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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
ARMSTRONG HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 333-32530 23-3033414
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(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock ($1 par value) New York Stock Exchange, Inc. (a)
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (b)
ARMSTRONG WORLD INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 1-2116 23-0366390
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(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (b)
7.45% Senior Quarterly Interest Bonds
Due 2038
(a) All Classes
(b) Common Stock and Preferred Stock
Purchase Rights only
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
The aggregate market value of the Common Stock of Armstrong Holdings, Inc. held
by non-affiliates based on the closing price ($3.92 per share) on the New York
Stock Exchange on February 16, 2001, was approximately $149.5 million. As of
February 16, 2001, the number of shares outstanding of registrant's Common Stock
was 40,831,200. This amount includes the 2,339,917 shares of Common Stock as of
December 31, 2000, held by The Chase Manhattan Bank, as Trustee for the employee
stock ownership accounts of the Company's Retirement Savings and Stock Ownership
Plan.
Documents Incorporated by Reference
- -----------------------------------
None
2
PART I
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Item 1. Business
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Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells interior finishings,
most notably floor coverings and ceiling systems, around the world. Armstrong
products are sold primarily for use in the finishing, refurbishing and repair of
residential, commercial and institutional buildings. Armstrong also designs,
manufactures and sells kitchen and bathroom cabinets.
Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the publicly-held
parent holding company of Armstrong. AHI became the parent company of Armstrong
on May 1, 2000, following AWI shareholder approval of a plan of exchange under
which each share of AWI was automatically exchanged for one share of AHI. AHI
was formed for purposes of the share exchange and holds no other significant
assets or operations apart from AWI and AWI's subsidiaries. Stock certificates
that formerly represented shares of AWI were automatically converted into
certificates representing the same number of shares of AHI. The publicly-held
debt of AWI was not affected in the transaction. The following discussion of
Armstrong's business is applicable to AHI and AWI.
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, 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 "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The
Chapter 11 cases are being jointly administered under case numbers 00-4469,
00-4470, and 00-4471 (the "Chapter 11 Cases").
AHI, and Armstrong's other subsidiaries, including Triangle Pacific Corp., WAVE
(Armstrong's ceiling grid systems joint venture with Worthington Industries),
Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries
were not a part of the Filing.
Like other companies involved in asbestos litigation, AWI has tried a number of
different approaches to managing its asbestos liability, including negotiating
broad-based settlements of claims and supporting efforts to find a legislative
resolution. The number of new claims filed and the cost to settle claims,
however, continued to escalate. In addition, liquidity concerns increased when
Owens Corning Fiberglass filed for Chapter 11 protection on October 5, 2000.
This hurt AWI's ability to obtain ongoing financing on acceptable terms. These
were the principal factors which led to the decision to make the Filing.
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing. In addition, as a
debtor-in-possession, AWI has the right, subject to the Court's approval, to
assume or reject any executory contracts and unexpired leases in existence at
the date of the Filing. Parties having claims as a result of any such rejection
may file claims with the Court which will be dealt with as part of the Chapter
11 Cases.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Cases.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and along with AWI's operating subsidiaries are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Cases could take a significant period of time.
3
Financing
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The Court has approved a $300 million debtor-in-possession credit facility
provided by a bank group led by The Chase Manhattan Bank (the "DIP Facility").
AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs. As of
February 28, 2001, AWI had $96.3 million of cash and cash equivalents in
addition to cash held by its non-debtor subsidiaries. Borrowings under the DIP
facility, if any, will constitute superpriority administrative expense claims in
the Chapter 11 Cases.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2000.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 29 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization items. Accordingly, AWI recorded a total of $103.3 million as
Reorganization Costs in December 2000, consisting of:
($ millions)
------------
Adjustment of net debt and debt issue costs to expected amount of allowed claim $ 42.0
ESOP related expenses 58.8
Professional fees 2.6
Interest income, post petition (0.3)
Other expenses directly related to bankruptcy, net 0.2
------
Total Chapter 11 reorganization costs $103.3
======
To record prepetition debt at the face value or the amount of the expected
allowed claims, AWI adjusted the amount of net debt and debt issue costs and
recorded a pre-tax expense of $42.0 million.
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. As described more
fully in Note 19, Armstrong has not permitted further employee contributions to
the ESOP. Therefore, it is expected that the ESOP will no longer have the
ability to repay Armstrong money it previously borrowed. In addition, a $15.5
million expense was recorded related to interest and tax penalty guarantees owed
to ESOP bondholders caused by the default on the ESOP bonds.
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
Discontinued Operations
- -----------------------
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.84 per share.
4
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001 entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. The proposed sale, while subject to certain
approvals, including that of the Court, is expected to close in June 2001.
Accordingly this segment has been classified as a discontinued operation in the
accompanying consolidated financial statements. Prior year balances and results
have been reclassified to reflect the net assets and results of discontinued
operations. Based on the expected net realizable value of the business,
Armstrong recorded a pretax net loss of $30.3 million in the fourth quarter of
2000, $19.5 million net of tax benefit.
Industry Segments
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Financial Information about Industry Segments
- ---------------------------------------------
See Item 8, Note 3 to Consolidated Financial Statements for financial
information on Armstrong's reportable industry segments.
Narrative Description of Business
- ---------------------------------
Armstrong designs, manufactures and sells interior finishings, most notably
floor coverings and ceiling systems around the world. Armstrong products are
sold primarily for use in the finishing, refurbishing and repair of residential,
commercial and institutional buildings. Armstrong also designs, manufactures and
sells kitchen and bathroom cabinets.
Floor Coverings
- ---------------
Armstrong is a worldwide manufacturer of a broad range of resilient floor
coverings for the interiors of homes and commercial and institutional buildings,
which are sold with adhesives, installation and maintenance materials and
accessories. Resilient flooring, in both sheet and tile forms, together with
laminate flooring and linoleum, are sold in a wide variety of types, designs,
and colors. Included are types of flooring that offer such features as ease of
installation, reduced maintenance (no-wax), and cushioning for greater underfoot
comfort. Floor covering products are sold to commercial, residential and
institutional customers through wholesalers, retailers (including large home
centers and buying groups), contractors, and to the hotel/motel and manufactured
homes industries.
Building Products
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As a major producer of ceiling materials in the United States and abroad,
Armstrong markets both residential and commercial ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs. Most
provide noise reduction and incorporate features intended to permit ease of
installation. These residential ceiling products are sold through wholesalers
and retailers (including large home centers). Commercial suspended ceiling
systems, designed for use in shopping centers, offices, schools, hospitals, and
other commercial and institutional settings, are available in numerous colors,
performance characteristics and designs and offer characteristics such as
acoustical control, accessibility to the plenum (the area above the ceiling),
rated fire protection, and aesthetic appeal. Armstrong sells commercial ceiling
materials and accessories to ceiling systems contractors and to resale
distributors. Framework (grid) products for Armstrong suspension ceiling systems
products are manufactured through a joint venture with Worthington Industries
and are sold by Armstrong.
Wood Products
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Armstrong's Triangle Pacific subsidiary manufactures and sells hardwood flooring
and other flooring, kitchen and bathroom cabinetry and related products.
Armstrong also distributes laminate flooring products. These products are used
primarily in residential new construction and remodeling, with some commercial
applications such as stores and restaurants. Flooring sales are generally made
through independent wholesale flooring distributors and retailers (including
large home centers and buying groups). Cabinets are sold through both
independent and Armstrong-owned distributors.
Major Customers
- ---------------
Armstrong businesses principally sell products through building products
distributors, who re-sell our products to retailers, builders, contractors,
installers and others. Armstrong also sells a significant portion of our
products to home center chains and industry buying groups. For example, for
2000, Armstrong sales by all operations to The Home Depot, Inc. totaled
approximately $373.2 million compared to approximately $344.8 million and $296.0
million in 1999 and 1998, respectively. No other customer accounted for more
than 10% of Armstrong's revenue.
5
Raw Materials
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Raw materials essential to Armstrong businesses are purchased worldwide in the
ordinary course of business from numerous suppliers. The principal raw materials
used by the Floor Coverings business include synthetic resins, plasticizers,
PVC, latex, linseed oil, limestone, films, pigments and inks. The principal raw
materials used by the Building Products business include mineral fibers and
fillers, clays, starches, newspaper and perlite, as well as steel used in the
ceiling grid manufacturing process. The principal raw materials used by the Wood
Products business include oak lumber, veneer, acrylics, plywood, particleboard
and fiberboard. Armstrong also purchases significant amounts of packaging
materials for all products and uses substantial amounts of energy such as
electricity and natural gas in our manufacturing operations. In general,
adequate supplies of raw materials were available to all of Armstrong's
businesses. Although prices for petroleum-based raw materials and energy were
markedly higher in 2000, no serious shortages were encountered in 2000, and none
are expected in 2001. Armstrong cannot guarantee that a significant shortage of
one raw material or another will not occur, however.
Armstrong's California resilient tile manufacturing plant experienced serious
disruptions into January 2001 due to the electric power supply shortage in that
state. Armstrong rejected a lower-rate contract we had been operating under,
which allowed for limited power cut-offs. Although Armstrong will now pay a
slightly higher rate, we expect our plant will be less exposed to electric power
shutdowns provided the state as a whole obtains adequate power supplies.
Otherwise, production from this plant may have to be shifted to other
facilities, resulting in undetermined capital expense and transportation costs.
Customers' orders for Armstrong products are typically for immediate shipment.
Thus, in each business group, Armstrong keeps sufficient inventory on hand to
satisfy orders, or manufacture product to meet delivery dates specified in
orders. As a result, there historically has been no material backlog in any
industry segment.
Patents and Intellectual Property Rights
- ----------------------------------------
Patent protection is important to Armstrong's business in the United States and
other markets. Armstrong's competitive position has been enhanced by U.S. and
foreign patents on products and processes developed or perfected within
Armstrong or obtained through acquisition or license. In addition, Armstrong
also benefits from our trade secrets for certain products and processes.
Patent protection extends for varying periods according to the date of patent
filing or grant and the legal term of a patent in the various countries where
patent protection is obtained. The actual protection afforded by a patent, which
can vary from country to country, depends upon the type of patent, the scope of
its coverage, and the availability of legal remedies in the country. Although
Armstrong considers that, in the aggregate, our patents and trade secrets
constitute a valuable asset of material importance to their business, they do
not regard any of their businesses as being materially dependent upon any single
patent or trade secret, or any group of related patents or trade secrets.
Armstrong products are sold around the world under numerous brand-name
trademarks that are considered in the aggregate to be of material importance.
Certain of Armstrong trademarks, including without limitation, house marks
Armstrong, Bruce, Hartco, Robbins, and DLW, and product line marks Cirrus,
Corlon, Cortega, Designer Solarian, Exelon, Fundamentals, I-Ceilings, Medintech,
Natural Inspirations, ToughGuard, Traffic Zone and Ultima are important to
Armstrong's business because of their significant brand name recognition.
Trademark protection continues in some countries as long as the mark is used, in
other countries, as long as it is registered. Registrations are generally for
fixed, but renewable, terms.
Competition
- -----------
There is strong competition in all of the industry segments in which Armstrong
does business. Competition in each industry segment and each geographic area
where Armstrong does business includes numerous companies. Principal methods of
competition include price, product performance and service. In addition, product
styling is a significant component of competition. Increasing competition in the
U.S. from worldwide producers is apparent in Armstrong's businesses. There is
currently excess production capacity in many geographic markets, which tends to
increase price competition.
6
Research & Development
- ----------------------
Research and development ("R&D") activities are important and necessary in
helping Armstrong improve its products. Principal research and development
functions include the development and improvement of products and manufacturing
processes.
Armstrong spent $60.0 million in 2000, $46.4 in 1999 and $36.7 million in 1998
on research and development activities worldwide.
Environmental Matters
- ---------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $6.2
million in 2000, $5.5 million in 1999 and $6.7 million in 1998 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other federal and
state environmental laws continue to change. Until all new regulatory
requirements are known, Armstrong cannot predict with certainty future capital
expenditures associated with compliance with environmental requirements.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
which have potential liability for the required investigation and remediation of
each site, and which in some cases, have agreed to jointly fund that required
investigation and remediation. With regard to some sites, however, Armstrong
disputes the liability, the proposed remedy or the proposed cost allocation
among the PRPs. Armstrong may also have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies. Armstrong
has also been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. Armstrong's payments
and remediation work on these sites is under review in light of the Chapter 11
Filing.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction 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 any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Cases also may
affect the ultimate amount of such contributions.
Liabilities of $13.5 million at December 31, 2000 and $13.2 million at December
31, 1999 were for potential environmental liabilities that Armstrong considers
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 liability is available and no
amount within that range is more likely than any other, the lower end of the
range has been used. As assessments and remediation activities progress at each
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the December
31, 2000 environmental liabilities are classified as prepetition liabilities
subject to compromise. As a general rule, such prepetition liabilities that do
not preserve company assets are addressed in the context of the Chapter 11
Cases.
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.
7
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
Employees
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As of December 31, 2000, we had approximately 15,400 employees around the world,
of whom approximately 3,800 are located outside of the United States. About 51%
of the approximately 8,900 hourly or salaried production and maintenance
employees in the United States are represented by labor unions.
Armstrong experienced a brief work stoppage at one of its Wood Products plants
in 2000. Otherwise, Armstrong's employee and labor relations remained good. In
the fall of 2001, Armstrong anticipates beginning negotiations on a new
collective bargaining agreement with the International Association of Machinists
and Aerospace Workers at its Lancaster, Pennsylvania plant.
Geographic Areas
- ----------------
See Item 8, Note 3 to Consolidated Financial Statements for financial
information by geographic areas.
Armstrong's non-U.S. operations are subject to local government laws concerning
restrictions on and transfers of investments, tariffs, personnel administration,
and other matters. In addition, consolidated earnings that originate outside the
U.S. are subject to both U.S. and non-U.S. tax laws and to certain exchange and
currency controls and the effects of currency fluctuations.
Cautionary Factors That May Affect Future Results
- -------------------------------------------------
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
The disclosures and analysis in this report contain some forward-looking
statements. This discussion about those statements is provided in accordance
with the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with discussions of future operating
or financial performance. In particular, these include statements relating to
future actions, prospective products, future performance or results of current
and anticipated products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results. From time to time, Armstrong
and/or AHI may also provide oral or written forward-looking statements in other
materials released to the public.
Any or all of the forward-looking statements in this report and in any other
public statements made may turn out to be wrong. They can be affected by
inaccurate assumptions Armstrong and/or AHI might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed. Actual future results may vary materially.
Armstrong and/or AHI undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, you should consult any further disclosures made by Armstrong and/or AHI
on related subjects in 10-Q, 8-K, 10-K or other reports filed with the SEC. Also
note the following cautionary discussion of risks and uncertainties relevant to
Armstrong businesses. These are some of the factors that could potentially cause
actual results to differ materially from expected and historical results. Other
factors besides those listed here could also adversely affect Armstrong and/or
AHI.
. Factors relating to AWI's Chapter 11 Filing, such as: the possible
disruption of relationships with creditors, customers, suppliers and
employees; the ultimate size of AWI's asbestos-related and other
liabilities; the ability to confirm and implement a plan of reorganization;
the availability of financing and refinancing for both AWI and its
subsidiaries that are not parties to its Chapter 11 Filing; and AWI's
ability to comply with covenants in its debtor in possession credit
facility.
8
. Claims of undetermined merit and amount have been asserted against
Armstrong and its subsidiaries for various legal, environmental and tax
matters, including AWI's asbestos related litigation. For more information
on these matters, see the discussion of Legal Proceedings in Item 3 in this
report.
. Balancing investment to create future growth in the constraints of a
price-competitive market is a challenge.
. Revenues and earnings can be affected by the level of success of new
product introductions.
. Much of Armstrong's revenues and earnings are exposed to changes in foreign
currency exchange rates. Where practical, Armstrong tries to reduce these
effects by matching local currency revenues with costs and local currency
assets with liabilities. Armstrong also manages foreign exchange risk with
foreign currency forward contracts and with purchased foreign currency
options.
. Notwithstanding Armstrong's efforts to foresee and plan for the effects of
changes in fiscal circumstances, Armstrong cannot predict with certainty
all changes in currency and interest rates, inflation or other related
factors affecting Armstrong businesses. For more information on these
matters, see the discussion of Market Risk in Item 7A of this report.
. International operations could be affected by changes in intellectual
property legal protections and remedies, trade regulations, and procedures
and actions affecting production, pricing and marketing of products, as
well as by unstable governments and legal systems, intergovernmental
disputes and possible nationalization.
. Business combinations among Armstrong's competitors or suppliers could
affect Armstrong's competitive position in the hard surface floor covering,
ceiling system and wood products businesses. Similarly, combinations or
alliances among Armstrong's major customers could increase their purchasing
power in dealing with Armstrong. And, of course, if Armstrong should enter
into one or more business combinations, Armstrong's business, finances and
capital structure could be affected.
. Growth in costs and expenses, raw material price increases (for example
increases in wood prices or in petroleum-based raw materials such as
plasticizers or PVCs), energy cost increases, changes in distribution and
product mix, and the impact of divestitures, restructuring and other
unusual items that could result from evolving business strategies and
organizational restructuring could affect future results.
. Revenues and earnings could be affected by various worldwide economic and
political factors, including improved efficiencies in the European flooring
market and variations in residential and commercial building rates and
economic growth rates in various areas of the world in which we do
business. These factors could affect the end-use markets for Armstrong
products in various parts of the world.
. Revenues and earnings could be affected by the extent to which Armstrong
successfully achieves integration of and synergies from acquisitions.
. Availability of raw materials due to changes in business conditions that
impact Armstrong's suppliers, including environmental conditions, laws and
regulations and/or business decisions made by Armstrong's suppliers could
affect future results.
. Revenues and earnings could be affected by business conditions that impact
Armstrong's major customers and/or business decisions made by Armstrong's
major customers.
Financial Information Filed With the Court
- ------------------------------------------
As previously disclosed, on December 6, 2000, AWI and two of its subsidiaries
(collectively, the "Debtors") filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware ("the Court").
9
Armstrong reports its operating results and financial statements on a
consolidated basis. These public reports are available through the U.S.
Securities and Exchange Commission and other sources, and are also provided free
of charge to investors who contact Armstrong. However, under applicable
bankruptcy law, AWI is now required to file periodically with the Court various
documents, including certain financial information on an unconsolidated basis.
This information includes statements, schedules, and monthly operating reports
in forms prescribed by Federal Bankruptcy Law.
Armstrong cautions that such materials are prepared according to requirements
under Federal Bankruptcy Law. While they accurately provide then-current
information required under Bankruptcy Law, they are nonetheless unconsolidated,
unaudited, and are prepared in a format different from that used in Armstrong's
consolidated financial statements filed under the securities laws. Accordingly,
Armstrong believes the substance and format do not allow meaningful comparison
with Armstrong's regular publicly-disclosed consolidated financial statements.
The materials filed with the Court are not prepared for the purpose of providing
a basis for an investment decision relating to the stock of AHI or the debt
securities of AWI, or for comparison with other financial information filed with
the SEC.
Notwithstanding, most of the Debtors' filings with the Court are available to
the public at the office of the Clerk of the Bankruptcy Court. Those filings may
also be obtained through private document retrieval services. Armstrong
undertakes no obligation to make any further public announcement with respect to
the documents filed with the Court or any matters referred to in them.
Item 2. Properties
- -------------------
Armstrong and AHI world headquarters are in Lancaster, Pennsylvania. Armstrong
owns a 100-acre, multi-building campus comprising the site of our corporate
headquarters, most operational headquarters, and our U.S. R&D operations and
marketing and service headquarters. Altogether, our headquarters operations
occupy over 986,000 square feet of floor space.
We produce and market Armstrong products and services throughout the world,
owning and operating 44 manufacturing plants in 14 countries. Thirty-three of
these facilities are located throughout the United States. In addition,
Armstrong has an interest through joint ventures in 7 additional plants in 7
countries.
Floor covering products and adhesives are produced at 14 plants, with principal
manufacturing facilities located in Pennsylvania, Illinois, Oklahoma, the U.K.,
and Germany. Building products are produced at 15 plants with principal
facilities in Georgia, the Florida-Alabama Gulf Coast area, Pennsylvania, the
U.K., and China. Wood products are produced at 16 plants, with principal
facilities located in West Virginia, Tennessee and Pennsylvania.
Sales offices are leased and owned worldwide, and leased facilities are utilized
to supplement Armstrong's owned warehousing facilities.
Productive capacity and the extent of utilization of Armstrong facilities are
difficult to quantify with certainty because in any one facility, maximum
capacity and utilization vary periodically depending upon the product that is
being manufactured, and individual facilities manufacture multiple products. In
this context, we estimate that the production facilities in each industry
segment were effectively utilized during 2000 at 80% to 90% of overall
productive capacity. Remaining productive capacity is sufficient to meet
expected customer demands. Armstrong believes that our various facilities are
adequate and suitable. Additional incremental investments in plant facilities
are made as appropriate to balance capacity with anticipated demand, improve
quality and service, and reduce costs.
Item 3. Legal Proceedings
- --------------------------
Asbestos-related Litigation
- ---------------------------
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Item 1 for further discussion.
10
Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.
Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.
In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.
Personal Injury Litigation
- --------------------------
Nearly all the asbestos-related personal injury lawsuits brought against AWI
relate to alleged exposure to asbestos-containing high-temperature insulation
products. The majority of these claims seek compensatory and punitive damages.
Claims may arise many years after first exposure to asbestos in light of the
decades long latency period for asbestos-related injury. Product identification
and determining exposure periods are difficult and uncertain. Over the long
history of asbestos litigation involving hundreds of companies, various parties
have tried to secure a comprehensive resolution of the litigation. In 1991, the
Judicial Panel for Multidistrict Litigation ordered the transfer of federal
cases to the Eastern District of Pennsylvania in Philadelphia for pretrial
purposes. AWI supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
court. That court has been instrumental in having the parties resolve large
numbers of cases from various jurisdictions and has been receptive to different
approaches to the resolution of claims. Claims filed in state courts have not
been directly affected by the transfer.
Amchem Settlement Class Action
- ------------------------------
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including AWI. It was designed to establish a
nonlitigation system for the resolution of those claims, and offered a method
for prompt compensation to claimants who were occupationally exposed to asbestos
if they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees; expedite compensation to claimants with
qualifying claims; and relieve the courts of the burden of handling future
claims. The District Court, after exhaustive discovery and testimony, approved
the settlement class action and issued a preliminary injunction that barred
class members from pursuing claims against Center members in the tort system.
The U.S. Court of Appeals for the Third Circuit reversed that decision, and the
reversal was sustained by the U.S. Supreme Court on September 25, 1997, holding
that the settlement class did not meet the requirements for class certification
under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated
on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and
a loss of the bar against the filing of claims in the tort system.
11
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
- ----------------------------------------------------------------------
("Center")
- ----------
The Facility was established in 1985 to evaluate, settle, pay and defend all
personal injury claims against member companies. Resolution and defense costs
were allocated by formula. The Facility subsequently dissolved, and the Center
was created in October 1988 by 21 former Facility members, including AWI. At the
time of the Filing, there were 16 members of the Center, including AWI.
Insurance carriers, while not members, are represented ex officio on the
Center's governing board and have agreed annually to provide a portion of the
Center's operational costs. The Center adopted many of the conceptual features
of the Facility and has addressed the claims in a manner consistent with the
prompt, fair resolution of meritorious claims. Resolution and defense costs are
allocated by formula among the member companies; adjustments over time due to
the departure of some members and other factors resulted in some increased share
for AWI.
As a result of the Filing, AWI is no longer an active participant in the Center.
The extent and amount of AWI liabilities as a result of its participation in the
Center have not been determined, but will be determined in AWI's Chapter 11
Case.
Number of Claims
- ----------------
The number of claims naming AWI as a defendant ranged from about 16,400 to
31,100 per year during the period from 1989 to 1997. However, subsequent to this
time and up to the Filing, claim filings significantly surpassed this average as
approximately 87,500 and 50,700 claims were filed in 1998 and 1999 respectively.
AWI had expected the number of claims to decline in 2000. However, during the
first eleven months of 2000 prior to the Filing, the Center received and
verified approximately 53,000 claims. Claims from major, established law firms
did decline, but this decline was more than offset by claims from new or
previously low-volume law firms.
Before filing under the Bankruptcy Code, AWI pursued broad-based settlements of
claims through the Center. The Center had reached Strategic Settlement Program
("SSP") agreements with law firms that covered approximately 130,000 claims that
named AWI as a defendant, including agreements with 17 law firms covering
approximately 36,800 claims during the first eleven months of 2000. These
agreements typically provided for multiyear payments for settlement of current
claims and established specific medical and other criteria for the settlement of
future claims as well as annual limits on the number of claims that can be filed
by these firms. These agreements also established fixed settlement values for
different asbestos-related medical conditions which were subject to periodic
re-negotiation over a period of 2 to 5 years. The plaintiff law firms were
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provided
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center could terminate an agreement with an individual law firm if
a significant number of that firm's clients elect not to participate under the
agreement. For some agreements, the component of the agreement that covered
future claims was subject to re-negotiation if members left the Center. As a
result of the Filing, AWI's obligations with respect to these settlements will
be determined in the context of its Chapter 11 Case.
Fourth Quarter 2000 Events
- --------------------------
On October 5, 2000, Owens Corning Fiberglass ("OCF"), a manufacturer of
insulation, filed for protection under Chapter 11 of the Bankruptcy Code to
address its asbestos liability. This filing adversely impacted AWI's
negotiations to obtain a 364-day credit facility which were underway at the
time. This credit facility was to replace an existing $450 million credit
facility that expired on October 19, 2000. Following the OCF filing, the
potential participants in the new credit facility decided to reevaluate their
credit exposures to AWI, primarily due to AWI's asbestos liability. AWI could
not reach agreement on a new facility with acceptable terms. The existing $450
million credit facility expired on October 19, 2000.
Additionally, AWI was concerned that a possible upward bias in the settlement
demands of asbestos plaintiffs would occur given the exit from the tort system
of OCF, an important defendant in asbestos litigation.
As set forth above, AWI filed for relief under Chapter 11 of the Bankruptcy Code
on December 6, 2000. As a result, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from filing new lawsuits against
AWI. In addition, AWI ceased making payments with respect to asbestos claims,
including payments pursuant to the outstanding SSP agreements. A separate
creditors committee representing the interests of asbestos claimants has been
appointed in the Chapter 11 Cases.
12
As a result of the Filing, AWI's present and future asbestos liability will be
addressed in the Chapter 11 Case rather than through the Center and a multitude
of lawsuits in different jurisdictions throughout the U.S. AWI believes that the
Chapter 11 process provides it with the opportunity to change its approach to
its asbestos liability and comprehensively address that liability in one forum.
It is anticipated that all present and future asbestos claims will be resolved
in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate was highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that could affect the range of the
liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The balance at December 31, 2000 is $690.6 million. It is reasonably
possible, however, that the actual liability could be significantly higher than
the recorded liability. As the Chapter 11 Cases proceed there should be more
clarity as to the extent of the liability to be addressed in the Chapter 11
Cases.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 that were filed by public and private building owners. These
cases present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures for
removal and replacement of such products. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Coverage
- ------------------
During relevant time periods, AWI purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., the former
subsidiary of AWI discussed above under "Background". AWI and ACandS agreed to
share certain coverage on a first-come first-served basis and to reserve for
ACandS a certain amount of excess coverage.
13
Wellington Agreement
- --------------------
In 1985, AWI and 52 other companies (asbestos defendants and insurers) signed
the Wellington Agreement. This Agreement settled disputes concerning personal
injury insurance coverage with signatory carriers. It provides broad coverage
for both defense and indemnity and applies to both products hazard and
nonproducts (general liability) coverages. Most of AWI resolutions of
asbestos-related personal injury products hazard coverage matters with its
solvent carriers has been achieved through the Wellington Agreement or other
settlements.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI's primary and excess remaining insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve alleged exposure during AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure under the Wellington Agreement is under way against
certain carriers to determine the percentage of resolved and unresolved claims
that are nonproducts claims, to establish the entitlement to such coverage and
to determine whether and how much reinstatement of prematurely exhausted
products hazard insurance is warranted. The nonproducts coverage potentially
available is substantial and includes defense costs in addition to limits. The
carriers have raised various defenses, including waiver, laches, statutes of
limitations and contractual defenses. One primary carrier alleges that it is no
longer bound by the Wellington Agreement, and another alleges that AWI agreed to
limit its claims for nonproducts coverage against that carrier when the
Wellington Agreement was signed. The ADR process is in the trial phase of
binding arbitration. One insurer has taken the position that it is entitled to
litigate in court certain issues in the ADR proceeding. During 1999, AWI
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to AWI on a number of issues related to
insurance coverage. However, during the fourth quarter of 2000, a new trial
judge was selected for the ADR. AWI is uncertain at this time as to the impact,
if any, this change will have on the preliminary decisions of the initial phases
of the ADR. Further, management believes that one of the carriers has been
experiencing financial difficulties, which could affect its ability to pay any
ultimate judgment. AWI has not adjusted the recorded asset amount at December
31, 2000 related to this carrier. Because of the continuing ADR process and the
possibilities for appeal on certain matters, AWI has not yet completely
determined the financial implications of the ADR proceedings.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of December 31, 2000. Of the total recorded
asset, approximately $77.2 million represents partial settlement for previous
claims that will be paid in a fixed and determinable flow and is reported at its
net present value discounted at 6.50%. The total amount recorded reflects AWI's
belief in the availability of insurance in this amount, based upon AWI's success
in insurance recoveries, recent settlement agreements that provide such
coverage, the nonproducts recoveries by other companies and the opinion of
outside counsel. Such insurance is either available through settlement or
probable of recovery through negotiation, litigation or resolution of the ADR
process that is in the trial phase of binding arbitration. Depending on further
progress of the ADR, activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS and the financial condition of the
insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $86 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $32.2 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Income Statement Charges
- ------------------------
AWI recorded charges to increase its estimate of probable asbestos-related
liability by $236.0 million in the second quarter of 2000, $335.4 million in
1999 and $274.2 million in 1998. Prior to 1998, charges to increase the
liability were effectively offset by corresponding increases in related
insurance recoveries.
14
Cash Flow Impact
- ----------------
AWI paid $226.9 million for asbestos-related claims in the first eleven months
of 2000 compared to $173.0 million in all of 1999. AWI received $27.7 million in
asbestos-related insurance recoveries during 2000 compared to $58.7 million
during 1999. During the pending Chapter 11 cases, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation and the impact of the ADR proceedings on the
insurance asset. Accordingly, AWI is not revising its previously recorded
liability. However, it is reasonably possible that AWI's total exposure to
personal injury asbestos claims may be significantly different than the recorded
liability.
Environmental Matters
- ---------------------
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $6.2
million in 2000, $5.5 million in 1999 and $6.7 million in 1998 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other federal and
state environmental laws continue to change. Until all new regulatory
requirements are known, Armstrong cannot predict with certainty future capital
expenditures associated with compliance with environmental requirements.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
which have potential liability for the required investigation and remediation of
each site and who, in some cases, have agreed to jointly fund that required
investigation and remediation. With regard to some sites, however, Armstrong
disputes the liability, the proposed remedy or the proposed cost allocation
among the PRPs. Armstrong may also have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies. Armstrong
has also been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. Armstrong's payments
and remediation work on these sites is under review in light of the Chapter 11
Filing.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on an evaluation of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction 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 any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Cases also may
affect the ultimate amount of such contributions.
Liabilities of $13.5 million at December 31, 2000 and $13.2 million at December
31, 1999 were for potential environmental liabilities that Armstrong considers
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 liability is available and no
amount within that range is more likely than any other, the lower end of the
range has been used. As assessments and remediation activities progress at each
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the December
31, 2000 environmental liabilities are classified as prepetition liabilities
subject to compromise. As a general rule, such prepetition liabilities that do
not preserve company assets are addressed in the context of the Chapter 11
Cases.
15
The estimated liabilities do not take into account any claims for recoveries
from insurance or third parties. Such recoveries, where probable, have been
recorded as an asset in the consolidated financial statements and are either
available through settlement or anticipated to be recovered through negotiation
or litigation.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
16
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
Armstrong Holding's Common Stock is traded on the New York Stock Exchange, Inc.,
the Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As
of March 1, 2001, there were approximately 7,100 holders of record of Armstrong
Holding's Common Stock.
During 2000, Armstrong issued a total of 1,200 shares of restricted Common Stock
to nonemployee directors of Armstrong pursuant to Armstrong's Restricted Stock
Plan for Nonemployee Directors. Given the small number of persons to whom these
shares were issued, applicable restrictions on transfer and the information
regarding Armstrong possessed by the directors, these shares were issued without
registration in reliance on Section 4(2) of the Securities Act of 1933, as
amended.
2000 First Second Third Fourth Total Year
---- ----- ------ ------ ------ ----------
Dividends per share of common stock $0.48 $0.48 $0.48 $0.00 $1.44
Price range of common stock--high $36.81 $20.50 $17.38 $12.19 $36.81
Price range of common stock--low $16.06 $15.30 $11.81 $0.75 $0.75
1999
----
Dividends per share of common stock $0.48 $0.48 $0.48 $0.48 $1.92
Price range of common stock--high $64.31 $59.69 $60.88 $45.13 $64.31
Price range of common stock--low $44.63 $45.00 $44.13 $29.00 $29.00
17
Item 6. Selected Financial Data
- --------------------------------
The following data is presented on a continuing operations basis.
(Dollars in millions except for per-share data) For Year 2000 1999 1998 1997 1996
- -------------------------------------------------------------- ---- ---- ---- ---- ----
Income statement data:
Net sales $3,003.8 $3,048.2 $ 2,496.1 $ 2,056.9 $ 2,012.3
Cost of goods sold 2,197.7 2,080.8 1,718.3 1,410.6 1,397.5
Total selling, general and administrative expenses
and goodwill amortization 570.2 581.7 453.7 340.0 374.0
Equity (earnings) loss from affiliates, net (18.0) (16.8) (13.8) 29.7 (19.1)
Restructuring and reorganization charges (reversals) 18.0 (1.4) 74.4 -- 46.5
Charge for asbestos liability, net 236.0 335.4 274.2 -- --
----- ----- ----- -- --
Operating income (loss) (0.1) 68.5 (10.7) 276.6 213.4
Interest expense 101.6 104.0 61.4 28.0 22.6
Other (income), net (74.6) (6.7) (1.7) (2.2) (6.9)
------ ----- ----- ----- -----
Earnings (loss) from continuing operations before Chapter 11
reorganization costs and income taxes (27.1) (28.8) (70.4) 250.8 197.7
Chapter 11 reorganization costs, net 103.3 -- -- -- --
----- -- -- -- --
Earnings (loss) from continuing operations before
income taxes (130.4) (28.8) (70.4) 250.8 197.7
Income tax expense (benefit) (41.4) (4.8) (24.9) 94.4 61.5
------ ----- ------ ---- ----
Earnings (loss) from continuing operations
applicable to common stock (a) (89.0) (24.0) (45.5) 156.4 136.2
Per common share - basic (b) (2.21) (0.60) (1.14) 3.85 3.48
Per common share - diluted (b) (2.21) (0.60) (1.14) 3.81 3.24
Net earnings (loss) 12.2 14.3 (9.3) 185.0 155.9
Net earnings (loss) applicable to common stock (a) 12.2 14.3 (9.3) 185.0 149.1
Per common share - basic (b) 0.30 0.36 (0.23) 4.55 3.81
Per common share - diluted (b) 0.30 0.36 (0.23) 4.50 3.61
Dividends declared per share of common stock 1.44 1.92 1.88 1.72 1.56
Capital expenditures 148.0 178.1 172.9 147.1 207.6
Aggregate cost of acquisitions 6.5 3.8 1,175.7 4.2 --
Depreciation and amortization 160.9 154.9 129.6 120.7 113.7
Average number of employees 15,472 15,561 13,406 9,280 9,188
Average number of common shares outstanding (millions) 40.2 39.9 39.8 40.6 39.1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance sheet data (December 31):
Working capital $652.8 $328.1 $473.9 $201.3 $215.8
Net property, plant and equipment 1,253.5 1,292.0 1,337.0 885.6 871.8
Total assets 3,874.6 3,981.4 4,086.8 2,296.4 2,049.7
Liabilities subject to compromise 2,385.2 -- -- -- --
Net long-term debt (c) 56.8 1,389.1 1,537.2 223.1 219.4
Total debt as a percentage of total capital (d) 10.9% 70.8% 72.6% 39.1% 36.8%
Shareholders' equity $665.1 $679.2 $709.7 $810.6 $790.0
Book value per share of common stock 16.30 16.87 17.57 20.20 19.19
Number of shareholders (e) 6,899 6,515 6,868 7,137 7,424
Common shares outstanding (millions) 40.8 40.3 39.8 40.1 41.2
Market value per common share $2.06 $33.38 $60.31 $74.75 $69.50
Notes:
Prior period amounts reflect reclassifications to conform with Emerging Issue
Task Force Issue Nos. 00-010 and 00-014 (See Note 2) and are presented on a
continuing operations basis.
(a) After deducting preferred dividend requirements and adding the tax benefits
for unallocated preferred shares.
(b) See definition of basic and diluted earnings per share in Note 2 to the
consolidated financial statements.
(c) 2000 net long-term debt excludes debt subject to compromise.
(d) Total debt includes short-term debt, current installments of long-term
debt, long-term debt and ESOP loan guarantee. Total capital includes total
debt and total shareholders' equity.
(e) Includes one trustee who is the shareholder of record on behalf of
approximately 6,000 to 6,500 employees for 1996.
18
From 1996 to July 1998, ceramic tile results were reported under the equity
method, whereas prior to 1996, ceramic tile operations were reported on a
consolidated or line item basis. From July 1998 to November 1998, ceramic tile
operations were reported under the cost method.
Beginning in 1998, consolidated results include Armstrong's acquisitions of
Triangle Pacific and DLW.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis corresponds to AHI financial statements.
Since there are no material differences between the financial statements of AHI
and Armstrong, the following discussion and analysis pertains to both AHI and
Armstrong.
2000 COMPARED WITH 1999
- -----------------------
Proceedings under Chapter 11
- ----------------------------
On December 6, 2000, AWI, the major operating subsidiary of AHI, 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 "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The
Chapter 11 cases are being jointly administered under case numbers 00-4469,
00-4470, and 00-4471 (the "Chapter 11 Cases").
AHI, and Armstrong's other subsidiaries, including Triangle Pacific Corp., WAVE
(Armstrong's ceiling grid systems joint venture with Worthington Industries),
Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries
were not a part of the Filing.
Like other companies involved in asbestos litigation, AWI has tried a number of
different approaches to managing its asbestos liability, including negotiating
broad-based settlements of claims and supporting efforts to find a legislative
resolution. The number of new claims filed and the cost to settle claims,
however, continued to escalate. In addition, liquidity concerns increased when
Owens Corning Fiberglass filed for Chapter 11 protection on October 5, 2000.
This hurt AWI's ability to obtain ongoing financing on acceptable terms. These
were the principal factors which led to the decision to make the Filing.
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing. In addition, as a
debtor-in-possession, AWI has the right, subject to the Court's approval, to
assume or reject any executory contracts and unexpired leases in existence at
the date of the Filing. Parties having claims as a result of any such rejection
may file claims with the Court which will be dealt with as part of the Chapter
11 Cases.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Cases.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and along with AWI's operating subsidiaries are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Cases could take a significant period of time.
Financing
- ---------
The Court has approved a $300 million debtor-in-possession credit facility
provided by a bank group led by The Chase Manhattan Bank (the "DIP Facility").
AWI believes that the DIP Facility, together with cash generated from
operations, will be more than adequate to address its liquidity needs. As of
February 28, 2001, AWI had $96.3 million of cash and cash equivalents in
addition to cash held by its non-debtor subsidiaries. Borrowings under the DIP
facility, if any, will constitute superpriority administrative expense claims in
the Chapter 11 Cases.
20
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2000.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 29 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as
reorganization items. Accordingly, AWI recorded a total of $103.3 million as
Reorganization Costs in December 2000, consisting of:
($ millions)
----------
Adjustment of net debt and debt issue costs to expected amount
of allowed claim $ 42.0
ESOP related expenses 58.8
Professional fees 2.6
Interest income, post petition (0.3)
Other expenses directly related to bankruptcy, net 0.2
------
Total Chapter 11 reorganization costs $103.3
======
To record prepetition debt at the face value or the amount of the expected
allowed claims, AWI adjusted the amount of net debt and debt issue costs and
recorded a pre-tax expense of $42.0 million.
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. As described more
fully in Note 19, Armstrong has not permitted further employee contributions to
the ESOP. Therefore, it is expected that the ESOP will no longer have the
ability to repay Armstrong money it previously borrowed. In addition, a $15.5
million expense was recorded related to interest and tax penalty guarantees owed
to ESOP bondholders caused by the default on the ESOP bonds.
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
Discontinued Operations
- -----------------------
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.84 per share.
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001 entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. The proposed sale, while subject to certain
approvals, including that of the Court, is expected to close in June 2001.
Accordingly this segment has been classified as a discontinued operation in the
accompanying consolidated financial statements. Prior year balances and results
have been reclassified to reflect
21
the net assets and results of discontinued operations. Based on the expected net
realizable value of the business, Armstrong recorded a pretax net loss of $30.3
million in the fourth quarter of 2000, $19.5 million net of tax benefit.
Other Divestitures
- ------------------
On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in an
after tax gain of $44.1 million ($60.2 million pretax) or $1.09 per share and
was recorded in other income. The financial results of IPG were reported as part
of the floor coverings segment. The proceeds and gain are subject to a post-
closing working capital adjustment, which Armstrong expects to finalize in the
first half of 2001. Under the terms of the agreement and a related supply
agreement, Armstrong agreed to purchase some of its installation products needs
from Ardex for an initial term of eight years, subject to certain minimums for
the first five years after the sale. The agreement also calls for price
adjustments based upon changing market prices for raw materials, labor and
energy costs.
Acquisitions
- ------------
On May 18, 2000, Armstrong acquired privately-held Switzerland-based Gema
Holding AG ("Gema"), a leading manufacturer and installer of metal ceilings, for
$6 million plus certain contingent consideration not to exceed $25.5 million
based on results over the three year period ending December 31, 2002. Gema, with
annual sales of nearly $50 million, has two manufacturing sites located in
Austria and Switzerland and employs nearly 300 people. The acquisition has been
recorded under the purchase method of accounting. The purchase price has been
allocated to the assets acquired and the liabilities assumed based on the
estimated fair market value at the date of acquisition. Contingent
consideration, when and if paid, will be accounted for as additional purchase
price. The fair market value of tangible and identifiable intangible assets
acquired exceeded the purchase price by $24.2 million and this amount has been
recorded as a reduction of the fair value of property, plant, and equipment.
Financial Condition
- -------------------
As shown on the Consolidated Balance Sheets on page 39, Armstrong had cash and
cash equivalents of $156.5 million at December 31, 2000, compared with $17.2
million at the end of 1999. The ratio of current assets to current liabilities
was 3.24 to 1 as of December 31, 2000, compared with 1.47 to 1 as of December
31, 1999. The increases were primarily related to the Chapter 11 filing.
Long-term debt, excluding Armstrong's guarantee of an ESOP loan and debt subject
to compromise, was $56.8 million, or 7.6 percent of total capital at December
31, 2000, compared with $1,389.1 million, or 59.7 percent of total capital, at
the end of 1999. All outstanding pre-petition long-term debt of entities that
filed for Chapter 11 protection has been classified as liabilities subject to
compromise at December 31, 2000. At December 31, 2000, and December 31, 1999,
ratios of total debt (including Armstrong's guarantee of an ESOP loan and
excluding debt subject to compromise) as a percent of total capital were 10.9
percent and 70.8 percent, respectively. Given the current accounting of
liabilities as subject to compromise, the comparison is not meaningful.
