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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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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:
Name of each exchange on
Title of each class which registered
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Common Stock ($1 par value) New York Stock Exchange, Inc.
Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (a)
9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (a)
(a) 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. [X]
The aggregate market value of the Common Stock of registrant held by
non-affiliates of the registrant based on the closing price ($70.50 per share)
on the New York Stock Exchange on February 10, 1997, was approximately $2.2
billion. For the purposes of determining this amount only, registrant has
defined affiliates as including (a) the executive officers named in Item 10 of
this 10-K Report, (b) all directors of registrant, and (c) each shareholder that
has informed registrant by February 14, 1997, as having sole or shared voting
power over 5% or more of the outstanding Common Stock of registrant as of
December 31, 1996. As of February 10, 1997, the number of shares outstanding of
registrant's Common Stock was 40,968,157. This amount includes the 5,057,382
shares of Common Stock as of December 31, 1996, held by Mellon Bank, N.A., as
Trustee for the employee stock ownership accounts of the Company's Retirement
Savings and Stock Ownership Plan.
Documents Incorporated by Reference
Portions of the Proxy Statement dated March 17, 1997, relative to the
April 28, 1997, annual meeting of the shareholders of registrant (the "Company's
1997 Proxy Statement") have been incorporated by reference into Part III of this
Form 10-K Report.
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PART I
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Item 1. Business
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Armstrong World Industries, Inc. is a Pennsylvania corporation incorporated in
1891. The Company is a manufacturer of interior furnishings, including floor
coverings, and building products which are sold primarily for use in the
furnishing, refurbishing, repair, modernization and construction of residential,
commercial and institutional buildings. It also manufactures various industrial
and other products. In late 1995, Armstrong sold its furniture business and
combined its ceramic tile business with Dal-Tile International Inc.
("Dal-Tile"), retaining a minority equity interest in the combined company.
Unless the context indicates otherwise, the term "Company" means Armstrong World
Industries, Inc. and its consolidated subsidiaries.
Industry Segments
The company's businesses include four reportable segments: floor coverings,
building products, industry products and ceramic tile.
INDUSTRY SEGMENTS
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at December 31 (millions) 1996 1995 1994
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Net trade sales:
Floor coverings $1,091.8 $1,053.9 $1,063.5
Building products 718.4 682.2 630.0
Industry products 346.2 348.8 312.2
Ceramic tile -- 240.1 220.3
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Total net sales $2,156.4 $2,325.0 $2,226.0
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Operating income (loss): (Note 1)
Floor coverings $ 146.9 $ 145.0 $ 189.6
Building products 95.1 92.2 86.8
Industry products 40.1 9.3 41.2
Ceramic tile (Note 2) 9.9 (168.4) 0.8
Unallocated corporate expense (36.1) (34.0) (23.8)
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Total operating income $ 255.9 $ 44.1 $ 294.6
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Depreciation and amortization:
Floor coverings $ 53.9 $ 47.9 $ 49.2
Building products 37.0 36.8 34.5
Industry products 19.1 19.3 17.6
Ceramic tile 4.3 13.5 13.8
Corporate 9.4 5.6 5.6
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Total depreciation
and amortization $ 123.7 $ 123.1 $ 120.7
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Capital additions: (Note 3)
Floor coverings $ 117.7 $ 77.3 $ 56.7
Building products 67.7 49.2 31.5
Industry products 22.5 45.0 22.6
Ceramic tile -- 9.6 20.4
Corporate 12.8 6.3 3.0
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Total capital additions $ 220.7 $ 187.4 $ 134.2
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Identifiable assets:
Floor coverings $ 687.9 $ 583.2 $ 575.7
Building products 541.1 513.5 478.1
Industry products 272.8 301.8 234.8
Ceramic tile 168.7 135.8 290.1
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
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Total assets $2,135.6 $2,149.8 $2,159.0
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Note 1:
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Restructuring charges in
operating income (millions) 1996 1995 1994
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Floor coverings $ 14.5 $ 25.0 --
Building products 8.3 6.3 --
Industry products 4.0 31.4 --
Ceramic tile -- -- --
Unallocated corporate expense 19.7 9.1 --
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Total restructuring charges
in operating income $ 46.5 $ 71.8 --
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Note 2: 1995 operating income includes a $177.2 million loss due to the ceramic
tile business combination. See "Equity Earnings From Affiliates" (see below).
Note 3: 1995 capital additions for industry segments include property, plant and
equipment from acquisitions of $15.6 million.
DISCONTINUED OPERATIONS
On December 29, 1995, the company sold the stock of its furniture subsidiary,
Thomasville Furniture Industries, Inc., to INTERCO Incorporated for $331.2
million in cash. INTERCO also assumed $8.0 million of Thomasville's
interest-bearing debt. The company recorded a gain on the sale of $83.9 million
after tax. Certain liabilities related to terminated benefit plans of
approximately $11.3 million were retained by the company. Thomasville and its
subsidiaries recorded sales of approximately $550.2 million in 1995 and $526.8
million in 1994.
EQUITY EARNINGS FROM AFFILIATES
Equity earnings from affiliates for 1996 were primarily comprised of the
company's after-tax share of the net income of the Dal-Tile International Inc.
business combination and the amortization of the excess of the company's
investment in Dal-Tile over the underlying equity in net assets, and the 50%
interest in the WAVE joint venture with Worthington Industries. Results in 1995
and 1994 reflect only the 50% interest in the WAVE joint venture.
In 1995, the company entered into a business combination with Dal-Tile
International Inc. The transaction was accounted for at fair value and involved
the exchange of $27.6 million in cash and the stock of the ceramic tile
operations, consisting primarily of American Olean Tile Company, a wholly owned
subsidiary, for ownership of 37% of the shares of Dal-Tile. The company's
investment in Dal-Tile exceeded the underlying equity in net assets by $123.9
million which will be amortized over a period of 30 years. The after-tax loss on
the transaction was $116.8 million.
In August 1996, Dal-Tile issued new shares in a public offering decreasing the
company's ownership share from 37% to 33%.
Armstrong's ownership of the combined Dal-Tile is accounted for under the equity
method. The summarized historical financial information for ceramic tile
operations is presented below.
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(millions) 1995 1994
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Net sales $240.1 $220.3
Operating income/(1)/ 8.8 0.8
Assets/(2)/ 269.8 290.1
Liabilities/(2)/ 17.3 19.6
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Note 1: Excludes 1995 loss of $177.2 million due to ceramic tile business
combination.
Note 2: 1995 balances were as of December 29, 1995, immediately prior to the
ceramic tile business combination.
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Narrative Description of Business
The Company manufactures and sells interior furnishings, including floor
coverings and building products, and makes and markets a variety of specialty
products for the building, automotive, textile, and other industries. The
Company's activities extend worldwide.
Floor Coverings
The Company is a prominent manufacturer of floor coverings for the interiors of
homes and commercial and institutional buildings, with a broad range of
resilient flooring together with adhesives, installation and maintenance
materials and accessories. Resilient flooring, in both sheet and tile form,
together with laminate flooring, is made 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 the commercial and residential
market segments through wholesalers, retailers, including large home centers,
and contractors, and to the hotel/motel and manufactured homes industries.
Building Products
A major producer of ceiling materials in the United States and abroad, the
Company markets both residential and architectural ceiling systems. Ceiling
materials for the home are offered in a variety of types and designs; most
provide noise reduction and incorporate Company-designed features intended to
permit ease of installation. These residential ceiling products are sold through
wholesalers and retailers, including large home centers. Architectural ceiling
systems, designed for use in shopping centers, offices, schools, hospitals, and
other commercial and institutional structures, are available in numerous colors,
performance characteristics and designs and offer characteristics such as
acoustical control, rated fire protection, and aesthetic appeal. Architectural
ceiling materials and accessories, along with acoustical wall panels, are sold
by the Company to ceiling systems contractors and to resale distributors. Grid
products are manufactured and sold through a joint venture with Worthington
Industries.
Industry Products
The Company, including a number of its subsidiaries, manufactures and markets a
variety of specialty products for the building, automotive, textile and other
industries. These products include flexible pipe insulation sold for use in
construction and in original equipment manufacture; gasket materials for new
equipment and replacement use in the automotive, farm equipment, appliance, and
other industries; textile mill supplies including cots and aprons sold to
equipment manufacturers and textile mills. Industry products are sold, depending
on type and ultimate use, to original equipment manufacturers, contractors,
wholesalers, fabricators and end users.
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Ceramic Tile
Ceramic tile for floors, walls and countertops, together with adhesives,
installation and maintenance materials and accessories are sold through home
centers, independent distributors and sales service centers operated by
Dal-Tile.
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The principal raw materials used in the manufacture of the Company's products
are synthetic resins, plasticizers, latex, mineral fibers and fillers, clays,
starches, perlite, and pigments and inks. In addition, the Company uses a wide
variety of other raw materials. Most raw materials are purchased from sources
outside of the Company. The Company also purchases significant amounts of
packaging materials for the containment and shipment of its various products.
During 1996, adequate supplies of raw materials were available to all of the
Company's industry segments.
Customers' orders for the Company's products are mostly for immediate shipment.
Thus, in each industry segment, the Company has implemented inventory systems,
including its "just in time" inventory system, pursuant to which orders are
promptly filled out of inventory on hand or the product is manufactured to meet
the delivery date specified in the order. As a result, there historically has
been no material backlog in any industry segment.
The competitive position of the Company has been enhanced by patents on products
and processes developed or perfected within the Company or obtained through
acquisition. Although the Company considers that, in the aggregate, its patents
constitute a valuable asset, it does not regard any industry segment as being
materially dependent upon any single patent or any group of related patents.
There is significant competition in all the industry segments in which the
Company does business. Competition in each industry segment includes numerous
active companies (domestic and foreign), with emphasis on price, product
performance and service. In addition, with the exception of industrial and other
products and services, product styling is a significant method of competition in
the Company's industry segments. Increasing domestic competition from foreign
producers is apparent in certain industry segments and actions continue to be
taken to meet this competition.
The Company invested $220.7 million in 1996, $171.8 million in 1995, and $134.2
million in 1994 for additions to the property, plant and equipment of its
continuing businesses.
Research and development activities are important and necessary in assisting the
Company to carry on and improve its business. Principal research and development
functions include the development of new products and processes and the
improvement of existing products and processes.
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The Company spent $59.3 million in 1996, $57.9 million in 1995, and $53.1
million in 1994 on research and development activities worldwide for the
continuing businesses.
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ENVIRONMENTAL MATTERS
In 1996, the company incurred capital expenditures of approximately $3.0 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1997 and 1998. The company
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.
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 18 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have voluntarily agreed to jointly fund the required investigation and
remediation of each site. With regard to some sites, however, Armstrong disputes
the liability, the proposed remedy or the proposed cost allocation. Armstrong
may also have rights of contribution or reimbursement from other parties or
coverage under applicable insurance policies. The company is also remediating
environmental contamination resulting from past industrial activity at certain
of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior company experience
in remediation of 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, the company's estimated liability reflects only the company's expected
share. In determining the probability of contribution, the company considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters. The estimated
liabilities do not take into account any claims for recoveries from insurance or
third parties.
Reserves at December 31, 1996, were for potential environmental liabilities that
the company considers probable and for which a reasonable estimate of the
potential liability could be made. Where existing data is sufficient to estimate
the amount of 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 a result, the
company has accrued, before agreed-to insurance coverage, $8.0 million to
reflect its estimated undiscounted liability for environmental remediation. As
assessments and remediation activities progress at each individual site, these
liabilities are reviewed to reflect additional information as it becomes
available.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the company 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.
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As of December 31, 1996, the Company had approximately 10,580 active employees,
of whom approximately 3,540 are located outside the United States. Year-end
employment in 1996 was below the level at the end of 1995 primarily as the
result of various restructuring activities. About 62% of the Company's
approximately 4,540 hourly or salaried production and maintenance employees in
the United States are represented by labor unions.
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Geographic Areas
GEOGRAPHIC AREAS
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at December 31 (millions) 1996 1995 1994
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Net trade sales:
United States $1,419.2 $1,586.4 $1,564.0
Europe 548.4 558.7 483.4
Other foreign 188.8 179.9 178.6
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Interarea transfers:
United States 105.0 101.1 95.0
Europe 13.2 13.8 8.7
Other foreign 30.4 32.1 26.1
Eliminations (148.6) (147.0) (129.8)
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Total net sales $2,156.4 $2,325.0 $2,226.0
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Operating income:
United States $ 202.7 $ 7.7 $ 235.5
(See Note 2 on page 3)
Europe 79.3 62.6 75.3
Other foreign 10.0 7.8 7.6
Unallocated corporate expense (36.1) (34.0) (23.8)
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Total operating income $ 255.9 $ 44.1 $ 294.6
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Identifiable assets:
United States $1,180.1 $1,044.5 $1,130.1
Europe 383.7 406.7 376.5
Other foreign 107.3 83.4 72.6
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
Eliminations (0.6) (0.3) (0.5)
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Total assets $2,135.6 $2,149.8 $2,159.0
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United States net trade sales include export sales to non-affiliated customers
of $34.0 million in 1996, $32.1 million in 1995 and $26.1 million in 1994. Also
included in United States net trade sales were ceramic tile operations sales of
$240.1 million and $220.3 million in 1995 and 1994, respectively.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain and Switzerland. Operations in Australia,
Canada, The People's Republic of China, Hong Kong, Indonesia, Japan, Korea,
Singapore and Thailand are in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates marketing
exported products are accounted for by methods that approximate arm's-length
transactions, after considering the costs incurred by the selling company and
the return on assets employed of both the selling unit and the purchasing unit.
Operating income of a geographic area includes income accruing from sales to
affiliates.
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The Company's foreign operations are subject to foreign government legislation
involving restrictions on investments (including transfers thereof), tariff
restrictions, personnel administration, and other actions by foreign
governments. In addition, consolidated earnings are subject to both U.S. and
foreign tax laws with respect to earnings of foreign subsidiaries, and to the
effects of currency fluctuations.
Item 2. Properties
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The Company produces and markets its products and services throughout the world,
operating 46 manufacturing plants in 12 countries; 23 of these plants are
located throughout the United States. Additionally, affiliates operate eight
plants in three countries.
Floor covering products and adhesives are produced at 17 plants with principal
manufacturing facilities located in Lancaster, Pennsylvania, and Stillwater,
Oklahoma. Building products are produced at 14 plants with principal facilities
in Macon, Georgia, the Florida-Alabama Gulf Coast area and Marietta,
Pennsylvania. Insulating materials, textile mill supplies, fiber gasket
materials and specialty papers and other products for industry are manufactured
at 15 plants with principal manufacturing facilities at Munster, Germany, and
Fulton, New York.
Numerous sales offices are leased worldwide, and leased facilities are utilized
to supplement the Company's owned warehousing facilities.
Productive capacity and extent of utilization of the Company's facilities are
difficult to quantify with certainty because in any one facility maximum
capacity and utilization varies periodically depending upon the product that is
being manufactured and individual facilities manufacture more than one type of
product. In this context, the Company estimates that the production facilities
in each of its industry segments were effectively utilized during 1996 at 80% to
90% of overall productive capacity in meeting market conditions. Remaining
productive capacity is sufficient to meet expected customer demands.
The Company believes its various facilities are adequate and suitable.
Additional incremental investments in plant facilities are being made as
appropriate to balance capacity with anticipated demand, improve quality and
service, and reduce costs.
Item 3. Legal Proceedings
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Asbestos-Related Litigation
The Company is one of many defendants in pending lawsuits and claims involving,
as of December 31, 1996, approximately 43,600 individuals alleging personal
injury from exposure to asbestos. This number includes approximately
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19,500 lawsuits and claims from the approximately 87,000 individuals who opted
out of the settlement class action (Georgine v. Amchem) referred to below. About
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18,400 claims from purported settlement class members were received as of
December 31, 1996, although many do not qualify at this time for payment.
Nearly all the personal injury suits and claims, except Georgine claims, seek
general and punitive damages arising from alleged exposures, at various times,
from World War II onward, to asbestos-containing products. Claims against the
Company generally involve allegations of negligence, strict liability, breach of
warranty and conspiracy with respect to its involvement with insulation
products. The Company discontinued the sale of all asbestos-containing
insulation products in 1969. The claims generally allege that injury may be
determined many years (up to 40 years) after first exposure to asbestos. Nearly
all suits name many defendants, and over 100 different companies are reportedly
involved. The Company believes that many current plaintiffs are unimpaired. A
few state and federal judges have consolidated numbers of asbestos-related
personal injury cases for trial, which the Company has generally opposed as
unfair. A large number of suits and claims have either been put on inactive
lists, settled, dismissed or otherwise resolved, and the Company is generally
involved in all stages of claims resolution and litigation, including trials and
appeals. While the number of pending cases has decreased during the past several
years in substantial part due to the Georgine settlement class action, neither
the rate of future dispositions nor the number of future potential unasserted
claims can be reasonably predicted at this time.
Attention has been given by various parties to securing a comprehensive
resolution of pending and future personal injury claims. The Judicial Panel for
Multidistrict Litigation ordered the transfer of all pending federal cases to
the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. The
Company has supported this transfer. Some cases are periodically released for
trial, although the issue of punitive damages is retained by the transferee
Court. State court cases have not been directly affected by the transfer. The
transferee Court has been instrumental in having the parties resolve large
numbers of cases in various jurisdictions and has been receptive to different
approaches to the resolution of claims.
Georgine Settlement Class Action
Georgine v. Amchem is a settlement class action filed in the Eastern District of
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Pennsylvania on January 15, 1993, that includes essentially all future
asbestos-related personal injury claims against members, including the Company,
of the Center for Claims Resolution ("Center") referred to below. It is designed
to establish a non-litigation system for the resolution of such claims against
Center members. Other companies may be able to join the class action later. The
settlement offers a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they meet certain exposure and medical
criteria. Compensation amounts are derived from historical settlement data.
Under limited circumstances and in limited numbers, qualifying claimants may
choose to arbitrate or litigate certain
-11-
claims after they are processed within the system. No punitive damages will be
paid under the proposed settlement. The settlement is designed to minimize
transactional costs, including attorneys fees, and to relieve the burden of
asbestos-related litigation on the courts. Each member of the Center is
obligated for its own fixed share of compensation and fees. Potential claimants
who neither filed a prior lawsuit against Center members nor filed an exclusion
request are subject to the class action. The class action does not include
claims deemed otherwise not covered by the class action settlement, or claims
for property damage. Annual case flow caps and compensation ranges for each
medical category (including amounts paid even more promptly under simplified
payment procedures) are established for an initial period of ten years. Case
flow caps may be increased if they were substantially exceeded during the
previous five-year period. The case flow figures and annual compensation levels
are subject to renegotiation after the initial ten-year period. Approximately
87,000 individuals have filed exclusion requests and have thus opted out of the
settlement. Such opt outs are not claims but are reservations of rights possibly
to bring claims in the future. The settlement will become final only after
certain issues, including insurance coverage, are resolved and appeals are
exhausted, a process which could take several years. The Center members stated
their intention to resolve over a five-year period the claims pending when the
class action was filed, and a significant number have been settled or are in
negotiations.
The Center members are seeking agreement from insurance carriers or a binding
judgment against them that the class action settlement will not jeopardize
existing insurance coverage; the class action is contingent upon such an
agreement or judgment. For carriers that do not agree, this matter will proceed
through alternative dispute resolution (for carriers that subscribed to the
Wellington Agreement referred to below), or through litigation.
On May 10, 1996, a three-judge panel of the U.S. Court of Appeals for the Third
Circuit issued an adverse decision in an appeal from the preliminary injunction
by the District Court that enjoined members of the Georgine class from
proceeding against Center members in the tort system. The Court of Appeals
decision ruled against maintaining the settlement class action, ordered that the
preliminary injunction be vacated, and ordered decertification of the class. The
Court ruled broadly that the case does not meet the requirements for class
certification under Federal Rule of Civil Procedure 23, concluding that a class
action cannot be certified for purposes of settlement unless it can be certified
for full-scale litigation. The Company believes that the Court erred in several
important respects. The Company believes that the Court's ruling was not
consistent with rulings of several other courts that have considered Rule 23
issues in comparable cases. In particular, the recent ruling in the Ahearn case
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by the Fifth Circuit Court of Appeals reached a contrary conclusion on a central
Rule 23 issue in Georgine.
On November 1, 1996, the U.S. Supreme Court accepted the Center's petition for
certiorari and the appeal was argued on February 18, 1997. A decision from the
Supreme Court is likely by July 1997. The preliminary injunction will remain
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in place while the case is pending in the Supreme Court. The Center's counsel
believes there to be substantial grounds for the Supreme Court to reverse the
Court of Appeals' decision.
The Company remains optimistic that a form of future claimants settlement class
action may ultimately be approved, although the courts may not uphold the
Georgine settlement class action, and may not uphold the companion insurance
action or, even if upheld, there is a potential that judicial action might
result in substantive modification of this settlement.
If the final resolution by the Supreme Court is not favorable to the Center
members, the District Court's injunction will likely be lifted and a large
number of lawsuits might be filed within a short time against the Center
members, resulting in a likely increase in the number of subsequent pending
cases in the tort system against the Company. In due course, the consequences
from lifting the injunction could result in presently undeterminable, but likely
higher, liability and defense costs under a claims resolution mechanism
alternative to Georgine which the Company believes would likely be negotiated.
Even if the appeal to the Supreme Court is successful, various issues remain to
be resolved and the potential exists that those issues will cause the class
action ultimately not to succeed or to be substantially modified. Similarly, the
potential exists that the companion insurance action will not be successful.
Insurance Carriers/Wellington Agreement
The Company's primary and excess insurance carriers have provided defense and
indemnity coverage for asbestos-related personal injury claims, and the primary
insurers are providing defense coverage for property damage claims.
Various insurance carriers provide products and non-products coverages for the
Company's asbestos-related personal injury claims and product coverage for
property damage claims. Most policies providing products coverage for personal
injury claims have been exhausted. The insurance carriers that currently provide
coverage or whose policies have provided or are believed to provide personal
injury products and non-products or property damage coverages are as follows:
Reliance Insurance Company; Aetna Casualty and Surety Company; Liberty Mutual
Insurance Companies; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier that
provided $25 million of bodily injury products coverage, is insolvent; the
Company is pursuing claims with
-13-
the state guaranty associations. The gap in coverage created by the Midland
insolvency was covered by other insurance. Certain companies in the London block
of coverage and certain carriers providing coverage at the excess level for
property damage claims only have also become insolvent. In addition, certain
insurance carriers that were not in the Company's California insurance
litigation also provide insurance for asbestos-related property damage claims.
The Company along with 52 other companies (defendants in the asbestos-related
litigation and certain of their insurers) signed the 1985 Agreement Concerning
Asbestos-Related Claims (the "Wellington Agreement"). This Agreement provided
for a final settlement of nearly all disputes concerning insurance for
asbestos-related personal injury claims between the Company and three of its
primary insurers and seven of its excess insurers that subscribed to the
Wellington Agreement. The one primary insurer that did not sign the Wellington
Agreement had earlier entered into the Interim Agreement with the Company and
had paid into the Wellington Asbestos Claims Facility (the "Facility"). The
Wellington Agreement provides for those insurers to indemnify the Company up to
the policy limits for claims that trigger policies in the insurance coverage
period, and nearly all claims against the Company fall within the coverage
period; both defense and indemnity are paid under the policies and there are no
deductibles under the applicable Company policies. The Wellington Agreement
addresses both products and non-products insurance coverage.
The Wellington Agreement also provided for the establishment of the Asbestos
Claims Facility to evaluate, settle, pay and defend all personal injury claims
against member companies. Liability payments and allocated expenses were
allocated by formula to each member. The Facility was dissolved when certain
members raised concerns about their share of liability payments and allocated
expenses and certain insurers raised concerns about defense costs and Facility
operating expenses.
Center for Claims Resolution
Following the dissolution of the Facility, the Center was created in October
1988 by Armstrong and 20 other companies, all of which were former members of
the Facility. Insurance carriers did not become members of the Center, although
a number of carriers signed an agreement to provide approximately 70% of the
financial support for the Center's operational costs during its first year of
operation; they are represented ex officio on the Center's governing board. The
Center adopted many of the conceptual features of the Facility, and the members'
insurers generally provide coverage under the Wellington Agreement. The Center
has revised the formula for shares of liability payments and defense costs over
time and has defended the members' interests and addressed the claims in a
manner consistent with the prompt, fair resolution of meritorious claims. The
share adjustments have resulted in some increased liability share for the
Company. In the settlement class action, each member will pay its own fixed
share of every claim. If a member withdraws, the shares of remaining members
will not change. The Center members have reached agreement annually with the
insurers relating to the
-14-
continuing operation of the Center and expect that the insurers will provide
funding for the Center's operating expenses for its ninth year of operation. The
Center processes pending claims as well as future claims in the settlement class
action.
