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
------------------------------------------------------1998
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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
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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 3001,2500 Columbia Avenue, Lancaster, Pennsylvania 1760417603
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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)
7.45% Senior Quarterly Interest Bonds
Due 2038
(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 ($72.812550.625 per share)
on the New York Stock Exchange on February 10, 1998,19, 1999, was approximately $2.7$1.7
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, 1998,15, 1999, as having sole or shared voting power
over 5% or more of the outstanding Common Stock of registrant as of December 31,
1997.1998. As of February 10, 1998,19, 1999, the number of shares outstanding of registrant's
Common Stock was 40,076,306.40,023,675. This amount includes the 4,826,2032,898,100 shares of Common
Stock as of December 31, 1997,1998, 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, 1998,1999, relative to the
April 27, 1998,26, 1999, annual meeting of the shareholders of registrant (the "Company's
19981999 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 ofdesigns, manufactures and sells interior furnishings, includingmost
notably floor coverings and buildingceiling systems. These products which are sold primarily
for use in the furnishing, refurbishing, repair, modernization and construction
of residential, commercial and institutional buildings. ItThe Company also
manufactures various industrial and other products.products, including pipe insulation,
gasket material and textile machine parts. On July 22, 1998, the Company
acquired Triangle Pacific Corp. ("Triangle Pacific"). Triangle Pacific
manufactures hardwood and other flooring and relevant products, as well as
kitchen and bathroom cabinets. Effective August 31, 1998, the Company acquired
93 percent of DLW Aktiengesellschaft ("DLW"), a German company, which
manufactures flooring and some office furniture in Europe. In late 1995, Armstrong1998, the Company
also sold its furniture business and
combined its ceramic tile business withequity investment in Dal-Tile International Inc. ("Dal-Tile"),
retaining a minority equity interestthrough which investment the Company participated in the combined company.ceramic tile market.
Unless the context indicates otherwise, the term "Company" means Armstrong World
Industries, Inc. and its consolidated subsidiaries.
Industry Segments
The company'sCompany's businesses include fourfive reportable segments: floor coverings,
building products, industrywood products, insulation products, and ceramic tile.
- --------------------all other.
NATURE OF OPERATIONS
- --------------------INDUSTRY SEGMENTS
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For year ended 1998
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Floor Building Wood Insulation All
(millions) coverings products products products other Totals
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Net sales to external customers $ 1,317.6 $ 756.8 $ 346.0 $ 230.0 $ 95.8 $ 2,746.2
Intersegment sales -- -- -- -- 39.5 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- -- 0.2 (13.8)
Segment operating income 176.5 116.6 38.6 46.3 9.1 387.1
Reorganization charges 53.5 10.1 -- 0.2 1.9 65.7
Segment assets 1,476.7 550.1 1,355.5 174.6 80.7 3,637.6
Depreciation and amortization 63.6 39.2 15.3 12.1 7.2 137.4
Equity investment 2.2 39.6 -- -- -- 41.8
Capital additions 93.6 42.5 12.4 11.3 5.9 165.7
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For year ended 1997
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Floor Building Wood Insulation All
(millions) coverings products products products other Totals
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Net sales to external customers $ 1,116.0 $ 754.5 $ -- $ 228.4 $ 99.8 $ 2,198.7
Intersegment sales -- -- -- -- 35.8 35.8
Equity (earnings) loss from affiliates 0.2 (12.9) -- -- 42.4 29.7
Segment operating income (loss) 186.5 122.3 -- 45.4 (2.6) 351.6
Segment assets 713.8 554.9 -- 165.1 219.2 1,653.0
Depreciation and amortization 65.5 37.5 -- 12.0 9.6 124.6
Equity investment 2.5 36.7 -- -- 135.7 174.9
Capital additions 76.6 54.4 -- 13.4 3.1 147.5
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For year ended 1996
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Floor Building Wood Insulation All
(millions) coverings products products products other Totals
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Net sales to external customers $ 1,091.8 $ 718.4 $ -- $ 246.8 $ 99.4 $ 2,156.4
Intersegment sales -- -- -- -- 40.9 40.9
Equity (earnings) loss from affiliates -- (9.1) -- -- (10.0) (19.1)
Segment operating income 195.4 103.4 -- 42.4 11.6 352.8
Reorganization and restructuring charges 14.5 8.3 -- 2.8 1.2 26.8
Segment assets 687.9 541.1 -- 184.0 257.5 1,670.5
Depreciation and amortization 53.9 37.0 -- 10.0 13.4 114.3
Equity investment -- 35.6 -- -- 168.7 204.3
Capital additions 117.7 67.7 -- 20.4 2.1 207.9
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Segment information has been prepared in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Segments were determined based on products and services provided by each
segment. Accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Performance of the segments is
evaluated on operating income before income taxes excluding reorganization and
restructuring charges, unusual gains and losses, and interest expense. The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties at current market prices.
3
The table below provides a reconciliation of segment information to total
consolidated information.
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at December 31 (millions) 1998 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 -- -- 240.1Total segment sales $ 2,746.2 $ 2,198.7 $ 2,156.4
Intersegment sales 39.5 35.8 40.9
Elimination of intersegment sales (39.5) (35.8) (40.9)
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Total netconsolidated sales $2,198.7 $2,156.4 $2,325.0$ 2,746.2 $ 2,198.7 $ 2,156.4
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Operating income:
Total segment operating income (loss): (Note 1)
Floor coverings $ 186.5387.1 $ 146.9351.6 $ 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)352.8
Segment reorganization and
restructuring charges (65.7) -- (26.8)
Corporate reorganization and
restructuring charges (8.9) -- (19.7)
Flooring discoloration charge -- -- (34.0)
Dal-Tile charge -- (29.7) --
Asbestos liability charge (274.2) -- --
Unallocated corporate expense(expense)
income 1.6 0.1 (36.1) (34.0)(16.4)
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Total consolidated operating income $ 39.9 $ 322.0 $ 255.9
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Assets:
Total assets for reportable
segments $ 44.1
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Depreciation and amortization:
Floor coverings3,637.6 $ 65.51,653.0 $ 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 5.61,670.5
Assets not assigned to business
segments 635.6 722.5 465.1
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Total consolidated assets $ 4,273.2 $ 2,375.5 $ 2,135.6
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Other significant items:
Depreciation and amortization
expense:
Segment totals $ 137.4 $ 124.6 $ 114.3
Unallocated corporate
depreciation and
amortization expense 5.3 8.1 9.4
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Total consolidated depreciation and
amortization expense $ 142.7 $ 132.7 $ 123.7
$ 123.1
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Capital additions:
(Note 3)
Floor coveringsSegment totals $ 76.6165.7 $ 117.7147.5 $ 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 6.3207.9
Unallocated corporate
capital additions 18.6 13.0 20.1
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Total consolidated capital additions $ 156.2184.3 $ 220.7160.5 $ 187.4228.0
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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 designs, manufactures and sells interior furnishings, including
floor coverings, and building products (primarily ceiling systems), wood flooring
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, linoleum, carpet and sports
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
4
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.
IndustryWood Products
The Company, including a number of its subsidiaries,through Triangle Pacific, manufactures and sells hardwood flooring
and other flooring and related products. The wood products segment also
manufactures and distributes kitchen and bathroom cabinets. These products are
used primarily in residential new construction and remodeling, with some
commercial applications such as retail stores and restaurants. Flooring sales
are generally made through independent wholesale flooring distributors and the
cabinets are distributed through Company-operated distributors and directly to
the end-user. The business of this segment is seasonal, with demand for its
products generally the highest between the months of April and November.
Insulation Products
The Company manufactures insulation products for the technical insulation
market. Insulation products are made in a wide variety of types and designs to
satisfy various industrial and commercial applications with the majority of the
products comprising closed cell flexible foams. A broad range of cladding and
other related materials for the insulation contracting market are also produced.
Insulation products are sold primarily throughout Europe and North America, with
increasing markets in Asia and South America.
All Other
Other business units include the making of a variety of specialty products for
the building, automotive, textile and other industries. These products include flexible pipe insulationindustries worldwide. Gasket materials are
sold for use in
construction and in original equipment manufacture; gasket materials for new
equipment and replacement use in the automotive, farm equipment, appliance,
small engine, compressor and other industries; textile mill supplies includingindustries. Textile products include cots and
aprons sold to equipment manufacturers and textile mills. IndustryGasket and textile
products are sold, depending on type and ultimate use, to original equipment
manufacturers, contractors, wholesalers, fabricators and end users.
Ceramic Tile
CeramicApproximately one third of the total sales of this segment relate to three
customers. Also, prior to the disposition of the Company's equity investment in
Dal-Tile in 1998, ceramic tile for floors, walls and countertops, together with
adhesives, installation and maintenance materials and accessories arewere sold
through home centers, independent ceramic and floor covering wholesalers and
sales service centers operated by Dal-Tile.
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The principal raw materials used in the manufacture of the Company's products
are synthetic resins, plasticizers, latex, linseed oil, limestone, cork, mineral
fibers and fillers, clays, starches, perlite, rubber, films, pigments, inks, oak
lumber and inks.logs, veneer, acrylics, plywood, particleboard and fiberboard. 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 - 5 -
products. During 1997,1998, 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
5
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.
In addition, certain of the Company's trademarks, including Armstrong, Bruce,
Hartco, Robbins, and DLW, are important to the Company's business because of
their significant brand name recognition.
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.businesses. Principal research and
development functions include the development of new products and processes and
the improvement of existing products and processes.
The Company spent $42.2 million in 1998, $47.8 million in 1997, and $55.2
million in 1996 and $57.9
million in 1995 on research and development activities worldwide for the
continuing businesses.
GEOGRAPHIC AREAS
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Net trade sales at December 31 (millions) 1998 1997 1996
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Americas:
United States $ 1,803.2 $ 1,412.2 $ 1,385.2
Canada 98.6 89.3 87.2
Other Americas 20.2 16.6 11.2
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Total Americas $ 1,922.0 $ 1,518.1 $ 1,483.6
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Europe:
Germany $ 182.5 $ 110.2 $ 142.4
England 142.5 130.3 129.5
France 65.9 53.1 63.2
Netherlands 57.0 33.1 37.2
Other Europe 183.4 161.7 123.0
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Total Europe $ 631.3 $ 488.4 $ 495.3
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Pacific area and other foreign $ 192.9 $ 192.2 $ 177.5
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Total net trade sales $ 2,746.2 $ 2,198.7 $ 2,156.4
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Sales are attributed to countries based on location of customer.
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Long-lived assets at December 31 (millions) 1998 1997 1996
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Americas:
United States $ 991.9 $ 746.3 $ 728.9
Canada 17.1 20.5 20.7
Other Americas 0.1 0.1 0.1
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Total Americas $ 1,009.1 $ 766.9 $ 749.7
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Europe:
Germany $ 270.3 $ 47.7 $ 58.0
England 52.7 54.7 51.4
Netherlands 42.3 13.0 16.8
Belgium 34.5 -- --
France 15.9 15.1 17.6
Other Europe 36.0 32.6 25.5
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Total Europe $ 451.7 $ 163.1 $ 169.3
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Pacific area:
China $ 34.0 $ 34.0 $ 34.9
Other Pacific area 7.2 8.2 10.1
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Total Pacific area $ 41.2 $ 42.2 $ 45.0
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Total long-lived assets $ 1,502.0 $ 972.2 $ 964.0
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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.
ACQUISITIONS
On July 22, 1998, the Company completed its acquisition of Triangle Pacific
Corp. ("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a
leading U.S. manufacturer of hardwood flooring and other flooring and related
products and a substantial manufacturer of kitchen and bathroom cabinets. The
acquisition, recorded under the purchase method of accounting, included the
purchase of outstanding shares of common stock of Triangle Pacific at $55.50 per
share which, plus acquisition costs, resulted in a total purchase price of
$911.5 million. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based on estimated fair market value at the
date of acquisition while the balance of $831.1 million was recorded as goodwill
and is being amortized over forty years on a straight-line basis.
Effective August 31, 1998, the Company acquired approximately 93% of the
total share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized
under the laws of the Federal Republic of Germany. DLW is a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, included the purchase of 93% of the total share capital of DLW
which, plus acquisition costs resulted in a total purchase price of $289.9
million. A portion of the purchase price has been allocated to assets acquired
and liabilities assumed based on fair market value at the date of acquisition
while the balance of $117.2 million was recorded as goodwill and is being
amortized over forty years on a straight-line basis. In this purchase price
allocation, $49.6 million was allocated to the estimable net realizable value of
DLW's furniture business and a carpet manufacturing business in the Netherlands,
which the Company has identified as businesses held for sale.
The allocation of the purchase price to the businesses held for sale was
determined as follows:
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(millions) 1998
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Estimated sales price $54.3
Less: Estimated cash outflows through disposal date (2.2)
Allocated interest through disposal date (2.5)
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Total $49.6
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The final sales price and cash flows pertaining to these businesses may
differ from these amounts. Disposals of these businesses should occur in the
first half of 1999.
The table below reflects the adjustment to the carrying value of the
businesses held for sale relating to interest allocation, profits and cash flows
in 1998.
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(millions) 1998
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Carrying value at August 31, 1998 $49.6
Interest allocated September 1 - December 31, 1998 1.1
Effect of exchange rate change 2.8
Profits excluded from consolidated earnings (0.4)
Cash flows funded by parent 2.8
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Carrying value at December 31, 1998 $55.9
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The purchase price allocation for these acquisitions is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies. The operating results of these acquired businesses have been
included in the Consolidated Statements of Earnings from the dates of
acquisition. Triangle Pacific's fiscal year ends on the Saturday closest to
December 31, which was January 2, 1999. The difference in Triangle Pacific's
fiscal year from that of the parent company was due to the difficulty in
changing its financial reporting systems to accommodate a calendar year end. No
events occurred between December 31 and January 2 at Triangle Pacific materially
affecting the Company's financial position or results of operations.
The table below reflects unaudited pro forma combined results of the
Company, Triangle Pacific and DLW as if the acquisitions had taken place at the
beginning of fiscal 1998 and 1997:
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(millions) 1998 1997
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Net sales $3,479.8 $3,350.0
Net earnings (14.2) 173.2
Net earnings per diluted share (0.36) 4.22
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7
In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what the actual combined results of operations might
have been if the acquisitions had been effective at the beginning of fiscal 1997
and 1998.
REORGANIZATION AND OTHER ACTIONS
In 1998 the Company recognized charges of $65.6 million, or $42.6 million after
tax, related to severance and enhanced retirement benefits for more than 650
positions, approximately 75% of which were salaried positions. In addition, the
Company recorded an estimated loss of $9.0 million, or $5.9 million after tax,
related to redundant flooring products machinery and equipment held for
disposal. Reorganization actions include corporate and business unit staff
reductions reflecting reorganization of engineering, research and development
and product styling and design; realignment of support activities in connection
with implementation of a new corporate logistics and financial software system;
changes to production processes in the Company's Lancaster flooring plant; and
elimination of redundant positions in formation of a new combined business
organization for Floor Products, Corporate Retail Accounts and Installation
Products. Approximately $28.6 million is cash expenditures for severance which
will occur over the next 12 months. The remainder is a noncash charge for
enhanced retirement benefits.
A 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-downs of assets. These
actions affected approximately 500 employees, about two-thirds of whom were in
staff positions. The majority of the cash outflow occurred within the following
12 months. As of December 31, 1998, an immaterial amount remained in the 1996
reserve related to a non-cancelable operating lease.
Severance payments of $10.4 million were made in 1998 for the elimination
of 209 positions related to the 1996 and 1998 reorganization and restructuring
actions.
EQUITY INVESTMENTS
Investments in affiliates were $41.8 million at December 31, 1998, a decrease of
$133.1 million, reflecting the sale of the Company's ownership of Dal-Tile,
somewhat offset by an increase in the Company's 50% interest in its WAVE joint
venture with Worthington Industries.
Equity earnings from affiliates for 1998 primarily comprised income from a
50% interest in the WAVE joint venture and the Company's share of a net loss at
Dal-Tile and amortization of the excess of the Company's investment in Dal-Tile
over the underlying equity in net assets. Equity losses from affiliates in 1997
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 a 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. Equity earnings from
affiliates for 1996 primarily comprised the Company's after-tax share of the net
income of the Dal-Tile International Inc. business combination, amortization of
the excess of the Company's investment in Dal-Tile over the underlying equity in
net assets, and earnings from its 50% interest in the WAVE joint venture.
In 1995 the Company entered into a business combination with Dal-Tile
whereby the Company exchanged cash and the stock of its ceramic tile operations,
consisting primarily of American Olean Tile company, a wholly-owned subsidiary,
for ownership of 37% of the shares of Dal-Tile. 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%.
In 1996 Dal-Tile refinanced all of its existing debt and recorded an
extraordinary loss. The Company's share of the extraordinary loss was $8.9
million after tax or $0.21 per diluted share.
In 1998 the Company announced its intention to dispose of its investment in
Dal-Tile. In July the Company sold 10.35 million shares of Dal-Tile at $8.50 per
share before commission and fees. Since this sale reduced the Company's
ownership of Dal-Tile below 20%, remaining shares were classified as
available-for-sale under the terms of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." An unrealized holding gain arising from valuing the securities at
market price was excluded from income and recognized as a separate component of
shareholders' equity.
In October and November, the Company sold its remaining 8.02 million shares
of Dal-Tile at $8.50 per share before commission and fees. The Company recorded
a total gain of $12.8 million after tax, classified as "Other income," in the
last half of 1998 on these sales.
8
ENVIRONMENTAL MATTERS
In 1997, the companyThe Company incurred capital expenditures of approximately $6.7 million in 1998,
$1.2 million in 1997 and $3.0 million in 1996 for environmental compliance and
control facilities and anticipates comparable annual expenditures for those
purposes for the years 19981999 and 1999.2000. The companyCompany does not anticipate that it
will incur significant capital expenditures in order to meet the requirements of
the Clean Air Act of 1990 ("CAA") and the final implementing regulations
promulgated by various state agencies. Until all new CAA regulatory requirements
are known, uncertainty will remain regarding future estimates of capital
expenditures.
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 1722 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.allocation among the
PRPs. Armstrong may also have rights of contribution or reimbursement from other
parties or coverage under applicable insurance policies. The companyCompany is also
remediating environmental contamination resulting from past industrial activity
at certain of its current and former 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 companyCompany
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'sCompany's estimated liability reflects only the company'sCompany's
expected share. In determining the probability of contribution, the companyCompany
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. Such recoveries, where probable, have been
recorded as an asset.
Reserves of $18.3 million at December 31, 1998, and $9.3 million at
December 31, 1997, were for potential environmental liabilities that the companyCompany
considers probable and for which a reasonable estimate of the potentialprobable 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 companyCompany has accrued,
before agreed-to insurance coverage, $9.3$18.3 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 companyCompany 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.
- 7 -
As of December 31, 1997,1998, the Company had approximately 10,60018,900 active employees,
of whom approximately 3,8006,800 are located outside the United States. About 62%50% of
the Company's approximately 4,3008,800 hourly or salaried production and maintenance
employees in the United States are represented by labor unions. GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------In February,
1999, the Company began to negotiate a new collective bargaining agreement with
the United Steel Workers of America 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 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)
- --------------------------------------------------------------------------------
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.
- 8 -its Lancaster, Pennsylvania, plant.
9
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
- -------------------
The Company produces and markets its products and services throughout the world,
owning and operating 4469 manufacturing plants in 13 countries; 2115 countries (including 5 plants
acquired as part of the DLW acquisition which are currently held for sale).
Forty of these plantsfacilities are located throughout the United States. Additionally, affiliates operate 19The Company
also has an interest through joint ventures in an additional 17 plants in 67
countries.
Floor covering products and adhesives are produced at 1627 plants with principal
manufacturing facilities located in Lancaster, Pennsylvania,Pennsylvania; Kankakee, Illinois,Illinois;
Stillwater, Oklahoma; and Stillwater, Oklahoma.Bietigheim-Bissingen, and Delmenhorst, Germany.
Building products are produced at 1520 plants with principal facilities in Macon,
Georgia,Georgia; the Florida-Alabama Gulf Coast areaarea; and Marietta, Pennsylvania. Insulating materials, textileWood
products are produced at 17 plants, comprised of 13 wood flooring and 4 cabinet
facilities. Principal wood products facilities include Beverly, West Virginia;
Nashville and Oneida, Tennessee; and Thompsontown, Pennsylvania. Insulation
products are produced at 13 plants with the principal facility located at
Munster, Germany. Textile mill supplies, fiber gasket materials and specialty
papers and other products for industry are manufactured at 168 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. Certain manufacturing locations also provide for the manufacture of
products for more than one industry segment. In this context, the Company
estimates that the production facilities in each of its industry segments were
effectively utilized during 19971998 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
- --------------------------
ASBESTOS-RELATED LITIGATION
PERSONAL INJURY LITIGATION
The companyCompany is one of many defendants in approximately 83,000154,000 pending claims as
of December 31, 1997,1998, 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 companyCompany generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The companyCompany
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 companyCompany 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 companyCompany
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 companyCompany 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.