As shown on the Consolidated Statements of Cash Flows on page 41, net cash
provided by operating activities for the year ended December 31, 2000, was $41.8
million compared with $338.1 million in 1999. The decrease was due to several
items including lower net income excluding the gain on sale of businesses and
changes in working capital, primarily accounts payable and accrued expenses.
Net cash provided by investing activities was $179.3 million for the year ended
December 31, 2000, compared with net cash used for investing activities of $62.0
million in 1999. The increase was primarily due to proceeds from the sales of
businesses in 2000.
Net cash used for financing activities was $78.1 million for the year ended
December 31, 2000, compared with $281.9 million in 1999. The decrease was
primarily due to net debt payments of $24.1 million in 2000 compared with net
debt payments of $202.1 million in 1999.
DIP Facility
- ------------
The Court has approved a $300 million debtor-in-possession financing facility to
be provided by a bank group led by the Chase Manhattan Bank. Borrowings under
the DIP Facility constitute superpriority administrative expense claims in the
Chapter 11 Cases. As of December 31, 2000, AWI has borrowed $5.0 million under
the DIP Facility. The DIP Facility expires no later than December 6, 2002 and
borrowings are limited to an adjusted amount of receivables, inventories and
PP&E. Depending on the amount of borrowings, the DIP Facility carries a interest
rate range of either Chase's Alternate Bank Rate plus 50 basis points to 100
basis points or LIBOR plus 150 basis points to 200 basis
22
points. The DIP Facility also contains several covenants including, among other
things, limits on asset sales, capital expenditures and a required ratio of debt
to cash flow. Prior to final Court approval of the DIP Facility, which was
obtained on February 7, 2001, AWI had preliminary available borrowings of $145
million as of December 31, 2000.
Asbestos-related litigation
- ---------------------------
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Item 1 for further discussion.
Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.
Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.
In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.
Personal Injury Litigation
- --------------------------
Nearly all the asbestos-related personal injury lawsuits brought against AWI
relate to alleged exposure to asbestos-containing high-temperature insulation
products. The majority of these claims seek compensatory and punitive damages.
Claims may arise many years after first exposure to asbestos in light of the
decades long latency period for asbestos-related injury. Product identification
and determining exposure periods are difficult and uncertain. Over the long
history of asbestos litigation involving hundreds of companies, various parties
have tried to secure a comprehensive resolution of the litigation. In 1991, the
Judicial Panel for Multidistrict Litigation ordered the transfer of federal
cases to the Eastern District of Pennsylvania in Philadelphia for pretrial
purposes. AWI supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
court. That court has been instrumental in having the parties resolve large
numbers of cases from various jurisdictions and has been receptive to different
approaches to the resolution of claims. Claims filed in state courts have not
been directly affected by the transfer.
Amchem Settlement Class Action
- ------------------------------
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including AWI. It was designed to establish a
nonlitigation system for the resolution of those claims, and offered a method
for prompt compensation to claimants who were occupationally exposed to asbestos
if they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees; expedite compensation to claimants with
qualifying claims; and relieve the courts of the burden of handling future
claims. The District Court, after exhaustive discovery and testimony, approved
the settlement class action and issued a preliminary injunction that barred
class members from pursuing claims against Center members in the tort system.
The U.S. Court of Appeals for the Third Circuit reversed that decision, and the
reversal was sustained by the U.S. Supreme Court on September 25, 1997, holding
that the settlement class did not meet the requirements for class certification
under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated
on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and
a loss of the bar against the filing of claims in the tort system.
23
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
- ----------------------------------------------------------------------
("Center")
- ----------
The Facility was established in 1985 to evaluate, settle, pay and defend all
personal injury claims against member companies. Resolution and defense costs
were allocated by formula. The Facility subsequently dissolved, and the Center
was created in October 1988 by 21 former Facility members, including AWI. At the
time of the Filing, there were 16 members of the Center, including AWI.
Insurance carriers, while not members, are represented ex officio on the
Center's governing board and have agreed annually to provide a portion of the
Center's operational costs. The Center adopted many of the conceptual features
of the Facility and has addressed the claims in a manner consistent with the
prompt, fair resolution of meritorious claims. Resolution and defense costs are
allocated by formula among the member companies; adjustments over time due to
the departure of some members and other factors resulted in some increased share
for AWI.
As a result of the Filing, AWI is no longer an active participant in the Center.
The extent and amount of AWI liabilities as a result of its participation in the
Center have not been determined, but will be determined in AWI's Chapter 11
Case.
Number of Claims
- ----------------
The number of claims naming AWI as a defendant ranged from about 16,400 to
31,100 per year during the period from 1989 to 1997. However, subsequent to this
time and up to the Filing, claim filings significantly surpassed this average as
approximately 87,500 and 50,700 claims were filed in 1998 and 1999 respectively.
AWI had expected the number of claims to decline in 2000. However, during the
first eleven months of 2000 prior to the Filing, the Center received and
verified approximately 53,000 claims. Claims from major, established law firms
did decline, but this decline was more than offset by claims from new or
previously low-volume law firms.
Before filing under the Bankruptcy Code, AWI pursued broad-based settlements of
claims through the Center. The Center had reached Strategic Settlement Program
("SSP") agreements with law firms that covered approximately 130,000 claims that
named AWI as a defendant, including agreements with 17 law firms covering
approximately 36,800 claims during the first eleven months of 2000. These
agreements typically provided for multiyear payments for settlement of current
claims and established specific medical and other criteria for the settlement of
future claims as well as annual limits on the number of claims that can be filed
by these firms. These agreements also established fixed settlement values for
different asbestos-related medical conditions which were subject to periodic
re-negotiation over a period of 2 to 5 years. The plaintiff law firms were
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provided
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center could terminate an agreement with an individual law firm if
a significant number of that firm's clients elect not to participate under the
agreement. For some agreements, the component of the agreement that covered
future claims was subject to re-negotiation if members left the Center. As a
result of the Filing, AWI's obligations with respect to these settlements will
be determined in the context of its Chapter 11 Case.
Fourth Quarter 2000 Events
- --------------------------
On October 5, 2000, Owens Corning Fiberglass ("OCF"), a manufacturer of
insulation, filed for protection under Chapter 11 of the Bankruptcy Code to
address its asbestos liability. This filing adversely impacted AWI's
negotiations to obtain a 364-day credit facility which were underway at the
time. This credit facility was to replace an existing $450 million credit
facility that expired on October 19, 2000. Following the OCF filing, the
potential participants in the new credit facility decided to reevaluate their
credit exposures to AWI, primarily due to AWI's asbestos liability. AWI could
not reach agreement on a new facility with acceptable terms. The existing $450
million credit facility expired on October 19, 2000.
Additionally, AWI was concerned that a possible upward bias in the settlement
demands of asbestos plaintiffs would occur given the exit from the tort system
of OCF, an important defendant in asbestos litigation.
As set forth above, AWI filed for relief under Chapter 11 of the Bankruptcy Code
on December 6, 2000. As a result, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from filing new lawsuits against
AWI. In addition, AWI ceased making payments with respect to asbestos claims,
including payments pursuant to the outstanding SSP agreements. A separate
creditors committee representing the interests of asbestos claimants has been
appointed in the Chapter 11 Cases.
24
As a result of the Filing, AWI's present and future asbestos liability will be
addressed in the Chapter 11 Case rather than through the Center and a multitude
of lawsuits in different jurisdictions throughout the U.S. AWI believes that the
Chapter 11 process provides it with the opportunity to change its approach to
its asbestos liability and comprehensively address that liability in one forum.
It is anticipated that all present and future asbestos claims will be resolved
in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate was highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that could affect the range of the
liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The balance at December 31, 2000 is $690.6 million. It is reasonably
possible, however, that the actual liability could be significantly higher than
the recorded liability. As the Chapter 11 Cases proceed there should be more
clarity as to the extent of the liability to be addressed in the Chapter 11
Cases.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 that were filed by public and private building owners. These
cases present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures for
removal and replacement of such products. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Coverage
- ------------------
During relevant time periods, AWI purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., the former
subsidiary of AWI discussed above under "Background". AWI and ACandS agreed to
share certain coverage on a first-come first-served basis and to reserve for
ACandS a certain amount of excess coverage.
25
Wellington Agreement
- --------------------
In 1985, AWI and 52 other companies (asbestos defendants and insurers) signed
the Wellington Agreement. This Agreement settled disputes concerning personal
injury insurance coverage with signatory carriers. It provides broad coverage
for both defense and indemnity and applies to both products hazard and
nonproducts (general liability) coverages. Most of AWI resolutions of
asbestos-related personal injury products hazard coverage matters with its
solvent carriers has been achieved through the Wellington Agreement or other
settlements.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI's primary and excess remaining insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve alleged exposure during AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure under the Wellington Agreement is under way against
certain carriers to determine the percentage of resolved and unresolved claims
that are nonproducts claims, to establish the entitlement to such coverage and
to determine whether and how much reinstatement of prematurely exhausted
products hazard insurance is warranted. The nonproducts coverage potentially
available is substantial and includes defense costs in addition to limits. The
carriers have raised various defenses, including waiver, laches, statutes of
limitations and contractual defenses. One primary carrier alleges that it is no
longer bound by the Wellington Agreement, and another alleges that AWI agreed to
limit its claims for nonproducts coverage against that carrier when the
Wellington Agreement was signed. The ADR process is in the trial phase of
binding arbitration. One insurer has taken the position that it is entitled to
litigate in court certain issues in the ADR proceeding. During 1999, AWI
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to AWI on a number of issues related to
insurance coverage. However, during the fourth quarter of 2000, a new trial
judge was selected for the ADR. AWI is uncertain at this time as to the impact,
if any, this change will have on the preliminary decisions of the initial phases
of the ADR. Further, management believes that one of the carriers has been
experiencing financial difficulties, which could affect its ability to pay any
ultimate judgment. AWI has not adjusted the recorded asset amount at December
31, 2000 related to this carrier. Because of the continuing ADR process and the
possibilities for appeal on certain matters, AWI has not yet completely
determined the financial implications of the ADR proceedings.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of December 31, 2000. Of the total recorded
asset, approximately $77.2 million represents partial settlement for previous
claims that will be paid in a fixed and determinable flow and is reported at its
net present value discounted at 6.50%. The total amount recorded reflects AWI's
belief in the availability of insurance in this amount, based upon AWI's success
in insurance recoveries, recent settlement agreements that provide such
coverage, the nonproducts recoveries by other companies and the opinion of
outside counsel. Such insurance is either available through settlement or
probable of recovery through negotiation, litigation or resolution of the ADR
process that is in the trial phase of binding arbitration. Depending on further
progress of the ADR, activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS and the financial condition of the
insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $86 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $32.2 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Income Statement Charges
- ------------------------
AWI recorded charges to increase its estimate of probable asbestos-related
liability by $236.0 million in the second quarter of 2000, $335.4 million in
1999 and $274.2 million in 1998. Prior to 1998, charges to increase the
liability were effectively offset by corresponding increases in related
insurance recoveries.
26
Cash Flow Impact
- ----------------
AWI paid $226.9 million for asbestos-related claims in the first eleven months
of 2000 compared to $173.0 million in all of 1999. AWI received $27.7 million in
asbestos-related insurance recoveries during 2000 compared to $58.7 million
during 1999. During the pending Chapter 11 cases, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation and the impact of the ADR proceedings on the
insurance asset. Accordingly, AWI is not revising its previously recorded
liability. However, it is reasonably possible that AWI's total exposure to
personal injury asbestos claims may be significantly different than the recorded
liability.
Consolidated Results
- --------------------
The following discussions of consolidated results are on a continuing operations
basis.
Net sales in 2000 of $3.00 billion were 1.5% lower when compared with net sales
of $3.05 billion in 1999. Excluding the impact of unfavorable foreign exchange
rates in 2000 and the divestitures of the gasket and textile businesses in 1999,
Armstrong sales were $65.2 million, or 2.2%, above the prior year. Floor
coverings sales decreased 7.5%; Building products sales increased 5.4%; Wood
products sales increased by 7.9%. Further excluding the 1999 divestitures, sales
increased 1.0% in the Americas and declined 3.1% in the Pacific Area. European
sales decreased 3.3% but would have increased 10.4% without the impact of
unfavorable foreign exchange rates.
The loss from continuing operations in 2000 was $89.0 million or $2.21 per
share. This included an after-tax charge of $153.4 million to increase the
estimated liability for asbestos-related claims and an after-tax gain of $44.1
million from the sale of the Installation Products Group ("IPG"), which was part
of the floor coverings segment.
Also included in 2000 was a pre-tax restructuring charge of $19.4 million, of
which $8.6 million related to severance and enhanced retirement benefits for
more than 180 positions (approximately 66% related to salaried positions) within
the European Flooring business. Restructuring actions also included staff
reductions due to the elimination of administrative positions, the consolidation
and closing of sales offices in Europe and the closure of the Team Valley,
England commercial tile plant. $2.6 million of the restructuring charge related
to severance and enhanced retirement benefits for 15 salaried positions due to
cost savings initiatives. These 15 eliminated positions were primarily in the
U.S. The remaining $8.2 million of the restructuring charge primarily related to
the remaining payments on a noncancelable operating lease for an office facility
in the U.S. The employees who occupied this office facility are being relocated
to the corporate headquarters. In addition, $1.4 million of the remaining
accrual for the 1998 restructuring charge was reversed during 2000, comprising
certain severance accruals that were no longer necessary as certain individuals
remained employed by Armstrong. An additional restructuring charge of $5.4
million, covering 54 salaried positions, will be recorded in the first quarter
of 2001 to continue these cost savings initiatives.
Armstrong also recorded $17.6 million to cost of goods sold in 2000 for
write-downs of inventory and production-line assets that were not categorized as
restructuring costs. The inventory write-downs were related to changes in
product offerings while the write-downs of production-line assets primarily
related to changes in production facilities and product offerings.
In addition, Armstrong recorded $10.1 million within selling, general and
administrative expenses ("SG&A") expense for CEO and management transition costs
during 2000. The components of this amount included hiring a new CEO, expenses
related to the departure of the prior CEO, covenant agreements related to
non-compete arrangements and other management transition costs. Armstrong had
anticipated approximately $7.6 million of fourth quarter 2000 costs related to
settlements of certain benefit plan obligations for former executive employees.
Due to the Chapter 11 Filing, only $2.7 million of these costs were actually
incurred in the fourth quarter of 2000.
Armstrong also recorded costs within SG&A of $3.8 million for severance payments
to approximately 100 employees that could not be classified as restructuring
costs and $2.3 million for fixed asset impairments related to the decision to
vacate office space in the U.S.
27
Armstrong recorded $103.3 million of Chapter 11 reorganization costs. See Note 1
for details of the reorganization costs.
Excluding the items impacting the 2000 results discussed above, earnings from
continuing operations for 2000 would have been $121.1 million, or $2.99 per
share.
Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified US defined benefit plan, established an additional benefit known as
the ESOP Pension Account to partially compensate active employee and retiree
ESOP shareholders for the decline in the market value of AHI's stock. The effect
of this amendment had no material impact to the financial position or results of
operations in 2000, but will increase the benefit obligation by $88.7 million in
2001 and will decrease the 2001 pension credit by $13.0 million compared to
prior periods.
The 1999 loss from continuing operations was $24.0 million, or $0.60 per share.
This included an after-tax charge of $218.0 million to increase the estimated
liability for asbestos-related claims, a $3.2 million loss from the sale of its
textile products business, a $6.0 million gain from the sale of its gasket
products subsidiary, a pre-tax restructuring reversal of $1.4 million and
proceeds from the settlement of various legal actions totaling $3.0 million.
Excluding these items, earnings from continuing operations for 1999 would have
been $188.4 million, or $4.69 per share.
Armstrong reported net earnings of $12.2 million, or $0.30 per share in 2000,
compared to net earnings of $14.3 million, or $0.36 per share in 1999.
Cost of goods sold in 2000 was 73.2% of sales, higher than cost of goods sold of
68.3% in 1999. Higher raw material costs primarily in floor coverings and wood
products and higher energy costs in building products were the primary drivers
of the increase.
SG&A expenses in 2000 were $546.3 million, or 18.2% of sales compared to $556.2
million, or 18.2% of sales in 1999. SG&A expenses in 2000 contained lower
employee incentive bonus accruals and lower selling expense offset by CEO and
management transition costs, expenses related to the reorganization of European
flooring business, asset write-downs related to the decision to vacate office
space in Lancaster, PA and inventory write-downs related to samples.
Equity earnings from affiliates of $18.0 million improved $1.2 million primarily
reflecting an improvement in the WAVE ceiling grid joint venture.
Goodwill amortization was $23.9 million for 2000 compared to $25.5 million in
1999 primarily due to lower foreign currency exchange rates.
Interest expense of $101.6 million in 2000 was lower than interest expense of
$104.0 million in 1999. In accordance with SOP 90-7, Armstrong did not record
$6.0 million of contractual interest expense on prepetition debt after the
Chapter 11 filing date.
Other income in 2000 includes a $60.2 million gain from the sale of IPG, which
was part of the floor coverings segment and a gain of $5.2 million resulting
from the demutualization of an insurance company with whom Armstrong has
company-owned life insurance policies and other items. 1999 other income
includes a $6.0 million gain on the divestiture of 65% of Armstrong Industrial
Specialties, Inc. ("AISI"), a loss of $5.0 million on the divestiture of Textile
Products, proceeds from the settlement of various legal actions totaling $3.0
million and a gain of $2.6 million resulting from the demutualization of an
insurance company with whom Armstrong has company-owned life insurance policies
and other items.
The 2000 effective tax rate benefit from continuing operations was 31.7% versus
16.7% for 1999. Excluding the impact of the asbestos charge, the gain on sale of
Installation Products, the reorganization charge and other related expenses in
2000, the 2000 effective tax rate was 39.3%. Excluding the asbestos charge and
the divestitures of the gaskets and textiles businesses, the 1999 effective tax
rate from continuing operations was 37.8%. The increase was due to nondeductible
goodwill and foreign source income.
28
New Accounting Pronouncements
- -----------------------------
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("FAS 138"), an amendment of FASB Statement No. 133 ("FAS 133"). FAS
138 amends some accounting and reporting standards contained in FAS 133 and also
addresses a limited number of issues causing implementation difficulties in
applying FAS 133. The statements provide for the recognition of a cumulative
adjustment for an accounting change, as of the date of adoption. Armstrong has
formed a team to identify and implement the appropriate systems and processes to
adopt these statements effective January 1, 2001. No material transition
adjustment will result from the adoption of the Statements.
In October 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB SFAS No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement is effective March 2001. Armstrong
does not anticipate any material impact on its financial statements from the
adoption of this Statement.
INDUSTRY SEGMENT RESULTS
- ------------------------
Floor Coverings
- ---------------
Worldwide floor coverings sales in 2000 of $1,263.9 million were $101.8 million,
or 7.5% below last year. Sales in the Americas were 4.3% below 1999. European
sales were 17.7% below prior year as a result of unfavorable foreign exchange
rate translation, lower prices and a less favorable mix driven by continued
market weakness. Excluding the effects of foreign exchange rate translation,
sales in Europe were 6.9% below last year. Pacific area sales were flat with
last year.
Operating income of $78.8 million in 2000 compared to $204.6 million in 1999.
Excluding expenses associated with reorganizing the European business, other
management changes and the $7.5 million fourth quarter impairments of production
line assets and samples inventory, the 2000 operating income was $107.3 million.
1999 operating income was $200.1 million excluding $4.8 million for insurance
settlements for past product claims, net of inventory write-offs, $3.3 million
of costs associated with changes in the production location for some product
lines and a net benefit of $3.0 million from changes in employee compensation
policies. The annual operating margin decline is primarily related to lower
sales volume and the impact of higher production costs, primarily higher raw
material prices.
Outlook
Sales in 2001 are expected to decrease modestly due to lower demand,
particularly in the Americas. Operating income is expected to decline
significantly due to the lower sales volume, continued price pressures on raw
materials and increased promotional and product development spending.
Building Products
- -----------------
Building products sales in 2000 were $837.2 million compared to $794.5 million
in 1999. Excluding the sales impact of the Gema acquisition in 2000, sales
increased 1.4%. Higher sales in the U.S., primarily in the U.S. commercial
channel, were mostly offset by lower European sales. Pacific area sales
increased 1.9%.
Operating income in 2000 was $113.9 million compared to $120.0 million in 1999.
The operating income decrease was primarily related to higher natural gas
prices, partially offset by positive earnings from the Gema acquisition. Results
from Armstrong's WAVE grid joint venture with Worthington Industries continue to
be strong, showing an 11% improvement over 1999.
Outlook
Sales in 2001 are expected to increase slightly as a full year's contribution
from Gema will be offset by slightly lower sales from other products in Europe.
Operating income is expected to decrease significantly due to a full year impact
of anticipated higher natural gas prices.
29
Wood Products
- -------------
Wood products sales in 2000 were $902.7 million compared to $836.5 million in
1999. Cabinet sales increased 5.1% due to higher volume. Wood flooring sales
increased 8.5% versus 1999 driven primarily by volume growth and improved
pricing. Operating income in 2000 was $74.3 million compared to $85.0 million in
1999. The decrease was due to higher lumber costs that offset sales volume
growth.
Outlook
Sales in 2001 are expected to increase slightly from 2000 levels. Operating
income is expected to decline slightly due to higher lumber price costs.
All Other
- ---------
Sales reported in this segment during 1999 comprised gasket materials (through
June 30, 1999) and textile mill supplies (through September 30, 1999). As
discussed previously, Armstrong sold the textiles business and 65% of the
gaskets business during 1999. Operating income in 2000 related to Armstrong's
remaining 35% interest in Interface Solutions Inc.
Geographic Areas
- ----------------
Net sales in the Americas in 2000 were $2.43 billion, compared to $2.45 billion
in 1999. Net sales in Europe in 2000 were $463.5 million, compared to $489.9
million in 1999 due to lower floor coverings sales. Sales to the Pacific area
and other foreign countries of $108.2 million compared to $111.7 million in
1999.
Long-lived assets in the Americas in 2000 were $975.1 million compared to $971.9
million in 1999. Long-lived assets in Europe in 2000 were $246.4 million
compared to $285.2 million in 1999. The decrease was primarily due lower foreign
currency exchange rates in 2000. Long-lived assets in the Pacific area in 2000
were $32.0 million compared to $34.9 million in 1999.
1999 COMPARED WITH 1998
- -----------------------
The results for 1999 compared with 1998 have been restated to reflect continuing
operations.
Divestitures
- ------------
On May 28, 1999, Armstrong's subsidiary, DLW, sold its furniture business for
total cash proceeds of $38.1 million. Armstrong acquired this business as part
of the acquisition of DLW in the third quarter of 1998 and had classified the
business as held for sale. There was no gain or loss on the transaction.
On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing,
Inc. Armstrong acquired this interest as part of its acquisition of DLW during
the third quarter of 1998. There was no material gain or loss on the
transaction.
On June 30, 1999, Armstrong sold 65% of its ownership in AISI, its gasket
products subsidiary, to a group of investors including Citicorp Venture Capital
Ltd. and the management of AISI for a cash purchase price of approximately $36.1
million. The sale resulted in a gain of approximately $6.0 million, or $0.15 per
share, which was recorded in other income.
On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a loss of $3.2
million, or $0.08 per share, which was recorded in other income.
Financing
- ---------
On March 16, 1999, Armstrong filed a shelf registration statement for $1 billion
of combined debt and equity securities. On May 19, 1999, Armstrong completed an
offering under the shelf registration statement of $200 million aggregate
principal amount of 7.45% Senior Notes due 2029. The net proceeds from this
offering were used to repay other indebtedness of Armstrong.
On October 21, 1999, Armstrong renewed a bank credit facility for $450 million
with a term of 364 days and cancelled a $300 million line of credit which was
due to expire in 2001. Armstrong retained a $450 million line of credit which
expires in 2003. There were no borrowings under these facilities at December 31,
1999.
30
Financial Condition
- -------------------
As shown on the Consolidated Statements of Cash Flows on page 41, net cash
provided by operating activities for the year ended December 31, 1999, was
$338.1 million compared with $243.3 million in 1998. The increase is due to
changes in working capital components, primarily an increase in accounts payable
and accrued expenses.
Net cash used for investing activities was $62.0 million for the year ended
December 31, 1999, compared with $1,198.3 million in 1998. The decrease was
primarily due to expenditures for acquisitions in 1998 and the proceeds from the
sales of businesses in 1999.
Net cash used for financing activities was $281.9 million for the year ended
December 31, 1999, compared with net cash provided by financing activities of
$937.3 million in 1998. The decrease was primarily due to the $202.1 million net
reduction of debt during 1999 compared to the $1,039.5 million net increase in
debt during 1998.
On October 15, 1999, Armstrong's ceiling grid joint venture with Worthington
Industries, WAVE, made a $25 million payment to each partner. Armstrong applied
the proceeds to debt reduction.
Consolidated Results
- --------------------
Net sales in 1999 of $3.05 billion were 22.1% higher when compared with net
sales of $2.50 billion in 1998. Triangle Pacific contributed $836.5 million and
$351.3 million of sales in 1999 and 1998 respectively, while DLW contributed
$228.8 million and $69.9 million during the same periods.
Excluding these acquisitions, Armstrong sales of $1,982.9 million were $92.0
million, or 4.4%, below prior year of which $51.5 million related to the absence
of gasket and textile sales, following the sale of those units in 1999. Floor
coverings sales decreased 3.5%; and Building products sales were down 0.6%.
Further excluding the impact of the gaskets and textiles divestitures, Americas
sales growth of 1.8% was offset by the European sales decline of 21.3% and the
Pacific Area sales decline of 4.8%.
Armstrong reported net earnings of $14.3 million, or $0.36 per share, compared
to a net loss of $9.3 million, or $0.23 per share in 1998. The 1999 and 1998
results include net after-tax charges of $218.0 million and $178.2 million,
respectively, for increases in the estimated liability for asbestos-related
claims. The 1998 results include after-tax charges of $48.5 million for
restructuring activities.
Cost of goods sold in 1999 was 68.3% of sales, lower than cost of goods sold of
68.8% in 1998. Excluding the effect of the 1998 acquisitions, Armstrong's cost
of goods sold was 65.6% in 1999 and 67.8% in 1998.
SG&A expenses in 1999 were $556.2 million, or 18.2% of sales. In 1998, SG&A
expenses were $443.0 million, or 17.7% of sales.
Equity earnings from affiliates of $16.8 million improved $3.0 million
reflecting primarily an improvement in the WAVE grid joint venture and the
equity method accounting of AISI for the post sale period in 1999.
Goodwill amortization was $25.5 million for 1999 compared to $10.7 million in
1998 due to a full year of amortization related to the Triangle Pacific and DLW
acquisitions.
Interest expense of $104.0 million in 1999 was higher than interest expense of
$61.4 million in 1998 due to higher levels of short- and long-term debt due to a
full year of acquisition-related debt.
Other income in 1999 includes a gain of $6.0 million on the divestiture of 65%
of AISI and a loss of $5.0 million on the divestiture of Textile Products. Other
income in 1999 also reflects proceeds from the settlement of various legal
actions totaling $3 million and a gain of $2.6 million resulting from the
receipt of cash and stock in connection with the demutualization of an insurance
company with whom Armstrong has company-owned life insurance policies and other
items.
Armstrong's 1999 effective tax rate, excluding the effects of the asbestos
charge, was 37.8% which was affected by nondeductible goodwill amortization.
Armstrong's 1998 tax benefit was generated by the charge for the increase in
asbestos liability, cost reduction and reorganization charges, and a tax benefit
associated with the gain on the sale of the Dal-Tile shares, partially offset by
the nondeductibility of goodwill.
31
Industry Segment Results
- ------------------------
Floor Coverings
- ---------------
Worldwide floor coverings sales in 1999 of $1,365.7 million included sales of
$228.8 million from DLW. Excluding DLW, sales were $1,136.9 million, or 1.1%
above last year. Sales in the Americas were essentially flat versus 1998 as
increased sales of commercial tile, installation products, and laminate were
almost offset by declines of residential tile and residential and commercial
sheet. The residential sheet decline was primarily due to lower sales in the
manufactured homes channel and Canada. Sales in the traditional retail channel
increased on higher unit volumes and improved product mix resulting from the
success of new product introductions. Both residential and commercial channels
experienced competitive pricing pressures during the year. European sales were
24.3% below prior year reflecting weak economic conditions and residential
pricing pressure resulting from excess capacity and the lack of business in
Russia. Pacific area sales were 2.0% ahead of last year.
Operating income of $203.5 million in 1999 compared to $175.2 million in 1998,
excluding restructuring charges and reversals. Higher operating margins were
primarily due to implementation of actions related to the 1998 cost reduction
activities, lower raw material and other costs, an improved mix of residential
sheet products. Additionally, operating results include $4.8 million for
insurance settlements for past product claims, net of inventory write-offs
mostly offset by $3.3 million of costs associated with changes in the production
location for some product lines. The impact of changes in employee compensation
policies resulted in a net benefit of $3.0 million.
Building Products
- -----------------
Building products sales in 1999 were $794.5 million compared to $799.0 million
in 1998 as strong performance from the U.S. commercial business was offset by
lower European sales and price pressure across most markets.
Operating income in 1999 was $119.7 million compared to $116.6 million in 1998,
excluding restructuring charges and reversals. The operating income increase
reflected the impact of 1998 cost reduction activities and lower raw material
and other costs. Results from Armstrong's WAVE grid joint venture with
Worthington Industries showed a 13% improvement over 1998.
Wood Products
- -------------
Wood products sales in 1999 were $836.5 million compared to $351.3 million in
1998. The increase was primarily due to a full year's sales in 1999 compared
with about 5 months of sales in 1998 following the acquisition of Triangle
Pacific.
Operating income in 1999 was $85.0 million compared to $38.6 million from the
date of acquisition in 1998.
On a comparable basis, sales and operating income for Triangle Pacific in 1999
were approximately 14.5% and 16.1% above the respective amounts reported by
Triangle Pacific in 1998.
All Other
- ---------
Sales reported in this segment comprised gasket materials and textile mill
supplies. As discussed previously, Armstrong sold the textiles business and 65%
of the gaskets business during 1999. Sales of $51.5 million decreased 47.1%
compared to 1998. Operating income of $6.0 million compared with $9.1 million in
1998, excluding restructuring charges.
Geographic Areas
- ----------------
Net sales in the Americas in 1999 were $2.45 billion, compared to $1.96 billion
recorded in 1998. The increase in sales to customers in the United States and
Canada was primarily due to a full year of Triangle Pacific sales. Net sales in
Europe in 1999 were $489.9 million, compared to $417.1 million in 1998.
Additional sales from DLW were somewhat offset by lower sales to Eastern Europe.
Sales to the Pacific area and other foreign countries of $111.7 million compared
to $117.3 million in 1998.
Long-lived assets in the Americas in 1999 were $971.9 million compared to $985.0
million in 1998. Long-lived assets in Europe in 1999 were $285.2 million
compared to $315.4 million in 1998. The decrease primarily relates to currency
exchange rate effects on German assets. Long-lived assets in the Pacific area in
1999 were $34.9 million compared to $36.6 million in 1998.
32
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
Market Risk
- -----------
Armstrong is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices that could impact its results of
operations and financial condition. Armstrong uses financial instruments,
including fixed and variable rate debt, as well as swap, forward and option
contracts to finance its operations and to hedge interest rate, currency and
commodity exposures. Armstrong continuously monitors developments in the capital
markets and only enters into currency and swap transactions with established
counterparties having investment-grade ratings. Exposure to individual
counterparties is controlled, and thus Armstrong considers the risk of
counterparty default to be negligible. Swap, forward and option contracts are
entered into for periods consistent with underlying exposure and do not
constitute positions independent of those exposures. Armstrong uses derivative
financial instruments as risk management tools and not for speculative trading
purposes. In addition, derivative financial instruments are entered into with a
diversified group of major financial institutions in order to manage Armstrong's
exposure to nonperformance on such instruments.
Interest Rate Sensitivity
- -------------------------
Due to AWI's Chapter 11 Filing, all affected debt has been classified as
liabilities subject to compromise. All such debt will be addressed in the
context of the Chapter 11 Cases and during the pendency thereof, AWI does not
expect to pay any principal, interest or other payments in respect thereof. The
table below provides information about Armstrong's long-term debt obligations as
of December 31, 2000, and December 31, 1999. The table presents principal cash
flows and related weighted-average interest rates by pre-Filing scheduled
maturity dates. Weighted-average variable rates are based on implied forward
rates in the yield curve at the reporting date. The information is presented in
U.S. dollar equivalents, which is Armstrong's reporting currency. The amounts
below as of December 31, 2000 reflect only post-petition debt and debt of
entities that were not a part of the Chapter 11 Filing.
After
Scheduled maturity date 2001 2002 2003 2004 2005 2005 Total
---- ---- ---- ---- ---- ---- -----
($ millions)
- ------------
As of December 31, 2000
Long-term debt:
Fixed rate $6.1 $3.1 $3.1 $2.6 $1.0 $37.0 $52.9
Avg. interest rate 5.60% 5.34% 6.71% 4.89% 7.23% 5.70% 5.72%
- ------------------------------------------ ------------ ------------ ---------- ---------- --------- ---------- ------------
Variable rate $2.0 -- -- -- -- $10.0 $12.0
Avg. interest rate 7.65% -- -- -- -- 3.86% 4.49%
After
2000 2001 2002 2003 2004 2004 Total
---- ---- ---- ---- ---- ---- -----
As of December 31, 1999
Long-term debt:
Fixed rate $31.1 $8.7 $0.8 $202.1 $1.3 $705.7 $949.7
Avg. interest rate 7.73% 8.66% 7.23% 6.36% 3.51% 7.61% 7.35%
- ------------------------------------------ ------------ ------------ ---------- ---------- --------- ---------- ------------
Variable rate $5.0 $2.0 -- $450.0 -- $18.5 $475.5
Avg. interest rate 7.65% 7.65% -- 6.20% -- 4.89% 6.17%
Armstrong historically managed its ratio of fixed to floating rate debt with the
objective of achieving a mix that management believed to be appropriate. To
manage this mix in a cost effective manner, Armstrong, from time to time,
entered into interest rate swap agreements, in which it agreed to exchange
various combinations of fixed and/or variable interest rates based on
agreed-upon notional amounts. In order to maintain the ratio of fixed to
floating rate debt which management believed appropriate, Armstrong maintained
$150 million of interest rate swaps during most of 2000. Armstrong received
fixed rates and paid floating rates on these swaps. However, all but one of the
interest rate swap agreements was terminated when Armstrong defaulted on its
commercial paper obligations on November 22, 2000. Details of the outstanding
swap agreement as of December 31, 2000 are as follows:
Maturity Date Notional Market
($ millions) Amount Pays Receives Value
------------ ------ ---- -------- -----
Aug. 15, 2003 $20.0 3 mo. LIBOR 6.54% $0.3
This interest rate swap agreement was subsequently terminated by the
counter-party on February 26, 2001.
33
Exchange Rate Sensitivity
- -------------------------
Armstrong manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. To a large extent, Armstrong's global manufacturing and
sales provide a natural hedge of foreign currency exchange rate movement, as
foreign currency expenses generally offset foreign currency revenues. At
December 31, 2000, Armstrong's major foreign currency exposures are to the
Canadian dollar, the Euro and the British pound.
Armstrong has used foreign currency forward exchange contracts and purchased
options to reduce its exposure to the risk that the eventual net cash inflows
and outflows, resulting from the sale of product to foreign customers and
purchases from foreign suppliers, will be adversely affected by changes in
exchange rates. These derivative instruments are used for firmly committed or
forecasted transactions. These transactions allow Armstrong to further reduce
its overall exposure to exchange rate movements, since the gains and losses on
these contracts offset losses and gains on the transactions being hedged.
Armstrong also used foreign currency forward exchange contracts to hedge
exposures created by cross-currency inter-company loans.
The table below details Armstrong's outstanding currency instruments, all of
which have scheduled maturity before December 31, 2001.
Notional Amount (millions) December 31, 2000 December 31, 1999
- -------------------------- ----------------- -----------------
Forward Contracts $20.4 $295.6
Purchased Options -- 8.3
Fair Value (millions):
- ----------------------
Forward Contracts $0.2 $9.4
Purchased Options -- 0.2
Commodity Price Sensitivity
- ---------------------------
Armstrong purchases natural gas for use in the manufacture of ceiling tiles and,
as a result, is exposed to movements in the price of natural gas. Armstrong has
a policy of minimizing cost volatility by purchasing natural gas swap contracts.
The table below provides information about Armstrong's natural gas swap
contracts that are sensitive to changes in commodity prices. Notional amounts
are in millions of Btu's (MMBtu) and weighted average contract prices.
On balance sheet commodity related derivatives 2000 2001 Total
---- ---- -----
As of December 31, 2000
- -----------------------
Swap contracts (long):
Contract amounts (MMBtu) -- -- --
Weighted average price ($/MMBtu) -- -- --
As of December 31, 1999
- -----------------------
Swap contracts (long):
Contract amounts (MMBtu) 950,000 -- 950,000
Weighted average price ($/MMBtu) $2.43 -- $2.43
34
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
ARMSTRONG HOLDINGS, INC. AND SUBSIDIARIES
- -----------------------------------------
The following consolidated financial statements are filed as part of this Annual
Report on Form 10-K:
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Earnings for the Years Ended December 31, 2000, 1999,
and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
1999, and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
2000, 1999, and 1998
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Reserves
ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES
- -------------------------------------------------
The following consolidated financial statements are filed as part of this Annual
Report on Form 10-K:
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Earnings for the Years Ended December 31, 2000, 1999,
and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
1999, and 1998
Consolidated Statements of Shareholder's Equity for the Years Ended December 31,
2000, 1999, and 1998
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Reserves
35
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
ARMSTRONG HOLDINGS, INC.
(millions except for per share data) First Second Third Fourth Total year
- ------------------------------------ ----- ------ ----- ------ ----------
2000 Net sales $741.9 $799.6 $803.2 $659.1 $3,003.8
- ----
Gross profit 214.4 235.5 219.4 136.8 806.1
Net earnings (loss) 30.7 7.5 74.3 (100.3) 12.2
Per share of common stock:
Basic: Net earnings (loss) 0.77 0.19 1.84 (2.48) 0.30
Diluted: Net earnings (loss) 0.76 0.19 1.83 (2.48) 0.30
Dividends per share of common stock 0.48 0.48 0.48 -- 1.44
Price range of common stock--high 36.81 20.50 17.38 12.19 36.81
Price range of common stock--low 16.06 15.30 11.81 0.75 0.75
1999 Net sales $732.4 $792.3 $800.7 $722.8 $3,048.2
- ----
Gross profit 230.9 260.2 266.2 210.1 967.4
Net earnings (loss) 48.3 72.8 71.7 (178.5) 14.3
Per share of common stock:
Basic: Net earnings (loss) 1.21 1.83 1.80 (4.46) 0.36
Diluted: Net earnings (loss) 1.20 1.81 1.78 (4.46) 0.36
Dividends per share of common stock 0.48 0.48 0.48 0.48 1.92
Price range of common stock--high 64.31 59.69 60.88 45.13 64.31
Price range of common stock--low 44.63 45.00 44.13 29.00 29.00
Quarterly financial information for Armstrong is identical to the AHI
information above except for net earnings (loss) which is detailed as follows.
Per share information is not applicable to AWI since it does not have any
publicly-traded stock.
(millions) First Second Third Fourth Total year
- ---------- ----- ------ ----- ------ ----------
2000 Net earnings $30.7 7.1 $74.3 ($100.3) $11.8
Note: The net sales and gross profit amounts reported above are reported on a
continuing operations basis. These amounts differ from those previously reported
on Form 10-Q due to the discontinued operations of the Insulation Products
segment and Textiles and Sports Flooring segment. Net sales are also impacted
from the implementation of EITF Issue Nos. 00-010 and 00-014 (see Note 2). The
sum of the quarterly earnings per share data does not equal the total year
amounts due to changes in the average shares outstanding and, for diluted data,
the exclusion of the antidilutive effect in certain quarters.
Fourth Quarter 2000 Compared With Fourth Quarter 1999
- -----------------------------------------------------
Net sales of $659.1 million decreased from sales of $722.8 million in the fourth
quarter of 1999. Wood products sales increased 1.7%. Floor coverings sales
decreased 26.0% with sales in the Americas and Europe both down similar
percentages. Americas sales declined due to a slow down in retail sales and
significant inventory reductions within the wholesale and retail channels while
European sales declined due to translation losses associated with weaker
European currencies and lower pricing driven by excess industry capacity.
Building products sales increased 8.7% due to the additional Gema sales.
36
A loss from continuing operations of $86.7 million in the fourth quarter of 2000
compared to a loss from continuing operations of $185.9 million in the fourth
quarter of 1999. An additional 2000 pretax charge of $2.3 million primarily
related to severance and enhanced retirement benefits for 15 corporate and line-
of-business staff positions (all salaried positions) as a result of streamlining
the organization to reflect staffing needs for current business conditions. The
2000 loss also reflects $3.8 million of lower ESOP compensation expense compared
to 1999. A net pretax charge of $335.4 million was recorded in the fourth
quarter of 1999 to increase the estimated liability net of the corresponding
insurance asset for asbestos-related claims. In 1999, $1.4 million of the 1998
pretax reorganization charge was reversed, related to severance accruals that
were no longer necessary.
For the fourth quarter, the cost of goods sold was 79.2% of sales compared to
70.9% in 1999. Excluding a $5.4 million charge to cost of goods sold in 2000 for
write-downs of production-line assets related to the reorganization efforts that
were not categorized as restructuring costs, the fourth quarter cost of goods
sold was 78.4%. These write-downs of production-line assets primarily related to
changes in production facilities and product offerings.
The fourth quarter of 2000 included $103.3 million in reorganization costs
related to the Chapter 11 filing. See Item 1 for details of the reorganization
costs.
Other income in 1999 includes a $1.5 million reduction of the gain on the second
quarter sale of AISI and a $0.7 million reduction of the loss on the third
quarter 1999 sale of Textile Products. Other income in 1999 also reflects
proceeds from the settlement of various legal actions totaling $3.0 million, net
of other items.
Armstrong's effective tax rate benefit in the fourth quarter of 2000 was 30.2%
compared to an effective tax rate benefit of 35.2% in the fourth quarter of
1999.
A net loss of $100.3 million or $2.48 per share compared to a net loss of $178.5
million or $4.46 per share in the fourth quarter of 1999.
37
Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Earnings
(in millions, except per share amounts)
Years Ended December 31
2000 1999 1998
---- ---- ----
Net sales $3,003.8 $3,048.2 $2,496.1
Cost of goods sold 2,197.7 2,080.8 1,718.3
-------- -------- --------
Gross profit 806.1 967.4 777.8
Selling, general and administrative expenses 546.3 556.2 443.0
Charge for asbestos liability, net 236.0 335.4 274.2
Restructuring and reorganization charges (reversals) 18.0 (1.4) 74.4
Goodwill amortization 23.9 25.5 10.7
Equity (earnings) from affiliates, net (18.0) (16.8) (13.8)
------ ------ ------
Operating income (loss) (0.1) 68.5 (10.7)
Interest expense (unrecorded contractual interest of $6.0 million in 2000) 101.6 104.0 61.4
Other (income), net (74.6) (6.7) (1.7)
------ ----- -----
Loss from continuing operations before Chapter 11 reorganization costs
and income tax benefit (27.1) (28.8) (70.4)
Chapter 11 reorganization costs, net 103.3 - -
------ -- --
Loss from continuing operations before income tax benefit (130.4) (28.8) (70.4)
Income tax benefit (41.4) (4.8) (24.9)
------ ----- ------
Loss from continuing operations ($89.0) ($24.0) ($45.5)
------- ------- -------
Income from discontinued operations, net of tax of $7.6, $19.7 and $13.6, respectively 5.9 38.3 36.2
Net gain on sale of discontinued operations, net of tax of $28.4 95.3 - -
------ -- --
Earnings from discontinued operations 101.2 38.3 36.2
------ ----- -----
Net earnings (loss) $ 12.2 $14.3 ($9.3)
====== ====== ======
Loss per share of common stock, continuing operations:
Basic $ (2.21) $ (0.60) $ (1.14)
Diluted $ (2.21) $ (0.60) $ (1.14)
Earnings per share of common stock, discontinued operations:
Basic $ 0.15 $ 0.96 $ 0.91
Diluted $ 0.15 $ 0.96 $ 0.91
Earnings per share of common stock, gain on sale of discontinued operations:
Basic $ 2.37 $ - $ -
Diluted $ 2.37 $ - $ -
Net earnings (loss) per share of common stock:
Basic $ 0.30 $ 0.36 $ (0.23)
Diluted $ 0.30 $ 0.36 $ (0.23)
Average number of common shares outstanding:
Basic 40.2 39.9 39.8
Diluted 40.5 40.2 40.4
See accompanying notes to consolidated financial statements beginning on page
42.