An increase in the utilization of the Company's insurance has occurred as a
result of the class action settlement and the commitment at the time to attempt
to resolve pending claims within five years. A substantial portion of the
insurance asset involves non-products insurance which is in alternate dispute
resolution. While the Company is seeking resolution of key issues in the
alternate dispute resolution process during 1997, a shortfall may develop
between available insurance and amounts necessary to pay claims, and that
shortfall may occur in the third quarter of 1997 or earlier, depending on the
timing of availability of certain coverages. The Company does not believe that
such shortfall would be material either to the financial condition of the
Company or to its liquidity. Aside from the class action settlement, no forecast
can be made for future years regarding either the rate of claims, the rate of
pending and future claims resolution by the Center, or the rate of utilization
of Company insurance. If the settlement class action is ultimately successful,
projections of the rate of disposition of future cases may be possible.
Property Damage Litigation
The Company is also one of many defendants in a total of 11 pending lawsuits and
claims as of December 31, 1996, brought by public and private building owners.
These lawsuits and claims include allegations of damage to buildings caused by
asbestos-containing products and generally claim compensatory and punitive
damages and equitable relief, including reimbursement of expenditures, for
removal and replacement of such products. The claims appear to be aimed at
friable (easily crumbled) asbestos-containing products, although allegations in
some suits encompass all asbestos-containing products, including allegations
with respect to previously installed asbestos-containing resilient flooring.
Among the lawsuits that have been resolved are four class actions that had been
certified, each involving a distinct class of building owner: public and private
schools; Michigan state public and private schools; colleges and universities;
and private property owners who leased facilities to the federal government. The
Company vigorously denies the validity of the allegations against it in these
suits and claims. Increasing defense costs, paid by the Company's insurance
carriers either under reservation or settlement arrangement, will be incurred.
As a consequence of the California insurance litigation discussed elsewhere in
this note, the Company believes that it is probable that costs of the property
damage litigation that are being paid by the Company's insurance carriers under
reservation of rights will not be subject to recoupment. These suits and claims
were not handled by the former Facility nor are they being handled by the
Center.
Certain co-defendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
several exceptions) has been stayed or restricted. Due to the
-15-
uncertainties involved, the long-term effect of these proceedings on the
litigation cannot be predicted.
California Insurance Coverage Lawsuit
The trial court issued final decisions in various phases in the insurance
lawsuit filed by the Company in California, including a decision that the
trigger of coverage for personal injury claims was continuous from exposure
through death or filing of a claim. The court also found that a triggered
insurance policy should respond with full indemnification up to exhaustion of
the policy limits. The court concluded that any defense obligation ceases upon
exhaustion of policy limits. Although not as comprehensive, another decision
established favorable defense and indemnity coverage for property damage claims
holding that coverage would be in effect during the period of installation and
during any subsequent period in which a release of fibers occurred. The
California appellate courts substantially upheld the trial court, and that
insurance coverage litigation is now concluded. The Company has resolved
personal injury products coverage matters with all of its solvent carriers
except one small excess carrier.
After concluding the last phase of the trial against one of its primary
carriers, which is also an excess carrier, the Company and the carrier reached a
settlement agreement on March 31, 1989. Under the terms of the settlement
agreement, coverage is provided for asbestos-related bodily injury and property
damage claims generally consistent with the interim rulings of the California
trial court and complementary to the Wellington Agreement. The parties also
agreed that a certain minimum and maximum percentage of indemnity and allocated
expenses incurred with respect to asbestos-related personal injury claims would
be deemed allocable to non-products claims coverage and that the percentage
amount would be negotiated or otherwise decided between the Company and the
insurance carrier.
Non-Products Insurance Coverage
Non-products insurance coverage is included in the Company's primary and a
number of excess policies for certain types of claims. The settlement agreement
referenced above with a primary carrier included a provision for non-products
claims. Non-products claims include among other things those claims that may
have arisen out of exposure during installation of asbestos materials.
Negotiations have been undertaken with the Company's primary insurance carriers
to categorize the percentage of previously resolved and yet to be resolved
asbestos-related personal injury claims as non-products claims and to establish
the entitlement to such coverage. The additional coverage potentially available
to pay such claims is substantial, and at the primary level, includes defense
costs in addition to limits. All the carriers raise various reasons why they
should not pay their coverage obligations, including contractual defenses,
waiver, laches and statutes of limitations. One primary carrier alleges that it
is no longer bound by the Wellington Agreement, and another alleges that the
Company agreed to limit its claims for non-products coverage against that
carrier at the time the Wellington Agreement was signed.
-16-
The Company has initiated an alternative dispute resolution proceeding against
the carriers. This proceeding is in the mediation phase. If coverage is not
mutually resolved during that phase with the help of a neutral party, the
proceeding moves to binding arbitration. Other proceedings against several non-
Wellington carriers may become necessary.
ACandS, Inc., a former subsidiary of the Company, has coverage rights under some
of the Company's insurance policies for certain insurance periods, and has
accessed such coverage on the same basis as the Company. It was a subscriber to
the Wellington Agreement, but is not a member of the Center. The Company and
ACandS, Inc., have negotiated a settlement agreement which reserves for ACandS,
Inc. a certain amount of insurance from the joint policies solely for its own
use for asbestos-related claims.
Based upon the Company's experience with this litigation and the disputes with
its insurance carriers, a reserve was recorded in June 1983 to cover estimated
potential liability, and settlement costs and legal and administrative costs not
covered under an Interim Agreement, the cost of litigation against the Company's
insurance carriers, and other factors involved in the litigation that are
referred to herein about which uncertainties exist. As a result of the
Wellington Agreement, the reserve was reduced for that portion associated with
personal injury suits and claims. In an insurance settlement on March 31, 1989,
the Company received $11.0 million, of which approximately $4.4 million was
credited to income and nearly all of the balance was recorded as an increase to
its reserve. Costs of litigation against insurance carriers and other legal
costs indirectly related to asbestos litigation will be expensed outside the
reserve.
Conclusions
- -----------
The Company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
Company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
flow caps to be negotiated after the initial ten-year period for the settlement
class action or the compensation levels to be negotiated for such claims, nor
whether, if needed, an alternative to the Georgine settlement vehicle may
ultimately emerge, or the ultimate liability if such alternative does not
emerge, or the scope of its non-products coverage ultimately deemed available.
Subject to the uncertainties and limitations referred to in this note and based
upon its experience and other factors also referred to in this note, the Company
believes that the estimated $141.6 million in liability and defense costs
recorded on the balance sheet will be incurred to resolve an estimated 43,600
asbestos-related personal injury claims pending against the Company as of
December 31, 1996. In addition to the currently estimated pending claims and
claims filed by those who have opted out of the settlement class action,
-17-
claims otherwise determined not to be subject to the settlement class action
will be resolved outside the settlement class action. The Company does not know
how many claims ultimately may be filed by claimants who have opted out of the
class action or who are determined not to be subject to the settlement class
action, or if the preliminary injunction is vacated, the number of claims that
then would not be subject to the class action constraints.
An insurance asset in the amount of $141.6 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount to
cover the liability in like amount referred to above. Such insurance has either
been agreed upon or is probable of recovery through negotiation, alternative
dispute resolution or litigation. A substantial portion of the insurance asset
involves non-products insurance which is in alternative dispute resolution.
While the Company is seeking resolution of the key issues in the alternative
dispute resolution process during 1997, a shortfall may develop between
available insurance and amounts necessary to pay claims that may occur in the
third quarter of 1997 or possibly in the second quarter, depending on the timing
of the availability of certain coverages. The Company believes such shortfall
would not be material either to the financial condition of the Company or to its
liquidity. The Company also notes that, based on maximum mathematical
projections covering a ten-year period from 1994 to 2004, its estimated cost in
Georgine reflects a reasonably possible additional liability of $245 million. If
Georgine is not ultimately approved, the Company believes that a claims
resolution mechanism alternative to the Georgine settlement will likely be
negotiated, albeit at a likely higher liability and defense costs. A portion of
such additional liability may not be covered by the Company's ultimately
applicable insurance recovery. However, the Company believes that any after-tax
impact on the difference between the aggregate of the estimated liability for
pending cases and the estimated cost for the ten-year maximum mathematical
projection or in the cost of an alternative settlement format, and the probable
insurance recovery, would not be material either to the financial condition of
the Company or to its liquidity, although it could be material to earnings if it
is determined in a future period to be appropriate to record a reserve for this
difference. The period in which such a reserve may be recorded and the amount of
any reserve that may be appropriate cannot be determined at this time. Subject
to the uncertainties and limitations referred to elsewhere in this note and
based upon its experience and other factors referred to above, the Company
believes it is probable that substantially all of the expenses and any liability
payments associated with the asbestos-related property damage claims will be
paid under an insurance coverage settlement agreement and through coverage from
the outcome of the California insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, settlements with other insurance carriers, the results of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld, an alternative
-18-
to Georgine would be negotiated, and its experience, the Company believes the
asbestos-related lawsuits and claims against the Company would not be material
either to the financial condition of the Company or to its liquidity, although
as stated above, the net effect of any future liabilities recorded in excess of
insurance assets could be material to earnings in such future period.
-19-
TINS Litigation
In 1984, suit was filed against the Company in the U. S. District Court for the
District of New Jersey (the "Court") by The Industry Network System, Inc.
(TINS), a producer of video magazines in cassette form, and Elliot Fineman, a
consultant (Fineman and The Industry Network System, Inc. v. Armstrong World
----------------------------------------------------------------
Industries, Inc., C.A. No. 84-3837 JWB). At trial, TINS claimed, among other
- ----------------
things, that the Company had improperly interfered with a tentative contract
which TINS had with an independent distributor of the Company's flooring
products and further claimed that the Company used its alleged monopoly power in
resilient floor coverings to obtain a monopoly in the video magazine market for
floor covering retailers in violation of federal antitrust laws. The Company
denied all allegations. On April 19, 1991, the jury rendered a verdict in the
case, which as entered by the court in its order of judgment, awarded the
plaintiffs the alternative, after all post-trial motions and appeals were
completed, of either their total tort claim damages (including punitive
damages), certain pre-judgment interest, and post-judgment interest or their
trebled antitrust claim damages, post-judgment interest and attorneys fees. The
higher amount awarded to the plaintiffs as a result of these actions totaled
$224 million in tort claim damages and pre-judgment interest, including $200
million in punitive damages.
On June 20, 1991, the Court granted judgment for the Company notwithstanding the
jury's verdict, thereby overturning the jury's award of damages and dismissing
the plaintiffs' claims with prejudice. Furthermore, on June 25, 1991, the Court
ruled that, in the event of a successful appeal restoring the jury's verdict in
the case, the Company would be entitled to a new trial on the matter.
On October 28, 1992, the United States Court of Appeals for the Third Circuit
issued an opinion in Fineman v. Armstrong World Industries, Inc. (No. 91-5613).
-------------------------------------------
The appeal was taken to the Court of Appeals from the two June 1991 orders of
the United States District Court in the case. In its decision on the plaintiff's
appeal of these rulings, the Court of Appeals sustained the U. S. District
Court's decision granting the Company a new trial, but overturned in certain
respects the District Court's grant of judgment for the Company notwithstanding
the jury's verdict.
The Court of Appeals affirmed the trial judge's order granting Armstrong a new
trial on all claims of plaintiffs remaining after the appeal; affirmed the trial
judge's order granting judgment in favor of Armstrong on the alleged actual
monopolization claim; affirmed the trial judge's order granting judgment in
favor of Armstrong on the alleged attempt to monopolize claim; did not disturb
the District Court's order dismissing the alleged conspiracy to monopolize
claim; affirmed the trial judge's order dismissing all of Fineman's personal
claims, both tort and antitrust; and affirmed the trial judge's ruling that
plaintiffs could not recover the aggregate amount of all damages awarded by the
jury and instead must elect damages awarded on one legal theory. However, the
Third Circuit, contrary to Armstrong's arguments, reversed the trial judge's
judgment for Armstrong on TINS' claim for an
-20-
alleged violation of Section 1 of the Sherman Act; reversed the trial judge's
judgment in favor of Armstrong on TINS' claim for tortious interference;
reversed the trial judge's judgment in favor of Armstrong on TINS' claim for
punitive damages; and reversed the trial judge's ruling that had dismissed TINS'
alleged breach of contract claim.
The Court of Appeals, in affirming the trial court's new trial order, agreed
that the trial court did not abuse its discretion in determining that the jury's
verdict was "clearly against the weight of the evidence" and that a new trial
was required due to the misconduct of plaintiffs' counsel.
The foregoing summary of the Third Circuit's opinion is qualified in its
entirety by reference thereto.
The Court of Appeals granted the Company's motion to stay return of the case to
the District Court pending the Company's Petition for Certiorari to the Supreme
Court appealing certain antitrust rulings of the Court of Appeals. The Company
was informed on February 22, 1993, that the Supreme Court denied its Petition.
After the case was remanded by the Third Circuit Court of Appeals in
Philadelphia to the U.S. District Court in Newark, New Jersey, a new trial
commenced on April 26, 1994. TINS claimed damages in the form of lost profits
ranging from approximately $19 million to approximately $56 million. Plaintiff
also claimed punitive damages in conjunction with its request for tort damages.
Other damages sought included reimbursement of attorneys' fees and interest,
including prejudgment interest.
On August 19, 1994, the jury returned a verdict in favor of the Company finding
that the Company had not caused damages to TINS. The court subsequently entered
judgment in the Company's favor based upon the verdict. TINS motion for a new
trial based upon alleged inaccurate jury instructions and alleged improper
evidentiary rulings during the trial, was denied and TINS filed an appeal with
the U.S. Court of Appeals for the Third Circuit. On October 11, 1995, the case
was argued before a panel of the U.S. Court of Appeals for the Third Circuit,
and on October 20, 1995, the Court issued a Judgment Order affirming the 1994
District Court verdict in favor of the Company. On November 2, 1995, TINS filed
a Petition for Rehearing by the same panel which was denied on December 5, 1995.
On January 24, 1996, TINS filed a motion seeking further appellate review by the
Circuit Court; that motion has been denied. Also denied was a motion by TINS
before the District Court to rescind an earlier 1984 agreement of settlement.
TINS has appealed this later decision to the Circuit Court, and a hearing will
likely be held on this issue during the first half of 1997. If the denial of the
motion were reversed on appeal, TINS could possibly be entitled to litigate
claims that had been resolved by means of the settlement agreement.
-----------------------------
-21-
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
- ------------------------------------
The information appearing in Item 10 hereof under the caption "Executive
Officers of the Registrant" is incorporated by reference herein.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
-------
The Company'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
February 10, 1997, there were approximately 7,396 holders of record of the
Company's Common Stock.
First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------------------
1996
Dividends per share of common stock 0.36 0.40 0.40 0.40
Price range of common stock--high 64 1/2 61 5/8 65 1/2 75 1/4
Price range of common stock--low 57 7/8 53 1/2 51 7/8 61 3/4
- ----------------------------------------------------------------------------------------------------------------------------
1995
Dividends per share of common stock 0.32 0.36 0.36 0.36
Price range of common stock--high 48 1/2 52 60 1/2 64 1/8
Price range of common stock--low 38 3/8 43 50 1/4 52 7/8
- ----------------------------------------------------------------------------------------------------------------------------
Total year
- ------------------------------------------------------------------------------------
1996
Dividends per share of common stock 1.56
Price range of common stock--high 75 1/4
Price range of common stock--low 51 7/8
- ------------------------------------------------------------------------------------
1995
Dividends per share of common stock 1.40
Price range of common stock--high 64 1/8
Price range of common stock--low 38 3/8
- ------------------------------------------------------------------------------------
During 1996, the Company issued a total of 1,400 shares of Common Stock to
nonemployee directors of the Company pursuant to the Company'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 the Company possessed by the directors, these shares were issued
without registration in reliance on Section 4(2) of the Securities Act of 1933,
as amended.
-22-
Item 6. Selected Financial Data
- --------------------------------
(Dollars in millions except for per-share data). For year 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales 2,156.4 2,325.0 2,226.0 2,075.7
Cost of goods sold 1,459.9 1,581.1 1,483.9 1,453.7
Total selling, general and administrative expenses 413.2 457.0 449.2 435.6
Equity (earnings) loss from affiliates (19.1) (6.2) (1.7) (1.4)
Restructuring charges 46.5 71.8 -- 89.3
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- 177.2 -- --
Operating income (loss) 255.9 44.1 294.6 98.5
Interest expense 22.6 34.0 28.3 38.0
Other expense (income), net (6.9) 1.9 0.5 (6.1)
Earnings (loss) from continuing businesses before
income taxes 240.2 8.2 265.8 66.6
Income taxes 75.4 (5.4) 78.6 17.6
Earnings (loss) from continuing businesses 164.8 13.6 187.2 49.0
As a percentage of sales 7.6% 0.6% 8.4% 2.4%
As a percentage of average monthly assets (a) 8.5% 0.7% 10.7% 2.8%
Earnings (loss) from continuing businesses
applicable to common stock (b) 158.0 (0.7) 173.1 35.1
Per common share--primary 3.97 (0.02) 4.60 0.93
Per common share--fully diluted (c) 3.81 (0.02) 4.10 0.92
Net earnings (loss) 155.9 123.3 210.4 63.5
As a percentage of sales 7.2% 5.3% 9.5% 3.1%
Net earnings (loss) applicable to common stock (b) 149.1 109.0 196.3 49.6
As a percentage of average shareholders' equity 19.6% 15.0% 31.3% 9.0%
Per common share--primary 3.76 2.90 5.22 1.32
Per common share--fully diluted (c) 3.60 2.67 4.64 1.26
Dividends declared per share of common stock 1.56 1.40 1.26 1.20
Purchases of property, plant and equipment 220.7 171.8 134.2 107.6
Aggregate cost of acquisitions -- 20.7 -- --
Total depreciation and amortization 123.7 123.1 120.7 117.0
Average number of employees--continuing businesses 10,572 13,433 13,784 14,796
Average number of common shares outstanding 39.1 37.1 37.5 37.2
- -----------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 243.5 346.8 384.4 279.3
Net property, plant and equipment--continuing businesses 964.0 878.2 966.4 937.6
Total assets 2,135.6 2,149.8 2,159.0 1,869.2
Long-term debt 219.4 188.3 237.2 256.8
Total debt as a percentage of total capital (d) 37.2% 38.5% 41.4% 52.2%
Shareholders' equity 790.0 775.0 735.1 569.5
Book value per share of common stock 19.19 20.10 18.97 14.71
Number of shareholders (e) (f) 7,424 7,084 7,473 7,963
Common shares outstanding 41.2 36.9 37.2 37.2
Market value per common share 69 1/2 62 38 1/2 53 1/4
- -------------------------------------------------------------======================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except for per-share data) For year 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------
Net sales 2,111.4 2,021.4 2,082.4 2,050.4
Cost of goods sold 1,536.1 1,473.7 1,469.8 1,423.2
Total selling, general and administrative expenses 446.6 415.1 404.0 380.7
Equity (earnings) loss from affiliates (0.2) -- -- --
Restructuring charges 160.8 12.5 6.8 5.9
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- -- (60.4) (9.5)
Operating income (loss) (31.9) 120.1 262.2 250.1
Interest expense 41.6 45.8 37.5 40.5
Other expense (income), net (7.2) (8.5) 19.7 (5.7)
Earnings (loss) from continuing businesses before
income taxes (66.3) 82.8 205.0 215.3
Income taxes (2.9) 32.7 69.5 74.6
Earnings (loss) from continuing businesses (63.4) 50.1 135.5 140.7
As a percentage of sales -3.0% 2.5% 6.5% 6.9%
As a percentage of average monthly assets (a) -3.3% 2.7% 7.5% 8.6%
Earnings (loss) from continuing businesses
applicable to common stock (b) (77.2) 30.7 116.0 131.0
Per common share--primary (2.07) 0.83 2.98 2.88
Per common share--fully diluted (c) (2.07) 0.83 2.74 2.76
Net earnings (loss) (227.7) 48.2 141.0 187.6
As a percentage of sales -10.8% 2.4% 6.8% 9.1%
Net earnings (loss) applicable to common stock (b) (241.5) 28.8 121.5 177.9
As a percentage of average shareholders' equity -33.9% 3.3% 13.0% 17.9%
Per common share--primary (6.49) 0.77 3.12 3.92
Per common share--fully diluted (c) (6.49) 0.77 2.86 3.72
Dividends declared per share of common stock 1.20 1.19 1.135 1.045
Purchases of property, plant and equipment 107.5 127.1 184.2 215.0
Aggregate cost of acquisitions 4.2 -- 16.1 --
Total depreciation and amortization 123.4 122.1 116.5 121.6
Average number of employees--continuing businesses 16,045 16,438 16,926 17,167
Average number of common shares outstanding 37.1 37.1 38.8 45.4
- ------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 239.8 353.8 305.2 449.4
Net property, plant and equipment--continuing businesses 967.2 1,042.8 1,032.7 944.0
Total assets 1,944.3 2,125.7 2,124.4 2,008.9
Long-term debt 266.6 301.4 233.2 181.3
Total debt as a percentage of total capital (d) 57.2% 46.9% 45.7% 36.1%
Shareholders' equity 569.2 885.5 899.2 976.5
Book value per share of common stock 14.87 23.55 24.07 23.04
Number of shareholders (e) (f) 8,611 8,896 9,110 9,322
Common shares outstanding 37.1 37.1 37.1 42.3
Market value per common share 31 7/8 29 1/4 25 37 1/4
========================================================================================================================
(Dollars in millions except for per-share data) For year 1988 1987 1986
- ----------------------------------------------------------------------------------------------------------
Net sales 1,843.4 1,608.7 1,295.0
Cost of goods sold 1,287.6 1,112.0 889.2
Total selling, general and administrative expenses 331.3 288.8 240.3
Equity (earnings) loss from affiliates -- -- --
Restructuring charges -- -- --
Loss from ceramic tile business formation/
(gain) from sales of woodlands (1.9) -- --
Operating income (loss) 226.4 207.9 165.5
Interest expense 25.8 11.5 5.4
Other expense (income), net (13.1) (4.3) (3.1)
Earnings (loss) from continuing businesses before
income taxes 213.7 200.7 163.2
Income taxes 79.4 82.2 70.0
Earnings (loss) from continuing businesses 134.3 118.5 93.2
As a percentage of sales 7.3% 7.4% 7.2%
As a percentage of average monthly assets (a) 10.4% 11.3% 10.8%
Earnings (loss) from continuing businesses
applicable to common stock (b) 133.9 118.0 92.8
Per common share--primary 2.90 2.50 1.93
Per common share--fully diluted (c) 2.90 2.50 1.93
Net earnings (loss) 162.7 150.4 122.4
As a percentage of sales 8.8% 9.3% 9.4%
Net earnings (loss) applicable to common stock (b) 162.3 150.0 122.0
As a percentage of average shareholders' equity 17.0% 17.6% 16.0%
Per common share--primary 3.51 3.18 2.54
Per common share--fully diluted (c) 3.51 3.18 2.54
Dividends declared per share of common stock 0.975 0.885 0.7325
Purchases of property, plant and equipment 165.8 156.7 119.1
Aggregate cost of acquisitions 355.8 71.5 53.1
Total depreciation and amortization 99.4 83.6 67.6
Average number of employees--continuing businesses 15,016 14,036 12,953
Average number of common shares outstanding 46.2 47.2 48.1
- ----------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 260.6 345.3 401.5
Net property, plant and equipment--continuing businesses 930.4 674.1 534.7
Total assets 2,073.1 1,574.9 1,277.5
Long-term debt 185.9 67.7 58.8
Total debt as a percentage of total capital (d) 35.9% 22.8% 16.9%
Shareholders' equity 1,021.8 913.8 813.0
Book value per share of common stock 21.86 19.53 16.85
Number of shareholders (e) (f) 10,355 9,418 9,621
Common shares outstanding 46.3 46.2 47.5
Market value per common share 35 32 1/4 29 7/8
==========================================================================================================
Notes:
(a) Assets exclude insurance for asbestos-related liabilities.
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated preferred shares.
(c) See definition of fully diluted earnings per share on page 37.
(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 years 1988 through 1996.
(f) Includes, for 1987 and 1986, a trustee who was the shareholder of record on
behalf of approximately 11,000 employees who obtained beneficial ownership
through the Armstrong Stock Ownership Plan, which was terminated at the end
of 1987.
Beginning in 1996, 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.