- 9 -
GeorgineAmchem Settlement Class Action
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District
- ------------------
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including the company.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.10
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 companyCompany
believes that an alternative claims resolution mechanism similar to GeorgineAmchem is
likely to emerge.
Asbestos-related liabilityRecent Events
During 1998, pending claims increased by 71,000 claims. This increase was higher
than previously anticipated. The Company and its outside counsel believe the
last halfincrease in claims filed during 1998 was partially due to acceleration of
1997, the company assessed the impactpending claims as a result of the Supreme Court's decision on Amchem and
additional claims that had been filed in the tort system against other
defendants (and not against Center members) while Amchem was pending.
Asbestos-Related Liability
The Company continually evaluates the nature and amount of recent Supreme Court rulingclaim
settlements and their impact on itsthe Company's projected asbestos resolution and
defense costs. In doing so, the company reviewed,Company reviews, among other things, its recent
and 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 Georgineprevious estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the companyCompany has recorded $251.7 million on the balance sheet as an estimated minimumits share of
liability to defend and resolve probable and estimable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. This estimate includes an assumption that the
number of new claims currently pendingfiled annually will be less than the number filed in 1998
as discussed above under "Recent Events." Of this amount, management expects to
incur approximately $80.0 million in 1999 and tohas reflected this amount as a
current liability. The Company believes it can reasonably estimate the number
and nature of future claims that may be filed through 2003. Thisduring the next six years. However
for claims that may be filed beyond that period, management believes that the
level of uncertainty is management's best
estimatetoo great to provide for reasonable estimation of the
minimum liability, although potentialnumber of future costs for claims, could range upthe nature of such claims, or the cost to an additional $387 million or an estimated maximumresolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of approximately $639 million.$274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.
Because of the uncertainties related to asbestos
litigation, it is not possible to estimate the number of personal injuryclaims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that mayare likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed after 2003in the
future is subject to a greater degree of uncertainty each year into the future.
As additional experience is gained regarding claims and settlements or their defenseother new
information becomes available regarding the potential liability, the Company
will reassess its potential liability and resolution costs. Therefore,revise the company's estimatedestimates as appropriate.
Because, among other things, payment of the 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. Managementextend over many
years, 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 companyCompany 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.
- 10 -
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.
PROPERTY DAMAGE LITIGATION
The Company is also one of many defendants in eight pending claims as of
December 31, 1998, brought by public and private building owners. These claims
include allegations of damage to buildings caused by asbestos-containing
products and generally seek compensatory and punitive damages and equitable
relief, including reimbursement of expenditures, for removal and replacement of
such products. 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.
11
INSURANCE COVERAGE
The company'sCompany'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.Company. The
companyCompany 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.
The insurance carriers that provide personal injury products hazard,
nonproducts or property damage coverages include the following: 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 (now part of AIG); 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 nonproducts (general liability) coverages.
California Insurance Coverage Lawsuit
Trial court decisions in the insurance lawsuit filed by the companyCompany 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 companyCompany has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to below,above, 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.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 -
Company.
Insurance Recovery Proceedings
A substantial portion of the company'sCompany'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 companyCompany 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. The Company has entered
into a settlement with a number of the carriers resolving its access to
coverage.
12
Other proceedings against non-Wellington carriers may become necessary.
An insurance asset in the amount of $291.6$264.8 million is recorded on the
balance
sheetConsolidated Balance Sheet. Of this amount, approximately $26 million represents
partial settlement for previous claims which will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.35%.
The total amount recorded reflects the company'sCompany's belief in the availability of
insurance in this amount, based upon the company'sCompany's success in insurance
recoveries, recent settlement agreements that provide such coverage, the
nonproducts recoveries by other companies and the opinion of outside counsel.
Such insurance is either available through settlement or probable of recovery
through negotiation, litigation or 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 withprocess which is in the
insurance
carriers. The company does not believe that after-tax effecttrial phase of binding arbitration. Of the $264.8 million asset, $16.0 million
has been recorded as a current asset reflecting management's estimate of the
shortfall
willminimum insurance payments to be material either to the financial condition of the company or to its
liquidity.received in 1999.
CONCLUSIONS
The companyCompany 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 GeorgineAmchem settlement vehicle may emerge, or the scope of its
insurance coverage ultimately deemed available.
The company has assessedCompany continually evaluates the nature and amount of recent claim
settlements and their impact ofon the recent Supreme Court ruling on itsCompany's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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 previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the companyCompany has recorded on the balance sheet $251.7 million as a minimum
estimated its share of
liability to defend and resolve probable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable asbestos-
relatedthrough 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. Of this amount, management expects to incur
approximately $80.0 million in 1999 and has reflected this amount as a current
liability. The Company believes it can reasonably estimate the number and nature
of future claims that may be filed during the next six years. However for claims
that may be filed beyond that period, management believes that the level of
uncertainty is too great to provide for reasonable estimation of the number of
future claims, the nature of such claims, or the cost to resolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims currently pending and tomay be filed through 2003.
- 12 -
Thisgreater than the recorded liability. The increase in
recorded liability of $274.2 million in 1998 is management's best estimateprimarily reflective of the
minimum liability, although potentialincreases in claims filed in 1998, recent settlement experience and current
expectations about future costs for these claims could range up to an additional $387 million or an
estimated maximum liability of approximately $639 million.claims.
Because of the uncertainties related to asbestos litigation, it is not
possible to precisely estimate the number of personal injury claims that may
ultimately 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 itIt is likelyreasonably possible there will be
such additional claims.claims beyond management's estimates. Management believes that the
potential additional costs for such additional 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 companyCompany 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$264.8 million is recorded on the
balance
sheetConsolidated Balance Sheet and reflects the company'sCompany's belief in the availability
of insurance in this amount, based upon the company'sCompany'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 either available through settlement or probable of recovery through
the ADR process, 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 companyCompany believes that a claims resolution mechanism alternative to the
GeorgineAmchem settlement will eventually emerge, and thatbut the resolution and defense
costs areliability is likely to be
higher than the earlier maximum mathematical projection in Georgine.Amchem.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the companyCompany 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 GeorgineAmchem settlement will
eventually emerge, and its experience, the companyCompany believes the asbestos-related
claims against the companyCompany would not be material either to the financial
condition of the companyCompany 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
Recent Developments
- 13 -
-------------------
On February 26, 1999, the Company received a preliminary decision in the initial
phase of the trial proceeding of the ADR which was favorable to the Company on a
number of issues related to insurance coverage. The decision, while favorable,
relates to the initial phase of the ADR proceeding. The Company has not yet
determined the financial implications of the decision.
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,March 1, 1999, there were approximately 7,1006,829 holders of record of the Company's
Common Stock.
During 1997,1998, the Company issued a total of 1,8002,400 shares of restricted 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
- --------------------------------------------------------------------------------
(millions except for per-share data) First Second Third Fourth Total year
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1998 Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88
Price range of common stock --high 87 7/8 90 68 3/8 70 1/4 90
Price range of common stock -- low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16
- -----------------------------------------------------------------------------------------------------------------------------
1997 Dividends per share of common stock 0.40 0.44 0.44 0.44 1.72
Price range of common stock--highstock --high 72 1/4 75 1/4 74 9/16 75 3/8 75 3/8
Price range of common stock--lowstock -- 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 1998 1997 1996 1995
1994
====================================================================================================================================- ------------------------------------------------------------------------------------------------
Net sales 2,746.2 2,198.7 2,156.4 2,325.0 2,226.0
Cost of goods sold 1,838.6 1,461.7 1,459.9 1,581.1 1,483.9
Total selling, general and
administrative expenses and
goodwill amortization 532.7 385.3 413.2 457.0 449.2
Equity (earnings) loss from
affiliates (13.8) 29.7 (19.1) (6.2)
(1.7)
RestructuringReorganization and restructuring
charges 74.6 -- 46.5 71.8
Charge for asbestos liability 274.2 -- -- --
Loss from ceramic tile business
formation/(gain) from sales
of woodlands -- -- -- 177.2 --
Operating income (loss) 39.9 322.0 255.9 44.1
294.6
Interest expense 62.2 28.0 22.6 34.0 28.3
Other expense (income), net (1.7) (2.2) (6.9) 1.9 0.5
Earnings (loss) from continuing
businesses before income taxes (20.6) 296.2 240.2 8.2
265.8
Income taxes (11.3) 111.2 75.4 (5.4) 78.6
Earnings (loss) from continuing
businesses (9.3) 185.0 164.8 13.6 187.2
As a percentage of sales -0.3% 8.4% 7.6% 0.6% 8.4%
As a percentage of average
monthly assets (a) -0.3% 9.0% 8.5% 0.7% 10.7%
Earnings (loss) from continuing
businesses applicable to
common stock (b) (9.3) 185.0 158.0 (0.7)
173.1
Per common share--basicshare-- basic (c) (0.23) 4.55 4.04 (0.02)
4.62
Per common share--dilutedshare-- diluted (c) (0.23) 4.50 3.82 (0.02)
4.09
Net earnings (loss) (9.3) 185.0 155.9 123.3 210.4
As a percentage of sales -0.3% 8.4% 7.2% 5.3% 9.5%
Net earnings (loss) applicable
to common stock (b) (9.3) 185.0 149.1 109.0 196.3
As a percentage of average
shareholders' equity -1.2% 22.3% 19.6% 15.0%
31.3%
Per common share--basicshare-- basic (c) (0.23) 4.55 3.81 2.94
5.24
Per common share--dilutedshare-- diluted (c) (0.23) 4.50 3.61 2.68 4.62
Dividends declared per share of
common stock 1.88 1.72 1.56 1.40
1.26
Capital expenditures 184.3 160.5 228.0 182.7 138.4
Aggregate cost of acquisitions 1,175.7 4.2 -- 20.7 --
Total depreciation and amortization 142.7 132.7 123.7 123.1
120.7
Average number of employees--continuingemployees--
continuing businesses 13,881 10,643 10,572 13,433 13,784
Average number of common shares
outstanding (millions) 39.8 40.6 39.1 37.1
37.5
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 367.8 128.5 243.5 346.8 384.4
Net property, plant and equipment--continuingequipment--
continuing businesses 1,502.0 972.2 964.0 878.2
966.4
Total assets 4,273.2 2,375.5 2,135.6 2,149.8
2,159.0
Net long-term debt 1,562.8 223.1 219.4 188.3 237.2
Total debt as a percentage of
total capital (d) 73.1% 39.2% 37.2% 38.5%
41.4%
Shareholders' equity 709.7 810.6 790.0 775.0 735.1
Book value per share of common stock 17.57 20.20 19.19 20.10 18.97
Number of shareholders (e) (f)6,868 7,137 7,424 7,084 7,473
Common shares outstanding (millions) 39.8 40.1 41.2 36.9 37.2
Market value per common share 60 5/16 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.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. 128.31.
(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 in1996.
14
From 1996 to July 1998, ceramic tile results were reported under the equity
method, whereas prior to 1996, ceramic tile operations were reported on a
consolidated or line item basis.
- 16 -
From July 1998 to November 1998, ceramic tile operations were reported under the
cost method.
Beginning in 1998, consolidated results include the Company's acquisitions of
Triangle Pacific and DLW.
(Dollars in millions except for
per-share data) For year 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales 2,226.0 2,075.7 2,111.4 2,021.4 2,082.4 2,050.4 1,843.4
Cost of goods sold 1,483.9 1,453.7 1,536.1 1,473.7 1,469.8 1,423.2 1,287.6
Total selling, general and
administrative expenses and
goodwill amortization 449.2 435.6 446.6 415.1 404.0 380.7 331.3
Equity (earnings) loss from
affiliates (1.7) (1.4) (0.2) -- -- -- --
Reorganization and restructuring
charges -- 89.3 160.8 12.5 6.8 5.9 --
Charge for asbestos liability -- -- -- -- -- -- --
Loss from ceramic tile business
formation/(gain) from sales
of woodlands -- -- -- -- (60.4) (9.5) (1.9)
Operating income (loss) 294.6 98.5 (31.9) 120.1 262.2 250.1 226.4
Interest expense 28.3 38.0 41.6 45.8 37.5 40.5 25.8
Other expense (income), net 0.5 (6.1) (7.2) (8.5) 19.7 (5.7) (13.1)
Earnings (loss) from continuing
businesses before income taxes 265.8 66.6 (66.3) 82.8 205.0 215.3 213.7
Income taxes 78.6 17.6 (2.9) 32.7 69.5 74.6 79.4
Earnings (loss) from continuing
businesses 187.2 49.0 (63.4) 50.1 135.5 140.7 134.3
As a percentage of sales 8.4% 2.4% -3.0% 2.5% 6.5% 6.9% 7.3%
As a percentage of average
monthly assets (a) 10.7% 2.8% -3.3% 2.7% 7.5% 8.6% 10.4%
Earnings (loss) from continuing
businesses applicable to
common stock (b) 173.1 35.1 (77.2) 30.7 116.0 131.0 133.9
Per common share-- basic (c) 4.62 0.95 (2.08) 0.83 2.98 2.88 2.90
Per common share-- diluted (c) 4.09 0.93 (2.08) 0.83 2.73 2.75 2.88
Net earnings (loss) 210.4 63.5 (227.7) 48.2 141.0 187.6 162.7
As a percentage of sales 9.5% 3.1% -10.8% 2.4% 6.8% 9.1% 8.8%
Net earnings (loss) applicable
to common stock (b) 196.3 49.6 (241.5) 28.8 121.5 177.9 162.3
As a percentage of average
shareholders' equity 31.3% 9.0% -33.9% 3.3% 13.0% 17.9% 17.0%
Per common share-- basic (c) 5.24 1.34 (6.51) 0.78 3.12 3.92 3.51
Per common share-- diluted (c) 4.62 1.27 (6.51) 0.78 2.86 3.72 3.50
Dividends declared per share of
common stock 1.26 1.20 1.20 1.19 1.135 1.045 0.975
Capital expenditures 138.4 110.3 109.8 129.7 186.5 216.9 167.8
Aggregate cost of acquisitions -- -- 4.2 -- 16.1 -- 355.8
Total depreciation and amortization 120.7 117.0 123.4 122.1 116.5 121.6 99.4
Average number of employees--
continuing businesses 13,784 14,796 16,045 16,438 16,926 17,167 15,016
Average number of common shares
outstanding (millions) 37.5 37.2 37.1 37.1 38.9 45.4 46.2
- ------------------------------------------------------------------------------------------------------------------------------------
Year-end position
Working capital--continuing businesses 384.4 279.3 239.8 353.8 305.2 449.4 260.6
Net property, plant and equipment--
continuing businesses 966.4 937.6 967.2 1,042.8 1,032.7 944.0 930.4
Total assets 2,159.0 1,869.2 1,944.3 2,125.7 2,124.4 2,008.9 2,073.1
Net long-term debt 237.2 256.8 266.6 301.4 233.2 181.3 185.9
Total debt as a percentage of
total capital (d) 41.4% 52.2% 57.2% 46.9% 45.7% 36.1% 35.9%
Shareholders' equity 735.1 569.5 569.2 885.5 899.2 976.5 1,021.8
Book value per share of common stock 18.97 14.71 14.87 23.55 24.07 23.04 21.86
Number of shareholders (e) 7,473 7,963 8,611 8,896 9,110 9,322 10,355
Common shares outstanding (millions) 37.2 37.2 37.1 37.1 37.1 42.3 46.3
Market value per common share 38 1/2 53 1/4 31 7/8 29 1/4 25 37 1/4 35
- ------------------------------------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1998 COMPARED WITH 1997
ACQUISITIONS
On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp.
("Triangle Pacific"). Triangle Pacific is a leading U.S. manufacturer of
hardwood flooring and other flooring and related products and a substantial
manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under
the purchase method of accounting, included the purchase of outstanding shares
of common stock of Triangle Pacific at $55.50 per share which, plus acquisition
costs, resulted in a total purchase price of $911.5 million. A portion of the
purchase price has been allocated to assets acquired and liabilities assumed
based on fair market value at the date of acquisition, while the balance of
$831.1 million was recorded as goodwill and is being amortized over forty years
on a straight-line basis.
Effective August 31, 1998, Armstrong acquired approximately 93% of the
total share capital of DLW Aktiengesellschaft ("DLW"), a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, included the purchase of 93% of the total share capital of DLW
which, plus acquisition costs, resulted in a total purchase price of $289.9
million. A portion of the purchase price has been allocated to assets acquired
and liabilities assumed based on fair market value at the date of acquisition,
while the balance of $117.2 million was recorded as goodwill and is being
amortized over forty years on a straight-line basis. In this purchase price
allocation, $49.6 million was allocated to the estimable net realizable value of
DLW's furniture business and of a carpet manufacturing business in the
Netherlands, which the Company has identified as businesses held for sale.
Disposals of these businesses should occur in the first half of 1999. Earnings
in these businesses, which have been excluded from the Company's operating
results, were $0.4 million in 1998. Interest costs of $1.1 million were
allocated to these businesses in 1998.
The allocation of purchase price to the assets and liabilities of Triangle
Pacific and DLW was still preliminary at December 31, 1998, and further
refinements are possible. The operating results of these acquired businesses
have been included in the Consolidated Statements of Earnings from the dates of
acquisition. Triangle Pacific results are included in Armstrong's wood products
segment and DLW results are included in Armstrong's floor coverings segment.
15
SALE OF DAL-TILE STOCK
In 1995 the Company entered into a business combination with Dal-Tile
International Inc. ("Dal-Tile") whereby the Company exchanged cash and the stock
of its ceramic tile operations, consisting primarily of American Olean Tile
Company, a wholly-owned subsidiary, for ownership of 37% of the shares of
Dal-Tile. In August 1996, Dal-Tile issued new shares in a public offering
there by 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%.
In 1998 the Company announced its intention to dispose of its investment in
Dal-Tile. In July the Company settled its sale of 10.35 million shares of
Dal-Tile at $8.50 per share before commission and fees. In October and November,
the Company sold its remaining 8.02 million shares of Dal-Tile at $8.50 per
share before commission and fees. The Company reported a gain of $12.8 million
after tax in 1998 on these sales.
FINANCING
On July 13, 1998, the Company entered into a new commercial paper program and
subsequently issued $1.0 billion of commercial paper. This commercial paper,
secured by lines of credit under a bank credit facility entered into on July 17,
1998, has maturities of up to 364 days and bears interest at rates between
approximately 5.0% and 5.25% at the beginning of 1999.
On July 15, 1998, Standard & Poor's ("S&P") lowered the ratings of the
Company's corporate credit, senior unsecured debt and revolving credit facility
to A minus from A and lowered its commercial paper rating on the Company to A-2
from A-1. On July 16, 1998, Moody's Investors Service ("Moody's") lowered the
Company's corporate credit, senior unsecured debt and revolving credit facility
ratings to Baa1 from A2 and lowered its commercial paper rating on the Company
to P-2 from P-1. Both Moody's and S&P cited factors relating to the acquisitions
of Triangle Pacific and DLW as the major reasons for their actions. It is
management's opinion that the Company has sufficient financial strength to
warrant any required support from lending institutions and financial markets.
On August 11, 1998, the Company completed an offering of $200 million of
6.35% Senior Notes due 2003 and a concurrent offering of $150 million of 6.5%
Senior Notes due 2005. On October 28, 1998, the Company completed an offering of
$180 million of 7.45% Senior Quarterly Interest Bonds due 2038. The Company used
the proceeds to repay outstanding commercial paper.
On October 29, 1998, the Company completed a new bank credit facility for
$900 million which comprise a $450 million line of credit expiring in 364 days
and a $450 million line of credit expiring in five years. This facility replaced
a $1.0 billion, 364-day bank credit facility entered into on July 17, 1998.
FINANCIAL CONDITION
As shown on the Consolidated Balance Sheets on page 28, the Company had cash and
cash equivalents of $38.2 million at December 31, 1998. As a result of
additional current assets added with the acquisitions of Triangle Pacific and
DLW, working capital at December 31, 1998, was $367.8 million compared with
$128.5 million recorded at the end of 1997. The ratio of current assets to
current liabilities was 1.49 to 1 as of December 31, 1998, compared with 1.27 to
1 as of December 31, 1997. The increase in this ratio from December 31, 1997,
primarily reflected asset and liability changes resulting from the acquisitions
of Triangle Pacific and DLW.
