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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, 1997
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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 ($72.8125 per share)
on the New York Stock Exchange on February 10, 1998, was approximately $2.7
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, 1998, as having sole or shared voting
power over 5% or more of the outstanding Common Stock of registrant as of
December 31, 1997. As of February 10, 1998, the number of shares outstanding of
registrant's Common Stock was 40,076,306. This amount includes the 4,826,203
shares of Common Stock as of December 31, 1997, 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 16, 1998, relative to the
April 27, 1998, annual meeting of the shareholders of registrant (the "Company's
1998 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.
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NATURE OF OPERATIONS
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at December 31 (millions) 1997 1996 1995
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Net trade sales:
Floor coverings $1,116.0 $1,091.8 $1,053.9
Building products 754.5 718.4 682.2
Industry products 328.2 346.2 348.8
Ceramic tile -- -- 240.1
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Total net sales $2,198.7 $2,156.4 $2,325.0
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Operating income (loss): (Note 1)
Floor coverings $ 186.5 $ 146.9 $ 145.0
Building products 122.3 95.1 92.2
Industry products 55.5 40.1 9.3
Ceramic tile (Note 2) (42.4) 9.9 (168.4)
Unallocated corporate expense 0.1 (36.1) (34.0)
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Total operating income $ 322.0 $ 255.9 $ 44.1
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Depreciation and amortization:
Floor coverings $ 65.5 $ 53.9 $ 47.9
Building products 37.5 37.0 36.8
Industry products 17.3 19.1 19.3
Ceramic tile 4.3 4.3 13.5
Corporate 8.1 9.4 5.6
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Total depreciation
and amortization $ 132.7 $ 123.7 $ 123.1
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Capital additions: (Note 3)
Floor coverings $ 76.6 $ 117.7 $ 77.3
Building products 54.4 67.7 49.2
Industry products 16.5 22.5 45.0
Ceramic tile -- -- 9.6
Corporate 8.7 12.8 6.3
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Total capital additions $ 156.2 $ 220.7 $ 187.4
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Identifiable assets:
Floor coverings $ 713.8 $ 687.9 $ 583.2
Building products 554.9 541.1 513.5
Industry products 248.6 272.8 301.8
Ceramic tile 135.7 168.7 135.8
Corporate 722.5 465.1 615.5
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Total assets $2,375.5 $2,135.6 $2,149.8
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Note 1:
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Restructuring charges in
operating income (millions) 1997 1996 1995
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Floor coverings $ -- $ 14.5 $ 25.0
Building products -- 8.3 6.3
Industry products -- 4.0 31.4
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: 1997 operating income includes a $29.7 million loss as a result of
charges incurred by Dal-Tile International Inc. for uncollectible receivables,
overstocked inventories and other asset revaluations. 1995 operating income
includes a $177.2 million loss due to the ceramic tile business combination. See
"Equity Earnings From Affiliates" on page 4.
Note 3: 1997 and 1995 capital additions for industry segments of property, plant
and equipment from acquisitions were $14.5 million and $15.6 million,
respectively.
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DISCONTINUED OPERATIONS
In 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 interest-bearing debt. The company recorded
a gain of $83.9 million after tax on the sale. 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.
EQUITY (EARNINGS) LOSS FROM AFFILIATES
Equity earnings from affiliates for 1997 were primarily comprised of the
company's share of the net loss from 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 income from the 50%
interest in the WAVE joint venture with Worthington Industries. The 1997 loss
included $8.4 million for the company's share of operating losses incurred by
Dal-Tile, a $29.7 million loss for the company's share of the charge incurred by
Dal-Tile, primarily for uncollectible receivables and overstocked inventories,
and $4.3 million for the amortization of Armstrong's initial investment in
Dal-Tile over the underlying equity in net assets of the business combination.
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
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%. During 1997, the company purchased
additional shares of Dal-Tile stock, increasing the company's ownership to 34%.
Armstrong's ownership of 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
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Net sales $240.1
Operating income/(1)/ 8.8
Assets/(2)/ 269.8
Liabilities/(2)/ 17.3
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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 worldwide 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 commercial 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). Commercial 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. Commercial
ceiling materials and accessories, along with acoustical wall panels, are sold
by the Company to ceiling systems contractors and to resale distributors.
Suspension ceiling systems 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.
Ceramic Tile
Ceramic tile for floors, walls and countertops, together with adhesives,
installation and maintenance materials and accessories are sold through home
centers, independent ceramic and floor covering wholesalers and sales service
centers operated by Dal-Tile.
-----------------------------------
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, films, 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
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products. During 1997, adequate supplies of raw materials were available to all
of the Company's industry segments.
Customers' orders for the Company's products are typically 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 of 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 $141.7 million in 1997, $220.7 million in 1996, and $171.8
million in 1995 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.
The Company spent $47.8 million in 1997, $55.2 million in 1996, and $57.9
million in 1995 on research and development activities worldwide for the
continuing businesses.
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ENVIRONMENTAL MATTERS
In 1997, the company incurred capital expenditures of approximately $1.2 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1998 and 1999. 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 17 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, 1997, 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, $9.3 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, 1997, the Company had approximately 10,600 active employees,
of whom approximately 3,800 are located outside the United States. About 62% of
the Company's approximately 4,300 hourly or salaried production and maintenance
employees in the United States are represented by labor unions.
GEOGRAPHIC AREAS
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at December 31 (millions) 1997 1996 1995
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Net trade sales:
United States $1,453.1 $1,419.2 $1,586.4
Europe 545.6 548.4 558.7
Other foreign 200.0 188.8 179.9
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Interarea transfers:
United States 111.7 105.0 101.1
Europe 14.9 13.2 13.8
Other foreign 29.2 30.4 32.1
Eliminations (155.8) (148.6) (147.0)
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Total net sales $2,198.7 $2,156.4 $2,325.0
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Operating income:
United States $ 236.1 $ 202.7 $ 7.7
(see note 2 on page 4)
Europe 77.2 79.3 62.6
Other foreign 8.6 10.0 7.8
Unallocated corp. income (expense) 0.1 (36.1) (34.0)
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Total operating income $ 322.0 $ 255.9 $ 44.1
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Identifiable assets:
United States $1,168.9 $1,180.1 $1,044.5
Europe 370.4 383.7 406.7
Other foreign 113.8 107.3 83.4
Corporate 722.5 465.1 615.5
Eliminations (0.1) (0.6) (0.3)
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Total assets $2,375.5 $2,135.6 $2,149.8
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United States net trade sales include export sales to non-affiliated customers
of $40.9 million in 1997, $34.0 million in 1996 and $32.1 million in 1995. Also
included in United States net trade sales were ceramic tile operations sales of
$240.1 million in 1995.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain, Sweden 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 44 manufacturing plants in 13 countries; 21 of these plants are
located throughout the United States. Additionally, affiliates operate 19 plants
in 6 countries.
Floor covering products and adhesives are produced at 16 plants with principal
manufacturing facilities located in Lancaster, Pennsylvania, Kankakee, Illinois,
and Stillwater, Oklahoma. Building products are produced at 15 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 16 plants with principal manufacturing facilities at Munster,
Germany, and Fulton, New York.
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 vary 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 1997 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
PERSONAL INJURY LITIGATION
The company is one of many defendants in approximately 83,000 pending claims as
of December 31, 1997, alleging personal injury from exposure to asbestos. The
increase in the number of claims during the last two quarters of 1997 is
primarily due to the inclusion of cases that had been subject to an injunction
related to the Georgine Settlement Class Action ("Georgine"), described below,
and those that had been filed in the tort system against other defendants (and
not against the Center for Claims Resolution ("Center") members) while Georgine
was pending.
Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against the company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined 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 large number of claims have been settled,
dismissed, put on inactive lists or otherwise resolved, and the company
generally is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals. Neither the rate
of future filings and resolutions nor the total number of future claims can be
predicted at this time with a high degree of certainty.
Attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. The company supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims in state courts have not been directly affected by the
transfer, although most recent cases have been filed in state courts.
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Georgine Settlement Class Action
Georgine v. Amchem was a settlement class action filed in the Eastern District
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of Pennsylvania, on January 15, 1993, that included essentially all future
personal injury claims against members of the Center, including the company. It
was designed to establish a nonlitigation system for the resolution of such
claims, and offered a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they met certain exposure and medical
criteria. Compensation amounts were derived from historical settlement data and
no punitive damages were to be paid. The settlement was designed to, among other
things, minimize transactional costs, including attorneys' fees, expedite
compensation to claimants with qualifying claims, and relieve the courts of the
burden of handling future claims. Based on maximum mathematical projections
covering a ten-year period starting in 1994, the company estimated in Georgine a
reasonably possible additional liability of $245 million.
The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on June 25, 1997, holding that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system. The company
believes that an alternative claims resolution mechanism to Georgine is likely
to emerge.
Asbestos-related liability
During the last half of 1997, the company assessed the impact of the recent
Supreme Court ruling on its projected asbestos resolution and defense costs. In
doing so, the company reviewed, among other things, its historical settlement
amounts, the incidence of past claims, the mix of the injuries and occupations
of the plaintiffs, the number of cases pending against it, the Georgine
projection and its experience. Subject to the uncertainties, limitations and
other factors referred to above and based upon its experience, the company has
recorded $251.7 million on the balance sheet as an estimated minimum liability
to defend and resolve probable and estimable asbestos-related personal injury
claims currently pending and to be filed through 2003. This is management's best
estimate of the minimum liability, although potential future costs for claims
could range up to an additional $387 million or an estimated maximum liability
of approximately $639 million. Because of the uncertainties related to asbestos
litigation, it is not possible to estimate the number of personal injury claims
that may be filed after 2003 or their defense and resolution costs. Therefore,
the company's estimated liability does not include costs for personal injury
claims that may be filed after 2003, although it is likely there will be such
additional claims. Management believes that the potential additional costs for
claims to be filed through 2003 and those filed thereafter, net of any potential
insurance recoveries, will not have a material after-tax effect on the financial
condition of the company or its liquidity, although the net after-tax effect of
any future liabilities recorded in excess of insurance assets could be material
to earnings in a future period.
PROPERTY DAMAGE LITIGATION
The company is also one of many defendants in 10 pending claims as of December
31, 1997, brought by public and private building owners. These claims include
allegations of damage to buildings caused by asbestos-containing products and
generally seek compensatory and punitive damages and equitable relief, including
reimbursement of expenditures, for removal and replacement of such products. The
claims appear to be aimed at friable (easily crumbled) asbestos-containing
products, although allegations encompass all asbestos-containing products,
including previously installed asbestos-containing resilient flooring. Among the
lawsuits that have been resolved are four class actions, which involve public
and private schools, Michigan state public and private schools, colleges and
universities, and private property owners who leased facilities to the federal
government. The company vigorously denies the validity of the allegations
against it in these claims. These suits and claims are not handled by the
Center. Insurance coverage has been resolved and is expected to cover almost all
costs of these claims.
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CODEFENDANT BANKRUPTCIES
Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
INSURANCE COVERAGE
The company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product hazard coverage for property damage claims. Certain policies also
provide coverage to ACandS, Inc., a former subsidiary of the company. The
company and ACandS, Inc., share certain limits that both have accessed and have
entered into an agreement that reserved for ACandS, Inc., a certain amount of
excess insurance.
California Insurance Coverage Lawsuit
Trial court decisions in the insurance lawsuit filed by the company in
California held that the trigger of coverage for personal injury claims was
continuous from exposure through death or filing of a claim, that a triggered
insurance policy should respond with full indemnification up to policy limits,
and that any defense obligation ceases upon exhaustion of policy limits.
Although not as comprehensive, another decision established favorable defense
and indemnity coverage for property damage claims, providing coverage during the
period of installation and any subsequent period in which a release of fibers
occurred. The California appellate courts substantially upheld the trial court,
and that insurance coverage litigation is now concluded. The company has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to below, or other
settlements. In 1989, a settlement with a carrier having both primary and excess
coverages provided for certain minimum and maximum percentages of costs for
personal injury claims to be allocated to nonproducts (general liability)
coverage, the percentage to be determined by negotiation or in alternative
dispute resolution ("ADR").
The insurance carriers that provided personal injury products hazard,
nonproducts or property damage coverages are as follows: Reliance Insurance
Company; Aetna (now Travelers) Casualty and Surety Company; Liberty Mutual
Insurance Company; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier that
provided $25 million of personal injury coverage, certain London companies, and
certain excess carriers providing only property damage coverage are insolvent.
The company is pursuing claims against insolvents in a number of forums.
Wellington Agreement
In 1985, the company and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled nearly all disputes
concerning personal injury insurance coverage with most of the company's
carriers, provided broad coverage for both defense and indemnity and addressed
both products hazard and non-products (general liability) coverages.
Asbestos Claims Facility ("Facility") and Center
for Claims Resolution
The Wellington Agreement established the Facility to evaluate, settle, pay and
defend all personal injury claims against member companies. Resolution and
defense costs were allocated by formula. The Facility subsequently dissolved,
and the Center was created in October 1988 by 21 former Facility members,
including the company. Insurance carriers, while not members, are represented ex
officio on the Center's governing board and have agreed annually to provide a
portion of the Center's operational costs. The Center adopted many of the
conceptual features of the Facility and has addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. Resolution
and defense costs are allocated by formula; adjustments over time have resulted
in some increased share for the company.
- 11 -
Insurance Recovery Proceedings
A substantial portion of the company's primary and excess insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve exposure during installation of asbestos
materials. The Wellington Agreement and the 1989 settlement agreement referred
to above have provisions for such coverage. An ADR process under the Wellington
Agreement is underway against certain carriers to determine the percentage of
resolved and unresolved claims that are nonproducts claims, to establish the
entitlement to such coverage and to determine whether and how much reinstatement
of prematurely exhausted products hazard insurance is warranted. The nonproducts
coverage potentially available is substantial and, for some policies, includes
defense costs in addition to limits. The carriers have raised various defenses,
including waiver, laches, statutes of limitations and contractual defenses. One
primary carrier alleges that it is no longer bound by the Wellington Agreement,
and another alleges that the company agreed to limit its claims for nonproducts
coverage against that carrier when the Wellington Agreement was signed. The ADR
process is in the trial phase of binding arbitration. Other proceedings against
non-Wellington carriers may become necessary.
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the company's belief in the availability of insurance in this
amount, based upon the company's success in insurance recoveries, settlement
agreements that provide such coverage, the nonproducts recoveries by other
companies and the opinion of outside counsel. Such insurance is probable of
recovery through negotiation or litigation. A substantial portion of the
insurance asset is in ADR, which the company believes may be resolved in 1998 or
later. A shortfall has developed between available insurance and amounts
necessary for resolution and defense costs. This shortfall was $39.9 million at
the end of 1997 and included a $1.5 million insurance recovery from an insolvent
insurance carrier. The recovery of insurance assets to cover the shortfall will
depend upon the resolution of the ADR and other disputes with the insurance
carriers. The company does not believe that after-tax effect of the shortfall
will be material either to the financial condition of the company or to its
liquidity.
CONCLUSIONS
The company does not know how many claims will be filed against it in the
future, or the details thereof or of pending suits not fully reviewed, or the
defense and resolution costs that may ultimately result therefrom, or whether an
alternative to the Georgine settlement vehicle may emerge, or the scope of its
insurance coverage ultimately deemed available.
The company has assessed the impact of the recent Supreme Court ruling on its
projected asbestos resolution and defense costs. Subject to the uncertainties,
limitations and other factors referred to above and based upon its experience,
the company has recorded on the balance sheet $251.7 million as a minimum
estimated liability to defend and resolve probable and estimable asbestos-
related personal injury claims currently pending and to be filed through 2003.
- 12 -
This is management's best estimate of the minimum liability, although potential
future costs for these claims could range up to an additional $387 million or an
estimated maximum liability of approximately $639 million. Because of the
uncertainties related to asbestos litigation, it is not possible to estimate the
number of personal injury claims that may be filed after 2003 or their cost.
Therefore, the company's estimated liability does not include costs for personal
injury claims that may be filed after 2003, although it is likely there will be
such additional claims. Management believes that the potential additional costs
for claims to be filed through 2003 and those filed thereafter, net of any
potential insurance recoveries, will not have a material after-tax effect on the
financial condition of the company or its liquidity, although the net after-tax
effect of any future liabilities recorded in excess of insurance assets could be
material to earnings in a future period.