-23-
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
- --------------------------------------------------------------------------------
1996 COMPARED WITH 1995
- --------------------------------------------------------------------------------
The 1995 and 1994 consolidated financial statements have been restated from the
1995 annual report to include the historical results of the ceramic tile
operations on an operating or consolidated line item basis rather than under the
equity method.
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 35), net cash
provided by operating activities and the sale of assets was sufficient to cover
normal working capital requirements, payments related to restructuring
activities and additional investment in plant, property and equipment. Most of
the 1996 beginning cash balance plus proceeds from exercised stock options
covered the reduction of debt, payments of dividends, preferred stock
redemptions, repurchase of shares, purchase of computer software and additional
investment in Dal-Tile International Inc., a company in which Armstrong has a
33% equity investment. The beginning cash balance of $256.9 million included
proceeds from the sale of Thomasville Furniture Industries, Inc., in December
1995.
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Uses of cash flow ($ millions)
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[BAR GRAPH APPEARS HERE]
Working capital was $243.5 million as of December 31, 1996, $103.3 million lower
than the $346.8 million recorded at year-end 1995. The reduction in working
capital over 12 months resulted primarily from the $191.5 million decrease in
cash. Partially offsetting the working capital decrease were increases in
inventories of $10.2 million, income tax benefits of $22.5 million, the $33.9
million decrease in short-term debt and current installments of long-term debt
and the $24.1 million decrease in accounts payable and accrued expenses.
The ratio of current assets to current liabilities was 1.76 to 1 as of December
31, 1996, compared with 1.92 to 1 as of December 31, 1995, primarily due to the
reduced levels of cash.
In the second quarter, the company announced that effective October 1, 1996, the
Employee Stock Ownership Plan (ESOP) and the Retirement Savings Plan (RSP) would
be merged to form the new Retirement Savings and Stock Ownership Plan (RSSOP).
On July 31, the trustee of the ESOP converted the preferred stock held by the
trust into approximately 5.1 million shares of common stock with a book value of
$139.1 million at a one-for-one ratio. The ultimate impact on the company's
results will depend on the level of employee participation in the restructured
plan and the stock price over time.
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Total debt/total debt + equity
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
Long-term debt, excluding the company's guarantee of the ESOP loan, increased
$31.1 million in 1996. The increase was primarily due to a low interest rate
loan for a capital addition at the Kankakee, Illinois, floor tile plant. At
December 31, 1996, long-term debt of $219.4 million represented 17.4% of total
capital compared with 14.9% at the end of 1995. The 1996 and 1995 year-end
ratios of total debt (including the company's financing of the ESOP loan) as a
percent of total capital were 37.2% and 38.5%, respectively.
In July 1996, the Board of Directors authorized the company to repurchase 3.0
million shares of its common stock (in addition to the 2.5 million shares
authorized in 1994), through the open market or through privately negotiated
transactions, bringing the total authorized common share repurchases to 5.5
million shares. The increased stock repurchase authorization will allow greater
flexibility in deploying cash flow and, to the extent that shares can be
repurchased at attractive prices, should increase earnings per share. Since the
inception of the plan, the company has repurchased approximately 2,380,000
shares through December 31, 1996, including approximately 1,328,000 shares
repurchased in 1996. In addition to shares repurchased under the above plan,
approximately 364,600 ESOP shares were repurchased in 1996. By early February
1997, the company had completed the 1994 2.5 million share repurchase plan.
Capital in excess of par value increased $112.8 million from December 31, 1995,
primarily as a result of two transactions. First, the company reissued treasury
stock to the trustee of the ESOP in the conversion of the preferred stock held
by the trust as mentioned above. Capital in excess of par value increased $102.4
million representing the excess of conversion value of the ESOP convertible
shares over the average acquisition cost of the treasury shares. Second, Dal-
Tile issued new shares in a public offering in August and used part of the
proceeds from the public offering to refinance all of its existing debt.
Although Armstrong's ownership share declined to 33% from 37%, Dal-Tile's net
assets increased, adding to the overall carrying
- 24 -
value of Armstrong's investment and resulting in the company recording $14.5
million as additional capital in excess of par value.
In April 1996, the company increased the five-year revolving line of credit with
11 banks from $200 million to $300 million. The line of credit is used for
general corporate purposes and as a backstop for commercial paper notes. On
November 1, the company's shelf registration statement for an additional $250
million of debt and/or equity securities was approved. The total amount of
unissued securities registered with the Securities and Exchange Commission is
now $500 million.
Should a need develop for additional financing, it is management's opinion that
the company has sufficient financial strength to warrant the required support
from lending institutions and financial markets.
- --------------------------------------------------------------------------------
Funds from operations/total debt
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
The company is involved in significant asbestos-related litigation which is
described more fully on pages 48-51 and which should be read in connection with
this discussion and analysis. The company does not know how many claims will be
filed against it in the future, nor the details thereof or of pending suits not
fully reviewed, nor the expense and any liability that may ultimately result
therefrom, nor does the company know whether the settlement class action
(Georgine v. Amchem) will ultimately succeed, the number of individuals who
ultimately will be deemed to have opted out or who could file claims outside the
settlement class action, nor the annual claims flow caps to be negotiated after
the initial 10-year period for the settlement class action or the compensation
levels to be negotiated for such claims, nor whether, if needed, an alternative
to the Georgine settlement vehicle may ultimately emerge, or the ultimate
liability if such alternative does not emerge, or the scope of its nonproducts
coverage ultimately deemed available.
Subject to the foregoing and based upon its experience and other factors also
referred to above, the company believes that the estimated $141.6 million in
liability and defense costs recorded on the 1996 balance sheet will be incurred
to resolve an estimated 43,600 asbestos-related personal injury claims pending
against the company as of December 31, 1996.
An insurance asset in the amount of $141.6 million recorded on the 1996 balance
sheet reflects the company's belief in the availability of insurance in this
amount to cover the liability in like amount referred to above. Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. A substantial portion of the
insurance asset involves nonproducts insurance which is in alternate dispute
resolution. While the company is seeking resolution of key issues in the
alternate dispute resolution process during 1997, a shortfall may develop
between available insurance and amounts necessary to pay claims as early as the
third quarter of 1997 or possibly in the second quarter depending on the timing
of the availability of certain coverage (the company believes such shortfall
would not be material either to the financial condition of the company or to its
liquidity). The company also notes that, based on maximum mathematical
projections covering a ten-year period from 1994 to 2004, its estimated cost in
the settlement class action reflects a reasonably possible additional liability
of $245 million. If the Georgine settlement class action mechanism is not
ultimately approved, the company believes that a claims resolution mechanism
alternative to the Georgine settlement will likely be negotiated, though at
likely higher liability and defense costs. A portion of such additional
liability may not be covered by the company's ultimately applicable insurance
recovery. However, the company believes that any after-tax impact on the
difference between the aggregate of the estimated liability for pending cases
and the estimated cost for the ten-year maximum mathematical projection or in
the cost of an alternative settlement format, and the probable insurance
recovery, would not be material either to the financial condition of the company
or to its liquidity, although it could be material to earnings if it is
determined in a future period to be appropriate to record a reserve for this
difference. The period in which such a reserve may be recorded and the amount of
any reserve that may be appropriate cannot be determined at this time. Subject
to the uncertainties and limitations referred to elsewhere and based upon its
experience and other factors referred to above, the company believes it is
probable that substantially all of the expenses and any liability payments
associated with the asbestos-related property damage claims will be paid as a
result of the outcome of the California insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom, and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld, an alternative to Georgine
would be negotiated, and its experience, the company believes the
asbestos-related lawsuits and claims against the company would not be material
either to the financial condition of the company or to its liquidity, although
as stated above, the net effect of any future liabilities recorded in excess of
insurance assets could be material to earnings in such future period.
- 25 -
Reference is made to the litigation involving The Industry Network System, Inc.
(TINS), discussed on page 51. In 1994, a jury returned a verdict finding that
the company had not caused damages to TINS, and the court subsequently entered
judgment in the company's favor. TINS' motion for a new trial was subsequently
denied. TINS filed an appeal with the U.S. Court of Appeals for the Third
Circuit which issued a judgment in favor of the company. TINS' Petition for
Rehearing by the same panel was denied in December 1995. On January 24, 1996,
TINS filed a motion seeking further appellate review by the Circuit Court which
denied the motion. Also denied was a motion by TINS before the District Court to
rescind an earlier 1984 agreement of settlement. TINS has appealed this later
decision to the Circuit Court, and it is expected that this appeal will be
argued during the first half of 1997.
Reference is also made to environmental matters as discussed on page 46. The
company believes any sum it may have to pay in connection with environmental
matters in excess of amounts accrued would not have a material adverse effect on
its financial condition, liquidity or results of operations, although the
recording of any future costs may be material to earnings in such future period.
- --------------------------------------------------------------------------------
Book value per share at year-end (dollars)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
CONSOLIDATED RESULTS
Net sales of $2.16 billion were lower when compared with last year's net sales
of $2.33 billion which included $0.24 billion of sales from the ceramic tile
operations. Beginning in 1996, ceramic tile is reported on the equity method;
therefore, a year-to-year sales comparison cannot be made for this industry
segment. Sales growth occurred in the floor coverings and building products
segments. The floor coverings segment sales growth came primarily from
residential and commercial floor tile sold through the U.S. home center channel
and floor sales in Eastern Europe and Russia. In the building products segment,
strong commercial ceiling sales in the latter part of the year offset earlier
servicing problems resulting from severe weather conditions in the first quarter
1996. Industry products sales were adversely affected by competitive pressure in
European insulation products and lower global textile products sales which more
than offset the positive impact of increases in the gasket and specialty paper
business.
Earnings from continuing businesses after income taxes in 1996 were $164.8
million or $3.97 per share on a primary basis and $3.81 per share on a fully
diluted basis and included after-tax charges of $29.6 million for restructuring
and $22.0 million for costs associated with the discoloration of a limited
portion of flooring products. Earnings from continuing businesses after income
taxes in 1995 were $13.6 million and included a $46.6 million charge after tax
for restructuring and a loss of $116.8 million after tax related to the business
combination of Armstrong's ceramic tile operations with Dal-Tile International
Inc.
Net earnings for 1996 were $155.9 million, or $3.76 per share on a primary basis
and $3.60 per share on a fully diluted basis and included the restructuring and
discoloration charges mentioned above plus $8.9 million or $0.21 per share for
the company's portion of an extraordinary loss from Dal-Tile related to the
refinancing of Dal-Tile's outstanding debt. A reduction in Dal-Tile's interest
expense should occur as a result of the debt refinancing. Net earnings in 1995
were $123.3 million or $2.90 per share on a primary basis and $2.67 on a fully
diluted basis and included $25.8 million of after-tax earnings from the
discontinued operations of Thomasville Furniture Industries, Inc., and $83.9
million representing the after-tax gain from its sale.
The company's Economic Value Added (EVA) performance as measured by return on
EVA capital was 14.8% in 1996, exceeding 1995's return on EVA capital of 14.0%
and the company's 12% cost of capital. In 1997, the company's cost of capital
for EVA will be reduced to 11% partially due to lower interest rates and stock
price volatility.
Cost of goods sold in 1996 was 67.7% of sales, slightly lower than the 68.0%
recorded in 1995. The 1996 cost of goods sold included $5.9 million for charges
associated with the floor discoloration issue which were offset by lower raw
material and other manufacturing costs. The cost of goods sold in 1995 included
the impact of start-up costs of approximately $3.1 million related to the
insulation products facility in Mebane, North Carolina.
Selling, general and administrative (SG&A) expenses in 1996 were $413.2 million
which included $14.0 million of expenses related to the discoloration issue. In
1995, SG&A expenses were $457.0 million and included $59.9 million of SG&A
expenses of the ceramic tile operations which was reported on an equity basis in
1996.
The second-quarter 1996 before-tax restructuring charge for continuing
businesses of $46.5 million, or $29.6 million after tax (79 cents per share on a
primary basis and 70 cents per share on a fully diluted basis), related
primarily to the reorganization of corporate and business unit staff positions;
realignment and consolidation of the Armstrong and W.W. Henry installation
products businesses; restructuring of production processes in the Munster,
Germany, ceilings facility; early retirement opportunities for employees in the
Fulton, New York, gasket and specialty paper products facility; and write-down
of assets. These actions affected approximately
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500 employees, about two-thirds of whom were in staff positions. These
restructuring actions continued the company's ongoing efforts to streamline the
organization and enable the businesses to be the best-cost suppliers in their
markets. The charges were estimated to be evenly split between cash payments and
noncash charges. The majority of the cash outflow was expected to occur over 12
months. It was anticipated that ongoing cost reductions and productivity
improvements should permit recovery of the charges in less than two years. In
1995, restructuring charges of $71.8 million before tax or $46.6 million after
tax ($1.09 per share on a fully diluted basis) were recorded. These charges
related primarily to the closure of a plant in Braintree, Massachusetts, and for
severance and early retirement incentives for approximately 670 employees in the
North American resilient flooring business and the European industry products
and building products businesses.
Actual severance payments charged against restructuring reserves were $32.1
million in 1996 relating to the elimination of 724 positions, of which 323
terminations occurred since the beginning of 1996. As of December 31, 1996,
$50.3 million of reserves remained for restructuring actions.
In July, the company learned that discoloration in a limited portion of its
residential sheet flooring product lines was occurring. The problem was traced
to a raw material used in production primarily between September 1995 and July
1996. The manufacturing process was corrected to eliminate any further
occurrence of this problem. New production was shipped to customers to meet
demand for this product. A portion of the production of the affected product
lines was shipped to retailers and potentially installed in consumers' homes.
The remainder was in the company's, wholesalers' or retailers' inventory.
In September, the company recorded charges of $34.0 million before tax or $22.0
million after tax ($0.53 per share) for costs associated with the discoloration
issue. These charges included the write-down to realizable value of the
company's inventory on hand or to be returned from independent wholesalers and
the potential cost of removing and replacing discolored product installed in
consumers' homes. The company will continue to monitor claims levels associated
with these products and may make further adjustments in the reserve based on
experience. Based on information currently available, the company believes that
any additional loss would not be material to the financial condition of the
company or to its liquidity, although the recording of any future liabilities
may be material to earnings in such future period.
Interest expense in 1996 of $22.6 million was lower than 1995's interest expense
of $34.0 million. The primary reasons for the decrease were the lower levels of
short-term debt and lower interest expense requirements on long-term debt.
Armstrong's effective tax rate for continuing businesses in 1996 was 31.4%. In
1995, Armstrong's effective tax benefit for continuing businesses was 65.9%.
Removing the tax effects of the loss on the ceramic tile business combination,
the effective tax rate would have been 29.7%, reflecting tax benefits related to
reduced foreign and state income tax expense.
GEOGRAPHIC AREA RESULTS (see page 39)
UNITED STATES
Net sales in 1996 were $1.42 billion, slightly lower than the $1.59 billion
recorded in 1995 which included $0.24 billion of ceramic tile sales. Sales
through the home center channel had significant year-to-year increases. The
commercial markets for ceilings and the residential and commercial markets for
floor tile continue to show strength. U.S. residential sheet flooring sales were
slightly below 1995.
Operating income of $202.7 million was higher than 1995's operating income of
$7.7 million which included a $177.2 million loss due to the ceramic tile
business combination. An organizational effectiveness study to review the
company's staff support activities was implemented by late 1996, and the
restructuring activities associated with this study had an adverse impact on
operating income of $34.5 million before tax. Operating income was also
negatively affected by the one-time charge of $34.0 million related to the floor
discoloration issue mentioned above. Restructuring activities in 1995 resulted
in $45.5 million before tax charged against operating income. Operating income
for 1996 was positively impacted by higher sales levels in the floor coverings
and building products segments and was leveraged through ongoing cost reduction
efforts.
Export sales of Armstrong products from the U.S. to trade customers of $34.0
million increased nearly $1.9 million, or 6.1%, compared with 1995.
EUROPE
Sales by the European affiliates reflected the soft economy largely offset by
the ability to enter into new market areas such as Eastern Europe and Russia.
Net sales decreased 1.8% to $548.4 million compared with 1995. Insulation sales
were negatively impacted by competitive pressures, although they increased in
the latter half of 1996. Floor Products sales increased from 1995, setting
several quarterly sales records in 1996. Building Products sales increased
slightly, despite softened demand and competitive pressure in the Western
European commercial market segment. Operating income increased 26.8% over 1995,
primarily due to cost savings obtained from prior years' restructuring
activities. Restructuring charges in Europe were $11.0 million and $24.9 million
in 1996 and 1995, respectively. In floor products, increased volume in addition
to productivity improvements have resulted in improved profits in the
residential sheet business. European insulation products operating income has
been positively impacted by its continued efforts to be the best-cost supplier
in the industry.
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OTHER FOREIGN
Sales increased 4.9% over 1995, with ceiling sales in the Pacific Rim providing
a significant part of the growth. Sales growth in Latin America for Building
Products continues a trend established over the past three years. Operating
income increased 28.6% over 1995, with start-up costs for the new ceilings plant
in China totaling $3.8 million offset by lower costs in the Pacific area Floor
Products and Building Products Operations.
INDUSTRY SEGMENT RESULTS (see page 3)
FLOOR COVERINGS
In the floor coverings segment, 1996 net sales of $1.09 billion were slightly
above 1995's $1.05 billion and included a reduction of $14.1 million for
customer returns associated with the discoloration of a limited portion of its
Residential Inlaid Color Sheet Flooring products line. The adverse effect of
these returns and the small decline in the U.S. residential sheet business were
offset by increases in residential sheet flooring sales in Europe, especially
Eastern Europe and Russia, and sales of all products to U.S. home centers. In
the home center channel, which is serviced through the Corporate Retail Accounts
Division, the strategy of segmenting products for the home centers has proven to
be successful. In this channel, The Home Depot and Lowe's are important
customers of our resilient floor products. Laminate flooring, manufactured and
marketed in alliance with the F. Egger Company of Austria, had a good initial
market reaction.
Operating income included a $34.0 million charge associated with the
discoloration issue and a $14.5 million restructuring charge primarily related
to the consolidation of the separate Armstrong and W.W. Henry installation
products businesses and to other reorganizations in the floor products
operations staff. Operating income in 1995 included a restructuring charge of
$25.0 million primarily related to the elimination of positions in North
America. Records were set in both the U.S. residential and commercial tile
businesses. Lower raw material costs and increased manufacturing productivity
had a positive impact on the cost profile of this business. However, operating
income was adversely impacted by start-up costs for laminate flooring. Capital
expenditures in this segment increased $40.4 million to $117.7 million and were
directed toward the rollout of the Quest display and merchandising system and
toward improved manufacturing process effectiveness.
- --------------------------------------------------------------------------------
Net trade sales ($ millions)
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[BAR GRAPH APPEARS HERE]
Outlook
The rollout of the Quest merchandising system with retailers was successful,
with the October 1996 introduction in Canada providing additional impetus. The
company believes that this state-of-the-art display system will provide a
competitive advantage in the residential sheet flooring market segment. Laminate
flooring, which was introduced to the U.S. market in late 1996, was introduced
in Canada in early 1997. The company expects that the laminate flooring alliance
with F. Egger Company, along with other business partnerships, should provide
additional growth opportunities and manufacturing capacity for the floor
coverings segment. The company will continue its strategy to increase its brand
recognition through increased advertising. These and other merchandising costs
plus small increases in raw material costs should be offset by the significant
productivity improvements that have been occurring worldwide. In the home center
channel, increases in the number of The Home Depot and Lowe's stores, in
addition to the segmentation strategy, should contribute to sales growth. The
company plans to have 14 independent regional distribution centers established
by the end of 1997 to service these customers. (Five distribution centers were
in place by the end of 1996.)
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Operating income ($ millions)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
BUILDING PRODUCTS
In the building products segment, net sales increased over 5.3% when compared to
1995 with growth primarily in North America and the Pacific Rim. North American
sales increased significantly with the major areas of market strength in the
commercial market segment and the home center channel. Manufacturing has
recovered from the severe weather conditions of early 1996, while inventories
and service levels have stabilized in anticipation of sales growth in 1997.
Operating income increased to $95.1 million, 3.1% over 1995. Operating income in
1996 included an $8.3 million restructuring charge, the majority of which
related to simplifying production processes in the Munster, Germany, ceilings
facility. The balance of the restructuring charge was associated with staff
reorganizations and asset write-downs in Europe. In 1995, operating income was
adversely impacted by a $6.3 million restructuring charge, primarily related to
elimination of
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administrative functions in the European operations. In the earlier part of
1996, operating income had been adversely impacted by weather-related problems
in North America and Europe. During 1996, additional costs were incurred for
integration and start-up of the new metal ceilings products business and the
wet-formed ceiling products plant in China. However, higher sales volume in
1996, improvements in its production processes and reductions in its
nonmanufacturing expenses more than offset these additional costs. Capital
expenditures in this segment increased by $18.5 million to $67.7 million.
Excellent sales and profit growth continued in North America and Europe from
WAVE, the grid system joint venture with Worthington Industries.
Outlook
Economic forecasts indicate continued growth in the U.S. commercial business and
recovery in western and southern Europe. New products play an important part of
the global building products segment. The most recent impact product is Ultima
ceilings which provides exceptional noise reduction, sag resistance and a
durable surface for commercial interiors. In 1996, the company announced its
planned joint venture with Partek Insulation, the foremost producer of rockwool-
based insulation in Finland and Sweden, to manufacture and distribute high-
performance, soft-fiber ceilings throughout Europe. The addition of this
alliance will strengthen the company's Scandinavian distribution business and
enhance its current ceiling line in Europe. The company believes that this new
product line, in addition to the metal ceilings business which will include the
planned joint venture with Hunter Douglas, will provide additional growth
opportunities primarily in Europe and serve as a foundation for growth in other
geographic areas. The ceilings plant in China, aimed at servicing the fast-
growing geographic market, began production in late 1996.
INDUSTRY PRODUCTS
Sales for the industry products segment of $346.2 million in 1996 decreased less
than 1% when compared with 1995's sales of $348.8 million. Sales in 1995
included $7.9 million of an exchange translation benefit when compared to 1996
rates and $4.9 million from the champagne cork business divested in 1995.
Operating income for 1996 was $40.1 million and includes a $4.0 million
restructuring charge, the majority of which related to an early retirement
offering to employees of the Fulton, New York, gasket and specialty paper
products facility. Operating income in 1995 of $9.3 million included a $31.4
million restructuring charge related to the closing of the Braintree,
Massachusetts, plant and elimination of employee positions in Europe. For
insulation products, cost reductions in Europe have enabled the business to
remain competitive through lower selling prices and thus to continue to gain
market share while in the U.S. sales growth was achieved through increased
market share. The Mebane, North Carolina, facility, which became operational in
1996, will provide low-cost manufacturing for the U.S. As a result of these
strategies, operating income for insulation products has increased. Income
increased significantly for Armstrong Industrial Specialties, Inc., especially
in its gaskets business. The textile products business continues to implement
several cost-saving initiatives to reduce its overhead. Despite these changes,
the business continued to generate a small operating loss of approximately $3.0
million due to continued worldwide market softness in the textile industry. In
1995, the company announced its intentions to discuss with potential buyers the
possible sale of the Textile Products Operations. Capital expenditures in the
industry products segment decreased $22.5 million from the higher levels of 1995
when expenditures were made for the construction of two plants and for the
acquisition of another plant.
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Capital additions ($ millions)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
Outlook
It is anticipated that the European insulation market environment will continue
to be price competitive, and further cost-saving actions are planned to achieve
volume increases through becoming the best-cost supplier in the industry. In
addition, this business is continuing to seek profitable growth into new
geographic areas such as Central Europe and Asia. Armstrong Industrial
Specialties plans to take advantage of its implementation of effective logistic
systems to enable on-time, defect-free delivery of its products. The company
believes the market for textile products will stabilize during 1997, at which
time cost reductions in the business will provide a better return. The
evaluation of strategic alternatives, including a possible sale, continues for
this business.
CERAMIC TILE
In the ceramic tile segment, 1996 results represent the company's share of the
after-tax net income of the Dal-Tile business combination reduced by the
amortization of the excess of the company's initial investment in Dal-Tile over
the underlying equity in net assets. Operating income for 1995 reflects the
pre-tax operating income of the ceramic tile operations, primarily the American
Olean Tile Company. Dal-Tile took several initiatives during 1996 to integrate
the business, including the closure of two plants and numerous sales service
centers. Sales growth in 1996 for ceramic tile occurred primarily in the home
center and independent distributor channels.
Outlook
Dal-Tile will continue its efforts to integrate the two businesses and enhance
operating efficiencies and capacity utilization. Continued growth is expected in
the home center channel and independent distributor channel, and planned
capacity expansions should provide a platform to improve Dal-Tile's
- 29 -
market share. Significant interest expense savings are anticipated from the
refinancing of existing debt with proceeds from the initial public offering
completed in 1996.
