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Armstrong World Industries 10-Q 2005
Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

ARMSTRONG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania   000-50408   23-3033414

(State or other jurisdiction of

incorporation or organization)

  Commission file
number
  (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

 

ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania   1-2116   23-0366390

(State or other jurisdiction of

incorporation or organization)

  Commission file
number
  (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

 

Armstrong World Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions.

 

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 Exchange 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 ¨

 

Number of shares of Armstrong Holdings, Inc.’s common stock outstanding as of October 19, 2005 - 40,664,461.

 


 

1


Table of Contents

TABLE OF CONTENTS

 

SECTION


        PAGES

Uncertainties Affecting Forward-Looking Statements

   3 – 4

PART I – FINANCIAL INFORMATION

    

Item 1.

  

Condensed Consolidated Financial Statements

    
    

Armstrong Holdings, Inc., and Subsidiaries

   5 –30
    

Report of Independent Registered Public Accounting Firm

   31
    

Armstrong World Industries, Inc., and Subsidiaries

   32 –57

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   58 –73

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   74

Item 4.

  

Controls and Procedures

   74

PART II – OTHER INFORMATION

    

Item 1.

  

Legal Proceedings

   75

Item 6.

  

Exhibits

   76-81

Signatures

   82

 

2


Table of Contents

Uncertainties Affecting Forward-Looking Statements

 

Our disclosures here and in other public documents and comments sometimes 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.

 

Risk Factors

 

Our business, operations and financial condition are subject to various risks. You should take them 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 and is not a complete list of all risks and uncertainties that might affect our future results. Related disclosures in subsequent 10-K, 10-Q and 8-K reports should also be consulted.

 

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. See related discussions in this document and our other SEC filings for more details.

 

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 the Company. 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), the Company 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 the company has in place processes and policies to mitigate these risks and to investigate and address such claims as they arise, the costs to defend or resolve such claims cannot be predicted.

 

3


Table of Contents

Construction activity variability and the size of our 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 and Asia also are important.

 

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 and availability has sometimes been tight. We source some of these materials from a limited number of suppliers, which increases the risk of unavailability. The impact of increased costs is greatest where our ability to pass along increased costs is limited, whether due to competitive pressures or other factors.

 

Consumer preference and competition

 

Our customers consider our products’ pricing, styling and performance, and our customer service when deciding whether to purchase our products. Shifting consumer preference, e.g. from residential vinyl products to other hard-surface flooring, 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. And competition from overseas competitors who have a lower cost structure is a particular threat in some areas, such as our U.S. flooring businesses.

 

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 25% 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 is subject to variable tax rates, credit risks in emerging markets, political risks, 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 or expand our plants and operations as needed, and we currently have several of these actions in various stages of completion. Each action generally involves substantial planning and capital investment. We can err in planning and executing our actions, which could create risks to 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 believe 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.

 

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 over 20% of our consolidated total sales. We do not have long-term contracts with these customers. The loss of sales to one of these major customers, or changes in our business relationship with them, could have a material adverse impact on our results.

 

4


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions, except per share amounts)

Unaudited

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Net sales

   $ 937.0     $ 893.5     $ 2,696.7     $ 2,642.0  

Cost of goods sold

     720.8       699.3       2,101.5       2,046.8  
    


 


 


 


Gross profit

     216.2       194.2       595.2       595.2  

Selling, general and administrative expenses

     158.2       151.6       495.6       462.6  

Goodwill impairment

     —         —         —         60.0  

Restructuring charges, net

     1.4       1.9       17.0       5.0  

Equity (earnings) from joint venture

     (9.9 )     (7.5 )     (28.2 )     (23.4 )
    


 


 


 


Operating income

     66.5       48.2       110.8       91.0  

Interest expense (unrecorded contractual interest of $20.5, $21.7, $63.6, $65.1)

     2.2       2.2       6.5       6.3  

Other non-operating expense

     1.1       1.1       1.4       2.9  

Other non-operating (income)

     (5.5 )     (1.4 )     (9.9 )     (4.7 )

Chapter 11 reorganization costs, net

     1.5       2.3       4.5       6.6  
    


 


 


 


Earnings from continuing operations before income taxes

     67.2       44.0       108.3       79.9  

Income tax expense

     21.1       20.8       47.5       51.2  
    


 


 


 


Net earnings from continuing operations

   $ 46.1     $ 23.2     $ 60.8     $ 28.7  

(Loss) from discontinued operations, net of tax of $0.2

     —         —         —         (0.4 )
    


 


 


 


Net earnings

   $ 46.1     $ 23.2     $ 60.8     $ 28.3  
    


 


 


 


Net earnings per share of common stock, continuing operations:

                                

Basic

   $ 1.14     $ 0.57     $ 1.50     $ 0.71  

Diluted

   $ 1.13     $ 0.57     $ 1.49     $ 0.71  

(Loss) per share of common stock, discontinued operations:

                                

Basic

   $ —       $ —       $ —       $ (0.01 )

Diluted

   $ —       $ —       $ —       $ (0.01 )

Net earnings per share of common stock:

                                

Basic

   $ 1.14     $ 0.57     $ 1.50     $ 0.70  

Diluted

   $ 1.13     $ 0.57     $ 1.49     $ 0.70  

Average number of common shares outstanding:

                                

Basic

     40.6       40.5       40.5       40.5  

Diluted

     40.7       40.7       40.7       40.7  

 

See accompanying notes to condensed consolidated financial statements beginning on page 9.

 

5


Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)

 

     Unaudited        
     September 30,
2005


    December 31,
2004


 
Assets                 

Current assets:

                

Cash and cash equivalents

   $ 540.8     $ 515.9  

Accounts and notes receivable, net

     405.6       336.1  

Inventories, net

     493.7       535.1  

Deferred income taxes

     15.6       15.6  

Income tax receivable

     7.0       7.0  

Other current assets

     89.1       72.5  
    


 


Total current assets

     1,551.8       1,482.2  

Property, plant and equipment, less accumulated depreciation and amortization of $1,562.5 and $1,540.7, respectively

     1,149.6       1,208.8  

Insurance receivable for asbestos-related liabilities, noncurrent

     88.8       88.8  

Prepaid pension costs

     488.9       480.9  

Investment in affiliates

     62.3       72.5  

Goodwill, net

     134.3       136.0  

Other intangibles, net

     69.0       76.0  

Deferred income taxes, noncurrent

     947.8       941.6  

Other noncurrent assets

     124.9       122.6  
    


 


Total assets

   $ 4,617.4     $ 4,609.4  
    


 


Liabilities and Shareholders’ Equity                 

Current liabilities:

                

Short-term debt

   $ 21.2     $ 11.1  

Current installments of long-term debt

     6.9       8.2  

Accounts payable and accrued expenses

     406.8       447.4  

Income tax payable

     35.4       20.3  

Deferred income taxes

     1.1       1.1  
    


 


Total current liabilities

     471.4       488.1  

Liabilities subject to compromise

     4,866.0       4,866.2  

Long-term debt, less current installments

     23.5       29.2  

Postretirement and postemployment benefit liabilities

     260.8       262.6  

Pension benefit liabilities

     231.7       258.9  

Other long-term liabilities

     88.2       87.6  

Deferred income taxes, noncurrent

     19.2       19.2  

Minority interest in subsidiaries

     8.1       9.3  
    


 


Total noncurrent liabilities

     5,497.5       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

     (957.8 )     (1,018.6 )

Accumulated other comprehensive income

     42.2       42.8  

Less common stock in treasury, at cost 2005 – 11,214,004 shares and 2004 – 11,210,018 shares

     (513.3 )     (513.3 )
    


 


Total shareholders’ (deficit)

     (1,351.5 )     (1,411.7 )
    


 


Total liabilities and shareholders’ equity

   $ 4,617.4     $ 4,609.4  
    


 


 

See accompanying notes to condensed consolidated financial statements beginning on page 9.