Long-term debt, excluding the Company's guarantee of an ESOP loan,
increased $1,339.7 million in 1998 due to the public debt offerings mentioned
above and classification of $750.0 million of commercial paper supported by
long-term bank credit facilities as long-term debt. At December 31, 1998,
long-term debt of $1,562.8 million, or 59.3 percent of total capital, compared
with $223.1 million, or 16.7 percent of total capital, at the end of 1997. For
the periods ended December 31, 1998, and December 31, 1997, ratios of total debt
(including the Company's guarantee of an ESOP loan) as a percent of total
capital were 73.1 percent and 39.2 percent, respectively.
As shown on the Consolidated Statements of Cash Flows on page 29, net cash
provided by operating activities for the year ended December 31, 1998, was
$252.2 million compared with $246.6 million in 1997. The increase is explained
by substantial reductions in Armstrong's pre-acquisition business units' current
assets partially offset by higher payments for asbestos claim payments prior to
insurance recoveries.
Net cash used for investing activities was $1,209.7 million for the year
ended December 31, 1998, compared with $152.8 million in 1997. The increase was
primarily due to expenditures for acquisitions and was partially offset by the
sale of the Company's investment in Dal-Tile.
Net cash provided by financing activities was $937.3 million for the year
ended December 31, 1998, primarily due to the commercial paper issuance and the
three public debt offerings mentioned above. In the prior year, net cash used
for financing activities, including a net reduction in debt and the repurchase
of common shares, was $98.6 million.
Under plans approved by the Company's Board of Directors for the repurchase
of 5.5 million shares of common stock, the Company had repurchased approximately
4,017,000 shares through June 30, 1998. In June 1998, the Company halted open
market purchases of its common shares upon the announcement of its intent to
purchase Triangle Pacific and DLW.
The Company is constantly evaluating its various business units and may
from time to time dispose of, or restructure, those units. On February 2, 1999,
the Company announced its intent to form a joint venture in the worldwide
technical insulation business with NMC (USA)/Nomaco (Belgium) and Thermaflex
(Netherlands).
[BAR CHART APPEARS HERE]
16
ASBESTOS-RELATED LITIGATION
The Company is involved in significant asbestos-related litigation which is
described more fully on pages 47-50 and which should be read in connection with
this discussion and analysis. The Company does not know how many claims will be
filed against it in the future, nor the details thereof, nor of pending suits
not fully reviewed, nor the defense and resolution costs that may ultimately
result therefrom, nor whether an alternative to the Amchem settlement vehicle
may emerge, nor the scope of its insurance coverage ultimately deemed available.
The Company continually evaluates the nature and amount of recent claim
settlements and their impact on the Company's projected asbestos resolution and
defense costs. Subject to the uncertainties, limitations and other factors
referred to above and based upon its experience, the Company has estimated its
share of liability to defend and resolve probable asbestos-related personal
injury claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has recorded $424.7 million as a liability in the accompanying
consolidated financial statements. The increase of $274.2 million in recorded
liability in 1998 is primarily reflective of the increases in claims filed in
1998, recent settlement experience and current expectations about future claims.
Management estimates that the timing of the cash flows required to resolve the
recorded liability will extend beyond 2004.
Because of the uncertainties related to asbestos litigation, it is not
possible to estimate precisely the number or cost of personal injury claims that
may ultimately be filed. The Company believes it can reasonably estimate the
number and nature of future claims that may be filed during the next six years.
However for claims that may be filed beyond that period, management believes
that the level of uncertainty is too great to provide for reasonable estimation
of the number of future claims, the nature of such claims, or the cost to
resolve them. Accordingly, it is reasonably possible that the total exposure to
personal injury claims may be greater than the recorded liability. Management
believes that the potential additional costs for such additional claims, net of
any potential insurance recoveries, will not have a material after-tax effect on
the financial condition or liquidity of the Company, although the net after-tax
effect of any future liabilities recorded in excess of insurance assets could be
material to earnings in a future period.
An insurance asset in the amount of $264.8 million, recorded on the
Consolidated Balance Sheet, reflects the Company's belief in the availability of
insurance in this amount based upon the Company's success in insurance
recoveries, settlement agreements that provide such coverage, nonproducts
recoveries by other companies, the opinion of outside counsel, and a recent
agreement with a number of carriers. Such insurance is either available due to
settlement or probable of recovery through negotiation, litigation or resolution
of an alternative dispute resolution (ADR) process which is in the trial phase
of binding arbitration. Further, depending on the Company's future assessment of
the conclusion of the trial phase of the ADR expected in early 1999, additional
insurance assets may be available. Of the $264.8 million asset, $16.0 million
has been recorded as a current asset reflecting management's estimate of the
minimum insurance payments to be received in 1999. However, the actual amount of
payments to be received in 1999 is dependent upon the actual liability incurred
and the nature and result of settlement discussions. Management estimates that
the timing of future cash payments for the remainder of the recorded asset may
extend beyond 10 years.
The Company believes that a claims resolution mechanism alternative to the
Amchem settlement will eventually emerge, but any liability is likely to be
higher than the projection in Amchem.
Subject to the uncertainties, limitations and other factors previously
stated and based upon its experience, the Company believes it is probable that
substantially all of the defense and resolution costs of property damage claims
will be covered by insurance.
Even though uncertainties remain as to the potential number of unasserted
claims and the liability resulting therefrom, and after consideration of the
factors involved, including the ultimate scope of its insurance coverage, the
Wellington Agreement and other settlements with insurance carriers, the results
of the California insurance coverage litigation, the establishment of the Center
for Claims Resolution, the likelihood that an alternative to the Amchem
settlement will eventually emerge, and its experience, the Company believes
asbestos-related claims against the Company will not be material either to the
financial condition or liquidity of the Company, although the net after-tax
effect of any future liabilities recorded in excess of insurance assets could be
material to earnings in such future period.
17
ACTIVITIES RELATED TO DOMCO INC.
In the fourth quarter of 1998, the Company declined to extend its cash tender
offer for all of the outstanding voting stock of Domco Inc. ("Domco"), a
Canadian flooring manufacturer. In June 1997, the Company commenced litigation
against Sommer Allibert, S.A. ("Sommer"), the majority shareholder of Domco,
alleging, among other things, that Sommer misused confidential information
provided to it by the Company and that Sommer breached a confidentiality
agreement with the Company in connection with earlier negotiations between the
Company and Sommer. That litigation remains pending in the U.S. District Court
for the Eastern District of Pennsylvania, although Sommer's counterclaim against
the Company and certain of its officers and certain of the Company's claims have
been dismissed. The Company intends to pursue its claim for damages, including
punitive damages, from Sommer. A trial date has not been set.
The Company recognized expenses arising from activities involving Domco and
Sommer totaling $12.3 million pretax, or $8.0 million after tax, in 1998.
CONSOLIDATED RESULTS
Net sales in 1998 of $2.75 billion were 24.9% higher when compared with net
sales of $2.20 billion in 1997. Triangle Pacific contributed $346.0 million of
sales and DLW $193.0 million of sales to the Company's business sales figure
before acquisitions of $2.21 billion.
Sales were affected unfavorably by economic developments in emerging
markets. For the Company's business before acquisitions, sales increased less
than 1% in each of floor coverings, building products and insulation products.
Pacific area sales were 13.5% below 1997, although insulation products increased
both domestic sales and exports from its Panyu, China, plant. In Europe, despite
a cessation of sales to Russia in August by all business units, floor coverings
increased sales to other customers including those in Eastern Europe. In total,
emerging market turmoil reduced 1998 sales by an estimated $14.7 million versus
last year, with over three-quarters of this total from lower Russian sales.
The Company reported a net loss of $9.3 million, or $0.23 per share,
including losses of $1.2 million related to Triangle Pacific and $2.8 million
related to DLW as well as after-tax charges of $178.2 million for an increase in
the estimated liability for asbestos-related claims and $48.5 million for cost
savings and reorganization. These results compare to net earnings of $185.0
million, or $4.50 per diluted share, in 1997.
The Company's Economic Value Added (EVA) performance as measured by return
on EVA capital of 13.6% in 1998 exceeded the Company's cost of capital of 11%
and the return on EVA capital of 13.3% in 1997. EVA calculations exclude
financial activity related to asbestos liability claims, while reorganization
charges are treated as investments upon which a return must be earned.
Cost of goods sold in 1998 was 67.0% of sales, higher than cost of goods
sold of 66.5% in 1997. The change reflected required purchase price accounting
adjustments related to Triangle Pacific and DLW. The Company's pre-acquisition
business had a cost of goods sold of 65.9% in 1998 due to manufacturing
efficiencies and lower raw material costs. The cost of goods sold also benefited
from several efficiency and policy savings related to the implementation of the
SAP Corporate Enterprise System, including a change in vacation policy resulting
in a $5.2 million benefit in the fourth quarter.
Selling, general and administrative (SG&A) expenses in 1998 were $522.0
million, or 19% of sales, primarily reflecting higher advertising costs. In
1997, SG&A expenses were $383.5 million, or 17.4% of sales.
In the fourth-quarter 1998, a noncash pretax charge of $274.2 million, or
$178.2 million after tax, was recorded for an increase in the estimated
liability for asbestos-related claims. This change primarily arose from a
greater-than-anticipated increase in personal injury filings since the Amchem
class settlement was invalidated in 1997, the Company's assessment of future
claims and recent settlements with plaintiffs' counsels. The Company also
recognized cost reduction and reorganization charges of $65.6 million, or $42.6
million after tax. This charge encompassed severance and enhanced retirement
benefits related to the termination of more than 650 positions, approximately
75% of which were salaried positions. In addition the Company recorded an
estimated loss of $9.0 million related to redundant flooring products machinery
and equipment held for disposal. Reorganization actions include corporate and
business unit staff reductions reflecting reorganization of engineering,
research and development and product styling and design; realignment of support
activities in connection with implementation of a new corporate logistics and
financial software system; changes to production processes in the Company's
Lancaster flooring plant; and elimination of redundant positions in formation of
a new combined business organization for Floor Products, Corporate Retail
Accounts and Installation Products. Approximately $28.6 million of the pretax
amount is for cash expenditures for severance which will occur over the next 12
months. The remainder is a noncash charge for enhanced retirement benefits.
Management believes that anticipated savings from the reorganization should
permit recovery of these charges in approximately two years. Severance payments
of $10.4 million in 1998 were made for the elimination of 209 positions related
to 1996 and 1998 restructuring and reorganization actions.
Interest expense of $62.2 million in 1998 was higher than interest expense
of $28.0 million in 1997 due to higher levels of short- and long-term debt used
to finance acquisitions.
The Company's 1998 tax benefit was generated by the charge for the increase
in asbestos liability, cost reduction and reorganization charges, and a tax
benefit associated with the gain on the sale of the Dal-Tile shares, partially
offset by the nondeductibility of goodwill in the Company's reported earnings.
18
INDUSTRY SEGMENT RESULTS (see pages 32 and 33)
FLOOR COVERINGS
Worldwide floor coverings sales in 1998 of $1,317.6 million included sales of
$193.0 million from DLW. Excluding DLW, flooring sales grew over 2% in the
Americas due to strong laminate sales that more than offset a decline to
residential vinyl markets. Sales through the home center channel continued to
capture significant volume with sales increases of 16.6% over 1997. In Europe
and the Pacific area, sales were down 8%. Sales for installation products rose
3.8% over 1997.
[BAR CHART APPEARS HERE]
Operating income of $176.5 million in 1998, which excluded cost reduction and
reorganization charges of $53.5 million and included a loss related to DLW of
$0.7 million, compared to $186.5 million in 1997. Lower operating margins were
due to pricing pressure in North America, an unfavorable product mix, and higher
advertising expenses only partially offset by lower raw material and other
costs. The cost reduction and reorganization charges of $53.5 million relate to
reductions of hourly and salaried staff in the U.S. and foreign operations and
changes to production processes in the Company's Lancaster flooring plant.
OUTLOOK
Sales in 1999 are expected to increase modestly due to a better mix in
the Americas in residential sheet flooring and laminates. European sales results
are anticipated to be slightly lower with weaker sales in Western Europe
reflecting price competition partially offset by more robust sales in Eastern
Europe. A more aggressive marketing program in Asia should increase sales in
that region. Operating income should improve, driven by announced cost
reductions and a favorable product mix.
BUILDING PRODUCTS
Building products sales of $756.8 million were slightly higher than the $754.5
million in 1997, as strong sales in the U.S. commercial segments and a favorable
mix were offset by weakness in emerging markets, principally Russia and the
Pacific area, down 29.4% compared to 1997.
Operating income of $116.6 million, which excluded cost reduction and
reorganization charges of $10.1 million, compared to $122.3 million in 1997. The
operating income decline reflected weaker performance by the business's metal
and soft fiber joint ventures in Europe and lower volumes to emerging markets,
partially offset by lower raw material and other costs. Results from the
Company's WAVE grid joint venture with Worthington Industries continue to be
strong, showing an 11% improvement over 1997. The cost reduction and
reorganization charges of $10.1 million relate to reductions of hourly and
salaried staff in the U.S. and foreign operations.
OUTLOOK
Sales in 1999 are expected to exceed those of 1998 with the largest growth
in U.S. commercial sales. Sales are anticipated to increase in Europe with the
exception of Russia, and sales in Asia should continue to reflect depressed
market conditions. Operating income should increase in 1999 reflecting lower
manufacturing and administrative costs and improved operating income from WAVE.
[BAR CHART APPEARS HERE]
WOOD PRODUCTS
This segment contributed $346.0 million to sales for the period from July 22,
1998, from which time Triangle Pacific's results were consolidated in the
Company's financial statements. Sales for Triangle Pacific in 1998, although
approximately 11% ahead of sales reported by Triangle Pacific in the comparable
period in 1997, reflected competitive pricing pressures created by falling
lumber prices and imported products.
Operating income from the date of consolidation of $38.6 million included
the amortization of acquisition goodwill and the costs of nonrecurring purchase
price adjustments related to inventory. On a comparable basis, operating income
for Triangle Pacific in 1998 was approximately 35% above operating income
reported by Triangle Pacific in 1997.
OUTLOOK
Triangle Pacific anticipates sales growth through its expansion of
dealer programs, continued growth of new products and improved product finishes.
Lower lumber prices, increases in sales volumes and continuing production
efficiencies should positively affect operating income. The integration of
Triangle Pacific should result in synergies as early as 1999.
19
INSULATION PRODUCTS
Sales of $230.0 million increased from $228.4 million in 1997. Sales in Europe
and the U.S. were level. Despite difficulties in the Pacific area, sales
increased from last year due to strong performance from the business's Panyu,
China, plant. Operating income of $46.3 million increased from $45.4 million in
1997, excluding cost reduction and reorganization charges of $0.2 million,
primarily due to cost cutting and SG&A expense reductions.
OUTLOOK
Price pressures in the markets for insulation products are expected to continue
into 1999. However, volume growth in sales of these products should offset this
negative pressure and result in a small operating income increase for this
business unit.
ALL OTHER
Sales reported in this segment comprise gasket materials and textile mill
supplies. Sales of $95.8 million decreased 4% compared to 1997. The major
influence on gasket products sales was the General Motors strike. Textile sales
declined due to slow sales to European textile machinery manufacturers.
Operating income reported in this segment comprises operating income from gasket
and textile products and ceramic tile. Operating income of $9.1 million
excluding cost reduction and reorganization charges of $1.9 million compared
with a loss of $2.6 million in 1997 reflecting the absence of losses from
Dal-Tile.
OUTLOOK
Sales of gasket products are anticipated to continue to reflect weakness in the
automotive sector and a downturn in the diesel market. Cost containment efforts
in gasket manufacturing should offset the effect of the sales volume decline.
Textile products are expected to be affected by price pressures in 1999.
GEOGRAPHIC AREAS (SEE PAGE 33)
Net sales in the Americas in 1998 were $1.92 billion, compared to $1.52 billion
recorded in 1997. The increase in sales to customers in the United States and
Canada was primarily due to the addition of Triangle Pacific sales. For the
Company's pre-acquisition business, sales growth continued to be strong in the
U.S. home center channel. Net sales in Europe in 1998 were $631.3 million,
compared to $488.4 million in 1997. Additional sales from DLW were somewhat
offset by lower sales to Eastern Europe, most notably Russia. Sales to
Scandinavian countries have continued to grow, reflecting increased sales from
the Swedish flooring and ceiling joint ventures. Sales to the Pacific area and
other foreign countries of $192.9 million were level with sales of $192.2
million in 1997.
Long-lived assets in the Americas in 1998 were $1.01 billion compared to
$0.77 billion in 1997. This increase reflects additional assets from the
acquisition of Triangle Pacific. Long-lived assets in Europe in 1998 were $451.7
million compared to $163.1 million in 1997. This increase reflects additional
assets from the acquisition of DLW. Long-lived assets in the Pacific area in
1998 were $41.2 million compared to $42.2 million in 1997.
MARKET RISK
The Company uses financial instruments, including fixed and variable rate debt,
as well as swap, forward and option contracts to finance its operations and to
hedge interest rate, currency and commodity exposures. Swap, forward and option
contracts are entered into for periods consistent with underlying exposure and
do not constitute positions independent of those exposures. The Company does not
enter into contracts for speculative purposes and is not a party to any
leveraged instruments.
20
INTEREST RATE SENSITIVITY
The table below provides information about the Company's long-term debt
obligations as of December 31, 1998, and December 31, 1997. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. Weighted average variable rates are based on implied forward
rates in the yield curve at the reporting date. The information is presented in
US dollar equivalents, which is the Company's reporting currency.
- ------------------------------------------------------------------------------------------------------------------------------------
Expected
maturity date After
($ millions) 1998 1999 2000 2001 2002 2003 2003 Total
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt:
Fixed rate -- $ 28.9 $ 46.2 $ 29.7 $ 5.5 $ 206.5 $ 507.9 $ 824.7
Avg. interest
rate -- 5.19% 6.38% 5.46% 6.42% 6.36% 7.50% 6.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Variable rate -- $ 4.0 $ 5.0 $ 302.0 $ 0.0 $ 450.0 $ 10.0 $ 771.0
Avg. interest
rate -- 7.0% 7.0% 5.71% 0.00% 5.90% 4.00% 5.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Expected
maturity date After
($ millions) 1998 1999 2000 2001 2002 2002 Total
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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%
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Debt cash flows increased as of December 31, 1998, in comparison to December 31,
1997, as a result of financing entered into in 1998 (see page 16). In 1997 and
1998 the Company entered into forward-starting interest rate swaps designated as
hedges of long-term bonds. In 1998 the Company terminated these interest rate
swaps concurrent with the issuance of its 7.45% quarterly interest bond due
2038. The loss of $16.3 million upon termination of the swaps will be recognized
as an adjustment to interest expense over the life of the bond.
The Company had no interest rate hedging agreements in place on December
31, 1998.
EXCHANGE RATE SENSITIVITY
The Company uses foreign currency forward contracts to reduce the risk that
future cash flows from transactions in foreign currencies will be affected
unfavorably by changes in exchange rates.
The table below provides anticipated net foreign cash flows for goods,
services and financing transactions for the following 12 months as of December
31, 1998, and December 31, 1997.
- --------------------------------------------------------------------------------
of Operations
-------------Foreign currency Commercial Financing Net Net
exposure ($ millions) exposure exposure hedge position
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
British pound $ 10.3 $(67.0) $ 53.2 $ (3.5)
Canadian dollar 51.6 -- -- 51.6
French franc 31.3 7.5 (7.5) 31.3
German mark (64.6) 277.5 (267.6) (54.7)
Italian lira 31.8 2.4 (2.4) 31.8
Spanish peseta 18.6 -- -- 18.6
Australian dollar 8.5 4.3 (4.3) 8.5
Belgian franc (22.6) (38.1) -- (60.7)
Dutch guilder (9.8) -- 12.0 2.2
Swedish krona (2.8) 2.2 (1.2) (1.8)
Swiss franc 1.6 (5.9) 3.7 (0.6)
United States dollar* 9.7 (9.5) -- 0.2
- --------------------------------------------------------------------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
British pound $(24.0) $(17.1) $ 12.1 $(29.0)
Canadian dollar 37.0 -- -- 37.0
French franc (17.0) 3.3 (3.3) (17.0)
German mark (48.0) 12.4 (12.4) (48.0)
Italian lira 25.0 2.3 (2.3) 25.0
Spanish peseta 7.0 2.3 (2.3) 7.0
- --------------------------------------------------------------------------------
Note: A positive amount indicates the Company is a net receiver of this
currency, while a negative amount indicates the Company is a net payer.
*Related to U.S. dollar exposures by foreign subsidiaries with a foreign
functional currency.
21
Company policy allows hedges of cash flow exposures of up to one year. The
table below summarizes the Company's foreign currency forward contracts and
average contract rates at December 31, 1998, and December 31, 1997. Foreign
currency amounts are translated at exchange rates as of December 31, 1998, and
December 31, 1997.