FOURTH QUARTER 1996 COMPARED WITH FOURTH QUARTER 1995
Sales from continuing businesses of $528.6 million were $29.0 million lower than
1995's fourth-quarter sales of $557.6 million which included $59.9 million of
ceramic tile sales. Sales for the ceramic tile business combination are not
included in the results for 1996 in accordance with the change to equity-based
accounting. Sales increased in all segments other than ceramic tile, assisted
primarily by growth in the following business units: the commercial and
residential floor tile business units, the commercial ceilings business and the
European insulation business.
Earnings from continuing businesses were $53.7 million, or $1.28 per share.
These results compare with 1995's fourth-quarter loss from continuing businesses
of $74.7 million or a loss of $2.09 per share on both a primary and fully
diluted basis. Fourth-quarter 1995's results included an after-tax loss of
$116.8 million ($2.73 per share on both a primary and fully diluted basis)
related to the Dal-Tile business combination.
The increase in earnings from continuing businesses reflects, in addition to the
effect of 1995's loss, a lower cost of goods sold of 69.2% when compared with
the 70.7% of 1995's fourth quarter. Lower overall raw material costs in 1996
and strategic initiatives to become the industry's best-cost supplier have
lowered the company's manufacturing costs.
All segments reported increases in operating income. In the floor coverings
segment, operating income was $45.6 million compared with $35.1 million in 1995.
Sales increases in residential and commercial floor tile, in addition to a sales
increase in residential sheet flooring, were the major contributors to the
growth. Fourth-quarter operating income for building products was $21.7 million
compared with 1995 fourth-quarter income of $19.8 million. The significant
factors driving this increase were sales growth, lower costs from productivity
improvements and lower costs of raw materials.
Industry products operating income of $9.9 million increased from $5.7 million
in the fourth quarter 1995. Sales volume continues to build in Europe and North
America in a turnaround from weaker levels earlier in 1996.
The ceramic tile segment fourth-quarter results, of $4.7 million, represent
Armstrong's after-tax share of the net income of the Dal-Tile business
combination and the amortization of the excess of the company's investment in
Dal-tile over the underlying equity in net assets. Prior year's fourth-quarter
results of $2.6 million, excluding the $177.2 million loss due to the ceramic
tile business combination, reflect the pre-tx operating income of the ceramic
tile operations. This segment continues to experience sales growth through the
home centers and independent distributor channels and significant cost savings
from the integration of the two businesses.
Armstrong's effective tax rate for continuing businesses in the fourth-quarter
1996 was 31.4%. In fourth quarter 1995, Armstrong had an effective tax benefit
for continuing businesses of 40.1%. Removing the tax effects of the loss on the
ceramic tile business combination, the effective tax rate would have been 19.9%.
This favorable rate included tax benefits related to reductions in foreign and
state income tax expense.
In December 1995, the company sold the stock of Thomasville Furniture
Industries, Inc. to INTERCO Incorporated. As a result of the sale, an after-tax
gain of $83.9 million, or $2.24 per share on primary basis and $1.96 on a fully
diluted basis, was recorded. The fourth-quarter 1995 earnings from this
discontinued business were $7.6 million, or $0.20 per share on a primary basis
and $0.18 on a fully diluted basis.
Fourth-quarter 1996 net earnings were $53.2 million compared with $16.8 million
in 1995. Net earnings per share were $1.27 million compared with 1995's $0.35 on
a primary basis and $0.34 on a fully diluted basis.
- --------------------------------------------------------------------------------
1995 COMPARED WITH 1994
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 35), net cash
provided by operating activities was sufficient to cover payment of dividends
and the investment in plant, property and equipment. The remaining cash,
combined with increases in short-term debt, cash proceeds from the exercised
stock options and sale of assets, was used to cover the repurchase of shares of
the company's common stock for the treasury, the increase in cash and cash
equivalents, acquisitions, reduction of long-term debt and purchase of computer
software. Acquisitions in 1995 included a gasket materials and specialty paper
manufacturing facility in New York and a metal ceilings production plant in
England.
In December, the company completed two major transactions. First, the company
sold its interests in Thomasville Furniture Industries, Inc., a wholly owned
subsidiary, to INTERCO International Inc. The purchase price of $331.2 million
included INTERCO's assumption of approximately $8 million of Thomasville debt.
An after-tax gain of $83.9 million, or $1.96 per share on a fully diluted basis,
was recorded on the sale.
Second, the company entered into a business combination with Dal-Tile
International Inc. Armstrong exchanged $27.6 million in cash and the stock of
its ceramic tile operations, consisting primarily of American Olean Tile
Company, a wholly owned subsidiary, for a 37% ownership of the combined company.
The after-tax loss on the transaction was $116.8 million, or $2.73 per share on
a fully diluted basis.
During the third quarter 1995, the company sold the champagne cork business in
Spain and announced its intention to discuss with potential buyers the possible
sale of the textile products operation. The divestiture of the champagne cork
business did not have a significant impact on financial results.
These actions showed the company's commitment to focus its efforts in its core
businesses and to divest businesses that do not earn in excess of their cost of
capital. The company used the net proceeds from these transactions to expand its
core businesses internally (with capital expenditures to strengthen the
businesses) and externally (with acquisitions to expand their size and scope),
and continued with its program of repurchasing shares of common stock.
In November 1994, the Board of Directors authorized the company to repurchase up
to 2.5 million shares of its common stock, either in the open market or in
negotiated transactions. During 1995, the company repurchased 782,110 shares
with a cash outlay of $40.6 million. Since the inception of the program, the
company had repurchased 1,052,110 shares with a total cash outlay of $51.1
million as of December 31, 1995.
Working capital was $346.8 million as of December 31, 1995, $37.6 million lower
than the $384.4 million recorded at year-end 1994. The reduction in working
capital resulted primarily from the $79.6 million net reduction in current
assets and liabilities after the change to equity-based accounting for the
ceramic tile business combination completed December 29, 1995. Also contributing
to the reduction in working capital were higher levels of accrued expenses,
primarily as a result of accruals for restructuring actions and higher current
installments on long-term debt. The effect of the ceramic tile business
combination and higher short-term liabilities was partially offset by the
increase in cash resulting from the sale of Thomasville, a decrease in
receivables and a decrease in inventories. The majority of the change in
receivables was due to the transfer of American Olean Tile receivables to Dal-
Tile as a part of the business combination. Although inventories decreased by
$33.2 million, without the effects of the business combination, inventories
would have increased $30.9 million, primarily due to the building of finished
stock for anticipated service level requirements. Included in these increases
was approximately $8.0 million due to the translation of foreign currency
receivables and inventories to U.S. dollars.
The 1995 year-end ratio of current assets to current liabilities was 1.92 to 1
compared with a ratio of 2.11 to 1 reported in 1994. Excluding the effects of
the ceramic tile business combination, the ratio remained unchanged when
compared with 1994.
Long-term debt, excluding the company's guarantee of the ESOP loan, was reduced
by $48.9 million in 1995. At December 31, 1995, long-term debt of $188.3 million
represented 14.9% of total capital compared with 18.9% at the end of 1994. The
1995 and 1994 year-end ratios of total debt (including the company's guarantee
of the ESOP loan) as a percent of total capital were 38.5% and 41.4%,
respectively.
CONSOLIDATED RESULTS
Net sales of $2.33 billion on a continuing business basis were once again an
all-time sales record for any year in the company's history. These results were
4% higher than the $2.23 billion recorded in 1994. The growth was largely due to
increased sales in both the global, particularly European, non-residential and
U.S. home center market segments. In keeping with one of the company's four key
strategies, 1995 saw the introduction of new products. The resilient flooring
business announced new floor products, primarily for the residential segment, at
its convention in December. Building Products Operations introduced a new
high-style, high-performance ceiling line, called Ultima, targeted to the
nonresidential segment. New glazed wall and floor tile products were introduced
by the ceramic tile operations.
Earnings from continuing businesses before income taxes were $8.2 million, a
decrease from the $265.8 million in 1994. The earnings decline was attributable
to restructuring charges of $71.8 million and the loss of $177.2 million related
to the business combination of Armstrong's ceramic tile operations with
Dal-Tile.
Net earnings for the year were $123.3 million, compared with $210.4 million in
1994. Net earnings per share of common stock for 1995 were $2.90 on a primary
basis and $2.67 on a fully diluted basis. In 1994, net earnings per share of
common
- 30 -
stock were $5.22 on a primary basis and $4.64 on a fully diluted basis. 1995's
net earnings included $25.8 million of after-tax earnings from the discontinued
operations of Thomasville Furniture Industries, Inc., and $83.9 million of the
after-tax gain from its sale. 1994's net earnings included $18.6 million in
after-tax gains resulting from the resolution of tax audits, the sale of its
majority interest in a subsidiary and the reduction of the company's estimated
health care liability.
The company's level of performance in Economic Value Added (EVA) as measured by
return on capital was 14% in 1995, exceeding the company's 12% cost of capital.
Cost of goods sold in 1995 was 68.0% of sales, slightly higher than the 66.7%
recorded in 1994. This increase largely reflects start-up costs at the new
insulation products facility in Mebane, North Carolina, and the impact of an
unfavorable sales mix in residential flooring sales in North America. Included
in the 1994 cost of goods sold was a one-time gain of $12.2 million reflecting a
reduction in the company's estimated health care liability for employees on
long-term disability.
Selling, general and administrative (SG&A) costs in 1995 were 1.7% higher than
1994. The increased costs primarily resulted from the translation of foreign
currency expenses to U.S. dollars at higher exchange rates. Excluding these
adjustments, expenses would have decreased by 1%.
Results for 1995 included restructuring charges of $71.8 million before tax or
$46.6 million after tax, or $1.09 per share on a fully diluted basis. In the
first quarter of 1995, the company announced plans to close a plant in
Braintree, Massachusetts. The before-tax restructuring charge of $15.6 million
included costs accrued for the elimination of 223 salaried and hourly employee
positions, for the obsolescence of equipment and for other costs to be incurred
after operations cease. Cash outlays were about one-third of the total charges
with the majority of the cash outlay occurring in early 1996. The plant ceased
operations on February 1,1996.
In the third quarter, the company recorded a restructuring charge of $56.2
million before tax or $36.5 million after tax related to the company's ongoing
efforts to streamline the organization and enable the businesses to be the
best-cost suppliers in their markets. The restructuring charges primarily
related to severance and early retirement incentives for approximately 670
employees, half of whom are hourly with the other half salaried. Nearly 40% of
the $56.2 million charge was related to the North American resilient flooring
business, while another 40% was related to the European Operations, primarily in
its industry products and building products segments. The balance was related to
corporate and other operating segments. The charges were estimated to be evenly
split between cash payments throughout 1996 and noncash charges, primarily to
cover retirement-related expenses. It was anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years.
The company's interest expense increased due to higher debt levels during the
year and charges related to deferred compensation plans.
Armstrong's effective tax rate for continuing businesses for 1995, excluding the
tax benefit on the loss related to the ceramic tile business combination, was
29.7% compared with a 29.6% rate in 1994.
GEOGRAPHIC AREA RESULTS (see page 39)
UNITED STATES
Sales increased slightly while operating income decreased when compared with
1994. Higher sales levels were generated through the national home center and
mass merchandiser channels, but were offset by lower levels in the
professionally installed resilient flooring segment. Sales price increases
occurred in most of the U.S. businesses; however, operating income was impacted
by the loss on the ceramic tile business combination, restructuring charges,
higher raw material prices and start-up costs of the North Carolina insulation
products facility. 1994 operating income included a one-time gain of $14.6
million through the reduction in the company's estimated health care liability
for employees on long-term disability.
Export sales of Armstrong products to trade customers increased $6.0 million, or
22.9%, compared with 1994.
EUROPE
During 1995, economic conditions continued to improve and increased demand in
Armstrong's end-use markets. For the year, sales increased 15.6%. All the
company's European businesses recorded year-to-year sales increases with the
building products segment being the most significant. Operating income decreased
by nearly 17%, impacted by restructuring charges. Partially offsetting these
charges was improved productivity--much of it related to restructuring actions
taken in 1993. The results in the European insulation products business
continued to be adversely affected by competitive pressure. An organizational
effectiveness study was completed in 1995 to align the staff with the global
business units and reduce costs.
OTHER FOREIGN
Sales in 1995 increased slightly when compared with 1994, assisted by an
increase in building products sales to China. Operating income also increased
slightly, but reflected continued competitive pressure and higher expenses
needed to expand to China and other Far East markets. The company continued to
extend its investments in the Pacific area with the start of construction of a
building products manufacturing facility in Shanghai, China, to take advantage
of this area's market opportunity.
INDUSTRY SEGMENT RESULTS (see page 3)
FLOOR COVERINGS
The floor coverings segment sales decreased less than 1% from 1994. Higher home
center and nonresidential sales volume was offset by lower sales in U.S.
professionally installed residential sheet flooring. Operating income decreased
23.5% compared with 1994. Operating income included a restructuring charge of
$25.0 million, 90% of which related to
- 31 -
elimination of employee positions in North America. Operating income was
favorably impacted by expense reductions and higher selling prices, introduced
early in 1995, that partially offset higher raw material prices. European sales
growth and profitability remained strong in this segment, with both hitting
record levels. Capital expenditures in this segment increased by $20.6 million
to $77.3 million and were directed toward modernization of equipment,
manufacturing capacity and operating efficiencies.
BUILDING PRODUCTS
The announcement in October 1995 that U.S. Building Products Operations was the
first building materials manufacturer and marketer to win a Malcolm Baldrige
National Quality Award demonstrated Building Products commitment to business
excellence. All geographic areas in the building products segment contributed to
the 8% sales increase with about one-third of the increase due to the
translation of foreign currencies to a weaker U.S. dollar. The European and
Pacific areas continued to show the strongest growth. In 1995, sales were
assisted by the worldwide introduction of Ultima, a high-performance, high-style
ceiling.
Operating income of $92.2 million included a restructuring charge of $6.3
million mainly related to administrative functions in the European operations.
Sales growth, primarily in the worldwide commercial markets, higher selling
prices and continuing cost reduction efforts were positive factors on operating
income. WAVE, the grid system joint venture with Worthington Industries, has
been highly successful in both North America and Europe and delivered excellent
results. Capital expenditures in this segment, which increased by $17.7 million
to $49.2 million, were directed at increasing capacity through productivity
improvements.
INDUSTRY PRODUCTS
The industry products segment's sales grew by almost 12%, with the weaker U.S.
dollar accounting for two-thirds of the increase. Operating income, which
decreased significantly, includes a $31.4 million restructuring charge related
to the closing of the Braintree, Massachusetts, plant and elimination of
employee positions in Europe. Operating income for insulation products, the
largest business in this segment, was essentially flat year-to-year with gains
on translations of foreign currencies to U.S. dollars offset by the
restructuring charges. Also adversely affecting operating income was the need to
meet competitive European pricing and the start-up costs of $6.1 million for the
new Mebane, North Carolina, insulation products plant.
In 1995, the Gasket and Specialty Paper Products Operations became the first
U.S. producer of soft gasket material to obtain an ISO 9001 registration. Gasket
and specialty paper products sales increased from 1994 principally reflecting
the acquisition in March of a gasket and specialty paper manufacturing facility
in Beaver Falls, New York. However, operating income was negatively impacted by
lower automotive and diesel market sales and higher raw material costs.
Effective in 1996, this business became a wholly owned subsidiary company,
Armstrong Industrial Specialties, Inc. In the third quarter 1995, the company
divested the champagne cork business in Spain. The textile products business
generated a modest operating loss; however, the loss was lower than the amount
recorded in 1994.
CERAMIC TILE
The ceramic tile segment recorded sales increases in both the commercial and
residential market segments of the business with the residential segment
continuing to reflect the highest growth.
In December 1995, the company entered into a business combination with Dal-Tile
International Inc. to strengthen its position in the worldwide market. The
before-tax loss from this business combination was $177.2 million.
Excluding this loss, the ceramic tile segment's operating income improved
significantly over 1994 aided by new product offerings including glazed floor
and wall tile targeted at opening price points.
- 32 -
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
QUARTERLY FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------
Quarterly financial information (millions except for per-share data) First Second Third Fourth Total year
- ---------------------------------------------------------------------------------------------------------------------------------
1996 Net sales $501.2 $563.2 $563.4 $258.6 $2,156.4
Gross profit 156.7 198.4 178.4 163.0 696.5
Earnings from continuing business 36.3 30.6 44.2 53.7 164.8
Net earnings 36.3 30.6 35.8 53.2 155.9
Per share of common stock:*
Primary: Earnings from continuing businesses 0.88 0.73 1.06 1.28 3.97
Net earnings 0.88 0.73 0.86 1.27 3.76
Fully diluted: Earnings from continuing businesses 0.81 0.68 1.06 1.28 3.81
Net earnings 0.81 0.68 0.86 1.27 3.60
Dividends per share of common stock 0.36 0.40 0.40 0.40 1.56
Price range of common stock--high 64 1/2 61 5/8 65 1/2 75 1/4 75 1/4
price range of common stock--low 57 7/8 53 1/2 51 7/8 61 3/4 51 7/8
- ---------------------------------------------------------------------------------------------------------------------------------
1995 Net sales $558.8 $596.8 $611.8 $557.6 $2,325.0
Gross profit 183.1 194.6 203.6 162.6 743.9
Earnings (loss) from continuing business 26.5 47.4 14.4 (74.7) 13.6
Net earnings 34.4 52.7 19.4 16.8 123.3
Per share of common stock:*
Primary: Earnings (loss) from continuing businesses 0.61 1.17 0.29 (2.09) (0.02)
Net earnings 0.82 1.31 0.42 0.35 2.90
Fully diluted: Earnings (loss) from continuing businesses 0.57 1.05 0.28 (2.09) (0.02)
Net earnings 0.75 1.18 0.40 0.34 2.67
Dividends per share of common stock 0.32 0.36 0.36 0.36 1.40
Price range of common stock--high 48 1/2 52 60 1/2 64 1/8 64 1/8
price range of common stock--low 38 3/8 43 50 1/4 52 7/8 38 3/8
- ---------------------------------------------------------------------------------------------------------------------------------
*The sum of the quarterly earnings per-share data does not always equal the
total year amounts due to changes in the average shares outstanding and, for
fully diluted data, the exclusion of the antidilutive effect in certain
quarters.
CONSOLIDATED STATEMENTS OF EARNINGS
- -------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1996 1995 1994
==========================================================================================================================
Net sales $2,156.4 $2,325.0 $2,226.0
Cost of goods sold 1,459.9 1,581.1 1,483.9
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 696.5 743.9 742.1
Selling, general and administrative expenses 413.2 457.0 449.2
Equity (earnings) from affiliates (19.1) (6.2) (1.7)
Restructuring charges 46.5 71.8 --
Loss from ceramic tile business combination -- 177.2 --
- --------------------------------------------------------------------------------------------------------------------------
Operating income 255.9 44.1 294.6
Interest expense 22.6 34.0 28.3
Other expense (income), net (6.9) 1.9 0.5
- --------------------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses before income taxes 240.2 8.2 265.8
Income taxes 75.4 (5.4) 78.6
- --------------------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses 164.8 13.6 187.2
- --------------------------------------------------------------------------------------------------------------------------
Discontinued business:
Earnings from operations of Thomasville Furniture Industries, Inc.
(less income taxes of $13.9 in 1995 and $15.5 in 1994) -- 25.8 23.2
Gain on disposal of discontinued business
(less income taxes of $53.4) -- 83.9 --
- --------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary loss 164.8 123.3 210.4
Extraordinary loss, less income taxes of $0.7 (8.9) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 155.9 $ 123.3 $ 210.4
- ------------------------------------------------------------------------------============================================
Dividends paid on Series A convertible preferred stock 8.8 18.8 19.0
Tax benefit on dividends paid on unallocated preferred shares 2.0 4.5 4.9
- --------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 149.1 $ 109.0 $ 196.3
- ------------------------------------------------------------------------------============================================
Per share of common stock (See note on page 37-51):
Primary:
Earnings (loss) from continuing businesses $ 3.97 $ (0.02) $ 4.60
Earnings from discontinued business -- 0.68 0.62
Gain on sale of discontinued business -- 2.24 --
Earnings before extraordinary loss 3.97 2.90 5.22
Extraordinary loss (0.21) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3.76 $ 2.90 $ 5.22
- --------------------------------------------------------------------------------===========================================
Fully diluted:
Earnings (loss) from continuing businesses $ 3.81 $ (0.02) $ 4.10
Earnings from discontinued business -- 0.60 0.54
Gain on sale of discontinued business -- 1.96 --
Earnings before extraordinary loss 3.81 2.67 4.64
Extraordinary loss (0.21) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3.60 $ 2.67 $ 4.64
- --------------------------------------------------------------------------------===========================================
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 33 -
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Millions except for numbers of shares and per-share data As of December 31 1996 1995
==========================================================================================================================
Assets
Current assets:
Cash and cash equivalents $ 65.4 $ 256.9
Accounts and notes receivable
(less allowance for discounts and losses: 1996--$34.9; 1995--$29.0) 216.7 217.9
Inventories 205.7 195.5
Income tax benefits 49.4 26.9
Other current assets 27.3 25.5
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 564.5 722.7
- --------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment
(less accumulated depreciation and amortization: 1996--$974.9; 1995--$975.9) 964.0 878.2
Insurance for asbestos-related liabilities 141.6 166.0
Investment in affiliates 204.3 162.1
Other noncurrent assets 261.2 220.8
- --------------------------------------------------------------------------------------------------------------------------
Total assets $2,135.6 $2,149.8
- ------------------------------------------------------------------------------------------------==========================
Liabilities and shareholders' equity
Current liabilities:
Short-term debt 14.5 22.0
Current installments of long-term debt 13.7 40.1
Accounts payable and accrued expenses 273.3 297.4
Income taxes 19.5 16.4
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 321.0 375.9
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt 219.4 188.3
Employee Stock Ownership Plan (ESOP) loan guarantee 221.3 234.7
Deferred income taxes 30.5 16.5
Postretirement and postemployment benefit liabilities 247.6 244.5
Asbestos-related liabilities 141.6 166.0
Other long-term liabilities 151.9 138.9
Minority interest in subsidiaries 12.3 10.0
- --------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 1,024.6 998.9
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Class A preferred stock. Authorized 20 million shares;
issued 5,654,450 shares of Series A convertible preferred stock;
outstanding: 1996--0 shares; 1995--5,421,998 shares;
cumulative retired: 1996--5,654,450 shares; 1995--232,452 shares -- 258.9
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 162.1 49.3
Reduction for ESOP loan guarantee (217.4) (225.1)
Retained earnings 1,222.6 1,133.8
Foreign currency translation 17.3 18.0
- --------------------------------------------------------------------------------------------------------------------------
1,236.5 1,286.8
- --------------------------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost:
1996--10,714,572 shares; 1995--15,014,098 shares 446.5 511.8
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 790.0 775.0
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,135.6 $2,149.8
- ------------------------------------------------------------------------------------------------==========================
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 34 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Millions Years ended December 31 1996 1995 1994
==========================================================================================================================
Cash flows from operating activities:
Net earnings $ 155.9 $ 123.3 $ 210.4
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization excluding furniture 123.7 123.1 120.7
Depreciation and amortization for furniture -- 13.0 12.7
Deferred income taxes 11.2 (8.7) 14.6
Equity change in affiliates (18.2) (6.3) (0.9)
Gain on sale of discontinued businesses -- (83.9) --
Loss on ceramic tile business combination net of taxes -- 116.8 --
Loss from restructuring activities 46.5 71.8 --
Restructuring payments (37.4) (18.3) (20.2)
(Increase) decrease in net assets of discontinued business -- 2.3 (4.4)
Extraordinary loss 8.9 -- --
Changes in operating assets and liabilities net of
effect of discontinued business, restructuring and dispositions:
(Increase) decrease in receivables 3.6 6.9 (18.8)
(Increase) in inventories (11.5) (34.3) (6.8)
(Increase) decrease in other current assets (22.8) 9.8 (3.6)
(Increase) in other noncurrent assets (57.4) (23.4) (18.9)
Increase (decrease) in accounts payable and accrued expenses (3.2) (37.0) 32.1
Increase (decrease) in income taxes payable 2.5 (8.2) (10.1)
Increase (decrease) in other long-term liabilities 15.2 20.0 (5.3)
Other, net 3.9 3.1 3.7
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 220.9 270.0 305.2
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment excluding furniture (220.7) (171.8) (134.2)
Purchases of property, plant and equipment for furniture -- (14.3) (14.1)
Investment in computer software (7.3) (10.9) (4.3)
Proceeds from sale of land, facilities and discontinued businesses 3.6 342.6 12.8
Acquisitions -- (20.7) --
Investment in affiliates (15.4) (27.6) --
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (239.8) 97.3 (139.8)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt (7.1) 3.2 (89.6)
Issuance of long-term debt 40.8 -- --
Reduction of long-term debt (40.0) (20.1) (5.7)
Cash dividends paid (70.1) (70.8) (66.2)
Purchase of common stock for the treasury (79.6) (41.3) (10.6)
Preferred stock redemption (21.4) (2.9) --
Proceeds from exercised stock options 6.2 7.0 8.4
Other, net (0.6) 2.3 (0.8)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (171.8) (122.6) (164.5)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (0.8) 0.2 2.0
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ (191.5) $ 244.9 $ 2.9
- ------------------------------------------------------------------------------============================================
Cash and cash equivalents at beginning of year $ 256.9 $ 12.0 $ 9.1
- ------------------------------------------------------------------------------============================================
Cash and cash equivalents at end of year $ 65.4 $ 256.9 $ 12.0
- ------------------------------------------------------------------------------============================================
Supplemental cash flow information
Interest paid $ 20.7 $ 29.6 $ 31.9
Income taxes paid $ 65.5 $ 76.9 $ 62.0
- ------------------------------------------------------------------------------============================================
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 35 -
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1996 1995 1994
==========================================================================================================================
Series A convertible preferred stock:
Balance at beginning of year $ 258.9 $ 261.6 $ 263.9
Conversion of preferred stock to common (241.5) -- --
Shares retired (17.4) (2.7) (2.3)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ -- $ 258.9 $ 261.6
- --------------------------------------------------------------------------------------------------------------------------
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 $ 49.3 $ 39.3 $ 29.7
Gain in investment in affiliates 14.5 -- --
Minimum pension liability adjustments (7.4) -- --
Conversion of preferred stock to common 102.4 -- --
Stock issuances 3.3 10.0 9.6
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 162.1 $ 49.3 $ 39.3
- --------------------------------------------------------------------------------------------------------------------------
Reduction for ESOP loan guarantee:
Balance at beginning of year $ (225.1) $ (233.9) $ (241.8)
Principal paid 13.4 10.7 8.4
Loans to ESOP (4.2) -- --
Accrued compensation (1.5) (1.9) (0.5)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (217.4) $ (225.1) $ (233.9)
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $1,133.8 $1,076.8 $ 927.7
Net earnings for year 155.9 123.3 210.4
Tax benefit on dividends paid on unallocated common shares 1.0 -- --
Tax benefit on dividends paid on unallocated preferred shares 2.0 4.5 4.9
- --------------------------------------------------------------------------------------------------------------------------
Total $1,292.7 $1,204.6 $1,143.0
- --------------------------------------------------------------------------------------------------------------------------
Less dividends:
Preferred stock
$3.462 per share $ 8.9 $ 18.8 $ 19.0
Common stock
$1.56 per share in 1996; 61.2
$1.40 per share in 1995; 52.0
$1.26 per share in 1994; 47.2
- --------------------------------------------------------------------------------------------------------------------------
Total dividends $ 70.1 $ 70.8 $ 66.2
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,222.6 $1,133.8 $1,076.8
- --------------------------------------------------------------------------------------------------------------------------
Foreign currency translation:
Balance at beginning of year $ 18.0 $ 8.3 $ (3.4)
Translation adjustments and hedging activities (4.4) 10.9 11.7
Allocated income taxes 3.7 (1.2) --
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 17.3 $ 18.0 $ 8.3
- --------------------------------------------------------------------------------------------------------------------------
Less treasury stock at cost:
Balance at beginning of year $ 511.8 $ 468.9 $ 458.5
Stock purchases 81.5 41.3 10.6
Conversion of preferred stock to common (139.1) -- --
Stock issuance activity, net (7.7) 1.6 (0.2)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 446.5 $ 511.8 $ 468.9
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 790.0 $ 775.0 $ 735.1
==========================================================================================================================
The Notes to Consolidated Financial Statements, pages 37-51, are an integral
part of these statements.
