UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 20052006
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
ARMSTRONG HOLDINGS,WORLD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
| Pennsylvania | ||||
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
| P. O. Box 3001, Lancaster, Pennsylvania | 17604 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (717) 397-0611
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Common Stock ($0.01 par value) | ||
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 ¨
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. ¨[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x NoLarge accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
The aggregate market value of the Common Stock of Armstrong Holdings,World Industries, Inc. held by non-affiliates based onwas not publicly traded as of the closing price ($2.42 per share) onend of the over-the-counter (OTC) Bulletin Board (trading symbol ACKHQ) on Junesecond quarter (June 30, 2005, was approximately $98.1 million.2006). As of February 10, 2006,March 23, 2007, the number of shares outstanding of registrant’s Common Stock was 40,664,461.
ARMSTRONG WORLD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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|
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Registrant’s telephone number, including area code (717) 397-0611
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 ¨
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
56,341,091.
Documents Incorporated by Reference
None
Uncertainties Affecting Forward-Looking Statements
Our disclosures here and in other public documents and comments contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Those statements provide our future expectations or forecasts, and can be identified by our use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “outlook,” etc. in discussions of future operating or financial performance or the outcome of contingencies such as liabilities or legal proceedings.
Any of our forward-looking statements may turn out to be wrong. Actual future results may differ materially. Forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We undertake no obligation to update any forward-looking statement.
You should take into account risks and uncertainties that affect our business, operations and financial condition in evaluating any investment decision involving Armstrong. It is not possible to predict all factors that could cause actual results to differ materially from expected and historical results. The discussion in the “Risk Factors” section below at Item 1A.1A is a summary of what we currently believe to be our most significant risk factors. Related disclosures in subsequent 10-K, 10-Q and 8-K reports should also be consulted.
| ITEM 1. | BUSINESS |
GeneralIntroduction
Armstrong World Industries, Inc. (“AWI” or “the Company”) is a Pennsylvania corporation incorporated in 1891. On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in order to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability. On October 2, 2006, AWI’s plan of reorganization (the “POR”), as confirmed by the U.S. District Court for the District of Delaware by order dated August 18, 2006, became effective, and AWI emerged from Chapter 11.
Armstrong Holdings, Inc. (“AHI”) is a Pennsylvania corporation and, as of September 30, 2006, was the publicly held parent holding company of AWI. Armstrong Holdings, Inc.’s only significant asset and operation iswas its indirect ownership, through Armstrong Worldwide, Inc. (a(“AWWD,” a Delaware Corporation)corporation), of all of the capital stock of AWI. We include separateUpon AWI’s POR becoming effective on October 2, 2006, all then-current shares of AWI were cancelled, and AHI was not entitled to any distribution under the POR in respect of its former equity interest in AWI. AHI, AWWD and AWI have a settlement (“the Settlement”) of claims pending court approval in AWI’s Chapter 11 case. See Note 1 to the Consolidated Financial Statements for additional information about AWI’s Chapter 11 case and the Settlement.
In connection with its emergence from bankruptcy on October 2, 2006 (the “Effective Date”), AWI adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Adopting fresh-start reporting has resulted in material adjustments to the historical carrying amount of reorganized Armstrong’s assets and liabilities. See Note 3 to the consolidated financial statements for Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries in this report because both companies have public securities that are registered under the Securities Exchange Act of 1934 (the “Securities Exchange Act”). The differences between themore information. As a result, our post-emergence financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries are primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. In 2005, we reversed a $1.6 million contingent liability of Armstrong Holdings, Inc. that was originally established when Armstrong Holdings, Inc. was formed, because the liability is no longer probable. Due tonot comparable with our pre-emergence financial statements. Despite the lack of material differencescomparability, we have combined the results of the Predecessor Company (which represent the first nine months of 2006) with the results of the Successor Company (which represent the last three months of 2006) in the operations, when we refercertain sections of this report to provide a total year view of operating results. Combining pre-emergence and post-emergence results is not in this document to Armstrong Holdings, Inc. and its subsidiaries as “AHI,” “Armstrong,” “we” and “us,” we are also effectively referring to AWI and its subsidiaries. We use the term “AWI” when we are referring solely to Armstrong World Industries, Inc.
accordance with U.S. generally accepted accounting principles (“GAAP”).
We maintain a website at http://www.armstrong.com. Information contained on our website is not incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange Commission (“SEC”).
General
We are a leading global producer of flooring products and ceiling systems for use primarily in the construction and renovation of residential, commercial, institutional and institutionalresidential buildings. Through our United States (“U.S.”) operations and U.S. and international subsidiaries, we design, manufacture and sell flooring products (resilient,(primarily resilient and wood carpeting and sports flooring) and ceiling systems (primarily mineral fiber, fiberglass and metal), around the world. We also design, manufacture and sell kitchen and bathroom cabinets in the U.S.
Our business strategy focuses on product innovation, product quality and customer service. In our businesses, these factors are the primary determinants of market share gain or loss. Our objective is to ensure that anyone buying a floor or ceiling can find an Armstrong product that meets his or her needs. Our cabinet strategy is more focused – on stock cabinets in select geographic markets. In these segments, we have the same objectives: high quality, good customer service and products that meet our customers’ needs. Our markets are very competitive, which limits our pricing flexibility. This requires that we increase our productivity each year – both in our plants and in our administration of the businesses.
Chapter 11 Proceeding
On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of AWI’s wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The Chapter 11 cases are being jointly administered under case number 00-4471 (the “Chapter 11 Case”). Through October 1, 2006, AWI is operatingoperated its business and managingmanaged its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. On October 2, 2006, when all conditions precedent were met, AWI’s court-approved Plan of Reorganization became effective, and AWI emerged from Chapter 11. AWI’s two wholly-owned subsidiaries that commenced Chapter 11 proceedings at the same time as AWI remain in Chapter 11. See Note 1 of the Consolidated Financial Statements for information on the Chapter 11 Case and Note 3032 of the Consolidated Financial Statements for information on asbestos litigation.
Reportable Segments
Resilient Flooring ��— produces and sources a broad range of floor coverings primarily for homes and commercial and institutional buildings. Resilient FlooringManufactured products in this segment include vinyl sheet, vinyl tile, linoleum flooring, and luxury vinyl tile.tile, automotive carpeting and other specialized textile floor products. In addition, our Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs and colors. We sell these products to wholesalers, large home centers, retailers, contractors and to the manufactured homes industry.
Wood Flooring — produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (predominantly pre-finished), pre-finished engineered wood floors in various wood species (with oak being the primary species of choice) and related accessories. Virtually all of our Wood Flooring’s sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home centers under the brand names Bruce®, Hartco®, Robbins®, Timberland™Timberland®, Armstrong™, HomerWood®, Capella® and Armstrong™T. Morton™.
Textiles and Sports Flooring (“TSF”) — produces carpeting and sports flooring products that are sold mainly in Europe. Carpeting products consist principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other sports surfaces. Our TSF products are sold primarily through retailers, contractors, distributors and other industrial businesses.
Building Products — produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment sources and sells woodcomplementary ceiling systems. Theproducts. Our products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems contractors and to resale distributors. Residential ceiling products are sold primarily in North America throughto wholesalers and retailers (including large home centers). Suspension system (grid) products manufactured by WAVE are sold by both Armstrong and our WAVE joint venture.
Cabinets — produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of company-ownedCompany-owned and independent distribution centers and through direct sales to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong™ and Bruce®.
Unallocated Corporate—Corporate -includes assets and expenses that have not been allocated to the business units. Unallocated Corporate assets are primarily deferred tax assets, cash, the Armstrong brand name and the U.S. prepaid pension cost. Expenses included in Unallocated Corporate are corporate departments’ expenses that have not been allocated to other reportable segments, and the U.S. pension credit. Expenses for our corporate departments (including computer services, human resources, legal, finance and other)certain benefit plans are allocated to the reportable segments when the departments provide specific work to the reportable segment and the expense allocation can be based on known metrics, such as time reporting, headcount or square-footage. The remaining expenses, which cannot be attributable to the reportable segments without a high degree of generalization, are reported in Unallocated Corporate.
The following chart illustrates the breakdown of our consolidated net sales for the year ended December 31, 20052006 by segment:
20052006 Consolidated Net Sales by Segment
(in $ millions)
See Note 34 of the Consolidated Financial Statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for additional financial information on our reportable segments.
Markets
The major markets in which we compete are:
North American Residential markets.Residential.The North American Residential markets account for nearlyNearly one-half of our total consolidated net sales.sales are for North American residential use. Our Resilient Flooring, Wood Flooring, Building Products and Cabinets segments sell products for use in the home. Homeowners have a multitude of finishing solution options for every room in their house. For flooring, they can choose from our vinyl and wood products, for which we are the market’sNorth America’s largest provider, or from our laminate and ceramic products. We compete directly with other domestic and international suppliers of these products. Our flooring products also compete with carpet, which we do not offer in this market.offer. Our ceiling products compete against mineral fiber and fiberglass products from other manufacturers, as well as drywall installations. In the kitchen and bath areas, we compete with thousands of other cabinet manufacturers that include large diversified corporations as well as small local craftsmen.
Our products are used in new home construction and existing home renovation work. Industry estimates are that existing home renovation (also known as replacement / remodel) work represents approximately two-thirds of the total North American residential market opportunity. Key U.S. statistics that indicate market opportunity include existing home sales (a key indicator for renovation opportunity), housing starts, housing completions, interest rates and consumer confidence. For our Resilient Flooring and Wood Flooring products, we believe there is some longer-term correlation between these statistics and our revenue, after reflecting a lag period between change in construction activity and our operating results of approximately several months. However, we believe that consumers’ preferences for product type, style, color, availability and affordability also significantly impact our revenue. Further, changes in
inventory levels and product focus at national home centers, which are our largest customers, can also significantly impact our revenue. Sales of our ceiling products in this marketfor residential use appear to follow the trend of existing home sales, with a several month lag period between change in existing home sales and our related operating results.
North American Commercial markets.Commercial. The North American Commercial markets account for approximately one-fourthNearly one-third of our total consolidated net sales.sales are for North American commercial use. Many of our products, primarily ceilings and Resilient Flooring, are used in commercial and institutional buildings. Our revenue opportunities come from new construction as well as renovation of existing buildings. Renovation work is estimated to represent approximately three-fourths of the total North American commercial market opportunity. We focus onMost of our revenue comes from four major segments of commercial building – office, education, retail and healthcare, as most of our revenue in these markets comes from these building segments.healthcare. We monitor U.S. construction starts (an indicator of U.S. monthly construction activity that provides us a reasonable indication of upcoming opportunity) and follow new projects. We have found that our revenue from new construction can lag behind construction starts by as much as one year. We also monitor office vacancy rates and general employment levels, which can indicate movement in renovation and new construction opportunities. We believe that these statistics, taking into account the time-lag effect, provide a reasonable indication of our future revenue opportunity from these markets.commercial renovation and new construction.
Non-North American markets.American. The non-North American marketsgeographies account for a little more thanabout one-fourth of our total consolidated net sales. The vast majority of our revenues generated outside of North America isare in Europe and isare commercial in nature. For the countries in which we have significant revenue, we monitor various national statistics (such as GDP) as well as known new projects. Revenues come primarily from new construction and renovation work.
The following table provides an estimate of our segments’ 20052006 net sales, by major markets.
(Estimated percentages of individual segment’s sales) | North American Residential | North American | Non-North American | Total | North Residential | North American Commercial | Non-North American | Total | ||||||||||||||||
Resilient Flooring | 45 | % | 30 | % | 25 | % | 100 | % | 40 | % | 30 | % | 30 | % | 100 | % | ||||||||
Wood Flooring | 95 | % | 5 | % | — | 100 | % | 95 | % | 5 | % | — | 100 | % | ||||||||||
Textiles & Sports Flooring | — | 5 | % | 95 | % | 100 | % | |||||||||||||||||
Building Products | 10 | % | 50 | % | 40 | % | 100 | % | 10 | % | 50 | % | 40 | % | 100 | % | ||||||||
Cabinets | 100 | % | — | — | 100 | % | 100 | % | — | — | 100 | % | ||||||||||||
Geographic Areas
We sell our products in more than 80 countries. Approximately 72%76% of our 20052006 revenue was derived from sales in the Americas, the vast majority of which came in the United States and Canada. The following chart illustrates the breakdown of our consolidated net sales for the year ended December 31, 20052006 by region, based on where the sale was made:
20052006 Consolidated Net Sales by Geography
(in $ millions)
See Note 34 of the Consolidated Financial Statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for financial information by geographic areas.
Customers
We use our market positionsreputation, capabilities, service and brand recognition to develop long-standing relationships with our customers. We principally sell products through building materials distributors, who re-sell our products to retailers, builders, contractors, installers and others. In the commercial sector, we also sell to several contractors and to subcontractors’ alliances. In the North American retail market,channel, which sells to end-users in the residential and light commercial and residential segments, we have important relationships with national home centers such as The Home Depot, Inc. and Lowe’s Companies, Inc. In the North American residential market,sector, we have important relationships with major homebuilders and buying groups. In the commercial market, we sell to several contractors and subcontractors’ alliances.
The following charts illustrate the estimated breakdown of our 20052006 consolidated net sales geographically by distribution channel:
 |  |
Net sales (in millions) to specific customers in excess of 10% of our consolidated net sales for 2006, 2005 2004 and 20032004 were:
Customer | 2005 | 2004 | 2003 | ||||||||
The Home Depot, Inc. | $ | 384.1 | $ | 393.4 | $ | 400.0 | |||||
Lowe’s Companies, Inc. | (1 | ) | (1 | ) | 318.7 | ||||||
Customer | 2006 | 2005 | 2004 | ||||||
The Home Depot, Inc. | $ | 364.1 | $ | 384.1 | $ | 393.4 | |||
Net sales to these customersThe Home Depot were recorded in our Resilient Flooring, Wood Flooring and Building Products segments. No other customers accounted for 10% or more of our total consolidated net sales.
Competition
There is strong competition in all of the reportable segments in which we do business. Principal methods of competition include product performance, product styling, service and price. Competition in the U.S. marketsNorth America comes from both domestic manufacturers and international producers.manufacturers. Additionally, some of our products compete with alternative products or finishing solutions, such as our resilient, laminate and wood flooring products competing with carpet products, and our ceiling products competing with drywall.drywall and exposed structure (also known as open plenum). There has beenis excess industry capacity for certain products in many geographic markets,some geographies, which tends to increase price competition. The following companies are our primary competitors:
Flooring segments – Amtico International, Inc., Anderson Hardwood Floors, Inc., Balta Industries, N.V., Beaulieu International Group, N.V., Columbia Forest Products, Inc., Congoleum Corporation, Faus, Inc., Forbo Holding AG, Gerflor Group, Interface, Inc., Krono Holding AG, Mannington Mills, Inc., Mohawk Industries, Inc., Pergo AB, Shaw Industries, Inc., Tarkett AG and Wilsonart International.
Building Products – Celotex Limited,CertainTeed, Chicago Metallic Corporation, Georgia-Pacific Corporation, Knauf AMF GmbH & Co. KG, Lafarge SA, Odenwald Faserplattenwerk GmbH, Rockfon A/S, Saint-Gobain and USG Corporation.
Cabinets – American Woodmark Corporation, Fortune Brands, Inc. and Masco CorporationCorporation.
Raw Materials
Raw materials essential to our businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The principal raw materials used in each business include the following:
Business | Principal Raw Materials | |
Resilient Flooring | Polyvinylchloride (“PVC”) resins and films, plasticizers, backings, limestone, pigments, linseed oil, inks and stabilizers | |
Wood Flooring | Hardwood lumber, veneer, coatings and stains | |
|
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Building Products | Mineral fibers, perlite, waste paper, clays, starches, and steel used in the production of metal ceilings and for our joint venture’s manufacturing of ceiling grids | |
Cabinets | Lumber, veneer, plywood, particleboard, fiberboard and components, such as doors and hardware | |
We also purchase significant amounts of packaging materials for all products and useconsume substantial amounts of energy, such as electricity and natural gas, and water in our manufacturing operations.
water.
In general, adequate supplies of raw materials are available to all of our businesses. However, availability can change for a number of reasons, including environmental conditions, laws and regulations, shifts in demand by other industries competing for the same materials, transportation disruptions and/or business decisions made by, or events that affect, our suppliers. There is no assurance that a significant shortage of raw materials will not occur.
Prices for certain high usage raw materials can fluctuate dramatically. Cost increases for these materials can have a significant adverse impact on our manufacturing costs. Given the competitiveness of our markets, we may not be able to recover the increased manufacturing costs through increasing selling prices to our customers.
Sourced Products
Some of the products that we sell are sourced from third parties. The primary sourced products include laminate, wood flooring, vinyl tile and ceramic products, specialized ceiling products, and installation-related products and accessories for some of our manufactured products. For certain sourced products, the majority of our purchases come from one supplier. Sales of sourced products represented between 10% to 15% of our total consolidated revenue in 2005, 2004 and 2003.
We purchase some of our sourced products from suppliers that are located outside of the U.S, primarily from Asia and Europe. The costs for these products are exposed to changes in foreign currency exchange rates, which can adversely affect our reported results from one period to the next. Our largest foreign currency exposure forSales of sourced products isrepresented approximately 10% to the Euro.
15% of our total consolidated revenue in 2006, 2005 and 2004.
In general, we believe we have adequate supplies of sourced products. WeHowever, we cannot guarantee that a significant shortage will not occur.
Hedging
We use financial instruments to hedge the following exposures: raw material and sourced product purchases denominated in foreign currency, cross-currency intercompany loans, and natural gas.energy. We use derivative financial instruments as risk management tools and not for speculative trading purposes. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Note 20 to the Consolidated Financial Statements of this Form 10-K for more information.
Patent and Intellectual Property Rights
Patent protection is important to our business in the U.S. and other markets. Our competitive position has been enhanced by U.S. and foreign patents on products and processes developed or perfected within Armstrong or obtained through acquisitions and licenses. In addition, we also benefit from our trade secrets for certain products and processes.
Patent protection extends for varying periods according to the date of patent filing or grant and the legal term of a patent in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies. Although we consider that, in the aggregate, our patents, licenses and trade secrets constitute a valuable asset of material importance to our business, we do not regard any of our businesses as being materially dependent upon any single patent or trade secret, or any group of related patents or trade secrets.
Certain of our trademarks, including without limitation, house marks
, Armstrong™, Bruce®, Desso®, Hartco®, Robbins®, T. Morton™, Timberland®, Capella®, HomerWood® and DLW™, and product line marks Allwood™, Arteffects®, Axiom®, Cirrus®, Corlon®, Cortega®, Designer Solarian®, Excelon®, Fundamentals® , Medintech®, Natural Inspirations™Inspirations®, Nature’s Gallery®, Second Look®, Solarian®, ToughGuard® and Ultima™Ultima® are important to our business because of their significant brand name recognition. Trademark protection continues in some countries as long as the mark is used, and continues in other countries as long as the mark is registered. Registrations are generally for fixed, but renewable, terms.
Employees
As of December 31, 2005,2006, we had approximately 14,90014,500 full-time and part-time employees worldwide, with approximately 10,5009,900 employees located in the United States. Approximately 9,9009,700 of the 14,90014,500 are production and maintenance employees, of whom approximately 7,5007,100 are located in the U.S. Approximately 72%69% of the production and maintenance employees in the U.S. are represented by labor unions. This percentage includes all production and maintenance employees at our plants and warehouses where labor unions exist, regardless of whether or not the employees actually pay union dues.exist. Outside the U.S., most of our production employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms.
Of our 14,500 employees, approximately 1,000 are associated with the principal operating companies of our Textiles and Sports Flooring segment, which was classified as a discontinued operation during the fourth quarter of 2006 (see Note 7 to the Consolidated Financial Statements for more information).
Research & Development
Research and development (“R&D”) activities are important and necessary in helping us improve our products’ competitiveness. Principal R&D functions include the development and improvement of products and manufacturing processes. We spent $48.5$48.8 million in 2006, $48.0 million in 2005 $47.0and $46.5 million in 2004 and $46.1 million in 2003 on R&D activities worldwide.
Environmental Matters
Most of our manufacturing and certain of our research facilities are affected by various federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities.
We are actively involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and similar state “Superfund” laws at 28 sites.6 off-site locations. We have also been investigating and/or remediating environmental contamination allegedly resulting from past industrial activity at certain of our4 domestic and 5 international current or former plant sites. Certain of AWI’s environmental liabilities are subject to dischargewere discharged through its Chapter 11 Case while others arewere not. Those environmental obligations that AWI has with respect to property that it owns or
operates or for which a non-debtor subsidiary is liable are likely to bewere unaffected by the Chapter 11 Case. Therefore, AWI and its subsidiaries will be required to continue meeting their ongoing environmental compliance obligations at such properties.
See Note 30Liabilities of $6.3 million and $27.3 million at December 31, 2006 and December 31, 2005, respectively were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the Consolidated Financial Statements for a full description of our environmental matters.probable liability could be made.
Information Filed With the Bankruptcy Court
Under applicable bankruptcy law, AWI iswas required to file periodically with the Bankruptcy Court various documents, including certain financial information on an unconsolidated basis.basis, while it was operating under Chapter 11. This information includesincluded statements, schedules, and monthly operating reports in forms prescribed by Federal Bankruptcy Law. We caution that, while such materials are prepared according to requirements under Federal Bankruptcy Law. While they accurately provideprovided then-current information required under Federal Bankruptcy Law, they arewere nonetheless unconsolidated, unaudited, and arewere prepared in a format different from that used in our consolidated financial statements filed under the securities laws. Accordingly, we believe the substance and format do not allow meaningful comparison with our regular publicly disclosed consolidated financial statements. The materials filed with the Bankruptcy Court arewere not prepared for the purpose of providing a basis for an investment decision relating to the stock of AHI or the debt securities of AWI, or for comparison with other financial information filed with the SEC.
Notwithstanding the foregoing, mostMost of AWI’s filings with the Bankruptcy Court are available to the public at the office of the Clerk of the Bankruptcy Court. Those filings may also be obtained through private document retrieval services. We undertake no obligation to make any further public announcement with respect to the documents filed with the Bankruptcy Court or any matters referred to in them.
See Note 1 of the Consolidated Financial Statements for discussion of certain items filed with the Bankruptcy Court, and www.armstrongplan.com for documents related to AWI’s Plan of Reorganization.
| ITEM 1A. | RISK FACTORS |
As noted in the introductory section titled, “Uncertainties Affecting Forward-Looking Statements” above, our business, operations and financial condition are subject to various risks. YouThese risks should take thembe taken into account in evaluating any investment decision involving Armstrong. It is not possible to predict or identify all factors that could cause actual results to differ materially from expected and historical results. The following discussion is a summary of what we believe to be our most significant risk factors. These and other factors could cause our actual results to differ materially from those in forward-looking statements made in this report.
We try to reduce both the likelihood that these risks will affect our businesses and the damage they could have if they do occur. But, no matter how accurate our foresight, how well we evaluate risks, and how effective we are at mitigating them, it is still possible that one of these problems or some other issue could have serious consequences for us.us, up to and including a materially adverse effect. See related discussions in this document and our other SEC filings for more details and subsequent disclosures.
Asbestos and Chapter 11
Asbestos personal injury claims are our biggest risk. Our balance sheet currently reflects an implied asbestos liability for AWI that results in negative equity for us. The size of our asbestos liability has not been finally determined in our Chapter 11 reorganization case. It could end up being substantially larger or smaller than the amount currently shown on our balance sheet. Even if that liability should be substantially reduced (for example by federal legislation), we may still have negative equity. Consequently an investment in Armstrong’s stock during our Chapter 11 Case is highly uncertain and speculative. See the discussions of our Chapter 11 Case and of proposed asbestos legislation in this document and in past SEC filings for details.
Claims, Litigation and Regulatory Actions
While we strive to ensure that our products comply with applicable government regulatory standards and internal requirements, and that our products perform effectively and safely, customers from time to time could claim that our products do not meet contractual requirements, and users could be harmed by use or misuse of our products. This could give rise to breach of contract, warranty or recall claims, or claims for negligence, product liability, strict liability, personal injury or property damage. The building materials industry has been subject to claims relating to silicates, mold, PVC, formaldehyde, toxic fumes, fire-retardant properties and other issues, as well as for incidents of catastrophic loss, such as building fires. Product liability insurance coverage may not be available or adequate in all circumstances. In addition, claims may arise related to patent infringement, environmental liabilities, distributor terminations, commercial contracts, antitrust or competition law, employment law and employee benefits issues, and other regulatory matters. While we have in place processes and policies to mitigate these risks and to investigate and address such claims as they arise, we cannot predict the costs to defend or resolve such claims.
Construction activity variability and the size of ourthe market opportunity
Our businesses have greater sales opportunities when construction activity is strong and, conversely, have fewer opportunities when such activity declines. Construction activity tends to increase when economies are strong, interest rates are favorable, government spending is strong, and consumers are confident. Since most of our sales are in the U.S., its economy is the most important for our business, but conditions in Europe, Canada and Asia also are relevant.
Raw materials and sourced product issues
The cost and availability of raw materials, packaging materials and energy are critical to our operations. For example, we use substantial quantities of natural gas, petroleum-based raw materials, hardwood lumber and mineral fiber in our manufacturing operations. The cost of these items has been volatile in recent years and availability has sometimes been tight. We source some of these materials from a limited number of suppliers, which increases the risk of unavailability. Limited availability could cause us to reformulate products or to limit our production. The impact of increased costs is greatest where our ability to pass along increased costs through price increases on our products is limited, whether due to competitive pressures or other factors.
Consumer preference and competition
Our customers consider our products’ pricing,performance, product styling, and performance, and our customer service and price when deciding whether to purchase our products. Shifting consumer preference in our highly competitive markets, e.g. from residential vinyl products to other hard-surface flooring products, styling preferences or inability to offer new competitive performance features could hurt our sales. These risks are inherent in our highly competitive markets. For certain products, there is excess industry capacity in several geographic markets, which tends to increase competition, based on price as well as on other factors. Anddoes competition from overseas competitors who have awith lower cost structure is a particular threat in some areas, such as our U.S. flooring businesses.structures.
International trade and operations
A significant portion of our products move in international trade, particularly among the U.S., Canada, Europe and Asia. Also, approximately 30% of our annual revenues are from operations outside the U.S. Our international trade is subject to currency exchange fluctuations, trade regulations, import duties, logistics costs and delays and other related risks. In addition, our international business isThey are also subject to variable tax rates, credit risks in emerging markets, political risks, uncertain legal systems, restrictions on repatriating profits to the U.S., and loss of sales to local competitors following currency devaluations in countries where we import products for sale.
Challenges in executing operational restructuring actions
We monitor how effectively and profitably our businesses service our customers. To stay competitive, we look for ways to make our operations more efficient and effective. We reduce, move orand expand our plants and operations as needed, and we currently have several of these actions in various stages of completion.needed. Each action generally involves substantial planning and capital investment. We can err in planning and executing our actions, which could create risks tohurt our customer service and cause unplanned costs.
Labor contracts
Most of our manufacturing employees are represented by unions and are covered by collective bargaining or similar agreements that must be periodically renegotiated. Although we believeanticipate that we will reach new contracts as older ones expire, our negotiations may result in a significant increase in our costs. Failure to reach new contracts could lead to work stoppages, which could have a material adverse effect on our operations.
hurt production, revenues, profits and customer relations.
Dependence on key customers
Some of our businesses are dependent on a few key customers. For example, much of our North America revenue comes from sales to home center retailers, including The Home Depot, Inc. and Lowe’s Companies, Inc. Together these customers account for approximately 20% of our consolidated total sales. We do not have long-term contracts with these customers.them. The loss of sales to one of these major customers, or changes in our business relationship with them, could have a material adverse impact onhurt both our results.revenues and profits.
| ITEM 2. | PROPERTIES |
Our world headquarters are in Lancaster, Pennsylvania. We own a 100-acre, multi-building campus comprising the site of our corporate headquarters, most operational headquarters, our U.S. R&D operations and marketing, and customer service headquarters. Altogether, our headquarters’ operations occupy approximately one million square feet of floor space.
We produce and market Armstrong products and services throughout the world, operating 4143 manufacturing plants in 12 countries as of December 31, 2005.2006. Three of our plants are leased and the remaining 3840 are owned. We have 2426 plants located throughout the United States. In addition, Armstrong has an interest through its WAVEtwo joint ventureventures in seveneight additional plants in five countries.
Business Segment | Number of Plants | Location of Principal Facilities | ||||
Resilient Flooring | 13 |
Canada, Germany, Sweden and the U.K. | ||||
Wood Flooring | ||||||
| ||||||
Building Products | 14 |
Germany and the U.K. | ||||
Cabinets | 2 | |||||
As of December 31, 2006, we also operated three plants in Belgium and The Netherlands in our now discontinued textiles and sports flooring business. See Note 7 to the Consolidated Financial Statements for further information regarding the sale of that operation.
Sales and administrative offices are leased and/or owned worldwide, and leased facilities are utilized to supplement our owned warehousing facilities.
For information on consolidation of production and related plant closures in 2005, see Note 13 of the Consolidated Financial Statements and “Cost Reduction Initiatives” in Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
Production capacity and the extent of utilization of our facilities are difficult to quantify with certainty. In any one facility, maximumutilization of our capacity and utilization varyvaries periodically depending upon demand for the product that is being manufactured. We believe our facilities are adequate and suitable to support the business. Additional incremental investments in plant facilities are made as appropriate to balance capacity with anticipated demand, improve quality and service, and reduce costs.
| ITEM 3. | LEGAL PROCEEDINGS |
See Note 3032 of the Consolidated Financial Statements, which is incorporated herein by reference, for a full description of our legal proceedings.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of stockholders during the fourth quarter of 2005.2006.
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
As a result of filing the PORFollowing AWI’s emergence from Chapter 11, AWI’s new common shares began trading on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (tradedOctober 10 under the ticker symbol “ACK”). Since November 14, 2002, Armstrong Holding’s common stock trades on the over-the-counter (OTC) Bulletin Board under the ticker symbol (ACKHQ)“AWI”. As of February 10, 2006,March 23, 2007, there were approximately 6,714156 holders of record of Armstrong Holding’sAWI’s Common Stock.
| First | Second | Third | Fourth | Total Year | |||||||||||
2005 | |||||||||||||||
Price range of common stock—high | $ | 2.82 | $ | 4.40 | $ | 3.10 | $ | 2.34 | $ | 4.40 | |||||
Price range of common stock—low | $ | 1.65 | $ | 1.50 | $ | 1.99 | $ | 1.49 | $ | 1.49 | |||||
2004 | |||||||||||||||
Price range of common stock—high | $ | 1.39 | $ | 1.55 | $ | 2.30 | $ | 3.51 | $ | 3.51 | |||||
Price range of common stock—low | $ | 0.95 | $ | 0.76 | $ | 1.16 | $ | 1.20 | $ | 0.76 | |||||
2006 | First | Second | Third | Fourth | Total Year | |||||||
Price range of common stock—high | n/a | n/a | n/a | $ | 42.50 | $ | 42.50 | |||||
Price range of common stock—low | n/a | n/a | n/a | $ | 30.00 | $ | 30.00 | |||||
2005 | ||||||||||||
Price range of common stock—high | n/a | n/a | n/a | n/a | n/a | |||||||
Price range of common stock—low | n/a | n/a | n/a | n/a | n/a | |||||||
There were no dividends declared or paid during 20052006 or 2004. The DIP Facility stipulates that AWI will not declare or pay any dividends either directly or indirectly and bankruptcy law bars dividends by companies in Chapter 11.
2005.
No companyCompany securities were repurchased by the companyCompany during 2006 or 2005.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following data is presented for continuing operations.
| (Dollars in millions except for per-share data) | For Year | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
Income statement data | ||||||||||||||||||||||
Net sales | $ | 3,558.4 | $ | 3,497.3 | $ | 3,259.0 | $ | 3,172.3 | $ | 3,138.7 | ||||||||||||
Cost of goods sold | 2,821.1 | 2,811.0 | 2,597.4 | 2,404.5 | 2,364.7 | |||||||||||||||||
Selling, general and administrative expenses | 652.7 | 635.0 | 612.1 | 630.8 | 596.6 | |||||||||||||||||
Charge for asbestos liability, net | — | — | 81.0 | 2,500.0 | 22.0 | |||||||||||||||||
Goodwill impairment | — | 108.4 | — | — | — | |||||||||||||||||
Restructuring charges, net | 23.2 | 18.3 | 8.6 | 1.9 | 9.0 | |||||||||||||||||
Goodwill amortization | — | — | — | — | 22.8 | |||||||||||||||||
Equity (earnings) from joint venture | (39.3 | ) | (31.6 | ) | (20.8 | ) | (19.7 | ) | (16.2 | ) | ||||||||||||
Operating income (loss) | 100.7 | (43.8 | ) | (19.3 | ) | (2,345.2 | ) | 139.8 | ||||||||||||||
Interest expense | 8.5 | 8.4 | 9.0 | 11.3 | 12.7 | |||||||||||||||||
Other non-operating expense | 1.5 | 3.1 | 5.7 | 3.6 | 10.3 | |||||||||||||||||
Other non-operating (income) | (12.0 | ) | (6.4 | ) | (5.0 | ) | (7.5 | ) | (13.3 | ) | ||||||||||||
Chapter 11 reorganization (income) costs, net | (1.2 | ) | 6.9 | 9.4 | 23.5 | 12.5 | ||||||||||||||||
Income tax expense (benefit) | 2.2 | 24.6 | (1.6 | ) | (827.8 | ) | 43.2 | |||||||||||||||
Earnings (loss) from continuing operations before cumulative change in accounting principle | 101.7 | (80.4 | ) | (36.8 | ) | (1,548.3 | ) | 74.4 | ||||||||||||||
Per common share – basic (a) | $ | 2.51 | $ | (1.99 | ) | $ | (0.91 | ) | $ | (38.23 | ) | $ | 1.84 | |||||||||
Per common share – diluted (a) | $ | 2.50 | $ | (1.99 | ) | $ | (0.91 | ) | $ | (38.23 | ) | $ | 1.82 | |||||||||
Cumulative effect of a change in accounting principle, net of tax of $2.2 | — | — | — | (593.8 | ) | — | ||||||||||||||||
Earnings (loss) from continuing operations | 101.7 | (80.4 | ) | (36.8 | ) | (2,142.1 | ) | 74.4 | ||||||||||||||
Per common share – basic (a) | $ | 2.51 | $ | (1.99 | ) | $ | (0.91 | ) | $ | (52.89 | ) | $ | 1.84 | |||||||||
Per common share – diluted (a) | $ | 2.50 | $ | (1.99 | ) | $ | (0.91 | ) | $ | (52.89 | ) | $ | 1.82 | |||||||||
Earnings (loss) from discontinued operations | 10.4 | (0.4 | ) | (2.5 | ) | (0.7 | ) | 18.4 | ||||||||||||||
Net earnings (loss) | $ | 112.1 | $ | (80.8 | ) | $ | (39.3 | ) | $ | (2,142.8 | ) | $ | 92.8 | |||||||||
Per common share – basic (a) | $ | 2.77 | $ | (2.00 | ) | $ | (0.97 | ) | $ | (52.91 | ) | $ | 2.29 | |||||||||
Per common share – diluted (a) | $ | 2.75 | $ | (2.00 | ) | $ | (0.97 | ) | $ | (52.91 | ) | $ | 2.27 | |||||||||
Dividends declared per share of common stock | — | — | — | — | — | |||||||||||||||||
| For Year | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Average number of common shares outstanding (in millions) | 40.5 | 40.5 | 40.5 | 40.5 | 40.5 | |||||||||||||||||
Average number of employees | 14,900 | 15,400 | 15,800 | 16,700 | 16,800 | |||||||||||||||||
Balance sheet data (December 31) | ||||||||||||||||||||||
Working capital | $ | 1,137.9 | $ | 994.1 | $ | 943.3 | $ | 859.3 | $ | 748.0 | ||||||||||||
Total assets | 4,606.0 | 4,609.4 | 4,647.8 | 4,504.8 | 4,038.1 | |||||||||||||||||
Liabilities subject to compromise | 4,864.7 | 4,866.2 | 4,858.5 | 4,861.1 | 2,357.6 | |||||||||||||||||
Net long-term debt (b) | 21.5 | 29.2 | 39.4 | 39.9 | 50.3 | |||||||||||||||||
Shareholders’ equity (deficit) | (1,305.3 | ) | (1,411.7 | ) | (1,330.2 | ) | (1,346.7 | ) | 760.4 | |||||||||||||
| Successor Company | Predecessor Company | |||||||||||||||||||||||
(Dollars in millions except for per-share data) | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006(1) | Year 2005 | Year 2004 | Year 2003 | Year 2002 | ||||||||||||||||||
| Income statement data | ||||||||||||||||||||||||
Net sales | $ | 817.3 | $ | 2,608.6 | $ | 3,326.6 | $ | 3,279.1 | $ | 3,069.0 | $ | 2,998.2 | ||||||||||||
Cost of goods sold | 660.4 | 2,028.7 | 2,651.8 | 2,654.4 | 2,461.4 | 2,282.8 | ||||||||||||||||||
Selling, general and administrative expenses | 144.0 | 417.0 | 590.0 | 567.7 | 552.4 | 574.5 | ||||||||||||||||||
Charge for asbestos liability, net | — | — | — | — | 81.0 | 2,500.0 | ||||||||||||||||||
Goodwill impairment | — | — | — | 108.4 | — | — | ||||||||||||||||||
Restructuring charges, net | 1.7 | 10.0 | 23.0 | 17.9 | 2.3 | 2.2 | ||||||||||||||||||
Equity (earnings) from joint venture | (5.3 | ) | (41.4 | ) | (39.3 | ) | (31.6 | ) | (20.8 | ) | (19.7 | ) | ||||||||||||
Operating income (loss) | 16.5 | 194.3 | 101.1 | (37.7 | ) | (7.3 | ) | (2,341.6 | ) | |||||||||||||||
Interest expense | 13.4 | 5.2 | 7.7 | 7.9 | 8.9 | 10.3 | ||||||||||||||||||
Other non-operating expense | 0.3 | 1.0 | 1.5 | 3.1 | 5.7 | 3.6 | ||||||||||||||||||
Other non-operating (income) | (4.3 | ) | (7.2 | ) | (11.8 | ) | (6.4 | ) | (4.6 | ) | (7.3 | ) | ||||||||||||
Chapter 11 reorganization (income) costs, net | — | (1,955.5 | ) | (1.2 | ) | 6.9 | 9.4 | 23.5 | ||||||||||||||||
Income tax expense (benefit) | 3.8 | 726.6 | (1.2 | ) | 21.4 | — | (825.9 | ) | ||||||||||||||||
Earnings (loss) from continuing operations before cumulative change in accounting principle | 3.3 | 1,424.2 | 106.1 | (70.6 | ) | (26.7 | ) | (1,545.8 | ) | |||||||||||||||
Per common share – basic (a) | $ | 0.06 | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||
Per common share – diluted (a) | $ | 0.06 | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||
Cumulative effect of a change in accounting principle, net of tax of $2.2 | — | — | — | — | — | (593.8 | ) | |||||||||||||||||
Earnings (loss) from continuing operations | 3.3 | 1,424.2 | 106.1 | (70.6 | ) | (26.7 | ) | (2,139.6 | ) | |||||||||||||||
Per common share – basic (a) | $ | 0.06 | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||
Per common share – diluted (a) | $ | 0.06 | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||
Earnings (loss) from discontinued operations | (1.1 | ) | (68.4 | ) | 5.0 | (9.1 | ) | (12.6 | ) | (3.2 | ) | |||||||||||||
Net earnings (loss) | $ | 2.2 | $ | 1,355.8 | $ | 111.1 | $ | (79.7 | ) | $ | (39.3 | ) | $ | (2,142.8 | ) | |||||||||
Per common share – basic (a) | $ | 0.04 | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||
Per common share – diluted (a) | $ | 0.04 | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||
Dividends declared per share of common stock | n/a | n/a | n/a | n/a | n/a | n/a | ||||||||||||||||||
Average number of common shares outstanding (in millions) | 55.0 | n/a | n/a | n/a | n/a | n/a | ||||||||||||||||||
Average number of employees | 14,500 | 14,700 | 14,900 | 15,400 | 15,800 | 16,700 | ||||||||||||||||||
| Balance sheet data (end of period) | ||||||||||||||||||||||||
Working capital | $ | 854.8 | $ | 1,128.0 | $ | 985.8 | $ | 933.3 | $ | 849.7 | ||||||||||||||
Total assets | 4,170.7 | 4,606.0 | 4,609.4 | 4,647.8 | 4,504.8 | |||||||||||||||||||
Liabilities subject to compromise | 1.3 | 4,869.4 | 4,870.9 | 4,863.2 | 4,865.8 | |||||||||||||||||||
Net long-term debt (b) | 801.5 | 21.5 | 29.2 | 39.4 | 39.9 | |||||||||||||||||||
Shareholders’ equity (deficit) | 2,164.7 | (1,319.9 | ) | (1,425.3 | ) | (1,345.0 | ) | (1,361.0 | ) | |||||||||||||||
| (1) | Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
NotesNotes::
| (a) | See definition of basic and diluted earnings per share in Note 2 of the Consolidated Financial Statements. The common stock of the Predecessor Company was not publicly traded. |
| (b) | Net long-term debt excludes debt subject to compromise for all periods presented. |
Certain prior year amounts have been reclassified to conform to the current year presentation. See Note 2 of the Consolidated Financial Statements.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Separate financial statements for AHI and AWI and its subsidiaries are includedArmstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in this document because both have outstanding public securities. The difference between the financial statements of1891. Armstrong Holdings, Inc. (“AHI”) is a Pennsylvania corporation and, its subsidiaries and AWI and its subsidiaries is primarily due toas of September 30, 2006, was the formationpublicly held parent holding company of AWI. Armstrong Holdings, Inc.’s only operation was its indirect ownership, through Armstrong Worldwide, Inc. (a Delaware corporation), of all of the capital stock of AWI. Upon AWI’s Plan of Reorganization (the “POR”) becoming effective on October 2, 2006, all then-current shares of AWI were cancelled and AHI no longer has any ownership interest in AWI. When we refer to employee compensation-related stock activity. The following discussion“we”, “our” and analysis pertains“us” in this report, we are referring to both AHI and AWI and its subsidiaries. The AHI 2005 income statement (but notReferences in this report to “reorganized Armstrong” are to AWI as it was reorganized under the AWI income statement) includesPOR on October 2, 2006, and its subsidiaries collectively. We use the reversal of a $1.6 million contingent liability which was establishedterm “AWI” when AHI was created. This is the only significant difference in the financial statements.
we are referring solely to Armstrong World Industries, Inc.
This discussion should be read in conjunction with the financial statements and the accompanying notes included elsewhere in this Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation. This discussion contains forward-looking statements based on our current expectations, which are inherently subject to risks and uncertainties. Actual results and the timing of certain events may differ significantly from those referred to in such forward-looking statements. We undertake no obligation beyond what is required under applicable securities law to publicly update or revise any forward-looking statement to reflect current or future events or circumstances, including those set forth in the section entitled “Uncertainties Affecting Forward-Looking Statements” and elsewhere in this Form 10-K.
References toFinancial performance metrics excluding the translation effect of changes in foreign exchange rates are non-GAAP measures.not in compliance with U.S. generally accepted accounting principles (“GAAP”). We believe that this information improves the comparability of business performance by excluding the impacts of changes in foreign exchange rates when translating comparable foreign currency amounts. We calculate the translation effect of foreign exchange rates by applying the current year’sconstant foreign exchange rates to the equivalent period’speriods’ reported foreign currency amounts as reported in the prior year. Additionally, we reference operating income prior to goodwill impairment.amounts. We believe that this non-GAAP referencemetric provides a clearer picture of our operating performance. Furthermore, management evaluates the performance of the businesses excluding these items.the effects of foreign exchange rates.
In connection with its emergence from bankruptcy on October 2, 2006 (the “Effective Date”), AWI adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Adopting fresh-start reporting has resulted in material adjustments to the historical carrying amount of reorganized Armstrong’s assets and liabilities. See Note 3 to the consolidated financial statements for more information. As a result, our post-emergence financial statements are not comparable with our pre-emergence financial statements. Despite the lack of comparability, we have combined the results of the Predecessor Company (which represent the first nine months of 2006 and includes the impact of emergence) with the results of the Successor Company (which represent the last three months of 2006) to facilitate the year-to-year discussion of operating results in certain sections of this Form 10-K. The combined financial information for 2006 is merely cumulative and does not give pro forma effect to the Predecessor’s results as if the consummation of the Plan and the related fresh-start reporting and other adjustments had occurred at the beginning of the period presented. Combining pre-emergence and post-emergence results is not in accordance with GAAP.
We maintain a website at http://www.armstrong.com. Information contained on our website is not necessarily incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange Commission (“SEC”).
OVERVIEW
We are a leading global producer of flooring products and ceiling systems for use primarily in the construction and renovation of residential, commercial and institutional buildings. Through our United
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
States (“U.S.”) operations and U.S. and international subsidiaries, we design, manufacture and sell flooring products (resilient, wood, carpeting(primarily resilient and sports flooring)wood) and ceiling systems (primarily mineral fiber, fiberglass and metal) around the world. We also design, manufacture and sell kitchen and bathroom cabinets in the U.S. We own and operate 41As of December 31, 2006 we operated 43 manufacturing plants (including three plants related to discontinued operations) in 12 countries, including 2426 plants located throughout the United States. Through WAVE, our joint venture with Worthington Industries, Inc., we also have an interest in 7 additional plants in 5 countries that produce suspension system (grid) products for our ceiling systems.
We also have an interest in a plant from our 50% interest in Kunshan Holdings Limited.
We report our financial results through the following segments: Resilient Flooring, Wood Flooring, Textiles and Sports Flooring, Building Products, Cabinets and Unallocated Corporate. See “Reportable Segment Results” for additional financial information on our segments.
On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of AWI’s wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. The Chapter 11 cases are being jointly administered under case number 00-4471 (the “Chapter 11 Case”). Through October 1, 2006, AWI is operatingoperated its business and managingmanaged its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. On October 2, 2006, AWI’s court-approved Plan of Reorganization became effective, and AWI emerged from Chapter 11. AWI’s two wholly-owned subsidiaries that commenced Chapter 11 proceedings at the same time as AWI remain in Chapter 11. See Note 1 of the Consolidated Financial Statements for information on the Chapter 11 Case and Note 3032 of the Consolidated Financial Statements for information on asbestos litigation.
Our consolidated net sales for 2006 were $3.4 billion, approximately 3% greater than consolidated net sales in 2005. Operating income was $210.8 million in 2006, as compared to $101.1 million in 2005. Cash and cash equivalents decreased by $338.4 million in 2006, primarily due to distributions related to our emergence from bankruptcy. In 2006:
Building Products generated record sales and operating income, mainly due to continued strength in the U.S. commercial construction markets.
Wood Flooring’s operating performance reflected growth through the first two-thirds of the year, and significant weakness in the final third due to declines in the U.S. housing markets. The cumulative effect for the entire year was lower operating profit on slightly higher revenue.
Cabinetsdelivered a significantly improved operating performance on higher price realization, manufacturing efficiencies and better product mix.
Resilient Flooring also had improved operating performance, and was profitable despite declining revenue.
Corporate Unallocatedexpense improved by $39 million, primarily due to an increase in the U.S. pension credit.
Factors Affecting Revenues
For an estimate of our segments’ 2006 net sales by major markets, see “Markets” in Item 1. Business, of this Form 10-K.
Markets. We compete in building material markets around the world. The majority of our sales are in North America and Europe. During 2006, these markets experienced the following:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Our consolidated net sales for 2005 were $3.6 billion, approximately 2% greater than consolidated net sales in 2004. Excluding the translation effect of foreign exchange rates, net sales in 2005 increased by approximately 1% from net sales in 2004. Operating income was $100.7 million in 2005, as compared to operating income prior to non-cash goodwill impairment charges of $64.6 million in 2004. (For a reconciliation of non-GAAP measures, see “Results of Operations, 2005 Compared to 2004”.) 2004 operating income also included a $44.8 million fixed asset impairment charge for our European resilient flooring business. Cash and cash equivalents increased by $86.3 million in 2005, which was higher than the cash increase in 2004. In 2005:
Factors Affecting Revenues
For an estimate of our segments’ 2005 net sales by major markets, see “Markets” in Item 1. Business of this Form 10-K.
Markets. We compete in building material markets around the world. The majority of our sales opportunity is in the North American and European markets. During 2005, these markets experienced the following:
U.S. retail sales ofthrough building materials, garden equipment and supply stores (an indicator of home renovation activity) increased approximately 10%9.0% in 20052006 over sales levels in 2004.2005, according to figures from the U.S. Census Bureau. This wasgrowth has been partially due to the strong sales of existing homes duringin the periods,first half on 2006, after allowing for the usual lag for renovation-related expenditures. Continued strength in employment conditions and consumer confidence has also sustained solid retail sales.
For several years,Within specific market segments, vinyl flooring products measured as a percent of the total residentialcontinued to lose share to laminate flooring, market, has been declining, while laminate, ceramic tile and hardwood flooring products have increased. This trend of changing consumer preferences for flooring also continued in 2005. For 2006, we estimate the residential replacement markets will remain flat and that it is likely that new construction demand will decline from record 2005 levels. A key consideration in changes in market segments is that margins for products sold into new construction tend to be lower than those sold into the renovation segment. Further, we expect the category of vinyl products to
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
continue to decline in units sold, while laminate, ceramic and hardwood flooring should continue to increase.wood flooring.
The North American commercial market strengthened overall in 2005,2006 with renovation increasing in the office and education segments, and construction completions in the office, healthcare, retail and education segments increasing by approximately 2%14%, 14%, 10% and 7%, 9% and 9%, respectively. Industry statistics indicate that commercial starts could marginally improverespectively, in 2006, with improvements anticipated in office, education and health care, while the retail segment will decline slightly. Indications are for a further decline in office vacancy rates, which could also positively impact the renovation segment of this market.nominal dollar terms.
Strong global demand for steel contributed to increased raw material costs for our WAVE joint venture, which were offset by price increases. However, an extended steel shortage could cause U.S. construction starts to be delayed or postponed, which could reduce our commercial sales.
Growth continued across most Pacific Rim markets.
All of our sales.
2007 outlook for each is uncertain to varying degrees.
Quality and Customer Service. Our quality and customer service are critical components of our total value proposition. In 2005,2006, we experienced the following:
issues.
Pricing Initiatives. During 20052006 and 2004,2005, we modified prices in response to changes in costs for raw materials and energy and to market conditions and the competitive environment. The net impact of these pricing initiatives improved sales in 20052006 compared to 2004.2005.
The most significant of these pricing actions were:
Resilient Flooring implemented select price increases for commercial products during the year in response to inflationary cost pressures.
In Wood Flooring, there were no significant pricing actions in 2006.
Building Products implemented select price increases during the year in response to inflationary cost pressures.
In Cabinets, we increased prices for selected U.S. products several times in 2004 andimplemented a January 2006 price increase.
In certain cases, price increases realized are less than the announced price increases effective in the fourth quarterbecause of 2005. We also made price concessions for certain products and geographical regions to respond to competitive conditions.
We estimate that the various pricing actions provided a net increase to our total consolidated net sales in 2004, selling prices were increased on solid wood products in response2006 compared to increased lumber costs. In 2005 we decreased prices on solid wood products in response to declining lumber prices and competitive conditions.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
We estimate that the various pricing actions provided a net increase to our total consolidated net sales in 2005 compared to 2004 of approximately $38 million.
Impact From Major Customers’ Decisions. Lowe’s Companies, Inc. (“Lowe’s”), one of our largest customers, increased its purchasing of laminate flooring products from other suppliers in the second quarter of 2004. Further, Lowe’s advised us in 2004 that they would reduce the number of laminate flooring products they purchase from us starting in the first quarter of 2005. Our totalDue to this decision, laminate flooring sales declinedto Lowe’s were reduced by approximately 20%$20 million in 2005,2006 compared to 2004, primarily as a result of these actions. We currently estimate that the Lowe’s decision will incrementally reduce 2006 sales2005. That impact was largely offset by approximately $30 million.
Certain national retailers dedicated less of their selling space to vinyl flooring products as customer demand for these products declined. This action contributed to the salesdouble-digit volume decline experiencedgrowth in our Resilient Flooring Americas business.
other channels.
Factors Affecting Operating Costs
Operating Expenses. Our operating expenses consist of direct production costs (principally raw materials, labor and energy) and manufacturing overhead costs, costs to purchase sourced products and selling, general and administrative (“SG&A”) expenses.expenses.
Our largest individual raw material expenditures are for lumber and veneers, PVC resins, backings for various flooring products and plasticizers. Fluctuations in the prices of these raw materials are generally beyond our control and have a direct impact on our financial results. In 2005,2006, we experienced the following:
PVC is a widely used, oil-based raw material. We experience cost pressures on PVC when energy prices increase and when industrial demand for the material increases. In January 2005, a U.S. supplier ceased producing PVC resins. While we have been able to address our PVC needs from other suppliers, the reduced manufacturing capacity led to upward pricing pressure. During 2005, this pressure increased as hurricanes that affected the Gulf Coast of the U.S., and an October fire at a manufacturing facility of one of our PVC resin suppliers, reduced PVC production. CostOur cost to acquire PVC resin and plasticizers prices increased by approximately $40$11 million in 20052006 compared to 2004.2005. In 2006,2007, we expect further year-on-year increases.
We incurred approximately $14$17 million of additional costs for natural gas in 20052006 compared to 20042005 due to price increases. In 2006,2007, we expect further year-on-year increases, due to pricing pressures.
In our normal course of business, we transfer certain products between locations to take advantage of our production capabilities and to better service our customers’ needs. During 2005, we incurred approximately $17 million of additional freight costs, due to rising fuel costs and additional logistics measures taken to maintain customer service levels.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amountsbut at a lower pace than experienced in millions)
2006.
Cost Reduction Initiatives. During 2004, we implemented several significant manufacturing and organizational changes to improve our cost structure and enhance our competitive position. We did not initiate any additional manufacturing or organizational changes in 2005 but did incur costs in 2005 related to previously announced cost reduction initiatives and for changes to the U.S. defined benefit pension plan. The major 2004 initiatives were:
We ceased production of certain products at our Resilient Flooring manufacturing plant in Lancaster, Pennsylvania, transferring production to other Resilient Flooring plants.
We announced that we would cease production at our Building Products plant in The Netherlands. Acceptance of the closure proposal was received from the local works council in the fourth quarter of 2004. The plant ceased production in the first quarter of 2005, and production was transferred to another Building Products location.
We ceased production at our Cabinets manufacturing plant in Morristown, Tennessee, transferring production to other Cabinets plants.
We restructured the sales force and management structure in our North America flooring organization.
We announced that we would cease production at our Wood Flooring manufacturing plant in Searcy, Arkansas. Production ended in the first quarter of 2005, and was transferred to other Wood Flooring plants. We recorded an impairment charge related to this closure.
In 2006 we announced that we would cease production at our Wood Flooring manufacturing plant in Nashville, Tennessee.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
We incurred the following net expenses in 2006 to implement these cost reduction initiatives:
| Cost of Goods Sold | SG&A | Restructuring Charges | Total Expenses | |||||||||||
Resilient Flooring | $ | 10.1 | $ | 7.4 | $ | 9.9 | $ | 27.4 | ||||||
Wood Flooring | 0.7 | — | 1.4 | 2.1 | ||||||||||
Building Products | 0.2 | — | 0.5 | 0.7 | ||||||||||
Cabinets | — | — | — | — | ||||||||||
Corporate Unallocated | — | — | (0.1 | ) | (0.1 | ) | ||||||||
Total Consolidated | $ | 11.0 | $ | 7.4 | $ | 11.7 | $ | 30.1 | ||||||
Cost of goods sold includes $0.7 million of fixed asset impairments (incurred in the nine months ended September 30, 2006), $0.3 million of accelerated depreciation (incurred in the nine months ended September 30, 2006) and $10.0 million of other related costs in 2006 ($0.6 million incurred in the three months ended December 31, 2006 and $9.4 million incurred in the nine months ended September 30, 2006). The Resilient Flooring SG&A costs in 2006 (incurred in the nine months ended September 30, 2006) relate to the Lancaster Plant cost reduction initiative.
In 2006, we recorded a gain of $14.3 million from the sale of a warehouse which became available as a result of the Resilient Flooring cost reduction initiatives. This gain was recorded in SG&A.
We incurred the following net expenses in 2005 due to implementing these cost reduction initiatives:
| Cost of Goods Sold | Restructuring Charges | Total Expenses | |||||||
Resilient Flooring | $ | 12.7 | $ | 16.2 | $ | 28.9 | |||
Wood Flooring | 13.9 | 0.1 | 14.0 | ||||||
Textiles & Sports Flooring | — | 0.2 | 0.2 | ||||||
Building Products | 1.6 | 6.3 | 7.9 | ||||||
Cabinets | 1.2 | 0.4 | 1.6 | ||||||
Corporate Unallocated | — | — | — | ||||||
Total Consolidated | $ | 29.4 | $ | 23.2 | $ | 52.6 | |||
| Cost of Goods Sold | Restructuring Charges | Total Expenses | |||||||
Resilient Flooring | $ | 12.7 | $ | 16.2 | $ | 28.9 | |||
Wood Flooring | 13.9 | 0.1 | 14.0 | ||||||
Building Products | 1.6 | 6.3 | 7.9 | ||||||
Cabinets | 1.2 | 0.4 | 1.6 | ||||||
Corporate Unallocated | — | — | — | ||||||
Total Consolidated | $ | 29.4 | $ | 23.0 | $ | 52.4 | |||
Cost of goods sold includes $14.3 million of fixed asset impairments, $7.1 million of accelerated depreciation and $8.0 million of other related costs in 2005.
During 2004, we recordedWe incurred the following amounts relatedexpenses in 2004 due to both the above mentionedimplementing these cost reduction initiatives, and to the following:initiatives:
| Cost of Goods Sold | Restructuring Charges | Total Expenses | |||||||
Resilient Flooring | $ | 28.1 | $ | 4.5 | $ | 32.6 | |||
Wood Flooring | 0.8 | 1.6 | 2.4 | ||||||
Building Products | 2.5 | 10.9 | 13.4 | ||||||
Cabinets | 1.9 | 0.4 | 2.3 | ||||||
Corporate Unallocated | — | 0.5 | 0.5 | ||||||
Total Consolidated | $ | 33.3 | $ | 17.9 | $ | 51.2 | |||
Cost of goods sold includes $18.9 million of fixed asset impairment charge on oneimpairments, $13.2 million of our Wood Flooring plants that was closed in 2003.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
We incurred the following expensesrecorded a gain of $1.1 million in 2004 due to implementing these cost reduction initiatives:
| Cost of Goods Sold | Restructuring Charges | Total Expenses | |||||||
Resilient Flooring | $ | 28.1 | $ | 4.1 | $ | 32.2 | |||
Wood Flooring | 0.8 | 2.0 | 2.8 | ||||||
Textiles & Sports Flooring | 0.1 | 0.4 | 0.5 | ||||||
Building Products | 2.5 | 10.9 | 13.4 | ||||||
Cabinets | 1.9 | 0.4 | 2.3 | ||||||
Corporate Unallocated | — | 0.5 | 0.5 | ||||||
Total Consolidated | $ | 33.4 | $ | 18.3 | $ | 51.7 | |||
Cost of goods sold includes $18.9 million of fixed asset impairments, $13.2 million of accelerated depreciation and $1.3 million of other related costs.
We recorded gains withinWood Flooring SG&A in 2004 of $2.9 million in Wood Flooring and TSF related to salesthe sale of buildingsa building that had previously been reserved as part of a cost reduction initiatives.
initiative.
See Note 1315 of the Consolidated Financial Statements for more information on restructuring charges.
On-going Cost Reduction.We expect to incur additional expenses of approximately $32$0.4 million in 20062007 to implement the 2004these cost reduction initiatives. In addition to significant cost reduction programs we expect to realize a gain of approximately $15 million in the first half of 2006 from the sale of a warehouse which became available ashave an ongoing focus on continuously improving our cost structure.
As a result of one of these initiatives. Once completely implemented, we believe that the annual cost savings from our 2004 initiatives will be approximately $58 million, when compared to the 2004 cost baseline. These projected savings will not be fully realized until 2007. We will continue to evaluate additional cost reduction actionsinitiatives and our on-going improvement efforts, we have realized significant reductions in 2006.
our manufacturing conversion costs.
Employee Benefits. We recorded a pre-tax charge of $16.9 million in the fourth quarter of 2005 in cost of goods sold ($11.4 million) and SG&A ($5.5 million), related to changes made to the U.S. defined benefit pension plan. The changes are considered a curtailment under SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“FAS 88”). The changes are expected to reduce Armstrong’s retirement-related expenses by approximately $13 million in 2006 and $15 million in 2007, based on pension assumptions for 2006.
Non-cash Impairment Charges. 2004 included a $108.4 million charge for goodwill impairment and a $44.8 million charge for fixed asset impairment, both related to the European resilient flooring business.
See also “Results of Operations” for further discussion of fresh-start and other significant items affecting operating costs.
Factors Affecting Cash FlowFlows
Historically, excluding the cash demands for asbestos-related claims in 2000 and prior years and the effects of settlement accounting, we typically generate positive cash flow fromin our operating activities. The amount of cash generated in any one period is dependent on a number of factors, including the amount of operating profit generated and the amount of working capital (such as inventory, receivables and payables) required to operate our businesses. We typically invest in property, plant & equipment (“PP&E”) and computer software.
During 2005,2006, our cash and cash equivalents balancedecreased by $386.4 million for the first nine months and increased by$48.0 million during the final 3 months of 2006, for a net decrease of $338.4 million for the twelve months of 2006. This compared to an increase of $86.3 million which was $54.7for 2005. The year on year net reduction of $424.7 million more than during 2004. The increase, compared to 2004, was primarily due to proceeds received frompayments of $1.1 billion to the saleAsbestos PI Trust and other creditors upon emergence, and payments for acquisitions of some notes receivable for $38.3$60.5 million, andpartially offset by the proceeds from the sale of an equity affiliate for $20.6new debt of $800.0 million.
EmployeesDeferred Taxes
As of December 31, 2005, we had approximately 14,900 full-time and part-time employees worldwide. This compares to approximately 15,500 employeesOur consolidated balance sheet as of December 31, 2004.2006, includes total deferred tax assets of $1,082.4 million (see Note 16 to the Consolidated Financial Statements). Included in these amounts is a deferred tax asset of $552.7 million and $45.5 million, respectively, relating to the U.S. federal and state income tax benefits expected to be realized in future periods with respect to various federal and state net operating losses arising in 2006 and prior years as a result of the amounts paid to the Asbestos PI Trust in 2006. We have concluded, based on the weight of available evidence, that all but $19.8 million of these tax benefits are more likely than not to be realized in the future. This amount represents a decrease of $29.2 million from the valuation allowance previously recorded with respect to these tax benefits as of December 31, 2005.
In arriving at this conclusion, we considered the profit before tax generated for the years 1996 through 2005, as well as future reversals of existing taxable temporary differences and projections of future profit before tax. The decline largely reflects headcount reductions associated with cost reduction initiativesfederal income tax deduction resulting from the amounts paid to the Asbestos PI Trust created a net operating loss in Resilient Flooring.2006. Under the Internal Revenue Code, a net operating loss resulting from the payment of asbestos claims, including payments to the Trust, can be carried back and offset against our federal taxable income in either the two or the ten preceding years, generating a refund of taxes paid in those years. The Company is still evaluating the alternative elections, but has
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
assumed a two-year carryback for purposes of calculating the tax provision. In addition, the Company may apply the loss as a carryforward adjustment to reduce future taxes. If certain specified changes in our ownership should occur, there could be an annual limitation on the amount of the carryforwards that can be utilized; however, we cannot anticipate this change for purposes of our valuation allowances assessment. As a result, it is more likely than not that we will realize the federal deferred tax asset value relating to these carryforwards.
In contrast to the results under the Internal Revenue Code, most U.S. states do not allow the carryback of a net operating loss in any significant amount. As a result, most of the state tax benefits resulting from the amounts paid to the Asbestos PI Trust will be realized through a reduction of future state income tax liabilities by offsetting the net operating losses resulting from our payments to the Trust against future state taxable income. Based on projections of future taxable income (consistent with historical results and anticipated future trends) in the U.S. states in which we conduct business operations and the loss carryforward periods allowed by current state laws (generally 5 to 20 years), we have concluded that all but $19.8 million of the $45.5 million of state income tax benefits relating to our state net operating loss carryforwards is more likely than not to be realized.
Employees
As of December 31, 2006, we had approximately 14,500 full-time and part-time employees worldwide. This compares to approximately 14,900 employees as of December 31, 2005. The decline reflects headcount reductions in both production and staff positions as part of ongoing cost reduction efforts. Of our 14,500 employees, approximately 1,000 are associated with the principal operating companies of our Textiles and Sports Flooring segment, which was classified as a discontinued operation during the fourth quarter of 2006 (see Note 7 to the Consolidated Financial Statements for more information).
During 2005,2006, we negotiated six collective bargaining agreements, with no locations experiencing a work stoppage. Throughout 2006,2007, collective bargaining agreements covering certain employees at sixthree plants will expire. As of the date of this filing, no employees are working under an expired contract.
Late in September 2004, our Hoogezand, The Netherlands plant (see “Cost Reduction Initiatives” and Note 13 of the Consolidated Financial Statements) experienced a 14 day work stoppage unrelated to a collective bargaining agreement, which delayed shipments of certain products. This work stoppage did not have a material impact on operations.
CRITICAL ACCOUNTING ESTIMATES
ManyIn preparing our consolidated financial statements in accordance with U.S. generally accepted accounting entries require usprinciples, we are required to make estimates. These entries include asbestos-related liabilitycertain estimates and insurance assets, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers compensation, pension obligations, asset impairments, restructuring reserves, tax valuation allowances, general liability and environmental claims. When preparing an entryassumptions that requires an estimate to be made, we determine what factors are most likely to affect the estimate.reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We gatherevaluate our estimates and assumptions on an on-going basis, using relevant information relevant to these factors from inside and outside the company. This information is evaluatedCompany. We believe that our estimates and an estimate is made.
The followingassumptions are the critical accounting estimates that management believesreasonable. However, actual results may differ from what was estimated and could have a significant impact to the financial statements ifstatements.
We have identified the estimates and judgments used by management turn out to be incorrect. Management hasfollowing as our critical accounting estimates. We have discussed the application of these critical accounting estimates with our Audit Committee.
Asbestos-related EstimatesFresh-Start Reporting and Reorganization Value– We record contingent liabilities, including asbestos-related liabilities, when a loss is probable and the amountAs part of loss can be reasonably estimated. Prior to its Chapter 11 Filing, AWI estimated its probable asbestos-related personal injury liability based upon a variety of factors including 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 and the status and results of broad-based settlement discussions. As of September 30, 2000, AWI had recorded a liability of $758.8 million for its asbestos-related personal injury liability that it determined was probable and estimable through 2006. Due to the increased uncertainty created as a result of the Filing, the only change made to the previously recorded liability through the third quarter of 2002 was to recordour emergence from bankruptcy on October and November 2000 payments of $68.2 million against the accrual. The asbestos-related personal injury liability balance recorded at December 31, 2001 was $690.6 million, which was recorded in liabilities subject to compromise.
AWI filed an initial POR and disclosure statement with respect to the POR during the fourth quarter of 2002. In March 2003, AWI filed an amended POR and disclosure statement. Based upon the foregoing, the discussions AWI had with the different creditors’ committees and the hearings held before the Bankruptcy Court, management believed that it was reasonably likely that the asbestos-related personal injury liability would be satisfied substantially in the manner set forth in the POR. As a result, AWI concluded that it could reasonably estimate its probable liability for current and future asbestos-related personal injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the liability2, 2006, we implemented fresh-start reporting in accordance with AICPA Statement of Position 90-7 “Financial(“SOP 90-7”),Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”)Code. Accordingly, our assets, liabilities and equity were adjusted to fair value. In this regard, our consolidated financial statements for periods subsequent to October 2, 2006 reflect a new basis of accounting and are not comparable to our historical consolidated financial statements for periods prior to October 2, 2006.
Under fresh-start reporting, a reorganization value is determined and allocated to our net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141,Business Combinations. Adjustments necessary to state our balance sheet accounts at fair value were made based on the work of management, financial consultants and independent appraisals. The recorded asbestos-related liability for personal injury claimsestimates and assumptions used to derive the reorganization value and allocation of approximately $3.2 billion at December 31, 2005 and 2004, which was treated as a liabilityvalue to assets are inherently subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI Trust pursuant to the POR and a recovery value percentage for the allowed claims of the Asbestos PI Trust that is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims. See “Asbestos-Related Litigation” in Note 30 of the Consolidated Financial Statements for further discussion on the Asbestos PI Trust and the treatment of asbestos-related claims under the POR.significant
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
In Februarybusiness, economic and competitive uncertainties and contingencies, many of 2005,which are beyond our control. Modification to these assumptions could have significantly changed the U.S. District Court denied confirmationreorganization value, and hence the resultant fair values of our assets and liabilities.
Accordingly, the POR in its current form. On December 29, 2005, the U.S. Courtadoption of Appeals affirmed the District Court’s decisionfresh-start reporting has had a material effect on our consolidated financial statements and is based on assumptions that employ a high degree of judgment. See Notes 1 and 3 to deny confirmation of the POR. AWI filed a modified POR with the Court on February 21, 2006. AWI is also monitoring a proposed asbestos claims litigation reform bill in Congress. AWI is unable to predict when and if the modified POR will be confirmed and, if confirmed, when the POR will be implemented. See “Recent Developments and Next Steps in the Chapter 11 Process” in Note 1 of the Consolidated Financial Statements. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded asbestos-related personal injury liability are possible and could be material to AWI’s financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.
Additionally, AWI has a recorded asset of $98.6 million as of December 31, 2005 representing estimated insurance recoveries related to its asbestos liability. Approximately $79 million of the recorded asset is determined from agreed coverage in place. During the second quarter of 2003, AWI reduced its previously recorded insurance asset for asbestos-related personal injury claims by $73 million reflecting management’s assessment of probable insurance recoveries in light of an unfavorable ruling in an alternative dispute resolution procedure. See “Asbestos-Related Litigation” in Note 30 of the Consolidated Financial Statements for further discussion.
The total amount of the estimated insurance recoveries asset recorded reflects the belief in the availability of insurance in this amount, based upon prior success in insurance recoveries, settlement agreements that provide such coverage, the nonproducts recoveries by other companiesinformation relative to our reorganization and the opinion of outside counsel. In our opinion, such insurance is either available through settlement or probable of recovery through negotiation or litigation. Although AWI revised its recorded asbestos liability by $2.5 billion in the fourth quarter of 2002, no increase has been recorded in the estimated insurance recovery asset. While we believe that the process of pursuing disputed insurance coverage may result in additional settlement amounts beyond those recorded, there has been no increase in the recorded amounts dueassumptions used to the uncertainties remaining in the process. The estimate of probable recoveries may be revised depending on the developments in the matters discussed above as well as events that occur in AWI’s Chapter 11 Case.
value reorganized Armstrong.
U.S. Pension Credit and Postretirement Benefit Costs – We maintain pension and postretirement plans throughout the world, with the most significant plans located in the U.S. The U.S. defined benefit pension plans were closed to new salaried and salaried production employees on January 1, 2005. On January 13, 2006 we announced thatWe also froze benefits will be frozen for certain non-production salaried employees effective February 28, 2006. Our defined benefit pension and postretirement benefit costs are developed from actuarial valuations. These valuations are calculated using a number of assumptions, which are determined in accordance with generally accepted accounting principles (“GAAP”). Each assumption represents management’s best estimate of the future. The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets and the estimated inflation in health care costs. These assumptions are generally updated annually at the beginning of the year and applied in the valuations recorded for that year. However, we also updated each of these assumptions and adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” as part of adopting fresh-start reporting in accordance with SOP 90-7.
The discount rate is used to determine retirement plan liabilities and to determine the interest cost component of net periodic pension and postretirement cost. Our actuary provides the expected modified duration of the liabilities. Management determines the appropriate discount rate by referencing the yield on investment grade fixed-income securities of a similar duration (14 years) to that of the expected liabilities, as well asutilizes the yield for Moody’s AA-rated long-term corporate bonds.bonds as the primary basis for determining the discount rate. As of December 31, 2005,2006, we assumed a discount rate of 5.50%5.75% compared with a discount rate of 5.75%5.50% as of December 31, 20042005 for the U.S. plans. This decreaseincrease is consistent with the declineincrease in U.S. corporate bond yields during the year. The effects of the decreasedincreased discount rate which increases our liabilities, will be amortized against earnings as described below. An additionalA one-quarter percentage point decrease in the discount rate to 5.25%5.50% would increase 20062007 operating income by $0.2$1.2 million, while a one-quarter percentage point increase in the discount rate to 5.75% would reduce 2006 operating income by $0.1
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
million. A reduction in the discount rate would increase the present value of benefits earned in the current year as expected. However, this increase would be more than offset by the resulting decrease in the interest cost component of the pension expense calculation.
calculation would more than offset the increased service cost component. A one-quarter percentage point increase in the discount rate to 6.00% would reduce 2007 operating income by $0.9 million.
We have two U.S. defined benefit pension plans, a qualified funded plan and a nonqualified unfunded plan. For the funded plan, the expected long-term return on plan assets represents a long-term view of the future estimated investment return on plan assets. This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals on the expected performance of the equity and bond markets over 10 to 20 years. Over the last 10 years, the annualized return was approximately 9.1%9.3% compared to an average expected return of 8.7%8.6%. The expected long-term return on plan assets used in determining our 20052006 U.S. pension credit was 8.0%. The actual return on plan assets achieved for 20052006 was 9.3%12.8%. In accordance with GAAP, this excess will be amortized into earnings as described below. We do not expect to be required to make cash contributions to the qualified funded plan during 2006.2007. We have assumed a return on plan assets during 20062007 of 8.0%. A one-quarter percentage point increase or decrease in this assumption would increase or decrease 20062007 operating income by approximately $5.0$5.3 million. Contributions to the unfunded plan were $3.4$3.2 million in 20052006 and arewere made on a monthly basis to fund benefit payments. We estimate the contributions to be approximately $3.5 million in 2006.2007. See Note 1618 of the Consolidated Financial Statements for more details.
The estimated inflation in health care costs represents a long-term view (5-10 years) of the expected inflation in our postretirement health care costs. We separately estimate expected health care cost increases for pre-65 retirees and post-65 retirees due to the influence of Medicare coverage at age 65, as illustrated below:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
| Assumptions | Actual | |||||||||||||||||
| Post 65 | Pre 65 | Overall | Post 65 | Pre 65 | Overall | |||||||||||||
2004 | 11 | % | 9 | % | 10 | % | 6 | % | 11 | % | 7 | % | ||||||
2005 | 10 | 8 | 9 | (3 | ) | (2 | ) | (3 | ) | |||||||||
2006 | 9 | 7 | 8 | |||||||||||||||
Assumptions | Actual | |||||||||||||||||
| Post 65 | Pre 65 | Overall | Post 65 | Pre 65 | Overall | |||||||||||||
2005 | 10.0 | % | 8.0 | % | 9.0 | % | (3 | )% | (2 | )% | (3 | )% | ||||||
2006, nine months ended September 30 | 9.0 | 7.0 | 8.0 | |||||||||||||||
2006, three months ended December 31 | 12.0 | 11.5 | 11.8 | |||||||||||||||
2006, full year | 9 | (1 | ) | 6 | ||||||||||||||
2007 | 12.0 | 11.5 | 11.8 | |||||||||||||||
In accordance with GAAP, the difference between the actual and expected health care costs is amortized into earnings as described below. The overallAs of December 31, 2006, the percentage of health care cost increases are estimated to decrease by 1 percentage point per year until 2008,2014, after which it is constant at 6%5%. A one percentage point increase in the assumed health care cost trend rate would reduce 20062007 operating income by $1.5$0.7 million, while a one percentage point decrease in the assumed health care cost trend rate would increase 20062007 operating income by $1.8$0.8 million. See Note 1618 of the Consolidated Financial Statements for more details.
Actual results that differ from our various pension and postretirement plan estimates are captured as actuarial gains/losses and are amortized into future earnings over the expected remaining service period of plan participants, which is approximately 11 years depending on the participants in the plan, in accordance with GAAP. Changes in assumptions could have significant effects on earnings in future years.
We recorded U.S. pension credits of $20.3 million, $14.3 million and $11.6 million in 2005, 2004 and 2003, respectively, reflecting the net overfunded status of our U.S. pension plans and the amortization into earnings of the difference between our actual results and the estimates used in the valuation process. During 2005, we also recorded a curtailment charge of $16.9 million related to the freezing of benefits for certain non-production salaried employees. We recorded U.S. postretirement benefit costs of $29.8 million, $30.3 million and $36.8 million in 2005, 2004 and 2003, respectively.
Impairments of Long-Lived Tangible and Intangible Assets– We periodically review significant tangible and intangible assets, including goodwill, for impairment under the guidelines of the Financial Accounting Standards Board (“FASB”) Statement Nos. 142 – “Goodwill and Other Intangible Assets” (“FAS 142”) and 144 – “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). In accordance with these
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Statements, we review our businesses for indicators of impairment such as operating losses and/or negative cash flows. If an indication of impairment exists, we estimate the fair value and compare it to the carrying value of the asset. If the fair value is less than the carrying value of the asset, we record an impairment charge equal to the difference between the fair value and carrying value of the asset. The cash flow estimates are based on management’s analysis of information available at the time of the estimate. Actual cash flows in the future that turn out to be lower than the estimate could lead to significant future impairments. In connection with our adoption of fresh-start reporting upon emerging from Chapter 11, all long-lived tangible and intangible assets were adjusted to fair value. If subsequent testing (either as a result of required annual testing or as a result of a triggering event) indicates that new fair values are less than the values derived from fresh-start reporting, those amounts would be adjusted downward and our future statements of income would be impacted.
In 2005, we recorded fixed asset impairment charges of $17.6 millionSee Notes 10 and accelerated depreciation of $7.1 million, in cost of goods sold. The majority of the impairment charges related12 to fixed assets in our Wood Flooring and Resilient Flooring business segments. The fixed asset impairment charges were triggered by an evaluation of current production capacity and future production levels for certain product lines. See Note 8 of the Consolidated Financial Statements for further information.
In 2004, we recorded goodwill impairment charges for our European resilient flooring reporting unit of $108.4 million. See Note 10 of the Consolidated Financial Statements for further information.
In 2004, we also recorded fixed asset impairment charges of $64.7 million and accelerated depreciation of $13.7 million, in cost of goods sold. The majority of these charges were recorded in our European resilient flooring business, triggered by actual operating losses and negative cash flows, and due to the announcement of the partial closure of the Resilient Flooring manufacturing plant in Lancaster PA. See “Cost Reduction Initiatives” for further discussion. See Note 8 of the Consolidated Financial Statements for further discussion on the European resilient flooring fixed asset impairment.
In 2003, we recorded fixed asset impairment charges of $10.5 million and accelerated depreciation of $30.1 million, in cost of goods sold and fixed asset impairment charges of $2.8 million in SG&A expense. The majority of these charges were recorded as part of the closure of the Wood Flooring manufacturing plants in Port Gibson, MS and Warren, AK.
Sales-related Accruals – We provide direct customer and end-user warranties for our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or replacement of the defective product. We collect and analyze warranty claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and the products’ respective sales and the amount of current sales.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
We also maintain numerous customer relationships that incorporate different sales incentive programs (primarily volume rebates and promotions). The rebates vary by customer and usually include tiered incentives based on the level of customers’ purchases. Certain promotional allowances are also tied to customer purchase volumes. We estimate the amount of expected annual sales during the course of the year and use the projected sales amount to estimate the cost of the incentive programs. For sales incentive programs that are on the same calendar basis as our fiscal calendar, actual sales information is used in the year-end accruals.
The amount of actual experience related to these accruals could differ significantly from the estimated amounts during the year. If this occurs, we adjust our accruals accordingly. We maintained sales-related accruals of $73.0$79.3 million and $78.8$73.0 million as of December 31, 20052006 and 2004,2005, respectively. We record the costs of these accruals as a reduction ofto gross sales.
NEW ACCOUNTING PRONOUNCEMENTSIncome Taxes – Our effective tax rate is primarily determined based on our pre-tax income and the statutory tax rates in the geographies in which we operate. The effective tax rate also reflects the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
In accordance with the requirements for fresh-start reporting pursuant to SOP 90-7, the Company has adopted FASB Interpretation No. 48 (“FIN48”), Accounting for Uncertainty in Income Taxes, effective as of October 2, 2006. The transition adjustments, although not material in the aggregate, were shown as an adjustment to the opening fresh-start balance sheet as of October 2, 2006.
Deferred tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date. These deferred tax assets and liabilities assume that benefits are recorded at the highest amount that is more likely than not of being sustained through the tax audit cycle.
As further described in Note 16, our consolidated balance sheet as of December 2004,31, 2006 includes a total deferred tax asset of $1,082.4 million. Included in these amounts is a deferred tax asset of $552.7 million and $45.5 million, respectively, relating to the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which requires all share-based payment transactionstax benefits expected to be recognizedrealized in future periods with respect to various federal and state net operating losses arising primarily as a result of the amounts paid to the Asbestos PI Trust in 2006. We have estimated that all but $19.8 million of these tax benefits are more likely than not to be realized in the financial statements using a fair-value methodfuture.
We record valuation allowances to reduce our deferred tax assets if it is more likely than not that some portion or all of accounting. This Statement replaces FASB Statement No. 123the deferred tax assets will not be realized. As of December 31, 2006, we have recorded valuation allowances totaling $190.3 million for various state and supersedes APB Opinion No. 25. The Statement also requiresforeign net operating loss and tax credit carryforwards. While we have considered future taxable income in assessing the recognition of compensation expenseneed for the fair valuevaluation allowances based on our best available projections, if these estimates and assumptions change in the future or actual results differ from our projections, we may be required to adjust our valuation allowances accordingly.
Inherent in determining our effective tax rate are judgments regarding business plans and expectations about future operations. These judgments include the amount and geographic mix of any unvested stock option awards outstanding atfuture taxable income, limitations on usage of net operating loss carry-forwards after emergence from bankruptcy, potential tax law changes, the dateimpact of ongoing or potential tax audits, earnings repatriation plans and other future tax consequences.
We establish reserves for certain tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. We review these tax uncertainties in light of the changing facts and circumstances and adjust them when significant changes warrant it. We have a number of audits in process in various jurisdictions.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
adoption. BasedIf our actual results differ from any of the estimates and assumptions used, an adjustment affecting income tax expense would be necessary in the period that such determination is made, unless the change is related to a pre-emergence asset or liability that is required to be reflected as an adjustment to the fresh-start reporting opening balance sheet, pursuant to SOP 90-7. Such adjustment could be material to our financial statements.
ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN FUTURE PERIODS
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements,” which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. We do not expect any material impact from adopting FAS 157.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“FAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115,” which permits companies to measure financial instruments and certain other assets and liabilities at fair value on an April 2005 rulinginstrument by the SEC, the standardinstrument basis. FAS 159 is effective as offor fiscal years beginning after November 15, 2007. We are currently evaluating the beginning of the first annual reporting period that begins after June 15, 2005. Adoptioneffects of this standard on January 1, 2006 for our existing stock options will not have a material impactpronouncement on our consolidated resultsfinancial statements.
Management’s Discussion and Analysis of operations or financial condition because allFinancial Condition and Results of our outstanding stock options are fully vested.Operations
(dollar amounts in millions)
RESULTS OF OPERATIONS
Unless otherwise indicated, net sales in these results of operations are reported based upon the location where the sale was made. Certain prior year amounts have been reclassified to conform to the current year presentation. Please refer to Note 34 in the Consolidated Financial Statements for a reconciliation of operating income to consolidated income before income taxes, extraordinary items, discontinued operations, and cumulative effect of changes in accounting principles.
2006 COMPARED TO 2005
CONSOLIDATED RESULTS
| Successor | Predecessor | Combined | Predecessor | Change is Favorable/ (Unfavorable) | ||||||||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2006 | Year 2005 | As Reported | Excluding Effects of Foreign Exchange Rates(1) | |||||||||||||||||
Net Sales: | ||||||||||||||||||||||
Americas | $ | 606.9 | $ | 2,011.3 | $ | 2,618.2 | $ | 2,562.4 | 2.2 | % | 1.8 | % | ||||||||||
Europe | 172.2 | 499.4 | 671.6 | 643.7 | 4.3 | % | 4.8 | % | ||||||||||||||
Pacific Rim | 38.2 | 97.9 | 136.1 | 120.5 | 12.9 | % | 13.6 | % | ||||||||||||||
Total Consolidated Net Sales | $ | 817.3 | $ | 2,608.6 | $ | 3,425.9 | $ | 3,326.6 | 3.0 | % | 2.8 | % | ||||||||||
Cost of goods sold | 660.4 | 2,028.7 | 2,689.1 | 2,651.8 | ||||||||||||||||||
SG&A | 144.0 | 417.0 | 561.0 | 590.0 | ||||||||||||||||||
Restructuring charges, net | 1.7 | 10.0 | 11.7 | 23.0 | ||||||||||||||||||
Equity earnings | (5.3 | ) | (41.4 | ) | (46.7 | ) | (39.3 | ) | ||||||||||||||
Operating Income | $ | 16.5 | $ | 194.3 | $ | 210.8 | $ | 101.1 | Favorable | 99.7 | % | |||||||||||
Interest Expense | 13.4 | 5.2 | 18.6 | 7.7 | ||||||||||||||||||
Other non-operating expense | 0.3 | 1.0 | 1.3 | 1.5 | ||||||||||||||||||
Other non-operating (income) | (4.3 | ) | (7.2 | ) | (11.5 | ) | (11.8 | ) | ||||||||||||||
Chapter 11 reorganization (income), net | — | (1,955.5 | ) | (1,955.5 | ) | (1.2 | ) | |||||||||||||||
Income tax expense (benefit) | 3.8 | 726.6 | 730.4 | (1.2 | ) | |||||||||||||||||
(Gain) loss from discontinued operations | 1.1 | 68.4 | 69.5 | (5.0 | ) | |||||||||||||||||
Net earnings | $ | 2.2 | $ | 1,355.8 | $ | 1,358.0 | $ | 111.1 | ||||||||||||||
(1) | Excludes favorable foreign exchange rate effect in translation of $7.8 million on net sales and $2.0 million on operating income |
Consolidated net revenue grew 3%, with positive contributions from both price and mix offsetting a modest volume decline.
Net revenue in the Americas increased 2%, on volume growth in the Wood Flooring business and both price and mix improvement in the Building Products and Cabinets segments. Declines in Resilient Flooring volumes and lower Wood Flooring pricing partially offset this growth.
Excluding the translation effect of changes in foreign exchange rates, net revenue in the European markets grew by 5%, mainly in the Building Products segment. Improved product mix and price realization increased revenue and offset modest volume declines.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Excluding the translation effect of changes in foreign exchange rates, net revenue in the Pacific Rim increased 14% on volume and product mix improvement.
