Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
ARMSTRONG WORLD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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1-2116
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23-0366390 |
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(State or other jurisdiction of
incorporation or organization)
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Commission file
number
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(I.R.S. Employer
Identification No.) |
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P. O. Box 3001, Lancaster, Pennsylvania
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17604 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (717) 397-0611
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock ($0.01 par value)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
The aggregate market value of the Common Stock of Armstrong World Industries, Inc. held by
non-affiliates based on the closing price ($29.22 per share) on the New York Stock Exchange
(trading symbol AWI) on June 30, 2008 was approximately $580 million. As of February 19, 2009, the
number of shares outstanding of registrants Common Stock was 57,039,580.
Documents Incorporated by Reference
None
2
Uncertainties Affecting Forward-Looking Statements
Our disclosures here and in other public documents and comments contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act. Those statements provide our
future expectations or forecasts, and can be identified by our use of words such as anticipate,
estimate, expect, project, intend, plan, believe, outlook, etc. in discussions of
future operating or financial performance, the outcome of contingencies such as liabilities or
legal proceedings, or our ability to pay any dividends or take any particular corporate action.
Any of our forward-looking statements may turn out to be wrong. Our actual future results, or our
ability to pay a dividend or take any particular corporate action, may differ materially from our
expected results. Forward-looking statements involve risks and uncertainties because they relate
to events and depend on circumstances that may or may not occur in the future. We undertake no
obligation to update any forward-looking statement.
You should take into account risks and uncertainties that affect our business, operations and
financial condition in evaluating any investment decision involving Armstrong. It is not possible
to predict all factors that could cause actual results to differ materially from expected and
historical results. The discussion in the Risk Factors section below at Item 1A is a summary of
what we currently believe to be our most significant risk factors. Related disclosures in
subsequent 10-K, 10-Q and 8-K reports should also be consulted.
4
PART I
ITEM 1. BUSINESS
Armstrong World Industries, Inc. (AWI or the Company) is a Pennsylvania corporation
incorporated in 1891. We are a leading global producer of flooring products and ceiling systems
for use primarily in the construction and renovation of commercial, institutional and residential
buildings. Through our United States (U.S.) operations and U.S. and international subsidiaries,
we design, manufacture and sell flooring products (primarily resilient and wood flooring) and
ceiling systems (primarily mineral fiber, fiberglass and metal) around the world. We also design,
manufacture and sell kitchen and bathroom cabinets in the U.S.
Our business strategy focuses on providing value to customers through product innovation, product
quality and customer service. In our businesses, these factors are the primary determinants of
market share gain or loss. Our objective is to ensure that anyone buying a hard surface floor or
ceiling can find an Armstrong product that meets his or her needs. Our cabinet strategy is more
focused on stock cabinets in select geographic markets. In these segments, we have the same
objectives: high quality, good customer service and products that meet our customers needs. Our
markets are very competitive, which limits our pricing flexibility. This requires that we increase
our productivity each year both in our plants and in our administration of the businesses.
We maintain a website at http://www.armstrong.com. Information contained on our website is not
incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, all amendments to those reports and other information about us are
available free of charge through this website as soon as reasonably practicable after the reports
are electronically filed with the Securities and Exchange Commission (SEC). These materials are
also available from the SECs website at www.sec.gov.
On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code in order to use the court-supervised reorganization process to achieve a resolution
of AWIs asbestos-related liability. On October 2, 2006, AWIs plan of reorganization (the POR),
as confirmed by the U.S. District Court for the District of Delaware by order dated August 18,
2006, became effective, and AWI emerged from Chapter 11. See Note 1 to the Consolidated Financial
Statements for additional information about AWIs Chapter 11 case.