38
Armstrong Holdings, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions)
As of December 31,
Assets 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $156.5 $17.2
Accounts and notes receivable, net 316.5 352.2
Inventories, net 340.2 352.4
Deferred income taxes 9.8 40.4
Net assets of discontinued operations 48.6 184.7
Other current assets 72.4 74.7
----- ----
Total current assets 944.0 1,021.6
Property, plant and equipment, less accumulated depreciation and
amortization of $1,006.4 and $1,035.3 million, respectively 1,253.5 1,292.0
Insurance receivable for asbestos-related liabilities, noncurrent 236.1 270.0
Investment in affiliates 37.3 34.2
Goodwill, net 846.0 898.4
Other intangibles, net 91.9 90.8
Deferred income tax assets, noncurrent 22.5 -
Other noncurrent assets 443.3 374.4
------ -----
Total assets $3,874.6 $3,981.4
========= ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $16.6 $65.9
Current installments of long-term debt 8.1 36.1
Accounts payable and accrued expenses 238.0 591.5
Income taxes 28.5 -
----- -
Total current liabilities 291.2 693.5
------ -----
Liabilities subject to compromise 2,385.2 -
Long-term debt, less current installments 56.8 1,389.1
Employee Stock Ownership Plan (ESOP) loan guarantee - 155.3
Postretirement and postemployment benefit liabilities 243.6 242.4
Pension benefit liabilities 154.7 168.3
Asbestos-related long-term liabilities, noncurrent - 506.5
Other long-term liabilities 71.1 91.5
Deferred income taxes - 43.8
Minority interest in subsidiaries 6.9 11.8
---- ----
Total noncurrent liabilities 2,918.3 2,608.7
Shareholders' equity:
Common stock, $1 par value per share
Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9
Capital in excess of par value 162.2 176.4
Reduction for ESOP loan guarantee (142.2) (190.3)
Retained earnings 1,151.5 1,196.2
Accumulated other comprehensive loss (45.2) (16.5)
Less common stock in treasury, at cost
2000 - 11,034,325 shares; 1999 - 11,628,705 shares (513.1) (538.5)
------- -------
Total shareholders' equity 665.1 679.2
------ -----
Total liabilities and shareholders' equity $3,874.6 $3,981.4
========= ========
See accompanying notes to consolidated financial statements beginning on page
42.
39
Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Shareholders' Equity
(amounts in millions)
2000 1999 1998
---- ---- ----
Common stock, $1 par value:
- --------------------------
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
------- ------- ------
Capital in excess of par value:
- ------------------------------
Balance at beginning of year $ 176.4 $ 173.0 $169.5
Stock issuances and other (8.9) 3.4 3.5
Contribution of treasury stock to ESOP (5.3) - -
----- - -
Balance at end of year $ 162.2 $ 176.4 $173.0
-------- -------- ------
Reduction for ESOP loan guarantee:
Balance at beginning of year $(190.3) $ (199.1) $ (207.7)
Principal paid 13.2 23.3 23.2
Loans to ESOP (7.3) (12.8) (10.1)
Interest on loans to ESOP (1.1) (1.3) (0.8)
Contribution of treasury stock to ESOP (4.1) (5.8) -
Impairment of loans to ESOP 43.3 - -
Accrued compensation 4.1 5.4 (3.7)
---- ---- -----
Balance at end of year $(142.2) $ (190.3) $ (199.1)
-------- --------- ---------
Retained earnings:
Balance at beginning of year $1,196.2 $ 1,257.0 $1,339.6
Net earnings (loss) for year 12.2 $12.2 14.3 $14.3 (9.3) $(9.3)
Tax benefit on dividends paid on unallocated
ESOP common shares 1.2 1.8 2.0
---- ---- ---
Total $1,209.6 $ 1,273.1 $1,332.3
Less common stock dividends (per share)
$1.44 in 2000; $1.92 in 1999; $1.88 in 1998 58.1 76.9 75.3
----- ----- ----
Balance at end of year $1,151.5 $ 1,196.2 $1,257.0
--------- ---------- --------
Accumulated other comprehensive income (loss):
Balance at beginning of year $ (16.5) $ (25.4) $ (16.2)
Foreign currency translation adjustments and
hedging activities (17.2) (3.4) (7.0)
Unrealized loss on available for sale securities (2.0) - -
Minimum pension liability adjustments (9.5) 12.3 (2.2)
----- ----- -----
Total other comprehensive income (loss) (28.7) (28.7) 8.9 8.9 (9.2) (9.2)
------ ------ ---- ---- ----- -----
Balance at end of year $ (45.2) $ (16.5) $ (25.4)
-------- -------- --------
Comprehensive income (loss) $ (16.5) $23.2 $(18.5)
- --------------------------- ======== ====== =======
Less treasury stock at cost:
Balance at beginning of year $ 538.5 $ 547.7 $526.5
Stock purchases 1.6 1.3 31.8
Stock issuance activity, net (17.6) (2.6) (10.6)
Contribution of treasury stock to ESOP (9.4) (7.9) -
----- ----- -
Balance at end of year $ 513.1 $ 538.5 $547.7
-------- -------- ------
Total shareholders' equity $ 665.1 $ 679.2 $709.7
======== ======== ======
See accompanying notes to consolidated financial statements beginning on page
42.
40
Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in millions)
Years Ended December 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $12.2 $14.3 ($9.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 160.9 154.9 129.6
Depreciation and amortization, discontinued operations 7.6 14.3 13.1
Gain on sale of businesses, net (183.9) (1.0) -
Gain on sale of investments in affiliates - - (12.8)
Deferred income taxes (35.7) (38.3) (27.9)
Equity earnings from affiliates, net (18.0) (16.8) (13.8)
Chapter 11 reorganization costs, net 103.3 - -
Chapter 11 reorganization costs paid (2.6) - -
Restructuring and reorganization charges (reversals) 18.0 (1.4) 74.4
Restructuring and reorganization payments (7.9) (16.9) (11.2)
Charge for asbestos liability, net 236.0 335.4 274.2
Payments for asbestos-related claims, net of recoveries (199.2) (114.4) (74.4)
Decrease in net assets of discontinued operations 42.7 25.7 5.4
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions
(Increase)/decrease in receivables 38.5 (26.9) 7.3
(Increase)/decrease in inventories 18.8 (22.0) 43.9
(Increase)/decrease in other current assets (10.6) 24.4 (30.1)
Increase in other noncurrent assets (41.6) (52.0) (108.5)
Increase/(decrease) in accounts payable and accrued expenses (119.6) 92.9 (23.2)
Increase/(decrease) in income taxes payable 27.5 (15.8) (6.5)
Increase/(decrease) in other long-term liabilities (23.8) 8.7 23.4
Other, net 19.2 (27.0) (10.3)
----- ------ -----
Net cash provided by operating activities 41.8 338.1 243.3
----- ------ -----
Cash flows from investing activities:
Purchases of property, plant and equipment, continuing operations (136.0) (166.5) (148.3)
Purchases of property, plant and equipment, discontinued operations (14.1) (17.1) (11.4)
Investment in computer software (12.0) (11.6) (24.6)
Acquisitions, net of cash acquired (6.5) (3.8) (1,175.7)
Investments in affiliates - - 147.6
Distributions from equity affiliates 12.7 40.8 11.4
Proceeds from the sale of businesses 329.9 88.3 -
Proceeds from the sale of assets 5.3 7.9 2.7
---- ---- ---
Net cash provided by (used for) investing activities 179.3 (62.0) (1,198.3)
------ ------ ---------
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (4.5) (69.7) 24.2
Issuance of long-term debt 3.4 200.0 1,293.9
Payments of long-term debt (23.0) (332.4) (278.6)
Cash dividends paid (58.1) (76.9) (75.3)
Purchase of common stock for the treasury, net (1.6) (1.3) (31.8)
Proceeds from exercised stock options 0.1 1.2 7.9
Other, net 5.6 (2.8) (3.0)
---- ----- -----
Net cash provided by (used for) financing activities (78.1) (281.9) 937.3
------ ------- -----
Effect of exchange rate changes on cash and cash equivalents (3.7) (2.9) 0.5
----- ----- ---
Net increase (decrease) in cash and cash equivalents $139.3 ($8.7) ($17.2)
Cash and cash equivalents at beginning of year $ 17.2 $25.9 $43.1
------ ------ ------
Cash and cash equivalents at end of year $156.5 $17.2 $25.9
======= ====== =====
See accompanying notes to consolidated financial statements beginning on page
42.
41
NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
- ----------------------------------------------
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells interior finishings,
most notably floor coverings and ceiling systems, around the world. Armstrong
products are sold primarily for use in the finishing, refurbishing and repair of
residential, commercial and institutional buildings. Armstrong also designs,
manufactures and sells kitchen and bathroom cabinets.
Armstrong Holdings, Inc. (which together with its subsidiaries is referred to
here as "AHI") is the publicly-held parent holding company of Armstrong.
Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000,
following AWI shareholder approval of a plan of exchange under which each share
of AWI was automatically exchanged for one share of Armstrong Holdings, Inc..
Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds
no other significant assets or operations apart from AWI and AWI's subsidiaries.
Stock certificates that formerly represented shares of AWI were automatically
converted into certificates representing the same number of shares of Armstrong
Holdings, Inc. The publicly-held debt of AWI was not affected in the
transaction.
On December 6, 2000, AWI, the major operating subsidiary of AHI, 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 "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The
Chapter 11 cases are being jointly administered under case numbers 00-4469,
00-4470, and 00-4471 (the "Chapter 11 Cases").
AHI, and Armstrong's other subsidiaries, including Triangle Pacific Corp., WAVE
(Armstrong's ceiling grid systems joint venture with Worthington Industries),
Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries
were not a part of the Filing.
Like other companies involved in asbestos litigation, AWI has tried a number of
different approaches to managing its asbestos liability, including negotiating
broad-based settlements of claims and supporting efforts to find a legislative
resolution. The number of new claims filed and the cost to settle claims,
however, continued to escalate. In addition, liquidity concerns increased when
Owens Corning Fiberglass filed for Chapter 11 protection on October 5, 2000.
This hurt AWI's ability to obtain ongoing financing on acceptable terms. These
were the principal factors which led to the decision to make the Filing.
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing. In addition, as a
debtor-in-possession, AWI has the right, subject to the Court's approval, to
assume or reject any executory contracts and unexpired leases in existence at
the date of the Filing. Parties having claims as a result of any such rejection
may file claims with the Court which will be dealt with as part of the Chapter
11 Cases.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Cases.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and along with AWI's operating subsidiaries are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Cases could take a significant period of time.
Financing
- ---------
The Court has approved a $300 million debtor-in-possession credit facility
provided by a bank group led by The Chase Manhattan Bank (the "DIP Facility").
AWI believes that the DIP Facility, together with cash generated from
operations,
42
will be more than adequate to address its liquidity needs. As of February 28,
2001, AWI had $96.3 million of cash and cash equivalents in addition to cash
held by its non-debtor subsidiaries. Borrowings under the DIP facility, if any,
will constitute superpriority administrative expense claims in the Chapter 11
Cases.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2000.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 29 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization items. Accordingly, AWI recorded a total of $103.3 million as
Reorganization Costs in December 2000, consisting of:
($ millions)
------------
Adjustment of net debt and debt issue costs to expected amount of allowed claim $ 42.0
ESOP related expenses 58.8
Professional fees 2.6
Interest income, post petition (0.3)
Other expenses directly related to bankruptcy, net 0.2
------
Total Chapter 11 reorganization costs $103.3
======
To record prepetition debt at the face value or the amount of the expected
allowed claims, AWI adjusted the amount of net debt and debt issue costs and
recorded a pre-tax expense of $42.0 million.
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. As described more
fully in Note 19, Armstrong has not permitted further employee contributions to
the ESOP. Therefore, it is expected that the ESOP will no longer have the
ability to repay Armstrong money it previously borrowed. In addition, a $15.5
million expense was recorded related to interest and tax penalty guarantees owed
to ESOP bondholders caused by the default on the ESOP bonds.
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Actual results may differ from these estimates.
43
Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of Armstrong Holdings, Inc., and its
subsidiaries. All significant intercompany transactions have been eliminated
from the consolidated financial statements. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Revenue Recognition. AHI records revenue from the sale of products and the
- -------------------
related accounts receivable as title transfers, generally on the date of
shipment. Provision is made for estimated applicable discounts and losses.
Earnings (loss) per Common Share. Basic earnings (loss) per share are computed
- --------------------------------
by dividing the earnings (loss) by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings (loss) per common
share reflect the potential dilution of securities that could share in earnings
(loss). The diluted earnings (loss) per share computations for some periods use
the basic number of shares due to the loss from continuing operations.
Advertising Costs. AHI recognizes advertising expenses as they are incurred.
- -----------------
Shipping and Handling Costs. Prior to 2000, AHI recorded some shipping and
handling costs as a reduction to net sales. In 2000, AHI applied the provisions
of Emerging Issues Task Force ("EITF") Issue No. 00-010, "Accounting for
Shipping and Handling Fees and Costs". Consequently, approximately $133.3
million of 2000 shipping and handling costs have been reclassified from net
sales to cost of goods sold. All income statements presented have been restated
to comply with this pronouncement by increasing net sales and cost of goods sold
as follows: 1999 - $125.9 million and 1998 - $104.2 million. This change had no
effect on gross margins or retained earnings as of any date.
Sales Incentives. Prior to 2000, AHI had been classifying most sales incentives
- ----------------
as a reduction of sales but was recording certain sales incentives as Selling
General and Administrative ("SG&A") expenses. In accordance with EITF Issue No.
00-014, "Accounting for Certain Sales Incentives", AHI reclassified sales
incentives from SG&A expense to net sales (reducing both) as follows: 2000 -
$1.3 million; 1999 - $1.2 million; and 1998 - $1.1 million.
Pension and Postretirement Benefits. AHI has plans that provide for pension,
- -----------------------------------
medical and life insurance benefits to certain eligible employees when they
retire from active service. Generally, AHI's practice is to fund the actuarially
determined current service costs and the amounts necessary to amortize prior
service obligations over periods ranging up to 30 years, but not in excess of
the funding limitations.
Taxes. Deferred tax assets and liabilities are recognized using enacted tax
- -----
rates for expected future tax consequences of events recognized in the financial
statements or tax returns. The tax benefit for dividends paid on unallocated
shares of stock held by the ESOP is recognized in shareholders' equity.
Gains and Losses on Divestitures. AHI records the gain or loss on divested
- --------------------------------
businesses in other income.
Cash and Cash Equivalents. Short-term investments that have maturities of three
- -------------------------
months or less when purchased are considered to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Inventories
- -----------
also include certain floor coverings samples.
Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost less accumulated depreciation and amortization. Depreciation
charges for financial reporting purposes are determined on the straight-line
basis at rates calculated to provide for the retirement of assets at the end of
their useful lives, generally as follows: buildings, 20 to 40 years; machinery
and equipment, 3 to 20 years. Impairment losses are recorded when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. When assets are
disposed of or retired, their costs and related depreciation are removed from
the financial statements and any resulting gains or losses normally are
reflected in "Selling, general and administrative expenses."
Costs of the construction of certain long-lived assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
Capitalized interest was $0.4 million in 2000, $4.3 million in 1999 and $5.8
million in 1998.
44
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods from 3 to 40 years. On a periodic basis, AHI
estimates the future undiscounted cash flows of the businesses to which goodwill
relates in order to ensure that the carrying value of goodwill and other
intangibles has not been impaired.
Foreign Currency Transactions. Gains or losses on foreign-currency transactions
- -----------------------------
are recognized through the statement of earnings. Amounts payable or receivable
denominated in foreign currencies are revalued at the exchange rate prevailing
at year-end.
Financial Instruments and Derivatives. AHI uses derivatives and other financial
- -------------------------------------
instruments to diversify or offset the effect of currency, interest rate and
commodity price variability.
AHI may enter into foreign currency forward contracts to offset the effect of
exchange rate changes on cash flow exposures denominated in foreign currencies.
Such exposures include firm commitments with third parties and intercompany
financial transactions.
Realized gains and losses on contracts are recognized in the consolidated
statements of earnings. Unrealized gains and losses on foreign currency options
that are designated as effective hedges as well as option premium expense are
deferred and included in the statements of earnings as part of the underlying
transactions. Unrealized gains and losses on foreign currency contracts used to
hedge intercompany transactions having the character of long-term investments
are included in other comprehensive income.
AHI may enter into interest rate swap agreements to alter the interest rate risk
profile of outstanding debt, thus altering AHI's exposure to changes in interest
rates. In these swaps, AHI agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference
to a notional principal amount. Any differences paid or received on interest
rate swap agreements, when terminated, are recognized as adjustments to interest
expense over the term of associated debt.
NOTE 3. NATURE OF OPERATIONS
- ----------------------------
Industry Segments
- -----------------
For the year ended 2000
-----------------------
Floor Building Wood All Unallocated
(millions) Coverings products products other Corporate Totals
- ---------- --------- -------- -------- ----- --------- ------
Net sales to external customers $ 1,263.9 $ 837.2 $ 902.7 -- -- $ 3,003.8
Intersegment sales 4.2 -- -- -- -- 4.2
Equity (earnings) from affiliates -- (17.9) -- (0.1) -- (18.0)
Segment operating income (loss) 78.8 113.9 74.3 0.1 ($ 267.2) (0.1)
Restructuring and reorganization charges,
net of reversals 7.9 0.2 1.7 -- 8.2 18.0
Segment assets 981.0 568.5 1,358.6 16.1 950.4 3,874.6
Depreciation and amortization 70.1 32.8 37.0 -- 21.0 160.9
Investment in affiliates 1.1 19.9 -- 16.3 -- 37.3
Capital additions 52.0 43.6 38.7 -- 13.7 148.0
45
For the year ended 1999
-----------------------
Floor Building Wood All Unallocated
(millions) coverings products products other Corporate Totals
- ---------- --------- -------- -------- ----- --------- ------
Net sales to external customers $ 1,365.7 $ 794.5 $ 836.5 $ 51.5 -- $ 3,048.2
Intersegment sales 2.7 -- -- 20.7 -- 23.4
Equity (earnings) loss from affiliates 0.1 (16.1) -- (0.8) -- (16.8)
Segment operating income (loss) 204.6 120.0 85.0 6.0 ($ 347.1) 68.5
Restructuring and reorganization reversals (1.1) (0.3) -- -- -- (1.4)
Segment assets 1,286.1 535.1 1,308.0 16.0 836.2 3,981.4
Depreciation and amortization 71.2 34.1 36.1 2.8 10.7 154.9
Investment in affiliates 3.3 14.9 -- 16.0 -- 34.2
Capital additions 71.9 45.5 41.5 2.7 16.5 178.1
For the year ended 1998
Floor Building Wood All Unallocated
(millions) coverings products products other Corporate Totals
- ---------- --------- -------- -------- ----- --------- ------
Net sales to external customers $1,248.5 $ 799.0 $ 351.3 $ 97.3 -- $ 2,496.1
Intersegment sales -- -- -- 39.5 -- 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- 0.2 -- (13.8)
Segment operating income (loss) 121.7 106.5 38.6 7.2 ($ 284.7) (10.7)
Reorganization charges 53.5 10.1 -- 1.9 8.9 74.4
Segment assets 1,146.0 550.1 1,279.0 67.6 1,044.1 4,086.8
Depreciation and amortization 62.6 39.2 15.3 7.2 5.3 129.6
Investment in affiliates 2.2 39.6 -- -- -- 41.8
Capital additions 93.5 42.5 12.4 5.9 18.6 172.9
Segments were determined based on products and services provided by each
segment. Accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Performance of the segments is
evaluated on operating income before income taxes, restructuring charges,
unusual gains and losses, and interest expense. AHI accounts for inter-segment
sales and transfers based upon its internal transfer pricing policy.
The floor coverings segment includes resilient flooring, adhesives, installation
and maintenance materials and accessories sold to commercial and residential
customers through wholesalers, retailers and contractors. To reduce interchannel
conflict, distinctive resilient flooring products have been introduced to allow
exclusive product offerings by our customers. Raw materials, especially
plasticizers and resins, are a significant cost of resilient flooring products.
AHI has no influence on the worldwide market prices of these materials and thus
is subject to cost changes.
The building products segment includes commercial and residential ceiling
systems. Grid products, manufactured through AHI's WAVE joint venture with
Worthington Industries, have become an important part of this business
worldwide. Earnings from this joint venture are included in this segment's
operating income and in "Equity Earnings from Affiliates" (see Note 9). The
major sales activity in this segment is commercial ceiling systems sold to
resale distributors and contractors worldwide, with European sales having a
significant impact. Ceiling systems for the residential home segment are sold
through wholesalers and retailers, mainly in the United States. Through a joint
venture with a Chinese partner, a plant in Shanghai manufactures ceilings for
the Pacific area. During 2000, AHI acquired privately-held Switzerland-based
Gema Holding AG ("Gema"), a manufacturer and installer of metal ceilings. See
Note 5 for further discussion.
The wood products segment is composed of Triangle Pacific Corp., a wholly owned
subsidiary, a manufacturer of consumer wood products including hardwood flooring
and cabinets. Products in this segment are used primarily in residential new
construction and remodeling and commercial applications such as retail stores
and restaurants. Approximately 35% of sales are from new construction which is
more cyclical than remodeling activity. Triangle Pacific manufactures hardwood
flooring under the brand names of Bruce, Hartco and Robbins while cabinets are
manufactured under the brand names of Bruce and IXL.
During most of 1999, "all other" included business units making a variety of
specialty products for the building, automotive, textile and other industries
worldwide. Gasket materials were sold for new and replacement use in
46
automotive, construction and farm equipment, appliance, small engine and
compressor industries. On June 30, 1999, Armstrong sold 65% of the gaskets
business. Since the divestiture, AHI has accounted for the gaskets business
under the equity method within the "all other" segment. Textile mill supplies,
including cots and aprons, were sold to equipment manufacturers and textile
mills. On September 30, 1999, Armstrong sold the textiles business. From 1997 to
1998, Armstrong owned an equity interest in Dal-Tile International Inc.
("Dal-Tile"), whose ceramic tile products are sold through home centers,
Dal-Tile sales service centers and independent distributors. In 1998, Armstrong
sold its interest in Dal-Tile.
During 2000, AHI recognized revenue of approximately $373.2 million from The
Home Depot, Inc., from sales in the floor coverings, building products and wood
products segments compared to approximately $344.8 million and $296.0 million in
1999 and 1998, respectively. No other customer represented more than 10% of
AHI's revenue.
The sales in the table below are allocated to geographic areas based upon the
location of the customer.
Geographic Areas
- ----------------
Net trade sales (millions) 2000 1999 1998
-------------------------- ---- ---- ----
Americas:
United States $ 2,276.5 $ 2,296.4 $ 1,842.8
Canada 129.1 123.0 100.4
Other Americas 26.5 27.2 18.5
---- ---- ----
Total Americas $ 2,432.1 $ 2,446.6 $ 1,961.7
--------- --------- ---------
Europe:
England $ 103.3 $ 107.2 $ 60.8
Germany 101.8 143.6 80.1
France 50.4 54.4 62.9
Italy 27.4 26.2 27.3
Russia 22.5 12.0 22.9
Other Europe 158.1 146.5 163.1
----- ----- -----
Total Europe $ 463.5 $ 489.9 $ 417.1
------- ------- -------
Pacific area:
China $ 26.9 $ 24.2 $ 25.5
Australia 24.4 27.2 29.2
Other Pacific area 56.9 60.3 62.6
---- ---- ----
Total Pacific area $ 108.2 $ 111.7 $ 117.3
------- ------- -------
Total net trade sales $ 3,003.8 $ 3,048.2 $ 2,496.1
========= ========= =========
47
Long-lived assets (property, plant and equipment) at December 31
- ----------------------------------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Americas:
United States $ 960.8 $ 955.7
Canada 14.2 16.1
Other Americas 0.1 0.1
--- ---
Total Americas $ 975.1 $ 971.9
------- -------
Europe:
Germany $ 174.5 $ 196.5
England 38.8 47.5
Netherlands 10.1 12.0
France 11.9 13.8
Sweden 9.4 15.2
Other Europe 1.7 0.2
--- ---
Total Europe $ 246.4 $ 285.2
------- -------
Pacific area:
China $ 26.2 $ 27.9
Other Pacific area 5.8 7.0
--- ---
Total Pacific area $ 32.0 $ 34.9
------ ------
Total long-lived assets $ 1,253.5 $ 1,292.0
========= =========
NOTE 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see Note 1), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the balance sheet. Liabilities that may be
affected by a plan of reorganization are recorded at the amount of the expected
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of AHI
subsidiaries not covered by the Filing remain classified on the consolidated
balance sheet based upon maturity date. AWI's asbestos liability is also
recorded in liabilities subject to compromise. See Note 29 for further
discussion of AWI's asbestos liability.
Liabilities subject to compromise at December 31, 2000 are as follows:
(millions) 2000
- ---------- ----
Debt (at face value) $ 1,400.4
Asbestos-related liability 690.6
Pre-petition trade payables 60.1
Pre-petition other payables and accrued interest 76.4
ESOP loan guarantee 157.7
-----
Total liabilities subject to compromise $ 2,385.2
=========
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
See Note 15 for detail of debt subject to compromise.
NOTE 5. ACQUISITIONS
- --------------------
On May 18, 2000, AHI acquired privately-held Switzerland-based Gema Holding AG
("Gema"), a manufacturer and installer of metal ceilings, for $6 million plus
certain contingent consideration not to exceed $25.5 million based on results
over the three year period ending December 31, 2002. Gema, with annual sales of
nearly $50 million, has two manufacturing sites located in Austria and
Switzerland and employs nearly 300 people. The acquisition has been recorded
under the purchase method of accounting. The purchase price has been allocated
to the assets acquired and the liabilities assumed based on the estimated fair
market value at the date of acquisition. Contingent consideration, when and if
paid, will be accounted for as additional purchase price. The fair market value
of
48
tangible and identifiable intangible assets acquired exceeded the purchase price
by $24.2 million and this amount has been recorded as a reduction of the fair
value of property, plant and equipment.
On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp.
("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a U.S.
manufacturer of hardwood flooring and other flooring and related products and a
manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under
the purchase method of accounting, resulted in a total purchase price of $911.5
million. The purchase price was allocated to tangible and identifiable
intangible assets acquired and liabilities assumed based on estimated fair
market value at the date of acquisition. The balance of $792.8 million was
recorded as goodwill and is being amortized over forty years on a straight-line
basis. During 1999, purchase price adjustments increased goodwill by $5.3
million. During 2000, adjustments primarily related to pre-acquisition
liabilities and property, plant and equipment values reduced goodwill by $1.4
million.
Effective August 31, 1998, Armstrong acquired approximately 93% of the total
share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized under
the laws of the Federal Republic of Germany. DLW is a flooring manufacturer in
Germany. The acquisition, recorded under the purchase method of accounting,
resulted in a total purchase price of $289.9 million. During 1999, Armstrong
increased its ownership percentage in DLW to approximately 96%. The purchase
price was allocated to net tangible and identifiable intangible assets acquired
based on the estimated fair market value at the date of acquisition. The balance
of $117.2 million was recorded as goodwill and is being amortized over forty
years on a straight-line basis. During 1999, purchase price adjustments
increased goodwill by $5.2 million. During 2000, adjustments primarily related
to pre-acquisition tax contingencies reduced goodwill by $8.9 million. In the
initial purchase price allocation, $49.6 million was allocated to the estimable
net realizable value of DLW's furniture business and a carpet manufacturing
business in the Netherlands, which Armstrong identified as businesses held for
sale. In May 1999, Armstrong sold the DLW furniture business for $38.1 million.
The remaining business held for sale, a Dutch carpet manufacturing company, was
sold during December 2000.
The operating results of these acquired businesses have been included in the
consolidated statements of earnings from the dates of acquisition. Triangle
Pacific's fiscal year ends on the Saturday closest to December 31, which was
December 30, 2000, January 1, 2000 and January 2, 1999. No events occurred
between December 31 and these dates at Triangle Pacific materially affecting
AHI's financial position or results of operations.
The table below reflects unaudited pro forma combined results of AHI, Triangle
Pacific and DLW as if the acquisitions had taken place at the beginning of
fiscal 1998:
(millions, except per share data) 1998
- ----------------------------------- ----
Net sales $ 2,874.9
Net earnings (14.2)
Net earnings per share (0.36)
In management's opinion, these unaudited pro forma amounts are not necessarily
indicative of what the actual combined results of operations might have been if
the acquisitions had been effective at the beginning of fiscal 1998.
NOTE 6. DISCONTINUED OPERATIONS
- -------------------------------
On May 31, 2000, AHI completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.84 per share.
In February 2001, AHI determined to permanently exit the Textiles and Sports
Flooring segment and on February 20, 2001, entered into negotiations to sell
substantially all of the businesses comprising this segment to a private equity
investor based in Europe. The proposed sale, while subject to certain approvals,
including that of the Court, is expected to close in June 2001. Accordingly,
this segment has been classified as a discontinued operation in the accompanying
consolidated financial statements. Prior year balances and results have been
reclassified to reflect the net assets and results of discontinued operations.
Based on the expected net realizable value of the business, AHI recorded a
pretax net loss of $30.3 million in the fourth quarter of 2000, $19.5 million
net of tax benefit.
49
The following comprises the net assets of discontinued operations as of December
31, 2000 and 1999.
2000 1999
---- ----
Cash $ 2.6 $ 18.4
Accounts receivable, net 52.5 83.8
Inventories, net 59.7 77.4
Property plant and equipment, net 67.5 147.1
Short-term debt (19.3) (5.0)
Long-term debt (10.5) (23.8)
Accounts payable and accrued expenses (54.0) (79.2)
Pension liabilities (3.3) (36.8)
Other, net (12.1) 2.8
Adjustment to net realizable value (34.5) --
------ --
Net assets of discontinued operations $ 48.6 $ 184.7
====== ========
NOTE 7. OTHER DIVESTITURES
- --------------------------
On July 31, 2000, AHI completed the sale of its Installation Products Group
("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million in
cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $44.1 million ($60.2 million pretax) or $1.09 per share and was recorded
in other income. The financial results of IPG were reported as part of the floor
coverings segment. The proceeds and gain are subject to a post-closing working
capital adjustment, which AHI expects to finalize in the first half of 2001.
Under the terms of the agreement and a related supply agreement, AHI will
purchase some of its installation products needs from Ardex for an initial term
of eight years, subject to certain minimums for the first five years after the
sale. The agreement also calls for price adjustments based upon changing market
prices for raw materials, labor and energy costs.
On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a loss of $3.2
million, or $0.08 per share, which was recorded in other income.
On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial
Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of
investors including Citicorp Venture Capital Ltd. and the management of AISI for
a cash purchase price of approximately $36.1 million. The sale resulted in a
gain of approximately $6.0 million, or $0.15 per share, which was recorded in
other income.
On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing,
Inc. Armstrong acquired this interest as part of its acquisition of DLW during
the third quarter of 1998. There was no material gain or loss on the
transaction.
On May 28, 1999, Armstrong's subsidiary DLW sold its furniture business for
total cash proceeds of $38.1 million. Armstrong acquired this business as part
of the acquisition of DLW in the third quarter of 1998 and had classified the
business as held for sale. There was no gain or loss on the transaction.
NOTE 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
A $19.4 million pre-tax reorganization charge was recorded in 2000, of which
$8.6 million related to severance and enhanced retirement benefits for more than
180 positions (approximately 66% related to salaried positions) within the
European Flooring business. Reorganization actions include staff reductions due
to the elimination of administrative positions, the consolidation and closing of
sales offices in Europe and the closure of the Team Valley, England commercial
tile plant. $2.6 million of the charge related to severance and enhanced
retirement benefits for 15 corporate and line-of-business staff positions (all
salaried positions) as a result of streamlining the organization to reflect
staffing needs for current business conditions. Of the $2.6 million, $0.1
million represented a non-cash charge for enhanced retirement benefits. The
remaining $8.2 million of the charge primarily related to the remaining payments
on a noncancelable operating lease for an office facility in the U.S. The
employees who occupied this office facility are being relocated to the corporate
headquarters.
In addition, $1.4 million of the remaining accrual for the $74.4 million 1998
reorganization charge was reversed in both 2000 and 1999, comprising certain
severance accruals that were no longer necessary. The amount in "other" below
primarily relates to foreign currency translation.
50
The following table summarizes activity in the restructuring accruals for 2000
and 1999:
Beginning Cash Ending
(millions) Balance Payments Charges Reversals Other Balance
- ---------- ------- -------- ------- --------- ----- -------
2000 $12.1 ($7.9) $19.3 ($1.4) ($0.7) $21.4
1999 30.6 (16.9) -- (1.4) (0.2) 12.1
Substantially all of the remaining balance of the restructuring accrual as of
December 31, 2000 relates to terminated employees with extended payouts, most of
which will be paid during 2001, and two noncancelable operating leases which
extend through 2005 and 2017.
AHI also recorded a $17.6 million charge to cost of goods sold in 2000 for
write-downs of inventory and production-line assets related to the
reorganization efforts that were not categorized as restructuring costs. The
inventory write-downs were related to changes in product offerings while the
write-downs of production-line assets primarily related to changes in production
facilities and product offerings.
AHI also recorded costs within selling, general and administrative expense of
$3.8 million for severance payments to approximately 100 employees that were not
classified as restructuring costs and $2.3 million for fixed asset impairments
related to the decision to vacate certain office space in the U.S.
In 1998, AHI recognized charges of $65.6 million, or $42.6 million after tax,
related to severance and enhanced retirement benefits for more than 650
positions, approximately 75% of which were salaried positions. In addition, AHI
recorded an estimated loss of $9.0 million, or $5.9 million after tax, related
to redundant flooring products machinery disposed of in 1999. Approximately
$28.6 million of the charge comprised cash expenditures for severance. The
remainder was a non-cash charge for enhanced retirement benefits.
NOTE 9. EQUITY INVESTMENTS
- --------------------------
Investments in affiliates were $37.3 million at December 31, 2000, an increase
of $3.1 million, reflecting the equity earnings of AHI's 50% interest in its
WAVE joint venture and its remaining 35% interest in Interface Solutions, Inc.
("ISI"). AHI continues to purchase certain raw materials from ISI under a
long-term supply agreement.
Equity earnings from affiliates for 2000 and 1999 consisted primarily of income
from a 50% interest in the WAVE joint venture and the 35% interest in ISI.
Equity earnings from affiliates for 1998 primarily comprised income from a 50%
interest in the WAVE joint venture, AHI's share of a net loss at Dal-Tile and
amortization of the excess of AHI's investment in Dal-Tile over the underlying
equity in net assets.
Condensed financial data for significant investments in affiliates accounted for
under the equity method of accounting are summarized below:
(millions) 2000 1999
- ---------- ---- ----
Current assets $ 68.3 $ 66.7
Non-current assets 34.4 37.8
Current liabilities 18.2 21.8
Non-current liabilities 50.4 57.7
(millions) 2000 1999
- ---------- ---- ----
Net sales $212.5 $202.3
Gross profit 60.3 53.7
Net earnings 35.5 32.3
51
NOTE 10. ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Customer receivables $ 349.1 $ 371.8
Customer notes 10.8 8.7
Miscellaneous receivables 7.7 15.4
Less allowance for discounts and losses (51.1) (43.7)
------- -------
Net accounts and notes receivable $ 316.5 $ 352.2
======= =======
Generally, AHI sells its products to select, pre-approved customers whose
businesses are directly affected by changes in economic and market conditions.
AHI considers these factors and the financial condition of each customer when
establishing its allowance for losses from doubtful accounts.
NOTE 11. INVENTORIES
- --------------------
Approximately 48% of AHI's total inventory in 2000 and 49% in 1999 were valued
on a LIFO (last-in, first-out) basis. Inventory values were lower than would
have been reported on a total FIFO (first-in, first-out) basis, by $47.8 million
at the end of 2000 and $45.6 million at year-end 1999.
(millions) 2000 1999
- ---------- ---- ----
Finished goods $ 208.9 $ 225.7
Goods in process 39.6 34.3
Raw materials and supplies 143.5 140.3
Less LIFO and other reserves (51.8) (47.9)
------- -------
Total inventories, net $ 340.2 $ 352.4
======= =======
NOTE 12. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Land $ 84.3 $ 99.2
Buildings 538.1 539.8
Machinery and equipment 1,569.3 1,601.0
Construction in progress 68.2 87.3
Less accumulated depreciation and amortization (1,006.4) (1,035.3)
--------- ---------
Net property, plant and equipment $ 1,253.5 $ 1,292.0
========== ==========
NOTE 13. GOODWILL AND OTHER INTANGIBLES
- ----------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Goodwill $ 908.9 $ 950.1
Less accumulated amortization (62.9) (51.7)
------- ------
Total goodwill, net $ 846.0 $ 898.4
======= =======
Other intangibles $ 121.7 $ 110.0
Less accumulated amortization (29.8) (19.2)
------- -------
Total other intangibles, net $ 91.9 $ 90.8
======= =======
Goodwill decreased by $52.4 million in 2000, reflecting the elimination of
goodwill attributable to IPG which was sold during 2000, tax valuation allowance
reduction and other adjustments related to DLW (see Note 5), scheduled
amortization of $23.9 million and foreign currency translations. Unamortized
computer software costs included in other intangibles were $50.5 million at
December 31, 2000, and $48.0 million at December 31, 1999.
52
NOTE 14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Payables, trade and other $ 142.3 $ 254.0
Employment costs 32.0 63.3
Reorganization and severance payments, current portion (see Note 8) 12.5 12.1
Asbestos-related claims, current portion (see Note 29) - 175.0
Other 51.2 87.1
------- -------
Total $ 238.0 $ 591.5
======= =======
Certain accounts payable and accrued expenses have been categorized as
liabilities subject to compromise (see Note 4).
NOTE 15. DEBT
- -------------
Average Average
year-end year-end
($ millions) 2000 interest rate 1999 Interest rate
- ------------ ---- ------------- ---- -------------
Borrowings under lines of credit $ 450.0 7.18% -- --
DIP Facility 5.0 9.50% -- --
Commercial paper 49.7 6.75% $ 495.9 6.20%
Foreign banks 11.7 5.58% 20.0 5.57%
Bank loans due 2001-2006 44.5 5.94% 42.7 6.26%
9.00% medium-term notes due 2001 7.5 9.00% 25.6 8.96%
6.35% senior notes due 2003 200.0 6.35% 199.9 6.35%
6.50% senior notes due 2005 150.0 6.50% 149.7 6.50%
9.75% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% senior notes due 2029 200.0 7.45% 199.8 7.45%
7.45% senior quarterly interest bonds due 2038 180.0 7.45% 180.0 7.45%
Industrial development bonds 29.8 4.97% 29.8 5.27%
Capital lease obligations 7.1 7.25% 11.4 7.25%
Other 21.6 12.34% 11.3 8.75%
-------- ------ -------- -----
Subtotal 1,481.9 7.27% 1,491.1 6.92%
Less debt subject to compromise 1,400.4 7.35% -- --
Less current portion and short-term debt 24.7 6.69% 102.0 6.61%
-------- ------ -------- -----
Total long-term debt, less current portion $ 56.8 5.55% $1,389.1 6.94%
======== ====== ======== =====
Scheduled payments of long-term debt (millions)
2001 $ 8.1 2004 $2.6
2002 3.1 2005 1.0
2003 3.1
In accordance with SOP 90-7, AWI stopped recording interest expense on unsecured
prepetition debt effective December 6, 2000.
Debt included in liabilities subject to compromise consisted of the following at
December 31, 2000.
($ millions) 2000
- ------------ ----
Borrowings under lines of credit $ 450.0
Commercial paper 49.7
9.00% medium-term notes due 2001 7.5
6.35% senior notes due 2003 200.0
6.50% senior notes due 2005 150.0
9.75% debentures due 2008 125.0
7.45% senior notes due 2029 200.0
7.45% senior quarterly interest bonds due 2038 180.0
Industrial development bonds 19.5
Other 18.7
--------
Total debt subject to compromise $1,400.4
========
53
Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Cases. As of December 31, 2000,
AWI has borrowed $5.0 million under the DIP Facility. The DIP Facility expires
no later than December 6, 2002 and borrowings are limited to an adjusted amount
of receivables, inventories and property, plant and equipment. Depending on the
amount of borrowings, the DIP Facility carries an interest rate range of either
Chase's Alternate Bank Rate plus 50 basis points to 100 basis points or LIBOR
plus 150 basis points to 200 basis points. The DIP Facility also contains
several covenants including, among other things, limits on asset sales, capital
expenditures and a required ratio of debt to cash flow. Prior to final Court
approval of the DIP Facility, which was obtained on February 7, 2001, AWI had
preliminary available borrowings of $145 million as of December 31, 2000.
On March 16, 1999, AWI filed a shelf registration statement for $1 billion of
combined debt and equity securities. On May 19, 1999, AWI completed an offering
under the shelf registration statement of $200 million aggregate principal
amount of 7.45% senior notes due 2029. The net proceeds from this offering were
used to repay other indebtedness of AWI.
Other debt includes an $18.6 million zero-coupon note due in 2013 that was fully
amortized to its face value due to the Chapter 11 filing.
In addition, AHI's foreign subsidiaries have approximately $38.9 million of
unused short-term lines of credit available from banks. The credit lines are
subject to immaterial annual commitment fees.
In order to maintain the ratio of fixed to floating rate debt which management
believes is appropriate, AHI maintained $150 million of interest rate swaps
during most of 2000. AHI received fixed rates and paid floating rates on these
swaps. However, all but one of the interest rate swap agreements was terminated
when AHI defaulted on its commercial paper obligations on November 22, 2000.
Details of the outstanding swap agreement as of December 31, 2000 are as
follows:
Notional Market
Maturity date ($ millions) amount Pays Receives value
- -------------------------- ------ ---- -------- -----
Aug. 15, 2003 $20.0 3 mo. LIBOR 6.54% $0.3
This interest rate swap agreement was subsequently terminated by the
counter-party on February 26, 2001.
NOTE 16. FINANCIAL INSTRUMENTS
- ------------------------------
AHI does not hold or issue financial instruments for trading purposes. The
estimated fair values of AHI's financial instruments are as follows:
2000 carrying Estimated 1999 carrying Estimated
(In millions at December 31) amount fair value amount fair value
- ---------------------------- ------ ---------- ------ ----------
Liabilities:
Debt subject to compromise $1,400.4 $ 386.6 -- --
Long-term debt, including current portion 64.9 64.9 $1,425.2 $1,369.2
Off-balance sheet financial instruments:
Foreign currency contract obligations -- 0.2 -- 9.4
Foreign currency options -- -- -- 0.2
Letters of credit/financial guarantees -- 165.6 -- 252.2
Lines of credit -- 39.1 -- 1,088.1
Interest rate swaps -- 0.3 -- (4.1)
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, 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 major
financial institutions taking into consideration current rates offered to AHI
for debt of the same remaining maturities. Foreign currency contract obligations
and options, as well as interest rate swaps, are estimated by obtaining quotes
from major financial
54
institutions. Letters of credit, financial guarantees and lines of credit
amounts are based on the estimated cost to settle the obligations.