Operating expenses in 2006 were impacted by the effects of adopting fresh-start reporting, as a result of AWI emerging from Chapter 11 on October 2, 2006 (net sales were not impacted by fresh-start reporting). In addition, both 2006 and 2005 operating expenses were impacted by several other significant items. The fresh-start and other significant items, which impacted cost of goods sold (“COGS”), selling, general and administrative expenses (“SG&A”), restructuring charges and Equity Earnings, include:
Increase / (Reduction) in Expenses, reported in $ millions | |||||||||
| Item | Where Reported | 2006 | 2005 | ||||||
Fresh-Start(1): | |||||||||
Change in depreciation and amortization | COGS | $ | (1.3 | ) | — | ||||
Change in costs for benefit plans | COGS | (4.6 | ) | — | |||||
Impact on hedging-related activity | COGS | (1.0 | ) | — | |||||
Inventory-related costs | COGS | 29.6 | — | ||||||
Change in depreciation and amortization | SG&A | 2.8 | — | ||||||
Change in costs for benefit plans | SG&A | (2.3 | ) | — | |||||
Inventory-related costs (WAVE) | Equity Earnings | 3.7 | — | ||||||
Expenses from WAVE step-up | Equity Earnings | 1.7 | — | ||||||
| Other Significant Items: | |||||||||
Business interruption claim(2) | COGS | (4.7 | ) | (3.5 | ) | ||||
Settlement of breach of contract dispute | COGS | — | (6.4 | ) | |||||
Cost reduction initiatives expenses(3) | COGS | 11.0 | 29.4 | ||||||
Product warranty accrual(4) | COGS | 3.3 | — | ||||||
Pension curtailment charge(3) | COGS | — | 11.4 | ||||||
Fixed asset impairments | COGS | — | 2.7 | ||||||
Contribution to Armstrong Foundation(5) | SG&A | 5.0 | — | ||||||
Liability settlement related to a divested business(6) | SG&A | 2.8 | — | ||||||
Patent infringement settlement(7) | SG&A | (8.6 | ) | — | |||||
Cost reduction initiatives expenses(3) | SG&A | 7.4 | — | ||||||
Gain on sale of properties(8) | SG&A | (17.0 | ) | — | |||||
Pension curtailment charge(3) | SG&A | — | 5.5 | ||||||
Chapter 11 related post-emergence expenses(9) | SG&A | 4.6 | — | ||||||
Environmental charges | SG&A | — | 3.1 | ||||||
Fixed asset impairments | SG&A | — | 0.5 | ||||||
Cost reduction initiatives expenses(3) | Restructuring | 11.7 | 23.0 | ||||||
| (1) | See Note 3 for more information on fresh-start reporting. |
| (2) | In the fourth quarter, we received the final payment for a business interruption claim, totaling $4.7 million. We received $3.5 million in 2005 for the same claim. |
| (3) | See “Factors Affecting Operating Costs” and Note 15 for a discussion on the cost reduction expenses and pension curtailment charges. |
| (4) | The majority of the product warranty accrual increase was from revising certain assumptions that were used in prior periods when estimating the accrual. |
| (5) | We made a contribution to the Armstrong Foundation (a community giving program funded by Armstrong) in the third quarter. |
| (6) | We settled a liability related to a previously divested business in the third quarter for an amount greater than what was previously accrued. |
| (7) | In the first quarter, we recorded a gain from the settlement of a patent infringement case. |
| (8) | During the year, we recorded a gain from the sale of two buildings. |
| (9) | AWI incurred expenses during the fourth quarter for Chapter 11 related post-emergence activities. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Cost of goods sold in 2006 was 78.5% of net sales, compared to 79.7% in 2005. This reduction was the result of benefits from higher selling prices, primarily in Building Products, better manufacturing performance, mainly in the Resilient and Wood Flooring businesses, and improvement from sales volume and mix. Cost of goods sold in 2006 also benefited from a larger U.S. pension plan credit. These factors more than offset raw material, energy and freight inflation across all businesses. In addition, cost of goods sold in 2006 and 2005 were impacted by the items as detailed in the above table.
SG&A expenses in 2006 were $561.0 million, or 16.4% of net sales compared to $590.0 million or 17.7% of net sales in 2005. The $29.0 million decrease was realized despite higher revenue and included the benefit from a larger U.S. pension plan credit. Resilient and Wood Flooring and Cabinets reduced spending, while Building Products grew at less than the rate of growth in revenue. In addition, both 2006 and 2005 SG&A expenses were impacted by the items as detailed in the above table.
Equity earnings, primarily from our WAVE joint venture, were $46.7 million in 2006, as compared to $39.3 million in 2005. 2006 results include expenses related to the adoption of fresh-start reporting as detailed in the above table. See Note 11 for further information.
We recorded operating income of $210.8 million in 2006, compared to operating income of $101.1 million in 2005.
Interest expense was $18.6 million in 2006, compared to $7.7 million in 2005. In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt during our Chapter 11 proceedings. This unrecorded interest expense was $57.6 million in 2006 and $82.8 million in 2005. Unrecorded interest expense reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt. Included in the $18.6 million in 2006 was $12.2 million from debt incurred as part of emerging from Chapter 11.
Other non-operating income of $11.5 million in 2006 compared to $11.8 million in the prior year. The 2005 results included a $3.4 million gain on the sale of our equity investment in Interface Solutions, Inc.
Net Chapter 11 reorganization income in 2006 was $1,955.5 million compared to $1.2 million of income recorded in 2005. See Note 3 to the Consolidated Financial Statements for a detailed breakout of the 2006 results. 2005 income primarily resulted from income on cash balances and a reversal of an accrual for professional fees for certain advisors.
During 2006, income tax expense of $730.4 million compared to income tax benefit of $1.2 million in 2005. The effective tax rate for 2006 as reported was 33.8% and was 38.3% excluding the tax impact of fresh-start reporting and POR-related settlement adjustments. The 2005 tax rate was lower than 2006 primarily due to certain one-time benefits recorded during 2005 of approximately $61.2 million related to a subsidiary capital restructuring.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
REPORTABLE SEGMENT RESULTS
Resilient Flooring
| Successor | Predecessor | Combined | Predecessor | Change is Favorable/ (Unfavorable) | ||||||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2006 | Year 2005 | As Reported | Excluding Effects of Foreign Exchange Rates(1) | |||||||||||||||
Net Sales: | ||||||||||||||||||||
Americas | $ | 187.0 | $ | 662.6 | $ | 849.6 | $ | 882.8 | (3.8 | )% | (4.3 | )% | ||||||||
Europe | 74.2 | 223.2 | 297.4 | 296.9 | 0.2 | % | 0.7 | % | ||||||||||||
Pacific Rim | 17.3 | 43.6 | 60.9 | 52.9 | 15.1 | % | 16.1 | % | ||||||||||||
Total Segment Net Sales | $ | 278.5 | $ | 929.4 | $ | 1,207.9 | $ | 1,232.6 | (2.0 | )% | (2.2 | )% | ||||||||
Operating Income | $ | (1.2 | ) | $ | 12.6 | $ | 11.4 | $ | (28.4 | ) | Favorable | Favorable | ||||||||
(1) | Excludes favorable foreign exchange rate effect in translation of $2.4 million on net sales and $1.5 million on operating income |
Net sales in the Americas decreased primarily due to volume declines in residential products primarily as a result of declining U.S. housing markets. Laminate sales were down slightly as lower prices offset volume growth as increases in sales to other customers more than offset a reduction in sales to Lowes. Commercial product sales grew on improved product mix and better pricing.
Net sales in Europe grew slightly on improvements in price realization and product/geographic mix. Net sales in the Pacific Rim sustained double-digit growth rates in strong markets.
Despite the decline in sales, operating profit increased significantly as benefits from cost reduction initiatives, reduced SG&A expenses and improved product mix offset substantial increases in the costs of petroleum-based raw materials. In addition, both 2006 and 2005 operating profit were impacted by the items that were previously described, and are detailed in the following table.
Increase / (Reduction) in Expenses, reported in $ millions | ||||||||
Item | 2006 | 2005 | ||||||
Fresh-Start(1) | ||||||||
Change in depreciation and amortization | $ | (0.8 | ) | — | ||||
Change in costs for benefit plans | (0.8 | ) | — | |||||
Impact on hedging-related activity | (0.2 | ) | — | |||||
Inventory-related costs | 7.2 | — | ||||||
| Other Significant Items: | ||||||||
Business interruption claim (2) | (4.7 | ) | $ | (3.5 | ) | |||
Settlement of breach of contract dispute | — | (5.2 | ) | |||||
Cost reduction initiative expenses(3) | 27.4 | 28.9 | ||||||
Fixed asset impairments | — | 1.8 | ||||||
Gain on sale of properties(4) | (17.0 | ) | — | |||||
Environmental charges | — | 3.1 | ||||||
| (1) | See Note 3 for more information on fresh-start reporting. |
| (2) | In the fourth quarter, we received the final payment for a business interruption claim, totaling $4.7 million. We received $3.5 million in 2005 for the same claim. |
| (3) | See “Factors Affecting Operating Costs” for a discussion on the cost reduction expenses and pension curtailment charges. |
| (4) | During the year, we recorded a gain from the sale of two buildings. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Wood Flooring
| Successor | Predecessor | Combined | Predecessor | |||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2006 | Year 2005 | Change is Favorable/ (Unfavorable) | ||||||||||||
Total Segment Net Sales(1) | $ | 192.6 | $ | 645.0 | $ | 837.6 | $ | 833.9 | 0.4 | % | ||||||
Operating Income | $ | (0.2 | ) | $ | 46.2 | $ | 46.0 | $ | 60.9 | (24.5 | )% | |||||
(1) | Virtually all Wood Flooring products are sold in the Americas, primarily in the U.S. |
Net sales in 2006 were up only slightly as significant weakness in the final third of the year due to declines in the U.S. housing markets offset both growth through the majority of the year, and the benefit from acquisitions. Volume, excluding acquisitions, was up modestly for the year, despite an 8% volume decline in the fourth quarter. Declining price realization partially offset the volume growth.
Operating income declined approximately $15 million compared to the prior year. The operating impact of improved volume and mix was offset by lower prices. Higher lumber costs and increased promotional and marketing spending offset improved manufacturing efficiencies and the contribution from acquisitions. In addition, both 2006 and 2005 operating profit were impacted by the items that were previously described, and are detailed in the following table.
Increase / (Reduction) in Expenses, reported in $ millions | |||||||
Item | 2006 | 2005 | |||||
Fresh-Start:(1) | |||||||
Change in depreciation and amortization | $ | (3.4 | ) | — | |||
Inventory-related costs | 12.4 | — | |||||
| Other Significant Items: | |||||||
Breach of contract settlement | — | (1.2 | ) | ||||
Cost reduction initiatives expenses(2) | 2.1 | 14.0 | |||||
Product warranty accrual(3) | 3.3 | — | |||||
Fixed Asset Impairments | — | 1.4 | |||||
| (1) | See Note 3 for more information on fresh-start reporting. |
| (2) | See “Factors Affecting Operating Costs” for a discussion on the cost reduction expenses. |
| (3) | The majority of the product warranty accrual increase was from revising certain assumptions that were used in prior periods when estimating the accrual. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Building Products
| Successor | Predecessor | Combined | Predecessor | Change is Favorable/ (Unfavorable) | ||||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2006 | Year 2005 | As Reported | Excluding Effects of Foreign Exchange Rates(1) | |||||||||||||
Net Sales: | ||||||||||||||||||
Americas | $ | 170.8 | $ | 529.3 | $ | 700.1 | $ | 633.2 | 10.6 | % | 9.9 | % | ||||||
Europe | 98.0 | 276.2 | 374.2 | 346.8 | 7.9 | % | 8.3 | % | ||||||||||
Pacific Rim | 20.9 | 54.3 | 75.2 | 67.6 | 11.2 | % | 11.7 | % | ||||||||||
Total Segment Net Sales | $ | 289.7 | $ | 859.8 | $ | 1,149.5 | $ | 1,047.6 | 9.7 | % | 9.5 | % | ||||||
Operating Income | $ | 24.9 | $ | 152.9 | $ | 177.8 | $ | 148.5 | 19.8 | % | 19.7 | % | ||||||
(1) | Excludes favorable foreign exchange rate effect in translation of $3.3 million on net sales and $0.5 million on operating income |
The Americas sustained growth through the year to achieve record net sales. Sales primarily benefited from price increases made to offset inflationary pressures and improved product mix.
Net sales in Europe grew $27 million as increased sales of metal ceilings and improved price and product mix offset volume declines in mineral fiber ceilings across weak Western European markets.
Net sales in the Pacific Rim increased almost $8 million on strong growth in India and Australia, and modest growth in China.
Building Products operating income grew 20% on higher sales. Improved performance by WAVE contributed an incremental $8 million of operating income. Higher prices and improved product mix offset significant increases in raw materials and energy costs and increased investment in SG&A. In addition, both 2006 and 2005 operating profit were impacted by the items that were previously described, and are detailed in the following table.
Increase / (Reduction) in Expenses, reported in $ millions | ||||||
Item | 2006 | 2005 | ||||
Fresh-Start:(1) | ||||||
Change in depreciation and amortization | $ | 5.2 | — | |||
Change in costs for benefit plans | (1.3 | ) | — | |||
Impact on hedging-related activity | (0.8 | ) | — | |||
Inventory-related costs | 9.2 | — | ||||
Inventory-related costs (WAVE) | 3.7 | — | ||||
Expenses from WAVE step-up | 1.7 | — | ||||
| Other Significant Items: | ||||||
Cost reduction initiatives expenses(2) | 0.7 | 7.9 | ||||
| (1) | See Note 3 for more information on fresh-start reporting. |
| (2) | See “Factors Affecting Operating Costs” for a discussion on the cost reduction expenses. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Cabinets
| Successor | Predecessor | Combined | Predecessor | |||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2006 | Year 2005 | Change is Favorable/ (Unfavorable) | ||||||||||||
Total Segment Net Sales(1) | $ | 56.5 | $ | 174.4 | $ | 230.9 | $ | 212.5 | 8.7 | % | ||||||
Operating Income | $ | 0.2 | $ | 6.1 | $ | 6.3 | $ | (9.7 | ) | Favorable | ||||||
(1) | All Cabinet products are sold in the Americas, primarily in the U.S. |
Net sales grew $18 million despite significant weakness in the final third of the year due to declines in the U.S. housing markets. Higher selling prices and improved product mix, more than offset lower volume related to market weakness.
The sales growth primarily contributed to a $16 million increase in operating income, which also benefited from lower SG&A expense. In addition, both 2006 and 2005 operating profit were impacted by the items that were previously described, and are detailed in the following table.
Increase / (Reduction) in Expenses, reported in $ millions | |||||
Item | 2006 | 2005 | |||
Fresh-Start:(1) | |||||
Change in depreciation and amortization | $ | 0.1 | — | ||
Inventory-related costs | 0.8 | — | |||
Other Significant Items: | |||||
Cost reduction initiatives expenses(2) | — | 1.6 | |||
| (1) | See Note 3 for more information on fresh-start reporting. |
| (2) | See “Factors Affecting Operating Costs” for a discussion on the cost reduction expenses. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Unallocated Corporate
Unallocated corporate expense of $30.7 million in 2006 decreased from $70.2 million in 2005. This decrease included a $20 million increased U.S. pension credit related to plan changes and favorable asset performance. In addition, both 2006 and 2005 operating profit were impacted by the items that were previously described, and are detailed in the following table.
Increase / (Reduction) in Expenses, reported in $ millions | ||||||
Item | 2006 | 2005 | ||||
Fresh-Start: | ||||||
Change in depreciation and amortization | $ | 0.3 | — | |||
Change in costs for benefit plans | (4.8 | ) | — | |||
Other Significant Items: | ||||||
Cost reduction initiatives expenses(2) | (0.1 | ) | — | |||
Pension curtailment charge(2) | — | 16.9 | ||||
Contribution to Armstrong Foundation(3) | 5.0 | — | ||||
Liability settlement related to a divested business(4) | 2.8 | — | ||||
Patent infringement settlement(5) | (8.6 | ) | — | |||
Chapter 11 related post-emergence expenses(6) | 4.6 | — | ||||
| (1) | See Note 3 for more information on fresh-start reporting. |
| (2) | See “Factors Affecting Operating Costs” for a discussion on the cost reduction expenses and pension curtailment charges. |
| (3) | We made a contribution to the Armstrong Foundation (a community giving program funded by Armstrong) in the third quarter. |
| (4) | We settled a liability related to a previously divested business in the third quarter for an amount greater than what was previously accrued. |
| (5) | In the first quarter, we recorded a gain from the settlement of a patent infringement case. |
| (6) | AWI incurred expenses during the fourth quarter for Chapter 11 related post-emergence activities. |
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow
As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance decreased by $338.4 million in 2006 ($48.0 million increase in the three months ended December 31, 2006 and $386.4 million decrease in the nine months ended September 30, 2006), compared to an $86.3 million increase in 2005.
Operating activities in 2006 used $676.0 million of net cash ($70.1 million provided in the three months ended December 31, 2006 and $746.1 million used in the nine months ended September 30, 2006), which was an $822.7 million change from the $146.7 million provided in 2005. The change was primarily due to the settlement of liabilities subject to compromise (excluding prepetition debt) of $832.7 million ($28.6 million in the three months ended December 31, 2006 and $804.1 million in the nine months ended September 30, 2006).
Net cash used for investing activities was $129.0 million in 2006 ($15.3 million used in the three months ended December 31, 2006 and $113.7 million used in the nine months ended September 30, 2006), compared to $48.5 million in 2005. The increase was primarily due to $60.5 million spent on acquisitions partially offset by an increase in distributions received from WAVE of $20.0 million and increased proceeds from the sale of assets of $34.0 million. 2005 also benefited from $58.9 million from the sale of notes and the sale of an investment in an affiliate.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Net cash totaling $459.9 million was provided by our financing activities in 2006 ($8.1 million used in the three months ended December 31, 2006 and $468.0 million provided in the nine months ended September 30, 2006), compared to $3.9 million used in 2005. In 2006, we received $800 million from the issuance of new debt upon emergence, while we used $300.7 million of cash as part of discharging the debt-related portion of liabilities subject to compromise. The change was also due to higher debt repayments by subsidiaries not involved in our Chapter 11 case.
Balance Sheet and Liquidity
Changes in significant balance sheet accounts and groups of accounts from December 31, 2005 to December 31, 2006 are as follows:
Successor December 31, | Predecessor December 31, | Increase (Decrease) | |||||||||
Cash and cash equivalents | $ | 252.5 | $ | 602.2 | ($ | 349.7 | ) | ||||
Current assets, excluding cash and cash equivalents | 1,118.9 | 959.1 | 159.8 | ||||||||
Current assets | $ | 1,371.4 | $ | 1,561.3 | ($ | 189.9 | ) | ||||
The decrease in cash and cash equivalents was described above (see “Cash Flow”). The increase in current assets, excluding cash and cash equivalents, is primarily due to the fair valuing of inventory as part of fresh-start reporting. See Note 3 to the Consolidated Financial Statements for further information.
Successor December 31, | Predecessor December 31, | (Decrease) | |||||||||
Property, plant and equipment, less accumulated depreciation and amortization (“PP&E”) | $ | 966.2 | $ | 1,180.7 | $ | (214.5 | ) | ||||
The decrease was primarily due to the fair valuing of tangible assets as part of fresh-start reporting. See Note 3 to the Consolidated Financial Statements for further information.
Liquidity
Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal needs, if required. On October 2, 2006, Armstrong executed a $1.1 billion senior credit facility arranged by Banc of America Securities LLC, J.P. Morgan Securities, Inc., and Barclays Capital. This facility is made up of a $300 million revolving credit facility (with a $150 million sublimit for letters of credit), a $300 million Term Loan A, and a $500 million Term Loan B. There were no outstanding borrowings under the revolving credit facility, but $40.2 million in letters of credit were outstanding, as of December 31, 2006 and, as a result, availability under the revolving credit facility was $259.8 million.
Our foreign subsidiaries had available lines of credit totaling $52.4 million, of which $8.0 million was used as of December 31, 2006, leaving $44.4 million of unused lines of credit available for foreign borrowings. However, these lines of credit are uncommitted, and poor operating results or credit concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have been able to maintain and, as needed, replace credit facilities to support our operations. We believe that cash on hand and generated from operations, together with lines of credit and the $300 million revolving credit facility, will be adequate to address our foreseeable liquidity needs in the normal course of business operations and for scheduled payments of non-filer debt obligations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
2005 COMPARED TO 2004
CONSOLIDATED RESULTS
| 2005 | 2004 | Change is Favorable | |||||||||||
As Reported | Excluding Effects of Foreign Exchange Rates(1) | ||||||||||||
Net Sales: | |||||||||||||
Americas | $ | 2,565.7 | $ | 2,543.0 | 0.9 | % | 0.6 | % | |||||
Europe | 874.0 | 841.0 | 3.9 | % | 2.4 | % | |||||||
Pacific Rim | 118.7 | 113.3 | 4.8 | % | 2.4 | % | |||||||
Total Consolidated Net Sales | $ | 3,558.4 | $ | 3,497.3 | 1.7 | % | 1.1 | % | |||||
Operating Income (Loss) | $ | 100.7 | $ | (43.8 | ) | Favorable | Favorable | ||||||
Goodwill Impairment | — | 108.4 | |||||||||||
Operating Income, Prior to Goodwill Impairment | $ | 100.7 | $ | 64.6 | 55.9 | % | 30.1 | % | |||||
| Change is Favorable | |||||||||||||
Predecessor 2005 | Predecessor 2004 | As Reported | Excluding Effects of Foreign Exchange Rates(1) | ||||||||||
Net Sales: | |||||||||||||
Americas | $ | 2,562.4 | $ | 2,540.5 | 0.9 | % | 0.6 | % | |||||
Europe | 643.7 | 624.0 | 3.2 | % | 1.4 | % | |||||||
Pacific Rim | 120.5 | 114.6 | 5.1 | % | 2.8 | % | |||||||
Total Consolidated Net Sales | $ | 3,326.6 | $ | 3,279.1 | 1.4 | % | 0.8 | % | |||||
Operating Income (Loss) | $ | 101.1 | $ | (37.7 | ) | Favorable | Favorable | ||||||
Goodwill Impairment | — | 108.4 | |||||||||||
Operating Income, Prior to Goodwill Impairment | $ | 101.1 | $ | 70.7 | 43.0 | % | 29.0 | % | |||||
(1) | Excludes favorable foreign exchange rate effect in translation of |
Net sales in the Americas increased $22.7$21.9 million, on volume growth in the Wood Flooring business and both price and volume growth in the Building Products segment. Declines in Resilient Flooring volumes and lower Wood Flooring pricing partially offset this growth. (See “Overview – Factors Affecting Revenue”).
Excluding the translation effect of changes in foreign exchange rates, net sales in the European markets grew by $20.6$8.8 million, with volume growth in resilient and sports products, and price realization in building products. Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim increased $2.8$3.3 million on strength in the Australian and Indian markets.
Cost of goods sold in 2005 was 79.3%79.7% of net sales, compared to 80.4%80.9% in 2004. The decrease was primarily due to sales price increases of $38nearly $40 million, benefits from cost reduction initiatives and approximately $47 million of lower fixed asset impairments, which more than offset $56approximately $50 million in raw material, energy and freight inflation, and approximately $11 million of the U.S. pension plan curtailment charge.
SG&A expenses in 2005 were $652.7$590.0 million, or 18.3%17.7% of net sales compared to $635.0$567.7 million or 18.1%17.3% of net sales in 2004. The $17.7$22.3 million increase supported higher sales and included approximately $9 million of increaseincreased selling and advertising expense, about $8 million in increased incentive compensation costs and approximately $6 million of the U.S. pension plan curtailment charge. Benefits from cost reduction initiatives partially offset these increases. In addition, Armstrong Holdings, Inc. SG&A expenses in 2005 benefited from a $1.6 million reversal of a contingent liability which was established when Armstrong Holdings, Inc. was created but is no longer required.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
In the second quarter of 2004, we recorded a $60.0 million non-cash goodwill impairment loss related to our European resilient flooring reporting unit based on a preliminary impairment assessment. During the fourth quarter of 2004, we recorded an additional $48.4 million non-cash goodwill impairment loss based on the results of our annual impairment test. The goodwill impairment charges arose from the European resilient flooring reporting unit’s fair value being lower than its carrying value. The fair value was negatively affected by lower operating profits and expected future cash flows. See Note 1012 to the Consolidated Financial Statements for further details.
We recorded net restructuring charges of $23.2$23.0 million in 2005, compared to $18.3$17.9 million in 2004. See Note 1315 of the Consolidated Financial Statements for a description of the restructuring actions. Once completely implemented, we believe that the annual cost savings from our 2004 initiatives will be approximately $58 million. These projected savings will not be fully realized until 2007.
Equity earnings from our WAVE joint venture were $39.3 million in 2005, as compared to $31.6 million in 2004. The growth in earnings was due to price realization ahead of steel price increases, and savings from cost initiatives.
We recorded operating income of $100.7$101.1 million in 2005, compared to an operating loss of $43.8$37.7 million in 2004. Operating income in 2004 prior to non-cash goodwill impairment was $64.6$70.7 million.
Interest expense was $8.5$7.7 million in 2005, compared to $8.4$7.9 million in 2004. In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $82.8 million in 2005 and $86.9 million in 2004. Unrecorded interest expense reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt.
Other non-operating income of $12.0$11.8 million in the 2005 compared to $6.4 million in the prior year. The 2005 results included a $3.4 million gain on the sale of our equity investment in Interface Solutions, Inc.
Net Chapter 11 reorganization income in 2005 was $1.2 million, $8.1 million better than the $6.9 million in cost recorded in 2004. The change was primarily due to increased interest income resulting from higher cash balances, increased interest rates, and a reversal of an accrual for professional fees for certain advisors.
During 2005, income tax expensebenefit of $2.2$1.2 million compared to income tax expense of $24.6$21.4 million in 2004. The adjusted effective tax rate for 2005 was 61%57.2% after excluding $61.2 million of tax benefits recorded in the year related to a subsidiary capital restructuring.The adjusted effective tax rate for 2004 was 51.3%46.7% after adjusting for the non-cash goodwill impairments and European resilient flooring fixed asset impairments of $108.4 million and $44.8 million respectively, in addition to the exclusion of $24.3 million in reported tax audit benefits. The higher 2005 tax rate was primarily due to higher overall tax losses in Europe for which the company does not expect to receive a tax benefit.
Net earnings from continuing operations of $101.7$106.1 million were recorded for 2005, compared to a net loss of $80.8$70.6 million for 2004.
Discontinued Operations:
In 2000, Armstrong completed its sales of all entities, assets and certain liabilities comprising its Insulation Products segment. During the fourth quarter of 2005, AHI recorded a net gain of $10.4 million due to the early settlement of the remaining notes receivable and the settlement of other disputed items.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
REPORTABLE SEGMENT RESULTS
Resilient Flooring
| 2005 | 2004 | Change is Favorable/(Unfavorable) | ||||||||||||
As Reported | Excluding Effects of Foreign Exchange Rates(1) | |||||||||||||
Net Sales: | ||||||||||||||
Americas | $ | 882.8 | $ | 924.6 | (4.5 | )% | (5.0 | )% | ||||||
Europe | 249.7 | 238.5 | 4.7 | % | 3.2 | % | ||||||||
Pacific Rim | 52.9 | 52.0 | 1.7 | % | (0.9 | )% | ||||||||
Total Segment Net Sales | $ | 1,185.4 | $ | 1,215.1 | (2.4 | )% | (3.2 | )% | ||||||
Operating (Loss) | $ | (25.8 | ) | $ | (150.2 | ) | Favorable | Favorable | ||||||
| Change is Favorable/ (Unfavorable) | ||||||||||||||
Predecessor 2005 | Predecessor 2004 | As Reported | Excluding Effects of Foreign Exchange Rates(1) | |||||||||||
Net Sales: | ||||||||||||||
Americas | $ | 882.8 | $ | 924.6 | (4.5 | )% | (5.0 | )% | ||||||
Europe | 296.9 | 285.7 | 3.9 | % | 1.8 | % | ||||||||
Pacific Rim | 52.9 | 52.0 | 1.7 | % | (0.8 | )% | ||||||||
Total Segment Net Sales | $ | 1,232.6 | $ | 1,262.3 | (2.4 | )% | (3.3 | )% | ||||||
Operating (Loss) | $ | (28.4 | ) | $ | (152.8 | ) | Favorable | Favorable | ||||||
(1) | Excludes favorable foreign exchange rate effect in translation of |
Net sales in the Americas decreased primarily due to a 20% decline in laminate flooring sales, largely as a result of the previously discussed decision by a major customer to increase purchases of non-Armstrong laminate flooring products. Sales of our vinyl products to the residential market declined about 6%, as consumer preference in the market continued to shift away from vinyl products. Sales of our vinyl products into the commercial market increased approximately 1% on increased price realization and new product introductions.
Excluding the translation effect of changes in foreign exchange rates, net sales in Europe increased by 3.2%1.8% due to higher volume, partially offset by price concessions and negative product mix. Excluding the
translation effect of changes in foreign exchange rates, net sales in the Pacific Rim decreased slightly, as growth in India was balanced by modest weakness in Australia.
2005 Resilient Flooring operating income reflects the negative impact of volume declines in laminate flooring and residential vinyl flooring, increased cost to acquire petroleum-based raw materials and environmental-related charges of $4.4 million. (See “Overview – Factors Affecting Operating Costs”). Partially offsetting these negative effects were modest price realization, significant gains in operating efficiencies related to both cost reduction initiatives and improved plant productivity, a $5.2 million gain from the settlement of a breach of contract dispute and $3.5 million of proceeds received from a business interruption claim. Operating income in 2004 was hurt by a $108.4 million non-cash goodwill impairment charge and a $44.8 million non-cash fixed asset impairment charge related to our European resilient flooring business.
Wood Flooring
| 2005 | 2004 | Change is Favorable | |||||||
Total Segment Net Sales(1) | $ | 833.9 | $ | 832.1 | 0.2 | % | |||
Operating Income | $ | 60.9 | $ | 51.4 | 18.5 | % | |||
Predecessor 2005 | Predecessor 2004 | Change is Favorable | |||||||
Total Segment Net Sales(1) | $ | 833.9 | $ | 832.1 | 0.2 | % | |||
Operating Income | $ | 60.9 | $ | 51.4 | 18.5 | % | |||
(1) | Virtually all Wood Flooring products are sold in the Americas, primarily in the U.S. |
Net sales in 2005 were flat. Total unit volume increased 2%, on growth in engineered floors of 10%. Total year growth was constrained by volume weakness in the beginning of the year due to competitive pricing actions. Net sales were also negatively impacted by price declines which were made in response to declining lumber prices and to competitive pressures (see “Overview – Factors Affecting Revenues”).
pressures.
Operating income increased by $9.5 million, despite fixed asset impairment charges of $15.4 million in 2005. Operating results benefited from declines in lumber pricing and manufacturing efficiencies related to cost reduction initiatives and improvements in productivity at some plant locations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Textiles and Sports Flooring (“TSF”)Building Products
| Change is Favorable | ||||||||||||||
| 2005 | 2004 | As Reported | Excluding Effects of Foreign Exchange Rates(2) | |||||||||||
Total Segment Net Sales(1) | $ | 279.0 | $ | 265.4 | 5.1 | % | 3.5 | % | ||||||
Operating (Loss) | $ | (4.4 | ) | $ | (7.1 | ) | 38.0 | % | 35.3 | % | ||||
| Change is Favorable | ||||||||||||
Predecessor 2005 | Predecessor 2004 | As Reported | Excluding Effects of Foreign Exchange Rates(1) | |||||||||
Net Sales: | ||||||||||||
Americas | $ | 633.2 | $ | 573.2 | 10.5 | % | 9.9 | % | ||||
Europe | 346.8 | 335.9 | 3.2 | % | 1.9 | % | ||||||
Pacific Rim | 67.6 | 62.6 | 8.0 | % | 5.8 | % | ||||||
Total Segment Net Sales | $ | 1,047.6 | $ | 971.7 | 7.8 | % | 6.9 | % | ||||
Operating Income | $ | 148.5 | $ | 127.0 | 16.9 | % | 15.9 | % | ||||
(1) |
| Excludes favorable foreign exchange rate effect in translation of |
Excluding the translation effect of changes in foreign exchange rates, net sales increased by 3.5%, due to strong volume and favorable mix in carpet tile and sports flooring. This growth was tempered by lower sales in the highly competitive broadloom carpet market.
The smaller 2005 operating loss was primarily due to increased sales volume, improved product mix, manufacturing efficiencies and reduced overhead expenses. A negative impact from raw materials and freight partially offset these factors.
Building Products
| Change is Favorable | ||||||||||||
| 2005 | 2004 | As Reported | Excluding Effects of Foreign | |||||||||
Net Sales: | ||||||||||||
Americas | $ | 636.5 | $ | 575.7 | 10.6 | % | 10.0 | % | ||||
Europe | 345.3 | 334.7 | 3.2 | % | 1.7 | % | ||||||
Pacific Rim | 65.8 | 61.3 | 7.3 | % | 5.3 | % | ||||||
Total Segment Net Sales | $ | 1,047.6 | $ | 971.7 | 7.8 | % | 6.8 | % | ||||
Operating Income | $ | 148.5 | $ | 127.0 | 16.9 | % | 15.7 | % | ||||
Excluding the translation effect of changes in foreign exchange rates, record net sales in the Americas increased 10% on the strength of volume growth and price realization. Sales to the U.S. Commercial markets grew 10%, including approximately 3% unit volume growth, due to favorable market conditions. (See “Overview – Factors Affecting Revenues”.) Net sales also benefited from volume and price increases in the Residential markets.
Excluding the translation effect of changes in foreign exchange rates, net sales in Europe grew approximately 2%. Unit volume of mineral fiber products, which constitute the majority of our European sales, increasedgrew by approximately 1%. Within the Western European market, growth in the U.K., France and Italy did not offset double-digit declines in the remaining countries related to lower commercial market
activity. Conversely, sales in the emerging markets of Eastern Europe (primarily Russia) increased about 5% due to construction growth. Products sold to the emerging markets tend to have lower margins than products sold into Western Europe. Excluding the translation effect of changes in foreign exchange rates, net sales of metal ceilings declined 9% on weakness in core markets.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim increased about 5%6%, with strength in the Indian and Australian markets offsetting weak Chinese markets.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Excluding the translation effect of changes in foreign exchange rates, Building Products operating income grew nearly 16%. Volume growth and increased equity earnings in WAVE drove operating income improvement despite higher selling expenses (related to volume). Price realization essentially offset inflationary pressure from raw materials, energy and freight.
Cabinets
| 2005 | 2004 | Change is (Unfavorable) | ||||||||
Total Segment Net Sales(1) | $ | 212.5 | $ | 213.0 | (0.2 | )% | ||||
Operating Income (Loss) | $ | (9.7 | ) | $ | 1.4 | Unfavorable | ||||
Predecessor 2005 | Predecessor 2004 | Change is (Unfavorable) | ||||||||
Total Segment Net Sales(1) | $ | 212.5 | $ | 213.0 | (0.2 | )% | ||||
Operating Income (Loss) | $ | (9.7 | ) | $ | 1.4 | Unfavorable | ||||
(1) | All Cabinet products are sold in the Americas, primarily in the U.S. |
Net sales in 2005 were basically flat versus 2004. Price increases and mix improvement related to new product introductions were offset by volume declines related to poor customer service. Customer lead- times and fill rates deteriorated due to unplanned manufacturing inefficiencies related to plant consolidation.
Operating losses in 2005 were caused by sales volume declines, manufacturing inefficiencies in the remaining plants resulting from the transfer of production from Morristown and higher SG&A expenses related to investment in process improvement initiatives, partially offset by improved product mix and higher selling prices.
Unallocated Corporate
Unallocated corporate expense of $68.8$70.2 million in 2005 increased from $66.3$64.7 million in 2004. This increase was primarily due to the $16.9 million curtailment charge in the fourth quarter of 2005 related to changes to our U.S. pension plan, and to higher compensation program costs (retention bonuses, incentive compensation, executive transition and severance). These increases were partially offset by lower environmental charges, the reversal of a contingent liability and an increased U.S. pension credit.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow
As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance increased by $86.3 million in 2005, compared to a $31.6 million increase in 2004.
Operating activities in 2005 provided $146.7 million of net cash, or $3.9 million more than the $142.8 million provided in 2004. The increase was primarily due to changes in inventories, partially offset by changes in accounts payable and accrued expenses and cash taxes paid. In 2005 we decreased inventories by $1.5 million compared with an increase of $61.7 million in 2004 which was primarily driven by our efforts to improve customer service in Wood Flooring during 2004. Also, in 2005 accounts payable and accrued expenses increased by $8.5 million compared with an increase of $61.1 million in 2004. The large increase in 2004 was primarily driven by higher accruals for employee incentives and increased trade payables related primarily to increased capital expenditures. Cash taxes paid were lower in 2005 by $34.4 million primarily due to a restructuring of subsidiary capital that resulted in a tax benefit on debt impairment of $29.6 million.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Net cash used for investing activities was $48.5 million in 2005, compared to $111.7 million in 2004. The decrease was primarily due to $38.3 million in proceeds received from the sale of some notes receivable, the proceeds from the sale of an equity affiliate for $20.6 million and an increase in distributions received from WAVE of $13.0 million.
Net cash totaling $3.9 million was used for our financing activities in 2005, compared to $7.0 million in 2004. The year-to-year change was due to lower payments of long-term debt in 2005 and increased
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
short-term borrowing for 2005 working capital needs for certain subsidiaries that are not participating in our Chapter 11 Case.
Balance Sheet and Liquidity
Changes in significant balance sheet accounts and groups of accounts from December 31, 2004 to December 31, 2005 are as follows:
| December 31, 2005 | December 31, 2004 | Increase (Decrease) | ||||||||
Cash and cash equivalents | $ | 602.2 | $ | 515.9 | $ | 86.3 | ||||
Current assets, excluding cash and cash equivalents | 959.1 | 966.3 | (7.2 | ) | ||||||
Current assets | $ | 1,561.3 | $ | 1,482.2 | $ | 79.1 | ||||
The increase in cash and cash equivalents was described above (see “Cash Flow”). The decrease in current assets, excluding cash and cash equivalents, was primarily due to the negative translation effects of changes in foreign exchange rates partially offset by an increase in the income tax receivable of $11.2 million and an increase of $10.0 million of the fair market value of hedges related to natural gas and foreign currency exposure of inter-company loans.
December 31, 2005 | December 31, 2004 | (Decrease) | ||||||||
Property, plant and equipment, less accumulated depreciation and amortization (“PP&E”) | $ | 1,145.3 | $ | 1,208.8 | $ | (63.5 | ) | |||
The decrease was primarily due to accelerated depreciation and impairments of $24.7 million (see “Impairments of Tangible and Intangible Assets”) and the negative translation effects of changes in foreign exchange rates.
DIP Facility
AWI has a $75 million debtor-in-possession credit facility that currently is limited to issuances of letters of credit. This facility is scheduled to mature on December 8, 2006. Obligations to reimburse drawings under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. There were no outstanding borrowings under the DIP Credit Facility as of December 31, 2005, or December 31, 2004 but, as of these dates, AWI had $43.3 million, and $40.6 million, respectively, in letters of credit outstanding that were issued pursuant to the DIP Credit Facility. As of December 31, 2005, the DIP Facility had $31.7 million that remained available for issuance of letters of credit. The DIP Credit Facility also contains several covenants including, among other things, limits on asset sales and capital expenditures and a required ratio of debt to cash flow. We are in compliance with all of the DIP Facility covenants. The covenants have not impaired our operating ability. In connection with implementation of a plan of reorganization, we expect to replace this facility with a new facility that would provide reorganized Armstrong with greater borrowing capacity and which will have debt covenants yet to be negotiated. In the event a plan of reorganization has not been implemented prior to December 8, 2006, we will pursue another extension of the DIP Facility.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Liquidity
Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal needs, if required. For certain international operations that are not participating in our Chapter 11 Case, we had lines of credit of $45.2 million at December 31, 2005, of which $19.8 million was used and $25.4 million was available. However, these lines of credit are uncommitted, and poor operating results or credit concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have been able to maintain and, as needed, replace credit facilities to support our operations. Additionally, we have letter of credit issuance capabilities under the DIP Facility (described above). We believe that cash on hand and generated from operations, together with lines of credit and the DIP Facility, will be adequate to address our foreseeable liquidity needs in the normal course of business operations and for scheduled non-filer debt obligations. Cash and liquidity needs will change significantly at the time of emergence, the timing of which remains uncertain (see “Note 1 – Proceedings Under Chapter 11”).
2004 COMPARED TO 2003
CONSOLIDATED RESULTS
Change is Favorable/(Unfavorable) | ||||||||||||||
| 2004 | 2003 | As Reported | Excluding Effects Exchange Rates(1) | |||||||||||
Net Sales: | ||||||||||||||
Americas | $ | 2,543.0 | $ | 2,390.8 | 6.4 | % | 6.1 | % | ||||||
Europe | 841.0 | 778.8 | 8.0 | % | (1.6 | )% | ||||||||
Pacific Rim | 113.3 | 89.4 | 26.7 | % | 19.9 | % | ||||||||
Total Consolidated Net Sales | $ | 3,497.3 | $ | 3,259.0 | 7.3 | % | 4.5 | % | ||||||
Operating (Loss) | $ | (43.8 | ) | $ | (19.3 | ) | Unfavorable | Unfavorable | ||||||
Goodwill Impairment | 108.4 | — | ||||||||||||
Charge for Asbestos Liability, Net | — | 81.0 | ||||||||||||
Operating Income, Prior to Goodwill Impairment and Charge for Asbestos Liability, Net | $ | 64.6 | $ | 61.7 | 4.7 | % | 1.1 | % | ||||||
Net sales in the Americas increased by approximately $152 million, primarily as a result of sales volume and price increases of wood flooring and ceiling products. Sales for resilient flooring products in the Americas declined primarily due to lower sales to the U.S. residential market (see “Overview – Factors Affecting Revenue”).
Excluding the translation effect of changes in foreign exchange rates, net sales in the European markets declined by 1.6%, primarily as a result of the weak economic conditions in our primary selling markets and volume declines for carpet and sports flooring products. Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim increased by approximately $19 million, primarily as a result of stronger sales in China and Australia.
Cost of goods sold in 2004 was 80.4% of net sales, compared to 79.7% in 2003. The 0.7 percentage point increase was primarily due to the European resilient flooring fixed asset impairment of $44.8 million (see Note 8 of the Consolidated Financial Statements) and higher raw material and energy costs of approximately $72 million (see significant items in “Overview – Factors Affecting Operating Costs”), offset by the effects of sales price increases of approximately $62 million and the benefit in 2004 from 2003 cost reduction initiatives.
SG&A expenses in 2004 were $635.0 million, or 18.1% of net sales compared to $612.1 million or 18.8% of net sales in 2003. Excluding the translation effect of changes in foreign exchange rates, SG&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
expenses in 2004 increased by approximately $1.9 million, primarily due to approximately $21 million of higher incentive compensation costs, approximately $9 million for increased selling and advertising expense and a $5.0 million contribution to the Armstrong Foundation (a community giving program funded by Armstrong), partially offset by the $3.1 million favorable impact of the Medicare Act, lower medical claim accruals, lower severance expenses and the benefit in 2004 from 2003 cost reduction initiatives.
There were no asbestos-related charges in 2004. During 2003, we reduced our previously recorded insurance asset for asbestos-related personal injury claims by $73 million, reflecting management’s current assessment of probable insurance recoveries based upon an unfavorable ruling in an alternative dispute resolution procedure. We also recorded an $8 million non-cash charge to reflect an agreement to settle claims from the Center for Claims Resolution and a surety bond insurance company. All amounts were reflected as a charge to asbestos liability, net. See “Asbestos-Related Litigation” in Note 30 of the Consolidated Financial Statements for additional information.
In the second quarter of 2004, we recorded a $60.0 million non-cash goodwill impairment loss related to our European resilient flooring reporting unit based on a preliminary impairment assessment. During the fourth quarter of 2004, we recorded an additional $48.4 million non-cash goodwill impairment loss based on the results of our annual impairment test. The goodwill impairment charges arose from the European resilient flooring reporting unit’s fair value being lower than its carrying value. The fair value was negatively affected by lower operating profits and expected future cash flows determined in recent forecasting analyses. See Note 10 to the Consolidated Financial Statements for further details.
We recorded restructuring charges, net, of $18.3 million in 2004, compared to $8.6 million in 2003. See Note 13 of the Consolidated Financial Statements for a description of the restructuring actions.
Equity earnings from affiliates, from our WAVE joint venture, were $31.6 million in 2004, as compared to $20.8 million in 2003. The improvement in earnings resulted from improved market conditions, the ability to provide product during the global steel shortage and realized price increases ahead of recognized increased steel cost.
We recorded an operating loss of $43.8 million in 2004, compared to an operating loss of $19.3 million in 2003. Operating income prior to non-cash goodwill impairment and asbestos-related charges was $64.6 million and $61.7 million, respectively.
Interest expense was $8.4 million in 2004, compared to $9.0 million in 2003. The decrease in interest expense is due to lower fees on the renewed DIP Facility and lower average outstanding debt amounts at our non-Chapter 11 subsidiaries. In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $86.9 million in 2004 and $95.1 million in 2003. Unrecorded interest expense reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt.
Chapter 11 reorganization costs, net in 2004 were $6.9 million, which was $2.5 million less than the $9.4 million amount recorded in 2003. The decrease was primarily due to lower professional fees resulting from less activity in the Chapter 11 process in 2004.
During 2004, income tax expense of $24.6 million compared to an income tax benefit of $1.6 million in 2003. The adjusted effective tax rate for 2004 was 25.3% based on adjusted pre-tax income from continuing operations of $97.4 million, which excluded the non-cash goodwill impairments of $108.4 million, which were nontaxable events, and European resilient flooring fixed asset impairments of $44.8 million, which required a full valuation allowance on the related deferred tax asset. Excluding the $81.0 million of asbestos-related charges, the adjusted effective tax rate for 2003 was 62.7%, based on adjusted pre-tax income from continuing operations of $42.6 million. The lower 2004 tax rate was primarily due to the overall favorable settlement of tax audits in the U.S. and in Germany that combined to reduce tax expense by approximately $19.4 million. In addition, the unfavorable impact in 2003 of
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
relatively higher nondeductible Chapter 11 reorganization costs (prior to the tax audits in the U.S.) on a relatively lower base of taxable income resulted in a higher effective tax rate for that year.
A net loss of $80.8 million was recorded for 2004, compared to a net loss of $39.3 million for 2003.
REPORTABLE SEGMENT RESULTS
Resilient Flooring
Change is Favorable/(Unfavorable) | |||||||||||||
| 2004 | 2003 | As Reported | Excluding Effects of Foreign | ||||||||||
Net Sales: | |||||||||||||
Americas | $ | 924.6 | $ | 935.0 | (1.1 | )% | (1.5 | )% | |||||
Europe | 238.5 | 205.2 | 16.2 | % | 5.7 | % | |||||||
Pacific Rim | 52.0 | 41.3 | 25.9 | % | 17.1 | % | |||||||
Total Segment Net Sales | $ | 1,215.1 | $ | 1,181.5 | 2.8 | % | 0.5 | % | |||||
Operating (Loss) Income | $ | (150.2 | ) | $ | 56.2 | Unfavorable | Unfavorable | ||||||
Net sales in the Americas decreased primarily due to an approximate 6% decline in laminate flooring sales, primarily as a result of a major customer’s decision to increase purchases of non-Armstrong laminate flooring products in the second quarter of 2004. Sales of our vinyl products to the residential market decreased approximately 3%, primarily from the residential floor covering market shift away from vinyl products. Sales of our vinyl products to the commercial market increased by approximately 3%, primarily due to price increases on certain vinyl sheet and tile products, and new product introductions.
Excluding the translation effect of changes in foreign exchange rates, net sales in Europe increased by 5.7% due to higher volume, which was partially offset by price concessions due to competitive pressure. Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim increased by approximately $8 million, primarily from strong sales in Australia and China.
Operating income in 2004 was negatively impacted by a $108.4 million non-cash goodwill impairment charge and a $44.8 million non-cash fixed asset impairment charge related to our European resilient flooring business. Operating results were also adversely impacted by lower laminate sales volume, increased costs to purchase PVC, wage and salary inflation increases and charges for the cost reduction initiatives (see “Overview – Factors Affecting Operating Costs”). Partially offsetting the negative effects of these items were operating income gains from manufacturing efficiencies.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Wood Flooring
| 2004 | 2003 | Change is Favorable | ||||||||
Total Segment Net Sales(1) | $ | 832.1 | $ | 738.6 | 12.7 | % | ||||
Operating Income (Loss) | $ | 51.4 | $ | (4.0 | ) | Favorable | ||||
Net sales in 2004 increased by $93.5 million. Units sold of pre-finished solid and engineered floors each increased by approximately 9%, primarily from the strong U.S. new home construction market. Net sales were also positively impacted by the price increases implemented on wood flooring products.
Operating results increased by $55.4 million, due to higher selling prices and sales volume, lower expenses for implementing the cost reduction initiatives (see “Overview – Factors Affecting Operating Costs”) and lower manufacturing overhead resulting from those initiatives. Partially offsetting these were higher costs for lumber and increased production expenses in certain plants.
Textiles and Sports Flooring (“TSF”)
Change is Favorable/(Unfavorable) | ||||||||||||||
| 2004 | 2003 | As Reported | Excluding Effects of Foreign Exchange Rates(2) | |||||||||||
Total Segment Net Sales(1) | $ | 265.4 | $ | 271.9 | (2.4 | )% | (10.8 | )% | ||||||
Operating (Loss) | $ | (7.1 | ) | $ | (11.0 | ) | Favorable | Favorable | ||||||
Excluding the translation effect of changes in foreign exchange rates, net sales decreased by 10.8%, primarily from volume declines in carpet flooring products due to weak economic conditions in our primary selling markets and loss of market share, caused by the lack of new product development. Net sales were also adversely affected by price concessions for Sports Flooring products that were required to meet competitive pressures.
The operating loss in 2004 was less than the loss in 2003, primarily due to the expense in 2003 of cost reduction initiatives and the benefit in 2004 of those cost reduction initiatives (see “Overview – Factors Affecting Operating Costs”). Partially offsetting these factors were the negative impact of lower sales volume and prices.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Building Products
| Change is Favorable | ||||||||||||
| 2004 | 2003 | As Reported | Excluding Effects Exchange Rates(1) | |||||||||
Net Sales: | ||||||||||||
Americas | $ | 575.7 | $ | 515.6 | 11.7 | % | 11.0 | % | ||||
Europe | 334.7 | 298.5 | 12.1 | % | 2.1 | % | ||||||
Pacific Rim | 61.3 | 48.1 | 27.4 | % | 22.4 | % | ||||||
Total Segment Net Sales | $ | 971.7 | $ | 862.2 | 12.7 | % | 8.4 | % | ||||
Operating Income | $ | 127.0 | $ | 95.2 | 33.4 | % | 28.7 | % | ||||
Excluding the translation effect of changes in foreign exchange rates, net sales in the Americas increased approximately $57 million. Unit volume to the U.S. Commercial markets increased by approximately 7%, primarily due to favorable market conditions. Complementing the impact from the higher volume were price increases started in July 2003 on most commercial products. Net sales also benefited from volume and price increases with the major national retailers in the U.S. Residential markets.
Excluding the translation effect of changes in foreign exchange rates, net sales in Europe increased by 2.1% from 2003. The volume of mineral fiber products, which constitute the majority of our European sales, increased by approximately 2%. The volume of mineral fiber product sold to Western European countries declined by approximately 1%, primarily due to lower commercial market activity in the Euro Zone, while volume sold to the emerging markets of Eastern Europe (primarily Russia) increased by approximately 7% due to construction growth in these markets. Products sold to the emerging markets tend to have lower margin than products sold in Western Europe. Excluding the translation effect of changes in foreign exchange rates, net sales of metal ceilings declined by approximately 1%, primarily from some loss of market share in Asia.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim increased approximately $11 million due to strong activity in the Chinese, Indian and Australian markets.
Excluding the translation effect of changes in foreign exchange rates, operating income increased 28.7%, as higher sales volume and prices, lower production expenses and increased equity earnings in WAVE were only partially offset by inflation in the cost of raw materials and energy, and higher selling expenses.
Cabinets
| 2004 | 2003 | Change is Favorable | ||||||||
Total Segment Net Sales(1) | $ | 213.0 | $ | 204.8 | 4.0 | % | ||||
Operating Income (Loss) | $ | 1.4 | $ | (11.1 | ) | Favorable | ||||
Net sales in 2004 increased approximately $8 million from 2003, primarily due to selling price increases and sales of higher priced products, both enabled by improved customer service.
Operating results improved by $12.5 million in 2004 from 2003, due to increased sales, manufacturing efficiencies and reduced SG&A expenses, partially offset by expenses for cost reduction initiatives.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Unallocated Corporate
Unallocated corporate expense of $66.3 million in 2004 decreased from $144.6 million in 2003. This decrease was primarily due to non-cash asbestos-related charges of $81.0 million in 2003. The remaining $2.7 million increase resulted primarily from increases of $9.4 million in employee incentive compensation, a $5.0 million contribution to the Armstrong Foundation (a community giving program funded by Armstrong) and $4.2 million to increase certain environmental liabilities at non-operating locations. These increases were partially offset by a $6.3 million write off of a note receivable in 2003 from a previous divestiture, $4.5 million in lower medical claims, a $2.9 million higher U.S. pension plan credit, and reduced expenses in corporate staff departments.
FINANCIAL CONDITION AND LIQUIDITY
As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance increased by $31.6 million in 2004, compared to a $104.3 million increase in 2003.
Operating activities in 2004 provided $142.8 million of net cash, or $23.0 million less than the $165.8 million provided in 2003. The decline in cash provided was primarily due to changes in inventories, receivables, and accounts payable and accrued expenses. In 2004, we increased inventories by $61.7 million, compared to decreasing $6.6 million in 2003, primarily as part of our efforts to improve customer service in Wood Flooring. Receivables increased $9.5 million in 2004, compared to decreasing $40.6 million in 2003, primarily as a result of increased sales. Offsetting these two uses of cash was an increase in accounts payable and accrued expenses of $61.1 million in 2004, primarily due to increased accruals for employee incentives and increased trade payables related primarily to increased capital expenditures and inventory.
Net cash used for investing activities was $111.7 million in 2004, compared to $57.2 million in 2003. In 2004, we increased our capital expenditures by $55.9 million primarily to upgrade our manufacturing operations and improve production efficiencies. During the third quarter of 2004, WAVE successfully extended the term of their existing bank debt and we received a $10 million distribution in the fourth quarter of 2004, while in 2003 we received $16 million in distributions.
Net cash totaling $7.0 million was used for our financing activities in 2004, compared to $14.1 million in 2003. The year-to-year change was due to certain subsidiaries that are not participating in our Chapter 11 Case increasing their short-term borrowing for working capital needs in 2004.
DISCONTINUED OPERATIONS
On May 31, 2000, Armstrong completed its sale of all entities, assets and certain liabilities comprising its Insulation Products segment. During 2003, AHI recorded a net loss of $2.4 million for the impairment of some notes receivable and the settlement of certain tax contingencies related to this divestiture. During the fourth quarter of 2005, AHI recorded a net gain of $10.4 million due to the early settlement of the remaining notes receivable and the settlement of other disputed items.
On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During 2004 and 2003, AHI recorded net losses of $0.4 million and $0.1 million, respectively, for the environmental and tax indemnifications related to this divestiture.
In accordance with FAS 144, these adjustments were classified as discontinued operations since the original divestitures were reported as discontinued operations.
OFF-BALANCE SHEET ARRANGEMENTS
No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
CONTRACTUAL OBLIGATIONS
As part of our normal operations, we enter into numerous contractual obligations that require specific payments during the term of the various agreements. The following table includes amounts ongoing under contractual obligations existing as of December 31, 2005.2006. Only known payments that are dependent solely on the passage of time are included. Obligations under contracts that contain minimum payment amounts are shown at the minimum payment amount. Contracts that have variable payment structures without minimum payments are excluded. Purchase orders that are entered into in the normal course of business are also excluded because they are generally cancelable and not legally binding. Amounts are presented below based upon the currently scheduled payment terms. Actual future payments may differ from the amounts presented below due to changes in payment terms or events leading to payments in addition to the minimum contractual amounts.
| 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | |||||||||||||||
Long-Term Debt (1) | $ | 5.4 | $ | 1.7 | $ | 1.3 | $ | 11.1 | $ | 1.2 | $ | 6.2 | $ | 26.9 | |||||||
Capital Lease Obligations(2) | 1.0 | 0.7 | 0.3 | — | — | 0.1 | 2.1 | ||||||||||||||
Operating Lease Obligations(2) | 14.6 | 12.1 | 8.4 | 4.9 | 2.5 | 7.9 | 50.4 | ||||||||||||||
Unconditional Purchase Obligations(3) | 11.9 | 2.9 | 1.9 | 0.9 | 0.7 | 0.1 | 18.4 | ||||||||||||||
Other Long-Term Obligations (4) | 2.4 | 0.2 | 0.1 | 0.1 | — | — | 2.8 | ||||||||||||||
Total Contractual Obligations | $ | 35.3 | $ | 17.6 | $ | 12.0 | $ | 17.0 | $ | 4.4 | $ | 14.3 | $ | 100.6 | |||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | |||||||||||||||
Long-Term Debt | $ | 10.9 | $ | 20.7 | $ | 34.0 | $ | 35.2 | $ | 237.7 | $ | 473.9 | $ | 812.4 | |||||||
Capital Lease Obligations(1) | 0.6 | 0.4 | — | — | — | 0.1 | 1.1 | ||||||||||||||
Operating Lease Obligations(1) | 14.9 | 12.0 | 8.8 | 4.7 | 2.3 | 7.2 | 49.9 | ||||||||||||||
Unconditional Purchase Obligations(2) | 17.1 | 11.2 | 6.0 | 4.0 | — | 0.1 | 38.4 | ||||||||||||||
Other Long-Term Obligations (3) | 1.6 | — | — | — | — | — | 1.6 | ||||||||||||||
Total Contractual Obligations | $ | 45.1 | $ | 44.3 | $ | 48.8 | $ | 43.9 | $ | 240.0 | $ | 481.3 | $ | 903.4 | |||||||
(1) |
| Capital and operating lease obligations include the minimum lease payments due under existing lease agreements with noncancelable lease terms in excess of one year. |
| Unconditional purchase obligations include (a) purchase contracts whereby we must make guaranteed minimum payments of a specified amount regardless of how little material is actually purchased (“take or pay” contracts) and (b) service agreements. Unconditional purchase obligations exclude contracts entered into during the normal course of business that are non-cancelable and have fixed per unit fees, but where the monthly commitment varies based upon usage. Cellular phone contracts are an example. |
| Other long-term obligations include payments under severance agreements. |
We have issued financial guarantees to assure payment on behalf of our subsidiaries in the event of default on various debt and lease obligations in the table above. We have not issued any guarantees on behalf of joint-venture or unrelated businesses.
As of December 31, 2005,For the past several years, we have maintained an agreement with the lending institution of one of our flooring distributors. Under this agreement, if the distributor werewas to default on its borrowingsobligations and the lender foreclosed on the assets, the bank could return a large part of anyportion of our products still at the distributor (subject to certain quality, current product line and roll size minimums)minimum criteria) for a refund of original cost. This agreement will expire in September 2006. At December 31, 2005,In October 2006, the amountlending institution of inventory held at the distributor was approximately $4.2 million. Historically, no claim has been made under anynotified us that the distributor had defaulted on its
Management’s Discussion and Analysis of these typesFinancial Condition and Results of agreementsOperations
(dollar amounts in millions)
obligations. As a result of the distributor’s default, we refunded the bank $1.1 million and we do not anticipate any such claims inreturned the future. As such, no liability has been recorded for this agreement.
related products to our inventory.
We are party to supply agreements, some of which require the purchase of inventory remaining at the supplier upon termination of the agreement. The last such agreement will expire on June 30,July 31, 2009. Had these agreements terminated at December 31, 2005,2006, Armstrong would have been obligated to purchase approximately $11.9$12.3 million of inventory. Historically, due to production planning, we have not had to purchase material amounts of product at the end of similar contracts. Accordingly, no liability has been recorded for most of these guarantees.
As of December 31, 2006, we were required to purchase approximately $0.3 million of inventory held by one of our suppliers and a liability was recorded for this inventory.
As part of our executive compensation plan, certain current and former executives participate in a split-dollar insurance program where we are responsible for remitting the premiums. Since 1998, the program was closed to new participants. As of December 31, 2005,2006, we carried a cash surrender value asset of $7.2$7.8 million related to this program. Should we discontinue making premium payments, the insured
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
executives have the right to the entire policy cash surrender value. In light of the Sarbanes-Oxley Act, we believe it is inappropriate to make the premium payments for twothree of the executives participating in this plan. As a result, beginning in 2003, we have required these twothree individuals to make the premium payments to continue the policy.
We utilize lines orof credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements. Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of our failure to pay our obligations to the beneficiary. This table summarizes the commitments we have available for use.use as of December 31, 2006. Letters of credit are currently arranged through AWI’s DIP Facility with JP Morgan Chase.our revolving credit facility. Certain letters of credit arranged with Wachovia Bank, N.A.another bank prior to the Filingour Chapter 11 filing remain outstanding.
| Total Amounts Committed | Less Than 1 Year | 1 – 3 Years | 4 – 5 Years | Over 5 Years | |||||||||
Other Commercial Commitments | |||||||||||||
Letters of Credit | $ | 71.4 | $ | 70.5 | $ | 0.9 | — | — | |||||
Other Commercial Commitments | Total Amounts Committed | Less Than 1 Year | 1 – 3 Years | 4 – 5 Years | Over 5 Years | |||||||
Letters of Credit | $ | 66.8 | $ | 66.8 | — | — | — | |||||
In addition, we have lines of credit for certain international operations totaling $45.2$52.4 million, of which $19.8$8.0 million was used at December 31, 20052006 and $25.4$44.4 million was available to ensure funds are available to meet operating requirements.
In disposing of assets, prior to the Filing, AWI and some subsidiaries hadhave entered into contracts that included various indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and other litigation. Some of these contracts hadhave exposure limits, but many diddo not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under these contracts. As a debtor-in-possession, for those contracts that are still executory where AWI was the sole guarantor, AWI anticipates rejecting those contracts. Parties that timely file claims with respect to such contracts will have such claims addressed in AWI’s Chapter 11 Case. AWI cannot estimate the value of any potential claims that will ultimately be allowed by the Bankruptcy Court. See Item 1 - Business regarding Proceedings under Chapter 11.
Subsidiaries that are not part of the Chapter 11 Filing also entered into certain contracts that included various indemnity provisions similar to those described above. Since these subsidiaries are not part of the Chapter 11 Filing, these contracts continue to be in effect. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, there is no way to estimate the potential maximum exposure under all these contracts. For contracts under which an indemnity claim has been received, a liability of $0.8$4.0 million has been recorded as of December 31, 2005.
2006. See Note 21 of the Consolidated Financial Statements for additional information.
In September 1999, we sold our Textiles Products operations. As part of the divestiture agreement, we transferred certain liabilities and assets to the purchaser to cover pension payments earned by the work force as of the sale date. We also reimbursereimbursed the purchaser for such pension payments that arewere not covered by the pension assets. In addition, we agreed to reimburse the purchaser for the tax impact of our reimbursement of the pension payments. This agreement hashad no termination date. AsIn the third quarter of December 31, 2005,2006, we maintained a $3.6 million netsettled this liability for this guarantee. As of December 31, 2005,and terminated the net present value of the maximum payments is approximately $5.4 million, excluding any amounts to be paid for tax reimbursement.
See Notes 4 and 22 to the Consolidated Financial Statements for a discussion of the ESOP loan guarantee.agreement.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
RELATED PARTIES
See Note 2931 of the Consolidated Financial Statements for a discussion of our relationships with WAVE and Interface Solutions, Inc. (“ISI”).
Related party transactions with executives and outside directors are discussed in Item 13 - Certain
Relationships and Related Transactions.Transactions, and Director Independence.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use swap, forward swaps and option contracts to hedge currency and commodity exposures. We regularly monitor developments in the capital markets and only enter into currency and swapcommodity transactions with established counterparties having investment-grade ratings. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible. Swap, forwardForward swap and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. We use derivative financial instruments as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions and energy companies in order to manage our exposure to potential nonperformance on such instruments.
Interest Rate Sensitivity
Armstrong is subject to interest rate variability on its Term Loan A, Term Loan B, revolving credit facility and other borrowings. There were no borrowings under the revolving credit facility as of December 31, 2006. A hypothetical increase of one-quarter percentage point in interest rates from December 31, 2006 levels would increase 2007 interest expense by approximately $2 million. We may execute interest rate swaps at some future date to mitigate our risk to interest rate variability.
Due to AWI’s Chapter 11 Filing in December 2000, all affected debt has beenwas classified as liabilities subject to compromise. All such debt will be addressed in the Chapter 11 Case.compromise until October 2, 2006 when AWI emerged from bankruptcy. While operating as a debtor-in-possession, AWI doesdid not expect to pay any principal, interest or other payments on this debt unless approved by the Bankruptcy Court. However, we also havehad debt ofin entities that were not a part of the Chapter 11 Filing,filing, which are beingwas paid on schedule.
The table below provides information about our long-term debt obligations as of December 31, 20052006, and 2004,December 31, 2005, including payment requirements and related weighted-average interest rates by scheduled maturity dates. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents, which is our reporting currency. The December 31, 2005 amounts below reflect only debt of entities that arewere not a part of the Chapter 11 Filing.
Successor Company Scheduled maturity date ($ millions) | 2007 | 2008 | 2009 | 2010 | 2011 | After 2012 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | $ | 0.6 | $ | 0.5 | <$ | 0.1 | <$ | 0.1 | <$ | 0.1 | <$ | 0.1 | $ | 1.1 | ||||||||||||||||||||||||||||||||||||||||||
Avg. interest rate | 7.54 | % | 7.46 | % | 5.85 | % | 7.63 | % | 7.63 | % | 7.63 | % | 7.49 | % | ||||||||||||||||||||||||||||||||||||||||||
Variable rate | $ | 10.3 | $ | 20.2 | $ | 34.0 | $ | 35.2 | $ | 237.7 | $ | 473.9 | $ | 811.3 | ||||||||||||||||||||||||||||||||||||||||||
Avg. interest rate | 6.91 | % | 6.87 | % | 6.10 | % | 6.86 | % | 6.85 | % | 7.10 | % | 6.97 | % | ||||||||||||||||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | After 2011 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Scheduled maturity date | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Predecessor Company Scheduled maturity date ($ millions) | 2006 | 2007 | 2008 | 2009 | 2010 | After 2011 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2005 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | $ | 4.4 | $ | 0.7 | $ | 0.2 | — | — | $ | 0.1 | $ | 5.4 | $ | 4.4 | $ | 0.7 | $ | 0.2 | — | — | $ | 0.1 | $ | 5.4 | ||||||||||||||||||||||||||||||||
Avg. interest rate | 6.22 | % | 7.55 | % | 7.63 | % | 7.63 | % | 7.63 | % | 7.63 | % | 6.47 | % | 6.22 | % | 7.55 | % | 7.63 | % | — | — | 7.63 | % | 6.47 | % | ||||||||||||||||||||||||||||||
Variable rate Avg. interest rate | $ | 1.0 5.61 | % | $ | 1.0 3.73 | % | $ | 1.1 3.76 | % | $ | 11.1 3.85 | % | $ | 1.2 3.80 | % | $ | 6.1 4.11 | % | $ | 21.5 3.99 | % | |||||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | After 2010 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Scheduled maturity date | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | $ | 7.9 | $ | 6.2 | $ | 1.6 | $ | 1.2 | $ | 1.0 | $ | 7.6 | $ | 25.5 | ||||||||||||||||||||||||||||||||||||||||||
Variable rate | $ | 1.0 | $ | 1.0 | $ | 1.1 | $ | 11.1 | $ | 1.2 | $ | 6.1 | $ | 21.5 | ||||||||||||||||||||||||||||||||||||||||||
Avg. interest rate | 6.34 | % | 6.25 | % | 7.07 | % | 6.89 | % | 6.70 | % | 6.71 | % | 6.51 | % | 5.61 | % | 3.73 | % | 3.76 | % | 3.85 | % | 3.80 | % | 4.11 | % | 3.99 | % | ||||||||||||||||||||||||||||
Variable rate Avg. interest rate | $ | 0.3 1.75 | % | $ | 0.3 1.75 | % | $ | 0.3 1.75 | % | $ | 0.3 1.75 | % | $ | 10.2 2.11 | % | $ | 0.5 1.75 | % | $ | 11.9 2.06 | % | |||||||||||||||||||||||||||||||||||
Exchange Rate Sensitivity
We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, asmovement. We have used foreign currency expenses generally offset foreign currency revenues.forward exchange contracts to reduce our remaining exposure. At December 31, 2005,2006, Armstrong’s major foreign currency exposures are to the Euro, the Canadian dollar and the British pound.
We have used foreign currency forward exchange contracts A 10% strengthening of all currencies against the U.S. dollar compared to reduceDecember 31, 2006 levels would decrease our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and purchases from foreign suppliers, will be adversely affected2007 earnings before income taxes by changes in exchange rates. These derivative instruments are used for firmly committed or forecasted transactions. These transactions allow us to further reduce our overall exposure to exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged.
approximately $5 million.
We also have useduse foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-companyintercompany loans.
The table below details our outstanding currency instruments as of December 31, 20052006 and 2004.2005. All the instruments outstanding as of December 31, 20052006 have scheduled maturity dates on or before MarchDecember 31, 2007.
| Maturing in: | ||||||||||||||||||||||
On balance sheet foreign exchange related derivatives | 2007 | 2008 | Total | |||||||||||||||||||
Successor Company As of December 31, 2006 | ||||||||||||||||||||||
Notional amounts (millions) | $ | 381.5 | $ | 0.0 | $ | 381.5 | ||||||||||||||||
Liabilities at fair value (millions) | $ | (2.0 | ) | — | $ | (2.0 | ) | |||||||||||||||
| Maturing in: | ||||||||||||||||||||||
| 2006 | 2007 | Total | Maturing in: | |||||||||||||||||||
On balance sheet FX related derivatives | ||||||||||||||||||||||
As of December 31, 2005 | ||||||||||||||||||||||
| 2006 | 2007 | Total | ||||||||||||||||||||
Predecessor Company As of December 31, 2005 | ||||||||||||||||||||||
Notional amounts (millions) | $ | 482.5 | $ | 3.2 | $ | 485.7 | $ | 482.5 | $ | 3.2 | $ | 485.7 | ||||||||||
Assets at fair value (millions) | $ | 1.5 | — | $ | 1.5 | $ | 1.5 | — | $ | 1.5 | ||||||||||||
| Maturing in: | ||||||||||||||||||||||
| 2005 | 2006 | Total | ||||||||||||||||||||
As of December 31, 2004 | ||||||||||||||||||||||
Notional amounts (millions) | $ | 378.1 | $ | 8.7 | $ | 386.8 | ||||||||||||||||
Assets at fair value (millions) | ($13.9 | ) | — | ($13.9 | ) | |||||||||||||||||
Commodity Price Sensitivity
We purchase natural gas for use in the manufacture of ceiling tiles and other products, as well as to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy of reducing short termnatural gas cost volatility through derivative instruments, including forward swap contracts, purchased call options, and zero-cashzero-cost collars. A 10% increase in natural gas prices compared to December 31, 2006 prices would increase our expenses by approximately $5 million. The table below provides information about Armstrong’s natural gas contracts as of December 31, 20052006 and 20042005 that are sensitive to changes in commodity prices. Notional amounts and price ranges are in millions of Btu’s (MMBtu).
| Maturing in: | Maturing in: | |||||||||||
| 2006 | 2007 | Total | 2007 | 2008 | Total | |||||||
On balance sheet commodity related derivatives | ||||||||||||
As of December 31, 2005 | ||||||||||||
Successor Company As of December 31, 2006 | ||||||||||||
Contract amounts (MMBtu) | 4,950,000 | 1,800,000 | 6,750,000 | 4,670,000 | 1,410,000 | 6,080,000 | ||||||
Contract price range ($/MMBtu) | $5.54 - $11.80 | $9.56 - $11.85 | $5.54 - $11.85 | $8.50 -$11.85 | $8.52 -$10.85 | $8.50 -$11.85 | ||||||
Assets at fair value (millions) | $15.0 | $3.7 | $18.7 | $1.9 | $0.6 | $2.5 | ||||||
| Maturing in: | ||||||||||||
| 2005 | 2006 | Total | Maturing in: | |||||||||
As of December 31, 2004 | ||||||||||||
2006 | 2007 | Total | ||||||||||
Predecessor Company As of December 31, 2005 | ||||||||||||
Contract amounts (MMBtu) | 5,230,000 | 1,630,000 | 6,860,000 | 4,950,000 | 1,800,000 | 6,750,000 | ||||||
Contract price range ($/MMBtu) | $4.46 - $6.72 | $6.37 - $8.10 | $4.46 - $8.10 | $5.54 -$11.80 | $9.56 -$11.85 | $5.54 -$11.85 | ||||||
Assets at fair value (millions) | $4.3 | $1.0 | $5.3 | $15.0 | $3.7 | $18.7 | ||||||
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
SUPPLEMENTARY DATA
Quarterly Financial Information for the Years Ended December 31, 2006 and 2005 (Unaudited)
The following consolidated financial statements are filed as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Three Month Period Ended December 31, 2006 (Successor Company) and the Nine Month Period Ended September 30, 2006(1) and the Years Ended December 31, 2005 and 2004 (Predecessor Company)
Consolidated Balance Sheets as of December 31, 2006 (Successor Company) and 2005 (Predecessor Company)
Consolidated Statements of Shareholders’ Equity (Deficit) for the Three Months Ended December 31, 2006 (Successor Company) and the Nine Months Ended September 30, 2006(1) and the Years Ended December 31, 2005 and 2004 (Predecessor Company)
Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2006 (Successor Company) and the Nine Months Ended September 30, 2006(1) and the Years Ended December 31, 2005 and 2004 (Predecessor Company)
Notes to Consolidated Financial Statements
Schedule II for the Three Month Period Ended December 31, 2006 (Successor Company) and the Nine Month Period Ended September 30, 2006(1) and the Years Ended December 31, 2005 and 2004 (Predecessor Company)
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QUARTERLY FINANCIAL INFORMATION
ARMSTRONG HOLDINGS,WORLD INDUSTRIES, INC. (unaudited)
(millions except for per share data) | First | Second | Third | Fourth | Total year | Predecessor Company | Successor Company | |||||||||||||||||||||||||
2005 | ||||||||||||||||||||||||||||||||
Net sales | $ | 840.7 | $ | 919.0 | $ | 937.0 | $ | 861.7 | $ | 3,558.4 | ||||||||||||||||||||||
| First | Second | Third(1) | Fourth | |||||||||||||||||||||||||||||
2006 Net sales | $ | 822.2 | $ | 884.0 | $ | 902.4 | $ | 817.3 | ||||||||||||||||||||||||
Gross profit | 178.2 | 200.8 | 216.2 | 142.1 | 737.3 | 167.6 | 203.8 | 208.5 | 156.9 | |||||||||||||||||||||||
Net earnings (loss) from continuing operations | (3.0 | ) | 17.7 | 46.1 | 40.9 | 101.7 | ||||||||||||||||||||||||||
Net earnings from continuing operations | 27.7 | 49.6 | 1,346.9 | 3.3 | ||||||||||||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.07 | ) | $ | 0.44 | $ | 1.14 | $ | 1.01 | $ | 2.51 | n/a | n/a | n/a | $ | 0.06 | ||||||||||||||||
Diluted | $ | (0.07 | ) | $ | 0.43 | $ | 1.13 | $ | 1.00 | $ | 2.50 | n/a | n/a | n/a | $ | 0.06 | ||||||||||||||||
Net earnings | 28.0 | 40.2 | 1,287.6 | 2.2 | ||||||||||||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | n/a | n/a | n/a | $ | 0.04 | |||||||||||||||||||||||||||
Diluted | n/a | n/a | n/a | $ | 0.04 | |||||||||||||||||||||||||||
Price range of common stock—high | n/a | n/a | n/a | $ | 42.50 | |||||||||||||||||||||||||||
Price range of common stock—low | n/a | n/a | n/a | $ | 30.00 | |||||||||||||||||||||||||||
| Predecessor Company | ||||||||||||||||||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||||||||||||||||||
2005 Net sales | $ | 788.1 | $ | 861.4 | $ | 871.6 | $ | 805.5 | ||||||||||||||||||||||||
Gross profit | 164.3 | 184.5 | 198.8 | 127.2 | ||||||||||||||||||||||||||||
Net earnings from continuing operations | 1.1 | 17.6 | 43.8 | 43.6 | ||||||||||||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||||||
Diluted | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||||||
Net earnings (loss) | (3.0 | ) | 17.7 | 46.1 | 51.3 | 112.1 | (3.2 | ) | 17.3 | 46.1 | 50.9 | |||||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.07 | ) | $ | 0.44 | $ | 1.14 | $ | 1.26 | $ | 2.77 | n/a | n/a | n/a | n/a | |||||||||||||||||
Diluted | $ | (0.07 | ) | $ | 0.43 | $ | 1.13 | $ | 1.26 | $ | 2.75 | n/a | n/a | n/a | n/a | |||||||||||||||||
Price range of common stock—high | $ | 2.82 | $ | 4.40 | $ | 3.10 | $ | 2.34 | $ | 4.40 | n/a | n/a | n/a | n/a | ||||||||||||||||||
Price range of common stock—low | $ | 1.65 | $ | 1.50 | $ | 1.99 | $ | 1.49 | $ | 1.49 | n/a | n/a | n/a | n/a | ||||||||||||||||||
2004 | ||||||||||||||||||||||||||||||||
Net sales | $ | 845.0 | $ | 903.5 | $ | 893.5 | $ | 855.3 | $ | 3,497.3 | ||||||||||||||||||||||
Gross profit | 184.6 | 216.4 | 194.2 | 91.1 | 686.3 | |||||||||||||||||||||||||||
Net earnings (loss) from continuing operations | 20.0 | (14.5 | ) | 23.2 | (109.1 | ) | (80.4 | ) | ||||||||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.49 | $ | (0.36 | ) | $ | 0.57 | $ | (2.69 | ) | $ | (1.99 | ) | |||||||||||||||||||
Diluted | $ | 0.49 | $ | (0.36 | ) | $ | 0.57 | $ | (2.69 | ) | $ | (1.99 | ) | |||||||||||||||||||
Net earnings (loss) | 19.6 | (14.5 | ) | 23.2 | (109.1 | ) | (80.8 | ) | ||||||||||||||||||||||||
Per share of common stock: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.48 | $ | (0.36 | ) | $ | 0.57 | $ | (2.69 | ) | $ | (2.00 | ) | |||||||||||||||||||
Diluted | $ | 0.48 | $ | (0.36 | ) | $ | 0.57 | $ | (2.69 | ) | $ | (2.00 | ) | |||||||||||||||||||
Price range of common stock—high | $ | 1.39 | $ | 1.55 | $ | 2.30 | $ | 3.51 | $ | 3.51 | ||||||||||||||||||||||
Price range of common stock—low | $ | 0.95 | $ | 0.76 | $ | 1.16 | $ | 1.20 | $ | 0.76 | ||||||||||||||||||||||
(1) | Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
There were no dividends paid in 20052006 or 2004.2005. The DIP Facility stipulatesstipulated that AWI willcould not declare or pay any dividends either directly or indirectly and bankruptcy law bars dividends by companies in Chapter 11.
Note: The net sales and gross profit amounts reported above are reported on a continuing operations basis. The sum of the quarterly earnings per share data may not equal the total year amounts due to changes in the average shares outstanding and, for diluted data, the exclusion of the antidilutive effect in certain quarters.
Fourth Quarter 20052006 Compared With Fourth Quarter 20042005
Net sales of $861.7$817.3 million in the fourth quarter of 2006 increased from net sales of $805.5 million in the fourth quarter of 2005, increased from net sales of $855.3 million in the fourth quarter of 2004, an increase of 0.7%1.5%. Excluding the unfavorablefavorable effects of foreign exchange rates of $10.3$13.1 million, net sales increased 2.0% on the strength of volume growthwere flat as price realization and improvedbetter product mix in Building Products.offset volume declines. Resilient Flooring net sales decreased 2.5%3.5%, excluding the unfavorablefavorable effects of foreign exchange rates,
primarily due to declining selling prices.volumes. Wood Flooring net sales decreased by 1.1%7.8% due to price declines related to decreasing lumber costs. Textiles and Sports Flooringweakness in the U.S residential markets. Building Products net sales increased 5.5%by 7.4%, excluding the unfavorablefavorable effects of foreign exchange rates of $3.9 million, due to strength in sports flooring and carpet tiles. Building Products net sales increased by 9.4%, excluding the unfavorable effects of foreign exchange rates of $3.8$7.0 million, due to increased selling prices and volume growth.improved product mix. Cabinets decreasedincreased by 0.6% with11.7% on improved price and mix nearly offsetting volume declines.volume. Net sales increased 1.7%decreased 3.4% in the Americas. Excluding the unfavorablefavorable effects of foreign exchange rates of $11.9$11.1 million, Europe net sales increased 3.4%,11.2% and Pacific Rim sales increased by 2.6%15.9%.
Operating expenses in the fourth quarter of 2006 were impacted by the effects of adopting fresh-start reporting, as a result of AWI emerging from Chapter 11 on October 2, 2006 (net sales were not impacted by fresh-start reporting). In addition, both 2006 and 2005 operating expenses were impacted by several other significant items. The fresh-start and other significant items, which impacted cost of goods sold (“COGS”), selling, general and administrative expenses (“SG&A”), restructuring charges and equity earnings, include:
Increase / (Reduction) in Expenses, reported in $ millions
| Item | Where Reported | 2006 | 2005 | |||||||
Fresh-Start(1): | ||||||||||
Change in depreciation and amortization | COGS | $ | (1.3 | ) | — | |||||
Change in costs for benefit plans | COGS | (4.6 | ) | — | ||||||
Impact on hedging-related activity | COGS | (1.0 | ) | — | ||||||
Inventory-related costs | COGS | 29.6 | — | |||||||
Change in depreciation and amortization | SG&A | 2.8 | — | |||||||
Change in costs for benefit plans | SG&A | (2.3 | ) | — | ||||||
Inventory-related costs (WAVE) | Equity Earnings | 3.7 | ||||||||
Expenses from WAVE step-up | Equity Earnings | 1.7 | — | |||||||
Other Significant Items: | ||||||||||
Business interruption claim(2) | COGS | (4.7 | ) | $ | (1.1 | ) | ||||
Cost reduction initiatives expenses(3) | COGS | 0.5 | 19.2 | |||||||
Pension curtailment charge(3) | COGS | — | 11.4 | |||||||
Fixed asset impairments | COGS | — | 2.7 | |||||||
Pension curtailment charge(3) | SG&A | — | 5.5 | |||||||
Chapter 11 related post-emergence expenses(4) | SG&A | 4.6 | — | |||||||
Fixed asset impairments | SG&A | — | 0.5 | |||||||
Cost reduction initiatives expenses(3) | Restructuring | 1.7 | 6.0 | |||||||
(1) | See Note 3 for more information on fresh-start reporting. |
(2) | In the fourth quarter, we received the final payment for a business interruption claim, totaling $4.7 million. We received $1.1 million in the fourth quarter of 2005 for the same claim. |
(3) | See “Factors Affecting Operating Costs” and Note 15 for a discussion on the cost reduction expenses and pension curtailment charges. |
(4) | AWI incurred $4.6 million in expenses during the fourth quarter for Chapter 11 related post-emergence activities. |
For the fourth quarter of 2005,2006, the cost of goods sold was 83.5%80.8% of net sales, compared to 89.3%84.2% in 2004.2005. The 5.83.4 percentage point decreaseimprovement was the result of benefits from higher selling prices, primarily due to approximately $47 million lower fixed asset impairment charges, improved volumein Building Products, better manufacturing performance, mainly in the Resilient and mixWood Flooring businesses, and operating efficiencies resultingimprovement from cost reduction initiatives.sales mix. Cost of goods sold in 2006 also benefited from a larger U.S. pension plan credit. These factors more than offset approximately $13 million in increased raw material energyinflation across all businesses. In addition, cost of goods sold in 2006 and freight expenses, and approximately $11 million of U.S. pension plan curtailment charges.
2005 were impacted by the items as detailed in the above table.
SG&A expenses for the fourth quarter of 20052006 were $157.1$144.0 million as compared to $172.4$142.2 million for the fourth quarter of 2004. The decrease is primarily due to lower selling2005. Resilient Flooring reduced spending, while Building Products and advertising expenses and favorable impactsWood Flooring grew at less than the rate of cost reduction initiatives, which more than offset the $6 million portion of the U.S. pension plan curtailment charge. The fourth quarter of 2004 included a $5 million contribution to the Armstrong Foundation (a community giving program funded by Armstrong).growth in revenue. In addition, Armstrong Holdings, Inc.both 2006 and 2005 SG&A expenses in 2005 benefited from a $1.6 million reversal of a contingent liability established when Armstrong Holdings, Inc. was created.
A goodwill impairment charge of $48.4 million was recordedwere impacted by the items as detailed in the fourth quarterabove table.
An operating income from continuing operations of 2004 related to our European resilient flooring business. See Note 10 of the Consolidated Financial Statements.
Restructuring charges, net, were $6.2$16.5 million in the fourth quarter of 2005, primarily related2006 compared to the transfer of commercial flooring production from Lancaster to other facilities around the world, and $13.3 million in the fourth quarter of 2004, primarily related to the announced closing of our Hoogezand facility and North American SG&A initiatives. See Note 13 of the Consolidated Financial Statements.
Anan operating loss from continuing operations of $10.1 million in the fourth quarter of 2005 compared to an operating loss of $134.8 million in the fourth quarter of 2004. 2004 included a goodwill impairment charge of $48.4 million and a $44.8 million fixed asset impairment charge, while 2005 includes $17.6 million of fixed asset impairment charges. Aside from these items, the change is primarily due to benefits from ongoing cost initiatives, and lower charges related to cost reduction initiatives.2005.
Chapter 11 reorganization costs, net were income of $5.7 million in theThe fourth quarter of 2005 and expensehad $5.7 million of $0.3 million in the fourth quarter of 2004. The change is primarilyChapter 11 reorganization income due to athe reversal of an accrual for professional fees for certain advisors.
The tax benefitexpense from continuing operations for the fourth quarter of 20052006 was $45.3$3.8 million compared to a tax benefit of $26.5$45.3 million for the same period of 2004.2005. The year over yearquarter to quarter comparative tax rates are not meaningful due to the relative size of the loss from operatingcontinuing operations reported in 2005 of $4.4 million versus the $7.1 million of income reported in 2004 of $134.8 million versus the $4.4 million reported for 2005. During the2006. The 2006 fourth quarter tax rate was negatively impacted by nondeductible bankruptcy fees and foreign losses with valuation allowances partially offset by favorable benefits from lower foreign tax rates, foreign exchange and foreign tax refunds, of which $1.5 million is related to a recent change in German tax law which allows for a recovery of previously frozen imputation tax credits. The comparative period of 2005 the Company recordedreflected $61.2 million of tax benefits related to a subsidiary capital restructuring, while the comparative period of 2004 reflected non-deductible goodwill and asset impairments of $93.2 million which increased the reported tax rate.restructuring.
Net income from continuing operations was $40.9 million in the fourth quarter of 2005 compared to a net loss of $109.1 million in the fourth quarter of 2004.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting was designed to provide reasonable assurance to management and our Board of Directors regarding the reliability of financial reporting and the fair presentation of our financial statements.
With the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.
Our management’s assessment of the effectiveness of our internal control over financial reporting for Armstrong Holdings, Inc. as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included herein.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders,
Armstrong Holdings, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Armstrong Holdings, Inc. and subsidiaries (“the Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Armstrong Holdings, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Armstrong Holdings, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated financial statements of the Company as listed in the accompanying index on page 48, and our report dated February 23, 2006 expressed an unqualified opinion on those consolidated financial statements. Our report dated February 23, 2006 contains an explanatory paragraph that states that three of the Company’s domestic subsidiaries, including Armstrong World Industries, Inc., the Company’s major operating subsidiary, filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on December 6, 2000, and that the filing under Chapter 11 and the increased uncertainty regarding the Company’s potential asbestos liability raise substantial doubt about the Company’s ability to continue as a going concern.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders,
Armstrong Holdings,World Industries, Inc.:
We have audited the accompanying consolidated financial statements of Armstrong Holdings,World Industries, Inc. and subsidiaries (“the Company”) as listed in the accompanying index on page 48.50. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index on page 48.50. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Armstrong Holdings,World Industries, Inc. and subsidiaries as of December 31, 2006 for the Successor Company and December 31, 2005 and 2004,for the Predecessor Company, and the results of their operations and their cash flows for each of the years in the three-year periodthree months ended December 31, 2006 for the Successor Company, and for the nine months ended September 30, 2006, and the years ended December 31, 2005 and December 31, 2004 for the Predecessor Company, in conformity with U.S. 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.
The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in NoteNotes 1 ofand 3 to the consolidated financial statements, threeon August 18, 2006, the Bankruptcy Court confirmed the Company’s Plan of Reorganization (the Plan), related to its Chapter 11 bankruptcy proceeding. The Plan became effective on October 2, 2006 and Armstrong World Industries, Inc. emerged from the Chapter 11 bankruptcy proceeding. In connection with its emergence from the Chapter 11 bankruptcy proceeding, Armstrong World Industries, Inc. adopted fresh-start reporting pursuant to Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” as of October 2, 2006. As a result, the financial statements of the Company’s domestic subsidiaries, including Successor Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable in all respects. As described in Note 3 to the consolidated financial statements, the Company has reflected the effects of the Plan and fresh-start reporting in the Predecessor Company for the nine month period ended September 30, 2006. As discussed in Notes 16 and 18 to the consolidated financial statements, upon adoption of fresh-start reporting, the Company changed its method of accounting for income tax contingencies as described by FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” and its method of accounting for defined benefit and other postretirement plans as described by Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).”