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the company's belief in the availability of insurance in this
amount, based upon the company's success in insurance recoveries, settlement
agreements that provide such coverage, the nonproducts recoveries by other
companies, and the opinion of outside counsel. Such insurance is probable of
recovery through negotiation or litigation. A substantial portion of the
insurance asset is in ADR, which the company believes may be resolved in 1998 or
later. A shortfall has developed between available insurance and amounts
necessary for resolution and defense costs. This shortfall was $39.9 million at
the end of 1997 and included a $1.5 million insurance recovery from an insolvent
insurance carrier. The recovery of insurance assets to cover the shortfall will
depend upon the resolution of the ADR and other disputes with the insurance
carriers. The company does not believe that after-tax effect of the shortfall
will be material either to the financial condition of the company or to its
liquidity.
The company believes that a claims resolution mechanism alternative to the
Georgine settlement will eventually emerge, and that the resolution and defense
costs are likely to be higher than the earlier maximum mathematical projection
in Georgine.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the company believes it is
probable that substantially all of the defense and resolution costs of property
damage claims will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and other settlements with insurance carriers, the results of the
California insurance coverage litigation, the establishment of the Center, the
likelihood that an alternative to the Georgine settlement will eventually
emerge, and its experience, the company believes the asbestos-related claims
against the company would not be material either to the financial condition of
the company or to its liquidity, although the net after-tax effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in such future period.
- 13 -
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 Equity and Related Stockholder
- --------------------------------------------------------------------------
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, 1998, there were approximately 7,100 holders of record of the
Company's Common Stock.
During 1997, the Company issued a total of 1,800 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.
Quarterly Financial Information
- --------------------------------------------------------------------------------
First Second Third Fourth Total year
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Dividends per share of common stock 0.40 0.44 0.44 0.44 1.72
Price range of common stock--high 72 1/4 75 1/4 74 9/16 75 3/8 75 3/8
Price range of common stock--low 64 3/4 61 1/2 64 3/8 64 1/8 61 1/2
- ------------------------------------------------------------------------------------------------------------------------------------
1996 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
- ------------------------------------------------------------------------------------------------------------------------------------
- 14 -
Item 6. Selected Financial Data
- --------------------------------
ELEVEN-YEAR SUMMARY
- --------------------------------------------------------------------------------
(Dollars in millions except for per-share data) For year 1997 1996 1995 1994
====================================================================================================================================
Net sales 2,198.7 2,156.4 2,325.0 2,226.0
Cost of goods sold 1,461.7 1,459.9 1,581.1 1,483.9
Total selling, general and administrative expenses 385.3 413.2 457.0 449.2
Equity (earnings) loss from affiliates 29.7 (19.1) (6.2) (1.7)
Restructuring charges -- 46.5 71.8 --
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- -- 177.2 --
Operating income (loss) 322.0 255.9 44.1 294.6
Interest expense 28.0 22.6 34.0 28.3
Other expense (income), net (2.2) (6.9) 1.9 0.5
Earnings (loss) from continuing businesses before
income taxes 296.2 240.2 8.2 265.8
Income taxes 111.2 75.4 (5.4) 78.6
Earnings (loss) from continuing businesses 185.0 164.8 13.6 187.2
As a percentage of sales 8.4% 7.6% 0.6% 8.4%
As a percentage of average monthly assets (a) 9.0% 8.5% 0.7% 10.7%
Earnings (loss) from continuing businesses
applicable to common stock (b) 185.0 158.0 (0.7) 173.1
Per common share--basic (c) 4.55 4.04 (0.02) 4.62
Per common share--diluted (c) 4.50 3.82 (0.02) 4.09
Net earnings (loss) 185.0 155.9 123.3 210.4
As a percentage of sales 8.4% 7.2% 5.3% 9.5%
Net earnings (loss) applicable to common stock (b) 185.0 149.1 109.0 196.3
As a percentage of average shareholders' equity 22.3% 19.6% 15.0% 31.3%
Per common share--basic (c) 4.55 3.81 2.94 5.24
Per common share--diluted (c) 4.50 3.61 2.68 4.62
Dividends declared per share of common stock 1.72 1.56 1.40 1.26
Capital expenditures 160.5 228.0 182.7 138.4
Aggregate cost of acquisitions 4.2 -- 20.7 --
Total depreciation and amortization 132.7 123.7 123.1 120.7
Average number of employees--continuing businesses 10,643 10,572 13,433 13,784
Average number of common shares outstanding (millions) 40.6 39.1 37.1 37.5
- ------------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 128.5 243.5 346.8 384.4
Net property, plant and equipment--continuing businesses 972.2 964.0 878.2 966.4
Total assets 2,375.5 2,135.6 2,149.8 2,159.0
Net long-term debt 223.1 219.4 188.3 237.2
Total debt as a percentage of total capital (d) 39.2% 37.2% 38.5% 41.4%
Shareholders' equity 810.6 790.0 775.0 735.1
Book value per share of common stock 20.20 19.19 20.10 18.97
Number of shareholders (e) (f) 7,137 7,424 7,084 7,473
Common shares outstanding (millions) 40.1 41.2 36.9 37.2
Market value per common share 74 3/4 69 1/2 62 38 1/2
- ------------------------------------------------------------------------============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990
====================================================================================================================================
Net sales 2,075.7 2,111.4 2,021.4 2,082.4
Cost of goods sold 1,453.7 1,536.1 1,473.7 1,469.8
Total selling, general and administrative expenses 435.6 446.6 415.1 404.0
Equity (earnings) loss from affiliates (1.4) (0.2) -- --
Restructuring charges 89.3 160.8 12.5 6.8
Loss from ceramic tile business formation/
(gain) from sales of woodlands -- -- -- (60.4)
Operating income (loss) 98.5 (31.9) 120.1 262.2
Interest expense 38.0 41.6 45.8 37.5
Other expense (income), net (6.1) (7.2) (8.5) 19.7
Earnings (loss) from continuing businesses before
income taxes 66.6 (66.3) 82.8 205.0
Income taxes 17.6 (2.9) 32.7 69.5
Earnings (loss) from continuing businesses 49.0 (63.4) 50.1 135.5
As a percentage of sales 2.4% -3.0% 2.5% 6.5%
As a percentage of average monthly assets (a) 2.8% -3.3% 2.7% 7.5%
Earnings (loss) from continuing businesses
applicable to common stock (b) 35.1 (77.2) 30.7 116.0
Per common share--basic (c) 0.95 (2.08) 0.83 2.98
Per common share--diluted (c) 0.93 (2.08) 0.83 2.73
Net earnings (loss) 63.5 (227.7) 48.2 141.0
As a percentage of sales 3.1% -10.8% 2.4% 6.8%
Net earnings (loss) applicable to common stock (b) 49.6 (241.5) 28.8 121.5
As a percentage of average shareholders' equity 9.0% -33.9% 3.3% 13.0%
Per common share--basic (c) 1.34 (6.51) 0.78 3.12
Per common share--diluted (c) 1.27 (6.51) 0.78 2.86
Dividends declared per share of common stock 1.20 1.20 1.19 1.135
Capital expenditures 110.3 109.8 129.7 186.5
Aggregate cost of acquisitions -- 4.2 -- 16.1
Total depreciation and amortization 117.0 123.4 122.1 116.5
Average number of employees--continuing businesses 14,796 16,045 16,438 16,926
Average number of common shares outstanding (millions) 37.2 37.1 37.1 38.9
- ------------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 279.3 239.8 353.8 305.2
Net property, plant and equipment--continuing businesses 937.6 967.2 1,042.8 1,032.7
Total assets 1,869.2 1,944.3 2,125.7 2,124.4
Net long-term debt 256.8 266.6 301.4 233.2
Total debt as a percentage of total capital (d) 52.2% 57.2% 46.9% 45.7%
Shareholders' equity 569.5 569.2 885.5 899.2
Book value per share of common stock 14.71 14.87 23.55 24.07
Number of shareholders (e) (f) 7,963 8,611 8,896 9,110
Common shares outstanding (millions) 37.2 37.1 37.1 37.1
Market value per common share 53 1/4 31 7/8 29 1/4 25
- ------------------------------------------------------------------------============================================================
- 15 -
1989 1988 1987
====================================================================================================================================
Net sales 2,050.4 1,843.4 1,608.7
Cost of goods sold 1,423.2 1,287.6 1,112.0
Total selling, general and administrative expenses 380.7 331.3 288.8
Equity (earnings) loss from affiliates -- -- --
Restructuring charges 5.9 -- --
Loss from ceramic tile business formation/
(gain) from sales of woodlands (9.5) (1.9) --
Operating income (loss) 250.1 226.4 207.9
Interest expense 40.5 25.8 11.5
Other expense (income), net (5.7) (13.1) (4.3)
Earnings (loss) from continuing businesses before
income taxes 215.3 213.7 200.7
Income taxes 74.6 79.4 82.2
Earnings (loss) from continuing businesses 140.7 134.3 118.5
As a percentage of sales 6.9% 7.3% 7.4%
As a percentage of average monthly assets (a) 8.6% 10.4% 11.3%
Earnings (loss) from continuing businesses
applicable to common stock (b) 131.0 133.9 118.0
Per common share--basic (c) 2.88 2.90 2.50
Per common share--diluted (c) 2.75 2.88 2.49
Net earnings (loss) 187.6 162.7 150.4
As a percentage of sales 9.1% 8.8% 9.3%
Net earnings (loss) applicable to common stock (b) 177.9 162.3 150.0
As a percentage of average shareholders' equity 17.9% 17.0% 17.6%
Per common share--basic (c) 3.92 3.51 3.18
Per common share--diluted (c) 3.72 3.50 3.16
Dividends declared per share of common stock 1.045 0.975 0.885
Capital expenditures 216.9 167.8 157.6
Aggregate cost of acquisitions -- 355.8 71.5
Total depreciation and amortization 121.6 99.4 83.6
Average number of employees--continuing businesses 17,167 15,016 14,036
Average number of common shares outstanding (millions) 45.4 46.2 47.2
- ------------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 449.4 260.6 345.3
Net property, plant and equipment--continuing businesses 944.0 930.4 674.1
Total assets 2,008.9 2,073.1 1,574.9
Net long-term debt 181.3 185.9 67.7
Total debt as a percentage of total capital (d) 36.1% 35.9% 22.8%
Shareholders' equity 976.5 1,021.8 913.8
Book value per share of common stock 23.04 21.86 19.53
Number of shareholders (e) (f) 9,322 10,355 9,418
Common shares outstanding (millions) 42.3 46.3 46.2
Market value per common share 37 1/4 35 32 1/4
- ------------------------------------------------------------------------============================================================
Notes:
(a) Assets exclude insurance recoveries for asbestos-related liabilities.
(b) After deducting preferred dividend requirements and adding the tax benefits
for unallocated preferred shares.
(c) See definition of basic and diluted earnings per share on page 35. Earnings
per share data is restated for all periods for adoption of SFAS No. 128.
(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 1997.
(f) Includes, for 1987, 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.
- 16 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
- --------------------------------------------------------------------------------
1997 COMPARED WITH 1996
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 33), the company
had cash and cash equivalents of $57.9 million at December 31, 1997. Cash
provided by operating activities, supplemented by increases in short-term debt;
proceeds from the sale of land, facilities and other assets, and cash proceeds
from exercised stock options, covered normal working capital requirements;
purchases of property, plant and equipment; payment of cash dividends;
repurchase of shares; acquisitions and investments in joint ventures and
computer software.
Cash provided by operating activities for the year ended December 31, 1997, was
$246.6 million compared with $220.9 million in 1996. The increase is primarily
due to the higher level of earnings before noncash charges and lower
restructuring payments year-to-year, partially offset by the payment of cash due
to a shortfall between currently available insurance and amounts necessary to
pay asbestos-related claims. Working capital was $128.5 million as of December
31, 1997, $115.0 million lower than the $243.5 million at year-end 1996. The
ratio of current assets to current liabilities was 1.27 to 1 as of December 31,
1997, compared with 1.76 to 1 as of December 31, 1996. The ratio decreased from
December 31, 1996, primarily due to accrued expenses for projected short-term
asbestos-related liability payments and higher levels of short-term debt used to
finance higher levels of receivables and inventories, refinancing of long-term
debt and other general corporate purposes.
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash from operations and uses of cash flow
--------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
- --------------------------------------------------------------------------------
- 17 -
Net cash used for investing activities was $152.8 million for the year ended
December 31, 1997, down from $239.8 million in 1996. This reduction was
primarily due to lower purchases of property, plant and equipment and higher
proceeds from the sale of land, facilities and other assets which were partially
offset by additional acquisitions and investments in joint ventures, and higher
investment in computer software.
Net cash used for financing activities was $98.6 million for the year ended
December 31, 1997, as cash provided by higher levels of short-term debt was
offset by cash used for payment of dividends and reduction of long-term debt. In
1996, net cash used for financing activities was $171.8 million as cash was used
to reduce debt and redeem outstanding preferred stock in addition to the payment
of dividends and repurchases of stock.
Under the 1994 and 1996 board-approved 5,500,000 common share repurchase plans,
the company has repurchased approximately 3,661,000 shares through December 31,
1997, including 1,281,000 shares repurchased in 1997.
Long-term debt, excluding the company's guarantee of the ESOP loan, increased
slightly in 1997. At December 31, 1997, long-term debt of $223.1 million, or
16.7% of total capital, compared with $219.4 million, or 17.4% of total capital,
at the end of 1996. The 1997 and 1996 year-end ratios of total debt (including
the company's financing of the ESOP loan) as a percent of total capital were
39.2% and 37.2%, respectively.
Other sources of capital include a $300 million revolving line of credit,
expiring 2001, which is used for general corporate purposes and as a backstop
for commercial paper notes; and $500 million of unissued debt and/or equity
securities registered with the Securities and Exchange Commission. 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. Early in 1998, the company's long-term debt
rating was reduced by Standard & Poor's from A+ to A while Moody's remained at
A2. The company's short-term debt ratings remained at A-1 from Standard & Poor's
and P-1 from Moody's.
The company has increased its investment in computer software with projects to
develop and implement a new corporate logistics system and a new financial and
human resource system. These new systems are year-2000-compliant. In addition, a
year 2000 project, expected to be completed in 1999, is converting the remainder
of the company's systems to minimize this exposure. The costs of this project
are not expected to be material to the company's results of operations,
financial condition or liquidity. Since the company cannot yet be asssured that
suppliers and other third parties with which it does business will be compliant
on a timely basis, the company cannot assess the potential impact, if any, that
their noncompliance may have on the company.
The company is involved in significant asbestos-related litigation which is
described more fully on pages 59-64 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, or the details thereof, or of pending suits not
fully reviewed, or the expense and any liability that may ultimately result
therefrom, or whether an alternative to the Georgine settlement vehicle may
emerge, or the ultimate liability if such alternative does not emerge, or the
scope of its nonproducts insurance coverage ultimately deemed available.
The company has assessed the impact of the recent Supreme Court ruling on its
projected asbestos resolution and defense costs. Subject to the uncertainties,
limitations and other factors referred to above and based upon its experience,
the company has recorded a current liability and long-term reserve totaling
$251.7 million on the balance sheet as an estimated minimum liability to defend
and resolve probable and estimable asbestos-related personal injury claims
currently pending and to be filed through 2003. This is management's best
estimate of the minimum liability, although potential future costs for claims
could range up to an additional $387 million or an estimated maximum liability
of approximately $639 million. Because of the uncertainties related to asbestos
litigation, it is not possible to estimate the number of personal injury claims
that may be filed after 2003 or their cost. Therefore, the company's estimated
liability does not reflect amounts for personal injury claims that may be filed
after 2003, although it is likely there will be such additional claims.
Management believes that the potential additional costs for claims to be filed
through 2003 and those filed thereafter, net of any potential insurance
recoveries, will not have a material after-tax effect on the financial condition
of the company or its liquidity, although the net after-tax effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in a future period.
- --------------------------------------------------------------------------------
- 18 -
------------------------------ --------------------------------
Total debt/total debt + equity Funds from operations/total debt
------------------------------ --------------------------------
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the company's belief in the availability of insurance in this
amount, based upon the company's success in insurance recoveries, the
agreements, including the Wellington Agreement, that provide such coverage, the
nonproducts recoveries by other companies and the opinion of outside counsel.
Such insurance is probable of recovery through negotiation, alternative dispute
resolution ("ADR") or litigation. A substantial portion of the insurance asset
is in ADR, which the company believes will not be resolved until 1998 or later.
As a consequence, a shortfall has developed between available insurance and
amounts necessary for resolution and defense costs. This shortfall was $39.9
million at the end of 1997 and included a $1.5 million insurance recovery from
an insolvent insurance carrier. The recovery of insurance assets to cover the
shortfall will depend upon the resolution of the ADR and other disputes with the
insurance carrier. The company does not believe that the after-tax effect of the
shortfall will be material either to the financial condition of the company or
to its liquidity.