In connection with its emergence from bankruptcy on October 2, 2006 (the Effective Date), AWI
adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7). Adopting
fresh-start reporting has resulted in material adjustments to the historical carrying amount of
reorganized Armstrongs assets and liabilities. See Note 3 to the Consolidated Financial
Statements for more information. As a result, our post-emergence financial statements are not
comparable to our pre-emergence financial statements. Despite the lack of comparability, we have
combined the 2006 results of the Predecessor Company (which represent the first nine months of 2006
and include the impact of emergence) with the results of the Successor Company (which represent the
last three months of 2006) to facilitate the year-to-year discussion of operating results in
certain sections of this Form 10-K. The combined financial information for 2006 is merely
cumulative and does not give pro forma effect to the Predecessors results as if the consummation
of the POR and the related fresh-start reporting and other adjustments had occurred at the
beginning of the period presented. Combining pre-emergence and post-emergence results is not in
accordance with U.S. generally accepted accounting principles (GAAP).
5
Reportable Segments
Resilient Flooring produces and sources a broad range of floor coverings primarily for homes and
commercial and institutional buildings. Manufactured products in this segment include vinyl sheet,
vinyl tile and linoleum flooring. In addition, our Resilient Flooring segment sources and sells
laminate flooring products, ceramic tile products, adhesives, installation and maintenance
materials and accessories. Resilient Flooring products are offered in a wide variety of types,
designs and colors. We sell these products worldwide to wholesalers, large home centers,
retailers, contractors and to the manufactured homes industry.
Wood Flooring produces and sources wood flooring products for use in new residential construction
and renovation, with some commercial applications in stores, restaurants and high-end offices. The
product offering includes pre-finished solid and engineered wood floors in various wood species,
and related accessories. Virtually all of our Wood Flooring sales are in North America. Our Wood
Flooring products are generally sold to independent wholesale flooring distributors and large home
centers. Our products are principally sold under the brand names Bruce®, Hartco®, Robbins®,
Timberland®, Armstrong®, HomerWood® and Capella®.
Building Products produces suspended mineral fiber, soft fiber and metal ceiling systems for use
in commercial, institutional and residential settings. In addition, our Building Products segment
sources complementary ceiling products. Our products, which are sold worldwide, are available in
numerous colors, performance characteristics and designs, and offer attributes such as acoustical
control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories
are sold to ceiling systems contractors and to resale distributors. Residential ceiling products
are sold primarily in North America to wholesalers and retailers (including large home centers).
Suspension system (grid) products manufactured by Worthington
Armstrong Venture
(WAVE) are sold by both Armstrong and our WAVE
joint venture.
Cabinets produces kitchen and bathroom cabinetry and related products, which are used primarily
in the U.S. residential new construction and renovation markets. Through our system of
Company-owned and independent distribution centers and through direct sales to builders, our
Cabinets segment provides design, fabrication and installation services to single and multi-family
homebuilders, remodelers and consumers under the brand names Armstrong® and Bruce®. All of
Cabinets sales are in the U.S.
Unallocated Corporate includes assets, liabilities, income and expenses that have not been
allocated to the business units. Balance sheet items classified as Unallocated Corporate are
primarily deferred income tax assets, cash and cash equivalents, the Armstrong brand name and the
U.S. prepaid pension cost/liability. Expenses for our corporate departments and certain benefit
plans are allocated to the reportable segments based on known metrics, such as time reporting,
headcount, square-footage or net sales. The remaining items, which cannot be attributed to the
reportable segments without a high degree of generalization, are reported in Unallocated Corporate.
6
The following chart illustrates the breakdown of our consolidated net sales for the year ended
December 31, 2008 by segment:
2008 Consolidated Net Sales by Segment
(in millions)
See Note 4 to the Consolidated Financial Statements and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations of this Form 10-K for additional
financial information on our reportable segments.
Markets
The major markets in which we compete are:
North American Residential. Approximately 40% of our total consolidated net sales are for North
American residential use. Our Resilient Flooring, Wood Flooring, Building Products and Cabinets
segments sell products for use in the home. Homeowners have a multitude of finishing solution
options for every room in their house. For flooring, they can choose from our vinyl and wood
products, for which we are North Americas largest provider, or from our laminate and ceramic
products. We compete directly with other domestic and international suppliers of these products.
