additional duties on multilayered hardwood flooring imported from China, and such duties could be material.
OTHER CLAIMS
We are involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of conducting business, including claims and legal actions involving our products, intellectual property, contracts with suppliers and distributors, employees and other matters. While complete assurance cannot be given to the outcome of these proceedings, we do not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations. |
Restructuring Actions
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Restructuring Actions | NOTE 11. RESTRUCTURING ACTIONS
During the third quarter of 2010, management made several significant decisions to address our cost structure. Given the materiality to our financial statements and impact to our operations, we decided to classify charges related to these actions as restructuring charges. We recorded $2.4 million and $7.3 million of restructuring charges related to those actions in the second quarter and first six months of 2011, respectively.
The following table summarizes these charges:
Floor Products Europe: We announced in the third quarter of 2010 that we intend to focus our European flooring strategy on products and regions where we believe we can be a market leader, and we will streamline our product range and sales organization accordingly. During the fourth quarter of 2010, we withdrew from the residential market, and as a result, we sold our Teesside, UK, manufacturing facility. In addition, we ceased production at our heterogeneous vinyl flooring plant in Holmsund, Sweden during the second quarter of 2011.
In addition to the restructuring costs of $2.2 million for the second quarter and $5.3 million for the first six months of 2011 reflected in the above table, we also recorded $2.7 million in the second quarter and $4.8 million in the first six months of 2011 of other related costs in cost of goods sold ($2.4 million in the second quarter and $4.1 million in the first six months) and SG&A expense ($0.3 million in the second quarter and $0.7 million in the first six months) in the first six months of 2011. These costs are primarily related to inventory obsolescence, accelerated depreciation and plant closure costs. Through June 30, 2011 we have incurred expense of $26.9 million related to this initiative. In total, we expect to incur expenses of approximately $30 million for these actions through 2011. The remaining expenses primarily will include severance benefits and asset write-downs.
Beaver Falls Plant: In the third quarter of 2010, we announced that the Beaver Falls, Pennsylvania, plant was scheduled to close in 2011. Production at the facility ended March 31, 2011, and production requirements have been transitioned to other facilities. The decision to close the plant was driven by the location and layout of the plant, technology limitations and the continued limited demand for the products we made at the plant.
In addition to the restructuring credits of $0.3 million in the second quarter and costs of $1.3 million in the first six months of 2011 reflected in the table above, we also recorded $1.8 million in the second quarter and $6.5 million in the first six months of 2011 of accelerated depreciation and $2.8 million of closure-related costs in cost of goods sold in the second quarter and first six months of 2011.
Through June 30, 2011 we have incurred expense of $22.9 million related to this initiative. In total, we expect to incur expenses of up to $25 million for this action through 2011. The remaining costs are primarily associated with on-going activities related to the closure of the facility.
North America SG&A: We are committed to augmenting margin expansion through the aggressive adoption of LEAN practices and projects to standardize, simplify or eliminate SG&A activities. As a result, in the third quarter of 2010, we began to restructure our North American SG&A operations. The first six months of 2011 restructuring expense related to this initiative was recorded in the Unallocated Corporate ($0.6 million), Resilient Flooring ($0.2 million) and Building Products ($0.1 million) segments.
Through June 30, 2011 we have incurred restructuring expense of $6.7 million related to this initiative. In total, we expect to incur restructuring expenses of up to $8 million through 2011 as we further streamline SG&A functions.
The following table summarizes activity in the restructuring accruals.
The amounts in "Other" are related to the effects of foreign currency translation.
Most of the accrual balance as of June 30, 2011 is expected to be paid during 2011. |
Segment Results
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Segment Results | NOTE 2. SEGMENT RESULTS
Impairment testing of our tangible assets occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. During the first quarter of 2011, we announced the idling of our Statesville, NC engineered wood production facility. As a result, we evaluated the impairment implications of this decision and determined no impairment charge was necessary. Additionally during the first quarter of 2010, we decided to exit our flight operations. As a result, we recorded a $3.1 million impairment charge in selling, general and administrative ("SG&A") expense. The fair values were determined by management estimates of market prices based upon information available at that time. This data included sales of similar equipment and historical appraisal information (considered Level 3 inputs in the fair value hierarchy as described in Note 15).