Subject to the uncertainties, limitations and other factors referred to in the
note covering asbestos-related legal proceedings, the company believes it is
probable that substantially all of the expenses and any liability payments
associated with the property damage claims will be paid under insurance coverage
settlement agreements 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 and settlements with other insurance
carriers, the results of the California insurance coverage litigation, the
remaining reserve, the establishment of the Center, the likelihood that an
alternative to the Georgine settlement will eventually emerge, and its
experience, the company believes the asbestos-related 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.
On June 16, 1997, the company commenced an all cash offer to purchase all of the
outstanding common shares and common share equivalents (including convertible
debentures and warrants on an as-if converted basis) of Domco Inc. ("Domco"), a
Canadian subsidiary of Sommer Allibert, S.A. ("Sommer"). The offer has been
extended and amended on a number of occasions since June, most recently to
increase the bid price per common share to CDN $26.50 (thereby increasing the
aggregate proposed purchase price to CDN $560 million) and to extend the
expiration date of the offer to May 29, 1998. The extension is intended to
permit the Quebec Securities Commission to rule on the issues of whether the
merger of Tarkett AG ("Tarkett") with Sommer constitutes an indirect takeover of
Domco and, if so, at a purchase price in excess of 115% of Domco's per share
price without providing similar value to Domco's minority shareholders in
violation of the rules under the Quebec Securities Act. The offer is conditional
upon the valid tender of 51% of the outstanding common shares of Domco on a
diluted basis. The company has recorded an asset of $8.3 million for costs
associated with the Domco acquisition. The company has obtained requisite
regulatory approvals from the United States Federal Trade Commission, the
Canadian Minister of Industry and the Competition Bureau in Canada. Sommer has
stated that it does not intend to sell its shares of Domco to the company, and
Domco's board of directors has rejected the company's offer to subscribe for
Domco common shares.
On June 9, 1997, the company filed a complaint in the United States District
Court for the Eastern District of Pennsylvania alleging that Sommer
(subsequently amended to include Tarkett and Marc Assa, the President du
Directoire of Sommer), had used confidential information provided by the company
during negotiations regarding the purchase of Sommer's worldwide flooring assets
to structure a transaction with Tarkett in violation of a confidentiality
agreement and exclusivity understanding with the company and a duty to negotiate
in good faith. The company intends to continue to pursue this litigation to
recover damages in a trial scheduled to begin on September 15, 1998. The
ultimate magnitude of the company's potential recovery is not known at this
time.
- 19 -
On June 23, 1997, the company filed a claim, amended on August 11, 1997, in the
Ontario Court (General Division) alleging that Sommer and its representatives on
Domco's board breached their fiduciary duty to Domco and acted in a manner
oppressive to Domco's minority shareholders when they rejected the company's bid
for Domco. The company's motion requesting a court injunction to prevent the
takeover of Domco by Tarkett, among other items, was dismissed. The company is
continuing to pursue this litigation to recover damages from Sommer and Domco's
directors, among other relief.
The company intends to continue to pursue all legal remedies available to it in
the United States and Canada against Sommer, Domco's directors, Tarkett and Marc
Assa.
MARKET RISK
The company uses financial instruments, including fixed and variable rate debt,
as well as swap, forward and option contracts to finance its operations and to
hedge interest rate, currency and commodity exposures. The swap, forward and
option contracts are entered into for periods consistent with the underlying
exposure and do not constitute positions independent of those exposures. The
company does not enter into contracts for speculative purposes and is not a
party to any leveraged instruments.
INTEREST RATE SENSITIVITY
The table below provides information about the company's debt obligations. The
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. Weighted average variable rates are based on implied
forward rates in the yield curve at the reporting date. The information is
presented in US dollar equivalents, which is the company's reporting currency.
- -------------------------------------------------------------------------------------------
Expected maturity After
date ($ millions) 1998 1999 2000 2001 2002 2002 Total
- -------------------------------------------------------------------------------------------
Liabilities
Long-term debt:
Fixed rate $ 13.5 $ 21.0 $ 22.1 $ 7.5 $ 0.0 $ 153.0 $ 217.1
Avg. interest rate 8.88% 4.79% 8.14% 9.00% 0.00% 9.13% 8.59%
- -------------------------------------------------------------------------------------------
Variable rate $ 1.0 $ 4.0 $ 5.0 $ 2.0 $ 0.0 $ 8.5 $ 20.5
Avg. interest rate 9.38% 8.28% 8.28% 8.28% 0.00% 3.90% 6.52%
- -------------------------------------------------------------------------------------------
The company is also party to forward starting interest rate swaps entered into
in anticipation of future debt issuance. On December 31, 1997, the notional
amount under these forward starting swaps was $100.0 million with all swap
initiation dates occurring during 1998. The market value of these forward
agreements on December 31, 1997, was $3.2 million less than the notional amount.
EXCHANGE RATE SENSITIVITY
The company uses foreign currency forward contracts and options to reduce the
risk that future cash flows from transactions in foreign currencies will be
negatively impacted by changes in exchange rates.
The table below provides anticipated net foreign cash flows for goods, services
and financing transactions for the next 12 months.
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Foreign currency Commercial Financing Net Net
exposure ($ millions) exposure exposure hedge position
- -------------------------------------------------------------------------------
British pound $(24.0) $(17.1) $ 12.1 $(29.0)
Canadian dollar 37.0 -- -- 37.0
French franc (17.0) 3.3 (3.3) (17.0)
German mark (48.0) 12.4 (12.4) (48.0)
Italian lira 25.0 2.3 (2.3) 25.0
Spanish peseta 7.0 2.3 (2.3) 7.0
- -------------------------------------------------------------------------------
Note 1: A positive amount indicates the company is a net receiver of this
currency, while a negative amount indicates the company is a net payer.
- 20 -
Company policy allows hedges of cash flow exposures of up to one year. The table
below summarizes the company's foreign currency forward contracts and average
contract rates at December 31, 1997. Foreign currency amounts are translated at
exchange rates as of December 31, 1997.
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Foreign currency Forward Contracts
contracts ($ millions) Sold Avg. rate Bought Avg. rate
- -------------------------------------------------------------------------------
British pound $ 5.0 $ 1.68 $17.1 1.61
Dutch guilder 2.0 2.00 -- --
French franc 3.3 5.9 -- --
German mark 12.4 1.79 -- --
Italian lira 2.3 1726 -- --
Spanish peseta 2.3 151.5 -- --
- -------------------------------------------------------------------------------
The foreign currency hedges are straightforward contracts that have no embedded
options or other terms that involve a higher level of complexity or risk.
COMMODITY PRICE SENSITIVITY
The table below provides information about the company's natural gas swap
contracts that are sensitive to changes in commodity prices. For the contracts,
the table presents the notional amounts in millions of Btu's (MMBtu) and
weighted average contract prices. All contracts mature in or before January
1999.
- --------------------------------------------------------------------------------
On Balance Sheet Commodity
Related Derivatives 1998 1999 Total
- --------------------------------------------------------------------------------
Swap contracts (long)
Contract amounts (MMBtu) 600,000 100,000 700,000
Weighted average price ($/MMBtu) $2.26 $2.43 $2.29
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS
Net sales in 1997 of $2.20 billion were 2.0% higher when compared with net sales
of $2.16 billion in 1996. Removing the currency translation impact of the
stronger U.S. dollar, sales would have increased 3.6%. Added sales from the new
Swedish flooring and soft-fiber ceilings joint ventures, along with sales growth
in laminate flooring and the worldwide commercial and U.S. home center
businesses, offset sales declines in the U.S. residential sheet flooring
business.
Net earnings of $185.0 million, or $4.50 per diluted share compared with $155.9
million, or $3.61 per diluted share, in 1996. The increase is primarily related
to the positive impact of manufacturing productivity improvements and some lower
raw material costs in 1997 and to the negative impact of the 1996 charges for
restructuring, floor discoloration product issues and the company's share of the
extraordinary loss of Dal-Tile International Inc., in which the company had a
33% equity interest. Adversely affecting 1997 earnings were ceramic tile losses
of $42.4 million, or $38.6 million after tax, including $8.4 million, or $6.1
million after tax, for the company's 34.4% share of operating losses incurred by
Dal-Tile; an additional $29.7 million before- and after-tax loss for the
company's share of the charge incurred by Dal-Tile, primarily for uncollectible
receivables and overstocked inventories; and $4.3 million, or $2.8 million after
tax, for the amortization of Armstrong's initial investment in Dal-Tile over the
underlying equity in net assets of the business combination. Net earnings in
1996 included after-tax charges of $29.6 million for restructuring, or $0.70 per
diluted share; $22.0 million for costs associated with the discoloration of a
limited portion of flooring products, or $0.53 per diluted share; and $8.9
million, or $0.21 per diluted share, for the company's share of an extraordinary
loss from Dal-Tile.
- 21 -
The company's Economic Value Added (EVA) performance as measured by return on
EVA capital of 13.3% in 1997 exceeded the company's 11% cost of capital by 2.3
percentage points. In 1996, the return on EVA capital was 14.8% and exceeded the
company's 12% cost of capital by 2.8 percentage points. In 1997, the company's
cost of capital was reduced to 11%, partially due to lower interest rates and
stock price volatility.
Cost of goods sold in 1997 was 66.5% of sales, lower than the 67.7% in 1996
which included charges associated with a floor discoloration issue. Cost of
goods sold was positively affected by continued productivity improvements and
some lower raw material costs which offset some promotional pricing actions and
a less favorable product mix.
Selling, general and administrative (SG&A) expenses in 1997 were $385.3 million,
or 17.5% of sales, which includes the currency translation impact of the
stronger U.S. dollar and some lower advertising and administrative costs when
compared with 1996. In 1996, SG&A expenses were $413.2 million, or 19.2% of
sales, and included a $14.0 million nonrecurring charge for floor discoloration.
During 1996, the company learned that discoloration had occurred in a limited
portion of its residential sheet flooring product lines. After correcting the
manufacturing process to eliminate any further occurrence of this problem, the
company recorded charges of $34.0 million before tax, or $22.0 million after tax
($0.53 per diluted share), for associated inventory and claims costs.
In 1996, the company incurred restructuring charges of $46.5 million, or $29.6
million after tax ($0.70 per diluted share), related primarily to reorganization
of staff and plant positions, consolidation of the installation products
businesses, restructuring of production processes and write-down of assets.
Severance payments charged against restructuring reserves were $17.2 million in
1997 relating to the elimination of 394 positions of which 247 terminations
occurred since the beginning of 1997. As of December 31, 1997, an immaterial
amount remained in the reserves for restructuring actions. Interest expense in
1997 of $28.0 million was higher than 1996's interest expense of $22.6 million.
The primary reason for the increase was higher levels of short-term debt used to
finance a variety of general corporate purposes.
The company's 1997 effective tax rate was 37.5%, negatively impacted by 3.4
percentage points from the recording of the company's equity share of the 1997
loss from Dal-Tile. The 1996 rate of 31.4% was positively affected by 1.7
percentage points from recording the company's equity share of the 1996 income
from Dal-Tile.
GEOGRAPHIC AREA RESULTS (see page 8)
UNITED STATES
Net sales in 1997 were $1.45 billion, higher than the $1.42 billion recorded in
1996. Sales growth was strongest in the U.S. home center channel serviced
through the Corporate Retail Accounts distribution unit, in the commercial
flooring and ceilings businesses and in insulation products. These increases
offset the negative impact of sales declines in U.S. residential sheet flooring.
Operating income in 1997 of $236.1 million was higher than 1996's operating
income of $202.7 million. Cost reduction efforts, most notably in building
products and insulation products, positively impacted 1997 operating income;
however, this improvement was offset by the $42.4 million loss from the ceramic
tile segment (discussed on page 24). In 1996, operating income was negatively
impacted by the previously mentioned charges of $34.5 million for restructuring
and $34.0 million for floor discoloration issues.
Export sales of Armstrong products from the U.S. to trade customers of $40.9
million increased $6.9 million, or over 20% compared with 1996. The majority of
the increase has come from a growth in sales to Latin America.
EUROPE
Sales and earnings results in the European markets remained mixed and
year-to-year comparisons were negatively impacted by the currency translation
effects of a stronger dollar. Net sales of $545.6 million in 1997 decreased less
than 1% with growth from recent product alliances, such as the Swedish flooring
and ceilings joint ventures, and sales to Central and Eastern Europe, especially
Russia, offset by the currency translation effects. Sales of industry products
in our traditional market segments declined, reflecting competitive pricing and
weakness in market economies in Western Europe, including the U.K. Operating
income decreased less than 3% from 1996 with negative currency translation
effects and small declines in floor coverings and building products somewhat
offset by gains from significant cost reductions in industry products. Operating
income in 1996 included $11.0 million of restructuring charges.
- 22 -
OTHER FOREIGN
Net sales increased 6% from 1996 with growth occurring in insulation and
building products which have both benefited from manufacturing facilities in
China. Operating income decreased 14% in 1997, reflecting startup costs at the
Shanghai ceiling plant earlier in 1997 and the more recent economic climate in
other Southeast Asian countries.
- --------------------------------------------------------------------------------
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Net trade sales
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[BAR CHART APPEARS HERE]
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INDUSTRY SEGMENT RESULTS (see page 3)
FLOOR COVERINGS
Worldwide floor coverings sales of $1.12 billion increased 2.2% from $1.09
billion in 1996 which included a $14.1 million reduction for product returns for
the potential discoloration of a limited portion of its product lines. The 1997
increase came primarily from the addition of sales from the laminate and Swedish
joint venture product lines and higher sales in the U.S. commercial and home
center channels. U.S. residential sheet flooring sales declined and were
adversely affected by a general weakness in high-end professionally installed
flooring, some shift toward alternative flooring products and consolidation of
the wholesaler distribution channel.
Operating income of $186.5 million compares to 1996's $146.9 million which
included charges of $34.0 million associated with the discoloration issue and
$14.5 million for restructuring primarily related to the consolidation in the
installation products business unit and other reorganizations in the floor
products operations staff. Sales increases and productivity gains were more than
offset by the negative impact of promotional pricing, a shift in product mix to
more mid-priced residential sheet flooring and other lower margin products in
the U.S. and start-up costs related to acquisitions and new product lines.
Capital expenditures for property, plant and equipment in the floor coverings
segment of $76.6 million in 1997 were directed toward improving manufacturing
processes. Capital expenditures in 1996 were $117.7 million and were primarily
related to the rollout of the Quest display and merchandising system and toward
improved manufacturing process effectiveness.
Outlook
New products, including laminate flooring and those of the Swedish flooring
joint venture, and sales of commercial and residential tile products should
continue to be the drivers of sales growth in 1998. New strategies in the
residential sheet flooring and laminate businesses will be focused on addressing
changes in the end-use market for these products. Manufacturing margins should
increase due to higher sales and lower costs resulting from the simplification
of product structures and the manufacturing process. The margin increase should
more than offset the higher advertising expense directed toward higher brand
awareness. The home center channel, serviced through Corporate Retail Accounts,
should continue to grow in 1998 at rates estimated to be greater than the
overall home improvement category. Consolidation in the installation products
business has been completed, and this business is now positioned to turn sales
growth into solid returns.
BUILDING PRODUCTS
Net sales of $754.5 million in the building products segment increased 5.0% from
1996. Sales growth was experienced in all geographic areas. In the Americas,
strength came from the U.S. commercial market segment and Latin America. In
Europe, added sales from the new Swedish soft-fiber ceilings joint venture and
Eastern Europe offset the impact of sluggish Western European economies and
continued lower selling prices. Sales grew in the Pacific Area (less than 10% of
the segment's business); however, the economic slowdown in Southeast Asia in the
latter part of 1997 has increased price competitiveness in this region.
Operating income of $122.3 million increased 28.7% from 1996, which included
$8.3 million in restructuring charges. The major factors in the 1997 improvement
were higher sales volume and increased productivity, reduced raw material prices
and lower startup costs in China than in 1996. In addition, solid increases in
profits continue to be realized from the WAVE grid joint venture. Negative
factors somewhat reducing the improvement were competitive pricing actions in
the U.S. home center channel and in Western Europe. In Eastern Europe and
Russia, the increased sales are concentrated in lower margin products. Capital
expenditures for property, plant and equipment were $54.4 million compared with
$67.7 million in 1996.
- 23 -
Outlook
Business plans in this unit are directed toward heightened brand awareness,
customer specific selling and training programs as well as focused efforts
toward the most profitable products and channels. Continued growth is
anticipated in commercial ceilings market segments in the U.S. and Latin
America. In Europe, the results are expected to follow the same trend as 1997,
with modest growth in the core Western European market and increased sales from
the metal ceilings and Swedish soft-fiber ceilings alliances and Eastern Europe.
The market in Asia is expected to continue to show growth although most of the
Southeast Asian countries will be negatively affected for some time by the
economic climate.