Our flooring products also compete with carpet, which we do not offer. Our ceiling products
compete against mineral fiber and fiberglass products from other manufacturers, as well as drywall.
In the kitchen and bath areas, we compete with thousands of other cabinet manufacturers that
include large diversified corporations as well as small local craftsmen.
Our products are used in new home construction and existing home renovation work. Industry
estimates are that existing home renovation (also known as replacement / remodel) work represents
approximately two-thirds of the total North American residential market opportunity. Key U.S.
statistics that indicate market opportunity include existing home sales (a key indicator for
renovation opportunity), housing starts, housing completions, interest rates and consumer
confidence. For our Resilient Flooring and Wood Flooring products, we believe there is some
longer-term correlation between these statistics and our revenue, after reflecting a lag period
between change in construction activity and our operating results of several months. However, we
believe that consumers preferences for product type, style, color, availability and affordability
also significantly
impact our revenue. Further, changes in inventory levels and product focus at
national home centers, which are our largest customers, can also significantly
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impact our revenue.
Sales of our ceiling products for residential use appear to follow the trend of existing home
sales, with a several month lag period between change in existing home sales and our related
operating results.
North American Commercial. Approximately 30% of our total consolidated net sales are for North
American commercial use. Many of our products, primarily ceilings and Resilient Flooring, are used
in commercial and institutional buildings. Our revenue opportunities come from new construction as
well as renovation of existing buildings. Renovation work is estimated to represent approximately
three-fourths of the total North American commercial market opportunity. Most of our revenue comes
from four major segments of commercial building office, education, retail and healthcare. We
monitor U.S. construction starts (an indicator of U.S. monthly construction activity that provides
us a reasonable indication of upcoming opportunity) and follow new projects. We have found that
our revenue from new construction can lag behind construction starts by as much as one year. We
also monitor office vacancy rates, GDP and general employment levels, which can indicate movement
in renovation and new construction opportunities. We believe that these statistics, taking into
account the time-lag effect, provide a reasonable indication of our future revenue opportunity from
commercial renovation and new construction.
Outside of North America. The geographies outside of North America account for about 30% of our
total consolidated net sales. Most of our revenues generated outside of North America are in
Europe and are
commercial in nature. For the countries in which we have significant revenue, we monitor various
national statistics (such as GDP) as well as known new projects. Revenues come primarily from new
construction and renovation work.
The following table provides an estimate of our segments 2008 net sales, by major markets.
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North |
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North |
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Outside of |
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(Estimated percentages of |
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American |
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American |
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North |
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individual segments sales) |
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Residential |
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Commercial |
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America |
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Total |
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Resilient Flooring |
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30 |
% |
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35 |
% |
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35 |
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100 |
% |
Wood Flooring |
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95 |
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5 |
% |
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100 |
% |
Building Products |
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10 |
% |
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50 |
% |
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40 |
% |
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100 |
% |
Cabinets |
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100 |
% |
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100 |
% |
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Geographic Areas
We sell our products in more than 80 countries. Approximately 70% of our 2008 revenue was derived
from sales in the Americas, the vast majority of which came in the United States and Canada. The
following chart illustrates the breakdown of our consolidated net sales for the year ended December
31, 2008 by region, based on where the sale was made:
2008 Consolidated Net Sales by Geography
(in millions)
See Note 4 to the Consolidated Financial Statements and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations of this Form 10-K for financial
information by geographic areas.
Customers
We use our reputation, capabilities, service and brand recognition to develop long-standing
relationships with our customers. We principally sell products through building materials
distributors, who re-sell our products to retailers, builders, contractors, installers and others.
In the commercial sector, we also sell to several contractors and to subcontractors alliances. In
the North American retail channel, which sells to end-users in the residential and light commercial
segments, we have important relationships with national home centers such as The Home Depot, Inc.
and Lowes Companies, Inc. In the North American residential sector, we have important
relationships with major homebuilders and buying groups.