NOTE 17. INCOME TAXES
- ---------------------
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the table below.
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets except for certain foreign tax credit and net operating loss
carryforwards for which AHI has provided a valuation allowance of $69.8 million.
The $6.4 million of U.S. foreign tax credit will expire in 2005. AHI has $879.0
million of state net operating losses with expirations between 2001 and 2020,
and $82.9 million of foreign net operating losses which will be carried forward
indefinitely. The $1.3 million decrease in the valuation allowance is
attributable to a $24.7 million decrease in foreign net operating loss and
capital loss carryforwards in connection with the sale of the Insulation
Products segment (see Note 6) and a $23.4 million increase due to unused state
net operating loss and U.S. foreign tax credit.
Deferred income taxes (assets) liabilities (millions) 2000 1999
- ----------------------------------------------------- ---- ----
Postretirement and postemployment benefits ($ 92.0) ($ 86.1)
Chapter 11 reorganization costs and restructuring costs (35.9) (3.3)
Asbestos-related liabilities (241.7) (238.5)
Foreign tax credit carryforward (6.4) --
Net operating losses (94.6) (62.2)
Capital loss carryforwards -- (20.2)
Other (86.8) (58.7)
------ ------
Total deferred tax assets (557.4) (469.0)
Valuation allowance 69.8 71.1
---- ----
Net deferred tax assets (487.6) (397.9)
Accumulated depreciation 173.7 183.0
Pension costs 105.9 69.3
Insurance for asbestos-related liabilities 85.4 103.6
Tax on unremitted earnings 27.0 --
Other 63.3 45.4
---- ----
Total deferred income tax liabilities 455.3 401.3
----- -----
Net deferred income tax liabilities (assets) (32.3) 3.4
Income tax benefit - current (9.8) (40.4)
Deferred income tax liability (asset) - noncurrent ($22.5) $ 43.8
======= ======
Details of taxes (millions) 2000 1999 1998
- --------------------------- ---- ---- ----
Earnings (loss) from continuing operations before income taxes:
Domestic ($ 135.9) $ 45.8 ($ 63.7)
Foreign 15.4 44.9 20.4
Eliminations (9.9) (119.5) (27.1)
----- ------- ------
Total ($ 130.4) ($ 28.8) ($ 70.4)
========= ======== ========
Income tax provision (benefit):
Current:
Federal ($ 12.2) $ 15.8 $ 11.2
Foreign 6.5 4.3 7.1
State 1.8 3.0 1.3
--- --- ---
Total current (3.9) 23.1 19.6
----- ---- ----
Deferred:
Federal (32.7) (36.6) (48.2)
Foreign (5.1) 8.2 3.3
State 0.3 0.5 0.4
--- --- ---
Total deferred (37.5) (27.9) (44.5)
------ ------ ------
Total income taxes (benefit) ($ 41.4) ($ 4.8) ($ 24.9)
======== ======= ========
At December 31, 2000, unremitted earnings of subsidiaries outside the U.S. were
$169.0 million (at December 31, 2000 balance sheet exchange rates). AHI expects
to repatriate $77.0 million of earnings and has provided $27.0
55
million of U.S. taxes. No U.S. taxes have been provided on the remaining
unremitted earnings as it is AHI's intention to invest these earnings
permanently. If such earnings were to be remitted without offsetting tax credits
in the U.S., withholding taxes would be $4.2 million.
Reconciliation to U.S. statutory tax rate (millions) 2000 1999 1998
- ---------------------------------------------------- ---- ---- ----
Continuing operations tax (benefit) at statutory rate ($ 45.6) ($ 10.0) ($ 24.6)
State income taxes, net of federal benefit 1.8 2.0 1.7
(Benefit) on ESOP dividend (1.0) (1.3) (1.2)
Tax on foreign and foreign-source income 2.9 3.4 4.4
Capital loss (0.8) -- --
Equity in (earnings) of affiliates -- -- (6.2)
Insurance programs 0.1 (0.6) (1.0)
Goodwill 9.9 7.1 3.3
Change in valuation allowance -- (4.0) --
Sale of subsidiary (9.1) -- --
Other items 0.4 (1.4) (1.3)
--- ----- -----
Tax expense (benefit) at effective rate ($ 41.4) ($ 4.8) ($ 24.9)
======== ======= ========
Other taxes (millions) 2000 1999 1998
- ---------------------- ---- ---- ----
Payroll taxes $ 59.7 $ 66.8 $ 51.3
Property, franchise and capital stock taxes 26.2 24.0 19.6
NOTE 18. OTHER LONG-TERM LIABILITIES
- -----------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Deferred compensation $ 34.9 $ 42.8
Other 36.2 48.7
---- ----
Total other long-term liabilities $71.1 $91.5
===== =====
NOTE 19. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSSOP)
- ------------------------------------------------------------
In 1989, Armstrong established an Employee Stock Ownership Plan ("ESOP") that
borrowed $270 million from banks and insurance companies, repayable over 15
years and guaranteed by AHI. The ESOP used the proceeds to purchase 5,654,450
shares of a new series of convertible preferred stock issued by Armstrong. In
1996, the ESOP was merged with the Retirement Savings Plan for salaried
employees (a defined-contribution pension plan) to form the Retirement Savings
and Stock Ownership Plan ("RSSOP"). On July 31, 1996, the trustee of the ESOP
converted the preferred stock held by the trust into approximately 5.1 million
shares of common stock at a one-for-one ratio.
The number of shares released for allocation to participant accounts has been
based on the proportion of principal and interest paid to the total amount of
debt service remaining to be paid over the life of the borrowings. Through
December 31, 2000, the RSSOP allocated 2,676,000 shares to participants that
remain outstanding, retired 1,318,000 shares, AHI issued 437,000 treasury shares
and the trustee purchased 242,000 shares on the open market as part of meeting
the necessary funding requirements. As of December 31, 2000, there were
approximately 2,340,000 shares in the RSSOP that had yet to be allocated to
participants.
All RSSOP shares are considered outstanding for earnings per share calculations.
Historically, dividends on allocated shares were credited to employee accounts
while dividends on unallocated shares were used to satisfy debt service
payments.
The RSSOP currently covers parent company nonunion employees and some union
employees.
56
Details of ESOP debt service payments (millions) 2000 1999 1998
- ------------------------------------------------ ---- ---- ----
Common stock dividends paid $ 4.5 $ 8.9 $ 9.0
Employee contributions 1.2 7.7 9.8
Company contributions 7.0 8.9 11.4
Company loans to ESOP 7.3 12.9 10.1
--- ---- ----
Debt service payments made by ESOP trustee $ 20.0 $ 38.4 $ 40.3
====== ====== ======
AHI recorded costs for the RSSOP of $10.5 million in 2000, $13.1 million in 1999
and $6.9 million in 1998.
The trustee borrowed from AHI $7.3 million in 2000, $12.9 million in 1999 and
$10.1 million in 1998. These loans were made to ensure that the financial
arrangements provided to employees remain consistent with the original intent of
the RSSOP. Such loans receivable were included as a component of shareholders'
equity. In December 2000, in connection with the Chapter 11 Filing of AWI and
default on RSSOP loan obligations, AHI recorded an impairment charge of $43.3
million related to these loans. The impairment was recorded as a component of
Chapter 11 reorganization costs.
On November 22, 2000, AHI failed to repay $50 million in commercial paper that
was due. As a result, the remaining ESOP bond principal balance of $142.2
million became immediately payable along with a $15.5 million interest and tax
make-whole premium. Additionally, the December 2000 ESOP debt service payment
was not made. As a result of the Chapter 11 filing, Armstrong's ESOP loan
guarantee of $157.7 million is now classified as a liability subject to
compromise.
AHI has amended the RSSOP to provide for a cash match of employee contributions
in lieu of the stock match. AHI recorded an expense of $0.5 million in 2000
related to the cash match. The RSSOP Plan document will be revised to reflect
this change.
NOTE 20. STOCK-BASED COMPENSATION PLANS
- ---------------------------------------
Awards under the 1993 Long-Term Stock Incentive Plan ("1993 Plan") may be in the
form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No
additional shares of common stock may be issued under the 1993 Plan.
During 1999, AHI adopted the 1999 Long-Term Incentive Plan ("1999 Plan") which
replaced the 1993 Plan. The 1999 Plan is similar to the 1993 Plan in that it
provides for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, performance-restricted shares and restricted
stock awards. The 1999 Plan also incorporates stock awards and cash incentive
awards. No more than 3,250,000 shares of common stock may be issued under the
1999 Plan, and no more than 300,000 of the shares may be awarded in the form of
performance restricted shares, restricted stock awards or stock awards. No
awards under the 1999 Plan will be granted after April 25, 2009. Pre-1999 grants
made under predecessor plans will be governed under the provisions of those
plans.
During 2000, AHI adopted the Stock Award Plan ("2000 Plan") to enable stock
awards and restricted stock awards to officers, key employees and non-employee
directors. No more than 750,000 treasury shares may be awarded under the 2000
Plan. The 2000 Plan will remain in effect until the earlier of the grant of all
the shares allowed under the plan or termination of the plan by the Board of
Directors.
Approximately 1,702,000 stock options were cancelled as a result of a restricted
stock for stock option exchange program offered to employees in 2000. Employees
other than the CEO holding stock options were given a one-time opportunity to
exchange their stock options with exercise prices above $50 per share for shares
of AHI restricted stock based on specified conversion ratios. The shares issued
under this exchange program were issued under the 2000 Plan and will be fully
vested by August 2002. Expenses related to this event were $1.5 million in 2000.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options are granted. The options
generally become exercisable in one to three years and expire 10 years from the
date of grant.
57
Changes in option shares outstanding
(thousands except for share price) 2000 1999 1998
- ---------------------------------- ---- ---- ----
Option shares at beginning of year 3,509.5 2,783.7 2,161.3
Options granted 1,818.5 829.7 914.8
Option shares exercised -- (54.5) (253.3)
Stock appreciation rights exercised -- (0.2) (3.1)
Options cancelled (2,550.5) (49.2) (36.0)
--------- ------ ------
Option shares at end of year 2,777.5 3,509.5 2,783.7
Option shares exercisable at end of year 973.3 1,828.0 1,372.0
Shares available for grant 4,068.7 3,307.3 789.7
Weighted average price per share:
Options outstanding $30.69 $58.48 $60.41
Options exercisable 48.92 57.12 52.38
Options granted 18.24 50.70 70.43
Option shares exercised N/A 36.17 41.68
The table below summarizes information about stock options outstanding at
December 31, 2000.
Stock options outstanding as of December 31, 2000
(thousands except for life and share price)
Options outstanding Options exercisable
----------------------------------------------------- ---------------------------------
Weighted- Weighted-
Number average average Number Weighted-
Range of outstanding remaining exercise exercisable average
exercise prices at 12/31/00 contractual life price at 12/31/00 exercise price
- --------------- ----------- ---------------- ----- ------------ --------------
$1.19 - $18.00 200.0 9.8 $ 8.78 -- --
$18.01 - $19.50 1,542.8 9.2 19.44 64.6 $ 19.44
$19.51 - $46.00 427.8 3.4 39.32 418.0 39.59
$46.01 - $60.00 427.7 5.5 55.11 356.9 56.07
$60.01 - $84.00 179.2 6.9 73.14 133.8 73.21
----- -----
2,777.5 973.3
======= =====
Performance restricted shares issuable under the 1993 and 1999 plans entitle
certain key executive employees to earn shares of AHI's common stock, but only
if the total company or individual business units meet certain predetermined
performance measures during defined performance periods (generally three years).
At the end of performance periods, common stock awarded may carry additional
restriction periods, during which time AHI will hold the shares in custody until
the expiration or termination of restrictions. Compensation expense will be
charged to earnings over the performance period. Within performance periods at
the end of 2000 were 1,500 unvested performance restricted shares outstanding
and 245 accumulated dividend equivalent shares. No performance restricted share
awards were earned based on the performance period ending December 31, 2000.
Within restriction periods at the end of 2000 were 22,028 shares of restricted
common stock outstanding based on performance periods ending prior to 2000 with
3,599 accumulated dividend equivalent shares.
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 444,443 shares of
restricted stock were granted (excluding performance-based awards discussed
above) during 2000. Of these restricted shares, 198,343 were granted under a
restricted stock for stock option exchange program. At the end of 2000, there
were 422,241 restricted shares of common stock outstanding with 11,769
accumulated dividend equivalent shares.
SFAS No. 123, "Accounting for Stock-Based Compensation," permits entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures. Had compensation cost for
these plans been determined consistent with SFAS No. 123, AHI's net earnings and
earnings per share would have been reduced to the following pro forma amounts.
58
(millions) 2000 1999 1998
- ---------- ---- ---- ----
Net earnings (loss):
- --------------------
As reported $12.2 $14.3 $ (9.3)
Pro forma 5.8 7.0 (16.1)
Basic earnings (loss) per share:
As reported 0.30 0.36 (0.23)
Pro forma 0.14 0.18 (0.40)
Diluted earnings (loss) per share:
As reported 0.30 0.36 (0.23)
Pro forma 0.14 0.17 (0.40)
The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the weighted-average assumptions for
2000, 1999 and 1998 presented in the table below. The weighted-average fair
value of stock options granted in 2000 was $2.08 per share.
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.48% 6.34% 5.14%
Dividend yield 9.50% 5.75% 3.03%
Expected life 5 years 5 years 5 years
Volatility 28% 28% 28%
Because the SFAS No. 123 method of accounting has not been applied to grants
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
NOTE 21. EMPLOYEE COMPENSATION
- ------------------------------
Employee compensation is presented in the table below. Charges for severance
costs and early retirement incentives to terminated employees have been
excluded. The increase in employee compensation from 1998 is primarily due to
the acquisitions of Triangle Pacific and DLW.
Employee compensation cost summary (millions) 2000 1999 1998
- --------------------------------------------- ---- ---- ----
Wages and salaries $ 631.9 $ 625.3 $516.8
Payroll taxes 59.7 66.8 51.3
Pension credits (38.1) (32.9) (38.5)
Insurance and other benefit costs 67.4 64.2 56.9
Stock-based compensation 4.4 4.2 5.0
----- --- ---
Total $ 725.3 $ 727.6 $591.5
======= ======= ======
NOTE 22. PENSION AND OTHER BENEFIT PROGRAMS
- -------------------------------------------
AHI and a number of its subsidiaries have pension plans and postretirement
medical and insurance benefit plans covering eligible employees worldwide. AHI
also has defined-contribution pension plans (including the Retirement Savings
and Stock Ownership Plan, as described in Note 19) for eligible employees.
Benefits from pension plans, which cover substantially all employees, are based
on an employee's compensation and years of service. Pension plans are funded by
AHI. Postretirement benefits are funded by AHI on a pay-as-you-go basis, with
the retiree paying a portion of the cost for health care benefits by means of
deductibles and contributions. AHI announced in 1989 and 1990 a 15-year
phase-out of its health care benefits for certain future retirees. These future
retirees include parent company nonunion employees and some union employees.
Shares of RSSOP common stock were allocated to eligible active employees through
June 2000, based on employee age and years to expected retirement, to help
employees offset their future postretirement medical costs. The RSSOP was
amended in November 2000 to suspend future allocations and starting in December
2000, AHI used cash to fund this benefit.
Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified US defined benefit plan, established an additional benefit known as
the ESOP Pension Account to partially compensate active employee and retiree
ESOP shareholders for the decline in the market value of AHI's stock. The effect
of this amendment had no material impact to the financial position or results of
operations in 2000, but will increase the benefit obligation by $88.7 million in
2001. The RIP Plan document will be revised to reflect these changes.
59
The following tables summarize the balance sheet impact, as well as the benefit
obligations, assets, funded status and rate assumptions associated with the
pension and postretirement benefit plans. The plan assets are primarily stocks,
mutual funds and bonds. Included in these assets were 1,426,751 shares of AHI
common stock at year-end 2000 and 1999.
Retiree Health and Life
Pension Benefits Insurance Benefits
------------------- -----------------------
U.S. defined-benefit plans (millions) 2000 1999 2000 1999
- ------------------------------------- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation as of January 1 $ 1,079.4 $ 1,163.5 $ 233.3 $ 262.5
Service cost 13.9 16.7 2.8 3.2
Interest cost 84.0 76.6 18.7 17.0
Plan participants' contributions -- -- 3.4 2.6
Plan amendments 25.8 -- -- --
Divestitures (4.0) -- (0.1) --
Effect of settlements (5.9) -- -- (4.1)
Effect of special termination benefits 1.4 1.7 -- --
Actuarial loss (gain) 33.0 (96.4) 26.6 (24.9)
Benefits paid (95.2) (82.7) (26.1) (23.0)
------ ------ ------ ------
Benefit obligation as of December 31 $ 1,132.4 $ 1,079.4 $ 258.6 $ 233.3
========= ========= ======= =======
Change in plan assets:
Fair value of plan assets as of January 1 $ 1,748.3 $ 1,874.9 -- --
Actual return (loss) on plan assets 137.9 (46.7) -- --
Divestitures (3.7) -- -- --
Effect of settlements (5.9) -- -- --
Employer contribution 9.2 2.8 $ 22.7 $ 20.5
Plan participants' contributions -- -- 3.4 2.6
Benefits paid (95.2) (82.7) (26.1) (23.1)
------ ------ ------ ------
Fair value of plan assets as of December 31 $ 1,790.6 $ 1,748.3 $ 0.0 $ 0.0
========= ========= ===== =====
Funded status $ 658.2 $ 668.9 $ (258.6) $(233.3)
Unrecognized net actuarial loss (gain) (422.7) (483.9) 48.6 23.0
Unrecognized transition asset (8.3) (14.5) -- --
Unrecognized prior service cost (benefit) 86.1 72.2 (4.2) (5.1)
---- ---- ----- -----
Net amount recognized $ 313.3 $ 242.7 $ (214.2) $ (215.4)
======= ======= ========= =========
The funded status of U.S. defined-benefit plans was determined using the
assumptions presented in the table below.
Retiree Health and Life
Pension Benefits Insurance Benefits
------------------- -----------------------
U.S. defined-benefit plans 2000 1999 2000 1999
- -------------------------- ---- ---- ---- ----
Weighted-average assumption as of
December 31:
Discount rate 7.50% 7.75% 7.50% 7.75%
Expected return on plan assets 9.50% 8.75% n/a n/a
Rate of compensation increase 4.25% 4.25% 4.25% 4.25%
Amounts recognized in the consolidated balance sheets consist of:
Retiree Health and Life
Pension Benefits Insurance Benefits
------------------- -----------------------
(millions) 2000 1999 2000 1999
- ---------- ---- ---- ---- ----
Prepaid benefit costs $ 333.6 $ 264.2 --
Accrued benefit liability (34.5) (30.2) $ (214.2) $ (215.4)
Intangible asset 1.6 2.0 -- --
Other comprehensive income 12.6 6.7 -- --
---- --- -- --
Net amount recognized $ 313.3 $ 242.7 $ (214.2) $ (215.4)
======= ======= ========= =========
60
Pension Benefits
----------------
U.S. pension plans with benefit obligations in excess of assets (millions) 2000 1999
- -------------------------------------------------------------------------- ---- ----
Retirement benefit equity plan:
- ------------------------------
Projected benefit obligation, December 31 $ 44.7 $34.9
Accrued benefit obligation, December 31 34.5 30.2
Fair value of plan assets, December 31 -- --
The components of pension credit are as follows:
Pension Benefits
----------------
U.S. defined-benefit plans (millions) 2000 1999 1998
- ------------------------------------- ---- ---- ----
Service cost of benefits earned during the year $ 13.9 $ 16.7 $ 17.5
Interest cost on projected benefit obligation 84.0 76.6 72.6
Expected return on plan assets (153.6) (147.0) (136.2)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 11.9 10.0 10.0
Recognized net actuarial gain (13.9) (17.3) (18.4)
------ ------ ------
Net periodic pension credit $ (63.9) $ (67.2) $ (60.7)
======== ======== ========
Costs for other funded and unfunded pension plans were $4.3 million in 2000, $3.9 million in 1999 and $3.6 million in 1998.
The components of postretirement benefit cost are as follows:
Retiree Health and
------------------
Life Insurance Benefits
-----------------------
U.S. defined-benefit plans (millions) 2000 1999 1998
- ------------------------------------- ---- ---- ----
Service cost of benefits earned during the year $ 2.8 $ 3.2 $ 3.3
Interest cost on accumulated postretirement benefit obligation 18.7 17.0 17.2
Amortization of prior service benefit (0.9) (0.9) (0.9)
Recognized net actuarial loss 1.0 0.6 1.3
--- --- ---
Net periodic postretirement benefit cost $ 21.6 $ 19.9 $ 20.9
====== ====== ======
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2000 and all future years. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
One percentage point
--------------------
U.S. retiree health and life insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------- -------- --------
Effect on total of service and interest cost components $ 2.1 $ (1.7)
Effect on postretirement benefit obligation 21.0 (17.9)
AHI has pension plans covering employees in a number of foreign countries that
utilize assumptions that are consistent with, but not identical to, those of the
U.S. plans. The following tables summarize the balance sheet impact as well as
the benefit obligations, assets, funded status and rate assumptions associated
with pension benefits.
61
Pension Benefits
----------------
Non-U.S. defined-benefit plans (millions) 2000 1999
- ----------------------------------------- ---- ----
Change in benefit obligation:
Benefit obligation as of January 1 $ 262.8 $ 287.0
Service cost 5.2 6.7
Interest cost 12.5 16.2
Plan participants' contributions 1.5 1.2
Plan amendments 0.7 --
Acquisitions 18.0 --
Divestitures (0.5) (2.6)
Effect of settlements (33.6) --
Effect of special termination benefits (0.7) 0.3
Foreign currency translation adjustment (21.6) (29.8)
Actuarial loss (gain) 14.6 (1.3)
Benefits paid (12.4) (14.9)
------ ------
Benefit obligation as of December 31 $ 246.5 $ 262.8
======= =======
Change in plan assets:
Fair value of plan assets as of January 1 $ 123.8 $ 105.6
Actual return on plan assets 0.4 21.9
Acquisitions 17.4 --
Divestitures (0.5) --
Employer contributions 43.7 12.5
Plan participants' contributions 1.5 1.2
Effect of settlements (33.6) --
Foreign currency translation adjustment (8.0) (2.5)
Benefits paid (12.4) (14.9)
------ ------
Fair value of plan assets as of December 31 $ 132.3 $ 123.8
======= =======
Funded status $ (114.2) $ (139.0)
Unrecognized net actuarial gain (4.7) (32.9)
Unrecognized transition obligation -- 0.4
Unrecognized prior service cost 3.9 4.7
--- ---
Net amount recognized $ (115.0) $(166.8)
========= ========
Amounts recognized in the consolidated balance sheets consist of:
Pension Benefits
----------------
(millions) 2000 1999
- ---------- ---- ----
Prepaid benefit cost $ 3.2 $ 2.6
Accrued benefit liability (123.9) (169.5)
Intangible asset 0.1 --
Other comprehensive income 5.6 0.1
--- ---
Net amount recognized $ (115.0) $ (166.8)
========= =========
Non-U.S. pension plans with benefit obligations Pension Benefits
----------------
in excess of assets (millions) 2000 1999
- ------------------------------ ---- ----
Projected benefit obligation, December 31 $ 125.3 $ 166.0
Accrued benefit obligation, December 31 122.2 159.9
Fair value of plan assets, December 31 0.6 0.6
62
The components of pension cost are as follows:
Non-U.S. defined-benefit plans (millions) 2000 1999
- ----------------------------------------- ---- ----
Service cost of benefits earned during the year $ 5.2 $ 6.7
Interest cost on projected benefit obligation 12.5 16.2
Expected return on plan assets (7.7) (6.1)
Amortization of transition obligation 0.1 0.2
Amortization of prior service cost 1.0 0.4
Recognized net actuarial gain (0.1) (0.1)
----- -----
Net periodic pension cost $ 11.0 $17.3
====== =====
Pension Benefits
----------------
Non-U.S. defined-benefit plans 2000 1999
- ------------------------------ ---- ----
Weighted-average assumption as of December 31:
Discount rate 5.69% 6.50%
Expected return on plan assets 6.43% 4.25%
Rate of compensation increase 3.85% 3.75%
NOTE 23. LEASES
- ---------------
AHI rents certain real estate and equipment. Several leases include options for
renewal or purchase and contain clauses for payment of real estate taxes and
insurance. In most cases, management expects that in the normal course of
business, leases will be renewed or replaced by other leases. As part of the
Chapter 11 Cases, AWI must decide whether to assume, assume and assign, or
reject prepetition unexpired leases and other prepetition executory contracts.
AWI has been granted an extension until August 6, 2001 by the Court to make
these decisions with respect to prepetition unexpired leases of real property
and this date may be further extended. With respect to prepetition executory
contracts and unexpired leases not related to real estate, AWI has until
confirmation of a reorganization plan to make these decisions unless such time
is shortened by the Court. The accompanying financial statements do not reflect
any adjustment related to assumption or rejection of such agreements.
Rental expense was $16.9 million in 2000, $19.3 million in 1999 and $24.7
million in 1998. Future minimum payments at December 31, 2000, by year and in
the aggregate, having noncancelable lease terms in excess of one year were as
follows:
Capital Operating
Scheduled minimum lease payments (millions) leases leases
- ------------------------------------------- ------ ------
2001 $ 0.9 $ 8.2
2002 1.0 5.1
2003 1.1 3.6
2004 2.1 2.8
2005 1.1 1.9
Thereafter 1.4 6.6
--- ---
Total $ 7.6 $ 28.2
===== ======
AHI has capital leases that have lease payments that extend until 2018. Assets under capital leases are included in the consolidated
balance sheets as follows:
(millions) 2000 1999
- ---------- ---- ----
Land $ 3.8 $3.8
Building 4.5 4.5
Machinery 26.2 21.5
Less accumulated amortization (12.1) (6.2)
------ -----
Net assets $ 22.4 $23.6
====== =====
63
NOTE 24. SHAREHOLDERS' EQUITY
- -----------------------------
Treasury share changes for 2000, 1999 and 1998 are as follows:
Years ended December 31 (thousands) 2000 1999 1998
- ----------------------------------- ---- ---- ----
Common shares
Balance at beginning of year 11,628.7 11,856.7 11,759.5
Stock purchases (1) 90.8 33.8 389.5
Stock issuance activity, net (685.2) (261.8) (292.3)
------- ------- -------
Balance at end of year 11,034.3 11,628.7 11,856.7
======== ======== ========
Note 1: Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market purchases of stock through
brokers.
In July 1996, the Board of Directors authorized Armstrong to repurchase 3.0
million shares of its common stock through the open market or through privately
negotiated transactions, bringing the total authorized common share repurchases
to 5.5 million shares. Under the total plan, Armstrong repurchased approximately
4,017,000 shares through December 31, 1998, with total cash outlay of $248.1
million, including 355,000 repurchased in 1998. In June 1998, Armstrong halted
purchases of its common shares under the common share repurchase program in
connection with its announcement to purchase Triangle Pacific and DLW.
The balance of each component of accumulated other comprehensive loss as of
December 31, 2000, and December 31, 1999, is presented in the table below.
(millions) 2000 1999
- ---------- ---- ----
Foreign currency translation adjustments and hedging activities $ 29.3 $ 12.1
Unrealized loss on available for sale securities 2.0 --
Minimum pension liability adjustments 13.9 4.4
---- ---
Total $ 45.2 $ 16.5
===== =====
The related tax effects allocated to each component of other comprehensive
income (loss) are presented in the table below.
Pre-tax Tax After tax
(millions) amount Benefit amount
- ---------- ------ ------- ------
Foreign currency translation adjustments and hedging activities ($ 17.2) -- ($ 17.2)
Unrealized loss on available for sale securities (2.0) -- (2.0)
Minimum pension liability adjustments (13.4) $ 3.9 (9.5)
------ ----- -----
Total ($ 32.6) $ 3.9 ($ 28.7)
======== ===== ========
NOTE 25. PREFERRED STOCK PURCHASE RIGHTS PLAN
- ---------------------------------------------
AHI has a shareholder rights plan under a Rights Agreement dated as of March 14,
2000 and in connection therewith distributed one right for each share of its
common stock outstanding. In general, the rights become exercisable at $300 per
right for a fractional share of a new series of Class A preferred stock 10 days
after a person or group, other than certain affiliates of AHI either acquires
beneficial ownership of shares representing 20% or more of the voting power of
AHI or announces a tender or exchange offer that could result in such person or
group beneficially owning shares representing 28% or more of the voting power of
AHI. If thereafter any person or group becomes the beneficial owner of 28% or
more of the voting power of AHI or if AHI is the surviving company in a merger
with a person or group that owns 20% or more of the voting power of AHI, then
each owner of a right (other than such 20% shareholder) would be entitled to
purchase shares of company common stock having a value equal to twice the
exercise price of the right. Should AHI be acquired in a merger or other
business combination, or sell 50% or more of its assets or earnings power, each
right would entitle the holder to purchase, at the exercise price, common shares
of the acquirer having a value of twice the exercise price of the right. The
exercise price was determined on the basis of the Board's view of the long-term
value of AHI 's common stock. The rights have no voting power nor do they
entitle a holder to receive dividends. At AHI's option, the rights are
redeemable prior to becoming exercisable at five cents per right. The rights
expire on March 21, 2006, unless extended or earlier redeemed by the AHI Board
of Directors.
64
NOTE 26. SUPPLEMENTAL FINANCIAL INFORMATION
- -------------------------------------------
Selected operating expenses (millions) 2000 1999 1998
- -------------------------------------- ---- ---- ----
Maintenance and repair costs $ 112.0 $ 110.0 $ 107.8
Research and development costs 60.0 46.4 36.7
Advertising costs 37.6 39.4 38.1
Other expense (income), net (millions)
- --------------------------------------
Interest and dividend income $ (5.5) $ (2.0) $ (3.3)
Gain on sale of businesses, net (60.2) (1.0) --
Demutualization proceeds (5.2) (2.6) --
Dal-Tile gain -- -- (12.8)
Domco litigation expense -- -- 12.3
Foreign currency transaction gain (6.0) (0.4) 0.3
Other 2.3 (0.7) 1.8
--- ----- ---
Total $(74.6) $ (6.7) $(1.7)
======= ======= ======
NOTE 27. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
(millions) 2000 1999 1998
--------- ---- ---- ----
Interest paid $100.4 $ 102.7 $ 48.2
Income taxes paid 14.0 47.1 25.7
Acquisitions:
Fair value of assets acquired $ 55.6 $3.8 $1,031.9
Cost in excess of net assets acquired -- -- 948.3
Less:
Net assets in excess of consideration 24.2 -- --
Liabilities assumed 24.9 -- 804.5
---- -- -----
Cash paid, net of cash acquired $ 6.5 $3.8 $1,175.7
===== ==== ========
NOTE 28. LOSS PER SHARE FROM CONTINUING OPERATIONS
- --------------------------------------------------
The table below provides a reconciliation of the numerators and denominators of
the basic and diluted per share calculations for net loss. Diluted
loss per share for each year was antidilutive.
Net Per share
Millions except for per-share data loss Shares amount
- ---------------------------------- ------ ------ ------
For the year ended 2000
-----------------------
BASIC LOSS PER SHARE
Loss from continuing operations $ (89.0) 40.2 $ (2.21)
DILUTED LOSS PER SHARE
Dilutive options 0.3
---
Loss from continuing operations $ (89.0) 40.5 $ (2.21)
======== ==== ========
For the year ended 1999
-----------------------
BASIC LOSS PER SHARE
Loss from continuing operations $(24.0) 39.9 $ (0.60)
DILUTED LOSS PER SHARE
Dilutive options 0.3
---
Loss from continuing operations $(24.0) 40.2 $ (0.60)
======= ==== ========
For the year ended 1998
-----------------------
BASIC LOSS PER SHARE
Loss from continuing operations $(45.5) 39.8 $ (1.14)
DILUTED LOSS PER SHARE
Dilutive options 0.6
---
Loss from continuing operations $(45.5) 40.4 $ (1.14)
======= ==== ========
65
NOTE 29. LITIGATION AND RELATED MATTERS
- ---------------------------------------
Asbestos-related Litigation
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Item 1 for further discussion.
Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.
Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.
In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.
Personal Injury Litigation
- --------------------------
Nearly all the asbestos-related personal injury lawsuits brought against AWI
relate to alleged exposure to asbestos-containing high-temperature insulation
products. The majority of these claims seek compensatory and punitive damages.
Claims may arise many years after first exposure to asbestos in light of the
decades long latency period for asbestos-related injury. Product identification
and determining exposure periods are difficult and uncertain. Over the long
history of asbestos litigation involving hundreds of companies, various parties
have tried to secure a comprehensive resolution of the litigation. In 1991, the
Judicial Panel for Multidistrict Litigation ordered the transfer of federal
cases to the Eastern District of Pennsylvania in Philadelphia for pretrial
purposes. AWI supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
court. That court has been instrumental in having the parties resolve large
numbers of cases from various jurisdictions and has been receptive to different
approaches to the resolution of claims. Claims filed in state courts have not
been directly affected by the transfer.
Amchem Settlement Class Action
- ------------------------------
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including AWI. It was designed to establish a
nonlitigation system for the resolution of those claims, and offered a method
for prompt compensation to claimants who were occupationally exposed to asbestos
if they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees; expedite compensation to claimants with
qualifying claims; and relieve the courts of the burden of handling future
claims. The District Court, after exhaustive discovery and testimony, approved
the settlement class action and issued a preliminary injunction that barred
class members from pursuing claims against Center members in the tort system.
The U.S. Court of Appeals for the Third Circuit reversed that decision, and the
reversal was sustained by the U.S. Supreme Court on September 25, 1997, holding
that the settlement class did not meet the requirements for class certification
under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated
on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and
a loss of the bar against the filing of claims in the tort system.
66
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
- ----------------------------------------------------------------------
("Center")
- ----------
The Facility was established in 1985 to evaluate, settle, pay and defend all
personal injury claims against member companies. Resolution and defense costs
were allocated by formula. The Facility subsequently dissolved, and the Center
was created in October 1988 by 21 former Facility members, including AWI. At the
time of the Filing, there were 16 members of the Center, including AWI.
Insurance carriers, while not members, are represented ex officio on the
Center's governing board and have agreed annually to provide a portion of the
Center's operational costs. The Center adopted many of the conceptual features
of the Facility and has addressed the claims in a manner consistent with the
prompt, fair resolution of meritorious claims. Resolution and defense costs are
allocated by formula among the member companies; adjustments over time due to
the departure of some members and other factors resulted in some increased share
for AWI.
As a result of the Filing, AWI is no longer an active participant in the Center.
The extent and amount of AWI liabilities as a result of its participation in the
Center have not been determined, but will be determined in AWI's Chapter 11
Case.
Number of Claims
- ----------------
The number of claims naming AWI as a defendant ranged from about 16,400 to
31,100 per year during the period from 1989 to 1997. However, subsequent to this
time and up to the Filing, claim filings significantly surpassed this average as
approximately 87,500 and 50,700 claims were filed in 1998 and 1999 respectively.
AWI had expected the number of claims to decline in 2000. However, during the
first eleven months of 2000 prior to the Filing, the Center received and
verified approximately 53,000 claims. Claims from major, established law firms
did decline, but this decline was more than offset by claims from new or
previously low-volume law firms.
Before filing under the Bankruptcy Code, AWI pursued broad-based settlements of
claims through the Center. The Center had reached Strategic Settlement Program
("SSP") agreements with law firms that covered approximately 130,000 claims that
named AWI as a defendant, including agreements with 17 law firms covering
approximately 36,800 claims during the first eleven months of 2000. These
agreements typically provided for multiyear payments for settlement of current
claims and established specific medical and other criteria for the settlement of
future claims as well as annual limits on the number of claims that can be filed
by these firms. These agreements also established fixed settlement values for
different asbestos-related medical conditions which were subject to periodic
re-negotiation over a period of 2 to 5 years. The plaintiff law firms were
required to recommend settlements to their clients although future claimants are
not legally obligated to accept the settlements. These agreements also provided
for nominal payments to future claimants who are unimpaired but who are eligible
for additional compensation if they develop a more serious asbestos-related
illness. The Center could terminate an agreement with an individual law firm if
a significant number of that firm's clients elect not to participate under the
agreement. For some agreements, the component of the agreement that covered
future claims was subject to re-negotiation if members left the Center. As a
result of the Filing, AWI's obligations with respect to these settlements will
be determined in the context of its Chapter 11 Case.
Fourth Quarter 2000 Events
- --------------------------
On October 5, 2000, Owens Corning Fiberglass ("OCF"), a manufacturer of
insulation, filed for protection under Chapter 11 of the Bankruptcy Code to
address its asbestos liability. This filing adversely impacted AWI's
negotiations to obtain a 364-day credit facility which were underway at the
time. This credit facility was to replace an existing $450 million credit
facility that expired on October 19, 2000. Following the OCF filing, the
potential participants in the new credit facility decided to reevaluate their
credit exposures to AWI, primarily due to AWI's asbestos liability. AWI could
not reach agreement on a new facility with acceptable terms. The existing $450
million credit facility expired on October 19, 2000.
Additionally, AWI was concerned that a possible upward bias in the settlement
demands of asbestos plaintiffs would occur given the exit from the tort system
of OCF, an important defendant in asbestos litigation.
As set forth above, AWI filed for relief under Chapter 11 of the Bankruptcy Code
on December 6, 2000. As a result, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from filing new lawsuits against
AWI. In addition, AWI ceased making payments with respect to asbestos claims,
including payments pursuant to the outstanding SSP agreements. A separate
creditors committee representing the interests of asbestos claimants has been
appointed in the Chapter 11 Cases.
As a result of the Filing, AWI's present and future asbestos liability will be
addressed in the Chapter 11 Case rather than through the Center and a multitude
of lawsuits in different jurisdictions throughout the U.S. AWI believes that the
67
Chapter 11 process provides it with the opportunity to change its approach to
its asbestos liability and comprehensively address that liability in one forum.
It is anticipated that all present and future asbestos claims will be resolved
in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate was highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that could affect the range of the
liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The balance at December 31, 2000 is $690.6 million. It is reasonably
possible, however, that the actual liability could be significantly higher than
the recorded liability. As the Chapter 11 Cases proceed there should be more
clarity as to the extent of the liability to be addressed in the Chapter 11
Cases.
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 that were filed by public and private building owners. These
cases present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures for
removal and replacement of such products. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Coverage
- ------------------
During relevant time periods, AWI purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., the former
subsidiary of AWI discussed above under "Background". AWI and ACandS agreed to
share certain coverage on a first-come first-served basis and to reserve for
ACandS a certain amount of excess coverage.
Wellington Agreement
- --------------------
In 1985, AWI and 52 other companies (asbestos defendants and insurers) signed
the Wellington Agreement. This Agreement settled disputes concerning personal
injury insurance coverage with signatory carriers. It provides broad coverage
for both defense and indemnity and applies to both products hazard and
nonproducts (general liability)
68
coverages. Most of AWI resolutions of asbestos-related personal injury products
hazard coverage matters with its solvent carriers has been achieved through the
Wellington Agreement or other settlements.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI's primary and excess remaining insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve alleged exposure during AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure under the Wellington Agreement is under way against
certain carriers to determine the percentage of resolved and unresolved claims
that are nonproducts claims, to establish the entitlement to such coverage and
to determine whether and how much reinstatement of prematurely exhausted
products hazard insurance is warranted. The nonproducts coverage potentially
available is substantial and includes defense costs in addition to limits. The
carriers have raised various defenses, including waiver, laches, statutes of
limitations and contractual defenses. One primary carrier alleges that it is no
longer bound by the Wellington Agreement, and another alleges that AWI agreed to
limit its claims for nonproducts coverage against that carrier when the
Wellington Agreement was signed. The ADR process is in the trial phase of
binding arbitration. One insurer has taken the position that it is entitled to
litigate in court certain issues in the ADR proceeding. During 1999, AWI
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to AWI on a number of issues related to
insurance coverage. However, during the fourth quarter of 2000, a new trial
judge was selected for the ADR. AWI is uncertain at this time as to the impact,
if any, this change will have on the preliminary decisions of the initial phases
of the ADR. Further, management believes that one of the carriers has been
experiencing financial difficulties, which could affect its ability to pay any
ultimate judgment. AWI has not adjusted the recorded asset amount at December
31, 2000 related to this carrier. Because of the continuing ADR process and the
possibilities for appeal on certain matters, AWI has not yet completely
determined the financial implications of the ADR proceedings.
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of December 31, 2000. Of the total recorded
asset, approximately $77.2 million represents partial settlement for previous
claims that will be paid in a fixed and determinable flow and is reported at its
net present value discounted at 6.50%. The total amount recorded reflects AWI's
belief in the availability of insurance in this amount, based upon AWI's success
in insurance recoveries, recent settlement agreements that provide such
coverage, the nonproducts recoveries by other companies and the opinion of
outside counsel. Such insurance is either available through settlement or
probable of recovery through negotiation, litigation or resolution of the ADR
process that is in the trial phase of binding arbitration. Depending on further
progress of the ADR, activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS and the financial condition of the
insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $86 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $32.2 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Income Statement Charges
- ------------------------
AWI recorded charges to increase its estimate of probable asbestos-related
liability by $236.0 million in the second quarter of 2000, $335.4 million in
1999 and $274.2 million in 1998. Prior to 1998, charges to increase the
liability were effectively offset by corresponding increases in related
insurance recoveries.
Cash Flow Impact
- ----------------
AWI paid $226.9 million for asbestos-related claims in the first eleven months
of 2000 compared to $173.0 million in all of 1999. AWI received $27.7 million in
asbestos-related insurance recoveries during 2000 compared to $58.7 million
during 1999. During the pending Chapter 11 cases, AWI does not expect to make
any further cash payments for
69
asbestos-related claims, but AWI may continue to receive insurance proceeds
under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation and the impact of the ADR proceedings on the
insurance asset. Accordingly, AWI is not revising its previously recorded
liability. However, it is reasonably possible that AWI's total exposure to
personal injury asbestos claims may be significantly different than the recorded
liability.
Environmental Matters
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $6.2
million in 2000, $5.5 million in 1999 and $6.7 million in 1998 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other federal and
state environmental laws continue to change. Until all new regulatory
requirements are known, Armstrong cannot predict with certainty future capital
expenditures associated with compliance with environmental requirements.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have potential liability for the required investigation and remediation of
each site and who, in some cases, have agreed to jointly fund that required
investigation and remediation. With regard to some sites, however, Armstrong
disputes the liability, the proposed remedy or the proposed cost allocation
among the PRPs. Armstrong may also have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies. Armstrong
has also been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. Armstrong's payments
and remediation work on these sites is under review under light of the Chapter
11 Filing.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction 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 any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Cases also may
affect the ultimate amount of such contributions.
Liabilities of $13.5 million at December 31, 2000 and $13.2 million at December
31, 1999 were for potential environmental liabilities that Armstrong considers
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 liability is available and no
amount within that range is more likely than any other, the lower end of the
range has been used. As assessments and remediation activities progress at each
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the December
31, 2000 environmental liabilities are classified as prepetition liabilities
subject to compromise. As a general rule, such pre-petition liabilities that do
not preserve company assets are addressed in the context of the Chapter 11
Cases. The estimated liabilities do not take into account any claims for
recoveries from insurance or third parties. Such recoveries, where probable,
have been recorded as an asset in the consolidated financial statements and are
either available through settlement or anticipated to be recovered through
negotiation or litigation.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
70
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
Note 30 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- -------------------------------------------------------------------------
INDUSTRIES, INC.
----------------
The difference between the financial statements of AHI and Armstrong is
primarily due to transactions related to the formation of Armstrong Holdings,
Inc. and stock activity.