 

6


Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(amounts in millions, except per share amounts)

Unaudited

 

     2005

    2004

Common stock, $1 par value:

                              

Balance at beginning of year and September 30

   $ 51.9             $ 51.9        
    


         


     

Capital in excess of par value:

                              

Balance at beginning of year

   $ 167.7             $ 167.9        

Stock issuances and other

     —                 (0.2 )      
    


         


     

Balance at September 30

   $ 167.7             $ 167.7        
    


         


     

Reduction for ESOP loan guarantee:

                              

Balance at beginning of year and September 30

   $ (142.2 )           $ (142.2 )      
    


         


     

Retained earnings (accumulated deficit):

                              

Balance at beginning of year

   $ (1,018.6 )           $ (937.8 )      

Net earnings for period

     60.8     $ 60.8       28.3     $ 28.3
    


         


     

Balance at September 30

   $ (957.8 )           $ (909.5 )      
    


         


     

Accumulated other comprehensive income:

                              

Balance at beginning of year

   $ 42.8             $ 43.3        

Foreign currency translation adjustments

     (12.0 )             (0.4 )      

Derivative gain, net

     9.1               1.8        

Minimum pension liability adjustments

     2.3               —          
    


         


     

Total other comprehensive (loss)/income

     (0.6 )     (0.6 )     1.4       1.4
    


 


 


 

Balance at September 30

   $ 42.2             $ 44.7        
    


         


     

Comprehensive income

           $ 60.2             $ 29.7
            


         

Less treasury stock at cost:

                              

Balance at beginning of year and September 30

   $ (513.3 )           $ (513.3 )      
    


         


     

Total shareholders’ (deficit)

   $ (1,351.5 )           $ (1,300.7 )      
    


         


     

 

See accompanying notes to condensed consolidated financial statements beginning on page 9.

 

7


Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited

 

    

Nine Months Ended

September 30,


 
     2005

    2004

 

Cash flows from operating activities:

                

Net earnings

   $ 60.8     $ 28.3  

Adjustments to reconcile net earnings to net cash provided by operating activities:

                

Depreciation and amortization

     106.7       105.4  

Deferred income taxes

     (11.1 )     (0.8 )

Equity (earnings) from affiliates, net

     (27.5 )     (25.2 )

Gain on sale of investment in affiliates

     (3.4 )     —    

Chapter 11 reorganization costs, net

     4.5       6.6  

Chapter 11 reorganization costs payments

     (9.2 )     (12.4 )

Restructuring charges, net of reversals

     17.0       5.0  

Restructuring payments

     (22.0 )     (2.1 )

Goodwill impairment

     —         60.0  

Asbestos-related insurance recoveries

     —         4.5  

Cash effect of hedging activities

     11.1       9.7  

Increase (decrease) in cash from change in:

                

Receivables

     (85.9 )     (58.3 )

Inventories

     24.0       (54.4 )

Other current assets

     5.5       13.5  

Other noncurrent assets

     (26.8 )     (24.1 )

Accounts payable and accrued expenses

     11.9       54.1  

Income taxes payable

     17.5       (11.4 )

Other long-term liabilities

     (3.0 )     9.2  

Other, net

     (6.6 )     (4.7 )
    


 


Net cash provided by operating activities

     63.5       102.9  
    


 


Cash flow from investing activities:

                

Purchases of property, plant and equipment and computer software

     (83.4 )     (69.1 )

Distributions from equity affiliates

     17.0       —    

Proceeds from the sale of investment in affiliates

     20.6       —    

Proceeds from the sale of assets

     4.7       4.6  
    


 


Net cash (used for) investing activities

     (41.1 )     (64.5 )
    


 


Cash flows from financing activities:

                

Increase in short-term debt, net

     12.1       12.3  

Payments of long-term debt

     (4.3 )     (6.1 )

Other, net

     —         (1.3 )
    


 


Net cash provided by financing activities

     7.8       4.9  
    


 


Effect of exchange rate changes on cash and cash equivalents

     (5.3 )     1.0  
    


 


Net increase in cash and cash equivalents

     24.9       44.3  

Cash and cash equivalents at beginning of year

     515.9       484.3  
    


 


Cash and cash equivalents at end of period

   $ 540.8     $ 528.6  
    


 


 

See accompanying notes to condensed consolidated financial statements beginning on page 9.

 

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Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

NOTE 1. BASIS OF PRESENTATION

 

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 difference between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries is primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. Due to the lack of material differences in the financial statements, when we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as “AHI,” “Armstrong,” “we,” “us,” and “ourselves,” 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.

 

The accounting policies used in preparing these statements are the same as those used in preparing AHI’s consolidated financial statements for the year ended December 31, 2004, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in AHI’s Form 10-K for the fiscal year ended December 31, 2004. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.

 

These financial statements are prepared in accordance with 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 changes, warranty, workers compensation, general liability and environmental claims. When preparing an estimate, management determines the amount based upon considering relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.

 

Operating results for the third quarter and first nine months of 2005 and the corresponding periods of 2004 included in this report are unaudited. However, these condensed consolidated financial statements have been reviewed by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) for a limited review of interim financial information.

 

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications were made to the condensed consolidated statement of earnings and primarily consisted of reclassifying 2004 amounts from other non-operating income and other non-operating expense to selling, general and administrative (“SG&A”) expense and discontinued operations.

 

There would have been no effect on net income and earnings per share if AHI had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-based Compensation,” to stock-based employee compensation in 2005 or 2004.

 

NOTE 2. CHAPTER 11 REORGANIZATION

 

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

 

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Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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” and Note 15 under “Asbestos-Related Litigation”.

 

AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the 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.

 

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, 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 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, 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 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

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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.

 

In order for the POR to be confirmed, the U.S. District Court must also issue findings of fact and conclusions of law in support of confirmation of the POR, enter or affirm an order confirming the POR and issue the “524(g) injunction” which is part of the POR.

 

Recent Developments and Next Steps in the Chapter 11 Process

 

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 (which is available at www.armstrongplan.com), 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. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. On April 28, 2005 the court granted the motion. A motion to dismiss the appeal for alleged lack of jurisdiction was filed by the Committee of Unsecured Creditors on March 29, 2005. On October 24, 2005, the court held oral arguments on the appeal and the court has not yet issued its ruling. AWI is also reviewing other options to resolve its Chapter 11 Case, and is monitoring a proposed asbestos claims litigation reform bill in Congress (see the discussion under “Potential Legislation” in Note 15). AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11.

 

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.

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 from independent activities of the subsidiaries or affiliates). See Note 15 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 six 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:

 

    AWI’s “Available Cash,” which is defined in the POR as:

 

    Cash available on the effective date of 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,

 

    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, 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.

 

    Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issued in lieu thereof, and

 

    Substantially all of the new common stock of AWI.

 

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

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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.

 

The POR provides that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:

 

    34.43% of the new common stock of reorganized Armstrong,

 

    34.43% of the first $1.05 billion of all the cash and 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 principal amount of Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes.

 

    60% of the next $50 million of Available Cash but, if such Available Cash is less than $50 million, then 60% of the balance in Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes, and

 

    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, or net cash proceeds from any private offerings of debt securities made in lieu of issuing such Plan Notes.

 

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. The POR provides for the distribution of warrants to purchase shares of reorganized Armstrong (the “Warrants”) to the holders of AWI’s existing common stock. The terms of the Warrants are provided in an exhibit to the POR. The Warrants:

 

    would permit the purchase of 5% of the common stock of reorganized Armstrong on a fully diluted basis, upon exercise of all the Warrants;

 

    would be exercisable at any time during the seven years after the effective date of the POR; and

 

    would permit the purchase of shares at an exercise price of $37.50, which is equal to 125% of the $30.00 per share equity value of reorganized Armstrong, as agreed among the financial advisers for AWI, the Asbestos Personal Injury Claimants’ Committee, the Unsecured Creditors’ Committee, and the Future Claimants’ Representative, as set forth in the Bankruptcy Court-approved disclosure statement for the POR (as further described below).

 

Whether any value would be realized from the Warrants would depend on whether the market value of reorganized Armstrong’s new common stock reaches a value in excess of the exercise price of the Warrants during the period that they may be exercised.