- 36 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The 1995 and 1994 consolidated financial statements have been restated from the
1995 annual report to include the historical results of the ceramic tile
operations on an operating or consolidated line item basis rather than under the
equity method.
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.
Consolidation Policy. The consolidated financial statements and accompanying
- --------------------
data in this report include the accounts of the parent Armstrong World
Industries, Inc., and its domestic and foreign subsidiaries. All significant
intercompany transactions have been eliminated from the consolidated statements.
Earnings per Common Share. In the third quarter, the employee stock ownership
- -------------------------
plan (ESOP) and retirement savings plan were merged resulting in the conversion
of convertible preferred shares into common stock. Primary earnings per share
for "Earnings from continuing businesses" and for "Net earnings" in 1996 are
determined by dividing the earnings, after deducting preferred dividends (net of
tax benefits on unallocated shares), by the average number of common shares
outstanding, including the converted shares from the conversion date forward.
Fully diluted earnings per share for 1996 include the shares of common stock
outstanding and the adjustments to common shares and earnings required to
portray the convertible preferred shares on an "if converted" basis prior to
conversion. The earnings per share calculation for 1996 reflects different
levels of shares for primary and fully diluted calculations since the converted
shares are only included in the weighted average common shares outstanding from
the conversion date forward.
Advertising Costs. The company's practice is to expense the costs of advertising
- -----------------
as they are incurred.
Postretirement Benefits. The company has plans that provide for medical and life
- -----------------------
insurance benefits to certain eligible employees when they retire from active
service. Generally, the company'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 full
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 was recognized in shareholders' equity.
Cash and Cash Equivalents. Short-term investments, substantially all of which
- -------------------------
have maturities of three months or less when purchased, are considered to be
cash equivalents and are carried at cost or less, generally approximating market
value.
Inventories. Inventories are valued at the lower of cost or market.
- -----------
Approximately 57% of 1996's inventories are valued using the last in, first out
(LIFO) method. Other inventories are generally determined on a first in, first
out (FIFO) method.
Long-Lived Assets. Property, plant and equipment values are stated at
- -----------------
acquisition cost, with accumulated depreciation and amortization deducted to
arrive at net book value. Depreciation charges for financial reporting purposes
are determined generally on the straight-line basis at rates calculated to
provide for the retirement of assets at the end of their useful lives.
Accelerated depreciation is generally used for tax purposes. When assets are
disposed of or retired, their costs and related depreciation are removed from
the books, and any resulting gains or losses are reflected in "Selling, general
and administrative expenses."
Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
Effective January 1, 1996, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
impairment losses be 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. The adoption of this standard did not have a
material impact on the company's operating results, cash flows or financial
position.
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods up to 31 years. On a periodic basis, the
company estimates the future undiscounted cash flows of the businesses to which
goodwill relates in order to ensure that the carrying value of goodwill has not
been impaired.
Financial Instruments. The company uses financial instruments to diversify or
- ---------------------
offset the effect of currency and interest rate variability.
The company may enter into foreign currency forward contracts and options to
offset the effect of exchange rate changes on cash flow exposures denominated in
foreign currencies. The exposures include firm commitments and anticipated
events encompassing sales, royalties, service fees, dividends and intercompany
loans.
Realized and unrealized gains and losses on contracts are marked to market and
recognized in the consolidated statements of earnings. Unrealized gains and
losses on foreign currency options (which consist primarily of purchased 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. Realized and unrealized gains and losses on foreign currency
contracts used to hedge intercompany transactions having the character of
long-term investments are included in the foreign currency translation component
of shareholders' equity.
The company may enter into interest rate swap agreements to alter the interest
rate risk profile of outstanding debt, thus altering the company's exposure to
changes in interest rates. In these swaps, the company 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 are recognized as adjustments
to interest rate expense over the life of the swap.
The company continuously monitors developments in the capital markets and only
enters into currency and swap transactions with established counterparties
having investment-grade ratings. The exposure to individual counterparties is
limited, and thus the company considers the risk of counterparty default to be
negligible.
- 37 -
Stock Compensation. On January 1, 1996, the company adopted SFAS No. 123,
- ------------------
"Accounting for Stock-Based Compensation," which permits entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied.
- --------------------------------------------------------------------------------
NATURE OF OPERATIONS
- --------------------------------------------------------------------------------
INDUSTRY SEGMENTS
- -------------------------------------------------------------------------
at December 31 (millions) 1996 1995 1994
- -------------------------------------------------------------------------
Net trade sales:
Floor coverings $1,091.8 $1,053.9 $1,063.5
Building products 718.4 682.2 630.0
Industry products 346.2 348.8 312.2
Ceramic tile -- 240.1 220.3
- -------------------------------------------------------------------------
Total net sales $2,156.4 $2,325.0 $2,226.0
- ------------------------------------------===============================
Operating income (loss): (Note 1)
Floor coverings $ 146.9 $ 145.0 $ 189.6
Building products 95.1 92.2 86.8
Industry products 40.1 9.3 41.2
Ceramic tile (Note 2) 9.9 (168.4) 0.8
Unallocated corporate expense (36.1) (34.0) (23.8)
- -------------------------------------------------------------------------
Total operating income $ 255.9 $ 44.1 $ 294.6
- ------------------------------------------===============================
Depreciation and amortization:
Floor coverings $ 53.9 $ 47.9 $ 49.2
Building products 37.0 36.8 34.5
Industry products 19.1 19.3 17.6
Ceramic tile 4.3 13.5 13.8
Corporate 9.4 5.6 5.6
- -------------------------------------------------------------------------
Total depreciation
and amortization $ 123.7 $ 123.1 $ 120.7
- ------------------------------------------===============================
Capital additions: (Note 3)
Floor coverings $ 117.7 $ 77.3 $ 56.7
Building products 67.7 49.2 31.5
Industry products 22.5 45.0 22.6
Ceramic tile -- 9.6 20.4
Corporate 12.8 6.3 3.0
- -------------------------------------------------------------------------
Total capital additions $ 220.7 $ 187.4 $ 134.2
- ------------------------------------------===============================
Identifiable assets:
Floor coverings $ 687.9 $ 583.2 $ 575.7
Building products 541.1 513.5 478.1
Industry products 272.8 301.8 234.8
Ceramic tile 168.7 135.8 290.1
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
- -------------------------------------------------------------------------
Total assets $2,135.6 $2,149.8 $2,159.0
- ------------------------------------------===============================
Note 1:
- -------------------------------------------------------------------------
Restructuring charges in
operating income (millions) 1996 1995 1994
- -------------------------------------------------------------------------
Floor coverings $14.5 $25.0 --
Building products 8.3 6.3 --
Industry products 4.0 31.4 --
Ceramic tile -- -- --
Unallocated corporate expense 19.7 9.1 --
- -------------------------------------------------------------------------
Total restructuring charges
in operating income $46.5 $71.8 --
- ---------------------------------------------============================
Note 2: 1995 operating income includes a $177.2 million loss due to the ceramic
tile business combination. See "Equity Earnings From Affiliates" on page 36.
Note 3: 1995 capital additions for industry segments include property, plant and
equipment from acquisitions of $15.6 million.
The floor coverings segment includes resilient flooring, adhesives, installation
and maintenance materials and accessories sold to U.S. commercial and
residential segments through wholesalers, retailers and contractors. The
Corporate Retail Accounts division provides marketing services and sales to home
centers, which have become an important part of the company's business. To
improve logistical cost-effectiveness, 14 independent regional distribution
centers are being established to service these customers (five of the centers
were in place by the end of 1996). To reduce interchannel conflict, segmented
resilient flooring products were introduced to allow exclusive sales in these
different markets. Raw materials, especially plasticizers and resins, are a
significant cost of resilient flooring products. The company has no influence on
the worldwide market of these materials and is subject to cost changes.
The building products segment manufactures both residential and architectural
ceiling systems. Grid products, manufactured through the joint venture with
Worthington Industries (WAVE), have become a more important part of this
business worldwide. Earnings from this joint venture are included in this
segment's operating income. The major sales activity in this segment is in
architectural ceiling systems for commercial and institutional structures which
are sold to contractors and resale distributors 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, production began in late 1996 in
Shanghai to manufacture ceilings and suspension systems for the Pacific area.
The industry products segment makes a variety of specialty products for the
building, automotive, textile and other industries worldwide. The majority of
sales in this segment are flexible pipe insulation used in construction and in
original equipment manufacturing. These sales are primarily in Europe, with
Germany having the largest concentration due to its regulatory requirements. The
major product costs for insulation are raw materials and labor. Strong
competition exists in insulation since there are minimal barriers to entry into
this market. Gasket materials are sold for new and replacement use in the
automotive, construction and farm equipment, appliance, small engine and
compressor industries. The automotive and diesel build rates are the most
sensitive market drivers for these products. Other products in the industry
products segment are textile mill supplies, including cots and aprons sold to
equipment manufacturers and textile mills. In 1995, the company announced its
intentions to discuss with potential buyers the possible sale of the textile
products operation.
The ceramic tile products segment includes ceramic tile sold through home
centers, company-owned sales service centers and independent distributors.
Ceramic tile products face significant competition from foreign suppliers.
Starting in 1996, this segment's results are reported as "Equity Earnings from
Affiliates" (see page 39) and are included in operating income.
- 38 -
GEOGRAPHIC AREAS
- ------------------------------------------------------------------------
at December 31 (millions) 1996 1995 1994
- ------------------------------------------------------------------------
Net trade sales:
United States $1,419.2 $1,586.4 $1,564.0
Europe 548.4 558.7 483.4
Other foreign 188.8 179.9 178.6
- ------------------------------------------------------------------------
Interarea transfers:
United States 105.0 101.1 95.0
Europe 13.2 13.8 8.7
Other foreign 30.4 32.1 26.1
Eliminations (148.6) (147.0) (129.8)
- ------------------------------------------------------------------------
Total net sales $2,156.4 $2,325.0 $2,226.0
- -----------------------------------------===============================
Operating income:
United States $ 202.7 $ 7.7 $ 235.5
(See Note 2 on page 35)
Europe 79.3 62.6 75.3
Other foreign 10.0 7.8 7.6
Unallocated corporate expense (36.1) (34.0) (23.8)
- ------------------------------------------------------------------------
Total operating income $ 255.9 $ 44.1 $ 294.6
- -----------------------------------------===============================
Identifiable assets:
United States $1,180.1 $1,044.5 $1,130.1
Europe 383.7 406.7 376.5
Other foreign 107.3 83.4 72.6
Discontinued business -- -- 182.1
Corporate 465.1 615.5 398.2
Eliminations (0.6) (0.3) (0.5)
- ------------------------------------------------------------------------
Total assets $2,135.6 $2,149.8 $2,159.0
- -----------------------------------------===============================
United States net trade sales include export sales to non-affiliated customers
of $34.0 million in 1996, $32.1 million in 1995 and $26.1 million in 1994. Also
included in United States net trade sales were ceramic tile operations sales of
$240.1 million and $220.3 million in 1995 and 1994, respectively.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain and Switzerland. Operations in Australia,
Canada, The People's Republic of China, Hong Kong, Indonesia, Japan, Korea,
Singapore and Thailand are in "Other foreign."
Transfers between geographic areas and commissions paid to affiliates marketing
exported products are accounted for by methods that approximate arm's-length
transactions, after considering the costs incurred by the selling company and
the return on assets employed of both the selling unit and the purchasing unit.
Operating income of a geographic area includes income accruing from sales to
affiliates.
- --------------------------------------------------------------------------------
OPERATING STATEMENT ITEMS
- --------------------------------------------------------------------------------
NET SALES
Net sales in 1996 totaled $2,156.4 million, 7.2% below the 1995 total of
$2,325.0 million and 3.1% below the 1994 total of $2,226.0 million. Sales are
not reported in 1996 for the ceramic tile segment in which Armstrong has a
minority interest. Prior to 1996, ceramic tile segment sales were consolidated
with total company results. Ceramic tile net sales for 1995 and 1994 were $240.1
million and $220.3 million, respectively.
EARNINGS FROM CONTINUING BUSINESSES
Earnings from continuing businesses were $164.8 million in 1996 compared with
$13.6 million in 1995 and $187.2 million in 1994. 1995 earnings included the
$116.8 million after-tax loss for the ceramic tile business combination
mentioned above. Included in the earnings for 1996 and 1995 were after-tax
restructuring charges of $29.6 million and $46.6 million, respectively.
DISCONTINUED OPERATIONS
On December 29, 1995, the company sold the stock of its furniture subsidiary,
Thomasville Furniture Industries, Inc., to INTERCO Incorporated for $331.2
million in cash. INTERCO also assumed $8.0 million of Thomasville's
interest-bearing debt. The company recorded a gain on the sale of $83.9 million
after tax. Certain liabilities related to terminated benefit plans of
approximately $11.3 million were retained by the company. Thomasville and its
subsidiaries recorded sales of approximately $550.2 million in 1995 and $526.8
million in 1994.
NET EARNINGS
Net earnings were $155.9 million for 1996 compared with $123.3 million and
$210.4 million in 1995 and 1994, respectively.
EQUITY EARNINGS FROM AFFILIATES
Equity earnings from affiliates for 1996 were primarily comprised of the
company's after-tax share of the net income of the Dal-Tile International Inc.
business combination and the amortization of the excess of the company's
investment in Dal-Tile over the underlying equity in net assets, and the 50%
interest in the WAVE joint venture with Worthington Industries. Results in 1995
and 1994 reflect only the 50% interest in the WAVE joint venture.
In 1995, the company entered into a business combination with Dal-Tile
International Inc. The transaction was accounted for at fair value and involved
the exchange of $27.6 million in cash and the stock of the ceramic tile
operations, consisting primarily of American Olean Tile Company, a wholly owned
subsidiary, for ownership of 37% of the shares of Dal-Tile. The company's
investment in Dal-Tile exceeded the underlying equity in net assets by $123.9
million which will be amortized over a period of 30 years. The after-tax loss on
the transaction was $116.8 million.
In August 1996, Dal-Tile issued new shares in a public offering decreasing the
company's ownership share from 37% to 33%.
Armstrong's ownership of the combined Dal-Tile is accounted for under the equity
method. The summarized historical financial information for ceramic tile
operations is presented below.
- -------------------------------------------------------------
(millions) 1995 1994
- -------------------------------------------------------------
Net sales $240.1 $220.3
Operating income/(1)/ 8.8 0.8
Assets/(2)/ 269.8 290.1
Liabilities/(2)/ 17.3 19.6
- -------------------------------------------------------------
Note 1: Excludes 1995 loss of $177.2 million due to ceramic tile business
combination.
Note 2: 1995 balances were as of December 29, 1995, immediately prior to the
ceramic tile business combination.
- 39 -
RESTRUCTURING CHARGES
Restructuring charges amounted to $46.5 million in 1996 and $71.8 million in
1995.
The second-quarter 1996 restructuring charge related primarily to the
reorganization of corporate and business unit staff positions; realignment and
consolidation of the Armstrong and W.W. Henry installation products businesses;
restructuring of production processes in the Munster, Germany, ceilings
facility; early retirement opportunities for employees in the Fulton, New York,
gasket and specialty paper products facility; and write-down of assets. These
actions affected approximately 500 employees, about two-thirds of whom were in
staff positions. The charges were estimated to be evenly split between cash
payments and noncash charges. The majority of the cash outflow was expected to
occur within the following 12 months. It was anticipated that ongoing cost
reductions and productivity improvements should permit recovery of these charges
in less than two years. The 1995 restructuring charges related primarily to the
closure of a plant in Braintree, Massachusetts, and for severance of 670
employees in the North American flooring business and the European industry
products and building products businesses.
Actual severance payments charged against restructuring reserves were $32.1
million in 1996 relating to the elimination of 724 positions, of which 323
terminations occurred since the beginning of 1996. As of December 31, 1996,
$50.3 million of reserves remained for restructuring actions.
DEPRECIATION AND AMORTIZATION
- -------------------------------------------------------------
(millions) 1996 1995 1994
- -------------------------------------------------------------
Depreciation $108.6 $114.9 $113.0
Amortization 15.1 8.2 7.7
- -------------------------------------------------------------
Total $123.7 $123.1 $120.7
- --------------------------------=============================
The increase in amortization of intangible assets relates principally to the
amortization of $4.1 million of the excess of the company's 1995 investment in
the ceramic tile business combination over its underlying equity in net assets.
SELECTED OPERATING EXPENSES
- -------------------------------------------------------------
(millions) 1996 1995 1994
- -------------------------------------------------------------
Maintenance and repair costs $105.3 $120.2 $117.5
Research and development costs 59.3 57.9 53.1
Advertising costs 18.4 25.5 29.6
- -------------------------------------------------------------
OTHER EXPENSE (INCOME), NET
- -------------------------------------------------------------
(millions) 1996 1995 1994
- -------------------------------------------------------------
Interest and dividend income $(6.5) $(3.3) $(3.7)
Foreign exchange, net loss 1.2 2.6 2.6
Postretirement liability
transition obligation -- 1.6 --
Environmental recoveries
discontinued businesses (2.8) -- --
Minority interest 0.3 0.6 1.8
Other 0.9 0.4 (0.2)
- -------------------------------------------------------------
Total $(6.9) $ 1.9 $ 0.5
- -------------------------------------------------------------
EMPLOYEE COMPENSATION
Employee compensation and the average number of employees are presented in the
table below. Restructuring charges for severance costs and early retirement
incentives have been excluded.
- -------------------------------------------------------------
Employee compensation
cost summary (millions) 1996 1995 1994
- -------------------------------------------------------------
Wages and salaries $509.7 $589.2 $585.9
Payroll taxes 51.5 61.7 54.8
Pension credits (16.1) (12.1) (13.3)
Insurance and other benefit costs 50.7 58.7 46.3
Stock-based compensation 5.8 0.8 0.1
- -------------------------------------------------------------
Total $601.6 $698.3 $673.8
- --------------------------------=============================
Average number of employees 10,572 13,433 13,784
- -------------------------------------------------------------
PENSION COSTS
The company and a number of its subsidiaries have pension plans covering
substantially all employees. Benefits from the principal plan are based on the
employee's compensation and years of service.
The company also had defined-contribution pension plans for eligible employees
at certain of its U.S. subsidiaries, such as the Employee Stock Ownership Plan
(ESOP) described on page 42.
Funding requirements, in accordance with provisions of the Internal Revenue
Code, are determined independently of expense using an expected long-term rate
of return on assets of 8.67%. The company's principal plan was subject to the
full funding limitation in 1996, 1995 and 1994, and the company made no
contribution to that plan in any of those years.
The total pension cost or credit from all plans is presented in the table below.
- -------------------------------------------------------------
Total pension
(credit) cost (millions) 1996 1995 1994
- -------------------------------------------------------------
U.S. defined-benefit plans:
Net pension credit $(39.9) $(26.5) $(29.1)
Early retirement incentives 10.1 28.7 --
Net curtailment gain -- (1.2) --
Defined contribution plans 9.9 4.2 4.3
Net pension cost of non-U.S.
defined-benefit plans 8.5 8.1 8.6
Other funded and unfunded
pension costs 5.4 3.3 2.9
- -------------------------------------------------------------
Total pension (credit) cost $ (6.0) $ 16.6 $(13.3)
- --------------------------------=============================
In 1995, the company recognized a $1.6 million curtailment gain from the sale of
furniture and a $0.4 million curtailment loss from the ceramic tile business
combination.
- 40 -
The net credit for U.S. defined-benefit pension plans was determined using the
assumptions presented in the table below.
- --------------------------------------------------------------
Net credit for U.S. defined-benefit
pension plans (millions) 1996 1995 1994
- --------------------------------------------------------------
Assumptions:
Discount rate 7.00% 8.00% 7.00%
Rate of increase in future
compensation levels 4.25% 5.25% 4.75%
Expected long-term rate of
return on assets 8.75% 8.75% 8.25%
- --------------------------------------------------------------
Actual (return) loss on assets $(124.2) $(406.7) $ 93.6
Less amount deferred 10.4 313.0 (182.5)
- --------------------------------------------------------------
Expected return on assets $(113.8) $(93.7) $(88.9)
Net amortization and other (9.4) (9.3) (9.5)
Service cost--benefits earned
during the year 17.2 16.7 17.9
Interest on the projected benefit
obligation 66.1 59.8 51.4
- --------------------------------------------------------------
Net pension credit $ (39.9) $ (26.5) $ (29.1)
- --------------------------------------------------------------
The funded status of the company's U.S. defined-benefit pension plans at the end
of 1996 and 1995 is presented in the following table.