71
Independent Auditors' Report
The Board of Directors and Shareholders,
Armstrong Holdings, Inc.:
We have audited the accompanying consolidated financial statements of Armstrong
Holdings, Inc. and subsidiaries ("the Company") as listed in the accompanying
index on page 35. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index on page 35. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong Holdings,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, three of the Company's domestic subsidiaries,
including Armstrong World Industries, Inc., the Company's major operating
subsidiary, filed separate voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court on
December 6, 2000. Armstrong World Industries, Inc. has also defaulted on certain
debt obligations. Although these operating subsidiaries are currently operating
their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court, the continuation of their businesses as going concerns is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
Bankruptcy Court. The filing under Chapter 11 and the resulting increased
uncertainty regarding the Company's potential asbestos liabilities, as discussed
in Note 29 of the consolidated financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of these
uncertainties.
KPMG LLP
February 26, 2001
Philadelphia, Pennsylvania
72
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
(in millions, except per share amounts)
Years Ended December 31
2000 1999 1998
---- ---- ----
Net sales $3,003.8 $3,048.2 $2,496.1
Cost of goods sold 2,197.7 2,080.8 1,718.3
-------- -------- --------
Gross profit 806.1 967.4 777.8
Selling, general and administrative expenses 545.8 556.2 443.0
Charge for asbestos liability, net 236.0 335.4 274.2
Restructuring and reorganization charges (reversals) 18.0 (1.4) 74.4
Goodwill amortization 23.9 25.5 10.7
Equity (earnings) from affiliates, net (18.0) (16.8) (13.8)
-------- -------- --------
Operating income (loss) 0.4 68.5 (10.7)
Interest expense (unrecorded contractual interest of $6.0 million in 2000) 101.6 104.0 61.4
Other (income), net (74.6) (6.7) (1.7)
-------- -------- --------
Loss from continuing operations before Chapter 11 reorganization costs
and income tax benefit (26.6) (28.8) (70.4)
Chapter 11 reorganization costs, net 103.3 - -
-------- -------- --------
Loss from continuing operations before income tax benefit (129.9) (28.8) (70.4)
Income tax benefit (40.5) (4.8) (24.9)
-------- -------- --------
Loss from continuing operations ($89.4) ($24.0) ($45.5)
-------- -------- --------
Income from discontinued operations, net of tax of $7.6, $19.7 and $13.6, respectively 5.9 38.3 36.2
Net gain on sale of discontinued operations, net of tax of $28.4 95.3 - -
-------- -------- --------
Earnings from discontinued operations 101.2 38.3 36.2
-------- -------- --------
Net earnings (loss) $11.8 $14.3 ($9.3)
======== ======== =========
See accompanying notes to consolidated financial statements beginning on page
77.
73
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions)
As of December 31,
Assets 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $ 156.5 $ 17.2
Accounts and notes receivable, net 316.5 352.2
Inventories, net 340.2 352.4
Deferred income taxes 9.8 40.4
Net assets of discontinued operations 48.6 184.7
Other current assets 72.3 74.7
-------- --------
Total current assets 943.9 1,021.6
Property, plant and equipment, less accumulated depreciation and
amortization of $1,006.4 and $1,035.3 million, respectively 1,253.5 1,292.0
Insurance receivable for asbestos-related liabilities, noncurrent 236.1 270.0
Investment in affiliates 37.3 34.2
Goodwill, net 846.0 898.4
Other intangibles, net 91.9 90.8
Deferred income tax assets, noncurrent 22.5 -
Other noncurrent assets 443.3 374.4
-------- --------
Total assets $3,874.5 $3,981.4
========= ========
Liabilities and Shareholder's Equity
------------------------------------
Current liabilities:
Short-term debt $16.6 $65.9
Current installments of long-term debt 8.1 36.1
Accounts payable and accrued expenses 238.0 591.5
Income taxes 30.0 -
-------- --------
Total current liabilities 292.7 693.5
-------- --------
Liabilities subject to compromise 2,390.2 -
Long-term debt, less current installments 56.8 1,389.1
Employee Stock Ownership Plan (ESOP) loan guarantee - 155.3
Postretirement and postemployment benefit liabilities 243.6 242.4
Pension benefit liabilities 154.7 168.3
Asbestos-related long-term liabilities, noncurrent - 506.5
Other long-term liabilities 71.1 91.5
Deferred income taxes - 43.8
Minority interest in subsidiaries 6.9 11.8
-------- --------
Total noncurrent liabilities 2,923.3 2,608.7
Shareholder's equity:
Common stock, $1 par value per share
Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9
Capital in excess of par value 173.4 176.4
Reduction for ESOP loan guarantee (142.2) (190.3)
Retained earnings 1,149.1 1,196.2
Accumulated other comprehensive loss (45.2) (16.5)
Less common stock in treasury, at cost
2000 - 11,393,170 shares; 1999 - 11,628,705 shares (528.5) (538.5)
-------- --------
Total shareholder's equity 658.5 679.2
-------- --------
Total liabilities and shareholder's equity $3,874.5 $3,981.4
======== ========
See accompanying notes to consolidated financial statements beginning on page
77.
74
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholder's Equity
(amounts in millions)
2000 1999 1998
---- ---- ----
Common stock, $1 par value:
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
-------- --------- --------
Capital in excess of par value:
Balance at beginning of year $ 176.4 $ 173.0 $ 169.5
Stock issuances and other 2.3 3.4 3.5
Contribution of treasury stock to ESOP (5.3) - -
-------- --------- --------
Balance at end of year $ 173.4 $ 176.4 $ 173.0
-------- --------- --------
Reduction for ESOP loan guarantee:
Balance at beginning of year $(190.3) $ (199.1) $ (207.7)
Principal paid 13.2 23.3 23.2
Loans to ESOP (7.3) (12.8) (10.1)
Interest on loans to ESOP (1.1) (1.3) (0.8)
Contribution of treasury stock to ESOP (4.1) (5.8) -
Impairment of loans to ESOP 43.3 - -
Accrued compensation 4.1 5.4 (3.7)
-------- --------- --------
Balance at end of year $(142.2) $ (190.3) $ (199.1)
-------- --------- --------
Retained earnings:
Balance at beginning of year $1,196.2 $ 1,257.0 $1,339.6
Net earnings (loss) for year 11.8 $ 11.8 14.3 $ 14.3 (9.3) $ (9.3)
Tax benefit on dividends paid on unallocated
ESOP common shares 1.2 1.8 2.0
-------- --------- --------
Total $1,209.2 $ 1,273.1 $1,332.3
Less rights redemptions 2.0 - -
Less common stock dividends (per share)
$1.44 in 2000; $1.92 in 1999; $1.88 in 1998 58.1 76.9 75.3
-------- --------- --------
Balance at end of year $1,149.1 $ 1,196.2 $1,257.0
-------- --------- --------
Accumulated other comprehensive income (loss):
Balance at beginning of year $ (16.5) $ (25.4) $ (16.2)
Foreign currency translation adjustments and
hedging activities (17.2) (3.4) (7.0)
Unrealized loss on available for sale securities (2.0) - -
Minimum pension liability adjustments (9.5) 12.3 (2.2)
-------- --------- --------
Total other comprehensive income (loss) (28.7) (28.7) 8.9 8.9 (9.2) (9.2)
-------- ------- --------- ------- -------- ------
Balance at end of year $ (45.2) $ (16.5) $ (25.4)
-------- --------- --------
Comprehensive income (loss) $ (16.9) $ 23.2 $(18.5)
======= ======= ======
Less treasury stock at cost:
Balance at beginning of year $ 538.5 $ 547.7 $526.5
Stock purchases - 1.3 31.8
Stock issuance activity, net (0.6) (2.6) (10.6)
Contribution of treasury stock to ESOP (9.4) (7.9) -
-------- --------- --------
Balance at end of year $ 528.5 $ 538.5 $ 547.7
-------- --------- --------
Total shareholder's equity $ 658.5 $ 679.2 $ 709.7
======== ========= ========
See accompanying notes to consolidated financial statements beginning on page
77.
75
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in millions)
Years Ended December 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $11.8 $14.3 ($9.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization, continuing operations 160.9 154.9 129.6
Depreciation and amortization, discontinued operations 7.6 14.3 13.1
Gain on sale of businesses, net (183.9) (1.0) -
Gain on sale of investments in affiliates - - (12.8)
Deferred income taxes (35.7) (38.3) (27.9)
Equity earnings from affiliates, net (18.0) (16.8) (13.8)
Chapter 11 reorganization costs, net 103.3 - -
Chapter 11 reorganization costs paid (2.6) - -
Restructuring and reorganization charges (reversals) 18.0 (1.4) 74.4
Restructuring and reorganization payments (7.9) (16.9) (11.2)
Charge for asbestos liability, net 236.0 335.4 274.2
Payments for asbestos-related claims, net of recoveries (199.2) (114.4) (74.4)
Decrease in net assets of discontinued operations 42.7 25.7 5.4
Changes in operating assets and liabilities net of effects of
reorganizations, restructuring, acquisitions and dispositions
(Increase)/decrease in receivables 38.5 (26.9) 7.3
(Increase)/decrease in inventories 18.8 (22.0) 43.9
(Increase)/decrease in other current assets (10.6) 24.4 (30.1)
Increase in other noncurrent assets (41.6) (52.0) (108.5)
Increase/(decrease) in accounts payable and accrued expenses (119.6) 92.9 (23.2)
Increase/(decrease) in income taxes payable 29.2 (15.8) (6.5)
Increase/(decrease) in other long-term liabilities (23.8) 8.7 23.4
Other, net 17.9 (27.0) (10.3)
-------- ------- -------
Net cash provided by operating activities 41.8 338.1 243.3
-------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment, continuing operations (136.0) (166.5) (148.3)
Purchases of property, plant and equipment, discontinued operations (14.1) (17.1) (11.4)
Investment in computer software (12.0) (11.6) (24.6)
Acquisitions, net of cash acquired (6.5) (3.8) (1,175.7)
Investments in affiliates - - 147.6
Distributions from equity affiliates 12.7 40.8 11.4
Proceeds from the sale of businesses 329.9 88.3 -
Proceeds from the sale of assets 5.3 7.9 2.7
---- ---- ----
Net cash provided by (used for) investing activities 179.3 (62.0) (1,198.3)
------ ------ ---------
Cash flows from financing activities:
Increase/(decrease) in short-term debt, net (4.5) (69.7) 24.2
Issuance of long-term debt 3.4 200.0 1,293.9
Payments of long-term debt (23.0) (332.4) (278.6)
Cash dividends paid (58.1) (76.9) (75.3)
Purchase of common stock for the treasury, net (1.6) (1.3) (31.8)
Proceeds from exercised stock options 0.1 1.2 7.9
Other, net 5.6 (2.8) (3.0)
-------- ------- -------
Net cash provided by (used for) financing activities (78.1) (281.9) 937.3
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (3.7) (2.9) 0.5
-------- ------- -------
Net increase (decrease) in cash and cash equivalents $ 139.3 ($8.7) ($17.2)
Cash and cash equivalents at beginning of year $ 17.2 $ 25.9 $ 43.1
-------- ------- -------
Cash and cash equivalents at end of year $ 156.5 $ 17.2 $ 25.9
======== ====== =======
See accompanying notes to consolidated financial statements beginning on page
77.
76
NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
- ----------------------------------------------
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells interior finishings,
most notably floor coverings and ceiling systems, around the world. Armstrong
products are sold primarily for use in the finishing, refurbishing and repair of
residential, commercial and institutional buildings. Armstrong also designs,
manufactures and sells kitchen and bathroom cabinets.
Armstrong Holdings, Inc. (which together with its subsidiaries is referred to
here as "AHI") is the publicly-held parent holding company of Armstrong.
Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000,
following AWI shareholder approval of a plan of exchange under which each share
of AWI was automatically exchanged for one share of Armstrong Holdings, Inc.
Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds
no other significant assets or operations apart from AWI and AWI's subsidiaries.
Stock certificates that formerly represented shares of AWI were automatically
converted into certificates representing the same number of shares of Armstrong
Holdings, Inc. The publicly-held debt of AWI was not affected in the
transaction.
On December 6, 2000, AWI, the major operating subsidiary of AHI, 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 "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The
Chapter 11 cases are being jointly administered under case numbers 00-4469,
00-4470, and 00-4471 (the "Chapter 11 Cases").
AHI, and Armstrong's other subsidiaries, including Triangle Pacific Corp., WAVE
(Armstrong's ceiling grid systems joint venture with Worthington Industries),
Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries
were not a part of the Filing.
Like other companies involved in asbestos litigation, AWI has tried a number of
different approaches to managing its asbestos liability, including negotiating
broad-based settlements of claims and supporting efforts to find a legislative
resolution. The number of new claims filed and the cost to settle claims,
however, continued to escalate. In addition, liquidity concerns increased when
Owens Corning Fiberglass filed for Chapter 11 protection on October 5, 2000.
This hurt AWI's ability to obtain ongoing financing on acceptable terms. These
were the principal factors which led to the decision to make the Filing.
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing. In addition, as a
debtor-in-possession, AWI has the right, subject to the Court's approval, to
assume or reject any executory contracts and unexpired leases in existence at
the date of the Filing. Parties having claims as a result of any such rejection
may file claims with the Court which will be dealt with as part of the Chapter
11 Cases.
Two creditors' committees, one representing asbestos claimants and the other
representing other unsecured creditors, have been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code they have the
right to be heard on matters that come before the Court in the Chapter 11 Cases.
It is AWI's intention to address all of its prepetition claims, including all
asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At
this juncture, it is impossible to predict with any degree of certainty how such
a plan will treat such claims and the impact AWI's Chapter 11 Case and any
reorganization plan will have on the shares of common stock of AWI, all of which
are held by AHI and along with AWI's operating subsidiaries are the only
material asset of AHI. Generally, under the provisions of the Bankruptcy Code,
holders of equity interests may not participate under a plan of reorganization
unless the claims of creditors are satisfied in full under the plan or unless
creditors accept a reorganization plan which permits holders of equity interests
to participate. The formulation and implementation of a plan of reorganization
in the Chapter 11 Cases could take a significant period of time.
Financing
- ---------
The Court has approved a $300 million debtor-in-possession credit facility
provided by a bank group led by The Chase Manhattan Bank (the "DIP Facility").
AWI believes that the DIP Facility, together with cash generated from
operations,
77
will be more than adequate to address its liquidity needs. As of February 28,
2001, AWI had $96.3 million of cash and cash equivalents in addition to cash
held by its non-debtor subsidiaries. Borrowings under the DIP facility, if any,
will constitute superpriority administrative expense claims in the Chapter 11
Cases.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
Armstrong has implemented this guidance in the accompanying financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 for detail of the liabilities subject to compromise at December 31, 2000.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of AWI's prepetition debt, now in default, is
recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing
remain classified on the consolidated balance sheet based upon maturity date.
AWI's asbestos liability is also recorded in liabilities subject to compromise.
See Note 27 for further discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization items. Accordingly, AWI recorded a total of $103.3 million as
Reorganization Costs in December 2000, consisting of:
($ millions)
-----------
Adjustment of net debt and debt issue costs to expected amount of allowed claim $ 42.0
ESOP related expenses 58.8
Professional fees 2.6
Interest income, post petition (0.3)
Other expenses directly related to bankruptcy, net 0.2
--------
Total Chapter 11 reorganization costs $ 103.3
========
To record prepetition debt at the face value or the amount of the expected
allowed claims, AWI adjusted the amount of net debt and debt issue costs and
recorded a pre-tax expense of $42.0 million.
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. As described more
fully in Note 19, Armstrong has not permitted further employee contributions to
the ESOP. Therefore, it is expected that the ESOP will no longer have the
ability to repay Armstrong money it previously borrowed. In addition, a $15.5
million expense was recorded related to interest and tax penalty guarantees owed
to ESOP bondholders caused by the default on the ESOP bonds.
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
Interest income in the above table is from short-term investments of cash earned
by AWI subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated historical financial
statements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Actual results may differ from these estimates.
78
Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of Armstrong World Industries, Inc.,
and its subsidiaries. All significant intercompany transactions have been
eliminated from the consolidated financial statements. Certain prior year
amounts have been reclassified to conform to the current year presentation.
Revenue Recognition. Armstrong records revenue from the sale of products and the
- -------------------
related accounts receivable as title transfers, generally on the date of
shipment. Provision is made for estimated applicable discounts and losses.
Earnings (loss) per Common Share. Basic earnings (loss) per share are computed
- --------------------------------
by dividing the earnings (loss) by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings (loss) per common
share reflect the potential dilution of securities that could share in earnings
(loss). The diluted earnings (loss) per share computations for some periods use
the basic number of shares due to the loss from continuing operations.
Advertising Costs. Armstrong recognizes advertising expenses as they are
- -----------------
incurred.
Shipping and Handling Costs. Prior to 2000, Armstrong recorded some shipping and
- ---------------------------
handling costs as a reduction to net sales. In 2000, Armstrong applied the
provisions of EITF Issue No. 00-010, "Accounting for Shipping and Handling Fees
and Costs". Consequently, approximately $133.3 million of 2000 shipping and
handling costs have been reclassified from net sales to cost of goods sold. All
income statements presented have been restated to comply with this pronouncement
by increasing net sales and cost of goods sold as follows: 1999 - $125.9 million
and 1998 - $104.2 million. This change had no effect on gross margin or retained
earnings as of any date.
Sales Incentives. Prior to 2000, Armstrong had been classifying most sales
- ----------------
incentives as a reduction of sales but was recording certain sales incentives as
Selling, General and Administrative ("SG&A") expenses. In accordance with EITF
Issue No. 00-014, "Accounting for Certain Sales Incentives", Armstrong
reclassified sales incentives from SG&A expense to net sales (reducing both) as
follows: 2000 - $1.3 million; 1999 - $1.2 million; and 1998 - $1.1 million.
Pension and Postretirement Benefits. Armstrong has plans that provide for
- -----------------------------------
pension, medical and life insurance benefits to certain eligible employees when
they retire from active service. Generally, Armstrong's practice is to fund the
actuarially determined current service costs and the amounts necessary to
amortize prior service obligations over periods ranging up to 30 years, but not
in excess of the funding limitations.
Taxes. Deferred tax assets and liabilities are recognized using enacted tax
- -----
rates for expected future tax consequences of events recognized in the financial
statements or tax returns. The tax benefit for dividends paid on unallocated
shares of stock held by the ESOP is recognized in shareholders' equity.
Gains and Losses on Divestitures. Armstrong records the gain or loss on divested
- --------------------------------
businesses in other income.
Cash and Cash Equivalents. Short-term investments that have maturities of three
- -------------------------
months or less when purchased are considered to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Inventories
- -----------
also include certain floor covering samples.
Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost less accumulated depreciation and amortization. Depreciation
charges for financial reporting purposes are determined on the straight-line
basis at rates calculated to provide for the retirement of assets at the end of
their useful lives, generally as follows: buildings, 20 to 40 years; machinery
and equipment, 3 to 20 years. Impairment losses are recorded when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. When assets are
disposed of or retired, their costs and related depreciation are removed from
the financial statements and any resulting gains or losses normally are
reflected in "Selling, general and administrative expenses."
Costs of the construction of certain long-lived assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
Capitalized interest was $0.4 million in 2000, $4.3 million in 1999 and $5.8
million in 1998.
79
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods from 3 to 40 years. On a periodic basis,
Armstrong estimates the future undiscounted cash flows of the businesses to
which goodwill relates in order to ensure that the carrying value of goodwill
and other intangibles has not been impaired.
Foreign Currency Transactions. Gains or losses on foreign-currency transactions
- -----------------------------
are recognized through the statement of earnings. Amounts payable or receivable
denominated in foreign currencies are revalued at the exchange rate prevailing
at year-end.
Financial Instruments and Derivatives. Armstrong uses derivatives and other
- -------------------------------------
financial instruments to diversify or offset the effect of currency, interest
rate and commodity price variability.
Armstrong may enter into foreign currency forward contracts to offset the effect
of exchange rate changes on cash flow exposures denominated in foreign
currencies. Such exposures include firm commitments with third parties and
intercompany financial transactions.
Realized gains and losses on contracts are recognized in the consolidated
statements of earnings. Unrealized gains and losses on foreign currency options
that are designated as effective hedges as well as option premium expense are
deferred and included in the statements of earnings as part of the underlying
transactions. Unrealized gains and losses on foreign currency contracts used to
hedge intercompany transactions having the character of long-term investments
are included in other comprehensive income.
Armstrong may enter into interest rate swap agreements to alter the interest
rate risk profile of outstanding debt, thus altering Armstrong's exposure to
changes in interest rates. In these swaps, Armstrong agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to a notional principal amount. Any differences paid or
received on interest rate swap agreements, when terminated, are recognized as
adjustments to interest expense over the term of associated debt.
NOTE 3. NATURE OF OPERATIONS
- ----------------------------
Industry Segments
- -----------------
For the year ended 2000
-----------------------
Floor Building Wood All Unallocated
(millions) coverings products products other Corporate Totals
- ---------- --------- -------- -------- ----- --------- ------
Net sales to external customers $ 1,263.9 $ 837.2 $ 902.7 -- -- $ 3,003.8
Intersegment sales 4.2 -- -- -- -- 4.2
Equity (earnings) from affiliates -- (17.9) -- (0.1) -- (18.0)
Segment operating income (loss) 78.8 113.9 74.3 0.1 ($ 266.7) 0.4
Restructuring and reorganization charges,
net of reversals 7.9 0.2 1.7 -- 8.2 18.0
Segment assets 981.0 568.5 1,358.6 16.1 950.3 3,874.5
Depreciation and amortization 70.1 32.8 37.0 -- 21.0 160.9
Investment in affiliates 1.1 19.9 -- 16.3 -- 37.3
Capital additions 52.0 43.6 38.7 -- 13.7 148.0
80
For the year ended 1999
-----------------------
Floor Building Wood All Unallocated
(millions) coverings products products other Corporate Totals
- ---------- --------- -------- -------- ----- --------- ------
Net sales to external customers $ 1,365.7 $ 794.5 $ 836.5 $ 51.5 -- $ 3,048.2
Intersegment sales 2.7 -- -- 20.7 -- 23.4
Equity (earnings) loss from affiliates 0.1 (16.1) -- (0.8) -- (16.8)
Segment operating income (loss) 204.6 120.0 85.0 6.0 ($ 347.1) 68.5
Restructuring and reorganization reversals (1.1) (0.3) -- -- -- (1.4)
Segment assets 1,286.1 535.1 1,308.0 16.0 836.2 3981.4
Depreciation and amortization 71.2 34.1 36.1 2.8 10.7 154.9
Investment in affiliates 3.3 14.9 -- 16.0 -- 34.2
Capital additions 71.9 45.5 41.5 2.7 16.5 178.1
For the year ended 1998
-----------------------
Floor Building Wood All Unallocated
(millions) coverings products products other Corporate Totals
- ---------- --------- -------- -------- ----- --------- ------
Net sales to external customers $1,248.5 $ 799.0 $ 351.3 $ 97.3 -- $ 2,496.1
Intersegment sales -- -- -- 39.5 -- 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- 0.2 -- (13.8)
Segment operating income (loss) 121.7 106.5 38.6 7.2 ($ 284.7) (10.7)
Reorganization charges 53.5 10.1 -- 1.9 8.9 74.4
Segment assets 1,146.0 550.1 1,279.0 67.6 1,044.1 4,086.8
Depreciation and amortization 62.6 39.2 15.3 7.2 5.3 129.6
Investment in affiliates 2.2 39.6 -- -- -- 41.8
Capital additions 93.5 42.5 12.4 5.9 18.6 172.9
Segments were determined based on products and services provided by each
segment. Accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Performance of the segments is
evaluated on operating income before income taxes, restructuring charges,
unusual gains and losses, and interest expense. Armstrong accounts for
inter-segment sales and transfers based upon its internal transfer pricing
policy.
The floor coverings segment includes resilient flooring, adhesives, installation
and maintenance materials and accessories sold to commercial and residential
customers through wholesalers, retailers and contractors. To reduce interchannel
conflict, distinctive resilient flooring products have been introduced to allow
exclusive product offerings by our customers. Raw materials, especially
plasticizers and resins, are a significant cost of resilient flooring products.
Armstrong has no influence on the worldwide market prices of these materials and
thus is subject to cost changes.
The building products segment includes commercial and residential ceiling
systems. Grid products, manufactured through Armstrong's WAVE joint venture with
Worthington Industries, have become an important part of this business
worldwide. Earnings from this joint venture are included in this segment's
operating income and in "Equity Earnings from Affiliates" (see Note 9). The
major sales activity in this segment is commercial ceiling systems sold to
resale distributors and contractors worldwide, with European sales having a
significant impact. Ceiling systems for the residential home segment are sold
through wholesalers and retailers, mainly in the United States. Through a joint
venture with a Chinese partner, a plant in Shanghai manufactures ceilings for
the Pacific area. During 2000, Armstrong acquired privately-held
Switzerland-based Gema Holding AG ("Gema"), a manufacturer and installer of
metal ceilings. See Note 5 for further discussion.
The wood products segment is composed of Triangle Pacific Corp., a wholly owned
subsidiary, a manufacturer of consumer wood products including hardwood flooring
and cabinets. Products in this segment are used primarily in residential new
construction and remodeling and commercial applications such as retail stores
and restaurants. Approximately 35% of sales are from new construction which is
more cyclical than remodeling activity. Triangle Pacific manufactures hardwood
flooring under the brand names of Bruce, Hartco and Robbins while cabinets are
manufactured under the brand names of Bruce and IXL.
81
During most of 1999, "all other" included business units making a variety of
specialty products for the building, automotive, textile and other industries
worldwide. Gasket materials were sold for new and replacement use in automotive,
construction and farm equipment, appliance, small engine and compressor
industries. On June 30, 1999, Armstrong sold 65% of the gaskets business. Since
the divestiture, Armstrong has accounted for the gaskets business under the
equity method within the "all other" segment. Textile mill supplies, including
cots and aprons, were sold to equipment manufacturers and textile mills. On
September 30, 1999, Armstrong sold the textiles business. From 1997 to 1998,
Armstrong owned an equity interest in Dal-Tile International Inc. ("Dal-Tile"),
whose ceramic tile products are sold through home centers, Dal-Tile sales
service centers and independent distributors. In 1998, Armstrong sold its
interest in Dal-Tile.
During 2000, Armstrong recognized revenue of approximately $373.2 million from
The Home Depot, Inc., from sales in the floor coverings, building products and
wood products segments compared to approximately $344.8 million and $296.0
million in 1999 and 1998, respectively. No other single customer represented
more than 10% of Armstrong's revenue.
The sales in the table below are allocated to the geographic areas based upon
location of the customer.
Geographic Areas
- ----------------
Net trade sales (millions) 2000 1999 1998
-------------------------- ---- ---- ----
Americas:
United States $ 2,276.5 $ 2,296.4 $ 1,842.8
Canada 129.1 123.0 100.4
Other Americas 26.5 27.2 18.5
---- ---- ----
Total Americas $ 2,432.1 $ 2,446.6 $ 1,961.7
--------- --------- ---------
Europe:
England $ 103.3 $ 107.2 $ 60.8
Germany 101.8 143.6 80.1
France 50.4 54.4 62.9
Italy 27.4 26.2 27.3
Russia 22.5 12.0 22.9
Other Europe 158.1 146.5 163.1
----- ----- -----
Total Europe $ 463.5 $ 489.9 $ 417.1
------- ------- -------
Pacific area:
China $ 26.9 $ 24.2 $ 25.5
Australia 24.4 27.2 29.2
Other Pacific area 56.9 60.3 62.6
---- ---- ----
Total Pacific area $ 108.2 $ 111.7 $ 117.3
------- ------- -------
Total net trade sales $ 3,003.8 $ 3,048.2 $ 2,496.1
========= ========= =========
82
Long-lived assets (property, plant and equipment) at December 31
- ----------------------------------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Americas:
United States $ 960.8 $ 955.7
Canada 14.2 16.1
Other Americas 0.1 0.1
--- ---
Total Americas $ 975.1 $ 971.9
------- -------
Europe:
Germany $ 174.5 $ 196.5
England 38.8 47.5
Netherlands 10.1 12.0
France 11.9 13.8
Sweden 9.4 15.2
Other Europe 1.7 0.2
--- ---
Total Europe $ 246.4 $ 285.2
------- -------
Pacific area:
China $ 26.2 $ 27.9
Other Pacific area 5.8 7.0
--- ---
Total Pacific area $ 32.0 $ 34.9
------ ------
Total long-lived assets $ 1,253.5 $ 1,292.0
========= =========
NOTE 4. LIABILITIES SUBJECT TO COMPROMISE
- -----------------------------------------
As a result of AWI's Chapter 11 filing (see note 1), pursuant to SOP 90-7, AWI
is required to segregate prepetition liabilities that are subject to compromise
and report them separately on the balance sheet. Liabilities that may be
affected by a plan of reorganization are recorded at the amount of the expected
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of Armstrong
subsidiaries not covered by the Filing remain classified on the consolidated
balance sheet based upon maturity date. AWI's asbestos liability is also
recorded in liabilities subject to compromise. See Note 27 for further
discussion of AWI's asbestos liability.
Liabilities subject to compromise at December 31, 2000 are as follows:
(millions) 2000
- ---------- ----
Debt (at face value) $ 1,400.4
Asbestos-related liability 690.6
Pre-petition trade payables 60.1
Pre-petition other payables and accrued interest 76.4
Amounts due to affiliates 5.0
ESOP loan guarantee 157.7
-----
Total liabilities subject to compromise $ 2,390.2
=========
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
See Note 15 for detail of debt subject to compromise.
NOTE 5. ACQUISITIONS
- --------------------
On May 18, 2000, Armstrong acquired privately-held Switzerland-based Gema
Holding AG ("Gema"), a manufacturer and installer of metal ceilings, for $6
million plus certain contingent consideration not to exceed $25.5 million, based
on results for the three years ended December 31, 2002. Gema, with annual sales
of nearly $50 million, has two manufacturing sites located in Austria and
Switzerland and employs nearly 300 people. The acquisition has been recorded
under the purchase method of accounting. The purchase price has been allocated
to the assets acquired
83
and the liabilities assumed based on the estimated fair market value at the date
of acquisition. Contingent consideration, when and if paid, will be accounted
for as additional purchase price. The fair market value of tangible and
identifiable intangible assets acquired exceeded the purchase price by $24.2
million and this amount has been recorded as a reduction of the fair value of
property, plant and equipment.
On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp.
("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a U.S.
manufacturer of hardwood flooring and other flooring and related products and a
manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under
the purchase method of accounting, resulted in a total purchase price of $911.5
million. The purchase price was allocated to tangible and identifiable
intangible assets acquired and liabilities assumed based on estimated fair
market value at the date of acquisition. The balance of $792.8 million was
recorded as goodwill and is being amortized over forty years on a straight-line
basis. During 1999, purchase price adjustments increased goodwill by $5.3
million. During 2000, adjustments primarily related to pre-acquisition
liabilities and property, plant and equipment values reduced goodwill by $1.4
million.
Effective August 31, 1998, Armstrong acquired approximately 93% of the total
share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized under
the laws of the Federal Republic of Germany. DLW is a flooring manufacturer in
Germany. The acquisition, recorded under the purchase method of accounting,
resulted in a total purchase price of $289.9 million. During 1999, Armstrong
increased its ownership percentage in DLW to approximately 96%. The purchase
price was allocated to net tangible and identifiable intangible assets acquired
based on the estimated fair market value at the date of acquisition. The balance
of $117.2 million was recorded as goodwill and is being amortized over forty
years on a straight-line basis. During 1999, purchase price adjustments
increased goodwill by $5.2 million. During 2000, adjustments primarily related
to pre-acquisition tax contingencies reduced goodwill by $8.9 million. In the
initial purchase price allocation, $49.6 million was allocated to the estimable
net realizable value of DLW's furniture business and a carpet manufacturing
business in the Netherlands, which Armstrong identified as businesses held for
sale. In May 1999, Armstrong sold the DLW furniture business for $38.1 million.
The remaining business held for sale, a Dutch carpet manufacturing company, was
sold during December 2000.
The operating results of these acquired businesses have been included in the
consolidated statements of earnings from the dates of acquisition. Triangle
Pacific's fiscal year ends on the Saturday closest to December 31, which was
December 30, 2000, January 1, 2000 and January 2, 1999. No events occurred
between December 31 and these dates at Triangle Pacific materially affecting
Armstrong's financial position or results of operations.
The table below reflects unaudited pro forma combined results of Armstrong,
Triangle Pacific and DLW as if the acquisitions had taken place at the beginning
of fiscal 1998:
(millions, except per share data) 1998
- --------------------------------- ----
Net sales $ 2,874.9
Net earnings (14.2)
Net earnings per share (0.36)
In management's opinion, these unaudited pro forma amounts are not necessarily
indicative of what the actual combined results of operations might have been if
the acquisitions had been effective at the beginning of fiscal 1998.
NOTE 6. DISCONTINUED OPERATIONS
- -------------------------------
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.84 per share.
In February 2001, Armstrong determined to permanently exit the Textiles and
Sports Flooring segment and on February 20, 2001, entered into negotiations to
sell substantially all of the businesses comprising this segment to a private
equity investor based in Europe. The proposed sale, while subject to certain
approvals, including that of the Court, is expected to close in June 2001.
Accordingly, this segment has been classified as a discontinued operation in the
accompanying consolidated financial statements. Prior year balances and results
have been reclassified to reflect the net assets and results of discontinued
operations. Based on the expected net realizable value of the business,
Armstrong recorded a pretax net loss of $30.3 million in the fourth quarter of
2000, $19.5 million net of tax benefit.
84
The following comprises the net assets of discontinued operations as of December
31, 2000 and 1999.
2000 1999
---- ----
Cash $ 2.6 $ 18.4
Accounts receivable, net 52.5 83.8
Inventories, net 59.7 77.4
Property plant and equipment, net 67.5 147.1
Short-term debt (19.3) (5.0)
Long-term debt (10.5) (23.8)
Accounts payable and accrued expenses (54.0) (79.2)
Pension liabilities (3.3) (36.8)
Other, net (12.1) 2.8
Adjustment to net realizable value (34.5) --
------ ------
Net assets of discontinued operations $ 48.6 $184.7
====== ======
NOTE 7. OTHER DIVESTITURES
- --------------------------
On July 31, 2000, Armstrong completed the sale of its Installation Products
Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million
in cash. Ardex purchased substantially all of the assets and liabilities of IPG
including its shares of the W.W. Henry Company. The transaction resulted in a
gain of $44.1 million ($60.2 million pretax) or $1.09 per share and was recorded
in other income. The financial results of IPG were reported as part of the floor
coverings segment. The proceeds and gain are subject to a post-closing working
capital adjustment, which Armstrong expects to finalize in the first half of
2001. Under the terms of the agreement and a related supply agreement, Armstrong
will purchase some of its installation products needs from Ardex for an initial
term of eight years, subject to certain minimums for the first five years after
the sale. The agreement also calls for price adjustments based upon changing
market prices for raw materials, labor and energy costs.
On September 30, 1999, Armstrong completed the sale of its Textile Products
Operations to Day International Group, Inc. The sale resulted in a loss of $3.2
million, or $0.08 per share, which was recorded in other income.
On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial
Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of
investors including Citicorp Venture Capital Ltd. and the management of AISI for
a cash purchase price of approximately $36.1 million. The sale resulted in a
gain of approximately $6.0 million, or $0.15 per share, which was recorded in
other income.
On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing,
Inc. Armstrong acquired this interest as part of its acquisition of DLW during
the third quarter of 1998. There was no material gain or loss on the
transaction.
On May 28, 1999, Armstrong's subsidiary DLW sold its furniture business for
total cash proceeds of $38.1 million. Armstrong acquired this business as part
of the acquisition of DLW in the third quarter of 1998 and had classified the
business as held for sale. There was no gain or loss on the transaction.
NOTE 8. RESTRUCTURING AND OTHER ACTIONS
- ---------------------------------------
A $19.4 million pre-tax reorganization charge was recorded in 2000, of which
$8.6 million related to severance and enhanced retirement benefits for more than
180 positions (approximately 66% related to salaried positions) within the
European Flooring business. Reorganization actions include staff reductions due
to the elimination of administrative positions, the consolidation and closing of
sales offices in Europe and the closure of the Team Valley, England commercial
tile plant. $2.6 million of the charge related to severance and enhanced
retirement benefits for 15 corporate and line-of-business staff positions (all
salaried positions) as a result of streamlining the organization to reflect
staffing needs for current business conditions. Of the $2.6 million, $0.1
million represented a non-cash charge for enhanced retirement benefits. The
remaining $8.2 million of the charge primarily related to the remaining payments
on a noncancelable operating lease for an office facility in the U.S. The
employees who occupied this office facility are being relocated to the corporate
headquarters.
In addition, $1.4 million of the remaining accrual for the $74.4 million 1998
reorganization charge was reversed in both 2000 and 1999, comprising certain
severance accruals that were no longer necessary. The amount in "other" below
primarily relates to foreign currency translation.
85
The following table summarizes activity in the restructuring accruals for 2000
and 1999:
Beginning Cash Ending
(millions) Balance Payments Charges Reversals Other Balance
- ---------- ------- -------- ------- --------- ----- -------
2000 $12.1 ($7.9) $ 19.3 ($1.4) ($0.7) $ 21.4
1999 30.6 (16.9) -- (1.4) (0.2) 12.1
Substantially all of the remaining balance of the restructuring accrual as of
December 31, 2000 relates to terminated employees with extended payouts, most of
which will be paid during 2001, and two noncancelable operating leases which
extend through 2005 and 2017.
Armstrong also recorded a $17.6 million charge to cost of goods sold in 2000 for
write-downs of inventory and production-line assets related to the
reorganization efforts that were not categorized as restructuring costs. The
inventory write-downs were related to changes in product offerings while the
write-downs of production-line assets primarily related to changes in production
facilities and product offerings.
Armstrong also recorded costs within selling, general and administrative expense
of $3.8 million for severance payments to approximately 100 employees that were
not classified as restructuring costs and $2.3 million for fixed asset
impairments related to the decision to vacate certain office space in the U.S.
In 1998, Armstrong recognized charges of $65.6 million, or $42.6 million after
tax, related to severance and enhanced retirement benefits for more than 650
positions, approximately 75% of which were salaried positions. In addition,
Armstrong recorded an estimated loss of $9.0 million, or $5.9 million after tax,
related to redundant flooring products machinery disposed of in 1999.
Approximately $28.6 million of the charge comprised cash expenditures for
severance. The remainder was a non-cash charge for enhanced retirement benefits.
NOTE 9. EQUITY INVESTMENTS
- --------------------------
Investments in affiliates were $37.3 million at December 31, 2000, an increase
of $3.1 million, reflecting the equity earnings of Armstrong's 50% interest in
its WAVE joint venture and its remaining 35% interest in Interface Solutions,
Inc. ("ISI"). Armstrong continues to purchase certain raw materials from ISI
under a long-term supply agreement.
Equity earnings from affiliates for 2000 and 1999 consisted primarily of income
from a 50% interest in the WAVE joint venture and the 35% interest in ISI.
Equity earnings from affiliates for 1998 primarily comprised income from a 50%
interest in the WAVE joint venture, Armstrong's share of a net loss at Dal-Tile
and amortization of the excess of Armstrong's investment in Dal-Tile over the
underlying equity in net assets.
Condensed financial data for significant investments in affiliates accounted for
under the equity method of accounting are summarized below:
(millions) 2000 1999
- ---------- ---- ----
Current assets $ 68.3 $ 66.7
Non-current assets 34.4 37.8
Current liabilities 18.2 21.8
Non-current liabilities 50.4 57.7
(millions) 2000 1999
- ---------- ---- ----
Net sales $212.5 $202.3
Gross profit 60.3 53.7
Net earnings 35.5 32.3
86
NOTE 10. ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Customer receivables $ 349.1 $ 371.8
Customer notes 10.8 8.7
Miscellaneous receivables 7.7 15.4
Less allowance for discounts and losses (51.1) (43.7)
------ ------
Net accounts and notes receivable $ 316.5 $ 352.2
======= =======
Generally, Armstrong sells its products to select, pre-approved customers whose
businesses are directly affected by changes in economic and market conditions.
Armstrong considers these factors and the financial condition of each customer
when establishing its allowance for losses from doubtful accounts.
NOTE 11. INVENTORIES
- --------------------
Approximately 48% of Armstrong's total inventory in 2000 and 49% in 1999 were
valued on a LIFO (last-in, first-out) basis. Inventory values were lower than
would have been reported on a total FIFO (first-in, first-out) basis, by $47.8
million at the end of 2000 and $45.6 million at year-end 1999.
(millions) 2000 1999
- ---------- ---- ----
Finished goods $ 208.9 $ 225.7
Goods in process 39.6 34.3
Raw materials and supplies 143.5 140.3
Less LIFO and other reserves (51.8) (47.9)
------ ------
Total inventories, net $ 340.2 $ 352.4
======= =======
NOTE 12. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Land $ 84.3 $ 99.2
Buildings 538.1 539.8
Machinery and equipment 1,569.3 1,601.0
Construction in progress 68.2 87.3
Less accumulated depreciation and amortization (1,006.4) (1,035.3)
--------- ---------
Net property, plant and equipment $ 1,253.5 $ 1,292.0
========= =========
NOTE 13. GOODWILL AND OTHER INTANGIBLES
- ----------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Goodwill $908.9 $950.1
Less accumulated amortization (62.9) (51.7)
------ ------
Total goodwill, net $ 846.0 $898.4
======= ======
Other intangibles $ 121.7 $110.0
Less accumulated amortization (29.8) (19.2)
------ ------
Total other intangibles, net $ 91.9 $90.8
====== =====
Goodwill decreased by $52.4 million in 2000, reflecting the elimination of
goodwill attributable to IPG which was sold during 2000, tax valuation allowance
reduction and other adjustments related to DLW (see Note 5), scheduled
amortization of $23.9 million and foreign currency translations. Unamortized
computer software costs included in other intangibles were $50.5 million at
December 31, 2000, and $48.0 million at December 31, 1999.
87
NOTE 14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Payables, trade and other $ 142.3 $ 254.0
Employment costs 32.0 63.3
Reorganization and severance payments, current portion (see Note 8) 12.5 12.1
Asbestos-related claims, current portion (see Note 27) - 175.0
Other 51.2 87.1
---- ----
Total $ 238.0 $ 591.5
======= =======
Certain accounts payable and accrued expenses have been categorized as
liabilities subject to compromise (see Note 4).
NOTE 15. DEBT
- -------------
Average Average
year-end year-end
($ millions) 2000 interest rate 1999 Interest rate
- ------------ ---- ------------- ---- -------------
Borrowings under lines of credit $ 450.0 7.18% -- --
DIP Facility 5.0 9.50% -- --
Commercial paper 49.7 6.75% $ 495.9 6.20%
Foreign banks 11.7 5.58% 20.0 5.57%
Bank loans due 2001-2006 44.5 5.94% 42.7 6.26%
9.00% medium-term notes due 2001 7.5 9.00% 25.6 8.96%
6.35% senior notes due 2003 200.0 6.35% 199.9 6.35%
6.50% senior notes due 2005 150.0 6.50% 149.7 6.50%
9.75% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% senior notes due 2029 200.0 7.45% 199.8 7.45%
7.45% senior quarterly interest bonds due 2038 180.0 7.45% 180.0 7.45%
Industrial development bonds 29.8 4.97% 29.8 5.27%
Capital lease obligations 7.1 7.25% 11.4 7.25%
Other 21.6 12.34% 11.3 8.75%
---- ------ ---- - -----
Subtotal 1,481.9 7.27% 1,491.1 6.92%
Less debt subject to compromise 1,400.4 7.35% -- --
Less current portion and short-term debt 24.7 6.69% 102.0 6.61%
---- ----- ----- -----
Total long-term debt, less current portion $ 56.8 5.55% $ 1,389.1 6.94%
====== ===== ========= =====
Scheduled payment of long-term debt (million)
2001 $ 8.1 2004 $ 2.6
2002 3.1 2005 1.0
2003 3.1
In accordance with SOP 90-7, AWI stopped recording interest expense on unsecured
prepetition debt effective December 6, 2000.