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 30, 2007
Armstrong World Industries, Inc., the Company’s major operating subsidiary, filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on December 6, 2000. Armstrong World Industries, Inc. has also defaulted on certain debt obligations. Although these operating subsidiaries are currently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and confirmation by the Bankruptcy Court. The filing under Chapter 11 and the resulting increased uncertainty regarding the Company’s potential asbestos liabilities, as discussed in Note 30 of the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of these uncertainties.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Armstrong Holdings, Inc., and Subsidiaries
Consolidated Statements of Earnings
(amounts in millions, except per share amounts)data)
| Years Ended December 31, | Successor Company | Predecessor Company | ||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006(1) | Year Ended December 31, 2005 | Year Ended December 31, 2004 | ||||||||||||||||||||||
Net sales | $ | 3,558.4 | $ | 3,497.3 | $ | 3,259.0 | $ | 817.3 | $ | 2,608.6 | $ | 3,326.6 | $ | 3,279.1 | ||||||||||||||
Cost of goods sold | 2,821.1 | 2,811.0 | 2,597.4 | 660.4 | 2,028.7 | 2,651.8 | 2,654.4 | |||||||||||||||||||||
Gross profit | 737.3 | 686.3 | 661.6 | 156.9 | 579.9 | 674.8 | 624.7 | |||||||||||||||||||||
Selling, general and administrative expenses | 652.7 | 635.0 | 612.1 | 144.0 | 417.0 | 590.0 | 567.7 | |||||||||||||||||||||
Charge for asbestos liability, net | — | — | 81.0 | |||||||||||||||||||||||||
Goodwill impairment | — | 108.4 | — | — | — | — | 108.4 | |||||||||||||||||||||
Restructuring charges, net | 23.2 | 18.3 | 8.6 | 1.7 | 10.0 | 23.0 | 17.9 | |||||||||||||||||||||
Equity (earnings) from joint venture | (39.3 | ) | (31.6 | ) | (20.8 | ) | ||||||||||||||||||||||
Equity earnings from joint venture | (5.3 | ) | (41.4 | ) | (39.3 | ) | (31.6 | ) | ||||||||||||||||||||
Operating income (loss) | 100.7 | (43.8 | ) | (19.3 | ) | 16.5 | 194.3 | 101.1 | (37.7 | ) | ||||||||||||||||||
Interest expense (unrecorded contractual interest of $82.8, $86.9 and $95.1, respectively) | 8.5 | 8.4 | 9.0 | |||||||||||||||||||||||||
Interest expense (unrecorded contractual interest of $0.0, $57.6, $82.8 and $86.9, respectively) | 13.4 | 5.2 | 7.7 | 7.9 | ||||||||||||||||||||||||
Other non-operating expense | 1.5 | 3.1 | 5.7 | 0.3 | 1.0 | 1.5 | 3.1 | |||||||||||||||||||||
Other non-operating (income) | (12.0 | ) | (6.4 | ) | (5.0 | ) | (4.3 | ) | (7.2 | ) | (11.8 | ) | (6.4 | ) | ||||||||||||||
Chapter 11 reorganization (income) costs, net | (1.2 | ) | 6.9 | 9.4 | — | (1,955.5 | ) | (1.2 | ) | 6.9 | ||||||||||||||||||
Earnings (loss) from continuing operations before income taxes | 103.9 | (55.8 | ) | (38.4 | ) | 7.1 | 2,150.8 | 104.9 | (49.2 | ) | ||||||||||||||||||
Income tax expense (benefit) | 2.2 | 24.6 | (1.6 | ) | 3.8 | 69.6 | (1.2 | ) | 21.4 | |||||||||||||||||||
Income tax expense on settlement and fresh-start adjustments | — | 657.0 | — | — | ||||||||||||||||||||||||
Earnings (loss) from continuing operations | 101.7 | (80.4 | ) | (36.8 | ) | 3.3 | 1,424.2 | 106.1 | (70.6 | ) | ||||||||||||||||||
Gain (loss) from discontinued operations, net of tax of $0.0, $0.2 and $0.1 | 10.4 | (0.4 | ) | (2.5 | ) | |||||||||||||||||||||||
Gain (loss) from discontinued operations, net of tax of $0.9, $(8.7), $2.8 and $3.5 | (1.1 | ) | (68.4 | ) | 5.0 | (9.1 | ) | |||||||||||||||||||||
Net earnings (loss) | $ | 112.1 | $ | (80.8 | ) | $ | (39.3 | ) | $ | 2.2 | $ | 1,355.8 | $ | 111.1 | $ | (79.7 | ) | |||||||||||
Earnings (loss) per share of common stock, continuing operations: | ||||||||||||||||||||||||||||
Earnings per share of common stock, continuing operations: | ||||||||||||||||||||||||||||
Basic | $ | 2.51 | $ | (1.99 | ) | $ | (0.91 | ) | $ | 0.06 | n/a | n/a | n/a | |||||||||||||||
Diluted | $ | 2.50 | $ | (1.99 | ) | $ | (0.91 | ) | $ | 0.06 | n/a | n/a | n/a | |||||||||||||||
Gain (loss) per share of common stock, discontinued operations: | ||||||||||||||||||||||||||||
Loss per share of common stock, discontinued operations: | ||||||||||||||||||||||||||||
Basic | $ | 0.26 | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.02 | ) | n/a | n/a | n/a | ||||||||||||||
Diluted | $ | 0.26 | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.02 | ) | n/a | n/a | n/a | ||||||||||||||
Net earnings (loss) per share of common stock: | ||||||||||||||||||||||||||||
Net earnings per share of common stock: | ||||||||||||||||||||||||||||
Basic | $ | 2.77 | $ | (2.00 | ) | $ | (0.97 | ) | $ | 0.04 | n/a | n/a | n/a | |||||||||||||||
Diluted | $ | 2.75 | $ | (2.00 | ) | $ | (0.97 | ) | $ | 0.04 | n/a | n/a | n/a | |||||||||||||||
Average number of common shares outstanding: | ||||||||||||||||||||||||||||
Basic | 40.5 | 40.5 | 40.5 | 55.0 | n/a | n/a | n/a | |||||||||||||||||||||
Diluted | 40.7 | 40.5 | 40.5 | 55.3 | n/a | n/a | n/a | |||||||||||||||||||||
(1) | Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
See accompanying notes to consolidated financial statements beginning on page 58.59.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions, except share data)
| December 31, 2005 | December 31, 2004 | |||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 602.2 | $ | 515.9 | ||||
Accounts and notes receivable, net | 328.8 | 336.1 | ||||||
Inventories, net | 514.5 | 535.1 | ||||||
Deferred income taxes | 15.4 | 15.6 | ||||||
Income tax receivable | 18.2 | 7.0 | ||||||
Other current assets | 82.2 | 72.5 | ||||||
Total current assets | 1,561.3 | 1,482.2 | ||||||
Property, plant and equipment, less accumulated depreciation and amortization of $1,562.0 and $1,540.7, respectively | 1,145.3 | 1,208.8 | ||||||
Insurance receivable for asbestos-related liabilities, noncurrent | 88.8 | 88.8 | ||||||
Prepaid pension costs | 476.9 | 480.9 | ||||||
Investment in affiliates | 67.4 | 72.5 | ||||||
Goodwill | 134.2 | 136.0 | ||||||
Other intangibles, net | 68.1 | 76.0 | ||||||
Deferred income taxes, noncurrent | 967.4 | 941.6 | ||||||
Other noncurrent assets | 96.6 | 122.6 | ||||||
Total assets | $ | 4,606.0 | $ | 4,609.4 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 14.6 | $ | 11.1 | ||||
Current installments of long-term debt | 5.4 | 8.2 | ||||||
Accounts payable and accrued expenses | 392.5 | 447.4 | ||||||
Income tax payable | 10.1 | 20.3 | ||||||
Deferred income taxes | 0.8 | 1.1 | ||||||
Total current liabilities | 423.4 | 488.1 | ||||||
Liabilities subject to compromise | 4,864.7 | 4,866.2 | ||||||
Long-term debt, less current installments | 21.5 | 29.2 | ||||||
Postretirement and postemployment benefit liabilities | 258.9 | 262.6 | ||||||
Pension benefit liabilities | 223.7 | 258.9 | ||||||
Other long-term liabilities | 90.0 | 87.6 | ||||||
Deferred income taxes, noncurrent | 21.2 | 19.2 | ||||||
Minority interest in subsidiaries | 7.9 | 9.3 | ||||||
Total noncurrent liabilities | 5,487.9 | 5,533.0 | ||||||
Shareholders’ equity (deficit): | ||||||||
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 | 167.7 | 167.7 | ||||||
Reduction for ESOP loan guarantee | (142.2 | ) | (142.2 | ) | ||||
Accumulated deficit | (906.5 | ) | (1,018.6 | ) | ||||
Accumulated other comprehensive income | 37.1 | 42.8 | ||||||
Less common stock in treasury, at cost 2005 – 11,214,449 shares and 2004 – 11,210,018 shares | (513.3 | ) | (513.3 | ) | ||||
Total shareholders’ (deficit) | (1,305.3 | ) | (1,411.7 | ) | ||||
Total liabilities and shareholders’ equity | $ | 4,606.0 | $ | 4,609.4 | ||||
| Successor Company | Predecessor Company | |||||||
| December 31, 2006 | December 31, 2005 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 252.5 | $ | 602.2 | ||||
Accounts and notes receivable, net | 321.9 | 328.8 | ||||||
Inventories, net | 521.7 | 514.5 | ||||||
Assets of discontinued business held for sale | 121.6 | — | ||||||
Deferred income taxes | 6.8 | 15.4 | ||||||
Income tax receivable | 81.4 | 18.2 | ||||||
Other current assets | 65.5 | 82.2 | ||||||
Total current assets | 1,371.4 | 1,561.3 | ||||||
Property, plant and equipment, less accumulated depreciation and amortization of $28.8 and $1,628.7, respectively | 966.2 | 1,180.7 | ||||||
Insurance receivable for asbestos-related liabilities, noncurrent | — | 88.8 | ||||||
Prepaid pension costs | 579.8 | 476.9 | ||||||
Investment in affiliates | 294.6 | 67.4 | ||||||
Goodwill | — | 134.2 | ||||||
Other intangibles, net | 669.9 | 32.7 | ||||||
Deferred income taxes, noncurrent | 201.4 | 967.4 | ||||||
Other noncurrent assets | 87.4 | 96.6 | ||||||
Total assets | $ | 4,170.7 | $ | 4,606.0 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 3.8 | $ | 14.6 | ||||
Current installments of long-term debt | 10.9 | 5.4 | ||||||
Accounts payable and accrued expenses | 443.3 | 392.5 | ||||||
Short term amounts due to affiliates | — | 10.0 | ||||||
Liabilities of discontinued business held for sale | 53.3 | — | ||||||
Income tax payable | 2.9 | 10.0 | ||||||
Deferred income taxes | 2.4 | 0.8 | ||||||
Total current liabilities | 516.6 | 433.3 | ||||||
Liabilities subject to compromise | 1.3 | 4,869.4 | ||||||
Long-term debt, less current installments | 801.5 | 21.5 | ||||||
Postretirement and postemployment benefit liabilities | 373.7 | 258.9 | ||||||
Pension benefit liabilities | 207.8 | 223.7 | ||||||
Other long-term liabilities | 75.7 | 90.0 | ||||||
Income taxes payable, noncurrent | 10.7 | — | ||||||
Deferred income taxes, noncurrent | 11.2 | 21.2 | ||||||
Minority interest in subsidiaries | 7.5 | 7.9 | ||||||
Total noncurrent liabilities | 1,489.4 | 5,492.6 | ||||||
Shareholders’ equity (deficit): | ||||||||
Common stock, par value per share $0.01 in 2006 and $1 in 2005 Authorized 200 million shares; issued 56,091,218 shares in 2006 and 51,878,910 shares in 2005 | 0.6 | 51.9 | ||||||
Capital in excess of par value | 2,099.8 | 172.6 | ||||||
Reduction for ESOP loan guarantee | — | (142.2 | ) | |||||
Retained earnings (accumulated deficit) | 2.2 | (910.8 | ) | |||||
Accumulated other comprehensive income | 62.1 | 37.1 | ||||||
Less common stock in treasury, at cost 2006 – 0 shares; 2005 – 11,393,170 shares | — | (528.5 | ) | |||||
Total shareholders’ equity (deficit) | 2,164.7 | (1,319.9 | ) | |||||
Total liabilities and shareholders’ equity (deficit) | $ | 4,170.7 | $ | 4,606.0 | ||||
See accompanying notes to consolidated financial statements beginning on page 58.59.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(amounts in millions, except per share amounts)
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
Common stock, $1 par value: | ||||||||||||||||||||||||
Balance at beginning and end of year | $ | 51.9 | $ | 51.9 | $ | 51.9 | ||||||||||||||||||
Capital in excess of par value: | ||||||||||||||||||||||||
Balance at beginning of year | $ | 167.7 | $ | 167.9 | $ | 167.6 | ||||||||||||||||||
Stock issuances and other | — | (0.2 | ) | 0.3 | ||||||||||||||||||||
Balance at end of year | $ | 167.7 | $ | 167.7 | $ | 167.9 | ||||||||||||||||||
Reduction for ESOP loan guarantee: | ||||||||||||||||||||||||
Balance at beginning and end of year | $ | (142.2 | ) | $ | (142.2 | ) | $ | (142.2 | ) | |||||||||||||||
Retained earnings (accumulated deficit): | ||||||||||||||||||||||||
Balance at beginning of year | $ | (1,018.6 | ) | $ | (937.8 | ) | $ | (898.5 | ) | |||||||||||||||
Net earnings (loss) for year | 112.1 | $ | 112.1 | (80.8 | ) | $ | (80.8 | ) | (39.3 | ) | $ | (39.3 | ) | |||||||||||
Balance at end of year | $ | (906.5 | ) | $ | (1,018.6 | ) | $ | (937.8 | ) | |||||||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||||||||||||||
Balance at beginning of year | $ | 42.8 | $ | 43.3 | $ | (12.2 | ) | |||||||||||||||||
Foreign currency translation adjustments | (14.1 | ) | 22.4 | 56.8 | ||||||||||||||||||||
Derivative gain (loss), net | 1.2 | 0.3 | (0.3 | ) | ||||||||||||||||||||
Minimum pension liability adjustments | 7.2 | (23.2 | ) | (1.0 | ) | |||||||||||||||||||
Total other comprehensive income (loss) | (5.7 | ) | (5.7 | ) | (0.5 | ) | (0.5 | ) | 55.5 | 55.5 | ||||||||||||||
Balance at end of year | $ | 37.1 | $ | 42.8 | $ | 43.3 | ||||||||||||||||||
Comprehensive income (loss) | $ | 106.4 | $ | (81.3 | ) | $ | 16.2 | |||||||||||||||||
Less treasury stock at cost: | ||||||||||||||||||||||||
Balance at beginning and end of year | $ | (513.3 | ) | $ | (513.3 | ) | $ | (513.3 | ) | |||||||||||||||
Total shareholders’ (deficit) | $ | (1,305.3 | ) | $ | (1,411.7 | ) | $ | (1,330.2 | ) | |||||||||||||||
| Successor Company | Predecessor Company | |||||||||||||||||||||||||||||
| Three Months ended December 31, 2006 | Nine months ended September 30, 2006(1) | Year 2005 | Year 2004 | |||||||||||||||||||||||||||
Common stock: | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 0.6 | $ | 51.9 | $ | 51.9 | $ | 51.9 | ||||||||||||||||||||||
Cancellation of Predecessor common stock | — | (51.9 | ) | — | — | |||||||||||||||||||||||||
Issuance of Successor common stock | — | 0.6 | — | — | ||||||||||||||||||||||||||
Balance at end of period | $ | 0.6 | $ | 0.6 | $ | 51.9 | $ | 51.9 | ||||||||||||||||||||||
Capital in excess of par value: | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 2,097.6 | $ | 172.6 | $ | 172.6 | $ | 172.7 | ||||||||||||||||||||||
Elimination of additional paid in capital due to cancellation of Predecessor common stock | — | (172.6 | ) | — | — | |||||||||||||||||||||||||
Paid in capital associated with issuance of Successor common stock | — | 2,097.6 | — | — | ||||||||||||||||||||||||||
Share-based employee compensation | 2.2 | — | — | — | ||||||||||||||||||||||||||
Other | — | — | (0.1 | ) | ||||||||||||||||||||||||||
Balance at end of period | $ | 2,099.8 | $ | 2,097.6 | $ | 172.6 | $ | 172.6 | ||||||||||||||||||||||
Reduction for ESOP loan guarantee: | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | — | $ | (142.2 | ) | $ | (142.2 | ) | $ | (142.2 | ) | |||||||||||||||||||
Cancellation of Predecessor ESOP loan guarantee | — | 142.2 | — | — | ||||||||||||||||||||||||||
Balance at end of period | $ | — | $ | — | $ | (142.2 | ) | $ | (142.2 | ) | ||||||||||||||||||||
Retained earnings (accumulated deficit): | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | — | $ | (910.8 | ) | $ | (1,021.9 | ) | $ | (942.2 | ) | |||||||||||||||||||
Net earnings (loss) for period | 2.2 | $ | 2.2 | 1,355.8 | $ | 1,355.8 | 111.1 | $111.1 | (79.7 | ) | $ | (79.7 | ) | |||||||||||||||||
Elimination of Predecessor retained earnings | — | (445.0 | ) | — | — | |||||||||||||||||||||||||
Balance at end of period | $ | 2.2 | $ | — | $ | (910.8 | ) | $ | (1,021.9 | ) | ||||||||||||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | — | $ | 37.1 | $ | 42.8 | $ | 43.3 | ||||||||||||||||||||||
Foreign currency translation adjustments | 2.1 | 18.5 | (14.1 | ) | 22.4 | |||||||||||||||||||||||||
Derivative gain (loss), net | 0.7 | (9.5 | ) | 1.2 | 0.3 | |||||||||||||||||||||||||
Pension adjustments | 59.3 | — | — | — | ||||||||||||||||||||||||||
Minimum pension liability adjustments | — | (0.7 | ) | 7.2 | (23.2 | ) | ||||||||||||||||||||||||
Total other comprehensive income (loss) | 62.1 | 62.1 | 8.3 | 8.3 | (5.7 | ) | (5.7 | ) | (0.5 | ) | (0.5 | ) | ||||||||||||||||||
Elimination of Predecessor accumulated other comprehensive income | — | (45.4 | ) | — | — | |||||||||||||||||||||||||
Balance at end of period | $ | 62.1 | $ | — | $ | 37.1 | $ | 42.8 | ||||||||||||||||||||||
Comprehensive income (loss) | $ | 64.3 | $ | 1,364.1 | $ | 105.4 | $ | (80.2 | ) | |||||||||||||||||||||
Less treasury stock at cost: | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | — | $ | (528.5 | ) | $ | (528.5 | ) | $ | (528.5 | ) | |||||||||||||||||||
Elimination of Predecessor treasury stock | — | 528.5 | — | — | ||||||||||||||||||||||||||
Balance at end of period | $ | — | $ | — | $ | (528.5 | ) | $ | (528.5 | ) | ||||||||||||||||||||
Total shareholders’ equity (deficit) | $ | 2,164.7 | $ | 2,098.2 | $ | (1,319.9 | ) | $ | (1,425.3 | ) | ||||||||||||||||||||
| (1) | Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
See accompanying notes to consolidated financial statements beginning on page 58.59.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in millions)
| Year Ended December 31, | Successor Company | Predecessor Company | ||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | Three Months ended December 31, 2006 | Nine Months ended September 30, 2006(1) | Year 2005 | Year 2004 | ||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||
Net earnings (loss) | $ | 112.1 | $ | (80.8 | ) | $ | (39.3 | ) | $ | 2.2 | $ | 1,355.8 | $ | 111.1 | $ | (79.7 | ) | |||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||||||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used by) operating activities: | ||||||||||||||||||||||||||||
Depreciation and amortization | 141.0 | 151.0 | 163.1 | 32.2 | 101.2 | 141.0 | 151.0 | |||||||||||||||||||||
Goodwill impairment | — | 108.4 | — | — | — | — | 108.4 | |||||||||||||||||||||
Fixed asset impairments | 17.6 | 64.7 | 10.5 | — | 0.6 | 17.6 | 64.7 | |||||||||||||||||||||
Deferred income taxes | (24.0 | ) | (22.4 | ) | (51.5 | ) | 1.8 | 726.2 | (24.6 | ) | (21.9 | ) | ||||||||||||||||
Gain on sale of assets | — | (17.1 | ) | (0.2 | ) | (2.9 | ) | |||||||||||||||||||||
Gain on sale of notes | (10.4 | ) | — | — | — | — | (10.4 | ) | — | |||||||||||||||||||
Equity (earnings) from affiliates, net | (39.0 | ) | (33.5 | ) | (20.7 | ) | ||||||||||||||||||||||
Equity earnings from affiliates, net | (5.3 | ) | (41.4 | ) | (39.0 | ) | (33.5 | ) | ||||||||||||||||||||
Gain on sale of investment in affiliates | (3.4 | ) | — | — | — | — | (3.4 | ) | — | |||||||||||||||||||
Chapter 11 reorganization (income) costs, net | (1.2 | ) | 6.9 | 9.4 | — | 15.2 | (1.2 | ) | 6.9 | |||||||||||||||||||
Chapter 11 reorganization costs payments | (12.7 | ) | (15.9 | ) | (25.8 | ) | — | (13.1 | ) | (12.7 | ) | (15.9 | ) | |||||||||||||||
Post-emergence chapter 11 fees | 4.6 | — | — | — | ||||||||||||||||||||||||
Post-emergence chapter 11 payments | (4.0 | ) | — | — | — | |||||||||||||||||||||||
Restructuring charges, net of reversals | 23.2 | 18.3 | 8.6 | 1.7 | 10.0 | 23.2 | 18.3 | |||||||||||||||||||||
Restructuring payments | (24.0 | ) | (4.1 | ) | (8.7 | ) | (0.4 | ) | (3.0 | ) | (24.0 | ) | (4.1 | ) | ||||||||||||||
Asbestos-related insurance recoveries | — | 4.5 | 31.0 | — | 7.0 | — | 4.5 | |||||||||||||||||||||
Payments for asbestos-related claims | — | — | (9.0 | ) | ||||||||||||||||||||||||
Charge for asbestos liability, net | — | — | 81.0 | |||||||||||||||||||||||||
Cash effect of hedging activities | 21.9 | 1.1 | (27.0 | ) | (3.1 | ) | (2.8 | ) | 21.9 | 1.1 | ||||||||||||||||||
Increase (decrease) in cash from change in: | ||||||||||||||||||||||||||||
Gain on discharge of debt and liabilities subject to compromise | — | (1,510.8 | ) | — | — | |||||||||||||||||||||||
Non-cash fresh-start adjustments | — | (389.5 | ) | — | — | |||||||||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||||||
Receivables | (8.7 | ) | (9.5 | ) | 40.6 | 49.6 | (66.0 | ) | (8.7 | ) | (9.5 | ) | ||||||||||||||||
Inventories | 1.5 | (61.7 | ) | 6.6 | 54.8 | (12.7 | ) | 1.5 | (61.7 | ) | ||||||||||||||||||
Other current assets | (3.7 | ) | 11.8 | (4.6 | ) | (5.1 | ) | 2.0 | (3.7 | ) | 11.8 | |||||||||||||||||
Other noncurrent assets | (16.8 | ) | (34.8 | ) | (18.6 | ) | (13.9 | ) | (45.3 | ) | (16.8 | ) | (34.8 | ) | ||||||||||||||
Accounts payable and accrued expenses | 8.5 | 61.1 | (15.6 | ) | (11.1 | ) | 11.3 | 8.5 | 61.1 | |||||||||||||||||||
Income taxes payable | (16.7 | ) | (29.8 | ) | 21.9 | (4.6 | ) | (64.7 | ) | (16.7 | ) | (31.4 | ) | |||||||||||||||
Other long-term liabilities | (20.1 | ) | 3.5 | 4.0 | (1.8 | ) | (10.5 | ) | (20.1 | ) | 3.5 | |||||||||||||||||
Cash distributed under the POR | (28.6 | ) | (804.1 | ) | — | — | ||||||||||||||||||||||
Other, net | 1.6 | 4.0 | 9.9 | 1.1 | 5.6 | 3.4 | 6.9 | |||||||||||||||||||||
Net cash provided by operating activities | 146.7 | 142.8 | 165.8 | |||||||||||||||||||||||||
Net cash provided by (used by) operating activities | 70.1 | (746.1 | ) | 146.7 | 142.8 | |||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||
Purchases of property, plant and equipment and computer software | (135.5 | ) | (134.0 | ) | (78.1 | ) | (40.3 | ) | (98.2 | ) | (135.5 | ) | (134.0 | ) | ||||||||||||||
Purchase of minority interest | — | (1.5 | ) | — | — | |||||||||||||||||||||||
Acquisitions | — | (60.5 | ) | — | — | |||||||||||||||||||||||
Proceeds from sale of notes | 38.3 | — | — | — | — | 38.3 | — | |||||||||||||||||||||
Distributions from equity affiliates | 23.0 | 10.0 | 16.0 | 25.0 | 18.0 | 23.0 | 10.0 | |||||||||||||||||||||
Investment in affiliates | — | (4.3 | ) | — | — | |||||||||||||||||||||||
Proceeds from sale of investment in affiliates | 20.6 | — | — | — | — | 20.6 | — | |||||||||||||||||||||
Loan to affiliate | — | (6.3 | ) | — | — | |||||||||||||||||||||||
Proceeds from the sale of assets | 5.1 | 12.3 | 4.9 | — | 39.1 | 5.1 | 12.3 | |||||||||||||||||||||
Net cash (used for) investing activities | (48.5 | ) | (111.7 | ) | (57.2 | ) | (15.3 | ) | (113.7 | ) | (48.5 | ) | (111.7 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||
Increase/(decrease) in short-term debt, net | 5.1 | 4.0 | (5.3 | ) | 2.8 | (15.2 | ) | 5.1 | 4.0 | |||||||||||||||||||
Issuance of long-term debt | — | 800.0 | — | — | ||||||||||||||||||||||||
Payments of long-term debt | (7.6 | ) | (9.8 | ) | (8.2 | ) | (0.2 | ) | (15.5 | ) | (7.6 | ) | (9.8 | ) | ||||||||||||||
Payments under the POR | — | (300.7 | ) | — | — | |||||||||||||||||||||||
Dividend to minority interest | — | (1.1 | ) | — | — | |||||||||||||||||||||||
Debt issuance costs | (10.7 | ) | — | — | — | |||||||||||||||||||||||
Other, net | (1.4 | ) | (1.2 | ) | (0.6 | ) | — | 0.5 | (1.4 | ) | (1.2 | ) | ||||||||||||||||
Net cash (used for) financing activities | (3.9 | ) | (7.0 | ) | (14.1 | ) | ||||||||||||||||||||||
Net cash provided by (used for) financing activities | (8.1 | ) | 468.0 | (3.9 | ) | (7.0 | ) | |||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (8.0 | ) | 7.5 | 9.8 | 1.3 | 5.4 | (8.0 | ) | 7.5 | |||||||||||||||||||
Net increase in cash and cash equivalents | $ | 86.3 | $ | 31.6 | $ | 104.3 | ||||||||||||||||||||||
Cash and cash equivalents at beginning of year | $ | 515.9 | $ | 484.3 | $ | 380.0 | ||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 48.0 | $ | (386.4 | ) | $ | 86.3 | $ | 31.6 | |||||||||||||||||||
Cash and cash equivalents at beginning of period | $ | 215.8 | $ | 602.2 | $ | 515.9 | $ | 484.3 | ||||||||||||||||||||
Cash and cash equivalents at end of year | $ | 602.2 | $ | 515.9 | $ | 484.3 | ||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | 263.8 | $ | 215.8 | $ | 602.2 | $ | 515.9 | ||||||||||||||||||||
Cash and cash equivalents at end of period from discontinued operations | 11.3 | — | — | — | ||||||||||||||||||||||||
Cash and cash equivalents at end of period from continuing operations | $ | 252.5 | $ | 215.8 | $ | 602.2 | $ | 515.9 | ||||||||||||||||||||
(1) | Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
See accompanying notes to consolidated financial statements beginning on page 58.59.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891. On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in order to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability. On October 2, 2006, when all conditions precedent were met, AWI’s plan of reorganization (the “POR”), as confirmed by the U.S. District Court for the District of Delaware by order dated August 18, 2006, became effective, and AWI emerged from Chapter 11.
Armstrong Holdings, Inc. (“AHI”) is a Pennsylvania corporation and, as of September 30, 2006, was the publicly held parent holding company of AWI. Armstrong Holdings, Inc.’sAHI’s only significant asset and operation iswas its indirect ownership, through Armstrong Worldwide, Inc. (a(“AWWD,” a Delaware Corporation)corporation), of all of the capital stock of AWI. We include separate financial statements for Armstrong Holdings, Inc.Upon AWI’s POR becoming effective on October 2, 2006, all then-current shares of AWI were cancelled, and AHI was not entitled to any distribution under the POR in respect of its subsidiariesformer equity interest in AWI. AHI, AWWD, and AWI have a settlement of claims pending court approval in AWI’s Chapter 11 case. See “Matters Concerning AHI” for additional information about the settlement.
When we refer to “we”, “our” and its subsidiaries“us” in this report, because both companies have public securities that are registered under the Securities Exchange Act of 1934 (the “Securities Exchange Act”). The differences between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries are primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. In 2005, we reversed a $1.6 million contingent liability of Armstrong Holdings, Inc. that was originally accrued when Armstrong Holdings, Inc. was formed, because the liability is no longer probable. Due to the lack of material differences in the operations, when we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as “AHI,” “Armstrong,” “we” and “us,” we are also effectively referring to AWI and its subsidiaries. References in this report to “reorganized Armstrong” are to AWI as it was reorganized under the POR on October 2, 2006, and its subsidiaries collectively. We use the term “AWI” when we are referring solely to Armstrong World Industries, Inc.
(Note: Particular documents referredAWI’s two wholly-owned subsidiaries that commenced Chapter 11 proceedings at the same time as AWI remain in Chapter 11. The following summarizes the events in its Chapter 11 case that led to in this section are available at www.armstrongplan.com)
AWI’s emergence.
Proceedings under Chapter 11
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief (the “Filing”) under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability. Also filing under Chapter 11 were two of AWI’s wholly-owned subsidiaries, Nitram Liquidators, Inc. (“Nitram”) and Desseaux Corporation of North America, Inc. (“Desseaux”). The Chapter 11 cases are being jointly administered under case number 00-4471 (the “Chapter 11 Case”). Shortly after its commencement, the Chapter 11 Case was assigned to Judge Randall J. Newsome. His appointment as a visiting judge in the District of Delaware ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassignedassigned to Judge Judith K. Fitzgerald.
AHI and all of AWI’s other direct and indirect subsidiaries and affiliates, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWI’s ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and Armstrong DLW AG, were not a part of the Filing and accordingly, except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI, the liabilities, including asbestos-related liability if any, of such companies willwere not be resolved in AWI’s Chapter 11 Case. See below under “The Asbestos Personal Injury Trust” and Note 3032 under “Asbestos-Related Litigation”.
Through October 1, 2006, AWI is operatingoperated its business and managingmanaged its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI iswas not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Bankruptcy Court. Similarly, claimants maycould not enforce any prepetition claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Bankruptcy Court. In addition, as a debtor-in-possession, AWI hashad the right, subject to the Bankruptcy Court’s approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Some of these have beenwere specifically assumed and others have beenwere specifically rejected already in the course of the Chapter 11 Case. In the plan of reorganization, which it has proposed, as described below, AWI has indicated theidentified other executory contracts and
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
unexpired leases that it intends to assumeassumed or reject upon consummation ofrejected effective on the plan;Effective Date; any not specifically assumed under the plan will beof reorganization were rejected upon consummationas of the plan. Parties having claims as a result of the rejection of a contract may file claims with the Bankruptcy Court, which will be dealt with as part of the Chapter 11 Case.
that date.
Three creditors’ committees, one representing asbestos personal injury claimants (the “Asbestos Personal Injury Claimants’ Committee”), one representing asbestos property damage claimants (the
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
“Asbestos “Asbestos Property Damage Committee”), and the other representing other unsecured creditors (the “Unsecured Creditors’ Committee”), were appointed in the Chapter 11 Case. In addition, an individual was appointed to represent the interests of future asbestos personal injury claimants (the “Future Claimants’ Representative”). In accordance with the provisions of the Bankruptcy Code, these parties havehad the right to be heard on matters that comecame before the Bankruptcy Court in the Chapter 11 Case. Upon resolution of all asbestos property damage claims, the Asbestos Property Damage Committee was disbanded.
Upon AWI’s emergence from Chapter 11 on October 2, 2006, the Asbestos Personal Injury Claimants’ Committee and the Unsecured Creditors’ Committee were disbanded. The Future Claimants’ Representative will continue to serve, but as of October 2, 2006 his expenses will be borne by the Asbestos Personal Injury Trust established under the plan of reorganization as described below.
Plan of Reorganization and Disclosure Statement
On November 4, 2002, AWI filed a Planplan of Reorganizationreorganization with the Bankruptcy Court. Subsequently, AWI filed several amendments to the plan, along with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as so amended and as modified by modifications filed with the Bankruptcy Court through May 23, 2006, was confirmed by the U.S. District Court for the District of Delaware (the “Court”) on October 17, 2003, November 10, 2003 and December 3, 2004,August 18, 2006. Such plan, as confirmed, is referred to in this report as the “POR”. ThePursuant to the POR, provides forupon emergence from Chapter 11 on October 2, 2006, AWI to continuecontinued to conduct its existing lines of business with a reorganized capital structure under which, among other things, its existing shares of stock will bewere cancelled and new common shares of reorganized Armstrong and notes will becash were issued to its unsecured creditors and to a trust, as further discussed below, to bethe Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (the “Asbestos PI Trust”), which was established under the POR, as described below, for the benefit of AWI’s current and future asbestos-related personal injury claimants, in full satisfaction of their claims against AWI. References in this report to “reorganized Armstrong” are to AWI as it would be reorganized under the POR, and its subsidiaries collectively. The POR excludes AWI’s Nitram and Desseaux subsidiaries, neither of which is material to Armstrong and which are pursuing separate resolutions of their Chapter 11 cases that are expected to result in the winding up of their affairs.
In connection with the vote of creditors on the POR, AWI was required to prepareprepared a disclosure statement concerning its business and the POR, including certain projected financial information assuming an Effective Dateeffective date of the POR asof July 1, 2003, intended to demonstrate to the Bankruptcy Court the feasibility of the POR and AWI’s ability to continue operations upon its emergence from Chapter 11. On May 30, 2003, the Bankruptcy Court approved the disclosure statement for distribution to parties in interest in the Chapter 11 Case. The projected financial information included in the disclosure statement was updated in certain respects by information submitted to the Bankruptcy Court in connection with the Bankruptcy Court’s November 2003 hearing on confirmation of the POR. ThePOR and was not otherwise updated for use in any submission made in the Chapter 11 Case. This projected financial information was prepared for the limited purposes of consideration by the Bankruptcy Court, creditors and other parties in interest in the Chapter 11 Case of matters pertinent to the case. As indicated in the disclosure statement, the projected financial information and various estimates of value therein provided should not be regarded as representations or warranties by AWI, AHI or any other person. There is no assurance that any such projection or valuation will be realized. The projected financial information and estimates of value were prepared by AWI and its financial advisors and havewere not been audited or reviewed by independent accountants. The projections will not be updated on an ongoing basis. At the time they were prepared in 2003, the projections reflected numerous assumptions concerning reorganized Armstrong’s anticipated future performance and with respect to prevailing and anticipated market and economic conditions, which were and remain beyond our control and which may not materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections may be wrong in a material respect. Actual results have and may vary significantly from those contemplated by the projections.
During 2003, the POR was submitted for a vote by AWI’s creditors for its approval. It was approved by each creditor class that was entitled to vote on the POR except the class of unsecured creditors. On
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
November 17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the PlanPOR and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors’ Committee filed an objection to the Bankruptcy Court’s proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR.
In order for a plan of reorganizationAWI’s POR to be confirmed, the U.S. District Court musthad to also issue findings of fact and conclusions of law in support of confirmation of the plan of reorganization,POR, enter or affirm an
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
order confirming the plan of reorganizationPOR and issue an injunction under Section 524(g) of the “524(g) injunction”Bankruptcy Code (see “Asbestos Personal Injury Trust” below) if it is part of the plan of reorganization.. Following procedural delays concerning the status of the prior U.S. District Court judge onpresiding over AWI’s Chapter 11 Case, the AWI case was assigned to U.S. District Court Judge Eduardo C. Robreno in June 2004. A hearing was held before Judge Robreno on December 15, 2004 to consider the objections to confirmation of the POR. On February 23, 2005, Judge Robreno ruled that the POR could not be confirmed. In the court’s decision, the Judge found that, because the class of unsecured creditors voted to reject the POR, the distribution of warrants to the existing equity holdersholder (AHI), as then provided under the POR, violated the absolute priority rule.
rule of the Bankruptcy Code.
AWI filed a Notice of Appealappealed this decision to the United States Court of Appeals for the Third Circuit on March 4, 2005.
Recent Developments and Next Steps in the Chapter 11 Process
Circuit. On December 29, 2005, the U.S. Court of Appealsthat court affirmed the District Court’s decision to deny confirmation of the POR.
At a status conference before Judge Robreno on February 3, 2006, AWI and the court-authorized representatives of AWI’s creditors and claimants advised the Court that they had agreed on a proposed schedule for a confirmation hearing on a modified POR which would eliminate the provisions regarding distribution of warrants to AWI’s existing AHI equity holders. Underholder. AWI filed the modified POR existing AHI equity holders would receive no distribution and their equity interests would be cancelled.with the Court on February 21, 2006. Following the conference, Judge Robreno signed an order that established such a schedule for a U.S. District Court confirmation hearing on the modified POR.
The schedule calls for the confirmation hearing to commencecommenced on May 23, 2006 and concluded with oral arguments on July 11, 2006. At that hearing, the Court will hearheard testimony and review otherreceived evidence relating to the Unsecured CreditorsCreditors’ Committee’s objection that the modified POR unfairly discriminatesdiscriminated against the unsecured creditors, based on the size of the present and future asbestos liability implied by the modified POR. AWI filed the modified POR with
On August 15, 2006, the Court on February 21, 2006. AWI is also monitoring a proposed asbestos claims litigation reform bill in Congress (seeissued its opinion overruling the discussion under “Potential Legislation” in Note 30). AWI is unable to predict whetherUnsecured Creditors’ Committee’s objection. On August 18, 2006, the modifiedCourt entered the order confirming AWI’s POR, will be confirmed or when AWI would emerge from Chapter 11.
along with its findings of facts and conclusions of law.
A description of the basic components of the POR, which remain unchangedas it became effective on October 2, 2006, follows.
Relationship to Armstrong Holdings, Inc. (“AHI”)
Upon the POR becoming effective on October 2, 2006, all then-current shares of AWI were cancelled, and AHI was not entitled to any distribution on account of its equity interest in AWI. See “Matters Concerning AHI” in this footnote for a discussion on the modified POR, follows.
pending matters between AHI and AWI.
Asbestos Personal Injury Trust
A principal feature ofUpon the POR isbecoming effective on October 2, 2006, the creation of a trust (the “AsbestosAsbestos PI Trust”),Trust was created, pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWI’s personal injury (including wrongful death) asbestos-related liability. AllAs of October 2, 2006, all present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWI’s pre-Filing use of or other activities involving asbestos will beare channeled to the Asbestos PI Trust.
In accordance with the “524(g) injunction” to be issued ifAs part of the POR, goes into effectan injunction was issued under Section 524(g) protecting various entities would be protected from such present and future AWI asbestos-related personal injury claims. These entities include, among others, reorganized AWI,Armstrong, AHI, AWI’s subsidiaries and other affiliates (as defined in the POR), and their
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
respective officers and directors. Upon emergenceNow that AWI has emerged from Chapter 11, AWI wouldreorganized Armstrong does not have any responsibility for these claims (including claims against AWIreorganized Armstrong based solely on its ownership of a subsidiary or other affiliate), nor wouldwill it participate in their resolution.
the resolution of these claims.
However, although AWI’s domestic and foreign subsidiaries and other affiliates would be protected parties,have certain protection afforded by the 524(g) injunction, asbestos-related personal injury claims against them wouldwill be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the pre-Filing manufacturing, installation, distribution or other activities of AWI or are based solely on AWI’s ownership of the subsidiaries or other affiliates (as distinguished from independent activities of the subsidiaries or affiliates). See Note 3032 under “Asbestos-Related Litigation.”
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
In addition, workers’ compensation claims brought against AWI or its subsidiaries or other affiliates wouldwill not be channeled to the Asbestos PI Trust and wouldwill remain subject to the workers’ compensation process. Workers’ compensation law provides that the employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Historically, workers’ compensation claims against AWI or its subsidiaries have not been significant in number or amount, and AWI has continued to honorhonored its obligations with respect to such claims during the Chapter 11 Case. Currently, AWI has threesix pending workers’ compensation claims, and itsa UK subsidiary has seven employer liability claims involving alleged asbestos exposure.
There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.
Management believes that neither AWI nor any of its subsidiaries or other affiliates is subject to any asbestos-related personal injury claims that wouldwill not be channeled to the Asbestos PI Trust under the POR whichand that are of a magnitude that, individually or collectively, would be material in amount to reorganized Armstrong.
Consideration to Be Distributed under the POR
The Asbestos PI Trust and the holders of allowed unsecured claims, wouldother than “convenience creditors” described below, became entitled on the Effective Date to share in the following consideration to be distributed to them under the POR:
AWI’s “Available Cash,” which, isas defined in the POR, as:was:
| ¡ | Cash available as of September 30, 2006 after reserving up to $100 million (as determined by AWI) to fund ongoing operations and making provisions for the payment of allowed claims of convenience creditors and certain other required payments under the POR, |
| ¡ | Any cash drawn, at AWI’s sole discretion, under a credit facility to be established as provided by the POR for the purpose of funding distributions under the POR, and |
| ¡ | Certain insurance proceeds related to environmental matters. |
However, pursuant to the POR, after reserving up to $100 million (as determined by AWI) to fund ongoing operations and making provisions for certain required payments under the POR,
However, proceeds received underfrom any private offering of debt securities and/or secured term loan borrowings made, as permitted by, the POR,and in connection with consummation of, the POR, and certain other amounts authorized or directed by the Court, would bewere excluded from the determination of Available Cash.
Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issuedor secured term loan borrowings made in lieu thereof,of Plan Notes, and
New common shares of reorganized Armstrong, representing all of the new common stockshares issued under, and outstanding after giving effect to, the POR, which were determined to be 56.4 million shares, except that an additional 5,349,000 shares (5% of AWI.the shares on a fully diluted basis) were reserved for issuance pursuant to a Long-Term Incentive Plan for key employees.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The total amount of Plan Notes would be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However,POR called for AWI wouldto use reasonable efforts to issue one or more private offerings of debt securities or arrange term loan borrowings on, or as soon as practicable after, the Effective Date. These offerings are expectedDate, so as to yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. IfPlan, which was the private offerings are successful,greater of (i) $1.125 billion less Available Cash and (ii) $775 million. Following its emergence, AWI received commitments for, and then entered into and received the Plan Notes would not be issued. If the offerings yield proceeds less than the amountfrom, $800 million of secured term loan borrowings for use principally in lieu of issuance of the Plan Notes prescribed by the Plan, Plan Notes equal to the difference will be issued. If only the Plan Notes are issued, reorganized Armstrong expects to issue an aggregate amount of $775 million of Plan Notes. These Plan Notes wouldThe borrowings consist of (i) a tranche of notes$300 million term loan with a seven-year5 year maturity and a fixed interest rate, (ii) a tranche of notes$500 million term loan with a ten-year maturity and a fixed interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy7 year maturity. Of the requirements of the POR and are on terms and conditions that are satisfactory to AWI, the Asbestos Personal Injury Claimants’ Committee, and the Future Claimants’ Representative. To the extent Plan Notes of more than one type are issued, a pro rata share of each tranche would be issued$800 million borrowed, $775 million was distributed to the Asbestos PI Trust and the holders of allowed unsecured claims.
Armstrong Holdings, Inc.,claims, as described in the following paragraph, and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
the remaining $25 million is being used by AWI for operational purposes.
The POR providesprovided that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:
34.43% of the 56.4 million new common stockshares of reorganized Armstrong,
34.43% of the first $1.05 billion of all the Available Cash and net cash andproceeds from the secured term loan borrowings in lieu of Plan Notes to be distributed under the POR to unsecured creditors (other than convenience creditors) and the Asbestos PI Trust, in the form of:
| ¡ | Up to $300 million of Available Cash and |
| ¡ | The balance in net cash proceeds from the secured term loan borrowings. |
34.43% of the remaining amount of any Available Cash, and any Plan Notes up to the maximum amount of Plan Notes provided to be issued under the POR, orremaining net cash proceeds from any private offerings of debt securitiesthe secured term loan borrowings made in lieu of issuing suchthe Plan Notes.
TheUnder the POR, the remaining amount of new common stockshares of reorganized Armstrong, Available Cash and Plan Notes or net cash proceeds from any private offerings of debt securitiesthe secured term loan borrowings, made in lieu of issuing the Plan Notes, would bewere distributed to the Asbestos PI Trust.
Pursuant to the POR, AWI also transferred rights arising under liability insurance policies issued to AWI with respect to asbestos-related personal injury claims to the Asbestos PI Trust. See Note 32 for additional information regarding the asbestos-related personal injury insurance proceedings.
Under the POR, unsecured creditors whose claims (other than claims on debt securities) are less than $10 thousand or who elect to reduce their claims to $10 thousand would bewere treated as “convenience creditors” and wouldwill receive payment of 75% of their allowed claim amount in cash (which payments would reducereduced the amount of Available Cash).
Under Payments totaling $2.4 million to-date were made to the POR, the existing equity interestsconvenience creditors, commencing on October 2, 2006, with another $0.6 million expected to be paid in AWI (including all of its outstanding shares of common stock) would be cancelled and the holders of such interests will receive no distribution of any consideration. As discussed above, the POR was modified on February 21, 2006 to delete the provisions for the distribution of warrants to existing equity holders.
future periods.
Valuation of Consideration to be Distributed under the POR
Based upon many assumptions (see Disclosure Statement discussion above), to calculateDuring the valuethird quarter of consideration to be distributed,2003, AWI used $2.7 billion asand its financial advisors estimated the value of reorganized Armstrong. This is the mid-point of the range of estimated values ofArmstrong to be between $2.4 billion and $3.0 billion, with the mid-point of this range used in the financial projections that was estimated bywere part of the Disclosure Statement. AWI and its financial advisors duringdetermined the third quarterreorganization value as of 2003. AWI’s estimated value of the considerationOctober 2, 2006 to be distributed under$2.94 billion. This value is being used as the POR to the Asbestos PI Trust and holders of allowed unsecured claims is:
The total value of the consideration to be distributed to the Asbestos PI Trust, other than rights under asbestos non-product liability insurance policies, has been estimated to be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) has been estimated to be approximately $0.9 billion. Based upon the estimated value of the POR consideration, and uponbasis for AWI’s estimate that unsecured claims allowed by the Bankruptcy Court (other than convenience claims) would total approximately $1.65 billion, AWI estimated that holders of allowed unsecured claims (other than convenience claims) would receive a recovery having a value equal to approximately 59.5% of their allowed claims.
AHI Dissolution
Upon implementation of the POR, all current stock of AWI would be cancelled and AHI would no longer have any ownership interest in reorganized AWI. Since the POR as modifiedfresh-start reporting. See Note 3 for additional information on February 21, 2006 no longer provides for warrants of reorganized AWI to go to AHI, it is expected that AHI will then have nofresh-start reporting.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
material assets to be distributed to AHI shareholders, and will dissolve. The POR provides that AWI would payBased upon the costs incurred in connection with administering AHI’s dissolution.
Common Stock and Debt Securities
As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol “ACK”) and two debt securities of AWI (traded under the ticker symbols “AKK” and “ACK 08”). AHI’s common stock resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol “ACKHQ” and one of AWI’s debt securities resumed trading under the ticker symbol “AKKWQ”.
Bar Datedistribution provisions for Filing Claims
The Bankruptcy Court established August 31, 2001 as the bar date for all claims against AWI except for asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) was rendered unnecessary under the terms of the POR which defers the filings of such claims untildescribed above, the Asbestos PI Trust is establishedand holders of allowed unsecured claims became entitled on the Effective Date to administer such claims.receive the following distributions:
| Number of Shares and Cash Distributed To | |||||||||
(reported in millions) | Asbestos Trust | Unsecured Creditors | Total | ||||||
Shares of reorganized Armstrong | 37.0 | 19.4 | 56.4 | ||||||
Cash proceeds from borrowings | $ | 508.2 | $ | 266.8 | $ | 775.0 | |||
Available Cash | 230.3 | 140.4 | 370.7 | ||||||
Total of cash proceeds | $ | 738.5 | $ | 407.2 | $ | 1,145.7 | |||
Book value of insurance receivable | $ | 91.5 | |||||||
Approximately 4,900 proofs of claim (including late-filed claims) totaling approximately $6.4 billion, alleging a right to payment from AWI, were filed with the Bankruptcy Court in response to the August 31, 2001 bar date. The disposition of these claims under the POR is discussed below. AWI continues the process of investigating and resolving these claims. The Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as part of the Chapter 11 process if the parties cannot agree.
In its ongoing review of the filed claims, AWI to date has objected to approximately 2,200 claims totaling $2.7 billion. The Bankruptcy Court disallowed these claims with prejudice.
During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9 million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance.
Approximately 1,100 proofs of claim totaling approximately $1.3 billion are pending with the Bankruptcy Court that are associated with asbestos-related personal injury litigation, including direct personal injury claims, claims by co-defendants for contribution and indemnification, and claims relating to AWI’s participation in the Center for Claims Resolution. As stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be addressed in the future pursuant to the procedures relatingDistribution to the Asbestos PI Trust developedof the above-mentioned new common shares was made on October 2, 2006 and distribution to it of its share of Available Cash and net cash proceeds from the secured term loan borrowings was completed by October 17, 2006. The rights arising under liability insurance policies issued to AWI with respect to asbestos related personal injury claims were transferred to the Asbestos PI Trust on October 2, 2006. The initial distribution to holders of allowed unsecured claims, of their pro rata share of the above-mentioned new common shares, Available Cash and net cash proceeds from the secured term loan borrowings, commenced on October 17, 2006. Substantially all of the total unsecured creditors’ value was distributed in connectionthe fourth quarter 2006, with some of the value reserved from distribution due to a few unsecured claims that remain unresolved. The remaining amount of distribution to the unsecured creditors will be made in future periods, as the disputed claims are resolved, in accordance with the dates and procedures established under the POR. See further discussion regarding AWI’s liability for asbestos-related matters in Note 30.
Matters Concerning AHI
Approximately 1,100 claims totaling approximately $1.6 billion alleging a right to payment for financing, environmental, trade debt and other claims remain. For these categoriesAs of claims, AWI has previously recorded approximately $1.6 billion in liabilities.
AWI has recorded liability amounts for claims that can be reasonably estimated and which it does not contest or believes are probable of being allowed by the Bankruptcy Court. The final valueSeptember 30, 2006, AHI’s only operation was its indirect ownership, through Armstrong Worldwide, Inc. (a Delaware corporation), of all the claims that will ultimately be allowed by the Bankruptcy Court is not known at this time. However, it is likely the value of the claims ultimately allowed bycapital shares of AWI. Upon the Bankruptcy Court will be different than amounts presently recorded by AWI. This difference could be materialPOR becoming effective on October 2, 2006, all then-current shares of AWI were cancelled, and AHI was not entitled to AWI’s financial position and the resultsany distribution on account of its operations. Management will continue to review the recorded liabilityequity interest in light of future developmentsAWI.
On August 23, 2006, AHI announced that it and Armstrong Worldwide, Inc. have pending claims in theAWI’s Chapter 11 Case (collectively, the “AHI Claim”). The AHI Claim relates to intercompany charges and make changescredits between the companies. If and to the recorded liability if and whenextent the AHI Claim or any part of it is appropriate.allowed in AWI’s Chapter 11 Case, AHI would recover on such claim on the same basis as other general unsecured creditors of AWI are entitled to recover under the POR.
A final federal income tax return for AHI and AWI on a consolidated basis is expected to be filed for 2006 by September 2007. AHI and AWI will report substantial tax losses in this final tax return. The use of the tax losses and the extent to which they result in tax refunds will be affected by elections to be made in this final consolidated return by AHI as agent for the Armstrong consolidated group. Some elections would be more beneficial to one company than the other. The Armstrong consolidated group will receive a substantial tax refund of current year, and possibly prior year, tax payments. The amount of the refund of prior year tax payments will depend in part on the elections made in the tax return. How much of the tax refunds will be retained by AHI was negotiated between AHI and reorganized Armstrong (see below).
In order to address the AHI Claim and its tax-related issues with AWI, at a meeting on September 16, 2006, the Board of Directors of AHI appointed a special committee of the Board. The members of the
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
committee are independent directors of AHI who do not serve as directors of, or otherwise participate in the affairs of, AWI. The committee negotiated with AWI concerning these matters.
On February 26, 2007, AHI and AWI announced that they reached a settlement on all intercompany claim and tax matters. The settlement was submitted to the U.S. Bankruptcy Court for its approval. The settlement calls for AWI to pay AHI $20 million in cash, and gives AHI an allowed claim under AWI’s confirmed Plan of Reorganization of $8.5 million. The settlement gives AWI the right to make all relevant tax elections and file all required tax returns on behalf of the Armstrong group of companies for all relevant tax periods during which the two companies were affiliated, and to receive and retain all related tax refunds. The U.S. Bankruptcy Court is scheduled to review the settlement on April 2, 2007.
Common Shares and Debt Securities
AWI’s new common shares began trading on the New York Stock Exchange on October 10 under the ticker symbol “AWI”. AWI’s pre-Filing debt securities that were trading in the OTC Bulletin Board under the ticker symbol “AKKWQ” ceased trading upon AWI’s emergence from Chapter 11.
Financing
Through October 1, 2006, AWI hashad a $75.0 million debtor-in-possession (“DIP”) credit facility that iswas limited to issuances of letters of credit. ThisOn October 2, 2006, this facility was cancelled, and AWI entered into a secured $300 million revolving credit facility, that is scheduled to mature on December 8, 2006. Asin 5 years. By October 16, 2006, AWI received commitments for, and the proceeds from, $800 million of December 31, 2005, AWI had approximately $43.3secured term loan borrowings. Of the $800 million in letters of credit, which were issued pursuantborrowed, $775 million was distributed to the DIP Facility. AsAsbestos PI Trust and holders of December 31, 2005, AWI had $309.7 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations and dividends from its subsidiaries, together with subsidiary lines of creditallowed unsecured claims, as described earlier in this note, and the DIP Facility, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.
remaining $25 million is being used by AWI for operational purposes. See Note 17 for further information on our debt.
Accounting Impact
AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance iswas implemented in the accompanying consolidated financial statements.
Pursuant to SOP 90-7, AWI is required to segregate pre-Filing liabilities that are subject to compromise and report them separately on the balance sheet. See Note 45 for detail of the liabilities subject to compromise at December 31, 20052006 and December 31,2004.31, 2005. Liabilities that may behave been affected by a plan of reorganization arewere recorded at the expected amount of the allowed claims, even if they may bewere settled for lesser amounts. Substantially all of AWI’s pre-Filing debt, now in default isas of the Filing Date, was recorded at face value and iswas classified within liabilities subject to compromise. Obligations of AWI subsidiaries not covered by the Filing remainremained classified on the consolidated balance sheet based upon maturity date. AWI’s estimated liability for asbestos-related personal injury claims iswas also recorded in liabilities subject to compromise. See Note 3032 for further discussion of AWI’s asbestos liability.
Additional pre-Filing claims (liabilities subject
Armstrong World Industries, Inc., and Subsidiaries
Notes to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.Consolidated Financial Statements
(dollar amounts in millions)
SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for losses related to the Filing as Chapter 11 reorganization (income) costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during 2006, 2005 2004 and 2003:2004:
| 2005 | 2004 | 2003 | ||||||||||
Professional fees | $ | 10.4 | $ | 11.5 | $ | 25.2 | ||||||
Interest income, post-Filing | (11.8 | ) | (4.8 | ) | (3.4 | ) | ||||||
Adjustments to pre-Filing liabilities | 0.1 | — | (12.9 | ) | ||||||||
Other expense directly related to bankruptcy, net | 0.1 | 0.2 | 0.5 | |||||||||
Total Chapter 11 reorganization (income) costs, net | $ | (1.2 | ) | $ | 6.9 | $ | 9.4 | |||||
| Successor Company | Predecessor Company | |||||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | |||||||||||||
Professional fees | $ | — | $ | 30.2 | $ | 10.4 | $ | 11.5 | ||||||||
Interest income, post-Filing | — | (15.0 | ) | (11.8 | ) | (4.8 | ) | |||||||||
Adjustments to pre-Filing liabilities | — | — | 0.1 | — | ||||||||||||
Gain from discharge of liabilities subject to compromise | — | (1,510.8 | ) | — | — | |||||||||||
Gain from fresh-start reporting | — | (459.9 | ) | — | — | |||||||||||
Other expense directly related to bankruptcy, net | — | — | 0.1 | 0.2 | ||||||||||||
Total Chapter 11 reorganization (income) costs, net | $ | — | $ | (1,955.5 | ) | $ | (1.2 | ) | $ | 6.9 | ||||||
Professional fees represent legal and financial advisory fees and expenses that were incurred directly related toas a result of the Filing.
We incurred $4.3 million in fees on October 2, 2006 as a direct result of our emergence from Chapter 11. We are reporting the $4.3 million in the Predecessor Company, as we selected September 30, 2006 as the date to adopt fresh-start reporting (see below and Note 3).
Interest income iswas earned from short-term investments subsequent to the Filing.
Armstrong Holdings, Inc.,Pursuant to SOP 90-7, AWI and Subsidiaries
Notesits subsidiaries adopted fresh-start reporting upon AWI emerging from Chapter 11. The conditions required in order for AWI to Consolidated Financial Statements
(dollar amounts in millions, except share data)
As a resultadopt fresh-start reporting were met on October 2, 2006. For administrative convenience, we selected September 30, 2006, following the close of business, as the Filing, realizationdate to adopt fresh-start reporting. Consequently, the impact of assets and liquidationemergence, including the gain on settlement of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assetscompromise and liquidate or settle liabilities for amounts other than thosethe gain on fresh-start reporting, is reflected in the condensed consolidated financial statements.
IfPredecessor Company for the nine months ended September 30, 2006 and when the POR is confirmedresults of operations beginning October 1, 2006 are reflected within the Successor Company. We recorded gains of $1,510.8 million and made effective, reorganized AWI’s condensed consolidated financial statements will change materially in amounts$459.9 million from discharging the liabilities subject to compromise and classifications throughadopting fresh-start reporting, respectively. See Note 3 for more information on the impact of the implementation of the fresh start accounting rulesplan of SOP 90-7.
Conclusion
reorganization and fresh-start reporting.
AWI is unable to predict whetherincurred $4.6 million of expenses during the modified POR will be confirmed or when AWI would emerge from Chapter 11. Therefore, the timing and termsfourth quarter of a resolution of the2006 for Chapter 11 Case remain uncertain.
related post-emergence activities. Pursuant to SOP 90-7, these expenses were reported as selling, general and administrative (SG&A) expenses.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy. The consolidated financial statements and accompanying data in this report include the accounts of AHIAWI and its majority-owned subsidiaries. The results of less than majority owned subsidiaries are accounted for under the equity method. All significant intercompany transactions have been eliminated from the consolidated financial statements.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Use of Estimates. These financial statements are prepared in accordance with U.S. generally accepted accounting principles and include management estimates and judgments, where appropriate. Management utilizes estimates to record many items including asbestos-related liabilities and insurance assets,asset values, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workersworkers’ compensation, general liability and environmental claims. When preparing an estimate, management determines the amount based upon the consideration of relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.
Reclassifications. Certain amounts in the prior years’ consolidated financial statementsConsolidated Statements of Earnings and related notes thereto have been reclassifiedrecast to conform to the 2005 presentation.2006 presentation, including the reclassification of our textiles and sports flooring business to discontinued operations. We also reclassified computer software from intangible assets to property, plant and equipment in the prior years’ Consolidated Balance Sheets.
Revenue Recognition:Recognition. We recognize revenue from the sale of products when persuasive evidence of an arrangement exists, title and risk of loss transfers to the customers, prices are fixed and determinable, and it is reasonably assured the related accounts receivable is collectable. Our sales terms primarily are FOB shipping point. We have some sales terms that are FOB destination. Our products are sold with normal and customary return provisions. Sales discounts are deducted immediately from the sales invoice. Provisions, which are recorded as a reduction of revenue, are made for the estimated cost of rebates, promotional programs and promotional programs.warranties. We defer recognizing revenue if special sales agreements, established at the time of sale, warrant this treatment.
Sales IncentivesIncentives.. Sales incentives are reflected as a reduction of net sales for all periods presented.
Shipping and Handling CostsCosts.. Shipping and handling costs are reflected in cost of goods sold for all periods presented.
Advertising Costs. We recognize advertising expenses as they are incurred.
Pension and Postretirement Benefits. We have benefit plans that provide for pension, medical and life insurance benefits to certain eligible employees when they retire from active service. Generally, for plans that maintain plan assets, our practice is to fund the actuarially determined current service costs and the amounts necessary to amortize prior service obligations for the pension benefits over periods ranging up to 30 years, but not in excess of the funding limitations.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Taxes. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Deferred tax assets and liabilities are recognized using enacted tax rates fortaxes to reflect the expected future tax consequences of events recognized in the financial statements orstatements. Deferred tax returns. The provision forassets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date which result from differences in the timing of reported taxable income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Valuation allowances are recorded to reducebetween tax and financial reporting. These deferred tax assets when itand liabilities assume that benefits are recorded at the highest amount that is more likely than not thatto be sustained through the tax audit cycle.
Taxes collected from customers and remitted to governmental authorities are reported on a tax benefit will not be realized.
net basis.
Earnings (loss) per Common Share. Basic earnings (loss) per share areis computed by dividing the earnings (loss) by the weighted average number of shares of common stock outstanding during the year.period. Diluted earnings (loss) per common share reflectreflects the potential dilution of securities that could share in the earnings (loss). The diluted earnings (loss) per share computations for 2004 and 2003 use the basic number of shares due to the loss from continuing operations.earnings.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and short-term investments that have maturities of three months or less when purchased.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Concentration of Credit. We principally sell products to customers in the building products industries, in various geographic regions. Net sales to specific customers in excess of 10% of our consolidated net sales for 2006, 2005 2004 and 20032004 were:
Customer | 2005 | 2004 | 2003 | ||||||||
The Home Depot, Inc. | $ | 384.1 | $ | 393.4 | $ | 400.0 | |||||
Lowe’s Companies, Inc. | (1 | ) | (1 | ) | 318.7 | ||||||
Customer | Successor Company | Predecessor Company | |||||||||||
| Three months ended December 31, 2006 | Nine months ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||
The Home Depot, Inc. | $ | 78.8 | $ | 285.3 | $ | 384.1 | $ | 393.4 | |||||
Net sales to these customersThe Home Depot, Inc. were recorded in our Resilient Flooring, Wood Flooring and Building Products segments. No other customers accounted for 10% or more of our total consolidated net sales.
There are no significant concentrations of credit risk other than with these two home center customersThe Home Depot, Inc. and Lowe’s Companies, Inc. who together represented approximately 22% and 24% of our trade receivables as of December 31, 2006 and 2005, and 2004.respectively. We monitor the creditworthiness of our customers and generally do not require collateral.
Receivables. We sell the vast majority of our products to select, pre-approved customers using customary trade terms that allow for payment in the future. Customer trade receivables, customer notes receivable and miscellaneous receivables (which include supply related rebates and claims to be received, unpaid insurance claims from litigation and other), net of allowances for doubtful accounts, rebates, promotional programs and warranties are reported in accounts and notes receivable, net. Notes receivable from divesting certain businesses are included in other current assets and other non-current assets based upon the payment terms. Insurance receivables for asbestos-related liabilities arewere primarily non-current, with the current portion reported in other current assets.
We establish credit worthiness prior to extending credit. We estimate the recoverability of current and non-current receivables each period. This estimate is based upon triggering events and new information in the period, which can include the review of any available financial statements and forecasts, as well as discussions with legal counsel and the management of the debtor company. As events occur which impact the uncollectibility of the receivable, all or a portion of the receivable is written off. Account balances are charged off against the allowance when the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories. Inventories are valued at the lower of cost or market. Inventories also include certain resilient flooring samples used in ongoing sales and marketing activities. Cash flows from the sale of inventory and the related cash receipts are classified as operating cash flows on the consolidated statements of cash flows. See Note 9 for further information on our accounting for inventories.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Property and Depreciation. Property,For the Predecessor Company, property, plant and equipment values are stated at acquisition cost less accumulated depreciation and amortization. For the Successor Company, property, plant and equipment were set equal to fair value as of our emergence date and are currently stated at that value less accumulated depreciation and amortization. Property, plant and equipment acquired after our emergence date is stated at acquisition cost less accumulated depreciation and amortization.
Depreciation charges for financial reporting purposes are determined on a straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives. Machinery and equipment includes manufacturing equipment (depreciated over 3 to 20 years), computer equipment (3 to 5 years) and office furniture and equipment (5 to 10 years). Within manufacturing equipment, assets that are subject to quick obsolescence or wear out quickly, such as tooling and engraving equipment, are
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
depreciated over shorter periods (3 to 7 years). Heavy production equipment, such as conveyors and production presses, are depreciated over longer periods (15 to 20 years). Buildings are depreciated over 20 to 40 years, depending on factors such as type of construction and use.
Impairment losses are recorded when indicators of impairment are present, such as operating losses and/or negative cash flows. Impairments of assets related to our manufacturing operations are recorded in cost of goods sold. For purposes of calculating any impairment, we estimate the fair value and compare it to the carrying value of the asset. If the fair value is less than the carrying value of the asset, we record an impairment equal to the difference between the fair value and carrying value of the asset. When assets are disposed of or retired, their costs and related depreciation are removed from the financial statements and any resulting gains or losses normally are reflected in cost of goods sold or SG&A expenses.
Costs of the construction of certain property include capitalized interest which is amortized over the estimated useful life of the related asset. There was no capitalized interest recorded in the nine months ended September 30, 2006, the year 2005 or the year 2004 and 2003 due to the Chapter 11 Filing.
There was also no capitalized interest in the three months ended December 31, 2006.
Plant and equipment held under capital leases are stated at the present value of the minimum lease payments. Plant and equipment held under capital leases and leasehold improvements are amortized on a straight line basis over the life of the lease plus any specific option periods.
Goodwill and Other Intangibles. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually in the fourth quarter. Effective with our emergence from Chapter 11 on October 2, 2006 and as part of fresh-start reporting, Predecessor Company goodwill was eliminated from our balance sheet and intangible assets were revalued. See Note 3 for further information. Intangible assets with determinable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or circumstances indicate that its carrying amount may not be recoverable. See Note 1012 for disclosure on goodwill and other intangibles.
Contingent Liabilities. In the context of the Chapter 11 Case, contingent pre-petition liabilities, including claims that became known after the Filing, are recorded on the basis of the expected amount of the allowed claim in accordance with SOP 90-7, even if they may be settled for lesser amounts.
Foreign Currency TransactionsTransactions.. Assets and liabilities of our subsidiaries operating outside the United States, which account in a functional currency other than USU.S. dollars, are translated using the year end exchange rate. Revenues and expenses are translated at exchange rates effective during each month. Foreign currency translation gains or losses are included as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Gains or losses on foreign currency transactions are recognized through the statement of earnings.
Financial Instruments and Derivatives. From time to time, we use derivatives and other financial instruments to diversify or offset the effect of currency, interest rate and commodity price variability. See Note 1820 for further discussion.
Stock-based Employee Compensation. On January 1, 2006, we adopted FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”). Prior to January 1, 2006, we used the intrinsic value method for stock-based employee compensation. There would have been no effect on net income if we had applied the fair value recognition provisions of FAS 123R to share-based employee compensation in 2005 and 2004. See Note 25 for additional information on FAS 123R.
Recently Adopted Accounting Standards
In connection with AWI’s emergence from Chapter 11 on October 2, 2006, reorganized Armstrong adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). As a result of the application of fresh-start reporting, changes in accounting principles that will be required in reorganized Armstrong’s financial statements within the twelve months following our emergence date were required to be adopted at the time fresh-start reporting was adopted.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Stock-based Employee Compensation. At December 31, 2005, we had three stock-based employee compensation plans, which are described more fully in Note 23. No equity compensation has been granted since AWI filed for Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing. However, some previously granted restricted stock and options vested after that date. All outstanding options are vested as of December 31, 2005. We account for these plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-based Compensation,” (“FAS 123”) to stock-based employee compensation.
| 2005 | 2004 | 2003 | |||||||||
Net earnings (loss), as reported | $ | 112.1 | $ | (80.8 | ) | $ | (39.3 | ) | |||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | — | — | 0.1 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | — | — | (0.2 | ) | |||||||
Pro forma net earnings (loss) | $ | 112.1 | $ | (80.8 | ) | $ | (39.4 | ) | |||
Net earnings (loss) per share: | |||||||||||
Basic – as reported | $ | 2.77 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Basic – pro forma | $ | 2.77 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Diluted – as reported | $ | 2.75 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Diluted – pro forma | $ | 2.75 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Recently Adopted Accounting Standardsmillions)
In November 2004,July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertain tax positions and adds new required annual disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. However, due to the requirements of fresh-start reporting, we were required to adopt FIN 48 effective October 2, 2006. See Note 16 for information regarding the adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting StandardStandards No. 151, “Inventory Costs”. The new Statement amends158 (“FAS 158”), “Employers’ Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amountsDefined Benefit Pension and Other Postretirement Plans,” which establishes recognition and disclosure provisions for sponsors of idle facility expense, freight, handling costs,defined benefit pension and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheadsother postretirement benefit plans. FAS 158 is effective for fiscal years ending after December 15, 2006. Due to the requirements of fresh-start reporting, we were required to adopt FAS 158 effective October 2, 2006. As part of fresh-start reporting, we recognized all unrecognized gains, losses, and prior service cost existing at October 2, 2006. The equity adjustment for FAS 158 in our December 31, 2006 balance sheet therefore represented only gains and losses incurred in the fourth quarter of conversion be based on2006.
Recently Issued Accounting Standards
In September 2006, the normal capacityFASB issued Statement of the production facilities. This statementFinancial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements,” which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after JuneNovember 15, 2005.2007. We elected to adopt this standard as of January 1, 2005, as permitted. Adoption of this standard diddo not have aexpect any material impact on our consolidated results of operations or financial condition.
from adopting FAS 157.
In December 2004,February 2007, the FASB issued FASB Staff PositionStatement of Financial Accounting Standards No. 159 (“FSP”) FAS No. 109-1 “Application159”), “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 109, Accounting115,” which permits companies to measure financial instruments and certain other assets and liabilities at fair value on an instrument by instrument basis. FAS 159 is effective for Income Taxes,fiscal years beginning after November 15, 2007. We are currently evaluating the effects of this pronouncement on our financial statements.
NOTE 3. PLAN OF REORGANIZATION AND FRESH-START REPORTING
In connection with its emergence from bankruptcy on October 2, 2006 (the “Effective Date”), AWI adopted fresh-start reporting in accordance with SOP 90-7. The conditions required in order for AWI to adopt fresh-start reporting were met on October 2, 2006. For administrative convenience, we selected September 30, 2006, following the close of business, as the date to adopt fresh-start reporting. Consequently, the impact of emergence, including the gain on settlement of liabilities subject to compromise and the gain on fresh-start reporting, is reflected in the Predecessor Company for the nine months ended September 30, 2006 and the results of operations beginning October 1, 2006 are reflected within the Successor Company. Adopting fresh-start reporting has resulted in material adjustments to the Tax Deduction on Qualified Production Activities Provided byhistorical carrying amount of reorganized Armstrong’s assets and liabilities. In addition, all accounting standards that are required to be adopted in the American Jobs Creation Actfinancial statements within twelve months following the adoption of 2004”. This FSP, which became effective upon issuance, provides that the tax deduction for income with respect to qualified domestic production activities,fresh-start reporting, were adopted as part of the American Jobs Creation Act of 2004 that was enacted on October 22, 2004, be treated as a special deduction as described in FAS No. 109.2, 2006. As a result, this deduction has no effect on our deferred tax assets and liabilities existing at the date of enactment. Instead, the impact of this deduction, which is effective January 1, 2005, will be reportedpost emergence financial statements are not comparable with our pre-emergence financial statements.
AWI engaged an independent appraisal firm to assist in the perioddetermination of reorganized Armstrong’s reorganization value as defined in which the deduction is claimedSOP 90-7. The approach used to determine reorganized Armstrong’s reorganization value was primarily based on our income tax returns.
In December 2004, the FASB issued FSP FAS No. 109-2 “Accounting and Disclosure Guidancea discounted cash flow approach, while also using a comparable company guideline method as a test for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. This FSP, which became effective upon issuance, allows an enterprise additional time beyond the financial reporting period of enactmentreasonableness of the American Jobs Creation Actderived value. These analyses are necessarily based on a variety of 2004estimates and assumptions which, though considered reasonable by management, may not be realized and are inherently subject to evaluate the effectsignificant business, economic and competitive uncertainties and contingencies, many of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109. See Note 14, Income Taxes, for more information on the impact of adopting this FSP.which are beyond AWI’s control.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which provides additional guidance on conditional asset retirement obligations under FAS 143, “Accounting for Asset Retirement Obligations.” This standard is effective for fiscal years ending after December 15, 2005. Adoption of this standard had no material impact on our consolidated results of operations or financial condition. We have numerous locations that contain asbestos, which meet the definition of an asset retirement obligation. Under current regulations, we are not currently required to remove the asbestos due to its present condition. At some undetermined timeThe assumptions used in the future, though, we willdiscounted cash flow analysis regarding revenue, costs and cash flows were provided by management, based on their best estimate at the time the analysis was performed. Key assumptions included a four year operating horizon with a compound average growth rate (CAGR) in sales of 3%, an effective tax rate of 38% and a discount rate based on an estimated weighted average cost of capital of 10.5%. In addition to the cash flows during the projection period, a terminal value for the enterprise was developed based on a perpetuity growth model using a constant growth rate of 2.5%. Changes in these assumptions could have had a significant effect on the determination of AWI’s reorganization value.
In applying fresh-start reporting as of the Effective Date, the reorganization value of reorganized Armstrong was determined to be $2.94 billion. This amount is within the range of values from the Disclosure Statement that supported the POR. The shareholders’ equity value was then derived as follows:
Reorganization value | $ | 2,940.0 | ||||
Less: | New interest bearing debt | (800.0 | ) | |||
| Predecessor debt assumed | (41.8 | ) | ||||
Shareholders’ equity | $ | 2,098.2 | ||||
Fresh-start reporting required us to removeallocate the asbestos. A liability has not been recognizedreorganization value to our assets and liabilities based upon their estimated fair values in accordance with procedures specified by SFAS 141, “Business Combinations.” Adjustments necessary to state our balance sheet accounts at December 31, 2005 because the fair value cannot be reasonably estimatedwere made based on the work of management and wean independent appraisal firm. The newly assigned fair values to our assets and liabilities fully reflect the emerged entity’s reorganization value. No goodwill was assigned at emergence.
The following table provides a reconciliation of the Predecessor’s consolidated balance sheet as of September 30, 2006 to that of the Successor’s on October 1, 2006, reflecting the debt and equity restructuring, reorganization and fresh-start reporting adjustments. We are unablereflecting the issuance of debt and cash payments to reasonably determine a settlementcreditors through October 17, 2006 (the initial distribution date, or range of settlement dates for asbestos removal. We will continueas determined by the POR) within the following table:
Armstrong World Industries, Inc., and Subsidiaries
Notes to review our locations with asbestosConsolidated Financial Statements
(dollar amounts in millions)
| Predecessor Sept. 30, 2006 | Plan of Reorganization | Fresh- Start | Successor Oct. 1, 2006 | ||||||||||||||||||
Current Assets: | |||||||||||||||||||||
Cash and cash equivalents | $ | 520.6 | $ | (304.8 | ) | (A | ) | $ | (5.9 | ) | (J | ) | $ | 209.9 | |||||||
Accounts and notes receivable, net | 407.5 | (46.8 | ) | (J | ) | 360.7 | |||||||||||||||
Inventories, net | 542.6 | 27.0 | (F,J | ) | 569.6 | ||||||||||||||||
Deferred income taxes | 18.2 | (17.2 | ) | (I | ) | 1.0 | |||||||||||||||
Assets of discontinued operations | — | 120.7 | (J | ) | 120.7 | ||||||||||||||||
Income tax receivable | 18.2 | (18.2 | ) | (H | ) | 78.5 | 78.5 | ||||||||||||||
Other current assets | 60.7 | (2.7 | ) | (J | ) | 58.0 | |||||||||||||||
Total current assets | 1,567.8 | (323.0 | ) | 153.6 | 1,398.4 | ||||||||||||||||
Property, plant and equipment | 1,194.2 | (242.6 | ) | (F,J | ) | 951.6 | |||||||||||||||
Insurance receivable for asbestos | 91.5 | (91.5 | ) | (B,C | ) | — | |||||||||||||||
Prepaid pension costs | 510.0 | (25.1 | ) | (F | ) | 484.9 | |||||||||||||||
Investment in affiliates | 95.0 | 219.2 | (F | ) | 314.2 | ||||||||||||||||
Goodwill, net | 143.1 | (143.1 | ) | (F,G | ) | — | |||||||||||||||
Other intangibles, net | 54.3 | 619.3 | (F | ) | 673.6 | ||||||||||||||||
Deferred income taxes, noncurrent | 967.4 | (719.1 | ) | (I | ) | 248.3 | |||||||||||||||
Other noncurrent assets | 97.5 | (5.6 | ) | (C | ) | (3.0 | ) | (F,J | ) | 88.9 | |||||||||||
Total assets | $ | 4,720.8 | $ | (420.1 | ) | $ | (140.8 | ) | $ | 4,159.9 | |||||||||||
Current liabilities: | |||||||||||||||||||||
Short-term debt | $ | 0.4 | $ | 0.9 | (J | ) | $ | 1.3 | |||||||||||||
Current portion of long term debt | 0.9 | 5.0 | (A,D | ) | 5.9 | ||||||||||||||||
Accounts payable and accrued expenses | 415.9 | 69.1 | (C | ) | (43.0 | ) | (F,J | ) | 442.0 | ||||||||||||
Short term amounts due affiliates | 10.1 | (10.1 | ) | (C | ) | — | |||||||||||||||
Liabilities of discontinued operations | — | 50.6 | (J | ) | 50.6 | ||||||||||||||||
Income tax payable | 7.5 | (64.5 | ) | (H | ) | 60.6 | (I,J | ) | 3.6 | ||||||||||||
Deferred income taxes | 0.8 | (0.8 | ) | (H | ) | 13.5 | 13.5 | ||||||||||||||
Total current liabilities | 435.6 | (1.3 | ) | 82.6 | 516.9 | ||||||||||||||||
Liabilities subject to compromise | 4,868.1 | (4,866.8 | ) | (C | ) | 1.3 | |||||||||||||||
Long term debt, less current portion | 12.1 | 795.0 | (A,D | ) | 807.1 | ||||||||||||||||
Postretirement and postemployment liabilities | 260.9 | 144.8 | (F | ) | 405.7 | ||||||||||||||||
Pension benefit liabilities | 230.7 | (3.0 | ) | (F,J | ) | 227.7 | |||||||||||||||
Other long term liabilities | 74.6 | (1.0 | ) | (C | ) | 0.5 | (F,J | ) | 74.1 | ||||||||||||
Income tax payable, noncurrent | — | 11.9 | (I | ) | 11.9 | ||||||||||||||||
Deferred income taxes, noncurrent | 35.7 | 534.7 | (H | ) | (560.7 | ) | (I,J | ) | 9.7 | ||||||||||||
Minority interest in subsidiaries | 7.3 | 7.3 | |||||||||||||||||||
Total noncurrent liabilities | 621.3 | 1,328.7 | (406.5 | ) | 1,543.5 | ||||||||||||||||
Shareholders’ equity: | |||||||||||||||||||||
Common stock – predecessor | 51.9 | (51.9 | ) | (E | ) | — | |||||||||||||||
Common stock – successor | — | 0.6 | (E | ) | 0.6 | ||||||||||||||||
Capital in excess of par | 172.6 | 1,480.1 | (E | ) | 444.9 | (K | ) | 2,097.6 | |||||||||||||
Reduction for ESOP loan guarantee | (142.2 | ) | 142.2 | (E | ) | — | |||||||||||||||
Accumulated deficit | (803.4 | ) | 1,019.8 | (C | ) | (216.4 | ) | (K | ) | — | |||||||||||
Accumulated other compr. income | 45.4 | (45.4 | ) | (K | ) | — | |||||||||||||||
Treasury stock-predecessor | (528.5 | ) | 528.5 | (E | ) | — | |||||||||||||||
Total shareholders’ equity (deficit) | (1,204.2 | ) | 3,119.3 | 183.1 | (F | ) | 2,098.2 | ||||||||||||||
Total liabilities and shareholders’ equity (deficit) | $ 4,720.8 | $ (420.1) | $ (140.8) | $ 4,159.9 | |||||||||||||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to determine when a liability should be recorded.Consolidated Financial Statements
(dollar amounts in millions)
Recently Issued Accounting StandardsNotes to Reorganization and “Fresh-Start” Activity
| (A) | To reflect cash proceeds from the debt and payout to the unsecured creditors and Asbestos PI Trust pursuant to the distribution provisions of the Plan of Reorganization (POR) as follows: |
In December 2004, the FASB issued Statement
Cash balance of Predecessor as of September 30, 2006 | $ | 520.6 | ||||||
Proceeds from Successor borrowing | $ | 800.0 | ||||||
Cash distributed to unsecured creditors | (362.0 | ) | ||||||
Cash distributed to asbestos trust | (738.5 | ) | ||||||
Cash distributed for convenience, cure and other | (4.3 | ) | ||||||
Net change in cash | (304.8 | ) | (304.8 | ) | ||||
Cash balance of Successor prior to fresh-start adjustments | $ | 215.8 | ||||||
Distributions to be made to unsecured creditors and asbestos trust | $ | 1,145.7 | ||||||
Distributions expected to be made for convenience, cure and other | 5.5 | |||||||
Total expected distributions | 1,151.2 | |||||||
Distributions made to date | (1,104.8 | ) | ||||||
Distributions reserved and pending | $ | 46.4 | ||||||
| (B) | To reflect assignment of asbestos insurance receivable to Asbestos PI Trust pursuant to POR. |
| (C) | To adjust for discharge of liabilities subject to compromise, assumption of certain liabilities and net gain on settlement pursuant to the POR as follows: |
Liabilities subject to compromise that were discharged: | ||||
Debt (at face value) | $ | 1,388.6 | ||
Asbestos related liability | 3,190.6 | |||
Prepetition trade payables | 57.1 | |||
Prepetition other payables and accrued interest | 68.1 | |||
Amounts due to affiliates | 4.7 | |||
ESOP loan guarantee | 157.7 | |||
Total liabilities subject to compromise | 4,866.8 | |||
Effect of new shares, new debt and other settlement items: | ||||
Liabilities subject to compromise not discharged and reclassified to liabilities | (19.2 | ) | ||
Insurance receivable transferred to asbestos trust | (91.5 | ) | ||
Fair value of new equity issued | (2,098.2 | ) | ||
Proceeds of Successor debt to be paid to creditors | (775.0 | ) | ||
Available cash to be paid to creditors | (370.7 | ) | ||
Amounts due to affiliates settled in bankruptcy | 10.1 | |||
Recognition of convenience, environmental and other claim liability | (5.5 | ) | ||
Other | (6.0 | ) | ||
Gross gain on settlement | 1,510.8 | |||
Less: Professional fees payable | (4.3 | ) | ||
Less: Tax effect on settlement | (486.7 | ) | ||
Net gain on settlement | $ | 1,019.8 | ||
| (D) | To record post emergence debt financing pursuant to the Senior Credit Agreement. |
| (E) | To record cancellation of predecessor common stock, close out of remaining equity balances and issuance of successor common stock. |
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which requires all share-based payment transactions to be recognizedStatements
(dollar amounts in the financial statements using a fair-value method of accounting. This Statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. The Statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. Based on an April 2005 ruling by the SEC, the standard is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. Adoption of this standard on January 1, 2006 for our existing stock options will not have a material impact on our consolidated results of operations or financial condition because all of our outstanding stock options are fully vested.millions)
| (F) | To set equity to reorganization value. Assets and liabilities then adjusted to fair value in connection with the application of fresh-start reporting. Adjustments creating net gain on fair value adjustments are as follows: |
Inventory | $ | 88.8 | ||
Property, plant and equipment | (172.3 | ) | ||
Prepaid pension costs | (22.8 | ) | ||
Investment in affiliates | 219.2 | |||
Goodwill | (143.1 | ) | ||
Other intangibles | 619.3 | |||
Postretirement and pension obligations | (146.2 | ) | ||
Other | 17.0 | |||
Gain on fresh-start adjustments before tax | 459.9 | |||
Less: Discontinued operation fair value adjustment | (70.4 | ) | ||
Less: Elimination of other comprehensive income | (45.4 | ) | ||
Less: Tax effect on fresh-start | (161.0 | ) | ||
Change in equity | $ | 183.1 | ||
(See Note 7 for a summary of amounts reclassified to Assets and Liabilities of Discontinued Business Held for Sale)
| (G) | To eliminate Predecessor goodwill. |
| (H) | To reflect tax effect on POR settlement items. |
| (I) | To adjust deferred income taxes to reflect differences in the book versus tax basis of revalued assets and liabilities. |
| (J) | To reclassify discontinued business as ‘Assets of discontinued business held for sale’ and ‘Liabilities of discontinued business held for sale.’ |
| (K) | To reset accumulated other comprehensive income and accumulated deficit to zero and adjust capital in excess of par to reorganization value. |
NOTE 3.4. NATURE OF OPERATIONS
Reportable Segments
Resilient Flooring — produces and sources a broad range of floor coverings primarily for homes and commercial and institutional buildings. Resilient FlooringManufactured products in this segment include vinyl sheet, vinyl tile, linoleum flooring, and luxury vinyl tile.tile, automotive carpeting and other specialized textile floor products. In addition, our Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs and colors. We sell these products to wholesalers, large home centers, retailers, contractors and to the manufactured homes industry.
Wood Flooring — produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (predominantly pre-finished), pre-finished engineered wood floors in various wood species (with oak being the primary species of choice) and related accessories. Virtually all of our Wood Flooring’s sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home centers under the brand names Bruce®, Hartco®, Robbins®, Timberland™Timberland®, Armstrong™, HomerWood®, Capella® and Armstrong™T. Morton™.
Textiles and Sports Flooring (“TSF”) — produces carpeting and sports flooring products that are sold mainly in Europe. Carpeting products consist principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other sports surfaces. Our TSF products are sold primarily through retailers, contractors, distributors and other industrial businesses.
Building Products — produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment sources and sells woodcomplementary ceiling systems. Theproducts. Our products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems contractors and to resale distributors. Residential ceiling products are sold primarily in North America throughto wholesalers and
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
retailers (including large home centers). Suspension system (grid) products manufactured by WAVE are sold by both Armstrong and our WAVE joint venture.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Cabinets — produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of company-ownedCompany-owned and independent distribution centers and through direct sales to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong™Armstrong® and Bruce®.