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

AHI’s shareholders were not entitled to vote on the POR. However, AHI’s shareholders were sent the Disclosure Statement and POR. If the POR is implemented, the only value that would be available to AHI shareholders is their ratable share of the Warrants available upon the contemplated dissolution of AHI. See AHI’s Plan of Dissolution below. As discussed above, however, on February 23, 2005, the U.S. District Court entered an order denying confirmation of the POR. In the court’s decision (which is available at www.armstrongplan.com), 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.

 

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, holders of allowed unsecured claims and AWI’s existing common stock, is:

 

    New common stock at $30 a share, which is the approximate mid-point of the range of estimated values of $24.66 and $35.30 per share, assuming a distribution of 56.4 million shares of new common stock to holders of unsecured claims and the Asbestos PI Trust;

 

    Plan Notes in the aggregate principal amount of $775 million, that are worth their face value;

 

    Available Cash of approximately $350 million that AWI expects to have; and

 

    Warrants with an estimated value of between $35 million and $40 million.

 

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’s Plan of Dissolution, Winding Up and Distribution (“Plan of Dissolution”)

 

In connection with the implementation of the POR, the Warrants would be issued to AHI (or a wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which would then be AHI’s only asset. Accordingly, the Board of Directors of AHI approved and recommended to AHI shareholders the Plan of Dissolution, whereby AHI would voluntarily dissolve and wind up its affairs in accordance with Pennsylvania law and, subject to completion of AHI’s winding up (including the satisfaction of any liabilities of AHI), distribute any remaining Warrants to the shareholders. At a special meeting of AHI shareholders on January 7, 2004, the Plan of Dissolution was approved. The POR provides that AWI would pay the costs and expenses incurred in connection with administering AHI’s Plan of 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,

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

indemnification, or subrogation) has been 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 4,800 proofs of claim (including late-filed claims) totaling approximately $6.3 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 15.

 

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.

 

Financing

 

AWI has a $75.0 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. As of September 30, 2005, AWI had approximately $43.4 million in letters of credit, which were issued pursuant to the DIP Facility. As of September 30, 2005, AWI had $306.9 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.

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 September 30, 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 15 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 costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities through September of 2005 and 2004:

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2005

    2004

    2005

    2004

 

Professional fees

   $ 4.7     $ 3.6     $ 11.8     $ 9.6  

Interest income, post-Filing

     (3.2 )     (1.4 )     (7.5 )     (3.1 )

Adjustments to pre-Filing liabilities

             —         0.1       —    

Other expense directly related to bankruptcy, net

     —         0.1       0.1       0.1  
    


 


 


 


Total Chapter 11 reorganization costs, net

   $ 1.5     $ 2.3     $ 4.5     $ 6.6  
    


 


 


 


 

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.

 

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 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.

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

NOTE 3. SEGMENT RESULTS

 

    

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


Net sales to external customers


   2005

   2004

   2005

   2004

Resilient Flooring

   $ 311.5    $ 308.1    $ 914.0    $ 934.1

Wood Flooring

     220.2      209.4      624.9      620.9

Textiles and Sports Flooring

     79.7      70.0      211.4      197.4

Building Products

     268.2      250.2      784.5      727.5

Cabinets

     57.4      55.8      161.9      162.1
    

  

  

  

Total sales to external customers

   $ 937.0    $ 893.5    $ 2,696.7    $ 2,642.0
    

  

  

  

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 

Segment operating income (loss)


   2005

    2004

    2005

    2004

 

Resilient Flooring

   $ 7.7     $ 10.8     $ (5.8 )   $ (13.3 )

Wood Flooring

     25.7       7.1       54.4       38.5  

Textiles and Sports Flooring

     3.2       2.8       (3.2 )     (0.8 )

Building Products

     43.1       40.0       116.0       106.3  

Cabinets

     (0.3 )     2.8       (9.5 )     4.9  

Unallocated Corporate (expense)

     (12.9 )     (15.3 )     (41.1 )     (44.6 )
    


 


 


 


Total consolidated operating income

   $ 66.5     $ 48.2     $ 110.8     $ 91.0  
    


 


 


 


 

Segment assets


  

September 30,

2005


  

December 31,

2004


     

Resilient Flooring

   $ 708.2    $ 737.9

Wood Flooring

     653.0      663.6

Textiles and Sports Flooring

     207.7      218.1

Building Products

     608.3      596.3

Cabinets

     104.9      102.2
    

  

Total segment assets

     2,282.1      2,318.1

Assets not assigned to segments

     2,335.3      2,291.3
    

  

Total consolidated assets

   $ 4,617.4    $ 4,609.4
    

  

 

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE

 

As a result of AWI’s Chapter 11 filing (see Note 2), 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 condensed consolidated balance sheet based upon maturity date. AWI’s asbestos liability is also recorded in liabilities subject to compromise. See Note 2 for further discussion on how the Chapter 11 process may address AWI’s liabilities subject to compromise and Note 15 for further discussion of AWI’s asbestos liability.

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

Liabilities subject to compromise at September 30, 2005 and December 31, 2004 are as follows:

 

     September 30,
2005


   December 31,
2004


Debt (at face value)(1)

   $ 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

     71.0      70.4

ESOP loan guarantee

     157.7      157.7
    

  

Total liabilities subject to compromise

   $ 4,866.0    $ 4,866.2
    

  

 

(1) 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 $20.5 million and $63.6 million in the third quarter and first nine months of 2005, respectively, and $21.7 million and $65.1 million in the third quarter and the first nine months of 2004, respectively.

 

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.

 

NOTE 5. DISCONTINUED OPERATIONS

 

On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During the first quarter of 2004, AHI recorded a net loss of $0.4 million for an environmental indemnification related to this divestiture. This adjustment was classified as discontinued operations since the original divestiture was reported as discontinued operations.

 

NOTE 6. INVENTORIES

 

     September 30,
2005


    December 31,
2004


 

Finished goods

   $ 325.5     $ 362.9  

Goods in process

     48.2       49.3  

Raw materials and supplies

     187.7       212.8  

Less LIFO and other reserves

     (67.7 )     (89.9 )
    


 


Total inventories, net

   $ 493.7     $ 535.1  
    


 


 

NOTE 7. NATURAL GAS HEDGES

 

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 hedging instruments. These instruments are designated as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent the hedge is considered effective as defined by SFAS 133, 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 September 30, 2005 was a $28.0 million asset compared to a $5.3 million asset at December 31, 2004, due to the price of natural gas increasing during the year.

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

NOTE 8. EQUITY INVESTMENTS

 

Investments in affiliates of $62.3 million at September 30, 2005 reflected the equity interest in our 50% investment in our WAVE joint venture. The balance decreased $10.2 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. Condensed income statement data for WAVE, our joint venture accounted for under the equity method of accounting, is summarized below:

 

    

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


     2005

   2004

   2005

   2004

Net sales

   $ 77.6    $ 68.2    $ 230.0    $ 209.9

Gross profit

     24.9      21.1      70.9      64.0

Net earnings

     19.9      14.9      56.4      46.7

 

NOTE 9. GOODWILL AND INTANGIBLE ASSETS

 

As of January 1, 2005, we had goodwill of approximately $136 million. Goodwill is required to be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.

 

The following table represents the changes in goodwill for the first nine months of 2005.

 

Goodwill by segment


   January 1, 2005

   Adjustments, net(1)

    Impairments

   September 30, 2005

Wood Flooring

   $ 108.2      —       —      $ 108.2

Building Products

     15.2    $ (1.7 )   —        13.5

Cabinets

     12.6      —       —        12.6
    

  


 
  

Total consolidated goodwill

   $ 136.0    $ (1.7 )   —      $ 134.3
    

  


 
  

(1) Consists of the effects of foreign exchange.

 

During the second quarter of 2004, we recorded a $60 million goodwill impairment charge in our European resilient flooring unit. This charge was caused by lowered financial projections for this business due to significant operating losses.

 

The following table details amounts related to intangible assets as of September 30, 2005 and December 31, 2004.