Debt included in liabilities subject to compromise consisted of the following at
December 31, 2000.
($ millions) 2000
- ------------ ----
Borrowings under lines of credit $ 450.0
Commercial paper 49.7
9.00% medium-term notes due 2001 7.5
6.35% senior notes due 2003 200.0
6.50% senior notes due 2005 150.0
9.75% debentures due 2008 125.0
7.45% senior notes due 2029 200.0
7.45% senior quarterly interest bonds due 2038 180.0
Industrial development bonds 19.5
Other 18.7
----
Total debt subject to compromise $1,400.4
========
88
Borrowings under the DIP Facility, if any, will constitute superpriority
administrative expense claims in the Chapter 11 Cases. As of December 31, 2000,
AWI has borrowed $5.0 million under the DIP Facility. The DIP Facility expires
no later than December 6, 2002 and borrowings are limited to an adjusted amount
of receivables, inventories and property, plant and equipment. Depending on the
amount of borrowings, the DIP Facility carries an interest rate range of either
Chase's Alternate Bank Rate plus 50 basis points to 100 basis points or LIBOR
plus 150 basis points to 200 basis points. The DIP Facility also contains
several covenants including, among other things, limits on asset sales, capital
expenditures and a required ratio of debt to cash flow. Prior to final Court
approval of the DIP Facility, which was obtained on February 7, 2001, AWI had
preliminary available borrowings of $145 million as of December 31, 2000.
On March 16, 1999, AWI filed a shelf registration statement for $1 billion of
combined debt and equity securities. On May 19, 1999, AWI completed an offering
under the shelf registration statement of $200 million aggregate principal
amount of 7.45% senior notes due 2029. The net proceeds from this offering were
used to repay other indebtedness of AWI.
Other debt includes an $18.6 million zero-coupon note due in 2013 that was fully
amortized to its face value due to the Chapter 11 filing.
In addition, Armstrong's foreign subsidiaries have approximately $38.9 million
of unused short-term lines of credit available from banks. The credit lines are
subject to immaterial annual commitment fees.
In order to maintain the ratio of fixed to floating rate debt which management
believes is appropriate, Armstrong maintained $150 million of interest rate
swaps during most of 2000. Armstrong received fixed rates and paid floating
rates on these swaps. However, all but one of the interest rate swap agreements
was terminated when Armstrong defaulted on its commercial paper obligations on
November 22, 2000. Details of the outstanding swap agreement as of December 31,
2000 are as follows:
Notional Market
Maturity date ($ millions) amount Pays Receives value
- -------------------------- -------- ---- -------- ------
Aug. 15, 2003 $20.0 3 mo. LIBOR 6.54% $0.3
This interest rate swap agreement was subsequently terminated by the counter-
party on February 26, 2001.
NOTE 16. FINANCIAL INSTRUMENTS
- ------------------------------
Armstrong does not hold or issue financial instruments for trading purposes. The
estimated fair values of Armstrong's financial instruments are as follows:
2000 carrying Estimated 1999 carrying Estimated
(In millions at December 31) amount fair value amount fair value
- ---------------------------- ------ ---------- ------ ----------
Liabilities:
Debt subject to compromise $1,400.4 $ 386.6 -- --
Long-term debt, including current portion 64.9 64.9 $1,425.2 $1,369.2
Off-balance sheet financial instruments:
Foreign currency contract obligations -- 0.2 -- 9.4
Foreign currency options -- -- -- 0.2
Letters of credit/financial guarantees -- 165.6 -- 252.2
Lines of credit -- 39.1 -- 1,088.1
Interest rate swaps -- 0.3 -- (4.1)
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, 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 major
financial institutions taking into consideration current rates offered to
Armstrong for debt of the same remaining maturities. Foreign currency contract
obligations and options, as well as interest rate swaps, are estimated by
obtaining quotes from major
89
financial institutions. Letters of credit, financial guarantees and lines of
credit amounts are based on the estimated cost to settle the obligations.
NOTE 17. INCOME TAXES
- ---------------------
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the table below.
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets except for certain foreign tax credit and net operating loss
carryforwards for which Armstrong has provided a valuation allowance of $69.8
million. The $6.4 million of U.S. foreign tax credit will expire in 2005.
Armstrong has $879.0 million of state net operating losses with expirations
between 2001 and 2020, and $82.9 million of foreign net operating losses which
will be carried forward indefinitely. The $1.3 million decrease in the valuation
allowance is attributable to a $24.7 million decrease in foreign net operating
loss and capital loss carryforwards in connection with the sale of the
Insulation Products segment (see Note 6) and a $23.4 million increase due to
unused state net operating loss and U.S. foreign tax credit.
Deferred income taxes (millions) 2000 1999
- -------------------------------- ---- ----
Postretirement and postemployment benefits ($ 92.0) (86.1)
Chapter 11 reorganization costs and restructuring costs (35.9) (3.3)
Asbestos-related liabilities (241.7) (238.5)
Foreign tax credit carryforward (6.4) --
Net operating losses (94.6) (62.2)
Capital loss carryforwards -- (20.2)
Other (86.8) (58.7)
------ ------
Total deferred tax assets (557.4) (469.0)
Valuation allowance 69.8 71.1
---- ----
Net deferred tax assets (487.6) (397.9)
Accumulated depreciation 173.7 183.0
Pension costs 105.9 69.3
Insurance for asbestos-related liabilities 85.4 103.6
Tax on unremitted earnings 27.0 --
----
Other 63.3 45.4
---- ----
Total deferred income tax liabilities 455.3 401.3
----- -----
Net deferred income tax liabilities (assets) (32.3) 3.4
Income tax benefit - current (9.8) (40.4)
Deferred income tax liability (asset) -noncurrent ($22.5) $ 43.8
======= ======
Details of taxes (millions) 2000 1999 1998
- --------------------------- ---- ---- ----
Earnings (loss) from continuing operations before income taxes:
Domestic ($ 135.4) 45.8 (63.7)
Foreign 15.4 44.9 20.4
Eliminations (9.9) (119.5) (27.1)
----- ------- ------
Total ($ 129.9) ($ 28.8) ($ 70.4)
========= ======== ========
Income tax provision (benefit):
Current:
Federal ($ 11.3) $ 15.8 11.2
Foreign 6.5 4.3 7.1
State 1.8 3.0 1.3
--- --- ---
Total current (3.0) 23.1 19.6
Deferred:
Federal (32.7) (36.6) (48.2)
Foreign (5.1) 8.2 3.3
State 0.3 0.5 0.4
--- --- ---
Total deferred (37.5) (27.9) (44.5)
------ ------ ------
Total income taxes (benefit) ($ 40.5) ($ 4.8) ($ 24.9)
======== ======= ========
90
At December 31, 2000, unremitted earnings of subsidiaries outside the U.S. were
$169.0 million (at December 31, 2000 balance sheet exchange rates). Armstrong
expects to repatriate $77.0 million of earnings and has provided $27.0 million
of U.S. taxes. No U.S. taxes have been provided on the remaining unremitted
earnings as it is Armstrong's intention to invest these earnings permanently. If
such earnings were to be remitted without offsetting tax credits in the U.S.,
withholding taxes would be $4.2 million.
Reconciliation to U.S. statutory tax rate (millions) 2000 1999 1998
- ---------------------------------------------------- ---- ---- ----
Continuing operations tax (benefit) at statutory rate ($ 45.5) ($ 10.0) ($ 24.6)
State income taxes, net of federal benefit 1.8 2.0 1.7
(Benefit) on ESOP dividend (1.0) (1.3) (1.2)
Tax on foreign and foreign-source income 2.9 3.4 4.4
Capital loss (0.8) -- --
Equity in (earnings) of affiliates -- -- (6.2)
Insurance programs 0.1 (0.6) (1.0)
Goodwill 9.9 7.1 3.3
Change in valuation allowance -- (4.0) --
Sale of subsidiary (9.1) -- --
Other items 1.2 (1.4) (1.3)
--- ----- -----
Tax expense (benefit) at effective rate ($ 40.5) ($ 4.8) ($ 24.9)
======== ======== ========
Other taxes (millions) 2000 1999 1998
- ---------------------- ---- ---- ----
Payroll taxes $ 59.7 $ 66.8 $ 51.3
Property, franchise and capital stock taxes 26.2 24.0 19.6
NOTE 18. OTHER LONG-TERM LIABILITIES
- ------------------------------------
(millions) 2000 1999
- ---------- ---- ----
Deferred compensation $ 34.9 $ 42.8
Other 36.2 48.7
---- ----
Total other long-term liabilities $ 71.1 $ 91.5
====== ======
NOTE 19. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSSOP)
- ------------------------------------------------------------
In 1989, Armstrong established an Employee Stock Ownership Plan ("ESOP") that
borrowed $270 million from banks and insurance companies, repayable over 15
years and guaranteed by Armstrong. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by
Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for
salaried employees (a defined-contribution pension plan) to form the Retirement
Savings and Stock Ownership Plan ("RSSOP"). On July 31, 1996, the trustee of the
ESOP converted the preferred stock held by the trust into approximately 5.1
million shares of common stock at a one-for-one ratio.
The number of shares released for allocation to participant accounts has been
based on the proportion of principal and interest paid to the total amount of
debt service remaining to be paid over the life of the borrowings. Through
December 31, 2000, the RSSOP allocated 2,676,000 shares to participants that
remain outstanding, retired 1,318,000 shares, Armstrong issued 437,000 treasury
shares and the trustee purchased 242,000 shares on the open market as part of
meeting the necessary funding requirements. As of December 31, 2000, there were
approximately 2,340,000 shares in the RSSOP that had yet to be allocated to
participants.
All RSSOP shares are considered outstanding for earnings per share calculations.
Historically, dividends on allocated shares were credited to employee accounts
while dividends on unallocated shares were used to satisfy debt service
payments.
The RSSOP currently covers parent company nonunion employees and some union
employees.
91
Details of ESOP debt service payments (millions) 2000 1999 1998
- ------------------------------------------------ ---- ---- ----
Common stock dividends paid $ 4.5 $ 8.9 $ 9.0
Employee contributions 1.2 7.7 9.8
Company contributions 7.0 8.9 11.4
Company loans to ESOP 7.3 12.9 10.1
--- ---- ----
Debt service payments made by ESOP trustee $ 20.0 $ 38.4 $ 40.3
====== ====== ======
Armstrong recorded costs for the RSSOP of $10.5 million in 2000, $13.1 million
in 1999 and $6.9 million in 1998.
The trustee borrowed from Armstrong $7.3 million in 2000, $12.9 million in 1999
and $10.1 million in 1998. These loans were made to ensure that the financial
arrangements provided to employees remain consistent with the original intent of
the RSSOP. Such loans receivable were included as a component of shareholder's
equity. In December 2000 in connection with the Chapter 11 Filing of AWI and
default on RSSOP loan obligations, Armstrong recorded an impairment charge of
$43.3 million related to these loans. The impairment was recorded as a component
of Chapter 11 reorganization costs.
On November 22, 2000, Armstrong failed to repay $50 million in commercial paper
that was due. As a result, the remaining ESOP bond principal balance of $142.2
million became immediately payable, along with a $15.5 million interest and tax
make-whole premium. Additionally, the December 2000 ESOP debt service payment
was not made. As a result of the Chapter 11 filing, Armstrong's ESOP loan
guarantee of $157.7 million is now classified as a liability subject to
compromise.
Armstrong has amended the RSSOP to provide for a cash match of employee
contributions in lieu of the stock match. Armstrong recorded an expense of $0.5
million in 2000 related to the cash match. The RSSOP Plan document will be
revised to reflect this change.
NOTE 20. STOCK-BASED COMPENSATION PLANS
- ---------------------------------------
Awards under the 1993 Long-Term Stock Incentive Plan ("1993 Plan") may be in the
form of stock options, stock appreciation rights in conjunction with stock
options, performance restricted shares and restricted stock awards. No
additional shares of common stock may be issued under the 1993 Plan.
During 1999, Armstrong adopted the 1999 Long-Term Incentive Plan ("1999 Plan")
which replaced the 1993 Plan. The 1999 Plan is similar to the 1993 Plan in that
it provides for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, performance-restricted shares and restricted
stock awards. The 1999 Plan also incorporates stock awards and cash incentive
awards. No more than 3,250,000 shares of common stock may be issued under the
1999 Plan, and no more than 300,000 of the shares may be awarded in the form of
performance restricted shares, restricted stock awards or stock awards. No
awards under the 1999 Plan will be granted after April 25, 2009. Pre-1999 grants
made under predecessor plans will be governed under the provisions of those
plans.
During 2000, Armstrong adopted the Stock Award Plan ("2000 Plan") to enable
stock awards and restricted stock awards to officers, key employees and
non-employee directors. No more than 750,000 treasury shares may be awarded
under the 2000 Plan. The 2000 Plan will remain in effect until the earlier of
the grant of all the shares allowed under the plan or termination of the plan by
the Board of Directors.
Approximately 1,702,000 stock options were cancelled as a result of a restricted
stock for stock option exchange program offered to employees in 2000. Employees
other than the CEO holding stock options were given a one-time opportunity to
exchange their stock options with exercise prices above $50 per share for shares
of Armstrong restricted stock based on specified conversion ratios. The shares
issued under this exchange program were issued under the 2000 Plan and will be
fully vested by August 2002. Expenses related to this event were $1.5 million in
2000.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options are granted. The options
generally become exercisable in one to three years and expire 10 years from the
date of grant.
92
Changes in option shares outstanding
(thousands except for share price) 2000 1999 1998
- ---------------------------------- ---- ---- ----
Option shares at beginning of year 3,509.5 2,783.7 2,161.3
Options granted 1,818.5 829.7 914.8
Option shares exercised -- (54.5) (253.3)
Stock appreciation rights exercised -- (0.2) (3.1)
Options cancelled (2,550.5) (49.2) (36.0)
--------- --------- ---------
Option shares at end of year 2,777.5 3,509.5 2,783.7
Option shares exercisable at end of year 973.3 1,828.0 1,372.0
Shares available for grant 4,068.7 3,307.3 789.7
Weighted average price per share:
Options outstanding $30.69 $58.48 $60.41
Options exercisable 48.92 57.12 52.38
Options granted 18.24 50.70 70.43
Option shares exercised N/A 36.17 41.68
The table below summarizes information about stock options outstanding at
December 31, 2000.
Stock options outstanding as of December 31, 2000
(thousands except for life and share price)
Options outstanding Options exercisable
----------------------------------------------------- ---------------------------------
Weighted- Weighted-
Number average average Number Weighted-
Range of outstanding remaining exercise exercisable average
exercise prices at 12/31/00 contractual life price at 12/31/00 exercise price
- --------------- ----------- ---------------- ----- ----------- --------------
$1.19 - $18.00 200.0 9.8 $ 8.78 -- --
$18.01 - $19.50 1,542.8 9.2 19.44 64.6 $ 19.44
$19.51 - $46.00 427.8 3.4 39.32 418.0 39.59
$46.01 - $60.00 427.7 5.5 55.11 356.9 56.07
$60.01 - $84.00 179.2 6.9 73.14 133.8 73.21
------- -----
2,777.5 973.3
======= =====
Performance restricted shares issuable under the 1993 and 1999 plans entitle
certain key executive employees to earn shares of Armstrong's common stock, but
only if the total company or individual business units meet certain
predetermined performance measures during defined performance periods (generally
three years). At the end of performance periods, common stock awarded may carry
additional restriction periods, during which time Armstrong will hold the shares
in custody until the expiration or termination of restrictions. Compensation
expense will be charged to earnings over the performance period. Within
performance periods at the end of 2000 were 1,500 unvested performance
restricted shares outstanding and 245 accumulated dividend equivalent shares. No
performance restricted share awards were earned based on the performance period
ending December 31, 2000. Within restriction periods at the end of 2000 were
22,028 shares of restricted common stock outstanding based on performance
periods ending prior to 2000 with 3,599 accumulated dividend equivalent shares.
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 444,443 shares of
restricted stock were granted (excluding performance-based awards discussed
above) during 2000. Of these restricted shares, 198,343 were granted under a
restricted stock for stock option exchange program. At the end of 2000, there
were 422,241 restricted shares of common stock outstanding with 11,769
accumulated dividend equivalent shares.
SFAS No. 123, "Accounting for Stock-Based Compensation," permits entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures. Had compensation cost for
these plans been determined consistent with SFAS No. 123, Armstrong's net
earnings would have been reduced to the following pro forma amounts.
93
(millions) 2000 1999 1998
- ---------- ---- ---- ----
Net earnings (loss):
- --------------------
As reported $11.8 $14.3 $ (9.3)
Pro forma 5.4 7.0 (16.1)
The fair value of grants was estimated on the date of grant using the
Black-Scholes option pricing model with the weighted-average assumptions for
2000, 1999 and 1998 presented in the table below. The weighted-average fair
value of stock options granted in 2000 was $2.08 per share.
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.48% 6.34% 5.14%
Dividend yield 9.50% 5.75% 3.03%
Expected life 5 years 5 years 5 years
Volatility 28% 28% 28%
Because the SFAS No. 123 method of accounting has not been applied to grants
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
NOTE 21. EMPLOYEE COMPENSATION
- ------------------------------
Employee compensation is presented in the table below. Charges for severance
costs and early retirement incentives to terminated employees have been
excluded. The increase in employee compensation from 1998 is primarily due to
the acquisitions of Triangle Pacific and DLW.
Employee compensation cost summary (millions) 2000 1999 1998
- --------------------------------------------- ---- ---- ----
Wages and salaries $ 631.9 $ 625.3 $ 516.8
Payroll taxes 59.7 66.8 51.3
Pension credits (38.1) (32.9) (38.5)
Insurance and other benefit costs 67.4 64.2 56.9
Stock-based compensation 4.4 4.2 5.0
------- ------- =======
Total $ 725.3 $ 727.6 $ 591.5
======= ======= =======
NOTE 22. PENSION AND OTHER BENEFIT PROGRAMS
- -------------------------------------------
Armstrong and a number of its subsidiaries have pension plans and postretirement
medical and insurance benefit plans covering eligible employees worldwide.
Armstrong also has defined-contribution pension plans (including the Retirement
Savings and Stock Ownership Plan, as described in Note 19) for eligible
employees. Benefits from pension plans, which cover substantially all employees,
are based on an employee's compensation and years of service. Pension plans are
funded by Armstrong. Postretirement benefits are funded by Armstrong on a
pay-as-you-go basis, with the retiree paying a portion of the cost for health
care benefits by means of deductibles and contributions. Armstrong announced in
1989 and 1990 a 15-year phase-out of its health care benefits for certain future
retirees. These future retirees include parent company nonunion employees and
some union employees. Shares of RSSOP common stock were allocated to eligible
active employees through June 2000, based on employee age and years to expected
retirement, to help employees offset their future postretirement medical costs.
The RSSOP was amended in November 2000 to suspend future allocations and
starting in December 2000, Armstrong used cash to fund this benefit.
Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a
qualified US defined benefit plan, established an additional benefit known as
the ESOP Pension Account to partially compensate active employee and retiree
ESOP shareholders for the decline in the market value of AHI's stock. The effect
of this amendment had no material impact to the financial position or results of
operations in 2000, but will increase the benefit obligation by $88.7 million in
2001. The RIP Plan document will be revised to reflect these changes.
The following tables summarize the balance sheet impact, as well as the benefit
obligations, assets, funded status and rate assumptions associated with the
pension and postretirement benefit plans. The plan assets are primarily stocks,
mutual funds and bonds. Included in these assets were 1,426,751 shares of
Armstrong common stock at year-end 2000 and 1999.
94
Retiree Health and Life
Pension Benefits Insurance Benefits
---------------- ------------------
U.S. defined-benefit plans (millions) 2000 1999 2000 1999
- ------------------------------------- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation as of January 1 $ 1,079.4 $ 1,163.5 $ 233.3 $ 262.5
Service cost 13.9 16.7 2.8 3.2
Interest cost 84.0 76.6 18.7 17.0
Plan participants' contributions -- -- 3.4 2.6
Plan amendments 25.8 -- -- --
Divestitures (4.0) -- (0.1) --
Effect of settlements (5.9) -- -- (4.1)
Effect of special termination benefits 1.4 1.7 -- --
Actuarial loss (gain) 33.0 (96.4) 26.6 (24.9)
Benefits paid (95.2) (82.7) (26.1) (23.0)
--------- --------- ------- -------
Benefit obligation as of December 31 $ 1,132.4 $ 1,079.4 $ 258.6 $ 233.3
========= ========= ======= =======
Change in plan assets:
Fair value of plan assets as of January 1 $ 1,748.3 $ 1,874.9 -- --
Actual return (loss) on plan assets 137.9 (46.7) -- --
Divestitures (3.7) -- -- --
Effect of settlements (5.9) -- -- --
Employer contribution 9.2 2.8 $ 22.7 $ 20.5
Plan participants' contributions -- -- 3.4 2.6
Benefits paid (95.2) (82.7) (26.1) (23.1)
--------- --------- ------- -------
Fair value of plan assets as of December 31 $ 1,790.6 $ 1,748.3 $ 0.0 $ 0.0
========= ========= ======= =======
Funded status $ 658.2 $ 668.9 $ (258.6) $(233.3)
Unrecognized net actuarial loss (gain) (422.7) (483.9) 48.6 23.0
Unrecognized transition asset (8.3) (14.5) -- --
Unrecognized prior service cost (benefit) 86.1 72.2 (4.2) (5.1)
--------- --------- --------- ---------
Net amount recognized $ 313.3 $ 242.7 $ (214.2) $ (215.4)
========= ========= ========= =========
The funded status of U.S. defined-benefit plans was determined using the
assumptions presented in the table below.
Retiree Health and Life
Pension Benefits Insurance Benefits
U.S. defined-benefit plans 2000 1999 2000 1999
- -------------------------- ---- ---- ---- ----
Weighted-average assumption as of
December 31:
Discount rate 7.50% 7.75% 7.50% 7.75%
Expected return on plan assets 9.50% 8.75% n/a n/a
Rate of compensation increase 4.25% 4.25% 4.25% 4.25%
Amounts recognized in the consolidated balance sheets consist of:
Retiree Health and Life
Pension Benefits Insurance Benefits
---------------- ------------------
(millions) 2000 1999 2000 1999
- ---------- ---- ---- ---- ----
Prepaid benefit costs $ 333.6 $ 264.2 --
Accrued benefit liability (34.5) (30.2) $ (214.2) $ (215.4)
Intangible asset 1.6 2.0 -- --
Other comprehensive income 12.6 6.7 -- --
------- ------- --------- ---------
Net amount recognized $ 313.3 $ 242.7 $ (214.2) $ (215.4)
======= ======= ========= =========
95
Pension Benefits
----------------
U.S. pension plans with benefit obligations in excess of assets (millions) 2000 1999
- -------------------------------------------------------------------------- ---- ----
Retirement benefit equity plan:
- ------------------------------
Projected benefit obligation, December 31 $ 44.7 $34.9
Accrued benefit obligation, December 31 34.5 30.2
Fair value of plan assets, December 31 -- --
The components of pension credit are as follows:
Pension Benefits
----------------
U.S. defined-benefit plans (millions) 2000 1999 1998
- ------------------------------------- ---- ---- ----
Service cost of benefits earned during the year $ 13.9 $ 16.7 $ 17.5
Interest cost on projected benefit obligation 84.0 76.6 72.6
Expected return on plan assets (153.6) (147.0) (136.2)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 11.9 10.0 10.0
Recognized net actuarial gain (13.9) (17.3) (18.4)
------ ------ ------
Net periodic pension credit $ (63.9) $ (67.2) $ (60.7)
======== ======== ========
Costs for other funded and unfunded pension plans were $4.3 million in 2000,
$3.9 million in 1999 and $3.6 million in 1998. The components of postretirement
benefit cost are as follows:
Retiree Health and
------------------
Life Insurance Benefits
-----------------------
U.S. defined-benefit plans (millions) 2000 1999 1998
- ------------------------------------- ---- ---- ----
Service cost of benefits earned during the year $ 2.8 $ 3.2 $ 3.3
Interest cost on accumulated postretirement benefit obligation 18.7 17.0 17.2
Amortization of prior service benefit (0.9) (0.9) (0.9)
Recognized net actuarial loss 1.0 0.6 1.3
--- --- ---
Net periodic postretirement benefit cost $ 21.6 $ 19.9 $ 20.9
====== ====== ======
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2000 and all future years. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
One percentage point
--------------------
U.S. retiree health and life insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------- -------- --------
Effect on total of service and interest cost components $ 2.1 $ (1.7)
Effect on postretirement benefit obligation 21.0 (17.9)
Armstrong has pension plans covering employees in a number of foreign countries
that utilize assumptions that are consistent with, but not identical to, those
of the U.S. plans. The following tables summarize the balance sheet impact as
well as the benefit obligations, assets, funded status and rate assumptions
associated with pension benefits.
96
Pension Benefits
Non-U.S. defined-benefit plans (millions) 2000 1999
- ----------------------------------------- ---- ----
Change in benefit obligation:
Benefit obligation as of January 1 $ 262.8 $ 287.0
Service cost 5.2 6.7
Interest cost 12.5 16.2
Plan participants' contributions 1.5 1.2
Plan amendments 0.7 --
Acquisitions 18.0 --
Divestitures (0.5) (2.6)
Effect of settlements (33.6) --
Effect of special termination benefits (0.7) 0.3
Foreign currency translation adjustment (21.6) (29.8)
Actuarial loss (gain) 14.6 (1.3)
Benefits paid (12.4) (14.9)
------ ------
Benefit obligation as of December 31 $ 246.5 $ 262.8
======= =======
Change in plan assets:
Fair value of plan assets as of January 1 $ 123.8 $ 105.6
Actual return on plan assets 0.4 21.9
Acquisitions 17.4 --
Divestitures (0.5) --
Employer contributions 43.7 12.5
Plan participants' contributions 1.5 1.2
Effect of settlements (33.6) --
Foreign currency translation adjustment (8.0) (2.5)
Benefits paid (12.4) (14.9)
------ ------
Fair value of plan assets as of December 31 $ 132.3 $ 123.8
======= =======
Funded status $ (114.2) $ (139.0)
Unrecognized net actuarial gain (4.7) (32.9)
Unrecognized transition obligation -- 0.4
Unrecognized prior service cost 3.9 4.7
--- ---
Net amount recognized $ (115.0) $(166.8)
========= ========
Amounts recognized in the consolidated balance sheets consist of:
Pension Benefits
----------------
(millions) 2000 1999
- ---------- ---- ----
Prepaid benefit cost $ 3.2 $ 2.6
Accrued benefit liability (123.9) (169.5)
Intangible asset 0.1 --
Other comprehensive income 5.6 0.1
--- ---
Net amount recognized $ (115.0) $ (166.8)
========= =========
Non-U.S. pension plans with benefit obligations Pension Benefits
----------------
in excess of assets (millions) 2000 1999
- ------------------------------ ---- ----
Projected benefit obligation, December 31 $ 125.3 $ 166.0
Accrued benefit obligation, December 31 122.2 159.9
Fair value of plan assets, December 31 0.6 0.6
97
The components of pension cost are as follows:
Non-U.S. defined-benefit plans (millions) 2000 1999
- ----------------------------------------- ---- ----
Service cost of benefits earned during the year $ 5.2 $ 6.7
Interest cost on projected benefit obligation 12.5 16.2
Expected return on plan assets (7.7) (6.1)
Amortization of transition obligation 0.1 0.2
Amortization of prior service cost 1.0 0.4
Recognized net actuarial gain (0.1) (0.1)
----- -----
Net periodic pension cost $ 11.0 $17.3
====== =====
Pension Benefits
----------------
Non-U.S. defined-benefit plans 2000 1999
- ------------------------------ ---- ----
Weighted-average assumption as of December 31:
Discount rate 5.69% 6.50%
Expected return on plan assets 6.43% 4.25%
Rate of compensation increase 3.85% 3.75%
NOTE 23. LEASES
- ---------------
Armstrong rents certain real estate and equipment. Several leases include
options for renewal or purchase and contain clauses for payment of real estate
taxes and insurance. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases. As part of the
Chapter 11 Cases, AWI must decide whether to assume, assume and assign, or
reject prepetition unexpired leases and other prepetition executory contracts.
AWI has been granted an extension until August 6, 2001 by the Court to make
these decisions with respect to prepetition unexpired leases of real property
and this date may be further extended. With respect to prepetition executory
contracts and unexpired leases not related to real estate, AWI has until
confirmation of a reorganization plan to make these decisions unless such time
is shortened by the Court. The accompanying financial statements do not reflect
any adjustment related to assumption or rejection of such agreements.
Rental expense was $16.9 million in 2000, $19.3 million in 1999 and $24.7
million in 1998. Future minimum payments at December 31, 2000, by year and in
the aggregate, having noncancelable lease terms in excess of one year were as
follows:
Capital Operating
Scheduled minimum lease payments (millions) leases Leases
- ------------------------------------------- ------ ------
2001 $ 0.9 $ 8.2
2002 1.0 5.1
2003 1.1 3.6
2004 2.1 2.8
2005 1.1 1.9
Thereafter 1.4 6.6
--- ---
Total $ 7.6 $ 28.2
===== ======
98
Armstrong has capital leases that have lease payments that extend until 2018.
Assets under capital leases are included in the consolidated balance sheets as
follows:
(millions) 2000 1999
- ---------- ---- ----
Land $ 3.8 $ 3.8
Building 4.5 4.5
Machinery 26.2 21.5
Less accumulated amortization (12.1) (6.2)
------ -----
Net assets $ 22.4 $23.6
====== =====
NOTE 24. SHAREHOLDER'S EQUITY
- -----------------------------
Treasury share changes for 2000, 1999 and 1998 are as follows:
Years ended December 31 (thousands) 2000 1999 1998
- ----------------------------------- ---- ---- ----
Common shares
Balance at beginning of year 11,628.7 11,856.7 11,759.5
Stock purchases (1) 56.4 33.8 389.5
Stock issuance activity, net (291.9) (261.8) (292.3)
-------- -------- --------
Balance at end of year 11,393.2 11,628.7 11,856.7
======== ======== ========
Note 1: Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market purchases of stock through
brokers.
In July 1996, the Board of Directors authorized Armstrong to repurchase 3.0
million shares of its common stock through the open market or through privately
negotiated transactions, bringing the total authorized common share repurchases
to 5.5 million shares. Under the total plan, Armstrong repurchased approximately
4,017,000 shares through December 31, 1998, with total cash outlay of $248.1
million, including 355,000 repurchased in 1998. In June 1998, Armstrong halted
purchases of its common shares under the common share repurchase program in
connection with its announcement to purchase Triangle Pacific and DLW.
The balance of each component of accumulated other comprehensive loss as of
December 31, 2000, and December 31, 1999, is presented in the table below.
(millions) 2000 1999
- ---------- ---- ----
Foreign currency translation adjustments and hedging activities $ 29.3 $ 12.1
Unrealized loss on available for sale securities 2.0 --
Minimum pension liability adjustments 13.9 4.4
------ ------
Total $ 45.2 $ 16.5
====== ======
The related tax effects allocated to each component of other comprehensive
income (loss) presented in the table below.
Pre-tax Tax After tax
(millions) Amount Benefit amount
- ---------- ------ ------- ------
Foreign currency translation adjustments and hedging activities ($ 17.2) -- ($ 17.2)
Unrealized loss on available for sale securities (2.0) -- (2.0)
Minimum pension liability adjustments (13.4) $ 3.9 (9.5)
------- ----- --------
Total ($ 32.6) $ 3.9 ($ 28.7)
======== ===== ========
99
NOTE 25. SUPPLEMENTAL FINANCIAL INFORMATION
- -------------------------------------------
Selected operating expenses (millions) 2000 1999 1998
- -------------------------------------- ---- ---- ----
Maintenance and repair costs $ 112.0 $ 110.0 $ 107.8
Research and development costs 60.0 46.4 36.7
Advertising costs 37.6 39.4 38.1
Other expense (income), net (millions)
- -------------------------------------
Interest and dividend income $ (5.5) $ (2.0) $ (3.3)
Gain on sale of businesses, net (60.2) (1.0) --
Demutualization proceeds (5.2) (2.6) --
Dal-Tile gain -- -- (12.8)
Domco litigation expense -- -- 12.3
Foreign currency transaction gain (6.0) (0.4) 0.3
Other 2.3 (0.7) 1.8
------- ------- -------
Total $(74.6) $ (6.7) $ (1.7)
======= ======= ======
NOTE 26. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
(millions) 2000 1999 1998
--------- ---- ---- ----
Interest paid $ 100.4 $ 102.7 $ 48.2
Income taxes paid 14.0 47.1 25.7
Acquisitions:
Fair value of assets acquired $ 55.6 $ 3.8 $1,031.9
Cost in excess of net assets acquired -- -- 948.3
Less:
Net assets in excess of consideration 24.2 -- --
Liabilities assumed 24.9 -- 804.5
------ ------- --------
Cash paid, net of cash acquired $ 6.5 $ 3.8 $1,175.7
====== ======= ========
NOTE 27. LITIGATION AND RELATED MATTERS
- ---------------------------------------
Asbestos-related Litigation
AWI is a defendant in personal injury claims and property damage claims related
to asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a fair and final
resolution of its asbestos liability. See Item 1 for further discussion.
Background
- ----------
AWI's involvement in asbestos litigation relates primarily to its participation
in the insulation contracting business. From around 1910 to 1933, AWI
manufactured and installed some high-temperature insulation products, including
some that contained asbestos. In 1939, AWI expanded its contract installation
service to provide a greater range of high and low temperature contracting
services to its customers. AWI generally manufactured its own low temperature
insulation products, but did not manufacture the high temperature products used
in its contracting operations. Some of the high temperature products furnished
and installed in the contracting operations contained asbestos.
Effective January 1, 1958, AWI separated its insulation contracting business
into a separate, independent subsidiary, Armstrong Contracting and Supply
Corporation ("ACandS"). From January 1, 1958 through August 31, 1969, ACandS
operated as an independent subsidiary in the insulation contracting business.
During this time period, AWI licensed certain tradenames and trademarks to
ACandS, which ACandS placed on certain insulation products manufactured by
others. Other than two specific products, AWI did not manufacture or sell any
asbestos-containing thermal insulation products during this period. In August
1969, AWI sold the ACandS subsidiary to a group of ACandS management employees
and ACandS continues to operate independently as a subsidiary of Irex
Corporation. AWI had no involvement with any asbestos-containing insulation
materials after 1969.
100
In addition, AWI manufactured some resilient flooring that contained
encapsulated asbestos until the early 1980's. AWI also manufactured some gasket
materials that contained encapsulated asbestos until the mid-1980's.
Personal Injury Litigation
- --------------------------
Nearly all the asbestos-related personal injury lawsuits brought against AWI
relate to alleged exposure to asbestos-containing high-temperature insulation
products. The majority of these claims seek compensatory and punitive damages.
Claims may arise many years after first exposure to asbestos in light of the
decades long latency period for asbestos-related injury. Product identification
and determining exposure periods are difficult and uncertain. Over the long
history of asbestos litigation involving hundreds of companies, various parties
have tried to secure a comprehensive resolution of the litigation. In 1991, the
Judicial Panel for Multidistrict Litigation ordered the transfer of federal
cases to the Eastern District of Pennsylvania in Philadelphia for pretrial
purposes. AWI supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
court. That court has been instrumental in having the parties resolve large
numbers of cases from various jurisdictions and has been receptive to different
approaches to the resolution of claims. Claims filed in state courts have not
been directly affected by the transfer.
Amchem Settlement Class Action
- ------------------------------
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including AWI. It was designed to establish a
nonlitigation system for the resolution of those claims, and offered a method
for prompt compensation to claimants who were occupationally exposed to asbestos
if they met certain exposure and medical criteria. Compensation amounts were
derived from historical settlement data and no punitive damages were to be paid.
The settlement was designed to, among other things, minimize transactional
costs, including attorneys' fees; expedite compensation to claimants with
qualifying claims; and relieve the courts of the burden of handling future
claims. The District Court, after exhaustive discovery and testimony, approved
the settlement class action and issued a preliminary injunction that barred
class members from pursuing claims against Center members in the tort system.
The U.S. Court of Appeals for the Third Circuit reversed that decision, and the
reversal was sustained by the U.S. Supreme Court on September 25, 1997, holding
that the settlement class did not meet the requirements for class certification
under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated
on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and
a loss of the bar against the filing of claims in the tort system.
Asbestos Claims Facility ("Facility") and Center for Claims Resolution
- ----------------------------------------------------------------------
("Center")
- ----------
The Facility was established in 1985 to evaluate, settle, pay and defend all
personal injury claims against member companies. Resolution and defense costs
were allocated by formula. The Facility subsequently dissolved, and the Center
was created in October 1988 by 21 former Facility members, including AWI. At the
time of the Filing, there were 16 members of the Center, including AWI.
Insurance carriers, while not members, are represented ex officio on the
Center's governing board and have agreed annually to provide a portion of the
Center's operational costs. The Center adopted many of the conceptual features
of the Facility and has addressed the claims in a manner consistent with the
prompt, fair resolution of meritorious claims. Resolution and defense costs are
allocated by formula among the member companies; adjustments over time due to
the departure of some members and other factors resulted in some increased share
for AWI.
As a result of the Filing, AWI is no longer an active participant in the Center.
The extent and amount of AWI liabilities as a result of its participation in the
Center have not been determined, but will be determined in AWI's Chapter 11
Case.
Number of Claims
- ----------------
The number of claims naming AWI as a defendant ranged from about 16,400 to
31,100 per year during the period from 1989 to 1997. However, subsequent to this
time and up to the Filing, claim filings significantly surpassed this average as
approximately 87,500 and 50,700 claims were filed in 1998 and 1999 respectively.
AWI had expected the number of claims to decline in 2000. However, during the
first eleven months of 2000 prior to the Filing, the Center received and
verified approximately 53,000 claims. Claims from major, established law firms
did decline, but this decline was more than offset by claims from new or
previously low-volume law firms.
Before filing under the Bankruptcy Code, AWI pursued broad-based settlements of
claims through the Center. The Center had reached Strategic Settlement Program
("SSP") agreements with law firms that covered approximately 130,000 claims that
named AWI as a defendant, including agreements with 17 law firms covering
approximately 36,800 claims during the first eleven months of 2000. These
agreements typically provided for multiyear payments for
101
settlement of current claims and established specific medical and other criteria
for the settlement of future claims as well as annual limits on the number of
claims that can be filed by these firms. These agreements also established fixed
settlement values for different asbestos-related medical conditions which were
subject to periodic re-negotiation over a period of 2 to 5 years. The plaintiff
law firms were required to recommend settlements to their clients although
future claimants are not legally obligated to accept the settlements. These
agreements also provided for nominal payments to future claimants who are
unimpaired but who are eligible for additional compensation if they develop a
more serious asbestos-related illness. The Center could terminate an agreement
with an individual law firm if a significant number of that firm's clients elect
not to participate under the agreement. For some agreements, the component of
the agreement that covered future claims was subject to re-negotiation if
members left the Center. As a result of the Filing, AWI's obligations with
respect to these settlements will be determined in the context of its Chapter 11
Case.
Fourth Quarter 2000 Events
- --------------------------
On October 5, 2000, Owens Corning Fiberglass ("OCF"), a manufacturer of
insulation, filed for protection under Chapter 11 of the Bankruptcy Code to
address its asbestos liability. This filing adversely impacted AWI's
negotiations to obtain a 364-day credit facility which were underway at the
time. This credit facility was to replace an existing $450 million credit
facility that expired on October 19, 2000. Following the OCF filing, the
potential participants in the new credit facility decided to reevaluate their
credit exposures to AWI, primarily due to AWI's asbestos liability. AWI could
not reach agreement on a new facility with acceptable terms. The existing $450
million credit facility expired on October 19, 2000.
Additionally, AWI was concerned that a possible upward bias in the settlement
demands of asbestos plaintiffs would occur given the exit from the tort system
of OCF, an important defendant in asbestos litigation.
As set forth above, AWI filed for relief under Chapter 11 of the Bankruptcy Code
on December 6, 2000. As a result, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from filing new lawsuits against
AWI. In addition, AWI ceased making payments with respect to asbestos claims,
including payments pursuant to the outstanding SSP agreements. A separate
creditors committee representing the interests of asbestos claimants has been
appointed in the Chapter 11 Cases.
As a result of the Filing, AWI's present and future asbestos liability will be
addressed in the Chapter 11 Case rather than through the Center and a multitude
of lawsuits in different jurisdictions throughout the U.S. AWI believes that the
Chapter 11 process provides it with the opportunity to change its approach to
its asbestos liability and comprehensively address that liability in one forum.
It is anticipated that all present and future asbestos claims will be resolved
in the Chapter 11 Case, which could take several years.
Asbestos-Related Personal Injury Liability
- ------------------------------------------
In evaluating its estimated asbestos-related personal injury liability prior to
the Filing, AWI reviewed, among other things, recent and historical settlement
amounts, the incidence of past and recent claims, the mix of the injuries and
occupations of the plaintiffs, the number of cases pending against it and the
status and results of broad-based settlement discussions. Based on this review,
AWI estimated its share of liability to defend and resolve probable
asbestos-related personal injury claims. This estimate was highly uncertain due
to the limitations of the available data and the difficulty of forecasting with
any certainty the numerous variables that could affect the range of the
liability.
AWI believes the range of probable and estimable liability is more uncertain now
than previously. There are significant differences in the way the asbestos
claims may be addressed under the bankruptcy process when compared to the tort
system. Accordingly, AWI currently is unable to ascertain how prior experience
with the number of claims and the amounts to settle claims will impact its
ultimate liability in the context of its Chapter 11 Case.
As of September 30, 2000, AWI's estimate of its asbestos-related liability that
was probable and estimable through 2006 ranged from $758.8 million to $1,363.3
million. AWI concluded that no amount within that range was more likely than any
other and, therefore, reflected $758.8 million as a liability in the condensed
consolidated financial statements in accordance with generally accepted
accounting principles. Due to the increased uncertainty created as a result of
the Filing, no change has been made to the previously recorded liability except
to record payments of $68.2 million against that accrual in October and November
2000. The balance at December 31, 2000 is $690.6 million. It is reasonably
possible, however, that the actual liability could be significantly higher than
the recorded liability. As the Chapter 11 Cases proceed there should be more
clarity as to the extent of the liability to be addressed in the Chapter 11
Cases.
102
Collateral Requirements
- -----------------------
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos claims asserted
against AWI. On October 27, 2000, the insurance company that underwrote the
surety bond informed AWI and the Center of its intention not to renew the surety
bond effective February 28, 2001. On February 6, 2001, the Center advised the
surety of the Center's demand for payment of the face value of the bond. The
surety filed a motion with the Court seeking to restrain the Center from drawing
on the bond. The motion was not granted.
Property Damage Litigation
- --------------------------
AWI is also one of many defendants in six pending property damage claims as of
December 31, 2000 that were filed by public and private building owners. These
cases present allegations of damage to the plaintiffs' buildings caused by
asbestos-containing products and generally seek compensatory and punitive
damages and equitable relief, including reimbursement of expenditures for
removal and replacement of such products. In the second quarter of 2000, AWI was
served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance. Continued prosecution of these actions and
the commencement of any new asbestos property damage actions are also stayed due
to the Filing. Consistent with prior periods and due to increased uncertainty,
AWI has not recorded any liability related to these claims.
Insurance Coverage
- ------------------
During relevant time periods, AWI purchased primary and excess insurance
policies providing coverage for personal injury claims and property damage
claims. Certain policies also provide coverage to ACandS, Inc., the former
subsidiary of AWI discussed above under "Background". AWI and ACandS agreed to
share certain coverage on a first-come first-served basis and to reserve for
ACandS a certain amount of excess coverage.