- --------------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating income
---------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital additions
---------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
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INDUSTRY PRODUCTS
Worldwide industry products segment sales of $328.2 million declined 5.2% when
compared with 1996; however, without the translation impact of the stronger U.S.
dollar, sales would have increased 2%. In the insulation products business sales
declines from competitive market pressure in Europe were offset by increases in
North America and the Pacific area. Sales of gasket products and textile
products, the other two businesses in this segment, were slightly above 1996.
A record operating income of $55.5 million increased $15.4 million from 1996's
$40.1 million. The majority of the increase was related to productivity gains in
insulation products in all geographic areas. Profits increased in gasket
products due to the introduction of new products into European markets and an
improved cost profile. The textile products business recorded a profit in 1997
compared with a loss in 1996. Capital expenditures for property, plant and
equipment in the industry products segment were $16.5 million compared with
$22.5 million in 1996.
Outlook
The European building industry is forecasted to remain soft in 1998. Competition
due to overcapacity in the insulation products industry will continue to result
in some price erosion; however, continued attention to lowering costs should
counter the negative impact of competition. In Asia, the market for insulation
products is expected to continue to expand although the economic climate in this
area may affect results. Worldwide growth in gasket sales is anticipated,
primarily due to new products with new applications.
CERAMIC TILE
The ceramic tile segment's 1997 operating loss of $42.4 million included $8.4
million for the company's share of operating losses incurred by Dal-Tile
International Inc., in which the company has a 34.4% equity interest; an
additional $29.7 million after-tax loss for the company's share of the charge
incurred by Dal-Tile, primarily for uncollectible receivables and overstocked
inventories; and $4.3 million for the amortization of Armstrong's initial
investment in Dal-Tile over the underlying equity in net assets of the business
combination. In 1996, the ceramic tile segment reported income of $9.9 million.
Outlook
Major reorganization and restructuring efforts took place at
Dal-Tile during 1997 to reduce overhead expenses and improve cash flow. Dal-Tile
management anticipates that, in 1998, the business should return to earning a
profit and be focused on improving customer service and increasing sales with
the assistance of the new logistics system implemented in 1997. The company is
evaluating all options regarding the Dal-Tile investment to ensure that the best
interests of Armstrong's shareholders are served.
SUBSEQUENT EVENT
On February 25, 1998, the company filed a Form 13D/A with the Securities and
Exchange Commission with respect to its ownership of Dal-Tile Common Stock
stating that the company has concluded that its interests would be best served
by disposing of its Dal-Tile investment. The company intends to pursue options
available to it to sell its shares of Dal-Tile Common Stock either in a private
transaction or through the public markets, though it is not precluding the
possibility of acquiring additional shares should circumstances change in the
future.
- 24 -
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The company plans to adopt these accounting standards for periods beginning with
January 1, 1998, as required. The adoption of these standards will not impact
consolidated results, financial condition, or long-term liquidity.
FOURTH QUARTER 1997 COMPARED
WITH FOURTH QUARTER 1996
Net sales of $527.4 million were slightly lower than 1996's fourth-quarter sales
of $528.6 million. Sales would have increased 2.0% without the negative currency
translation effect of a stronger U.S. dollar. Sales decreased in the floor
coverings segment as strong sales in the U.S. residential flooring tile business
unit and Europe, especially from the Swedish flooring joint venture, were more
than offset by lower U.S. residential sheet flooring sales. Building products
sales grew due to strength in the U.S. commercial market segment and added sales
from the Swedish soft-fiber ceilings joint venture. Sales decreased in the
industry products segment, largely due to a stronger U.S. dollar and competitive
pricing in insulation products, particularly in Europe.
Operating income of $72.2 million compares with $79.4 million in the
fourth-quarter 1996. By operating segment, increases were reported in the
building products and industry products segments, while declines were reported
in the floor coverings and ceramic tile segments. Operating income in the floor
coverings segment of $40.5 million decreased when compared with $45.6 million in
1996. Sales increases in residential tile and commercial sheet and tile flooring
were offset by promotional pricing and a shift in product mix to more mid-priced
residential sheet flooring and other lower margin products. Fourth-quarter
operating income for building products was $28.8 million compared with 1996
fourth-quarter income of $21.7 million. The significant factors driving this
increase were sales growth, lower costs from productivity improvements and the
increase in profits realized from the WAVE grid joint venture. Industry products
operating income of $13.9 million increased from $9.9 million in the fourth
quarter 1996. The increase resulted from lower manufacturing costs in the
insulation, gasket and textile products business units.
The ceramic tile segment fourth-quarter operating loss of $8.4 million
represents Armstrong's share of the net loss of the Dal-Tile business
combination and the amortization of the excess of the company's initial
investment in Dal-Tile over the underlying equity in net assets. Fourth-quarter
1996 operating income of $4.7 million reflects Armstrong's share of the
after-tax operating income of Dal-Tile and the amortization of the excess of the
company's initial investment in Dal-Tile over the underlying equity in net
assets.
Cost of goods sold as a percent of sales was 67.6%, compared with 69.2% in the
fourth quarter 1996. Lower raw material costs in floor coverings and building
products, productivity improvements and controlled manufacturing period expense
were the primary reasons for the lower manufacturing costs.
Armstrong's effective tax rate in fourth quarter 1997 was 31.3% and was
comparable to the effective tax rate for continuing businesses of 31.4% in
fourth quarter 1996.
- 25 -
Net earnings were $46.8 million, or $1.15 per diluted share and included losses
of $5.5 million after tax, or $0.13 per diluted share, from the ceramic tile
segment. These results compare with 1996's fourth-quarter net earnings of $53.2
million or $1.28 per diluted share, including $4.2 million, or $0.10 per diluted
share, of earnings from the company's investment in Dal-Tile.
- --------------------------------------------------------------------------------
1996 COMPARED WITH 1995
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 33), 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. The beginning cash balance of $256.9
million included proceeds from the sale of Thomasville Furniture Industries,
Inc., in December 1995.
Working capital was $243.5 million as of December 31, 1996, $103.3 million lower
than the $346.8 million reported 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.
On October 1, 1996, the Employee Stock Ownership Plan (ESOP) and the Retirement
Savings Plan (RSP) were merged to form the new Retirement Savings and Stock
Ownership Plan (RSSOP). Prior to the merger of the plans, 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.
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 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.
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 value of Armstrong's investment
and resulting in the company recording $14.5 million as additional capital in
excess of par value.
- 26 -
CONSOLIDATED RESULTS
Net sales of $2.16 billion were lower when compared with 1995's net sales of
$2.33 billion which included $0.24 billion of sales from the ceramic tile
operations. Beginning in 1996, ceramic tile was 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 $4.04 per basic share and $3.82 per diluted share 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.
Net earnings for 1996 were $155.9 million, or $3.81 per basic share and $3.61
per diluted share and included the restructuring and discoloration charges
mentioned above plus $8.9 million or $0.21 per diluted share for the company's
portion of an extraordinary loss from Dal-Tile related to the refinancing of
Dal-Tile's outstanding debt. Net earnings in 1995 were $123.3 million or $2.94
per basic share and $2.68 per diluted share 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.
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 ($0.79 per basic share
and $0.70 per share on a 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 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 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.
- 27 -
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 1996, 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 1996, the company recorded charges of $34.0 million before tax or
$22.0 million after tax ($0.53 per diluted 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 planned to continue to monitor claims
levels associated with these products and make any further adjustments in the
reserve based on experience.
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 8)
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 in 1996 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.
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.
- 28 -
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 proved to be
successful. 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 1996 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.
BUILDING PRODUCTS
In the building products segment, net sales of $718.4 million in 1996 increased
more than 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 recovered from the severe weather conditions of early
1996, while inventories and service levels 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 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 profit growth continued from WAVE, the grid
system joint venture with Worthington Industries.
INDUSTRY PRODUCTS
Sales for the industry products segment of $346.2 million in 1996 decreased less
than 1% when compared with 1995 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 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. As a result of these strategies, operating
income for insulation products 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. 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.
- 29 -
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 reflected the
pretax 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
(See pages 20 to 21 under Item 7 above.)
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
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Net sales $518.3 $577.4 $575.6 $527.4 $2,198.7
Gross profit 171.3 199.2 195.6 170.9 737.0
Net earnings 45.5 58.9 33.8 46.8 185.0
Per share of common stock:
Basic: Net earnings 1.11 1.45 0.83 1.16 4.55
Diluted: Net earnings 1.10 1.43 0.82 1.15 4.50
Dividends per share of common stock 0.40 0.44 0.44 0.44 1.72
Price range of common stock--high 72 1/4 75 1/4 74 9/16 75 3/8 75 3/8
Price range of common stock--low 64 3/4 61 1/2 64 3/8 64 1/8 61 1/2
- ------------------------------------------------------------------------------------------------------------------------------------
1996 Net sales $501.2 $563.2 $563.4 $528.6 $2,156.4
Gross profit 156.7 198.4 178.4 163.0 696.5
Earnings before extraordinary loss 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:*
Basic: Earnings before extraordinary loss 0.89 0.74 1.07 1.30 4.04
Net earnings 0.89 0.74 0.87 1.29 3.81
Diluted: Earnings before extraordinary loss 0.81 0.68 1.06 1.29 3.82
Net earnings 0.81 0.68 0.86 1.28 3.61
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
- ------------------------------------------------------------------------------------------------------------------------------------
*The sum of the quarterly earnings per-share data does not equal the total year
amounts due to changes in the average shares outstanding and, for diluted data,
the exclusion of the antidilutive effect in certain quarters.
- 30 -
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1997 1996 1995
=====================================================================================================================
Net sales $ 2,198.7 $ 2,156.4 $ 2,325.0
Cost of goods sold 1,461.7 1,459.9 1,581.1
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 737.0 696.5 743.9
Selling, general and administrative expenses 385.3 413.2 457.0
Equity (earnings) loss from affiliates 29.7 (19.1) (6.2)
Restructuring charges -- 46.5 71.8
Loss from ceramic tile business combination -- -- 177.2
- ---------------------------------------------------------------------------------------------------------------------
Operating income 322.0 255.9 44.1
Interest expense 28.0 22.6 34.0
Other expense (income), net (2.2) (6.9) 1.9
- ---------------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses before income taxes 296.2 240.2 8.2
Income taxes 111.2 75.4 (5.4)
- ---------------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses 185.0 164.8 13.6
- ---------------------------------------------------------------------------------------------------------------------
Discontinued business:
Earnings from operations of Thomasville Furniture Industries, Inc.
(less income taxes of $13.9) -- -- 25.8
Gain on disposal of discontinued business
(less income taxes of $53.4) -- -- 83.9
- ---------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary loss 185.0 164.8 123.3
Extraordinary loss (less income taxes of $0.7) -- (8.9) --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 185.0 $ 155.9 $ 123.3
- -------------------------------------------------------------------------------======================================
Dividends paid on Series A convertible preferred stock -- 8.8 18.8
Tax benefit on dividends paid on unallocated preferred shares -- 2.0 4.5
- ---------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 185.0 $ 149.1 $ 109.0
- -------------------------------------------------------------------------------======================================
Per share of common stock (see note on page 35):
Basic:
Earnings (loss) from continuing businesses $ 4.55 $ 4.04 $ (0.02)
Earnings from discontinued business -- -- 0.70
Gain on sale of discontinued business -- -- 2.26
Earnings before extraordinary loss 4.55 4.04 2.94
Extraordinary loss -- (0.23) --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 4.55 $ 3.81 $ 2.94
- -------------------------------------------------------------------------------======================================
Diluted:
Earnings (loss) from continuing businesses $ 4.50 $ 3.82 $ (0.02)
Earnings from discontinued business -- -- 0.60
Gain on sale of discontinued business -- -- 1.96
Earnings before extraordinary loss 4.50 3.82 2.68
Extraordinary loss -- (0.21) --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 4.50 $ 3.61 $ 2.68
- -------------------------------------------------------------------------------======================================
The Notes to Consolidated Financial Statements, pages 35-64, are an integral
part of these statements.
- 31 -
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Millions except for numbers of shares and per-share data As of December 31 1997 1996
============================================================================================================
Assets
Current assets:
Cash and cash equivalents $ 57.9 $ 65.4
Accounts and notes receivable
(less allowance for discounts and losses: 1997--$37.5; 1996--$34.9) 252.6 216.7
Inventories 220.1 205.7
Income tax benefits 25.9 49.4
Other current assets 43.5 27.3
- ------------------------------------------------------------------------------------------------------------
Total current assets 600.0 564.5
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment
(less accumulated depreciation and amortization: 1997--$1,004.3; 1996--$974.9) 972.2 964.0
Insurance for asbestos-related liabilities 291.6 141.6
Investment in affiliates 174.9 204.3
Other noncurrent assets 336.8 261.2
- ------------------------------------------------------------------------------------------------------------
Total assets $ 2,375.5 $ 2,135.6
- ------------------------------------------------------------------------------------========================
Liabilities and shareholders' equity
Current liabilities:
Short-term debt $ 84.1 $ 14.5
Current installments of long-term debt 14.5 13.7
Accounts payable and accrued expenses 339.9 273.3
Income taxes 33.0 19.5
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 471.5 321.0
- ------------------------------------------------------------------------------------------------------------
Long-term debt 223.1 219.4
Employee Stock Ownership Plan (ESOP) loan guarantee 201.8 221.3
Deferred income taxes 53.7 30.5
Postretirement and postemployment benefit liabilities 248.0 247.6
Asbestos-related long-term liabilities 179.7 141.6
Other long-term liabilities 172.1 151.9
Minority interest in subsidiaries 15.0 12.3
- ------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 1,093.4 1,024.6
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $1 par value per share
Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9
Capital in excess of par value 155.1 162.1
Reduction for ESOP loan guarantee (207.7) (217.4)
Retained earnings 1,339.6 1,222.6
Foreign currency translation (1.8) 17.3
- ------------------------------------------------------------------------------------------------------------
1,337.1 1,236.5
- ------------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost:
1997--11,759,510 shares; 1996--10,714,572 shares 526.5 446.5
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 810.6 790.0
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,375.5 $ 2,135.6
- ------------------------------------------------------------------------------------========================
The Notes to Consolidated Financial Statements, pages 35-64, are an integral
part of these statements.
- 32 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Millions Years ended December 31 1997 1996 1995
==============================================================================================================
Cash flows from operating activities:
Net earnings $185.0 $155.9 $123.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization excluding discontinued business 132.7 123.7 123.1
Depreciation and amortization for discontinued business -- -- 13.0
Deferred income taxes 24.2 11.2 (8.7)
Equity change in affiliates 37.2 (18.2) (6.3)
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 (18.6) (37.4) (18.3)
Payments for asbestos-related claims (41.4) -- --
Extraordinary loss -- 8.9 --
Changes in operating assets and liabilities net of effect of
discontinued business, restructuring and dispositions:
(Increase) decrease in receivables (40.8) 3.6 6.9
(Increase) in inventories (12.8) (11.5) (34.3)
(Increase) decrease in other current assets 10.5 (22.8) 9.8
(Increase) in other noncurrent assets (69.0) (57.4) (23.4)
Increase (decrease) in accounts payable and accrued expenses 16.6 (3.2) (37.0)
Increase (decrease) in income taxes payable 11.5 2.5 (8.2)
Increase in other long-term liabilities 23.2 15.2 20.0
Other, net (11.7) 3.9 5.4
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 246.6 220.9 270.0
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment excluding discontinued business (141.7) (220.7) (171.8)
Purchases of property, plant and equipment for discontinued business -- -- (14.3)
Investment in computer software (18.8) (7.3) (10.9)
Proceeds from sale of land, facilities and discontinued businesses 24.3 3.6 342.6
Acquisitions (4.2) -- (20.7)
Investment in affiliates (12.4) (15.4) (27.6)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (152.8) (239.8) 97.3
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt 69.3 (7.1) 3.2
Issuance of long-term debt 7.2 40.8 --
Reduction of long-term debt (17.0) (40.0) (20.1)
Cash dividends paid (70.0) (70.1) (70.8)
Purchase of common stock for the treasury, net (89.2) (81.5) (41.3)
Preferred stock redemption -- (21.4) (2.9)
Proceeds from exercised stock options 7.9 6.2 7.0
Other, net (6.8) 1.3 2.3
- --------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (98.6) (171.8) (122.6)
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2.7) (0.8) 0.2
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ (7.5) $(191.5) $244.9
- ---------------------------------------------------------------------------------=============================
Cash and cash equivalents at beginning of year $ 65.4 $256.9 $ 12.0
- ---------------------------------------------------------------------------------=============================
Cash and cash equivalents at end of year $ 57.9 $ 65.4 $256.9
- ---------------------------------------------------------------------------------=============================
Supplemental cash flow information
Interest paid $ 23.5 $ 20.7 $ 29.6
Income taxes paid $ 54.5 $ 65.5 $ 76.9
- ---------------------------------------------------------------------------------=============================
The Notes to Consolidated Financial Statements, pages 35-64, are an integral
part of these statements.