Unallocated Corporate — - includes assets and expenses that have not been allocated to the business units. Unallocated Corporate assets are primarily deferred tax assets, cash, the Armstrong brand name and the U.S. prepaid pension cost. Expenses included in Unallocated Corporate are corporate departments’ expenses that have not been allocated to other reportable segments, and the U.S. pension credit. Expenses for our corporate departments (including computer services, human resources, legal, finance and other)certain benefit plans are allocated to the reportable segments when the departments provide specific work to the reportable segment and the expense allocation can be based on known metrics, such as time reporting, headcount or square-footage. The remaining expenses, which cannot be attributable to the reportable segments without a high degree of generalization, are reported in Unallocated Corporate.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
For the year ended 2005 | Resilient Flooring | Wood Flooring | Textiles & Sports Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||||||||||||||||||||||||||||||
Successor Company For the three months ended December 31, 2006 | Resilient Flooring | Wood Flooring | Building Products | Cabinets | Unallocated Corporate | Total | ||||||||||||||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 1,185.4 | $ | 833.9 | $ | 279.0 | $ | 1,047.6 | $ | 212.5 | — | $ | 3,558.4 | $ | 278.5 | $ | 192.6 | $ | 289.7 | $ | 56.5 | — | $ | 817.3 | ||||||||||||||||||||||||||
Equity (earnings) from joint venture | — | — | — | (39.3 | ) | — | — | (39.3 | ) | — | 0.2 | (5.5 | ) | — | — | (5.3 | ) | |||||||||||||||||||||||||||||||||
Segment operating income (loss)(1) | (25.8 | ) | 60.9 | (4.4 | ) | 148.5 | (9.7 | ) | $ | (68.8 | ) | 100.7 | (1.2 | ) | (0.2 | ) | 24.9 | 0.2 | (7.2 | ) | 16.5 | |||||||||||||||||||||||||||||
Restructuring charges, net of reversals | 16.2 | 0.1 | 0.2 | 6.3 | 0.4 | — | 23.2 | 0.3 | 1.4 | — | — | — | 1.7 | |||||||||||||||||||||||||||||||||||||
Segment assets | 675.9 | 646.4 | 196.6 | 613.2 | 99.1 | 2,374.8 | 4,606.0 | 690.1 | 498.9 | 1,159.8 | 81.8 | 1,740.1 | 4,170.7 | |||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 54.8 | 19.0 | 5.4 | 33.9 | 2.4 | 25.5 | 141.0 | 10.5 | 2.3 | 13.9 | 0.7 | 4.8 | 32.2 | |||||||||||||||||||||||||||||||||||||
Fixed asset impairment loss | 1.8 | 15.3 | — | 0.5 | — | — | 17.6 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Investment in affiliates | — | — | — | 67.4 | — | — | 67.4 | — | 4.0 | 290.6 | — | — | 294.6 | |||||||||||||||||||||||||||||||||||||
Capital additions | 42.8 | 28.8 | 4.6 | 42.6 | 4.5 | 12.2 | 135.5 | 10.3 | 10.2 | 12.1 | 1.5 | 4.1 | 38.2 | |||||||||||||||||||||||||||||||||||||
For the year ended 2004 | Resilient Flooring | Wood Flooring | Textiles & Sports Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 1,215.1 | $ | 832.1 | $ | 265.4 | $ | 971.7 | $ | 213.0 | — | $ | 3,497.3 | |||||||||||||||||||||||||||||||||||||
Equity (earnings) from joint venture | — | — | — | (31.6 | ) | — | — | (31.6 | ) | |||||||||||||||||||||||||||||||||||||||||
Segment operating income (loss)(1) | (150.2 | ) | 51.4 | (7.1 | ) | 127.0 | 1.4 | $ | (66.3 | ) | (43.8 | ) | ||||||||||||||||||||||||||||||||||||||
Restructuring charges, net of reversals | 4.5 | 1.6 | 0.4 | 10.9 | 0.4 | 0.5 | 18.3 | |||||||||||||||||||||||||||||||||||||||||||
Segment assets | 737.9 | 663.6 | 218.1 | 596.3 | 102.2 | 2,291.3 | 4,609.4 | |||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 62.6 | 18.1 | 5.6 | 35.2 | 3.8 | 25.7 | 151.0 | |||||||||||||||||||||||||||||||||||||||||||
Fixed asset impairment loss | 63.1 | 0.8 | — | 0.4 | 0.4 | — | 64.7 | |||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment | 108.4 | — | — | — | — | — | 108.4 | |||||||||||||||||||||||||||||||||||||||||||
Investment in affiliates | 0.6 | — | — | 51.0 | — | 20.9 | 72.5 | |||||||||||||||||||||||||||||||||||||||||||
Capital additions | 33.8 | 33.7 | 3.9 | 44.5 | 1.4 | 16.7 | 134.0 | |||||||||||||||||||||||||||||||||||||||||||
For the year ended 2003 | Resilient Flooring | Wood Flooring | Textiles & Sports Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 1,181.5 | $ | 738.6 | $ | 271.9 | $ | 862.2 | $ | 204.8 | — | $ | 3,259.0 | |||||||||||||||||||||||||||||||||||||
Equity (earnings) from joint venture | — | — | — | (20.8 | ) | — | — | (20.8 | ) | |||||||||||||||||||||||||||||||||||||||||
Segment operating income (loss) (1) | 56.2 | (4.0 | ) | (11.0 | ) | 95.2 | (11.1 | ) | $ | (144.6 | ) | (19.3 | ) | |||||||||||||||||||||||||||||||||||||
Restructuring charges, net of reversals | 1.2 | 0.8 | 7.4 | — | — | (0.8 | ) | 8.6 | ||||||||||||||||||||||||||||||||||||||||||
Segment assets | 915.3 | 576.6 | 207.1 | 551.5 | 102.3 | 2,295.0 | 4,647.8 | |||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 60.6 | 39.4 | 5.2 | 30.2 | 1.6 | 26.1 | 163.1 | |||||||||||||||||||||||||||||||||||||||||||
Fixed asset impairment loss | 1.1 | 3.4 | — | 3.8 | 1.6 | 0.6 | 10.5 | |||||||||||||||||||||||||||||||||||||||||||
Investment in affiliates | 0.6 | — | — | 29.5 | — | 18.8 | 48.9 | |||||||||||||||||||||||||||||||||||||||||||
Capital additions | 26.5 | 17.3 | 3.4 | 22.3 | 1.6 | 7.0 | 78.1 | |||||||||||||||||||||||||||||||||||||||||||
Predecessor Company For the nine months ended September 30, 2006 | Resilient Flooring | Wood Flooring | Building Products | Cabinets | Unallocated Corporate | Total | ||||||||||||||
Net sales to external customers | $ | 929.4 | $ | 645.0 | $ | 859.8 | $ | 174.4 | — | $ | 2,608.6 | |||||||||
Equity (earnings) from joint venture | — | 0.1 | (41.5 | ) | — | — | (41.4 | ) | ||||||||||||
Segment operating income (loss)(1) | 12.6 | 46.2 | 152.9 | 6.1 | (23.5 | ) | 194.3 | |||||||||||||
Restructuring charges, net of reversals | 9.6 | — | 0.5 | — | (0.1 | ) | 10.0 | |||||||||||||
Depreciation and amortization | 35.2 | 15.0 | 27.7 | 2.1 | 17.8 | 97.8 | ||||||||||||||
Fixed asset impairment loss | — | 0.6 | — | — | — | 0.6 | ||||||||||||||
Capital additions | 20.8 | 23.9 | 34.1 | 3.8 | 10.0 | 92.6 | ||||||||||||||
Predecessor Company For the year ended 2005 | Resilient Flooring | Wood Flooring | Building Products | Cabinets | Unallocated Corporate | Total | ||||||||||||||||
Net sales to external customers | $ | 1,232.6 | $ | 833.9 | $ | 1,047.6 | $ | 212.5 | — | $ | 3,326.6 | |||||||||||
Equity (earnings) from joint venture | — | — | (39.3 | ) | — | — | (39.3 | ) | ||||||||||||||
Segment operating income (loss)(1) | (28.4 | ) | 60.9 | 148.5 | (9.7 | ) | (70.2 | ) | 101.1 | |||||||||||||
Restructuring charges, net of reversals | 16.2 | 0.1 | 6.3 | 0.4 | — | 23.0 | ||||||||||||||||
Segment assets | 715.9 | 646.4 | 613.2 | 99.1 | 2,374.8 | 4,449.4 | ||||||||||||||||
Depreciation and amortization | 55.6 | 19.0 | 33.9 | 2.4 | 25.5 | 136.4 | ||||||||||||||||
Fixed asset impairment loss | 1.8 | 15.3 | 0.5 | — | — | 17.6 | ||||||||||||||||
Investment in affiliates | — | — | 67.4 | — | — | 67.4 | ||||||||||||||||
Capital additions | 42.8 | 28.8 | 42.6 | 4.5 | 12.2 | 130.9 | ||||||||||||||||
Predecessor Company For the year ended 2004 | Resilient Flooring | Wood Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||
Net sales to external customers | $ | 1,262.3 | $ | 832.1 | $ | 971.7 | $ | 213.0 | — | $ | 3,279.1 | ||||||||||
Equity (earnings) from joint venture | — | — | (31.6 | ) | — | — | (31.6 | ) | |||||||||||||
Segment operating income (loss) (1) | (152.8 | ) | 51.4 | 127.0 | 1.4 | (64.7 | ) | (37.7 | ) | ||||||||||||
Restructuring charges, net of reversals | 4.5 | 1.6 | 10.9 | 0.4 | 0.5 | 17.9 | |||||||||||||||
Segment assets | 787.8 | 663.6 | 596.3 | 102.2 | 2,291.3 | 4,441.2 | |||||||||||||||
Depreciation and amortization | 63.9 | 18.1 | 35.2 | 3.8 | 25.7 | 146.7 | |||||||||||||||
Fixed asset impairment loss | 63.1 | 0.8 | 0.4 | 0.4 | — | 64.7 | |||||||||||||||
Goodwill impairment | 108.4 | — | — | — | — | 108.4 | |||||||||||||||
Investment in affiliates | 0.6 | — | 51.0 | — | 20.9 | 72.5 | |||||||||||||||
Capital additions | 34.3 | 33.7 | 44.5 | 1.4 | 16.7 | 130.6 | |||||||||||||||
(1) | Segment operating income (loss) is the measure of segment profit or loss reviewed by the chief operating decision maker. The sum of the segments’ operating income (loss) equals the total consolidated operating income as reported on our income statement. The |
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
following reconciles our total consolidated operating income (loss) to income before taxes, extraordinary items, discontinued operations, and the cumulative effect of changes in accounting principles. These items are only measured and managed on a consolidated basis: |
| 2005 | 2004 | 2003 | ||||||||||
Segment operating income (loss) | $ | 100.7 | $ | (43.8 | ) | $ | (19.3 | ) | ||||
Interest expense | 8.5 | 8.4 | 9.0 | |||||||||
Other non-operating expense | 1.5 | 3.1 | 5.7 | |||||||||
Other non-operating (income) | (12.0 | ) | (6.4 | ) | (5.0 | ) | ||||||
Chapter 11 reorganization costs, net | (1.2 | ) | 6.9 | 9.4 | ||||||||
Income (loss) before taxes and discontinued operations | $ | 103.9 | $ | (55.8 | ) | $ | (38.4 | ) | ||||
| Successor Company | Predecessor Company | |||||||||||||||
| Three months ended December 31, 2006 | Nine months ended September 30, 2006(1) | 2005 | 2004 | |||||||||||||
Segment operating income (loss) | $ | 16.5 | $ | 194.3 | $ | 101.1 | $ | (37.7 | ) | |||||||
Interest expense | 13.4 | 5.2 | 7.7 | 7.9 | ||||||||||||
Other non-operating expense | 0.3 | 1.0 | 1.5 | 3.1 | ||||||||||||
Other non-operating (income) | (4.3 | ) | (7.2 | ) | (11.8 | ) | (6.4 | ) | ||||||||
Chapter 11 reorganization costs, net | — | (1,955.5 | ) | (1.2 | ) | 6.9 | ||||||||||
Income (loss) before taxes and discontinued operations | $ | 7.1 | $ | 2,150.8 | $ | 104.9 | $ | (49.2 | ) | |||||||
| (1) | Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
Accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
The sales in the table below are allocated to geographic areas based upon the location of the customer.
Geographic Areas | 2005 | 2004 | 2003 | |||||||||||||||||||
Net trade sales | ||||||||||||||||||||||
| Successor Company | Predecessor Company | |||||||||||||||||||||
Geographic Areas Net trade sales | Three months ended December 31, 2006 | Nine months ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||||||||
Americas: | ||||||||||||||||||||||
United States | $ | 2,351.1 | $ | 2,338.9 | $ | 2,210.9 | $ | 560.7 | $ | 1,825.2 | $ | 2,334.1 | $ | 2,327.3 | ||||||||
Canada | 192.2 | 177.6 | 162.2 | 36.7 | 157.6 | 192.1 | 177.6 | |||||||||||||||
Other Americas | 31.2 | 31.8 | 24.8 | 8.8 | 25.8 | 30.9 | 31.5 | |||||||||||||||
Total Americas | $ | 2,574.5 | $ | 2,548.3 | $ | 2,397.9 | $ | 606.2 | $ | 2,008.6 | $ | 2,557.1 | $ | 2,536.4 | ||||||||
Europe: | ||||||||||||||||||||||
Germany | $ | 184.9 | $ | 181.2 | $ | 178.2 | $ | 41.0 | $ | 115.6 | $ | 160.9 | $ | 154.6 | ||||||||
United Kingdom | 160.1 | 148.0 | 125.5 | 31.6 | 94.6 | 126.6 | 116.2 | |||||||||||||||
Other Europe | 492.0 | 478.1 | 439.3 | 91.2 | 270.3 | 341.2 | 337.6 | |||||||||||||||
Total Europe | $ | 837.0 | $ | 807.3 | $ | 743.0 | $ | 163.8 | $ | 480.5 | $ | 628.7 | $ | 608.4 | ||||||||
Total Pacific Rim | $ | 146.9 | $ | 141.7 | $ | 118.1 | $ | 47.3 | $ | 119.5 | $ | 140.8 | $ | 134.3 | ||||||||
Total net trade sales | $ | 3,558.4 | $ | 3,497.3 | $ | 3,259.0 | $ | 817.3 | $ | 2,608.6 | $ | 3,326.6 | $ | 3,279.1 | ||||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Long-lived assets (property, plant and equipment), net at December 31 | 2005 | 2004 | ||||
Americas: | ||||||
United States | $ | 805.4 | $ | 823.6 | ||
Canada | 13.7 | 14.8 | ||||
Total Americas | $ | 819.1 | $ | 838.4 | ||
Europe: | ||||||
Germany | $ | 169.6 | $ | 191.3 | ||
Other Europe | 129.7 | 150.8 | ||||
Total Europe | $ | 299.3 | $ | 342.1 | ||
Total Pacific Rim | $ | 26.9 | $ | 28.3 | ||
Total long-lived assets, net | $ | 1,145.3 | $ | 1,208.8 | ||
Long-lived assets (property, plant and equipment), net at December 31 | Successor 2006 | Predecessor 2005 | |||||
Americas: | |||||||
United States | $ | 723.8 | $ | 834.5 | |||
Other Americas | 19.7 | 13.8 | |||||
Total Americas | $ | 743.5 | $ | 848.3 | |||
Europe: | |||||||
Germany | $ | 101.3 | $ | 170.4 | |||
Other Europe | 83.6 | 134.2 | |||||
Total Europe | $ | 184.9 | $ | 304.6 | |||
Total Pacific Rim | $ | 37.8 | $ | 27.8 | |||
Total long-lived assets, net | $ | 966.2 | $ | 1,180.7 | |||
The reduction in European long-lived assets is primarilySuccessor Company balance excludes amounts related to discontinued operations.
For discussion of the negative translation effects of changes in foreign exchange rates.
net reduction, refer to Note 10, “Property, Plant and Equipment.”
NOTE 4.5. LIABILITIES SUBJECT TO COMPROMISE
As a result of AWI’s Chapter 11 Filing (see Note 1), pursuant to SOP 90-7, AWI iswas required to segregate prepetition liabilities that arewere subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by athe plan of reorganization arewere recorded at the amount of the expected allowed claims, even if they may behave been settled for lesser amounts. Substantially all of AWI’s prepetition debt now in default, iswas recorded at face value and iswas classified within liabilities subject to compromise. Obligations of our subsidiaries that arewere not covered by the Filing remainremained classified on the consolidated balance sheet based upon maturity date. AWI’s asbestos liability iswas also recorded in liabilities subject to compromise. See Note 1 for further discussion on how the Chapter 11 process may address AWI’s
Liabilities subject to compromise at December 31, 2006 and December 31, 2005 are as follows:
Successor 2006 | Predecessor 2005 | ||||||
Debt (at face value) | — | $ | 1,388.6 | ||||
Asbestos-related liability | — | 3,190.6 | |||||
Prepetition trade payables | $ | 1.0 | 58.1 | ||||
Prepetition other payables and accrued interest | 0.3 | 69.7 | |||||
Amounts due to affiliates | — | 4.7 | |||||
ESOP loan guarantee | — | 157.7 | |||||
Total liabilities subject to compromise | $ | 1.3 | $ | 4,869.4 | |||
The remaining liabilities subject to compromise relate to Nitram Liquidators, Inc. and Note 30 for further discussionDesseaux Corporation of AWI’s asbestos liability.North America, Inc., which are wholly owned subsidiaries of AWI and which remain under Chapter 11 protection.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Liabilities subject to compromise at December 31, 2005 and December 31, 2004 are as follows:
| 2005 | 2004 | |||||
Debt (at face value) | $ | 1,388.6 | $ | 1,388.6 | ||
Asbestos-related liability | 3,190.6 | 3,190.6 | ||||
Prepetition trade payables | 58.1 | 58.9 | ||||
Prepetition other payables and accrued interest | 69.7 | 70.4 | ||||
ESOP loan guarantee | 157.7 | 157.7 | ||||
Total liabilities subject to compromise | $ | 4,864.7 | $ | 4,866.2 | ||
Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.
See Note 15 for detail of debt subject to compromise.millions)
NOTE 5.6. ACQUISITIONS
On April 3, 2006, we purchased certain assets and assumed certain liabilities of HomerWood, Inc., a hardwood flooring company. On May 1, 2006 we purchased certain assets and assumed certain liabilities of Capella Engineered Wood, LLC, a hardwood flooring company, and of its parent company, Capella, Inc. The combined purchase price of these acquisitions was $61.5 million. Both acquisitions were financed from existing cash balances. Both investments will expand Armstrong’s wood flooring product offerings. The acquisitions were accounted for under the purchase method of accounting in the second quarter of 2006. Preliminary allocation of the purchase price to the fair value of tangible and identifiable intangible assets acquired in each transaction has been completed.
NOTE 7. DISCONTINUED OPERATIONS
On May 31, 2000, Armstrong completed its sale of all entities, assets and certain liabilities comprising its Insulation Products segment. During 2003 AHI recorded a net loss of $2.4 million for the impairment of some notes receivable and the settlement of certain tax contingencies related to this divestiture. During the fourth quarter of 2005, AHIwe recorded a net gain of $10.4 million due to the early settlement of the remaining notes receivable and the settlement of other disputed items.
During the fourth quarter of 2006, we recorded a net gain of $1.7 million due to the settlement of various legal disputes.
On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During 2004, and 2003, AHIwe recorded net losses of $0.4 million and $0.1 million, respectively, for the environmental and tax indemnificationsindemnification related to this divestiture.
In accordance with FAS 144, these adjustments were classified as discontinued operations since the original divestitures were reported as discontinued operations.
On March 27, 2007 we entered into an agreement to sell Tapijtfabriek H. Desseaux N.V. and its subsidiaries (“Desseaux”)—the principal operating companies in our European Textile and Sports Flooring business segment. These businesses were classified as discontinued operations at October 2, 2006 as they met the criteria of FAS 144. In accordance with SOP 90-7, the estimated net realizable value from the sale was used to determine the business’ fair value with respect to fresh-start reporting. In this regard, an adjustment of $70.4 million was reflected within the Predecessor Company’s loss from discontinued operations (See Note 3). Finalization of the sale transaction is expected in the second quarter of 2007.
Prior period results within the Consolidated Statement of Earnings have been recast to reflect the results of discontinued operations. The segment results in Note 4 exclude amounts related to discontinued operations. The Successor Company Consolidated Statement of Cash Flows for the three month period ended December 31, 2006 does not separately report the cash flows of the discontinued operations, and the Balance Sheets and Statements of Cash Flows for prior periods have not been recast.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Net sales, pre-tax income and net income from discontinued operations, as well as net assets of the Desseaux business for the Successor and Predecessor periods are as follows:
| Successor Company | Predecessor Company | |||||||||||||||
| Three months ended December 31, 2006 | Nine months ended September 30, 2006(1) | 2005 | 2004 | |||||||||||||
Net sales | $ | 66.7 | $ | 187.1 | $ | 231.8 | $ | 218.2 | ||||||||
Pre-tax loss from discontinued operations | $ | (2.8 | ) | $ | (6.7 | ) | $ | (2.6 | ) | $ | (5.0 | ) | ||||
Fresh-start reporting adjustments | — | (70.4 | ) | — | — | |||||||||||
Gain (loss) on sale of assets | 2.6 | — | 10.4 | (0.6 | ) | |||||||||||
Income tax (expense) benefit | (0.9 | ) | 8.7 | (2.8 | ) | (3.5 | ) | |||||||||
Net income (loss) from discontinued operations | $ | (1.1 | ) | $ | (68.4 | ) | $ | 5.0 | $ | (9.1 | ) | |||||
| (1) | Reflects the effects of fresh-start reporting. |
| Successor Company | ||||
| December 31, 2006 | ||||
Current assets | $ | 119.8 | ||
Property, plant and equipment | 1.6 | |||
Non-current assets | 0.2 | |||
Assets of discontinued business held for sale | 121.6 | |||
Current liabilities | (47.9 | ) | ||
Other non-current liabilities | (5.4 | ) | ||
Liabilities of discontinued business held for sale | (53.3 | ) | ||
Net assets | $ | 68.3 | ||
NOTE 6.8. ACCOUNTS AND NOTES RECEIVABLE
| 2005 | 2004 | |||||||
Customer receivables | $ | 355.8 | $ | 372.0 | ||||
Customer notes | 6.3 | 7.9 | ||||||
Miscellaneous receivables | 17.3 | 14.7 | ||||||
Less allowance for discounts and losses | (50.6 | ) | (58.5 | ) | ||||
Net accounts and notes receivable | $ | 328.8 | $ | 336.1 | ||||
| Successor Company | Predecessor Company | |||||||
| December 31, 2006 | December 31, 2005 | |||||||
Customer receivables | $ | 355.9 | $ | 355.8 | ||||
Customer notes | 7.4 | 6.3 | ||||||
Miscellaneous receivables | 18.2 | 17.3 | ||||||
Less allowance for discounts and losses | (59.6 | ) | (50.6 | ) | ||||
Net accounts and notes receivable | $ | 321.9 | $ | 328.8 | ||||
Generally, we sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.
The Successor Company balance excludes amounts related to discontinued operations.
NOTE 7. INVENTORIES
Following are the components of our inventories:
| 2005 | 2004 | |||||||
Finished goods | $ | 339.1 | $ | 362.9 | ||||
Goods in process | 44.6 | 45.9 | ||||||
Raw materials and supplies | 194.4 | 216.2 | ||||||
Less LIFO and other reserves | (63.6 | ) | (89.9 | ) | ||||
Total inventories, net | $ | 514.5 | $ | 535.1 | ||||
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
NOTE 9. INVENTORIES
Following are the components of our inventories:
| Successor Company | Predecessor Company | |||||||
| December 31, 2006 | December 31, 2005 | |||||||
Finished goods | $ | 330.0 | $ | 339.1 | ||||
Goods in process | 37.0 | 44.6 | ||||||
Raw materials and supplies | 163.2 | 194.4 | ||||||
Less LIFO and other reserves | (8.5 | ) | (63.6 | ) | ||||
Total inventories, net | $ | 521.7 | $ | 514.5 | ||||
As more fully discussed in Note 3 and pursuant to SOP 90-7, we recorded an increase in the estimated fair value of net inventories of $92.1 million, partially offset by the reclassification of discontinued operations of $65.1 million, resulting in a net increase of $27.0 million upon adopting fresh-start reporting. The Successor Company balance excludes inventories related to discontinued operations.
Approximately 44%68% and 40%44% of our total inventory in 20052006 and 2004,2005, respectively, was valued on a LIFO (last-in, first-out) basis. Inventory values were lowerhigher than would have been reported on a total FIFO (first-in, first-out) basis by $52.2$0.2 million at the end of 20052006 and $74.1lower by $52.2 million at year-end 2004.
2005.
The distinction between the use of different methods of inventory valuation is primarily based on geographical locations and/or legal entities rather than types of inventory. The following table summarizes the amount of inventory that is not accounted for under the LIFO method.
| 2005 | 2004 | |||||
International locations | $ | 156.4 | $ | 173.0 | ||
U.S. Wood Flooring and Cabinets | 111.6 | 125.4 | ||||
U.S. sourced products | 19.3 | 23.2 | ||||
Total | $ | 287.3 | $ | 321.6 | ||
| Successor Company | Predecessor Company | ||||||
| 2006 | 2005 | ||||||
International locations | $ | 128.7 | $ | 156.4 | |||
U.S. Wood Flooring and Cabinets | 36.5 | 111.6 | |||||
U.S. sourced products | 1.4 | 19.3 | |||||
Total | $ | 166.6 | $ | 287.3 | |||
Our international locations all use the FIFO method of inventory valuation primarily because either the LIFO method is not permitted for local tax and/or statutory reporting purposes, or the entities were part of various acquisitions that had adopted the FIFO method prior to our acquisition. In these situations, a conversion to LIFO would be highly complex and involve excessive cost and effort to achieve under local tax and/or statutory reporting requirements.
Several of the Wood Flooring and Cabinets entities were acquired by Triangle Pacific Corporation (“TPC”) prior to our acquisition of TPC in 1998. TPC had elected to retain the historical inventory valuation policies of the acquired companies and, on the basis of consistency and due to the excessive cost involved, we elected not to amend these policies.
Upon emergence, the Successor Company elected to value TPC wood flooring products using one consistent LIFO methodology. Predecessor Company financial statements were not restated for this election, due to the lack of comparability with the Successor Company’s financial statements as a result of adopting fresh-start reporting.
The sourced products represent certain finished goods sourced from third party manufacturers, of unique type, primarily from foreign suppliers.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 8.10. PROPERTY, PLANT AND EQUIPMENT
As more fully discussed in Note 3 and pursuant to SOP 90-7, upon adopting fresh-start reporting we recorded a $242.6 million reduction to fair value our net property, plant and equipment. This adjustment was made based on the work of management and our independent appraisal firm. The values listed in the Predecessor Company at December 31, 2005 have been restated to reflect the reclassification of capitalized software costs within the Property, Plant and Equipment classification. The Successor Company balance excludes amounts related to discontinued operations.
| 2005 | 2004 | |||||||
Land | $ | 69.4 | $ | 77.0 | ||||
Buildings | 652.0 | 657.4 | ||||||
Machinery and equipment | 1,904.4 | 1,937.3 | ||||||
Construction in progress | 81.5 | 77.8 | ||||||
Less accumulated depreciation and amortization | (1,562.0 | ) | (1,540.7 | ) | ||||
Net property, plant and equipment | $ | 1,145.3 | $ | 1,208.8 | ||||
| Successor Company | Predecessor Company | |||||||
| December 31, 2006 | December 31, 2005 | |||||||
Land | $ | 124.2 | $ | 69.4 | ||||
Buildings | 259.7 | 652.0 | ||||||
Machinery and equipment | 512.3 | 1,904.4 | ||||||
Computer software | 29.1 | 102.1 | ||||||
Construction in progress | 69.7 | 81.5 | ||||||
Less accumulated depreciation and amortization | (28.8 | ) | (1,628.7 | ) | ||||
Net property, plant and equipment | $ | 966.2 | $ | 1,180.7 | ||||
In the fourth quarter of 2005, we recorded $17.6 million of fixed asset impairment charges, primarily in Wood Flooring. These impairment charges related to idle equipment and unused property associated with excess manufacturing capacity and products that will no longer be produced. These charges were recorded in cost of goods sold. The fixed asset impairment charges were triggered by an evaluation of current production capacity and future production levels for certain product lines.
In the fourth quarter of 2004, we recorded a $44.8 million fixed asset impairment charge in Resilient Flooring for our European resilient flooring business. This impairment charge reduced land by approximately $29 million and buildings by approximately $16 million and was reported in cost of goods sold. The fixed asset impairment charge was triggered by actual operating losses and negative cash flows incurred in the European resilient flooring business. The expectation was that the operating losses and negative cash flows would continue in the near future. The fixed asset fair values were determined by an independent appraisal firm.
NOTE 11. EQUITY INVESTMENTS
Investments in affiliates of $294.6 million at December 31, 2006, reflected the equity interest in our 50% investment in our WAVE joint venture and our 50% investment in Kunshan Holdings Limited. The balance increased $227.2 million from December 31, 2005, primarily due to the revaluation of our equity investment in WAVE to its fair value as part of fresh-start reporting, along with the recording of their net undistributed earnings.
| Successor Company | Predecessor Company | ||||||||||||||||
Affiliate | Income Statement Classification | Three months ended December 31, 2006 | Nine months ended September 30, 2006 | 2005 | 2004 | ||||||||||||
WAVE | Equity earnings from joint venture | $ | 5.5 | $ | 41.5 | $ | 39.3 | $ | 31.6 | ||||||||
KHL | Equity loss from joint venture | (0.2 | ) | (0.1 | ) | — | — | ||||||||||
ISI | Other non-operating income | — | — | 4.1 | 1.9 | ||||||||||||
ISI/Other | Other non-operating expense | — | — | (1.0 | ) | — | |||||||||||
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
NOTE 9. EQUITY INVESTMENTS
Investments in affiliates of $67.4 million at December 31, 2005, reflected the equity interest in our 50% investment in our WAVE joint venture. The balance decreased $5.1 million from December 31, 2004, primarily due to theIn August 2005, sale ofwe sold our equity interest in Interface Solutions, Inc. partially offset by
We account for our WAVE joint venture using the equity interestmethod of accounting. Our recorded investment in WAVE was $219.2 million, as of emerging from Chapter 11, and $213.7 million, as of December 31, 2006, higher than our 50% share of the carrying values reported in WAVE’s net undistributed earnings.consolidated financial statements for the same periods. These differences are due to our adopting fresh-start reporting upon emerging from Chapter 11, while WAVE’s consolidated financial statements do not reflect fresh-start reporting. The $219.2 million difference as of emergence is comprised of the following fair value adjustments to assets:
Affiliate | Income Statement Classification | 2005 | 2004 | 2003 | |||||||||
WAVE | Equity earnings from joint venture | $ | 39.3 | $ | 31.6 | $ | 20.8 | ||||||
ISI | Other non-operating income | 4.1 | 1.9 | 0.3 | |||||||||
ISI/Other | Other non-operating expense | (1.0 | ) | — | (0.4 | ) | |||||||
Inventory | $ | 3.7 | |
Property, plant and equipment | 5.4 | ||
Other intangibles | 192.2 | ||
Goodwill | 17.9 |
Of the $192.2 million fair value adjustment to other intangibles, $107 million is for identifiable intangible assets that have useful lives of between 15 and 20 years, while the remaining amount is for identifiable intangibles that have indefinite lives. Our equity earnings reported in the fourth quarter of 2006 were reduced by $5.4 million due to the impact of fresh-start reporting. See Exhibit 99.1 for WAVE’s consolidated financial statements. Condensed financial data for WAVE which we account for under the equity method of accounting, is summarized below:
| 2005 | 2004 | December 31, 2006 | December 31, 2005 | |||||||||
Current assets | $ | 125.5 | $ | 145.1 | $ | 157.7 | $ | 125.5 | ||||
Non-current assets | 30.4 | 33.8 | 28.2 | 30.4 | ||||||||
Current liabilities | 19.1 | 71.4 | 28.8 | 19.1 | ||||||||
Other non-current liabilities | 5.8 | 5.1 | 4.1 | 5.8 | ||||||||
| 2005 | 2004 | 2003 | |||||||
Net sales | $ | 307.7 | $ | 278.6 | $ | 213.8 | |||
Gross profit | 99.1 | 86.3 | 61.7 | ||||||
Net earnings | 78.6 | 63.2 | 41.7 | ||||||
| Three months ended December 31, 2006 | Nine months ended September 30, 2006 | 2005 | 2004 | |||||||||
Net sales | $ | 88.6 | $ | 260.2 | $ | 307.7 | $ | 278.6 | ||||
Gross profit | 21.3 | 102.8 | 99.1 | 86.3 | ||||||||
Net earnings | 21.9 | 83.0 | 78.6 | 63.2 | ||||||||
See discussion in Note 2931 for additional information on these related parties.
On February 27, 2007, we received a $50 million dividend from WAVE. This will reduce our investment in affiliates in the first quarter of 2007.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 10.12. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of January 1, 2005,2006, we had goodwill of $136.0$134.2 million. Goodwill is requiredAs more fully discussed in Note 3 and pursuant to be testedSOP 90-7, we eliminated the existing goodwill of $143.1 upon adopting fresh-start reporting. The newly assigned fair values to our assets and liabilities fully reflect the emerged entity’s reorganization value. No goodwill was assigned at emergence.
The following table represents the changes in goodwill for impairment at least annually. We perform our annual assessment in the fourth quarter.2006:
Goodwill by segment | January 1, 2006 | Goodwill acquired | Adjustments, net(1) | Fresh-Start Impacts | December 31, 2006 | |||||||||||
Wood Flooring | $ | 108.2 | $ | 8.0 | — | $ | (116.2 | ) | $ | — | ||||||
Building Products | 13.4 | — | $ | 0.9 | (14.3 | ) | — | |||||||||
Cabinets | 12.6 | — | — | (12.6 | ) | — | ||||||||||
Total consolidated goodwill | $ | 134.2 | $ | 8.0 | $ | 0.9 | $ | (143.1 | ) | $ | — | |||||
(1) | Consists of the effects of foreign exchange. |
In the fourth quarter of 2005, we completed our annual assessment of goodwill as required by FAS 142 and determined there was no impairment. The following table represents the changes in goodwill for 2005:
Goodwill by segment | January 1, 2005 | Adjustments, net(1) | Impairments | December 31, 2005 | |||||||||
Wood Flooring | $ | 108.2 | — | — | $ | 108.2 | |||||||
Building Products | 15.2 | $ | (1.8 | ) | — | 13.4 | |||||||
Cabinets | 12.6 | — | — | 12.6 | |||||||||
Total consolidated goodwill | $ | 136.0 | $ | (1.8 | ) | $ | — | $ | 134.2 | ||||
(1) | Consists of the effects of foreign exchange. |
Other Intangible Assets
DuringPursuant to SOP 90-7, we recorded the second quarter of 2004, we concluded that an indication of impairment existed for our European resilient flooring goodwill, which was based on an assessment of financial projections incorporated in our annual strategic plan process. Continuing price declines and volume shortfalls related to our European resilient flooring products were causing significant operating losses, and we revised our projections accordingly. We calculated a preliminary estimate of the European resilient flooring reporting unit’sestimated fair value using discounted cash flows. Based on this preliminary fair value calculation, we recorded a non-cashof intangibles, not including goodwill, impairment loss of $60.0$673.6 million inupon adopting fresh-start reporting. The values listed for the second quarterPredecessor at December 31, 2005 have been restated to reflect the reclassification of 2004. Incapitalized computer software costs to the fourth quarter of 2004, we completed our annual assessment of goodwill as required by FAS 142Property, Plant and Equipment classification.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
determined that based upon a revised strategic plan, our European resilient flooring goodwill was fully impaired. Therefore, we recorded an additional $48.4 million impairment charge. The goodwill impairment charges arose from the European resilient flooring reporting unit’s fair value being lower than its carrying value. The fair value was negatively affected by lower operating profits and expected future cash flows determined in recent forecasting analyses. We calculated the reporting unit’s fair value using discounted cash flows. No other goodwill impairment was identified in our annual assessment.
The following table represents the changes in goodwill during 2004.
Goodwill by segment | January 1, 2004 | Adjustments, net(1) | Impairments | December 31, 2004 | ||||||||||
Resilient Flooring | $ | 107.1 | $ | 1.3 | $ | (108.4 | ) | — | ||||||
Wood Flooring | 110.4 | (2.2 | ) | — | $ | 108.2 | ||||||||
Building Products | 14.0 | 1.2 | — | 15.2 | ||||||||||
Cabinets | 12.6 | — | — | 12.6 | ||||||||||
Total consolidated goodwill | $ | 244.1 | $ | 0.3 | $ | (108.4 | ) | $ | 136.0 | |||||
Intangible Assetsmillions)
The following table details amounts related to our intangible assets as of December 31, 20052006 and 2004.2005.
| Estimated Useful Life | Successor Company | Predecessor Company | |||||||||||||||||||||||||
| December 31, 2005 | December 31, 2004 | December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
Amortizing intangible assets | |||||||||||||||||||||||||||
Computer software | $ | 102.1 | $ | 66.7 | $ | 109.8 | $ | 66.4 | |||||||||||||||||||
Land use rights and other | 4.5 | 1.1 | 4.4 | 1.0 | |||||||||||||||||||||||
Customer relationships | 20 years | $ | 165.1 | $ | 2.1 | — | — | ||||||||||||||||||||
Developed technology | 15 years | 77.9 | 1.2 | — | — | ||||||||||||||||||||||
Other | Various | 10.1 | 0.4 | $ | 4.5 | $ | 1.1 | ||||||||||||||||||||
Total | $ | 106.6 | $ | 67.8 | $ | 114.2 | $ | 67.4 | $ | 253.1 | $ | 3.7 | $ | 4.5 | $ | 1.1 | |||||||||||
Non-amortizing intangible assets | |||||||||||||||||||||||||||
Trademarks and brand names | 29.3 | 29.2 | Indefinite | 420.5 | 29.3 | ||||||||||||||||||||||
Total intangible assets | $ | 135.9 | $ | 143.4 | |||||||||||||||||||||||
Total other intangible assets | $ | 673.6 | $ | 33.8 | |||||||||||||||||||||||
Aggregate Amortization Expense | |||||||||||||||||||||||||||
For the year ended December 31 | $ | 16.7 | $ | 15.4 | |||||||||||||||||||||||
Predecessor Company | |||||||||||||||||||||||||||
For the year ended December 31, 2005 | $ | 0.1 | |||||||||||||||||||||||||
For the nine months ended September 30, 2006 | $ | 0.1 | |||||||||||||||||||||||||
Successor Company | |||||||||||||||||||||||||||
For the three months ended December 31, 2006 | $ | 3.7 | |||||||||||||||||||||||||
The increase in trademarks and brand names is from the recognition of the fair value of the Armstrong and Bruce brand names. Based on our intention to use these brand names indefinitely due to their importance in our selling efforts, we have not assigned a useful life to these assets. We will test these assets for impairment annually in the fourth quarter.
Amortization charges for computer softwareThere are determined on a straight-line basis at rates calculatedno intangible assets related to provide for the retirement of assets at the end of their useful lives, generally 3 to 7 years.
discontinued operations.
The annual amortization expense expected for the years 20062007 through 20102011 is as follows:
2006 | $ | 13.8 | |||||||||
2007 | 9.0 | $ | 14.2 | 2010 | $ | 13.6 | |||||
2008 | 6.5 | 13.6 | 2011 | 13.6 | |||||||
2009 | 3.6 | 13.6 | |||||||||
2010 | 1.3 | ||||||||||
NOTE 13. OTHER NON-CURRENT ASSETS
| Successor Company | Predecessor Company | ||||||
| December 31, 2006 | December 31, 2005 | ||||||
Cash surrender value of Company owned life insurance policies | $ | 52.9 | $ | 65.1 | |||
Other | 34.5 | 31.5 | |||||
Total other non-current assets | $ | 87.4 | $ | 96.6 | |||
The Successor balance excludes amounts related to discontinued operations.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
NOTE 11. OTHER NON-CURRENT ASSETS
| 2005 | 2004 | |||||
Cash surrender value of company owned life insurance policies | $ | 65.1 | $ | 66.8 | ||
Long term notes receivable | 3.5 | 31.8 | ||||
Other | 28.0 | 24.0 | ||||
Total other non-current assets | $ | 96.6 | $ | 122.6 | ||
The reduction in long term notes receivable from 2004 to 2005 was primarily due to the early settlement of some notes receivable related to a previous divestiture.
NOTE 12.14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| 2005 | 2004 | |||||
Payables, trade and other | $ | 256.2 | $ | 259.8 | ||
Employment costs | 59.9 | 65.7 | ||||
Restructuring severance expenses | 2.8 | 18.0 | ||||
Other | 73.6 | 103.9 | ||||
Total accounts payable and accrued expenses | $ | 392.5 | $ | 447.4 | ||
| Successor Company | Predecessor Company | ||||||
| December 31, 2006 | December 31, 2005 | ||||||
Payables, trade and other | $ | 231.5 | $ | 256.2 | |||
Employment costs | 118.9 | 59.9 | |||||
Other | 92.9 | 76.4 | |||||
Total accounts payable and accrued expenses | $ | 443.3 | $ | 392.5 | |||
Certain other accounts payable and accrued expenses have been categorized as liabilities subject to compromise (see Note 4)5).
The Successor Company balance excludes amounts related to discontinued operations.
NOTE 13.15. RESTRUCTURING AND OTHER ACTIONS
Net restructuring charges of $23.2$1.7 million, $10.0 million, $23.0 million and $18.3$17.9 million were recorded in the three months ended December 31, 2006, the nine months ended September 30, 2006 and the years 2005 and 2004, respectively. The following table summarizes these charges:
| Net Charge/ (Reversal) | (unaudited) Number of Employees Impacted | Successor Company | Predecessor Company | |||||||||||||||||||||||||||||
Action Title | 2005 | 2004 | Segment | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | (unaudited) Number of Employees Impacted | Segment | |||||||||||||||||||||||
Lancaster Plant | $ | 16.3 | $ | 1.0 | 450 | Resilient Flooring | $ | 0.5 | $ | 9.6 | $ | 16.3 | $ | 1.0 | 450 | Resilient Flooring | ||||||||||||||||
Nashville Plant | 1.4 | — | — | — | 270 | Wood Flooring | ||||||||||||||||||||||||||
Hoogezand | 6.3 | 10.9 | 130 | Building Products | — | 0.5 | 6.3 | 10.9 | 130 | Building Products | ||||||||||||||||||||||
North America SG&A | (0.1 | ) | 5.3 | 250 | Resilient Flooring, Wood Flooring,Corporate | (0.2 | ) | — | (0.1 | ) | 5.3 | 250 | Resilient Flooring, Wood Flooring, Unallocated Corporate | |||||||||||||||||||
Morristown | 0.4 | 0.4 | 100 | Cabinet Products | — | — | 0.4 | 0.4 | 100 | Cabinet Products | ||||||||||||||||||||||
Oss | 0.2 | 0.7 | 70 | Textiles & Sports Flooring | ||||||||||||||||||||||||||||
Searcy | 0.1 | 0.8 | 230 | Wood Flooring | — | — | 0.1 | 0.8 | 230 | Wood Flooring | ||||||||||||||||||||||
European Consolidation | — | (0.8 | ) | Resilient Flooring, Textiles & Sports Flooring | ||||||||||||||||||||||||||||
European consolidation | — | — | — | (0.5 | ) | Resilient Flooring | ||||||||||||||||||||||||||
U.K. Lease | — | (0.1 | ) | — | — | Unallocated Corporate | ||||||||||||||||||||||||||
Total | $ | 23.2 | $ | 18.3 | $ | 1.7 | $ | 10.0 | $ | 23.0 | $ | 17.9 | ||||||||||||||||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Lancaster Plant: TheThese charges related to the fourth quarter 2004 decision to cease commercial flooring production at Lancaster in 2006. Commercial flooring production requirements will beare being serviced in part by our other facilities around the world. OfWe recorded the $16.3 million charge in 2005, $14.1 million is a non-cash chargefollowing costs related to termination benefits to be paid through the U.S. pension plan. In 2004, $0.6 million of the $1.0 million charge related to these non-cash benefits. The other $2.2 million in 2005 and $0.4 million in 2004 is comprised of severance and related costs. this initiative:
| Successor Company | Predecessor Company | |||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | |||||||||||
Non-cash restructuring charges | $ | 0.5 | $ | 8.5 | $ | 14.1 | $ | 0.6 | ||||||
Severance and related costs | — | 1.1 | 2.2 | 0.4 | ||||||||||
Total restructuring charges | $ | 0.5 | $ | 9.6 | $ | 16.3 | $ | 1.0 | ||||||
Fixed asset impairments | — | — | — | $ | 17.7 | |||||||||
Accelerated depreciation | ��� | $ | 0.3 | $ | 6.4 | 10.3 | ||||||||
Other related costs | $ | 0.5 | 9.3 | 6.3 | — | |||||||||
Total cost of goods sold | $ | 0.5 | $ | 9.6 | $ | 12.7 | $ | 28.0 | ||||||
Gain on sale of warehouse | — | $ | (14.3 | ) | — | — | ||||||||
Other related costs | — | 7.4 | — | — | ||||||||||
Total SG&A | — | $ | (6.9 | ) | — | — | ||||||||
We have incurred project-to-date restructuring charges of $17.3$27.4 million related primarily to severance and pension related costs. We do not expect to incur approximately $13 millionany additional restructuring or other charges related to this initiative in the future.
Nashville: This charge is related to the fourth quarter 2006 decision to cease production at this facility in 2007. Finished goods production ceased in January 2007. All production activities are expected to cease by the end of 2007. Solid hardwood flooring production requirements are being serviced by six of our existing plants in the United States. We have incurred project-to-date restructuring charges in 2006, in addition to $0.3of $1.4 million of accelerated depreciation and
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
$11.6 million of other related costs, both in cost of goods sold, and approximately $6 million in SG&A. Further, we expect to realize a gainincur additional restructuring charges of approximately $15$0.1 million related to this initiative in 2006 from the sale of a warehouse which became available as a result of this initiative. We recorded $6.4 million and $10.3 million of accelerated depreciation in 2005 and 2004, respectively. We also recorded $6.3 million of other related costs in 2005 and $17.7 million of fixed asset impairments in 2004, both in cost of goods sold.
2007.
Hoogezand: These charges are related to the first quarter 2004 decision to close the manufacturing facility and are comprised of severance and related costs. Closure of the plant was completed in the first quarter of 2005. The production was transferred to another Building Products location in Münster, Germany and resulted in a net reduction of approximately 72 positions. We have incurred project-to-date restructuring charges of $17.2$17.7 million, and expect to incur an additional $0.6$0.3 million of restructuring charges and $0.2 million of accelerated depreciation in 2006.2007. Additionally, we recorded $0.5 million and $1.4 million of accelerated depreciation in cost of goods sold in 2005 and 2004, respectively. We also recorded $0.2 million, $0.7 million and $1.1 million of other related costs in cost of goods sold in 2006, 2005 and 2004, respectively. In 2005, we recorded fixed asset impairments of $0.4 million, also in cost of goods sold.
North America SG&A: The net reversal of $0.2 million in 2006 (Resilient Flooring), net reversal of $0.1 million in 2005 (Resilient Flooring) and net charge of $5.3 million in 2004 ($4.0 million in Resilient Flooring, $0.8 million in Wood Flooring, and $0.5 million in Corporate) were recorded for severance and related costs due to a restructuring of the sales force and management structure in North America in response to changing market conditions. This initiative was announced in the fourth quarter of 2004 and was completed in the second quarter of 2005. We incurred project-to-date restructuring charges of $5.2$5.0 million and do not expect to incur any additional charges.
Morristown: The charges related to the fourth quarter 2004 decision to close a plant in Tennessee in the first quarter of 2005. Manufacturing was consolidated at two existing plants in the United States. We have incurred project-to-date restructuring charges of $0.4 million for severance related charges and $0.4 million of related shutdown costs and do not expect to incur additional costs. Additionally, we recorded $0.2
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
$0.2 million and $1.5 million of accelerated depreciation in 2005 and 2004, respectively, in cost of goods sold. We also recorded $1.0 million of other related costs in 2005 and $0.4 million of fixed asset impairments in 2004, both in cost of goods sold.
Searcy: The charge related to the fourth quarter 2004 decision to cease production at a solid hardwood flooring location in Arkansas in the first quarter of 2005 and was comprised of estimated severance benefits and related costs. We continue to manufacture solid wood flooring at other plants across the United States. We incurred $0.9 million of restructuring charges for the project-to-date and do not expect to incur any additional charges. Additionally, in the fourth quarter of2006 and 2005, we recorded an asset impairment chargecharges of $0.7 million and $13.9 million, respectively, in cost of goods sold related to property, plant and equipment at this site. See Note 810 for further discussion.
Oss: The charges were recorded to reflect shutdown costs related to a plant closure in The Netherlands. The related severance charges were recorded during the third quarter of 2003 when the plant closure was announced. We will continue to manufacture carpet at other plants across Europe. We incurred project-to-date restructuring charges of $4.9 million and do not expect to incur any additional costs in the future.
European consolidation: The net reversal in 2004 comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Textiles and Sports Flooring ($0.3 million) and Resilient Flooring ($0.5 million) segments.segment.
U.K. Lease: In 2003,1996, we recorded neta restructuring chargescharge to reflect future rent associated with the vacated portion of $8.6a leased building. The lease extends through 2017. In the third quarter of 2006, we signed a new sublease agreement for a portion of the unused space and, accordingly, recorded a reduction of $0.1 million primarily relatedin our reserve to reflect the European consolidation and Oss plant closure.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
future expected sublease income.
The following table summarizes activity in the reorganization and restructuring accruals for 2005 and 2004.2006. The amount of net charges in the table does not agree to the income statement due to non-cash charges for enhanced retirement benefits that did not affect the restructuring accrual accounts.
Beginning Balance | Cash Payments | Net Charges | Other | Ending Balance | |||||||||||||
2005 | $ | 24.8 | $ | (24.0 | ) | $ | 9.1 | $ | (1.1 | ) | $ | 8.8 | |||||
2004 | 10.0 | (4.1 | ) | 17.7 | 1.2 | 24.8 | |||||||||||
Predecessor Company: | ||||
Balance, December 31, 2004 | $ | 23.8 | ||
Cash payments | (23.5 | ) | ||
Net charges | 8.9 | |||
Other | (1.0 | ) | ||
Balance, December 31, 2005 | $ | 8.2 | ||
Cash payments | (2.8 | ) | ||
Net charges | 1.5 | |||
Other | 0.4 | |||
Balance, September 30, 2006 | $ | 7.3 | ||
Liability discharged upon emergence | (1.3 | ) | ||
Successor Company: | ||||
Cash payments | (0.4 | ) | ||
Net charges | 1.2 | |||
Other | 0.2 | |||
Balance, December 31, 2006 | $ | 7.0 | ||
The amount in “other” for 2005 and 2004 is related to the effects of foreign currency translation.
Of the 2005 and 2004 endingThe Predecessor Company balances included $1.3 million is reported in liabilities subject to compromise.
This amount was discharged upon emergence from Chapter 11 in accordance with the POR.
Substantially all of the remaining balance of the restructuring accrual as of December 31, 20052006 relates to athe noncancelable U.K. operating lease, which extends through 2017, and severance for terminated employees, with extended payouts, the majority of which will be paid in 2006.2007.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 14.16. INCOME TAXES
The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the table below. Management believes it is more likely than not that results of future operations will generate sufficient taxable income to realize deferred tax assets including, specifically, the asbestos-related liability differences which will be realized subsequent to emergence from Chapter 11 as a U.S. net operating losslosses of $1,579 million principally resulting from the payment to the Asbestos PI Trust set-up under the POR that may be carried forward for 20 years.
We have provided valuation allowances for certain state and foreign net operating loss carryforwards, foreign tax credits and other basis adjustments of $268.7$190.3 million. We have $513.6$1,678 million of state net operating loss carryforwards with expirations between 20062007 and 2025,2026, and $327.2$305.5 million of foreign net operating loss carryforwards, which are available for carryforward indefinitely. The net increasedecrease in valuation allowance from 20042005 of $78.4 million is primarily attributabledue to an increase in anticipated state taxable earnings available to absorb post-emergence state tax NOLs, offset by increases for foreign tax credit and capital losses and certain non-U.S.loss carryforwards incurred during 2006. Prior to consummation of the Company’s POR, it was unclear whether changes to the capital or legal structure would allow for the generation of sufficient taxable earnings for state tax purposes to realize the state net operating losses generatedlosses. Management concluded its evaluation of the projected profit before tax during the fresh-start process after also considering the impact of increases in 2005, including additional needs to cover deferred tax liabilities with indefinite lives, offset by $4.6 millionrelated to adjustments made to the carrying value of losses utilized for state tax purposes.certain intangible assets on the opening balance sheet.
| Successor Company | Predecessor Company | |||||||||||||||
Deferred income tax assets (liabilities) | 2005 | 2004 | December 31, 2006 | December 31, 2005 | ||||||||||||
Postretirement and post employment benefits | $ | 108.9 | $ | 116.0 | ||||||||||||
Postretirement and postemployment benefits | $ | 189.5 | $ | 108.9 | ||||||||||||
Chapter 11 reorganization costs and restructuring costs | 40.9 | 21.5 | 1.5 | 40.9 | ||||||||||||
Asbestos-related liabilities | 1,262.7 | 1,352.7 | — | 1,262.7 | ||||||||||||
Pension assets | 33.9 | 38.6 | ||||||||||||||
Pension benefit liabilities | 34.8 | 33.9 | ||||||||||||||
Net operating losses | 134.3 | 139.0 | 730.2 | 134.3 | ||||||||||||
Foreign tax credit carryforward | 38.5 | — | ||||||||||||||
Capital losses | 10.6 | — | 14.2 | 10.6 | ||||||||||||
Other | 87.2 | 36.2 | 73.7 | 87.2 | ||||||||||||
Total deferred tax assets | 1,678.5 | 1,704.0 | 1,082.4 | 1,678.5 | ||||||||||||
Valuation allowance | (268.7 | ) | (265.5 | ) | (190.3 | ) | (268.7 | ) | ||||||||
Net deferred tax assets | 1,409.8 | 1,438.5 | 892.1 | 1,409.8 | ||||||||||||
Intangibles | (304.2 | ) | — | |||||||||||||
Accumulated depreciation | (190.9 | ) | (199.1 | ) | (90.1 | ) | (190.9 | ) | ||||||||
Pension credit | (184.7 | ) | (182.6 | ) | ||||||||||||
Prepaid pension costs | (225.6 | ) | (184.7 | ) | ||||||||||||
Insurance for asbestos-related liabilities | (39.0 | ) | (38.3 | ) | — | (39.0 | ) | |||||||||
Tax on unremitted earnings | (1.9 | ) | (28.8 | ) | (39.8 | ) | (1.9 | ) | ||||||||
Other | (32.5 | ) | (52.8 | ) | (37.8 | ) | (32.5 | ) | ||||||||
Total deferred income tax liabilities | (449.0 | ) | (501.6 | ) | (697.5 | ) | (449.0 | ) | ||||||||
Net deferred income tax assets | $ | 960.8 | $ | 936.9 | $ | 194.6 | $ | 960.8 | ||||||||
Deferred income taxes have been classified in the Consolidated Balance Sheet as: | ||||||||||||||||
Deferred income tax asset – current | $ | 6.8 | $ | 15.4 | ||||||||||||
Deferred income tax asset – non-current | 201.4 | 967.4 | ||||||||||||||
Deferred income tax liability – current | (2.4 | ) | (0.8 | ) | ||||||||||||
Deferred income tax liability – non-current | (11.2 | ) | (21.2 | ) | ||||||||||||
Net deferred income tax assets | $ | 194.6 | $ | 960.8 | ||||||||||||
The Successor Company balance excludes amounts related to discontinued operations.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
Deferred income taxes have been classified in the Consolidated Balance Sheet as: | 2005 | 2004 | ||||||
Deferred income tax asset – current | $ | 15.4 | $ | 15.6 | ||||
Deferred income tax asset – non-current | 967.4 | 941.6 | ||||||
Deferred income tax liability – current | (0.8 | ) | (1.1 | ) | ||||
Deferred income tax liability – non-current | (21.2 | ) | (19.2 | ) | ||||
Net deferred income tax assets | $ | 960.8 | $ | 936.9 | ||||
Details of taxes | 2005 | 2004 | 2003 | |||||||||
Earnings (loss) from continuing operations before income taxes: | ||||||||||||
Domestic | $ | 120.7 | $ | 79.1 | $ | (53.7 | ) | |||||
Foreign | (53.2 | ) | (130.8 | ) | 20.0 | |||||||
Eliminations | 36.4 | (4.1 | ) | (4.7 | ) | |||||||
Total | $ | 103.9 | $ | (55.8 | ) | $ | (38.4 | ) | ||||
Income tax provision (benefit): | ||||||||||||
Current: | ||||||||||||
Federal | $ | 1.6 | $ | 33.1 | $ | 25.2 | ||||||
Foreign | 20.4 | 14.5 | 20.8 | |||||||||
State | 4.2 | (0.9 | ) | 3.9 | ||||||||
Total current | 26.2 | 46.7 | 49.9 | |||||||||
Deferred: | ||||||||||||
Federal | (34.8 | ) | (15.6 | ) | (41.5 | ) | ||||||
Foreign | 9.0 | (6.2 | ) | (9.3 | ) | |||||||
State | 1.8 | (0.3 | ) | (0.7 | ) | |||||||
Total deferred | (24.0 | ) | (22.1 | ) | (51.5 | ) | ||||||
Total income taxes (benefit) | $ | 2.2 | $ | 24.6 | $ | (1.6 | ) | |||||
| Successor Company | Predecessor Company | |||||||||||||||
Details of taxes | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||
Earnings (loss) from continuing operations before income taxes: | ||||||||||||||||
Domestic | $ | 34.0 | $ | 1,950.1 | $ | 119.1 | $ | 80.7 | ||||||||
Foreign | (6.4 | ) | 196.0 | (50.6 | ) | (125.8 | ) | |||||||||
Eliminations | (20.5 | ) | 4.7 | 36.4 | (4.1 | ) | ||||||||||
Total | $ | 7.1 | $ | 2,150.8 | $ | 104.9 | $ | (49.2 | ) | |||||||
Income tax provision (benefit): | ||||||||||||||||
Current: | ||||||||||||||||
Federal | — | $ | (13.2 | ) | $ | 1.6 | $ | 33.1 | ||||||||
Foreign | $ | 1.8 | 14.6 | 19.0 | 14.9 | |||||||||||
State | 0.2 | (1.0 | ) | 4.2 | (0.9 | ) | ||||||||||
Total current | 2.0 | 0.4 | 24.8 | 47.1 | ||||||||||||
Deferred: | ||||||||||||||||
Federal | 3.7 | 761.6 | (35.4 | ) | (15.1 | ) | ||||||||||
Foreign | (1.7 | ) | (6.2 | ) | 7.6 | (10.3 | ) | |||||||||
State | (0.2 | ) | (29.2 | ) | 1.8 | (0.3 | ) | |||||||||
Total deferred | 1.8 | 726.2 | (26.0 | ) | (25.7 | ) | ||||||||||
Total income taxes (benefit) | $ | 3.8 | $ | 726.6 | $ | (1.2 | ) | $ | 21.4 | |||||||
At December 31, 2005, unremitted earnings2006, the Company had $105.3 million excess book basis in the shares of certain foreign subsidiaries outside the U.S. were $106.5 million. We expect to repatriate $7.3 million for which $1.9 million of U.S. taxes were provided in 2005. No U.S.no deferred taxes have been provided onbecause we consider the remaining unremittedunderlying earnings to be permanently reinvested. This basis difference could reverse through a sale of the subsidiaries, the receipt of dividends from the subsidiaries, as our intentionwell as various other events. It is not practical to investcalculate the residual income tax which would result if these earnings permanently. If suchbasis differences reversed due to the complexities of the tax law and the hypothetical nature of the calculations. We do, however, estimate that approximately $1.4 million in non-U.S. withholding taxes would be payable if the underlying earnings were to be remitted, approximately $8.2 million in net taxes would be payable including $3.6 million of non-U.S. withholding taxes.distributed.
Reconciliation to U.S. statutory tax rate | 2005 | 2004 | 2003 | |||||||||
Continuing operations tax (benefit) at statutory rate | $ | 36.4 | $ | (19.5 | ) | $ | (13.4 | ) | ||||
State income taxes, net of federal benefit | 3.4 | (2.8 | ) | 0.4 | ||||||||
Foreign losses and change in valuation allowance | 25.2 | 18.4 | 7.8 | |||||||||
Tax on foreign and foreign-source income | 0.2 | (3.4 | ) | (5.8 | ) | |||||||
HIA Dividend tax cost | (0.4 | ) | — | — | ||||||||
Goodwill impairment | — | 37.9 | — | |||||||||
Bankruptcy reorganization expense | 2.5 | (5.1 | ) | 9.0 | ||||||||
Benefit for subsidiary debt impairment | (29.6 | ) | — | — | ||||||||
Capital Loss Utilization | (3.7 | ) | — | — | ||||||||
Permanent book/tax differences | (6.1 | ) | (2.7 | ) | 0.4 | |||||||
Net tax on unremitted earnings | (25.7 | ) | 1.8 | — | ||||||||
Tax expense (benefit) at effective rate | $ | 2.2 | $ | 24.6 | $ | (1.6 | ) | |||||
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
| Successor Company | Predecessor Company | ||||||||||||||||||||||||
Reconciliation to U.S. statutory tax rate | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | |||||||||||||||||||||
Continuing operations tax (benefit) at statutory rate | $ | 2.5 | $ | 752.8 | $ | 36.7 | (17.2 | ) | |||||||||||||||||
State income taxes, net of federal benefit (1) | — | (30.2 | ) | 3.4 | (2.8 | ) | |||||||||||||||||||
Foreign losses (1) | 4.8 | 35.7 | 22.7 | 12.8 | |||||||||||||||||||||
Tax on foreign and foreign-source income | (5.0 | ) | (1.1 | ) | (1.0 | ) | (3.2 | ) | |||||||||||||||||
HIA Dividend tax cost | — | — | (0.4 | ) | — | ||||||||||||||||||||
Goodwill impairment | — | — | — | 37.9 | |||||||||||||||||||||
Bankruptcy reorganization expense | 2.0 | 8.8 | 2.5 | (5.1 | ) | ||||||||||||||||||||
Benefit for subsidiary debt impairment | — | — | (29.6 | ) | — | ||||||||||||||||||||
Capital Loss Utilization | — | — | (3.7 | ) | — | ||||||||||||||||||||
Permanent book/tax differences Permanent fresh-start adjustments Permanent settlement adjustments | | (0.8 — — | ) | | (25.8 (0.9 (39.6 | ) ) ) | | (6.1 — — | ) | | (2.8 — — | ) | |||||||||||||
Net tax on unremitted earnings | 0.3 | 26.9 | (25.7 | ) | 1.8 | ||||||||||||||||||||
Tax expense (benefit) at effective rate | $ | 3.8 | $ | 726.6 | $ | (1.2 | ) | $ | 21.4 | ||||||||||||||||
(1) State and foreign differences include impact of changes in valuation allowance. | (1) State and foreign differences include impact of changes in valuation allowance. |
| |||||||||||||||||||||||
| Successor Company | Predecessor Company | ||||||||||||||||||||||||
Other taxes | 2005 | 2004 | 2003 | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||||||||
Payroll taxes | $ | 83.5 | $ | 81.5 | $ | 78.0 | $ | 16.9 | $ | 55.3 | $ | 72.4 | $ | 71.2 | |||||||||||
Property, franchise and capital stock taxes | 16.3 | 17.8 | 15.8 | 4.6 | 12.3 | 15.4 | 16.5 | ||||||||||||||||||
As previously described, the Company funded its Asbestos PI Trust in 2006 resulting in certain significant tax adjustments that impacted the effective tax rate for the nine months ended September 30, 2006. We reduced valuation allowances of approximately $29.2 million related to certain state net operating losses and deferred tax assets as available evidence, including pre-tax profit projections and new deferred tax liabilities on fresh-start adjustments, indicates that it is now more likely than not that these benefits will be realized. In addition, as part of fresh-start reporting, several significant balance sheet accounts were reversed resulting in a permanent book versus tax difference which has an impact on the effective tax rate. These reversals were primarily the reduction in the carrying value of nondeductible goodwill as well as certain other foreign currency translation accounts.
The effective tax rate for the three months ended December 31, 2006, reflects a tax benefit of $1.5 million related to a recent change in German tax law which allows for a recovery of previously frozen imputation tax credits. This benefit was more than offset, however, by non-U.S. losses incurred during the quarter for which a full valuation allowance is required.
During the fourth quarter of 2005, the companyCompany completed a restructuring of a subsidiary that resulted in a tax benefit on intercompany debt impairment of $29.6 million in addition to a capital loss tax benefit of $3.7 million. The restructuring also caused the elimination of previously unremitted taxable earnings on which we had recorded a deferred tax liability of $27.0 million.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
In October 2004, the American Jobs Creations Act of 2004 (the “AJCA”) was signed into law. The AJCA provides for a one-time tax deduction of 85% of certain foreign earnings that were repatriated in 2005. During 2005, the Company repatriated foreign earnings eligible for this deduction and recorded a net tax benefit of $0.4 million as a result of the reversal of deferred taxes previously provided on these earnings.
The 2005 2004 and 20032004 tax provisions reflect the reversal of certain federal, state and foreign tax accruals no longer required due to the completion of tax audits and expiration of statutes of limitation partially offset by certain nondeductible expenses.
In accordance with the requirements for fresh-start reporting pursuant to SOP 90-7, the Company has adopted FASB Interpretation No. 48 (“FIN48”), Accounting for Uncertainty in Income Taxes, effective as of October 2, 2006. The transition adjustments, although not material in the aggregate, were shown as an adjustment to the opening fresh-start balance sheet.
NOTE 15. DEBT
(See Note 4 regarding treatmentThe Company has $37.0 million of prepetition debt.Unrecognized Tax Benefits (“UTB”)
($ millions) | 2005 | Average year-end interest rate | 2004 | Average year-end interest rate | ||||||||
Borrowings under lines of credit | $ | 450.0 | 7.18 | % | $ | 450.0 | 7.18 | % | ||||
DIP Facility | — | — | — | — | ||||||||
Commercial paper | 50.0 | 6.75 | % | 50.0 | 6.75 | % | ||||||
Foreign banks | 14.6 | 4.12 | % | 11.1 | 3.68 | % | ||||||
Bank loans due 2004-2015 | 15.4 | 6.10 | % | 24.7 | 6.04 | % | ||||||
9.00% medium-term notes due 2001 | 7.5 | 9.00 | % | 7.5 | 9.00 | % | ||||||
6.35% senior notes due 2003 | 200.0 | 6.35 | % | 200.0 | 6.35 | % | ||||||
6.50% senior notes due 2005 | 150.0 | 6.50 | % | 150.0 | 6.50 | % | ||||||
9.75% debentures due 2008 | 125.0 | 9.75 | % | 125.0 | 9.75 | % | ||||||
7.45% senior notes due 2029 | 200.0 | 7.45 | % | 200.0 | 7.45 | % | ||||||
7.45% senior quarterly interest bonds due 2038 | 180.0 | 7.45 | % | 180.0 | 7.45 | % | ||||||
Industrial development bonds | 21.0 | 4.95 | % | 21.0 | 4.13 | % | ||||||
Capital lease obligations | 1.5 | 7.63 | % | 2.7 | 7.63 | % | ||||||
Other | 15.1 | 8.62 | % | 15.1 | 8.61 | % | ||||||
Subtotal | 1,430.1 | 7.23 | % | 1,437.1 | 7.21 | % | ||||||
Less debt subject to compromise | 1,388.6 | 7.29 | % | 1,388.6 | 7.29 | % | ||||||
Less current portion and short-term debt | 20.0 | 4.70 | % | 19.3 | 4.74 | % | ||||||
Total long-term debt, less current portion | $ | 21.5 | 5.17 | % | $ | 29.2 | 4.80 | % | ||||
Approximately $29.9 as of 12/31/06. $2.3 million of the $41.5UTB, if recognized in future periods, would impact the reported effective tax rate. $34.7 million of total debt not subjectthe UTB are generally related to compromise outstandingissues that existed as of the fresh-start date that, if recognized, would result in adjustments to the fresh-start balance sheet. $19.3 million of the UTB, if recognized, would increase net operating losses.
It is reasonably possible that certain UTB may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. The Company estimates that statute expirations will result in recognition of $1.1 million related to certain non-deductible expenses over the next twelve months.
Under FIN 48, the Company has elected to continue its prior practice of accounting for interest and penalties on uncertain tax positions as income tax expense consistently for all income tax purposes, and as a result has reported $2.0 million in the aggregate related to interest and penalty exposure as accrued income tax expense in the statement of financial position as of December 31, 2005 was secured with buildings2006.
The Company has significant operations in over 26 countries and other assets. Approximately $35.7 million offiles income tax returns in approximately 80 tax jurisdictions, in some cases for multiple legal entities per jurisdiction. Generally, the $48.5 million of total debt notCompany has open tax years subject to compromise outstandingtax audit scrutiny on average of between 3 years to 6 years in these taxing jurisdictions. The Company has not materially extended any open statutes of limitation for any significant location and has reviewed and accrued for, where necessary, tax liabilities for open periods. The Company has been audited in the United States, the most significant tax jurisdiction, for all tax years through 2003, resulting in the years 2004 through 2006 being subject to future potential tax audit adjustments while years prior to 2004 are settled. The Company is not currently under audit for U.S. Federal tax purposes, although there are ongoing audits in The Netherlands and Germany which may result in future changes to reported tax. We have evaluated the need for additional tax reserves for these audits as part of December 31, 2004 was secured with buildings and other assets.our FIN 48 adoption process.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
Scheduled payments of long-term debt, excluding debt subject to compromise (millions):The Company had the following activity recorded for unrecognized tax benefits for the three months ended December 31, 2006:
2006 | $ | 5.4 | |
2007 | 1.7 | ||
2008 | 1.3 | ||
2009 | 11.1 | ||
2010 | 1.2 |
| Taxes Payable | ||||||||||||||||||
| Current | Non-Current | Taxes Receivable | NOL Carryforward | Total | ||||||||||||||
Unrecognized tax benefits upon adoption of fresh-start reporting | $ | 1.1 | $ | 9.6 | $ | 8.3 | $ | 16.6 | $ | 35.6 | ||||||||
Gross change for current year positions | — | 0.2 | — | 2.6 | 2.8 | |||||||||||||
Increase for prior period positions | — | 0.1 | — | — | 0.1 | |||||||||||||
Decrease for prior period positions | — | — | — | — | — | |||||||||||||
Decrease due to settlements and payments | (1.1 | ) | — | — | — | (1.1 | ) | |||||||||||
Decrease due to statute expirations | — | (0.4 | ) | — | — | (0.4 | ) | |||||||||||
Unrecognized tax benefits at December 31, 2006 | $ | — | $ | 9.5 | $ | 8.3 | $ | 19.2 | $ | 37.0 | ||||||||
NOTE 17. DEBT
Debt from the table above included in liabilities subject to compromise consisted of the following at December 31, 2005 and 2004.
($ millions) | 2005 | 2004 | ||||
Borrowings under lines of credit | $ | 450.0 | $ | 450.0 | ||
Commercial paper | 50.0 | 50.0 | ||||
9.00% medium-term notes due 2001 | 7.5 | 7.5 | ||||
6.35% senior notes due 2003 | 200.0 | 200.0 | ||||
6.50% senior notes due 2005 | 150.0 | 150.0 | ||||
9.75% debentures due 2008 | 125.0 | 125.0 | ||||
7.45% senior notes due 2029 | 200.0 | 200.0 | ||||
7.45% senior quarterly interest bonds due 2038 | 180.0 | 180.0 | ||||
Industrial development bonds | 11.0 | 11.0 | ||||
Other | 15.1 | 15.1 | ||||
Total debt subject to compromise | $ | 1,388.6 | $ | 1,388.6 | ||
In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $82.8 million, $86.9 million and $95.1 million for 2005, 2004 and 2003, respectively. Unrecorded interest expense reflects the amount of interest expense we would have incurred under the original maturities(See Note 5 regarding treatment of prepetition debt.)
| Successor Company | Predecessor Company | |||||||||||
($ millions) | 2006 | Average year-end interest rate | 2005 | Average year-end interest rate | ||||||||
Borrowings under lines of credit | — | — | $ | 450.0 | 7.18 | % | ||||||
Term Loan A | $ | 300.0 | 6.85 | % | — | — | ||||||
Term Loan B | 500.0 | 7.10 | % | — | — | |||||||
Commercial paper | — | — | 50.0 | 6.75 | % | |||||||
Foreign banks | 2.8 | 4.17 | % | 14.6 | 4.12 | % | ||||||
Bank loans due 2007-2015 | 1.3 | 3.11 | % | 15.4 | 6.10 | % | ||||||
9.00% medium-term notes due 2001 | — | — | 7.5 | 9.00 | % | |||||||
6.35% senior notes due 2003 | — | — | 200.0 | 6.35 | % | |||||||
6.50% senior notes due 2005 | — | — | 150.0 | 6.50 | % | |||||||
9.75% debentures due 2008 | — | — | 125.0 | 9.75 | % | |||||||
7.45% senior notes due 2029 | — | — | 200.0 | 7.45 | % | |||||||
7.45% senior quarterly interest bonds due 2038 | — | — | 180.0 | 7.45 | % | |||||||
Industrial development bonds | 10.0 | 4.26 | % | 21.0 | 4.95 | % | ||||||
Capital lease obligations | 1.1 | 7.63 | % | 1.5 | 7.63 | % | ||||||
Other | 1.0 | 7.89 | % | 15.1 | 8.62 | % | ||||||
Subtotal | 816.2 | 6.96 | % | 1,430.1 | 7.23 | % | ||||||
Less debt subject to compromise | — | — | 1,388.6 | 7.29 | % | |||||||
Less current portion and short-term debt | 14.7 | 6.48 | % | 20.0 | 4.70 | % | ||||||
Total long-term debt, less current portion | $ | 801.5 | 6.97 | % | $ | 21.5 | 5.17 | % | ||||
The Successor Company balance excludes amounts related to discontinued operations.
On October 21, 2005, the Court announced it had approved AWI’s motion to extend the maturity date from December 8, 2005, to December 8,2, 2006, on its $75Armstrong executed a $1.1 billion senior credit facility arranged by Banc of America Securities LLC, J.P. Morgan Securities, Inc., and Barclays Capital. This facility is made up of a $300 million DIP Credit Facility that is limited to issuances ofrevolving credit facility (with a $150 million sublimit for letters of credit. Obligations undercredit), a $300 million Term Loan A, and a $500 million Term Loan B. This $1.1 billion senior credit facility is secured by U.S. personal
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
property (excluding land and buildings), the DIP Facilitycapital stock of material U.S. subsidiaries, and a 65% pledge of the stock of our material foreign subsidiaries.
The senior credit facility includes two financial covenants which do not permit the ratio of consolidated funded indebtedness to reimburse drawings underconsolidated EBITDA (earnings before interest, taxes, depreciation and amortization) (“Consolidated Leverage Ratio”) to be greater than 3.75 to 1.00 and the lettersratio of credit constituteconsolidated EBITDA to consolidated interest expense to be less than 3.00 to 1.00. We are in compliance with these covenants. The Revolving Credit and Term Loan A portions are currently priced at a super-priority administrative expense claim inspread of 1.50% over LIBOR and the Chapter 11 Case.Term Loan B portion is priced at 1.75% over LIBOR for its entire tenor. As of December 31, 20052006, the Term Loan A and 2004, AWI had approximately $43.3Term Loan B were both fully funded and are currently priced on a variable interest rate basis. The Term Loan A and Term Loan B portions of the credit facility may be prepaid without penalty at the maturity of their respective interest reset periods. Any amounts prepaid may not be reborrowed. The credit facility also includes an “incremental credit facility” feature under which the credit facility may be increased by an additional $200 million and $40.6 million, respectively, in letters of credit that were issued under the DIP Facility.at our option.
In addition, AHI’s foreign subsidiaries have approximately $25.4Approximately $4.1 million of unused short-term linesthe remaining $16.2 million of credit available from banks.debt as of December 31, 2006 was secured with buildings and other assets. The credit lines at our foreign subsidiaries are subject to immaterial annual commitment fees.
As of December 31, 2005, approximately $29.9 million of the $41.5 million of total debt outstanding not subject to compromise was secured with buildings and other assets.
Scheduled payments of long-term debt (excluding discontinued operations) (millions):
2007 | $ | 10.9 | 2010 | $ | 35.2 | |||
2008 | 20.7 | 2011 | 237.7 | |||||
2009 | 34.0 |
NOTE 16.18. PENSION AND OTHER BENEFIT PROGRAMS
We have defined benefit pension plans and postretirement medical and insurance benefit plans covering eligible employees worldwide. We also have defined-contribution pension plans for eligible employees. Benefits from defined benefit pension plans, which cover substantially all employees worldwide, are based primarily on an employee’s compensation and years of service. We fund our pension plans when appropriate. The U.S. defined benefit pension plans were closed to new salaried and salaried production employees on January 1, 2005. On January 13, 2006 we announced thatWe also froze benefits will be frozen for certain non-production salaried employees effective February 28, 2006. We fund postretirement benefits 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.
Medicare Act
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“The Act”) became law in the United States. The Act provides employers sponsoring prescription drug programs for Medicare-eligible participants with a range of options for coordinating with the new
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
government-sponsored program. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employer’s program.
Pursuant to guidance issued in the second quarter of 2004 by the FASB, we elected to begin recording the effect of the Act in the second quarter of 2004, retroactive to January 1, 2004. The Act affects both operating income and balance sheet liabilities over time. The 2005 total year benefit of $9.2 million was recorded in cost of goods sold ($5.6 million) and SG&A ($3.6 million). The 2004 total year benefit of $7.0 million was recorded in cost of goods sold ($3.9 million) and SG&A ($3.1 million). The reduction in the accumulated postretirement benefit obligation related to the Medicare benefit was $52.4 million, reflected in the 2004 actuarial (gain)/loss in the table below.
UNITED STATES PLANS
The following tables summarize the balance sheet impact of the pension and postretirement benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The pension benefits disclosures include both the Retirement Income Plan (RIP) and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
We use a December 31 measurement date for our U.S. defined benefit plans.
| Pension Benefits | Retiree Health and Life Insurance Benefits | Successor Company | Predecessor Company | |||||||||||||||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||
U.S. defined-benefit pension plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006(1) | Year 2005 | |||||||||||||||||||||||||
Change in benefit obligation: | ||||||||||||||||||||||||||||
Benefit obligation as of January 1 | $ | 1,637.4 | $ | 1,570.8 | $ | 396.7 | $ | 436.6 | ||||||||||||||||||||
Benefit obligation as of beginning of period | $ | 1,705.0 | $ | 1,775.9 | $ | 1,637.4 | ||||||||||||||||||||||
Service cost | 24.7 | 23.2 | 2.9 | 3.4 | 3.4 | 13.6 | 24.7 | |||||||||||||||||||||
Interest cost | 96.0 | 91.3 | 20.6 | 22.3 | 24.3 | 69.4 | 96.0 | |||||||||||||||||||||
Plan participants’ contributions | — | — | 6.1 | 5.7 | ||||||||||||||||||||||||
Plan amendments | (10.5 | ) | 0.9 | (4.9 | ) | — | — | 0.2 | (10.5 | ) | ||||||||||||||||||
Effect of curtailments | (8.3 | ) | — | — | — | — | — | (8.3 | ) | |||||||||||||||||||
Effect of special termination benefits | 14.1 | 0.6 | — | — | 0.5 | 8.5 | 14.1 | |||||||||||||||||||||
Actuarial (gain)/loss | 128.3 | 50.9 | (9.7 | ) | (37.0 | ) | (0.5 | ) | (78.0 | ) | 128.3 | |||||||||||||||||
Benefits paid | (105.8 | ) | (100.3 | ) | (33.2 | ) | (34.3 | ) | (27.3 | ) | (84.6 | ) | (105.8 | ) | ||||||||||||||
Benefit obligation as of December 31 | $ | 1,775.9 | $ | 1,637.4 | $ | 378.5 | $ | 396.7 | ||||||||||||||||||||
Benefit obligation as of end of period | $ | 1,705.4 | $ | 1,705.0 | $ | 1,775.9 | ||||||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||||||
Fair value of plan assets as of January 1 | $ | 2,010.4 | $ | 1,882.9 | — | — | ||||||||||||||||||||||
Fair value of plan assets as of beginning of period | $ | 2,143.7 | $ | 2,089.2 | $ | 2,010.4 | ||||||||||||||||||||||
Actual return on plan assets – gain | 181.2 | 224.5 | — | — | 121.5 | 136.7 | 181.2 | |||||||||||||||||||||
Employer contribution | 3.4 | 3.3 | $ | 27.1 | $ | 28.6 | 0.8 | 2.4 | 3.4 | |||||||||||||||||||
Plan participants’ contributions | — | — | 6.1 | 5.7 | ||||||||||||||||||||||||
Benefits paid | (105.8 | ) | (100.3 | ) | (33.2 | ) | (34.3 | ) | (27.3 | ) | (84.6 | ) | (105.8 | ) | ||||||||||||||
Fair value of plan assets as of December 31 | $ | 2,089.2 | $ | 2,010.4 | $ | 0.0 | $ | 0.0 | ||||||||||||||||||||
Fair value of plan assets as of end of period | $ | 2,238.7 | $ | 2,143.7 | $ | 2,089.2 | ||||||||||||||||||||||
Funded status of the plans | $ | 313.3 | $ | 373.0 | $ | (378.5 | ) | $ | (396.7 | ) | $ | 533.3 | $ | 438.7 | $ | 313.3 | ||||||||||||
Unrecognized net actuarial (gain)/loss | 21.9 | (46.4 | ) | 171.5 | 193.2 | — | — | 21.9 | ||||||||||||||||||||
Unrecognized prior service cost (benefit) | 101.7 | 117.7 | (39.3 | ) | (40.7 | ) | — | — | 101.7 | |||||||||||||||||||
Net asset/(liability) recognized | $ | 436.9 | $ | 444.3 | $ | (246.3 | ) | $ | (244.2 | ) | ||||||||||||||||||
Net asset recognized | $ | 533.3 | $ | 438.7 | $ | 436.9 | ||||||||||||||||||||||
| (1) | Reflects the effects of fresh-start reporting. |
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
| Pension Benefits | Retiree Health and Life Insurance Benefits | Successor Company | Predecessor Company | ||||||||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
Weighted-average assumptions used to determine benefit obligations at December 31: | |||||||||||||||||||||
U.S. defined-benefit pension plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | ||||||||||||||||||
Weighted-average assumptions used to determine benefit obligations at end of period: | |||||||||||||||||||||
Discount rate | 5.50 | % | 5.75 | % | 5.50 | % | 5.75 | % | 5.75 | % | 5.75 | % | 5.50 | % | |||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | |||||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: | |||||||||||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost for the period: | |||||||||||||||||||||
Discount rate | 5.75 | % | 6.00 | % | 5.75 | % | 6.00 | % | 5.75 | % | 5.50 | % | 5.75 | % | |||||||
Expected return on plan assets | 8.00 | % | 8.00 | % | n/a | n/a | 8.00 | % | 8.00 | % | 8.00 | % | |||||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | |||||||
| Successor Company | Predecessor Company | |||||||||||
U.S. defined-benefit retiree health and life insurance plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 (1) | Year 2005 | |||||||||
Change in benefit obligation: | ||||||||||||
Benefit obligation as of beginning of period | $ | 391.5 | $ | 378.5 | $ | 396.7 | ||||||
Service cost | 0.7 | 1.8 | 2.9 | |||||||||
Interest cost | 5.4 | 14.9 | 20.6 | |||||||||
Plan participants’ contributions | 1.6 | 4.7 | 6.1 | |||||||||
Plan amendments | — | (3.4 | ) | (4.9 | ) | |||||||
Effect of curtailments | — | (0.3 | ) | — | ||||||||
Actuarial (gain)/loss | — | 19.3 | (9.7 | ) | ||||||||
Benefits paid, gross | (9.3 | ) | (25.3 | ) | (33.2 | ) | ||||||
Medicare subsidy receipts | 0.7 | 1.3 | — | |||||||||
Benefit obligation as of end of period | $ | 390.6 | $ | 391.5 | $ | 378.5 | ||||||
Change in plan assets: | ||||||||||||
Fair value of plan assets as of beginning of period | — | — | — | |||||||||
Employer contribution | $ | 7.0 | $ | 19.3 | $ | 27.1 | ||||||
Plan participants’ contributions | 1.6 | 4.7 | 6.1 | |||||||||
Benefits paid, gross | (9.3 | ) | (25.3 | ) | (33.2 | ) | ||||||
Medicare subsidy receipts | 0.7 | 1.3 | — | |||||||||
Fair value of plan assets as of end of period | $ | 0.0 | $ | 0.0 | $ | 0.0 | ||||||
Funded status of the plans | $ | (390.6 | ) | $ | (391.5 | ) | $ | (378.5 | ) | |||
Unrecognized net actuarial (gain)/loss | — | — | 171.5 | |||||||||
Unrecognized prior service cost (benefit) | — | — | (39.3 | ) | ||||||||
Net liability recognized | $ | (390.6 | ) | $ | (391.5 | ) | $ | (246.3 | ) | |||
| (1) | Reflects the effects of fresh-start reporting. |
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
| Successor Company | Predecessor Company | ||||||||
U.S. defined-benefit retiree health and life insurance plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | 2005 | ||||||
Weighted-average assumptions used to determine benefit obligations at December 31: | |||||||||
Discount rate | 5.70 | % | 5.70 | % | 5.50 | % | |||
Rate of compensation increase | n/a | n/a | 4.00 | % | |||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: | |||||||||
Discount rate | 5.70 | % | 5.50 | % | 5.75 | % | |||
Rate of compensation increase | n/a | n/a | 4.00 | % | |||||
Investment Policies
The RIP’s primary investment objective is to increase the ratio of RIP assets to liabilities by maximizing the long-term return on investments while minimizing the likelihood of cash contributions over the next 5-10 years. This is to be achieved by (a) investing primarily in publicly-traded equities, (b) limiting return volatility by diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) investing a portion of RIP assets in a bond portfolio whose duration is roughly equal to the duration of RIP liabilities. Derivatives may be used either to implement investment positions efficiently or to hedge risk but not to create investment leverage.
Each asset class utilized by the RIP has a defined asset allocation target and allowable range. The table below shows the asset allocation target and the December 31, 20052006 and 20042005 position for each asset class:
Target Weight at December 31, 2005 | Position at December 31, | ||||||||
Asset Class | 2005 | 2004 | |||||||
Domestic equity | 41 | % | 37 | % | 40 | % | |||
International equity | 22 | % | 26 | % | 25 | % | |||
High yield bonds | 5 | % | 6 | % | 6 | % | |||
Long duration bonds | 25 | % | 27 | % | 24 | % | |||
Real estate | 7 | % | 2 | % | 1 | % | |||
Other fixed income | 0 | % | 2 | % | 4 | % | |||
| Successor Company | Predecessor Company | ||||||||
Target Weight at | Position at December 31, | ||||||||
Asset Class | 2006 | 2005 | |||||||
Domestic equity | 41 | % | 40 | % | 37 | % | |||
International equity | 22 | % | 23 | % | 26 | % | |||
High yield bonds | 5 | % | 5 | % | 6 | % | |||
Long duration bonds | 25 | % | 26 | % | 27 | % | |||
Real estate | 7 | % | 5 | % | 2 | % | |||
Other fixed income | 0 | % | 1 | % | 2 | % | |||
Basis of Rate-of-Return Assumption
Long-term asset class return assumptions are determined based on input from investment professionals on the expected performance of the asset classes over 10 to 20 years. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. An incremental component was added for the expected return from active management based both on the RIP’s experience and on historical information obtained from the RIP’s investment consultants. These forecast gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 8.00% per annum.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
Amounts recognized in the consolidated balance sheetsassets and liabilities at year end consist ofof::
| Pension Benefits | Retiree Health and Life Insurance Benefits | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Prepaid pension costs | $ | 460.0 | $ | 465.1 | ||||||||||||
Pension benefit liabilities | (44.3 | ) | (41.2 | ) | $ | (246.3 | ) | $ | (244.2 | ) | ||||||
Intangible asset | 0.3 | 0.5 | — | — | ||||||||||||
Other comprehensive income | 20.9 | 19.9 | — | — | ||||||||||||
Net asset/(liability) recognized | $ | 436.9 | $ | 444.3 | $ | (246.3 | ) | $ | (244.2 | ) | ||||||
| Pension Benefits | Retiree Health and Life Insurance Benefits | |||||||||||||||
| Successor Company | Predecessor Company | Successor Company | Predecessor Company | |||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Prepaid pension costs | $ | 578.7 | $ | 460.0 | ||||||||||||
Accounts payable and accrued expenses | (3.5 | ) | — | $ | (30.7 | ) | ||||||||||
Postretirement and postemployment benefit liabilities | — | — | (359.9 | ) | $ | (246.3 | ) | |||||||||
Pension benefit liabilities | (41.9 | ) | (44.3 | ) | — | �� | — | |||||||||
Other intangibles, net | — | 0.3 | — | — | ||||||||||||
Net amount recognized | $ | 533.3 | $ | 416.0 | $ | (390.6 | ) | $ | (246.3 | ) | ||||||
Amounts recognized in accumulated other comprehensive income at year end consist of:
| Pension Benefits | Retiree Health and Life Insurance Benefits | ||||||||||||
| Successor Company | Predecessor Company | Successor Company | Predecessor Company | ||||||||||
| 2006 | 2005 | 2006 | 2005 | ||||||||||
Net actuarial (gain) | $ | (79.5 | ) | — | |||||||||
Prior service cost (credit) | — | — | |||||||||||
Accumulated other comprehensive income | $ | (79.5 | ) | $ | 20.9 | $ | — | $ | — | ||||
Amounts recognized in accumulated other comprehensive income as of September 30, 2006 were eliminated as part of fresh-start reporting. The $79.5 million gain in accumulated other comprehensive income as of year end was a result of Successor Company activity.