- --------------------------------------------------------------------------------
Foreign currency Forward Contracts
contracts ($ millions) Sold Avg. rate Bought Avg. rate
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
British pound $ 13.8 1.68 $67.0 1.67
French franc 7.5 5.57 -- --
German mark 329.4 1.64 61.8 1.65
Italian lira 2.4 1653 -- --
Australian dollar 4.3 0.6207 -- --
Dutch guilder -- -- 12.0 1.88
Swedish krona 1.2 8.0 -- --
Swiss franc 2.2 1.34 5.9 1.31
- --------------------------------------------------------------------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
British pound $ 5.0 1.68 $17.1 1.61
Dutch guilder 2.0 2.00 -- --
French franc 3.3 5.9 -- --
German mark 12.4 1.79 -- --
Italian lira 2.3 1726 -- --
Spanish peseta 2.3 151.5 -- --
- --------------------------------------------------------------------------------
Foreign currency hedges are contracts that have no embedded options or other
terms that involve a higher level of complexity or risk.
COMMODITY PRICE SENSITIVITY
The table below provides information about the Company's natural gas swap
contracts that are sensitive to changes in commodity prices. Notional amounts
are in millions of Btu's (MMBtu) and weighted average contract prices. All
contracts mature in or before December 2000.
- --------------------------------------------------------------------------------
On Balance Sheet Commodity
Related Derivatives 1998 1999 2000 Total
- --------------------------------------------------------------------------------
As of December 31, 1998
- --------------------------------------------------------------------------------
Swap contracts (long):
Contract amounts (MMBtu) -- 2,350,000 250,000 2,600,000
Weighted average price ($/MMBtu) -- $ 2.15 $ 2.41 $ 2.17
- --------------------------------------------------------------------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
Swap contracts (long):
Contract amounts (MMBtu) 600,000 100,000 -- 700,000
Weighted average price ($/MMBtu) $ 2.26 $ 2.43 -- $ 2.29
- --------------------------------------------------------------------------------
YEAR 2000 ACTIVITIES
The Company increased its investment in computer software in 1997 and 1998 with
projects to develop and implement a new corporate logistics system and a new
financial and human resource system. These new systems are year-2000 compliant.
In addition, a Year 2000 Project, expected to be completed in 1999, is
converting the remainder of the Company's software and hardware information
technology and noninformation technology systems to minimize any exposure to
year-2000 compliance failures. Parallel workstreams or "tracks" have been
established by the Company to complete the work required to repair or replace
noncompliant systems and monitor the degree of year-2000 compliance by
Armstrong's business partners. The workstreams encompass (a) local projects to
repair all internally developed and supported applications; (b) infrastructure
projects to repair or replace all infrastructure components (e.g., mainframe and
client server computer systems, networks, phone switches and personal
computers); and (c) remote projects to repair or replace all remote systems:
plant supported systems and applications, PLC's and other factory systems.
The Year 2000 Project includes several phases: an inventory phase to
identify all software and hardware components potentially affected; an
assessment phase to determine if identified components are compliant; a planning
phase to establish plans to bring components into compliance; an execution phase
to carry out needed actions determined during the planning phase; a testing
phase to verify compliance; and a completion phase to bring the revised
component into production. For the local and infrastructure tracks, the project
is currently in the testing and completion phases. For the remote track, the
project is at various phases depending upon the location.
22
Total costs of the Year 2000 Project worldwide are estimated to be $19.1
million through 1999. Actual costs through December 1998 were $9.4 million.
Management believes internally generated funds and existing sources of liquidity
are sufficient to meet expected funding requirements for this project.
The Company is in the process of assessing, through letters of inquiry, the
year-2000 compliance of customers and suppliers. Responses to these letters are
being evaluated for compliance, the need for follow-up actions, or contingency
plans. Until completion of this process, the Company cannot assess the potential
impact, if any, that year-2000 noncompliance by customers and suppliers may have
on the Company. Management currently believes the most reasonably-likely worst
case scenario would be that a small number of suppliers, who are not critical to
the operation of the Company's business, will be unable to supply materials for
a short time after January 1, 2000. Moreover, management is creating contingency
plans to prepare for any reasonably-likely worst case scenarios, including
manual operations, selection of alternative suppliers, early purchase of
inventory and additional software repair.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement established
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after September 15, 1999. The adoption of this
standard is not expected to materially impact the Company's consolidated
results, financial condition or long-term liquidity.
In April 1998, the American Institute of Certified Public Accountants
(AICPA), issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement is not expected to materially
impact the Company's consolidated results, financial condition or long-term
liquidity.
1997 COMPARED WITH 1996
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
As shown on the Consolidated Statements of Cash Flows (see page 33)29), the companyCompany
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,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; and 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 iswas
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 hasCompany repurchased approximately 3,661,000 shares through December
31, 1997, including 1,281,000 shares repurchased in 1997.
Long-term debt, excluding the company'sCompany'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'sCompany'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.
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- 18 -23
------------------------------ --------------------------------
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 $(29.0)
Canadian dollar 37.0 -- -- 37.0
French franc (17.0) 3.3 (3.3) (17.0)
German mark (48.0) 12.4 (12.4) (48.0)
Italian lira 25.0 2.3 (2.3) 25.0
Spanish peseta 7.0 2.3 (2.3) 7.0
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Note 1: A positive amount indicates the company is a net receiver of this
currency, while a negative amount indicates the company is a net payer.
- 20 -
Company policy allows hedges of cash flow exposures of up to one year. The table
below summarizes the company's foreign currency forward contracts and average
contract rates at December 31, 1997. Foreign currency amounts are translated at
exchange rates as of December 31, 1997.
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Foreign currency Forward Contracts
contracts ($ 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 iswas 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'sCompany's
share of the extraordinary loss of Dal-Tile International Inc., in which the
companyCompany 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'sCompany's 34.4% share of operating
losses incurred by Dal-Tile; an additional $29.7 million before- and after-tax
loss for the company'sCompany'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'sCompany's
share of an extraordinary loss from Dal-Tile.
- 21 -
The company's Economic Value Added (EVA)EVA performance as measured by return on EVA capital of 13.3% in 1997
exceeded the company'sCompany's 11% cost of capital by 2.3 percentage points. In 1996,
the return on EVA capital was 14.8% and exceeded the company'sCompany's 12% cost of
capital by 2.8 percentage points. In 1997, the company'sCompany'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)SG&A expenses in 1997 were $385.3$383.5 million, or 17.5%17.4% 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$410.5 million, or 19.2%19.0% of sales, and included a $14.0
million nonrecurring charge for floor discoloration.
During 1996, the companyCompany 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 companyCompany 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 companyCompany 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'sCompany's 1997 effective tax rate was 37.5%, negatively impacted by 3.4
percentage points from the recording of the company'sCompany'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'sCompany'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)pages 32 and 33)
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 comparesin 1997 compared to 1996's $146.9$195.4
million, which
includedexcluding 1996 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.24
BUILDING PRODUCTS
Net sales of $754.5 million in the building products segment increased 5.0%5% 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 offsetcontributed to the impact of sluggish Western European economies
and continued lower selling prices. Sales grew in the Pacific Areaarea (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 $103.4 million in 1996,
which includedexcluded $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 bewere 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 arewere 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 plansINSULATION PRODUCTS
Sales of $228.4 million decreased from $246.8 million 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.
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Operating income
---------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
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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 sales1996. 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 operatingOperating income of $55.5$45.4 million increased $15.4from
$42.4 million from 1996's
$40.1 million. The majorityin 1996 excluding $2.8 million of the increase was relatedrestructuring charges, primarily
due to productivity gains in insulation products in all geographic areas.
ALL OTHER
Sales reported in this segment comprise sales of gasket materials and textile
mill supplies. Sales of $99.8 million increased from $99.4 million reported in
1996.
Operating income reported in this segment comprises operating income from
gasket materials, textile products and ceramic tile. An operating loss of $2.6
million compared to an operating income of $11.6 million in 1996 excluding $1.2
million of restructuring charges. The 1997 loss included $8.4 million for the
Company's share of operating losses incurred by Dal-Tile International Inc., in
which the Company had a 34.4% equity interest and $4.3 million for the
amortization of the Company's initial investment in Dal-Tile over the underlying
equity in net assets of the business combination. The 1997 loss excluded a $29.7
million after-tax loss from the Company's share of a charge incurred by Dal-
Tile, primarily for uncollectible receivables and overstocked inventories. In
1996, ceramic tile reported income of $9.9 million. 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$3.1 million compared with $22.5$2.1 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 1996GEOGRAPHIC AREAS (see page 33)
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,Americas in 1997 were more
than offset by lower U.S. residential sheet flooring sales. Building products
sales grew due$1.52 billion, compared to strength$1.48 billion
recorded 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.
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1996 COMPARED WITH 1995
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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.1998. Sales growth occurredwas strongest 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,distribution unit. Additional
growth in the strategy of segmenting products forAmericas reflected the home centers provedincrease in sales to be
successful. LaminateMexico and South
America. Net sales in Europe in 1997 were $488.4 million, compared to $495.3
million in 1996. Growth from product alliances, such as Swedish flooring manufactured and
marketedceilings joint ventures, and sales to Central and Eastern Europe, especially
Russia were offset by lower sales to Western Europe, which reflected competitive
pricing and weakness 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 relatedeconomies in this area. Sales to the consolidationPacific area
and other foreign countries of the
separate Armstrong$192.2 million grew from sales of $177.5 million
in 1996. This increase primarily reflected growth in sales of insulation 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 millionwhich benefited from manufacturing facilities 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 2122 under Item 7 above.)
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedule
The following consolidated financial statements are filed as part of this Annual
Report on Form 10-K:
Consolidated Financial Statements
Consolidated Statements of Earnings for the Years Ended December 31, 27
1998, 1997, and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 29
1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended 30
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements 31-50
Financial Statement Schedule
Schedule II - Valuation and Qualifying Reserves 60
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
-------------------------
Computation for Basic Earnings
per Share Exhibit 11(a)
Computation for Diluted Earnings
per Share Exhibit 11(b)
25
QUARTERLY FINANCIAL INFORMATION
Quarterly Financial Information
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Quarterly financial information (millions
except for per-share data) First Second Third Fourth Total year
- ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
1998 Net sales $ 543.1 $ 555.6 $ 821.6 $ 825.9 $2,746.2
Gross profit 180.4 193.8 271.9 261.5 907.6
Net earnings (loss) 46.5 56.1 61.5 (173.4) (9.3)
Per share of common stock:
Basic: Net earnings (loss) 1.17 1.41 1.55 (4.36) (0.23)
Diluted: Net earnings (loss) 1.15 1.38 1.53 (4.36) (0.23)
Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88
Price range of common stock --high 87 7/8 90 68 3/8 70 1/4 90
Price range of common stock -- low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16
- -------------------------------------------------------------------------------------------------------
1997 Net sales $518.3 $577.4 $575.6 $527.4$ 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--highstock --high 72 1/4 75 1/4 74 9/16 75 3/8 75 3/8
Price range of common stock--lowstock -- 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
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
*TheNote: 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 -The increase
in sales and net earnings from the second to the third quarter in 1998 reflects
the Triangle Pacific and DLW acquisitions.
FOURTH QUARTER 1998 COMPARED WITH FOURTH QUARTER 1997
Net sales of $825.9 million increased 56.6% from sales of $527.4 million in the
fourth quarter of 1997. Triangle Pacific contributed $178.7 million of sales and
DLW $129.1 million of sales to the Company's pre-acquisition business sales
figure of $518.1 million. A decline in sales in the Company's pre-acquisition
businesses came from floor coverings, as solid performance from North American
residential sheet and laminates was offset by slower sales to emerging markets
and competitive price pressures in Western Europe. Sales declined in building
products as weak economic conditions in emerging markets offset strong activity
in U.S. commercial markets. Sales of insulation products increased, led by
strong sales in China.
The operating loss of $254.0 million compared to an operating income of
$72.2 million in the fourth quarter of 1997. Triangle Pacific contributed $21.3
million of operating income while DLW lost $0.9 million. A $274.2 million
noncash pretax charge was recorded in the fourth quarter for an increase in the
estimated liability for asbestos-related claims. An additional pretax charge of
$74.6 million related primarily to reorganization of corporate and business unit
staff positions reflecting reorganization of engineering, research and
development and product styling and design; realignment of support activities in
connection with implementation of a new software system; changes to production
processes in the Company's Lancaster flooring plant; and elimination of
redundant positions in formation of a new combined business organization for
Floor Products, Corporate Retail Accounts and Installation Products. Also
negatively impacting fourth quarter results when compared with fourth quarter
1997 were higher goodwill amortization charges related to acquisitions of
Triangle Pacific and DLW. These expenses were partially offset from an
improvement of $8.7 million in equity earnings from affiliates as the Company's
remaining investment in Dal-Tile, which produced a loss from affiliates of $8.4
million in the fourth quarter of 1997, was sold in the fourth quarter of 1998.
The sale of 8.02 million shares of Dal-Tile created a pretax gain of $6.3
million.
For the fourth quarter, the cost of goods sold was 68.3% of sales compared
to 67.6% in 1997. Required purchase price accounting adjustments to inventories
at Triangle Pacific and DLW increased the cost of goods sold by $5.6 million,
without which gross margin percentage would have been 0.6 percentage points
better. The Company's base business cost of goods sold was 67.7%, or 0.1 points
lower than 1997, as price erosion and mix in floor coverings offset favorable
manufacturing efficiencies and lower raw material costs. The cost of goods sold
also benefited from several efficiency and policy savings related to the
implementation of the SAP Corporate Enterprise System, including a change in
vacation policy resulting in a $5.2 million benefit in the fourth quarter.
The Company's effective tax rate in the fourth quarter of 1998 was (36.6)%
compared to an effective tax rate of 31.3% in the fourth quarter of 1997. The
difference in the tax rates is primarily due to the recognition of a tax benefit
associated with the gain on the sale of the Dal-Tile shares somewhat offset by
the nondeductibility of goodwill in the Company's reported earnings.
The net loss was $173.4 million or $4.36 per diluted share compared to net
earnings of $46.8 million or $1.15 per diluted share in fourth quarter 1997.
Increased interest expense in addition to the asbestos liability and cost
reduction and reorganization charges were the primary reasons for the decline.
26
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1998 1997 1996
1995
============================================================================================================================================================================================================================
Net sales $ 2,746.2 $ 2,198.7 $ 2,156.4 $ 2,325.0
Cost of goods sold 1,838.6 1,461.7 1,459.9
1,581.1
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross profit 907.6 737.0 696.5 743.9
Selling, general and administrative expenses 385.3 413.2 457.0522.0 383.5 410.5
Equity (earnings) loss from affiliates, net (13.8) 29.7 (19.1)
(6.2)
RestructuringReorganization and restructuring charges 74.6 -- 46.5
71.8
Loss from ceramic tile business combinationCharge for asbestos liability 274.2 -- --
177.2Goodwill amortization 10.7 1.8 2.7
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating income 39.9 322.0 255.9
44.1
Interest expense 62.2 28.0 22.6
34.0
Other expense (income),income, net (1.7) (2.2) (6.9)
1.9
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing businesses(loss) before income taxes and extraordinary loss (20.6) 296.2 240.2
8.2
Income taxestax (benefit) expense (11.3) 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(loss) before extraordinary loss (9.3) 185.0 164.8 123.3
Extraordinary loss (less income taxes of $0.7) -- -- (8.9)
--
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (9.3) $ 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 (loss) applicable to common stock $ (9.3) $ 185.0 $ 149.1
$ 109.0
- -------------------------------------------------------------------------------======================================-------------------------------------------------------------------------------------------------------
Per share of common stock (see note on page 35)46):
Basic:
Earnings (loss) from continuing businessesbefore extraordinary loss $ (0.23) $ 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 (loss) $ (0.23) $ 4.55 $ 3.81
$ 2.94
- -------------------------------------------------------------------------------======================================-------------------------------------------------------------------------------------------------------
Diluted:
Earnings (loss) from continuing businessesbefore extraordinary loss $ (0.23) $ 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 (loss) $ (0.23) $ 4.50 $ 3.61
$ 2.68
- -------------------------------------------------------------------------------======================================-------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, pages 35-64,31-50, are an integral
part of these statements.
- 31 -27
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Millions except for numbers of shares and per-share data As of December 31 1998 1997
1996
============================================================================================================- ---------------------------------------------------------------------------------------------------------
AssetsASSETS
Current assets:
Cash and cash equivalents $ 57.938.2 $ 65.457.9
Accounts and notes receivable
(less allowance for discounts and losses:
1998--$49.8; 1997--$37.5; 1996--$34.9)37.5) 440.4 252.6
216.7
Inventories 465.1 220.1 205.7
Income tax benefits 52.5 25.9
49.4Net assets of businesses held for sale 55.9 --
Other current assets 69.0 43.5
27.3
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,121.1 600.0
564.5
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment
(less accumulated depreciation and amortization:
1998--$1,121.9; 1997--$1,004.3; 1996--$974.9)1,004.3) 1,502.0 972.2 964.0
Insurance for asbestos-related liabilities 248.8 291.6 141.6
Investment in affiliates 41.8 174.9
204.3Goodwill, net 965.4 27.7
Other intangibles, net 63.2 32.6
Other noncurrent assets 336.8 261.2330.9 276.5
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,375.5 $ 2,135.6$4,273.2 $2,375.5
- ------------------------------------------------------------------------------------========================
Liabilities and shareholders' equity---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:Liabilities:
Short-term debt $ 84.1149.9 $ 14.584.1
Current installments of long-term debt 32.9 14.5 13.7
Accounts payable and accrued expenses 544.8 339.9 273.3
Income taxes 25.7 33.0
19.5
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 753.3 471.5
321.0
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 1,562.8 223.1 219.4
Employee Stock Ownership Plan (ESOP) loan guarantee 178.6 201.8 221.3
Deferred income taxes 107.6 53.7 30.5
Postretirement and postemployment benefit liabilities 249.0 248.0
247.6Pension benefit liabilities 235.5 73.8
Asbestos-related long-term liabilities 344.8 179.7 141.6
Other long-term liabilities 172.1 151.9115.8 98.3
Minority interest in subsidiaries 16.1 15.0
12.3
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 2,810.2 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 155.1 162.1173.0 169.5
Reduction for ESOP loan guarantee (199.1) (207.7) (217.4)
Retained earnings 1,257.0 1,339.6
1,222.6
Foreign currency translation (1.8) 17.3Accumulated other comprehensive income (loss) (25.4) (16.2)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1,257.4 1,337.1
1,236.5
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Less common stock in treasury, at cost:
1998--11,856,721 shares; 1997--11,759,510 shares; 1996--10,714,572 shares 547.7 526.5
446.5
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 709.7 810.6
790.0
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,375.5 $ 2,135.6$4,273.2 $2,375.5
- ------------------------------------------------------------------------------------========================---------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, pages 35-64,31-50, are an integral
part of these statements.
- 32 -28
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Millions Years ended December 31 1998 1997 1996
1995
==============================================================================================================- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $185.0 $155.9 $123.3(loss) $ (9.3) $ 185.0 $ 155.9
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization excluding discontinued business142.7 132.7 123.7 123.1
Depreciation and amortization for discontinued business -- -- 13.0
Deferred income taxes (27.9) 24.2 11.2 (8.7)
Equity change in affiliates (4.8) 37.2 (18.2) (6.3)
Gain on sale of discontinued businessesinvestment in affiliates (12.8) -- --
(83.9)
Loss on ceramic tile business combination net of taxes -- -- 116.8
Loss fromReorganization and restructuring activitiescharges 74.6 -- 46.5
71.8
RestructuringSeverance and reorganization payments (11.2) (18.6) (37.4) (18.3)
Payments for asbestos-related claims, net of recoveries (74.4) (41.4) --
Charge for asbestos liability 274.2 -- --
Extraordinary loss -- -- 8.9 --
Changes in operating assets and liabilities net of effecteffects of
discontinued business, restructuringbusinesses, reorganizations and dispositions:
(Increase) decrease in receivables 3.5 (40.8) 3.6
6.9
(Increase) decrease in inventories 44.4 (12.8) (11.5) (34.3)
(Increase) decrease in other current assets (28.2) 10.5 (22.8) 9.8
(Increase) in other noncurrent assets (112.0) (69.0) (57.4) (23.4)
Increase (decrease) in accounts payable and accrued expenses (19.4) 16.6 (3.2) (37.0)
Increase (decrease) in income taxes payable (2.7) 11.5 2.5 (8.2)
Increase in other long-term liabilities 26.0 23.2 15.2
20.0
Other, net (10.5) (11.7) 3.9
5.4
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 252.2 246.6 220.9
270.0
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment excluding discontinued business(159.7) (141.7) (220.7) (171.8)
Purchases of property, plant and equipment for discontinued business -- -- (14.3)
Investment in computer software (24.6) (18.8) (7.3) (10.9)
Proceeds from sale of land, facilities and discontinued businesses 2.7 24.3 3.6
342.6
Acquisitions, net of cash acquired (1,175.7) (4.2) -- (20.7)
Investment in affiliates 147.6 (12.4) (15.4)
(27.6)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)used for investing activities (1,209.7) (152.8) (239.8)
97.3
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term debt 24.2 69.3 (7.1) 3.2
Issuance of long-term debt 1,293.9 7.2 40.8 --
Reduction of long-term debt (278.6) (17.0) (40.0) (20.1)
Cash dividends paid (75.3) (70.0) (70.1) (70.8)
Purchase of common stock for the treasury, net (31.8) (89.2) (81.5) (41.3)
Preferred stock redemption -- -- (21.4) (2.9)
Proceeds from exercised stock options 7.9 7.9 6.2 7.0
Other, net (3.0) (6.8) 1.3
2.3
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash used forprovided by (used for) financing activities 937.3 (98.6) (171.8)
(122.6)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 0.5 (2.7) (0.8)
0.2
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)decrease in cash and cash equivalents $ (19.7) $ (7.5) $(191.5) $244.9$ (191.5)
- ---------------------------------------------------------------------------------=============================--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year $ 57.9 $ 65.4 $256.9 $ 12.0256.9
- ---------------------------------------------------------------------------------=============================--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 38.2 $ 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 35-64,31-50, are an integral
part of these statements.