During the second quarter of 2010, we received additional information regarding the estimated fair value for our flight operations assets. As a result we recorded an additional $3.0 million impairment charge in SG&A expense in the second quarter of 2010. The fair values were determined by management estimates and an independent valuation. The valuation information included sales of similar equipment and estimates of market prices (considered Level 2 inputs in the fair value hierarchy) for these assets. We sold the corporate aircraft in the fourth quarter of 2010.
We also recorded an asset impairment charge of $2.1 million in the second quarter of 2010 in SG&A expense for a European Resilient Flooring warehouse facility due to the decline in the commercial property sector. The fair value was determined by management estimates of market prices available at that time. This data included sales and leases of comparable properties within similar real estate markets (considered Level 3 inputs in the fair value hierarchy). We sold the warehouse on January 1, 2011.
During the first quarter of 2010, we also announced that one of our European metal ceilings manufacturing facilities would be shutdown in the second quarter of 2010, which prompted us to perform an impairment test for this asset group. The carrying amount of the tangible assets was determined to be recoverable as the projected undiscounted cash flows exceeded the carrying value. We sold the facility in the third quarter of 2010. |
Intangible Assets
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Intangible Assets | NOTE 8. INTANGIBLE ASSETS
The following table details amounts related to our intangible assets as of June 30, 2011 and December 31, 2010.
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Debt
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6 Months Ended |
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Jun. 30, 2011
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Debt | Â |
Debt |
NOTE 13. DEBT
On March 10, 2011 we amended our $1.05 billion senior credit facility arranged by Merrill Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities, Inc., and Barclays Capital. We modified the terms of our $550 million Term Loan B incurring a call premium of $5.5 million. The amended terms of the Term Loan B resulted in a lower LIBOR floor (1.0% vs. 1.5%) and interest rate spread (3.0% vs. 3.5%). We also extended its maturity from May 2017 to March 2018. All other terms, conditions and covenants are unchanged from the November 23, 2010 agreement. During the first six months of 2011, we were in compliance with all covenants of the previous and amended credit agreements. Our facility is made up of a $250 million revolving credit facility (with a $150 million sublimit for letters of credit), a $250 million Term Loan A and a $550 million Term Loan B. The facility is secured by U.S. personal property, the capital stock of material U.S. subsidiaries, and a pledge of 65% of the stock of our material first tier foreign subsidiaries.
In connection with the amendment to Term Loan B, we paid a $5.5 million prepayment premium (representing one percent of the principal amount of Term Loan B). This amount was capitalized and is being amortized into interest expense over the life of the loan. Additionally, we paid approximately $1.6 million of fees to third parties, (banks, attorneys, etc.) which is reflected in interest expense. |
Accounts Payable And Accrued Expenses
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Jun. 30, 2011
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Accounts Payable And Accrued Expenses | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts Payable And Accrued Expenses | NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
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Equity Investment
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Jun. 30, 2011
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Equity Investment | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Investment | NOTE 7. EQUITY INVESTMENT
Investment in joint venture of $194.7 million at June 30, 2011 reflected the equity interest in our 50% investment in our Worthington Armstrong Venture ("WAVE") joint venture. Condensed income statement data for WAVE is summarized below:
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Acquisitions
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6 Months Ended |
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Jun. 30, 2011
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Acquisitions | Â |
Acquisitions | NOTE 3. ACQUISITIONS
As of December 31, 2009, we owned 80% of our Shanghai ceiling operations. During the fourth quarter of 2009, we made deposits of $3.3 million to initiate the purchase of the remaining 20% interest. During the first quarter of 2010, we completed the acquisition with additional cash payments of $7.8 million. We recorded the difference between the purchase price and the net book value of the net equity acquired within capital in excess of par value. |
Accounts And Notes Receivable
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Accounts And Notes Receivable | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts And Notes Receivable | NOTE 4. ACCOUNTS AND NOTES RECEIVABLE
Generally, we sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts. |
Income Tax Expense
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6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Income Tax Expense | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Expense | NOTE 12. INCOME TAX EXPENSE
The effective tax rate for the second quarter of 2011 was lower than the comparable period of 2010 due to the partial release of state valuation allowances based on our projected ability to utilize the deferred tax assets to offset future taxable income.
The effective tax rate for the first six months of 2011 was lower than the first six months of 2010 due to the enactment of the healthcare reform legislation in March 2010. The release of the valuation allowance in the second quarter of 2011 offset an increase in the valuation allowance in the first quarter of 2011.