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The following charts illustrate the estimated breakdown of our 2008 consolidated net sales
geographically by distribution channel:
2008 Americas Sale by Customer Type
2008 Non-Americas Sales by Customer Type
Net sales to The Home Depot, Inc. were $364.1 million in 2006, which was in excess of 10% of our
consolidated net sales for that year. Net sales to The Home Depot were less than 10% of
consolidated net sales in 2008 and 2007. Net sales to The Home Depot were recorded in our
Resilient Flooring, Wood Flooring and Building Products segments. No other customers accounted for
10% or more of our total consolidated net sales.
Product Array and Impact on Performance
Each of our businesses offers a wide assortment of products that are differentiated by style/design
and by performance attributes. Pricing for products within the assortment vary according to the
level of value they provide. Changes in the relative quantity of products purchased at the
different value points can impact year-to-year comparisons of net sales and operating income.
Where significant, we discuss the impact of these relative changes as product mix, customer mix
or geographic mix in Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-K.
10
Competition
There is strong competition in all of our businesses. Principal attributes of competition include
product performance, product styling, service and price. Competition in North America comes from
both domestic and international manufacturers. Additionally, some of our products compete with
alternative products or finishing solutions. Our resilient, laminate and wood flooring products
compete with carpet products, and our ceiling products compete with drywall and exposed structure
(also known as open plenum). There is excess industry capacity for certain products in some
geographies, which tends to increase price competition. The following companies are our primary
competitors:
Flooring segments Amtico International, Inc., Beaulieu International Group, N.V., Congoleum
Corporation, Faus, Inc., Forbo Holding AG, Gerflor Group, Interface, Inc., IVC Group, Krono Holding
AG, Mannington Mills, Inc., Mohawk Industries, Inc., Pfleiderer AG, Shaw Industries, Inc., Tarkett
AG and Wilsonart International.
Building Products CertainTeed, Chicago Metallic Corporation, Georgia-Pacific Corporation, Knauf
AMF GmbH & Co. KG, Lafarge SA, Odenwald Faserplattenwerk GmbH, Rockfon A/S, Saint-Gobain and USG
Corporation.
Cabinets American Woodmark Corporation, Fortune Brands, Inc. and Masco Corporation.
Raw Materials
Raw materials essential to our businesses are purchased worldwide in the ordinary course of
business from numerous suppliers. The principal raw materials used in each business include the
following:
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Principal Raw Materials |
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Resilient Flooring
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Polyvinylchloride (PVC) resins and films,
plasticizers, backings, limestone, pigments, linseed
oil, inks and stabilizers |
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Wood Flooring
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Hardwood lumber, veneer, coatings and stains |
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Building Products
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Mineral fibers, perlite, waste paper, clays, starches
and steel used in the production of metal ceilings and
for our joint ventures manufacturing of ceiling grid |
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Cabinets
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Lumber, veneer, plywood, particleboard and components,
such as doors and hardware |
We also purchase significant amounts of packaging materials and consume substantial amounts of
energy, such as electricity and natural gas, and water.
In general, adequate supplies of raw materials are available to all of our businesses. However,
availability can change for a number of reasons, including environmental conditions, laws and
regulations, shifts in demand by other industries competing for the same materials, transportation
disruptions and/or business decisions made by, or events that affect, our suppliers. There is no
assurance that a significant shortage of raw materials will not occur.
Prices for certain high usage raw materials can fluctuate dramatically. Cost increases for these
materials can have a significant adverse impact on our manufacturing costs. Given the
competitiveness of our markets, we may not be able to recover the increased manufacturing costs
through increasing selling prices to our customers.
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Sourced Products
Some of the products that we sell are sourced from third parties. The primary sourced products
include laminate, wood flooring, vinyl sheet and tile and ceramic products, specialized ceiling
products, and installation-related products and accessories for some of our manufactured products.