- 33 -29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Millions except for per-share data Years ended December 31 1998 1997 1996
1995
=========================================================================================================- ------------------------------------------------------------------------------------------------------------------------------------
SeriesSERIES A convertible preferred stock:CONVERTIBLE PREFERRED STOCK:
Balance at beginning of year $ -- $ 258.9-- $ 261.6258.9
Conversion of preferred stock to common -- -- (241.5) --
Shares retired -- -- (17.4)
(2.7)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ -- $ -- $ 258.9--
- ---------------------------------------------------------------------------------------------------------
Common stock,------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, $1 par value:PAR VALUE:
Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9
- ---------------------------------------------------------------------------------------------------------
Capital in excess of par value:------------------------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year $ 162.1169.5 $ 49.3169.5 $ 39.349.3
Gain in investment in affiliates -- 14.5 -- Minimum pension liability adjustments (4.5) (7.4) --14.5
Conversion of preferred stock to common -- -- 102.4 --
Stock issuances and other (2.5)3.5 -- 3.3
10.0
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 155.1173.0 $ 162.1169.5 $ 49.3169.5
- ---------------------------------------------------------------------------------------------------------
Reduction for------------------------------------------------------------------------------------------------------------------------------------
REDUCTION FOR ESOP loan guarantee: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)
Principal paid 23.2 19.6 13.4
Loans to ESOP (10.1) (5.5) (4.2)
Accrued compensation (4.5) (4.4) (1.5)
- ---------------------------------------------------------------------------------------------------------
Retained earnings:------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (199.1) $ (207.7) $ (217.4)
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year $1,339.6 $1,222.6 $1,133.8
$1,076.8
Net earnings (loss) for year (9.3) $ (9.3) 185.0 $ 185.0 155.9 123.3$ 155.9
Tax benefit on dividends paid on unallocated common shares 2.0 2.0 1.0 --
Tax benefit on dividends paid on unallocated preferred shares -- -- 2.0
4.5
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $1,332.3 $1,409.6 $1,292.7
$1,204.6
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Preferred stock $ -- $ 8.9-- $ 18.88.9
Common stock (per share):
$1.88 in 1998; $1.72 per share in 1997; $1.56 in 1996 75.3 70.0 $1.56 per share in 1996; 61.2
$1.40 per share in 1995 52.0
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total dividends $ 75.3 $ 70.0 $ 70.1
$ 70.8
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,257.0 $1,339.6 $1,222.6
$1,133.8
- ---------------------------------------------------------------------------------------------------------
Foreign currency translation:------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of year $ 17.3(16.2) $ 9.9 $ 18.0
$ 8.3
TranslationForeign currency translation adjustments and hedging activities (18.2) (4.4) 10.9
Allocated(7.0) (19.1) (0.7)
Minimum pension liability adjustments (2.2) (7.0) (7.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income taxes (0.9) 3.7 (1.2)(loss) (9.2) $ (9.2) (26.1) $ (26.1) (8.1) $ (8.1)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (1.8)(25.4) $ 17.3(16.2) $ 18.09.9
- ---------------------------------------------------------------------------------------------------------
Less treasury stock at cost:------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(18.5) $ 158.9 $ 147.8
- ------------------------------------------------------------------------------------------------------------------------------------
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
Stock purchases 31.8 89.2 81.5
Conversion of preferred stock to common -- -- (139.1)
Stock issuance activity, net (10.6) (9.2) (7.7)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 547.7 $ 526.5 $ 446.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 709.7 $ 810.6 $ 790.0
$ 775.0
- ---------------------------------------------------------------------====================================------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements, pages 35-64,31-50, are an integral
part of these statements.
- 34 -30
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 reflectsreflect 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
- -----------------Company recognizes advertising expenses as they are
- -----------------
incurred.
Postretirement Benefits. The companyCompany has plans that provide for medical and life
- -----------------------
insurance benefits to certain eligible employees when they retire from active
service. Generally, the company'sCompany'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 thean ESOP wasis 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%38% of 1997's1998'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.lives as
follows: buildings, 30 years; machinery and equipment, 3 to 15 years.
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
normally 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.
Capitalized interest was $5.8 million in 1998, $1.8 million in 1997 and $2.9
million in 1996.
Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on
- ------------------------------
a straight-line basisbasis. Goodwill is amortized over periods up to 3040 years while
other intangibles are amortized over periods up to 7 years. On a periodic basis,
the companyCompany estimates the future undiscounted cash flows of the businesses to
which goodwill relates in order to ensure that the carrying value of goodwill
and other intangibles has not been impaired.
Financial Instruments. The companyCompany uses financial instruments to diversify or
- ---------------------
offset the effect of currency, and interest rate and commodity price variability.
The companyCompany 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. TheSuch exposures include firm commitments and anticipated
events encompassing sales, royalties, service fees, dividendswith third parties and
intercompany loans.financial transactions.
Realized and unrealized gains and losses on contracts are marked to market and
recognized in the consolidated statementsConsolidated
Statements of earnings.Earnings. Unrealized gains and losses on foreign currency options
(which consist primarily of purchased options
that are designated as effective hedges)hedges as well as option premium expense are
deferred and included in the statements of earnings as part of the underlying
transactions. Realized and unrealizedUnrealized 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.other comprehensive income.
The companyCompany may enter into interest rate swap agreements to alter the
interest rate risk profile of outstanding debt, thus altering the company'sCompany's
exposure to changes in interest rates. In these swaps, the companyCompany agrees to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to a notional principal amount. Any
differences paid or received on interest rate swap agreements, when terminated,
are recognized as adjustments to interest rate expense over the life of
the swap.associated debt.
The companyCompany continuously monitors developments in the capital markets and
only enters into currency and swap transactions with established counterparties
having investment-grade ratings. The exposureExposure to individual counterparties is
limited,controlled, and thus the companyCompany considers the risk of counterparty default to
be negligible.
- 36 -31
- --------------------
NATURE OF OPERATIONS
- --------------------
INDUSTRY SEGMENTS
- -----------------------------------------------------------------------
at December 31 (millions) 1997 1996 1995
- -----------------------------------------------------------------------
Net trade sales:
- -------------------------------------------------------------------------------------------------------------------------------
For year ended 1998
- -------------------------------------------------------------------------------------------------------------------------------
Floor coverings $1,116.0 $1,091.8 $1,053.9 Building Wood Insulation All
(millions) coverings products products products other Totals
- -------------------------------------------------------------------------------------------------------------------------------
Net sales to external customers $1,317.6 $ 756.8 $ 346.0 $ 230.0 $ 95.8 $2,746.2
Intersegment sales -- -- -- -- 39.5 39.5
Equity (earnings) loss from affiliates 0.2 (14.2) -- -- 0.2 (13.8)
Segment operating income 176.5 116.6 38.6 46.3 9.1 387.1
Reorganization charges 53.5 10.1 -- 0.2 1.9 65.7
Segment assets 1,476.7 550.1 1,355.5 174.6 80.7 3,637.6
Depreciation and amortization 63.6 39.2 15.3 12.1 7.2 137.4
Equity investment 2.2 39.6 -- -- -- 41.8
Capital additions 93.6 42.5 12.4 11.3 5.9 165.7
- -------------------------------------------------------------------------------------------------------------------------------
For year ended 1997
- -------------------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- -------------------------------------------------------------------------------------------------------------------------------
Net sales to external customers $1,116.0 $ 754.5 $ -- $ 228.4 $ 99.8 $2,198.7
Intersegment sales -- -- -- -- 35.8 35.8
Equity (earnings) loss from affiliates 0.2 (12.9) -- -- 42.4 29.7
Segment operating income (loss) 186.5 122.3 -- 45.4 (2.6) 351.6
Segment assets 713.8 554.9 -- 165.1 219.2 1,653.0
Depreciation and amortization 65.5 37.5 -- 12.0 9.6 124.6
Equity investment 2.5 36.7 -- -- 135.7 174.9
Capital additions 76.6 54.4 -- 13.4 3.1 147.5
- -------------------------------------------------------------------------------------------------------------------------------
For year ended 1996
- -------------------------------------------------------------------------------------------------------------------------------
Floor Building Wood Insulation All
(millions) coverings products products products other Totals
- -------------------------------------------------------------------------------------------------------------------------------
Net sales to external customers $1,091.8 $ 718.4 $ -- $ 246.8 $ 99.4 $2,156.4
Intersegment sales -- -- -- -- 40.9 40.9
Equity (earnings) loss from affiliates -- (9.1) -- -- (10.0) (19.1)
Segment operating income 195.4 103.4 -- 42.4 11.6 352.8
Reorganization and restructuring charges 14.5 8.3 -- 2.8 1.2 26.8
Segment assets 687.9 541.1 -- 184.0 257.5 1,670.5
Depreciation and amortization 53.9 37.0 -- 10.0 13.4 114.3
Equity investment -- 35.6 -- -- 168.7 204.3
Capital additions 117.7 67.7 -- 20.4 2.1 207.9
- -------------------------------------------------------------------------------------------------------------------------------
Segment information has been prepared in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Segments were determined based on 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)
- -----------------------------------------------------------------------
Totaland services provided
by each segment. Accounting policies of the segments are the same as those
described in the summary of significant accounting policies. Performance of the
segments is evaluated on operating income $ 322.0 $ 255.9 $ 44.1
- -------------------------------------==================================
Depreciationbefore income taxes excluding
reorganization 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 lossunusual gains and losses, and interest
expense. The Company accounts for intersegment sales and transfers 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 dueif the
sales or transfers were 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 -
third parties at current market prices.
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, segmenteddistinctive resilient flooring products werehave been
introduced to allow exclusive product offerings by our customers. Raw materials,
especially plasticizers and resins, are a significant cost of resilient flooring
products. The companyCompany has no influence on the worldwide market prices of these
materials and thus is subject to cost changes.
The building products segment manufactures bothincludes commercial and residential ceiling
systems. Grid products, manufactured through the Company's WAVE joint venture
with Worthington Industries, have become an important part of this business
worldwide. Earnings from this joint venture are included in this segment's
operating income and in "Equity Earnings from Affiliates" (see "Equity
Investments" note on page 40)35). 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 industrywood products segment makesis composed of Triangle Pacific Corp., a varietywholly
owned subsidiary, a leading manufacturer of specialtyconsumer wood products for the
building, automotive, textileincluding
hardwood flooring and other industries worldwide. The majority of
salescabinets. Products in this segment are used primarily in
residential new construction and remodeling and commercial applications such as
retail stores and restaurants. Approximately 40% of sales are from new
construction which is more cyclical than remodeling activity. Triangle Pacific
is the largest manufacturer in the world of hardwood flooring under the brand
names of Bruce, Hartco, Robbins, Premier and Traffic Zone. Cabinet manufacturing
is a highly fragmented industry with significant price competition. The cabinet
market is dependent on new home construction and remodeling activity.
The insulation products segment includes flexible pipe insulation used in
construction and in original equipment manufacturing. These salesSales 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.
"All other" includes business units making a variety of specialty products
for the building, automotive, textile and other industries worldwide. Gasket
materials are sold for new and replacement use in the automotive, construction and
farm equipment, appliance, small engine and compressor industries. The automotiveAutomotive
and diesel build rates are the most sensitive market drivers for these products.
From 1996 to 1998, the Company owned an equity interest in Dal-Tile
International Inc. ("Dal-Tile"), whose ceramic tile products are sold through
home centers, Dal-Tile sales service centers and independent distributors. In
1998 the Company sold its interest in Dal-Tile. Other products in the industry
products segment"all
other" category are textile mill supplies, including cots and aprons sold to
equipment manufacturers and textile mills.
32
The ceramic tile productstable below provides a reconciliation of segment includes ceramic tile sold through home
centers,information to total
consolidated information.
- --------------------------------------------------------------------------------
(millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales:
Total segment sales $2,746.2 $2,198.7 $2,156.4
Intersegment sales 39.5 35.8 40.9
Elimination of intersegment sales (39.5) (35.8) (40.9)
- --------------------------------------------------------------------------------
Total consolidated sales $2,746.2 $2,198.7 $2,156.4
- --------------------------------------------------------------------------------
Operating income:
Total segment operating income $ 387.1 $ 351.6 $ 352.8
Segment reorganization and
restructuring charges (65.7) -- (26.8)
Corporate reorganization and
restructuring charges (8.9) -- (19.7)
Flooring discoloration charge -- -- (34.0)
Dal-Tile sales service centerscharge -- (29.7) --
Asbestos liability charge (274.2) -- --
Unallocated corporate (expense) income 1.6 0.1 (16.4)
- --------------------------------------------------------------------------------
Total consolidated operating income $ 39.9 $ 322.0 $ 255.9
- --------------------------------------------------------------------------------
Assets:
Total assets for reportable segments $3,637.6 $1,653.0 $1,670.5
Assets not assigned to business segments 635.6 722.5 465.1
- --------------------------------------------------------------------------------
Total consolidated assets $4,273.2 $2,375.5 $2,135.6
- --------------------------------------------------------------------------------
Other significant items:
Depreciation 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"amortization expense:
Segment totals $ 137.4 $ 124.6 $ 114.3
Unallocated corporate depreciation
and are included in operating income.amortization expense 5.3 8.1 9.4
- 38--------------------------------------------------------------------------------
Total consolidated depreciation and
amortization expense $ 142.7 $ 132.7 $ 123.7
- --------------------------------------------------------------------------------
Capital additions:
Segment totals $ 165.7 $ 147.5 $ 207.9
Unallocated corporate capital additions 18.6 13.0 20.1
- --------------------------------------------------------------------------------
Total consolidated capital additions $ 184.3 $ 160.5 $ 228.0
- --------------------------------------------------------------------------------
GEOGRAPHIC AREAS
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Net trade sales at December 31 (millions) 1998 1997 1996
1995
- -------------------------------------------------------------------------------
Net trade sales:--------------------------------------------------------------------------------
Americas:
United States $1,453.1 $1,419.2 $1,586.4$1,803.2 $1,412.2 $1,385.2
Canada 98.6 89.3 87.2
Other Americas 20.2 16.6 11.2
- --------------------------------------------------------------------------------
Total Americas $1,922.0 $1,518.1 $1,483.6
- --------------------------------------------------------------------------------
Europe:
Germany $ 182.5 $ 110.2 $ 142.4
England 142.5 130.3 129.5
France 65.9 53.1 63.2
Netherlands 57.0 33.1 37.2
Other Europe 545.6 548.4 558.7
Other183.4 161.7 123.0
- --------------------------------------------------------------------------------
Total Europe $ 631.3 $ 488.4 $ 495.3
- --------------------------------------------------------------------------------
Pacific area and other foreign 200.0 188.8 179.9$ 192.9 $ 192.2 $ 177.5
- -------------------------------------------------------------------------------
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 trade sales $2,746.2 $2,198.7 $2,156.4
$2,325.0
- --------------------------------------------===================================
Operating income:--------------------------------------------------------------------------------
Sales are attributed to countries based on location of customer.
- --------------------------------------------------------------------------------
Long-lived assets at December 31 (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Americas:
United States $ 236.1991.9 $ 202.7746.3 $ 7.7
(see note 2728.9
Canada 17.1 20.5 20.7
Other Americas 0.1 0.1 0.1
- --------------------------------------------------------------------------------
Total Americas $1,009.1 $ 766.9 $ 749.7
- --------------------------------------------------------------------------------
Europe:
Germany $ 270.3 $ 47.7 $ 58.0
England 52.7 54.7 51.4
Netherlands 42.3 13.0 16.8
Belgium 34.5 -- --
France 15.9 15.1 17.6
Other Europe 36.0 32.6 25.5
- --------------------------------------------------------------------------------
Total Europe $ 451.7 $ 163.1 $ 169.3
- --------------------------------------------------------------------------------
Pacific area:
China $ 34.0 $ 34.0 $ 34.9
Other Pacific area 7.2 8.2 10.1
- --------------------------------------------------------------------------------
Total Pacific area $ 41.2 $ 42.2 $ 45.0
- --------------------------------------------------------------------------------
Total long-lived assets $1,502.0 $ 972.2 $ 964.0
- --------------------------------------------------------------------------------
33
ACQUISITIONS
On July 22, 1998, the Company completed its acquisition of Triangle Pacific
Corp. ("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a
leading U.S. manufacturer of hardwood flooring and other flooring and related
products and a substantial manufacturer of kitchen and bathroom cabinets. The
acquisition, recorded under the purchase method of accounting, included the
purchase of outstanding shares of common stock of Triangle Pacific at $55.50 per
share which, plus acquisition costs, resulted in a total purchase price of
$911.5 million. A portion of the purchase price has been allocated to assets
acquired and liabilities assumed based 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)
- -------------------------------------------------------------------------------
Totalestimated fair market value at the
date of acquisition while the balance of $831.1 million was recorded as goodwill
and is being amortized over forty years on a straight-line basis.
Effective August 31, 1998, the Company acquired approximately 93% of the
total share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized
under the laws of the Federal Republic of Germany. DLW is a leading flooring
manufacturer in Germany. The acquisition, recorded under the purchase method of
accounting, included the purchase of 93% of the total share capital of DLW
which, plus acquisition costs, resulted in a total purchase price of $289.9
million. A portion of the purchase price has been allocated to assets $2,375.5 $2,135.6 $2,149.8
- --------------------------------------------===================================
United Statesacquired
and liabilities assumed based on the estimated fair market value at the date of
acquisition while the balance of $117.2 million was recorded as goodwill and is
being amortized over forty years on a straight-line basis. In this purchase
price allocation, $49.6 million was allocated to the estimable net trade sales include export sales to non-affiliated customersrealizable
value of $40.9 millionDLW's furniture business and a carpet manufacturing business 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,which the Company has identified as businesses held for sale.
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 comprisedallocation of the company's share ofpurchase price to 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 millionbusinesses held 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 transactionsale 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.determined as follows:
- --------------------------------------------------------------------------------
(millions) 19951998
- --------------------------------------------------------------------------------
Estimated sales price $54.3
Less: Estimated cash outflows through disposal date (2.2)
Allocated interest through disposal date (2.5)
- --------------------------------------------------------------------------------
Total $49.6
- --------------------------------------------------------------------------------
The final sales price and cash flows pertaining to these businesses may
differ from these amounts. Disposals of these businesses should occur in the
first half of 1999.
The table below reflects the adjustment to the carrying value of the
businesses held for sale relating to interest allocation, profits and cash flows
in 1998.
- --------------------------------------------------------------------------------
(millions) 1998
- --------------------------------------------------------------------------------
Carrying value at August 31, 1998 $49.6
Interest allocated September 1-December 31, 1998 1.1
Effect of exchange rate change 2.8
Profits excluded from consolidated earnings (0.4)
Cash flows funded by parent 2.8
- --------------------------------------------------------------------------------
Carrying value at December 31, 1998 $55.9
- --------------------------------------------------------------------------------
The purchase price allocation for these acquisitions is preliminary and
further refinements are likely to be made based on the completion of final
valuation studies. The operating results of these acquired businesses have been
included in the Consolidated Statements of Earnings from the dates of
acquisition. Triangle Pacific's fiscal year ends on the Saturday closest to
December 31, which was January 2, 1999. The difference in Triangle Pacific's
fiscal year from that of the parent company was due to the difficulty in
changing its financial reporting systems to accommodate a calendar year end. No
events occurred between December 31 and January 2 at Triangle Pacific materially
affecting the Company's financial position or results of operations.