- ---------------------------------------------------------------------
Funded status of U.S. defined-benefit
pension plans (millions) 1996 1995
- ---------------------------------------------------------------------
Assumptions:
Discount rate 7.25% 7.00%
Compensation rate 4.50% 4.25%
- ---------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ (824.4) $ (726.7)
- ---------------------------------------------------------------------
Accumulated benefit obligation $ (899.4) $ (802.4)
- ---------------------------------------------------------------------
Projected benefit obligation for
services rendered to date $ (981.2) $ (901.2)
Plan assets at fair value $ 1,501.9 $1,446.6
Plan assets in excess of projected
benefit obligation $ 520.7 $545.4
Unrecognized transition asset (33.9) (40.3)
Unrecognized prior service cost 99.9 81.8
Unrecognized net gain--experience
different from assumptions (462.6) (491.8)
Provision for restructuring charges (9.1) (9.9)
- ---------------------------------------------------------------------
Prepaid pension cost $ 115.0 $ 85.2
- ------------------------------------------------=====================
The plan assets, stated at estimated fair value as of December 31, are primarily
listed stocks and bonds.
The company 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.
- -------------------------------------------------------------
Net cost for non-U.S. defined-benefit
pension plans (millions) 1996 1995 1994
- -------------------------------------------------------------
Actual (return) loss on assets $(8.4) $(11.2) $ 1.8
Less amount deferred 2.5 5.9 (6.1)
- -------------------------------------------------------------
Expected return on assets $(5.9) $(5.3) $(4.3)
Net amortization and other 0.5 0.4 0.6
Service cost--benefits earned
during the year 5.3 4.9 5.2
Interest on the projected benefit
obligation 8.6 8.1 7.1
- -------------------------------------------------------------
Net pension cost $ 8.5 $ 8.1 $ 8.6
- ---------------------------------============================
The funded status of the non-U.S. defined-benefit pension plans at the end of
1996 and 1995 is presented in the following table.
- -------------------------------------------------------------------
Funded status of non-U.S. defined-benefit
pension plans (millions) 1996 1995
- -------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(112.8) $(103.0)
- -------------------------------------------------------------------
Accumulated benefit obligation $(117.2) $(107.6)
- -------------------------------------------------------------------
Projected benefit obligation for services
rendered to date $(125.5) $(115.8)
- -------------------------------------------------------------------
Plan assets at fair value 84.5 71.4
- -------------------------------------------------------------------
Projected benefit obligation greater than
plan assets $ (41.0) $(44.4)
Unrecognized transition obligation 2.4 3.3
Unrecognized prior service cost 5.1 3.4
Unrecognized net gain--experience
different from assumptions (16.9) (13.4)
Adjustment required to recognize
minimum liability (0.6) (0.4)
- -------------------------------------------------------------------
Accrued pension cost $ (51.0) $ (51.5)
- ------------------------------------------------===================
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
AND POSTEMPLOYMENT BENEFITS
The company has postretirement benefit plans that provide for medical and life
insurance benefits to certain eligible employees, worldwide, when they retire
from active service. The company funds these benefit costs primarily on a
pay-as-you-go basis, with the retiree paying a portion of the cost for health
care benefits through deductibles and contributions.
The company announced in 1989 and 1990 a 15-year phaseout of its cost of health
care benefits for certain future retirees. These future retirees include parent
company nonunion employees and some union employees. Shares of ESOP common stock
are scheduled to be allocated to these employees, based on employee age and
years to expected retirement, to help offset future postretirement medical
costs. In addition, they may enroll in a voluntary portion of the ESOP to
purchase additional shares.
The postretirement benefit costs were determined using the assumptions presented
in the table below.
- ---------------------------------------------------------------------
Periodic postretirement
benefit costs (millions) 1996 1995 1994
- ---------------------------------------------------------------------
Assumptions:
Discount rate 7.00% 8.25% 7.75%
Rate of increase in future
compensation levels 4.25% 5.25% 4.75%
- ---------------------------------------------------------------------
Service cost of benefits earned
during the year $ 3.7 $ 2.8 $ 3.0
Interest cost on accumulated
postretirement benefit obligation 17.0 17.1 16.5
Net amortization and other 0.5 (0.8) (0.8)
Periodic postretirement benefit cost $21.2 $19.1 $18.7
- -----------------------------------------============================
- 41 -
The status of the company's postretirement benefit plans at the end of 1996 and
1995 is presented in the following table.
- ---------------------------------------------------------------------------
Status of postretirement
benefit plans (millions) 1996 1995
- ---------------------------------------------------------------------------
Assumptions:
Discount rate 7.25% 7.00%
Compensation rate 4.50% 4.25%
- ---------------------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $164.9 $161.5
Fully eligible active plan participants 14.7 17.2
Other active plan participants 67.5 67.9
- ---------------------------------------------------------------------------
Total APBO $247.1 $246.6
- ---------------------------------------------------------------------------
Unrecognized prior service credit 7.8 7.3
Unrecognized net loss (37.9) (40.7)
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost $217.0 $213.2
- -----------------------------------------------------======================
The assumed health care cost trend rate used to measure the APBO was 11% in
1995, decreasing 1% per year to an ultimate rate of 6% by the year 2000. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, if the health care cost trend rate assumptions were
increased by 1%, the APBO as of December 31, 1996, would be increased by $23.6
million. The effect of this change on the total of service and interest costs
for 1996 would be an increase of $2.4 million.
The company provides certain postemployment benefits to former or inactive
employees and their dependents during the period following employment but before
retirement.
Postemployment benefit expense totaled $3.1 million in 1996, which included a
$2.9 million credit resulting from favorable actuarial experience with regard to
assumed plan retirement and mortality rates. In 1995, the company recorded a
postemployment benefit expense of $3.2 million, which included a $4.1 million
credit from the transfer of the payment responsibility for certain disability
benefits to the company's defined-benefit pension plan. In 1994, the company
recorded a postemployment benefit credit of $12.2 million, which included a
$14.6 million gain related to the qualification in 1994 of long-term disabled
employees for primary medical coverage under Medicare.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
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 the company. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by the
company. In 1996, the ESOP was merged with the Retirement Savings Plan to form
the new 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. In December 1996, the trustee borrowed $4.2 million at 5.9% from the
company. The loan was made to ensure that the financial arrangements provided to
employees remain consistent with the original intent of the ESOP.
The number of shares released for allocation to participant accounts is 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, 1996, the ESOP had allocated to participants a total of 2,245,230 shares and
retired 597,068 shares.
The ESOP currently covers parent company nonunion employees, some union
employees and employees of domestic subsidiaries.
The company's guarantee of the ESOP loan has been recorded as a long-term
obligation and as a reduction of shareholders' equity on its consolidated
balance sheet.
- ---------------------------------------------------------------------------
Details of ESOP debt service
payments (millions) 1996 1995 1994
- ---------------------------------------------------------------------------
Preferred dividends paid $ 8.9 $18.8 $19.0
Common stock dividends paid 4.0 -- --
Employee contributions 5.3 6.7 6.2
Company contributions 11.0 6.2 4.9
Company loan to ESOP 4.2 -- --
- ---------------------------------------------------------------------------
Debt service payments made
by ESOP trustee $33.4 $31.7 $30.1
- ---------------------------------------====================================
The company recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $9.4 million in 1996, $3.5 million in 1995 and $3.6 million
in 1994. These costs were partially offset by savings realized from changes to
company-sponsored health care benefits and elimination of the contribution-
matching feature in the company-sponsored voluntary retirement savings plan.
TAXES
Taxes totaled $140.4 million in 1996, $71.7 million in 1995 and $150.4 million
in 1994.
- ---------------------------------------------------------------------------
Details of taxes (millions) 1996 1995 1994
- ---------------------------------------------------------------------------
Earnings (loss) from continuing businesses before income taxes:
Domestic $176.5 $(28.7) $262.7
Foreign 87.6 68.0 52.1
Eliminations (23.9) (31.1) (49.0)
- ---------------------------------------------------------------------------
Total $240.2 $ 8.2 $265.8
- ---------------------------------------------------------------------------
Income tax provision (benefit):
Current:
Federal $ 36.2 $(19.7) $ 12.8
Foreign 33.4 23.4 25.9
State 1.4 (0.2) 5.0
- ---------------------------------------------------------------------------
Total current 71.0 3.5 43.7
- ---------------------------------------------------------------------------
Deferred:
Federal 4.9 (6.2) 41.4
Foreign (0.5) (2.7) (2.2)
State -- -- (4.3)
- ---------------------------------------------------------------------------
Total deferred 4.4 (8.9) 34.9
- ---------------------------------------------------------------------------
Total income taxes 75.4 (5.4) 78.6
Payroll taxes 50.3 61.5 54.8
Property, franchise and capital
stock taxes 14.7 15.6 17.0
- ---------------------------------------------------------------------------
Total taxes $140.4 $ 71.7 $150.4
- --------------------------------------=====================================
- 42 -
At December 31, 1996, unremitted earnings of subsidiaries outside the United
States were $125.2 million (at December 31, 1996, balance sheet exchange rates)
on which no U.S. taxes have been provided. If such earnings were to be remitted
without offsetting tax credits in the United States, withholding taxes would be
$9.4 million. The company's intention, however, is to reinvest those earnings
permanently or to repatriate them only when it is tax effective to do so.
- -----------------------------------------------------------------------------
Reconciliation to
U.S. statutory tax rate (millions) 1996 1995 1994
- -----------------------------------------------------------------------------
Tax expense at statutory rate $84.1 $ 2.9 $93.0
State income taxes 0.9 -- (1.5)
(Benefit) on ESOP dividend (1.5) (2.1) (1.7)
Tax (benefit) on foreign and
foreign-source income 6.2 (7.7) (1.4)
Utilization of excess foreign
tax credit (6.5) -- (5.4)
Equity in earnings of affiliates (4.2) -- --
Reversal of prior year provisions -- -- (6.5)
Insurance programs (1.2) -- --
Other items (2.4) (0.1) 2.1
Loss from ceramic tile business
combination -- 1.6 --
- -----------------------------------------------------------------------------
Tax (benefit) expense at effective rate $75.4 $(5.4) $78.6
- -----------------------------------------====================================
EXTRAORDINARY LOSS
In 1996, Dal-Tile refinanced all of its existing debt resulting in an
extraordinary loss. The company's share of the extraordinary loss was $8.9
million after tax, or $0.21 per share.
- --------------------------------------------------------------------------------
BALANCE SHEET ITEMS
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased to $65.4 million at the end of 1996 from
$256.9 million at the end of 1995. The large cash balance at the end of 1995 was
primarily due to the cash proceeds received from the sale of Thomasville
Furniture Industries, Inc., in December 1995. Most of the 1996 beginning cash
balance covered the decrease of debt, repurchase of shares of company stock,
payment of dividends, redemption of preferred stock, purchase of computer
software and additional investment in Dal-Tile. Operating and other factors
associated with the decrease in cash and cash equivalents are detailed in the
Consolidated Statements of Cash Flows on page 35.
RECEIVABLES
- -----------------------------------------------------------------------------
Accounts and notes
receivable (millions) 1996 1995
- -----------------------------------------------------------------------------
Customers' receivables $214.7 $213.4
Customers' notes 18.4 21.3
Miscellaneous receivables 18.5 12.2
- -----------------------------------------------------------------------------
251.6 246.9
- -----------------------------------------------------------------------------
Less allowance for discounts and losses 34.9 29.0
- -----------------------------------------------------------------------------
Net $216.7 $217.9
- ---------------------------------------------------==========================
Generally, the company sells its products to select, preapproved groups of
customers which include flooring and building material distributors, ceiling
systems contractors, regional and national mass merchandisers, home centers and
original equipment manufacturers. The businesses of these customers are directly
affected by changes in economic and market conditions. The company considers
these factors and the financial condition of each customer when establishing its
allowance for losses from doubtful accounts.
The carrying amount of the receivables approximates fair value because of the
short maturity of these items. Trade receivables are recorded in gross billed
amounts as of date of shipment. Provision is made for estimated applicable
discounts and losses.
INVENTORIES
Inventories were $205.7 million in 1996, $10.2 million higher than at the end of
1995. The increase was primarily due to higher inventory levels for the
introduction of the new laminate flooring product.
Approximately 57% in 1996 and 51% in 1995 of the company's total inventory was
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 $60.6
million at the end of 1996 and $62.4 million at year-end 1995.
- -----------------------------------------------------------------------------
Inventories (millions) 1996 1995
- -----------------------------------------------------------------------------
Finished goods $143.7 $119.9
Goods in process 20.1 24.0
Raw materials and supplies 41.9 51.6
- -----------------------------------------------------------------------------
Total $205.7 $195.5
- ---------------------------------------------------==========================
INCOME TAX BENEFITS
Income tax benefits were $49.4 million in 1996 and $26.9 million in 1995. The
increase was primarily due to prepayment of income taxes. Of these amounts,
deferred tax benefits were $26.9 million in 1996 and $26.4 million in 1995.
OTHER CURRENT ASSETS
Other current assets were $27.3 million in 1996, an increase of $1.8 million
from the $25.5 million in 1995.
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
Land $ 24.4 $ 25.6
Buildings 409.2 390.6
Machinery and equipment 1,344.8 1,313.7
Construction in progress 160.5 124.2
- -----------------------------------------------------------------------------
1,938.9 1,854.1
- -----------------------------------------------------------------------------
Less accumulated depreciation
and amortization 974.9 975.9
- -----------------------------------------------------------------------------
Net $ 964.0 $ 878.2
- -------------------------------------------------============================
The $84.8 million increase in gross book value to $1,938.9 million at the end of
1996 included $220.7 million for capital additions and a $122.2 million
reduction from sales, retirements, dispositions and other changes.
The unexpended cost of approved capital appropriations amounted to $62.6 million
at year-end 1996, substantially all of which is scheduled to be expended during
1997.
- 43 -
INSURANCE FOR ASBESTOS-RELATED LIABILITIES
Insurance for asbestos-related liabilities was $141.6 million reflecting the
company's belief in the ultimate availability of insurance in an amount to cover
the estimated potential liability of a like amount (see page 46). Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. See discussion on pages 48-51.
OTHER NONCURRENT ASSETS
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
Goodwill and other intangibles $ 46.1 $ 50.2
Pension-related assets 158.3 108.4
Other 56.8 62.2
- -----------------------------------------------------------------------------
Total $261.2 $220.8
- ---------------------------------------------------==========================
Other noncurrent assets increased $40.4 million in 1996. Goodwill and other
intangibles decreased $4.1 million reflecting lower spending levels in computer
software systems and acquired intangibles from acquisitions. The $49.9 million
increase in pension-related assets reflects the net pension credit of $39.9
million and an increase in the assets of the deferred compensation plans.
Noncurrent assets are carried at the lower of cost or market or under the equity
method of accounting.
INVESTMENTS IN AFFILIATES
Investments in affiliates were $204.3 million in 1996, an increase of $42.2
million, reflecting the December 29, 1995, ceramic tile business combination
with Dal-Tile International Inc. whereby the company acquired a 37% interest in
Dal-Tile in exchange for the stock of the company's ceramic tile operations and
$27.6 million in cash. Also included in investments in affiliates is the 50%
interest in the WAVE joint venture.
In August Dal-Tile issued new shares in a public offering and used part of the
proceeds from the offering to refinance all of its existing debt. Although the
company's ownership share declined to 33% from 37%, Dal-Tile's net assets
increased, adding to the overall value of the company's investment. In 1996 the
company purchased an additional $15.4 million of Dal-Tile shares through open
market trades and as a part of the initial public offering.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
Payables, trade and other $158.2 $168.3
Employment costs 49.7 51.2
Restructuring costs 27.6 40.1
Other 37.8 37.8
- -----------------------------------------------------------------------------
Total $273.3 $297.4
- ---------------------------------------------------==========================
The carrying amount of accounts payable and accrued expenses approximates fair
value because of the short maturity of these items.
INCOME TAXES
- -----------------------------------------------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
Payable--current $19.3 $15.0
Deferred--current 0.2 1.4
- -----------------------------------------------------------------------------
Total $19.5 $16.4
- ----------------------------------------------------=========================
The tax effects of principal temporary differences between the carrying amounts
of assets and liabilities and their tax bases are summarized in the following
table. Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets.
- -----------------------------------------------------------------------------
Deferred income taxes (millions) 1996 1995
- -----------------------------------------------------------------------------
Postretirement and postemployment benefits $ (87.0) $ (82.6)
Restructuring benefits (13.6) (13.4)
Asbestos-related liabilities (49.4) (58.1)
Capital loss carry forward (22.1) --
Other (65.8) (64.6)
Valuation allowance 22.1 --
- -----------------------------------------------------------------------------
Net deferred assets $(215.8) $(218.7)
- -----------------------------------------------------------------------------
Accumulated depreciation $ 95.6 $ 90.7
Pension costs 38.2 35.8
Insurance for asbestos-related liabilities 49.4 58.1
Other 36.4 25.6
- -----------------------------------------------------------------------------
Total deferred income tax liabilities $ 219.6 $ 210.2
- -----------------------------------------------------------------------------
Net deferred income tax liabilities (assets) $ 3.8 $ (8.5)
- -----------------------------------------------------------------------------
Less net income tax (benefits)--current (26.7) (25.0)
Deferred income taxes--long term $ 30.5 $ 16.5
- --------------------------------------------------===========================
DEBT
- -----------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
(millions) 1996 rate 1995 rate
- -----------------------------------------------------------------------------
Short-term debt:
Commercial paper $ -- -- $ -- --
Foreign banks 14.5 6.81% 22.0 7.27%
- -----------------------------------------------------------------------------
Total short-term debt $ 14.5 6.81% $ 22.0 7.27%
- -----------------------------------------------------------------------------
Long-term debt:
93/4% debentures
due 2008 $125.0 9.75% $125.0 9.75%
Medium-term notes
8.75-9% due
1997-2001 52.8 8.93% 92.8 8.74%
Bank loan due 1999 $ 21.0 4.79% -- --
Industrial
development bonds 19.5 5.25% 8.5 5.35%
Other 14.8 8.57% 2.1 12.29%
- -----------------------------------------------------------------------------
Total long-term debt $233.1 8.67% $228.4 9.20%
- -----------------------------------------------------------------------------
Less current installments 13.7 8.91% 40.1 8.50%
- -----------------------------------------------------------------------------
Net long-term debt $219.4 8.65% $188.3 9.35%
- -----------------------------================================================
- -----------------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- -----------------------------------------------------------------------------
1998 $18.2 2001 $ 7.5
1999 25.0 2002 --
2000 21.9
- -----------------------------------------------------------------------------
The December 31, 1996, carrying amounts of short-term debt and current
installments of long-term debt approximate fair value because of the short
maturity of these items.
- 44 -
The estimated fair value of net long-term debt was $252.8 million and $234.9
million at December 31, 1996 and 1995, respectively. The fair value estimates of
long-term debt were based upon quotes from major financial institutions, taking
into consideration current rates offered to the company for debt of the same
remaining maturities.
The 9 3/4% debentures and the medium-term notes are not redeemable until
maturity and have no sinking-fund requirements.
The bank loan has a favorable variable interest rate and may be prepaid prior to
maturity.
The industrial development bonds mature in 2004 and 2024 with interest rates
typical of their type.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had a
carrying value of $2.2 million at December 31, 1996.
In April 1996, Armstrong increased the five-year revolving line of credit for
general corporate purposes from $200.0 million to $300.0 million. In addition,
the company's foreign subsidiaries have approximately $141.3 million of unused
short-term lines of credit available from banks. Some credit lines are subject
to an annual commitment fee.
The company can borrow from its banks generally at rates approximating the
lowest available to commercial borrowers and can issue short-term commercial
paper notes supported by the lines of credit.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
The company uses foreign currency forward contracts and options to reduce the
risk that future cash flows from transactions in foreign currencies will be
negatively impacted by changes in exchange rates.
The following table shows anticipated net cash flows for goods, services and
financing transactions for the next 12 months:
- -----------------------------------------------------------------------------
Foreign currency Commercial Financing Net Net
exposure (millions)/1/ exposure exposure hedge position
- -----------------------------------------------------------------------------
British pound $ (6.2) $(34.2) $ 34.2 $ (6.2)
Canadian dollar 47.7 (0.0) (2.2) 45.5
French franc (25.9) 2.6 (2.6) (25.9)
German mark (39.0) 33.2 (33.2) (39.0)
Italian lira 14.3 2.5 (2.5) 14.3
Spanish peseta 7.0 2.7 (2.7) 7.0
- -----------------------------------------------------------------------------
Note 1: A positive amount indicates the company is a net receiver of this
currency, while a negative amount indicates the company is a net payer.
The company policy allows hedges of cash flow exposures up to one year. The
table below summarizes the company's foreign currency forward contracts and
options by currency at December 31, 1996. Foreign currency amounts are
translated at exchange rates as of December 31, 1996.
- -----------------------------------------------------------------------------
Foreign currency
contracts (millions) Forward contracts Option contracts
- -----------------------------------------------------------------------------
Sold Bought Sold Bought
- -----------------------------------------------------------------------------
British pound $ 1.3 $35.5 $ -- $ --
Canadian dollar 6.2 4.0 -- --
French franc 6.4 3.8 -- --
German mark 46.6 13.4 -- --
Italian lira 2.5 -- -- --
Spanish peseta 2.7 -- -- --
- -----------------------------------------------------------------------------
The foreign currency hedges are straightforward contracts that have no embedded
options or other terms that involve a higher level of complexity or risk. The
company does not hold or issue financial instruments for trading purposes.
The realized and unrealized gains and losses relating to the company's
management of foreign currency and interest rate exposures are as follows:
- -----------------------------------------------------------------------------
Foreign currency Interest rate
Gain (loss) (millions) hedging/1/ swaps
- -----------------------------------------------------------------------------
Year 1996
- -----------------------------------------------------------------------------
Income statement:
Realized $(1.1) $ --
Unrealized (0.9) --
On balance sheet 1.9 --
Off balance sheet -- --
- -----------------------------------------------------------------------------
Total $(0.1) $ --
- ----------------------------------------------===============================
Year 1995
- -----------------------------------------------------------------------------
Income statement:
Realized $(3.5) $ --
Unrealized 0.5 --
On balance sheet 0.3 --
Off balance sheet -- --
- -----------------------------------------------------------------------------
Total $(2.7) $ --
- ----------------------------------------------===============================
Year 1994
- -----------------------------------------------------------------------------
Income statement:
Realized $(3.2) $ 0.2
Unrealized 0.4 --
On balance sheet 0.9 --
Off balance sheet -- --
- -----------------------------------------------------------------------------
Total $(1.9) $0.2
- ----------------------------------------------===============================
Note 1: Excludes the offsetting effect of interest rate differentials on
underlying intercompany transactions being hedged of $0.6 million in 1996, $0.1
million in 1995 and $0.6 million in 1994.
The company had no interest rate hedging agreements on December 31, 1995 and
1996.
As of December 31, 1996, the company had provided $178.1 million in standby
letters of credit and financial guarantees. The company does not normally
provide collateral or other security to support these instruments.
- 45 -
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were $151.9 million in 1996, an increase of $13.0
million from $138.9 million in 1995. Increases of $3.0 million for
pension-related liabilities and $9.6 million for deferred compensation were the
primary causes for the increase. Also included in other long-term liabilities
were amounts for workers' compensation, vacation accrual, a reserve for
estimated environmental-remediation liabilities (see "Environmental Matters" on
this page) and a $4.7 million residual reserve for the estimated potential
liability primarily associated with claims pending in the company's
asbestos-related litigation.
Based upon the company's experience with the asbestos-related litigation--as
well as the Wellington Agreement, other settlement agreements with certain of
the company's insurance carriers and an earlier interim agreement with several
primary carriers--the residual reserve of $4.7 million is intended to cover
potential liability and settlement costs that are not covered by insurance,
legal and administrative costs not covered under the agreements and certain
other factors that have been involved in the litigation about which
uncertainties exist. Future costs of litigation against the company's insurance
carriers and other legal costs indirectly related to the litigation, expected to
be modest, will be expensed outside the reserve. Amounts, primarily insurance
litigation costs, estimated to be payable within one year are included under
current liabilities.
This reserve does not address any unanticipated reduction in expected insurance
coverage that might result in the future related to pending lawsuits and claims
nor any potential shortfall in such coverage for claims that are subject to the
settlement class action referred to on pages 45-48.
The fair value of other long-term liabilities was estimated to be $141.4 million
at December 31, 1996, and $128.9 million at December 31, 1995, using a
discounted cash flow approach at discount rates of 6.5% in 1996 and 5.8% in
1995.