 

     September 30, 2005

   December 31, 2004

     Gross Carrying
Amount


   Accumulated
Amortization


   Gross Carrying
Amount


   Accumulated
Amortization


Amortized intangible assets

                           

Computer software

   $ 112.8    $ 76.5    $ 109.8    $ 66.4

Land use rights and other

     4.5      1.1      4.4      1.0
    

  

  

  

Total

   $ 117.3    $ 77.6    $ 114.2    $ 67.4
    

  

  

  

Unamortized intangible assets

                           

Trademarks and brand names

   $ 29.3           $ 29.2       
    

         

      

Other intangible assets, gross

   $ 146.6           $ 143.4       
    

         

      

Aggregate Amortization Expense

                           

For the nine months ended September 30, 2005

          $ 12.8              

For the nine months ended September 30, 2004

          $ 11.5              

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

NOTE 10. RESTRUCTURING AND OTHER ACTIONS

 

Net restructuring charges of $17.0 million and $5.0 million were recorded in the first nine months of 2005 and 2004, respectively. These charges are summarized in the following table:

 

     Net Charge/(Reversal)

   

Segment


     Three Months Ended
September 30,


   Nine Months Ended
September 30,


   

Action Title


   2005

   2004

   2005

    2004

   

Lancaster Plant

   $ 0.2      —      $ 11.3       —       Resilient Flooring

Hoogezand

     1.1    $ 1.9      5.1     $ 5.8     Building Products

North America SG&A

     —        —        (0.1 )     —       Resilient Flooring

Morristown

     0.1      —        0.4       —       Cabinet Products

Searcy

     —        —        0.1       —       Wood Flooring

Oss

     —        —        0.2       —       Textiles & Sports Flooring

European consolidation

     —        —        —         (0.8 )   Resilient Flooring, Textiles & Sports Flooring
    

  

  


 


   

Total

   $ 1.4    $ 1.9    $ 17.0     $ 5.0      
    

  

  


 


   

 

Lancaster Plant: The charge 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 $11.3 million charge in 2005, $10.5 million is a non-cash charge related to termination benefits to be paid through the U.S. pension plan. The other $0.8 million is comprised of severance and related costs. We have incurred project-to-date restructuring charges of $12.3 million related primarily to severance and pension related costs. We expect to incur an additional $27 million of restructuring charges starting in the fourth quarter of 2005 and continuing through 2008, with the majority of charges to be incurred in 2005 and 2006. Additionally, we recorded $5.3 million of accelerated depreciation and $2.7 million of other related costs in the first nine months of 2005, 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 $16.0 million, and expect to incur an additional $0.8 million in the fourth quarter of 2005. Additionally, we recorded $0.5 million and $1.5 million of accelerated depreciation in cost of goods sold in the first nine months of 2005 and 2004, respectively. We also recorded $0.6 million and $0.2 million of other related costs in cost of goods sold in the first nine months of 2005 and 2004, respectively.

 

North America SG&A: The 2005 net reversal of $0.1 million was related to Resilient Flooring and was 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 2005 charge 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 expect to incur an additional $0.1 million of shutdown costs in the remainder of 2005. Additionally, we recorded $0.2 million of accelerated depreciation and $0.9 million of other related costs in 2005, 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.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

We incurred $0.9 million of restructuring charges for the project-to-date and do not expect to incur any additional charges.

 

Oss: The 2005 charge was 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 reversals in 2004 comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Resilient Flooring ($0.5 million) and Textiles and Sports Flooring ($0.3 million) segments.

 

The following table summarizes activity in the restructuring accruals for the first nine months of 2005 and 2004.

 

     Beginning
Balance


   Cash
Payments


   

Net

Charges


   Other

    Ending
Balance


2005

   $ 24.8    $ (22.0 )   $ 6.5    $ (1.0 )   $ 8.3

2004

     10.0      (2.1 )     5.0      0.1       13.0

 

The amount in “other” for 2005 and 2004 is related to the effects of foreign currency translation.

 

Of the September 30, 2005 and 2004 ending balances, $1.3 million is reported in liabilities subject to compromise.

 

Substantially all of the ending balance of the restructuring accrual as of September 30, 2005 relates to a noncancelable operating lease which extends through 2017, a lease for office space in the U.S. which is expected to be settled as part of our Chapter 11 emergence process, and severance for terminated employees, the majority of which will be paid in 2005.

 

NOTE 11. INCOME TAX EXPENSE

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Earnings from continuing operations before income taxes

   $ 67.2     $ 44.0     $ 108.3     $ 79.9  

Income tax expense

     21.1       20.8       47.5       51.2  

Effective tax rate

     31.4 %     47.3 %     43.9 %     64.1 %

 

The 2005 effective tax rates for the third quarter and first nine months are lower than the comparable 2004 periods primarily due to the favorable conclusion of I.R.S. audit and appeals issues for $3.7 million in 2005 and the impact of the AJCA dividends as described below. In addition, the nine-month tax rate for 2004 included a $60 million non-taxable goodwill impairment charge.

 

On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. During the third quarter of 2005, AWI approved a dividend plan whereby $5.1 million of qualified and $17.1 million of base dividends were declared. AWI reported a $2.9 million tax benefit in the third quarter of 2005 for this event due to the utilization of additional deemed-paid foreign tax credits and the release of deferred tax liabilities previously recorded on the underlying earnings. AWI is evaluating further dividends, which may be declared in the fourth quarter of 2005. The range of possible amounts that we are

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

considering for repatriation under this provision is between zero and $60 million. The related potential range of income tax expense is between zero and $3.6 million.

 

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 AJCA to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109.

 

NOTE 12. PENSIONS

 

Following are the components of net periodic benefit costs:

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

U.S. defined-benefit plans

                                

Pension Benefits

                                

Service cost of benefits earned

   $ 6.2     $ 5.8     $ 18.5     $ 17.4  

Interest cost on projected benefit obligation

     24.0       22.8       71.9       68.5  

Expected return on plan assets

     (39.4 )     (36.9 )     (118.4 )     (110.8 )

Amortization of prior service cost

     4.1       4.3       12.4       13.0  

Recognized net actuarial loss

     0.3       0.4       1.1       1.2  
    


 


 


 


Net periodic pension (credit)

   $ (4.8 )   $ (3.6 )   $ (14.5 )   $ (10.7 )
    


 


 


 


Retiree Health and Life Insurance Benefits

                                

Service cost of benefits earned

   $ 0.7     $ 0.6     $ 2.1     $ 1.9  

Interest cost on projected benefit obligation

     5.2       5.5       15.5       16.5  

Amortization of prior service benefit

     (1.4 )     (1.3 )     (4.2 )     (4.1 )

Recognized net actuarial loss

     2.9       2.4       8.9       7.3  
    


 


 


 


Net periodic postretirement benefit cost

   $ 7.4     $ 7.2     $ 22.3     $ 21.6  
    


 


 


 


Non-U.S. defined-benefit plans

                                

Pension Benefits

                                

Service cost of benefits earned

   $ 2.4     $ 2.4     $ 7.6     $ 7.1  

Interest cost on projected benefit obligation

     5.3       5.2       16.5       15.7  

Expected return on plan assets

     (3.8 )     (3.6 )     (11.9 )     (10.9 )

Amortization of transition obligation

     —         —         (0.1 )     —    

Amortization of prior service cost

     0.1       0.1       0.2       0.2  

Recognized net actuarial loss

     0.4       0.1       1.4       0.3  
    


 


 


 


Net periodic pension cost

   $ 4.4     $ 4.2     $ 13.7     $ 12.4  
    


 


 


 


 

We previously disclosed in our financial statements for the year ended December 31, 2004 that we expected to contribute $22.7 million to our non-U.S. defined benefit pension plans in 2005. As of September 30, 2005, $20.3 million of contributions have been made. We presently anticipate contributing an additional $5.5 million to fund our non-U.S. pension plans in 2005 for a total of $25.8 million.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

NOTE 13. 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 the first nine months of 2005 and 2004:

 

     2005

    2004

 

Balance at January 1

   $ 22.6     $ 25.5  

Reductions for payments

     (28.5 )     (28.4 )

Current year warranty accruals

     29.7       27.1  

Preexisting warranty accrual changes

     (0.2 )     (0.7 )

Effects of foreign exchange translation

     (1.0 )     (0.1 )
    


 


Balance at September 30

   $ 22.6     $ 23.4  
    


 


 

NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION

 

     Nine Months Ended
September 30,


     2005

   2004

Interest paid

   $ 1.5    $ 1.7

Income taxes paid, net

   $ 41.1    $ 63.2

 

NOTE 15. LITIGATION AND RELATED MATTERS

 

ASBESTOS-RELATED LITIGATION

 

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

 

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Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 2 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 the POR may be implemented, it must be confirmed by order of the Bankruptcy Court and the U.S. District Court. In addition, consummation of the POR is subject to the satisfaction after confirmation of certain conditions, as provided by 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. AWI filed a Notice of Appeal to the U.S. Court of Appeals for the Third Circuit on March 4, 2005. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. A motion to dismiss the appeal was filed by the Committee of Unsecured Creditors on March 29, 2005. AWI is also reviewing other options to resolve its Chapter 11 Case. See Note 2 for further discussion of AWI’s Chapter 11 process.