No amounts in accumulated other comprehensive income are expected to be amortized into the pension credit or postretirement benefit cost in 2007.
The accumulated benefit obligation for the U.S. defined benefit pension plans was $1,734.5$1,686.0 million and $1,551.0$1,734.5 million at December 31, 20052006 and 2004,2005, respectively.
| Pension Benefits | ||||||
U.S. pension plans with benefit obligations in excess of assets | 2005 | 2004 | ||||
Projected benefit obligation, December 31 | $ | 47.7 | $ | 46.1 | ||
Accrued benefit obligation, December 31 | 44.3 | 41.2 | ||||
Fair value of plan assets, December 31 | — | — | ||||
The abovefollowing table relates to the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.
U.S. pension plans with benefit obligations in excess of assets | Pension Benefits | |||||
Successor 2006 | Predecessor 2005 | |||||
Projected benefit obligation, December 31 | $ | 45.4 | $ | 47.7 | ||
Accumulated benefit obligation, December 31 | 43.3 | 44.3 | ||||
Fair value of plan assets, December 31 | — | — | ||||
The components of pension credit are as follows:
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
| Pension Benefits | ||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2003 | |||||||||
Service cost of benefits earned during the year | $ | 24.7 | $ | 23.2 | $ | 21.8 | ||||||
Interest cost on projected benefit obligation | 96.0 | 91.3 | 91.8 | |||||||||
Expected return on plan assets | (158.5 | ) | (147.7 | ) | (144.5 | ) | ||||||
Amortization of prior service cost | 16.0 | 17.4 | 17.9 | |||||||||
Amortization of net actuarial loss | 1.5 | 1.5 | 1.4 | |||||||||
Net periodic pension credit | $ | (20.3 | ) | $ | (14.3 | ) | $ | (11.6 | ) | |||
| Successor Company | Predecessor Company | |||||||||||||||
The components of pension credit are as follows: U.S. defined-benefit pension plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||
Service cost of benefits earned during the period | $ | 3.4 | $ | 13.6 | $ | 24.7 | $ | 23.2 | ||||||||
Interest cost on projected benefit obligation | 24.3 | 69.4 | 96.0 | 91.3 | ||||||||||||
Expected return on plan assets | (42.5 | ) | (121.5 | ) | (158.5 | ) | (147.7 | ) | ||||||||
Amortization of prior service cost | — | 6.7 | 16.0 | 17.4 | ||||||||||||
Amortization of net actuarial loss | — | 1.3 | 1.5 | 1.5 | ||||||||||||
Net periodic pension credit | $ | (14.8 | ) | $ | (30.5 | ) | $ | (20.3 | ) | $ | (14.3 | ) | ||||
As a result of our January 13, 2006 announcement that certain non-production salaried employees will have their plan benefits frozen as of February 28, 2006, we recorded a curtailment charge of $16.9 million in the fourth quarter of 2005 in cost of goods sold ($11.4 million) and SG&A ($5.5 million). This charge is not reflected in the table above.
In addition, we recorded separate charges of $0.5 million in the three months ended December 31, 2006, $8.5 million in the nine months ended September 30, 2006, $14.1 million in 2005 and $0.6 million in 2004 within restructuring expense for special termination benefits related to the closure of certain operations at a manufacturing plant in Lancaster. See Note 1315 for further information.
The components of postretirement benefits cost are as follows:
Retiree Health and Life Insurance Benefits | ||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2003 | |||||||||
Service cost of benefits earned during the year | $ | 2.9 | $ | 3.4 | $ | 3.4 | ||||||
Interest cost on accumulated postretirement benefit obligation | 20.6 | 22.3 | 26.2 | |||||||||
Amortization of prior service benefit | (5.6 | ) | (5.1 | ) | (5.1 | ) | ||||||
Amortization of net actuarial loss | 11.9 | 9.7 | 12.3 | |||||||||
Net periodic postretirement benefit cost | $ | 29.8 | $ | 30.3 | $ | 36.8 | ||||||
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
| Successor Company | Predecessor Company | |||||||||||||||
The components of postretirement benefit costs are as follows: U.S. defined-benefit retiree health and life insurance plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||
Service cost of benefits earned during the period | $ | 0.7 | $ | 1.8 | $ | 2.9 | $ | 3.4 | ||||||||
Interest cost on accumulated postretirement benefit obligation | 5.4 | 14.9 | 20.6 | 22.3 | ||||||||||||
Amortization of prior service benefit | — | (4.8 | ) | (5.6 | ) | (5.1 | ) | |||||||||
Amortization of net actuarial loss | — | 9.4 | 11.9 | 9.7 | ||||||||||||
Net periodic postretirement benefit cost | $ | 6.1 | $ | 21.3 | $ | 29.8 | $ | 30.3 | ||||||||
For measurement purposes, an average raterates of 8% annual increase in the per capita cost of covered health care benefits wasof 11.5% for pre-65 retirees and 12.0% for post-65 retirees were assumed for 2006,2007, decreasing 1% per year to an ultimate rate of 6%5%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| One percentage point | |||||||
U.S. retiree health and life insurance benefit plans | Increase | Decrease | |||||
Effect on total of service and interest cost components | $ | 0.7 | $ | (0.8 | ) | ||
Effect on postretirement benefit obligation | 12.0 | (14.6 | ) | ||||
| One percentage point | |||||||
U.S. retiree health and life insurance benefit plans | Increase | Decrease | |||||
Effect on total of service and interest cost components | $ | 0.7 | $ | (0.8 | ) | ||
Effect on postretirement benefit obligation | 11.5 | (14.0 | ) | ||||
We expect to contribute $3.5 million to our U.S. defined benefit pension plans and $24.7$30.7 million to our U.S. postretirement benefit plans in 2006.2007.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. plans:
| Pension Benefits | Retiree Health and Benefits | |||||
2006 | $ | 95.7 | $ | 24.7 | ||
2007 | 94.6 | 25.3 | ||||
2008 | 93.3 | 25.8 | ||||
2009 | 93.2 | 26.1 | ||||
2010 | 92.9 | 26.5 | ||||
2011-2015 | 476.5 | 129.5 | ||||
| Pension Benefits | Retiree Health and Life Insurance Benefits, Gross | Retiree Health Medicare Subsidy Receipts | ||||||||
2007 | $ | 107.2 | $ | 33.5 | $ | (2.8 | ) | |||
2008 | 107.4 | 35.2 | (3.0 | ) | ||||||
2009 | 107.5 | 36.6 | (3.1 | ) | ||||||
2010 | 108.0 | 37.8 | (3.2 | ) | ||||||
2011 | 108.8 | 38.2 | (3.3 | ) | ||||||
2012-2016 | 571.9 | 179.2 | (15.4 | ) | ||||||
NON-U.S. PLANS
We have defined benefit pension plans covering employees in a number of foreign countries that utilize assumptions which are consistent with, but not identical to, those of the U.S. plans. The following tables summarize the balance sheet impact of foreign pension benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions.
Effective with our adoption of FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” on October 2, 2006, we use a December 31 measurement date for all of our non-U.S. defined benefit plans. Prior to our adoption of FAS 158, we used a December 31 measurement date for most of our non-U.S. defined benefit plans.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
We use a December 31 measurement date for most of our non-U.S. defined benefit plans.
| Successor Company | Predecessor Company | |||||||||||
Non-U.S. defined-benefit plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006(1) | Year 2005 | |||||||||
Change in benefit obligation: | ||||||||||||
Benefit obligation as of beginning of period | $ | 397.2 | $ | 377.6 | $ | 396.2 | ||||||
Service cost | 1.7 | 5.1 | 6.1 | |||||||||
Interest cost | 4.5 | 12.3 | 17.7 | |||||||||
Plan participants’ contributions | 0.5 | 1.5 | 2.0 | |||||||||
Measurement date adjustment | — | 0.8 | — | |||||||||
Foreign currency translation adjustment | 11.8 | 26.3 | (40.7 | ) | ||||||||
Actuarial (gain) loss | (5.0 | ) | (11.9 | ) | 15.6 | |||||||
Benefits paid | (4.2 | ) | (14.5 | ) | (19.3 | ) | ||||||
Benefit obligation as of end of period | $ | 406.5 | $ | 397.2 | $ | 377.6 | ||||||
Change in plan assets: Fair value of plan assets as of beginning of period | $ | 215.7 | $ | 175.6 | $ | 158.4 | ||||||
Actual return on plan assets—gain | 7.4 | 9.3 | 26.2 | |||||||||
Employer contributions | 4.6 | 30.2 | 22.1 | |||||||||
Plan participants’ contributions | 0.5 | 1.5 | 2.0 | |||||||||
Foreign currency translation adjustment | 5.9 | 14.1 | (13.8 | ) | ||||||||
Benefits paid | (4.2 | ) | (15.0 | ) | (19.3 | ) | ||||||
Fair value of plan assets as of end of period | $ | 229.9 | $ | 215.7 | $ | 175.6 | ||||||
Funded status of the plans | $ | (176.6 | ) | $ | (181.5 | ) | $ | (202.0 | ) | |||
Unrecognized net actuarial loss | — | — | 68.6 | |||||||||
Unrecognized transition asset | — | — | (0.1 | ) | ||||||||
Unrecognized prior service cost | — | — | 3.0 | |||||||||
Net liability recognized | $ | (176.6 | ) | $ | (181.5 | ) | $ | (130.5 | ) | |||
| (1) | Reflects the effects of fresh-start reporting. |
| Pension Benefits | ||||||||
Non-U.S. defined-benefit plans | 2005 | 2004 | ||||||
Change in benefit obligation: | ||||||||
Benefit obligation as of January 1 | $ | 488.0 | $ | 403.8 | ||||
Service cost | 10.0 | 9.3 | ||||||
Interest cost | 21.7 | 21.2 | ||||||
Plan participants’ contributions | 3.5 | 3.6 | ||||||
Plan amendments | 1.4 | 0.2 | ||||||
Foreign currency translation adjustment | (52.7 | ) | 37.1 | |||||
Actuarial loss | 25.1 | 33.1 | ||||||
Benefits paid | (22.3 | ) | (20.3 | ) | ||||
Benefit obligation as of December 31 | $ | 474.7 | $ | 488.0 | ||||
Change in plan assets: | ||||||||
Fair value of plan assets as of January 1 | $ | 248.2 | $ | 200.4 | ||||
Actual return on plan assets - gain | 35.4 | 17.7 | ||||||
Employer contributions | 26.6 | 28.3 | ||||||
Plan participants’ contributions | 3.5 | 3.6 | ||||||
Foreign currency translation adjustment | (25.3 | ) | 18.5 | |||||
Benefits paid | (22.3 | ) | (20.3 | ) | ||||
Fair value of plan assets as of December 31 | $ | 266.1 | $ | 248.2 | ||||
Funded status of the plans | $ | (208.6 | ) | $ | (239.8 | ) | ||
Unrecognized net actuarial loss | 84.3 | 89.3 | ||||||
Unrecognized transition asset | (0.1 | ) | (0.3 | ) | ||||
Unrecognized prior service cost (benefit) | 0.6 | (0.7 | ) | |||||
Net liability recognized | $ | (123.8 | ) | $ | (151.5 | ) | ||
Non-U.S. defined-benefit plans Weighted-average assumptions used to determine benefit obligations at end of period: Discount rate Rate of compensation increase Weighted-average assumptions used to determine net periodic benefit cost for the period: Discount rate Expected return on plan assets Rate of compensation increase Successor
Company Predecessor Company Three
Months
Ended
December
31, 2006 Nine
Months
Ended
September
30, 2006 Year 2005 4.7 % 4.6 % 4.3 % 3.2 % 3.2 % 3.0 % 4.6 % 4.3 % 4.8 % 6.6 % 6.5 % 6.5 % 3.2 % 3.0 % 3.3 %
The funded status of non-U.S. defined-benefit plans was determined using the following assumptions:
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
| Pension Benefits | ||||||
| 2005 | 2004 | |||||
Non-U.S. defined-benefit plans | ||||||
Weighted-average assumptions used to determine benefit obligations at December 31: | ||||||
Discount rate | 4.3 | % | 4.8 | % | ||
Rate of compensation increase | 2.9 | % | 3.2 | % | ||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: | ||||||
Discount rate | 4.8 | % | 5.4 | % | ||
Expected return on plan assets | 5.7 | % | 6.4 | % | ||
Rate of compensation increase | 3.2 | % | 3.4 | % | ||
(dollar amounts in millions)
Investment Policies
Each of the funded non-US pension plan’s primary investment objective is to earn sufficient long-term returns on investments both to increase the ratio of the assets to liabilities in order for the plans to meet their benefits obligations, and to minimize required cash contributions to the plans. This is to be achieved by (a) investing in publicly-traded equities, (b) limiting return volatility by diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) utilizing long duration bonds to limit the volatility of the plans’ asset/liability ratios.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Each of the plans has a targeted asset allocation for each asset class. The table below shows, for each asset class, the weighted average of the several plans’ asset allocation targets and positions at December 31, 20052006 and 2004:2005:
Target Weight at December 31, 2005 | Position at December 31, | ||||||||
Asset Class | 2005 | 2004 | |||||||
Equities | 46 | % | 51 | % | 49 | % | |||
Long duration bonds | 18 | % | 17 | % | 17 | % | |||
Other fixed income | 31 | % | 30 | % | 34 | % | |||
Real estate | 5 | % | 2 | % | 0 | % | |||
| Successor Company | Predecessor Company | ||||||||
| Target Weight at | Position at December 31, | ||||||||
Asset Class | December 31, 2006 | 2006 | 2005 | ||||||
Equities | 56 | % | 58 | % | 62 | % | |||
Long duration bonds | 28 | % | 28 | % | 25 | % | |||
Other fixed income | 7 | % | 7 | % | 12 | % | |||
Real estate | 9 | % | 7 | % | 1 | % | |||
Basis of Rate-of-Return Assumption
Long-term asset class return forecasts were obtained from investment professionals. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. These forecast asset class returns were weighted by the plans’ target asset class weights, yielding a long-term return forecast of 5.7%6.6% per annum.
annum for the three month period ended December 31, 2006 and 6.5% per annum for the nine month period ended September 30, 2006 and the year 2005.
Amounts recognized in the consolidated balance sheets consist of:
| Pension Benefits | ||||||||
| 2005 | 2004 | |||||||
Prepaid pension cost | $ | 16.9 | $ | 15.8 | ||||
Pension benefit liabilities | (179.4 | ) | (217.7 | ) | ||||
Intangible asset | 2.7 | 3.4 | ||||||
Other comprehensive income | 36.0 | 47.0 | ||||||
Net liability recognized | $ | (123.8 | ) | $ | (151.5 | ) | ||
| Pension Benefits | ||||||||
Successor 2006 | Predecessor 2005 | |||||||
Prepaid pension costs | $ | 1.1 | $ | 8.7 | ||||
Accounts payable and accrued expenses | (11.8 | ) | — | |||||
Pension benefit liabilities | (165.9 | ) | (177.9 | ) | ||||
Other intangibles, net | — | 2.7 | ||||||
Net amount recognized | $ | (176.6 | ) | $ | (166.5 | ) | ||
The amounts reported above for 2005 exclude prepaid pension cost of $8.2 million and pension benefit liabilities of $1.5 million which relate to discontinued operations.
Amounts recognized in accumulated other comprehensive income at year end consist of:
| Pension Benefits | |||||||
| Successor Company | Predecessor Company | ||||||
| 2006 | 2005 | ||||||
Net actuarial (gain) | $ | (9.0 | ) | ||||
Prior service cost (credit) | — | ||||||
Accumulated other comprehensive income | $ | (9.0 | ) | $ | 36.0 | ||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Amounts recognized in accumulated other comprehensive income as of September 30, 2006 were eliminated as part of fresh-start reporting. The $9.0 million gain in accumulated other comprehensive income as of year end was a result of Successor Company activity.
No amounts in accumulated other comprehensive income are expected to be amortized into pension cost in 2007.
The accumulated benefit obligation for the non-U.S. defined benefit pension plans was $434.5$372.5 million and $449.0$345.6 million at December 31, 20052006 and 2004,2005, respectively.
| Pension Benefits | Pension Benefits | ||||||||||||
Non-U.S. pension plans with benefit obligations in excess of assets | 2005 | 2004 | Successor 2006 | Predecessor 2005 | |||||||||
Projected benefit obligation, December 31 | $ | 474.7 | $ | 402.0 | $ | 382.7 | $ | 377.6 | |||||
Accrued benefit obligation, December 31 | 434.5 | 370.3 | 350.0 | 345.6 | |||||||||
Fair value of plan assets, December 31 | 266.1 | 161.8 | 205.0 | 175.6 | |||||||||
The components of pension cost are as follows:
Non-U.S. defined-benefit plans | 2005 | 2004 | 2003 | |||||||||
Service cost of benefits earned during the year | $ | 10.0 | $ | 9.3 | $ | 8.2 | ||||||
Interest cost on projected benefit obligation | 21.7 | 21.2 | 19.4 | |||||||||
Expected return on plan assets | (15.7 | ) | (14.8 | ) | (12.8 | ) | ||||||
Amortization of transition obligation (asset) | (0.1 | ) | 0.2 | 0.3 | ||||||||
Amortization of prior service cost | 0.3 | 0.2 | 0.6 | |||||||||
Amortization of net actuarial loss | 1.9 | 0.5 | 0.5 | |||||||||
Net periodic pension cost | $ | 18.1 | $ | 16.6 | $ | 16.2 | ||||||
In addition, we recorded a separate charge in 2003 of $0.3 million within restructuring expense for a curtailment loss related to the closure of certain operations at a manufacturing plant in Oss, the Netherlands. See Note 13 for further information.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Costs for other non-U.S. defined contribution benefit plans and multiemployer pension plans were $11.7 million in 2005, $11.0 million in 2004, and $11.3 million in 2003.
| Successor Company | Predecessor Company | |||||||||||||||
The components of pension cost are as follows: Non-U.S. defined-benefit plans | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||
Service cost of benefits earned during the period | $ | 1.7 | $ | 5.1 | $ | 6.1 | $ | 5.9 | ||||||||
Interest cost on projected benefit obligation | 4.5 | 12.3 | 17.7 | 17.4 | ||||||||||||
Expected return on plan assets | (3.6 | ) | (8.6 | ) | (11.3 | ) | (10.4 | ) | ||||||||
Amortization of transition obligation (asset) | — | (0.1 | ) | (0.1 | ) | 0.2 | ||||||||||
Amortization of prior service cost | — | 0.4 | 0.5 | 0.4 | ||||||||||||
Amortization of net actuarial loss | — | 2.1 | 1.7 | 0.4 | ||||||||||||
Net periodic pension cost | $ | 2.6 | $ | 11.2 | $ | 14.6 | $ | 13.9 | ||||||||
We expect to contribute $23.9$17.7 million to our non-U.S. defined benefit pension plans in 2006.
2007.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years:
| Pension Benefits | Pension Benefits | |||||
2006 | $ | 19.3 | ||||
2007 | 19.8 | $ | 20.3 | |||
2008 | 21.4 | 21.2 | ||||
2009 | 22.3 | 20.6 | ||||
2010 | 22.9 | 21.5 | ||||
2011-2015 | 133.5 | |||||
2011 | 22.4 | |||||
2012-2016 | 135.6 | |||||
Costs for other defined contribution benefit plans and multiemployer pension plans were $3.3 million in the three months ended December 31, 2006, $9.6 million in the nine months ended September 30, 2006, $11.0 million in 2005 and $10.4 million in 2004.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 17.19. FINANCIAL INSTRUMENTS
We do not hold or issue financial instruments for trading purposes. The estimated fair values of our financial instruments as of December 31, 2005 and 2004 are as follows:
| 2005 | 2004 | |||||||||||||||
| Carrying amount | Estimated fair value | Carrying amount | Estimated fair value | |||||||||||||
Assets/(Liabilities): | ||||||||||||||||
Debt subject to compromise | $ | (1,388.6 | ) | $ | (976.7 | ) | $ | (1,388.6 | ) | $ | (982.8 | ) | ||||
Long-term debt, including current portion | (26.9 | ) | (26.9 | ) | (37.4 | ) | (37.4 | ) | ||||||||
Foreign currency contract obligations | 1.5 | 1.5 | (13.9 | ) | (13.9 | ) | ||||||||||
Natural gas contracts | 18.7 | 18.7 | 5.3 | 5.3 | ||||||||||||
| Successor Company | Predecessor Company | |||||||||||||||
| 2006 | 2005 | |||||||||||||||
(millions at December 31) | Carrying amount | Estimated fair value | Carrying amount | Estimated fair value | ||||||||||||
Assets/(Liabilities): | ||||||||||||||||
Debt subject to compromise | — | — | $ | (1,388.6 | ) | $ | (976.7 | ) | ||||||||
Long-term debt, including current portion | $ | (812.4 | ) | $ | (812.4 | ) | (26.9 | ) | (26.9 | ) | ||||||
Foreign currency contract obligations | (2.0 | ) | (2.0 | ) | 1.5 | 1.5 | ||||||||||
Natural gas contracts | 2.5 | 2.5 | 18.7 | 18.7 | ||||||||||||
Other energy contracts | (0.5 | ) | (0.5 | ) | — | — | ||||||||||
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 us for debt of the same remaining maturities. The fair value estimates of foreign currency contract obligations are estimated from national exchange quotes. The fair valuesvalue estimates of natural gas contracts are estimated by obtaining quotes from major financial institutions and energy companies.
institutions.
We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements. On December 31, 2005, our2006, we had a $300 million revolving credit facility with a $150 million sublimit for letters of credit, of which $40.2 million was outstanding. There were no outstanding borrowings under the revolving credit facility. Availability under this facility totaled $259.8 million as of December 31, 2006. Our foreign subsidiaries that are not participating in our Chapter 11 Case had available lines of credit totaling $45.2$52.4 million, of which $19.8$8.0 million was used, leaving $25.4$44.4 million of unused lines of credit available for borrowing on December 31, 2005.
foreign borrowings.
On December 31, 2005,2006, we had outstanding letters of credit totaling $71.4$66.8 million, of which $43.3$40.2 million was issued under the DIP Facility. Letters ofrevolving credit are currently arranged through AWI’s DIP Facility with JP Morgan Chase. Certain letters of creditfacility and $26.6 were arranged with Wachovia Bank, N.A. prior to the Filing remain outstanding. The DIP Facility had $31.7 million that remained available for issuance of letters of credit as of December 31, 2005.another bank. Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AHI’sAWI’s failure to pay its obligations to the beneficiary. We also have several commercial letters of credit whereby vendors are paid directly via the letter of credit.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
NOTE 18.20. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use swap, forward swaps and option contracts to hedge currency and commodity exposures. We regularly monitor developments in the capital markets and only enter into currency and swap transactions with established counter-parties having investment grade ratings. Exposure to individual counterparties is controlled and thus we consider the riskderivative financial instruments are entered into with a diversified group of counterparty default to be negligible. Swap, forwardmajor financial institutions. Forward swaps and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. At inception, we formally designate and document our derivatives as either (1) a hedge of a forecasted transaction or “cash flow” hedge, or (2) a hedge of the fair value of a recognized liability or asset or “fair value” hedge. We use derivative financial instruments as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions and energy companies in order to manage Armstrong’s exposure to nonperformance on such instruments.
Interest Rate Risk - Due to AWI’s Chapter 11 Filing, all affected debt was classified as liabilities subject to compromise and there—There were no open interest rate derivatives as of December 31, 20052006 and 2004.2005. We may at some future date execute interest rate swaps to mitigate interest rate variability on our Term Loan A and B and other floating rate debt.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Currency Rate Risk - We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. We manage our cash flow exposures on a residualnet basis and use derivatives to hedge our unmatched foreign currency cash inflows and outflows. At December 31, 2005,2006, our major foreign currency exposures are to the Euro, the Canadian dollar, and the British pound.
We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and purchases from foreign suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. Cash flow hedges are executed quarterly for up to 15 months forward and allow us to further reduce our overall exposure to exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged. The effective portion of gainsGains and losses on these instruments are deferred in other comprehensive income until the underlying transaction is recognized in earnings. The net fair value of these instruments at December 31, 20052006 was a liabilityan asset of $2.8$2.1 million. A gain of $3.1 million mostis included in other comprehensive income related to changes in the fair value of our foreign currency forward exchange contracts since September 30, 2006, all of which is expected to be charged to earnings in the next twelve months. The earnings impact is reported in either net sales or cost of goods sold to match the underlying transaction being hedged. The netearnings impact of these hedges was a gain of $0.5 million in the three months ended December 31, 2006 and a loss of $1.1$0.9 million during 2005.in the nine months ended September 30, 2006. There were no circumstances where hedge treatment was discontinued during 2005.2006. The earnings impact of the ineffective portion of these hedges and of adopting fresh-start reporting was not material during 2005.
2006.
We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-companyintercompany loans. The underlying inter-companyintercompany loans are classified as short-term and translation adjustments related to these loans are recorded in other non-operating income. The offsetting gains and losses on the related derivative contracts are also recorded in other non-operating income. These transactions are executed on a six-month rolling basis and are offset or increased as repayment or additional inter-companyintercompany loans are extended. The fair value of these instruments at December 31, 20052006 was an asseta liability of $4.2$4.1 million, all of which is expected to be takencharged to earnings in the next twelve months. During 2005,2006, the net earnings impact of these transactions was a loss of $2.7 million in the three months ended December 31, 2006 and a gain of $3.0$1.1 million in the nine months ended September 30, 2006, recorded in other non-operating income, which was comprisedincome. The earnings impact of a gain of approximately $36.5 million from theadopting fresh-start reporting for our foreign currency forward exchange contracts substantially offset by the 2005 translation adjustment of approximately $33.5 million for the underlying inter-company loans.
was not material.
Commodity Price Risk - We purchase natural gas for use in the manufacture of ceiling tiles and other products and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy of reducing short term cost volatility by purchasing natural gas forward
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
contracts, purchased call options, and zero-cash collars.zero-cost collars up to 15 months forward to reduce our overall exposure to natural gas price movements. The gains and losses on these transactions offset losses and gains on the transactions being hedged. These instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying products are sold. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. There were no circumstances where hedge treatment was discontinued during 2006. The fair value of these instruments at December 31, 20052006 was an $18.7a $2.5 million asset,asset. There is also a loss of $2.0 million included in other comprehensive income related to changes in the fair value of our natural gas hedge contracts since September 30, 2006, of which $10.1$1.4 million is expected to be takencharged to earnings in the next twelve months. The earnings impact of hedges that matured during 2005,2006, recorded in cost of goods sold, was $14.4$0.6 million of income.expense in the three months ended December 31, 2006 and $0.9 million of expense in the nine months ended September 30, 2006. The earnings impact of the
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
ineffective portion of these hedges was not material during 2005.
2006. As a result of the adoption of fresh-start reporting, we recognized a charge of $6.1 million to fair value these instruments, which was reported in the results of the Predecessor Company.
NOTE 19.21. GUARANTEES
As of December 31, 2005,For the past several years, we have maintained an agreement with the lending institution of one of our flooring distributors. Under this agreement, if the distributor werewas to default on its borrowingsobligations and the lender foreclosed on the assets, the bank could return a large part of anyportion of our products still at the distributor (subject to certain quality, current product line and roll size minimums)minimum criteria) for a refund of original cost. This agreement will expire in September 2006. At December 31, 2005,In October 2006, the amountlending institution of inventory held at the distributor was approximately $4.2 million. Historically, no claim has been made under anynotified us that the distributor had defaulted on its obligations. As a result of these types of agreementsthe distributor’s default, we refunded the bank $1.1 million and we do not anticipate any such claim inreturned the future. As such, no liability has been recorded for this agreement.
related products to our inventory.
In disposing of assets, prior to the Filing, AWI and some subsidiaries hadhave entered into contracts that included various indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and other litigation. Some of these contracts hadhave exposure limits, but many diddo not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under these contracts. As a debtor-in-possession, for those contracts that are still executory where AWI was the sole guarantor, AWI anticipates rejecting those contracts. Parties that timely file claims with respect to such contracts will have such claims addressed in AWI’s Chapter 11 Case. AWI cannot estimate the value of any potential claims that will ultimately be allowed by the Bankruptcy Court. See Item 1 - Business regarding Proceedings under Chapter 11.
Subsidiaries that are not part of the Chapter 11 Filing also entered into certain contracts that included various indemnity provisions similar to those described above. Since these subsidiaries are not part of the Chapter 11 Filing, these contracts continue to be in effect. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under all these contracts. For contracts under which an indemnity claim has been received, a liability of $0.8$4.0 million has been recorded as of December 31, 2005.2006. See Note 3032 of the Consolidated Financial Statements for additional information.
In September 1999, we sold our Textiles Products operations. As part of the divestiture agreement, we transferred certain liabilities and assets to the purchaser to cover pension payments earned by the work force as of the sale date. We also reimbursereimbursed the purchaser for such pension payments that are not covered by the pension assets. In addition, we agreed to reimburse the purchaser for the tax impact of our reimbursement of the pension payments. This agreement hashad no termination date. AsIn the third quarter of December 31, 2005,2006, we maintained a $3.6 million net liability forsettled this guarantee. As of December 31, 2005, the net present value of the maximum payments is approximately $5 million, excluding any amounts paid for tax reimbursement.
See Notes 4obligation and 22 for a discussion of the ESOP loan guarantee.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
have no further obligation under this agreement.
NOTE 20.22. PRODUCT WARRANTIES
We provide direct customer and end-user warranties for our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or replacement of the defective product. We collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes the activity for the accrual of product warranties for 20052006 and 2004:2005:
| 2005 | 2004 | Successor Company | Predecessor Company | |||||||||||||||||
Balance at beginning of year | $ | 22.6 | $ | 25.5 | ||||||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | ||||||||||||||||||
Balance at beginning of period | $ | 22.6 | $ | 21.1 | $ | 22.6 | ||||||||||||||
Reductions for payments | (34.3 | ) | (39.0 | ) | (9.4 | ) | (23.9 | ) | (34.3 | ) | ||||||||||
Current year warranty accruals | 34.6 | 37.3 | ||||||||||||||||||
Current period warranty accruals | 8.0 | 28.9 | 34.6 | |||||||||||||||||
Preexisting warranty accrual changes | (0.7 | ) | (1.8 | ) | (0.2 | ) | (0.3 | ) | (0.7 | ) | ||||||||||
Acquisitions | — | 0.6 | — | |||||||||||||||||
Discontinued operations | — | (4.1 | ) | — | ||||||||||||||||
Effects of foreign exchange translation | (1.1 | ) | 0.6 | 0.2 | 0.3 | (1.1 | ) | |||||||||||||
Balance at end of year | $ | 21.1 | $ | 22.6 | ||||||||||||||||
Balance at end of period | $ | 21.2 | $ | 22.6 | $ | 21.1 | ||||||||||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The warranty reserve is recorded as a reduction of sales and accounts receivable. The Successor Company balance excludes amounts related to discontinued operations.
NOTE 21.23. OTHER LONG-TERM LIABILITIES
| 2005 | 2004 | Successor Company December 31, 2006 | Predecessor Company December 31, 2005 | ||||||||||
Long-term deferred compensation arrangements | $ | 39.4 | $ | 40.6 | $ | 36.1 | $ | 39.4 | |||||
U.S. workers’ compensation | 18.3 | 16.9 | 15.5 | 18.3 | |||||||||
Environmental liabilities not subject to compromise | 7.9 | 9.4 | 5.9 | 7.9 | |||||||||
Other | 24.4 | 20.7 | 18.2 | 24.4 | |||||||||
Total other long-term liabilities | $ | 90.0 | $ | 87.6 | $ | 75.7 | $ | 90.0 | |||||
The Successor Company balance excludes amounts related to discontinued operations.
NOTE 22.24. SAVINGS AND INVESTMENT PLAN (SIP)
In 1989, we established an Employee Stock Ownership Plan (“ESOP”) that borrowed $270 million from banks and insurance companies, repayable over 15 years and guaranteed by AWI. The ESOP used the proceeds to purchase 5,654,450 shares of a new series of company convertible preferred stock issued by Armstrong.stock. In 1996, the ESOP was merged with the Retirement Savings Plan for salaried employees (a defined-contribution pension plan) to form the Retirement Savings and Stock Ownership Plan. 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. Effective March 1, 2005, the name of the plan was changed to the Savings and Investment Plan (SIP).
The number of shares released for allocation to participant accounts has been based on the proportion of principal and interest paid to the total amount of debt service remaining to be paid over the life of the borrowings. Through December 31, 2005,2006, the SIP allocated 1,969,0001,503,000 AHI shares to participants that remain outstanding, participants retired 2,455,0002,921,000 shares, AHIArmstrong contributed an additional 437,000 shares from its treasury (in 1999 and 2000) and the trustee purchased 243,000 shares on the open market to allocate to employees.employees (in 1999 and 2000). During 2005 and 2004, the SIP sold 1,462,000 and 450,000 unallocated shares on the open market, respectively. The proceeds from the sale remainremained in the SIP and are expected to beuntil November 2006 when they were allocated to participants no later than when the SIP debt is addressed inas a result of AWI’s Chapter 11 proceedings.emergence. As of December 31, 2005,2006, there were no sharesassets in the SIP that had yet to be allocated to participants.
The SIP is a qualified defined contribution plan that also includes a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate. The SIP currently covers parent company nonunion employees, some parent company union employees, Wood Flooring salaried
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
employees, and Cabinets salaried employees. We recorded costs for the SIP of $1.9 million in the three months ended December 31, 2006, $6.2 million in the nine months ended September 30, 2006, $6.5 million in 2005 and $5.8 million in 2004, and $5.6 million in 2003, which related to companyCompany cash matching contributions.
All SIP shares are considered outstanding for earnings per share calculations. Historically, dividends on allocated shares were credited to employee accounts while dividends on unallocated shares were used to satisfy debt service payments.
On November 22, 2000, AWI failed to repay $50 million in commercial paper that was due. Subsequently, the remaining ESOP bond principal balance of $142.2 million became immediately payable along with a $15.5 million interest and tax make-whole premium. ESOP debt service payments have not been made since June 2000. As a result of the Chapter 11 Filing, AWI’s guarantee of these
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
ESOP loan obligations of $157.7 million is nowwas classified as a liability subject to compromise.compromise and was discharged as part of AWI’s Chapter 11 emergence.
The SIP does not hold any shares of reorganized Armstrong.
NOTE 23.25. STOCK-BASED COMPENSATION PLANS
On January 1, 2006, we adopted FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), which requires all share-based payment transactions to be recognized in the financial statements using a fair-value method of accounting. This statement replaced FASB Statement No. 123 and superseded APB Opinion No. 25. Prior to January 1, 2006, we used APB Opinion No. 25’s intrinsic value method for stock-based employee compensation. There would have been no effect on 2005 or 2004 net income if we had applied the fair value recognition provisions of FAS 123R to share-based employee compensation in those years because all outstanding awards were fully vested.
Predecessor Company
We used the modified prospective method of adopting FAS 123R, which does not require restatement of prior periods. There was no impact of adoption of the new standard because all of our outstanding stock options on January 1, 2006 were fully vested.
Awards under the 1993 Long-Term Stock Incentive Plan (“1993 Plan”) were made in the form of stock options, stock appreciation rights in conjunction with stock options, performance restricted shares and restricted stock awards. No additional awards may be issued under the 1993 Plan.
During 1999, we adopted the 1999 Long-Term Incentive Plan (“1999 Plan”) which replaced the 1993 Plan. Pre-1999 grants made under predecessor plans will bewere governed under the provisions of those plans. The 1999 Plan providesprovided for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, performance-restricted shares and restricted stock awards. The 1999 Plan also incorporatesincorporated stock awards and cash incentive awards. No more than 3,250,000 shares of common stock may be issued under the 1999 Plan, and no more than 300,000 of the shares may be awarded in the form of performance restricted shares, restricted stock awards or stock awards. The 1999 Plan does not allow awards to be granted after April 25, 2009.
During 2000, we adopted the Stock Award Plan (“2000 Plan”) to enable stock awards and restricted stock awards to officers, key employees and non-employee directors. No more than 750,000 treasuryUpon AHI becoming AWI’s corporate parent on May 1, 2000, all outstanding options and restricted shares may be awarded under the 2000 Plan. The 2000 Plan will remain in effect until the earliergranted by AHI were converted into equivalent options and restricted shares of the grant of all the shares allowed under the plan or termination of the plan by the Board of Directors.
AHI.
All three of the plans discussed above will most likely bewere terminated upon AWI emerging from Chapter 11.11 on October 2, 2006. No equity based compensation has beenwas granted since AWI filed for relief underbetween the Chapter 11 in December 2000,filing date and the Chapter 11 emergence date, other than commitments entered into prior to the Chapter 11 filing.
Options were 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 became exercisable in one to three years and expireexpired 10 years from the date of grant.
Changes in option shares outstanding (thousands except for share price) | 2005 | 2004 | 2003 | |||||||||
Option shares at beginning of year | 2,264.0 | 2,376.9 | 2,508.8 | |||||||||
Options granted | — | — | — | |||||||||
Option shares exercised | — | — | — | |||||||||
Options cancelled | (276.7 | ) | (112.9 | ) | (131.9 | ) | ||||||
Option shares at end of year | 1,987.3 | 2,264.0 | 2,376.9 | |||||||||
Option shares exercisable at end of year | 1,987.3 | 2,264.0 | 2,343.6 | |||||||||
Shares available for grant | 4,815.4 | 4,538.7 | 4,425.8 | |||||||||
Weighted average price per share: | ||||||||||||
Options outstanding | $ | 27.97 | $ | 29.75 | $ | 30.62 | ||||||
Options exercisable | $ | 27.97 | $ | 29.75 | $ | 31.01 | ||||||
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
| Predecessor Company | ||||||||||||
Changes in AHI option shares outstanding (thousands except for share price) | Nine Months 2006 | 2005 | 2004 | |||||||||
Option shares at beginning of period | 1,987.3 | 2,264.0 | 2,376.9 | |||||||||
Options granted | — | — | — | |||||||||
Option shares exercised | — | — | — | |||||||||
Options forfeited | (23.8 | ) | (44.9 | ) | (20.8 | ) | ||||||
Options expired | (189.8 | ) | (231.8 | ) | (92.1 | ) | ||||||
Option shares at end of period | 1,773.7 | 1,987.3 | 2,264.0 | |||||||||
Option shares exercisable at end of period | 1,773.7 | 1,987.3 | 2,264.0 | |||||||||
Shares available for grant | 5,029.0 | 4,815.4 | 4,538.7 | |||||||||
Weighted average price per share: | ||||||||||||
Options outstanding | $ | 24.67 | $ | 27.97 | $ | 29.75 | ||||||
Options exercisable | $ | 24.67 | $ | 27.97 | $ | 29.75 | ||||||
The table below summarizes information about stockAlthough the plans under which these options outstanding at December 31, 2005.
(thousands except for life and share price)
| Options outstanding and exercisable | |||||||
Range of exercise prices | Number outstanding and exercisable at 12/31/05 | Weighted- average remaining contractual life | Weighted- average exercise price | ||||
$1.19 - $3.60 | 200.0 | 5.1 | $ | 2.39 | |||
$3.61 - $16.40 | 100.0 | 4.6 | 16.38 | ||||
$16.41 - $19.50 | 1,200.4 | 4.2 | 19.44 | ||||
$19.51 - $60.00 | 307.7 | 1.4 | 55.34 | ||||
$60.01 - $83.06 | 179.2 | 1.9 | 73.14 | ||||
| 1,987.3 | |||||||
were issued were terminated upon AWI’s emerging from Chapter 11, the existing option contracts remain enforceable against AHI. Reorganized Armstrong has no further liability under these plans.
Restricted stock awards were used for the purposes of recruitment, special recognition and retention of key employees. NoAs of September 30, 2006, no award of restricted stock shares washad been granted in 2005, 2004 or 2003. At the endsince 2000. As of 2005,September 30, 2006, there were 114,419111,463 restricted shares of AHI common stock outstanding with 715596 accumulated dividend equivalent shares. These awards expired upon AWI’s emerging from Chapter 11 on October 2, 2006.
Successor Company
As of October 2, 2006, the Board of Directors of reorganized AWI adopted and the then sole shareholder of AWI approved, reorganized Armstrong’s 2006 Long-Term Incentive Plan (“2006 Plan”).
The 2006 Plan authorizes us to issue stock options, stock appreciation rights, restricted stock awards, stock units, performance-based awards and cash awards to officers and key employees. No more than 5,349,000 common shares may be issued under the 2006 Plan, and the 2006 Plan will terminate on October 2, 2016, after which time no further awards may be made. As of December 31, 2006, 3,226,400 shares were available for future grants under the 2006 plan.
For grants made between our Chapter 11 emergence on October 2, 2006 and October 17, 2006, options were granted to purchase shares at a price equal to the volume weighted average closing price of the shares for the period October 18, 2006 through October 31, 2006. For grants made on or after October 18, 2006, options were granted to purchase shares at prices equal to the closing market price of the shares on the dates the options were granted. The options generally become exercisable in two to four years and expire 10 years from the date of grant.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Successor Company Three Months Ended December 31, 2006 | ||||||||||
| Number of shares (thousands) | Weighted- average exercise price | Weighted- average remaining contractual term (years) | Aggregate intrinsic value (millions) | |||||||
Option shares outstanding at beginning of period | — | — | ||||||||
Options granted | 1,592.0 | $ | 38.42 | |||||||
Option shares exercised | — | — | ||||||||
Options forfeited | — | — | ||||||||
Option shares outstanding at end of period | 1,592.0 | $ | 38.42 | 9.8 | $ | 6.3 | ||||
Option shares exercisable at end of period | — | — | — | — | ||||||
Option shares expected to vest | 1,537.8 | $ | 6.1 | |||||||
FAS 123 permits entitiesWe have reserved sufficient authorized shares to continueallow us to applyissue new shares upon exercise of all outstanding options. When options are actually exercised, we will issue new shares, use treasury shares (if available), acquire shares held by investors, or a combination of these alternatives in order to satisfy the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures. Had compensation costs for these plans been determined consistent with FAS 123, our net earnings and earnings per share would have been changed to the following pro forma amounts.
| 2005 | 2004 | 2003 | |||||||||
Net earnings (loss): | |||||||||||
As reported | $ | 112.1 | $ | (80.8 | ) | $ | (39.3 | ) | |||
Pro forma | $ | 112.1 | $ | (80.8 | ) | $ | (39.4 | ) | |||
Basic earnings (loss) per share: | |||||||||||
As reported | $ | 2.77 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Pro forma | $ | 2.77 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Diluted earnings (loss) per share: | |||||||||||
As reported | $ | 2.75 | $ | (2.00 | ) | $ | (0.97 | ) | |||
Pro forma | $ | 2.75 | $ | (2.00 | ) | $ | (0.97 | ) | |||
option exercises.
The fair value of option grants was estimated on the date of grant using the Black-Scholes option pricing model. There were noThe weighted average assumptions for the three months ended December 31, 2006 are presented in the table below.
| Successor Company | ||||
Three Months 2006 | ||||
Weighted-average grant date fair value of options granted | $ | 15.51 | ||
Assumptions | ||||
Risk free rate of return | 4.6 | % | ||
Expected term (in years) | 6.5 | |||
Expected volatility | 33.2 | % | ||
Expected dividend yield | 0.0 | % | ||
The risk free rate of return is determined based on the implied yield available on zero coupon U.S. Treasury bills at the time of grant with a remaining term equal to the expected term of the option. The expected life is the midpoint of the average vesting period and the contractual life of the grant. Because reorganized Armstrong’s stock options granted in 2005, 2004 or 2003.has been trading for only a short period of time, the expected volatility is established based on an average of the actual historical volatilities of the stock prices of a peer group of companies. The expected dividend yield is assumed to be zero, again due to our limited history.
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
In addition to options, we also granted restricted stock and restricted stock units. These awards generally have vesting periods of two to four years. A summary of these awards follows:
| Successor Company Nonvested Stock Awards | ||||||
| Number of Shares | Weighted- average fair | |||||
Beginning of period | — | — | ||||
Granted | 530,650 | $ | 36.96 | |||
Vested | — | — | ||||
Forfeited | — | — | ||||
End of period | 530,650 | $ | 36.96 | |||
In addition to the equity awards described above, we also granted 57,281 phantom shares to non-employee directors which will be settled in the future for cash. These awards generally have vesting periods of one to three years. The awards are generally payable six months following the director’s separation from service. The total liability recorded for these shares as of December 31, 2006 was $0.3 million.
We recognize compensation expense on a straight-line basis over the vesting period. Share-based compensation cost was $2.5 million ($1.5 million net of tax benefit) in the three months ended December 31, 2006. There has been no cash flow impact to date of these awards.
As of December 31, 2006, there was $42.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 3.8 years.
NOTE 24.26. EMPLOYEE COMPENSATION
Employee compensation is presented in the table below. Charges for severance costs and early retirement incentives to terminated employees (otherwisethat were otherwise recorded as restructuring charges)charges have been excluded.
Employee compensation cost | 2005 | 2004 | 2003 | |||||||
Wages and salaries | $ | 800.2 | $ | 778.5 | $ | 718.9 | ||||
Payroll taxes | 83.5 | 81.5 | 78.0 | |||||||
Pension expense (credits), net | 26.4 | 13.3 | 15.9 | |||||||
Insurance and other benefit costs | 92.8 | 96.0 | 112.2 | |||||||
Stock-based compensation | (0.1 | ) | — | 0.2 | ||||||
Total | $ | 1,002.8 | $ | 969.3 | $ | 925.2 | ||||
Employee compensation cost | Successor Company | Predecessor Company | |||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||||
Wages and salaries | $ | 180.0 | $ | 555.6 | $ | 746.5 | $ | 730.3 | |||||||
Payroll taxes | 16.9 | 55.3 | 72.4 | 71.2 | |||||||||||
Pension expense (credits), net | (8.9 | ) | (9.7 | ) | 22.2 | 10.0 | |||||||||
Insurance and other benefit costs | 23.3 | 64.2 | 92.8 | 96.0 | |||||||||||
Stock-based compensation | 2.5 | — | (0.1 | ) | — | ||||||||||
Total | $ | 213.8 | $ | 665.4 | $ | 933.8 | $ | 907.5 | |||||||
On January 13, 2006 we announced that certain U.S. non-production salaried employees will have their pension plan benefits frozen as of February 28, 2006. As a result, we recorded a curtailment charge of $16.9 million in the fourth quarter of 2005. This amount is included in the pension expense reported in the table above.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 25.27. LEASES
We rent certain real estate and equipment. Several leases include options for renewal or purchase, and contain clauses for payment of real estate taxes and insurance. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. As part of the Chapter 11 Case, AWI must decide whether to assume, assume and assign, or reject prepetition unexpired leases and other prepetition executory contracts. AWI has been granted an extension through and including the date on which an order confirming the Plan is entered by the U.S. District Court for the District of Delaware to make these decisions with respect to prepetition unexpired leases of real property. With respect to prepetition executory contracts and unexpired leases not related to real estate, AWI has until confirmation of a reorganization plan to make these decisions unless such time is shortened by the Bankruptcy Court. The accompanying financial statements do not reflect any adjustment related to assumption or rejection of such agreements.
Rental expense was $24.9$5.5 million in the three months ended December 31, 2006, $16.9 million in the nine months ended September 30, 2006, $23.1 million in 2005 $22.4and $22.3 million in 2004 and $21.3 million in 2003.2004. Future minimum payments at December 31, 2005,2006, by year and in the aggregate, having noncancelable lease terms in excess of one year were as follows:
Scheduled minimum lease payments | Capital Leases | Operating Leases | ||||
2006 | $ | 1.0 | $ | 14.6 | ||
2007 | 0.7 | 12.1 | ||||
2008 | 0.3 | 8.4 | ||||
2009 | — | 4.9 | ||||
2010 | — | 2.5 | ||||
Thereafter | 0.1 | 7.9 | ||||
Total | $ | 2.1 | $ | 50.4 | ||
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
Scheduled minimum lease payments (excluding discontinued operations) | Capital Leases | Operating Leases | ||||
2007 | $ | 0.6 | $ | 14.9 | ||
2008 | 0.4 | 12.0 | ||||
2009 | — | 8.8 | ||||
2010 | — | 4.7 | ||||
2011 | — | 2.3 | ||||
Thereafter | 0.1 | 7.2 | ||||
Total | $ | 1.1 | $ | 49.9 | ||
Assets under capital leases are included in the consolidated balance sheets as follows:
| 2005 | 2004 | Successor December 31, | Predecessor December 31, | |||||||||||||
Land | $ | 3.8 | $ | 3.8 | $ | 1.5 | $ | 3.8 | ||||||||
Building | 4.1 | 4.1 | 4.6 | 4.1 | ||||||||||||
Machinery | 25.2 | 26.7 | 3.3 | 25.2 | ||||||||||||
Less accumulated amortization | (14.9 | ) | (14.6 | ) | (0.2 | ) | (14.9 | ) | ||||||||
Net assets | $ | 18.2 | $ | 20.0 | $ | 9.2 | $ | 18.2 | ||||||||
The Successor Company balance excludes amounts related to discontinued operations.
NOTE 26.28. SHAREHOLDERS’ EQUITY
Treasury share changes for 2005, 2004 and 2003 are as follows:
Years ended December 31 (in thousands) | 2005 | 2004 | 2003 | |||
Common shares | ||||||
Balance at beginning of year | 11,210.0 | 11,210.0 | 11,201.3 | |||
Stock purchases and other | 4.4 | — | 8.7 | |||
Balance at end of year | 11,214.4 | 11,210.0 | 11,210.0 | |||
Stock purchases and other representThere were no Successor Company treasury shares received under stock-based compensation plan forfeitures and share tax withholding transactions.
at December 31, 2006. Predecessor Company treasury shares were 11,393,170 at December 31, 2005.
The balance of each component of accumulated other comprehensive income as of December 31, 20052006 and 20042005 is presented in the table below.
| 2005 | 2004 | Successor December 31, | Predecessor December 31, | ||||||||||||
Foreign currency translation adjustments | $ | 70.2 | $ | 84.3 | $ | 2.1 | $ | 70.2 | |||||||
Derivative gain, net | 4.8 | 3.6 | 0.7 | 4.8 | |||||||||||
Pension adjustments | 59.3 | — | |||||||||||||
Minimum pension liability adjustments | (37.9 | ) | (45.1 | ) | — | (37.9 | ) | ||||||||
Accumulated other comprehensive income | $ | 37.1 | $ | 42.8 | $ | 62.1 | $ | 37.1 | |||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The related tax effects allocated to each component of other comprehensive income for 20052006 are presented in the table below.
| Successor Company | |||||||||||||||||||||||
Pre-tax Amount | Tax Expense (Benefit) | After tax Amount | Pre-tax Amount | Tax (Expense) Benefit | After tax Amount | ||||||||||||||||||
Foreign currency translation adjustments | $ | (13.8 | ) | $ | (0.3 | ) | $ | (14.1 | ) | $ | 0.8 | $ | 1.3 | $ | 2.1 | ||||||||
Derivative gain, net | 1.8 | (0.6 | ) | 1.2 | 1.1 | (0.4 | ) | 0.7 | |||||||||||||||
Minimum pension liability adjustments | 10.0 | (2.8 | ) | 7.2 | |||||||||||||||||||
Pension adjustments | 88.7 | (29.4 | ) | 59.3 | |||||||||||||||||||
Total other comprehensive income | $ | (2.0 | ) | $ | (3.7 | ) | $ | (5.7 | ) | $ | 90.6 | $ | (28.5 | ) | $ | 62.1 | |||||||
The Successor Company balance excludes amounts related to discontinued operations.
NOTE 29. SUPPLEMENTAL FINANCIAL INFORMATION
| Successor Company | Predecessor Company | ||||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | ||||||||||
Selected operating expenses | |||||||||||||
Maintenance and repair costs | $ | 27.6 | $ | 88.3 | $ | 111.7 | $ | 114.8 | |||||
Research and development costs | 12.8 | 36.0 | 48.0 | 46.5 | |||||||||
Advertising costs | 6.5 | 23.3 | 33.0 | 31.5 | |||||||||
Other non-operating expense | |||||||||||||
Foreign currency translation loss, net of hedging activity | $ | — | $ | — | $ | — | $ | 1.3 | |||||
Equity loss in ISI | — | — | 0.9 | — | |||||||||
Other | 0.3 | 1.0 | 0.6 | 1.8 | |||||||||
Total | $ | 0.3 | $ | 1.0 | $ | 1.5 | $ | 3.1 | |||||
Other non-operating income | |||||||||||||
Interest income | $ | 4.0 | $ | 2.9 | $ | 4.6 | $ | 4.0 | |||||
Foreign currency translation gain, net of hedging activity | 0.3 | 4.2 | 2.8 | — | |||||||||
Equity earnings in ISI | — | — | 0.7 | 1.9 | |||||||||
Gain on sale of ISI | — | — | 3.4 | — | |||||||||
Other | — | 0.1 | 0.3 | 0.5 | |||||||||
Total | $ | 4.3 | $ | 7.2 | $ | 11.8 | $ | 6.4 | |||||
Armstrong Holdings,World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)millions)
NOTE 27. SUPPLEMENTAL FINANCIAL INFORMATION
| 2005 | 2004 | 2003 | |||||||
Selected operating expenses | |||||||||
Maintenance and repair costs | $ | 115.4 | $ | 118.9 | $ | 107.8 | |||
Research and development costs | 48.5 | 47.0 | 46.1 | ||||||
Advertising costs | 33.3 | 31.8 | 32.7 | ||||||
Other non-operating expense | |||||||||
Foreign currency translation loss, net of hedging activity | — | $ | 1.3 | $ | 3.8 | ||||
Equity loss in ISI | $ | 0.9 | — | — | |||||
Other | 0.6 | 1.8 | 1.9 | ||||||
Total | $ | 1.5 | $ | 3.1 | $ | 5.7 | |||
Other non-operating income | |||||||||
Interest income | $ | 4.7 | $ | 4.0 | $ | 3.5 | |||
Foreign currency translation gain, net of hedging activity | 2.8 | — | — | ||||||
Equity earnings in ISI | 0.7 | 1.9 | 0.3 | ||||||
Gain on sale of ISI | 3.4 | — | — | ||||||
Interest on asbestos receivable payment | — | — | 1.1 | ||||||
Other | 0.4 | 0.5 | 0.1 | ||||||
Total | $ | 12.0 | $ | 6.4 | $ | 5.0 | |||
NOTE 28.30. SUPPLEMENTAL CASH FLOW INFORMATION
| 2005 | 2004 | 2003 | |||||||
Interest paid | $ | 2.5 | $ | 2.8 | $ | 3.1 | |||
Income taxes paid, net of refunds | $ | 42.9 | 77.3 | 27.5 | |||||
| Successor Company | Predecessor Company | |||||||||||
| Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year 2005 | Year 2004 | |||||||||
Interest paid | $ | 9.9 | $ | 0.7 | $ | 2.5 | $ | 2.8 | ||||
Income taxes paid, net of refunds | 7.5 | 56.6 | 42.9 | 77.3 | ||||||||
NOTE 29.31. RELATED PARTIES
We purchase grid products from WAVE, our 50%-owned joint venture with Worthington Industries. The total amount of these purchases was approximately $22 million in the three months ended December 31, 2006, $54 million in the nine months ended September 30, 2006, $68 million in the year 2005 and $60 million in the year 2004. We also provide certain selling, promotional and administrative processing services to WAVE for which we receive reimbursement. Those services amounted to $3.4 million in the three months ended December 31, 2006, $10.3 million in the nine months ended September 30, 2006, $13.0 million in the year 2005 and $11.8 million in the year 2004. The net amounts due from us to WAVE for all of our relationships were $4.7 million and $4.4 million at the end of 2006 and 2005, respectively. See Note 11 for additional information.
We sold 65% of our ownership in our gasket products subsidiary (now known as Interface Solutions, Inc. or “ISI”) on June 30, 1999. We still retained a 35% ownership of this business as of December 31, 2004. As part of the 1999 divestiture, we had agreed to continue to purchase a portion of the felt products used in the manufacturing of resilient flooring from ISI for an initial term of eight years. We were required to purchase at least 75% of our felt requirements from ISI. Our purchases of felt products from ISI for the pre-divested part of 2005 2004 and 20032004 were $16.4 million $27.5 million and $26.9$27.5 million, respectively. The amountsamount due to ISI for these purchases werewas $1.7 million and $1.6 million at the end of 2004 and 2003.2004. Additionally, we had received nominal monthly payments from ISI for some logistics and administrative services. The amounts outstanding from ISI at the end of 2004 and 2003 for the logistics and administrative services we had provided to them were less than $0.1 million. On August 8, 2005 we sold our remaining 35% equity interest in ISI and ISI is no longer considered a related party. See Note 911 for additional information.
We purchase grid products from WAVE, our 50%-owned joint venture with Worthington Industries. The total amount of these purchases was approximately $68 million, $60 million and $51 million for the years ended December 31, 2005, 2004 and 2003, respectively. We also provide certain selling, promotional and administrative processing services to WAVE for which we receive reimbursement. Those services amounted to $13.0 million, $11.8 million and $9.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. The net amounts due from us to WAVE for all of our relationships were $4.4 million and $4.0 million at the end of 2005 and 2004. See Note 9 for additional information.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
NOTE 30.32. LITIGATION AND RELATED MATTERS
ASBESTOS-RELATED LITIGATION
(Note: Particular documents referred to in this section are available at www.armstrongplan.com)
On October 2, 2006 (the “Effective Date”), AWI’s plan of reorganization, which was confirmed by order dated August 18, 2006, became effective, and AWI emerged from Chapter 11. The following summarizes the asbestos-related litigation matters during the Chapter 11 Case and how they were impacted by AWI’s emergence.
Prior to December 6, 2000, AWI, the major operating subsidiary of AHI, had been named as a defendant in personal injury cases and property damage cases related to asbestos-containing products. On December 6, 2000, AWI filed a voluntary petition for relief (“the Filing”) under Chapter 11 of the U.S. Bankruptcy Code to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability.
Two of AWI’s domestic subsidiaries also commenced Chapter 11 proceedings at the time of the Filing. AHI and all of AWI’s other direct and indirect subsidiaries and affiliates, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrong’s ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada and Armstrong DLW AG were not a part of the Filing
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
and accordingly the liabilities, including asbestos-related liability if any, of such companies arising out of their own activities willwere not be resolved in AWI’s Chapter 11 Case except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI.
Asbestos-Related Personal Injury Claims
Prior to the Filing, AWI was a member of the Center for Claims Resolution (the “CCR”), which handled the defense and settlement of asbestos-related personal injury claims on behalf of its members. The CCR pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (“SSP”) and had reached agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant.
Due to the Filing, holders of asbestos-related personal injury claims arewere stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. A creditors’ committee representing the interests of asbestos-related personal injury claimants and an individual representing the interests of future claimants have beenwas appointed in the Chapter 11 Case. Upon AWI’s present and future asbestos-related liabilityemergence on October 2, 2006, the Asbestos Personal Injury Claimants’ Committee was disbanded. The Future Claimants’ Representative will continue to serve, but as of October 2, 2006 his expenses will be addressed in its Chapter 11 Case.borne by the Asbestos Personal Injury Trust. See Note 1 regarding AWI’s Chapter 11 proceeding.
proceeding and its emergence from Chapter 11.
During 2003, AWI and the other parties in its Chapter 11 Case reached agreement on a plan of reorganization that addresses how all of AWI’s pre-Filing liabilities are to be settled. Several amendments to the plan of reorganization were filed, culminating in the Fourth Amended Plan of Reorganization filed with the Bankruptcy Court on May 23, 2003, which was modified by modifications filed with the Bankruptcy Court through May 23, 2006, and which was confirmed by the U.S. District Court for the District of Delaware (the “Court”) on October 17, 2003, November 10, 2003, and December 3, 2004, andAugust 18, 2006. Such plan, as confirmed, is referred to in this report as the “POR”.
Before a plan of reorganization may be implemented by AWI, it must be confirmed by order of both the Bankruptcy Court and the U.S. District Court. In addition, consummation of a plan of reorganization may be subject to the satisfaction after confirmation of certain conditions, as provided by the plan of reorganization. On November 17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the POR and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors’ Committee filed an objection to the Bankruptcy Court’s proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR. On February 23, 2005, the U.S. District Court Judge Eduardo C. Robreno ruled that the POR, in its current form, could not be confirmed. In the court’s decision, the Judge found that, because the class of unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule. AWI filed a Notice of Appeal to the U.S. Court of Appeals for the Third Circuit on March 4, 2005. On December 29, 2005, the U.S. Court of Appeals affirmed the District Court’s decision to deny confirmation of the POR.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
At a status conference before Judge Robreno on February 3, 2006, AWI and the court-authorized representatives of AWI’s creditors and claimants advised the Court that they had agreed on a proposed schedule for a confirmation hearing on a modified POR which would eliminate the provisions regarding distribution of warrants to existing AHI equity holders. Under the modified POR, existing AHI equity holders would receive no distribution and their equity interests would be cancelled. Following the conference, Judge Robreno signed an order that established such a schedule for a U.S. District Court confirmation hearing on the modified POR. The schedule calls for the confirmation hearing to commence on May 23, 2006. At that hearing, the Court will hear testimony and review other evidence relating to the Unsecured Creditors Committee’s objection that the modified POR unfairly discriminates against the unsecured creditors, based on the size of the present and future asbestos liability implied by the modified POR. AWI filed the modified POR with the Court on February 21, 2006. AWI is also monitoring a proposed asbestos claims litigation reform bill in Congress. See Note 1 for further discussion of AWI’son the Chapter 11 process. AWI is unableproceedings that led to predict whether the modified POR will be confirmed or when AWI would emergeAWI’s emergence from Chapter 11.
11 on October 2, 2006.
A description of the basic components of the POR which remain unchanged in the modifed POR,effecting AWI’s asbestos-related liability follows.
Basic Components of the PORAsbestos PI Trust
A principal featureUpon AWI’s Plan of Reorganization becoming effective on October 2, 2006, the POR is the creation of a trust (the “AsbestosAsbestos PI Trust”),Trust was created, pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing and resolving AWI’s personal injury (including wrongful death) asbestos-related liability. AllAs of October 2, 2006, all present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWI’s pre-Filing use of or other activities involving asbestos would bewere channeled to the Asbestos PI Trust.
InAs part of the POR, in accordance with thean 524(g) injunction ifissued under Section 524(g) and entered in connection with the POR, goes into effect, various entities would beare protected from such present and future asbestos-related personal injury claims. These entities include, among others, reorganized AWI,Armstrong, AHI, AWI’s subsidiaries and other affiliates (as defined in the POR), and their respective officers and directors. Upon emergenceNow that it has emerged from Chapter 11, AWI woulddoes not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor woulddoes it participate in their resolution.
However, although AWI’s domestic and foreign subsidiaries and other affiliates would be protected parties,have certain protection afforded by the 524(g) injunction, asbestos-related personal injury claims against them wouldwill be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the manufacturing, installation, distribution or other activities of AWI or are based solely on AWI’s ownership of the subsidiaries or other affiliates (as distinguished from independent activities of the subsidiaries or affiliates). Currently, three asbestos-related personal injury litigations against subsidiaries of AWI
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
allegedly arising out of such independent activities are pending. These claims wouldwill not be channeled to the Asbestos PI Trust under the POR inasmuch as they do not involve activities of AWI. The subsidiaries deny liability and are aggressively defending the matters. AWI has not recorded any liability for these matters. Management does not expect that any sum that may have to be paid in connection with these matters will be material to reorganized Armstrong.
In addition, workers’ compensation claims brought against AWI or its subsidiaries or other affiliates wouldwill not be channeled to the Asbestos PI Trust and wouldwill remain subject to the workers’ compensation process. Historically, workers’ compensation claims against AWI and its subsidiaries have not been significant in number or amount and AWI has continued to honorhonored its obligations with respect to such claims during the Chapter 11 Case. Workers’ compensation law provides that the employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Currently, AWI has threesix pending workers’ compensation claims, and itsa UK subsidiary has seven employer liability claims involving alleged asbestos exposure.
There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.
Management believes that neither AWI nor any of its subsidiaries or other affiliates is subject to any asbestos-related personal injury claims that wouldwill not be channeled to the Asbestos PI Trust under the POR and that are of a magnitude that, individually or collectively, would be material in amount to reorganized Armstrong.
Potential Legislation
On April 19, 2005 asbestos personal injury claims reform legislation was introduced, as the FAIR Act of 2005 (S.852), to the United States Senate. On May 26, 2005 the bill was reported out of committee. There is uncertainty as to whether this bill or any asbestos reform proposal will become law, and what impact there might be on AWI’s Chapter 11 Case.
If legislation as currently proposed is enacted into law prior to AWI implementing a confirmed plan of reorganization, AWI’s asbestos liability would likely be materially reduced from the $3.2 billion amount currently recorded, but its size would depend on AWI’s payment obligations under the law and the present value of those obligations. In such event, AWI would seek to develop a new plan of reorganization based on a re-evaluation of the then value of AWI’s assets and ongoing businesses, the amount of allowed unsecured claims against AWI (including any post-petition interest that may be allowed on such claims, as to which no amount is currently recorded in AWI’s liabilities subject to compromise), the amount AWI would be required to pay under the enacted legislation, and other factors. Under the absolute priority rule applicable in Chapter 11, AWI’s shareholder would not be entitled to any recovery until the allowed claims of all of its creditors have been satisfied. We do not know enough today to predict the likely terms of a reorganization plan that may be feasible under such circumstances, or if such reorganization would result in existing AHI shareholders receiving or retaining any equity value in AWI upon AWI’s emergence from Chapter 11.
Asbestos-Related Liability
Based upon events through early March 2003, specificallyAs of October 2, 2006, when the parties’ agreement on the basic terms of the POR’s treatment of AWI’s asbestos-related liabilities, management concluded that it could reasonably estimate its probable liability for AWI’s currentPOR became effective, all present and future asbestos-related personal injury claims. Accordingly, in the fourth quarter of 2002,claims against AWI, recorded a $2.5 billion charge to increase the balance sheet liability. The recorded asbestos-related liability for personal injuryincluding contribution claims of approximately $3.2 billion at December 31, 2005 and December 31, 2004, which was treated as subject to compromise, represents the estimated amountco-defendants, arising directly or indirectly out of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paidAWI’s pre-Filing use of or other activities involving asbestos are channeled to the Asbestos PI Trust pursuant toTrust. AWI does not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor will it participate in their resolution. Accordingly, AWI reflected the POR and an assumption forresolution of this purpose that the recovery value percentage for the allowed claimsliability, which totaled approximately $3.2 billion as of the Asbestos PI Trust is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims.
AWI is unable to predict whether the modified POR will be confirmed, or when AWI would emergeSeptember 30, 2006, as part of emerging from Chapter 11. Therefore,See Note 5 for additional information on the timing and termssettlement of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changesliabilities subject to the recorded asbestos-related liability are possible and could be material to AWI’s financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and with respect to any legislation, and will make changes to the recorded liability if and when it is appropriate.
compromise.
Insurance Recovery Proceedings
AAs of September 30, 2006 and December 31, 2005, a substantial portion of AWI’s primary and remaining excess insurance asset is nonproductswas non-products (general liability) insurance for personal injury claims. In the past, AWI hashad entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution (“ADR”) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproductsnon-products claims, to establish the entitlement to such coverage and to determine whether and how
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.
During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWI’s claims against certain Liberty Mutual policies were barred by the statute of limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that insurance assets of $73 million were no
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
longer probable of recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The $1.6 million claimed for these costs and fees is in dispute. Based upon an AWI request, the appellate panel held a rehearing on November 21, 2003. In January 2004, the appellate panel upheld its initial ruling. On February 4, 2004, AWI filed a motion in the U.S. District Court for the Eastern District of Pennsylvania to vacate the rulings of the appellate panel.
In July 2002, AWI filed a lawsuit against Liberty Mutual in the U.S. District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues not subject to binding ADR. In October 2006, Liberty Mutual filed counterclaims and a jury demand requesting declaratory judgment in its favor. The U.S. District Court has not yet set a schedule to hear this matter.
On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (“Home”) under an order of liquidation. Less than $10 million of AWI’s recorded insurance asset is based on policies with Home, which management believes is probable of recovery. AWI filed a proof of claim against Home during June 2004. It is uncertain when AWI will receive proceeds from Home under these insurance policies.
Insurance Asset
An insurance asset in respectThe issue of asbestos claims in the amount of $98.6 million was recorded as of December 31, 2005 and December 31, 2004. The total amount recorded reflects AWI’s belief that insurance proceeds will be recovered in this amount, based upon AWI’s success in insurance recoveries, settlement agreements that provide suchshared coverage the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance, in our opinion, is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) was resolved through a court-approved settlement among AWI, ACandS and the financial conditioninsurer, and AWI received net proceeds of $7 million during the third quarter of 2006. As part of the insurers,settlement, ACandS’s remaining limits for shared coverage was assigned to AWI.
On October 2, 2006, pursuant to the POR becoming effective, AWI may revise its estimatetransferred rights arising under liability insurance policies issued to AWI with respect to asbestos-related personal injury claims to the Asbestos PI Trust. As of probable insurance recoveries. Approximately $79 millionOctober 2, 2006, resolution of the $98.6ADR and other asbestos-related personal injury insurance matters is the responsibility of the Asbestos PI Trust and at its expense.
Insurance Asset
An insurance asset in respect of asbestos claims in the amount of $91.5 million asset is determined from agreed coverage in place. Of the $98.6 million, $9.8 million has beenwas recorded as a current assetof September 30, 2006 and $98.6 million as of December 31, 2005 reflecting management’s estimate2005. As part of accounting for emergence, AWI reflected the minimumtransfer of rights arising under liability insurance paymentspolicies issued to be received inAWI with respect to asbestos-related personal injury claims to the next 12 months.
Many uncertainties remain in theAsbestos PI Trust. Therefore, there is no recorded insurance recovery process; therefore, AWI did not increase the estimated insurance recovery asset in 2005.
respect of asbestos claims as of December 31, 2006. See Notes 1 and 3 for additional information.
Cash Flow Impact
As a result of the Chapter 11 Filing, AWI hasdid not mademake any payments for asbestos-related personal injury claims since the fourth quarter of 2000. Additionally,2000 through 2006. AWI did not receive anyreceived $4.5 million in asbestos-related insurance recoveries in 2004, had no recoveries during 2005, butand received $4.5$7 million during 2004. Duringin 2006 from the pendencycourt-approved settlement with ACandS and the insurer, described above.
As of October 2, 2006, upon the POR becoming effective, all present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWI’s pre-Filing use of or other activities involving asbestos, are channeled to the Asbestos PI Trust. Pursuant to the POR, the Asbestos PI Trust received its share of reorganized Armstrong’s new common shares, Available Cash, and net cash proceeds from the secured term loan borrowings. Pursuant to the POR, on October 2, 2006, AWI also transferred rights arising under liability insurance policies issued to AWI with respect to asbestos-related personal injury claims to the Asbestos PI Trust. Now that it has emerged from Chapter 11, Case,AWI does not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor does it participate in their resolution. Following its distribution of consideration, described above, to the Asbestos PI Trust, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond 10 years.flow impact from asbestos-related personal injury claims against AWI.
Conclusion
Many uncertainties continue to exist about the matters impacting AWI’s asbestos-related liability and insurance asset. These uncertainties include when and if a plan of reorganization will be confirmed by the Bankruptcy Court and the U.S. District Court, the impact of any potential legislation, and the financial condition of AWI’s insurance carriers.
Additionally, if a plan of reorganization is confirmed, AWI is unable to predict when it will be implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWI’s financial position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and with respect to any legislation, and will make changes to the recorded amounts if and when it is appropriate.
ENVIRONMENTAL MATTERS
Environmental Expenditures
Most of our manufacturing and certain of our research facilities are affected by various federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities.
As a result of continuous changes in regulatory requirements, we cannot predict with certainty future expenditures associated with compliance with environmental requirements. The United States Environmental Protection Agency (“EPA”) has promulgated a new regulation pursuant to the Clean Air Act that may impact our domestic manufacturing operations. That regulation, The National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers and Process Heaters Act, became effective in November, 2004, and requires compliance by September 13, 2007. While we are finalizing our review of this regulation, adoption of this regulation is not expected to have a material impact on our consolidated results of operations or financial condition.
Environmental Remediation
Summary
We are actively involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and similar state “Superfund” laws at 286 off-site locations. We have also been investigating and/or remediating environmental contamination allegedly resulting from past industrial activity at 4 domestic and 5 international current or former plant sites. In most cases, we are one of many potentially responsible parties (“PRPs”) which have potential liability for the required investigation and remediation of each site and which, insite. In some cases, we have agreed to jointly fund that required investigation and remediation. With regard toremediation, while at some sites, however, we dispute the liability, the proposed remedy or the proposed cost allocation among the PRPs. We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.
We have also been remediating environmental contamination resulting from past industrial activity at certain of our former plant sites. Estimates of our future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site and consider factors such as our activities in conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our 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 remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. Additionally,matters, and the impact of AWI’s emergence from Chapter 11 Case also may affectupon the ultimate amountvalidity of such contributions.
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
the claim.
Effects of Chapter 11
Certain ofUpon AWI’s emergence from Chapter 11 on October 2, 2006, AWI’s environmental liabilities are subject to discharge through its Chapter 11 Case while others are not. AWI’s payments and remediation work on such sites for which AWI is a PRP is under review in light of the Chapter 11 Filing. The bar date for claims from the EPA expired during the third quarter of 2003. AWI received an unliquidated proof of claim from the EPA. Those environmental obligations that AWI has with respect to property that it owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue meeting its on-going environmental compliance obligations at the properties that AWI owns or operates. AWI will also be required to address the effects of any contamination at those sites, even if the contamination predated Chapter 11 Filing. In addition, AWI may be obligated to remedy the off-site impact of activities that occurred on the properties it owns and operates.
Monetary claims with respect to properties that AWI does not own or operate (such as formerly owned sites, or landfills to which AWI’s waste was taken) may be discharged in AWI’s Chapter 11 Case. Accordingly, claimswere discharged. Claims brought by a federal or state agency alleging that AWI should reimburse the claimant for money that it spent cleaning up a site which AWI does not own or operate, would be subject to discharge, provided the claimant received proper notice of the bankruptcy and bar date. The same would be true for monetary claims by private parties, such as other PRPs with respect to sites with multiple PRPs. Under the POR, the Superfund sites at which AWI is alleged to be a PRP are being treated as unsecured liabilities subject to compromise. Other Superfund sites relate to entitiesPRPs, were discharged upon emergence. Now that are not part of AWI’sit has emerged from Chapter 11, Case and thereforeAWI does not have any responsibility for these claims.
Those environmental obligations that we have with respect to AWI’s subsidiaries, as well as those environmental claims AWI has with respect to property that it currently owns or operates, have not been discharged. Therefore, we will not be discharged.required to continue meeting our on-going environmental compliance obligations at those sites.
In addition to the right to sue for reimbursement of the money it spends, however, CERCLA also gives the federal government the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to those States. While we believe such rights do not surviveagainst AWI were also discharged upon AWI’s emergence from Chapter 11, there does not appear to be controlling judicial precedent in that these injunctive rights are dischargeable.regard. Thus, according to some cases, while a governmental agency’s right to require AWI to reimburse it for the costs of cleaning up a site may be dischargeable, the same government agency’s right to compel us to spend our money cleaning up the same site may not be dischargeabledischarged even though the financial impact to AWI would be the same in both instances.
Specific Events
Upon emergence, AWI has been working to resolve as many ofresolved its environmental liabilities at 43 sites through its Chapter 11 Case as possible. AWI has entered into aCase. The liabilities at 37 sites were resolved through the global environmental settlement (“Global Settlement”) with the Department of Justice (“DOJ”) and the EPA with respect to CERCLA liability at 37 sites. Pursuant toliability. The Global Settlement, which was approved by the proposed Settlement Agreement, the federal government would covenant not to sue AWI for either monetary or injunctive relief under CERCLA at 19Bankruptcy Court in October 2005, provided EPA an approved proof of these sites, in exchange for an allowed claim amount in the bankruptcyamount of $8.7 million, which included $7.8 million with respect to known claims concerning sites that AWI does not own or operate. Under the settlement, AWI also has contribution protection underPeterson Puritan site. At one CERCLA with respect to private party claims at the sites at which the government receives an allowed claim. Additionally, AWI has the benefit of discharge both at the 19 sites for which the government receives an allowed claim and at an additional 18 sites identified in the Settlement Agreement. At an additional site, however, AWI will continue to participate in the cleanup under a previously approved Consent Decree. The EPA Settlement Approval Order was enteredIn addition to the federal claims resolved by the Bankruptcy Court in October 2005. In accordanceGlobal Settlement, AWI’s emergence from Chapter 11 also resolved its environmental liabilities with this global settlement becoming effective, the EPA proof of claim has been amended to assert a claim in the amount of $8.7 million. This amount includes the $7.8 million that AWI and EPA agreed upon with respect to the Peterson Puritan site. In connection with the global settlement, AWI filed a motion with the Bankruptcy Court on January 11, 2006, objecting to claims asserted by certain PRPs and requesting the Court enter an order disallowing such claims. On February 21, 2006 the Court issued its order disallowing such claims.
State and/or private parties at 6 other sites.
AWI is subject to a unilateral order by the Oregon Department of Environmental Quality (“DEQ”) to conduct a remedial investigation and feasibility study and any necessary remedial design and action at its
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (“OC”) and Kaiser Gypsum Company, Inc. (“Kaiser”). AWI has entered into an agreement with Kaiser for the sharing of costs and responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement with the DEQ. PursuantDEQ, pursuant to the settlement,which, OC has made a lump sum payment to the DEQ in exchange for contribution protection (including protection against common law and statutory contribution claims by AWI against OC), and a covenant not to sue. AWI has reached an agreement with the DEQ as to how these funds will be made available to reimburse AWI and Kaiser for thea portion of their shared costs of investigation and remediation of the site. AWI has recorded an environmental liability with respect to the investigation and feasibility study at its St. Helen’s facility, but not for Scappoose Bay because AWI continues to dispute responsibility for contamination of Scappoose Bay.
A foreign subsidiary of AWI sold a manufacturing facility in 1990, which was prior to AWI’s acquisition of the subsidiary. Under the terms of the sales agreement, an environmental indemnification was provided to the buyer of the facility. During the third quarter of 2005, the facility owner discovered additional areas of soil contamination that require additional remediation. Accordingly, a $3.1 million charge was recorded within SG&A expense to increase our probable liability. As additional sampling efforts and meetings with local government authorities continue, further increases to our recorded liability are possible.
Summary of Financial Position
Liabilities of $27.3$6.3 million (which includes $0.4 million for discontinued operations) and $28.0$27.3 million at December 31, 20052006 and December 31, 2004,2005, respectively were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing $19.4 million of the December 31, 2005 and $18.6 million of the December 31, 2004 environmental liabilities arewere classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.
The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or litigation. The amount of the recorded asset for estimated recoveries was $2.2 million and $2.3 million at December 31, 20052006 and $2.4 million at December 31, 2004.
2005, respectively.
Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we believe that any sum we may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on our financial condition, or liquidity, although the recording of future costs may be material to earnings in such future period.
PATENT INFRINGEMENT CLAIMS
We are a defendant in two lawsuits claiming patent infringement related to some of our laminate flooring products. The plaintiffs have claimed unspecified monetary damages. We are being defended and indemnified by our supplier for costs and potential damages related to the litigation.
During the first quarter of 2006, a favorable settlement of a patent infringement case totaling $8.6 million was recorded within SG&A. This case, in which we were the plaintiff, related to a previously divested business. We received the proceeds in the second quarter of 2006.
BREACH OF CONTRACT CLAIM
Since 2003, we had been pursuing a breach of contract claim against a former laminate flooring supplier. An arbitration hearing was held in March 2005. In July 2005 the tribunal communicated that it intended to rule in Armstrong’s favor. A hearing to address an award amount had been scheduled in September
Armstrong Holdings, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions, except share data)
2005. Prior to this scheduled hearing, the parties reached a settlement in which the supplier agreed to pay $6.75 million to Armstrong to resolve all existing and potential claims between the parties. The Bankruptcy Court approved the settlement in October 2005. Accordingly, we recorded a net gain in the third quarter of 2005 of $6.4 million in our Resilient Flooring ($5.2 million) and Wood Flooring ($1.2 million) segments.
OTHER CLAIMS
Additionally, we are involved in various other claims and legal actions involving product liability, patent infringement, breach of contract, distributor termination, employment law issues (including one purported class action suit pending in California state court) and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not expect that any sum that may have to be paid in connection with these matters will have a materially adverse effect on our consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in which a matter is resolved.
NOTE 31.33. EARNINGS PER SHARE
In 2004 and 2003, the diluted loss per share is calculated using basic common shares outstanding since using diluted common shares would be anti-dilutive. The difference between the average number of basic and diluted common shares outstanding is due to contingently issuable shares. Earnings per share components may not add due to rounding.
NOTE 32. PREFERRED STOCK PURCHASE RIGHTS PLAN34. SUBSEQUENT EVENTS
AHI hasOn February 15, 2007, we announced that we have initiated a shareholder rights plan under a Rights Agreement dated asreview of March 14, 2000 and in connection therewith distributed one right for each share of its common stock outstanding. In general, the rights become exercisable at $300 per right for a fractional share of a new series of Class A preferred stock 10 days after a person or group, other than certain affiliates of AHI, either acquires beneficial ownership of shares representing 20% or more of the voting power of AHI or announces a tender or exchange offer that could result in such person or group beneficially owning shares representing 28% or more of the voting power of AHI. Currently, one right is attached to each share of common stock and trades automatically with the share of common stock. When exercisable, the rights may trade separately from the common stock. If thereafter any person or group becomes the beneficial owner of 28% or more of the voting power of AHI, or if AHI is the surviving company in a merger with a person or group that owns 20% or more of the voting power of AHI, then each owner of a right (other than such 20% shareholder) would be entitled to purchase shares of company common stock having a value equal to twice the exercise price of the right. Should AHI be acquired in a merger or other business combination, or sell 50% or more of its assets or earnings power, each right would entitle the holder to purchase, at the exercise price, common shares of the acquirer having a value of twice the exercise price of the right. The rights have no voting power nor do they entitle a holder to receive dividends. At AHI’s option, the rights are redeemable prior to becoming exercisable at five cents per right. Pursuant to action by the AHI Board of Directors on February 20, 2006, the rights are scheduled to expire on the earlier of March 21, 2008 or the date a plan of reorganization in AWI’s Chapter 11 Case becomes effective. Previously, the rights were scheduled to expire on March 21, 2006. The rights can be extended or shortened (by redemption) by the AHI Board of Directors.
Report of Independent Registered Public Accounting Firm
The Board of Directors,
Armstrong World Industries, Inc.:
our strategic alternatives. We have audited the accompanying consolidatedretained Lazard Freres & Co. LLC as our financial statements ofadvisor and Weil, Gotshal & Manges LLP as our legal advisor to assist in this process. The Armstrong World Industries, Inc. and subsidiaries (“the Company”) as listed in the accompanying index on page 48. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index on page 48. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. 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.
The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 of the consolidated financial statements, the Company and two of its domestic subsidiaries filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on December 6, 2000. The Company has also defaulted on certain debt obligations. Although the Company and these operating subsidiaries are currently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and confirmation by the Bankruptcy Court. The filing under Chapter 11 and the resulting increased uncertainty regarding the Company’s potential asbestos liabilities, as discussed in Note 30 of the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of these uncertainties.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 23, 2006
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
(amounts in millions)
| Years Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net sales | $ | 3,558.4 | $ | 3,497.3 | $ | 3,259.0 | ||||||
Cost of goods sold | 2,821.1 | 2,811.0 | 2,597.4 | |||||||||
Gross profit | 737.3 | 686.3 | 661.6 | |||||||||
Selling, general and administrative expenses | 654.3 | 633.4 | 612.1 | |||||||||
Charge for asbestos liability, net | — | — | 81.0 | |||||||||
Goodwill impairment | — | 108.4 | — | |||||||||
Restructuring charges, net | 23.2 | 18.3 | 8.6 | |||||||||
Equity (earnings) from joint venture | (39.3 | ) | (31.6 | ) | (20.8 | ) | ||||||
Operating income (loss) | 99.1 | (42.2 | ) | (19.3 | ) | |||||||
Interest expense (unrecorded contractual interest of $82.8, $86.9 and $95.1, respectively) | 8.4 | 8.4 | 9.0 | |||||||||
Other non-operating expense | 1.5 | 3.1 | 5.7 | |||||||||
Other non-operating (income) | (11.9 | ) | (6.4 | ) | (5.0 | ) | ||||||
Chapter 11 reorganization (income) costs, net | (1.2 | ) | 6.9 | 9.4 | ||||||||
Earnings (loss) from continuing operations before income taxes | 102.3 | (54.2 | ) | (38.4 | ) | |||||||
Income tax expense (benefit) | 1.6 | 25.1 | (1.6 | ) | ||||||||
Earnings (loss) from continuing operations | 100.7 | (79.3 | ) | (36.8 | ) | |||||||
Gain (loss) from discontinued operations, net of tax of $0.0, $0.2 and $0.1 | 10.4 | (0.4 | ) | (2.5 | ) | |||||||
Net earnings (loss) | $ | 111.1 | $ | (79.7 | ) | $ | (39.3 | ) | ||||
See accompanying notes to consolidated financial statements beginning on page 111.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions, except share data)
| December 31, 2005 | December 31, 2004 | |||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 602.2 | $ | 515.9 | ||||
Accounts and notes receivable, net | 328.8 | 336.1 | ||||||
Inventories, net | 514.5 | 535.1 | ||||||
Deferred income taxes | 15.4 | 15.6 | ||||||
Income tax receivable | 18.2 | 7.0 | ||||||
Other current assets | 82.2 | 72.5 | ||||||
Total current assets | 1,561.3 | 1,482.2 | ||||||
Property, plant and equipment, less accumulated depreciation and amortization of $1,562.0 and $1,540.7, respectively | 1,145.3 | 1,208.8 | ||||||
Insurance receivable for asbestos-related liabilities, noncurrent | 88.8 | 88.8 | ||||||
Prepaid pension costs | 476.9 | 480.9 | ||||||
Investment in affiliates | 67.4 | 72.5 | ||||||
Goodwill | 134.2 | 136.0 | ||||||
Other intangibles, net | 68.1 | 76.0 | ||||||
Deferred income taxes, noncurrent | 967.4 | 941.6 | ||||||
Other noncurrent assets | 96.6 | 122.6 | ||||||
Total assets | $ | 4,606.0 | $ | 4,609.4 | ||||
| Liabilities and Shareholder’s Equity | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 14.6 | $ | 11.1 | ||||
Current installments of long-term debt | 5.4 | 8.2 | ||||||
Accounts payable and accrued expenses | 392.5 | 447.4 | ||||||
Short term amounts due to affiliates | 10.0 | 13.3 | ||||||
Income tax payable | 10.0 | 15.3 | ||||||
Deferred income taxes | 0.8 | 1.1 | ||||||
Total current liabilities | 433.3 | 496.4 | ||||||
Liabilities subject to compromise | 4,869.4 | 4,870.9 | ||||||
Long-term debt, less current installments | 21.5 | 29.2 | ||||||
Postretirement and postemployment benefit liabilities | 258.9 | 262.6 | ||||||
Pension benefit liabilities | 223.7 | 258.9 | ||||||
Other long-term liabilities | 90.0 | 87.6 | ||||||
Deferred income taxes, noncurrent | 21.2 | 19.8 | ||||||
Minority interest in subsidiaries | 7.9 | 9.3 | ||||||
Total noncurrent liabilities | 5,492.6 | 5,538.3 | ||||||
Shareholder’s equity (deficit): | ||||||||
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 | 172.6 | 172.6 | ||||||
Reduction for ESOP loan guarantee | (142.2 | ) | (142.2 | ) | ||||
Accumulated deficit | (910.8 | ) | (1,021.9 | ) | ||||
Accumulated other comprehensive income | 37.1 | 42.8 | ||||||
Less common stock in treasury, at cost 2005 and 2004 – 11,393,170 shares | (528.5 | ) | (528.5 | ) | ||||
Total shareholder’s (deficit) | (1,319.9 | ) | (1,425.3 | ) | ||||
Total liabilities and shareholder’s equity | $ | 4,606.0 | $ | 4,609.4 | ||||
See accompanying notes to consolidated financial statements beginning on page 111.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholder’s Equity
(amounts in millions, except per share amounts)
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
Common stock, $1 par value: | ||||||||||||||||||||||||
Balance at beginning and end of year | $ | 51.9 | $ | 51.9 | $ | 51.9 | ||||||||||||||||||
Capital in excess of par value: | ||||||||||||||||||||||||
Balance at beginning of year | $ | 172.6 | $ | 172.7 | $ | 172.9 | ||||||||||||||||||
Stock issuances and other | — | (0.1 | ) | (0.2 | ) | |||||||||||||||||||
Balance at end of year | $ | 172.6 | $ | 172.6 | $ | 172.7 | ||||||||||||||||||
Reduction for ESOP loan guarantee: | ||||||||||||||||||||||||
Balance at beginning and end of year | $ | (142.2 | ) | $ | (142.2 | ) | $ | (142.2 | ) | |||||||||||||||
Retained earnings (accumulated deficit): | ||||||||||||||||||||||||
Balance at beginning of year | $ | (1,021.9 | ) | $ | (942.2 | ) | $ | (902.9 | ) | |||||||||||||||
Net earnings (loss) for year | 111.1 | $ | 111.1 | (79.7 | ) | $ | (79.7 | ) | (39.3 | ) | $ | (39.3 | ) | |||||||||||
Balance at end of year | $ | (910.8 | ) | $ | (1,021.9 | ) | $ | (942.2 | ) | |||||||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||||||||||||||
Balance at beginning of year | $ | 42.8 | $ | 43.3 | $ | (12.2 | ) | |||||||||||||||||
Foreign currency translation adjustments | (14.1 | ) | 22.4 | 56.8 | ||||||||||||||||||||
Derivative gain (loss), net | 1.2 | 0.3 | (0.3 | ) | ||||||||||||||||||||
Minimum pension liability adjustments | 7.2 | (23.2 | ) | (1.0 | ) | |||||||||||||||||||
Total other comprehensive income (loss) | (5.7 | ) | (5.7 | ) | (0.5 | ) | (0.5 | ) | 55.5 | 55.5 | ||||||||||||||
Balance at end of year | $ | 37.1 | $ | 42.8 | $ | 43.3 | ||||||||||||||||||
Comprehensive income (loss) | $ | 105.4 | $ | (80.2 | ) | $ | 16.2 | |||||||||||||||||
Less treasury stock at cost: | ||||||||||||||||||||||||
Balance at beginning and end of year | $ | (528.5 | ) | $ | (528.5 | ) | $ | (528.5 | ) | |||||||||||||||
Total shareholder’s (deficit) | $ | (1,319.9 | ) | $ | (1,425.3 | ) | $ | (1,345.0 | ) | |||||||||||||||
See accompanying notes to consolidated financial statements beginning on page 111.