We do not expect to record any material changes during 2011 to unrecognized tax benefits that were claimed on tax returns covering tax years ending on or before December 31, 2010. |
Inventories
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Inventories | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories | NOTE 5. INVENTORIES
|
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Financial Instruments
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Jun. 30, 2011
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Financial Instruments | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Instruments | NOTE 15. FINANCIAL INSTRUMENTS
We do not hold or issue financial instruments for trading purposes. The estimated fair values of our financial instruments are as follows:
The carrying amounts of cash and cash equivalents of $304.6 million at June 30, 2011 (made up of bank deposits), receivables, accounts payable and accrued expenses, short-term debt and current installments of long-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt were based upon quotes from a major financial institution of recently observed trading levels of our Term Loan B debt. The fair value estimates of foreign currency contract obligations are estimated from market quotes provided by a well recognized national market data provider. The fair value estimates of natural gas contracts are estimated using internal valuation models with verification by obtaining quotes from major financial institutions. For swap transactions, fair value is calculated using NYMEX market quotes provided by a well recognized national market data provider. For option based strategies, fair value is calculated using an industry standard Black-Scholes model with market based inputs, including but not limited to, underlying asset price, strike price, implied volatility, discounted risk free rate and time to expiration, provided by a well recognized national market data provider. The fair value estimates for interest rate swap contracts are estimated by obtaining quotes from major financial institutions with verification by internal valuation models. As of June 30, 2011 we also have $26.4 million of restricted cash that is held by a trustee related to the construction of our West Virginia mineral wool plant. The trustee has invested the cash in money market investments. The carrying value on our balance sheet approximates the fair value because of the short-term maturity of the instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Liabilities measured at fair value on a recurring basis are summarized below:
We do not have any financial assets or liabilities that are valued using Level 3 (unobservable) inputs. |
Condensed Consolidated Statements Of Shareholder's Equity (USD $)
In Millions |
AWI Shareholders [Member]
Common Stock [Member]
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AWI Shareholders [Member]
Capital In Excess Of Par Value [Member]
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AWI Shareholders [Member]
Retained Earnings (Accumulated Deficit) [Member]
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AWI Shareholders [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
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AWI Shareholders [Member]
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Noncontrolling Interest [Member]
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Common Stock [Member]
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Capital In Excess Of Par Value [Member]
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Retained Earnings (Accumulated Deficit) [Member]
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Accumulated Other Comprehensive Income (Loss) [Member]
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Total
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Balance at beginning of year at Dec. 31, 2009 | $ 0.6 | $ 2,052.1 | $ 144.4 | $ (297.8) | Â | $ 8.6 | $ 0.6 | $ 2,052.1 | $ 144.4 | $ (297.8) | Â |
Share-based employee compensation | Â | 4.1 | Â | Â | Â | Â | Â | 4.1 | Â | Â | Â |
Non-controlling interest purchase | Â | (3.5) | Â | 1.1 | Â | (8.6) | Â | (3.5) | Â | 1.1 | Â |
Foreign currency translation adjustments | Â | Â | Â | (29.4) | Â | Â | Â | Â | Â | (29.4) | Â |
Derivative (loss) gain, net | Â | Â | Â | 2.7 | Â | Â | Â | Â | Â | 2.7 | Â |
Pension and postretirement adjustments | Â | Â | Â | 0.4 | Â | Â | Â | Â | Â | 0.4 | Â |
Total other comprehensive income (loss) | Â | Â | Â | (25.2) | Â | Â | Â | Â | Â | (25.2) | Â |
Net earnings for period | Â | Â | 7.4 | Â | Â | Â | Â | Â | 7.4 | Â | 7.4 |
Comprehensive income (loss) | Â | Â | Â | Â | (17.8) | Â | Â | Â | Â | Â | (17.8) |
Total shareholders' equity | Â | Â | Â | Â | 1,882.1 | Â | Â | Â | Â | Â | 1,882.1 |
Balance at Jun. 30, 2010 | 0.6 | 2,052.7 | 151.8 | (323.0) | Â | Â | 0.6 | 2,052.7 | 151.8 | (323.0) | Â |
Balance at beginning of year at Dec. 31, 2010 | 0.6 | 1,451.2 | (35.3) | (325.7) | Â | Â | 0.6 | 1,451.2 | (35.3) | (325.7) | Â |
Share-based employee compensation | Â | 10.5 | Â | Â | Â | Â | Â | 10.5 | Â | Â | Â |
Foreign currency translation adjustments | Â | Â | Â | 15.4 | Â | Â | Â | Â | Â | 15.4 | Â |