 

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 six employer liability claims involving alleged asbestos exposure.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 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.

 

Asbestos-Related Liability

 

Based upon events through early March 2003, primarily 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 September 30, 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 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 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 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.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 September 30, 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 September 30, 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 the first nine months of 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 the first nine months of 2005 but received $4.5 million during the first nine months of 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 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.

 

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 and is currently awaiting consideration from the full Senate. 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, AWI’s recorded asbestos liability would likely be materially reduced from the $3.2 billion amount currently implied by the POR, but its size would depend on AWI’s payment obligations under the law and the present value of those obligations. In such event, the POR would no longer provide an appropriate framework for a reorganization of AWI, and 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 provision is currently included under the POR), 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

 

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Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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.

 

Conclusion

 

Many uncertainties continue to exist about the matters impacting AWI’s asbestos-related liability and insurance asset. These uncertainties include when and if the POR will be confirmed by the U.S. District Court, the impact of any potential legislation, and the financial condition of AWI’s insurance carriers.

 

Additionally, if the POR 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 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 recently 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.

 

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Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 negotiated 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 would have 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 would continue to participate in the cleanup under a previously approved Consent Decree. Upon this global settlement becoming effective, the EPA proof of claim will be 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. On April 8, 2005, AWI and EPA filed a joint motion with the Bankruptcy Court seeking approval of the Settlement Agreement. Liberty Mutual Insurance Company and Travelers Indemnity Company and Travelers Casualty and Surety Company filed objections to the joint motion with the Bankruptcy Court. Following negotiations with the insurers, AWI entered into a Stipulation with each of them resolving their objections. The EPA Settlement Approval Order was entered by the Bankruptcy Court in October 2005.

 

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 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

 

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Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

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 $28.9 million and $28.0 million at September 30, 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 September 30, 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 September 30, 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 have been pursuing a breach of contract claim against a former laminate flooring supplier. An arbitration hearing was held in March 2005. On July 29, 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 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 late October 2005. Under the settlement agreement, payment of the settlement amount (now in escrow) is to be made to Armstrong within approximately one

 

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Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions, except share data)

 

week following certification by Armstrong that the appeal period has passed and the approval order has become final. 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.

 

NOTE 16. EARNINGS PER SHARE

 

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.

 

30


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

Armstrong Holdings, Inc.:

 

We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries (“the Company”) as of September 30, 2005, the related condensed consolidated statements of earnings for the three and nine-month periods ended September 30, 2005 and 2004, and the related condensed consolidated statements of cash flows and shareholders’ equity for the nine-month periods ended September 30, 2005 and 2004. These condensed consolidated financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries as of December 31, 2004, and the related consolidated statements of earnings, cash flows and shareholders’ equity for the year then ended (not presented herein); and in our report dated March 14, 2005, we expressed an unqualified opinion on those consolidated financial statements. Our report dated March 14, 2005 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. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ KPMG LLP

 

Philadelphia, Pennsylvania

October 24, 2005

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions)

Unaudited

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Net sales

   $ 937.0     $ 893.5     $ 2,696.7     $ 2,642.0  

Cost of goods sold

     720.8       699.3       2,101.5       2,046.8  
    


 


 


 


Gross profit

     216.2       194.2       595.2       595.2  

Selling, general and administrative expenses

     158.2       151.6       496.2       462.6  

Goodwill impairment

     —         —         —         60.0  

Restructuring charges, net

     1.4       1.9       17.0       5.0  

Equity (earnings) from joint venture

     (9.9 )     (7.5 )     (28.2 )     (23.4 )
    


 


 


 


Operating income

     66.5       48.2       110.2       91.0  

Interest expense (unrecorded contractual interest of $20.5, $21.7, $63.6, $65.1)

     2.2       2.2       6.4       6.3  

Other non-operating expense

     1.1       1.1       1.4       2.9  

Other non-operating (income)

     (5.5 )     (1.4 )     (9.8 )     (4.7 )

Chapter 11 reorganization costs, net

     1.5       2.3       4.5       6.6  
    


 


 


 


Earnings from continuing operations before income taxes

     67.2       44.0       107.7       79.9  

Income tax expense

     21.1       20.8       47.5       51.2  
    


 


 


 


Net earnings from continuing operations

   $ 46.1     $ 23.2     $ 60.2     $ 28.7  

(Loss) from discontinued operations, net of tax of $0.2

     —         —         —         (0.4 )
    


 


 


 


Net earnings

   $ 46.1     $ 23.2     $ 60.2     $ 28.3  
    


 


 


 


 

See accompanying notes to condensed consolidated financial statements beginning on page 36.

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)

 

     Unaudited        
     September 30, 2005

    December 31, 2004

 
Assets                 

Current assets:

                

Cash and cash equivalents

   $ 540.8     $ 515.9  

Accounts and notes receivable, net

     405.6       336.1  

Inventories, net

     493.7       535.1  

Deferred income taxes

     15.6       15.6  

Income tax receivable

     7.0       7.0  

Other current assets

     89.1       72.5  
    


 


Total current assets

     1,551.8       1,482.2  

Property, plant and equipment, less accumulated depreciation and amortization of $1,562.5 and $1,540.7, respectively

     1,149.6       1,208.8  

Insurance receivable for asbestos-related liabilities, noncurrent

     88.8       88.8  

Prepaid pension costs

     488.9       480.9  

Investment in affiliates

     62.3       72.5  

Goodwill, net

     134.3       136.0  

Other intangibles, net

     69.0       76.0  

Deferred income taxes, noncurrent

     947.8       941.6  

Other noncurrent assets

     124.9       122.6  
    


 


Total assets

   $ 4,617.4     $ 4,609.4  
    


 


Liabilities and Shareholder’s Equity                 

Current liabilities:

                

Short-term debt

   $ 21.2     $ 11.1  

Current installments of long-term debt

     6.9       8.2  

Accounts payable and accrued expenses

     406.8       447.4  

Short term amounts due to affiliates

     13.3       13.3  

Income tax payable

     31.0       15.3  

Deferred income taxes

     1.1       1.1  
    


 


Total current liabilities

     480.3       496.4  

Liabilities subject to compromise

     4,870.7       4,870.9  

Long-term debt, less current installments

     23.5       29.2  

Postretirement and postemployment benefit liabilities

     260.8       262.6  

Pension benefit liabilities

     231.7       258.9  

Other long-term liabilities

     88.2       87.6  

Deferred income taxes, noncurrent

     19.8       19.8  

Minority interest in subsidiaries

     8.1       9.3  
    


 


Total noncurrent liabilities

     5,502.8       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

     (961.7 )     (1,021.9 )

Accumulated other comprehensive income

     42.2       42.8  

Less common stock in treasury, at cost 2005 and 2004 – 11,393,170 shares

     (528.5 )     (528.5 )
    


 


Total shareholder’s (deficit)

     (1,365.7 )     (1,425.3 )
    


 


Total liabilities and shareholder’s equity

   $ 4,617.4     $ 4,609.4  
    


 


 

See accompanying notes to condensed consolidated financial statements beginning on page 36.