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net earnings (loss) | $ | 111.1 | $ | (79.7 | ) | $ | (39.3 | ) | ||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 141.0 | 151.0 | 163.1 | |||||||||
Goodwill impairment | — | 108.4 | — | |||||||||
Fixed asset impairments | 17.6 | 64.7 | 10.5 | |||||||||
Deferred income taxes | (24.6 | ) | (21.9 | ) | (51.5 | ) | ||||||
Gain on sale of notes | (10.4 | ) | — | — | ||||||||
Equity (earnings) from affiliates, net | (39.0 | ) | (33.5 | ) | (20.7 | ) | ||||||
Gain on sale of investment in affiliates | (3.4 | ) | — | — | ||||||||
Chapter 11 reorganization (income) costs, net | (1.2 | ) | 6.9 | 9.4 | ||||||||
Chapter 11 reorganization costs payments | (12.7 | ) | (15.9 | ) | (25.8 | ) | ||||||
Restructuring charges, net of reversals | 23.2 | 18.3 | 8.6 | |||||||||
Restructuring payments | (24.0 | ) | (4.1 | ) | (8.7 | ) | ||||||
Asbestos-related insurance recoveries | — | 4.5 | 31.0 | |||||||||
Payments for asbestos-related claims | — | — | (9.0 | ) | ||||||||
Charge for asbestos liability, net | — | — | 81.0 | |||||||||
Cash effect of hedging activities | 21.9 | 1.1 | (27.0 | ) | ||||||||
Increase (decrease) in cash from change in: | ||||||||||||
Receivables | (8.7 | ) | (9.5 | ) | 40.6 | |||||||
Inventories | 1.5 | (61.7 | ) | 6.6 | ||||||||
Other current assets | (3.7 | ) | 11.8 | (4.6 | ) | |||||||
Other noncurrent assets | (16.8 | ) | (34.8 | ) | (18.6 | ) | ||||||
Accounts payable and accrued expenses | 8.5 | 61.1 | (15.6 | ) | ||||||||
Income taxes payable | (16.7 | ) | (31.4 | ) | 21.9 | |||||||
Other long-term liabilities | (20.1 | ) | 3.5 | 4.0 | ||||||||
Other, net | 3.2 | 4.0 | 9.9 | |||||||||
Net cash provided by operating activities | 146.7 | 142.8 | 165.8 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property, plant and equipment and computer software | (135.5 | ) | (134.0 | ) | (78.1 | ) | ||||||
Proceeds from sale of notes | 38.3 | |||||||||||
Distributions from equity affiliates | 23.0 | 10.0 | 16.0 | |||||||||
Proceeds from sale of investment in affiliates | 20.6 | |||||||||||
Proceeds from the sale of assets | 5.1 | 12.3 | 4.9 | |||||||||
Net cash (used for) investing activities | (48.5 | ) | (111.7 | ) | (57.2 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Increase/(decrease) in short-term debt, net | 5.1 | 4.0 | (5.3 | ) | ||||||||
Payments of long-term debt | (7.6 | ) | (9.8 | ) | (8.2 | ) | ||||||
Other, net | (1.4 | ) | (1.2 | ) | (0.6 | ) | ||||||
Net cash (used for) financing activities | (3.9 | ) | (7.0 | ) | (14.1 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (8.0 | ) | 7.5 | 9.8 | ||||||||
Net increase in cash and cash equivalents | $ | 86.3 | $ | 31.6 | $ | 104.3 | ||||||
Cash and cash equivalents at beginning of year | $ | 515.9 | $ | 484.3 | $ | 380.0 | ||||||
Cash and cash equivalents at end of year | $ | 602.2 | $ | 515.9 | $ | 484.3 | ||||||
See accompanying notes to consolidated financial statements beginning on page 111.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891. Armstrong Holdings, Inc. is a Pennsylvania corporation and the publicly held parent holding company of AWI. Armstrong Holdings, Inc.’s only significant asset and operation is its indirect ownership, through Armstrong Worldwide, Inc. (a Delaware Corporation), of all of the capital stock of AWI. We include separate financial statements for Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries in this report because both companies have public securities that are registered under the Securities Exchange Act of 1934 (the “Securities Exchange Act”). The differences between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries are primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. In 2005, we reversed a $1.6 million contingent liability of Armstrong Holdings, Inc. that was originally accrued when Armstrong Holdings, Inc. was formed, because the liability is no longer probable. Due to the lack of material differences in the operations, when we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as “AHI,” “Armstrong,” “we” and “us,” we are also effectively referring to AWI and its subsidiaries. We use the term “AWI” when we are referring solely to Armstrong World Industries, Inc.
(Note: Particular documents referred to in this section are available at www.armstrongplan.com)
Proceedings under Chapter 11
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief (the “Filing”) under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability. Also filing under Chapter 11 were two of AWI’s wholly-owned subsidiaries, Nitram Liquidators, Inc. (“Nitram”) and Desseaux Corporation of North America, Inc. (“Desseaux”). The Chapter 11 cases are being jointly administered under case number 00-4471 (the “Chapter 11 Case”). Shortly after its commencement, the Chapter 11 Case was assigned to Judge Randall J. Newsome. His appointment as a visiting judge in the District of Delaware ended on December 31, 2003. On January 6, 2004, the Chapter 11 Case was reassigned to Judge Judith K. Fitzgerald.
AHI and all of AWI’s other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (AWI’s ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada, and Armstrong DLW AG, were not a part of the Filing and accordingly, except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI, the liabilities, including asbestos-related liability if any, of such companies will not be resolved in AWI’s Chapter 11 Case. See below under “The Asbestos Personal Injury Trust”Settlement Trust, the holder of approximately 66% of AWI’s outstanding common shares, has retained Merrill Lynch as its financial advisor and Note 30 under “Asbestos-Related Litigation”.
AWI is operatingKeating Muething & Klekamp PLL and Kaplan, Strangis and Kaplan, P.A. as its business and managing its propertieslegal advisors. There can be no assurance as a debtor-in-possession subject to the provisionslikelihood, terms or timing of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Bankruptcy Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Bankruptcy Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Bankruptcy Court’s approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Some of these have been specifically assumed and others have been specifically rejected already in the course of the Chapter 11 Case. In the plan of reorganization which it has proposed, as described below, AWI has indicated the other executory contracts and unexpired leases that it intends to assume or reject upon consummation of the plan; any not specifically assumed under the plan will be rejected upon consummation of the plan. Parties having claims as a result of the rejection of a contract may file claims with the Bankruptcy Court, which will be dealt with as part of the Chapter 11 Case.transaction.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Three creditors’ committees, one representing asbestos personal injury claimants (the “Asbestos Personal Injury Claimants’ Committee”), one representing asbestos property damage claimants (the “Asbestos Property Damage Committee”), and the other representing other unsecured creditors (the “Unsecured Creditors’ Committee”), were appointed in the Chapter 11 Case. In addition,On March 27, 2007, we entered into an individual was appointedagreement to represent the interests of future asbestos personal injury claimants (the “Future Claimants’ Representative”). In accordance with the provisions of the Bankruptcy Code, these parties have the right to be heard on matters that come before the Bankruptcy Court in the Chapter 11 Case. Upon resolution of all asbestos property damage claims, the Asbestos Property Damage Committee was disbanded.
Plan of Reorganization and Disclosure Statement
On November 4, 2002, AWI filed a Plan of Reorganization with the Bankruptcy Court. Subsequently, AWI filed several amendments to the plan, along with various exhibits. The Fourth Amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 and, as so amended and as modified by modifications filed with the Bankruptcy Court on October 17, 2003, November 10, 2003 and December 3, 2004, is referred to in this report as the “POR”. The POR provides for AWI to continue to conduct its existing lines of business with a reorganized capital structure under which, among other things, its existing shares of stock will be cancelled and new common shares and notes will be issued to its unsecured creditors and to a trust, as further discussed below, to be established under the POR for the benefit of AWI’s current and future asbestos-related personal injury claimants, in full satisfaction of their claims against AWI. References in this report to “reorganized Armstrong” are to AWI as it would be reorganized under the POR,sell Tapijtfabriek H. Desseaux N.V. and its subsidiaries collectively. The POR excludes AWI’s Nitram and Desseaux subsidiaries, neitherfor approximately $53.2 million, plus finalization of which is material to Armstrong andcertain post completion adjustments. These businesses, which are pursuing separate resolutions of their Chapter 11 cases that are expected to result in the winding up of their affairs.
In connection with the vote of creditors on the POR, AWI was required to prepare a disclosure statement concerning its business and the POR, including certain projected financial information assuming an Effective Date of the POR as July 1, 2003, intended to demonstrate to the Bankruptcy Court the feasibility of the POR and AWI’s ability to continue operations upon its emergence from Chapter 11. On May 30, 2003, the Bankruptcy Court approved the disclosure statement for distribution to parties in interest in the Chapter 11 Case. The projected financial information included in the disclosure statement was updated in certain respects by information submitted to the Bankruptcy Court in connection with the Bankruptcy Court’s November 2003 hearing on confirmation of the POR. The projected financial information was prepared for the limited purposes of consideration by the Bankruptcy Court, creditors and other parties in interest in the Chapter 11 Case of matters pertinent to the case. As indicated in the disclosure statement, the projected financial information and various estimates of value therein provided should not be regarded as representations or warranties by AWI, AHI or any other person. There is no assurance that any such projection or valuation will be realized. The projected financial information and estimates of value were prepared by AWI and its financial advisors and have not been audited or reviewed by independent accountants. The projections will not be updated on an ongoing basis. At the time they were prepared in 2003, the projections reflected numerous assumptions concerning reorganized Armstrong’s anticipated future performance and with respect to prevailing and anticipated market and economic conditions, which were and remain beyond our control and which may not materialize. Projections are inherently subject to significant and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections may be wrong in a material respect. Actual results may vary significantly from those contemplated by the projections.
During 2003, the POR was submitted for a vote by AWI’s creditors for its approval. It was approved by each creditor class that was entitled to vote on the POR except the class of unsecured creditors. On November 17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the Plan and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors’ Committee filed an objection to the Bankruptcy Court’s proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
In order for a plan of reorganization to be confirmed, the U.S. District Court must also issue findings of fact and conclusions of law in support of confirmation of the plan of reorganization, enter or affirm an order confirming the plan of reorganization and issue the “524(g) injunction” (see “Asbestos Personal Injury Trust” below) if it is part of the plan of reorganization. Following procedural delays concerning the status of the prior U.S. District Court judge on AWI’s Chapter 11 Case, the AWI case was assigned to U.S. District Court Judge Eduardo C. Robreno in June 2004. A hearing was held before Judge Robreno on December 15, 2004 to consider the objections to confirmation of the POR. On February 23, 2005, Judge Robreno ruled that the POR could not be confirmed. In the court’s decision, the Judge found that, because the class of unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule.
AWI filed a Notice of Appeal to the United States Court of Appeals for the Third Circuit on March 4, 2005.
Recent Developments and Next Steps in the Chapter 11 Process
On December 29, 2005, the U.S. Court of Appeals affirmed the District Court’s decision to deny confirmation of the POR.
At a status conference before Judge Robreno on February 3, 2006, AWI and the court-authorized representatives of AWI’s creditors and claimants advised the Court that they had agreed on a proposed schedule for a confirmation hearing on a modified POR which would eliminate the provisions regarding distribution of warrants to existing AHI equity holders. Under the modified POR, existing AHI equity holders would receive no distribution and their equity interests would be cancelled. Following the conference, Judge Robreno signed an order that established such a schedule for a U.S. District Court confirmation hearing on the modified POR. The schedule calls for the confirmation hearing to commence on May 23, 2006. At that hearing, the Court will hear testimony and review other evidence relating to the Unsecured Creditors Committee’s objection that the modified POR unfairly discriminates against the unsecured creditors, based on the size of the present and future asbestos liability implied by the modified POR. AWI filed the modified POR with the Court on February 21, 2006. AWI is also monitoring a proposed asbestos claims litigation reform bill in Congress (see the discussion under “Potential Legislation” in Note 30). AWI is unable to predict whether the modified POR will be confirmed or when AWI would emerge from Chapter 11.
A description of the basic components of the POR, which remain unchanged in the modified POR, follows.
Asbestos Personal Injury Trust
A principal feature of the POR is the creation of a trust (the “Asbestos PI Trust”), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWI’s personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWI’s pre-Filing use of or other activities involving asbestos will be channeled to the Asbestos PI Trust.
In accordance with the “524(g) injunction” to be issued if the POR goes into effect various entities would be protected from such present and future AWI asbestos-related personal injury claims. These entities include, among others, reorganized AWI, AHI, AWI’s subsidiaries and other affiliates (as defined in the POR), and their respective officers and directors. Upon emergence from Chapter 11, AWI would not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor would it participate in their resolution.
However, although AWI’s domestic and foreign subsidiaries and other affiliates would be protected parties, asbestos-related personal injury claims against them would be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the pre-Filing manufacturing, installation, distribution or other activities of AWI, or AWI’s ownership of the subsidiaries or affiliates (as distinguished
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
from independent activities of the subsidiaries or affiliates). See Note 30 under “Asbestos-Related Litigation.”
In addition, workers’ compensation claims brought against AWI or its subsidiaries or other affiliates would not be channeled to the Asbestos PI Trust and would remain subject to the workers’ compensation process. Workers’ compensation law provides that the employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Historically, workers’ compensation claims against AWI or its subsidiaries have not been significant in number or amount, and AWI has continued to honor its obligations with respect to such claims during the Chapter 11 Case. Currently, AWI has three pending workers’ compensation claims, and its UK subsidiary has seven employer liability claims involving alleged asbestos exposure.
There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.
Management believes neither AWI nor its subsidiaries or other affiliates is subject to asbestos-related personal injury claims, that would not be channeled to the Asbestos PI Trust under the POR, which would be material in amount to reorganized Armstrong.
Consideration to Be Distributed under the POR
The Asbestos PI Trust and the holders of allowed unsecured claims would share in the following consideration to be distributed under the POR:
However, proceeds received under any private offering of debt securities and/or secured term loan borrowings made, as permitted by the POR, in connection with consummation of the POR, and certain other amounts authorized or directed by the Court, would be excluded from the determination of Available Cash.
The total amount of Plan Notes would be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI would use reasonable efforts to issue one or more private offerings of debt securities on, or as soon as practicable after, the Effective Date. These offerings are expected to yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private offerings are successful, the Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, Plan Notes equal to the difference will be issued. If only the Plan Notes are issued, reorganized Armstrong expects to issue an aggregate amount of $775 million of Plan Notes. These Plan Notes would consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity and a fixed interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of the POR and are on terms and conditions that are satisfactory to AWI, the Asbestos Personal Injury Claimants’ Committee, and the Future Claimants’ Representative. To the extent Plan Notes of more than one type are issued, a pro rata share of each tranche would be issued to the Asbestos PI Trust and the holders of unsecured claims.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The POR provides that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:
The remaining amount of new common stock of reorganized Armstrong, Available Cash and Plan Notes or net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes would be distributed to the Asbestos PI Trust.
Under the POR, unsecured creditors whose claims (other than claims on debt securities) are less than $10 thousand or who elect to reduce their claims to $10 thousand would be treated as “convenience creditors” and would receive payment of 75% of their allowed claim amount in cash (which payments would reduce the amount of Available Cash).
Under the POR, the existing equity interests in AWI (including all of its outstanding shares of common stock) would be cancelled and the holders of such interests will receive no distribution of any consideration. As discussed above, the POR was modified on February 21, 2006 to delete the provisions for the distribution of warrants to existing equity holders.
Valuation of Consideration to be Distributed under the POR
Based upon many assumptions (see Disclosure Statement discussion above), to calculate the value of consideration to be distributed, AWI used $2.7 billion as the value of reorganized Armstrong. This is the mid-point of the range of estimated values of $2.4 billion and $3.0 billion that was estimated by AWI and its financial advisors during the third quarter of 2003. AWI’s estimated value of the consideration to be distributed under the POR to the Asbestos PI Trust and holders of allowed unsecured claims is:
The total value of the consideration to be distributed to the Asbestos PI Trust, other than rights under asbestos non-product liability insurance policies, has been estimated to be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) has been estimated to be approximately $0.9 billion. Based upon the estimated value of the POR consideration, and upon AWI’s estimate that unsecured claims allowed by the Bankruptcy Court (other than convenience claims) would total approximately $1.65 billion, AWI estimated that holders of allowed unsecured claims (other than convenience claims) would receive a recovery having a value equal to approximately 59.5% of their allowed claims.
AHI Dissolution
Upon implementation of the POR, all current stock of AWI would be cancelled and AHI would no longer have any ownership interest in reorganized AWI. Since the POR as modified on February 21, 2006 no
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
longer provides for warrants of reorganized AWI to go to AHI, it is expected that AHI will then have no material assets to be distributed to AHI shareholders, and will dissolve. The POR provides that AWI would pay the costs incurred in connection with administering AHI’s dissolution.
Common Stock and Debt Securities
As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol “ACK”) and two debt securities of AWI (traded under the ticker symbols “AKK” and “ACK 08”). AHI’s common stock resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol “ACKHQ” and one of AWI’s debt securities resumed trading under the ticker symbol “AKKWQ”.
Bar Date for Filing Claims
The Bankruptcy Court established August 31, 2001 as the bar date for all claims against AWI except for asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) was rendered unnecessary under the terms of the POR, which defers the filings of such claims until the Asbestos PI Trust is established to administer such claims.
Approximately 4,900 proofs of claim (including late-filed claims) totaling approximately $6.4 billion, alleging a right to payment from AWI, were filed with the Bankruptcy Court in response to the August 31, 2001 bar date. The disposition of these claims under the POR is discussed below. AWI continues the process of investigating and resolving these claims. The Bankruptcy Court will ultimately determine the claims and related liability amounts that will be allowed as part of the Chapter 11 process if the parties cannot agree.
In its ongoing review of the filed claims, AWI to date has objected to approximately 2,200 claims totaling $2.7 billion. The Bankruptcy Court disallowed these claims with prejudice.
During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9 million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance.
Approximately 1,100 proofs of claim totaling approximately $1.3 billion are pending with the Bankruptcy Court that are associated with asbestos-related personal injury litigation, including direct personal injury claims, claims by co-defendants for contribution and indemnification, and claims relating to AWI’s participation in the Center for Claims Resolution. As stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be addressed in the future pursuant to the procedures relating to the Asbestos PI Trust developed in connection with the POR. See further discussion regarding AWI’s liability for asbestos-related matters in Note 30.
Approximately 1,100 claims totaling approximately $1.6 billion alleging a right to payment for financing, environmental, trade debt and other claims remain. For these categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities.
AWI has recorded liability amounts for claims that can be reasonably estimated and which it does not contest or believes are probable of being allowed by the Bankruptcy Court. The final value of all the claims that will ultimately be allowed by the Bankruptcy Court is not known at this time. However, it is likely the value of the claims ultimately allowed by the Bankruptcy Court will be different than amounts presently recorded by AWI. This difference could be material to AWI’s financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Financing
AWI has a $75.0 million debtor-in-possession (“DIP”) credit facility that is limited to issuances of letters of credit. This facility is scheduled to mature on December 8, 2006. As of December 31, 2005, AWI had approximately $43.3 million in letters of credit, which were issued pursuant to the DIP Facility. As of December 31, 2005, AWI had $309.7 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations and dividends from its subsidiaries, together with subsidiary lines of credit and the DIP Facility, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.
Accounting Impact
AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is implemented in the accompanying consolidated financial statements.
Pursuant to SOP 90-7, AWI is required to segregate pre-Filing liabilities that are subject to compromise and report them separately on the balance sheet. See Note 4 for detail of the liabilities subject to compromise at December 31, 2005 and December 31,2004. Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWI’s pre-Filing debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of AWI subsidiaries not covered by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWI’s estimated liability for asbestos-related personal injury claims is also recorded in liabilities subject to compromise. See Note 30 for further discussion of AWI’s asbestos liability.
Additional pre-Filing claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for losses related to the Filing as Chapter 11 reorganization (income) costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during 2005, 2004 and 2003:
| 2005 | 2004 | 2003 | ||||||||||
Professional fees | $ | 10.4 | $ | 11.5 | $ | 25.2 | ||||||
Interest income, post-Filing | (11.8 | ) | (4.8 | ) | (3.4 | ) | ||||||
Adjustments to pre-Filing liabilities | 0.1 | — | (12.9 | ) | ||||||||
Other expense directly related to bankruptcy, net | 0.1 | 0.2 | 0.5 | |||||||||
Total Chapter 11 reorganization (income) costs, net | $ | (1.2 | ) | $ | 6.9 | $ | 9.4 | |||||
Professional fees represent legal and financial advisory fees and expenses directly related to the Filing.
Interest income is earned from short-term investments subsequent to the Filing.
As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
If and when the POR is confirmed and made effective, reorganized AWI’s condensed consolidated financial statements will change materially in amounts and classifications through the implementation of the fresh start accounting rules of SOP 90-7.
Conclusion
AWI is unable to predict whether the modified POR will be confirmed or when AWI would emerge from Chapter 11. Therefore, the timing and terms of a resolution of the Chapter 11 Case remain uncertain.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy. The consolidated financial statements and accompanying data in this report include the accounts of AWI and its majority-owned subsidiaries. The results of less than majority owned subsidiaries are accounted for under the equity method. All significant intercompany transactions have been eliminated from the consolidated financial statements.
Use of Estimates. These financial statements are prepared in accordance with U.S. generally accepted accounting principles and include management estimates and judgments, where appropriate. Management utilizes estimates to record many items including asbestos-related liabilities and insurance assets, allowances for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers compensation, general liability and environmental claims. When preparing an estimate, management determines the amount based upon the consideration of relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.
Reclassifications. Certain amounts in the prior years’ consolidated financial statements and notes thereto have been reclassified to conform to the 2005 presentation.
Revenue Recognition: We recognize revenue from the sale of products when persuasive evidence of an arrangement exists, title and risk of loss transfers to the customers, prices are fixed and determinable, and it is reasonably assured the related accounts receivable is collectable. Our sales terms primarily are FOB shipping point. We have some sales terms that are FOB destination. Our products are sold with normal and customary return provisions. Sales discounts are deducted immediately from the sales invoice. Provisions, which are recorded as a reduction of revenue, are made for the estimated cost of rebates and promotional programs. We defer recognizing revenue if special sales agreements, established at the time of sale, warrant this treatment.
Sales Incentives. Sales incentives are reflected as a reduction of net sales for all periods presented.
Shipping and Handling Costs. Shipping and handling costs are reflected in cost of goods sold for all periods presented.
Advertising Costs. We recognize advertising expenses as they are incurred.
Pension and Postretirement Benefits. We have benefit plans that provide for pension, medical and life insurance benefits to certain eligible employees when they retire from active service. Generally, for plans that maintain plan assets, our practice is to fund the actuarially determined current service costs and the amounts necessary to amortize prior service obligations for the pension benefits over periods ranging up to 30 years, but not in excess of the funding limitations.
Taxes. The provision for income taxes has been determined using the asset and liability approach of accounting for income 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 provision for income taxes represents income taxes paid or payable for the current year plus the change
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
in deferred taxes during the year. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and short-term investments that have maturities of three months or less when purchased.
Concentration of Credit. We principally sell products to customers in the building products industries, in various geographic regions. Net sales to specific customers in excess of 10% of our consolidated net sales for 2005, 2004 and 2003 were:
Customer | 2005 | 2004 | 2003 | ||||||||
The Home Depot, Inc. | $ | 384.1 | $ | 393.4 | $ | 400.0 | |||||
Lowe’s Companies, Inc. | (1 | ) | (1 | ) | 318.7 | ||||||
Net sales to these customers were recordedcompanies in our Resilient Flooring, Wood Flooring and Building Products segments. No other customers accounted for 10% or more of our total consolidated net sales.
There are no significant concentrations of credit risk other than with these two home center customers who represented approximately 24% of our trade receivables as of December 31, 2005 and 2004. We monitor the creditworthiness of our customers and generally do not require collateral.
Receivables. We sell the vast majority of our products to select, pre-approved customers using customary trade terms that allow for payment in the future. Customer trade receivables, customer notes receivable and miscellaneous receivables (which include supply related rebates and claims to be received, unpaid insurance claims from litigation and other), net of allowances for doubtful accounts, are reported in accounts and notes receivable, net. Notes receivable from divesting certain businesses are included in other current assets and other non-current assets based upon the payment terms. Insurance receivables for asbestos-related liabilities are primarily non-current, with the current portion reported in other current assets.
We establish credit worthiness prior to extending credit. We estimate the recoverability of current and non-current receivables each period. This estimate is based upon triggering events and new information in the period, which can include the review of any available financial statements and forecasts, as well as discussions with legal counsel and the management of the debtor company. As events occur which impact the uncollectibility of the receivable, all or a portion of the receivable is written off. Account balances are charged off against the allowance when the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories. Inventories are valued at the lower of cost or market. Inventories also include certain resilient flooring samples used in ongoing sales and marketing activities. Cash flows from the sale of inventory and the related cash receipts are classified as operating cash flows on the consolidated statements of cash flows.
Property and Depreciation. Property, plant and equipment values are stated at acquisition cost less accumulated depreciation and amortization. Depreciation charges for financial reporting purposes are determined on a straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives. Machinery and equipment includes manufacturing equipment (depreciated over 3 to 20 years), computer equipment (3 to 5 years) and office furniture and equipment (5 to 10 years). Within manufacturing equipment, assets that are subject to quick obsolescence or wear out quickly, such as tooling and engraving equipment, are depreciated over shorter periods (3 to 7 years). Heavy production equipment, such as conveyors and production presses, are depreciated over longer periods (15 to 20 years). Buildings are depreciated over 20 to 40 years, depending on factors such as type of construction and use.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Impairment losses are recorded when indicators of impairment are present, such as operating losses and/or negative cash flows. Impairments of assets related to our manufacturing operations are recorded in cost of goods sold. For purposes of calculating any impairment, we estimate the fair value and compare it to the carrying value of the asset. If the fair value is less than the carrying value of the asset, we record an impairment equal to the difference between the fair value and carrying value of the asset. When assets are disposed of or retired, their costs and related depreciation are removed from the financial statements and any resulting gains or losses normally are reflected in SG&A expenses.
Costs of the construction of certain property include capitalized interest which is amortized over the estimated useful life of the related asset. There was no capitalized interest recorded in 2005, 2004 and 2003 due to the Chapter 11 Filing.
Plant and equipment held under capital leases are stated at the present value of the minimum lease payments. Plant and equipment held under capital leases and leasehold improvements are amortized straight line over the life of the lease plus any specific option periods.
Goodwill and Other Intangibles. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually in the fourth quarter. Intangible assets with determinable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or circumstances indicate that its carrying amount may not be recoverable. See Note 10 for disclosure on goodwill and other intangibles.
Contingent Liabilities. In the context of the Chapter 11 Case, contingent pre-petition liabilities, including claims that became known after the Filing, are recorded on the basis of the expected amount of the allowed claim in accordance with SOP 90-7, even if they may be settled for lesser amounts.
Foreign Currency Transactions. Assets and liabilities of our subsidiaries operating outside the United States, which account in a functional currency other than US dollars, are translated using the year end exchange rate. Revenues and expenses are translated at exchange rates effective during each month. Foreign currency translation gains or losses are included as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Gains or losses on foreign currency transactions are recognized through the statement of earnings.
Financial Instruments and Derivatives. From time to time, we use derivatives and other financial instruments to diversify or offset the effect of currency, interest rate and commodity price variability. See Note 18 for further discussion.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Stock-based Employee Compensation. At December 31, 2005, we had three stock-based employee compensation plans, which are described more fully in Note 23. No equity compensation has been granted since AWI filed for Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing. However, some previously granted restricted stock and options vested after that date. All outstanding options are vested as of December 31, 2005. We account for these plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The following table illustrates the effect on net income if we had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-based Compensation,” (“FAS 123”) to stock-based employee compensation.
| 2005 | 2004 | 2003 | |||||||||
Net earnings (loss), as reported | $ | 111.1 | $ | (79.7 | ) | $ | (39.3 | ) | |||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | — | — | 0.1 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | — | — | (0.2 | ) | |||||||
Pro forma net earnings (loss) | $ | 111.1 | $ | (79.7 | ) | $ | (39.4 | ) | |||
Recently Adopted Accounting Standards
In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, “Inventory Costs”. The new Statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We elected to adopt this standard as of January 1, 2005, as permitted. Adoption of this standard did not have a material impact on our consolidated results of operations or financial condition.
In December 2004, the FASB issued FASB Staff Position (“FSP”) FAS No. 109-1 “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. This FSP, which became effective upon issuance, provides that the tax deduction for income with respect to qualified domestic production activities, as part of the American Jobs Creation Act of 2004 that was enacted on October 22, 2004, be treated as a special deduction as described in FAS No. 109. As a result, this deduction has no effect on our deferred tax assets and liabilities existing at the date of enactment. Instead, the impact of this deduction, which is effective January 1, 2005, will be reported in the period in which the deduction is claimed on our income tax returns.
In December 2004, the FASB issued FSP FAS No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”. This FSP, which became effective upon issuance, allows an enterprise additional time beyond the financial reporting period of enactment of the American Jobs Creation Act of 2004 to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109. See Note 14, Income Taxes, for more information on the impact of adopting this FSP.
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which provides additional guidance on conditional asset retirement obligations under FAS 143, “Accounting for Asset Retirement Obligations.” This standard is effective for fiscal years ending after December 15, 2005. Adoption of this standard had no material impact on our consolidated results of operations or financial condition. We have numerous locations that contain asbestos, which meet the definition of an asset retirement obligation. Under current regulations, we are not currently required to remove the asbestos due to its present condition. At some undetermined time in the future, though, we
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
will be required to remove the asbestos. A liability has not been recognized at December 31, 2005 because the fair value cannot be reasonably estimated and we are unable to reasonably determine a settlement date or range of settlement dates for asbestos removal. We will continue to review our locations with asbestos to determine when a liability should be recorded.
Recently Issued Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which requires all share-based payment transactions to be recognized in the financial statements using a fair-value method of accounting. This Statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. The Statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. Based on an April 2005 ruling by the SEC, the standard is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. Adoption of this standard on January 1, 2006 for our existing stock options will not have a material impact on our consolidated results of operations or financial condition because all of our outstanding stock options are fully vested.
NOTE 3. NATURE OF OPERATIONS
Reportable Segments
Resilient Flooring — produces a broad range of floor coverings for homes and commercial and institutional buildings. Resilient Flooring products include vinyl sheet, vinyl tile, linoleum flooring and luxury vinyl tile. In addition, our Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs and colors. We sell these products to wholesalers, large home centers, retailers, contractors and to the manufactured homes industry.
Wood Flooring — produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (predominantly pre-finished), engineered wood floors in various wood species (with oak being the primary species of choice) and related accessories. Virtually all of our Wood Flooring’s sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home centers under the brand names Bruce®, Hartco®, Robbins®, Timberland™ and Armstrong™.
TextilesEuropean Textile and Sports Flooring (“TSF”) — produces carpeting and sports flooring products that are sold mainly in Europe. Carpeting products consist principally of carpet tiles and broadloom used in commercial applications and in the leisure and travel industry. Sports flooring products include artificial turf and other sports surfaces. Our TSF products are sold primarily through retailers, contractors, distributors and other industrial businesses.
Building Products — produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment, sources and sells wood ceiling systems. The products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems contractors and to resale distributors. Residential ceiling products are sold primarily in North America through wholesalers and retailers (including large home centers). Suspension system (grid) products manufactured by WAVE are sold by both Armstrong and our WAVE joint venture.
Cabinets — produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of company-owned and independent distribution centers and through direct sales to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong™ and Bruce®.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Unallocated Corporate — includes assets and expenses that have not been allocated to the business units. Unallocated Corporate assets are primarily deferred tax assets, cash and the U.S. prepaid pension cost. Expenses included in Unallocated Corporate are corporate departments’ expenses that have not been allocated to other reportable segments, and the U.S. pension credit. Expenses for our corporate departments (including computer services, human resources, legal, finance and other) are allocated to the reportable segments when the departments provide specific work to the reportable segment and the expense allocation can be based on known metrics, such as time reporting, headcount or square-footage. The remaining expenses, which cannot be attributable to the reportable segments without a high degree of generalization, are reported in Unallocated Corporate.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
For the year ended 2005 | Resilient Flooring | Wood Flooring | Textiles & Sports Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||||||||
Net sales to external customers | $ | 1,185.4 | $ | 833.9 | $ | 279.0 | $ | 1,047.6 | $ | 212.5 | — | $ | 3,558.4 | |||||||||||||||
Equity (earnings) from joint venture | — | — | — | (39.3 | ) | — | — | (39.3 | ) | |||||||||||||||||||
Segment operating income (loss)(1) | (25.8 | ) | 60.9 | (4.4 | ) | 148.5 | (9.7 | ) | $ | (70.4 | ) | 99.1 | ||||||||||||||||
Restructuring charges, net of reversals | 16.2 | 0.1 | 0.2 | 6.3 | 0.4 | — | 23.2 | |||||||||||||||||||||
Segment assets | 675.9 | 646.4 | 196.6 | 613.2 | 99.1 | 2,374.8 | 4,606.0 | |||||||||||||||||||||
Depreciation and amortization | 54.8 | 19.0 | 5.4 | 33.9 | 2.4 | 25.5 | 141.0 | |||||||||||||||||||||
Fixed asset impairment loss | 1.8 | 15.3 | — | 0.5 | — | — | 17.6 | |||||||||||||||||||||
Investment in affiliates | — | — | — | 67.4 | — | — | 67.4 | |||||||||||||||||||||
Capital additions | 42.8 | 28.8 | 4.6 | 42.6 | 4.5 | 12.2 | 135.5 | |||||||||||||||||||||
For the year ended 2004 | Resilient Flooring | Wood Flooring | Textiles & Sports Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||||||||
Net sales to external customers | $ | 1,215.1 | $ | 832.1 | $ | 265.4 | $ | 971.7 | $ | 213.0 | — | $ | 3,497.3 | |||||||||||||||
Equity (earnings) from joint venture | — | — | — | (31.6 | ) | — | — | (31.6 | ) | |||||||||||||||||||
Segment operating income (loss)(1) | (150.2 | ) | 51.4 | (7.1 | ) | 127.0 | 1.4 | $ | (64.7 | ) | (42.2 | ) | ||||||||||||||||
Restructuring charges, net of reversals | 4.5 | 1.6 | 0.4 | 10.9 | 0.4 | 0.5 | 18.3 | |||||||||||||||||||||
Segment assets | 737.9 | 663.6 | 218.1 | 596.3 | 102.2 | 2,291.3 | 4,609.4 | |||||||||||||||||||||
Depreciation and amortization | 62.6 | 18.1 | 5.6 | 35.2 | 3.8 | 25.7 | 151.0 | |||||||||||||||||||||
Fixed asset impairment loss | 63.1 | 0.8 | — | 0.4 | 0.4 | — | 64.7 | |||||||||||||||||||||
Goodwill impairment | 108.4 | — | — | — | — | — | 108.4 | |||||||||||||||||||||
Investment in affiliates | 0.6 | — | — | 51.0 | — | 20.9 | 72.5 | |||||||||||||||||||||
Capital additions | 33.8 | 33.7 | 3.9 | 44.5 | 1.4 | 16.7 | 134.0 | |||||||||||||||||||||
For the year ended 2003 | Resilient Flooring | Wood Flooring | Textiles & Sports Flooring | Building Products | Cabinets | Unallocated Corporate | Total | |||||||||||||||||||||
Net sales to external customers | $ | 1,181.5 | $ | 738.6 | $ | 271.9 | $ | 862.2 | $ | 204.8 | — | $ | 3,259.0 | |||||||||||||||
Equity (earnings) from joint venture | — | — | — | (20.8 | ) | — | — | (20.8 | ) | |||||||||||||||||||
Segment operating income (loss) (1) | 56.2 | (4.0 | ) | (11.0 | ) | 95.2 | (11.1 | ) | $ | (144.6 | ) | (19.3 | ) | |||||||||||||||
Restructuring charges, net of reversals | 1.2 | 0.8 | 7.4 | — | — | (0.8 | ) | 8.6 | ||||||||||||||||||||
Segment assets | 915.3 | 576.6 | 207.1 | 551.5 | 102.3 | 2,295.0 | 4,647.8 | |||||||||||||||||||||
Depreciation and amortization | 60.6 | 39.4 | 5.2 | 30.2 | 1.6 | 26.1 | 163.1 | |||||||||||||||||||||
Fixed asset impairment loss | 1.1 | 3.4 | — | 3.8 | 1.6 | 0.6 | 10.5 | |||||||||||||||||||||
Investment in affiliates | 0.6 | — | — | 29.5 | — | 18.8 | 48.9 | |||||||||||||||||||||
Capital additions | 26.5 | 17.3 | 3.4 | 22.3 | 1.6 | 7.0 | 78.1 | |||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Segment operating income (loss) | $ | 99.1 | $ | (42.2 | ) | $ | (19.3 | ) | ||||
Interest expense | 8.4 | 8.4 | 9.0 | |||||||||
Other non-operating expense | 1.5 | 3.1 | 5.7 | |||||||||
Other non-operating (income) | (11.9 | ) | (6.4 | ) | (5.0 | ) | ||||||
Chapter 11 reorganization costs, net | (1.2 | ) | 6.9 | 9.4 | ||||||||
Income (loss) before taxes and discontinued operations | $ | 102.3 | $ | (54.2 | ) | $ | (38.4 | ) | ||||
Accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The sales in the table below are allocated to geographic areas based upon the location of the customer.
Geographic Areas | 2005 | 2004 | 2003 | ||||||
Net trade sales | |||||||||
Americas: | |||||||||
United States | $ | 2,351.1 | $ | 2,338.9 | $ | 2,210.9 | |||
Canada | 192.2 | 177.6 | 162.2 | ||||||
Other Americas | 31.2 | 31.8 | 24.8 | ||||||
Total Americas | $ | 2,574.5 | $ | 2,548.3 | $ | 2,397.9 | |||
Europe: | |||||||||
Germany | $ | 184.9 | $ | 181.2 | $ | 178.2 | |||
United Kingdom | 160.1 | 148.0 | 125.5 | ||||||
Other Europe | 492.0 | 478.1 | 439.3 | ||||||
Total Europe | $ | 837.0 | $ | 807.3 | $ | 743.0 | |||
Total Pacific Rim | $ | 146.9 | $ | 141.7 | $ | 118.1 | |||
Total net trade sales | $ | 3,558.4 | $ | 3,497.3 | $ | 3,259.0 | |||
Long-lived assets (property, plant and equipment), net at December 31 | 2005 | 2004 | ||||
Americas: | ||||||
United States | $ | 805.4 | $ | 823.6 | ||
Canada | 13.7 | 14.8 | ||||
Total Americas | $ | 819.1 | $ | 838.4 | ||
Europe: | ||||||
Germany | $ | 169.6 | $ | 191.3 | ||
Other Europe | 129.7 | 150.8 | ||||
Total Europe | $ | 299.3 | $ | 342.1 | ||
Total Pacific Rim | $ | 26.9 | $ | 28.3 | ||
Total long-lived assets, net | $ | 1,145.3 | $ | 1,208.8 | ||
The reduction in European long-lived assets is primarily related to the negative translation effects of changes in foreign exchange rates.
NOTE 4. LIABILITIES SUBJECT TO COMPROMISE
As a result of AWI’s Chapter 11 Filing (see Note 1), pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims, even if they may be settled for lesser amounts. Substantially all of AWI’s prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of our subsidiaries that are not covered by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWI’s asbestos liability is also recorded in liabilities subject to compromise. See Note 1 for further discussion on how the Chapter 11 process may address AWI’s liabilities subject to compromise and Note 30 for further discussion of AWI’s asbestos liability.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Liabilities subject to compromise at December 31, 2005 and December 31, 2004 are as follows:
| 2005 | 2004 | |||||
Debt (at face value) | $ | 1,388.6 | $ | 1,388.6 | ||
Asbestos-related liability | 3,190.6 | 3,190.6 | ||||
Prepetition trade payables | 58.1 | 58.9 | ||||
Prepetition other payables and accrued interest | 69.7 | 70.4 | ||||
Amounts due to affiliates | 4.7 | 4.7 | ||||
ESOP loan guarantee | 157.7 | 157.7 | ||||
Total liabilities subject to compromise | $ | 4,869.4 | $ | 4,870.9 | ||
Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.
See Note 15 for detail of debt subject to compromise.
NOTE 5. DISCONTINUED OPERATIONS
On May 31, 2000, Armstrong completed its sale of all entities, assets and certain liabilities comprising its Insulation Products segment. During 2003 AHI recorded a net loss of $2.4 million for the impairment of some notes receivable and the settlement of certain tax contingencies related to this divestiture. During the fourth quarter of 2005, AHI recorded a net gain of $10.4 million due to the early settlement of the remaining notes receivable and the settlement of other disputed items.
On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During 2004 and 2003, AHI recorded net losses of $0.4 million and $0.1 million, respectively, for the environmental and tax indemnifications related to this divestiture.
In accordance with FAS 144, these adjustments were classified as discontinued operations since the original divestitures were reported as discontinued operations.
NOTE 6. ACCOUNTS AND NOTES RECEIVABLE
| 2005 | 2004 | |||||||
Customer receivables | $ | 355.8 | $ | 372.0 | ||||
Customer notes | 6.3 | 7.9 | ||||||
Miscellaneous receivables | 17.3 | 14.7 | ||||||
Less allowance for discounts and losses | (50.6 | ) | (58.5 | ) | ||||
Net accounts and notes receivable | $ | 328.8 | $ | 336.1 | ||||
Generally, we sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 7. INVENTORIES
Following are the components of our inventories:
| 2005 | 2004 | |||||||
Finished goods | $ | 339.1 | $ | 362.9 | ||||
Goods in process | 44.6 | 45.9 | ||||||
Raw materials and supplies | 194.4 | 216.2 | ||||||
Less LIFO and other reserves | (63.6 | ) | (89.9 | ) | ||||
Total inventories, net | $ | 514.5 | $ | 535.1 | ||||
Approximately 44% and 40% of our total inventory in 2005 and 2004, respectively, 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 $52.2 million at the end of 2005 and $74.1 million at year-end 2004.
The distinction between the use of different methods of inventory valuation is primarily based on geographical locations and/or legal entities rather than types of inventory. The following table summarizes the amount of inventory that is not accounted for under the LIFO method.
| 2005 | 2004 | |||||
International locations | $ | 156.4 | $ | 173.0 | ||
U.S. Wood Flooring and Cabinets | 111.6 | 125.4 | ||||
U.S. sourced products | 19.3 | 23.2 | ||||
Total | $ | 287.3 | $ | 321.6 | ||
Our international locations all use the FIFO method of inventory valuation primarily because either the LIFO method is not permitted for local tax and/or statutory reporting purposes, or the entities were part of various acquisitions that had adopted the FIFO method prior to our acquisition. In these situations, a conversion to LIFO would be highly complex and involve excessive cost and effort to achieve under local tax and/or statutory reporting requirements.
Several of the Wood Flooring and Cabinets entities were acquired by Triangle Pacific Corporation (“TPC”) prior to our acquisition of TPC in 1998. TPC had elected to retain the historical inventory valuation policies of the acquired companies and, on the basis of consistency and due to the excessive cost involved, we elected not to amend these policies.
The sourced products represent certain finished goods sourced from third party manufacturers of unique type, primarily from foreign suppliers.
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
| 2005 | 2004 | |||||||
Land | $ | 69.4 | $ | 77.0 | ||||
Buildings | 652.0 | 657.4 | ||||||
Machinery and equipment | 1,904.4 | 1,937.3 | ||||||
Construction in progress | 81.5 | 77.8 | ||||||
Less accumulated depreciation and amortization | (1,562.0 | ) | (1,540.7 | ) | ||||
Net property, plant and equipment | $ | 1,145.3 | $ | 1,208.8 | ||||
In the fourth quarter of 2005, we recorded $17.6 million of fixed asset impairment charges, primarily in Wood Flooring. These impairment charges related to idle equipment and unused property associated with excess manufacturing capacity and products that will no longer be produced. These charges were recorded in cost of goods sold. The fixed asset impairment charges were triggered by an evaluation of current production capacity and future production levels for certain product lines.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
In the fourth quarter of 2004, we recorded a $44.8 million fixed asset impairment charge in Resilient Flooring for our European resilient flooring business. This impairment charge reduced land by approximately $29 million and buildings by approximately $16 million and was reported in cost of goods sold. The fixed asset impairment charge was triggered by actual operating losses and negative cash flows incurred in the European resilient flooring business. The expectation was that the operating losses and negative cash flows would continue in the near future. The fixed asset fair values were determined by an independent appraisal firm.
NOTE 9. EQUITY INVESTMENTS
Investments in affiliates of $67.4 million at December 31, 2005, reflected the equity interest in our 50% investment in our WAVE joint venture. The balance decreased $5.1 million from December 31, 2004, primarily due to the August 2005 sale of our equity interest in Interface Solutions, Inc. partially offset by our equity interest in WAVE’s net undistributed earnings.
Affiliate | Income Statement Classification | 2005 | 2004 | 2003 | |||||||||
WAVE | Equity earnings from joint venture | $ | 39.3 | $ | 31.6 | $ | 20.8 | ||||||
ISI | Other non-operating income | 4.1 | 1.9 | 0.3 | |||||||||
ISI/Other | Other non-operating expense | (1.0 | ) | — | (0.4 | ) | |||||||
See Exhibit 99.1 for WAVE’s consolidated financial statements. Condensed financial data for WAVE, which we account for under the equity method of accounting, is summarized below:
| 2005 | 2004 | |||||
Current assets | $ | 125.5 | $ | 145.1 | ||
Non-current assets | 30.4 | 33.8 | ||||
Current liabilities | 19.1 | 71.4 | ||||
Other non-current liabilities | 5.8 | 5.1 | ||||
| 2005 | 2004 | 2003 | |||||||
Net sales | $ | 307.7 | $ | 278.6 | $ | 213.8 | |||
Gross profit | 99.1 | 86.3 | 61.7 | ||||||
Net earnings | 78.6 | 63.2 | 41.7 | ||||||
See discussion in2006 (See Note 29 for additional information on these related parties.
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of January 1, 2005, we had goodwill of $136.0 million. Goodwill is required to be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.
In the fourth quarter of 2005, we completed our annual assessment of goodwill as required by FAS 142 and determined there was no impairment. The following table represents the changes in goodwill for 2005:
Goodwill by segment | January 1, 2005 | Adjustments, net(1) | Impairments | December 31, 2005 | |||||||||
Wood Flooring | $ | 108.2 | — | — | $ | 108.2 | |||||||
Building Products | 15.2 | $ | (1.8 | ) | — | 13.4 | |||||||
Cabinets | 12.6 | — | — | 12.6 | |||||||||
Total consolidated goodwill | $ | 136.0 | $ | (1.8 | ) | $ | — | $ | 134.2 | ||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
During the second quarter of 2004, we concluded that an indication of impairment existed for our European resilient flooring goodwill, which was based on an assessment of financial projections incorporated in our annual strategic plan process. Continuing price declines and volume shortfalls related to our European resilient flooring products were causing significant operating losses, and we revised our projections accordingly. We calculated a preliminary estimate of the European resilient flooring reporting unit’s fair value using discounted cash flows. Based on this preliminary fair value calculation, we recorded a non-cash goodwill impairment loss of $60.0 million in the second quarter of 2004. In the fourth quarter of 2004, we completed our annual assessment of goodwill as required by FAS 142 and determined that based upon a revised strategic plan, our European resilient flooring goodwill was fully impaired. Therefore, we recorded an additional $48.4 million impairment charge. The goodwill impairment charges arose from the European resilient flooring reporting unit’s fair value being lower than its carrying value. The fair value was negatively affected by lower operating profits and expected future cash flows determined in recent forecasting analyses. We calculated the reporting unit’s fair value using discounted cash flows. No other goodwill impairment was identified in our annual assessment.
The following table represents the changes in goodwill during 2004.
Goodwill by segment | January 1, 2004 | Adjustments, net(1) | Impairments | December 31, 2004 | ||||||||||
Resilient Flooring | $ | 107.1 | $ | 1.3 | $ | (108.4 | ) | — | ||||||
Wood Flooring | 110.4 | (2.2 | ) | — | $ | 108.2 | ||||||||
Building Products | 14.0 | 1.2 | — | 15.2 | ||||||||||
Cabinets | 12.6 | — | — | 12.6 | ||||||||||
Total consolidated goodwill | $ | 244.1 | $ | 0.3 | $ | (108.4 | ) | $ | 136.0 | |||||
Intangible Assets
The following table details amounts related to our intangible assets as of December 31, 2005 and 2004.
| December 31, 2005 | December 31, 2004 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
Amortizing intangible assets | ||||||||||||
Computer software | $ | 102.1 | $ | 66.7 | $ | 109.8 | $ | 66.4 | ||||
Land use rights and other | 4.5 | 1.1 | 4.4 | 1.0 | ||||||||
Total | $ | 106.6 | $ | 67.8 | $ | 114.2 | $ | 67.4 | ||||
Non-amortizing intangible assets | ||||||||||||
Trademarks and brand names | 29.3 | 29.2 | ||||||||||
Total intangible assets | $ | 135.9 | $ | 143.4 | ||||||||
Aggregate Amortization Expense | ||||||||||||
For the year ended December 31 | $ | 16.7 | $ | 15.4 | ||||||||
Amortization charges for computer software are determined on a straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives, generally 3 to 7 years.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The annual amortization expense expected for the years 2006 through 2010 is as follows:
2006 | $ | 13.8 | |
2007 | 9.0 | ||
2008 | 6.5 | ||
2009 | 3.6 | ||
2010 | 1.3 |
NOTE 11. OTHER NON-CURRENT ASSETS
| 2005 | 2004 | |||||
Cash surrender value of company owned life insurance policies | $ | 65.1 | $ | 66.8 | ||
Long term notes receivable | 3.5 | 31.8 | ||||
Other | 28.0 | 24.0 | ||||
Total other non-current assets | $ | 96.6 | $ | 122.6 | ||
The reduction in long term notes receivable from 2004 to 2005 was primarily due to the early settlement of some notes receivable related to a previous divestiture.
NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| 2005 | 2004 | |||||
Payables, trade and other | $ | 256.2 | $ | 259.8 | ||
Employment costs | 59.9 | 65.7 | ||||
Restructuring severance expenses | 2.8 | 18.0 | ||||
Other | 73.6 | 103.9 | ||||
Total accounts payable and accrued expenses | $ | 392.5 | $ | 447.4 | ||
Certain other accounts payable and accrued expenses have been categorized as liabilities subject to compromise (see Note 4)7).
NOTE 13. RESTRUCTURING AND OTHER ACTIONS
Net restructuring charges of $23.2 million and $18.3 million were recorded in 2005 and 2004, respectively. The following table summarizes these charges:
Net Charge/ (Reversal) | (unaudited) Number of Employees Impacted | |||||||||||
Action Title | 2005 | 2004 | Segment | |||||||||
Lancaster Plant | $ | 16.3 | $ | 1.0 | 450 | Resilient Flooring | ||||||
Hoogezand | 6.3 | 10.9 | 130 | Building Products | ||||||||
North America SG&A | (0.1 | ) | 5.3 | 250 | Resilient Flooring, Wood Flooring, Corporate | |||||||
Morristown | 0.4 | 0.4 | 100 | Cabinet Products | ||||||||
Oss | 0.2 | 0.7 | 70 | Textiles & Sports Flooring | ||||||||
Searcy | 0.1 | 0.8 | 230 | Wood Flooring | ||||||||
European Consolidation | — | (0.8 | ) | Resilient Flooring, Textiles & Sports Flooring | ||||||||
Total | $ | 23.2 | $ | 18.3 | ||||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Lancaster Plant: The charges related to the fourth quarter 2004 decision to cease commercial flooring production at Lancaster in 2006. Commercial flooring production requirements will be serviced by other facilities around the world. Of the $16.3 million charge in 2005, $14.1 million is a non-cash charge related to termination benefits to be paid through the U.S. pension plan. In 2004, $0.6 million of the $1.0 million charge related to these non-cash benefits. The other $2.2 million in 2005 and $0.4 million in 2004 is comprised of severance and related costs. We have incurred project-to-date restructuring charges of $17.3 million related primarily to severance and pension related costs. We expect to incur approximately $13 million of restructuring charges in 2006, in addition to $0.3 million of accelerated depreciation and $11.6 million of other related costs, both in cost of goods sold, and approximately $6 million in SG&A. Further, we expect to realize a gain of approximately $15 million in 2006 from the sale of a warehouse which became available as a result of this initiative. We recorded $6.4 million and $10.3 million of accelerated depreciation in 2005 and 2004, respectively. We also recorded $6.3 million of other related costs in 2005 and $17.7 million of fixed asset impairments in 2004, both in cost of goods sold.
Hoogezand: These charges are related to the first quarter 2004 decision to close the manufacturing facility and are comprised of severance and related costs. Closure of the plant was completed in the first quarter of 2005. The production was transferred to another Building Products location in Münster, Germany and resulted in a net reduction of approximately 72 positions. We have incurred project-to-date restructuring charges of $17.2 million, and expect to incur an additional $0.6 million of restructuring charges and $0.2 million of accelerated depreciation in 2006. Additionally, we recorded $0.5 million and $1.4 million of accelerated depreciation in cost of goods sold in 2005 and 2004, respectively. We also recorded $0.7 million and $1.1 million of other related costs in cost of goods sold in 2005 and 2004, respectively. In 2005, we recorded fixed asset impairments of $0.4 million, also in cost of goods sold.
North America SG&A: The net reversal of $0.1 million in 2005 (Resilient Flooring) and net charge of $5.3 million in 2004 ($4.0 million in Resilient Flooring, $0.8 million in Wood Flooring, and $0.5 million in Corporate) were recorded for severance and related costs due to a restructuring of the sales force and management structure in North America in response to changing market conditions. This initiative was announced in the fourth quarter of 2004 and was completed in the second quarter of 2005. We incurred project-to-date restructuring charges of $5.2 million and do not expect to incur any additional charges.
Morristown: The charges related to the fourth quarter 2004 decision to close a plant in Tennessee in the first quarter of 2005. Manufacturing was consolidated at two existing plants in the United States. We have incurred project-to-date restructuring charges of $0.4 million for severance related charges and $0.4 million of related shutdown costs and do not expect to incur additional costs. Additionally, we recorded $0.2 million and $1.5 million of accelerated depreciation in 2005 and 2004, respectively, in cost of goods sold. We also recorded $1.0 million of other related costs in 2005 and $0.4 million of fixed asset impairments in 2004, both in cost of goods sold.
Searcy: The charge related to the fourth quarter 2004 decision to cease production at a solid hardwood flooring location in Arkansas in the first quarter of 2005 and was comprised of severance benefits and related costs. We continue to manufacture solid wood flooring at other plants across the United States. We incurred $0.9 million of restructuring charges for the project-to-date and do not expect to incur any additional charges. Additionally, in the fourth quarter of 2005, we recorded an asset impairment charge of $13.9 million related to property, plant and equipment at this site. See Note 8 for further discussion.
Oss: The charges were recorded to reflect shutdown costs related to a plant closure in The Netherlands. The related severance charges were recorded during the third quarter of 2003 when the plant closure was announced. We will continue to manufacture carpet at other plants across Europe. We incurred project-to-date restructuring charges of $4.9 million and do not expect to incur any additional costs in the future.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
European consolidation: The net reversal in 2004 comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Textiles and Sports Flooring ($0.3 million) and Resilient Flooring ($0.5 million) segments.
In 2003, we recorded net restructuring charges of $8.6 million, primarily related to the European consolidation and Oss plant closure.
The following table summarizes activity in the reorganization and restructuring accruals for 2005 and 2004. The amount of net charges in the table does not agree to the income statement due to non-cash charges for enhanced retirement benefits that did not affect the restructuring accrual accounts.
Beginning Balance | Cash Payments | Net Charges | Other | Ending Balance | |||||||||||||
2005 | $ | 24.8 | $ | (24.0 | ) | $ | 9.1 | $ | (1.1 | ) | $ | 8.8 | |||||
2004 | 10.0 | (4.1 | ) | 17.7 | 1.2 | 24.8 | |||||||||||
The amount in “other” for 2005 and 2004 is related to the effects of foreign currency translation.
Of the 2005 and 2004 ending balances, $1.3 million is reported in liabilities subject to compromise.
Substantially all of the remaining balance of the restructuring accrual as of December 31, 2005 relates to a noncancelable operating lease, which extends through 2017, and severance for terminated employees with extended payouts, the majority of which will be paid in 2006.
NOTE 14. INCOME TAXES
The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the table below. Management believes it is more likely than not that results of future operations will generate sufficient taxable income to realize deferred tax assets including, specifically, the asbestos-related liability differences which will be realized subsequent to emergence from Chapter 11 as a U.S. net operating loss that may be carried forward for 20 years.
We have provided valuation allowances for certain state and foreign net operating loss carryforwards and other basis adjustments of $268.7 million. We have $513.6 million of state net operating loss carryforwards with expirations between 2006 and 2025, and $327.2 million of foreign net operating loss carryforwards, which are available for carryforward indefinitely. The net increase in valuation allowance from 2004 is primarily attributable to an increase for capital losses and certain non-U.S. operating losses generated in 2005, including additional needs to cover deferred tax liabilities with indefinite lives, offset by $4.6 million of losses utilized for state tax purposes.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Deferred income tax assets (liabilities) | 2005 | 2004 | ||||||
Postretirement and postemployment benefits | $ | 108.9 | $ | 116.0 | ||||
Chapter 11 reorganization costs and restructuring costs | 40.9 | 21.5 | ||||||
Asbestos-related liabilities | 1,262.7 | 1,352.7 | ||||||
Pension assets | 33.9 | 38.6 | ||||||
Net operating losses | 134.3 | 139.0 | ||||||
Capital losses | 10.6 | — | ||||||
Other | 87.2 | 36.2 | ||||||
Total deferred tax assets | 1,678.5 | 1,704.0 | ||||||
Valuation allowance | (268.7 | ) | (265.5 | ) | ||||
Net deferred tax assets | 1,409.8 | 1,438.5 | ||||||
Accumulated depreciation | (190.9 | ) | (199.1 | ) | ||||
Pension credit | (184.7 | ) | (182.6 | ) | ||||
Insurance for asbestos-related liabilities | (39.0 | ) | (38.3 | ) | ||||
Tax on unremitted earnings | (1.9 | ) | (28.8 | ) | ||||
Other | (32.5 | ) | (53.4 | ) | ||||
Total deferred income tax liabilities | (449.0 | ) | (502.2 | ) | ||||
Net deferred income tax assets | $ | 960.8 | $ | 936.3 | ||||
Deferred income taxes have been classified in the Consolidated Balance Sheet as: | ||||||||
Deferred income tax asset – current | $ | 15.4 | $ | 15.6 | ||||
Deferred income tax asset – non-current | 967.4 | 941.6 | ||||||
Deferred income tax liability – current | (0.8 | ) | (1.1 | ) | ||||
Deferred income tax liability – non-current | (21.2 | ) | (19.8 | ) | ||||
Net deferred income tax assets | $ | 960.8 | $ | 936.3 | ||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Details of taxes | 2005 | 2004 | 2003 | |||||||||
Earnings (loss) from continuing operations before income taxes: | ||||||||||||
Domestic | $ | 119.1 | $ | 80.7 | $ | (53.7 | ) | |||||
Foreign | (53.2 | ) | (130.8 | ) | 20.0 | |||||||
Eliminations | 36.4 | (4.1 | ) | (4.7 | ) | |||||||
Total | $ | 102.3 | $ | (54.2 | ) | $ | (38.4 | ) | ||||
Income tax provision (benefit): | ||||||||||||
Current: | ||||||||||||
Federal | $ | 1.6 | $ | 33.1 | $ | 25.2 | ||||||
Foreign | 20.4 | 14.5 | 20.8 | |||||||||
State | 4.2 | (0.9 | ) | 3.9 | ||||||||
Total current | 26.2 | 46.7 | 49.9 | |||||||||
Deferred: | ||||||||||||
Federal | (35.4 | ) | (15.1 | ) | (41.5 | ) | ||||||
Foreign | 9.0 | (6.2 | ) | (9.3 | ) | |||||||
State | 1.8 | (0.3 | ) | (0.7 | ) | |||||||
Total deferred | (24.6 | ) | (21.6 | ) | (51.5 | ) | ||||||
Total income taxes (benefit) | $ | 1.6 | $ | 25.1 | $ | (1.6 | ) | |||||
At December 31, 2005, unremitted earnings of subsidiaries outside the U.S. were $106.5 million. We expect to repatriate $7.3 million for which $1.9 million of U.S. taxes were provided in 2005. No U.S. taxes have been provided on the remaining unremitted earnings as our intention is to invest these earnings permanently. If such earnings were to be remitted, approximately $8.2 million in net taxes would be payable including $3.6 million of non-U.S. withholding taxes.
Reconciliation to U.S. statutory tax rate | 2005 | 2004 | 2003 | |||||||||
Continuing operations tax (benefit) at statutory rate | $ | 35.8 | $ | (19.0 | ) | $ | (13.4 | ) | ||||
State income taxes, net of federal benefit | 3.4 | (2.8 | ) | 0.4 | ||||||||
Foreign losses and change in valuation allowance | 25.2 | 18.4 | 7.8 | |||||||||
Tax on foreign and foreign-source income | 0.2 | (3.4 | ) | (5.8 | ) | |||||||
HIA Dividend tax cost | (0.4 | ) | — | — | ||||||||
Goodwill impairment | — | 37.9 | — | |||||||||
Bankruptcy reorganization expense | 2.5 | (5.1 | ) | 9.0 | ||||||||
Benefit for subsidiary debt impairment | (29.6 | ) | — | — | ||||||||
Capital Loss Utilization | (3.7 | ) | — | — | ||||||||
Permanent book/tax differences | (6.1 | ) | (2.7 | ) | 0.4 | |||||||
Net tax on unremitted earnings | (25.7 | ) | 1.8 | — | ||||||||
Tax expense (benefit) at effective rate | $ | 1.6 | $ | 25.1 | $ | (1.6 | ) | |||||
Other taxes | 2005 | 2004 | 2003 | |||||||||
Payroll taxes | $ | 83.5 | $ | 81.5 | $ | 78.0 | ||||||
Property, franchise and capital stock taxes | 16.3 | 17.8 | 15.8 | |||||||||
During the fourth quarter of 2005, the company completed a restructuring of a subsidiary that resulted in a tax benefit on intercompany debt impairment of $29.6 million in addition to a capital loss tax benefit of $3.7 million. The restructuring also caused the elimination of previously unremitted taxable earnings on which we had recorded a deferred tax liability of $27.0 million.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
In October 2004, the American Jobs Creations Act of 2004 (the “AJCA”) was signed into law. The AJCA provides for a one-time tax deduction of 85% of certain foreign earnings that were repatriated in 2005. During 2005, the Company repatriated foreign earnings eligible for this deduction and recorded a net tax benefit of $0.4 million as a result of the reversal of deferred taxes previously provided on these earnings.
The 2005, 2004 and 2003 tax provisions reflect the reversal of certain federal, state and foreign tax accruals no longer required due to the completion of tax audits and expiration of statutes of limitation partially offset by certain nondeductible expenses.
NOTE 15. DEBT
(See Note 4 regarding treatment of prepetition debt.)
($ millions) | 2005 | Average year-end interest rate | 2004 | Average year-end interest rate | ||||||||
Borrowings under lines of credit | $ | 450.0 | 7.18 | % | $ | 450.0 | 7.18 | % | ||||
DIP Facility | — | — | — | — | ||||||||
Commercial paper | 50.0 | 6.75 | % | 50.0 | 6.75 | % | ||||||
Foreign banks | 14.6 | 4.12 | % | 11.1 | 3.68 | % | ||||||
Bank loans due 2004-2015 | 15.4 | 6.10 | % | 24.7 | 6.04 | % | ||||||
9.00% medium-term notes due 2001 | 7.5 | 9.00 | % | 7.5 | 9.00 | % | ||||||
6.35% senior notes due 2003 | 200.0 | 6.35 | % | 200.0 | 6.35 | % | ||||||
6.50% senior notes due 2005 | 150.0 | 6.50 | % | 150.0 | 6.50 | % | ||||||
9.75% debentures due 2008 | 125.0 | 9.75 | % | 125.0 | 9.75 | % | ||||||
7.45% senior notes due 2029 | 200.0 | 7.45 | % | 200.0 | 7.45 | % | ||||||
7.45% senior quarterly interest bonds due 2038 | 180.0 | 7.45 | % | 180.0 | 7.45 | % | ||||||
Industrial development bonds | 21.0 | 4.95 | % | 21.0 | 4.13 | % | ||||||
Capital lease obligations | 1.5 | 7.63 | % | 2.7 | 7.63 | % | ||||||
Other | 15.1 | 8.62 | % | 15.1 | 8.61 | % | ||||||
Subtotal | 1,430.1 | 7.23 | % | 1,437.1 | 7.21 | % | ||||||
Less debt subject to compromise | 1,388.6 | 7.29 | % | 1,388.6 | 7.29 | % | ||||||
Less current portion and short-term debt | 20.0 | 4.70 | % | 19.3 | 4.74 | % | ||||||
Total long-term debt, less current portion | $ | 21.5 | 5.17 | % | $ | 29.2 | 4.80 | % | ||||
Approximately $29.9 million of the $41.5 million of total debt not subject to compromise outstanding as of December 31, 2005 was secured with buildings and other assets. Approximately $35.7 million of the $48.5 million of total debt not subject to compromise outstanding as of December 31, 2004 was secured with buildings and other assets.
Scheduled payments of long-term debt, excluding debt subject to compromise (millions):
2006 | $ | 5.4 | |
2007 | 1.7 | ||
2008 | 1.3 | ||
2009 | 11.1 | ||
2010 | 1.2 |
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Debt from the table above included in liabilities subject to compromise consisted of the following at December 31, 2005 and 2004.
($ millions) | 2005 | 2004 | ||||
Borrowings under lines of credit | $ | 450.0 | $ | 450.0 | ||
Commercial paper | 50.0 | 50.0 | ||||
9.00% medium-term notes due 2001 | 7.5 | 7.5 | ||||
6.35% senior notes due 2003 | 200.0 | 200.0 | ||||
6.50% senior notes due 2005 | 150.0 | 150.0 | ||||
9.75% debentures due 2008 | 125.0 | 125.0 | ||||
7.45% senior notes due 2029 | 200.0 | 200.0 | ||||
7.45% senior quarterly interest bonds due 2038 | 180.0 | 180.0 | ||||
Industrial development bonds | 11.0 | 11.0 | ||||
Other | 15.1 | 15.1 | ||||
Total debt subject to compromise | $ | 1,388.6 | $ | 1,388.6 | ||
In accordance with SOP 90-7, we did not record contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $82.8 million, $86.9 million and $95.1 million for 2005, 2004 and 2003, respectively. Unrecorded interest expense reflects the amount of interest expense we would have incurred under the original maturities of prepetition debt.
On October 21, 2005, the Court announced it had approved AWI’s motion to extend the maturity date from December 8, 2005, to December 8, 2006, on its $75 million DIP Credit Facility that is limited to issuances of letters of credit. Obligations under the DIP Facility to reimburse drawings under the letters of credit constitute a super-priority administrative expense claim in the Chapter 11 Case. As of December 31, 2005 and 2004, AWI had approximately $43.3 million and $40.6 million, respectively, in letters of credit that were issued under the DIP Facility.
In addition, AHI’s foreign subsidiaries have approximately $25.4 million of unused short-term lines of credit available from banks. The credit lines are subject to immaterial annual commitment fees.
NOTE 16. PENSION AND OTHER BENEFIT PROGRAMS
We have defined benefit pension plans and postretirement medical and insurance benefit plans covering eligible employees worldwide. We also have defined-contribution pension plans for eligible employees. Benefits from defined benefit pension plans, which cover substantially all employees worldwide, are based primarily on an employee’s compensation and years of service. We fund our pension plans when appropriate. The U.S. defined benefit pension plans were closed to new salaried and salaried production employees on January 1, 2005. On January 13, 2006 we announced that benefits will be frozen for certain non-production salaried employees effective February 28, 2006. We fund postretirement benefits 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.
Medicare Act
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“The Act”) became law in the United States. The Act provides employers sponsoring prescription drug programs for Medicare-eligible participants with a range of options for coordinating with the new government-sponsored program. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employer’s program.
Pursuant to guidance issued in the second quarter of 2004 by the FASB, we elected to begin recording the effect of the Act in the second quarter of 2004, retroactive to January 1, 2004. The Act affects both operating income and balance sheet liabilities over time. The 2005 total year benefit of $9.2 million was
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
recorded in cost of goods sold ($5.6 million) and SG&A ($3.6 million). The 2004 total year benefit of $7.0 million was recorded in cost of goods sold ($3.9 million) and SG&A ($3.1 million). The reduction in the accumulated postretirement benefit obligation related to the Medicare benefit was $52.4 million, reflected in the 2004 actuarial (gain)/loss in the table below.
UNITED STATES PLANS
The following tables summarize the balance sheet impact of the pension and postretirement benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The pension benefits disclosures include both the Retirement Income Plan (RIP) and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.
We use a December 31 measurement date for our U.S. defined benefit plans.
| Pension Benefits | Retiree Health and Life Insurance Benefits | |||||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation as of January 1 | $ | 1,637.4 | $ | 1,570.8 | $ | 396.7 | $ | 436.6 | ||||||||
Service cost | 24.7 | 23.2 | 2.9 | 3.4 | ||||||||||||
Interest cost | 96.0 | 91.3 | 20.6 | 22.3 | ||||||||||||
Plan participants’ contributions | — | — | 6.1 | 5.7 | ||||||||||||
Plan amendments | (10.5 | ) | 0.9 | (4.9 | ) | — | ||||||||||
Effect of curtailments | (8.3 | ) | — | — | — | |||||||||||
Effect of special termination benefits | 14.1 | 0.6 | — | — | ||||||||||||
Actuarial (gain)/loss | 128.3 | 50.9 | (9.7 | ) | (37.0 | ) | ||||||||||
Benefits paid | (105.8 | ) | (100.3 | ) | (33.2 | ) | (34.3 | ) | ||||||||
Benefit obligation as of December 31 | $ | 1,775.9 | $ | 1,637.4 | $ | 378.5 | $ | 396.7 | ||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets as of January 1 | $ | 2,010.4 | $ | 1,882.9 | — | — | ||||||||||
Actual return on plan assets – gain | 181.2 | 224.5 | — | — | ||||||||||||
Employer contribution | 3.4 | 3.3 | $ | 27.1 | $ | 28.6 | ||||||||||
Plan participants’ contributions | — | — | 6.1 | 5.7 | ||||||||||||
Benefits paid | (105.8 | ) | (100.3 | ) | (33.2 | ) | (34.3 | ) | ||||||||
Fair value of plan assets as of December 31 | $ | 2,089.2 | $ | 2,010.4 | $ | 0.0 | $ | 0.0 | ||||||||
Funded status of the plans | $ | 313.3 | $ | 373.0 | $ | (378.5 | ) | $ | (396.7 | ) | ||||||
Unrecognized net actuarial (gain)/loss | 21.9 | (46.4 | ) | 171.5 | 193.2 | |||||||||||
Unrecognized prior service cost (benefit) | 101.7 | 117.7 | (39.3 | ) | (40.7 | ) | ||||||||||
Net asset/(liability) recognized | $ | 436.9 | $ | 444.3 | $ | (246.3 | ) | $ | (244.2 | ) | ||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
| Pension Benefits | Retiree Health and Life Insurance Benefits | |||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2005 | 2004 | ||||||||
Weighted-average assumptions used to determine benefit obligations at December 31: | ||||||||||||
Discount rate | 5.50 | % | 5.75 | % | 5.50 | % | 5.75 | % | ||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: | ||||||||||||
Discount rate | 5.75 | % | 6.00 | % | 5.75 | % | 6.00 | % | ||||
Expected return on plan assets | 8.00 | % | 8.00 | % | n/a | n/a | ||||||
Rate of compensation increase | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||
Investment Policies
The RIP’s primary investment objective is to increase the ratio of RIP assets to liabilities by maximizing the long-term return on investments while minimizing the likelihood of cash contributions over the next 5-10 years. This is to be achieved by (a) investing primarily in publicly-traded equities, (b) limiting return volatility by diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) investing a portion of RIP assets in a bond portfolio whose duration is roughly equal to the duration of RIP liabilities. Derivatives may be used either to implement investment positions efficiently or to hedge risk but not to create investment leverage.
Each asset class utilized by the RIP has a defined asset allocation target and allowable range. The table below shows the asset allocation target and the December 31, 2005 and 2004 position for each asset class:
Target Weight at December 31, 2005 | Position at December 31, | ||||||||
Asset Class | 2005 | 2004 | |||||||
Domestic equity | 41 | % | 37 | % | 40 | % | |||
International equity | 22 | % | 26 | % | 25 | % | |||
High yield bonds | 5 | % | 6 | % | 6 | % | |||
Long duration bonds | 25 | % | 27 | % | 24 | % | |||
Real estate | 7 | % | 2 | % | 1 | % | |||
Other fixed income | 0 | % | 2 | % | 4 | % | |||
Basis of Rate-of-Return Assumption
Long-term asset class return assumptions are determined based on input from investment professionals on the expected performance of the asset classes over 10 to 20 years. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. An incremental component was added for the expected return from active management based both on the RIP’s experience and on historical information obtained from the RIP’s investment consultants. These forecast gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 8.00% per annum.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Amounts recognized in the consolidated balance sheets consist of:
| Pension Benefits | Retiree Health and Life Insurance Benefits | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Prepaid pension costs | $ | 460.0 | $ | 465.1 | ||||||||||||
Pension benefit liabilities | (44.3 | ) | (41.2 | ) | $ | (246.3 | ) | $ | (244.2 | ) | ||||||
Intangible asset | 0.3 | 0.5 | — | — | ||||||||||||
Other comprehensive income | 20.9 | 19.9 | — | — | ||||||||||||
Net asset/(liability) recognized | $ | 436.9 | $ | 444.3 | $ | (246.3 | ) | $ | (244.2 | ) | ||||||
The accumulated benefit obligation for the U.S. defined benefit pension plans was $1,734.5 million and $1,551.0 million at December 31, 2005 and 2004, respectively.
| Pension Benefits | ||||||
U.S. pension plans with benefit obligations in excess of assets | 2005 | 2004 | ||||
Projected benefit obligation, December 31 | $ | 47.7 | $ | 46.1 | ||
Accrued benefit obligation, December 31 | 44.3 | 41.2 | ||||
Fair value of plan assets, December 31 | — | — | ||||
The above table relates to the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.
The components of pension credit are as follows:
| Pension Benefits | ||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2003 | |||||||||
Service cost of benefits earned during the year | $ | 24.7 | $ | 23.2 | $ | 21.8 | ||||||
Interest cost on projected benefit obligation | 96.0 | 91.3 | 91.8 | |||||||||
Expected return on plan assets | (158.5 | ) | (147.7 | ) | (144.5 | ) | ||||||
Amortization of prior service cost | 16.0 | 17.4 | 17.9 | |||||||||
Amortization of net actuarial loss | 1.5 | 1.5 | 1.4 | |||||||||
Net periodic pension credit | $ | (20.3 | ) | $ | (14.3 | ) | $ | (11.6 | ) | |||
As a result of our January 13, 2006 announcement that certain non-production salaried employees will have their plan benefits frozen as of February 28, 2006, we recorded a curtailment charge of $16.9 million in the fourth quarter of 2005 in cost of goods sold ($11.4 million) and SG&A ($5.5 million). This charge is not reflected in the table above.
In addition, we recorded separate charges of $14.1 million in 2005 and $0.6 million in 2004 within restructuring expense for special termination benefits related to the closure of certain operations at a manufacturing plant in Lancaster. See Note 13 for further information.
The components of postretirement benefits cost are as follows:
Retiree Health and Life Insurance Benefits | ||||||||||||
U.S. defined-benefit plans | 2005 | 2004 | 2003 | |||||||||
Service cost of benefits earned during the year | $ | 2.9 | $ | 3.4 | $ | 3.4 | ||||||
Interest cost on accumulated postretirement benefit obligation | 20.6 | 22.3 | 26.2 | |||||||||
Amortization of prior service benefit | (5.6 | ) | (5.1 | ) | (5.1 | ) | ||||||
Amortization of net actuarial loss | 11.9 | 9.7 | 12.3 | |||||||||
Net periodic postretirement benefit cost | $ | 29.8 | $ | 30.3 | $ | 36.8 | ||||||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
For measurement purposes, an average rate of 8% annual increase in the per capita cost of covered health care benefits was assumed for 2006, decreasing 1% per year to an ultimate rate of 6%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| One percentage point | |||||||
U.S. retiree health and life insurance benefit plans | Increase | Decrease | |||||
Effect on total of service and interest cost components | $ | 0.7 | $ | (0.8 | ) | ||
Effect on postretirement benefit obligation | 12.0 | (14.6 | ) | ||||
We expect to contribute $3.5 million to our U.S. defined benefit pension plans and $24.7 million to our U.S. postretirement benefit plans in 2006.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. plans:
| Pension Benefits | Retiree Health and Life Insurance Benefits | |||||
2006 | $ | 95.7 | $ | 24.7 | ||
2007 | 94.6 | 25.3 | ||||
2008 | 93.3 | 25.8 | ||||
2009 | 93.2 | 26.1 | ||||
2010 | 92.9 | 26.5 | ||||
2011-2015 | 476.5 | 129.5 | ||||
NON-U.S. PLANS
We have defined benefit pension plans covering employees in a number of foreign countries that utilize assumptions which are consistent with, but not identical to, those of the U.S. plans. The following tables summarize the balance sheet impact of foreign pension benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions.
We use a December 31 measurement date for most of our non-U.S. defined benefit plans.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
| Pension Benefits | ||||||||
Non-U.S. defined-benefit plans | 2005 | 2004 | ||||||
Change in benefit obligation: | ||||||||
Benefit obligation as of January 1 | $ | 488.0 | $ | 403.8 | ||||
Service cost | 10.0 | 9.3 | ||||||
Interest cost | 21.7 | 21.2 | ||||||
Plan participants’ contributions | 3.5 | 3.6 | ||||||
Plan amendments | 1.4 | 0.2 | ||||||
Foreign currency translation adjustment | (52.7 | ) | 37.1 | |||||
Actuarial loss | 25.1 | 33.1 | ||||||
Benefits paid | (22.3 | ) | (20.3 | ) | ||||
Benefit obligation as of December 31 | $ | 474.7 | $ | 488.0 | ||||
Change in plan assets: Fair value of plan assets as of January 1 | $ | 248.2 | $ | 200.4 | ||||
Actual return on plan assets - gain | 35.4 | 17.7 | ||||||
Employer contributions | 26.6 | 28.3 | ||||||
Plan participants’ contributions | 3.5 | 3.6 | ||||||
Foreign currency translation adjustment | (25.3 | ) | 18.5 | |||||
Benefits paid | (22.3 | ) | (20.3 | ) | ||||
Fair value of plan assets as of December 31 | $ | 266.1 | $ | 248.2 | ||||
Funded status of the plans | $ | (208.6 | ) | $ | (239.8 | ) | ||
Unrecognized net actuarial loss | 84.3 | 89.3 | ||||||
Unrecognized transition asset | (0.1 | ) | (0.3 | ) | ||||
Unrecognized prior service cost (benefit) | 0.6 | (0.7 | ) | |||||
Net liability recognized | $ | (123.8 | ) | $ | (151.5 | ) | ||
The funded status of non-U.S. defined-benefit plans was determined using the following assumptions:
| Pension Benefits | ||||||
Non-U.S. defined-benefit plans | 2005 | 2004 | ||||
Weighted-average assumptions used to determine benefit obligations at December 31: | ||||||
Discount rate | 4.3 | % | 4.8 | % | ||
Rate of compensation increase | 2.9 | % | 3.2 | % | ||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: | ||||||
Discount rate | 4.8 | % | 5.4 | % | ||
Expected return on plan assets | 5.7 | % | 6.4 | % | ||
Rate of compensation increase | 3.2 | % | 3.4 | % | ||
Investment Policies
Each of the funded non-US pension plan’s primary investment objective is to earn sufficient long-term returns on investments both to increase the ratio of the assets to liabilities in order for the plans to meet their benefits obligations, and to minimize required cash contributions to the plans. This is to be achieved by (a) investing in publicly-traded equities, (b) limiting return volatility by diversifying investments among additional asset classes with differing expected rates of return and return correlations, and (c) utilizing long duration bonds to limit the volatility of the plans’ asset/liability ratios.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Each of the plans has a targeted asset allocation for each asset class. The table below shows, for each asset class, the weighted average of the several plans’ asset allocation targets and positions at December 31, 2005 and 2004:
Target Weight at December 31, 2005 | Position at December 31, | ||||||||
Asset Class | 2005 | 2004 | |||||||
Equities | 46 | % | 51 | % | 49 | % | |||
Long duration bonds | 18 | % | 17 | % | 17 | % | |||
Other fixed income | 31 | % | 30 | % | 34 | % | |||
Real estate | 5 | % | 2 | % | 0 | % | |||
Basis of Rate-of-Return Assumption
Long-term asset class return forecasts were obtained from investment professionals. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. These forecast asset class returns were weighted by the plans’ target asset class weights, yielding a long-term return forecast of 5.7% per annum.
Amounts recognized in the consolidated balance sheets consist of:
| Pension Benefits | ||||||||
| 2005 | 2004 | |||||||
Prepaid pension cost | $ | 16.9 | $ | 15.8 | ||||
Pension benefit liabilities | (179.4 | ) | (217.7 | ) | ||||
Intangible asset | 2.7 | 3.4 | ||||||
Other comprehensive income | 36.0 | 47.0 | ||||||
Net liability recognized | $ | (123.8 | ) | $ | (151.5 | ) | ||
The accumulated benefit obligation for the non-U.S. defined benefit pension plans was $434.5 million and $449.0 million at December 31, 2005 and 2004, respectively.
| Pension Benefits | ||||||
Non-U.S. pension plans with benefit obligations in excess of assets | 2005 | 2004 | ||||
Projected benefit obligation, December 31 | $ | 474.7 | $ | 402.0 | ||
Accrued benefit obligation, December 31 | 434.5 | 370.3 | ||||
Fair value of plan assets, December 31 | 266.1 | 161.8 | ||||
The components of pension cost are as follows:
Non-U.S. defined-benefit plans | 2005 | 2004 | 2003 | |||||||||
Service cost of benefits earned during the year | $ | 10.0 | $ | 9.3 | $ | 8.2 | ||||||
Interest cost on projected benefit obligation | 21.7 | 21.2 | 19.4 | |||||||||
Expected return on plan assets | (15.7 | ) | (14.8 | ) | (12.8 | ) | ||||||
Amortization of transition obligation (asset) | (0.1 | ) | 0.2 | 0.3 | ||||||||
Amortization of prior service cost | 0.3 | 0.2 | 0.6 | |||||||||
Amortization of net actuarial loss | 1.9 | 0.5 | 0.5 | |||||||||
Net periodic pension cost | $ | 18.1 | $ | 16.6 | $ | 16.2 | ||||||
In addition, we recorded a separate charge in 2003 of $0.3 million within restructuring expense for a curtailment loss related to the closure of certain operations at a manufacturing plant in Oss, the Netherlands. See Note 13 for further information.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Costs for other non-U.S. defined contribution benefit plans and multiemployer pension plans were $11.7 million in 2005, $11.0 million in 2004, and $11.3 million in 2003.
We expect to contribute $23.9 million to our non-U.S. defined benefit pension plans in 2006.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years:
| Pension Benefits | |||
2006 | $ | 19.3 | |
2007 | 19.8 | ||
2008 | 21.4 | ||
2009 | 22.3 | ||
2010 | 22.9 | ||
2011-2015 | 133.5 | ||
NOTE 17. FINANCIAL INSTRUMENTS
We do not hold or issue financial instruments for trading purposes. The estimated fair values of our financial instruments as of December 31, 2005 and 2004 are as follows:
| 2005 | 2004 | |||||||||||||||
| Carrying amount | Estimated fair value | Carrying amount | Estimated fair value | |||||||||||||
Assets/(Liabilities): | ||||||||||||||||
Debt subject to compromise | $ | (1,388.6 | ) | $ | (976.7 | ) | $ | (1,388.6 | ) | $ | (982.8 | ) | ||||
Long-term debt, including current portion | (26.9 | ) | (26.9 | ) | (37.4 | ) | (37.4 | ) | ||||||||
Foreign currency contract obligations | 1.5 | 1.5 | (13.9 | ) | (13.9 | ) | ||||||||||
Natural gas contracts | 18.7 | 18.7 | 5.3 | 5.3 | ||||||||||||
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 us for debt of the same remaining maturities. The fair value estimates of foreign currency contract obligations are estimated from national exchange quotes. The fair values of natural gas contracts are estimated by obtaining quotes from major financial institutions and energy companies.
We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements. On December 31, 2005, our foreign subsidiaries that are not participating in our Chapter 11 Case had available lines of credit totaling $45.2 million, of which $19.8 million was used, leaving $25.4 million of unused lines of credit for borrowing on December 31, 2005.