- 33 -
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1997 1996 1995
=========================================================================================================
Series A convertible preferred stock:
Balance at beginning of year $ -- $ 258.9 $ 261.6
Conversion of preferred stock to common -- (241.5) --
Shares retired -- (17.4) (2.7)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ -- $ -- $ 258.9
- ---------------------------------------------------------------------------------------------------------
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 $ 162.1 $ 49.3 $ 39.3
Gain in investment in affiliates -- 14.5 --
Minimum pension liability adjustments (4.5) (7.4) --
Conversion of preferred stock to common -- 102.4 --
Stock issuances and other (2.5) 3.3 10.0
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 155.1 $ 162.1 $ 49.3
- ---------------------------------------------------------------------------------------------------------
Reduction for ESOP loan guarantee:
Balance at beginning of year $ (217.4) $ (225.1) $ (233.9)
Principal paid 19.6 13.4 10.7
Loans to ESOP (5.5) (4.2) --
Accrued compensation (4.4) (1.5) (1.9)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ (207.7) $ (217.4) $ (225.1)
- ---------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $1,222.6 $1,133.8 $1,076.8
Net earnings for year 185.0 155.9 123.3
Tax benefit on dividends paid on unallocated common shares 2.0 1.0 --
Tax benefit on dividends paid on unallocated preferred shares -- 2.0 4.5
- ---------------------------------------------------------------------------------------------------------
Total $1,409.6 $1,292.7 $1,204.6
- ---------------------------------------------------------------------------------------------------------
Less dividends:
Preferred stock $ -- $ 8.9 $ 18.8
Common stock
$1.72 per share in 1997; 70.0
$1.56 per share in 1996; 61.2
$1.40 per share in 1995 52.0
- ---------------------------------------------------------------------------------------------------------
Total dividends $ 70.0 $ 70.1 $ 70.8
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $1,339.6 $1,222.6 $1,133.8
- ---------------------------------------------------------------------------------------------------------
Foreign currency translation:
Balance at beginning of year $ 17.3 $ 18.0 $ 8.3
Translation adjustments and hedging activities (18.2) (4.4) 10.9
Allocated income taxes (0.9) 3.7 (1.2)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ (1.8) $ 17.3 $ 18.0
- ---------------------------------------------------------------------------------------------------------
Less treasury stock at cost:
Balance at beginning of year $ 446.5 $ 511.8 $ 468.9
Stock purchases 89.2 81.5 41.3
Conversion of preferred stock to common -- (139.1) --
Stock issuance activity, net (9.2) (7.7) 1.6
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 526.5 $ 446.5 $ 511.8
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 810.6 $ 790.0 $ 775.0
- ---------------------------------------------------------------------====================================
The Notes to Consolidated Financial Statements, pages 35-64, are an integral
part of these statements.
- 34 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- ------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------
Use of Estimates. These financial statements are prepared in accordance with
- ----------------
generally accepted accounting principles and include management estimates and
judgments, where appropriate. Actual results may differ from these estimates.
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 1997, the company adopted Statement of Financial
- -------------------------
Accounting Standards (SFAS) No. 128, "Earnings per Share." The adoption of this
statement requires the company to replace primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share are
computed by dividing the earnings available to common shareholders by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share reflects the potential dilution of securities
that could share in the earnings. (See note on page 41.)
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 preferred 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 the lower of cost or an amount generally
approximating market value.
Inventories. Inventories are valued at the lower of cost or market.
- -----------
Approximately 57% of 1997'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.
- 35 -
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. Impairment losses
are recorded when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. When assets are disposed of or retired, their costs and related
depreciation are removed from the 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.
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basis over periods up to 30 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.
- 36 -
- --------------------
NATURE OF OPERATIONS
- --------------------
INDUSTRY SEGMENTS
- -----------------------------------------------------------------------
at December 31 (millions) 1997 1996 1995
- -----------------------------------------------------------------------
Net trade sales:
Floor coverings $1,116.0 $1,091.8 $1,053.9
Building products 754.5 718.4 682.2
Industry products 328.2 346.2 348.8
Ceramic tile -- -- 240.1
- -----------------------------------------------------------------------
Total net sales $2,198.7 $2,156.4 $2,325.0
- -------------------------------------==================================
Operating income (loss): (Note 1)
Floor coverings $ 186.5 $ 146.9 $ 145.0
Building products 122.3 95.1 92.2
Industry products 55.5 40.1 9.3
Ceramic tile (Note 2) (42.4) 9.9 (168.4)
Unallocated corporate expense 0.1 (36.1) (34.0)
- -----------------------------------------------------------------------
Total operating income $ 322.0 $ 255.9 $ 44.1
- -------------------------------------==================================
Depreciation and amortization:
Floor coverings $ 65.5 $ 53.9 $ 47.9
Building products 37.5 37.0 36.8
Industry products 17.3 19.1 19.3
Ceramic tile 4.3 4.3 13.5
Corporate 8.1 9.4 5.6
- -----------------------------------------------------------------------
Total depreciation
and amortization $ 132.7 $ 123.7 $ 123.1
- -------------------------------------==================================
Capital additions: (Note 3)
Floor coverings $ 76.6 $ 117.7 $ 77.3
Building products 54.4 67.7 49.2
Industry products 16.5 22.5 45.0
Ceramic tile -- -- 9.6
Corporate 8.7 12.8 6.3
- -----------------------------------------------------------------------
Total capital additions $ 156.2 $ 220.7 $ 187.4
- -------------------------------------==================================
Identifiable assets:
Floor coverings $ 713.8 $ 687.9 $ 583.2
Building products 554.9 541.1 513.5
Industry products 248.6 272.8 301.8
Ceramic tile 135.7 168.7 135.8
Corporate 722.5 465.1 615.5
- -----------------------------------------------------------------------
Total assets $2,375.5 $2,135.6 $2,149.8
- -------------------------------------==================================
Note 1:
- -----------------------------------------------------------------------
Restructuring charges in
operating income (millions) 1997 1996 1995
- -----------------------------------------------------------------------
Floor coverings $-- $ 14.5 $ 25.0
Building products -- 8.3 6.3
Industry products -- 4.0 31.4
Unallocated corporate expense -- 19.7 9.1
- -----------------------------------------------------------------------
Total restructuring charges
in operating income $-- $ 46.5 $ 71.8
- ------------------------------------------=============================
Note 2: 1997 operating income includes a $29.7 million loss as a result of
charges incurred by Dal-Tile International Inc. for uncollectible receivables,
overstocked inventories and other asset revaluations. 1995 operating income
includes a $177.2 million loss due to the ceramic tile business combination. See
"Equity Earnings From Affiliates" on page 40.
Note 3: 1997 and 1995 capital additions for industry segments of property, plant
and equipment from acquisitions were $14.5 million and $15.6 million,
respectively.
- 37 -
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 products and marketing services to
home centers, which have become an important part of the company's business. To
improve logistical cost-effectiveness, 13 independent regional distribution
centers are being established to service these customers (12 of the centers were
in place by the end of 1997). To reduce interchannel conflict, segmented
resilient flooring products were introduced to allow exclusive product offerings
by our customers. 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 commercial and residential
ceiling systems. Grid products, manufactured through the WAVE joint venture with
Worthington Industries, have become an important part of this business
worldwide. Earnings from this joint venture are included in this segment's
operating income and in "Equity Earnings from Affiliates" (see page 40). The
major sales activity in this segment is in commercial ceiling systems sold to
resale distributors and contractors worldwide, with European sales having a
significant impact. Ceiling systems for the residential home segment are sold
through wholesalers and retailers, mainly in the United States. Through a joint
venture with a Chinese partner, a plant facility in Shanghai manufactures
ceilings 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.
The ceramic tile products segment includes ceramic tile sold through home
centers, Dal-Tile 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"
and are included in operating income.
- 38 -
GEOGRAPHIC AREAS
- -------------------------------------------------------------------------------
at December 31 (millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Net trade sales:
United States $1,453.1 $1,419.2 $1,586.4
Europe 545.6 548.4 558.7
Other foreign 200.0 188.8 179.9
- -------------------------------------------------------------------------------
Interarea transfers:
United States 111.7 105.0 101.1
Europe 14.9 13.2 13.8
Other foreign 29.2 30.4 32.1
Eliminations (155.8) (148.6) (147.0)
- -------------------------------------------------------------------------------
Total net sales $2,198.7 $2,156.4 $2,325.0
- --------------------------------------------===================================
Operating income:
United States $ 236.1 $ 202.7 $ 7.7
(see note 2 on page 37)
Europe 77.2 79.3 62.6
Other foreign 8.6 10.0 7.8
Unallocated corp. income (expense) 0.1 (36.1) (34.0)
- -------------------------------------------------------------------------------
Total operating income $ 322.0 $ 255.9 $ 44.1
- --------------------------------------------===================================
Identifiable assets:
United States $1,168.9 $1,180.1 $1,044.5
Europe 370.4 383.7 406.7
Other foreign 113.8 107.3 83.4
Corporate 722.5 465.1 615.5
Eliminations (0.1) (0.6) (0.3)
- -------------------------------------------------------------------------------
Total assets $2,375.5 $2,135.6 $2,149.8
- --------------------------------------------===================================
United States net trade sales include export sales to non-affiliated customers
of $40.9 million in 1997, $34.0 million in 1996 and $32.1 million in 1995. Also
included in United States net trade sales were ceramic tile operations sales of
$240.1 million in 1995.
"Europe" includes operations located primarily in England, France, Germany,
Italy, the Netherlands, Poland, Spain, Sweden 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.
- 39 -
- -------------------------
OPERATING STATEMENT ITEMS
- -------------------------
NET SALES
Net sales in 1997 totaled $2,198.7 million, 2.0% above the 1996 total of
$2,156.4 million and 5.4% below the 1995 total of $2,325.0 million. Prior to
1996, ceramic tile segment sales were consolidated with total company results.
Ceramic tile net sales for 1995 were $240.1 million.
EQUITY (EARNINGS) LOSS FROM AFFILIATES
Equity earnings from affiliates for 1997 were primarily comprised of
the company's share of the net loss from 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 income from
the 50% interest in the WAVE joint venture with Worthington Industries. The 1997
loss included $8.4 million for the company's share of operating losses incurred
by Dal-Tile, a $29.7 million loss for the company's share of the charge incurred
by Dal-Tile, primarily for uncollectible receivables and overstocked
inventories, and $4.3 million for the amortization of Armstrong's initial
investment in Dal-Tile over the underlying equity in net assets of the business
combination. 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
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%. During 1997, the company purchased
additional shares of Dal-Tile stock, increasing the company's ownership to 34%.
Armstrong's ownership of Dal-Tile is accounted for under the equity method. The
summarized historical financial information for ceramic tile operations is
presented below.
- --------------------------------------------------------------------------------
(millions) 1995
- --------------------------------------------------------------------------------
Net sales $ 240.1
Operating income/(1)/ 8.8
Assets/(2)/ 269.8
Liabilities/(2)/ 17.3
- --------------------------------------------------------------------------------
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.
EARNINGS FROM CONTINUING BUSINESSES
Earnings from continuing businesses were $185.0 million in 1997 compared with
$164.8 million in 1996 and $13.6 million in 1995. Earnings from continuing
businesses in 1997 included $38.6 million in losses from its ceramic tile
segment mentioned above. Included in the earnings for 1996 and 1995 were
after-tax restructuring charges of $29.6 million and $46.5 million,
respectively. 1995 earnings included the $116.8 million after-tax loss for the
ceramic tile business combination mentioned above.
DISCONTINUED OPERATIONS
In 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
- 40 -
of interest-bearing debt. The company recorded a gain of $83.9 million after tax
on the sale. 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.
NET EARNINGS
Net earnings were $185.0 million for 1997 compared with $155.9 million and
$123.3 million in 1996 and 1995, respectively.
EARNINGS PER SHARE
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted per share calculations for earnings (loss) from
continuing businesses.
- --------------------------------------------------------------------------------
Earnings Per-Share
Millions except for per-share data (Loss) Shares Amount
- --------------------------------------------------------------------------------
For the year ended 1997
- --------------------------------------------------------------------------------
Basic Earnings per Share
Earnings from continuing businesses $ 185.0 40.6 $ 4.55
- --------------------------------------------------------------------------------
Dilutive options 0.4
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Earnings available for common $ 185.0 41.0 $ 4.50
- ---------------------------------------------===================================
For the year ended 1996
- --------------------------------------------------------------------------------
Earnings from continuing businesses $ 164.8
Less: preferred stock dividends 8.8
Plus: tax benefit on dividends paid on
unallocated preferred shares 2.0
- --------------------------------------------------------------------------------
Basic Earnings per Share
Earnings available for common $ 158.0 39.1 $ 4.04
- ---------------------------------------------===================================
Earnings from continuing businesses $ 164.8
Less: increased contribution to the ESOP
assuming conversion of preferred
shares to common 3.2
Less: net reduction in tax benefits assuming
conversion of the ESOP preferred
shares to common 0.6
- --------------------------------------------------------------------------------
Dilutive options 0.4
Common shares issuable under the ESOP 2.6
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Earnings available for common $ 161.0 42.1 $ 3.82
- ---------------------------------------------===================================
For the year ended 1995
- --------------------------------------------------------------------------------
Earnings from continuing businesses $ 13.6
Less: preferred stock dividends 18.8
Plus: tax benefit on dividends paid on
unallocated preferred shares 4.5
- --------------------------------------------------------------------------------
Basic Earnings per Share
Earnings (loss) available for common $ (0.7) 37.1 $ (0.02)
- ---------------------------------------------===================================
Earnings from continuing businesses $ 13.6
Less: increased contribution to the ESOP
assuming conversion of preferred
shares to common 7.3
Less: net reduction in tax benefits assuming
conversion of the ESOP preferred
shares to common 1.2
- --------------------------------------------------------------------------------
Dilutive options 0.3
Common shares issuable under the ESOP 5.4
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Earnings available for common $ 5.1 42.8 $ (0.02)/1/
- ---------------------------------------------===================================
Note 1: Diluted earnings (loss) per share from continuing businesses for 1995
was antidilutive.
- 41 -
In 1996, the employee stock ownership plan (ESOP) and retirement savings plan
were merged resulting in the conversion of convertible preferred shares into
common stock. Basic earnings per share for "Earnings from continuing businesses"
in 1996 and 1995 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 ESOP shares from
the conversion date forward. Diluted earnings per share for 1996 and 1995
include the shares of common stock outstanding, the dilutive effect of stock
options and the adjustments to common shares and earnings required to portray
the convertible preferred ESOP shares on an "if converted" basis prior to
conversion.
In 1997, the company adopted SFAS No. 128, "Earnings per Share,"
effective December 15, 1997. As a result, the company's reported earnings per
share for 1996 and 1995 were restated. The effect of this accounting change on
previously reported earnings per-share data was as follows:
- --------------------------------------------------------------------------------
Per-share amounts 1996 1995
- --------------------------------------------------------------------------------
Primary earnings (loss) from continuing
businesses per share as reported $ 3.97 $ (0.02)
Effect of SFAS No. 128 0.07 --
- --------------------------------------------------------------------------------
Basic earnings (loss) from continuing
businesses per share as restated $ 4.04 $ (0.02)
- ---------------------------------------------------------=======================
Fully diluted earnings (loss) from continuing
businesses per share as reported $ 3.81 $ (0.02)
Effect of SFAS No. 128 0.01 --
- --------------------------------------------------------------------------------
Diluted earnings (loss) from continuing
businesses per share as restated $ 3.82 $ (0.02)
- ---------------------------------------------------------=======================
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.
- 42 -
Actual severance payments charged against restructuring reserves were $17.2
million in 1997 relating to the elimination of 394 positions, of which 247
terminations occurred since the beginning of 1997. As of December 31, 1997, an
immaterial amount remained in the reserves for restructuring actions.
DEPRECIATION AND AMORTIZATION
- --------------------------------------------------------------------------------
(millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Depreciation $ 117.4 $ 108.6 $ 114.9
Amortization 15.3 15.1 8.2
- --------------------------------------------------------------------------------
Total $ 132.7 $ 123.7 $ 123.1
- ----------------------------------------========================================
Depreciation expense increased in 1997 primarily due to higher capital
expenditures in 1996.