Wellington Agreement
- --------------------
In 1985, AWI and 52 other companies (asbestos defendants and insurers) signed
the Wellington Agreement. This Agreement settled disputes concerning personal
injury insurance coverage with signatory carriers. It provides broad coverage
for both defense and indemnity and applies to both products hazard and
nonproducts (general liability) coverages. Most of AWI resolutions of
asbestos-related personal injury products hazard coverage matters with its
solvent carriers has been achieved through the Wellington Agreement or other
settlements.
Insurance Recovery Proceedings
- ------------------------------
A substantial portion of AWI's primary and excess remaining insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve alleged exposure during AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure under the Wellington Agreement is under way against
certain carriers to determine the percentage of resolved and unresolved claims
that are nonproducts claims, to establish the entitlement to such coverage and
to determine whether and how much reinstatement of prematurely exhausted
products hazard insurance is warranted. The nonproducts coverage potentially
available is substantial and includes defense costs in addition to limits. The
carriers have raised various defenses, including waiver, laches, statutes of
limitations and contractual defenses. One primary carrier alleges that it is no
longer bound by the Wellington Agreement, and another alleges that AWI agreed to
limit its claims for nonproducts coverage against that carrier when the
Wellington Agreement was signed. The ADR process is in the trial phase of
binding arbitration. One insurer has taken the position that it is entitled to
litigate in court certain issues in the ADR proceeding. During 1999, AWI
received preliminary decisions in the initial phases of the trial proceeding of
the ADR which were generally favorable to AWI on a number of issues related to
insurance coverage. However, during the fourth quarter of 2000, a new trial
judge was selected for the ADR. AWI is uncertain at this time as to the impact,
if any, this change will have on the preliminary decisions of the initial phases
of the ADR. Further, management believes that one of the carriers has been
experiencing financial difficulties, which could affect its ability to pay any
ultimate judgment. AWI has not adjusted the recorded asset amount at December
31, 2000 related to this carrier. Because of the continuing ADR process and the
possibilities for appeal on certain matters, AWI has not yet completely
determined the financial implications of the ADR proceedings.
103
Insurance Asset
- ---------------
An insurance asset in respect of asbestos personal injury claims in the amount
of $268.3 million is recorded as of December 31, 2000. Of the total recorded
asset, approximately $77.2 million represents partial settlement for previous
claims that will be paid in a fixed and determinable flow and is reported at its
net present value discounted at 6.50%. The total amount recorded reflects AWI's
belief in the availability of insurance in this amount, based upon AWI's success
in insurance recoveries, recent settlement agreements that provide such
coverage, the nonproducts recoveries by other companies and the opinion of
outside counsel. Such insurance is either available through settlement or
probable of recovery through negotiation, litigation or resolution of the ADR
process that is in the trial phase of binding arbitration. Depending on further
progress of the ADR, activities such as settlement discussions with insurance
carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS and the financial condition of the
insurers, AWI may revise its estimate of probable insurance recoveries.
Approximately $86 million of the $268.3 million asset is determined from agreed
coverage in place and is therefore directly related to the amount of the
liability and could decrease if the final amount of the liability decreases. Of
the $268.3 million asset, $32.2 million has been recorded as a current asset
reflecting management's estimate of the minimum insurance payments to be
received in the next 12 months.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Due to the Filing, the settlement process may be delayed, pending further
clarification as to the asbestos liability. While AWI believes the Chapter 11
process will strengthen its position on resolving disputed insurance and may
therefore result in higher settlement amounts than recorded, there has been no
change in the recorded amounts due to the uncertainties created by the Filing.
Accordingly, this asset could also change significantly based upon events which
occur in the Court. Management estimates that the timing of future cash payments
for the remainder of the recorded asset may extend beyond 10 years.
Income Statement Charges
- ------------------------
AWI recorded charges to increase its estimate of probable asbestos-related
liability by $236.0 million in the second quarter of 2000, $335.4 million in
1999 and $274.2 million in 1998. Prior to 1998, charges to increase the
liability were effectively offset by corresponding increases in related
insurance recoveries.
Cash Flow Impact
- ----------------
AWI paid $226.9 million for asbestos-related claims in the first eleven months
of 2000 compared to $173.0 million in all of 1999. AWI received $27.7 million in
asbestos-related insurance recoveries during 2000 compared to $58.7 million
during 1999. During the pending Chapter 11 cases, AWI does not expect to make
any further cash payments for asbestos-related claims, but AWI may continue to
receive insurance proceeds under the terms of various settlement agreements.
Conclusion
- ----------
Many uncertainties exist surrounding the financial impact of AWI's involvement
with asbestos litigation. These uncertainties include the impact of the Filing
and the Chapter 11 process, the number of future claims to be filed, the impact
of any potential legislation and the impact of the ADR proceedings on the
insurance asset. Accordingly, AWI is not revising its previously recorded
liability. However, it is reasonably possible that AWI's total exposure to
personal injury asbestos claims may be significantly different than the recorded
liability.
Environmental Matters
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $6.2
million in 2000, $5.5 million in 1999 and $6.7 million in 1998 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. Armstrong does not anticipate that it will incur significant capital
expenditures in order to meet the requirements of the Clean Air Act of 1990 and
the final implementing regulations promulgated by various state agencies.
However, applicable requirements under the Clean Air Act and other federal and
state environmental laws continue to change. Until all new regulatory
requirements are known, Armstrong cannot predict with certainty future capital
expenditures associated with compliance with environmental requirements.
104
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have potential liability for the required investigation and remediation of
each site and who, in some cases, have agreed to jointly fund that required
investigation and remediation. With regard to some sites, however, Armstrong
disputes the liability, the proposed remedy or the proposed cost allocation
among the PRPs. Armstrong may also have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies. Armstrong
has also been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. Armstrong's payments
and remediation work on these sites is under review under light of our Chapter
11 filing.
Estimates of Armstrong's future environmental liability at any of the Superfund
sites or current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction 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 any Superfund site, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site costs. As a result,
Armstrong's estimated liability reflects only Armstrong's expected share. In
determining the probability of contribution, Armstrong considers the solvency of
the parties, whether liability is being disputed, the terms of any existing
agreements and experience with similar matters. The Chapter 11 Cases also may
affect the ultimate amount of such contributions.
Liabilities of $13.5 million at December 31, 2000 and $13.2 million at December
31, 1999 were for potential environmental liabilities that Armstrong considers
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 liability is available and no
amount within that range is more likely than any other, the lower end of the
range has been used. As assessments and remediation activities progress at each
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $6.4 million of the December
31, 2000 environmental liabilities are classified as prepetition liabilities
subject to compromise. As a general rule, such pre-petition liabilities that do
not preserve company assets are addressed in the context of the Chapter 11
Cases. The estimated liabilities do not take into account any claims for
recoveries from insurance or third parties. Such recoveries, where probable,
have been recorded as an asset in the consolidated financial statements and are
either available through settlement or anticipated to be recovered through
negotiation or litigation.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, liquidity or results of
operations, although the recording of future costs may be material to earnings
in such future period.
Note 28 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD
- -------------------------------------------------------------------------
INDUSTRIES, INC.
- ----------------
The difference between the financial statements of AHI and Armstrong is
primarily due to transactions related to the formation of Armstrong Holdings,
Inc. and stock activity.
105
Independent Auditors' Report
The Board of Directors,
Armstrong World Industries, Inc.:
We have audited the accompanying consolidated financial statements of Armstrong
World Industries, Inc. and subsidiaries ("the Company") as listed in the
accompanying index on page 35. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index on page 35. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong World
Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company and two of its domestic
subsidiaries filed separate voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court on
December 6, 2000. The Company has also defaulted on certain debt obligations.
Although the Company and these operating subsidiaries are currently operating
their businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court, the continuation of their businesses as going concerns is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and confirmation by the
Bankruptcy Court. The filing under Chapter 11 and the resulting increased
uncertainty regarding the Company's potential asbestos liabilities, as discussed
in Note 27 of the consolidated financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of these
uncertainties.
KPMG LLP
February 26, 2001
Philadelphia, Pennsylvania
106
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers
- ------------------------------------------
The following information is current as of March 1, 2001. Each Executive Officer
serves a one-year term until reelected or until his or her earlier death,
resignation, retirement or replacement.
Directors of Armstrong Holdings, Inc.
- -------------------------------------
H. Jesse Arnelle - Age 67; Director since 1995, Member -- Audit Committee and
Finance Committee. Mr. Arnelle is Of Counsel with the law firm of Womble,
Carlyle, Sandridge & Rice since October 1997 and former senior partner and
co-founder of Arnelle, Hastie, McGee, Willis & Greene, a San Francisco-based
corporate law firm from which he retired in 1996. He is a graduate of
Pennsylvania State University and the Dickinson School of Law. Armstrong has
retained Womble, Carlyle, Sandridge and Rice for many years, including 2000. Mr.
Arnelle served as Vice Chairman (1992-1995) and Chairman (1996-1998) of the
Board of Trustees of the Pennsylvania State University. He serves on the Boards
of Waste Management, Inc., FPL Group, Inc., Eastman Chemical Company, Textron,
Inc. and Gannett Corporation.
Van C. Campbell - Age 62; Director since 1991, Member -- Audit Committee and
Finance Committee (Chairman); Former Vice Chairman, Corning Incorporated. Mr.
Campbell graduated from Cornell University and holds an MBA degree from Harvard
University. He retired in 1999 as Vice Chairman of Corning Incorporated (glass
and ceramic products) and a member of its Board of Directors. He also serves on
the Boards of Covance Inc., and Quest Diagnostics Incorporated. Mr. Campbell is
a Trustee of the Corning Museum of Glass.
Donald C. Clark - Age 69; Director since 1996, Member -- Board Affairs and
Governance Committee (Chairman) and Management Development and Compensation
Committee. Former Chairman of the Board, Household International, Inc. Mr. Clark
is a graduate of Clarkson University and Northwestern University where he earned
his MBA degree. He joined Household International, Inc. (consumer financial
services) in 1955 and, after holding a number of managerial and executive
positions, was elected Chief Executive Officer in 1982 and Chairman of the Board
in 1984. In 1994, he relinquished the title of Chief Executive Officer and
retired as a Director and Chairman of the Board in May 1996, as a result of
reaching Household's mandatory retirement age for employee directors. Mr. Clark
is a life trustee of Northwestern University and Chairman of the Board of
Trustees of Clarkson University. He is also a Director of The PMI Group, Inc.
and a life director of Evanston Northwestern Healthcare.
Judith R. Haberkorn - Age 54; Director since July 1998, Member -- Board Affairs
and Governance Committee and Management Development and Compensation Committee.
Retired President - Consumer Sales and Service, Bell Atlantic. Ms. Haberkorn is
a graduate of Briarcliff (N.Y.) College and completed the Advanced Management
Program at Harvard Business School. From 1998 until her retirement in June 2000,
she served as President - Consumer Sales & Service for Bell Atlantic
(telecommunications). She previously served as President - Public & Operator
Services (1997-1998), also at Bell Atlantic, and Vice President - Material
Management (1990-1997) for NYNEX Telesector Resources Group
(telecommunications). Ms. Haberkorn is a director of Enesco Corporation and
serves on the advisory board of Norfolk Southern. She is the chair of the
Committee of 200 and a member of The International Women's Forum and The Harvard
Business School Network of Women Alumnae. She is a Vice President Emerita of The
Harvard Business School Alumni Advisory Board and a member of the Visiting
Committee.
107
John A. Krol - Age 64; Director since February 1998, Member -- Board Affairs and
Governance Committee and Management Development and Compensation Committee;
Former Chairman of the Board, E.I. du Pont de Nemours and Company. Mr. Krol is a
graduate of Tufts University where he also received a master's degree in
chemistry. From 1997 until his retirement in 1998, he was Chairman of the Board
of DuPont (chemicals, fibers, petroleum, life sciences and diversified
businesses), which he joined in 1963, and where he also served as Chief
Executive Officer (1995-1998), President (1995-1997), Vice Chairman (1992-1995),
and Senior Vice President of DuPont Fibers (1990-1992). He is a director of Mead
Corporation, Milliken & Company and Molecular Circuitry Inc. Mr. Krol also
serves on the Boards of Trustees of the Tufts University and the University of
Delaware, and the corporate liaison board of the American Chemical Society. He
is on the advisory Boards of Teijin Limited and Bechtel Corporation. He is a
trustee of the Hagley Museum and the U.S. Council for International Business. He
is also president of GEM: The National Consortium for Graduate Degrees for
Minorities in Engineering and Science, Inc.
David M. Levan - Age 55; Director since February 1998, Member -- Board Affairs
and Governance Committee and Management Development and Compensation Committee.
Former Chairman, President and Chief Executive Officer, Conrail, Inc. Mr. LeVan
is a graduate of Gettysburg College and the Harvard University Advanced
Management Program. From May 1996 until his retirement in August 1998, he served
as Chairman, President and Chief Executive Officer of Conrail (rail freight
transportation), which he joined in 1978, and where he also served as Chief
Operating Officer (1994-1996), Executive Vice President (1993-1994), and in
various Senior Vice President positions (1990-1993). Mr. LeVan is a member of
the Board of Trustees of Gettysburg College. He is also a member of the Board of
the Philadelphia Fire Department Historical Corporation.
Michael D. Lockhart - Age 51; Director, Chairman of the Board and Chief
Executive Office since August 2000. Director since November 2000 and Chairman
since March 2001 of Armstrong World Industries, Inc. Mr. Lockhart previously
served as Chairman and Chief Executive Officer of General Signal (a diversified
manufacturer) headquartered in Stamford, CT from September 1995 until it was
acquired in October 1998. He joined General Signal as President and Chief
Operating Officer in September 1994. From 1981 until 1994, Mr. Lockhart worked
for General Electric in various executive capacities in the GE Credit
Corporation (now GE Capital), GE Transportation Systems and GE Aircraft Engines.
He is a trustee of The Committee for Economic Development and a member of the
Business Council for the Graduate School of Business at the University of
Chicago.
James E. Marley - Age 65; Director 1988; Member -- Audit Committee (Chairman)
and Finance Committee and Director of Armstrong World Industries, Inc. Former
Chairman of the Board, AMP Incorporated. Mr. Marley is a graduate of
Pennsylvania State University and earned a master's degree in mechanical
engineering from Drexel University. From 1993 until his retirement (August
1998), he served as Chairman of the Board of AMP Incorporated
(electrical/electronic connection devices), which he joined in 1963 and where he
served as President and Chief Operating Officer (1990-1992) and President
(1986-1990). He also serves on the Board of Arvin Meritor, Inc.
David W. Raisbeck - Age 51; Director since 1997, Member -- Audit Committee and
Finance Committee. Vice Chairman, Cargill, Incorporated. Mr. Raisbeck is a
graduate of Iowa State University and the executive MBA program at the
University of Southern California. He joined Cargill, Incorporated (agricultural
trading and processing businesses) in 1971 and has held a variety of
merchandising and management positions focused primarily in the commodity and
the financial trading businesses. Mr. Raisbeck was elected President of
Cargill's Trading Sector in June 1993, a Director of Cargill's Board in August
1994, Executive Vice President in August 1995 and Vice Chairman in November
1999. He is a member of the Executive Committee and the ESOP Committee of the
Cargill Board. He also serves as a Director of Eastman Chemical. Mr. Raisbeck is
a member of the Chicago Mercantile Exchange and Minneapolis Grain Exchange. He
is a governor of the Iowa State University Foundation and a member of the Dean's
Advisory Council for the College of Business at Iowa State University. He serves
on the board of the Greater Minneapolis YMCA.
108
Jerre L. Stead - Age 58; Director since 1992, Member -- Board Affairs and
Governance Committee and Management Development and Compensation Committee
(Chairman). Retired Chairman and Chief Executive Officer, Ingram Micro, Inc. Mr.
Stead is a graduate of the University of Iowa and was a participant in the
Advanced Management Program, Harvard Business School. From August 1996 until
June 2000, he served as Chairman and Chief Executive Officer of Ingram Micro,
Inc. (technology products and services). During 1995, he served as Chairman,
President and Chief Executive Officer of Legent Corporation (integrated product
and service software solutions) until its sale late in 1995. He was Executive
Vice President, American Telephone and Telegraph Company (telecommunications)
and Chairman and Chief Executive Officer of AT&T Global Information Solutions
(computers and communicating), formerly NCR Corp. (1993-1994). He was President
of AT&T Global Business Communications Systems (communications) (1991-1993) and
Chairman, President and Chief Executive Officer (1989-1991) and President
(1987-1989) of Square D Company (industrial control and electrical distribution
products). In addition, he held numerous positions during a 21-year career at
Honeywell. He is a Director of Thomas & Betts, Conexant Systems, Inc.,
Brightpoint Inc. and Mobility Electronics, Inc.
Executive Officers of Armstrong Holdings, Inc.
- ----------------------------------------------
Michael D. Lockhart - (See description, above.)
Frank A. Riddick, III - Age 44; Chief Executive Officer, Triangle Pacific Corp.
since November 2000; President and Chief Operating Officer, Armstrong Holdings,
Inc. since August 2000. Previously Executive Vice President and Chief Operating
Officer since February 2000 and Senior Vice President, Finance and Chief
Financial Officer, Armstrong World Industries, Inc. since April 1995; Controller
FMC Corporation, Chicago, IL (chemicals, machinery), May 1993 - March 1995.
Matthew J. Angello - Age 41; Senior Vice President, Corporate Human Resources
since October 2000. Previously Vice President, Human Resources, Floor Products
Operations, Armstrong World Industries, Inc. since January 1997; Vice President
and Senior Director, Human Resources, The Restaurant Company (food service)
since 1992.
John N. Rigas - Age 52; Senior Vice President, Secretary and General Counsel
since November 2000. Previously Deputy General Counsel-Litigation, Armstrong
World Industries, Inc. since March 1999; worked for Dow Corning Corporation
(specialty chemical company) from October 1982 until March 1999, his last title
being Senior Managing Counsel.
E. Follin Smith - Age 41; Senior Vice President and Chief Financial Officer
since March 2000. Previously Vice President and Treasurer, Armstrong World
Industries, Inc. since August 1998; and the following positions with General
Motors Corporation (automobile manufacturer): Chief Financial Officer, Delphi
Chassis Systems, April 1997-July 1998; Assistant Treasurer, October 1994-April
1997; Vice President Finance, General Motors Acceptance Corporation, May
1994-September 1994; Treasurer, General Motors of Canada Limited, June
1992-April 1994.
William C. Rodruan - Age 46; Vice President and Controller since July 1999.
Previously Director, Corporate Transformation and Shared Services since February
1997 and Vice President of Finance, Corporate Retail Accounts, Armstrong World
Industries, Inc. since July 1994.
Michael B. Shaffer - Age 34; Vice President Consulting and Audit Staff since
March 2001. Previously held the following positions with General Electric and GE
Capital (industrial manufacturing and financial services): Senior Vice
President, National Trailer Storage, April 1999-February 2001; Senior Vice
President, Quality, November 1998-April 1999; Manager, Financial Planning and
Analysis, January 1997-November 1998; Manager, Sourcing Finance and Product
Costing, October 1994-January 1997.
Directors of Armstrong World Industries, Inc. (See descriptions, above.)
- ------------------------------------------------------------------------
Michael D. Lockhart
James E. Marley
John N. Rigas
109
Executive Officers of Armstrong World Industries, Inc.
- ------------------------------------------------------
Michael D. Lockhart - (See description, above.)
Marc R. Olivie - Age 47; President and Chief Executive Officer, Armstrong Floor
Products Operations and Corporate President since October 2000. Previously,
President, Worldwide Building Products Operations since October 1996; and the
following positions with Sara Lee Corporation (branded consumer products):
President, Sara Lee Champion Europe, Inc. (Italy), March 1994-October 1996; Vice
President, Corporate Development, Sara Lee/DE (Netherlands), September
1993-March 1994.
Stephen J. Senkowski - Age 50; President and Chief Executive Officer, Armstrong
Building Products Operations since October 2000. Previously, Senior Vice
President-Americas, Building Products Operations, since April 2000;
President/Chief Executive Officer, WAVE since July 1997; Vice President,
Innovation Process, Building Products Operations since 1994.
Floyd F. Sherman -Age 61; President, July 1998 - November 2000 and Chairman of
the Board since 1992 and Chief Executive Officer, July 1992-November 2000;
President, 1981-November 1994, Triangle Pacific Corp.
William C. Rodruan - (See description, above.)
E. Follin Smith - (See description, above.)
Stephen E. Stockwell - Age 55; Vice President, Corporate Alliances since
December 2000. Previously Senior Vice President Floor Products, Americas,
Residential Sales, since July 1998; President, Corporate Retail Accounts
Division, November 1994-July 1998; Vice President, Corporate Retail Accounts,
July 1994-November 1994; General Manager, Residential Sales, Floor Division,
January 1994-July 1994; Field Sales Manager, Floor Division, 1988-1994.
Michael B. Shaffer - (See description, above.)
Involvement in Certain Legal Proceedings
- ----------------------------------------
On December 6, 2000, AWI and two of Armstrong's wholly owned subsidiaries,
Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc., filed
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Several of
AHI's officers and directors are also officers or directors of AWI or the
subsidiaries of Armstrong which filed for reorganization under Chapter 11. In
addition, all present directors of AHI were or are directors of AWI within the
past year. As such, these executive officers and directors have been associated
with a corporation that filed a petition under the federal bankruptcy laws
within the last five years.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the registrant's
officers and directors, and persons who own more than ten percent of the shares
of Common Stock outstanding, to file periodic reports of ownership and changes
in ownership with the Securities and Exchange Commission. Based solely on a
review of copies of these reports furnished to Armstrong and AHI, Armstrong and
AHI believe all of these reports were filed in a timely manner except as
follows: George A. Lorch failed to timely report on a Form 4 the distribution of
14,915 shares of restricted stock on October 19, 2000. The grant had previously
been reported on a Form 5 filed on January 31, 1997 as the acquisition of a
derivative security. The vesting and distribution of this restricted stock
should have been reported on a Form 4 as a settlement of a derivative security.
This transaction was subsequently reported on a Form 5 on February 12, 2001.
110
Item 11. Executive Compensation
- --------------------------------
Executive Officers' Compensation
- --------------------------------
The following table shows the compensation received by the Chief Executive
Officers and the four other highest paid individuals who served as executive
officers of AHI or Armstrong during 2000. The data reflects compensation for
services rendered to AHI and Armstrong and their subsidiaries in each of the
last three fiscal years in the positions disclosed in Item 10.
TABLE 1: SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------------------
Awards Payout
----------------------------------
Other AHI AHI
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Current Year Salary Bonus sation Awards Options/ Payouts sation
Principal Position ($) ($)/3/ ($)/4/ ($)/5/ SARs(#) ($) ($)/6/
- ------------------------------------------------------------------------------------------------------------------------------------
M. D. Lockhart 2000 321,212/1/ 5,401,640 ----- 2,456,250 200,000 ----- -----
Chairman and
Chief Executive Officer, AHI;
Chairman, Armstrong
- ------------------------------------------------------------------------------------------------------------------------------------
G. A. Lorch 2000 756,667/2/ - ----- ----- 168,000 ----- 50,520
Advisor to the 1999 792,500 1,831,780 115,000 86,558
Chairman and Chief Executive 1998 752,500 1,007,339 93,000 64,247
Officer, AHI; formerly Chairman
and Chief Executive Officer of
Armstrong and AWI through August
7, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
M. R. Olivie 2000 392,875 565,144 ----- ----- 60,000 ----- 32,421
President & Chief Executive 1999 343,125 362,147 25,000 33,708
Officer, Armstrong Floor Products 1998 327,750 237,236 20,300 15,433
Operations and Corporate
President, Armstrong
- ------------------------------------------------------------------------------------------------------------------------------------
F. A. Riddick, III 2000 508,182 184,398 ----- 818,750 90,000 ----- 24,513
President and Chief 1999 390,000 665,680 254,688 40,000 21,596
Operating Officer, AHI; President 1998 354,000 364,448 75,600 11,249
& Chief Executive Officer,
Triangle Pacific
- ------------------------------------------------------------------------------------------------------------------------------------
F. F. Sherman 2000 536,250 31,576 60,828 ----- 70,000 ----- 15,702
Chairman Triangle Pacific 1999 518,750 638,685 60,892 37,000 27,346
1998 360,772 310,660 50,000 29,074
- ------------------------------------------------------------------------------------------------------------------------------------
S. J. Senkowski 2000 219,583 309,322 ----- ----- 13,000 ----- 6,104
President & Chief Executive 1999 133,830 172,925 6,500 4,800
Officer, Armstrong Worldwide 1998 120,960 138,311 3,460 5,798
Building Products Operations
- ------------------------------------------------------------------------------------------------------------------------------------
/1/ Mr. Lockhart's employment with the company commenced August 7, 2000.
/2/ Mr. Lorch resigned as Chairman and Chief Executive Officer of AHI and
Armstrong on August 7, 2000, when he became Advisor to the Chairman and CEO. Mr.
Lorch retired December 1, 2000.
/3/ The amounts disclosed include the following items:
111
Mr. Lockhart had a guaranteed bonus for 2000 along with a $5,000,000 signing
bonus. Messrs. Olivie, Riddick and Senkowski received supplemental bonuses of
$250,000, $200,000 and $175,000 respectively. Mr. Olivie received $100,000 as a
contract bonus for his new position as President & Chief Executive Officer of
Armstrong Floor Products Operations.
/4/ Mr. Sherman received a car allowance of $56,736 in 1999 and in 2000.
Otherwise, the aggregate value of personal benefits received by these officers
did not exceed the lesser of $50,000 or 10% of combined salary and bonus.
/5/ The number and value of restricted stock held by each as of February 16,
2001, is as follows: Michael D. Lockhart - 150,000 ($588,000); Marc R. Olivie -
5,290 ($20,763) and Frank A. Riddick, III - 59,653 ($233,840). In 2000, Mr.
Lockhart and Mr. Riddick received restricted stock awards of 150,000 and 50,000
shares respectively valued at the amounts disclosed on the grant date. These
shares vest and become free of restrictions four years from the grant date.
/6/ Includes above-market interest credited to each individual's Armstrong
Deferred Compensation Plan account: Floyd F. Sherman - $252 and Stephen J.
Senkowski $97.
Includes the following vested amount in the Retirement Savings and Stock
Ownership Plan for members' Equity and Match Accounts: George A. Lorch - $2,762;
Marc R. Olivie - $4,805; Frank A. Riddick, III - $2,481; and Stephen J.
Senkowski - $2,882.
Includes the following amount of non-elective contribution by Armstrong to
each individual's Bonus Replacement Retirement Plan Account: George A. Lorch -
$19,500; Marc R. Olivie - $18,500 and Frank A. Riddick, III - $17,600. This
contribution results in a corresponding reduction in the amount of the
executive's Management Achievement Plan payment.
Includes the following present value costs of Armstrong's portion of 2000
premiums for split-dollar life insurance: George A. Lorch - $28,258; Marc R.
Olivie - $9,116; Frank A. Riddick, III - $4,432; and Stephen J. Senkowski -
$3,125. The executives waived future participation in the Armstrong-paid group
term life insurance program as a condition to participate in the split-dollar
life insurance program.
Mr. Sherman had taxable income of $15,400 related to life insurance
benefits provided by Triangle Pacific Corp.
Change in Control Agreements
- ----------------------------
Armstrong and AHI have entered into change in control ("CIC") agreements with a
group of senior executives, including the officers named in the Summary
Compensation Table. These agreements provide severance benefits in the event of
a change in control of AHI. The purpose of the agreements is to foster the
continued employment for key executives in the face of a possible change in
control of AHI.
The severance benefits are payable if the executive is involuntarily terminated
or terminates employment for good reason within three years following a change
in control. Good reason to terminate employment exists if there are significant
changes in the nature of the employment following the change in control. For
example, a reduction in compensation, a change in responsibility, or a
relocation of the place of employment would constitute significant changes. For
the most senior officers, the agreement includes a provision where the executive
may choose to terminate employment for any reason during the thirty-day period
beginning twelve months following a qualifying change in control and receive
severance benefits. The qualifying change in control must meet the definitions
in (2) and (3) shown below. The agreement has an automatic renewal feature,
meaning the agreements will continue in effect unless either Armstrong, AHI or
the executive elects not to extend the agreement.
For the purposes of these agreements, a change in control includes the
following: (1) acquisition by a person (excluding certain qualified owners) of
beneficial ownership of 20% or more of AHI's common stock; (2) change in the
composition of the Board of AHI, so that existing Board members and their
approved successors do not constitute a majority of the Board; (3) consummation
of a merger or consolidation of AHI, unless shareholders of voting securities
immediately prior to the merger or consolidation continue to hold 66-2/3% or
more of the voting securities of the resulting entity; and (4) shareholder
approval of a liquidation or dissolution of AHI or sale of substantially all of
AHI's assets.
112
Severance benefits under the agreements depend on the position the executive
holds, but generally include: (1) a lump severance payment equal to two or three
times the sum of the officer's annual base salary and the higher of either (a)
the officer's highest annual bonus earned in the three years prior to
termination or prior to the change in control or (b) the annual target bonus for
the year in which the change in control occurs; (2) a lump payment of the
portion of the target incentive award calculated by multiplying the target award
by the fractional number of months completed in the performance award period;
(3) payment of remaining premium payments for split-dollar life insurance
policies; (4) enhanced retirement benefits payable as a lump sum; (5)
continuation of life, disability, accident and health insurance benefits for
three years following termination; (6) full reimbursement for the payment of
excise taxes; and (7) payment of legal fees in connection with a good faith
dispute involving the agreement.
Employment Agreements
- ---------------------
AHI and Armstrong amended their employment agreement with George A. Lorch as of
August 7, 2000. The terms of this agreement were subsequently amended whereby
Mr. Lorch continued employment in a non-executive capacity through November 30,
2000 at a base salary of $835,000 per year. Following Mr. Lorch's retirement on
December 1, 2000, he agreed to provide consulting services to AHI through
January 31, 2003 with compensation of $1.8 million due on February 1, 2001 and
$125,000 per quarter beginning February 1, 2001 with the final payment due
November 1, 2002. If AHI terminates the employment and consulting agreement with
Mr. Lorch without "cause" or if Mr. Lorch terminates his employment and
consulting engagement for "good reason," Mr. Lorch is entitled to all amounts
payable under the agreement through January 31, 2003. Mr. Lorch's employment
agreement also contains a non-competition provision that bars him from competing
with AHI or any subsidiaries or affiliates for an additional two years. Mr.
Lorch also entered into a Stock Option Surrender Agreement with AHI, under which
he agreed to cancel options to purchase 559,380 shares of Armstrong stock in
exchange for a payment of $1.0 million on February 1, 2001. In February 2001,
subject to court approval in AWI's Chapter 11 case, the parties agreed to (i)
void the Stock Option Surrender Agreement; (ii) extend Mr. Lorch's
non-competition period an additional 2 years; and (iii) increase the $1.8
million payment referenced above to $2.8 million.
AHI and Armstrong entered into a three-year employment agreement with Michael D.
Lockhart, effective August 7, 2000, in which Mr. Lockhart agreed to serve as
Chairman of the Board and Chief Executive Officer of AHI at an initial base
salary of $800,000 per year and a $5,000,000 one-time signing bonus. Portions of
the signing bonus must be repaid to AHI if Mr. Lockhart terminates employment
for any reason other than death, disability or good reason or is terminated for
cause. The employment agreement is automatically renewed for an additional
one-year term on the third anniversary of the date of the agreement and each
successive anniversary, unless AHI gives notice not to extend the agreement at
least 180 days prior to the anniversary date. If AHI terminates the employment
agreement with Mr. Lockhart without "cause" or if Mr. Lockhart terminates his
employment for "good reason" prior to the third year of the employment contact,
Mr. Lockhart is entitled to receive (1) a lump-sum cash payment equal to his
base salary, plus the higher of (i) his target bonus in the year of termination,
or (ii) the highest bonus award earned during the last three years, including
the year of termination, multiplied by either the number of years remaining in
his employment agreement or by two ("2"), whichever is larger and (2)
continuation of certain benefits for a period equal to the greater of two years
or the remaining term of the agreement. If AHI terminates the employment
agreement with Mr. Lockhart without "cause" or if Mr. Lockhart terminates his
employment for "good reason" after the third year of the employment contact, Mr.
Lockhart is entitled to receive (1) a lump-sum cash payment equal to his base
salary, plus the higher of (i) his target bonus in the year of termination, or
(ii) the highest bonus award earned during the last three years, including the
year of termination, multiplied by either the number of years remaining in his
employment agreement or by one ("1"), whichever is larger and (2) continuation
of certain benefits. Mr. Lockhart's employment agreement also contains a
non-competition provision that bars him from competing with AHI or any
subsidiaries or affiliates for a period of two years following his termination.
The agreement also provides Mr. Lockhart with the opportunity to participate in
all short-term and long-term incentive plans offered by AHI and Armstrong,
including an annual cash incentive opportunity and an annual long-term incentive
award under the company's stock incentive plan. The value of the long-term
incentive award on the grant date is 150% of Mr. Lockhart's target annual cash
compensation for the year.
AHI and Frank A. Riddick, III entered into a three-year employment agreement
effective August 7, 2000, in which Mr. Riddick agreed to serve as President and
Chief Operating Officer of AHI. In November 2000, Armstrong, Triangle Pacific
Corp. and Mr. Riddick entered into an employment agreement to allow Mr. Riddick
to also serve as Chief Executive Officer of Triangle Pacific Corp., a
wholly-owned subsidiary of AHI and Armstrong. This employment agreement provides
Mr. Riddick an initial base salary of $600,000 and is automatically renewed for
an additional one-year term on the second anniversary of the date of the
agreement and each successive anniversary, unless notice not to extend the
period is provided by Triangle Pacific Corp. or by Mr. Riddick at least 180 days
prior to the anniversary date. A special cash retention payment of $250,000 is
payable December 28, 2001, provided Mr. Riddick is still
113
employed by AHI, or has been terminated without "cause". If Triangle Pacific
Corp. terminates the employment agreement with Mr. Riddick without "cause" or if
Mr. Riddick terminates his employment for "good reason" during the term of the
agreement, Mr. Riddick is entitled to receive (1) a lump-sum cash payment equal
to three ("3") times the sum of his base salary plus the higher of (i) his
target bonus in the year of termination, or (ii) the highest bonus award earned
during the last three years, including the year of termination and (2)
continuation of certain benefits for three years. If Triangle Pacific Corp.
terminates the employment agreement with Mr. Riddick without "cause" or if Mr.
Riddick terminates his employment for "good reason" at the end of the term of
the agreement, Mr. Riddick is entitled to receive (1) a lump-sum cash payment
equal to one and one-half ("1.5") times the sum of his base salary plus the
higher of (i) his target bonus in the year of termination, or (ii) the highest
bonus award earned during the last three years, including the year of
termination and (2) continuation of certain benefits. Mr. Riddick's employment
agreements also contain non-competition provisions that bar him from competing
with AHI or any subsidiaries or affiliates for a period of two years following
his termination. The agreement with Triangle Pacific Corp. and Armstrong also
provides Mr. Riddick with the opportunity to participate in all short-term and
long-term incentive plans offered to senior officers of Armstrong.
AHI and Armstrong entered into an employment agreement with Marc R. Olivie,
effective October 1, 2000 and ending December 31, 2003. Mr. Olivie agreed to
serve as President and Chief Executive Officer, Armstrong Floor Products
Operations, Armstrong at an initial base salary of $500,000 and a one-time cash
payment of $100,000. A special cash retention payment of $250,000 is payable
December 28, 2001, provided Mr. Olivie is still employed by Armstrong or AHI, or
has been terminated without "cause." If Armstrong terminates the employment
agreement with Mr. Olivie without "cause" or if Mr. Olivie terminates his
employment for "good reason," Mr. Olivie is entitled to receive a cash payment
equal to the greater of (1) his base salary plus the target bonuses Mr. Olivie
would have earned over the term of the agreement or (2) $1,100,000, and
continuation of certain benefits for three years. If Mr. Olivie gives 90 days
notice to voluntarily terminate his employment at the end of the term of the
agreement, he will receive a $1,100,000 severance payment. Mr. Olivie's
employment agreement also contains a non-competition provision that bars him
from competing with AHI or any subsidiaries or affiliates for a period of two
years following his termination. The agreement also provides Mr. Olivie with the
opportunity to participate in the Management Achievement Plan. He will receive
$500,000 in lieu of participation in any award in 2001, but will participate in
long-term incentive plans for 2002-2003.
Severance Pay Plan for Salaried Employees
- -----------------------------------------
A Severance Pay Plan for AWI Salaried Employees was adopted in 1990. This plan
is designed to cushion the effects of unemployment for certain salaried
employees. The benefits are payable if a covered employee is terminated under
certain circumstances. All salaried employees of AHI and AWI, including four of
the executive officers named in the Summary Compensation Table, are eligible to
participate in the plan. A participant will be entitled to severance pay if they
are terminated and an exclusion does not apply. The employee is not entitled to
severance pay if the reason for the termination is the following: (1) voluntary
separation; (2) the employee accepts employment with the successor organization
in connection with the sale of a plant, unit, division or subsidiary; (3) the
employee rejects the offer of a similar position with comparable compensation in
the same geographic area, made by AHI or AWI, their subsidiaries or any
successor organization; or (4) misconduct or unsatisfactory performance.
Severance benefits will be offset by payments made under CIC agreements or
individual employment agreements.
Under the plan, the scheduled amount of the payment is based on the employee's
length of service, reason for termination and cash compensation level. The
amount of the payment ranges from a minimum of two weeks' pay (base salary plus
target bonus) to a maximum of 52 weeks' pay. Effective July 2, 2001, a new
schedule of payments applies that ranges from a minimum of two weeks' base
salary to a maximum of 39 weeks' base salary. Subject to certain limitations,
benefits may be paid by salary continuation or lump-sum payments. A participant
may also choose a combination of periodic and lump-sum payments. The Severance
Pay Committee retains the right to depart from the severance pay schedule where
factors justify an upward or downward adjustment in the level of benefits. In no
event may the severance benefit exceed two times the participant's annual
compensation.
114
TABLE 2:OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the grant of stock options
during 2000 under AHI's Long-Term Stock Incentive Plan to each of the named
executives:
- ----------------------------------------------------------------------------------------------------------------
Individual Grants
- ----------------------------------------------------------------------------------------------------------------
AHI Securities Percent of Total
Underlying Options/SARs
Options/SARs Granted To Exercise Or Grant Date
Granted/1/ Employees In Base Price Expiration Present Value/2/
Name (#) Fiscal Year ($/share) Date ($)
- ----------------------------------------------------------------------------------------------------------------
M. D. Lockhart 100,000 5.6% 16.3750 8/07/10 83,387
- ----------------------------------------------------------------------------------------------------------------
M. D. Lockhart 100,000 5.6% 1.1875 12/07/10 22,659
- ----------------------------------------------------------------------------------------------------------------
G. A. Lorch 168,000 9.3% 19.4375 2/28/10 205,451
- ----------------------------------------------------------------------------------------------------------------
M. R. Olivie 60,000 3.3% 19.4375 2/28/10 75,519
- ----------------------------------------------------------------------------------------------------------------
F. A. Riddick, III 90,000 5.0% 19.4375 2/28/10 111,610
- ----------------------------------------------------------------------------------------------------------------
F. F. Sherman 70,000 3.9% 19.4375 2/28/10 87,549
- ----------------------------------------------------------------------------------------------------------------
S. J. Senkowski 13,000 0.7% 19.4375 2/28/10 18,448
- ----------------------------------------------------------------------------------------------------------------
/1/ These options become exercisable in equal installments at one, two and three
years from the date of grant. The exceptions are in the case of death or
disability and a defined change in control event. All stock options become
exercisable immediately upon a change in control of AHI.
/2/ In accordance with Securities and Exchange Commission rules, the numbers in
the column titled "Grant Date Present Value" were determined using the
Black-Scholes model. These are not AHI or Armstrong's predictions. However, the
following material weighted-average assumptions and adjustments were necessary:
(1) an option term of five years; (2) a volatility of 28%; (3) a dividend yield
of 8.55%; (4) a risk free interest rate of 6.28%; and (5) a reduction of 17% to
reflect the possibility that the above stock options will be forfeited prior to
the expiration date.
Whether these options ever have actual value will depend on the future
market price of AHI's stock. We cannot forecast this with any reasonable
certainty.
TABLE 3: AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information regarding the exercise of AHI stock
options during 2000 and the unexercised options held as of the end of 2000 by
each of the named executives.
- -------------------------------------------------------------------------------------------------------------------------
AHI Shares Value Realized Securities Underlying Value of Unexercised
Acquired On (market price at Unexercised Options/SARs At In-The-Money Options/SARs At
Exercise exercise less Fiscal Year-End Fiscal Year-End
exercise price) (#) ($)
- -------------------------------------------------------------------------------------------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
M. D. Lockhart 0 0 0 200,000 0 87,500
- -------------------------------------------------------------------------------------------------------------------------
G. A. Lorch 0 0 51,300 168,000 0 0
- -------------------------------------------------------------------------------------------------------------------------
M. R. Olivie 0 0 0 60,000 0 0
- -------------------------------------------------------------------------------------------------------------------------
F. A. Riddick, III 0 0 30,000 90,000 0 0
- -------------------------------------------------------------------------------------------------------------------------
F. F. Sherman 0 0 0 70,000 0 0
- -------------------------------------------------------------------------------------------------------------------------
S. J. Senkowski 0 0 1,655 13,000 0 0
- -------------------------------------------------------------------------------------------------------------------------
RETIREMENT INCOME PLAN BENEFITS
The following table shows the estimated pension benefits payable to a
participant at normal retirement age under Armstrong's Retirement Income Plan
and Retirement Benefit Equity Plan. The Retirement Income Plan is a qualified
defined benefit pension plan. The Retirement Benefit Equity Plan is a partially
funded, nonqualified supplemental pension plan. It provides participants with
benefits that would otherwise be denied by reason of certain Internal
115
Revenue Code limitations on qualified plan benefits. The amounts shown in Table
4 are based on compensation that is covered under the plans and years of service
with Armstrong and its subsidiaries. Mr. Sherman does not participate in the
Retirement Income Plan. Mr. Sherman participates in the Triangle Pacific Corp.
Salaried Employees Profit Sharing Plan and the Triangle Pacific Corp
Supplemental Profit Sharing and Deferred Compensation Plan.
TABLE 4: ANNUAL RETIREMENT BENEFIT BASED ON SERVICE/1/
- -------------------------------------------------------------------------------------------------------------------
Average Final 15 20 25 30 35 40
Compensation/2/ Years Years Years Years Years Years
- -------------------------------------------------------------------------------------------------------------------
$200,000 $44,000 $58,000 $73,000 $87,000 $102,000 $114,000
- -------------------------------------------------------------------------------------------------------------------
$400,000 $90,000 $120,000 $150,000 $180,000 $210,000 $234,000
- -------------------------------------------------------------------------------------------------------------------
$600,000 $137,000 $182,000 $228,000 $273,000 $319,000 $355,000
- -------------------------------------------------------------------------------------------------------------------
$800,000 $183,000 $244,000 $305,000 $366,000 $427,000 $475,000
- -------------------------------------------------------------------------------------------------------------------
$1,000,000 $230,000 $306,000 $383,000 $459,000 $536,000 $596,000
- -------------------------------------------------------------------------------------------------------------------
$1,200,000 $276,000 $368,000 $460,000 $552,000 $644,000 $716,000
- -------------------------------------------------------------------------------------------------------------------
$1,400,000 $323,000 $430,000 $538,000 $645,000 $753,000 $837,000
- -------------------------------------------------------------------------------------------------------------------
$1,600,000 $369,000 $492,000 $615,000 $738,000 $861,000 $957,000
- -------------------------------------------------------------------------------------------------------------------
$1,800,000 $416,000 $554,000 $693,000 $831,000 $970,000 $1,078,000
- -------------------------------------------------------------------------------------------------------------------
$2,000,000 $462,000 $616,000 $770,000 $924,000 $1,078,000 $1,198,000
- -------------------------------------------------------------------------------------------------------------------
$2,200,000 $509,000 $678,000 $848,000 $1,017,00 $1,187,000 $1,319,000
- -------------------------------------------------------------------------------------------------------------------
$2,400,000 $555,000 $740,000 $925,000 $1,110,000 $1,295,000 $1,439,000
- -------------------------------------------------------------------------------------------------------------------
$2,600,000 $602,000 $802,000 $1,003,000 $1,203,000 $1,404,000 $1,560,000
- -------------------------------------------------------------------------------------------------------------------
$2,800,000 $648,000 $864,000 $1,080,000 $1,296,000 $1,512,000 $1,680,000
- -------------------------------------------------------------------------------------------------------------------
$3,000,000 $695,000 $926,000 $1,158,000 $1,389,000 $1,621,000 $1,801,000
- -------------------------------------------------------------------------------------------------------------------
/1/ Benefits shown assume retirement in 2000. The benefits are computed as a
straight life annuity beginning at age 65 and are not subject to deduction for
Social Security or other offsets.