ASBESTOS-RELATED LIABILITIES
Asbestos-related liabilities of $141.6 million represent the estimated potential
liability and defense cost to resolve approximately 43,600 personal injury
claims pending against the company as of December 31, 1996. The company has
recorded an insurance asset (see page 44) in the amount of $141.6 million for
coverage of these claims. See discussion on pages 48-51.
ENVIRONMENTAL MATTERS
In 1996, the company incurred capital expenditures of approximately $3.0 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1997 and 1998. The company
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.
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 18 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have voluntarily agreed to jointly fund the required investigation and
remediation of each site. With regard to some sites, however, Armstrong disputes
the liability, the proposed remedy or the proposed cost allocation. Armstrong
may also have rights of contribution or reimbursement from other parties or
coverage under applicable insurance policies. The company is also remediating
environmental contamination resulting from past industrial activity at certain
of its current plant sites.
Estimates of future liability are based on an evaluation of currently available
facts regarding each individual site and consider factors including existing
technology, presently enacted laws and regulations and prior company experience
in remediation of 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, the company's estimated liability reflects only the company's expected
share. In determining the probability of contribution, the company considers the
solvency of the parties, whether responsibility is being disputed, the terms of
any existing agreements and experience regarding similar matters. The estimated
liabilities do not take into account any claims for recoveries from insurance or
third parties.
Reserves at December 31, 1996, were for potential environmental liabilities that
the company considers probable and for which a reasonable estimate of the
potential liability could be made. Where existing data is sufficient to estimate
the amount of 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 a result, the
company has accrued, before agreed-to insurance coverage, $8.0 million to
reflect its estimated undiscounted liability for environmental remediation. As
assessments and remediation activities progress at each individual site, these
liabilities are reviewed to reflect additional information as it becomes
available.
Actual costs to be incurred at identified sites in the future may vary from the
estimates, given the inherent uncertainties in evaluating environmental
liabilities. Subject to the imprecision in estimating environmental remediation
costs, the company 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.
- 46 -
STOCK-BASED COMPENSATION PLANS
Awards under the 1993 Long-Term Stock Incentive 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 more than
4,300,000 shares of common stock may be issued under the Plan, and no more than
430,000 shares of common stock may be awarded in the form of restricted stock
awards. The Plan extends to April 25, 2003. Pre-1993 grants made under
predecessor plans will be governed under the provisions of those plans.
Options are granted to purchase shares at prices not less than the closing
market price of the shares on the dates the options were granted. The options
generally become exercisable in one to three years and expire 10 years from the
date of grant.
- ------------------------------------------------------------------------
Changes in option shares outstanding
(thousands except for share price) 1996 1995 1994
- ------------------------------------------------------------------------
Option shares at beginning of year 1,841.6 1,612.1 1,708.4
Options granted 728.7 642.8 247.1
Option shares exercised (376.7) (390.9) (323.1)
Stock appreciation rights exercised (10.8) (11.5) (8.5)
Options cancelled (21.4) (10.9) (11.8)
Option shares at end of year 2,161.4 1,841.6 1,612.1
Option shares exercisable at end
of year 1,185.8 1,196.7 1,367.1
Shares available for grant 1,914.6 2,838.9 3,691.5
- ------------------------------------------------------------------------
Weighted average price per share:
Options outstanding $50.06 $43.00 $36.82
Options exercisable 41.11 37.93 33.67
Options granted 60.30 52.47 54.39
Option shares exercised 36.27 33.48 31.20
- ------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1996.
- ------------------------------------------------------------------------
Stock options outstanding as of 12/31/96
- ------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------ -----------------------
Range Number Weighted- Weighted- Number Weighted-
of outstanding average average exercisable average
exercise at remaining exercise at exercise
prices 12/31/96 option life price 12/31/96 price
- ------------------------------------------------------------------------
$28-37 453,086 5.4 $31.52 453,086 $31.52
37-46 484,059 6.1 43.64 484,059 43.64
46-55 248,620 7.3 53.64 248,620 53.64
55-64 915,880 9.1 60.57 0 --
64-72 59,800 9.8 66.37 0 --
- ------------------------------------------------------------------------
2,161,445 1,185,765
- -----------=========------------------------------=========-------------
Performance restricted shares issuable under the 1993 Long-Term Stock Incentive
Plan entitle certain key executive employees to earn shares of Armstrong's
common stock, only if the total company or individual business units meet
certain predetermined performance measures during defined performance periods
(generally three years). Total company performance measures include Armstrong's
total shareholder return relative to the Standard and Poor's 500 group of
companies. At the end of the performance periods, common stock awarded will
carry additional restriction periods (generally three or four years), whereby
the shares will be held in custody by the company until the expiration or
termination of the restrictions. Compensation expense will be charged to
earnings over the period in which the restrictions lapse. At the end of 1996,
there were 121,440 performance restricted shares outstanding, with 3,834
accumulated dividend equivalent shares, and 204,510 shares of restricted common
stock were outstanding with 5,132 accumulated dividend equivalent shares, based
on performance periods ending prior to 1996. No common stock awards will be
issued in 1997 based on the performance period ending December 1996.
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 42,950 shares of
restricted stock were granted (excluding performance based awards discussed
above) during 1996. At the end of 1996, there were 124,339 restricted shares of
common stock outstanding with 3,702 accumulated dividend equivalent shares.
On January 1, 1996, the company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which 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, the company's net earnings and earnings
per share (EPS) would have been reduced to the following pro forma amounts.
- ------------------------------------------------------------------------
(millions) 1996 1995
- ------------------------------------------------------------------------
Net earnings: As reported $155.9 $123.3
Pro forma 150.7 121.4
Primary EPS: As reported 3.76 2.90
Pro forma 3.63 2.85
Fully diluted EPS:As reported 3.60 2.67
Pro forma 3.48 2.62
- ------------------------------------------------------------------------
The fair value of grants was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1996 and
1995.
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
Risk-free interest rates 6.17% 6.38%
Dividend yield 2.32% 2.39%
Expected lives 5 years 5 years
Volatility 21% 25%
- ------------------------------------------------------------------------
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.
- 47 -
TREASURY SHARES
Treasury share changes for 1996, 1995 and 1994 are as follows:
- ------------------------------------------------------------------------
Years ended
December 31 (thousands) 1996 1995 1994
- ------------------------------------------------------------------------
Common shares
Balance at beginning of year 15,014.1 14,602.1 14,656.5
Stock purchases/(1)/ 1,357.6 795.7 272.4
Stock issuance activity, net/(2)/ (5,657.1) (383.7) (326.8)
- ------------------------------------------------------------------------
Balance at end of year 10,714.6 15,014.1 14,602.1
- ------------------------------------====================================
Note 1: Includes small unsolicited buybacks of shares, shares received under
share tax withholding transactions and open market purchases of stock through
brokers.
Note 2: 1996 includes 5,057,400 shares issued as a result of conversion of
preferred to common stock.
In July 1996, the Board of Directors authorized the company to repurchase an
additional 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 has
repurchased approximately 2,380,000 shares through December 31, 1996, with a
total cash outlay of $130.7 million, including 1,328,000 repurchased in 1996. In
addition to shares repurchased under the above plan, approximately 364,600 ESOP
shares were repurchased in 1996.
PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1996, the Board of Directors renewed the company's 1986 shareholder rights
plan and in connection therewith declared a distribution of one right for each
share of the company's common stock outstanding on and after January 19, 1996.
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 the company, either acquires beneficial
ownership of shares representing 20% or more of the voting power of the company
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
the company. If thereafter any person or group becomes the beneficial owner of
28% or more of the voting power of the company or if the company is the
surviving company in a merger with a person or group that owns 20% or more of
the voting power of the company, 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 the company 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 the company's common stock. The
rights have no voting power nor do they entitle a holder to receive dividends.
At the company's option, the rights are redeemable prior to becoming exercisable
at five cents per right. The rights expire on March 21, 2006.
- --------------------------------------------------------------------------------
LITIGATION AND RELATED MATTERS
- --------------------------------------------------------------------------------
ASBESTOS-RELATED LITIGATION
The company is one of many defendants in pending lawsuits and claims involving,
as of December 31, 1996, approximately 43,600 individuals alleging personal
injury from exposure to asbestos-containing products. Included in the above
number are approximately 19,500 lawsuits and claims from the approximately
87,000 individuals who opted out of the settlement class action (Georgine v.
Amchem) referred to below. About 18,400 claims from purported class members were
received as of December 31, 1996. Nearly all the pending personal injury suits
and claims, except Georgine claims, seek general and punitive damages arising
from alleged exposures to asbestos-containing insulation products used,
manufactured or sold by the company. The company discontinued the sale of all
asbestos-containing insulation products in 1969. Although a large number of
suits and claims pending in prior years have been resolved, neither the rate of
future dispositions nor the number of future potential unasserted claims can be
reasonably predicted.
The Judicial Panel for Multidistrict Litigation ordered the transfer of all
pending federal cases to the Eastern District Court in Philadelphia for pretrial
purposes. Periodically some of those cases are released for trial. Pending state
court cases have not been directly affected by the transfer. A few state judges
have consolidated numbers of asbestos-related personal injury cases for trial, a
process the company generally opposes as being unfair.
GEORGINE SETTLEMENT CLASS ACTION
Georgine v. Amchem is a settlement class action that includes essentially all
future asbestos-related personal injury claims against members, including the
company, of the Center for Claims Resolution ("Center") referred to below that
was filed on January 15, 1993, in the Eastern District of Pennsylvania and was
given tentative approval on August 16, 1994. It is designed to establish a
nonlitigation system for the resolution of claims against the Center members.
Other companies may be able to join the class action later. The settlement
offers a method for prompt compensation to claimants who were occupationally
exposed to asbestos if they meet certain exposure and medical criteria.
Compensation amounts are derived from historical settlement data. Under limited
circumstances and in limited numbers, qualifying claimants may choose to
arbitrate or litigate certain claims after they are processed within the system.
No punitive damages will be paid under the proposed settlement. The settlement
is designed to minimize transactional costs, including attorneys' fees, and to
relieve the burden on the courts. Each member of the Center is obligated for its
own fixed share of compensation and fees. Potential claimants who neither filed
a prior lawsuit against Center members nor filed an exclusion request form are
subject to the class action. The class action does not include claims deemed
otherwise not covered by the class action settlement or claims for property
damage. Annual case flow caps and compensation ranges for
- 48 -
each medical category (including amounts paid even more promptly under the
simplified payment procedures) are established for an initial period of 10
years. Case flow caps may be increased if they were substantially exceeded
during the previous five-year period. The case flow figures and annual
compensation levels are subject to renegotiation after the initial 10-year
period. Opt-outs from the settlement class action are not claims as such but
rather are reservation of rights possibly to bring claims in the future. The
settlement will become final only after certain issues, including issues related
to insurance coverage, are resolved and appeals are exhausted, a process which
could take several years. The Center members stated their intention to resolve
over a five-year period the personal injury claims that were pending when the
settlement class action was filed. A significant number of these pending claims
have been finally or tentatively settled or are currently the subject of
negotiations.
The company is seeking agreement from its insurance carriers or a binding
judgment against them that the class action will not jeopardize existing
insurance coverage; and the class action is contingent upon such an agreement or
judgment. With respect to carriers that do not agree, this matter will be
resolved either by alternative dispute resolution, in the case of the insurance
carriers that subscribed to the Wellington Agreement referred to below, or else
by litigation.
On May 10, 1996, a three-judge panel of the U.S. Court of Appeals for the Third
Circuit issued an adverse decision in an appeal from the preliminary injunction
by the District Court enjoining members of the Georgine class from litigating
asbestos-related personal injury claims in the tort system. The appeal was
brought by certain intervenors who opposed the class action. The Court of
Appeals decision-which will not become effective until that Court issues its
mandate-ruled against maintaining the settlement class action, ordered that the
preliminary injunction issued by the District Court be vacated, and ordered the
District Court to decertify the class. The Court ruled broadly that the case
does not meet the requirements for class certification under Federal Rule of
Civil Procedure 23, concluding that a class action cannot be certified for
purposes of settlement unless it can be certified for full-scale litigation. The
company believes that the Court erred in several important respects. The
Center's petition for rehearing before the Third Circuit en banc was denied.
On November 1, 1996, the U.S. Supreme Court accepted the Center's petition for
certiorari and, accordingly, the appeal will proceed through briefing to
argument heard on February 18, 1997, and a likely decision by July 1997. The
preliminary injunction will remain in place while the case is pending in the
Supreme Court.
The company remains optimistic that a future claimants settlement class action
may ultimately be approved, although the courts may not uphold this settlement
class action, and may not uphold the companion insurance action or, even if
upheld, there is a potential that judicial action might result in substantive
modification of this settlement.
If the final resolution by the Supreme Court is not favorable to the Center, the
District Court's injunction will likely be lifted. If the injunction is lifted,
a large number of new asbestos-related personal injury lawsuits might be filed
within a short period of time against the Center members, including the company.
The company believes that the number of subsequent pending cases in the tort
system against the company would likely increase. In due course, the
consequences from a lifting of the injunction could result in presently
undeterminable, but likely higher, liability and defense costs under a claims
resolution mechanism alternative to the Georgine settlement which the company
believes would likely be negotiated.
Even if the appeal to the Supreme Court is successful, various issues remain to
be resolved in the class action, and the potential exists that those issues will
cause the class action ultimately not to succeed or to be substantially
modified. Similarly, the potential exists that the above-referenced companion
insurance action will not be successful.
INSURANCE SETTLEMENTS
Pending personal injury lawsuits and claims are being paid by insurance proceeds
under the 1985 Agreement Concerning Asbestos-Related Claims (the "Wellington
Agreement") and under other insurance settlements noted below. A new claims
handling organization, known as the Center for Claims Resolution (the "Center"),
was created in October 1988 by Armstrong and 20 other companies to replace the
Wellington Asbestos Claims Facility (the "Facility"), which was dissolved.
Generally, the dissolution of the Facility did not affect the company's overall
Wellington Agreement insurance settlement. That settlement provided for final
resolution of nearly all disputes concerning insurance for asbestos-related
personal injury claims as between the company and three of its primary insurers
and eight of its excess insurers. The one primary carrier that did not sign the
Wellington Agreement paid into the Wellington Facility and settled with the
company in March 1989 nearly all outstanding issues of coverage for
asbestos-related personal injury and property damage claims. In addition, other
excess-insurance carriers have entered into settlement agreements with the
company which complement the Wellington Agreement. ACandS, Inc., a former
subsidiary of the company, which has for certain insurance periods coverage
rights under some company insurance policies, subscribed to the Wellington
Agreement but did not become a member of the Center.
One excess carrier (providing $25 million of coverage) and certain companies in
an excess carrier's block of coverage (involving several million dollars of
coverage) have become insolvent. Certain carriers providing excess level
coverage solely for property damage claims also have become insolvent. The
several million dollars of coverage referred to has been paid by company
reserves. The $25 million insolvency gap is being covered by other available
insurance coverage. The company and ACandS, Inc., have negotiated a settlement
agreement that reserves for ACandS, Inc., a certain amount of insurance from
joint policies solely for its use in the payment of costs for asbestos-related
claims.
- 49 -
CENTER FOR CLAIMS RESOLUTION
The Center operates under a concept of allocated shares of liability payments
and defense costs for its members based primarily on historical and current
experience, and it defends the members' interests and addresses claims in a
manner consistent with the prompt, fair resolution of meritorious claims. The
Center sharing formula has been revised over time. These changes have caused
some increase in the company's share in certain areas. As to claims resolved
under the settlement class action, the company has agreed to a percentage of
each resolution payment. Although the Center members and their participating
insurers were not obligated beyond one year, the insurance companies are
expected to commit to the continuous operation of the Center for a ninth year
and to funding of the Center's operating expenses. With the filing of the
settlement class action, the Center continued to process pending claims and has
handled the program for processing future asbestos-related personal injury
claims. No forecast can be made for future years regarding either the rate of
pending and future claims resolution by the Center or the rate of utilization of
company insurance.
PROPERTY DAMAGE LITIGATION
The company is also one of many defendants in a total of 11 pending lawsuits and
claims, as of December 31, 1996, brought by public and private building owners.
These lawsuits and claims include allegations of damage to buildings caused by
asbestos-containing products and generally claim compensatory and punitive
damages and equitable relief, including reimbursement of expenditures, for
removal and replacement of such products. These suits and claims appear to be
aimed at friable (easily crumbled) asbestos-containing products although
allegations in some suits encompass other asbestos-containing products,
including allegations with respect to previously installed asbestos-containing
resilient flooring. The company vigorously denies the validity of the
allegations against it contained in these suits and claims. Defense costs, paid
by the company's insurance carriers either under reservation or settlement
arrangement, will be incurred. These suits and claims are not encompassed within
the Wellington Agreement nor are they being handled by the Center.
INSURANCE COVERAGE LITIGATION
In 1996, Armstrong concluded a lawsuit in California state court to resolve
disputes concerning certain of its insurance carriers' obligations with respect
to personal injury and property damage liability coverage, including defense
costs, for alleged personal injury and property damage asbestos-related lawsuits
and claims. The Court issued final decisions generally in the company's favor,
and the carriers appealed. The California Court of Appeal substantially upheld
the trial court's final decisions, and the insurance carriers petitioned the
California Supreme Court which ruled favorably for the company. Upon remand, the
Court of Appeal issued its final decision favorable to the company in keeping
with the Supreme Court's ruling.
NONPRODUCTS INSURANCE COVERAGE
Nonproducts insurance coverage is included in the company's primary insurance
policies and certain excess policies for certain claims, including those that
may have arisen out of exposure during installation of asbestos materials or
before control of such materials was relinquished. An alternate dispute
resolution proceeding has been initiated, and negotiations are currently
underway with several of the company's primary carriers to resolve the
nonproducts coverage issues. The additional coverage potentially available to
pay claims categorized as nonproducts is substantial and, at the primary level,
includes defense costs in addition to indemnity limits. The insurance carriers
have raised various reasons why they should not pay their coverage obligations,
including contractual defenses, waiver, laches and the statute of limitations.
CONCLUSIONS
The company does not know how many claims will be filed against it in the
future, nor the details thereof or of pending suits not fully reviewed, nor the
expense and any liability that may ultimately result therefrom, nor does the
company know whether the settlement class action will ultimately succeed, the
number of individuals who ultimately will be deemed to have opted out or who
could file claims outside the settlement class action, nor the annual claims
caps to be negotiated after the initial 10-year period for the settlement class
action or the compensation levels to be negotiated for such claims, nor whether,
if needed, an alternative to the Georgine settlement vehicle may ultimately
emerge, or the ultimate liability if such alternative does not emerge, or the
scope of its nonproducts coverage ultimately deemed available.
Subject to the foregoing and based upon its experience and other factors also
referred to above, the company believes that the estimated $141.6 million in
liability and defense costs recorded on the 1996 balance sheet will be incurred
to resolve an estimated 43,600 asbestos-related personal injury claims pending
against the company as of December 31, 1996. A ruling from the Court established
January 24, 1994, as the date after which any asbestos-related personal injury
claims filed by non-opt-out claimants against the company or other members of
the Center are subject to the settlement class action. In addition to the
currently estimated pending claims and any claims filed by individuals deemed to
have opted out of the settlement class action, any claims otherwise determined
not to be subject to the settlement class action will be resolved outside the
settlement class action. The company does not know how many such claims
ultimately may be filed by claimants deemed to have opted out of the class
action or by claimants otherwise determined not to be subject to the settlement
class action.
An insurance asset in the amount of $141.6 million recorded on the 1996 balance
sheet reflects the company's belief in the availability of insurance in this
amount to cover the liability in like amount referred to above. Such insurance
has either been agreed upon or is probable of recovery through negotiation,
- 50 -
alternative dispute resolution or litigation. A substantial portion of the
insurance asset involves nonproducts insurance which is in alternative dispute
resolution. While the company is seeking resolution of key issues in the
alternative dispute resolution process during 1997, a shortfall may develop
between available insurance and amounts necessary to pay claims, and that
shortfall may occur as early as the third quarter of 1997 or possibly in the
second quarter depending on the timing of the availability of certain coverage;
the company believes such shortfall would not be material either to the
financial condition of the company or to its liquidity. The company also notes
that, based on maximum mathematical projections covering a ten-year period from
1994 to 2004, its estimated cost in Georgine reflects a reasonably possible
additional liability of $245 million. If Georgine is not ultimately approved,
the company believes that a claims resolution mechanism alternative to the
Georgine settlement will likely be negotiated, albeit at a likely higher
liability and defense costs. A portion of such additional liability may not be
covered by the company's ultimately applicable insurance recovery. However, the
company believes that any after-tax impact on the difference between the
aggregate of the estimated liability for pending cases and the estimated cost
for the ten-year maximum mathematical projection or in the cost of an
alternative settlement format, and the probable insurance recovery, would not be
material either to the financial condition of the company or to its liquidity,
although it could be material to earnings if it is determined in a future period
to be appropriate to record a reserve for this difference. The period in which
such a reserve may be recorded and the amount of any reserve that may be
appropriate cannot be determined at this time. Subject to the uncertainties and
limitations referred to elsewhere in this note and based upon its experience and
other factors referred to above, the company believes it is probable that
substantially all of the expenses and any liability payments associated with the
asbestos-related property damage claims will be paid under an insurance coverage
settlement agreement and through coverage from the outcome of the California
insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom and the ultimate scope of its insurance
coverage, after consideration of the factors involved, including the Wellington
Agreement, the referenced settlements with other insurance carriers, the results
of the California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the Georgine settlement class action and the
likelihood that if Georgine is not ultimately upheld an alternative to Georgine
would be negotiated, and its experience, the company believes the
asbestos-related lawsuits and claims against the company would not be material
either to the financial condition of the company or to its liquidity, although
as stated above, the net effect of any future liabilities recorded in excess of
insurance assets could be material to earnings in such future period.
Additional details concerning this litigation are set forth in the company's
Form 10-K available to any shareholder upon request.
TINS LITIGATION
In October 1992, the U.S. Court of Appeals for the Third Circuit issued its
decision in a lawsuit brought by The Industry Network System, Inc. (TINS), and
its founder, Elliot Fineman. The plaintiffs alleged that in 1984 Armstrong had
engaged in antitrust and tort law violations and breach of contract which
damaged TINS' ability to do business. The Court of Appeals sustained the U.S.
District Court's decision that the April 1991 jury verdict against Armstrong in
the amount of $224 million including $200 million in punitive damages should be
vacated, and that there should be a new trial on all claims remaining after the
appeal. The Court of Appeals sustained the District Court ruling that the jury's
verdict had reflected prejudice and passion due to the improper conduct of
plaintiffs' counsel and was clearly contrary to the weight of the evidence. The
Court of Appeals affirmed or did not disturb the trial court's order dismissing
all of TINS' claims under Section 2 of the Sherman Act for alleged conspiracy,
monopolization and attempt to monopolize and dismissing all of Mr. Fineman's
personal claims. These claims were not the subject of a new trial. However, the
Court of Appeals reversed the trial court's directed verdict for Armstrong on
TINS' claim under Section 1 of the Sherman Act, reversed the summary judgment in
Armstrong's favor on TINS' claim for breach of contract based on a 1984
settlement agreement, and reversed the judgment n.o.v. for Armstrong on TINS'
tortious interference and related punitive damage claims. These claims were the
subject of a new trial.
A second trial of the TINS' litigation began on April 26, 1994, in the Newark,
New Jersey, District Court. TINS asked for damages in a range of $17 to $56
million. A jury found that Armstrong had breached its contract with TINS and had
interfered with TINS' contractual business relationship with an Armstrong
wholesaler but that Armstrong's conduct did not damage TINS and awarded no
compensatory or nominal money damages. Following oral argument on November 14,
1994, TINS' motion for a partial or complete new trial was denied by the
District Court and TINS filed an appeal with the U.S. Court of Appeals for the
Third Circuit. On October 11, 1995, the case was argued before a panel of the
U.S. Court of Appeals for the Third Circuit, and on October 20, 1995, the Court
issued a Judgment Order affirming the 1994 District Court verdict in favor of
the company. On November 2, 1995, TINS filed a Petition for Rehearing by the
same panel which was denied on December 5, 1995. On January 24, 1996, TINS filed
a motion seeking further appellate review by the Circuit Court. That motion has
been denied. Also denied was a motion by TINS before the District Court to
rescind our earlier 1984 agreement of settlement. TINS has appealed this later
decision to the Circuit Court and a hearing will likely be held on this issue
during the first half of 1997. If the denial of the motion is reversed on
appeal, TINS could possibly be entitled to litigate claims that had been
resolved by means of the settlement agreement.