The table below reflects unaudited pro forma combined results of the
Company, Triangle Pacific and DLW as if the acquisitions had taken place at the
beginning of fiscal 1998 and 1997:
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 240.1
Operating income/(1)/ 8.8
Assets/(2)/ 269.8
Liabilities/(2)/ 17.3$3,479.8 $3,350.0
Net earnings (14.2) 173.2
Net earnings per diluted share (0.36) 4.22
- --------------------------------------------------------------------------------
Note 1: Excludes 1995 lossIn management's opinion, these unaudited pro forma amounts are not
necessarily indicative of $177.2 million due to ceramic tile business
combination.
Note 2: 1995 balances were aswhat the actual combined results of December 29, 1995, immediately prior tooperations might
have been if the ceramic tile business combination.
EARNINGS FROM CONTINUING BUSINESSES
Earnings from continuing businesses were $185.0 million inacquisitions had been effective at the beginning of fiscal 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 in1998.
34
REORGANIZATION AND OTHER ACTIONS
In 1998 the earnings for 1996 and 1995 were
after-tax restructuringCompany recognized charges of $29.6$65.6 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 $83.9or $42.6 million after
tax, on the sale. Certain liabilities related to terminated benefit plansseverance and enhanced retirement benefits for more than 650
positions, approximately 75% of approximately $11.3which were salaried positions. In addition, the
Company recorded an estimated loss of $9.0 million, were retained by the company. Thomasvilleor $5.9 million after tax,
related to redundant flooring products machinery and its
subsidiaries recorded salesequipment held for
disposal. Reorganization actions include corporate and business unit staff
reductions reflecting reorganization of approximately $550.2 millionengineering, research and development
and product styling and design; realignment of support activities in 1995.
NET EARNINGS
Net earnings were $185.0 million for 1997 comparedconnection
with $155.9 millionimplementation of a new corporate logistics 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 contributionfinancial software system;
changes 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 resultingproduction processes in the conversionCompany's Lancaster flooring plant; and
elimination of convertible preferred shares into
common stock. Basic earnings per shareredundant positions in formation of a new combined business
organization for "Earnings from continuing businesses"
in 1996Floor Products, Corporate Retail Accounts and 1995 are determined by dividingInstallation
Products. Approximately $28.6 million is cash expenditures for severance which
will occur over 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 sharenext 12 months. The remainder is a noncash charge 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.
Theenhanced retirement benefits.
A 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-downwrite-downs 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
occuroccurred 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, 1997,1998, an immaterial amount remained in the reserves1996
reserve related to a non-cancelable operating lease.
Severance payments of $10.4 million were made in 1998 for the elimination
of 209 positions related to the 1996 and 1998 reorganization and restructuring
actions.
DEPRECIATIONEQUITY INVESTMENTS
Investments in affiliates were $41.8 million at December 31, 1998, a decrease of
$133.1 million, reflecting the sale of the Company's ownership of Dal-Tile,
somewhat offset by an increase in the Company's 50% interest in its WAVE joint
venture with Worthington Industries.
Equity earnings from affiliates for 1998 primarily comprised income from a
50% interest in the WAVE joint venture and the Company's share of a net loss at
Dal-Tile and amortization of the excess of the Company's investment in Dal-Tile
over the underlying equity in net assets. Equity losses from affiliates in 1997
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 a 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. Equity earnings from
affiliates for 1996 primarily comprised the Company's after-tax share of the net
income of the Dal-Tile International Inc. business combination, amortization of
the excess of the Company's investment in Dal-Tile over the underlying equity in
net assets, and earnings from its 50% interest in the WAVE joint venture.
In 1995 the Company entered into a business combination with Dal-Tile
whereby the Company exchanged cash and the stock of its ceramic tile operations,
consisting primarily of American Olean Tile Company, a wholly-owned subsidiary,
for ownership of 37% of the shares of Dal-Tile. 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%.
In 1996 Dal-Tile refinanced all of its existing debt and recorded an
extraordinary loss. The Company's share of the extraordinary loss was $8.9
million after tax or $0.21 per diluted share.
In 1998 the Company announced its intention to dispose of its investment in
Dal-Tile. In July the Company sold 10.35 million shares of Dal-Tile at $8.50 per
share before commission and fees. Since this sale reduced the Company's
ownership of Dal-Tile below 20%, remaining shares were classified as
available-for-sale under the terms of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." An unrealized holding gain arising from valuing the securities at
market price was excluded from income and recognized as a separate component of
shareholders' equity.
In October and November, the Company sold its remaining 8.02 million shares
of Dal-Tile at $8.50 per share before commission and fees. The Company recorded
a total gain of $12.8 million after tax, classified as "Other income," in the
last half of 1998 on these sales.
RECEIVABLES
- --------------------------------------------------------------------------------
Accounts and notes receivable (millions) 1998 1997
- --------------------------------------------------------------------------------
Customers' receivables $462.9 $255.2
Customers' notes 15.5 15.1
Miscellaneous receivables 11.8 19.8
- --------------------------------------------------------------------------------
490.2 290.1
- --------------------------------------------------------------------------------
Less allowance for discounts and losses 49.8 37.5
- --------------------------------------------------------------------------------
Net $440.4 $252.6
- --------------------------------------------------------------------------------
35
Generally, the Company sells its products to select, preapproved 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
Approximately 38% of the Company's total inventory in 1998 and 57% in 1997 were
valued on a LIFO (last-in, first-out) basis. Inventory values were lower than
would have been reported on a total FIFO (first-in, first-out) basis, by $50.5
million at the end of 1998 and $60.3 million at year-end 1997.
- --------------------------------------------------------------------------------
Inventories (millions) 1998 1997
- --------------------------------------------------------------------------------
Finished goods $251.2 $149.4
Goods in process 51.5 19.9
Raw materials and supplies 162.4 50.8
- --------------------------------------------------------------------------------
Total $465.1 $220.1
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND AMORTIZATIONEQUIPMENT
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Land $ 111.5 $ 20.4
Buildings 549.8 395.4
Machinery and equipment 1,759.5 1,450.5
Construction in progress 203.1 110.2
- --------------------------------------------------------------------------------
2,623.9 1,976.5
- --------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 1,121.9 1,004.3
- --------------------------------------------------------------------------------
Net $1,502.0 $ 972.2
- --------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLES
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Goodwill $ 993.4 $ 44.0
Less accumulated amortization 28.0 16.3
- --------------------------------------------------------------------------------
Total goodwill $ 965.4 $ 27.7
- --------------------------------------------------------------------------------
Other intangibles $ 78.7 $ 55.2
Less accumulated amortization 15.5 22.6
- --------------------------------------------------------------------------------
Total other intangibles $ 63.2 $ 32.6
- --------------------------------------------------------------------------------
Goodwill and other intangibles increased by $968.3 million, reflecting
goodwill related to Triangle Pacific and DLW, higher spending levels in computer
software systems and acquired intangibles from acquisitions. Unamortized
computer software costs included in other intangibles were $56.0 million at
December 31, 1998, and $24.8 million at December 31, 1997.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Payables, trade and other $235.2 $174.0
Asbestos-related claims, current portion 80.0 72.0
Employment costs 82.5 47.7
Reorganization and severance payments 30.6 12.2
Other 116.5 34.0
- --------------------------------------------------------------------------------
Total $544.8 $339.9
- --------------------------------------------------------------------------------
DEBT
- --------------------------------------------------------------------------------
Average Average
year-end year-end
interest interest
(millions) 1998 rate 1997 rate
- --------------------------------------------------------------------------------
Short-term debt:
Commercial paper $ 104.1 6.20% $ 60.8 6.33%
Foreign banks 45.8 5.29% 23.3 6.23%
- --------------------------------------------------------------------------------
Total short-term debt $ 149.9 5.92% $ 84.1 6.30%
- --------------------------------------------------------------------------------
Long-term debt:
Bank loans due 1999-2006 $ 91.9 4.96% $ 25.0 4.74%
Medium-term notes
8.95-9% due 2000-2001 25.6 8.96% 39.1 8.94%
6.35% Senior notes due 2003 199.8 6.35% -- --
6.5% Senior notes due 2005 149.7 6.50% -- --
9 3/4% debentures due 2008 125.0 9.75% 125.0 9.75%
7.45% Senior quarterly
interest bonds due 2038 180.0 7.45% -- --
Industrial development bonds 31.2 4.67% 19.5 5.10%
Commercial paper, noncurrent 750.0 6.20% -- --
Capital lease obligations 13.3 7.25% -- --
Other 29.2 7.28% 29.0 7.76%
- --------------------------------------------------------------------------------
Total long-term debt $1,595.7 6.64% $ 237.6 8.46%
- --------------------------------------------------------------------------------
Less current installments 32.9 5.54% 14.5 8.91%
- --------------------------------------------------------------------------------
Net long-term debt $1,562.8 6.66% $ 223.1 8.43%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Scheduled amortization of long-term debt (millions)
- --------------------------------------------------------------------------------
2000 $ 51.2 2003 $656.5
2001 331.7 2004 16.3
2002 5.5
- --------------------------------------------------------------------------------
36
On August 11, 1998, the Company completed an offering of $200 million of
6.35% Senior Notes due 2003 and a concurrent offering of $150 million of 6.5%
Senior Notes due 2005. On October 28, 1998, the Company completed an offering of
$180 million of 7.45% Senior Quarterly Interest Bonds due 2038. The Company used
the proceeds from the issuance of the securities to repay outstanding commercial
paper.
The 7.45% Senior Quarterly Interest Bonds are callable in five years and
have no sinking-fund requirements.
The Company's 9 3/4% debentures, senior notes and medium-term notes are not
redeemable until maturity and have no sinking-fund requirements.
The industrial development bonds mature in 2004, 2009 and 2024.
Other debt includes an $18.6 million zero-coupon note due in 2013 that had
a carrying value of $2.8 million at December 31, 1998, and an effective interest
rate of 13.4%.
The Company has three unused credit agreements: a $450 million credit agreement
expiring in 364 days; a $450 million line of credit expiring in 2003; and a
revolving line of credit of $300 million, expiring in 2001. In addition, the
Company's foreign subsidiaries have approximately $258.9 million of unused
short-term lines of credit available from banks. The credit lines are subject to
immaterial annual commitment fees. The Company intends to refinance a portion of
its outstanding commercial paper balance on a long-term basis. Such intent is
supported by the $450 million line of credit expiring in 2003 and the $300
million revolving line of credit expiring in 2001. Accordingly, long-term debt
includes $750 million of commercial paper reclassified from short-term debt.
In 1997 and 1998 the Company entered into forward-starting interest rate
swaps designated as hedges of long-term bonds. In 1998 the Company terminated
these interest rate swaps concurrent with the issuance of its 7.45% quarterly
interest bond due 2038. The loss of $16.3 million upon termination of the swaps
will be recognized as an adjustment to interest expense over the life of the
bond.
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:
- --------------------------------------------------------------------------------
1998 Estimated 1997 Estimated
(In millions at Carrying fair Carrying fair
December 31) amount value amount value
- --------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 38.2 $ 38.2 $ 57.9 $ 57.9
Receivables 440.4 440.4 252.6 252.6
Liabilities:
Accounts payable and
accrued expenses $ 544.8 $ 544.8 $ 339.9 $ 339.9
Short-term and
long-term debt 1,745.6 1,756.0 321.7 356.6
Other long-term liabilities 115.8 115.8 98.3 98.3
Off-balance sheet financial
instruments:
Foreign currency
contract obligations $ -- $ 6.4 $ -- $ 0.3
Letters of credit/financial
guarantees -- 244.6 -- 186.1
Lines of credit -- 1,458.9 -- 409.6
Natural gas contracts -- (0.5) -- (0.1)
- --------------------------------------------------------------------------------
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued expenses, short-term debt and current installments of
long-term debt approximate fair value because of the short-term maturity of
these instruments.
The fair value estimates of long-term debt were based upon quotes from
major financial institutions taking into consideration current rates offered to
the Company for debt of the same remaining maturities.
Other long-term liabilities consist primarily of deferred compensation
payments, for which cost approximates fair value.
Foreign currency contract obligations are estimated by obtaining quotes
from brokers.
Letters of credit, financial guarantees and lines of credit amounts are
based on the estimated cost to settle the obligations.
Natural gas contract amounts are based on estimated cost to settle the
contracts.
INCOME TAXES
- --------------------------------------------------------------------------------
Income taxes payable (millions) 1998 1997
- --------------------------------------------------------------------------------
Payable -- current $25.3 $32.2
Deferred -- current 0.4 0.8
- --------------------------------------------------------------------------------
Total $25.7 $33.0
- --------------------------------------------------------------------------------
37
The tax effects of principal temporary differences between the carrying
amounts of assets and liabilities and their tax bases are summarized in the
table below. Management believes it is more likely than not that the results of
future operations will generate sufficient taxable income to realize deferred
tax assets except for net operating losses and capital loss carryforwards. Of
the $61.1 million in capital loss carryforwards at December 31, 1998, $15.0
million will expire in 1999, $37.7 million will expire in 2001 and $8.4 million
will expire in 2003. Of the $21.3 million in foreign net operating losses, $3.3
million will expire in 2003 and the remaining $18.0 million will be carried
forward indefinitely. Valuation allowances increased $0.2 million in 1998.
- --------------------------------------------------------------------------------
Deferred income taxes (millions) 1998 1997
- --------------------------------------------------------------------------------
Postretirement and postemployment benefits $ (87.7) $ (87.0)
Reorganization payments (24.2) (7.4)
Asbestos-related liabilities (150.3) (82.1)
Net operating losses (8.2) (9.0)
Capital loss carryforward (21.3) (20.4)
Other (97.9) (66.0)
- --------------------------------------------------------------------------------
Total deferred tax assets $(389.6) $(271.9)
- --------------------------------------------------------------------------------
Valuation allowance 29.5 29.3
- --------------------------------------------------------------------------------
Net deferred tax assets $(360.1) $(242.6)
- --------------------------------------------------------------------------------
Accumulated depreciation $ 224.8 $ 102.4
Pension costs 51.3 48.3
Insurance for asbestos-related liabilities 92.7 94.4
Other 55.7 30.5
- --------------------------------------------------------------------------------
Total deferred income tax liabilities $ 424.5 $ 275.6
- --------------------------------------------------------------------------------
Net deferred income tax liabilities $ 64.4 $ 33.0
- --------------------------------------------------------------------------------
Deferred tax asset -- current (43.2) (20.7)
- --------------------------------------------------------------------------------
Deferred income tax liability -- long term $ 107.6 $ 53.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Details of taxes (millions) 1998 1997 1996
1995
- --------------------------------------------------------------------------------
DepreciationEarnings (loss) before income taxes:
Domestic $ 117.4(57.1) $ 108.6236.4 $ 114.9
Amortization 15.3 15.1 8.2176.5
Foreign 63.5 92.9 87.6
Eliminations (27.0) (33.1) (23.9)
- --------------------------------------------------------------------------------
Total $ 132.7(20.6) $ 123.7296.2 $ 123.1
- ----------------------------------------========================================
Depreciation expense increased in 1997 primarily due to higher capital
expenditures in 1996.
SELECTED OPERATING EXPENSES240.2
- --------------------------------------------------------------------------------
(millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Maintenance and repair costsIncome tax provision (benefit):
Current:
Federal $ 107.311.2 $ 105.346.8 $ 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)36.2
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 0.421.7 35.7 33.4
State 1.3 1.5 1.4
- --------------------------------------------------------------------------------
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.current 34.2 84.0 71.0
- --------------------------------------------------------------------------------
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 0.8Deferred:
Federal (48.2) 30.9 4.9
Foreign 2.3 (3.7) (0.5)
State 0.4 -- --
- --------------------------------------------------------------------------------
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.deferred (45.5) 27.2 4.4
- --------------------------------------------------------------------------------
Total pension (credit)
cost (millions) 1997 1996 1995income taxes $ (11.3) $ 111.2 $ 75.4
- --------------------------------------------------------------------------------
38
At December 31, 1998, unremitted earnings of subsidiaries outside the
United States were $155.6 million (at December 31, 1998, balance sheet exchange
rates) for which no 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 3.3taxes 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
unremitted earnings permanently or to repatriate them only when it is tax
effective to do so.
- --------------------------------------------------------------------------------
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 forReconciliation to
U.S. defined-benefit pension plans was determined using the
assumptions presented in the table below.
- --------------------------------------------------------------------------------
Net credit for U.S. defined-benefit
pension plansstatutory tax rate (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)1998 1997 1996
- --------------------------------------------------------------------------------
Assumptions:
DiscountTax expense (benefit) at statutory rate 7.00% 7.25%
Compensation rate 4.00% 4.50%$ (7.2) $ 103.7 $ 84.1
State income taxes, net of federal benefit 1.7 1.0 0.9
(Benefit) on ESOP dividend (1.2) (0.9) (1.5)
Tax (benefit) on foreign and
foreign-source income 0.6 1.1 6.2
Utilization of excess foreign tax credit -- (2.9) (6.5)
Equity in (earnings) loss of affiliates (6.2) 9.9 (4.2)
Insurance programs (1.0) (0.8) (1.2)
Goodwill 3.3 -- --
Other items (1.3) 0.1 (2.4)
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligationTax (benefit) expense at effective rate $ (911.5)(11.3) $ (824.4)111.2 $ 75.4
- --------------------------------------------------------------------------------
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 plansOther taxes (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)1998 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(116.4) $(112.8)Payroll taxes $ 65.0 $ 50.7 $ 51.5
Property, franchise and capital
stock taxes $ 20.0 $ 16.6 $ 14.7
- --------------------------------------------------------------------------------
Accumulated benefit obligation $(119.3) $(117.2)Other long-term liabilities
- --------------------------------------------------------------------------------
Projected benefit obligation for services
rendered to date $(127.4) $(125.5)(millions) 1998 1997
- --------------------------------------------------------------------------------
Plan assets at fair value 95.5 84.5Deferred compensation $ 38.1 $ 32.8
Other 77.7 65.5
- --------------------------------------------------------------------------------
Projected benefit obligation greater than
plan assetsTotal other long-term liabilities $ (31.9)115.8 $ (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)98.3
- --------------------------------------------------------------------------------
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.Company. The ESOP used the proceeds to purchase
5,654,450 shares of a new series of convertible preferred stock issued by the
company.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, 1997,1998, the ESOP had allocated to participants a total of 1,800,0001,966,000
shares and retired 800,000953,000 shares.
The ESOP currently covers parent company nonunion employees and some union
employees.
- 47 -
The company'sCompany'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.Consolidated
Balance Sheets.
- ----------------------------------------------------------------------------------------------------------------------------------------------
Details of ESOP debt service
payments (millions) 1998 1997 1996
1995
- ----------------------------------------------------------------------------------------------------------------------------------------------
Preferred dividends paid $ -- $ 8.9-- $ 18.88.9
Common stock dividends paid 9.0 8.5 4.0
--
Employee contributions 9.8 9.7 5.3
6.7
Company contributions 11.4 14.7 11.0 6.2
Company loans to ESOP 10.1 5.5 4.2
--
- ----------------------------------------------------------------------------------------------------------------------------------------------
Debt service payments made
by ESOP trustee $ 40.3 $ 38.4 $ 33.4
$ 31.7
- --------------------------------==============================--------------------------------------------------------------------------------
The companyCompany recorded costs for the ESOP, utilizing the 80% of the shares
allocated method, of $6.9 million in 1998, $10.4 million in 1997 and $9.4
million in 1996 and $3.5
million in 1995.1996. These costs were partially offset by savings realized from
previous changes to company-sponsoredCompany-sponsored health care benefits and elimination of
the contribution-matching feature in the company-sponsoredCompany-sponsored voluntary retirement
savings plan.