On December 31, 2005, we had outstanding letters of credit totaling $71.4 million, of which $43.3 million was issued under the DIP Facility. Letters of credit are currently arranged through AWI’s DIP Facility with JP Morgan Chase. Certain letters of credit arranged with Wachovia Bank, N.A. prior to the Filing remain outstanding. The DIP Facility had $31.7 million that remained available for issuance of letters of credit as of December 31, 2005. Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AHI’s failure to pay its obligations to the beneficiary. We also have several commercial letters of credit whereby vendors are paid directly via the letter of credit.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use swap, forward and option contracts to hedge currency and commodity exposures. We regularly monitor developments in the capital markets and only enter into currency and swap transactions with established counter-parties having investment grade ratings. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible. Swap, forward and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. At inception, we formally designate and document our derivatives as a hedge of a forecasted transaction or “cash flow” hedge. We use derivative financial instruments as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions and energy companies in order to manage Armstrong’s exposure to nonperformance on such instruments.
Interest Rate Risk - Due to AWI’s Chapter 11 Filing, all affected debt was classified as liabilities subject to compromise and there were no open interest rate derivatives as of December 31, 2005 and 2004.
Currency Rate Risk - We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. We manage our cash flow exposures on a residual basis and use derivatives to hedge our unmatched foreign currency cash inflows and outflows. At December 31, 2005, our major foreign currency exposures are to the Euro, the Canadian dollar, and the British pound.
We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and purchases from foreign suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. Cash flow hedges are executed quarterly for up to 15 months forward and allow us to further reduce our overall exposure to exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged. The effective portion of gains and losses on these instruments are deferred in other comprehensive income until the underlying transaction is recognized in earnings. The net fair value of these instruments at December 31, 2005 was a liability of $2.8 million, most of which is expected to be charged to earnings in the next twelve months. The impact is reported in either net sales or cost of goods sold to match the underlying transaction being hedged. The net impact of these hedges was a loss of $1.1 million during 2005. There were no circumstances where hedge treatment was discontinued during 2005. The impact of the ineffective portion of these hedges was not material during 2005.
We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-company loans. The underlying inter-company loans are classified as short-term and translation adjustments related to these loans are recorded in other non-operating income. The offsetting gains and losses on the related derivative contracts are also recorded in other non-operating income. These transactions are executed on a six-month rolling basis and are offset or increased as repayment or additional inter-company loans are extended. The fair value of these instruments at December 31, 2005 was an asset of $4.2 million, all of which is expected to be taken to earnings in the next twelve months. During 2005, the net impact of these transactions was a gain of $3.0 million, recorded in other non-operating income, which was comprised of a gain of approximately $36.5 million from the foreign currency forward exchange contracts substantially offset by the 2005 translation adjustment of approximately $33.5 million for the underlying inter-company loans.
Commodity Price Risk - We purchase natural gas for use in the manufacture of ceiling tiles and other products and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy of reducing short term cost volatility by purchasing natural gas forward
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
contracts, purchased call options, and zero-cash collars. These instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying products are sold. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The fair value of these instruments at December 31, 2005 was an $18.7 million asset, of which $10.1 million is expected to be taken to earnings in the next twelve months. The impact of hedges that matured during 2005, recorded in cost of goods sold, was $14.4 million of income. The impact of the ineffective portion of these hedges was not material during 2005.
NOTE 19. GUARANTEES
As of December 31, 2005, we maintained an agreement with the lending institution of one of our distributors. Under this agreement, if the distributor were to default on its borrowings and the lender foreclosed on the assets, the bank could return a large part of any of our products still at the distributor (subject to certain quality and roll size minimums) for a refund of original cost. This agreement will expire in September 2006. At December 31, 2005, the amount of inventory held at the distributor was approximately $4.2 million. Historically, no claim has been made under any of these types of agreements and we do not anticipate any such claim in the future. As such, no liability has been recorded for this agreement.
In disposing of assets prior to the Filing, AWI and some subsidiaries had entered into contracts that included various indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and other litigation. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under these contracts. As a debtor-in-possession, for those contracts that are still executory where AWI was the sole guarantor, AWI anticipates rejecting those contracts. Parties that timely file claims with respect to such contracts will have such claims addressed in AWI’s Chapter 11 Case. AWI cannot estimate the value of any potential claims that will ultimately be allowed by the Bankruptcy Court. See Item 1 - Business regarding Proceedings under Chapter 11.
Subsidiaries that are not part of the Chapter 11 Filing also entered into certain contracts that included various indemnity provisions similar to those described above. Since these subsidiaries are not part of the Chapter 11 Filing, these contracts continue to be in effect. Some of these contracts had exposure limits, but many did not. Due to the nature of the indemnities, it is not possible to estimate the potential maximum exposure under all these contracts. For contracts under which an indemnity claim has been received, a liability of $0.8 million has been recorded as of December 31, 2005. See Note 30 of the Consolidated Financial Statements for additional information.
In September 1999, we sold our Textiles Products operations. As part of the divestiture agreement, we transferred certain liabilities and assets to the purchaser to cover pension payments earned by the work force as of the sale date. We also reimburse the purchaser for such pension payments that are not covered by the pension assets. In addition, we agreed to reimburse the purchaser for the tax impact of our reimbursement of the pension payments. This agreement has no termination date. As of December 31, 2005, we maintained a $3.6 million net liability for this guarantee. As of December 31, 2005, the net present value of the maximum payments is approximately $5 million, excluding any amounts paid for tax reimbursement.
See Notes 4 and 22 for a discussion of the ESOP loan guarantee.
NOTE 20. PRODUCT WARRANTIES
We provide direct customer and end-user warranties for our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 25 years and provide for the repair or
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
replacement of the defective product. We collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes the activity for the accrual of product warranties for 2005 and 2004:
| 2005 | 2004 | |||||||
Balance at beginning of year | $ | 22.6 | $ | 25.5 | ||||
Reductions for payments | (34.3 | ) | (39.0 | ) | ||||
Current year warranty accruals | 34.6 | 37.3 | ||||||
Preexisting warranty accrual changes | (0.7 | ) | (1.8 | ) | ||||
Effects of foreign exchange translation | (1.1 | ) | 0.6 | |||||
Balance at end of year | $ | 21.1 | $ | 22.6 | ||||
NOTE 21. OTHER LONG-TERM LIABILITIES
| 2005 | 2004 | |||||
Long-term deferred compensation arrangements | $ | 39.4 | $ | 40.6 | ||
U.S. workers’ compensation | 18.3 | 16.9 | ||||
Environmental liabilities not subject to compromise | 7.9 | 9.4 | ||||
Other | 24.4 | 20.7 | ||||
Total other long-term liabilities | $ | 90.0 | $ | 87.6 | ||
NOTE 22. SAVINGS AND INVESTMENT PLAN (SIP)
In 1989, we established an Employee Stock Ownership Plan (“ESOP”) that borrowed $270 million from banks and insurance companies, repayable over 15 years and guaranteed by AWI. The ESOP used the proceeds to purchase 5,654,450 shares of a new series of convertible preferred stock issued by Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for salaried employees (a defined-contribution pension plan) to form the Retirement Savings and Stock Ownership Plan. 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. Effective March 1, 2005, the name of the plan was changed to the Savings and Investment Plan (SIP).
The number of shares released for allocation to participant accounts has been based on the proportion of principal and interest paid to the total amount of debt service remaining to be paid over the life of the borrowings. Through December 31, 2005, the SIP allocated 1,969,000 shares to participants that remain outstanding, participants retired 2,455,000 shares, AHI contributed an additional 437,000 shares from its treasury and the trustee purchased 243,000 shares on the open market to allocate to employees. During 2005 and 2004, the SIP sold 1,462,000 and 450,000 unallocated shares on the open market, respectively. The proceeds from the sale remain in the SIP and are expected to be allocated to participants no later than when the SIP debt is addressed in AWI’s Chapter 11 proceedings. As of December 31, 2005, there were no shares in the SIP that had yet to be allocated to participants.
The SIP is a qualified defined contribution plan that also includes a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate. The SIP currently covers parent company nonunion employees, some parent company union employees, Wood Flooring salaried employees, and Cabinets salaried employees. We recorded costs for the SIP of $6.5 million in 2005, $5.8 million in 2004 and $5.6 million in 2003, which related to company cash matching contributions.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
All SIP shares are considered outstanding for earnings per share calculations. Historically, dividends on allocated shares were credited to employee accounts while dividends on unallocated shares were used to satisfy debt service payments.
On November 22, 2000, AWI failed to repay $50 million in commercial paper that was due. Subsequently, the remaining ESOP bond principal balance of $142.2 million became immediately payable along with a $15.5 million interest and tax make-whole premium. ESOP debt service payments have not been made since June 2000. As a result of the Chapter 11 Filing, AWI’s guarantee of these ESOP loan obligations of $157.7 million is now classified as a liability subject to compromise.
NOTE 23. STOCK-BASED COMPENSATION PLANS
Awards under the 1993 Long-Term Stock Incentive Plan (“1993 Plan”) were made in the form of stock options, stock appreciation rights in conjunction with stock options, performance restricted shares and restricted stock awards. No additional awards may be issued under the 1993 Plan.
During 1999, we adopted the 1999 Long-Term Incentive Plan (“1999 Plan”) which replaced the 1993 Plan. Pre-1999 grants made under predecessor plans will be governed under the provisions of those plans. The 1999 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, performance-restricted shares and restricted stock awards. The 1999 Plan also incorporates stock awards and cash incentive awards. No more than 3,250,000 shares of common stock may be issued under the 1999 Plan, and no more than 300,000 of the shares may be awarded in the form of performance restricted shares, restricted stock awards or stock awards. The 1999 Plan does not allow awards to be granted after April 25, 2009.
During 2000, we adopted the Stock Award Plan (“2000 Plan”) to enable stock awards and restricted stock awards to officers, key employees and non-employee directors. No more than 750,000 treasury shares may be awarded under the 2000 Plan. The 2000 Plan will remain in effect until the earlier of the grant of all the shares allowed under the plan or termination of the plan by the Board of Directors.
All three of the plans discussed above will most likely be terminated upon AWI emerging from Chapter 11. No equity based compensation has been granted since AWI filed for relief under Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Options were 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 became 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) | 2005 | 2004 | 2003 | |||||||||
Option shares at beginning of year | 2,264.0 | 2,376.9 | 2,508.8 | |||||||||
Options granted | — | — | — | |||||||||
Option shares exercised | — | — | — | |||||||||
Options cancelled | (276.7 | ) | (112.9 | ) | (131.9 | ) | ||||||
Option shares at end of year | 1,987.3 | 2,264.0 | 2,376.9 | |||||||||
Option shares exercisable at end of year | 1,987.3 | 2,264.0 | 2,343.6 | |||||||||
Shares available for grant | 4,815.4 | 4,538.7 | 4,425.8 | |||||||||
Weighted average price per share: | ||||||||||||
Options outstanding | $ | 27.97 | $ | 29.75 | $ | 30.62 | ||||||
Options exercisable | $ | 27.97 | $ | 29.75 | $ | 31.01 | ||||||
The table below summarizes information about stock options outstanding at December 31, 2005. (thousands except for life and share price)
| Options outstanding and exercisable | |||||||
Range of exercise prices | Number outstanding and at 12/31/05 | Weighted- average remaining contractual life | Weighted- average exercise price | ||||
$1.19 - $3.60 | 200.0 | 5.1 | $ | 2.39 | |||
$3.61 - $16.40 | 100.0 | 4.6 | 16.38 | ||||
$16.41 - $19.50 | 1,200.4 | 4.2 | 19.44 | ||||
$19.51 - $60.00 | 307.7 | 1.4 | 55.34 | ||||
$60.01 - $83.06 | 179.2 | 1.9 | 73.14 | ||||
| 1,987.3 | |||||||
Restricted stock awards were used for the purposes of recruitment, special recognition and retention of key employees. No award of restricted stock shares was granted in 2005, 2004 or 2003. At the end of 2005, there were 114,419 restricted shares of common stock outstanding with 715 accumulated dividend equivalent shares.
FAS 123 permits entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings disclosures. Had compensation costs for these plans been determined consistent with FAS 123, our net earnings would have been changed to the following pro forma amounts.
| 2005 | 2004 | 2003 | |||||||||
Net earnings (loss): | |||||||||||
As reported | $ | 111.1 | �� | $ | (79.7 | ) | $ | (39.3 | ) | ||
Pro forma | $ | 111.1 | $ | (79.7 | ) | $ | (39.4 | ) | |||
The fair value of grants was estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted in 2005, 2004 or 2003.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 24. EMPLOYEE COMPENSATION
Employee compensation is presented in the table below. Charges for severance costs and early retirement incentives to terminated employees (otherwise recorded as restructuring charges) have been excluded.
Employee compensation cost | 2005 | 2004 | 2003 | |||||||
Wages and salaries | $ | 800.2 | $ | 778.5 | $ | 718.9 | ||||
Payroll taxes | 83.5 | 81.5 | 78.0 | |||||||
Pension expense (credits), net | 26.4 | 13.3 | 15.9 | |||||||
Insurance and other benefit costs | 92.8 | 96.0 | 112.2 | |||||||
Stock-based compensation | (0.1 | ) | — | 0.2 | ||||||
Total | $ | 1,002.8 | $ | 969.3 | $ | 925.2 | ||||
On January 13, 2006 we announced that certain U.S. non-production salaried employees will have their pension plan benefits frozen as of February 28, 2006. As a result, we recorded a curtailment charge of $16.9 million in the fourth quarter of 2005. This amount is included in the pension expense reported in the table above.
NOTE 25. LEASES
We rent certain real estate and equipment. Several leases include options for renewal or purchase, and contain clauses for payment of real estate taxes and insurance. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. As part of the Chapter 11 Case, AWI must decide whether to assume, assume and assign, or reject prepetition unexpired leases and other prepetition executory contracts. AWI has been granted an extension through and including the date on which an order confirming the Plan is entered by the U.S. District Court for the District of Delaware to make these decisions with respect to prepetition unexpired leases of real property. With respect to prepetition executory contracts and unexpired leases not related to real estate, AWI has until confirmation of a reorganization plan to make these decisions unless such time is shortened by the Bankruptcy Court. The accompanying financial statements do not reflect any adjustment related to assumption or rejection of such agreements.
Rental expense was $24.9 million in 2005, $22.4 million in 2004 and $21.3 million in 2003. Future minimum payments at December 31, 2005, by year and in the aggregate, having noncancelable lease terms in excess of one year were as follows:
Scheduled minimum lease payments | Capital Leases | Operating Leases | ||||
2006 | $ | 1.0 | $ | 14.6 | ||
2007 | 0.7 | 12.1 | ||||
2008 | 0.3 | 8.4 | ||||
2009 | — | 4.9 | ||||
2010 | — | 2.5 | ||||
Thereafter | 0.1 | 7.9 | ||||
Total | $ | 2.1 | $ | 50.4 | ||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Assets under capital leases are included in the consolidated balance sheets as follows:
| 2005 | 2004 | |||||||
Land | $ | 3.8 | $ | 3.8 | ||||
Building | 4.1 | 4.1 | ||||||
Machinery | 25.2 | 26.7 | ||||||
Less accumulated amortization | (14.9 | ) | (14.6 | ) | ||||
Net assets | $ | 18.2 | $ | 20.0 | ||||
NOTE 26. SHAREHOLDERS’ EQUITY
Treasury shares were unchanged at 11,393,170 for 2005, 2004, and 2003.
The balance of each component of accumulated other comprehensive income as of December 31, 2005 and 2004 is presented in the table below.
| 2005 | 2004 | |||||||
Foreign currency translation adjustments | $ | 70.2 | $ | 84.3 | ||||
Derivative gain, net | 4.8 | 3.6 | ||||||
Minimum pension liability adjustments | (37.9 | ) | (45.1 | ) | ||||
Accumulated other comprehensive income | $ | 37.1 | $ | 42.8 | ||||
The related tax effects allocated to each component of other comprehensive income for 2005 are presented in the table below.
Pre-tax Amount | Tax Expense (Benefit) | After tax Amount | ||||||||||
Foreign currency translation adjustments | $ | (13.8 | ) | $ | (0.3 | ) | $ | (14.1 | ) | |||
Derivative gain, net | 1.8 | (0.6 | ) | 1.2 | ||||||||
Minimum pension liability adjustments | 10.0 | (2.8 | ) | 7.2 | ||||||||
Total other comprehensive income | $ | (2.0 | ) | $ | (3.7 | ) | $ | (5.7 | ) | |||
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 27. SUPPLEMENTAL FINANCIAL INFORMATION
| 2005 | 2004 | 2003 | |||||||
Selected operating expenses | |||||||||
Maintenance and repair costs | $ | 115.4 | $ | 118.9 | $ | 107.8 | |||
Research and development costs | 48.5 | 47.0 | 46.1 | ||||||
Advertising costs | 33.3 | 31.8 | 32.7 | ||||||
Other non-operating expense | |||||||||
Foreign currency translation loss, net of hedging activity | — | $ | 1.3 | $ | 3.8 | ||||
Equity loss in ISI | $ | 0.9 | — | — | |||||
Other | 0.6 | 1.8 | 1.9 | ||||||
Total | $ | 1.5 | $ | 3.1 | $ | 5.7 | |||
Other non-operating income | |||||||||
Interest income | $ | 4.6 | $ | 4.0 | $ | 3.5 | |||
Foreign currency translation gain, net of hedging activity | 2.8 | — | — | ||||||
Equity earnings in ISI | 0.7 | 1.9 | 0.3 | ||||||
Gain on sale of ISI | 3.4 | — | — | ||||||
Interest on asbestos receivable payment | — | — | 1.1 | ||||||
Other | 0.4 | 0.5 | 0.1 | ||||||
Total | $ | 11.9 | $ | 6.4 | $ | 5.0 | |||
NOTE 28. SUPPLEMENTAL CASH FLOW INFORMATION
| 2005 | 2004 | 2003 | |||||||
Interest paid | $ | 2.5 | $ | 2.8 | $ | 3.1 | |||
Income taxes paid, net of refunds | $ | 42.9 | 77.3 | 27.5 | |||||
NOTE 29. RELATED PARTIES
We sold 65% of our ownership in our gasket products subsidiary, (now known as Interface Solutions, Inc. or “ISI”) on June 30, 1999. We still retained a 35% ownership of this business as of December 31, 2004. As part of the 1999 divestiture, we had agreed to continue to purchase a portion of the felt products used in the manufacturing of resilient flooring from ISI for an initial term of eight years. We were required to purchase at least 75% of our felt requirements from ISI. Our purchases of felt products from ISI for the pre-divested part of 2005, 2004 and 2003 were $16.4 million, $27.5 million and $26.9 million, respectively. The amounts due to ISI for these purchases were $1.7 million and $1.6 million at the end of 2004 and 2003. Additionally, we had received nominal monthly payments from ISI for some logistics and administrative services. The amounts outstanding from ISI at the end of 2004 and 2003 for the logistics and administrative services we had provided to them were less than $0.1 million. On August 8, 2005 we sold our remaining 35% equity interest in ISI and ISI is no longer considered a related party. See Note 9 for additional information.
We purchase grid products from WAVE, our 50%-owned joint venture with Worthington Industries. The total amount of these purchases was approximately $68 million, $60 million and $51 million for the years ended December 31, 2005, 2004 and 2003, respectively. We also provide certain selling, promotional and administrative processing services to WAVE for which we receive reimbursement. Those services amounted to $13.0 million, $11.8 million and $9.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. The net amounts due from us to WAVE for all of our relationships were $4.4 million and $4.0 million at the end of 2005 and 2004. See Note 9 for additional information.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 30. LITIGATION AND RELATED MATTERS ASBESTOS-RELATED LITIGATION
(Note: Particular documents referred to in this section are available at www.armstrongplan.com)
Prior to December 6, 2000, AWI, the major operating subsidiary of AHI, had been named as a defendant in personal injury cases and property damage cases related to asbestos-containing products. On December 6, 2000, AWI filed a voluntary petition for relief (“the Filing”) under Chapter 11 of the U.S. Bankruptcy Code to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability.
Two of AWI’s domestic subsidiaries also commenced Chapter 11 proceedings at the time of the Filing. AHI and all of AWI’s other direct and indirect subsidiaries, including Armstrong Wood Products Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrong’s ceiling grid systems joint venture with Worthington Industries, Inc.), Armstrong Canada and Armstrong DLW AG were not a part of the Filing and accordingly the liabilities, including asbestos-related liability if any, of such companies arising out of their own activities will not be resolved in AWI’s Chapter 11 Case except for any asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities of AWI.
Asbestos-Related Personal Injury Claims
Prior to the Filing, AWI was a member of the Center for Claims Resolution (the “CCR”), which handled the defense and settlement of asbestos-related personal injury claims on behalf of its members. The CCR pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (“SSP”) and had reached agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant.
Due to the Filing, holders of asbestos-related personal injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the CCR with respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. A creditors’ committee representing the interests of asbestos-related personal injury claimants and an individual representing the interests of future claimants have been appointed in the Chapter 11 Case. AWI’s present and future asbestos-related liability will be addressed in its Chapter 11 Case. See Note 1 regarding AWI’s Chapter 11 proceeding.
During 2003, AWI and the other parties in its Chapter 11 Case reached agreement on a plan of reorganization that addresses how all of AWI’s pre-Filing liabilities are to be settled. Several amendments to the plan of reorganization were filed, culminating in the Fourth Amended Plan of Reorganization filed with the Bankruptcy Court on May 23, 2003, which was modified by modifications filed with the Bankruptcy Court on October 17, 2003, November 10, 2003, and December 3, 2004, and is referred to in this report as the “POR”.
Before a plan of reorganization may be implemented by AWI, it must be confirmed by order of both the Bankruptcy Court and the U.S. District Court. In addition, consummation of a plan of reorganization may be subject to the satisfaction after confirmation of certain conditions, as provided by the plan of reorganization. On November 17 and 18, 2003, the Bankruptcy Court held a hearing on confirmation of the POR and on December 19, 2003, issued proposed findings of fact and conclusions of law and a proposed order confirming the POR, notwithstanding the rejection of the POR by the class of unsecured creditors. On December 29, 2003, the Unsecured Creditors’ Committee filed an objection to the Bankruptcy Court’s proposed findings of fact and conclusions of law and the proposed order of confirmation of the POR. On February 23, 2005, the U.S. District Court Judge Eduardo C. Robreno ruled that the POR, in its current form, could not be confirmed. In the court’s decision, the Judge found that, because the class of unsecured creditors voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule. AWI filed a Notice of Appeal to the U.S. Court of Appeals for the Third Circuit on March 4, 2005. On December 29, 2005, the U.S. Court of Appeals affirmed the District Court’s decision to deny confirmation of the POR.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
At a status conference before Judge Robreno on February 3, 2006, AWI and the court-authorized representatives of AWI’s creditors and claimants advised the Court that they had agreed on a proposed schedule for a confirmation hearing on a modified POR which would eliminate the provisions regarding distribution of warrants to existing AHI equity holders. Under the modified POR, existing AHI equity holders would receive no distribution and their equity interests would be cancelled. Following the conference, Judge Robreno signed an order that established such a schedule for a U.S. District Court confirmation hearing on the modified POR. The schedule calls for the confirmation hearing to commence on May 23, 2006. At that hearing, the Court will hear testimony and review other evidence relating to the Unsecured Creditors Committee’s objection that the modified POR unfairly discriminates against the unsecured creditors, based on the size of the present and future asbestos liability implied by the modified POR. AWI filed the modified POR with the Court on February 21, 2006. AWI is also monitoring a proposed asbestos claims litigation reform bill in Congress. See Note 1 for further discussion of AWI’s Chapter 11 process. AWI is unable to predict whether the modified POR will be confirmed or when AWI would emerge from Chapter 11.
A description of the basic components of the POR, which remain unchanged in the modified POR, follows.
Basic Components of the POR
A principal feature of the POR is the creation of a trust (the “Asbestos PI Trust”), pursuant to section 524(g) of the Bankruptcy Code, for the purpose of addressing AWI’s personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants, arising directly or indirectly out of AWI’s pre-Filing use of or other activities involving asbestos would be channeled to the Asbestos PI Trust.
In accordance with the 524(g) injunction if the POR goes into effect, various entities would be protected from such present and future asbestos-related personal injury claims. These entities include, among others, reorganized AWI, AHI, AWI’s subsidiaries and other affiliates (as defined in the POR), and their respective officers and directors. Upon emergence from Chapter 11, AWI would not have any responsibility for these claims (including claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor would it participate in their resolution.
However, although AWI’s domestic and foreign subsidiaries and other affiliates would be protected parties, asbestos-related personal injury claims against them would be channeled to the Asbestos PI Trust only to the extent such claims directly or indirectly relate to the manufacturing, installation, distribution or other activities of AWI or are based solely on AWI’s ownership of the subsidiaries or other affiliates (as distinguished from independent activities of the subsidiaries or affiliates). Currently, three asbestos-related personal injury litigations against subsidiaries of AWI allegedly arising out of such independent activities are pending. These claims would not be channeled to the Asbestos PI Trust under the POR inasmuch as they do not involve activities of AWI. The subsidiaries deny liability and are aggressively defending the matters. AWI has not recorded any liability for these matters. Management does not expect that any sum that may have to be paid in connection with these matters will be material to Armstrong.
In addition, workers’ compensation claims brought against AWI or its subsidiaries or other affiliates would not be channeled to the Asbestos PI Trust and would remain subject to the workers’ compensation process. Historically, workers’ compensation claims against AWI and its subsidiaries have not been significant in number or amount and AWI has continued to honor its obligations with respect to such claims during the Chapter 11 Case. Workers’ compensation law provides that the employer is responsible for evaluation, medical treatment and lost wages as a result of a job-related injury. Currently, AWI has three pending workers’ compensation claims, and its UK subsidiary has seven employer liability claims involving alleged asbestos exposure.
There also is uncertainty as to proceedings, if any, brought in certain foreign jurisdictions with respect to the effect of the 524(g) injunction in precluding the assertion in such jurisdictions of asbestos-related
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
personal injury claims, proceedings related thereto or the enforcement of judgments rendered in such proceedings.
Management believes that neither AWI nor any of its subsidiaries or other affiliates is subject to any asbestos-related personal injury claims that would not be channeled to the Asbestos PI Trust and that are of a magnitude that, individually or collectively, would be material to reorganized Armstrong.
Potential Legislation
On April 19, 2005 asbestos personal injury claims reform legislation was introduced, as the FAIR Act of 2005 (S.852), to the United States Senate. On May 26, 2005 the bill was reported out of committee. There is uncertainty as to whether this bill or any asbestos reform proposal will become law, and what impact there might be on AWI’s Chapter 11 Case.
If legislation as currently proposed is enacted into law prior to AWI implementing a confirmed plan of reorganization, AWI’s asbestos liability would likely be materially reduced from the $3.2 billion amount currently recorded, but its size would depend on AWI’s payment obligations under the law and the present value of those obligations. In such event, AWI would seek to develop a new plan of reorganization based on a re-evaluation of the then value of AWI’s assets and ongoing businesses, the amount of allowed unsecured claims against AWI (including any post-petition interest that may be allowed on such claims, as to which no amount is currently recorded in AWI’s liabilities subject to compromise), the amount AWI would be required to pay under the enacted legislation, and other factors. Under the absolute priority rule applicable in Chapter 11, AWI’s shareholder would not be entitled to any recovery until the allowed claims of all of its creditors have been satisfied. We do not know enough today to predict the likely terms of a reorganization plan that may be feasible under such circumstances, or if such reorganization would result in existing AHI shareholders receiving or retaining any equity value in AWI upon AWI’s emergence from Chapter 11.
Asbestos-Related Liability
Based upon events through early March 2003, specifically the parties’ agreement on the basic terms of the POR’s treatment of AWI’s asbestos-related liabilities, management concluded that it could reasonably estimate its probable liability for AWI’s current and future asbestos-related personal injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the balance sheet liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at December 31, 2005 and December 31, 2004, which was treated as subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI Trust pursuant to the POR and an assumption for this purpose that the recovery value percentage for the allowed claims of the Asbestos PI Trust is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims.
AWI is unable to predict whether the modified POR will be confirmed, or when AWI would emerge from Chapter 11. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded asbestos-related liability are possible and could be material to AWI’s financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and with respect to any legislation, and will make changes to the recorded liability if and when it is appropriate.
Insurance Recovery Proceedings
A substantial portion of AWI’s primary and remaining excess insurance asset is nonproducts (general liability) insurance for personal injury claims. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution (“ADR”) procedure was commenced 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
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.
During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWI’s claims against certain Liberty Mutual policies were barred by the statute of limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that insurance assets of $73 million were no longer probable of recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The $1.6 million claimed for these costs and fees is in dispute. Based upon an AWI request, the appellate panel held a rehearing on November 21, 2003. In January 2004, the appellate panel upheld its initial ruling. On February 4, 2004, AWI filed a motion in the U.S. District Court for the Eastern District of Pennsylvania to vacate the rulings of the appellate panel.
In July 2002, AWI filed a lawsuit against Liberty Mutual in the U.S. District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues not subject to binding ADR. The U.S. District Court has not yet set a schedule to hear this matter.
On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (“Home”) under an order of liquidation. Less than $10 million of AWI’s recorded insurance asset is based on policies with Home, which management believes is probable of recovery. AWI filed a proof of claim against Home during June 2004. It is uncertain when AWI will receive proceeds from Home under these insurance policies.
Insurance Asset
An insurance asset in respect of asbestos claims in the amount of $98.6 million was recorded as of December 31, 2005 and December 31, 2004. The total amount recorded reflects AWI’s belief that insurance proceeds will be recovered in this amount, based upon AWI’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, in our opinion, is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $79 million of the $98.6 million asset is determined from agreed coverage in place. Of the $98.6 million, $9.8 million has been recorded as a current asset as of December 31, 2005 reflecting management’s estimate of the minimum insurance payments to be received in the next 12 months.
Many uncertainties remain in the insurance recovery process; therefore, AWI did not increase the estimated insurance recovery asset in 2005.
Cash Flow Impact
As a result of the Chapter 11 Filing, AWI has not made any payments for asbestos-related personal injury claims since the fourth quarter of 2000. Additionally, AWI did not receive any asbestos-related insurance recoveries during 2005 but received $4.5 million during 2004. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond 10 years.
Conclusion
Many uncertainties continue to exist about the matters impacting AWI’s asbestos-related liability and insurance asset. These uncertainties include when and if a plan of reorganization will be confirmed by the Bankruptcy Court and the U.S. District Court, the impact of any potential legislation, and the financial condition of AWI’s insurance carriers.
Additionally, if a plan of reorganization is confirmed, AWI is unable to predict when it will be implemented. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWI’s financial position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and with respect to any legislation, and will make changes to the recorded amounts if and when it is appropriate.
ENVIRONMENTAL MATTERS
Environmental Expenditures
Most of our manufacturing and certain of our research facilities are affected by various federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at our operating facilities.
As a result of continuous changes in regulatory requirements, we cannot predict with certainty future expenditures associated with compliance with environmental requirements. The United States Environmental Protection Agency (“EPA”) has promulgated a new regulation pursuant to the Clean Air Act that may impact our domestic manufacturing operations. That regulation, The National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers and Process Heaters Act, became effective in November, 2004, and requires compliance by September 13, 2007. While we are finalizing our review of this regulation, adoption of this regulation is not expected to have a material impact on our consolidated results of operations or financial condition.
Environmental Remediation
Summary
We are involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and similar state “Superfund” laws at 28 sites. In most cases, we are one of many potentially responsible parties (“PRPs”) which have potential liability for the required investigation and remediation of each site and which, in some cases, have agreed to jointly fund that required investigation and remediation. With regard to some sites, however, we dispute the liability, the proposed remedy or the proposed cost allocation among the PRPs. We may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.
We have also been remediating environmental contamination resulting from past industrial activity at certain of our former plant sites. Estimates of our future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site and consider factors such as our activities in conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our 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 remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. Additionally, the Chapter 11 Case also may affect the ultimate amount of such contributions.
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Effects of Chapter 11
Certain of AWI’s environmental liabilities are subject to discharge through its Chapter 11 Case while others are not. AWI’s payments and remediation work on such sites for which AWI is a PRP is under review in light of the Chapter 11 Filing. The bar date for claims from the EPA expired during the third quarter of 2003. AWI received an unliquidated proof of claim from the EPA. Those environmental obligations that AWI has with respect to property that it owns or operates are likely to be unaffected by the Chapter 11 Case. Therefore, AWI will be required to continue meeting its on-going environmental compliance obligations at the properties that AWI owns or operates. AWI will also be required to address the effects of any contamination at those sites, even if the contamination predated Chapter 11 Filing. In addition, AWI may be obligated to remedy the off-site impact of activities that occurred on the properties it owns and operates.
Monetary claims with respect to properties that AWI does not own or operate (such as formerly owned sites, or landfills to which AWI’s waste was taken) may be discharged in AWI’s Chapter 11 Case. Accordingly, claims brought by a federal or state agency alleging that AWI should reimburse the claimant for money that it spent cleaning up a site which AWI does not own or operate would be subject to discharge, provided the claimant received proper notice of the bankruptcy and bar date. The same would be true for monetary claims by private parties, such as other PRPs with respect to sites with multiple PRPs. Under the POR, the Superfund sites at which AWI is alleged to be a PRP are being treated as unsecured liabilities subject to compromise. Other Superfund sites relate to entities that are not part of AWI’s Chapter 11 Case and therefore will not be discharged.
In addition to the right to sue for reimbursement of the money it spends, CERCLA also gives the federal government the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to those States. While we believe such rights do not survive Chapter 11, there does not appear to be controlling judicial precedent that these injunctive rights are dischargeable. Thus, according to some cases, while a governmental agency’s right to require AWI to reimburse it for the costs of cleaning up a site may be dischargeable, the same government agency’s right to compel us to spend our money cleaning up the same site may not be dischargeable even though the financial impact to AWI would be the same in both instances.
Specific Events
AWI has been working to resolve as many of its environmental liabilities through its Chapter 11 Case as possible. AWI has entered into a global environmental settlement with the Department of Justice (“DOJ”) and the EPA with respect to CERCLA liability at 37 sites. Pursuant to the proposed Settlement Agreement, the federal government would covenant not to sue AWI for either monetary or injunctive relief under CERCLA at 19 of these sites, in exchange for an allowed claim amount in the bankruptcy with respect to known claims concerning sites that AWI does not own or operate. Under the settlement, AWI also has contribution protection under CERCLA with respect to private party claims at the sites at which the government receives an allowed claim. Additionally, AWI has the benefit of discharge both at the 19 sites for which the government receives an allowed claim and at an additional 18 sites identified in the Settlement Agreement. At an additional site, AWI will continue to participate in the cleanup under a previously approved Consent Decree. The EPA Settlement Approval Order was entered by the Bankruptcy Court in October 2005. In accordance with this global settlement becoming effective, the EPA proof of claim has been amended to assert a claim in the amount of $8.7 million. This amount includes the $7.8 million that AWI and EPA agreed upon with respect to the Peterson Puritan site. In connection with the global settlement, AWI filed a motion with the Bankruptcy Court on January 11, 2006, objecting to claims asserted by certain PRPs and requesting the Court enter an order disallowing such claims. On February 21, 2006 the Court issued its order disallowing such claims.
AWI is subject to a unilateral order by the Oregon Department of Environmental Quality (“DEQ”) to conduct a remedial investigation and feasibility study and any necessary remedial design and action at its
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (“OC”) and Kaiser Gypsum Company, Inc. (“Kaiser”). AWI has entered into an agreement with Kaiser for the sharing of costs and responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement with the DEQ. Pursuant to the settlement, OC has made a lump sum payment to the DEQ in exchange for contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI has reached an agreement with the DEQ as to how these funds will be made available for the investigation and remediation of the site. AWI has recorded an environmental liability with respect to the investigation and feasibility study at its St. Helen’s facility, but not for Scappoose Bay because AWI continues to dispute responsibility for contamination of Scappoose Bay.
A foreign subsidiary of AWI sold a manufacturing facility in 1990, which was prior to AWI’s acquisition of the subsidiary. Under the terms of the sales agreement, an environmental indemnification was provided to the buyer of the facility. During the third quarter of 2005, the facility owner discovered additional areas of soil contamination that require additional remediation. Accordingly, a $3.1 million charge was recorded within SG&A expense to increase our probable liability. As additional sampling efforts and meetings with local government authorities continue, further increases to our recorded liability are possible.
Summary of Financial Position
Liabilities of $27.3 million and $28.0 million at December 31, 2005 and December 31, 2004, respectively were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing, $19.4 million of the December 31, 2005 and $18.6 million of the December 31, 2004 environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.
The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or litigation. The amount of the recorded asset for estimated recoveries was $2.3 million at December 31, 2005 and $2.4 million at December 31, 2004.
Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we believe that any sum we may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on our financial condition, or liquidity, although the recording of future costs may be material to earnings in such future period.
PATENT INFRINGEMENT CLAIMS
We are a defendant in two lawsuits claiming patent infringement related to some of our laminate flooring products. The plaintiffs have claimed unspecified monetary damages. We are being defended and indemnified by our supplier for costs and potential damages related to the litigation.
BREACH OF CONTRACT CLAIM
Since 2003, we had been pursuing a breach of contract claim against a former laminate flooring supplier. An arbitration hearing was held in March 2005. In July 2005 the tribunal communicated that it intended to rule in Armstrong’s favor. A hearing to address an award amount had been scheduled in September
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
2005. Prior to this scheduled hearing, the parties reached a settlement in which the supplier agreed to pay $6.75 million to Armstrong to resolve all existing and potential claims between the parties. The Bankruptcy Court approved the settlement in October 2005. Accordingly, we recorded a net gain in the third quarter of 2005 of $6.4 million in our Resilient Flooring ($5.2 million) and Wood Flooring ($1.2 million) segments.
OTHER CLAIMS
Additionally, we are involved in various other claims and legal actions involving product liability, patent infringement, breach of contract, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not expect that any sum that may have to be paid in connection with these matters will have a materially adverse effect on our consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in which a matter is resolved.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our chief executive officer and our chief financial officer, as of the end of the period covered by this report, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 20052006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm are incorporated by reference to Item 8.
| ITEM 9B. | OTHER INFORMATION |
On March 27, 2007, the Company entered into a Share Purchase Agreement with NPM Capital N.V. and Flagstone Beheer B.V. to sell Tapijtfabriek H. Desseaux N.V. and its subsidiaries for approximately EUR 40,000,000. The purchase price is subject to post-completion adjustments in respect of working capital and certain other assets and liabilities to be calculated within 90 days of completion.
Shareholder Rights Plan ExtendedTapijtfabriek H. Desseaux N.V. and its subsidiaries were the principal operating companies of Armstrong’s European Textile and Sports Flooring business segment. The Company is retaining ownership of certain Desseaux businesses including automotive carpeting and linoleum-based indoor sports flooring. Armstrong expects to use the sale proceeds to fund its continuing operations in Europe.
On February 20, 2006,The sale is expected to close in April 2007, subject to certain conditions including clearance from the Board of Directors of Armstrong Holdings, Inc. extended the Rights under the March 14, 2000 Rights Agreement (the “Agreement”) which established the Company’s shareholder rights plan (the “Plan”). The extension runs until the earlier of March 21, 2008 or the date a plan of reorganization in Armstrong World Industries, Inc. becomes effective. Further extensionEuropean Union merger control authority. A copy of the Plan, or its earlier redemption, is still permitted. The amended Summary of RightsShare Purchase Agreement is filed herewith as an exhibit.
2006 Actions on Awards for Future Annual Bonus and Long-Term Incentive Compensation
On February 20, 2006, the Company took annual compensation actions on executive compensation programs. The Company has established and administers our executive compensation programs to attract and retain executive talent necessary for our operations. As a general rule, we also try to structure our compensation programs to maximize the deductibility of the Company’s executive compensation expense for tax purposes. Historically, the principal components of our executive compensation have included base salary, an annual performance-based bonus under our Management Achievement Plan (“MAP”), and a long-term incentive component that has been provided under our 1999 Long-Term Incentive Plan (“LTIP”). Since Armstrong World Industries, Inc. filed for Chapter 11 protection in December 2000, that long-term incentive component has been provided through cash incentive awards instead of stock options, performance restricted shares or restricted stock awards, which have not been allowed under Chapter 11. Other elements of our total executive officer remuneration are disclosed in Item 11 of this Report on Form 10-K.
Traditionally, the Company’s independent Management Development and Compensation Committee of the Board of Directors (the “Committee”) meets in February to establish performance goals for the Company’s operations under the MAP and LTIP, and establish target awards under those plans for executives to be paid in the future based upon achievement of those operating goals. Accordingly, on
February 20, 2006, that Committee set operating performance goals and set target awards under both of those plans.
The following summary of the terms and operation of the MAP and LTIP is qualified in its entirety by reference to the provisions of those plans, which are incorporated by reference as exhibits to this filing.
With respect to our Chief Executive Officer (“CEO”), Mr. Lockhart, his employment agreement dated August 7, 2000 (which has previously been filed with the SEC in the 10-Q for the quarter ended September 30, 2000) addresses his contractual rights with respect to annual bonus and long-term incentive compensation. The Committee administers Mr. Lockhart’s awards under MAP and LTIP with a view towards observing those contractual obligations.
If the Company performs above a MAP performance threshold for 2006, participants in the MAP will be eligible to receive a payment in 2007 based upon a percentage of their target bonus. Each executive’s target bonus is calculated as a percentage of their annual base salary earnings ranging from 15% (at the base level for participants) to 125% (for the CEO).
Similarly, if the Company performs above a LTIP performance threshold for 2006 and 2007, participants in the LTIP will be eligible to receive a payment in 2008 equal to a percentage of their 2006 LTIP cash incentive award target grant. LTIP award target grants are calculated as a percentage of the executive’s current base salary ranging from 12% (at the base level for participants) to 337% (for the CEO).
As a general rule, if the Company’s performance equals the operating goals set by the Committee, the authorized payout under each of the MAP and LTIP has been set at 120% of the executive’s target bonus and LTIP award target grant. Mr. Lockhart’s actual LTIP award payment, however, will be based on payout formulae established by the Committee.
If the Company does not achieve the threshold levels of performance against the MAP and LTIP operating goals that have been established, no payments on the 2006 awards will be made to executive officers. If the threshold MAP and LTIP performance is achieved, but the results are less than the goals, relatively lower authorized payouts are allowed for participants. If the Company should exceed the operating goals, there would be allowed a relative increase in the payments to participants under the MAP and LTIP. However, the Committee has the discretion to reduce actual payments to participants based on individual performance factors. With the exception of Mr. Lockhart’s LTIP awards, the Committee has traditionally reduced the authorized MAP and LTIP payments, except in situations where the Committee determined that a participant’s contributions merited the full authorized payment.
The table below shows the current base salary level, the 2006 MAP target bonus as a percentage of each executive’s 2006 base salary earnings, and the LTIP award target grant amount for each executive officer.
Executive Officer | Current Base Salary | 2006 MAP Award % of Actual Base | 2006 LTIP Award | ||||||
Michael D. Lockhart | $ | 980,000 | 125 | % | $ | 3,308,000 | |||
Stephen J. Senkowski | 550,000 | 70 | % | 1,182,500 | |||||
F. Nicholas Grasberger | 450,000 | 60 | % | 810,000 | |||||
John N. Rigas | 382,000 | 50 | % | 573,000 | |||||
Frank J. Ready | 367,000 | 50 | % | 458,800 | |||||
William C. Rodruan | 280,400 | 45 | % | 280,400 | |||||
The form of the LTIP award letter is filed hereto as an Exhibit. (There is no award letter used for the MAP.) Executives are eligible to receive a merit-based salary increase effective April 1, 2006. Any increase to an executive’s base salary earnings will be factored in to their MAP bonus to be paid in 2007.
Mr. Frank Ready was elected an executive officer of Armstrong World Industries, Inc. on February 20, 2006.
Modification to Plan of Reorganization Filed
On February 21, 2006, AWI filed modifications to its Fourth Amended Plan of Reorganization in its Chapter 11 case. The Modified Plan (a copy of which is filed with this report) is substantially similar to AWI’s previously filed Fourth Amended Plan of Reorganization except that it eliminates the distribution of warrants to shareholders of AWI’s parent company, Armstrong Holdings, Inc. This modification is consistent with the January 2006 decision by the Third Circuit Court of Appeals upholding Judge Robreno’s previous ruling that the issuance of the warrants under the Fourth Amended Plan violated the so-called “absolute priority rule” of the Bankruptcy Code.Exhibit No. 10.38.
| ITEM 10. | DIRECTORS, |
Code of Ethics
Armstrong has followed a code of ethics for many years. The companyCompany began in a small cork-cutting shop in 1860 in Pittsburgh under its Founder, Thomas Armstrong. He was determined that his companyCompany act with fairness and in the “balanced best interests (of) customers, stockholders, employees, suppliers, community neighbors, government and the general public.”
Thomas Armstrong was among the first American entrepreneurs to discard the old business maxim ofcaveat emptor—”Let the buyer beware”—and replace it by practicing the principle of “Let the buyer have faith,” which became an enduring motto for Armstrong.
To memorialize this ethical foundation, in 1960 Armstrong adopted its Operating Principles which incorporate the philosophy of Thomas Armstrong and his successors:
To respect the dignity and inherent rights of the individual human being in all dealings with people.
To maintain high moral and ethical standards to reflect honesty, integrity, reliability and forthrightness in all relationships.
To reflect the tenets of good taste and common courtesy in all attitudes, words and deeds.
To serve fairly and in proper balance the interests of all groups associated with the business – customers, stockholders, employees, suppliers, community neighbors, government and the public.
In 1992, Armstrong built on these Operating Principles and established its “Code of Business Conduct”, which applies to all employees, executives and directors, specifically including our Chief Executive Officer, our Chief Financial Officer and our Controller. That Code was updated in 2000, when the current version was introduced.
In 2002, we adopted an additional “Code of Ethics for Financial Professionals,” which applies to all professionals in Armstrong’s finance and controller functions worldwide, including our Chief Financial Officer and our Controller.
These Codes are intended to deter wrongdoing and to promote:
Honest and ethical conduct, including handling of actual or apparent conflicts of interest between personal and professional relationships;
Full, fair, accurate, timely and understandable public disclosures;
Compliance with applicable governmental laws, rules and regulations;
The prompt internal reporting of violations of the Codes; and,
Accountability for compliance with the Codes.
These two Codes are available on the Armstrong web site atwww.armstrong.com/corporatena/corp_mission.html. If the substance of either Code is amended in the future, we will note the date and describe the nature of the amendment at that web site. We will also note at that site any express or implicit waiver from a provision of either Code granted to any Armstrong officer. To date, no such waivers have been granted.
Armstrong HoldingsWorld Industries, Inc. Board of Directors
The Board of Directors has three committees: an Audit Committee, a Management Development and Compensation Committee, and a Nominating and Governance Committee. Each committee has a charter; the charters are posted atwww.armstrong.com/corporatena/article9706.html.The Board met four times during the fiscal year ended December 31, 2006. All Directors participated in at least 75% of all meetings of the Board of Directors and the committee meetings of the Board on which they served. The business experience of all of the directors is described below under the heading “Director Information.” The Board has determined that all outside membersnon-employee directors of the Board, including all members of the Audit Committee, Management Development and Compensation Committee, and Nominating and Governance Committees,Committee, are independent in accordance with the rules and regulations of The NASDAQNew York Stock Market, Inc. Although Armstrong is not currently listed on NASDAQ, the company anticipates listing its stock on that exchange when AWI emerges from Chapter 11, and has been complying with NASDAQ requirements in preparation for such listing.
Exchange (“NYSE”). The Board of Directors has also determined that all outside membersnon-employee directors of the Board are independent within the meaning of Armstrong’s Corporate Governance Principles (seewww.armstrong.com/corporate/corp_mission.html)corp_mission.html) on the Company’s website at http://www.armstrong.com under “About Armstrong” and “Corporate Governance”. The standardsSee also Item 13. Certain Relationships and Related Transactions, and Director Independence, for a discussion of independence set forth in Armstrong’s Corporatethe Board’s determination as to director independence.
Nominating and Governance Principles incorporate and, in certain areas exceed, the standards under NASDAQ.
Committee
The determinations made as to independence under the rulesNominating and regulations of NASDAQGovernance Committee members are James J. Gaffney (Chair), Judith R. Haberkorn, Russell F. Peppet and Armstrong’s Corporate Governance Principals were based upon the Board’s consideration of relationships between directors and the company or management, and of known factors that reasonably could compromise the independent judgment of a director. For example, the Board considered director relationships with vendors and service providers to the company, and considered whether any director had sought to influence any decisions by the company in a manner beneficial to their personal interests.
Based on information disclosed by the directors, the Board was advised that no outside director was disqualified from being considered an independent director under Armstrong’s Corporate Governance Principles or any governmental or NASDAQ regulation. Following consideration of these facts, the Board of Directors determined that all outside directors are, in fact, “independent”.
Alexander M. Sanders, Jr. The Board, lead by its Nominating & Governance Committee monitors the independence of outside directors. Eachthe non-employee directors and is responsible for developing and recommending corporate governance guidelines and principles. This Committee is also responsible for identifying qualified potential board members and recommending directors for appointments to Board committees.
The Committee will consider director is chargedcandidates nominated by shareholders as well as non-shareholders. The procedures by which nominees may be recommended to the Board of Directors are posted atwww.armstrong.com/corporatena/article9748.htmlon the Company’s website at http://www.armstrong.com under “About Armstrong” and “Corporate Governance”. Shareholders who wish to suggest an individual for service on the Board of Directors are requested to review the “Process for Evaluation of Director Candidates”, “Director Responsibilities and Qualifications”, and “Position Description for an Armstrong Director” and supply the following information:
The full name, address, education and professional experience of the individual and why this person will be a good director.
The consent of the individual to be considered and to serve if elected.
The individual’s assessment of their qualifications and independence under SEC, NYSE and Articles II and III of Armstrong’s Corporate Governance Principles.
The number of shares of Armstrong stock and the amount of Armstrong bonds held by the individual, and by the person(s) supporting the individual.
Candidates are sought through search processes to identify qualified prospects who could complement the Board with a responsibilityrange of candorrelevant backgrounds and disclosure to their Board colleagues relative to potentially compromising relationships, transactions and compensation.experience. Typically, two aspects of each potential director are considered:
Individual director qualities – the personal characteristics that each director should have (such as integrity, independence, diligence) for the board to perform effectively as a team; and
Specific background skills, experience and competencies – the talents and insights (preferably aligned with corporate business and strategy) that should be present when the entire board meets, with each individual director contributing in one or more areas.
The Nominating and Governance Committee employs the same basic process for all director candidates, regardless of how they may be proposed for consideration. There have been no changes to the procedures by which shareholders may recommend nominees to the Board of Directors within the past year.
Audit Committee and Audit Committee Expert
The Audit Committee of Armstrong Holdings consists of John J. Roberts (Chairman)(Chair), H. Jesse Arnelle,Robert C. Garland, James E. MarleyJ. O’Connor and M. Edward Sellers.Arthur J. Pergament. The business experienceAudit Committee is responsible for the oversight of thesevarious auditing and all other directors is described below underaccounting matters, including the heading “Director Information”.selection of the Company’s independent auditors, the scope of the annual audits, pre-approval of any non-audit services to be performed and the Company’s accounting practices and internal accounting controls. The Board of Directors determined that at least one member of this committee,Committee, John J. Roberts, qualifies as an “Audit Committee Financial Expert” as defined in Item 401(h)(2)407(d)(5) of Regulation S-K of the Securities Exchange Act. Mr. Roberts is also independent, as that term is used in SEC regulations pertaining to such experts (Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act ). Additionally, as noted above, all of the members of the Audit Committee are independent under the listing standards of NASDAQthe NYSE and within the meaning of the applicable SEC rule pertaining to Audit Committees (Rule 10A-3) under the Securities Exchange Act.
Management Development and Compensation Committee
The Management Development and Compensation Committee Members are Judith R. Haberkorn (Chair), James J. Gaffney, Russell F. Peppet and Alexander M. Sanders, Jr. The Management Development and Compensation Committee oversees the Company’s compensation and benefit programs, and employment practices. The Committee establishes the overall philosophy and policies governing these programs including those pertaining to management salaries and incentive compensation. The Committee appoints and monitors outside advisors on compensation and benefit matters.
Director Information
The following information is current as of February 24, 2006. The directors named here serveMarch 27, 2007. Each director serves a one-year term until re-elected or until their successors aresuccessor is elected, or until their earlier death, resignation, retirement, or removal.
Directors of Armstrong Holdings, Inc.James J. Gaffney
H. Jesse Arnelle – Age 72;66; Director since July 1995; Member – Audit Committee. Mr. Arnelle was Of Counsel with the law firm of Womble Carlyle Sandridge & Rice, PLLC from October 1997 until September 2005 and former senior partner and co-founder of Arnelle, Hastie, McGee, Willis & Greene, a San Francisco-based corporate law firm from which he retired in 1996. He is a graduate of Pennsylvania State University and the Dickinson School of Law. Armstrong has retained Womble Carlyle Sandridge & Rice, PLLC as one of its outside law firms on various legal matters since the 1980’s. Mr. Arnelle served as Vice Chairman (1992-1995) and Chairman (1996-1998) of the Board of Trustees of the Pennsylvania State University. He serves on the Boards of FPL Group, Inc., URS Corporation, Textron Corporation and Metropolitan Life Series Fund.
Judith R. Haberkorn – Age 59; Director since July 1998; Lead Director of the Board;2006. Member – Nominating and Governance Committee (Chair) and Management Development and Compensation Committee. Consultant to GS Capital Partners, II, LP, a private investment fund affiliated with Water Street Corporate Recovery Fund I, LP and Goldman, Sachs & Co. and other affiliated investment funds from 1997-2003. From 1995-1997, he served as Chairman of the Board and Chief Executive Officer of General Aquatics, Inc., comprised of companies involved in the manufacturing of swimming pool equipment and pool construction. He was President and Chief Executive Officer of KDI Corporation, a conglomerate with companies involved in swimming pool construction and manufactured products. Mr. Gaffney serves as Chairman of the Board of Directors of Imperial Sugar Company and serves on the Boards of SCP Pool, Inc. and Beacon Roofing Supply, Inc.
Robert C. Garland
Age 39; Director since October 2006. Member – Audit Committee. Mr. Garland recently completed an assignment in the recycled pulp and paper industry on behalf of Oaktree Capital Management, LLC and Cerberus Capital Management, L.P. Mr. Garland joined American Fiber Resources, Inc. as Chief Financial Officer in January 1999. In June 2000 he was appointed as both President and Chief Financial Officer and from June 2001 through 2006 served as Chief Executive Officer, President and Chief Financial Officer. Mr. Garland’s experience includes business restructuring and business turnaround consulting at Price Waterhouse, LLP, Professor of Finance at the University of Pittsburgh Katz MBA program, and Vice President, Finance and Legal at an international medical equipment distributor.
Judith R. Haberkorn
Age 60; Director from July 1998-May 2000; reelected September 2006. Lead Director and Member – Management Development and Compensation Committee (Chair) and Nominating and Governance Committee. Ms. Haberkorn also served on the Board of Directors of Armstrong Holdings, Inc. from May 2000- October 2006. Ms. Haberkorn is a graduate of Briarcliff (N.Y.)(NY) College and completed the Advanced Management Program at Harvard Business School. From 1998 until her retirementShe served Bell Atlantic (telecommunications) and its predecessor in June 2000, she serveda variety of management positions for over a decade – most recently as President – Consumer Sales & Service for Bell Atlantic (telecommunications).from 1998 until her retirement in 2000. She previously served as President – Public & Operator Services (1997-1998), also at Bell Atlantic, and Vice President – Material Management (1990-1997) for NYNEX Telesector Resources Group (telecommunications). Ms. Haberkorn is a directorDirector of Enesco Corporation and serves on the advisory board of Norfolk Southern.ExpressJet Holdings, Inc. She is Chair Emerita of the Committee of 200 and a member of The International Women’s Forum and Thethe Harvard Business School Network of Women Alumnae. SheMs. Haberkorn is a Vice President Emerita of the Harvard Business School Alumni Advisory Board and completed two terms as a member of the Visiting Committee.Committee in May 2006.
Michael D. Lockhart –
Age 56;58; Director of Armstrong World Industries, Inc. since November 2000 and Chairman of the Board and Chief Executive Officer since March 2001. Chairman of the Board and Chief Executive Officer of AHIArmstrong Holdings, Inc. since August 2000. Director since November 2000 and Chairman of the Board and President since March 2001 of Armstrong World Industries, Inc. Mr. Lockhart previously served as Chairman and Chief Executive Officer of General Signal (a diversified manufacturer) headquartered in Stamford, Connecticut from September 1995 until it was acquired in October 1998. He joined General Signal as President and Chief Operating Officer in September 1994. From 1981 until 1994, Mr. Lockhart worked for General Electric in various executive capacities in the GE Capital,Credit Corporation (now GE Power Systems,Capital), GE Transportation Systems and GE Aircraft Engines. He is a member of the Business Council for the Graduate School of Business at the University of Chicago.
James J. O’Connor
James E. Marley – Age 70; Director since November 1988;February 2007. Member – Audit Committee, also Director—Armstrong World Industries, Inc.Committee. Mr. MarleyO’Connor is a graduate of Pennsylvania State University and earned a master’s degree in mechanical engineering from Drexel University. From 1993 until his retirement (August 1998), he served asRetired Chairman of the Board and Chief Executive Officer of AMP Incorporated (electrical/electronic connection devices), which heUnicom Corporation. He joined Commonwealth Edison Company in 1963, became President in 1977, a Director in 1978 and where he served as PresidentChairman and Chief OperatingExecutive in 1980. In 1994, he was also named Chairman and Chief Executive Officer (1990-1992) and President (1986-1990).of Unicom Corporation, which then became the parent company of Commonwealth Edison Company. He alsoretired in 1998. Mr. O’Connor serves on the BoardBoards of Arvin Meritor,Directors of Corning, Inc., Smurfit – Stone Container Corporation, UAL Corporation and United Airlines.
Russell F. Peppet
Ruth M. Owades – Age 57;67; Director since April 2002;October 2006. Member – Nominating and Governance Committee and Management Development and Compensation Committee. Ms. OwadesSince 2001, Mr. Peppet has been a Consultant to a number of firms, principally in the mutual fund industry. He is a graduatePartner in Park Avenue Equity Partners, a private equity firm. He was Chief Executive Officer of Scripps College in Claremont, California and earned an MBAPossible Dreams, Inc. from Harvard Business School. She2002-2003. Mr. Peppet was a Fulbright Scholar in Strasbourg, France. Since 2002, she has served as the PresidentPrincipal of Owades Enterprises, LLC. (marketing enterprise having the rights to four new patented consumer products). SheChurchill Capital, Inc. from 1998-2001 and Vice Chairman of Quirk Carson Peppet, Inc., a private equity firm from 1990-1998. He was the founderemployed by and CEO (1989-2001) of Calyx & Corolla (first fresh flower catalog and internet company). She was also the founder and CEO of Gardener’s Eden (a catalog of gardening tools and accessories). Ms. Owades was a directorformer Partner and Vice Chairman of Providian Financial Corporation untilPeat, Marwick, Mitchell & Co., now KPMG from 1969-1988. Mr. Peppet serves on the Boards of Directors of Liberty Tire Recycling LLC and Sunrise Medical LTC Holdings, Inc.
Arthur J. Pergament
Age 46; Director since October 2005 (when2006. Member – Audit Committee. Founder and Chief Executive Officer of Pergament Advisors, LLC, a New York based asset manager serving the company was acquired by Washington Mutual Corp.)institutional and is currently a directorhigh net worth communities. Co-founder and Director of The J. Jill Group,Accelerated Technologies, Inc., an incubator specializing in the development of coronary and the Center for Women’s Business Research. She also served as a member of the Board of Associates of Harvard Business School, the Board of Trustees of Scripps College and the Council on Competitiveness.vascular devices.
John J. Roberts –
Age 61;62; Director since April 2003;September 2006. Member – Audit Committee (Chairman)(Chair). Mr. Roberts also served on the Board of Directors of Armstrong Holdings, Inc. from April 2003-October 2006. Mr. Roberts formerly served as Global Managing Partner for PricewaterhouseCoopersPricewaterhouse Coopers LLP from 1998 until his retirement in June 2002. Mr. RobertsHe held numerous positions at Coopers & Lybrand LLP from 1967 until its merger with Price WaterhousePricewaterhouse LLP in 1998. From 1994 to 1998 Mr. Roberts served as one of three members of the Office of the Chairman of Coopers & Lybrand’s United States operations. Prior to that time, Mr. Roberts held other positions at Coopers & Lybrand, including Deputy Vice Chairman, Vice Chairman and Managing Partner. Mr. Roberts is a graduate of Drexel University. He serves on the Boards of Directors and Audit Committees of Safeguard Scientifics, Inc. and, the Pennsylvania Real Estate Investment Trust. He also serves on the Board of DirectorsTrust, and Audit Committee of Vonage Inc., a privately-held company.
Alexander M. Edward Sellers – Sanders, Jr.
Age 61;68; Director since April 2001; Member – Audit Committee. Mr. Sellers is a graduate of Vanderbilt University and received his MBA from Harvard Business School. Mr. Sellers joined Blue Cross Blue Shield of South Carolina and The Companion Group of Companies (a health, life, property and casualty insurance company with related services and functions) in 1987, serving as President and Chief Operating Officer until 1992 when he assumed the role of President and Chief Executive Officer. In 2001, he was named Chairman and Chief Executive Officer. He serves as Chair of the South Carolina Council on Competitiveness. He also serves on the following Boards: Open Networks Technologies, Inc.; National Bank of South Carolina; American Red Cross; ETV (Educational Television) Endowment of South Carolina, Central Carolina Economic Development Alliance and Central Carolina Community Foundation. Mr. Sellers is past Chair of the South Carolina State Chamber of Commerce; Palmetto Business Forum; Columbia College; ETV Endowment Board, and the Palmetto Conservation Foundation.
Jerre L. Stead – Age 63; Director since April 1992;October 2006. Member – Nominating and Governance Committee and Management Development and Compensation Committee (Chairman). Mr. SteadCommittee. President Emeritus of Charleston College since 2001. He served as President of Charleston College from 1992-2001. He was a Chief Judge on the South Carolina Court of Appeals and Acting Associate Justice, South Carolina Supreme Court from 1983-1992. Judge Sanders is a graduate of the University of Iowa and was a participantShareholder in the Advanced Management Program, Harvard Business School. He has served as the Chairmanlaw firm of the Board of IHS, Inc. since December 2000. From August 1996 until June 2000 he served as ChairmanSanders & Nettles, LLC and Chief Executive Officer of Ingram Micro, Inc. (technology products and services). During 1995, he served as Chairman, President and Chief Executive Officer of Legent Corporation (integrated product and service software solutions) until its sale late in 1995. He was Executive Vice President, American Telephone and Telegraph Company (telecommunications) and Chairman and Chief Executive Officer of AT&T Global Information Solutions (computers and communicating), formerly NCR Corp. (1993-1994). He was President of AT&T Global Business Communications Systems (communications) (1991-1993) and Chairman, President and Chief Executive Officer (1989-1991) and President (1987-1989) of Square D Company (industrial control and electrical distribution products). In addition, he held numerous positions during a 21-year career at Honeywell. He is a Director of Conexant Systems, Inc., Brightpoint Inc., Mobility Electronics, Inc. and Mindspeed, Inc.
Directors of Armstrong World Industries, Inc.
Michael D. Lockhart – (See description, above.)
James E. Marley – (See description, above.)
John N. Rigas – (See description, below.)
Changes to Nomination Procedures
There have been no changes to the procedures by which shareholders may recommend nominees toserves on the Board of Directors of the National Bank of South Carolina and has been Chairman of the Charleston School of Law, LLC since these procedures were first disclosed in the March 31, 2004 Form 10-Q. These procedures are posted atwww.armstrong.com/corporatena/article9748.html.
2003.
Executive Officer Information
The following information is current as of February 24, 2006.March 27, 2007. Each executive officer serves a one-year term until reelected or until his earlier death, resignation, retirement or replacement.
removal.
Executive Officers of Armstrong Holdings, Inc.
Michael D. Lockhart – - (See description, above.)
Stephen J. Senkowski – Age 54; Executive Vice President, Armstrong Holdings, Inc. and Executive Vice President and President and Chief Executive Officer, Armstrong Building Products, Armstrong World Industries, Inc. since April 2004. Previously, President and Chief Executive Officer, Armstrong Building Products, Armstrong World Industries, Inc. October 2000 – April 2004; Senior Vice President, Americas, Building Products Operations, Armstrong World Industries, Inc. April 2000 – October 2000; President/Chief Executive Officer, WAVE July 1997 – April 2000; Vice President, Innovation Process, Building Products Operations 1994 – July 1997.
F. Nicholas Grasberger, III –
Age 42;43; Senior Vice President and Chief Financial Officer since January 2005. Previously Vice President and Chief Financial Officer of Kennametal, Inc. (a manufacturer of cutting tools and wear parts) August 2000 – December 2004. PreviouslyFormerly employed at H. J. Heinz (a global U.S. based food company) for eleven years, his last title being Treasurer.
Donald A. McCunniff
John N. Rigas – Age 57;50; Senior Vice President, Secretary and General Counsel, Armstrong Holdings, Inc.Human Resources since November 2000 and Armstrong World Industries, Inc. since May 2001.March 2006. Previously Deputy General Counsel-Litigation, Armstrong World Industries, Inc. March 1999 – November 2000; worked for Dow Corning Corporation (specialty chemical company) October 1982 – March 1999, his last title being Senior Managing Counsel.
William C. Rodruan – Age 51; Vice President Human Resources, Corporate, Honeywell International. Joined Honeywell in 1995 and Controller, Armstrong World Industries, Inc. since July 1999served in various senior level Human Resources positions in Defense and Armstrong Holdings, Inc. since May 2000. Previously Director, Corporate TransformationSpace, Electronics, Process Automation, and Shared Services, Armstrong World Industries, Inc. February 1997 – July 1999 and Vice President of Finance, Corporate Retail Accounts, Armstrong World Industries, Inc. July 1994 – February 1997.
Aircraft Landing Systems.
Executive Officers of Armstrong World Industries, Inc.
Michael D. Lockhart – (See description, above.)
Stephen J. Senkowski – (See description, above.)
F. Nicholas Grasberger III – (See description, above.)
John N. Rigas – (See description, above.)
William C. Rodruan – (See description, above.)
Frank J. Ready –
Age 44;45; President and Chief Executive Officer, North American Flooring Operations Armstrong World Industries, Inc. and Armstrong Holdings, Inc. since June 2004. Previously Senior Vice President, Sales and Marketing, July 2003 – June 2004; Senior Vice President, Operations, December 2002 – July 2003; Senior Vice President, Marketing, June 2000 – December 2002.
John N. Rigas
Age 58; Senior Vice President and General Counsel since November 2000. Previously Deputy General Counsel-Litigation, March 1999 – November 2000; worked for Dow Corning Corporation (specialty chemical company) October 1982 – March 1999, his last title being Senior Managing Counsel.
William C. Rodruan
Age 52; Vice President and Controller since July 1999. Previously Director, Corporate Transformation and Shared Services, February 1997 – July 1999, and Vice President of Finance, Corporate Retail Accounts July 1994 – February 1997.
Involvement in Certain Legal ProceedingsStephen J. Senkowski
On December 6,Age 56; Executive Vice President since April 2004, and President and Chief Executive Officer, Armstrong Building Products since October 2000; Senior Vice President, Americas, Building Products Operations, April 2000 AWI and two of Armstrong World Industries’ wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc., filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Therefore, individuals who were or are executive officers and directors of AWI have been associated with a corporation that filed a petition under the federal bankruptcy laws within the last five years. With the exception of Ms. Owades and Messrs. Sellers and Roberts, all present directors of AHI were or are directors of AWI.
– October 2000; President/Chief Executive Officer, WAVE (the Company’s ceiling grid joint venture) July 1997 – April 2000; Vice President, Innovation Process, Building Products Operations 1994 – July 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Securities and Exchange Commission (“SEC”) regulations require Armstrong Holdings,World Industries, Inc. directors and executive officers, and any persons beneficially owning more than ten percent of its common stock to report to the SEC their ownership of this stock and any changes in that ownership. SEC regulations also require these persons to furnish the companyCompany with copies of these reports. SEC rules require the companyCompany to report any failure to timely file those reports in the previous fiscal year.
Based solely upon our review of copies of reports furnished to us and written representations from directors and executive officers, we believe that all of these filing requirements were satisfied by Armstrong Holdings’World Industries, Inc.’s directors and executive officers during 20052006 except as follows. In connection with the exception of one late filingits emergence from bankruptcy on October 2, AWI filed a Registration Statement on Form 4 reporting two transactions by8-A on October 10, 2006. The Form 3 reports for Messrs. Garland, Grasberger, Lockhart, McCunniff, Peppet, Pergament, Ready, Rigas, Roberts, Rodruan, Sanders, Senkowski and Ms. Haberkorn were filed one day late, on October 11, 2006. The Form 3 reports for Mr. Arnelle relating to the cash outGaffney and termination ofMr. Miller (who was a director from October 2, 2006 until his deferred compensation account, which included 1,703 stock equivalent units.resignation on October 23, 2006) were filed October 16 and October 23, 2006, respectively.
| ITEM 11. | EXECUTIVE COMPENSATION |
Armstrong Compensation Discussion and Analysis
Executive Officers’ Compensation Objectives and Overview
Armstrong’s executive compensation program has been designed to attract, retain and motivate the executive talent necessary to achieve the Company’s goals. The five elements of executive compensation are base salary, annual incentive compensation, long-term incentive compensation, employee benefits and perquisites. Both annual incentive compensation and long-term incentive compensation are based on a “pay for performance” philosophy. “Pay for performance” includes individual performance and financial performance of the corporation and, where applicable, the business unit.
The following table showsCompany provides a competitive level of cash compensation through base salary and targeted annual incentive payments for achieving annual goals. There is limited upside in the cash compensation received bypaid when these goals are exceeded and bonuses are reduced when the Chief Executive Officergoals are not met. The opportunity for more significant compensation is aligned with the achievement of long-term financial goals and the four other highest paid individuals who served as executive officers during 2005. The data reflects compensation for services renderedreturns provided to AHI and AWI and its subsidiaries in each of the last three fiscal years, for services in these individual’s current position or previous positions during the three year period.
TABLE 1: SUMMARY COMPENSATION TABLE
| ANNUAL COMPENSATION | LONG-TERM COMPENSATION | |||||||||||||||
| Awards | Payout | |||||||||||||||
Name and Current Principal Position | Year | Salary ($) | Bonus ($)2 | Other Annual Compensation ($)3 | AHI Restricted | AHI Securities | LTIP Payouts ($)5 | All Other ( $)6 | ||||||||
M. D. Lockhart Chairman of the Board and CEO, AHI and AWI | 2005 2004 2003 | 965,000 920,000 905,000 | 1,186,000 1,337,000 — | 160,899 166,637 127,779 | — — — | — — — | 2,337,000 611,900 1,359,200 | 27,516 27,016 6,276 | ||||||||
S. J. Senkowski Executive Vice President, AHI; Executive Vice President and CEO, Armstrong Building Products, AWI | 2005 2004 2003 | 544,853 502,525 426,250 | 868,400 771,800 535,798 | — — — | — — — | — — — | 440,000 — — | 27,128 26,290 25,143 | ||||||||
F. N. Grasberger, III Senior Vice President, and CFO, AHI & AWI | 2005 | 450,0001 | 1,020,000 | 152,359 | — | — | — | 30,620 | ||||||||
J. N. Rigas, Senior Vice President, Secretary and General Counsel, AHI & AWI | 2005 2004 2003 | 379,000 365,000 345,000 | 528,000 421,400 330,000 | — — — | — — — | — — — | 262,500 — — | 27,516 27,016 6,276 | ||||||||
W. C. Rodruan Vice President and Controller, AHI & AWI | 2005 2004 2003 | 278,400 269,775 260,625 | 261,400 197,170 267,474 | — — — | — — — | — — — | 110,000 — — | 27,739 26,970 16,246 | ||||||||
|
|
Management Achievement Plan and Long-Term Incentive Plan
Bonus payments disclosed in the “Summary Compensation Table” included awards made to executive officers in accordance with the Management Achievement Plan for Keyshareholders over time. Executives (“MAP”). Under the MAP, an executive can earn cash rewards in relation toabove-market compensation through Armstrong’s long-term incentive equity grants. The underlying principle is that higher levels of compensation will be aligned with delivering superior long-term financial results and creating shareholder value.
The Company regularly reviews the attainmentcompetitiveness of corporate, business unit and individual goals.its executive compensation program. The corporate and business unit goals are set by the Management Development and Compensation Committee (the “Committee”) annually compares the Armstrong CEO’s total direct compensation to that of CEOs of 18 selected manufacturing companies listed below. Hewitt Associates’ role in the CEO review is limited to compiling the compensation information for the Committee.
Air Products & Chemicals | Cummins, Inc. | Parker Hannifin Corp. | ||
American Standard | Hershey Company | PPG Industries | ||
Ball Corp. | Masco Corp. | Sherwin-Williams Co. | ||
Black & Decker | Mohawk Industries, Inc. | Stanley Works | ||
Brunswick Corp. | Newell Rubbermaid | Steelcase, Inc. | ||
Corning, Inc. | Owens Corning | USG Corp. |
For other executive positions, Armstrong subscribes to multiple national executive compensation surveys. Armstrong uses as benchmarks for its pay policy the policies of other comparable companies. When necessary, Armstrong adjusts for the size of the companies in the benchmark group to provide a truer benchmark.
During the period of Armstrong World Industries’ (AWI) Chapter 11 bankruptcy reorganization, the Company used court-approved cash retention payments and enhanced severance provisions in order to retain key talent. Certain executive officers, excluding Mr. Lockhart, received cash retention payments. For 2006, Messrs. Ready and Rigas were the only executive officers who received cash retention payments.
Armstrong’s employee benefit plans for executives are generally the same as those provided to other salaried employees. Executive benefits and perquisites are described below under the Rationale for Pay Elements.
All of the named executive officers are covered under Individual Change in Control Agreements to provide a competitive level of financial security in the case of a potential change in control. Mr. Lockhart has an Employment Agreement which he first entered into on August 7, 2000. This agreement was amended in 2001 to permit the use of long-term cash incentive awards in lieu of grants of stock options and performance restricted shares because the Company was prevented from providing equity compensation while in Chapter 11. The Employment Agreement specifies the level and terms of his annual incentive and long-term incentive awards, severance benefits for termination not related to a change in control, two years of credited pension service for each year worked and reasonable personal use of Company aircraft which includes a tax gross-up benefit. In recognition of Mr. Lockhart’s contributions to the Company and his leadership during AWI’s Chapter 11 reorganization, the Board of Directors. A specific weightingDirectors in 2005 granted him five additional years of service credit under the pension plan. Mr. Lockhart’s Employment and Change in Control Agreements were assumed by the Company with court approval in its Chapter 11 case.
Compensation Program Reward Features
Base Salary
Base salaries for executive officers are reviewed annually by the Committee. With input from the CEO, the Committee evaluates the base salary of each executive officer taking into account their performance for the prior year and their salary level relative to the base salary range midpoint which is assigned to eachset using the benchmark information described above. The Committee approves the salaries of the executive officers except for Mr. Lockhart. The Committee meets in executive session to evaluate Mr. Lockhart’s base salary and may recommend to the Board of Directors salary changes for Mr. Lockhart.
Annual Bonus
Annual incentive payments are made pursuant to the Management Achievement Plan (MAP). The MAP provides for incentive compensation payments based on the Company’s performance relative to operating income goals established early in the year by the Committee. These goals are generally set equal to the annual operating plan which is not easily attained. In the last five years, the corporate and business unit achievement segments where such segmentsbonus payout ranged from zero to 115% of target bonus. The Committee specifies the adjustments to operating income that are applicable.allowed for incentive compensation purposes. Each MAP participant has a targetedtarget bonus amount calculated as a percentage of their annual base salary earnings ranging from 15% of salary at the lowest level to 125% for the CEO.
The MAP includes a Committee-approved payout schedule (shown below) which relates percent of target bonus paid to overall financial performance. With the exception of Mr. Ready, all executive officers are measured on corporate financial results. Mr. Ready’s MAP payment is weighted 30% on corporate results and 70% on his business unit results. The Committee may adjust payouts based on individual performance.
When the Committee sets financial targets for the MAP, it also sets a maximum payout schedule. The payout schedule is based on the actual financial achievement percentage against target for the year. Participants are told to expect a bonus payout that is 20% below the maximum payout schedule. The Committee generally exercises negative discretion, reducing the bonus payout percentage by 20%. In unusual circumstances, the Committee can lower or raise the amount of the negative discretion applied to the maximum payout percentage.
2006 MAP Payout Schedule
| ||||
% of Financial Target | Maximum Payout as % of Target Bonus | |||
Less than 70% | 0% | |||
70% | 50% | |||
80% | 100% | |||
90% | 110% | |||
100% | 120% | |||
110% | 130% | |||
120% | 140% | |||
• | Schedule continues at same payout line, uncapped | • | ||
• | • | |||
• | • | |||
The MAP requires that participants above a specified grade level have their annual bonus payment reduced by up to $20,000 and they receive a Company contribution in the amount of the reduction to a qualified, tax-deferred profit sharing plan.
Effective for 2007, the threshold for bonus payout under the MAP was increased from 70% of the financial target to 80% of the financial target. The Committee also established a maximum bonus payout of 200% of a participant’s target bonus amount.
Long-Term Incentives
During the period of AWI’s Chapter 11 reorganization, the Company used cash-based long-term incentive (LTIP) compensation in lieu of equity grants. Each LTIP participant has an annual target award which isvalue expressed as a percentage of their annual base salary earnings and varies withranging from 12% of salary at the participant’slowest level of responsibility. Incentive amounts earned underto 337% for the corporate and business unit segments ofCEO.
For the MAP are based on performance against predetermined goals. A threshold performance level is established, below which no award is payable.
Payouts were also made to executive officers underother than the Long-Term Incentive Plan (the “Incentive Plan”). The Incentive Plan providesCEO, the 2005 and 2006 long-term cash incentive awards to officers and key employeesaward payments were based on the attainment ofCompany’s operating income performance goalsover two years compared to targets established by the Management DevelopmentCommittee. These targets require a 10 percent annual increase in corporate operating income over the 2004 actual results. The Committee defines in advance allowable adjustments to operating income. Similar to the MAP, the LTIP payout schedule (shown below) establishes the relationship between financial performance and CompensationLTIP payments. The Committee of the Board of Directors. Each award is conditioned upon achievement of one or more performance goals covering a performance period of one or more years, as set forth in the award agreement. In making a cash incentive award, a threshold performance level is established, below which no award will be payable.
may adjust payouts based on individual performance.
Change in Control Agreements2005 / 2006 LTIP Cash Incentive Award Payout Schedule
A group of senior executives, including M. D. Lockhart, S. J. Senkowski, J. N. Rigas, W. C. Rodruan and F. N. Grasberger III have entered into change in control (“CIC”) agreements. These agreements provide severance benefits in the event of a change in control of AHI or AWI. The purpose of the agreements is to foster stability in the management ranks in the face of a possible change in control.
The severance benefits are payable if the executive is involuntarily terminated or terminates employment for good reason within three years following a change in control. Good reason to terminate employment exists if there are significant changes in the nature of the individual’s employment following the change in control. For example, a reduction in compensation, a change in responsibility, or a relocation of the place of employment would constitute significant changes. For most senior officers, the agreement includes a provision where the executive may choose to terminate employment during the thirty-day period beginning twelve months following a qualifying change in control and receive severance benefits. The qualifying change in control must meet the definitions in (2) and (3) shown below. The agreements have an automatic annual renewal feature, meaning the agreements will continue in effect unless either one of Armstrong, AHI or the executive elects not to extend the agreement.
For the purposes of these agreements, a change in control includes the following: (1) acquisition by a person (excluding certain qualified owners) of beneficial ownership of 20% or more of AHI’s common stock; (2) change in the composition of the Board of AHI, so that existing Board members and their approved successors do not constitute a majority of the Board; (3) consummation of a merger or consolidation of AHI, unless shareholders of voting securities immediately prior to the merger or consolidation continue to hold 66-2/3% or more of the voting securities of the resulting entity; and (4) shareholder approval of a liquidation or dissolution of AHI or sale of substantially all of AHI’s assets.
Severance benefits under the agreements depend on the position the executive holds, but generally include: (1) a lump severance payment equal to two or three times the sum of the officer’s annual base salary and the higher of the officer’s highest annual bonus earned in the three years prior to termination or prior to the change in control; (2) a lump-sum payment of the portion of the officer’s target incentive awards applicable to the year of termination of employment calculated by multiplying the target award by the fractional number of months completed in the performance award period; (3) three additional years of age and service credit for the purpose of determining pension benefits, the actuarial present value of which are payable as a lump sum; (4) continuation of life, disability, accident and health insurance benefits for three years following termination; (5) full reimbursement for the payment of any applicable excise taxes; and (6) payment of legal fees incurred in connection with a good faith dispute involving the agreement.
The Bankruptcy Court in Armstrong World Industries’ Chapter 11 Case approved AWI’s assumption of the CIC agreements subject to certain modifications. The modifications limit in certain respects (i) what constitutes a change in control under the CIC agreements; and (ii) with respect to the CIC agreements for the most senior officers, what constitutes “Good Reason” entitling the executive to terminate employment and receive benefits under the agreement. The issuance of the new stock of reorganized AWI according to the provisions of a plan of reorganization would constitute a change in control under the CIC agreements for all executives except for F. N. Grasberger III.
% of Financial Target | Maximum Payout as % of Award | |||
Less than 70% | 0% | |||
70% | 50% | |||
80% | 100% | |||
90% | 110% | |||
100% | 120% | |||
110% | 130% | |||
120% | 140% | |||
• | Schedule continues at same payout line, uncapped | • | ||
• | • | |||
• | • |
Employment Agreements
Armstrong entered into an employment agreement with Michael D. Lockhart effective August 7, 2000, in which Mr. Lockhart agreed to serve as Chairman of the Board and Chief Executive Officer of AHI at an initial base salary of $800,000 per year and a $5,000,000 one-time signing bonus. This contract was subsequently approved by the Bankruptcy Court in Armstrong World Industries’ Chapter 11 Case. The employment agreement was automatically renewed for an additional one-year term on the third anniversary of the date of the agreement and renews for an additional one-year term on each successive anniversary, unless AHI gives notice not to extend the agreement at least 180 days prior to the anniversary date. If the employment agreement with Mr. Lockhart is terminated without “cause,” or if Mr. Lockhart terminates his employment for “good reason”, Mr. Lockhart is entitled to receive (1) a lump-sum cash payment equal to his base salary, plus the higher of (i) the bonus for which he is eligible in the year of termination at target performance levels, or (ii) the highest bonus award paid during the last three years, multiplied by either the number of years remaining in his employment agreement or by one (“1”), whichever is larger, and (2) continuation of certain benefits for the remainder of the term of his employment agreement. Mr. Lockhart’s employment agreement also contains a non-competition provisionLong-Term Incentives
Mr. Lockhart’s Employment Agreement specifies that bars him from competing with AHI or any subsidiaries or affiliates for a period40% of two years following his termination. The agreement also provides Mr. Lockhart with the opportunity to participate in all short-term and long-term incentive plans offered by AHI and AWI, including an annual cash incentive opportunity and an annual long-term incentive award under AHI’s long-term incentive plan. The agreement further provides that the value of his annual long-term incentive award on the grant date is required to equal 150% of Mr. Lockhart’s target annual cash compensation (salarybe granted as stock options and bonus) for the year, and that he receives two years of service credit for every one year of actual service towards the calculation of his pension benefits under the Retirement Benefit Equity Plan. In addition, in March 2005, the company granted Mr. Lockhart five additional years of service credit under that plan. See the section “Benefits from Retirement Plans” below for a table illustrating actual benefit payments based upon credited years of service and compensation.
AWI hired F. Nicholas Grasberger III effective January 1, 200560% as Senior Vice President and Chief Financial Officer of AHI at an initial base salary of $450,000 per year and a $300,000 one-time signing bonus. His agreement also provides Mr. Grasberger with the opportunity to participate in AWI’s annual cash incentive and long-term incentive plans with target incentive awards for 2005 valued at 60% and 180% of annual base salary respectively. As approved by the Bankruptcy Court in AWI’s Chapter 11 Case, Mr. Grasberger received a Cash Retention Payment of $450,000 since he was employed through December 31, 2005.performance restricted share grants. During AWI’s Chapter 11 reorganization, Mr. Grasberger will qualify for enhanced severance benefits if he meets the eligibility provisionsuse of equity-based incentive compensation was not viable. In place of equity grants, the AWI Severance Pay PlanCommittee used cash incentive awards which is described below. His severance payment would be two times the sum of annual base salary and target annual bonus. Mr. Grasberger would be eligible to continue health care and life insurance benefits for
two years at active employee costs. Following emergence from Chapter 11 reorganization, AWI will provide a minimum severance payment equal to annual base salary, and benefits would continue for one year. At the time of AWI’s emergence from Chapter 11 reorganization, it is planned that Mr. Grasberger would receive equity awards consisting of 41,400 shares of restricted stock and 124,200 nonqualified stock options. It is anticipated that both awards would vest in one-third installments at two, three and four years from the grant date.
Severance Pay Plan for Salaried Employees
The Severance Pay Plan for Armstrong World Industries’ Salaried Employees was adopted in 1990. This plan iswere designed to cushionmimic the effectsperformance of unemployment for certain salaried employees. The benefitsstock options and performance restricted share grants.
These awards are payable if a covered employee is terminated under certain circumstances. All salaried employees of AHI and AWI, including the officers named in the Summary Compensation Table, are eligible to participate in the plan. A participant will be entitled to severance pay if they are terminated and an exclusion does not apply. The employee is not entitled to severance pay if the reason for the termination is the following: (1) voluntary separation; (2) the employee accepts employment with the successor organization in connection with the sale of a plant, unit, division or subsidiary; (3) the employee rejects the offer of a position in the same geographic area at a base salary of at least 90% of the employee’s current salary made by AHI or AWI, their subsidiaries or any successor organization; (4) misconduct; or (5) unsatisfactory performance, unless otherwise approvedbased on Committee-approved incentive payment formulae measured by the Severance Pay Committee. Severance benefits will be offset byCompany’s growth in earnings before interest, taxes, depreciation and amortization (EBITDA). Mr. Lockhart’s 2005 LTIP payments made under CIC agreements or individual employment agreements.
Under the plan, the scheduled amount of the payment isfor 2006 performance were based on the employee’s grade level, length of service, and base salary level. The amount offollowing formulae. Cash Payment 1 was designed to mimic the payment ranges from a minimum of two weeks base salary to a maximum of 52 weeks base salary. The Severance Pay Committee retains the right to depart from the severance pay schedule where factors justify an upward or downward adjustment in the level of benefits. In no event may the severance benefit exceed two times the participant’s annual compensation.
Enhanced Severance Benefits during AWI’s Chapter 11 Reorganization
Under the Retention Program for Key Employees approved by the Bankruptcy Court in AWI’s Chapter 11 Case, enhanced severance benefits apply to approximately 120 employees (excluding M. D. Lockhart) during the term of the Chapter 11 reorganization. Cash severance payments ranging from two years of base salary and target annual bonus for the year of termination to nine months of base salary apply depending on the employee’s job and evaluation level. Employees will receive continued health care and life insurance benefits for the duration of their severance payment period along with outplacement support. Effective December 5, 2005, the company discontinued extending these enhanced severance benefits to newly hired and newly promoted employees.
Other Benefits
Except as specifically noted, the benefit programs for executives are generally the same as those offered to the company’s other salaried employees. Depending on the executive’s job evaluation and pay level, Armstrong currently provides the following executive benefits: (1) supplemental benefits on comparable terms to those otherwise available under either the pension or savings plan but for qualified plan limitations, (2) company-paid long-term disability insurance, (3) limited reimbursement (a maximum of $4,500 per year) for personal financial planning expenses, and (4) annual company-paid physical exams. As noted in the Summary Compensation Table, Mr. Lockhart has access to company aircraft for personal use and is reimbursed for taxes accrued as a result of his imputed taxable income stemming from such use.
TABLE 2: OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no grantperformance of stock options or any other equity-based awards during 2005 under anyand Cash Payment 2 was intended to approximate the value of Armstrong’s stock-based compensation plans. No equity compensation awards have been made since AWI’s Chapter 11 Filinga performance restricted share grant. There are no payments if there is no increase in December 2000, other than commitments entered into prior to the Chapter 11 filing.