 

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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholder’s Equity

(amounts in millions, except per share amounts)

Unaudited

 

     2005

    2004

Common stock, $1 par value:

                              

Balance at beginning of year and September 30

   $ 51.9             $ 51.9        
    


         


     

Capital in excess of par value:

                              

Balance at beginning of year and September 30

   $ 172.6             $ 172.7        
    


         


     

Reduction for ESOP loan guarantee:

                              

Balance at beginning of year and September 30

   $ (142.2 )           $ (142.2 )      
    


         


     

Retained earnings (accumulated deficit):

                              

Balance at beginning of year

   $ (1,021.9 )           $ (942.2 )      

Net earnings for period

     60.2     $ 60.2       28.3     $ 28.3
    


         


     

Balance at September 30

   $ (961.7 )           $ (913.9 )      
    


         


     

Accumulated other comprehensive income:

                              

Balance at beginning of year

   $ 42.8             $ 43.3        

Foreign currency translation adjustments

     (12.0 )             (0.4 )      

Derivative gain, net

     9.1               1.8        

Minimum pension liability adjustments

     2.3               —          
    


         


     

Total other comprehensive (loss)/income

     (0.6 )     (0.6 )     1.4       1.4
    


 


 


 

Balance at September 30

   $ 42.2             $ 44.7        
    


         


     

Comprehensive income

           $ 59.6             $ 29.7
            


         

Less treasury stock at cost:

                              

Balance at beginning of year and September 30

   $ (528.5 )           $ (528.5 )      
    


         


     

Total shareholder’s (deficit)

   $ (1,365.7 )           $ (1,315.3 )      
    


         


     

 

See accompanying notes to condensed consolidated financial statements beginning on page 36.

 

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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited

 

    

Nine Months Ended

September 30,


 
     2005

    2004

 

Cash flows from operating activities:

                

Net earnings

   $ 60.2     $ 28.3  

Adjustments to reconcile net earnings to net cash provided by operating activities:

                

Depreciation and amortization

     106.7       105.4  

Deferred income taxes

     (11.1 )     (0.8 )

Equity (earnings) from affiliates, net

     (27.5 )     (25.2 )

Gain on sale of investment in affiliates

     (3.4 )     —    

Chapter 11 reorganization costs, net

     4.5       6.6  

Chapter 11 reorganization costs payments

     (9.2 )     (12.4 )

Restructuring charges, net of reversals

     17.0       5.0  

Restructuring payments

     (22.0 )     (2.1 )

Goodwill impairment

     —         60.0  

Asbestos-related insurance recoveries

     —         4.5  

Cash effect of hedging activities

     11.1       9.7  

Increase (decrease) in cash from change in:

                

Receivables

     (85.9 )     (58.3 )

Inventories

     24.0       (54.4 )

Other current assets

     5.5       13.5  

Other noncurrent assets

     (26.8 )     (24.1 )

Accounts payable and accrued expenses

     11.9       54.1  

Income taxes payable

     18.1       (11.4 )

Other long-term liabilities

     (3.0 )     9.2  

Other, net

     (6.6 )     (4.7 )
    


 


Net cash provided by operating activities

     63.5       102.9  
    


 


Cash flow from investing activities:

                

Purchases of property, plant and equipment and computer software

     (83.4 )     (69.1 )

Distributions from equity affiliates

     17.0       —    

Proceeds from the sale of investment in affiliates

     20.6       —    

Proceeds from the sale of assets

     4.7       4.6  
    


 


Net cash (used for) investing activities

     (41.1 )     (64.5 )
    


 


Cash flows from financing activities:

                

Increase in short-term debt, net

     12.1       12.3  

Payments of long-term debt

     (4.3 )     (6.1 )

Other, net

     —         (1.3 )
    


 


Net cash provided by financing activities

     7.8       4.9  
    


 


Effect of exchange rate changes on cash and cash equivalents

     (5.3 )     1.0  
    


 


Net increase in cash and cash equivalents

     24.9       44.3  

Cash and cash equivalents at beginning of year

     515.9       484.3  
    


 


Cash and cash equivalents at end of period

   $ 540.8     $ 528.6  
    


 


See accompanying notes to condensed consolidated financial statements beginning on page 36.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

NOTE 1. BASIS OF PRESENTATION

 

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 difference between the financial statements of Armstrong Holdings, Inc. and its subsidiaries and AWI and its subsidiaries is primarily due to transactions that occurred in 2000 related to the formation of Armstrong Holdings, Inc. and to employee compensation-related stock activity. Due to the lack of material differences in the financial statements, when we refer in this document to Armstrong Holdings, Inc. and its subsidiaries as “AHI,” “Armstrong,” “we,” “us,” and “ourselves,” 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.

 

The accounting policies used in preparing these statements are the same as those used in preparing AHI’s consolidated financial statements for the year ended December 31, 2004, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in AHI’s Form 10-K for the fiscal year ended December 31, 2004. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.

 

These financial statements are prepared in accordance with 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 changes, warranty, workers compensation, general liability and environmental claims. When preparing an estimate, management determines the amount based upon considering relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates.

 

Operating results for the third quarter and first nine months of 2005 and the corresponding periods of 2004 included in this report are unaudited.

 

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications were made to the condensed consolidated statement of earnings and primarily consisted of reclassifying 2004 amounts from other non-operating income and other non-operating expense to selling, general and administrative (“SG&A”) expense and discontinued operations.

 

There would have been no effect on net income and earnings per share if AHI had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-based Compensation,” to stock-based employee compensation in 2005 or 2004.

 

NOTE 2. CHAPTER 11 REORGANIZATION

 

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

 

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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

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” and Note 15 under “Asbestos-Related Litigation”.

 

AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the 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.

 

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, 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 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, 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 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

 

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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

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.

 

In order for the POR to be confirmed, the U.S. District Court must also issue findings of fact and conclusions of law in support of confirmation of the POR, enter or affirm an order confirming the POR and issue the “524(g) injunction” which is part of the POR.

 

Recent Developments and Next Steps in the Chapter 11 Process

 

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 (which is available at www.armstrongplan.com), 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. On March 18, 2005, AWI filed a motion to expedite the appeal to the U.S. Court of Appeals. On April 28, 2005 the court granted the motion. A motion to dismiss the appeal for alleged lack of jurisdiction was filed by the Committee of Unsecured Creditors on March 29, 2005. On October 24, 2005, the court held oral arguments on the appeal and the court has not yet issued its ruling. AWI is also reviewing other options to resolve its Chapter 11 Case, and is monitoring a proposed asbestos claims litigation reform bill in Congress (see the discussion under “Potential Legislation” in Note 15). AWI is unable to predict whether the POR will be confirmed or when AWI would emerge from Chapter 11.

 

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

 

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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

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 from independent activities of the subsidiaries or affiliates). See Note 15 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 six 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:

 

    AWI’s “Available Cash,” which is defined in the POR as:

 

    Cash available on the effective date of 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,

 

    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, 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.

 

    Plan Notes of AWI as further described below or net cash proceeds from any private offerings of debt securities issued in lieu thereof, and

 

    Substantially all of the new common stock of AWI.

 

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

 

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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

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.

 

The POR provides that unsecured creditors, other than convenience creditors described below, would receive their pro rata share of:

 

    34.43% of the new common stock of reorganized Armstrong,

 

    34.43% of the first $1.05 billion of all the cash and 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 principal amount of Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes.

 

    60% of the next $50 million of Available Cash but, if such Available Cash is less than $50 million, then 60% of the balance in Plan Notes or in net cash proceeds from any private offerings of debt securities made in lieu of issuing Plan Notes, and

 

    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, or net cash proceeds from any private offerings of debt securities made in lieu of issuing such Plan Notes.