We purchase some of our sourced products from suppliers that are located outside of the U.S.,
primarily from Asia and Europe. Sales of sourced products represented approximately 10% to 15% of
our total consolidated revenue in 2008, 2007 and 2006.
In general, we believe we have adequate supplies of sourced products. However, we cannot guarantee
that a significant shortage will not occur.
Hedging
We use financial instruments to hedge the following exposures: sourced product purchases
denominated in foreign currency, cross-currency intercompany loans and energy. We use derivative
financial instruments as risk management tools, not for speculative trading purposes. See Item 7A.
Quantitative and Qualitative Disclosures About Market Risk and Note 21 to the Consolidated
Financial Statements of this Form 10-K for more information.
Patent and Intellectual Property Rights
Patent protection is important to our business in the U.S. and other markets. Our competitive
position has been enhanced by U.S. and foreign patents on products and processes developed or
perfected within Armstrong or obtained through acquisitions and licenses. In addition, we benefit
from our trade secrets for certain products and processes.
Patent protection extends for varying periods according to the date of patent filing or grant and
the legal term of a patent in the various countries where patent protection is obtained. The
actual protection afforded by a patent, which can vary from country to country, depends upon the
type of patent, the scope of its coverage, and the availability of legal remedies. Although we
consider that, in the aggregate, our patents, licenses and trade secrets constitute a valuable
asset of material importance to our business, we do not regard any of our businesses as being
materially dependent upon any single patent or trade secret, or any group of related patents or
trade secrets.
Certain
of our trademarks, including without limitation, house marks
, Armstrong
®, Bruce
®,
Hartco
®, Robbins
®, Timberland
®, Capella
®, HomerWood
® and DLW, and product line marks Allwood,
Arteffects
®, Axiom
®, Capz, Ceramaguard
®,
Cirrus
®, Corlon
®, Cortega
®, CushionStep,
Designer
Solarian
®, Dune, Excelon
®, Fine Fissured, Fundamentals
® , Infusions
®, Medintech
®, Metalworks,
Natural Creations
®, Natural Inspirations
®, Natures Gallery
®, Optima
®, Rhinofloor
®, Sahara,
Scala
®, Second Look
®, Solarian
®, SoundScapes
®, StrataMax
®, Techzone, T. Morton, ToughGuard
®
and
Ultima
®, Woodworks
® are important to our business because of their significant brand name
recognition. Trademark protection continues in some countries as long as the mark is used, and
continues in other countries as long as the mark is registered. Registrations are generally for
fixed, but renewable, terms.
Employees
As of December 31, 2008, we had approximately 12,200 full-time and part-time employees worldwide,
with approximately 8,400 employees located in the United States. Approximately 7,900 of the 12,200
are production and maintenance employees, of whom approximately 5,800 are located in the U.S.
Approximately 63% of the production and maintenance employees in the U.S. are represented by labor
unions. This percentage includes all production and maintenance employees at our plants and
warehouses where labor unions exist. Outside the U.S., most of our production employees are
covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms.
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Research & Development
Research and development (R&D) activities are important and necessary in helping us improve our
products competitiveness. Principal R&D functions include the development and improvement of
products and manufacturing processes. We spent $38.8 million in 2008, $44.0 million in 2007 and
$43.9 million in 2006 on R&D activities worldwide.
Environmental Matters
Most of our manufacturing and certain of our research facilities are affected by various federal,
state and local environmental requirements relating to the discharge of materials or the protection
of the environment. We make expenditures necessary for compliance with applicable environmental
requirements at each of our operating facilities.
We are actively involved in proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), and similar state Superfund laws at four off-site
locations. We have also been investigating and/or remediating environmental contamination
allegedly resulting from past industrial activity at five domestic and five international current
or former plant sites. Certain of AWIs environmental liabilities were discharged through its
Chapter 11 Case while others were not. Those environmental obligations that AWI has with respect
to property that it owns or operates or for which a non-debtor subsidiary is liable were unaffected
by the Chapter 11 Case. Therefore, AWI and its subsidiaries are required to continue meeting their
ongoing environmental compliance obligations at such properties.