SELECTED OPERATING EXPENSES
- --------------------------------------------------------------------------------
(millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Maintenance and repair costs $ 107.3 $ 105.3 $ 120.2
Research and development costs 47.8 55.2 57.9
Advertising costs 10.5 18.4 25.5
- --------------------------------------------------------------------------------
OTHER EXPENSE (INCOME), NET
- --------------------------------------------------------------------------------
(millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Interest and dividend income $ (4.9) $ (6.5) $ (3.3)
Foreign exchange, net loss 0.5 1.2 2.6
Postretirement liability
transition obligation -- -- 1.6
Discontinued businesses 0.8 (2.8) --
Minority interest 0.6 0.3 0.6
Other 0.8 0.9 0.4
- --------------------------------------------------------------------------------
Total $ (2.2) $ (6.9) $ 1.9
- --------------------------------------------====================================
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) 1997 1996 1995
- --------------------------------------------------------------------------------
Wages and salaries $ 494.7 $ 509.7 $ 589.2
Payroll taxes 50.7 51.5 61.7
Pension credits (22.2) (16.1) (12.1)
Insurance and other benefit costs 51.9 50.7 58.7
Stock-based compensation 9.6 5.8 0.8
- --------------------------------------------------------------------------------
Total $ 584.7 $ 601.6 $ 698.3
- ------------------------------------------======================================
Average number of employees 10,643 10,572 13,433
- --------------------------------------------------------------------------------
- 43 -
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 47.
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 1997, 1996 and 1995, 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) 1997 1996 1995
- --------------------------------------------------------------------------------
U.S. defined-benefit plans:
Net pension credit $ (47.8) $ (39.9) $ (26.5)
Early retirement incentives -- 10.1 28.7
Net curtailment gain -- -- (1.2)
Defined contribution plans 10.4 9.9 4.2
Net pension cost of non-U.S
defined-benefit plans 8.2 8.5 8.1
Other funded and unfunded
pension costs 7.0 5.4 3.3
- --------------------------------------------------------------------------------
Total pension (credit) cost $ (22.2) $ (6.0) $ 16.6
- --------------------------------------------====================================
In 1995, the company recognized a $1.6 million curtailment gain from the sale of
the furniture business and a $0.4 million curtailment loss from the ceramic tile
business combination.
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) 1997 1996 1995
- --------------------------------------------------------------------------------
Assumptions:
Discount rate 7.25% 7.00% 8.00%
Rate of increase in future
compensation levels 4.50% 4.25% 5.25%
Expected long-term rate of
return on assets 8.75% 8.75% 8.75%
- --------------------------------------------------------------------------------
Actual return on assets $ (324.3) $ (124.2) $ (406.7)
Less amount deferred 201.5 10.4 313.0
- --------------------------------------------------------------------------------
Expected return on assets $ (122.8) $ (113.8) $ (93.7)
Net amortization and other (11.4) (9.4) (9.3)
Service cost--benefits earned
during the year 15.8 17.2 16.7
Interest on the projected benefit
obligation 70.6 66.1 59.8
- --------------------------------------------------------------------------------
Net pension credit $ (47.8) $ (39.9) $ (26.5)
- ------------------------------------------======================================
- 44 -
The funded status of the company's U.S. defined-benefit pension plans at the end
of 1997 and 1996 is presented in the following table.
- --------------------------------------------------------------------------------
Funded status of U.S. defined-benefit
pension plans (millions) 1997 1996
- --------------------------------------------------------------------------------
Assumptions:
Discount rate 7.00% 7.25%
Compensation rate 4.00% 4.50%
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ (911.5) $ (824.4)
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ (977.4) $ (899.4)
- --------------------------------------------------------------------------------
Projected benefit obligation for
services rendered to date $(1,048.0) $ (981.2)
- --------------------------------------------------------------------------------
Plan assets at fair value $ 1,754.5 $ 1,501.9
- --------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation $ 706.5 $ 520.7
Unrecognized transition asset (27.6) (33.9)
Unrecognized prior service cost 90.2 99.9
Unrecognized net gain--experience
different from assumptions (604.9) (462.6)
Provision for restructuring charges (1.4) (9.1)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 162.8 $ 115.0
- ------------------------------------------------------==========================
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) 1997 1996 1995
- --------------------------------------------------------------------------------
Actual return on assets $ (15.4) $ (8.4) $ (11.2)
Less amount deferred 8.6 2.5 5.9
- --------------------------------------------------------------------------------
Expected return on assets $ (6.8) $ (5.9) $ (5.3)
Net amortization and other 0.5 0.5 0.4
Service cost--benefits earned
during the year 5.7 5.3 4.9
Interest on the projected benefit
obligation 8.8 8.6 8.1
- --------------------------------------------------------------------------------
Net pension cost $ 8.2 $ 8.5 $ 8.1
- ------------------------------------------------================================
- 45 -
The funded status of the non-U.S. defined-benefit pension plans at the end of
1997 and 1996 is presented in the following table.
- --------------------------------------------------------------------------------
Funded status of non-U.S. defined-benefit
pension plans (millions) 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(116.4) $(112.8)
- --------------------------------------------------------------------------------
Accumulated benefit obligation $(119.3) $(117.2)
- --------------------------------------------------------------------------------
Projected benefit obligation for services
rendered to date $(127.4) $(125.5)
- --------------------------------------------------------------------------------
Plan assets at fair value 95.5 84.5
- --------------------------------------------------------------------------------
Projected benefit obligation greater than
plan assets $ (31.9) $ (41.0)
Unrecognized transition obligation 1.4 2.4
Unrecognized prior service cost 5.3 5.1
Unrecognized net gain--experience
different from assumptions (21.8) (16.9)
Adjustment required to recognize
minimum liability (0.4) (0.6)
- --------------------------------------------------------------------------------
Accrued pension cost $ (47.4) $ (51.0)
- ----------------------------------------------------------======================
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) 1997 1996 1995
- --------------------------------------------------------------------------------
Assumptions:
Discount rate 7.25% 7.00% 8.25%
Rate of increase in future
compensation levels 4.50% 4.25% 5.25%
- --------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 3.3 $ 3.7 $ 2.8
- --------------------------------------------------------------------------------
Interest cost on accumulated
postretirement benefit obligation 17.6 17.0 17.1
- --------------------------------------------------------------------------------
Net amortization and other 0.3 0.5 (0.8)
- --------------------------------------------------------------------------------
Periodic postretirement benefit cost $ 21.2 $ 21.2 $ 19.1
- ---------------------------------------------===================================
- 46 -
The status of the company's postretirement benefit plans at the end of 1997 and
1996 is presented in the following table.
- --------------------------------------------------------------------------------
Status of postretirement
benefit plans (millions) 1997 1996
- ---------------------------------------------------------------------
Assumptions:
Discount rate 7.00% 7.25%
Compensation rate 4.00% 4.50%
- ---------------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $ 180.7 $ 164.9
Fully eligible active plan participants 11.8 14.7
Other active plan participants 70.2 67.5
- ---------------------------------------------------------------------
Total APBO $ 262.7 $ 247.1
- ---------------------------------------------------------------------
Unrecognized prior service credit 6.8 7.8
Unrecognized net loss (50.9) (37.9)
- ---------------------------------------------------------------------
Accrued postretirement benefit cost $ 218.6 $ 217.0
- ----------------------------------------------=======================
The assumed health care cost trend rate used to measure the APBO was 10% in
1996, 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, 1997, would be increased by $22.4
million. The effect of this change on the total of service and interest costs
for 1997 would be an increase of $2.3 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 1997, which
included a $3.2 million credit resulting from an increase in the percentage of
disabled employees assumed to qualify for Medicare coverage. In 1996, the
company recorded postemployment benefit expense of $3.1 million, which included
a $2.9 million credit resulting from favorable actuarial experience with regard
to assumed plan retirement and mortality rates. In 1995, postemployment benefit
expense was $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.
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.
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, 1997, the ESOP had allocated to participants a total of 1,800,000 shares and
retired 800,000 shares.
The ESOP currently covers parent company nonunion employees and some union
employees.
- 47 -
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) 1997 1996 1995
- --------------------------------------------------------------
Preferred dividends paid $ -- $ 8.9 $ 18.8
Common stock dividends paid 8.5 4.0 --
Employee contributions 9.7 5.3 6.7
Company contributions 14.7 11.0 6.2
Company loans to ESOP 5.5 4.2 --
- --------------------------------------------------------------
Debt service payments made
by ESOP trustee $ 38.4 $ 33.4 $ 31.7
- --------------------------------==============================
The company recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $10.4 million in 1997, $9.4 million in 1996 and $3.5
million in 1995. 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.
The trustee borrowed $5.5 million from the company in 1997 and $4.2 million in
1996. These loans were made to ensure that the financial arrangements provided
to employees remain consistent with the original intent of the ESOP.
TAXES
Taxes totaled $178.5 million in 1997, $141.6 million in 1996 and $71.9 million
in 1995.
- --------------------------------------------------------------------------------
Details of taxes (millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Earnings (loss) from continuing businesses before income taxes:
Domestic $ 236.4 $ 176.5 $ (28.7)
Foreign 92.9 87.6 68.0
Eliminations (33.1) (23.9) (31.1)
- --------------------------------------------------------------------------------
Total $ 296.2 $ 240.2 $ 8.2
- ----------------------------------------------==================================
Income tax provision (benefit):
Current:
Federal $ 46.8 $ 36.2 $ (19.7)
Foreign 35.7 33.4 23.4
State 1.5 1.4 (0.2)
- --------------------------------------------------------------------------------
Total current 84.0 71.0 3.5
- --------------------------------------------------------------------------------
Deferred:
Federal 30.9 4.9 (6.2)
Foreign (3.7) (0.5) (2.7)
- --------------------------------------------------------------------------------
Total deferred 27.2 4.4 (8.9)
- --------------------------------------------------------------------------------
Total income taxes 111.2 75.4 (5.4)
Payroll taxes 50.7 51.5 61.7
Property, franchise and capital
stock taxes 16.6 14.7 15.6
- --------------------------------------------------------------------------------
Total taxes $ 178.5 $ 141.6 $ 71.9
- ----------------------------------------------==================================
At December 31, 1997, unremitted earnings of subsidiaries outside the United
States were $117.9 million (at December 31, 1997, 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
$5.4 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.
- 48 -
- --------------------------------------------------------------------------------
Reconciliation to
U.S. statutory tax rate (millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Tax expense at statutory rate $ 103.7 $ 84.1 $ 2.9
State income taxes 1.0 0.9 --
(Benefit) on ESOP dividend (0.9) (1.5) (2.1)
Tax (benefit) on foreign and
foreign-source income 1.1 6.2 (7.7)
Utilization of excess foreign
tax credit (2.9) (6.5) --
Equity in (earnings) loss of affiliates 9.9 (4.2) --
Insurance programs (0.8) (1.2) --
Other items 0.1 (2.4) (0.1)
Loss from ceramic tile business
combination -- -- 1.6
- --------------------------------------------------------------------------------
Tax (benefit) expense at effective rate $ 111.2 $ 75.4 $ (5.4)
- ------------------------------------------------================================
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 diluted share.
- -------------------
BALANCE SHEET ITEMS
- -------------------
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased to $57.9 million at the end of 1997 from
$65.4 million in 1996. Operating and other factors causing the decrease in cash
and cash equivalents are detailed in the Consolidated Statements of Cash Flows
on page 33.
RECEIVABLES
- ------------------------------------------------------------------------------
Accounts and notes
receivable (millions) 1997 1996
- ------------------------------------------------------------------------------
Customers' receivables $ 255.2 $ 214.7
Customers' notes 15.1 18.4
Miscellaneous receivables 19.8 18.5
- ------------------------------------------------------------------------------
290.1 251.6
- ------------------------------------------------------------------------------
Less allowance for discounts and losses 37.5 34.9
- ------------------------------------------------------------------------------
Net $ 252.6 $ 216.7
- -----------------------------------------------------=========================
The increase in receivables of $35.9 million was primarily due to the Swedish
flooring and ceiling acquisitions, a higher level of billings related to
Corporate Retail Accounts and Building Products and some extended terms in Floor
Coverings.
Generally, the company sells its products to select, preapproved groups of
customers, whose businesses 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.
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 $220.1 million in 1997, $14.4 million higher than 1996. The
increase was primarily due to the addition of inventories from the Swedish
flooring and ceilings joint ventures.
Approximately 57% of the company's total inventory in 1997 and 1996 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 $60.3 million
at the end of 1997 and $60.6 million at year-end 1996.
- ------------------------------------------------------------------------------
Inventories (millions) 1997 1996
- ------------------------------------------------------------------------------
Finished goods $ 149.4 $ 143.7
Goods in process 19.9 20.1
Raw materials and supplies 50.8 41.9
- ------------------------------------------------------------------------------
Total $ 220.1 $ 205.7
- -----------------------------------------------------=========================
- 49 -
INCOME TAX BENEFITS
Income tax benefits were $25.9 million in 1997 and $49.4 million in 1996. Of
these amounts, deferred tax benefits were $21.5 million in 1997 and $26.9
million in 1996.
OTHER CURRENT ASSETS
Other current assets were $43.5 million in 1997, an increase of $16.2 million
from the $27.3 million in 1996, primarily due to an increase in prepaid
expenses.
PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Land $ 20.4 $ 24.4
Buildings 395.4 409.2
Machinery and equipment 1,450.5 1,344.8
Construction in progress 110.2 160.5
- --------------------------------------------------------------------------------
1,976.5 1,938.9
- --------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 1,004.3 974.9
- --------------------------------------------------------------------------------
Net $ 972.2 $ 964.0
- -----------------------------------------------------===========================
The $37.6 million increase in gross book value to $1,976.5 million at the end of
1997 included $141.7 million for capital additions and a $55.2 million reduction
from sales, retirements, dispositions and other changes. Also because of
translating property, plant and equipment in foreign currency into U.S. dollars
at lower exchange rates, 1997 gross book value was lower by $48.9 million and
net book value declined by $14.1 million.
The unexpended cost of approved capital appropriations amounted to $121.2
million at year-end 1997, substantially all of which is scheduled to be expended
during 1998.
INSURANCE FOR ASBESTOS-RELATED LIABILITIES
Insurance for asbestos-related liabilities was $291.6 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 55). Such insurance
has either been agreed upon or is probable of recovery through negotiation,
alternative dispute resolution or litigation. See discussion on pages 59-64.
INVESTMENTS IN AFFILIATES
Investments in affiliates were $174.9 million in 1997, a decrease of $29.4
million, reflecting the decrease from the company's 34% share of the Dal-Tile
losses somewhat offset by the increase from the 50% interest in the WAVE joint
venture.
In 1997 the company purchased additional shares of Dal-Tile for $9.7 million
through open market trades.
OTHER NONCURRENT ASSETS
- --------------------------------------------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Goodwill and other intangibles $ 60.3 $ 46.1
Pension-related assets 219.8 158.3
Other 56.7 56.8
- --------------------------------------------------------------------------------
Total $ 336.8 $ 261.2
- ------------------------------------------------------==========================
Other noncurrent assets increased $75.6 million in 1997. Goodwill and other
intangibles increased $14.2 million, reflecting higher spending levels in
computer software systems and acquired intangibles from acquisitions. The $61.5
million increase in pension-related assets reflects the net pension credit of
$47.8 million and an increase in the assets of the deferred compensation plans.