 

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. The POR provides for the distribution of warrants to purchase shares of reorganized Armstrong (the “Warrants”) to the holders of AWI’s existing common stock. The terms of the Warrants are provided in an exhibit to the POR. The Warrants:

 

    would permit the purchase of 5% of the common stock of reorganized Armstrong on a fully diluted basis, upon exercise of all the Warrants;

 

    would be exercisable at any time during the seven years after the effective date of the POR; and

 

    would permit the purchase of shares at an exercise price of $37.50, which is equal to 125% of the $30.00 per share equity value of reorganized Armstrong, as agreed among the financial advisers for AWI, the Asbestos Personal Injury Claimants’ Committee, the Unsecured Creditors’ Committee, and the Future Claimants’ Representative, as set forth in the Bankruptcy Court-approved disclosure statement for the POR (as further described below).

 

Whether any value would be realized from the Warrants would depend on whether the market value of reorganized Armstrong’s new common stock reaches a value in excess of the exercise price of the Warrants during the period that they may be exercised.

 

AHI’s shareholders were not entitled to vote on the POR. However, AHI’s shareholders were sent the Disclosure Statement and POR. If the POR is implemented, the only value that would be available to AHI shareholders is their ratable share of the Warrants available upon the contemplated dissolution of AHI. See AHI’s Plan of Dissolution below. As discussed above, however, on February 23, 2005, the U.S. District Court entered an order denying confirmation of the POR. In the court’s decision (which is available at www.armstrongplan.com), the Judge found that, because the class of unsecured creditors

 

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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

voted to reject the POR, the distribution of warrants to existing equity holders under the POR violated the absolute priority rule.

 

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, holders of allowed unsecured claims and AWI’s existing common stock, is:

 

    New common stock at $30 a share, which is the approximate mid-point of the range of estimated values of $24.66 and $35.30 per share, assuming a distribution of 56.4 million shares of new common stock to holders of unsecured claims and the Asbestos PI Trust;

 

    Plan Notes in the aggregate principal amount of $775 million, that are worth their face value;

 

    Available Cash of approximately $350 million that AWI expects to have; and

 

    Warrants with an estimated value of between $35 million and $40 million.

 

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’s Plan of Dissolution, Winding Up and Distribution (“Plan of Dissolution”)

 

In connection with the implementation of the POR, the Warrants would be issued to AHI (or a wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which would then be AHI’s only asset. Accordingly, the Board of Directors of AHI approved and recommended to AHI shareholders the Plan of Dissolution, whereby AHI would voluntarily dissolve and wind up its affairs in accordance with Pennsylvania law and, subject to completion of AHI’s winding up (including the satisfaction of any liabilities of AHI), distribute any remaining Warrants to the shareholders. At a special meeting of AHI shareholders on January 7, 2004, the Plan of Dissolution was approved. The POR provides that AWI would pay the costs and expenses incurred in connection with administering AHI’s Plan of 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) has been 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 4,800 proofs of claim (including late-filed claims) totaling approximately $6.3 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

 

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Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

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 15.

 

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.

 

Financing

 

AWI has a $75.0 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. As of September 30, 2005, AWI had approximately $43.4 million in letters of credit, which were issued pursuant to the DIP Facility. As of September 30, 2005, AWI had $306.9 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 September 30, 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

 

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(dollar amounts in millions, except share data)

 

liability for asbestos-related personal injury claims is also recorded in liabilities subject to compromise. See Note 15 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 costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities through September of 2005 and 2004:

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2005

    2004

    2005

    2004

 

Professional fees

   $ 4.7     $ 3.6     $ 11.8     $ 9.6  

Interest income, post-Filing

     (3.2 )     (1.4 )     (7.5 )     (3.1 )

Adjustments to pre-Filing liabilities

             —         0.1       —    

Other expense directly related to bankruptcy, net

     —         0.1       0.1       0.1  
    


 


 


 


Total Chapter 11 reorganization costs, net

   $ 1.5     $ 2.3     $ 4.5     $ 6.6  
    


 


 


 


 

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.

 

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 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.

 

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(dollar amounts in millions, except share data)

 

NOTE 3. SEGMENT RESULTS

 

    

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


Net sales to external customers


   2005

   2004

   2005

   2004

Resilient Flooring

   $ 311.5    $ 308.1    $ 914.0    $ 934.1

Wood Flooring

     220.2      209.4      624.9      620.9

Textiles and Sports Flooring

     79.7      70.0      211.4      197.4

Building Products

     268.2      250.2      784.5      727.5

Cabinets

     57.4      55.8      161.9      162.1
    

  

  

  

Total sales to external customers

   $ 937.0    $ 893.5    $ 2,696.7    $ 2,642.0
    

  

  

  

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 

Segment operating income (loss)


   2005

    2004

    2005

    2004

 

Resilient Flooring

   $ 7.7     $ 10.8     $ (5.8 )   $ (13.3 )

Wood Flooring

     25.7       7.1       54.4       38.5  

Textiles and Sports Flooring

     3.2       2.8       (3.2 )     (0.8 )

Building Products

     43.1       40.0       116.0       106.3  

Cabinets

     (0.3 )     2.8       (9.5 )     4.9  

Unallocated Corporate (expense)

     (12.9 )     (15.3 )     (41.7 )     (44.6 )
    


 


 


 


Total consolidated operating income

   $ 66.5     $ 48.2     $ 110.2     $ 91.0  
    


 


 


 


 

Segment assets


   September 30,
2005


   December 31,
2004


Resilient Flooring

   $ 708.2    $ 737.9

Wood Flooring

     653.0      663.6

Textiles and Sports Flooring

     207.7      218.1

Building Products

     608.3      596.3

Cabinets

     104.9      102.2
    

  

Total segment assets

     2,282.1      2,318.1

Assets not assigned to segments

     2,335.3      2,291.3
    

  

Total consolidated assets

   $ 4,617.4    $ 4,609.4
    

  

 

NOTE 4. LIABILITIES SUBJECT TO COMPROMISE

 

As a result of AWI’s Chapter 11 filing (see Note 2), 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 condensed consolidated balance sheet based upon maturity date. AWI’s asbestos liability is also recorded in liabilities subject to compromise. See Note 2 for further discussion on how the Chapter 11 process may address AWI’s liabilities subject to compromise and Note 15 for further discussion of AWI’s asbestos liability.

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

Liabilities subject to compromise at September 30, 2005 and December 31, 2004 are as follows:

 

     September 30,
2005


   December 31,
2004


Debt (at face value)(1)

   $ 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

     71.0      70.4

Amounts due to affiliates

     4.7      4.7

ESOP loan guarantee

     157.7      157.7
    

  

Total liabilities subject to compromise

   $ 4,870.7    $ 4,870.9
    

  

(1) 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 $20.5 million and $63.6 million in the third quarter and first nine months of 2005, respectively, and $21.7 million and $65.1 million in the third quarter and the first nine months of 2004, respectively.

 

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.

 

NOTE 5. DISCONTINUED OPERATIONS

 

On December 29, 1995, Armstrong sold a furniture subsidiary, Thomasville Furniture Industries. During the first quarter of 2004, AHI recorded a net loss of $0.4 million for an environmental indemnification related to this divestiture. This adjustment was classified as discontinued operations since the original divestiture was reported as discontinued operations.

 

NOTE 6. INVENTORIES

 

     September 30,
2005


    December 31,
2004


 

Finished goods

   $ 325.5     $ 362.9  

Goods in process

     48.2       49.3  

Raw materials and supplies

     187.7       212.8  

Less LIFO and other reserves

     (67.7 )     (89.9 )
    


 


Total inventories, net

   $ 493.7     $ 535.1  
    


 


 

NOTE 7. NATURAL GAS HEDGES

 

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 hedging instruments. These instruments are designated as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent the hedge is considered effective as defined by SFAS 133, 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 September 30, 2005 was a $28.0 million asset compared to a $5.3 million asset at December 31, 2004, due to the price of natural gas increasing during the year.

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

NOTE 8. EQUITY INVESTMENTS

 

Investments in affiliates of $62.3 million at September 30, 2005 reflected the equity interest in our 50% investment in our WAVE joint venture. The balance decreased $10.2 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. Condensed income statement data for WAVE, our joint venture accounted for under the equity method of accounting, is summarized below:

 

    

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


     2005

   2004

   2005

   2004

Net sales

   $ 77.6    $ 68.2    $ 230.0    $ 209.9

Gross profit

     24.9      21.1      70.9      64.0

Net earnings

     19.9      14.9      56.4      46.7

 

NOTE 9. GOODWILL AND INTANGIBLE ASSETS

 

As of January 1, 2005, we had goodwill of approximately $136 million. Goodwill is required to be tested for impairment at least annually. We perform our annual assessment in the fourth quarter.