- 51 -
Independent auditors' report
The Board of Directors and Shareholders,
Armstrong World Industries, Inc.:
We have audited the consolidated balance sheets of Armstrong World Industries,
Inc. and subsidiaries as of December 31, 1996, and 1995, and the related
consolidated financial statements of earnings, cash flows, and shareholders'
equity for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion the related supplementary information and
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Philadelphia, PA
February 14, 1997
- 52 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Directors of the Registrant
- ---------------------------
The information appearing in the tabulation in the section captioned "Election
of Directors" on pages 1-4 of the Company's 1997 Proxy Statement is incorporated
by reference herein.
Executive Officers of the Registrant
- ------------------------------------
George A. Lorch* -- Age 55; Chairman of the Board since April 25, 1994; and
President (Chief Executive Officer) since September 7, 1993; Executive Vice
President 1988-1993.
E. Allen Deaver* -- Age 61; Executive Vice President since March 1, 1988.
Marc R. Olivie -- Age 43; President, Worldwide Building Products Operations
since October 15, 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; Executive Director, Corporate
Development, Sara Lee Corporation (Chicago, Illinois/France) April
1990-September 1993.
Robert J. Shannon, Jr. -- Age 48, President, Worldwide Floor Products Operations
since February 1, 1997; President Floor Products Operations International
February 1, 1996, through February 1, 1997; President American Olean Tile
Company, Inc. March 1, 1992 through December 29, 1995.
Stephen E. Stockwell -- Age 51; President, Corporate Retail Accounts Division
since November 22, 1994; Vice President, Corporate Retail Accounts July 1, 1994,
through November 22, 1994; General Manager, Residential Sales, Floor Division
January 26, 1994 through July 1, 1994; Field Sales Manager, Floor Division,
1988-1994.
Ulrich J. Weimer -- Age 52; President, Armstrong Insulation Products since
February 1, 1996; Geschaftsfuhrer, Armstrong World Industries G.m.b.H. since
December 11, 1995; General Manager, Worldwide Insulation Products Operations
February 1, 1993 through June 1, 1995; General Manager, Worldwide Insulation,
Armstrong Europe Services, August 1, 1991 through January 31, 1993.
- 53 -
Douglas L. Boles -- Age 39; Senior Vice President, Human Resources since
March 1, 1996; and the following positions with PepsiCo (consumer products):
Vice President of Human Resources, Pepsi Foods International Europe Group (U.K.)
June 1995-February 1996; Vice President of Human Resources, Walkers Snack Foods
(U.K.) March 1994-June 1995; Vice President of Human Resources, Snack Ventures
Europe (Netherlands) September 1992-March 1994; Vice President of Human
Resources, PepsiCola International, Latin America Division (Brazil) October
1989-September 1992.
Larry A. Pulkrabek -- Age 57; Senior Vice President, Secretary and General
Counsel since February 1, 1990.
Frank A. Riddick, III -- Age 40; Senior Vice President, Finance and Chief
Financial Officer since April 1995; and the following positions with FMC
Corporation, Chicago, IL (chemicals, machinery): Controller May 1993-March 1995;
Treasurer December 1990-May 1993.
David J. Feight -- Age 54; Vice President and Director of Business Development
since May 1, 1994; Team Leader PATH process 1993-1994; General Manager Sales and
Marketing, Building Products Operations 1988-1993.
Edward R. Case -- Age 50; Vice President and Treasurer since May 8, 1996; and
the following positions with Campbell Soup Company (branded food products):
Director, Corporate Development October 1994-May 1996; Director, Financial
Planning, U.S. Soup May 1993-September 1994; Deputy Treasurer September
1991-April 1993.
Bruce A. Leech, Jr. -- Age 54; Controller since February 1, 1990.
All information presented above is current as of March 1, 1997. The term of
office for each Executive Officer in his present capacity is one year, and each
such Executive Officer will serve until reelected or until a successor is
elected at the annual meeting of directors which follows the annual
shareholders' meeting. Each Executive Officer has been employed by the Company
in excess of five continuous years with the exception of Messrs. Boles, Case,
Olivie and Riddick. Members of the Executive Committee of the Board of Directors
as of March 1, 1997, are designated by an asterisk(*) following each of their
names. The Executive Committee consists of those Executive Officers who serve as
Directors.
Item 11. Executive Compensation
- --------------------------------
The information appearing in the sections captioned "Directors' Compensation" on
pages 4-6 and "Compensation Committee Interlocks and Insider Participation,"
"Executive Officers' Compensation," (other than the information contained under
the subcaption "Performance Graph") and "Retirement Income Plan Benefits," on
pages 10-16 of the Company's 1997 Proxy Statement is incorporated by reference
herein.
- 54 -
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information appearing in the sections captioned "Stock Ownership of Certain
Beneficial Owners" on page 17 and "Directors' and Executive Officers' Security
Ownership" on page 6 of the Company's 1997 Proxy Statement is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Not applicable.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
The financial statements and schedules filed as a part of this Annual Report on
Form 10-K are listed in the "Index to Financial Statements and Schedules" on
page 62.
- 55 -
a. The following exhibits are filed as a part of this Annual Report on
Form 10-K:
Exhibits
- --------
No. 3(a) Copy of Registrant's By-laws, as amended effective
December 16, 1996.
No. 3(b) Registrant's restated Articles of Incorporation, as
amended, are incorporated by reference herein from
registrant's 1994 Annual Report on Form 10-K wherein
they appear as Exhibit 3(b).
No. 4(a) Registrant's Rights Agreement effective as of March
21, 1996, between the registrant and Chemical Mellon
Shareholder Services, L.L.C., as Rights Agent,
relating to the registrant's Preferred Stock Purchase
Rights is incorporated by reference herein from
registrant's registration statement on Form 8-A/A
dated March 15, 1996, wherein it appeared as Exhibit
4.
No. 4(b) Copy of Registrant's Retirement Savings and Stock
Ownership Plan as amended and restated effected
October 1, 1996.
No. 4(d) Registrant's Indenture, dated as of March 15, 1988,
between the registrant and Morgan Guaranty Trust
Company of New York, as Trustee, as to which The
First National Bank of Chicago is successor trustee,
is incorporated herein by reference from registrant's
1995 Annual Report on Form 10-K wherein it appears as
Exhibit 4(c).
No. 4(e) Registrant's Supplemental Indenture dated as of
October 19, 1990, between the registrant and The
First National Bank of Chicago, as Trustee, is
incorporated by reference herein from registrant's
1994 Annual Report on Form 10-K wherein it appears as
Exhibit 4(d).
No. 10(i)(a) Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the
registrant and other companies is incorporated by
reference herein from the registrant's 1993 Annual
Report on Form 10-K wherein it appears as Exhibit
10(i)(a).
No. 10(i)(b) Copy of Producer Agreement concerning Center for
Claims Resolution dated September 23, 1988, among the
registrant and other companies as amended.
- 56 -
No. 10(i)(c) Credit Agreement between the registrant, certain
banks listed therein, and Morgan Guaranty Trust
Company of New York, as Agent, dated as of February
7, 1995, providing for a $200,000,000 credit
facility, is incorporated by reference herein from
registrant's 1994 Annual Report on Form 10-K wherein
it appears as Exhibit 10(i)(c).
No. 10(i)(d) Stock Purchase Agreement dated as of December 21,
1995, by and among Dal-Tile International Inc.,
Armstrong Enterprises, Inc., Armstrong Cork Finance
Corporation and Armstrong World Industries, Inc. is
incorporated herein by reference from the
registrant's Current Report on Form 8-K filed January
16, 1996, wherein it appeared as Exhibit 2.01.
No. 10(i)(e) Stock Purchase Agreement dated as of November 18,
1995, by and among Armstrong World Industries, Inc.,
Armstrong Enterprises, Inc., and Interco Incorporated
is incorporated herein by reference from the
registrant's Current Report on Form 8-K filed January
16, 1996, wherein it appeared as Exhibit 2.
No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key
Employees, as amended, is incorporated by reference
herein from registrant's 1995 Annual Report on Form
10-K wherein it appears as Exhibit 10(iii)(a). *
No. 10(iii)(b) Registrant's Deferred Compensation Plan for
Nonemployee Directors, as amended, is incorporated by
reference herein from registrant's 1994 Annual Report
on Form 10-K wherein it appears as Exhibit
10(iii)(b). *
No. 10(iii)(c) Copy of registrant's Directors' Retirement Income
Plan, as amended. *
No. 10(iii)(d) Copy of registrant's Management Achievement Plan for
Key Executives, as amended. *
No. 10(iii)(e) Copy of registrant's Retirement Benefit Equity Plan
(formerly known as the Excess Benefit Plan), as
amended. *
No. 10(iii)(f) Armstrong Deferred Compensation Plan, as amended, is
incorporated by reference herein from registrant's
1994 Annual Report on Form 10-K wherein it appears as
Exhibit 10(iii)(f). *
- 57 -
No. 10(iii)(g) Registrant's Employment Protection Plan for Salaried
Employees of Armstrong World Industries, Inc., as
amended, is incorporated by reference herein from
registrant's 1994 Annual Report on Form 10-K wherein
it appears as Exhibit 10(iii)(g). *
No. 10(iii)(h) Copy of registrant's Restricted Stock Plan For
Nonemployee Directors, as amended. *
No. 10(iii)(i) Registrant's Severance Pay Plan for Salaried
Employees, is incorporated by referenced herein from
registrant's 1994 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(i). *
No. 10(iii)(j) Registrant's 1993 Long-Term Stock Incentive
Plan is incorporated by reference herein from the
registrant's 1993 Proxy Statement wherein it appeared
as Exhibit A. *
No. 10(iii)(k) Form of Agreement Between the Company and certain of
its Executive Officers, together with a schedule
identifying those executives is incorporated by
reference herein from registrant's quarterly report
on Form 10-Q for the quarter ended June 30, 1996,
wherein it appears as Exhibit 10. *
No. 10(iii)(l) Form of Indemnification Agreement between the
registrant and each of the registrant's Nonemployee
Directors. *
No. 11 A statement regarding computation of per share
earnings on both primary and fully diluted bases is
set forth in the Financial Statement Schedules on
pages 63 and 64 of this Annual Report on Form 10-K.
No. 21 List of the registrant's domestic and foreign
subsidiaries.
No. 23 Consent of Independent Auditors.
No. 24 Powers of Attorney and authorizing resolutions.
No. 27 Financial Data Statement
No. 99(a) Copy of Annual Report on Form 11-K for the fiscal
year ended September 30, 1996, for the Retirement
Savings Plan For Hourly-Paid Employees of Armstrong
World Industries, Inc. is herewith filed with the
Commission.
- 58 -
No. 99(b) Copy of Annual Report on Form 11-K for the fiscal
year ended September 30, 1996, for the Retirement
Savings Plan for Salaried Employees of Armstrong
World Industries, Inc., is herewith filed with the
Commission.
No. 99(c) Copy of Annual Report on Form 11-K for the fiscal
year ended September 30, 1995, for the Armstrong
World Industries, Inc. Employee Stock Ownership Plan
("Share In Success Plan") is herewith filed with the
Commission.
* Compensatory Plan
- 59 -
b. During the last quarter of 1996, three reports on Form 8-K were filed.
On October 3, 1996, the registrant filed a Current Report on Form 8-K
to report the October 3, 1996, press release regarding the impact of
the discoloration problem.
On October 18, 1996, the registrant filed a Current Report on Form 8-K
to reflect the restated consolidated financial statements of Armstrong
World Industries, Inc. that included the historical results of the
ceramic tile operations on an operating or consolidated line item basis
rather than under the equity method.
On November 6, 1996, the registrant filed a Current Report on Form 8-K
to report that on November 1, 1996, the U.S. Supreme Court granted the
petition of certiorari filed by the Center for Claims Resolution, a
group of 20 defendant companies including Armstrong World Industries,
Inc., which sought appeal of the May 10, 1996, decision of a
three-judge panel of the U.S. Court of Appeals for the Third Circuit
which had overturned the 1994 District Court decision tentatively
approving a national asbestos class action settlement in Georgine v.
-----------
Armchem.
-------
This 10-K contains certain "forward-looking statements"(within the
meaning of the Private Securities Litigation Reform Act of 1995). Among
other things they regard the company's earnings; liquidity and
financial condition; the ultimate outcome of the company's asbestos-
related litigation (including the likelihood that an alternative to the
Georgine settlement will be negotiated); and certain operational
matters. Words or phrases denoting the anticipated results of future
events - such as "anticipate," "believe," "estimate," "expect," "will
likely," "are expected to," "will continue," "project," and similar
expressions that denote uncertainty - are intended to identify such
forward-looking statements. Actual results may differ materially:
(1) as a result of risk and uncertainties identified in connection with
those forward-looking statements, including those factors identified
under the sections captioned "Outlook" in Management's Discussion and
Analysis of Financial Condition and Results of Operations and those
factors identified under the caption "Litigation and Related Matters"
in the Notes to Consolidated Financial Statements in connection with
the company's asbestos-related litigation; (2) as a result of factors
over which the company has no control, including the strength of
domestic and foreign economies, sales growth, competition and certain
cost increases; or (3) if the factors on which the company's
conclusions are based do not conform the company's expectations.
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/ George A. Lorch
------------------------------
Chairman
Date March 25, 1997
----------------------------
- 60 -
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 and
in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant:
George A. Lorch Chairman and President (Principal Executive
Officer)
Frank A. Riddick, III Senior Vice President, Finance
(Principal Financial Officer)
Bruce A. Leech, Jr. Controller
(Principal Accounting Officer)
H. Jesse Arnelle Director
Van C. Campbell Director
Donald C. Clark Director
E. Allen Deaver Director By /s/ George A. Lorch
James E. Marley Director ----------------------
J. Phillip Samper Director (George A. Lorch, as
Jerre L. Stead Director attorney-in-fact and
on his own behalf)
As of March 25, 1997
- 61 -
ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedules
The following consolidated financial statements and Financial Review are filed
as part of this Annual Report on Form 10-K:
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Earnings for the Years Ended December 31,
1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994
The following additional financial data should be read in conjunction with the
financial statements. Schedules not included with this additional data have been
omitted because they are not applicable or the required information is presented
in the financial statements or the financial review.
Additional Financial Data Page No.
------------------------- --------
Supplementary information to financial
review
Computation for Primary Earnings
per Share 63
Computation for Fully Diluted
Earnings per Share 64
Depreciation Rates 65
Schedule II - Valuation and Qualifying Reserves 66
- 62 -
Exhibit No. 11(a)
COMPUTATION FOR PRIMARY EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
1996 1995 1994
---- ---- ----
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock options 39.7 37.6 37.6
==== ==== ====
Primary Earnings Per Share
- --------------------------
Earnings from continuing businesses $164.8 $13.6 $187.2
Less:
Dividend requirement on Series A
convertible preferred stock 8.8 18.8 19.0
Plus:
Tax benefit on dividends paid on unallocated
preferred shares 2.0 4.5 4.9
--- --- ---
Pro forma earnings (loss) available for common
- ----------------------------------------------
shareholders:
- -------------
Continuing businesses 158.0 (0.7) 173.1
Discontinued business -- 109.7 23.2
----- ----- -----
Before Extraordinary Loss 158.0 109.0 196.3
Extraordinary Loss (8.9) -- --
----- ----- -----
Net Earnings $149.1 $109.0 $196.3
====== ====== ======
Primary earnings (loss) per share of common stock
- -------------------------------------------------
Continuing businesses $3.97 $(0.02) $4.60
Discontinued business -- 2.92 0.62
-- ---- ----
Before Extraordinary Loss 3.97 2.90 5.22
Extraordinary Loss (0.21) -- --
------ ---- ----
Net Earnings $3.76 $2.90 $5.22
===== ===== =====
- 63 -
Exhibit No. 11(b)
COMPUTATION FOR FULLY DILUTED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
1996 1995 1994
---- ---- ----
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock
options 39.7 37.6 37.6
Average number of common shares issuable
under the Employee Stock Ownership Plan 2.6 5.4 5.8
--- --- ---
Average number of common and common
equivalent shares outstanding 42.3 43.0 43.4
==== ==== ====
Adjustments to Earnings
- -----------------------
Earnings from continuing businesses $164.8 $13.6 $187.2
Less:
Increased contribution to the Employee
Stock Ownership Plan assuming
conversion of preferred shares to
common 3.2 7.3 7.9
Net reduction in tax benefits assuming
conversion of the Employee Stock
Ownership Plan preferred shares to
common 0.6 1.2 1.0
--- --- ---
Pro forma net earnings available for common
- -------------------------------------------
shareholders:
- -------------
Continuing businesses 161.0 5.1 178.3
Discontinued business -- 109.7 23.2
---- ----- ----
Before Extraordinary Loss 161.0 114.8 201.5
Extraordinary Loss (8.9) -- --
----- ----- -----
Net Earnings $152.1 $114.8 $201.5
====== ====== ======
Fully diluted net earnings (loss) per share of
- ----------------------------------------------
common stock
- ------------
Continuing businesses $3.81 (a)$(0.02) $4.10
Discontinued business -- 2.56 .54
--- ---- ----
Before Extraordinary Loss 3.81 2.67 4.64
Extraordinary Loss (0.21) -- --
------ ---- ----
Net Earnings $3.60 $2.67 $4.64
===== ===== =====
(a) Fully diluted earnings (loss) per share from
continuing businesses for 1995 was antidilutive.
- 64 -
DEPRECIATION RATES
For Years Ended December 31
The approximate average effective rates of depreciation are as follows:
1996 1995 1994
---- ---- ----
% % %
Domestic companies:
Buildings 3.2 3.3 3.2
Machinery and Equipment 6.5 6.2 6.6
Foreign companies:
Buildings 3.5 3.8 3.3
Machinery and Equipment 7.8 8.5 9.5
- 65 -
SCHEDULE II
-----------
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------
For Years Ended December 31
---------------------------
(amounts in millions)
Provision for Losses 1996 1995 1994
- -------------------- ---- ---- ----
Balance at Beginning of Year $ 8.7 $ 9.7 $11.1
Additions Charged to Earnings $ 5.4 $ 2.9 $ 4.0
Deductions $ 3.2 $ 3.9 $ 5.4
Balance at End of Year $10.9 $ 8.7 $ 9.7
- -----------------------------------------------------------------------------------
Provision for Discounts
- -----------------------
Balance at Beginning of Year $20.3 $17.3 $14.0
Additions Charged to Earnings $74.5 $82.2 $77.7
Deductions $70.8 $79.2 $74.4
Balance at End of Year $24.0 $20.3 $17.3
- -----------------------------------------------------------------------------------
Provision for Discounts and Losses
- ----------------------------------
Balance at Beginning of Year $29.0 $27.0 $25.1
Additions Charged to Earnings $79.9 $85.1 $81.7
Deductions $74.0 $83.1 $79.8
Balance at End of Year $34.9 $29.0 $27.0
- 66 -
EXHIBIT INDEX
Exhibits
- --------
No. 3(a) Copy of Registrant's By-laws, as amended effective
December 16, 1996.
No. 3(b) Registrant's restated Articles of Incorporation, as
amended, are incorporated by reference herein from
registrant's 1994 Annual Report on Form 10-K wherein
they appear as Exhibit 3(b).
No. 4(a) Registrant's Rights Agreement effective as of March
21, 1996, between the registrant and Chemical Mellon
Shareholder Services, L.L.C., as Rights Agent,
relating to the registrant's Preferred Stock Purchase
Rights is incorporated by reference herein from
registrant's registration statement on Form 8-A/A
dated March 15, 1996, wherein it appeared as Exhibit
4.
No. 4(b) Copy of Registrant's Retirement Savings and Stock
Ownership Plan as amended and restated effected
October 1, 1996.
No. 4(d) Registrant's Indenture, dated as of March 15, 1988,
between the registrant and Morgan Guaranty Trust
Company of New York, as Trustee, as to which The
First National Bank of Chicago is successor trustee,
is incorporated herein by reference from registrant's
1995 Annual Report on Form 10-K wherein it appears as
Exhibit 4(c).
No. 4(e) Registrant's Supplemental Indenture dated as of
October 19, 1990, between the registrant and The
First National Bank of Chicago, as Trustee, is
incorporated by reference herein from registrant's
1994 Annual Report on Form 10-K wherein it appears as
Exhibit 4(d).
No. 10(i)(a) Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the
registrant and other companies is incorporated by
reference herein from the registrant's 1993 Annual
Report on Form 10-K wherein it appears as Exhibit
10(i)(a).
No. 10(i)(b) Copy of Producer Agreement concerning Center for
Claims Resolution dated September 23, 1988, among the
registrant and other companies as amended.
- 67 -
No. 10(i)(c) Credit Agreement between the registrant, certain
banks listed therein, and Morgan Guaranty Trust
Company of New York, as Agent, dated as of February
7, 1995, providing for a $200,000,000 credit
facility, is incorporated by reference herein from
registrant's 1994 Annual Report on Form 10-K wherein
it appears as Exhibit 10(i)(c).
No. 10(i)(d) Stock Purchase Agreement dated as of December 21,
1995, by and among Dal-Tile International Inc.,
Armstrong Enterprises, Inc., Armstrong Cork Finance
Corporation and Armstrong World Industries, Inc. is
incorporated herein by reference from the
registrant's Current Report on Form 8-K filed January
16, 1996, wherein it appeared as Exhibit 2.01.
No. 10(i)(e) Stock Purchase Agreement dated as of November 18,
1995, by and among Armstrong World Industries, Inc.,
Armstrong Enterprises, Inc., and Interco Incorporated
is incorporated herein by reference from the
registrant's Current Report on Form 8-K filed January
16, 1996, wherein it appeared as Exhibit 2.
No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key
Employees, as amended, is incorporated by reference
herein from registrant's 1995 Annual Report on Form
10-K wherein it appears as Exhibit 10(iii)(a). *
No. 10(iii)(b) Registrant's Deferred Compensation Plan for
Nonemployee Directors, as amended, is incorporated by
reference herein from registrant's 1994 Annual Report
on Form 10-K wherein it appears as Exhibit
10(iii)(b). *
No. 10(iii)(c) Copy of registrant's Directors' Retirement Income
Plan, as amended. *
No. 10(iii)(d) Copy of registrant's Management Achievement Plan for
Key Executives, as amended. *
No. 10(iii)(e) Copy of registrant's Retirement Benefit Equity Plan
(formerly known as the Excess Benefit Plan), as
amended. *
No. 10(iii)(f) Armstrong Deferred Compensation Plan, as amended, is
incorporated by reference herein from registrant's
1994 Annual Report on Form 10-K wherein it appears as
Exhibit 10(iii)(f). *
- 68 -
No. 10(iii)(g) Registrant's Employment Protection Plan for Salaried
Employees of Armstrong World Industries, Inc., as
amended, is incorporated by reference herein from
registrant's 1994 Annual Report on Form 10-K wherein
it appears as Exhibit 10(iii)(g). *
No. 10(iii)(h) Copy of registrant's Restricted Stock Plan For
Nonemployee Directors, as amended. *
No. 10(iii)(i) Registrant's Severance Pay Plan for Salaried
Employees, is incorporated by referenced herein from
registrant's 1994 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(i). *
No. 10(iii)(j) Registrant's 1993 Long-Term Stock Incentive
Plan is incorporated by reference herein from the
registrant's 1993 Proxy Statement wherein it appeared
as Exhibit A. *
No. 10(iii)(k) Form of Agreement Between the Company and certain of
its Executive Officers, together with a schedule
identifying those executives is incorporated by
reference herein from registrant's quarterly report
on Form 10-Q for the quarter ended June 30, 1996,
wherein it appears as Exhibit 10. *
No. 10(iii)(l) Form of Indemnification Agreement between the
registrant and each of the registrant's Nonemployee
Directors. *
No. 11 A statement regarding computation of per share
earnings on both primary and fully diluted bases is
set forth in the Financial Statement Schedules on
pages 63 and 64 of this Annual Report on Form 10-K.
No. 21 List of the registrant's domestic and foreign
subsidiaries.
No. 23 Consent of Independent Auditors.
No. 24 Powers of Attorney and authorizing resolutions.
No. 27 Financial Data Statement
No. 99(a) Copy of Annual Report on Form 11-K for the fiscal
year ended September 30, 1996, for the Retirement
Savings Plan For Hourly-Paid Employees of Armstrong
World Industries, Inc. is herewith filed with the
Commission.
- 69 -
No. 99(b) Copy of Annual Report on Form 11-K for the fiscal
year ended September 30, 1996, for the Retirement
Savings Plan for Salaried Employees of Armstrong
World Industries, Inc., is herewith filed with the
Commission.
No. 99(c) Copy of Annual Report on Form 11-K for the fiscal
year ended September 30, 1995, for the Armstrong
World Industries, Inc. Employee Stock Ownership Plan
("Share In Success Plan") is herewith filed with the
Commission.
* Compensatory Plan
- 70 -