The trustee borrowed $5.5$10.1 million from the companyCompany in 1998, $5.5 million
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 -39
- --------------------------------------------------------------------------------
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) 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Option shares at beginning of year 2,161.3 2,161.4 1,841.6
1,612.1
Options granted 914.8 286.8 728.7 642.8
Option shares exercised (253.3) (265.5) (376.7) (390.9)
Stock appreciation rights exercised (3.1) (4.7) (10.8)
(11.5)
Options cancelled (36.0) (16.7) (21.4) (10.9)
Option shares at end of year 2,783.7 2,161.3 2,161.4 1,841.6
Option shares exercisable at end
of year 1,372.0 1,262.1 1,185.8 1,196.7
Shares available for grant 789.7 1,585.5 1,914.6 2,838.9
- --------------------------------------------------------------------------------
Weighted average price per share:
Options outstanding $ 60.41 $ 54.01 $ 50.06
$ 43.00
Options exercisable 52.38 46.88 41.11
37.93
Options granted 70.43 69.63 60.30 52.47
Option shares exercised 41.68 39.10 36.27 33.48
- --------------------------------------------------------------------------------
The following table below summarizes information about stock options outstanding at
December 31, 1997.1998.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Stock options outstanding as of 12/31/9798
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
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 option98 contractual life price 12/31/9798 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--------------------------------------------------------------------------------
$29-55 713,468 4.9 $43.31 698,168 $43.09
55-60 625,042 7.3 59.52 461,662 59.76
60-68 565,540 8.1 63.26 10,000 65.50
66-74 288,050 9.2 69.75 3,100 71.1563.90 125,112 63.45
68-72 238,437 8.2 69.90 69,073 69.91
72-86 641,230 9.1 73.71 17,973 79.23
- -----------------------------------------------------------------------------
2,161,272 1,262,102--------------------------------------------------------------------------------
2,783,717 1,371,988
- -----------=========----------------------------------=========----------------------------------------------------------------------------------------------
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, but only if the total companyCompany or individual business
units meet certain predetermined performance measures during defined performance
periods (generally three years). Total companyCompany 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), wherebyduring which time the
shares will be held in custody by the companyCompany until the expiration or
termination of the restrictions. Compensation expense will be charged to earnings
over the period in which the
restrictions lapse.performance period. Within the performance periods at the end of 19971998 were
109,8376,600 performance restricted shares outstanding, with 6,253777 accumulated dividend
equivalent shares. RestrictedNo restricted common stock awards will be issued in
1998were earned based on the
performance period ending December 31, 1997.1998. Within the restriction periods at the
end of 19971998 were 180,199182,425 shares of restricted common stock outstanding with 9,118 accumulated dividend equivalent shares, based on
performance periods ending prior to 1997.
- 57 -
1998.
Restricted stock awards can be used for the purposes of recruitment,
special recognition and retention of key employees. Awards for 27,70036,750 shares of
restricted stock were granted (excluding performance based awards discussed
above) during 1997.1998. At the end of 1997,1998, there were 151,039157,334 restricted shares of
common stock outstanding with 7,097 accumulated dividend equivalent shares.outstanding.
40
On January 1, 1996, the companyCompany 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'sCompany's net earnings and earnings
per share (EPS) would have been reduced to the following pro forma amounts.
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
(millions) 1998 1997 1996
1995
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Net earnings:earnings (loss):
As reported $ (9.3) $ 185.0 $ 155.9
$ 123.3
Pro forma (16.1) 180.7 150.7
121.4
Basic EPS:earnings (loss) per share:
As reported (0.23) 4.55 3.81
2.94
Pro forma (0.40) 4.45 3.68
2.89
Diluted EPS:earnings (loss) per share:
As reported (0.23) 4.50 3.61
2.68
Pro forma (0.40) 4.39 3.49
2.64
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
The fair value of grants was estimated on the date of grant using the
Black-Scholes option-pricingoption pricing model with the following assumptions for 1998, 1997 and 1996
presented in the table below. The weighted-average fair value of stock options
granted in 1998 was $17.34.
- --------------------------------------------------------------------------------
1998 1997 1996
and 1995.
- -----------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rates 5.14% 6.21% 6.17%
6.38%
Dividend yield 3.03% 2.46% 2.32% 2.39%
Expected lives 5 years 5 years 5 years
Volatility 28% 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 SHARESEMPLOYEE COMPENSATION
Employee compensation and the average number of employees are presented in the
table below. Charges for severance costs and early retirement incentives to
terminated employees have been excluded.
- --------------------------------------------------------------------------------
Employee compensation cost summary (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Wages and salaries $ 590.4 $ 494.7 $ 509.7
Payroll taxes 65.0 50.7 51.5
Pension credits (38.1) (22.2) (16.1)
Insurance and other benefit costs 60.0 51.9 50.7
Stock-based compensation 5.0 9.6 5.8
- --------------------------------------------------------------------------------
Total $ 682.3 $ 584.7 $ 601.6
- --------------------------------------------------------------------------------
Average number of employees 13,881 10,643 10,572
- --------------------------------------------------------------------------------
PENSION AND OTHER BENEFIT PROGRAMS
The Company and a number of its subsidiaries have pension plans and
postretirement medical and insurance benefit plans covering eligible employees
worldwide.
The Company also has defined-contribution pension plans for eligible
employees. Costs for these plans were $6.9 million in 1998, $10.4 million in
1997, and $9.9 million in 1996. The Company also has an Employee Stock Ownership
Plan, as described on page 39. Benefits from the pension plan, which cover
substantially all employees and include the employees of Triangle Pacific,
acquired on July 22, 1998, are based on an employee's compensation and years of
service. Pension plans are funded by the Company. Postretirement benefits are
funded by the Company on a pay-as-you-go basis, with the retiree paying a
portion of the cost for health care benefits by means of deductibles and
contributions. The Company announced in 1989 and 1990 a 15-year phaseout of its
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.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in February 1998. In accordance with this
standard, pension costs for the U.S. include those related to the pension plan
and the retirement benefit equity plan, a nonqualified pension plan. The new
standard does not change the measurement or recognition of costs for pension or
other postretirement plans. It standardizes disclosures and eliminates those
that are no longer useful. The following tables, in accordance with the new
standard, summarize the balance sheet impact, as well as the benefit
obligations, assets, funded status and rate assumptions associated with the
pension and postretirement benefit plans. The plan assets are primarily listed
as stocks and bonds. Included in these assets were 1,426,751 shares of Armstrong
common stock at year-end 1997 and 1998.
41
- -----------------------------------------------------------------------------------
Retiree Health and Life
U.S. defined-benefit Pension Benefits Insurance Benefits
plans (millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation as of
January 1 $1,078.1 $1,001.3 $ 262.7 $ 247.1
Service cost 17.5 16.4 3.3 3.3
Interest cost 72.6 72.6 17.2 17.6
Plan participants' contributions -- -- 2.3 2.1
Acquisition 15.1 -- -- --
Effect of special termination benefits 38.1 7.8 -- --
Actuarial loss (gain) 15.5 51.8 (1.0) 14.1
Benefits paid (73.4) (71.8) (22.0) (21.5)
- -----------------------------------------------------------------------------------
Benefit obligation as
of December 31 $1,163.5 $1,078.1 $ 262.5 $ 262.7
- -----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets as
of January 1 $1,754.4 $1,501.9 $ -- $ --
Actual return on plan assets 180.3 322.6 -- --
Acquisition 11.4 -- -- --
Employer contribution 2.2 1.7 19.7 19.4
Plan participants' contributions -- -- 2.3 2.1
Benefits paid (73.4) (71.8) (22.0) (21.5)
- -----------------------------------------------------------------------------------
Fair value of plan assets as
of December 31 $1,874.9 $1,754.4 $ 0.0 $ 0.0
- -----------------------------------------------------------------------------------
Funded status $ 711.4 $ 676.3 $ (262.5) $ (262.7)
Unrecognized net actuarial
loss (gain) (597.4) (586.2) 48.8 50.9
Unrecognized transition asset (20.7) (26.9) -- --
Unrecognized prior service
cost (benefit) 82.2 92.2 (6.0) (6.8)
- -----------------------------------------------------------------------------------
Net amount recognized $ 175.5 $ 155.4 $ (219.7) $ (218.6)
- -----------------------------------------------------------------------------------
The funded status of U.S. defined-benefit plans was determined using the
assumptions presented in the table below.
- -----------------------------------------------------------------------------------
Retiree Health and Life
Pension Benefits Insurance Benefits
U.S. defined-benefit plans 1998 1997 1998 1997
- -----------------------------------------------------------------------------------
Weighted-average assumption
as of December 31:
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 8.75% 8.75% n/a n/a
Rate of compensation increase 3.75% 4.00% 3.75% 4.00%
- -----------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets consist of:
- -------------------------------------------------------------------------------------
Retiree Health and Life
Pension Benefits Insurance Benefits
(millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------
Prepaid benefit costs $ 187.8 $ 164.2 $ -- $ --
Accrued benefit liability (40.2) (23.2) (219.7) (218.6)
Intangible asset 2.3 2.6 -- --
Other comprehensive income 25.6 11.8 -- --
- -------------------------------------------------------------------------------------
Net amount recognized $ 175.5 $ 155.4 $(219.7) $(218.6)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
U.S. Pension plans with benefit obligations Pension Benefits
in excess of assets (millions) 1998 1997
- -------------------------------------------------------------------------------------
Retirement benefit equity plan
Projected benefit obligation, December 31 $48.4 $30.1
Accrued benefit obligation, December 31 40.2 23.2
Fair value of plan assets, December 31 -- --
- -------------------------------------------------------------------------------------
The components of pension credit are as follows:
- -------------------------------------------------------------------------------------
U.S. defined-benefit Pension Benefits
plans (millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 17.5 $ 16.4 $ 17.6
Interest cost on projected
benefit obligation 72.6 72.6 67.4
Expected return on plan assets (136.2) (122.8) (113.8)
Amortization of transition asset (6.2) (6.2) (6.2)
Amortization of prior service cost 10.0 10.0 10.0
Recognized net actuarial gain (18.4) (13.6) (12.0)
- -------------------------------------------------------------------------------------
Net periodic pension credit $ (60.7) $ (43.6) $ (37.0)
- -------------------------------------------------------------------------------------
Costs for other funded and unfunded pension plans were $4.0 million in
1998, $2.8 million in 1997 and $2.5 million in 1996.
42
The components of postretirement benefit costs are as follows:
- -------------------------------------------------------------------------------------
U.S. defined-benefit Retiree Health and Life Insurance Benefits
plans (millions) 1998 1997 1996
- -------------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 3.3 $ 3.3 $ 3.7
Interest cost on accumulated
postretirement benefit obligation 17.2 17.6 17.0
Amortization of prior service benefit (0.9) (0.9) (0.9)
Recognized net actuarial loss 1.3 1.2 1.4
- -------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 20.9 $ 21.2 $ 21.2
- -------------------------------------------------------------------------------------
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate was assumed
to decrease 1% per year to an ultimate rate of 6% by the year 2000.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
- --------------------------------------------------------------------------------
U.S. retiree health and life One percentage point
insurance benefit plans (millions) Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 2.2 $ (1.8)
Effect on postretirement benefit obligation $22.8 $(19.3)
- --------------------------------------------------------------------------------
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. These plans include those of DLW, acquired on
August 31, 1998. The following tables summarize the balance sheet impact as well
as the benefit obligations, assets, funded status and rate assumptions
associated with pension benefits.
- --------------------------------------------------------------------------------
Non-U.S. defined-benefit Pension Benefits
plans (millions) 1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation as of January 1 $ 127.4 $ 125.5
Service cost 6.3 5.7
Interest cost 12.3 8.8
Plan participants' contributions 1.4 1.1
Plan amendments -- 0.5
Acquisition 164.6 --
Effect of settlements (0.5) (1.3)
Effect of special termination benefits 0.5 --
Foreign currency translation adjustment 12.8 (9.2)
Actuarial loss 10.2 2.2
Benefits paid (9.8) (5.9)
- --------------------------------------------------------------------------------
Benefit obligation as of December 31 $ 325.2 $ 127.4
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets as of January 1 $ 95.5 $ 84.5
Actual return on plan assets 16.7 15.4
Acquisition 35.1 --
Employer contribution 6.3 2.5
Plan participants' contribution 1.4 1.1
Foreign currency translation adjustment 1.9 (2.1)
Benefits paid (9.8) (5.9)
- --------------------------------------------------------------------------------
Fair value of plan assets as of December 31 $ 147.1 $ 95.5
- --------------------------------------------------------------------------------
Funded status $(178.1) $ (31.9)
Unrecognized net actuarial gain (21.1) (21.8)
Unrecognized transition obligation 1.6 1.4
Unrecognized prior service cost 4.9 5.3
- --------------------------------------------------------------------------------
Net amount recognized $(192.7) $ (47.0)
- --------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets consist of:
- --------------------------------------------------------------------------------
Pension Benefits
(millions) 1998 1997
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 2.2 $ 3.2
Accrued benefit liability (195.3) (50.6)
Intangible asset 0.2 0.2
Other comprehensive income 0.2 0.2
- --------------------------------------------------------------------------------
Net amount recognized $(192.7) $ (47.0)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Non-U.S. pension plans with benefit obligations Pension Benefits
in excess of assets (millions) 1998 1997
- --------------------------------------------------------------------------------
Projected benefit obligation, December 31 $192.5 $46.8
Accrued benefit obligation, December 31 186.3 45.1
Fair value of plan assets, December 31 0.6 --
- --------------------------------------------------------------------------------
43
The components of pension cost are as follows:
- --------------------------------------------------------------------------------
Non-U.S. defined-benefit Pension Benefits
plans (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost of benefits earned
during the year $ 6.3 $ 5.7 $ 5.3
Interest cost on projected
benefit obligation 12.3 8.8 8.6
Expected return on plan assets (7.4) (6.8) (5.9)
Amortization of transition obligation 0.3 0.3 0.7
Amortization of prior service cost (benefit) 0.4 0.4 (0.1)
Recognized net actuarial gain (0.2) (0.2) (0.1)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 11.7 $ 8.2 $ 8.5
- --------------------------------------------------------------------------------
The funded status of non-U.S. defined-benefit plans was determined using
the assumptions presented in the table below.
- --------------------------------------------------------------------------------
Pension Benefits
Non-U.S. defined-benefit plans 1998 1997
- --------------------------------------------------------------------------------
Weighted-average assumption as of December 31:
Discount rate 6.25% 7.00%
Expected return on plan assets 6.25% 8.00%
Rate of compensation increase 3.50% 4.75%
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Treasury share changes for 1998, 1997 1996 and 19951996 are as follows:
- --------------------------------------------------------------------------------
Years ended
December 31 (thousands) 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Common shares
Balance at beginning of year 11,759.5 10,714.6 15,014.1
14,602.1
Stock purchases/(1)/purchases(1) 389.5 1,299.2 1,357.6 795.7
Stock issuance activity, net/(2)/net(2) (292.3) (254.3) (5,657.1) (383.7)
- --------------------------------------------------------------------------------
Balance at end of year 11,856.7 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 companyCompany 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 3,661,0004,017,000 shares through December 31, 1997,1998, with a
total cash outlay of $218.7$248.1 million, including 1,281,000355,000 repurchased in 1997.1998.
In June 1998, the Company halted purchases of its common shares under the
common share repurchase program in connection with its announcement to purchase
Triangle Pacific and DLW.
The balance of each component of other comprehensive income as of December
31, 1998, and December 31, 1997, is presented in the table below.
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Foreign currency translation adjustments
and hedging activities $ 8.7 $ 1.7
Minimum pension liability adjustments 16.7 14.5
- --------------------------------------------------------------------------------
Total $25.4 $16.2
- --------------------------------------------------------------------------------
The related tax effects allocated to each component of other comprehensive
income are presented in the table below.
- --------------------------------------------------------------------------------
Before-Tax Tax After-Tax
(millions) Amount Benefit Amount
- --------------------------------------------------------------------------------
Foreign currency translation
adjustments and hedging activities $ 7.0 $ 0.0 $ 7.0
Minimum pension liability adjustments 13.8 11.6 2.2
- --------------------------------------------------------------------------------
Total $20.8 $11.6 $ 9.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other comprehensive income
reclassification adjustments (millions) 1998 1997
- --------------------------------------------------------------------------------
Unrealized holding gains arising during period $ 12.8 $ --
Less:
Reclassification adjustment for gains
included in net income (12.8) --
- --------------------------------------------------------------------------------
Net unrealized gains on securities $ 0.0 $ --
- --------------------------------------------------------------------------------
44
PREFERRED STOCK PURCHASE RIGHTS PLAN
In 1996 the Board of Directors renewed the company'sCompany's 1986 shareholder rights
plan and in connection therewith declared a distribution of one right for each
share of the company'sCompany'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,Company, either acquires beneficial
ownership of shares representing 20% or more of the voting power of the companyCompany
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.Company. If thereafter any person or group becomes the beneficial owner of
28% or more of the voting power of the companyCompany or if the companyCompany is the
surviving company in a merger with a person or group that owns 20% or more of
the voting power of the company,Company, then each owner of a right (other than such 20%
shareholder) would be entitled to purchase shares of companyCompany common stock having
a value equal to twice the exercise price of the right. Should the companyCompany 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'sCompany's common stock. The
rights have no voting power nor do they entitle a holder to receive dividends.
At the company'sCompany's option, the rights are redeemable prior to becoming exercisable
at five cents per right. The rights expire on March 21, 2006.
SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------------------------------------------------------------------------
Selected operating expenses (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Maintenance and repair costs $ 112.3 $ 107.3 $ 105.3
Research and development costs 42.2 47.8 55.2
Advertising costs 41.2 19.3 25.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other expense (income), net (millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest and dividend income $ (3.3) $ (4.9) $ (6.5)
Foreign exchange, net loss 0.5 0.5 1.2
Dal-Tile gain (12.8) -- --
Domco litigation expense 12.3 -- --
Deferred compensation 1.0 0.5 --
Discontinued businesses 0.3 0.8 (2.8)
Minority interest (0.9) 0.6 0.3
Other 1.2 0.3 0.9
- --------------------------------------------------------------------------------
Total $ (1.7) $ (2.2) $ (6.9)
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
(millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest paid $ 48.6 $ 23.5 $ 20.7
Income taxes paid $ 35.3 $ 54.5 $ 65.5
- --------------------------------------------------------------------------------
Acquisitions:
Fair value of assets acquired $1,031.9 $ 32.6 $ --
Cost in excess of net assets acquired 948.3 -- --
Less:
Liabilities assumed 804.5 28.4 --
- --------------------------------------------------------------------------------
Cash paid, net of cash acquired $1,175.7 $ 4.2 $ --
- --------------------------------------------------------------------------------
LEASES
The Company rents certain real estate and equipment. Several leases include
options for renewal or purchase and contain clauses for payment of real estate
taxes and insurance. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases. Rental expense
was $26.1 million in 1998, $15.5 million in 1997, and $13.1 million in 1996.
Triangle Pacific leases a plant and related equipment in Beverly, West Virginia.
The lease agreement contains a purchase option of $1 until 2018. As a result,
the present value of the remaining future minimum lease payments is recorded as
a capitalized lease asset and related capitalized lease obligation. Assets under
this capital lease as included in the Consolidated Balance Sheets are as
follows:
- --------------------------------------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Land $ 3.8 $ --
Building 4.5 --
Machinery and equipment 21.5 --
- --------------------------------------------------------------------------------
Total assets $29.8 $ --
- --------------------------------------------------------------------------------
Less accumulated amortization 4.8 --
- --------------------------------------------------------------------------------
Net assets $25.0 $ --
- --------------------------------------------------------------------------------
45
Future minimum payments at December 31, 1998, by year and in the aggregate,
under the Triangle Pacific lease and other operating leases having noncancelable
lease terms in excess of one year were as follows:
- --------------------------------------------------------------------------------
Scheduled minimum lease payments Capital Operating
(millions) leases leases
- --------------------------------------------------------------------------------
1999 $ 2.0 $ 9.7
2000 4.2 8.0
2001 0.8 4.6
2002 0.8 3.1
2003 2.2 2.2
Thereafter 3.3 13.8
- --------------------------------------------------------------------------------
Total $13.3 $41.4
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
The table below 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 1998
- --------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Earnings (loss) from continuing businesses $ (9.3) 39.8 $(0.23)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
Dilutive options 0.6
Earnings (loss) available for
common shareholders $ (9.3) 40.4 $(0.23)/1/
- --------------------------------------------------------------------------------
For the year ended 1997
- --------------------------------------------------------------------------------
Basic Earnings per Share
Earnings from continuing businesses $185.0 40.6 $ 4.55
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Dilutive options 0.4
Earnings available for common shareholders $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 shareholders $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 shareholders 0.6
- --------------------------------------------------------------------------------
Diluted Earnings per Share
Dilutive options 0.4
Common shares issuable under the ESOP 2.6
Earnings available for common shareholders $161.0 42.1 $ 3.82
- --------------------------------------------------------------------------------
Note 1: Diluted earnings (loss) per share from continuing businesses for 1998
was antidilutive.
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 is 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 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.
46
ENVIRONMENTAL MATTERS
The Company incurred capital expenditures of approximately $6.7 million in 1998,
$1.2 million in 1997 and $3.0 million in 1996 for environmental compliance and
control facilities and anticipates comparable annual expenditures for those
purposes for the years 1999 and 2000. 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 ("CAA") and the final implementing regulations
promulgated by various state agencies. Until all new CAA regulatory requirements
are known, uncertainty will remain regarding future estimates of capital
expenditures.