Derivative (loss) gain, net | Â | Â | Â | (2.4) | Â | Â | Â | Â | Â | (2.4) | Â |
Pension and postretirement adjustments | Â | Â | Â | 6.5 | Â | Â | Â | Â | Â | 6.5 | Â |
Total other comprehensive income (loss) | Â | Â | Â | 19.5 | Â | Â | Â | Â | Â | 19.5 | Â |
Net earnings for period | Â | Â | 51.4 | Â | Â | Â | Â | Â | 51.4 | Â | 51.4 |
Comprehensive income (loss) | Â | Â | Â | Â | 70.9 | Â | Â | Â | Â | Â | 70.9 |
Total shareholders' equity | Â | Â | Â | Â | 1,172.2 | Â | Â | Â | Â | Â | 1,172.2 |
Balance at Jun. 30, 2011 | $ 0.6 | $ 1,461.7 | $ 16.1 | $ (306.2) | Â | Â | $ 0.6 | $ 1,461.7 | $ 16.1 | $ (306.2) | Â |
Derivative Financial Instruments
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Jun. 30, 2011
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Derivative Financial Instruments | NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use forward swaps and option contracts to hedge these exposures. Exposure to individual counterparties is controlled and derivative financial instruments are entered into with a diversified group of major financial institutions. Forward swaps and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. At inception, hedges that we designate as hedging instruments are formally documented as either (1) a hedge of a forecasted transaction or "cash flow" hedge, or (2) a hedge of the fair value of a recognized liability or asset or "fair value" hedge. We also formally assess both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting, and any future mark-to-market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes. Counter Party Risk
We only enter into derivative transactions with established counterparties having a credit rating of A or better. We monitor counterparty credit default swap levels and credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap Dealer Agreements ("ISDA's") with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We generally do not post nor receive cash collateral with any counterparty for our derivative transactions. As of June 30, 2011, we had no cash collateral posted or received for any of our derivative transactions. These ISDA agreements do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible.
Commodity Price Risk — We purchase natural gas for use in the manufacture of ceiling tiles and other products, and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy to reduce cost volatility for North American natural gas purchases by purchasing natural gas forward contracts and swaps, purchased call options, and zero-cost collars up to 24 months forward to reduce our overall exposure to natural gas price movements. There is a high correlation between the hedged item and the hedged instrument. The gains and losses on these transactions offset gains and losses on the transactions being hedged. These instruments are designated as cash flow hedges. At June 30, 2011 and December 31, 2010 the notional amount of these hedges was $47.5 million and $37.0 million, respectively. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying gas is consumed. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The earnings impact of the ineffective portion of these hedges was not material during the second quarter or first six months of 2011 and 2010. The contracts are based on forecasted usage of natural gas measured in MMBtu's.
Currency Rate Risk —
Sales and Purchases — We manufacture and sell our products in a number of countries throughout the world and, as a result we are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. We manage our cash flow exposures on a net basis and use derivatives to hedge the majority of our unmatched foreign currency cash inflows and outflows. As of June 30, 2011, our major foreign currency exposures are to the Canadian dollar, the Euro, and the Australian dollar.
We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. Cash flow hedges are executed quarterly generally up to 15 months forward and allow us to further reduce our overall exposure to exchange rate movements, since gains and losses on these contracts offset gains and losses on the transactions being hedged. The notional amount of these hedges was $49.6 million and $89.9 million at June 30, 2011 and December 31, 2010, respectively. Gains and losses on these instruments are recorded in other comprehensive income, to the extent effective, until the underlying transaction is recognized in earnings. The earnings impact of the ineffective portion of these hedges was not material during the second quarter or first six months of 2011 and 2010.
Intercompany Loan and Dividends — We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends. The underlying intercompany loans are classified as short-term, and translation adjustments related to these loans are recorded in other non-operating income or expense. The offsetting gains or losses on the related derivative contracts are also recorded in other non-operating income or expense. These contracts are decreased or increased as repayments are made or additional intercompany loans are extended or adjusted for intercompany dividend activity as necessary. The notional amount of these hedges was $11.1 million and $143.2 million at June 30, 2011 and December 31, 2010, respectively.