/2/ Calculated as the average annual compensation in the three highest paid
years during the 10 years prior to retirement. Annual compensation equals the
total of the amounts reported under the columns captioned "Salary" and "Bonus"
in the Summary Compensation Table as well as Armstrong contributions under the
Bonus Replacement Retirement Plan.
The 2000 annual compensation and estimated years of service for plan
purposes for each of the executives named in the Summary Compensation Table were
as follows: Michael D. Lockhart - $321,212 (0.4 years); George A. Lorch -
$2,607,947 (37.5 years); Marc R. Olivie - $773,522 (24.2 years); Frank A.
Riddick, III - $1,191,462 (20.8 years) and Steven J. Senkowski - $310,766 (27.6
years). Mr. Lockhart receives two years of service credit for every one year of
actual service toward the calculation of his pension benefits under the
Retirement Benefit Equity Plan. Messrs. Riddick and Olivie's estimated years of
service include 15 and 20 years, respectively, of credit for prior service
awarded to them upon their employment with Armstrong. The Armstrong retirement
benefit will be reduced by the value of any defined benefit pension payable by
previous employers for the respective period of the prior service credit.
Special provisions apply if the Retirement Income Plan is terminated within
five years following an Extraordinary Event, as this item is defined in the
Plan. In that event, Plan liabilities will first be satisfied; then, remaining
Plan assets will be applied to increase retirement income to employees. The
amount of the increase is based on the assumption that the employee would have
continued employment with Armstrong until retirement. The executives named in
the Summary Compensation Table, except for Mr. Sherman, would be entitled to
this benefit.
Special provisions also apply in the event that a salaried member is
terminated other than for cause or resigns for good reason, as those terms are
defined in the plan, within two years following a change in control of
Armstrong. If those members have at least 10 years of service and are at least
50 years in age, they would be eligible for early retirement without certain
normal reductions applying. Those members would also receive some Social
Security replacement benefits. Members with 15 or more years of service would
also receive credit under the plan for an additional five years of service.
116
Compensation of Directors
- -------------------------
AHI and Armstrong pay directors who are not employees a retainer of $50,000 per
year. Shared directors receive only a single retainer. AHI and Armstrong
nonemployee directors receive $1,200 for each Board meeting and $1,000 for each
Committee (other than Executive Committee) meeting attended. Nonemployee members
of AHI's Executive Committee receive an annual fee of $3,000. AHI and Armstrong
also pay $2,500 per day plus reasonable expenses to directors for special
assignments in connection with Board activity. Additionally, AHI pays an annual
fee of $3,000 to each Committee chairperson.
AHI and Armstrong do not separately compensate directors who are officers or
employees of AHI or Armstrong for services rendered as a director.
Discontinuation of Director's Retirement Benefits
- -------------------------------------------------
In 1995, the Board discontinued the Directors Retirement Income Plan for
directors who joined the Board after January 1, 1996. The four current directors
who were then eligible for participation in the plan subsequently elected to opt
out of participation. Consequently, no current director is eligible to
participate in this plan. Under the plan, if a director attained six years of
Board service, the director qualified for retirement benefits after leaving the
Board. The annual retirement benefit equaled the Board retainer in effect on the
date of termination. The benefit is payable for a period equal to the length of
the director's Board service, but ceases upon a director's death. Messrs.
Arnelle, Campbell, Marley and Stead elected to discontinue plan participation
and waive their right to accrued benefits. As a result, they became eligible to
receive phantom shares of AHI common stock. They each received an award of 200
phantom shares on January 1, 1996, and were to continue to receive 200 phantom
shares every January 1 until attaining 12 years of Board service. On February
26, 2001, the Board amended the deferred compensation plan to discontinue the
annual award of 200 phantom shares. In addition, they each received a phantom
share award to replace the value of the accrued benefit the director elected to
forfeit. This award was the greater of (1) 200 shares times the number of full
years of Board service as of January 1, 1996, or (2) the number of shares whose
fair market value as of January 1, 1996, equaled the present value of benefits
accrued under the Directors' Retirement Income Plan.
Restricted Stock Plan for Nonemployee Directors
- -----------------------------------------------
On February 26, 2001, the Board terminated the Restricted Stock Plan for
Non-Employee Directors. Under this plan, each nonemployee director received an
award of 200 shares of restricted common stock upon becoming a director and
annual awards each July 1st. For 2000, each non-employee director was eligible
to receive an award of 400 shares. All shares previously awarded have been
distributed to the Directors.
Each nonemployee director has the right to receive dividends on, and has voting
power with respect to, the shares.
Nonstatutory Stock Option Alternatives
- --------------------------------------
Beginning in 1998, each director could elect to receive nonstatutory stock
options instead of receiving other forms of compensation. Each year, a director
could separately elect to receive stock options in lieu of each of the following
year's: (1) scheduled cash payments; (2) phantom share award; and (3) award of
common stock under the Restricted Stock Plan for Non-Employee Directors. This
election must be made not later than December 1 in the year preceding the
payment year.
The resulting stock options: (1) are granted at fair market value; (2) have a
ten-year option term; (3) are immediately exercisable; and (4) are transferable
for the benefit of an immediate family member.
For 2000, the following directors elected to receive the following stock options
in lieu of other compensation:
Mr. Campbell - 2,010; Mr. Clark - 5,560; Ms. Haberkorn - 3,250 and Mr. LeVan -
5,260
Management Development and Compensation Committee
- -------------------------------------------------
The Management Development and Compensation Committee members are Jerre L. Stead
(Chairman); Donald C. Clark; Judith R. Haberkorn; John A. Krol; and David M.
LeVan. The Management Development and Compensation Committee establishes the
overall philosophy and policies governing compensation programs, including those
subject to Section 162(m) of the Internal Revenue Code, for AHI and Armstrong
management.
117
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Stock Ownership of Certain Beneficial Owners
- --------------------------------------------
AHI indirectly owns all of the capital stock of Armstrong. The following table
sets forth each person or entity that may be deemed to have beneficial ownership
of more than 5% of the outstanding common stock of AHI. This table shows
ownership as of December 31, 2000, and is based upon information furnished to
AHI. All Armstrong stock is owned by AHI, except for 11.6 million shares in
Armstrong's treasury.
- -------------------------------------------------------------------------------------
Name And Address Of Beneficial Amount And Nature Of Percent Of Class
Owner Beneficial Ownership Outstanding/1/
- -------------------------------------------------------------------------------------
Chase Manhattan Bank/2/ 2,339,917 5.73%
4 Chase Metrotech Center
18th Floor West
Brooklyn, NY 11245
- -------------------------------------------------------------------------------------
Dimensional Fund Advisors/3/ 2,124,000 5.20%
1299 Ocean Ave., 11th floor,
Santa Monica, CA 90401
- -------------------------------------------------------------------------------------
/1/ In accordance with applicable rules of the Securities and Exchange
Commission, this percentage is based upon the total 40,844,585 shares of AHI
common stock that were outstanding on December 31, 2000.
/2/ Chase Manhattan Bank serves as the trustee of the employee stock ownership
portion of the Retirement Savings and Stock Ownership Plan (the "RSSOP"). In
that capacity, Chase Manhattan Bank may be deemed to be the beneficial owner of
2,339,917 shares, or 5.73% of AHI outstanding shares. Chase Manhattan Bank holds
shared voting power and no investment power with respect to these shares. Chase
Manhattan Bank votes shares which are allocated to participant's accounts under
the RSSOP in accordance with the participant's direction. Shares which are
unallocated under the RSSOP and allocated shares for which the trustee does not
receive directions are voted by the trustee in the same proportion as the
directed shares are voted. In the event of a tender offer for the stock in the
RSSOP, the trustee is required to tender unallocated shares in the same
proportion that allocated shares are tendered. Chase Manhattan Bank disclaims
beneficial ownership of all shares that have been allocated to the individual
accounts of employee participants in the RSSOP for which directions are
received.
/3/ Dimensional Fund Advisors Inc., advises that it is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940, that
furnishes investment advice to four investment companies registered under the
Investment Company Act of 1940, and serves as investment manager to certain
other commingled group trusts and separate accounts. These investment companies,
trusts and accounts are the "Funds." In its role as investment advisor or
manager, Dimensional advises that it possesses voting and/or investment power
over the securities of the Issuer described in this schedule that are owned by
the Funds. All securities reported in this schedule are owned by the Funds.
Dimensional Fund Advisors Inc. disclaims beneficial ownership of such
securities.
118
Security Ownership of Management
- --------------------------------
The following table shows the amount of AHI stock that each director, each
individual named in the Summary Compensation Table, and all directors and
executive officers owned as a group. The ownership rights in these shares
consist of sole voting and investment power, except where otherwise indicated.
This information is as of February 16, 2001. No Armstrong World Industries, Inc.
stock is owned by anyone.
- ------------------------------------------------------------------------------------------------------
Name Stock Options
Exercisable w/in Total Beneficial Deferred Stock
Stock/1/ 60 days Ownership Units/2/
- ------------------------------------------------------------------------------------------------------
H. Jesse Arnelle 1,946 0 1,946 1,703
- ------------------------------------------------------------------------------------------------------
Van C. Campbell 2,200 5,330 7,530 9,915
- ------------------------------------------------------------------------------------------------------
Donald C. Clark 4,448 12,080 16,528 1,894
- ------------------------------------------------------------------------------------------------------
Judith R. Haberkorn 772 4,970 5,742 1,910
- ------------------------------------------------------------------------------------------------------
John A. Krol 1,020 2,990 4,010 644
- ------------------------------------------------------------------------------------------------------
David M. LeVan 5,644 11,500 17,144 301
- ------------------------------------------------------------------------------------------------------
Michael D. Lockhart 151,500 0 151,500 0
- ------------------------------------------------------------------------------------------------------
James E. Marley 4,285 1,410 5,695 8,086
- ------------------------------------------------------------------------------------------------------
Marc R. Olivie 25,437 20,000 45,437 9,303
- ------------------------------------------------------------------------------------------------------
David W. Raisbeck 1,024 0 1,024 11,880
- ------------------------------------------------------------------------------------------------------
Frank A. Riddick, III 91,507 60,000 151,507 1,687
- ------------------------------------------------------------------------------------------------------
Stephen J. Senkowski 3,881 5,988 9,869 1,327
- ------------------------------------------------------------------------------------------------------
Floyd F. Sherman 15,712 23,333 39,045 0
- ------------------------------------------------------------------------------------------------------
Jerre L. Stead 4,400 3,260 7,660 2,094
- ------------------------------------------------------------------------------------------------------
Directors and executive 362,184 199,769 561,953 53,952
officers as a group (19
persons)
- ------------------------------------------------------------------------------------------------------
/1/ Includes the following shares held by each nonemployee director under AHI's
Restricted Stock Plan for Non-Employee Directors: H. Jesse Arnelle - 1,400; Van
C. Campbell - 2,000; Donald C. Clark - 1,100; Judith R. Haberkorn - 600; John A.
Krol - 900; David M. LeVan - 600; James E. Marley - 2,100; David W. Raisbeck -
900; Jerre L. Stead - 1,900. Each director holds voting but not investment power
in these shares. The directors may also forfeit their rights to these shares in
certain events.
Includes the following shares that may be deemed to be owned by the employee
through the employee stock ownership accounts of AHI's Retirement Savings and
Stock Ownership Plan ("RSSOP"): Frank A. Riddick, III - 1,272; Marc R. Olivie -
1,278; Stephen J. Senkowski - 2,062; and executive officers as a group - 11,734.
Each of the above individuals and each member of the group holds shared voting
power with AHI and no investment power with respect to these shares.
Includes the following shares indirectly owned and held in the savings accounts
of the RSSOP accounts of the following individuals: Frank A. Riddick, III -
1,188; Marc R. Olivie - 3,301; Stephen J. Senkowski - 38 and executive officers
as a group - 6,086.
Includes the following shares indirectly owned and held in the Bonus Replacement
Retirement Plan accounts: Marc R. Olivie - 1,538 and executive officers as a
group - 1,830.
Included also are 100 shares Jerre L. Stead owns jointly with his wife.
For each director, the shares listed under the "Total Beneficial Ownership"
column represent less than 1.0% ownership of the outstanding shares on February
16, 2001. All current directors and officers as a group beneficially own 1.38%
of the outstanding shares on February 16, 2001.
/2/ Includes phantom shares held in a stock subaccount under the Deferred
Compensation Plan. The participants have no voting or investment power.
119
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
During 2000, AWI had various business arrangements with organizations with which
certain directors are affiliated. However, none of those arrangements were
material to either AWI or any of those organizations. Moreover, those
transactions were pursuant to arm's length negotiations in the ordinary course
of business and on terms we believe to be fair.
120
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
The financial statements filed as a part of this Annual Report on Form 10-K are
listed in the "Index to Financial Statements and Schedules" on page 35.
a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
--------
No. 3(a) Armstrong Holdings, Inc.'s Amended and Restated Articles of
Incorporation are incorporated herein by reference from
Exhibit 3.1(i) to Armstrong Holdings, Inc.'s Report on Form
8-K dated May 9, 2000.
No. 3(b) Armstrong Holdings, Inc.'s Bylaws, effective May 1, 2000.
No. 3(c) Armstrong World Industries, Inc.'s restated Articles of
Incorporation, as amended, are incorporated by reference
herein from Armstrong World Industries, Inc.'s 1994 Annual
Report on Form 10-K wherein they appear as Exhibit 3(b).
No. 3(d) Armstrong World Industries, Inc.'s Bylaws as amended
November 9, 2000.
No. 4(a) Armstrong Holdings, Inc.'s Shareholder Summary of Rights to
Purchase Preferred Stock dated as of March, 14, 2000 is
incorporated by reference herein from Armstrong Holdings,
Inc.'s registration statement on Form 8-K dated May 9, 2000,
wherein it appeared as Exhibit 99.2.
No.4(b) Armstrong World Industries, Inc.'s Retirement Savings and
Stock Ownership Plan effective as of October 1, 1996, as
amended November 5, 1999 is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1999 Annual Report
on Form 10-K wherein it appeared as Exhibit 4(b). *
No. 4(c) Armstrong World Industries, Inc.'s $450,000,000 Credit
Agreement (5-year) dated as of October 29, 1998, among
Armstrong World Industries, Inc., The Chase Manhattan Bank,
as administrative agent, and the banks listed therein, is
incorporated herein by reference from Armstrong World
Industries, Inc.'s 1998 Annual Report on Form 10-K, wherein
it appeared as Exhibit 4(f).
No. 4(d) Armstrong World Industries, Inc.'s Indenture, dated as of
August 6, 1996, between Armstrong World Industries, Inc. and
The Chase Manhattan Bank, formerly known as Chemical Bank,
as successor to Mellon Bank, N.A., as Trustee, is
incorporated herein by reference from Armstrong World
Industries, Inc.'s registration statement on Form S-3/A
dated August 14, 1996, wherein it appeared as Exhibit 4.1.
No 4(e) Instrument of Resignation, Appointment and Acceptance dated
as of December 1, 2000 among Armstrong World Industries,
Inc., The Chase Manhattan Bank and Wells Fargo Bank
Minnesota, National Association, regarding Armstrong World
Industries, Inc.'s Indenture, dated as of August 6, 1996,
between Armstrong World Industries, Inc. and The Chase
Manhattan Bank, formerly known as Chemical Bank, as
successor to Mellon Bank, N.A., as Trustee.
No. 4(f) Copy of portions of Armstrong World Industries, Inc.'s Board
of Directors' Pricing Committee's resolutions establishing
the terms and conditions of $200,000,000 of 6.35% Senior
Notes Due 2003 and $150,000,000 of 6 1/2% Senior Notes Due
2005, is incorporated herein by reference from Armstrong
World Industries, Inc.'s 1998 Annual Report on Form 10-K,
wherein it appeared as Exhibit 4(h).
No. 4(g) Copy of portions of Armstrong World Industries, Inc.'s Board
of Directors' Pricing Committee's resolutions establishing
the terms and conditions of $180,000,000 of 7.45% Senior
Quarterly Interest Bonds Due 2038, is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1998
Annual Report on Form 10-K, wherein it appeared as Exhibit
4(i).
No. 4(h) Note Purchase Agreement dated June 19, 1989 for 8.43% Series
A Guaranteed Serial ESOP Notes due 1989 -2001 and 9.00%
Series B Guaranteed Serial ESOP Notes due 2000-2004 for the
121
Armstrong World Industries, Inc. Employee Stock Ownership
Plan ("Share in Success Plan") Trust, with Armstrong World
Industries, Inc. as guarantor is incorporated by reference
herein from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s registration statement on Form 10-Q for
the quarter ended September 30, 2000, wherein it appeared as
Exhibit 4(a).
No. 4(i) Armstrong World Industries, Inc.'s $300,000,000 Revolving
Credit and Guarantee Agreement dated December 6, 2000,
between Armstrong World Industries, Inc. and The Chase
Manhattan Bank and the banks referenced therein; the First
Amendment to this Agreement, dated February 2, 2001; and the
Amendment Letter to this Agreement, dated February 28, 2001.
Armstrong Holdings, Inc. and Armstrong World Industries,
Inc. agree to furnish to the Commission upon request copies
of instruments defining the rights of holders of long-term
debt of the registrants and their subsidiaries which are not
filed herewith in accordance with applicable rules of the
Commission because the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the
registrants and their subsidiaries on a consolidated basis.
No. 10(i)(a) Armstrong World Industries, Inc.'s Agreement Concerning
Asbestos-Related Claims dated June 19, 1985, (the
"Wellington Agreement") among Armstrong World Industries,
Inc. and other companies is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1997 Annual Report
on Form 10-K wherein it appeared as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution,
as amended, among Armstrong World Industries, Inc. and other
companies is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1999 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(b).
No. 10(i)(c) Indenture, dated as of March 15, 1988, between Armstrong
World Industries, Inc. and Morgan Guaranty Trust Company of
New York, as Trustee, as to which The First National Bank of
Chicago is successor trustee, (relating to Armstrong World
Industries, Inc.'s $125 million 9-3/4% Debentures due 2008
and Series A Medium Term Notes) is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1995
Annual Report on Form 10-K wherein it appeared as Exhibit
4(c).
No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between
Armstrong World Industries, Inc. and First National Bank of
Chicago, as Trustee, is incorporated herein by reference
from Armstrong World Industries, Inc.'s Registration
Statement on Form S-3 (File No. 333- 74501) dated March 16,
1999, wherein it appeared as Exhibit 4.3.
No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes
due 2029 is incorporated by reference herein from Armstrong
World Industries, Inc.'s Report on Form 8-K which was filed
with the Commission on May 29, 1999, wherein it appeared as
Exhibit 4.2.
No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998,
among Armstrong World Industries, Inc., Triangle Pacific
Corp., and Sapling Acquisition, Inc., is incorporated by
reference herein from Armstrong World Industries, Inc.'s
Form 8-K filed on June 15, 1998, wherein it appeared as
Exhibit 10.1.
No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by
and among AISI Acquisition Corp. and Armstrong World
Industries, Inc and Armstrong Industrial Specialties, Inc.
is incorporated by reference herein from Armstrong World
Industries, Inc.'s Report on Form 8- K filed on July 14,
1999, wherein it appeared as Exhibit 1.
No. 10(iii)(a) Armstrong World Industries, Inc.'s Long-Term Stock Option
Plan for Key Employees, as amended, is incorporated by
reference herein from Armstrong World Industries, Inc.'s
1995 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(a). *
No. 10(iii)(b) Armstrong World Industries, Inc.'s Long Term Stock Incentive
Plan is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1998 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(j). *
122
No. 10(iii)(c) Armstrong World Industries, Inc.'s Directors' Retirement
Income Plan, as amended, is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1996 Annual Report
on Form 10-K wherein it appeared as Exhibit 10(iii)(c).*
No. 10(iii)(d) Armstrong World Industries, Inc. and Armstrong Holdings,
Inc.'s Management Achievement Plan for Key Executives, as
amended February 26, 2001. *
No. 10(iii)(e) Armstrong Wold Industries, Inc.'s Retirement Benefit Equity
Plan (formerly known as the Excess Benefit Plan), as amended
January 1, 2000 is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(e).*
No. 10(iii)(f) Armstrong Holdings, Inc.'s Deferred Compensation Plan, as
amended May 1, 2000.*
No. 10(iii)(g) Armstrong World Industries, Inc.'s Employment Protection
Plan for Salaried Employees of Armstrong World Industries,
Inc., as amended, is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1994 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(g).*
No. 10(iii)(h) Armstrong World Industries, Inc.'s Restricted Stock Plan For
Non-employee Directors, as amended, is incorporated by
reference herein from Armstrong World Industries, Inc.'s
1996 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(h).*
No. 10(iii)(i) Armstrong World Industries, Inc.'s Severance Pay Plan for
Salaried Employees, as amended October 31, 2000.*
No. 10(iii)(j) Armstrong World Industries, Inc.'s 1999 Long Term Stock
Incentive Plan is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(j).*
No. 10(iii)(k) Form of Agreement between Armstrong World Industries, Inc.
and certain of its Executive Officers, together with a
schedule identifying those executives and the material
differences among the agreements to which each executive is
a party.*
No. 10(iii)(l) Agreement between Armstrong Holdings, Inc. and Michael D.
Lockhart, dated August 7, 2000 is incorporated by reference
herein from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, wherein it appeared as
Exhibit 10(e).*
No. 10(iii)(m) Form of Indemnification Agreement between Armstrong
Holdings, Inc., Armstrong World Industries, Inc. and certain
of its Directors and Officers, together with a schedule
identifying those Directors and Officers, is incorporated by
reference herein from Armstrong Holdings, Inc. and Armstrong
World Industries, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, wherein it appeared as
Exhibit 10(iii)(a).*
No. 10(iii)(n) Amended and Restated Employment and Consulting Agreement
between Armstrong Holdings, Inc., Armstrong World
Industries, Inc. and George A. Lorch dated February 2001.*
No. 10(iii)(o) Form of Indemnification Agreement between Armstrong
Holdings, Inc. and certain of its Directors and Officers
dated October 20, 2000, together with a schedule identifying
those Directors and Officers and the material differences
among the agreements to which each executive is a party.*
No. 10(iii)(p) Form of Indemnification Agreement between Armstrong World
Industries, Inc. and certain of its Directors and Officers,
together with a schedule identifying those Directors and
Officers dated October 20, 2000 and the material differences
among the agreements to which each executive is a party.*
No. 10(iii)(q) Armstrong World Industries, Inc.'s Bonus Replacement
Retirement Plan, dated as of January 1, 1998, as amended, is
incorporated by reference herein from Armstrong World
Industries, Inc.'s 1998 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(m).*
123
No. 10(iii)(r) Copy of Employment Agreement between the Armstrong World
Industries, Inc. and George A. Lorch dated as of December
13, 1999 is incorporated herein by reference from Armstrong
World Industries, Inc.'s 1999 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(n).*
No. 10(iii)(s) Amended and Restated Employment and Consulting Agreement
between Armstrong Holdings, Inc., Armstrong World
Industries, Inc. and George A. Lorch dated August 7, 2000
and as amended October 30, 2000 is incorporated herein by
reference from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 wherein it appeared as
Exhibit 10(c).*
No. 10(iii)(t) Employment Agreement between Armstrong Holdings, Inc. and
Michael D. Lockhart dated August 7, 2000 is incorporated
herein by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 wherein it
appeared as Exhibit 10(a).*
No. 10(iii)(u) Employment Agreement between Armstrong Holdings, Inc. and
Frank A. Riddick, III dated August 7, 2000 is incorporated
herein by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 wherein it
appeared as Exhibit 10(b).*
No. 10(iii)(v) Employment Agreement between Triangle Pacific Corp. and
Armstrong World Industries, Inc. and Frank A. Riddick, III
dated November 14, 2000.*
No. 10(iii)(w) Amendment to Employment Agreement between Armstrong
Holdings, Inc. and Frank A. Riddick, III dated November 14,
2000.*
No. 10(iii)(x) Employment Agreement between Armstrong World Industries,
Inc. and Marc R. Olivie, dated October 1, 2000.*
No. 10(iii)(y) Armstrong Holdings, Inc.'s Stock Award Plan is incorporated
by reference herein from Armstrong Holdings, Inc.'s
registration statement on form S-8 filed August 16, 2000,
wherein it appeared as Exhibit 4.1.*
No. 10(iii)(z) Terms of Restricted Stock for Stock Option Exchange Program
Offered to Employees and Schedule of Participating Officers
is incorporated by reference herein from Armstrong Holdings,
Inc. and Armstrong World Industries, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000
wherein it appeared as Exhibit 10(i).*
No. 10(iii)(aa) Management Services Agreement between Armstrong Holdings,
Inc. and Armstrong World Industries, Inc., dated August 7,
2000 is incorporated by reference herein from Armstrong
Holdings, Inc. and Armstrong World Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 wherein it appeared as Exhibit 10(g).*
No. 10(iii)(bb) Agreement between Armstrong Holdings, Inc. and Armstrong
World Industries, Inc. and Triangle Pacific Corp. dated
November 14, 2000.*
No. 10(iii)(cc) Stock Option Surrender Agreement between Armstrong Holdings,
Inc. and George A. Lorch, dated September 25, 2000 is
incorporated by reference herein from Armstrong Holdings,
Inc. and Armstrong World Industries, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000
wherein it appeared as Exhibit 10(d).*
No. 11(a) Computation for basic earnings.
No. 11(b) Computation for diluted earnings per share.
No. 21 List of Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s domestic and foreign subsidiaries.
No. 23 Consent of Independent Auditors.
124
No. 24 Powers of Attorney and authorizing resolutions.
* Compensatory Plan
b. The following reports on Form 8-K were filed during the last quarter of
2000:
On November 27, 2000, the registrant filed a report on Form 8-K discussing
Armstrong World Industries Inc.'s failure to repay $50 million in
commercial paper that was due November 22, 2000.
On December 7, 2000, the registrant filed a report on Form 8-K reporting
that Armstrong World Industries Inc., Nitram Liquidators, Inc. and Desseaux
North America, Inc. filed voluntary petitions for relief under Chapter 11
of Title 11 of the United States Code with the United States Bankruptcy
Court for the District of Delaware in Wilmington.
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARMSTRONG HOLDINGS, INC.
------------------------
(Registrant)
By /s/ Michael D. Lockhart
--------------------------
Chairman and Chief Executive Officer
Date: March 29, 2001
----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant AHI
and in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant AHI:
Michael D. Lockhart Chairman and Chief Executive Officer
(Principal Executive Officer)
E. Follin Smith Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
William C. Rodruan Vice President and Controller
(Principal Accounting Officer)
H. Jesse Arnelle Director
Van C. Campbell Director
Donald C. Clark Director
Judith R. Haberkorn Director
John A. Krol Director
David M. LeVan Director
James E. Marley Director
David W. Raisbeck Director
Jerre L. Stead Director
By: /s/ Michael D. Lockhart
-----------------------------
(Michael D. Lockhart, as
attorney-in-fact for AHI directors and on his own behalf)
As of March 29, 2001
By: /s/ E. Follin Smith
------------------------
(E. Follin Smith)
As of March 29, 2001
By: /s/ William C. Rodruan
---------------------------
(William C. Rodruan)
As of March 29, 2001
126
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Registrant)
By /s/ Michael D. Lockhart
----------------------------
Chairman and Chief Executive Officer
Date: March 29, 2001
----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
Armstrong and in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant Armstrong:
Michael D. Lockhart Director and Chairman
(Principal Executive Officer)
E. Follin Smith Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
William C. Rodruan Vice President and Controller
(Principal Accounting Officer)
James E. Marley Director
John N. Rigas Director
By: /s/ Michael D. Lockhart
-----------------------------
(Michael D. Lockhart, as
attorney-in-fact for James E. Marley and on his own
behalf)
As of March 29, 2001
By: /s/ E. Follin Smith
------------------------
(E. Follin Smith)
As of March 29, 2001
By: /s/ William C. Rodruan
---------------------------
(William C. Rodruan)
As of March 29, 2001
By: /s/ John N. Rigas
----------------------
(John N. Rigas)
As of March 29, 2001
127
SCHEDULE II
-----------
Armstrong Holdings, Inc. and Armstrong World Industries, Inc.
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------
For Years Ended December 31
---------------------------
(amounts in millions)
Provision for Losses 2000 1999 1998
- -------------------- ---- ---- ----
Balance at beginning of year $ 21.6 $ 15.0 $ 10.1
Additions Charged to earnings 13.1 10.2 6.1
Deductions (10.7) (3.5) (10.8)
Balances via acquisitions/(divestitures) 0.0 (0.1) 9.6
------- ------- -------
Balance at end of year $ 24.0 $ 21.6 $ 15.0
======= ======= =======
Provision for Discounts
- -----------------------
Balance at beginning of year $ 22.1 $ 31.3 $ 24.5
Additions charged to earnings 271.7 257.6 208.6
Deductions (267.7) (266.3) (204.2)
Balance via acquisitions/(divestitures) 1.0 (0.5) 2.4
------- ------- -------
Balance at end of year $ 27.1 $ 22.1 $ 31.3
======= ======= =======
Total Provision for Discounts and Losses
- ----------------------------------------
Balance at beginning of year $ 43.7 $ 46.3 $ 34.6
Additions charged to earnings 284.8 267.8 214.7
Deductions (278.4) (269.8) (215.0)
Balances via acquisitions/(divestitures) 1.0 (0.6) 12.0
------- ------- -------
Balance at end of year $ 51.1 $ 43.7 $ 46.3
======= ======= =======
128
EXHIBIT INDEX
-------------
No. 3(a) Armstrong Holdings, Inc.'s Amended and Restated Articles of
Incorporation are incorporated herein by reference from
Exhibit 3.1(i) to Armstrong Holdings, Inc.'s Report on Form
8-K dated May 9, 2000.
No. 3(b) Armstrong Holdings, Inc.'s Bylaws, effective May 1, 2000.
No. 3(c) Armstrong World Industries, Inc.'s restated Articles of
Incorporation, as amended, are incorporated by reference
herein from Armstrong World Industries, Inc.'s 1994 Annual
Report on Form 10-K wherein they appear as Exhibit 3(b).
No. 3(d) Armstrong World Industries, Inc.'s Bylaws as amended
November 9, 2000.
No. 4(a) Armstrong Holdings, Inc.'s Shareholder Summary of Rights to
Purchase Preferred Stock dated as of March, 14, 2000 is
incorporated by reference herein from Armstrong Holdings,
Inc.'s registration statement on Form 8-K dated May 9, 2000,
wherein it appeared as Exhibit 99.2.
No. 4(b) Armstrong World Industries, Inc.'s Retirement Savings and
Stock Ownership Plan effective as of October 1, 1996, as
amended November 5, 1999 is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1999 Annual Report
on Form 10-K wherein it appeared as Exhibit 4(b). *
No. 4(c) Armstrong World Industries, Inc.'s $450,000,000 Credit
Agreement (5-year) dated as of October 29, 1998, among
Armstrong World Industries, Inc., The Chase Manhattan Bank,
as administrative agent, and the banks listed therein, is
incorporated herein by reference from Armstrong World
Industries, Inc.'s 1998 Annual Report on Form 10-K, wherein
it appeared as Exhibit 4(f).
No. 4(d) Armstrong World Industries, Inc.'s Indenture, dated as of
August 6, 1996, between Armstrong World Industries, Inc. and
The Chase Manhattan Bank, formerly known as Chemical Bank,
as successor to Mellon Bank, N.A., as Trustee, is
incorporated herein by reference from Armstrong World
Industries, Inc.'s registration statement on Form S-3/A
dated August 14, 1996, wherein it appeared as Exhibit 4.1.
No. 4(e) Instrument of Resignation, Appointment and Acceptance dated
as of December 1, 2000 among Armstrong World Industries,
Inc., The Chase Manhattan Bank and Wells Fargo Bank
Minnesota, National Association, regarding Armstrong World
Industries, Inc.'s Indenture, dated as of August 6, 1996,
between Armstrong World Industries, Inc. and The Chase
Manhattan Bank, formerly known as Chemical Bank, as
successor to Mellon Bank, N.A., as Trustee.
No. 4(f) Copy of portions of Armstrong World Industries, Inc.'s Board
of Directors' Pricing Committee's resolutions establishing
the terms and conditions of $200,000,000 of 6.35% Senior
Notes Due 2003 and $150,000,000 of 6 1/2% Senior Notes Due
2005, is incorporated herein by reference from Armstrong
World Industries, Inc.'s 1998 Annual Report on Form 10-K,
wherein it appeared as Exhibit 4(h).
No. 4(g) Copy of portions of Armstrong World Industries, Inc.'s Board
of Directors' Pricing Committee's resolutions establishing
the terms and conditions of $180,000,000 of 7.45% Senior
Quarterly Interest Bonds Due 2038, is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1998
Annual Report on Form 10-K, wherein it appeared as Exhibit
4(i).
No. 4(h) Note Purchase Agreement dated June 19, 1989 for 8.43% Series
A Guaranteed Serial ESOP Notes due 1989 -2001 and 9.00%
Series B Guaranteed Serial ESOP Notes due 2000-2004 for the
Armstrong World Industries, Inc. Employee Stock Ownership
Plan ("Share in Success Plan") Trust, with Armstrong World
Industries, Inc. as guarantor is incorporated by reference
herein from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s registration statement on Form 10-Q for
the quarter ended September 30, 2000, wherein it appeared as
Exhibit 4(a).
129
No. 4(i) Armstrong World Industries, Inc.'s $300,000,000 Revolving
Credit and Guarantee Agreement dated December 6, 2000,
between Armstrong World Industries, Inc. and The Chase
Manhattan Bank and the banks referenced therein; the First
Amendment to this Agreement, dated February 2, 2001; and the
Amendment Letter to this Agreement, dated February 28, 2001.
Armstrong Holdings, Inc. and Armstrong World Industries,
Inc. agree to furnish to the Commission upon request copies
of instruments defining the rights of holders of long-term
debt of the registrants and their subsidiaries which are not
filed herewith in accordance with applicable rules of the
Commission because the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the
registrants and their subsidiaries on a consolidated basis.
No. 10(i)(a) Armstrong World Industries, Inc.'s Agreement Concerning
Asbestos-Related Claims dated June 19, 1985, (the
"Wellington Agreement") among Armstrong World Industries,
Inc. and other companies is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1997 Annual Report
on Form 10-K wherein it appeared as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution,
as amended, among Armstrong World Industries, Inc. and other
companies is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1999 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(i)(b).
No. 10(i)(c) Indenture, dated as of March 15, 1988, between Armstrong
World Industries, Inc. and Morgan Guaranty Trust Company of
New York, as Trustee, as to which The First National Bank of
Chicago is successor trustee, (relating to Armstrong World
Industries, Inc.'s $125 million 9-3/4% Debentures due 2008
and Series A Medium Term Notes) is incorporated herein by
reference from Armstrong World Industries, Inc.'s 1995
Annual Report on Form 10-K wherein it appeared as Exhibit
4(c).
No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between
Armstrong World Industries, Inc. and First National Bank of
Chicago, as Trustee, is incorporated herein by reference
from Armstrong World Industries, Inc.'s Registration
Statement on Form S-3 (File No. 333-74501) dated March 16,
1999, wherein it appeared as Exhibit 4.3.
No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes
due 2029 is incorporated by reference herein from Armstrong
World Industries, Inc.'s Report on Form 8-K which was filed
with the Commission on May 29, 1999, wherein it appeared as
Exhibit 4.2.
No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998,
among Armstrong World Industries, Inc., Triangle Pacific
Corp., and Sapling Acquisition, Inc., is incorporated by
reference herein from Armstrong World Industries, Inc.'s
Form 8-K filed on June 15, 1998, wherein it appeared as
Exhibit 10.1.
No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by
and among AISI Acquisition Corp. and Armstrong World
Industries, Inc and Armstrong Industrial Specialties, Inc.
is incorporated by reference herein from Armstrong World
Industries, Inc.'s Report on Form 8- K filed on July 14,
1999, wherein it appeared as Exhibit 1.
No. 10(iii)(a) Armstrong World Industries, Inc.'s Long-Term Stock Option
Plan for Key Employees, as amended, is incorporated by
reference herein from Armstrong World Industries, Inc.'s
1995 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(a). *
No. 10(iii)(b) Armstrong World Industries, Inc.'s Long Term Stock Incentive
Plan is incorporated by reference herein from Armstrong
World Industries, Inc.'s 1998 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(j). *
No. 10(iii)(c) Armstrong World Industries, Inc.'s Directors' Retirement
Income Plan, as amended, is incorporated by reference herein
from Armstrong World Industries, Inc.'s 1996 Annual Report
on Form 10-K wherein it appeared as Exhibit 10(iii)(c).*
No. 10(iii)(d) Armstrong World Industries, Inc. and Armstrong Holdings,
Inc.'s Management Achievement Plan for Key Executives, as
amended February 26, 2001. *
130
No. 10(iii)(e) Armstrong World Industries, Inc.'s Retirement Benefit Equity
Plan (formerly known as the Excess Benefit Plan), as amended
January 1, 2000 is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(e).*
No. 10(iii)(f) Armstrong Holdings, Inc.'s Deferred Compensation Plan, as
amended May 1, 2000.*
No. 10(iii)(g) Armstrong World Industries, Inc.'s Employment Protection
Plan for Salaried Employees of Armstrong World Industries,
Inc., as amended, is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1994 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(g). *
No. 10(iii)(h) Armstrong World Industries, Inc.'s Restricted Stock Plan For
Non-employee Directors, as amended, is incorporated by
reference herein from Armstrong World Industries, Inc.'s
1996 Annual Report on Form 10-K wherein it appeared as
Exhibit 10(iii)(h). *
No. 10(iii)(i) Armstrong World Industries, Inc.'s Severance Pay Plan for
Salaried Employees, as amended October 31, 2000. *
No. 10(iii)(j) Armstrong World Industries, Inc.'s 1999 Long Term Stock
Incentive Plan is incorporated by reference herein from
Armstrong World Industries, Inc.'s 1999 Annual Report on
Form 10-K wherein it appeared as Exhibit 10(iii)(j).*
No. 10(iii)(k) Form of Agreement between Armstrong World Industries, Inc.
and certain of its Executive Officers, together with a
schedule identifying those executives and the material
differences among the agreements to which each executive is
a party. *
No. 10(iii)(l) Agreement between Armstrong Holdings, Inc. and Michael D.
Lockhart, dated August 7, 2000 is incorporated by reference
herein from Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, wherein it appeared as
Exhibit 10(e). *
No. 10(iii)(m) Form of Indemnification Agreement between Armstrong
Holdings, Inc., Armstrong World Industries, Inc. and certain
of its Directors and Officers, together with a schedule
identifying those Directors and Officers, is incorporated by
reference herein from Armstrong Holdings, Inc. and Armstrong
World Industries, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, wherein it appeared as
Exhibit 10(iii)(a). *
No. 10(iii)(n) Amended and Restated Employment and Consulting Agreement
between Armstrong Holdings, Inc., Armstrong World
Industries, Inc. and George A. Lorch dated February 2001. *
No. 10(iii)(o) Form of Indemnification Agreement between Armstrong
Holdings, Inc. and certain of its Directors and Officers
dated October 20, 2000, together with a schedule identifying
those Directors and Officers and the material differences
among the agreements to which each executive is a party. *
No. 10(iii)(p) Form of Indemnification Agreement between Armstrong World
Industries, Inc. and certain of its Directors and Officers,
together with a schedule identifying those Directors and
Officers dated October 20, 2000 and the material differences
among the agreements to which each executive is a party. *
No. 10(iii)(q) Armstrong World Industries, Inc.'s Bonus Replacement
Retirement Plan, dated as of January 1, 1998, as amended, is
incorporated by reference herein from Armstrong World
Industries, Inc.'s 1998 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(m). *
No. 10(iii)(r) Copy of Employment Agreement between the Armstrong World
Industries, Inc. and George A. Lorch dated as of December
13, 1999 is incorporated herein by reference from Armstrong
World Industries, Inc.'s 1999 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(n). *
No. 10(iii)(s) Amended and Restated Employment and Consulting Agreement
between Armstrong Holdings, Inc., Armstrong World
Industries, Inc. and George A. Lorch dated August 7, 2000
and as amended October 30, 2000 is incorporated herein by
reference from Armstrong Holdings, Inc. and Armstrong World
131
Industries, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 wherein it appeared as
Exhibit 10(c). *
No. 10(iii)(t) Employment Agreement between Armstrong Holdings, Inc. and
Michael D. Lockhart dated August 7, 2000 is incorporated
herein by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 wherein it
appeared as Exhibit 10(a). *
No. 10(iii)(u) Employment Agreement between Armstrong Holdings, Inc. and
Frank A. Riddick, III dated August 7, 2000 is incorporated
herein by reference from Armstrong Holdings, Inc. and
Armstrong World Industries, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 wherein it
appeared as Exhibit 10(b). *
No. 10(iii)(v) Employment Agreement between Triangle Pacific Corp. and
Armstrong World Industries, Inc. and Frank A. Riddick, III
dated November 14, 2000. *
No. 10(iii)(w) Amendment to Employment Agreement between Armstrong
Holdings, Inc. and Frank A. Riddick, III dated November 14,
2000. *
No. 10(iii)(x) Employment Agreement between Armstrong World Industries,
Inc. and Marc R. Olivie dated October 1, 2000. *
No. 10(iii)(y) Armstrong Holdings, Inc.'s Stock Award Plan is incorporated
by reference herein from Armstrong Holdings, Inc.'s
registration statement on form S-8 filed August 16, 2000,
wherein it appeared as Exhibit 4.1. *
No. 10(iii)(z) Terms of Restricted Stock for Stock Option Exchange Program
Offered to Employees and Schedule of Participating Officers
is incorporated by reference herein from Armstrong Holdings,
Inc. and Armstrong World Industries, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000
wherein it appeared as Exhibit 10(i). *
No. 10(iii)(aa) Management Services Agreement between Armstrong Holdings,
Inc. and Armstrong World Industries, Inc., dated August 7,
2000 is incorporated by reference herein from Armstrong
Holdings, Inc. and Armstrong World Industries, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 wherein it appeared as Exhibit 10(g). *
No. 10(iii)(bb) Agreement between Armstrong Holdings, Inc. and Armstrong
World Industries, Inc. and Triangle Pacific Corp. dated
November 14, 2000. *
No. 10(iii)(cc) Stock Option Surrender Agreement between Armstrong Holdings,
Inc. and George A. Lorch, dated September 25, 2000 is
incorporated by reference herein from Armstrong Holdings,
Inc. and Armstrong World Industries, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000
wherein it appeared as Exhibit 10(d). *
No. 11(a) Computation for basic earnings.
No. 11(b) Computation for diluted earnings per share.
No. 21 List of Armstrong Holdings, Inc. and Armstrong World
Industries, Inc.'s domestic and foreign subsidiaries.
No. 23 Consent of Independent Auditors.
No. 24 Powers of Attorney and authorizing resolutions.
* Compensatory Plan
132