- 50 -
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- --------------------------------------------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Payables, trade and other $ 174.0 $ 158.2
Asbestos-related claims 72.0 --
Employment costs 47.7 49.7
Restructuring costs 12.2 27.6
Other 34.0 37.8
- --------------------------------------------------------------------------------
Total $ 339.9 $ 273.3
- ----------------------------------------------------------======================
INCOME TAXES
- --------------------------------------------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Payable--current $ 32.2 $ 19.3
Deferred--current 0.8 0.2
- --------------------------------------------------------------------------------
Total $ 33.0 $ 19.5
- ----------------------------------------------------------======================
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) 1997 1996
- --------------------------------------------------------------------------------
Postretirement and postemployment benefits $ (87.0) $ (87.0)
Restructuring benefits (7.4) (13.6)
Asbestos-related liabilities (82.1) (49.4)
Capital loss carryforward (20.4) (22.1)
Other (75.0) (65.8)
Valuation allowance 29.3 22.1
- --------------------------------------------------------------------------------
Net deferred assets $(242.6) $(215.8)
- --------------------------------------------------------------------------------
Accumulated depreciation $ 102.4 $ 95.6
Pension costs 48.3 38.2
Insurance for asbestos-related liabilities 94.4 49.4
Other 30.5 36.4
- --------------------------------------------------------------------------------
Total deferred income tax liabilities $ 275.6 $ 219.6
- --------------------------------------------------------------------------------
Net deferred income tax liabilities (assets) $ 33.0 $ 3.8
- --------------------------------------------------------------------------------
Less net income tax (benefits)--current (20.7) (26.7)
- --------------------------------------------------------------------------------
Deferred income taxes--long term $ 53.7 $ 30.5
- ----------------------------------------------------------======================
- 51 -
DEBT
- --------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
(millions) 1997 rate 1996 rate
- --------------------------------------------------------------------------
Short-term debt:
Commercial paper $ 60.8 6.33% $ -- --
Foreign banks 23.3 6.23% 14.5 6.81%
- --------------------------------------------------------------------------
Total short-term debt $ 84.1 6.30% $ 14.5 6.81%
- --------------------------------------------------------------------------
Long-term debt:
9 3/4% debentures
due 2008 $125.0 9.75% $125.0 9.75%
Medium-term notes
8.75-9% due
1998-2001 39.1 8.94% 52.8 8.93%
Bank loans
due 1999-2000 25.0 4.74% 21.0 4.79%
Industrial
development bonds 19.5 5.10% 19.5 5.25%
Other 29.0 7.76% 14.8 8.57%
- --------------------------------------------------------------------------
Total long-term debt $237.6 8.46% $233.1 8.67%
- --------------------------------------------------------------------------
Less current installments 14.5 8.91% 13.7 8.91%
- --------------------------------------------------------------------------
Net long-term debt $223.1 8.43% $219.4 8.65%
- -------------------------------===========================================
- ----------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- ----------------------------------------------------------------------
1999 $25.0 2002 $--
2000 27.1 2003 --
2001 9.5
- ----------------------------------------------------------------------
The 9 3/4% debentures and the medium-term notes are not redeemable until
maturity and have no sinking-fund requirements.
The bank loans have favorable interest rates.
The industrial development bonds mature in 2004 and 2024 and have favorable
interest rates.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had a
carrying value of $2.5 million at December 31, 1997.
Armstrong has a revolving line of credit of $300.0 million, expiring in 2001,
for general corporate purposes. At December 31, 1997, there were no borrowings
under this facility. In addition, the company's foreign subsidiaries have
approximately $109.6 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.
- 52 -
FINANCIAL INSTRUMENTS
The company does not hold or issue financial instruments for trading purposes.
The estimated fair value of the company's financial instruments are as follows:
- -----------------------------------------------------------------------------
1997 1996
(In millions at Carrying Fair Carrying Fair
December 31) amount value amount value
- -----------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 57.9 $ 57.9 $ 65.4 $ 65.4
Receivables 252.6 252.6 216.7 216.7
Liabilities:
Short-term and
long-term debt $321.7 $356.6 $247.6 $281.4
Other noncurrent
financial liabilities 172.1 160.1 151.9 141.4
Off-balance sheet financial
instruments:
Foreign currency
contract obligations $ -- $ 0.3 $ -- $ 1.2
Letters of credit/financial
guarantees -- 186.1 -- 178.1
Line of credit -- 409.6 -- 441.3
- -----------------------------------------------------------------------------
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, receivables, accounts payable
and accrued expenses, short-term debt and current installments of long-term debt
approximate fair value because of the short-term maturity of these instruments.
The fair value estimates of long-term debt were based upon quotes from major
financial institutions taking into consideration current rates offered to the
company for debt of the same remaining maturities.
Other noncurrent financial liabilities consist primarily of deferred payments,
for which cost approximates fair value.
Foreign currency contract obligations are estimated by obtaining quotes from
brokers.
Letters of credit, financial guarantees and line of credit amounts are based on
the estimated cost to settle the obligations.
- 53 -
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
The company does not normally provide collateral or other security to support
letters of credit, financial guarantees or lines of credit.
The company is party to forward starting interest rate swaps entered into in
anticipation of future debt issuance. The current notional amount under these
forward starting swaps is $100.0 million with all swap initiation dates
occurring during 1998. The market value of these forward agreements on December
31, 1997, was $3.2 million less than the notional amount.
The company uses foreign currency forward contracts and options to reduce the
risk that future cash flows from transactions in foreign currencies will be
negatively impacted by changes in exchange rates.
The table below provides anticipated net foreign cash flows for goods, services
and financing transactions for the next 12 months.
- --------------------------------------------------------------------------------
Foreign currency Commercial Financing Net Net
exposure ($ millions) exposure exposure hedge position
- --------------------------------------------------------------------------------
British pound $(24.0) $(17.1) $12.1 $(29.0)
Canadian dollar 37.0 -- -- 37.0
French franc (17.0) 3.3 (3.3) (17.0)
German mark (48.0) 12.4 (12.4) (48.0)
Italian lira 25.0 2.3 (2.3) 25.0
Spanish peseta 7.0 2.3 (2.3) 7.0
- --------------------------------------------------------------------------------
Note 1: A positive amount indicates the company is a net receiver of this
currency, while a negative amount indicates the company is a net payer.
The company policy allows hedges of cash flow exposures of up to one year. The
table below summarizes the company's foreign currency forward contracts and
average contract rates at December 31, 1997. Foreign currency amounts are
translated at exchange rates as of December 31, 1997.
- ------------------------------------------------------------------
Foreign currency Forward Contracts
contracts ($ millions) Sold Avg. rate Bought Avg. rate
- ------------------------------------------------------------------
British pound $ 5.0 1.68 $17.1 1.61
Dutch guilder 2.0 2.00 -- --
French franc 3.3 5.9 -- --
German mark 12.4 1.79 -- --
Italian lira 2.3 1726 -- --
Spanish peseta 2.3 151.5 -- --
- ------------------------------------------------------------------
The foreign currency hedges are straightforward contracts that have no embedded
options or other terms that involve a higher level of complexity or risk.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were $172.1 million in 1997, an increase of $20.2
million from $151.9 million in 1996. Increases of $4.9 million for
pension-related liabilities and $5.8 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
the next page) and a $4.6 million residual reserve for the estimated potential
liability primarily associated with claims pending in the company's
asbestos-related litigation.
- 54 -
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 $4.6 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 59-64.
ASBESTOS-RELATED LIABILITIES
The company reserved $179.7 million in long-term liabilities and $72.0 million
in current accrued liabilities for asbestos-related claims. The company has
recorded an insurance asset (see page 50) in the amount of $291.6 million for
coverage of asbestos-related claims. See discussion on pages 59-64.
ENVIRONMENTAL MATTERS
In 1997, the company incurred capital expenditures of approximately $1.2 million
for environmental compliance and control facilities and anticipates comparable
annual expenditures for those purposes for the years 1998 and 1999. 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 17 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
- 55 -
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, 1997, 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, $9.3 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.
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.
- 56 -
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) 1997 1996 1995
- --------------------------------------------------------------------------------
Option shares at beginning of year 2,161.4 1,841.6 1,612.1
Options granted 286.8 728.7 642.8
Option shares exercised (265.5) (376.7) (390.9)
Stock appreciation rights exercised (4.7) (10.8) (11.5)
Options cancelled (16.7) (21.4) (10.9)
Option shares at end of year 2,161.3 2,161.4 1,841.6
Option shares exercisable at end
of year 1,262.1 1,185.8 1,196.7
Shares available for grant 1,585.5 1,914.6 2,838.9
- --------------------------------------------------------------------------------
Weighted average price per share:
Options outstanding $ 54.01 $ 50.06 $ 43.00
Options exercisable 46.88 41.11 37.93
Options granted 69.63 60.30 52.47
Option shares exercised 39.10 36.27 33.48
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1997.
- -----------------------------------------------------------------------------
Stock options outstanding as of 12/31/97
- -----------------------------------------------------------------------------
Options outstanding Options exercisable
--------------------------------------- -----------------------
Range Number Weighted- Weighted- Number Weighted-
of outstanding average average exercisable average
exercise at remaining exercise at exercise
prices 12/31/97 option life price 12/31/97 price
- -----------------------------------------------------------------------------
$28-38 359,876 4.3 $31.75 359,876 $31.75
38-54 361,127 6.4 45.10 361,127 45.10
54-62 846,219 7.7 58.57 527,999 57.91
62-66 306,000 8.1 63.26 10,000 65.50
66-74 288,050 9.2 69.75 3,100 71.15
- -----------------------------------------------------------------------------
2,161,272 1,262,102
- -----------=========----------------------------------=========--------------
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 a peer group of 12 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. Within the performance periods at the end of 1997 were
109,837 performance restricted shares outstanding, with 6,253 accumulated
dividend equivalent shares. Restricted common stock awards will be issued in
1998 based on the performance period ending December 31, 1997. Within the
restriction periods at the end of 1997 were 180,199 shares of restricted common
stock outstanding, with 9,118 accumulated dividend equivalent shares, based on
performance periods ending prior to 1997.
- 57 -
Restricted stock awards can be used for the purposes of recruitment, special
recognition and retention of key employees. Awards for 27,700 shares of
restricted stock were granted (excluding performance based awards discussed
above) during 1997. At the end of 1997, there were 151,039 restricted shares of
common stock outstanding with 7,097 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) 1997 1996 1995
- -------------------------------------------------------------------------
Net earnings: As reported $ 185.0 $ 155.9 $ 123.3
Pro forma 180.7 150.7 121.4
Basic EPS: As reported 4.55 3.81 2.94
Pro forma 4.45 3.68 2.89
Diluted EPS: As reported 4.50 3.61 2.68
Pro forma 4.39 3.49 2.64
- -------------------------------------------------------------------------
The fair value of grants was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1997, 1996
and 1995.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
Risk-free interest rates 6.21% 6.17% 6.38%
Dividend yield 2.46% 2.32% 2.39%
Expected lives 5 years 5 years 5 years
Volatility 19% 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.
TREASURY SHARES
Treasury share changes for 1997, 1996 and 1995 are as follows:
- --------------------------------------------------------------------------------
Years ended
December 31 (thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Common shares
Balance at beginning of year 10,714.6 15,014.1 14,602.1
Stock purchases/(1)/ 1,299.2 1,357.6 795.7
Stock issuance activity, net/(2)/ (254.3) (5,657.1) (383.7)
- --------------------------------------------------------------------------------
Balance at end of year 11,759.5 10,714.6 15,014.1
- -------------------------------------------========------========------=========
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.
- 58 -
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 3,661,000 shares through December 31, 1997, with a
total cash outlay of $218.7 million, including 1,281,000 repurchased in 1997.
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
PERSONAL INJURY LITIGATION
The company is one of many defendants in approximately 83,000 pending claims as
of December 31, 1997, alleging personal injury from exposure to asbestos. The
increase in the number of claims during the last two quarters of 1997 is
primarily due to the inclusion of cases that had been subject to an injunction
related to the Georgine Settlement Class Action ("Georgine"), described below,
and those that had been filed in the tort system against other defendants (and
not against the Center for Claims Resolution ("Center") members) while Georgine
was pending.
Nearly all claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against the company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its
- 59 -
involvement with asbestos-containing insulation products. The company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined 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 large number of claims have been settled,
dismissed, put on inactive lists or otherwise resolved, and the company
generally is involved in all stages of claims resolution and litigation,
including individual trials, consolidated trials and appeals. Neither the rate
of future filings and resolutions nor the total number of future claims can be
predicted at this time with a high degree of certainty.
Attention has been given by various parties to securing a comprehensive
resolution of the litigation. In 1991, the Judicial Panel for Multidistrict
Litigation ordered the transfer of federal cases to the Eastern District of
Pennsylvania in Philadelphia for pretrial purposes. The company supported this
transfer. Some cases are periodically released for trial, although the issue of
punitive damages is retained by the transferee court. That court has been
instrumental in having the parties resolve large numbers of cases in various
jurisdictions and has been receptive to different approaches to the resolution
of claims. Claims in state courts have not been directly affected by the
transfer, although most recent cases have been filed in state courts.
Georgine Settlement Class Action
Georgine v. Amchem was a settlement class action filed in the Eastern District
- ------------------
of Pennsylvania, on January 15, 1993, that included essentially all future
personal injury claims against members of the Center, including the company. It
was designed to establish a nonlitigation system for the resolution of such
claims, and offered a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they met certain exposure and medical
criteria. Compensation amounts were derived from historical settlement data and
no punitive damages were to be paid. The settlement was designed to, among other
things, minimize transactional costs, including attorneys' fees, expedite
compensation to claimants with qualifying claims, and relieve the courts of the
burden of handling future claims. Based on maximum mathematical projections
covering a ten-year period starting in 1994, the company estimated in Georgine a
reasonably possible additional liability of $245 million.
The District Court, after exhaustive discovery and testimony, approved the
settlement class action and issued a preliminary injunction that barred class
members from pursuing claims against Center members in the tort system. The U.S.
Court of Appeals for the Third Circuit reversed that decision, and the reversal
was sustained by the U.S. Supreme Court on June 25, 1997, holding that the
settlement class did not meet the requirements for class certification under
Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on
July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a
loss of the bar against the filing of claims in the tort system. The company
believes that an alternative claims resolution mechanism to Georgine is likely
to emerge.
- 60 -
Asbestos-related liability
During the last half of 1997, the company assessed the impact of the recent
Supreme Court ruling on its projected asbestos resolution and defense costs. In
doing so, the company reviewed, among other things, its historical settlement
amounts, the incidence of past claims, the mix of the injuries and occupations
of the plaintiffs, the number of cases pending against it, the Georgine
projection and its experience. Subject to the uncertainties, limitations and
other factors referred to above and based upon its experience, the company has
recorded $251.7 million on the balance sheet as an estimated minimum liability
to defend and resolve probable and estimable asbestos-related personal injury
claims currently pending and to be filed through 2003. This is management's best
estimate of the minimum liability, although potential future costs for claims
could range up to an additional $387 million or an estimated maximum liability
of approximately $639 million. Because of the uncertainties related to asbestos
litigation, it is not possible to estimate the number of personal injury claims
that may be filed after 2003 or their defense and resolution costs. Therefore,
the company's estimated liability does not include costs for personal injury
claims that may be filed after 2003, although it is likely there will be such
additional claims. Management believes that the potential additional costs for
claims to be filed through 2003 and those filed thereafter, net of any potential
insurance recoveries, will not have a material after-tax effect on the financial
condition of the company or its liquidity, although the net after-tax effect of
any future liabilities recorded in excess of insurance assets could be material
to earnings in a future period.
PROPERTY DAMAGE LITIGATION
The company is also one of many defendants in 10 pending claims as of December
31, 1997, brought by public and private building owners. These claims include
allegations of damage to buildings caused by asbestos-containing products and
generally seek compensatory and punitive damages and equitable relief, including
reimbursement of expenditures, for removal and replacement of such products. The
claims appear to be aimed at friable (easily crumbled) asbestos-containing
products, although allegations encompass all asbestos-containing products,
including previously installed asbestos-containing resilient flooring. Among the
lawsuits that have been resolved are four class actions, which involve public
and private schools, Michigan state public and private schools, colleges and
universities, and private property owners who leased facilities to the federal
government. The company vigorously denies the validity of the allegations
against it in these claims. These suits and claims are not handled by the
Center. Insurance coverage has been resolved and is expected to cover almost all
costs of these claims.
- 61 -
CODEFENDANT BANKRUPTCIES
Certain codefendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
INSURANCE COVERAGE
The company's primary and excess insurance policies provide product hazard and
nonproducts (general liability) coverages for personal injury claims, and
product hazard coverage for property damage claims. Certain policies also
provide coverage to ACandS, Inc., a former subsidiary of the company. The
company and ACandS, Inc., share certain limits that both have accessed and have
entered into an agreement that reserved for ACandS, Inc., a certain amount of
excess insurance.
California Insurance Coverage Lawsuit
Trial court decisions in the insurance lawsuit filed by the company in
California held that the trigger of coverage for personal injury claims was
continuous from exposure through death or filing of a claim, that a triggered
insurance policy should respond with full indemnification up to policy limits,
and that any defense obligation ceases upon exhaustion of policy limits.
Although not as comprehensive, another decision established favorable defense
and indemnity coverage for property damage claims, providing coverage during the
period of installation and any subsequent period in which a release of fibers
occurred. The California appellate courts substantially upheld the trial court,
and that insurance coverage litigation is now concluded. The company has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to below, or other
settlements. In 1989, a settlement with a carrier having both primary and excess
coverages provided for certain minimum and maximum percentages of costs for
personal injury claims to be allocated to nonproducts (general liability)
coverage, the percentage to be determined by negotiation or in alternative
dispute resolution ("ADR").
The insurance carriers that provided personal injury products hazard,
nonproducts or property damage coverages are as follows: Reliance Insurance
Company; Aetna (now Travelers) Casualty and Surety Company; Liberty Mutual
Insurance Company; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier that
provided $25 million of personal injury coverage, certain London companies, and
certain excess carriers providing only property damage coverage are insolvent.