 

The following table represents the changes in goodwill for the first nine months of 2005.

 

Goodwill by segment


   January 1, 2005

   Adjustments, net(1)

    Impairments

   September 30, 2005

Wood Flooring

   $ 108.2      —       —      $ 108.2

Building Products

     15.2    $ (1.7 )   —        13.5

Cabinets

     12.6      —       —        12.6
    

  


 
  

Total consolidated goodwill

   $ 136.0    $ (1.7 )   —      $ 134.3
    

  


 
  

 

(1) Consists of the effects of foreign exchange.

 

During the second quarter of 2004, we recorded a $60 million goodwill impairment charge in our European resilient flooring unit. This charge was caused by lowered financial projections for this business due to significant operating losses.

 

The following table details amounts related to intangible assets as of September 30, 2005 and December 31, 2004.

 

     September 30, 2005

   December 31, 2004

     Gross Carrying
Amount


   Accumulated
Amortization


   Gross Carrying
Amount


   Accumulated
Amortization


Amortized intangible assets

                           

Computer software

   $ 112.8    $ 76.5    $ 109.8    $ 66.4

Land use rights and other

     4.5      1.1      4.4      1.0
    

  

  

  

Total

   $ 117.3    $ 77.6    $ 114.2    $ 67.4
    

  

  

  

Unamortized intangible assets

                           

Trademarks and brand names

   $ 29.3           $ 29.2       
    

         

      

Other intangible assets, gross

   $ 146.6           $ 143.4       
    

         

      

Aggregate Amortization Expense

                           

For the nine months ended September 30, 2005

          $ 12.8              

For the nine months ended September 30, 2004

          $ 11.5              

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

NOTE 10. RESTRUCTURING AND OTHER ACTIONS

 

Net restructuring charges of $17.0 million and $5.0 million were recorded in the first nine months of 2005 and 2004, respectively. These charges are summarized in the following table:

 

     Net Charge/(Reversal)

     
     Three Months Ended
September 30,


   Nine Months Ended
September 30,


     

Action Title


   2005

   2004

   2005

    2004

   

Segment


Lancaster Plant

   $ 0.2      —      $ 11.3       —       Resilient Flooring

Hoogezand

     1.1    $ 1.9      5.1     $ 5.8     Building Products

North America SG&A

     —        —        (0.1 )     —       Resilient Flooring

Morristown

     0.1      —        0.4       —       Cabinet Products

Searcy

     —        —        0.1       —       Wood Flooring

Oss

     —        —        0.2       —       Textiles & Sports Flooring

European consolidation

     —        —        —         (0.8 )   Resilient Flooring, Textiles & Sports Flooring
    

  

  


 


   

Total

   $ 1.4    $ 1.9    $ 17.0     $ 5.0      
    

  

  


 


   

 

Lancaster Plant: The charge 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 $11.3 million charge in 2005, $10.5 million is a non-cash charge related to termination benefits to be paid through the U.S. pension plan. The other $0.8 million is comprised of severance and related costs. We have incurred project-to-date restructuring charges of $12.3 million related primarily to severance and pension related costs. We expect to incur an additional $27 million of restructuring charges starting in the fourth quarter of 2005 and continuing through 2008, with the majority of charges to be incurred in 2005 and 2006. Additionally, we recorded $5.3 million of accelerated depreciation and $2.7 million of other related costs in the first nine months of 2005, 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 $16.0 million, and expect to incur an additional $0.8 million in the fourth quarter of 2005. Additionally, we recorded $0.5 million and $1.5 million of accelerated depreciation in cost of goods sold in the first nine months of 2005 and 2004, respectively. We also recorded $0.6 million and $0.2 million of other related costs in cost of goods sold in the first nine months of 2005 and 2004, respectively.

 

North America SG&A: The 2005 net reversal of $0.1 million was related to Resilient Flooring and was 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 2005 charge 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 expect to incur an additional $0.1 million of shutdown costs in the remainder of 2005. Additionally, we recorded $0.2 million of accelerated depreciation and $0.9 million of other related costs in 2005, 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.

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

We incurred $0.9 million of restructuring charges for the project-to-date and do not expect to incur any additional charges.

 

Oss: The 2005 charge was 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 reversals in 2004 comprised certain severance accruals that were no longer necessary in the remaining accruals from the 2003 and 2002 charges in the Resilient Flooring ($0.5 million) and Textiles and Sports Flooring ($0.3 million) segments.

 

The following table summarizes activity in the restructuring accruals for the first nine months of 2005 and 2004.

 

     Beginning
Balance


   Cash
Payments


   

Net

Charges


   Other

    Ending
Balance


2005

   $ 24.8    $ (22.0 )   $ 6.5    $ (1.0 )   $ 8.3

2004

     10.0      (2.1 )     5.0      0.1       13.0

 

The amount in “other” for 2005 and 2004 is related to the effects of foreign currency translation.

 

Of the September 30, 2005 and 2004 ending balances, $1.3 million is reported in liabilities subject to compromise.

 

Substantially all of the ending balance of the restructuring accrual as of September 30, 2005 relates to a noncancelable operating lease which extends through 2017, a lease for office space in the U.S. which is expected to be settled as part of our Chapter 11 emergence process, and severance for terminated employees, the majority of which will be paid in 2005.

 

NOTE 11. INCOME TAX EXPENSE

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Earnings from continuing operations before income taxes

   $ 67.2     $ 44.0     $ 107.7     $ 79.9  

Income tax expense

     21.1       20.8       47.5       51.2  

Effective tax rate

     31.4 %     47.3 %     44.1 %     64.1 %

 

The 2005 effective tax rates for the third quarter and first nine months are lower than the comparable 2004 periods primarily due to the favorable conclusion of I.R.S. audit and appeals issues for $3.7 million in 2005 and the impact of the AJCA dividends as described below. In addition, the nine-month tax rate for 2004 included a $60 million non-taxable goodwill impairment charge.

 

On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. During the third quarter of 2005, AWI approved a dividend plan whereby $5.1 million of qualified and $17.1 million of base dividends were declared. AWI reported a $2.9 million tax benefit in the third quarter of 2005 for this event due to the utilization of additional deemed-paid foreign tax credits and the release of deferred tax liabilities previously recorded on the underlying earnings. AWI is evaluating further dividends, which may be declared in the fourth quarter of 2005. The range of possible amounts that we are

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar amounts in millions, except share data)

 

considering for repatriation under this provision is between zero and $60 million. The related potential range of income tax expense is between zero and $3.6 million.

 

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 AJCA to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109.

 

NOTE 12. PENSIONS

 

Following are the components of net periodic benefit costs:

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

U.S. defined-benefit plans

                                

Pension Benefits

                                

Service cost of benefits earned

   $ 6.2     $ 5.8     $ 18.5     $ 17.4  

Interest cost on projected benefit obligation

     24.0       22.8       71.9       68.5  

Expected return on plan assets

     (39.4 )     (36.9 )     (118.4 )     (110.8 )

Amortization of prior service cost

     4.1       4.3       12.4       13.0  

Recognized net actuarial loss

     0.3       0.4       1.1       1.2  
    


 


 


 


Net periodic pension (credit)

   $ (4.8 )   $ (3.6 )   $ (14.5 )   $ (10.7 )
    


 


 


 


Retiree Health and Life Insurance Benefits

                                

Service cost of benefits earned

   $ 0.7     $ 0.6     $ 2.1     $ 1.9  

Interest cost on projected benefit obligation

     5.2       5.5       15.5       16.5  

Amortization of prior service benefit

     (1.4 )     (1.3 )     (4.2 )     (4.1 )

Recognized net actuarial loss

     2.9       2.4       8.9       7.3  
    


 


 


 


Net periodic postretirement benefit cost

   $ 7.4     $ 7.2     $ 22.3     $ 21.6