Interest Rate Risk — We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. Interest expense on variable-rate liabilities increases or decreases as a result of interest rate fluctuations. On March 31, 2011 we entered into two interest rate swaps, on our Term Loan A and Term Loan B, with notional amounts of $100 million and $200 million, respectively, which mature in November 2015. Under the terms of the Term Loan A swap, we receive 3-month LIBOR and pay a fixed rate over the hedged period. Under the terms of the Term Loan B swap, we receive the greater of 3-month LIBOR or the 1% LIBOR Floor and pay a fixed rate over the hedged period. These swaps are designated as cash flow hedges to hedge against changes in LIBOR for a portion of our variable rate debt. The mark-to-market loss was $6.7 million at June 30, 2011.
Financial Statement Impacts
Our derivative assets, whether or not designated as hedging instruments, were not material as of June 30, 2011 and December 31, 2010.
The following tables detail amounts related to our derivatives as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and June 30, 2010.
The amount of gain (loss) recognized in income for derivative instruments not designated as hedging instruments was $(0.2) million and $4.3 million for the second quarter and first six months of 2011, respectively, and insignificant for the second quarter and first six months of 2010. |
Supplemental Cash Flow Information
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Jun. 30, 2011
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Supplemental Cash Flow Information | Â | |||||||||||||||||||||||||||||||||||||||||||||
Supplemental Cash Flow Information | NOTE 18. SUPPLEMENTAL CASH FLOW INFORMATION
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Business And Basis Of Presentation
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6 Months Ended |
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Jun. 30, 2011
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Business And Basis Of Presentation | Â |
Business And Basis Of Presentation | NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation incorporated in 1891. When we refer to "we", "our" and "us" in this report, we are referring to AWI and its subsidiaries. We use the term "AWI" when we are referring solely to Armstrong World Industries, Inc.
In December 2000 AWI filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware ("the Bankruptcy Court") in order to use the court-supervised reorganization process to achieve a resolution of AWI's asbestos-related liability. Also filing under Chapter 11 were two of AWI's wholly-owned subsidiaries, Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America, Inc. ("Desseaux"). On October 2, 2006, AWI's court-approved Plan of Reorganization ("POR") became effective, and AWI emerged from Chapter 11. See Note 1 to our 2010 annual report on Form 10-K for more information on the Chapter 11 Case.
On October 2, 2006, the Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust ("Asbestos PI Trust") was created to address AWI's personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWI's pre-Filing use of, or other activities involving, asbestos are channeled to the Asbestos PI Trust.
In August 2009 Armor TPG Holdings LLC ("TPG") and the Asbestos PI Trust entered into agreements whereby TPG purchased 7,000,000 shares of AWI common stock from the Asbestos PI Trust, and acquired an economic interest in an additional 1,039,777 shares from the Asbestos PI Trust. The Asbestos PI Trust and TPG together hold more than 60% of AWI's outstanding shares and have entered into a shareholders' agreement pursuant to which the Asbestos PI Trust and TPG have agreed to vote their shares together on certain matters.
The accounting policies used in preparing the Condensed Consolidated Financial Statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended December 31, 2010. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in our Form 10-K for the fiscal year ended December 31, 2010. 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. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.
Certain amounts in the prior year's Condensed Consolidated Financial Statements have been recast to conform to the 2011 presentation.
These Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The statements include management estimates and judgments, where appropriate. Management utilizes estimates to record many items including asset values, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers' compensation, general liability and environmental claims and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.
In June 2011 the Financial Accounting Standards Board ("FASB") issued new guidance which is now part of Accounting Standards Codification ("ASC") 220: "Presentation of Comprehensive Income". The new guidance will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The standard does not change the items which must be reported in other comprehensive income. These provisions are to be applied retrospectively and will be effective for us as of January 1, 2012. Because this guidance impacts presentation only, it will have no effect on our financial condition, results of operations or cash flows.
In January 2010 the FASB issued new guidance, which is now part of ASC 820, "Fair Value Measurements and Disclosures". The new guidance requires disclosures of the amounts of assets and liabilities transferred into and out of Levels 1 and 2, along with a description of the reasons for the transfers. The new guidance also requires additional disclosures related to activity presented for Level 3 measurements. These provisions were effective for us as of January 1, 2010 except for the additional disclosures related to activities for Level 3 measurements which were effective for us as of January 1, 2011. There was no impact on our financial statements from the adoption of this guidance.