The company is pursuing claims against insolvents in a number of forums.
Wellington Agreement
In 1985, the company and 52 other companies (asbestos defendants and insurers)
signed the Wellington Agreement. This Agreement settled nearly all disputes
concerning personal injury insurance coverage with most of the company's
carriers, provided broad coverage for both defense and indemnity and addressed
both products hazard and non-products (general liability) coverages.
- 62 -
Asbestos Claims Facility ("Facility") and
Center for Claims Resolution
The Wellington Agreement established the Facility to evaluate, settle, pay and
defend all personal injury claims against member companies. Resolution and
defense costs were allocated by formula. The Facility subsequently dissolved,
and the Center was created in October 1988 by 21 former Facility members,
including the company. Insurance carriers, while not members, are represented ex
officio on the Center's governing board and have agreed annually to provide a
portion of the Center's operational costs. The Center adopted many of the
conceptual features of the Facility and has addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. Resolution
and defense costs are allocated by formula; adjustments over time have resulted
in some increased share for the company.
Insurance Recovery Proceedings
A substantial portion of the company's primary and excess insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve exposure during installation of asbestos
materials. The Wellington Agreement and the 1989 settlement agreement referred
to above have provisions for such coverage. An ADR process under the Wellington
Agreement is underway against certain carriers to determine the percentage of
resolved and unresolved claims that are nonproducts claims, to establish the
entitlement to such coverage and to determine whether and how much reinstatement
of prematurely exhausted products hazard insurance is warranted. The nonproducts
coverage potentially available is substantial and, for some policies, includes
defense costs in addition to limits. The carriers have raised various defenses,
including waiver, laches, statutes of limitations and contractual defenses. One
primary carrier alleges that it is no longer bound by the Wellington Agreement,
and another alleges that the company agreed to limit its claims for nonproducts
coverage against that carrier when the Wellington Agreement was signed. The ADR
process is in the trial phase of binding arbitration. Other proceedings against
non-Wellington carriers may become necessary.
- 63 -
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the company's belief in the availability of insurance in this
amount, based upon the company's success in insurance recoveries, settlement
agreements that provide such coverage, the nonproducts recoveries by other
companies and the opinion of outside counsel. Such insurance is probable of
recovery through negotiation or litigation. A substantial portion of the
insurance asset is in ADR, which the company believes may be resolved in 1998 or
later. A shortfall has developed between available insurance and amounts
necessary for resolution and defense costs. This shortfall was $39.9 million at
the end of 1997 and included a $1.5 million insurance recovery from an insolvent
insurance carrier. The recovery of insurance assets to cover the shortfall will
depend upon the resolution of the ADR and other disputes with the insurance
carriers. The company does not believe that after-tax effect of the shortfall
will be material either to the financial condition of the company or to its
liquidity.
CONCLUSIONS
The company does not know how many claims will be filed against it in the
future, or the details thereof or of pending suits not fully reviewed, or the
defense and resolution costs that may ultimately result therefrom, or whether an
alternative to the Georgine settlement vehicle may emerge, or the scope of its
insurance coverage ultimately deemed available.
The company has assessed the impact of the recent Supreme Court ruling on its
projected asbestos resolution and defense costs. Subject to the uncertainties,
limitations and other factors referred to above and based upon its experience,
the company has recorded on the balance sheet $251.7 million as a minimum
estimated liability to defend and resolve probable and estimable
asbestos-related personal injury claims currently pending and to be filed
through 2003. This is management's best estimate of the minimum liability,
although potential future costs for these claims could range up to an additional
$387 million or an estimated maximum liability of approximately $639 million.
Because of the uncertainties related to asbestos litigation, it is not possible
to estimate the number of personal injury claims that may be filed after 2003 or
their cost. Therefore, the company's estimated liability does not include costs
for personal injury claims that may be filed after 2003, although it is likely
there will be such additional claims. Management believes that the potential
additional costs for claims to be filed through 2003 and those filed thereafter,
net of any potential insurance recoveries, will not have a material after-tax
effect on the financial condition of the company or its liquidity, although the
net after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
An insurance asset in the amount of $291.6 million is recorded on the balance
sheet and reflects the company's belief in the availability of insurance in this
amount, based upon the company's success in insurance recoveries, settlement
agreements that provide such coverage, the nonproducts recoveries by other
companies, and the opinion of outside counsel. Such insurance is probable of
recovery through negotiation or litigation. A substantial portion of the
insurance asset is in ADR, which the company believes may be resolved in 1998 or
later. A shortfall has developed between available insurance and amounts
necessary for resolution and defense costs. This shortfall was $39.9 million at
the end of 1997 and included a $1.5 million insurance recovery from an insolvent
insurance carrier. The recovery of insurance assets to cover the shortfall will
depend upon the resolution of the ADR and other disputes with the insurance
carriers. The company does not believe that after-tax effect of the shortfall
will be material either to the financial condition of the company or to its
liquidity.
The company believes that a claims resolution mechanism alternative to the
Georgine settlement will eventually emerge, and that the resolution and defense
costs are likely to be higher than the earlier maximum mathematical projection
in Georgine.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the company believes it is
probable that substantially all of the defense and resolution costs of property
damage claims will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted claims
and the liability resulting therefrom, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and other settlements with insurance carriers, the results of the
California insurance coverage litigation, the establishment of the Center, the
likelihood that an alternative to the Georgine settlement will eventually
emerge, and its experience, the company believes the asbestos-related claims
against the company would not be material either to the financial condition of
the company or to its liquidity, although the net after-tax effect of any future
liabilities recorded in excess of insurance assets could be material to earnings
in such future period.
- 64 -
Independent auditors' report
The Board of Directors and Shareholders,
Armstrong World Industries, Inc.:
We have audited the consolidated financial statements of Armstrong World
Industries, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Armstrong World
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Philadelphia, PA
February 13, 1998
- 65 -
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 1-5 of the Company's 1998 Proxy Statement is incorporated
by reference herein.
Executive Officers of the Registrant
- ------------------------------------
George A. Lorch* -- Age 56; Chairman of the Board since April 25, 1994; and
President (Chief Executive Officer) since September 7, 1993; Executive Vice
President 1988-1993.
Marc R. Olivie -- Age 44; 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 49, 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 52; 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 53; 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.
Douglas L. Boles -- Age 40; 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.
Deborah K. Owen -- Age 46; Senior Vice President, Secretary and General Counsel
since January 1, 1998; Attorney, Law Offices of Deborah K. Owen, Columbia, MD,
September 1996-September 1997; Partner, Arent Fox Kintner Poltkin & Kahn law
firm, Washington DC, August 1994-August 1996; Commissioner, Federal Trade
Commission, Washington, DC, October 1989-August 1994.
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.
Edward R. Case -- Age 51; 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
- 66 -
Planning, U.S. Soup May 1993-September 1994; Deputy Treasurer September
1991-April 1993.
Bruce A. Leech, Jr. -- Age 55; Controller since February 1, 1990.
All information presented above is current as of March 1, 1998. 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, Riddick and Ms. Owen.
(*)Member of the Executive Committee of the Board of Directors as of March 1,
1998.
Item 11. Executive Compensation
- --------------------------------
The information appearing in the sections captioned "Directors' Compensation" on
pages 5-6 and "Executive Officers' Compensation," (other than the information
contained under the subcaption "Performance Graph") and "Retirement Income Plan
Benefits," on pages 11-15 of the Company's 1998 Proxy Statement is incorporated
by reference herein.
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 7 of the Company's 1998 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 72.
- 67 -
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 March 9,
1998.
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) Registrant's Retirement Savings and Stock Ownership Plan
as amended and restated effective October 1, 1996, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K where it appeared as Exhibit 4(b). *
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 appeared 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
appeared as Exhibit 4(d).
No. 10(i)(a) Copy of Agreement Concerning Asbestos-Related Claims
dated June 19, 1985, (the "Wellington Agreement") among the
registrant and other companies.
No. 10(i)(b) Producer Agreement concerning Center for Claims
Resolution dated September 23, 1988, among the registrant and
other companies as amended is incorporated by reference herein
from registrant's 1996 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(i)(b).
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 appeared as Exhibit 10(i)(c).
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 appeared as Exhibit
10(iii)(a). *
- 68 -
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
appeared as Exhibit 10(iii)(b). *
No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(c).
*
No. 10(iii)(d) Registrant's Management Achievement Plan for Key Executives,
as amended, is incorporated by reference herein from
registrant's 1996 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(d). *
No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known as
the Excess Benefit Plan), as amended, is incorporated by
reference herein from registrant's 1996 Annual Report on Form
10-K wherein it appeared as Exhibit 10(iii)(e). *
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 appeared as Exhibit 10(iii)(f).
*
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 appeared as Exhibit 10(iii)(g).
*
No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors,
as amended, is incorporated by reference herein from
registrant's 1996 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(h). *
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) Copy of registrant's 1993 Long-Term Stock Incentive Plan as
amended. *
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 September 30, 1997, wherein it appeared as Exhibit 10. *
No. 10(iii)(l) Form of Indemnification Agreement between the registrant and
each of the registrant's Nonemployee Directors, is
incorporated by reference herein from registrant's 1996 Annual
Report on Form 10-K wherein it appeared as Exhibit 10(iii)(l).
*
No. 11 A statement regarding computation of per share earnings on
both basic and diluted bases is
- 69 -
set forth in the Financial Statement Schedules on pages 73 and
74 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. 27.1 Financial Data Schedule
No. 27.2 Restated Financial Data Schedule
No. 27.3 Restated Financial Data Schedule
* Compensatory Plan
- 70 -
b. During the last quarter of 1997, no reports on Form 8-K were filed.
This 10-K contains certain "forward looking statements" (within the meaning of
the Private Securities Litigation Reform Act of 1995). Among other things, they
pertain to 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 from
anticipated future results: (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 costs increases; or (3) if the factors on which
the Company's conclusions are based do not conform to 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 20, 1998
-------------------------------
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 By /s/ George A. Lorch
Donald C. Clark Director -----------------------------
James. E. Marley Director (George A. Lorch, as
David W. Raisbeck Director attorney-in-fact and
J. Phillip Samper Director on his own behalf)
Jerre L. Stead Director As of March 20, 1998
- 71 -
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, 1997 and 1996
Consolidated Statements of Earnings for the Years Ended December 31, 1997,
1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
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.
------------------------- --------
Computation for Basic Earnings
per Share 73
Computation for Diluted Earnings
per Share 74
Schedule II - Valuation and Qualifying Reserves 75
- 72 -
Exhibit No. 11(a)
COMPUTATION FOR BASIC EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
1997 1996 1995
---- ---- ----
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding 40.6 39.1 37.1
==== ==== ====
Basic Earnings Per Share
Earnings from continuing businesses $185.0 $164.8 $13.6
Less:
Dividend requirement on Series A
convertible preferred stock -- 8.8 18.8
Plus:
Tax benefit on dividends paid on
unallocated preferred shares -- 2.0 4.5
---- ---- ----
Pro forma earnings (loss) available for common
- ----------------------------------------------
shareholders:
- -------------
Continuing businesses 185.0 158.0 (0.7)
Discontinued business -- -- 109.7
----- ----- -----
Before Extraordinary Loss 185.0 158.0 109.0
Extraordinary Loss -- (8.9) --
----- ----- -----
Net Earnings $185.0 $149.1 $109.0
====== ====== ======
Basic earnings (loss) per share of common stock
- -----------------------------------------------
Continuing businesses $ 4.55 $ 4.04 $(0.02)
Discontinued business -- -- 2.96
------ ------ ------
Before Extraordinary Loss 4.55 4.04 2.94
Extraordinary Loss -- (0.23) --
------ ------ ------
Net Earnings $ 4.55 $ 3.81 $ 2.94
====== ====== ======
- 73 -
Exhibit No. 11(b)
COMPUTATION FOR DILUTED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
1997 1996 1995
---- ---- ----
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding 40.6 39.1 37.1
Average number of common shares issuable
under stock options 0.4 0.4 0.3
Average number of common shares issuable
under the Employee Stock Ownership Plan -- 2.6 5.4
---- --- ---
Average number of common and common
equivalent shares outstanding 41.0 42.1 42.8
==== ==== ====
Adjustments to Earnings
- -----------------------
Earnings from continuing businesses $185.0 $164.8 $13.6
Less:
Increased contribution to the Employee
Stock Ownership Plan assuming
conversion of preferred shares to
common -- 3.2 7.3
Net reduction in tax benefits assuming
conversion of the Employee Stock
Ownership Plan preferred shares to
common -- 0.6 1.2
---- --- ---
Pro forma earnings available for common
- ---------------------------------------
shareholders:
- -------------
Continuing businesses 185.0 161.0 5.1
Discontinued business -- -- 109.7
---- ---- -----
Before Extraordinary Loss 185.0 161.0 114.8
Extraordinary Loss -- (8.9) --
---- ---- ----
Net Earnings $185.0 $152.1 $114.8
====== ====== ======
Diluted earnings (loss) per share of
- ------------------------------------
common stock
- ------------
Continuing businesses $4.50 $3.82 (a) $(0.02)
Discontinued business -- -- 2.56
---- ---- ----
Before Extraordinary Loss $4.50 $3.82 $2.68
Extraordinary Loss -- (0.21) --
---- ----- ----
Net Earnings $4.50 $3.61 $2.68
===== ===== =====
(a) Diluted earnings (loss) per share from continuing businesses for 1995
was antidilutive.
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SCHEDULE II
-----------
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------
For Years Ended December 31
---------------------------
(amounts in millions)
Provision for Losses 1997 1996 1995
- -------------------- ---- ---- ----
Balance at Beginning of Year $10.9 $ 8.7 $ 9.7
Additions Charged to Earnings 7.3 5.4 2.9
Deductions 5.4 3.2 3.9
Balance at End of Year $12.8 $10.9 $ 8.7
- --------------------------------------------------------------------------------
Provision for Discounts
- -----------------------
Balance at Beginning of Year $24.0 $20.3 $17.3
Additions Charged to Earnings 76.7 74.5 82.2
Deductions 76.0 70.8 79.2
Balance at End of Year $24.7 $24.0 $20.3
- --------------------------------------------------------------------------------
Provision for Discounts and Losses
- ----------------------------------
Balance at Beginning of Year $34.9 $29.0 $27.0
Additions Charged to Earnings 84.0 79.9 85.1
Deductions 81.4 74.0 83.1
Balance at End of Year $37.5 $34.9 $29.0
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EXHIBIT INDEX
No. 3(a) Copy of registrant's By-laws, as amended effective March
9, 1998.
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) Registrant's Retirement Savings and Stock Ownership Plan
as amended and restated effective October 1, 1996, is
incorporated by reference herein from registrant's 1996
Annual Report on Form 10-K where it appeared as Exhibit
4(b). *
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 appeared 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 appeared as Exhibit 4(d).
No. 10(i)(a) Copy of Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the
registrant and other companies.
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution
dated September 23, 1988, among the registrant and other
companies as amended is incorporated by reference herein
from registrant's 1996 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(i)(b).
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 appeared as Exhibit 10(i)(c).
- 76 -
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 appeared 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 appeared as Exhibit 10(iii)(b). *
No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as
amended, is incorporated by reference herein from
registrant's 1996 Annual Report on Form 10-K wherein it
appeared as Exhibit 10(iii)(c). *
No. 10(iii)(d) Registrant's Management Achievement Plan for Key
Executives, as amended, is incorporated by reference
herein from registrant's 1996 Annual Report on Form 10-K
wherein it appeared as Exhibit 10(iii)(d). *
No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly
known as the Excess Benefit Plan), as amended, is
incorporated by reference herein from registrant's 1996
Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(e). *
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 appeared as Exhibit
10(iii)(f). *
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 appeared as Exhibit
10(iii)(g). *
No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee
Directors, as amended, is incorporated by reference herein
from registrant's 1996 Annual Report on Form 10-K wherein
it appeared as Exhibit 10(iii)(h). *
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) Copy of registrant's 1993 Long-Term Stock Incentive Plan
as amended. *
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 September 30, 1997, wherein it appeared as Exhibit
10. *
- 77 -
No. 10(iii)(l) Form of Indemnification Agreement between the registrant
and each of the registrant's Nonemployee Directors, is
incorporated by reference herein from registrant's 1996
Annual Report on Form 10-K wherein it appeared as Exhibit
10(iii)(l). *
No. 11 A statement regarding computation of per share earnings on
both basic and diluted bases is set forth in the Financial
Statement Schedules on pages 73 and 74 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. 27.1 Financial Data Schedule
No. 27.2 Restated Financial Data Schedule
No. 27.3 Restated Financial Data Schedule
* Compensatory Plan
- 78 -