Liabilities of $6.5 million and $7.0 million at December 31, 2008 and December 31, 2007,
respectively, were for potential environmental liabilities that we consider probable and for which
a reasonable estimate of the probable liability could be made. See Note 32 to the Consolidated
Financial Statements of this Form 10-K for more information.
ITEM 1A. RISK FACTORS
As noted in the introductory section titled, Uncertainties Affecting Forward-Looking Statements
above, our business, operations and financial condition are subject to various risks. These risks
should be taken into account in evaluating any investment decision involving Armstrong. It is not
possible to predict or identify all factors that could cause actual results to differ materially
from expected and historical results. The following discussion is a summary of what we believe to
be our most significant risk factors. These and other factors could cause our actual results to
differ materially from those in forward-looking statements made in this report.
We try to reduce both the likelihood that these risks will affect our businesses and their
potential impact. 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, up to and including a materially adverse effect. See
related discussions in this document and our other SEC filings for more details and subsequent
disclosures.
Our business is dependent on construction activity. Downturns in construction activity and global
economic conditions, such as weak consumer confidence and weak credit markets, adversely affect our
business and our profitability.
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. When the economy is weak and access to credit is limited, customers,
distributors and suppliers are at heightened risk of defaulting on their obligations. Since most
of our sales are in the U.S., its economy is the most important for our business, but conditions in
Europe, Canada and Asia also are significant. A prolonged economic
downturn would exacerbate the adverse effect on our business and
profitability.
13
We
require a significant amount of liquidity to fund our operations.
Our
liquidity needs vary throughout the year. There are no significant
debt maturities until 2011 and 2013 under our existing senior credit
facility. We believe that cash on hand and generated from operations
will be adequate to address our foreseeable liquidity needs. If
future operating performance declines significantly, we cannot assure
that our business will generate sufficient cash flow from operations
to fund our needs or to remain in compliance with our debt covenants.
In addition, we received a very substantial federal income tax refund
in 2007. The tax year in question is still being audited by the IRS.
If we were required to repay a substantial portion of the refund, our
liquidity position would be adversely affected.
Our markets are highly competitive. Competition can reduce demand for our products or cause us to
lower prices. Failure to compete effectively by meeting consumer preferences and maintaining
market share would adversely affect our results.
Our customers consider our products performance, product styling, customer service and price when
deciding whether to purchase our products. Shifting consumer preference in our highly competitive
markets, e.g. from residential vinyl products to other flooring products, styling preferences or
inability to offer new competitive performance features could hurt our sales. For certain
products, there is excess industry capacity in several geographic markets, which tends to increase
price competition, as does competition from overseas competitors with lower cost structures.
If the availability of raw materials and energy decreases, or the costs increase, and we are unable
to pass along increased costs, our operating results could be adversely affected.
The cost and availability of raw materials, packaging materials, energy and sourced products 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 some items has been volatile in recent years and availability has sometimes been tight.
We source some materials from a limited number of suppliers, which, among other things, increases
the risk of unavailability. Limited availability could cause us to reformulate products or to
limit our production. The impact of increased costs is greatest where our ability to pass along
increased costs through price increases on our products is limited, whether due to competitive
pressures or other factors.
Reduction in sales to key customers could have a material adverse effect on our revenues and
profits.
Some of our businesses are dependent on a few key customers such as The Home Depot, Inc. and Lowes
Companies, Inc. The loss of sales to one of these major customers, or changes in our business
relationship with them, could hurt both our revenues and profits.
Changes in the political,
regulatory and business environments of our international markets, including changes in trade
regulations and currency exchange fluctuations, could have an adverse effect on our business.