In March 2010 the FASB issued new guidance, which is now part of ASC 815, "Derivatives and Hedging". The new guidance clarifies the scope exception for embedded credit related derivatives. The provisions were effective for us as of January 1, 2011. There was no impact on our financial statements from the adoption of this guidance.
In July 2010 the FASB issued new guidance, which is now part of ASC 310, "Receivables". The new guidance increases the disclosure requirements regarding the credit quality of financing receivables and the allowance for credit losses. Some of the provisions were effective for us as of December 31, 2010 and others were effective January 1, 2011. There was no impact on our financial statements from the adoption of this guidance.
Operating results for the second quarter and first six months of 2011 and the corresponding periods of 2010 included in this report are unaudited. However, these Condensed Consolidated Financial Statements have been reviewed by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) for a limited review of interim financial information. |
Severances And Related Costs
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6 Months Ended |
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Jun. 30, 2011
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Severances And Related Costs | Â |
Severances And Related Costs | NOTE 10. SEVERANCES AND RELATED COSTS
See Note 11 for a discussion of severance charges associated with restructuring actions.
In the first quarter of 2011, we recorded $3.0 million in cost of goods sold for severance and related costs to reflect position eliminations in our European Resilient Flooring business as a result of improved manufacturing productivity. In addition, we recorded $0.5 million in SG&A expense for severance and related costs to reflect the separation costs for our former Senior Vice President, General Counsel and Secretary.
In the first quarter of 2010, we recorded $11.2 million in SG&A expense for severance and related costs to reflect the separation costs for our former Chairman and Chief Executive Officer. In accordance with the separation agreement, payment was made in the third quarter of 2010.
During the first quarter of 2010, we announced the shutdown of finished goods production at two Wood Flooring plants and the restarting of certain operations at a previously idled Wood Flooring plant. We recorded $2.8 million of severance and related costs in the first quarter of 2010 for approximately 425 employees affected by these actions. The charges were recorded in cost of goods sold.
In the second quarter of 2010, we recorded $4.1 million of severance and related costs for employees impacted by the closure of a European metal ceilings manufacturing facility and by the elimination of 75 other manufacturing and SG&A positions around the world. |
Pensions And Other Benefit Programs
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Pensions And Other Benefit Programs | NOTE 14. PENSIONS AND OTHER BENEFIT PROGRAMS
Following are the components of net periodic benefit costs (credits):
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Condensed Consolidated Statements Of Earnings (USD $)
In Millions, except Per Share data |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2011
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Jun. 30, 2010
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Jun. 30, 2011
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Jun. 30, 2010
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Condensed Consolidated Statements Of Earnings | Â | Â | Â | Â |
Net sales | $ 748.6 | $ 724.8 | $ 1,433.8 | $ 1,383.7 |
Cost of goods sold | 563.9 | 554.4 | 1,088.4 | 1,067.5 |
Gross profit | 184.7 | 170.4 | 345.4 | 316.2 |
Selling, general and administrative expenses | 122.2 | 131.8 | 242.3 | 275.3 |
Restructuring charges, net | 2.4 | 7.3 | ||
Equity earnings from joint venture | (12.6) | (14.3) | (29.0) | (25.4) |
Operating income | 72.7 | 52.9 | 124.8 | 66.3 |
Interest expense | 11.5 | 4.0 | 26.3 | 7.9 |
Other non-operating expense | 0.8 | 0.3 | 1.1 | 0.3 |
Other non-operating (income) | (0.8) | (0.8) | (1.4) | (1.5) |
Earnings before income taxes | 61.2 | 49.4 | 98.8 | 59.6 |
Income tax expense | 23.3 | 22.6 | 47.4 | 52.2 |
Net earnings | $ 37.9 | $ 26.8 | $ 51.4 | $ 7.4 |
Net earnings per share of common stock | Â | Â | Â | Â |
Basic | $ 0.64 | $ 0.47 | $ 0.88 | $ 0.13 |
Diluted | $ 0.64 | $ 0.46 | $ 0.87 | $ 0.13 |
Average number of common shares outstanding: | Â | Â | Â | Â |
Basic | 58.3 | 57.6 | 58.2 | 57.6 |
Diluted | 58.9 | 58.1 | 58.8 | 58.1 |