TABLE 3: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information regarding the exercise of stock options during 2005 and the unexercised options held as of the end of 2005 by each of the named executives:
AHI Shares (#) | Value Realized ($) | Securities Underlying Unexercised Options At Fiscal Year-End (#) | Value of Unexercised In-The-Money Options At Fiscal Year-End ($) | ||||||||||
Name | Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||
M. D. Lockhart | 0 | 0 | 300,000 | 0 | $ | 36,250 | 0 | ||||||
S. J. Senkowski | 0 | 0 | 13,000 | 0 | 0 | 0 | |||||||
F. N. Grasberger III | 0 | 0 | 0 | 0 | 0 | 0 | |||||||
J. N. Rigas | 0 | 0 | 17,000 | 0 | 0 | 0 | |||||||
W. C. Rodruan | 0 | 0 | 13,600 | 0 | 0 | 0 | |||||||
TABLE 4: LONG TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
The following table sets forth information regarding the long-term incentive plan awards granted during 2005 to each of the named executives:EBITDA.
| = | $1.24 million | x | |||||||||||||||
| 2004 EBITDA | ||||||||||||||||||
| (Maximum of $1.24 million) | ||||||||||||||||||
Cash Payment 2 | = | $1.86 million | x | EBITDA | x | [ | 1+ | (2006 EBITDA - 2004 EBITDA) | ] | |||||||||
| Growth Factor | 2004 EBITDA | |||||||||||||||||
| (Maximum of $2.79 million) | ||||||||||||||||||
| where |
| |||||||
| EBITDA Compound Annual Growth | |||||||
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When the Company changed Mr. Lockhart’s long-term incentive awards from equity to cash, it created a conflict with respect to the payment provisions under the long-term incentive plan and his Employment Agreement. The maximum total cash payment permitted annually under the long-term incentive plan for any one participant is $3 million. To the extent, if any, the calculated payments for these awards exceed this amount, the balance would be paid to Mr. Lockhart as a contractual obligation under the terms of his Employment Agreement. Now that AWI has emerged from Chapter 11 reorganization, the Company has reverted to equity grants for Mr. Lockhart.
Rationale for Pay Elements
The base salary and annual incentive components of Armstrong’s executive compensation program are the same as those used by other large manufacturing companies. Base salary and annual incentives are necessary to deliver competitive current compensation. Long-term incentive compensation is used to support executive retention and align a portion of the total direct compensation with the achievement of longer term goals which should result in an increase in shareholder value. While in Chapter 11, Armstrong could not use equity as a long-term incentive.
Effective October 2, 2006 (the date of AWI’s emergence from Chapter 11), the Committee granted restricted stock awards and nonstatutory stock options to certain key managers as provided for under the Plan of Reorganization. Because AWI common stock was not trading on the New York Stock Exchange on the grant date, the Committee set the exercise price of the stock options as the volume weighted average closing price of reorganized AWI stock over the period of October 18 through October 31 as reported by the New York Stock Exchange, which was $38.42. The stock options have a ten-year term. Both the stock options and the restricted stock awards vest in three equal installments at two, three and four years from the grant date. The timing of these stock option grants was established to coincide with AWI’s emergence from Chapter 11. With the exception of Mr. Lockhart whose Employment Agreement specifies that he receive annual long-term incentive awards, these emergence equity grants replace each manager’s long-term incentive award which would have been made in early 2007.
Typically, equity grants are made on the date of the Company’s regular February board of directors meeting, and the Company has resumed that schedule. Equity grants for new hires who are not executive officers may be approved by the Committee Chair. These grants will be made on or about the date of hire and will be reported to the full Committee at the next scheduled meeting.
Tax Deductibility of Compensation
Armstrong’s annual and long-term incentive plans have been designed to qualify cash and certain equity incentives as performance-based compensation under Section 162(m) of the Internal Revenue Code (IRC). This includes the MAP, LTIP payments, performance restricted shares, restricted stock awards and stock option grants where the payment or award provisions comply with the IRC requirements. If the calculated payments for Mr. Lockhart’s long-term cash incentive awards exceed $3 million for 2007 performance, the Company may not receive a tax deduction for the portion of the payment that exceeds $3 million.
Employee Benefits
Employee benefits include the typical health, welfare and retirement benefit offerings. Armstrong requires executives to pay health care premiums which are 40% higher than those paid by most salaried employees. The Company provides a company-paid long-term disability benefit for executives above a specified grade level. For all participants in the Armstrong pension plan, a nonqualified pension plan has been established to pay any benefit which cannot be paid under the qualified plan due to statutory limits. The pension plan was amended effective March 1, 2006, to increase the reduction for early retirement for participants who retire between the ages of 55 and 65.
Mr. Grasberger is ineligible to participate in Armstrong’s defined benefit pension plan. He and all other salaried employees hired on or after January 1, 2005, are eligible to participate in a 401(k) savings plan with an enhanced company match. Armstrong matches 100% of the first 4% of employee contributions and 50% of the next 4% of employee contributions in the enhanced plan. A nonqualified deferred compensation plan was established to provide similar 401(k) benefits as it applies to managers hired on or after January 1, 2005 whose eligible earnings exceeded $187,500 in 2006. This nonqualified plan is not funded. Mr. Ready has a balance of less than $3,000 in a prior nonqualified deferred compensation plan to which deferrals were discontinued starting in 2001.
Messrs. Senkowski and Ready are participants in split dollar life insurance policies which were entered into in 1996 and 1997. Armstrong discontinued making premium payments on the policy for Mr. Senkowski starting in 2003 and for Mr. Ready in 2007. Armstrong retains a collateral interest in the policies’ cash value equal to the premiums paid by the Company for each participant.
Perquisites
Armstrong’s perquisites are designed to assist in the overall health and productivity of the executives. Perquisites are limited to an annual Company-paid physical and an annual reimbursement of up to $4,500 for personal financial planning / tax preparation services. Mr. Lockhart’s personal use of Company aircraft allows him to make more productive use of his time and travel in a more secure environment. This is appropriate and in the best interest of the Company to maximize the time he has to focus on Company business issues.
Determination of Pay Amounts
Base Salary – Armstrong base salary midpoints are positioned at the median of the competitive market for companies based on sales revenue. Executive base salaries are reviewed annually based on individual performance.
Annual Bonus – Armstrong targets annual incentive pay at the median of the competitive market for companies based on sales revenue. Each executive is assigned an annual incentive target award expressed as a percentage of base salary. Mr. Lockhart’s annual incentive target of 125% of base salary is specified in his Employment Agreement.
Long-Term Incentives – Armstrong targets long-term incentive pay at the median of the competitive market for companies based on sales revenue. Each executive is assigned a long-term incentive target award expressed as a percentage of base salary. Mr. Lockhart’s annual long-term incentive target award is specified in his Employment Agreement having a value on the date of grant equal to 150% of the sum of his base salary and annual incentive opportunity at target performance.
Stock Ownership and Trading Policy
The Compensation Committee of reorganized AWI has not established executive stock ownership guidelines. The Committee believes that equity grants made under the Plan of Reorganization result in key employees having a substantial equity stake in the Company.
Our policy requires directors, senior management and other designated employees with access to non-public earnings information to pre-clear any transactions in Company stock, and restricts their trades to three periods of about one week each per year after earnings are released. In addition, those persons and all other employees are barred from speculation in the Company’s stock. So-called “short selling”; in-and-out trading, most “puts” and “calls”, and all other types of derivative transactions are prohibited.
Compensation Committee Report
The Management Development and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis (CD&A) with management. Based on this review and discussion, the Committee recommended that the CD&A be included in the Form 10-K for the fiscal year ended December 31, 2006 to be filed with the Securities and Exchange Commission.
| Management Development and Compensation Committee | ||
Judith R. Haberkorn, Chair | ||
James J. Gaffney | ||
Russell F. Peppet | ||
Alexander M. Sanders, Jr. |
SUMMARY COMPENSATION TABLE
The table below summarizes the total compensation reported for each of the named executive officers for the fiscal year ended December 31, 2006.
Name and Principal Position | Year | Salary | Bonus(1) | Stock Awards(2) | Option Awards(2) | Non-Equity Incentive Plan Compensation (3) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compensation(4) | Total | ||||||||||||||||||
M. D. Lockhart Chairman of the Board and President and CEO | 2006 | $ | 980,000 | — | $ | 172,875 | $ | 148,500 | $ | 4,162,000 | $ | 789,956 | $ | 221,896 | (5) | $ | 6,475,227 | ||||||||||
F. N. Grasberger Senior Vice President and Chief Financial Officer | 2006 | $ | 465,000 | — | $ | 95,427 | $ | 81,972 | $ | 1,196,000 | — | $ | 54,968 | (6) | $ | 1,893,367 | |||||||||||
S. J. Senkowski Executive Vice President and President and CEO, Armstrong Building Products | 2006 | $ | 565,000 | — | $ | 127,236 | $ | 109,296 | $ | 1,684,000 | $ | 185,672 | $ | 14,153 | $ | 2,685,357 | |||||||||||
J. N. Rigas Senior Vice President and General Counsel | 2006 | $ | 382,000 | $ | 382,000 | $ | 63,618 | $ | 54,648 | $ | 819,000 | $ | 71,302 | $ | 13,240 | $ | 1,785,808 | ||||||||||
F. J. Ready President and CEO, North American Flooring Operations | 2006 | $ | 374,500 | $ | 367,000 | $ | 63,618 | $ | 54,648 | $ | 694,000 | $ | 30,706 | $ | 13,157 | $ | 1,597,629 | ||||||||||
| The amounts disclosed are cash retention payments paid on December 28, 2006 for Messrs. Rigas and Ready which were approved by the bankruptcy court in AWI’s Chapter 11 case. |
(2) | The amounts reflect the expense recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123R, but disregarding forfeitures related to service-based vesting as directed by SEC regulations for this purpose, for awards made in 2006 pursuant to the 2006 Long-Term Incentive Plan. The assumptions used to calculate these amounts are set forth in Note 25 to the Company’s Consolidated Financial Statements for the year ended December 31, 2006. |
(3) | The amounts disclosed are the awards under the 2006 Management Achievement Plan and 2005 Long-Term Cash Incentive Awards. The amounts under the Management Achievement Plan are as follows: M. D. Lockhart—$1,520,000; F. N. Grasberger—$321,000; S. J. Senkowski—$455,000; J. N. Rigas—$220,000 and F. J. Ready—$215,000. As specified under the Management Achievement Plan, award amounts are subject to a mandatory reduction of up to $20,000 to the extent a corresponding contribution can be made to the Bonus Replacement Retirement Plan which is a qualified, tax-deferred profit sharing plan. For 2006, $20,000 reductions were made for each of Messrs. Lockhart, Senkowski, Rigas and Ready. The following payments were made under the 2005 Long-Term Cash Incentive Awards: M. D. Lockhart—$2,642,000; F. N. Grasberger—$875,000; S. J. Senkowski—$1,229,000; J. N. Rigas—$599,000 and F. J. Ready—$479,000. The payments were approved by the Management Development and Compensation Committee at its February 19, 2007 meeting. |
(4) |
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(5) | The |
6) | Mr. Grasberger received a Company matching contribution of $15,000 under the Savings and Investment Plan and was credited with a Company matching contribution of $32,850 under the Armstrong Nonqualified Deferred Compensation Plan in accordance with the terms of these plans. |
The material terms of Mr. Lockhart’s Employment Agreement are described in the Compensation Discussion and Analysis (CD & A). The CD & A also explains the Company’s approach for setting the amount of base salary and annual bonus in proportion to total compensation.
GRANTS OF PLAN-BASED AWARDS
The table below shows information on annual incentive compensation, long-term cash incentive awards, stock options and restricted stock awards which were provided to each of the Company’s named executive officers in 2006. We have included performance restricted share and stock option grants that were made to Mr. Lockhart on February 19, 2007. There is no assurance that the Grant Date Fair Value of Stock and Option Awards will be realized by the executive.
Name | Grant Date | Board Committee Authorization Date(1) | All Other Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option ($ / Sh) | Grant Date Value of Stock | |||||||||||||||||||||||||||
| Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | ||||||||||||||||||||||||||||||||
Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | ||||||||||||||||||||||||||||
M. D. Lockhart | (2 | ) | N/A | $ | 367,500 | $ | 1,225,000 | (3 | ) | ||||||||||||||||||||||||
| (4 | ) | 2/20/06 | 0 | $ | 1,323,000 | $ | 1,323,000 | ||||||||||||||||||||||||||
| (4 | ) | 2/20/06 | 0 | $ | 1,985,000 | $ | 2,977,500 | ||||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 75,000 | $ | 2,766,000 | |||||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 225,000 | $ | 38.42 | $ | 3,489,750 | |||||||||||||||||||||||||
| (7 | ) | 2/19/07 | 64,100 | $ | 52.38 | $ | 1,323,057 | ||||||||||||||||||||||||||
| (7 | ) | 2/19/07 | 18,950 | 37,900 | 56,850 | $ | 1,985,202 | ||||||||||||||||||||||||||
F. N. Grasberger | (2 | ) | N/A | $ | 83,700 | $ | 279,000 | (3 | ) | ||||||||||||||||||||||||
| (5 | ) | 2/20/06 | $ | 243,000 | $ | 810,000 | (5 | ) | |||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 41,400 | $ | 1,526,832 | |||||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 124,200 | $ | 38.42 | $ | 1,926,342 | |||||||||||||||||||||||||
S. J. Senkowski | (2 | ) | N/A | $ | 118,650 | $ | 395,500 | (3 | ) | ||||||||||||||||||||||||
| (5 | ) | 2/20/06 | $ | 354,750 | $ | 1,182,500 | (5 | ) | |||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 55,200 | $ | 2,035,776 | |||||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 165,600 | $ | 38.42 | $ | 2,568,456 | |||||||||||||||||||||||||
J. N. Rigas | (2 | ) | N/A | $ | 57,300 | $ | 191,000 | (3 | ) | ||||||||||||||||||||||||
| (5 | ) | 2/20/06 | $ | 171,900 | $ | 573,000 | (5 | ) | |||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 27,600 | $ | 1,017,888 | |||||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 82,800 | $ | 38.42 | $ | 1,284,228 | |||||||||||||||||||||||||
F. J. Ready | (2 | ) | N/A | $ | 56,175 | $ | 187,250 | (3 | ) | ||||||||||||||||||||||||
| (5 | ) | 2/20/06 | $ | 137,640 | $ | 458,800 | (5 | ) | |||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 27,600 | $ | 1,017,888 | |||||||||||||||||||||||||||
| (6 | ) | 10/2/06 | 9/21/06 | 82,800 | $ | 38.42 | $ | 1,284,228 | |||||||||||||||||||||||||
(1) | As part of planning for implementation of the Company’s emergence from Chapter 11, the Management Development and Compensation Committee (the “Committee”) was reconstituted on September 21, 2006, and approved the grants of stock options and restricted stock awards authorized by the Company’s Plan of Reorganization to be effective upon such emergence, which occurred on October 2, 2006. All other grant dates are on the dates of the Committee’s actions. |
(2) | The amounts shown represent the 2006 participation by the named executive officers in the Management Achievement Plan (MAP). The actual payouts approved by the Committee on February 19, 2007 are included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. The amount shown under the Target column above was the expected payout amount. |
(3) | For 2006, there was no stated maximum payout under the MAP except for a $3 million per participant annual limit established under the plan. |
(4) | Mr. Lockhart’s Employment Agreement specifies that 40% of the value of his annual long-term incentive award is to be granted as stock options and 60% as performance restricted share grants. During AWI’s Chapter 11 reorganization, the use of equity-based incentive compensation was not viable. In place of equity grants, the Committee used cash incentive |
Cash Payment 1 | = | $1.323 million | x | |||||||||||||||
| 2005 EBITDA | ||||||||||||||||||
Cash Payment 2 | = | $1.985 million | x | EBITDA Growth Factor | x | [ | 1+ | (2007 EBITDA | ] | |||||||||
| 2005 EBITDA | ||||||||||||||||||
| where | EBITDA Growth Factor | EBITDA Compound Annual Growth | ||
| 1.00 | 12.0% or higher | |||
| 0.75 | 8.0 to 11.9% | |||
| 0.50 | 4.0 to 7.9% | |||
| 0.25 | 0.0 to 3.9% | |||
| 0.00 | Less than zero |
The payout formulae are not structured with a threshold payout. If 2007 EBITDA results are the same as 2005, a payment of $496,250 would be earned. If there is an increase in EBITDA results, the payout would be determined according to the formulae. When the Company changed Mr. Lockhart’s long-term incentive awards from equity to cash, it created a conflict with respect to the payment provisions under the long-term incentive plan and his Employment Agreement which was assumed by the Company with court approval in its Chapter 11 case. The maximum total cash payment permitted annually under the long-term incentive plan for any one participant is $3 million. To the extent, if any, the calculated payments for these awards exceed this amount, the balance would be paid to Mr. Lockhart as a contractual obligation under the terms of his Employment Agreement. Cash payments earned will be paid in early 2008.
| The 2006 long-term cash incentive award |
| To be effective on the date of AWI’s emergence from Chapter 11 (October 2, 2006), the Committee on September 21, 2006 approved the grant of restricted stock awards and nonstatutory stock options to certain key managers, including the named executive officers, as provided for under the Plan of Reorganization. Because AWI common stock was not trading on the New York Stock Exchange on the grant date, the Committee set the exercise price of the stock options as the volume weighted average closing price of AWI common stock over the period of October 18 through October 31 as reported by the New York Stock Exchange. The exercise price was $38.42. The stock options have a stated ten-year term. Both the stock options and the restricted stock awards vest in three equal installments at two, three and four years from the October 2, 2006 grant date. If AWI declares cash dividends, holders of unvested restricted stock will receive cash payments of an equal amount. With the exception of Mr. Lockhart, whose Employment Agreement specifies that he receive annual long-term incentive awards, these emergence equity grants replaced each participant’s long-term incentive award which would have been made in early 2007. |
(7) | On February 19, 2007, the Committee authorized the grant of nonstatutory stock options having a Black-Scholes value of $1.323 million and a three-year performance restricted share grant with a value of $1.985 million to Mr. Lockhart. Under the terms of Mr. Lockhart’s Employment Agreement, he is to receive annual long-term incentive awards with an aggregate value on the |
performance period of January 1, 2007 through December 31, 2009 based on a 50% weighting on cumulative normalized EBITDA and a 50% weighting on cumulative free cash flow excluding the impact of acquisitions and divestitures. The Committee established a financial target for each measure and a payout schedule to determine the number of shares that will be earned. If AWI declares cash dividends, Mr. Lockhart will receive cash payments of an equal amount based on the number of performance restricted shares granted at Target.
(8) | The assumptions used to calculate these values for the 2006 grants are set forth in Note 25 to the Company’s Consolidated Financial Statements for the year ended December 31, 2006. The assumptions for Mr. Lockhart’s 2007 long-term incentive equity grants are as follows: |
Performance Restricted Share grant: Value of $52.38 per share based on 2/16/07 closing price
BENEFITS FROM RETIREMENT PLANSStock Option grants:
Vesting Period | ||||||||||||
| 1 year | 2 years | 3 years | ||||||||||
Exercise price | $ | 52.38 | $ | 52.38 | $ | 52.38 | ||||||
Assumed years to exercise | 5.5 | 6.0 | 6.5 | |||||||||
Volatility | 27.97 | % | 30.72 | % | 32.23 | % | ||||||
Risk free interest rate | 4.85 | % | 4.85 | % | 4.86 | % | ||||||
Dividend rate | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table below shows the estimated pensionnumber of shares covered by exercisable and unexercisable stock options and unvested restricted stock awards held by the Company’s named executive officers on December 31, 2006.
Name | Option Awards | Stock Awards | ||||||||||||||||||
Number of Securities Underlying Unexercised Options (#) | Number of Securities Underlying Unexercised Options (#) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date(1) | Number of Shares or Units of Stock That Have Not Vested (#)(2) | Market ($)(3) | Equity Incentive or Other Rights That (#) | Equity ($) | ||||||||||||
| Exercisable | Unexercisable | |||||||||||||||||||
M. D. Lockhart | 225,000 | $ | 38.42 | 10/2/16 | 75,000 | $ | 3,179,250 | |||||||||||||
F. N. Grasberger | 124,200 | $ | 38.42 | 10/2/16 | 41,400 | $ | 1,754,946 | |||||||||||||
S. J. Senkowski | 165,600 | $ | 38.42 | 10/2/16 | 55,200 | $ | 2,339,928 | |||||||||||||
J. N. Rigas | 82,800 | $ | 38.42 | 10/2/16 | 27,600 | $ | 1,169,964 | |||||||||||||
F. J. Ready | 82,800 | $ | 38.42 | 10/2/16 | 27,600 | $ | 1,169,964 | |||||||||||||
(1) | All options have a stated option expiration date of October 2, 2016. In the event of the death of the optionee, all outstanding options will be exercisable by the beneficiary for a minimum of one year from the date of death without regard to the stated option expiration date. The options vest in three equal installments at two, three and four years from the grant date of October 2, 2006. |
(2) | The shares vest in three equal installments at two, three and four years from the grant date of October 2, 2006. |
(3) | As required by the SEC, the 2006 year-end closing market price of the Company’s common stock was used to determine the values shown in this column. |
OPTION EXERCISES AND STOCK VESTED
None of the Company’s named executive officers exercised any stock options, stock appreciation rights or similar instruments nor did they acquire stock awards, restricted stock units or similar instruments on vesting during the fiscal year ended December 31, 2006.
PENSION BENEFITS
The table below shows the present value of accumulated benefits payable to a participant at normal retirement ageeach of the named executive officers, including the number of years of service credited to each such named executive officer, under Armstrong’sthe Retirement Income Plan and Retirement Benefit Equity Plan. The Retirement Income Plan is a qualified defined benefit pension plan. Salaried employees hired after December 31, 2004 do not participate in this plan but instead receive an enhanced match under the 401(k) savings plan. Under the terms of the Armstrong Nonqualified Deferred Compensation Plan, eligible managers who earned more than $175,000 during 2005 were permitted to elect to defer up to 8% of their base salary and bonus compensation above this amount and receive credit for a company match under this plan of up to 6% of pay. Thenonqualified Retirement Benefit Equity Plan is an unfunded, nonqualified supplemental pension plan. It provides participants with benefits that would otherwise be denied by reasonas of certain Internal Revenue Code limitations on qualified plan benefits.December 31, 2006. The amounts shownwere determined using the same interest rate and mortality rate assumptions used in Table 5 are based on compensation that is covered under the plans and years of service with AWI and its subsidiaries (plus additional years of credited service awarded).
In January 2006, the company announced that effective March 1, 2006,Company’s Consolidated Financial Statements. Information regarding the Retirement Income Plan and the Retirement Benefit Equity Plan wouldcan be found in Note 18 to the Company’s Consolidated Financial Statements.
Name | Plan Name | Number of Years Credited Service (#) | Present Value of Benefit ($) | Payments During Last Fiscal Year ($) | ||||
M. D. Lockhart(1) | Retirement Income Plan for Employees of Armstrong World Industries, Inc. | 6.4 | $686,810 | 0 | ||||
| Retirement Benefit Equity Plan of Armstrong World Industries, Inc. | 17.8 | $3,549,977 | 0 | |||||
F. N. Grasberger | Not eligible | |||||||
S. J. Senkowski | Retirement Income Plan for Employees of Armstrong World Industries, Inc. | 33.6 | $1,418,137 | 0 | ||||
| Retirement Benefit Equity Plan of Armstrong World Industries, Inc. | 33.6 | $3,168,942 | 0 | |||||
J. N. Rigas(2) | Retirement Income Plan for Employees of Armstrong World Industries, Inc. | 7.8 | $1,077,680 | 0 | ||||
| Retirement Benefit Equity Plan of Armstrong World Industries, Inc. | 24.8 | $730,606 | 0 | |||||
F. J. Ready | Retirement Income Plan for Employees of Armstrong World Industries, Inc. | 23.5 | $800,997 | 0 | ||||
| Retirement Benefit Equity Plan of Armstrong World Industries, Inc. | 23.5 | $375,430 | 0 | |||||
(1) | Under the terms of his Employment Agreement, Mr. Lockhart receives two years of service credit for every one year of actual service toward the calculation of his pension benefits under the Retirement Benefit Equity Plan. The Board of Directors granted him five additional years of service credit in 2005. |
(2) | Mr. Rigas’ years of service include 17 years credit for prior service awarded to him upon his employment with Armstrong. The Armstrong retirement benefit for Mr. Rigas has been reduced by the value of his defined benefit pension payable by his previous employer for the respective period of the prior service credit. |
PENSION BENEFITS
All of the named executive officers (excluding Mr. Grasberger) participate in the Company’s qualified defined benefit pension plan, the Retirement Income Plan (RIP), as do other Armstrong salaried employees. An unfunded, nonqualified defined benefit pension plan, the Retirement Benefit Equity Plan (RBEP), has been established to pay any benefit which cannot be paid under the qualified RIP by reason of Internal Revenue Code limitations. All pension benefits are paid by the Company. The pension plans were closed to new salaried participants effective January 1, 2005. Benefits payable under the RIP and RBEP are based on a formula that yields an annual amount payable over the participant’s lifetime beginning at the age where the participant qualifies for an unreduced life annuity benefit.
In addition, Messrs. Senkowski, Rigas and Ready may qualify for an additional annuity payment under the ESOP Pension Account (EPA) to the extent such benefit can be paid under the qualified pension plan. The EPA was established in 2000 to restore a portion of the value lost by a broad group of employees who had purchased shares of Company stock and received Company contributions of additional shares which were intended to help fund the cost of their retiree health care coverage. The starting EPA balance was determined by multiplying the number of ESOP shares held by the participant by $47.75 which was the guaranteed value of the original ESOP convertible preferred shares. The EPA is credited with interest annually using the November 30-year Treasury bond rate. Interest is credited up to the date the participant commences regular pension benefits under the RIP.
Participants in the defined benefit pension plan may retire as early as age 55 provided the participant is vested under the plan. Participants become vested after completing five years of continuous employment having worked at least 1,000 hours in each year. Normal retirement date is the first of the month nearest the participant’s 65th birthday. Effective March 1, 2006, the pension plans were amended to stop future benefit accrualsincrease the reduction for early retirement for non-production salaried employees whoseparticipants who retire between the ages of 55 and 65. Prior to these amendments, an employee who retired from active employment could receive an unreduced pension benefit commencing on the date of retirement if the employee’s age plus years(minimum age 55) and Total Service totaled 90 points (Rule of 90). Employees continue to receive credit for post-March 1, 2006 age and service total less than 60credits but the accrued Rule of 90 pension benefit is frozen as of February 28, 2006. These
employees are eligibleThe Present Value of Accumulated Benefit shown for the 401(k) savings plan with the enhanced match starting March 1, 2006. Employees whose age plus years of service total 60 or higher continue to accrue benefits under the Retirement Income Plan and the Retirement Benefit Equity Plan but are subject to higher benefit reductions for early retirement on or after age 55 but prior to age 65. Messrs. Lockhart, Senkowski, Rigas and Rodruan qualify to continue to accrue future benefitsReady reflect the actuarial value of their respective Rule of 90 pension benefits.
The normal form of benefit payment is a monthly annuity. Except for payments having a lump sum present value of $10,000 or less under thosethe qualified plan, no lump sum payments are permitted. Various forms of annuity payments (including life, joint and survivor, period certain and level income options) are available under the pension plans. The annuity payments for these options are determined by actuarially adjusting the life annuity pension amount for the selected form of payment. The formula for the regular life annuity pension benefit for salaried employees under the RIP is based on the following factors:
TABLE 5: PENSION PLAN TABLEthe participant’s Average Final Compensation (AFC) which is the average of the three highest years of eligible compensation (base salary plus annual incentive) during the last ten years of employment
ANNUAL RETIREMENT BENEFIT BASED ON CREDITED SERVICE1
| Remuneration2 | 15 Years | 20 Years | 25 Years | 30 Years | 35 Years | 40 Years | |||||||||||||
| $ | 200,000 | $ | 43,000 | $ | 58,000 | $ | 72,000 | $ | 86,000 | $ | 101,000 | $ | 113,000 | ||||||
| $ | 400,000 | $ | 90,000 | $ | 120,000 | $ | 150,000 | $ | 179,000 | $ | 209,000 | $ | 233,000 | ||||||
| $ | 600,000 | $ | 136,000 | $ | 182,000 | $ | 227,000 | $ | 272,000 | $ | 318,000 | $ | 354,000 | ||||||
| $ | 800,000 | $ | 183,000 | $ | 244,000 | $ | 305,000 | $ | 365,000 | $ | 426,000 | $ | 474,000 | ||||||
| $ | 1,000,000 | $ | 229,000 | $ | 306,000 | $ | 382,000 | $ | 458,000 | $ | 535,000 | $ | 595,000 | ||||||
| $ | 1,200,000 | $ | 276,000 | $ | 368,000 | $ | 460,000 | $ | 551,000 | $ | 643,000 | $ | 715,000 | ||||||
| $ | 1,400,000 | $ | 322,000 | $ | 430,000 | $ | 537,000 | $ | 644,000 | $ | 752,000 | $ | 836,000 | ||||||
| $ | 1,600,000 | $ | 369,000 | $ | 492,000 | $ | 615,000 | $ | 737,000 | $ | 860,000 | $ | 956,000 | ||||||
| $ | 1,800,000 | $ | 415,000 | $ | 554,000 | $ | 692,000 | $ | 830,000 | $ | 969,000 | $ | 1,077,000 | ||||||
| $ | 2,000,000 | $ | 462,000 | $ | 616,000 | $ | 770,000 | $ | 923,000 | $ | 1,077,000 | $ | 1,197,000 | ||||||
| $ | 2,200,000 | $ | 508,000 | $ | 678,000 | $ | 847,000 | $ | 1,016,000 | $ | 1,186,000 | $ | 1,318,000 | ||||||
| $ | 2,400,000 | $ | 555,000 | $ | 740,000 | $ | 925,000 | $ | 1,109,000 | $ | 1,294,000 | $ | 1,438,000 | ||||||
| $ | 2,600,000 | $ | 601,000 | $ | 802,000 | $ | 1,002,000 | $ | 1,202,000 | $ | 1,403,000 | $ | 1,559,000 | ||||||
| $ | 2,800,000 | $ | 648,000 | $ | 864,000 | $ | 1,080,000 | $ | 1,295,000 | $ | 1,511,000 | $ | 1,679,000 | ||||||
the participant’s number of years of Total Service (credited years of employment with the Company) used to calculate the pension amount
the participant’s Adjusted Covered Compensation (ACC) which is a percentage of the average Social Security tax base for the 35-year period ending with the year the participant will qualify for an unreduced Social Security pension benefit
The unreduced annual life annuity pension is the sum of the following four calculations each of which shall not be less than zero.
| 3. | (AFC – 2 x ACC) x 0.0015 x Total Service to 35 years |
The 2005 annual compensation and estimated years of service
| 4. | AFC x 0.012 x Total Service over 35 years |
To the extent the participant is eligible for an EPA pension benefit that can be paid from the qualified pension plan purposes for each(RIP), all or the allowable portion of the executives named in the Summary Compensation Table were as follows:
M. D. Lockhart - $2,322,000 (15.8 years); S. J. Senkowski - $896,653 (32.6 years); J. N. Rigas - $557,900 (23.8 years) and W. C. Rodruan - $397,370 (29.6 years). Mr. Grasberger participates in the 401(k) savings plan with the enhanced match. Under his employment agreement, Mr. Lockhart receives two years of service credit for every one year of actual service toward the calculation of his pension benefits under the Retirement Benefit Equity Plan and five additional years of service credit, which are reflected in the numbers above. Estimated years of service include 17 years credit for prior service awarded to J. N. Rigas upon his employment with Armstrong. The Armstrong retirement benefit for Mr. Rigascalculated EPA annuity will be reduced byadded to the value of any defined benefitregular pension payable by his previous employer foramount. EPA annuity amounts that cannot be paid from the respective period of the prior service credit.qualified plan are forfeited.
Special provisions apply if the Retirement Income Planqualified pension plan is terminated within five years following an Extraordinary Event, as this item is defined in the plan.RIP. In that event, plan liabilities will first be satisfied; then, remaining plan assets will be applied to increase retirement income to employees. The amount of the increase is based on the assumption that the employee would have continued employment with Armstrong until retirement. All of the named executive officers except for Mr. Grasberger would be entitled to this benefit under these circumstances.
The assumptions used to calculate the actuarial present values shown in the table above are as follows:
Discount rate used to value benefit obligations equals 5.75%
RP2000CH Mortality Table projected to 2007
EPA interest rate of 4.73%
1994 GAR (RR 2001-62) Mortality Table for EPA annuity conversion
Retirement at age 65 or Rule of 90 eligibility as specified
NONQUALIFIED DEFERRED COMPENSATION
The table below shows the executive contributions, earnings and account balances for the named executive officers who participate in the Company’s nonqualified deferred compensation plans.
Name | Executive Contributions in 2006 ($) (1) | Registrant Contributions ($)(2) | Aggregate Earnings ($) | Aggregate Withdrawals / ($) | Aggregate ($) (3) | ||||||||
M. D. Lockhart | Does not participate | ||||||||||||
F. N. Grasberger | $43,800 | $ | 32,850 | $ | 11,942 | 0 | $ | 128,253 | |||||
S. J. Senkowski | Does not participate | ||||||||||||
J. N. Rigas | Does not participate | ||||||||||||
F. J. Ready | 0 | 0 | $ | 207 | 0 | $ | 2,777 | ||||||
(1) | The amount in this column is also reported as either Salary or Non-Equity Incentive Plan Compensation in the Summary Compensation Table. |
(2) | The amount in this column is also reported in the All Other Compensation column of the Summary Compensation Table. |
(3) | $38,500 of the account balance for Mr. Grasberger was reported as compensation in the Summary Compensation Table for the fiscal year ended December 31, 2005. |
Armstrong maintains two nonqualified deferred compensation plans that apply to certain of the Company’s named executive officers.
Armstrong Deferred Compensation Plan
The Armstrong Deferred Compensation Plan, which was established in 1985, was closed to new deferrals of base salary and annual incentive compensation starting in 2001. The plan is partially funded with Company-owned life insurance policies held in a grantor trust. These policies were purchased by the Company prior to 1996. Mr. Ready is the only named executive officer participant in this plan. Participants may transfer account balances between any of the plan’s available phantom investment options.
Investment Option | 2006 Return | ||
Fidelity Magellan Fund | 7.22 | % | |
Fidelity OTC Portfolio Fund | 9.45 | % | |
Fidelity Asset Manager Fund | 9.19 | % | |
Spartan U.S. Equity Index Fund | 15.72 | % | |
Moody’s Average Corporate Bond Yield | 6.21 | % |
The normal form of payout is a 15-year annuity with monthly payments starting on a post-employment date selected by the participant (minimum age 55) but in no event commencing later than the participant’s 65th birthday. Requests for single sum payments are subject to approval by the Company.
If a participant resigns or is discharged for willful, deliberate or gross misconduct, the participant may be paid a single sum amount equal to 94% of the account balance (subject to Company approval) and would forfeit the remaining account balance. If a participant dies before commencing annuity payments, a survivor benefit will be paid to the participant’s designated beneficiary (or estate) as a ten-year annuity. The present value of the survivor benefit is the greater of the participant’s account balance or an amount equal to three times the participant’s actual deferrals. If the participant dies after commencing annuity payments, the remaining payments will be made to the participant’s designated beneficiary or estate.
Armstrong Nonqualified Deferred Compensation Plan
As explained under the Pension Benefits section, the Company’s defined benefit pension plans were closed to new salaried participants effective January 1, 2005. Salaried employees hired on or after January 1, 2005, including Mr.
Grasberger, are eligible to participate in a 401(k) savings plan with an enhanced company match. Armstrong matches 100% on the first 4% of employee contributions and 50% of the next 4% of employee contributions in the enhanced plan. The Armstrong Nonqualified Deferred Compensation Plan was established to provide similar 401(k) benefits as it applies to eligible managers, including Mr. Grasberger, whose eligible earnings (base salary plus annual incentive) exceed 12.5 times the Internal Revenue Code 402(g) elective deferral limit in effect for the plan year. For 2006, the eligible earnings limit was $187,500. A participant may elect to defer up to 8% of eligible base salary earnings and up to 8% of eligible annual incentive earnings. The Company matching contribution will be the same as that provided under the qualified 401(k) savings plan with the enhanced Company match. Mr. Grasberger is the only named executive officer participant in this unfunded, nonqualified plan. Participants may transfer account balances between any of the plan’s available phantom investment options listed below on a daily basis.
Investment Option | 2006 Return | ||
Davis New York Venture Fund | 15.12 | % | |
Fidelity Capital Appreciation Fund | 13.80 | % | |
Fidelity Diversified International Fund | 22.52 | % | |
Fidelity Equity Income Fund | 19.81 | % | |
Fidelity Intermediate Bond Fund | 4.26 | % | |
Fidelity Low-Priced Stock Fund | 17.76 | % | |
Fidelity Managed Income Portfolio II | 4.33 | % | |
Fidelity OTC Portfolio | 9.45 | % | |
Goldman Sachs Mid Cap Value Fund | 16.06 | % | |
Morgan Stanley Institutional Global Value Equity Portfolio | 21.40 | % | |
Morgan Stanley Institutional Value Portfolio | 17.12 | % | |
Neuberger Berman Fasciano Fund | 4.86 | % | |
Rainier Small / Mid Cap Equity Portfolio | 14.95 | % | |
Spartan U.S. Equity Index Fund | 15.72 | % |
Fidelity Freedom Funds
Fund | 2006 Return | Fund | 2006 Return | |||
Income | 6.37% | 2030 | 12.90% | |||
2010 | 9.46% | 2035 | 12.94% | |||
2015 | 10.36% | 2040 | 13.49% | |||
2020 | 11.61% | 2045 | 9.00% | |||
2025 | 11.84% | 2050 | 9.00% |
Participants become 100% vested in the Company match account after completing three years of continuous employment having worked at least 1,000 hours in each year.
Except in the case of an unforeseeable emergency or having reached age 70, no in-service distributions are permitted. Participants can elect to receive plan benefits as a single lump sum or in 120 monthly installments commencing on the date of the participant’s termination of employment. All elections must comply with the Internal Revenue Code requirements. In the event of a participant’s death, the remaining payments shall be paid to the participant’s designated beneficiary or estate.
The Company reserves the right to cause the participant to forfeit or require repayment of the Company match benefits where the participant is discharged for willful, deliberate of gross misconduct or where the participant has engaged in conduct that is injurious to the Company.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The tables below summarize the estimated value of the potential payments and benefits under the Company’s plans and arrangements to which the named executive officers would be entitled upon termination of employment under the circumstances indicated. Except for the continuation of health and welfare benefits and outplacement support, amounts would be paid as a lump sum at termination. The amounts shown assume that such termination was effective December 31, 2006. In accordance with SEC instructions, Company stock is valued at the December 31, 2006 closing price.
Each of the named executive officers who participate in the Company’s Pension Benefits and / or Nonqualified Deferred Compensation plans are eligible for the benefits shown in the accompanying tables and related narrative disclosures.
M. D. Lockhart | ||||||||||||||||
Benefit | Resignation | Involuntary for Cause | Involuntary without Cause | Termination for Good Reason | Change in Control without Pension Enhancements | Change in Control with Pension Enhancements | ||||||||||
Cash Severance | — | — | $ | 2,337,000 | $ | 2,337,000 | $ | 7,011,000 | $ | 7,011,000 | ||||||
Vacation Pay | — | — | 60,050 | 60,050 | — | — | ||||||||||
Savings Plan | — | — | 7,750 | 7,750 | — | — | ||||||||||
Pension Accrual | — | — | 285,459 | 285,459 | ��� | — | ||||||||||
Health & Welfare Benefit Continuation | — | — | 2,110 | 2,110 | 19,992 | 19,992 | ||||||||||
Outplacement Support | — | — | 14,000 | 14,000 | 30,000 | 30,000 | ||||||||||
Accelerated Long-Term Incentives | ||||||||||||||||
Cash Incentive Awards | — | — | — | — | 3,308,000 | 3,308,000 | ||||||||||
Restricted Stock | — | — | 3,179,250 | 3,179,250 | 3,179,250 | 3,179,250 | ||||||||||
Stock Options | — | — | 893,250 | 893,250 | 893,250 | 893,250 | ||||||||||
Change in Control Lump Sum Retirement Payment | — | — | — | — | 3,138,400 | 5,725,100 | ||||||||||
Excise Taxes & Gross-Up | — | — | — | — | 7,143,425 | 8,460,147 | ||||||||||
Total | — | — | $ | 6,778,869 | $ | 6,778,869 | $ | 24,723,317 | $ | 28,626,739 | ||||||
F. N. Grasberger | |||||||||||||||
Benefit | Resignation | Involuntary for Cause | Involuntary without Cause | Termination for Good Reason | Change in Control without Pension Enhancements | Change in Control with Pension Enhancements | |||||||||
Cash Severance | — | — | $ | 470,000 | $ | 470,000 | $ | 2,220,000 | Not Applicable | ||||||
Health & Welfare Benefit Continuation | — | — | 2,523 | 2,523 | 31,725 | ||||||||||
Outplacement Support | — | — | 14,000 | 14,000 | 30,000 | ||||||||||
Accelerated Long-Term Incentives | |||||||||||||||
Cash Incentive Awards | — | — | — | — | 810,000 | ||||||||||
Restricted Stock | — | — | — | 1,754,946 | 1,754,946 | ||||||||||
Stock Options | — | — | — | 493,074 | 493,074 | ||||||||||
Excise Taxes & Gross-Up | — | — | — | — | 1,623,382 | ||||||||||
Total | — | — | $ | 486,523 | $ | 2,734,543 | $ | 6,962,753 | |||||||
S. J. Senkowski Benefit Involuntary for Cause Involuntary without Cause Termination for Good Reason Cash Severance Health & Welfare Benefit Continuation Outplacement Support Accelerated Long-Term Incentives Cash Incentive Awards Restricted Stock Stock Options Change in Control Lump Sum Retirement Payment Excise Taxes & Gross-Up Total Resignation Change in
Control
without
Pension
Enhancements Change in
Control with
Pension
Enhancements — — $ 570,000 $ 570,000 $ 2,787,000 $ 2,787,000 — — — — 28,960 28,960 — — 14,000 14,000 30,000 30,000 — — — — 1,182,500 1,182,500 — — — 2,339,928 2,339,928 2,339,928 — — — 657,432 657,432 657,432 — — — — 2,457,000 3,169,500 — — — — 3,611,602 3,973,369 — — $ 584,000 $ 3,581,360 $ 13,094,422 $ 14,168,689
J. N. Rigas | ||||||||||||||||
Benefit | Resignation | Involuntary for Cause | Involuntary without Cause | Termination for Good Reason | Change in Control without Pension Enhancements | Change in Control with Pension Enhancements | ||||||||||
Cash Severance | — | — | $ | 382,000 | $ | 382,000 | $ | 1,682,700 | $ | 1,682,700 | ||||||
Health & Welfare Benefit Continuation | — | — | — | — | 29,897 | 29,897 | ||||||||||
Outplacement Support | — | — | 14,000 | 14,000 | 30,000 | 30,000 | ||||||||||
Accelerated Long-Term Incentives | ||||||||||||||||
Cash Incentive Awards | — | — | — | — | 573,000 | 573,000 | ||||||||||
Restricted Stock | — | — | — | 1,169,964 | 1,169,964 | 1,169,964 | ||||||||||
Stock Options | — | — | — | 328,716 | 328,716 | 328,716 | ||||||||||
Change in Control Lump Sum Retirement Payment | — | — | — | — | 284,100 | 946,100 | ||||||||||
Excise Taxes & Gross-Up | — | — | — | — | 1,359,407 | 1,695,533 | ||||||||||
Total | — | — | $ | 396,000 | $ | 1,894,680 | $ | 5,457,784 | $ | 6,455,910 | ||||||
F. J. Ready Benefit Involuntary for Cause Involuntary without Cause Termination for Good Reason Cash Severance Health & Welfare Benefit Continuation Outplacement Support Accelerated Long-Term Incentives Cash Incentive Awards Restricted Stock Stock Options Change in Control Lump Sum Retirement Payment Excise Taxes & Gross-Up Total Resignation Change in
Control
without
Pension
Enhancements Change in
Control with
Pension
Enhancements — — $ 341,200 $ 341,200 $ 1,731,000 Not Applicable — — — — 22,995 — — 14,000 14,000 30,000 — — — — 458,800 — — — 1,169,964 1,169,964 — — — 328,716 328,716 — — — — 203,300 — — — — 1,405,407 — — $ 355,200 $ 1,853,880 $ 5,350,182
Resignation or Involuntary Termination for Cause
No incremental benefits are provided to any of the named executive officers in the event of a voluntary resignation or an involuntary termination for Cause. Cause is defined as (i) the willful and continued failure by the executive to substantially perform the executive’s duties after a written demand for substantial performance is delivered to the executive by the Board of Directors, or (ii) the willful engaging by the executive in conduct which is demonstrably and materially injurious to the Company, or (iii) the executive’s conviction of any felony.
Involuntary Termination without Cause
Effective October 2, 2006, a Change in Control (CIC) occurred under the terms of the CIC agreements for Messrs. Lockhart, Senkowski, Rigas and RodruanReady by reason of the Company’s emergence from Chapter 11 reorganization. As a result, an involuntary termination without Cause or a termination for Good Reason effective December 31, 2006 involving Messrs. Lockhart, Senkowski, Rigas or Ready would trigger the payment of the amounts shown in the Change in Control without Pension Enhancements column.
Effective February 15, 2007, a Potential CIC occurred under the terms of Mr. Grasberger’s CIC agreement from the Company’s announcement to initiate a review of its strategic alternatives. If Mr. Grasberger were to be involuntarily terminated without Cause or terminated for Good Reason and an actual CIC occurs within six months of the date of his termination, he would be entitled to CIC severance benefits.
The following discussion assumes that a CIC or a Potential CIC had not yet occurred. In the event a named executive officer (other than Mr. Lockhart) is involuntarily terminated for reasons other than Cause, the executive will be eligible for a lump sum cash severance benefit. The normal severance payment is provided under the terms of the Severance Pay Plan for Salaried Employees of AWI. A salaried employee is eligible for severance pay if the employee is terminated and an exclusion does not apply. The employee is not eligible for severance pay if the reason for termination is any one of the following:
| (i) | voluntary separation |
| (ii) | the employee accepts employment with a successor organization in connection with the sale of a plant, unit, division or subsidiary |
| (iii) | the employee rejects the Company’s offer of a position in the same geographic area at a base salary of at least 90% of the employee’s current salary |
| (iv) | misconduct |
| (v) | unsatisfactory performance unless otherwise approved by the Severance Pay Committee |
Severance benefits will be offset by payments made under individual change in control or employment agreements.
The schedule of benefits for executive participants provides two weeks of base salary severance per year of credited service with a minimum of eight weeks and a maximum of 52 weeks. Mr. Grasberger was provided with a minimum severance benefit of 52 weeks base salary as part of his initial employment offer. Mr. Rigas was credited with 20 years of prior service credit for severance determination purposes when he joined Armstrong. The Severance Pay Committee reserves the right to depart from the severance pay schedule where factors justify an upward or downward adjustment in the level of benefits. In no event may the severance payment exceed two times the participant’s annual compensation.
In the event of involuntary termination where severance applies, all salaried employees are eligible for continuation of health care and life insurance benefits at active employee premium contributions for a period of six months unless the employee is eligible for and elects retiree health care coverage. Mr. Grasberger is eligible for twelve months of benefit continuation under the terms of his employment offer. In addition, senior executives are eligible for twelve months of executive outplacement support provided by an outside service provider.
Under the terms of Mr. Lockhart’s Employment Agreement, he is eligible for a lump sum severance payment in the event of his termination for Good Reason or termination by the Company for any reason other than Cause, death or a disability of six months. The lump sum severance amount is equal to the sum of his annual base salary and the highest annual incentive award paid in the three years preceding the date of termination or his target annual incentive. Mr. Lockhart is also eligible to continue his participation in all employee benefit plans for the remaining term of his Employment Agreement or until comparable benefits are obtained from a subsequent employer during this benefit.time period. Mr. Lockhart’s involuntary termination without Cause would be considered a termination for Good Reason as it applies to accelerated vesting of his outstanding restricted stock awards and unvested stock options.
Mr. Lockhart’s Employment Agreement specifies that he shall not during or after the term of the agreement disclose any confidential Company information that is not generally known or available to the public without prior written consent of the Company. Except as permitted by the Company with prior written consent, Mr. Lockhart shall not, for a period of 24 months following his termination of employment, directly or indirectly own, enter into the employ of or render any services to any person, firm or corporation within the United States or any foreign country in which the Company is doing or contemplating doing business on the date of termination which is a competitor of the Company. He shall not approach or solicit any customer in respect of any service or product supplied by the Company or solicit the services of any director, executive officer or employee of the Company. These noncompete and nonsolicitation provisions terminate in the event Mr. Lockhart receives severance payments under his Change in Control Agreement.
Termination for Good Reason
Under the terms of the long-term incentive grants, in the event a named executive officer terminates for Good Reason, all outstanding restricted stock awards and unvested stock options which were granted on October 2, 2006 will automatically vest. Termination for Good Reason is as defined in each executive’s Individual Change in Control Agreement and includes any one of the following events:
| (i) | the assignment to the executive of any duties inconsistent with the executive’s status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the executive’s responsibilities |
| (ii) | a reduction by the Company in the executive’s annual base salary |
| (iii) | the relocation of the executive’s place of employment by more than 50 miles (30 miles in the case of Mr. Lockhart) unless such relocation is closer to the executive’s principal residence, or the Company requiring the executive to be based anywhere other than such principal place of employment except for required business travel to an extent substantially consistent with present travel obligations |
| (iv) | failure by the Company to pay to the executive any portion of the executive’s current compensation |
| (v) | failure by the Company to continue in effect any compensation or benefit plan in which the executive participates immediately prior to a Change in Control which is material to the executive’s total compensation unless an equitable arrangement has been made |
In addition, termination for Good Reason includes an election by any of the named executive officers to terminate employment during the thirty-day period beginning twelve months following a qualifying Change in Control.
Change in Control
The Company has entered into Change in Control (CIC) Agreements with twelve senior executives including the named executive officers. These CIC agreements were assumed by the Company with court approval in its Chapter 11 case. These agreements provide severance benefits in the event of a CIC of AWI. The purpose of the agreements is to foster stability among this group of executives in the face of a possible CIC. The agreements have an automatic one-year renewal feature, meaning the agreements continue in effect unless (i) either the executive or the Company elects not to extend the agreement or (ii) an actual CIC occurs. If a CIC occurs, the agreement
continues in effect for 36 months beyond the month in which the CIC occurs. For each of Messrs. Lockhart, Senkowski, Rigas and Ready, their CIC agreements will continue in effect until October 31, 2009. Under its terms, Mr. Grasberger’s CIC agreement currently extends to September 30, 2009 but continues to be subject to the one-year renewal feature.
For purposes of Mr. Grasberger’s agreement, a CIC includes any one of the following events:
| (i) | acquisition by a person (excluding certain qualified owners) of beneficial ownership of 20% or more of AWI’s common stock |
| (ii) | a change in the composition of the AWI Board of Directors so that existing Board members and their approved successors do not constitute a majority of the Board |
| (iii) | consummation of a merger or consolidation of AWI unless shareholders of voting securities immediately prior to the merger or consolidation continue to hold 66 2/3% or more of the voting securities of the resulting entity |
| (iv) | shareholder approval of a liquidation or dissolution of AWI or sale of substantially all of AWI’s assets |
CIC severance benefits are payable if the executive is involuntarily terminated or terminates employment for Good Reason within three years following a CIC. For the named executive officers except for Mr. Grasberger, AWI’s emergence from Chapter 11 on October 2, 2006 represented a CIC. For each of the named executive officers, the agreement includes a provision where the executive may choose to terminate employment during the thirty-day period beginning twelve months following a qualifying Change in Control and receive the severance benefits (the “modified single trigger” provision). The qualifying Change in Control must meet the definitions in (ii) and (iii) shown above. In approving AWI’s assumption of these CIC agreements, the Bankruptcy Court modified the agreements such that any transaction which is effected by the AWI Asbestos Personal Injury Settlement Trust would not qualify as a CIC for purposes of the modified single-trigger provision.
Severance benefits for the named executive officers, which are payable in the event of the executive’s termination following a CIC, include:
| (i) | a lump sum cash severance payment equal to three times the sum of the executive’s annual base salary and the higher of the executive’s highest annual bonus earned in the three years prior to termination or prior to the CIC (in Mr. Lockhart’s agreement, his annual target bonus will be used if it is higher than the actual bonus earned) |
| (ii) | a lump sum payment of the portion of the executive’s annual target bonus applicable to the year of termination calculated by multiplying the target bonus by the fraction obtained by dividing the number of full and partial months completed during such uncompleted performance award period by twelve |
| (iii) | three additional years of age and service credit for the purpose of calculating pension benefits where the incremental actuarial present value is paid as a lump sum cash payment |
| (iv) | continuation of life, disability, accident and health insurance benefits at active employee contributions for three years following termination which shall be reduced to the extent comparable benefits are made available to the executive by a subsequent employer without cost |
| (v) | eligibility for post-retirement health care and life insurance benefits had the executive terminated employment during the period of three years after the actual date of termination |
| (vi) | payment for unused vacation which would have been earned had the executive continued employment through December 31 of the year of termination |
| (vii) | Company payment of reasonable fees for executive outplacement support for up to three years where the cost shall not exceed 20% of the executive’s annual base salary at the time of the CIC |
| (viii) | full reimbursement for the payment of any applicable excise taxes including tax gross-up |
| (ix) | payment of legal fees incurred in connection with a good faith dispute involving the CIC agreement |
Under the terms of the CIC agreements, certain stock-based benefits are accelerated upon the occurrence of a CIC. This includes accelerated vesting of all unvested stock options and unvested restricted stock awards. All unearned performance restricted shares held by the executive shall be deemed to have been earned to the maximum extent permitted under the stock plan and shall become free of restrictions.
In addition, the Management Development and Compensation Committee included a provision in the 2006 long-term cash incentive awards that provides for a cash payment equal to the executive’s award amount upon a CIC of AWI.
The tables above refer to a Change in Control with and without Pension Enhancements. The Pension Enhancements relate to CIC benefits that were part of the Company’s defined benefit pension plan prior to plan amendments that suspended these benefits effective March 1, 2004 to the extent legally permitted. The Pension Enhancements provided for five years of additional service for benefit determination, immediate payments with no actuarial reduction and a Social Security bridge payable to age 62 for employees who would be involuntarily terminated within two years following a CIC of the Company. Eligibility requirements were age 50 and either 10 years or 15 years of Company service depending on the enhancement.
Notwithstanding the Company’s amendments to freeze the accrued benefit enhancements under the qualified pension plan and eliminate past and future benefit enhancements under the nonqualified pension plan, the Company would be required to include such enhancements in the calculation of the CIC Lump Sum Retirement Payment for certain of the named executive officers. This would occur for a CIC of AWI which has not been approved by a majority of disinterested directors or where a person acquires beneficial ownership of 28% or more of the outstanding AWI common stock and within five years thereafter, disinterested directors no longer constitute a majority of the Board.
Compensation of Directors
AHI and Armstrong doWorld Industries, Inc. does not separately compensate directors who are employees for services as a director. AHI and Armstrong payThe Company pays directors who are not employees aan annual retainer of $90,000 per year. Shared directors receive only$155,000, comprised of $70,000 cash plus an award of restricted stock or phantom stock units (which each have the same value as a single retainer.share of Company stock) valued at $85,000 in accordance with a Phantom Stock Unit Plan adopted by the Company effective October 23, 2006. The phantom stock units (the “Units”) vest on the one-year anniversary of the award or, if earlier, the date of a change in control event, contingent upon the director’s continued service through such date. On October 23, 2006, each outside director was also awarded a one-time grant of 6,000 Units, vesting with respect to one-third of the Units on each of the first three annual anniversaries of the date of the award or, if earlier, the date of a change in control event, contingent upon the directors’ continued service through such date. The Units are payable in cash six months following the director’s separation from service or, if earlier, upon the occurrence of certain change in control events. All Units, whether or not vested, are forfeited if the director is removed for cause, and unvested Units are forfeited if the director terminates service for any reason prior to vesting. In accordance with the Company’s Corporate Governance Principles, each director must acquire and then hold until 6 months following the end of his/her service, phantom units and/or shares of Company stock equal in value to three times the annual director’s retainer at the time they join the Board. Directors should endeavor to reach that level of ownership within five years of joining the Board.
The Lead Director and the Audit Committee chairman receivesChair each receive an additional annual feeretainer of $20,000 and the chairpersons of the$20,000. The Management Development and Compensation Committee Chair and the Nominating and Governance Committee Chair each receive an additional annual feeretainer of $10,000. AHI and Armstrong directorsDirectors who are not employees are paid $2,500 per day plus reasonable expenses for special assignments including special meetings in connection with Board activity.activities. Cash payments are made quarterly in arrears. The annual award of restricted stock/phantom stock units is made in one installment in October at or about the time of the regular October board meeting to directors serving at the time. Cash payments and restricted stock/phantom stock unit grants for positions starting at other dates are pro-rated by the number of days remaining in the then-current payment period.
Other benefits for non-employee directors include: annual physical exam expenses reimbursed up to $2000 (non-employee directors only); travel accident insurance; participation in the Armstrong Foundation (a non-profit organization independent of the Company) Higher Education Gift-Matching Program; the Company’s Employee Purchase Programs; and participation in the “compassionate use” provision of the Company’s Aircraft Operation Policy. One director received reimbursement for annual physical exam expenses and two directors participated in the Higher Education Gift-Matching Program. A schedule of Armstrong Nonemployee Director Compensation is included in this Report as Exhibit No. 10.19.
Management DevelopmentAWI has entered into indemnity agreements with each member of its Board of Directors. The agreements generally provide that, if the director becomes involved in a claim (as defined in the agreement) by reason of an indemnifiable event (as defined in the agreement), the Company will indemnify the director as provided in the agreement. Specific terms and conditions are set forth in the individual indemnity agreements, the form of which is listed as Exhibit No. 10.33 to this Report.
2006 Director Compensation Committee and Interlocks and Insider ParticipationTable1
The Management Development and Compensation Committee members are Jerre L. Stead (Chairman); Judith R. Haberkorn; and Ruth M. Owades. The Management Development and Compensation Committee establishes the overall philosophy and policies governing compensation programs, including those subject to Section 162(m) of the Internal Revenue Code, for AHI and Armstrong management.
Name | Fees ($)2 | Stock ($)345 | All Other Compensation ($)6 | Total ($) | |||||
James J. Gaffney | 20,000 | 7 | 41,328 | 61,328 | |||||
Robert C. Garland | 17,500 | 41,328 | 58,828 | ||||||
Judith R. Haberkorn | 25,000 | 8 | 41,328 | 66,328 | |||||
James E. Marley | 0 | 9 | 41,328 | 2,000 | 43,328 | ||||
Russell F. Peppet | 17,500 | 41,328 | 58,828 | ||||||
Arthur J. Pergament | 17,500 | 41,328 | 58,828 | ||||||
John J. Roberts | 22,500 | 10 | 41,328 | 698 | 64,526 | ||||
Alexander M. Sanders, Jr. | 17,500 | 41,328 | 385 | 59,213 |
None of the members of the Management Development and Compensation Committee is a current or former officer of the company or was a party to any related party transaction (as determined under SEC disclosure requirements) involving the company during the year ended December 31, 2005.
1 | Messrs. Lockhart and Rigas are not listed in the table because the Company does not compensate directors who are employees for services as a director. |
2 | Includes a payment of $17,500, representing one quarter of the annual cash retainer of $70,000. |
3 | This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2006 fiscal year for the fair value of the phantom stock units granted in 2006, in accordance with FAS 123(R). |
4 | On October 23, 2006 pursuant to the Phantom Stock Unit Plan, each outside director was awarded 2,183 stock units; the number of units equal to (i) $85,000 divided by (ii) the fair market value of the common stock on the date of the award ($38.95), rounded to the next highest whole number. The units vest on the one-year anniversary of the award or, if earlier, the date of a change in control event, contingent upon the director’s continued service through such date. On October 23, 2006, each outside director was also awarded a one-time grant of 6,000 units, with a fair market value of the common stock on the date of the award of $38.95, vesting with respect to one-third of the units on each of the first three annual anniversaries of the date of the award, or if earlier, the date of a change in control event, contingent upon the director’s continued service through such date. |
5 | As of December 31, 2006, each of Ms. Haberkorn and Messrs. Gaffney, Garland, Peppet, Pergament, Roberts and Sanders held an aggregate of 8,183 units under the Phantom Stock Unit Plan. |
6 | Messrs. Marley, Roberts and Sanders received tax gross-ups related to imputed income in connection with the use of the Company aircraft. Mr. Marley also received payments under the Armstrong Deferred Compensation Plan. |
7 | Includes a quarterly payment of $2,500 as a special retainer for Mr. Gaffney as Chair of the Nominating and Governance Committee. |
8 | Includes a quarterly payment of $5,000 as a special retainer for Ms. Haberkorn as Lead Director and a quarterly payment of $2,500 as a special retainer for Ms. Haberkorn as Chair of the Management Development and Compensation Committee. |
9 | Mr. Marley was a director of both Armstrong Holdings, Inc. and Armstrong World Industries, Inc. from January 1, 2006 to October 2, 2006. He received $ 67,989 for his services to Armstrong Holdings, Inc. He did not receive any separate remuneration for his service to Armstrong World Industries, Inc. He resigned from both Boards effective October 2, 2006, the date of the Company’s emergence from Chapter 11, as provided for in the Company’s Plan of Reorganization. |
10 | Includes a quarterly payment of $5,000 as a special retainer for Mr. Roberts as Chair of the Audit Committee. |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
a) Stock Ownership of Certain Beneficial Owners
AHI indirectly owns all of the capital stock of AWI. The following table1sets forth, as of February 14, 2006,28, 2007, each person or entity known to AHIAWI that may be deemed to have beneficial ownership of more than 5% of the outstanding AHIAWI common stock. In accordance with applicable rules of the Securities and Exchange Commission, this information is based on Section 13G information filed with the Commission.
Name And Address Of Beneficial Owner | Amount And Nature Of Beneficial Ownership | Percent Of Class Outstanding2 | |||
Harbinger Capital Partners Master Fund I, Ltd. 3 c/o International Fund Services Third Floor, Bishop Square Redmond’s Hill Dublin, Ireland L2 | 6,426,032 | 15.8 | % | ||
Chesapeake Partners Management Co. Inc.4 1829 Reisterstown Road, Suite 220 Baltimore, MD 21208 | 3,500,850 | 8.6 | % | ||
Glenview Capital Management, LLC5 399 Park Avenue, Floor 39 New York, NY 10022 | 2,405,662 | 5.9 | % | ||
Name And Address Of Beneficial Owner | Amount And Nature Of Beneficial Ownership | Percent Of Class Outstanding2 | |||
Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust c/o Kevin E. Irwin Keating Muething & Klekamp PLL One East Fourth Street, Suite 1400 Cincinnati, OH 45202 | 36,981,480 | 65.6 | % |
1) | A Schedule 13G was filed on February 9, 2007, by Harry Huge, Managing Trustee, on behalf of said Trust. A Schedule 13G was filed on January 23, 2007 by Dean M. Trafelet in his capacity as the Future Claimants’ Representative (“FCR”) under the Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust Agreement, effective October 2, 2006. Mr. Trafelet, in his capacity as FCR, has certain consent rights with |
2) | In accordance with applicable rules of the Securities and Exchange Commission, this percentage is based upon the total |
28, 2007.
b) Security Ownership of Management
The following table shows the amount of AHICompany common stock thatowned by each director, each individual named in the Summary Compensation Table and all directors and executive officers owned as a group. The ownership rights in these shares consist of sole voting and investment power, except where otherwise indicated. No individual identified below holds any Company stock, directly or indirectly, or holds any stock options exercisable within 60 days. No named individual beneficially owns 1% or more of the outstanding common shares. Collectively, all of the directors and executive officers as a group beneficially would own 1.2%less than 1% of the outstanding common shares, assuming all of the options disclosed in the table were to be exercised.shares. This information is as of January 24, 2006.February 28, 2007.
Name | Stock1 | Stock Options Exercisable within 60 days | Total Beneficial Ownership | Restricted Stock2 | Phantom Shares3 | |||||
H. Jesse Arnelle | 2,044 | — | 2,044 | — | — | |||||
Judith R. Haberkorn | 1,084 | 4,970 | 6,054 | — | — | |||||
Michael D. Lockhart | 100,124 | 300,000 | 400,124 | — | — | |||||
James E. Marley | 3,022 | 1,410 | 4,432 | — | — | |||||
Ruth M. Owades | 5,000 | — | 5,000 | — | — | |||||
John. J. Roberts | — | — | — | — | — | |||||
M. Edward Sellers | — | — | — | — | — | |||||
Jerre L. Stead | 4,400 | 3,260 | 7,660 | — | — | |||||
F. Nicholas Grasberger III | — | — | — | — | — | |||||
William C. Rodruan | 4,356 | 13,600 | 17,956 | 1,447 | 283 | |||||
John N. Rigas | 979 | 17,000 | 17,979 | — | — | |||||
Stephen J. Senkowski | 3,235 | 13,000 | 16,235 | 1,995 | — | |||||
Director and officers as a group (12 persons) | 124,244 | 353,240 | 477,484 | 3,442 | 283 |
Name | Restricted Stock1 | Total Beneficial Ownership | Phantom Stock Units3 | ||||
James J. Gaffney | — | — | 8,183 | ||||
Robert C. Garland | — | — | 8,183 | ||||
Judith R. Haberkorn | — | — | 8,183 | ||||
Michael D. Lockhart | 131,850 | 2 | 131,850 | — | |||
James J. O’Connor | — | — | 6,963 | ||||
Russell F. Peppet | — | — | 8,183 | ||||
Arthur J. Pergament | — | — | 8,183 | ||||
John J. Roberts | — | — | 8,183 | ||||
Alexander M. Sanders, Jr. | — | — | 8,183 | ||||
F. Nicholas Grasberger III | 41,400 | 41,400 | — | ||||
Frank J. Ready | 27,600 | 27,600 | — | ||||
John N. Rigas | 27,600 | 27,600 | — | ||||
Stephen J. Senkowski | 55,200 | 55,200 | — | ||||
Director and officers as a group (15 persons) | 321,250 | 321,250 | 64,244 |
1) |
Includes the following shares indirectly owned and held in the savings accounts of the SIP accounts of the following individuals: S. J. Senkowski – 38 and W. C. Rodruan – 782 and executive officers as a group – 820.
2) | Mr. Lockhart’s restricted stock consists of 75,000 restricted shares granted on October 2, 2006 and 56,850 shares of performance restricted stock granted on February 19, 2007. The performance restricted stock grant is divided into two awards of 28,425 shares each. 100% of the first award will be earned if the Company’s three-year earnings performance achieves 150% of a Board established target. 100% of the second award will be earned if the Company’s three-year cumulative free cash flow (excluding acquisition and divestiture events) achieves 150% of a Board established target. In each case, fewer shares will be earned for lesser performance. |
3) | Includes phantom |
Equity Compensation Plan Information
No equity-based compensation has been granted since AWI filed for relief under Chapter 11 in December 2000, other than commitments entered into prior to the Chapter 11 filing.
The following table provides information as of December 31, 2005 regarding securities that were authorized for issuance under pre-December 2000 grants pursuant to equity compensation plans:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||||||||
Equity compensation plans approved by security holders | 1,997,317 | $ | 27.83 | 4,815,424 | |||||||||
Equity compensation plans not approved by security holders2 | 105,119 | — | 504,653 | ||||||||||
Total | 2,102,436 | $ | 26.44 | 5,320,077 | |||||||||
Plan category | Number of securities (a) | Weighted-average (b) | Number of securities (c) | ||||
Equity compensation plans approved by security holders2 | 1,591,950 | $ | 38.42 | 3,226,400 | |||
Equity compensation plans not approved by security holders | — | — | — | ||||
Total | 1,591,950 | $ | 38.42 | 3,226,400 | |||
1) | Excludes restricted stock |
2) | The |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Transactions with Related Persons
ThereApart from the Armstrong Holdings, Inc. matter discussed below, there have been no transactions since January 1, 2006, and there are no currently proposed transactions in which the Company was or is to be a participant in which any of the following persons had or will have a direct or indirect material interest:
(i) any director or executive officer of the Company,
(ii) any nominee for director,
(iii) any 5% or greater shareholder of the Company, or
(iv) any immediate family member of any person identified above.
See Note 1 to the Consolidated Financial Statements for a description of claims between the Company and its former holding company, Armstrong Holdings, Inc. (“AHI”), and the proposed resolution of those issues between the companies as negotiated by independent committees of the directors of the two companies. Also see Exhibit 10.37 to this Report for the settlement Stipulation of the companies that has been submitted for Court approval. The Company’s Plan of Reorganization contemplates that AHI, which now has no business, operations or employees, will be dissolved as soon as practicable. Mr. Lockhart and members of the Company’s management have served and continue to serve as officers of AHI pending such dissolution. Other than Mr. Lockhart, no director of the Company is also a current director of AHI.
Oversight and Review of Transactions with Related Persons
The Company’s Code of Business Conduct and its Corporate Governance Principles and governance documents address officer and director independence from conflicting interests as well as procedures for the review, approval or ratification of transactions with related persons. The Nominating and Governance Committee is charged with reviewing and approving any proposed related-party transactions by the Company involving directors, nominees and/or executive officers and other persons.
Any proposed “related party transaction” involving any executive officer, director or director nominee as defined under SEC Regulation S-K, Item 404 must be approved by the Nominating and Governance Committee comprised of independent directors who must have no connection with the transaction. Any waiver of the Company’s Code of Business Conduct, particularly its conflicts-of-interest provisions, that is proposed to apply to any director or executive officer must be reviewed in advance by the same Committee, which is responsible for making a recommendation to the Board of Directors for approval or disapproval. The Board’s decision on any such matter would be disclosed publicly in compliance with applicable law and the rules of the NYSE.
The governance documents referred to above (namely the Company’s Code of Business Conduct, its Corporate Governance Principles and the Charter of the Nominating and Governance Committee) can be found on the Company’s web site at http://www.armstrong.com under “About Armstrong” and “Corporate Governance.”
Since emerging from Chapter 11, the Company has only one shareholder that holds 5% or more of the Company’s stock, namely the Armstrong World Industries Asbestos Personal Injury Settlement Trust (the “Trust”), which holds approximately 65% of the Company’s stock. As part of the Company’s Plan of Reorganization, when the Company emerged from Chapter 11 it established a new corporate charter (“Articles of Incorporation”), new Bylaws, and entered into a Stockholder and Registration Rights Agreement with the Trust. Those documents have been previously discussed and filed with the SEC in the Company’s Report on Form 8-K dated October 2, 2006 and are incorporated by reference as exhibits to this Report. Among other things, those documents prescribe governance standards for the Company, certain voting obligations of the Trust, and spell out terms under which the Company would register the Trust’s stock for public sale.
In the event of a proposed transaction between the Company and the Trust, the Company’s Board of Directors would consider the matter first. Depending on the nature of the proposed transaction, under the above-referenced governance documents in certain cases approval of disinterested members of the Board would be required to authorize a transaction, and in other cases approval of a majority of the shares not owned by the Trust would be required.
For example, any transaction between the Company (or any of its subsidiaries) and the Trust or any of its affiliates (other than payment of the same dividend or other pro rata distribution to all common shareholders) would require the approval of a majority of the “disinterested directors” (in addition to any Board approval customarily required for the transaction). Disinterested directors includes only directors who have no personal financial interest in the transaction and who are not trustees, officers or employees of the Trust or are otherwise affiliated with the Trust, unless the transaction is approved by a vote of the other shareholders. However, the Board may delegate to management approval of categories of transactions with the Trust it considers immaterial. To date, no such transactions have been proposed, and no such delegation has been made.
Any corporate transaction (such as a stock sale or merger) in which the Trust would have the ability to dispose of stock representing more than 5% of the shares outstanding to any person who would subsequently own either more than 35% of the Company’s stock or more Common Shares than the Trust, will also require approval of a majority of the disinterested directors, unless it is approved by vote of the shareholders (as may be required by law or listing standards). Usually, the required vote will be the majority of the shareholders or, if the Trust would receive any different treatment in the transaction than other shareholders, by the vote of the holders of a majority of the stock not owned by the Trust.
A merger, recapitalization or similar corporate transaction by the Company in which a dividend or distribution is made to the Trust or in which any outstanding stock is exchanged or changed in any way, and in which the Trust is treated differently than the other shareholders will require approval by the holders of a majority of the shares not owned by the Trust. If such shareholder approval is obtained, approval of the transaction by a majority of the disinterested directors as discussed above will not be required.
See the Company’s Articles of Incorporation, Bylaws and the Stockholder and Registration Rights Agreement for full details on how a particular proposed transaction would be handled. The discussion above is qualified by reference to those documents, which would govern the approval of any proposed transaction subject to their provisions.
Director Independence
The Board has determined that each of its eight non-employee directors —namely, Ms. Haberkorn and Messrs. Gaffney, Garland, O’Connor, Peppet, Pergament, Roberts, and Sanders—is independent, meaning in the Board’s business judgment he or she meets the standards of independence specified in the Company’s Corporate Governance Principles, SEC Rule 10A-3(b)(1) and New York Stock Exchange (NYSE) Rule 303A.02, and has no relationship with the Company or its management that may interfere with the exercise of his or her responsibilities on the Board or any committee.
The Board’s determinations were based upon consideration of relationships between directors and the Company or management, and of factors that reasonably could compromise the independent judgment of a director. For example, the Board considered whether there were any director relationships with vendors or service providers and considered whether any director had sought to influence any decisions by the Company in a manner beneficial to their personal interests. There were no transactions, relationships or relatedarrangements disclosed by any non-employee director for the Board to consider in this regard.
The Board, led by its Nominating and Governance Committee, monitors the independence of outside directors. Each director is charged with a responsibility of candor and disclosure to their Board colleagues relative to potentially compromising relationships, transactions and compensation.
As indicated above, the Company’s Corporate Governance Principles, which contain the Company’s independence standard referred to disclose.herein, are available on the Company’s website at http://www.armstrong.com under “About Armstrong” and “Corporate Governance”.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Professional Audit Fee Services Rendered
The following table presents fees for professional audit services rendered by KPMG LLP for the audit of AHI’sArmstrong’s annual financial statements for 20052006 and 2004,2005, and fees billed for other services rendered by KPMG LLP. For the purposes of this table, audit fees are for services rendered in connection with the audit of AHI’sArmstrong’s financial statements as of and for the year ended December 31, 2005,2006, for which a portion of the billings occurred or will occur in 2006.2007. All fees in 20052006 and 20042005 were pre-approved by the Audit Committee.
(amounts in 000’s) | 2005 | 2004 | ||||
Audit Fees | $ | 5,700 | $ | 3,950 | ||
Audit Related Fees(1) | 360 | 900 | ||||
Audit and Audit Related Fees | 6,060 | 4,850 | ||||
Tax Fees(2) | 1,234 | 915 | ||||
All Other Fees(3) | 93 | 105 | ||||
Total Fees | $ | 7,387 | $ | 5,870 | ||
(amounts in 000’s) | 2006 | 2005 | ||||
Audit Fees | $ | 6,500 | $ | 5,700 | ||
Audit Related Fees(1) | 580 | 360 | ||||
Audit and Audit Related Fees | 7,080 | 6,060 | ||||
Tax Fees(2) | 2,325 | 1,234 | ||||
All Other Fees(3) | 127 | 93 | ||||
Total Fees | $ | 9,532 | $ | 7,387 | ||
1) | Audit Related Fees consisted principally of fees for audits of financial statements of certain employee benefit plans, accounting research assistance on technical topics, international financial reporting standards at some foreign locations and other matters with respect to foreign statutory financial statements. |
2) | Tax Fees consisted of fees for tax consultation and tax compliance services. |
3) | All Other Fees consist primarily of fees for Bankruptcy Court fee application preparation. |
Audit Committee Pre-approval Policies and Procedures
The Audit Committee of Armstrong Holdings,World Industries, Inc.’s Board of Directors adoptedfollows a policy and procedure that requires their pre-approval of any audit and accounting services provided by the firm that serves as our independent auditor. Per the policy, management cannot engage the independent auditor for any services without the Audit Committee’s pre-approval. The Audit Committee delegates to the Committee Chair the authority to pre-approve services not exceeding 5% of the total audit fees for the year for purposes of handling immediate needs, with a report to the full Committee of such approvals at its next meeting. The policy and procedures comply with Section 10A(i) of the Securities Exchange Act.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a)(1) | The financial statements and schedule of | |
| (a)(2) | The financial statements required to be filed pursuant to Item 15(d) of Form 10-K are: | |
| Worthington Armstrong Venture consolidated financial statements as of December 31, | ||
| (a)(3) | The following exhibits are filed as | |
| Exhibit No. | Description | ||
| No. 2.1 | |||
| Armstrong World Industries, Inc.’s Fourth Amended Plan of Reorganization, | |||
| No. 3.1 | |||
| No. 3.2 | Armstrong World Industries, Inc.’s Bylaws are incorporated by reference from the Current Report on Form 8-K dated | ||
| No. 4.1 | |||
| Armstrong World Industries, Inc.’s Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended April 12, 2001 is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, wherein it appeared as Exhibit 4. * (SEC File No. 1-2116) | |||
| No. 10.1 | ||
| No. | ||
| No. | |||
| No. | |||
| No. | ||
| Form of Change in Control Agreement | ||
| No. | Change in Control Agreement | |
| No. | Form of Indemnification Agreement | |
| No. | Form of Indemnification Agreement | |
| No. | Form of Indemnification Agreement | ||
| No. | |||
| No. | Employment Agreement | ||
| No. | Amendment to August 7, 2000 Employment Agreement | ||
| No. | |||
| Management Services Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc., dated August 7, 2000 is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 wherein it appeared as Exhibit 10(g). * (SEC File No. 000-50408) | |||
| No. | |||
| Hiring Agreement | |||
| No. | Change in Control Agreement | ||
| No. | Indemnification Agreement | ||
| No. | ||
| Form of Long-Term Incentive Plan 2005 award letter regarding executive participation | ||
| No. | Armstrong World Industries, Inc.’s Nonqualified Deferred Compensation Plan effective January | |
| No. | ||
| No. | Agreement of Purchase and Sale between S-J Realty Management, LLC and Armstrong World Industries, Inc. dated December 5, 2005, is incorporated by reference from the Current Report filed on Form 8-K on January 30, 2006, wherein it appeared as Exhibit 10.1. | |
| No. | Form of grant letter regarding executive officer participation in Armstrong World Industries, Inc.’s 2006 retention payment program is incorporated by reference from the Current Report filed on Form 8-K on January 30, 2006, wherein it appeared as Exhibit 10.1.* | |
| No. | ||
| Order of the U.S. District Court dated January 26, 2006, and related Armstrong World Industries, Inc.’s Motion for an Order Authorizing and Approving Continued Cash Retention Program for Key Employees, is incorporated by reference from the Current Report filed on Form 8-K/A on February 2, 2006, wherein it appeared as Exhibit 99.1 * | ||
| No. | ||
| Form of Long-Term Incentive Plan 2006 award letter regarding executive participation in the 2006 Long-Term Incentive Plan is | ||
| No. 10.24 | Change in Control Agreement with Donald A. McCunniff dated March 13, 2006 is incorporated by reference from the Current Report filed on Form 8-K on March 14, 2006, wherein it appeared as Exhibit 10.1. * | |
| No. 10.25 | Indemnification Agreement with Donald A. McCunniff dated March 13, 2006 is incorporated by reference from the Current Report filed on Form 8-K on March 14, 2006, wherein it appeared as Exhibit 10.2. * | |
| No. 10.26 | Credit Agreement, dated as of October 2, 2006, by and among the Company, certain subsidiaries of the Company as guarantors, Bank of America, N.A., as Administrative Agent, the other lenders party thereto, JP Morgan Chase Bank, N.A. and Barclays Bank PLC, as Co-Syndication Agents and LaSalle Bank National Association and the Bank of Nova Scotia, as Co-Documentation Agents, is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.1. | |
| No. 10.27 | The Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust Agreement dated as of October 2, 2006, by and among Armstrong World Industries, Inc. and, as trustees, Anne M. Ferazzi, Harry Huge, Paul A. Knuti, Lewis R. Sifford and Thomas M. Tully is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.2. | |
| No. 10.28 | Stockholder and Registration Rights Agreement, dated as of October 2, 2006, by and between Armstrong World Industries, Inc. and the Armstrong World Industries, Inc. Asbestos Personal Injury Asbestos Trust is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.3. | |
| No. 10.29 | Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.4.* | |
| No. 10.30 | Form of Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan Stock Option Agreement is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.5. * | |
| No. 10.31 | Form of Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan Restricted Stock Award Agreement is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.6. * | |
| No. 10.32 | Form of Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan notice of restricted stock and/or option award is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.7. * | |
| No. 10.33 | Form of Indemnification Agreement for directors and officers of Armstrong World Industries, Inc. is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.8. * A Schedule of Participating Directors and Officers is filed with this Report. | |
| No. 10.34 | 2006 Director Phantom Stock Unit Plan is incorporated by reference from the Current Report on Form 8-K dated October 23, 2006, wherein it appeared as Exhibit 10.1. * | |
| No. 10.35 | 2006 Director Phantom Stock Unit Agreement is incorporated by reference from the Current Report on Form 8-K dated October 23, 2006, wherein it appeared as Exhibit 10.2. * A Schedule of Participating Directors is filed with this Report. | |
| No. 10.36 | 2006 Director Phantom Stock Unit Agreement is incorporated by reference from the Current Report on Form 8-K dated October 23, 2006, wherein it appeared as Exhibit 10.3. * A Schedule of Participating Directors is filed with this Report. | |
| No. 10.37 | Stipulation and Agreement with Respect to Claims of Armstrong Holdings, Inc. and Armstrong Worldwide, Inc.; and Motion for Order Approving Stipulation and Agreement are incorporated by reference from the Current Report on Form 8-K dated February 26, 2007, wherein they appeared as Exhibits 99.2 and 99.3, respectively. | |
| No. 10.38 | Share Purchase Agreement dated March 27, 2007, between the Company and NPM Capital N.V. and Flagstone Beheer B.V. for the sale of Tapijtfabriek H. Desseaux N.V. and its subsidiaries is filed with this Report. | |
| No. 11.1 | Computation for basic earnings per share. | |
| No. 11.2 | Computation for diluted earnings per share. | |
| No. | ||
| No. 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| No. 23.2 | ||
| Consent of Independent Registered Public Accounting Firm. | ||
| No. 24.1 | Power of Attorney and authorizing resolution. | |
| No. 31.1 | Certification of Principal Executive Officer | |
| No. 31.2 | Certification of Principal Financial Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. | |
| No. | ||
| Certification of Chief Executive Officer | ||
| No. 32.2 | Certification of Chief Financial Officer | |
| No. 99.1 | Worthington Armstrong Venture consolidated financial statements as of December 31, | |
| * | Management Contract or Compensatory Plan. |
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 | ||
| (Registrant) | ||
| By: | /s/ Michael D. Lockhart | |
| Chairman and Chief Executive Officer | ||
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant AHI and in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant AHI:
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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.
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant Armstrong and in the capacities and on the dates indicated.
Directors and Principal Officers of the registrant AWI:
Name | Title | |
Michael D. Lockhart | Chairman and Chief Executive Officer | |
(Principal Executive Officer) | ||
F. Nicholas Grasberger III | Senior Vice President and Chief Financial Officer | |
(Principal Financial Officer) | ||
William C. Rodruan | Vice President and Controller | |
(Chief Accounting Officer) | ||
James | Director | |
Robert C. Garland | Director | |
Judith R. Haberkorn | Director | |
James J. O’Connor | Director | |
Russell F. Peppet | Director | |
Arthur J. Pergament | Director | |
John | Director | |
Alexander M. Sanders, Jr. | Director | |
| By: | /s/ Michael D. Lockhart | |
| (Michael D. Lockhart, as attorney-in-fact for | ||
| As of | ||
| By: | /s/ F. Nicholas Grasberger III | |
| (F. Nicholas Grasberger III) | ||
| As of | ||
| By: | /s/ William C. Rodruan | |
| (William C. Rodruan) | ||
| As of | ||
SCHEDULE II
Armstrong Holdings, Inc. and Armstrong World Industries, Inc.
Valuation and Qualifying Reserves of Accounts Receivable
For Years Ended December 31(amounts in millions)
| Successor Company | Predecessor Company | |||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | Three Months Ended December 31, 2006 | Nine Months Ended September 30, 2006 | Year Ended December 31, 2005 | Year Ended December 31, 2004 | ||||||||||||||||||||||
Provision for Losses | ||||||||||||||||||||||||||||
Balance at beginning of year | $ | 13.0 | $ | 18.9 | $ | 20.3 | $ | 10.8 | $ | 10.8 | $ | 13.0 | $ | 18.9 | ||||||||||||||
Additions charged to earnings | 2.7 | 4.1 | 6.4 | 1.4 | 5.2 | 2.4 | 2.9 | |||||||||||||||||||||
Deductions | (4.9 | ) | (10.0 | ) | (7.8 | ) | (1.6 | ) | (4.1 | ) | (3.7 | ) | (8.1 | ) | ||||||||||||||
Discontinued operations | — | (1.1 | ) | (0.9 | ) | (0.7 | ) | |||||||||||||||||||||
Balance at end of year | $ | 10.8 | $ | 13.0 | $ | 18.9 | $ | 10.6 | $ | 10.8 | $ | 10.8 | $ | 13.0 | ||||||||||||||
Provision for Discounts | ||||||||||||||||||||||||||||
Provision for Discounts and Warranties | ||||||||||||||||||||||||||||
Balance at beginning of year | $ | 45.5 | $ | 47.3 | $ | 41.4 | $ | 49.6 | $ | 39.8 | $ | 45.5 | $ | 47.3 | ||||||||||||||
Additions charged to earnings | 212.6 | 217.8 | 229.6 | 48.2 | 185.5 | 212.6 | 217.8 | |||||||||||||||||||||
Deductions | (218.3 | ) | (219.6 | ) | (223.7 | ) | (48.8 | ) | (175.7 | ) | (218.3 | ) | (219.6 | ) | ||||||||||||||
Discontinued operations | — | — | — | — | ||||||||||||||||||||||||
Balance at end of year | $ | 39.8 | $ | 45.5 | $ | 47.3 | $ | 49.0 | $ | 49.6 | $ | 39.8 | $ | 45.5 | ||||||||||||||
Total Provision for Discounts and Losses | ||||||||||||||||||||||||||||
Total Provision for Discounts, Warranties and Losses | ||||||||||||||||||||||||||||
Balance at beginning of year | $ | 58.5 | $ | 66.2 | $ | 61.7 | $ | 60.4 | $ | 50.6 | $ | 58.5 | $ | 66.2 | ||||||||||||||
Additions charged to earnings | 215.3 | 221.9 | 236.0 | 49.6 | 190.7 | 215.0 | 220.7 | |||||||||||||||||||||
Deductions | (223.2 | ) | (229.6 | ) | (231.5 | ) | (50.4 | ) | (179.8 | ) | (222.0 | ) | (227.7 | ) | ||||||||||||||
Discontinued operations | — | (1.1 | ) | (0.9 | ) | (0.7 | ) | |||||||||||||||||||||
Balance at end of year | $ | 50.6 | $ | 58.5 | $ | 66.2 | $ | 59.6 | $ | 60.4 | $ | 50.6 | $ | 58.5 | ||||||||||||||
Exhibit Index
| Exhibit No. | ||
| No. 10.19 | Schedule of Armstrong World Industries, Inc. Nonemployee Directors Compensation. | |
| No. | ||
| No. | ||
| No. | ||
| No. | ||
| No. 11.1 | Computation for basic earnings per share. | |
| No. 11.2 | Computation for diluted earnings per share. | |
| No. 21 | ||
| No. 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| No. 23.2 | ||
| Consent of Independent Registered Public Accounting Firm. | ||
| No. 24 | Power of Attorney and authorizing resolution. | |
| No. 31.1 | Certification of Principal Executive Officer | |
| No. 31.2 | Certification of Principal Financial Officer | |
| No. | ||
| Certification of Chief Executive Officer | ||
| No. 32.2 | Certification of Chief Financial Officer | |
| No. 99.1 | Worthington Armstrong Venture consolidated financial statements as of December 31, | |
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