As with many industrial companies, Armstrong is currently involved in
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"), and similar state laws at approximately 22 sites.
In most cases, Armstrong is one of many potentially responsible parties ("PRPs")
who have 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 among the
PRPs. 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 and former 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. Such recoveries, where probable, have been
recorded as an asset.
Reserves of $18.3 million at December 31, 1998, and $9.3 million at
December 31, 1997, were for potential environmental liabilities that the Company
considers probable and for which a reasonable estimate of the probable 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, $18.3 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.
LITIGATION AND RELATED MATTERS
- ------------------------------
ASBESTOS-RELATED LITIGATION
PERSONAL INJURY LITIGATION
The companyCompany is one of many defendants in approximately 83,000154,000 pending claims as
of December 31, 1997,1998, 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 companyCompany generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its - 59 -
involvement with asbestos-containing insulation products. The companyCompany
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 companyCompany 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 companyCompany
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 companyCompany 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.
Georgine47
Amchem Settlement Class Action
Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern
District
- ------------------
District of Pennsylvania on January 15, 1993, that included essentially all
future personal injury claims against members of the Center for Claims
Resolution ("Center"), including the company.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 companyCompany
believes that an alternative claims resolution mechanism similar to GeorgineAmchem is
likely to emerge.
- 60 -
Asbestos-related liabilityRecent Events
During 1998, pending claims increased by 71,000 claims. This increase was higher
than previously anticipated. The Company and its outside counsel believe the
last halfincrease in claims filed during 1998 was partially due to acceleration of
1997, the company assessed the impactpending claims as a result of the Supreme Court's decision on Amchem and
additional claims that had been filed in the tort system against other
defendants (and not against Center members) while Amchem was pending.
Asbestos-Related Liability
The Company continually evaluates the nature and amount of recent Supreme Court rulingclaim
settlements and their impact on itsthe Company's projected asbestos resolution and
defense costs. In doing so, the company reviewed,Company reviews, among other things, its recent
and 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 Georgineprevious estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the companyCompany has recorded $251.7 million on the balance sheet as an estimated minimumits share of
liability to defend and resolve probable and estimable asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. This estimate includes an assumption that the
number of new claims currently pendingfiled annually will be less than the number filed in 1998
as discussed above under "Recent Events." Of this amount, management expects to
incur approximately $80.0 million in 1999 and tohas reflected this amount as a
current liability. The Company believes it can reasonably estimate the number
and nature of future claims that may be filed through 2003. Thisduring the next six years. However
for claims that may be filed beyond that period, management believes that the
level of uncertainty is management's best
estimatetoo great to provide for reasonable estimation of the
minimum liability, although potentialnumber of future costs for claims, could range upthe nature of such claims, or the cost to an additional $387 million or an estimated maximumresolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of approximately $639 million.$274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.
Because of the uncertainties related to asbestos
litigation, it is not possible to estimate the number of personal injuryclaims, the ultimate
settlement amounts, and similar matters, it is extremely difficult to obtain
reasonable estimates of the amount of the ultimate liability. The Company's
evaluation of the range of probable liability is primarily based on known
pending claims and an estimate of potential claims that mayare likely to occur and
can be reasonably estimated. The estimate of likely claims to be filed after 2003in the
future is subject to a greater degree of uncertainty each year into the future.
As additional experience is gained regarding claims and settlements or their defenseother new
information becomes available regarding the potential liability, the Company
will reassess its potential liability and resolution costs. Therefore,revise the company's estimatedestimates as appropriate.
Because, among other things, payment of the 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. Managementextend over many
years, 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 companyCompany 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.
48
PROPERTY DAMAGE LITIGATION
The Company is also one of many defendants in eight pending claims as of
December 31, 1998, brought by public and private building owners. These claims
include allegations of damage to buildings caused by asbestos-containing
products and generally seek compensatory and punitive damages and equitable
relief, including reimbursement of expenditures, for removal and replacement of
such products. 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.
INSURANCE COVERAGE
The company'sCompany'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.Company. The
companyCompany 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.
The insurance carriers that provide personal injury products hazard,
nonproducts or property damage coverages include the following: 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 (now part of AIG); 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 nonproducts (general liability) coverages.
California Insurance Coverage Lawsuit
Trial court decisions in the insurance lawsuit filed by the companyCompany 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 companyCompany has
resolved most personal injury products hazard coverage matters with its solvent
carriers through the Wellington Agreement, referred to below,above, 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.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.Company.
Insurance Recovery Proceedings
A substantial portion of the company'sCompany'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 companyCompany 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. The Company has entered
into a settlement with a number of the carriers resolving its access to
coverage.
49
Other proceedings against non-Wellington carriers may become necessary.
- 63 -
An insurance asset in the amount of $291.6$264.8 million is recorded on the
balance
sheetConsolidated Balance Sheet. Of this amount, approximately $26 million represents
partial settlement for previous claims which will be paid in a fixed and
determinable flow and is reported at its net present value discounted at 6.35%.
The total amount recorded reflects the company'sCompany's belief in the availability of
insurance in this amount, based upon the company'sCompany's success in insurance
recoveries, recent settlement agreements that provide such coverage, the
nonproducts recoveries by other companies and the opinion of outside counsel.
Such insurance is either available through settlement or probable of recovery
through negotiation, litigation or 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 withprocess which is in the
insurance
carriers. The company does not believe that after-tax effecttrial phase of binding arbitration. Of the $264.8 million asset, $16.0 million
has been recorded as a current asset reflecting management's estimate of the
shortfall
willminimum insurance payments to be material either to the financial condition of the company or to its
liquidity.received in 1999.
CONCLUSIONS
The companyCompany 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 GeorgineAmchem settlement vehicle may emerge, or the scope of its
insurance coverage ultimately deemed available.
The company has assessedCompany continually evaluates the nature and amount of recent claim
settlements and their impact ofon the recent Supreme Court ruling on itsCompany's projected asbestos resolution and
defense costs. In doing so, the Company reviews, among other things, its recent
and 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 previous estimates based on the Amchem projection and its recent
experience. Subject to the uncertainties, limitations and other factors referred
to above and based upon its experience, the companyCompany has recorded on the balance sheet $251.7 million as a minimum
estimated its share of
liability to defend and resolve probable and estimable
asbestos-related personal injury
claims. The Company's estimation of such liability that is probable and
estimable through 2004 ranges from $424.7 million to $813 million. The Company
has concluded that no amount within that range is more likely than any other,
and therefore has reflected $424.7 million as a liability in the accompanying
consolidated financial statements. Of this amount, management expects to incur
approximately $80.0 million in 1999 and has reflected this amount as a current
liability. The Company believes it can reasonably estimate the number and nature
of future claims currently pending and tothat may be filed through 2003. Thisduring the next six years. However for claims
that may be filed beyond that period, management believes that the level of
uncertainty is management's best estimatetoo great to provide for reasonable estimation of the minimum liability,
although potentialnumber of
future costs for these claims, could range upthe nature of such claims, or the cost to an additional
$387 million or an estimated maximumresolve them.
Accordingly, it is reasonably possible that the total exposure to personal
injury claims may be greater than the recorded liability. The increase in
recorded liability of approximately $639 million.$274.2 million in 1998 is primarily reflective of the
increases in claims filed in 1998, recent settlement experience and current
expectations about future claims.
Because of the uncertainties related to asbestos litigation, it is not
possible to precisely estimate the number of personal injury claims that may
ultimately 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 itIt is likelyreasonably possible there will be
such additional claims.claims beyond management's estimates. Management believes that the
potential additional costs for such additional 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 companyCompany 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$264.8 million is recorded on the
balance
sheetConsolidated Balance Sheet and reflects the company'sCompany's belief in the availability
of insurance in this amount, based upon the company'sCompany'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 either available through settlement or probable of recovery through
the ADR process, 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 companyCompany believes that a claims resolution mechanism alternative to the
GeorgineAmchem settlement will eventually emerge, and thatbut the resolution and defense
costs areliability is likely to be
higher than the earlier maximum mathematical projection in Georgine.Amchem.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the companyCompany 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 GeorgineAmchem settlement will
eventually emerge, and its experience, the companyCompany believes the asbestos-related
claims against the companyCompany would not be material either to the financial
condition of the companyCompany 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 -50
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.index on page
25. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the accompanying
index.index on page 25. 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, 19971998 and 1996,1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997,1998, 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 -2, 1999
51
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 1-52-5 of the Company's 19981999 Proxy Statement is incorporated
by reference herein.
Executive Officers of the Registrant
- ------------------------------------
George A. Lorch* -- Age 56;57; 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;45; 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 49,50, President, Worldwide Floor Products Operations
since February 1, 1997; President Floor Products Operations International
February 1, 1996, through February1996;-February 1, 1997; President American Olean Tile Company, Inc.
March 1, 1992 through December1992-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;54; 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 June1993-June 1, 1995.
Douglas L. Boles -- Age 40;41; 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;47; 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 PoltkinPlotkin & Kahn, law
firm,PLLC,
Washington, DC, August 1994-August 1996; Commissioner, Federal Trade Commission,
Washington, DC, October 1989-August 1994.
Frank A. Riddick, III -- Age 40;42; 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;52; Vice President and Controller since April 27, 1998;
Vice President and Treasurer, since May 8, 1996;1996-April 26, 1998; 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.52
E. Follin Smith -- Age 39; Vice President and Treasurer since August 1998; and
the following positions with General Motors Corporation (automobile
manufacturer): Chief Financial Officer, Delphi Chassis Systems, April 1997-July
1998; Assistant Treasurer, October 1994-April 1997; Vice President, Finance,
General Motors Acceptance Corporation, May 1994-September 1994; Treasurer,
General Motors of Canada Limited, June 1992-April 1994.
Dr. Bernd F. Pelz -- Age 55; ControllerPresident DLW Aktiengesellschaft since February 1, 1990.September
1998; Member of the Executive Board, DLW Aktiengesellschaft since April 1990,
and its Chairman since October 1991.
Floyd F. Sherman -- Age 59; President, Wood Flooring and Cabinet Operations
since July 24, 1998; and the following positions with Triangle Pacific Corp.:
Chairman of the Board and Chief Executive Officer since July 1992; President
1981-November 1994.
All information presented above is current as of March 1, 1998.1999. The term of
office for each Executive Officer in his or her 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, Sherman, Pelz and Ms. Owen.Mses. Owen and Smith.
(*)Member of the Executive Committee of the Board of Directors as of March 1,
1998.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
The information appearing in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 9 of the Company's 1999 Proxy Statement
is incorporated by reference herein.
Item 11. Executive Compensation
- --------------------------------
The information appearing in the sections captioned "Directors' Compensation" on
pages 5-66-7 and "Executive Officers' Compensation," (other than the information
contained under the subcaption "Performance Graph") and "Retirement Income Plan
Benefits," on pages 11-1512-17 of the Company's 19981999 Proxy Statement is incorporated
by reference herein.
Mr. Sherman, President, Wood Flooring and Cabinet Operations, one of the named
executives in the Summary Compensation Table on page 12 of the Company's 1999
Proxy Statement, has entered into a change of control agreement with the
Company. The change of control agreement is similar to the change of control
agreements which are described under the caption Change in Control Agreements on
page 13 of the Company's 1999 Proxy Statement, except that Mr. Sherman does not
participate in the Company's defined benefit retirement plan or its split-dollar
life insurance plan and his benefits under his agreement have been modified
accordingly. This agreement was entered into after the Company's 1999 Proxy
Statement went to print.
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 17pages 17-18 and "Directors' and Executive Officers' SecurityStock
Ownership" on page 7pages 8-9 of the Company's 19981999 Proxy Statement is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Not applicable.The information appearing under the biography of H. Jesse Arnelle appearing on
page 3 of the Company's 1999 Proxy Statement is incorporated by reference
herein.
PART IV
-------
53
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
The financial statements and schedulesschedule 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 -25.
54
a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
- --------
No. 3(a) Copy of registrant'sRegistrant's By-laws, as amended effective March 9, 1998.1998, are
incorporated by reference herein from registrant's 1997 Annual
Report on Form 10-K wherein they appear as Exhibit 3(a).
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)4(c) 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)4(d) 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. 4(e) Copy of registrant's Credit Agreement (364-day) dated as of
October 29, 1998, among the registrant, The Chase Manhattan Bank
as administrative agent, and listed banks.
No. 4(f) Copy of registrant's Credit Agreement (5-year) dated as of October
29, 1998, among the registrant, The Chase Manhattan Bank as
administrative agent, and listed banks.
No. 4(g) Registrant's Indenture, dated as of August 6, 1996, between the
Registrant and The Chase Manhattan Bank, formerly known as
Chemical Bank, as successor to Mellon Bank, N.A., as Trustee, is
incorporated herein by reference from registrant's registration
statement on Form S-3/A dated August 14, 1996.
No. 4(h) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $200,000,000 of 6.35% Senior Notes Due 2003 and
$150,000,000 of 6 1/2% Senior Notes Due 2005.
55
No. 4(i) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $180,000,000 7.45% Senior Quarterly Interest
Bonds Due 2038.
No. 10(i)(a) Copy ofRegistrant's Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the registrant
and other companies.companies is incorporated by reference herein from
registrant's 1997 Annual Report on Form 10-K wherein it appeared
as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution 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(i)(d) Copy of registrant's Amendment No. 1 to Credit Agreement
included herein as Exhibit 10(i)(c).
No. 10(i)(e) Agreement and Plan of Merger dated as of June 12, 1998, among
the registrant, Triangle Pacific Corp., and Sapling Acquisition,
Inc., is incorporated by reference herein from registrant's Form
8-K filed on June 15, 1998, wherein it appeared as Exhibit 10.1.
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,Copy of agreement between DLW and Dr. Bernd F. Pelz, 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). amended.*
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'sCopy of 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).December 14, 1998. *
No. 10(iii)(e) Registrant'sCopy of registrant's Retirement Benefit Equity Plan (formerly
known as the Excess Benefit Plan), as amended is incorporated by
reference herein fromApril 27, 1998. *
No.10(iii)(f) Copy of 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).September 21, 1998. *
No. 10(iii)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). *
56
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'sCopy of 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).amended April 27, 1998. *
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 10.10, provided that a
revised schedule, identifying the officers that are a party to
that agreement, is filed herewith. *
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 computation10(iii)(m) Copy of registrant's Bonus Replacement Retirement Plan, dated as
of January 1, 1998. *
No. 11(a) Computation for basic earnings per shareshare.
No. 11(b) Computation for diluted 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.per share.
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. 27.127 Financial Data Schedule
No. 27.2 Restated Financial Data Schedule
No. 27.3 Restated Financial Data ScheduleStatement
* Compensatory Plan
- 70 -57
b. During the last quarter of 1997, noThe following reports on Form 8-K were filed.filed during the last quarter of
1998:
1. On October 21, 1998, the registrant filed a current report on Form 8-K
announcing its third quarter 1998 results.
2. On November 2, 1998, the registrant filed a current report on Form 8-K
announcing that it had completed an underwritten public offering under its
existing shelf registration statement (File No. 333-6333) of $180 million
aggregate principal amount of 7.45% Senior Quarterly Interest Bonds due
2038.
3. On November 19, 1998, the registrant filed a current report on Form 8-K
announcing its expectation to take a charge in the fourth quarter of 1998
of approximately $78 million primarily to reflect a work force reduction.
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 GeorgineAmchem settlement will be negotiated);
anticipated efficiencies relating to acquisitions; 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 companyCompany 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
-------------------------------15, 1999
-------------------------
58
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.Edward R. Case Vice President and Controller
(Principal Accounting Officer)
H. Jesse Arnelle Director
Van C. Campbell Director
Donald C. Clark Director
Judith R. Haberkorn Director
John A. Krol Director
David M. LeVan Director
James E. Marley Director
David W. Raisbeck Director
Jerre L. Stead Director
By /s/ 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.
- 74 -15, 1999
59
SCHEDULE II
-----------
Valuation and Qualifying Reserves of Accounts Receivable
--------------------------------------------------------
For Years Ended December 31
---------------------------
(amounts in millions)
Provision for Losses 1998 1997 1996 1995
- -------------------- ---- ---- ----
Balance at Beginning of Year $10.9$ 12.8 $ 10.9 $ 8.7 $ 9.7
Additions Charged to Earnings 7.2 7.3 5.4
2.9
Deductions 11.4 5.4 3.2
3.9Balances acquired via acquisitions 12.0 -- --
Balance at End of Year $12.8 $10.9 $ 8.720.6 $ 12.8 $ 10.9
- --------------------------------------------------------------------------------
Provision for Discounts
- -----------------------
Balance at Beginning of Year $24.0 $20.3 $17.3$ 24.7 $ 24.0 $ 20.3
Additions Charged to Earnings 93.3 76.7 74.5
82.2
Deductions 88.8 76.0 70.8 79.2
Balance at End of Year $24.7 $24.0 $20.3$ 29.2 $ 24.7 $ 24.0
- --------------------------------------------------------------------------------
Total Provision for Discounts and Losses
- --------------------------------------------------------------------------
Balance at Beginning of Year $34.9 $29.0 $27.0$ 37.5 $ 34.9 $ 29.0
Additions Charged to Earnings 100.5 84.0 79.9
85.1
Deductions 100.2 81.4 74.0
83.1Balances acquired via acquisitions 12.0 -- --
Balance at End of Year $37.5 $34.9 $29.0$ 49.8 $ 37.5 $ 34.9
60
a. The following exhibits are filed as a part of this Annual Report on Form
10-K:
Exhibits
- 75 -
EXHIBIT INDEX--------
No. 3(a) Copy of registrant'sRegistrant's By-laws, as amended effective March 9, 1998.1998, are
incorporated by reference herein from registrant's 1997 Annual
Report on Form 10-K wherein they appear as Exhibit 3(a).
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)4(c) 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)4(d) 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. 4(e) Copy of registrant's Credit Agreement (364-day) dated as of
October 29, 1998, among the registrant, The Chase Manhattan Bank
as administrative agent, and listed banks.
No. 4(f) Copy of registrant's Credit Agreement (5-year) dated as of October
29, 1998, among the registrant, The Chase Manhattan Bank as
administrative agent, and listed banks.
No. 4(g) Registrant's Indenture, dated as of August 6, 1996, between the
Registrant and The Chase Manhattan Bank, formerly known as
Chemical Bank, as successor to Mellon Bank, N.A., as Trustee, is
incorporated herein by reference from registrant's registration
statement on Form S-3/A dated August 14, 1996.
No. 4(h) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $200,000,000 of 6.35% Senior Notes Due 2003 and
$150,000,000 of 6 1/2% Senior Notes Due 2005.
No. 4(i) Copy of portions of the registrant's Board of Directors' Pricing
Committee's resolution establishing the terms and conditions of
the issuance of $180,000,000 7.45% Senior Quarterly Interest
Bonds Due 2038.
No. 10(i)(a) Copy ofRegistrant's Agreement Concerning Asbestos-Related Claims dated
June 19, 1985, (the "Wellington Agreement") among the registrant
and other companies.companies is incorporated by reference herein from
registrant's 1997 Annual Report on Form 10-K wherein it appeared
as Exhibit 10(i)(a).
No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution 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).
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No. 10(i)(d) Copy of registrant's Amendment No. 1 to Credit Agreement
included herein as Exhibit 10(i)(c).
No. 10(i)(e) Agreement and Plan of Merger dated as of June 12, 1998, among
the registrant, Triangle Pacific Corp., and Sapling Acquisition,
Inc., is incorporated by reference herein from registrant's Form
8-K filed on June 15, 1998, wherein it appeared as Exhibit 10.1.
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,Copy of agreement between DLW and Dr. Bernd F. Pelz, 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). amended.*
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'sCopy of 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).December 14, 1998. *
No. 10(iii)(e) Registrant'sCopy of registrant's Retirement Benefit Equity Plan (formerly
known as the Excess Benefit Plan), as amended is
incorporated by reference herein fromApril 27, 1998. *
No.10(iii)(f) Copy of 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).September 21, 1998. *
No. 10(iii)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'sCopy of 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).amended April 27, 1998. *
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 10.10, provided that a
revised schedule, identifying the officers that are a party to
that agreement, is filed herewith. *
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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 computation10(iii)(m) Copy of registrant's Bonus Replacement Retirement Plan, dated as
of January 1, 1998. *
No. 11(a) Computation for basic earnings per shareshare.
No. 11(b) Computation for diluted 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.per share.
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. 27.127 Financial Data Schedule
No. 27.2 Restated Financial Data Schedule
No. 27.3 Restated Financial Data ScheduleStatement
* Compensatory Plan
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