A significant portion of our products
move in international trade, particularly among the U.S., Canada, Europe and Asia. Also,
approximately 30% of our annual revenues are from operations outside the U.S. Our international
trade is subject to currency exchange fluctuations, trade regulations, import duties, logistics
costs and delays and other related risks. They are also subject to variable tax rates, credit
risks in emerging markets, political risks, uncertain legal systems, restrictions on repatriating
profits to the U.S., and loss of sales to local competitors following currency devaluations in
countries where we import products for sale.
14
Capital investments and restructuring actions may not achieve expected savings in our operating
costs.
We look for ways to make our operations more efficient and effective. We reduce, move and expand
our plants and operations as needed. Each action generally involves substantial planning and
capital investment. We can err in planning and executing our actions, which could hurt our
customer service and cause unplanned costs.
Labor disputes or work stoppages could hurt production and reduce sales and profits.
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 anticipate
that we will reach new contracts as current 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 hurt production, revenues, profits and customer relations.
Adverse judgments in regulatory actions, product claims and other litigation could be costly.
Insurance coverage may not be available or adequate in all circumstances.
While we strive to ensure that our products comply with applicable government regulatory standards
and internal requirements, and that our products perform effectively and safely, customers from
time to time could claim that our products do not meet contractual requirements, and users could be
harmed by use or misuse of our products. This could give rise to breach of contract, warranty or
recall claims, or claims for negligence, product liability, strict liability, personal injury or
property damage. The building materials industry has been subject to claims relating to silicates,
mold, PVC, formaldehyde, toxic fumes, fire-retardant properties and other issues, as well as for
incidents of catastrophic loss, such as building fires. Product liability insurance coverage may
not be available or adequate in all circumstances. In addition, claims may arise related to patent
infringement, environmental liabilities, distributor terminations, commercial contracts, antitrust
or competition law, employment law and employee benefits issues, and other regulatory matters.
While we have in place processes and policies to mitigate these risks and to investigate and
address such claims as they arise, we cannot predict the costs to defend or resolve such claims.
Our principal shareholder could significantly influence our business and our affairs.
The Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust, formed in 2006 as
part of AWIs emergence from bankruptcy, holds approximately 65% of outstanding shares. Such a
large ownership could result in below average equity market liquidity and affect matters which
require approval by our shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
15
ITEM 2. PROPERTIES
Our world headquarters are in Lancaster, Pennsylvania. We own a 100-acre, multi-building campus
comprising the site of our corporate headquarters, most operational headquarters, our U.S. R&D
operations and marketing, and customer service headquarters. Altogether, our headquarters
operations occupy approximately one million square feet of floor space.
We produce and market Armstrong products and services throughout the world, operating 40
manufacturing plants in 10 countries as of December 31, 2008. Three of our plants are leased and
the remaining 37 are owned. We have 25 plants located throughout the United States. In addition,
we have an interest through our WAVE joint venture in seven additional plants in five countries.
|
|
|
|
|
|
|
Business |
|
Number |
|
|
Segment |
|
of Plants |
|
Location of Principal Facilities |
|
|
|
|
|
|
|
Resilient Flooring
|
|
|
13 |
|
|
U.S. (California, Illinois, Mississippi,
Oklahoma, Pennsylvania), Australia,
Canada, Germany, Sweden and the U.K. |
|
|
|
|
|
|
|
Wood Flooring
|
|
|
11 |
|
|
U.S. (Arkansas, Kentucky, Mississippi,
Missouri, North Carolina, Pennsylvania,
Tennessee, Texas, West Virginia) |
|
|
|
|
|
|
|
Building Products
|
|
|
14 |
|
|
U.S. (Alabama, Florida, Georgia, Oregon,
Pennsylvania), China, France, Germany
and the U.K. |
|
|
|
|
|
|
|
Cabinets
|
|
|
2 |
|
|
U.S. (Nebraska and Pennsylvania) |
As part of our ongoing cost reduction efforts, in February 2009 we announced the idling of a
Resilient Flooring plant in Canada and a Wood Flooring plant in Mississippi. Both plants are
expected to be idled in the second quarter of 2009.
Sales and administrative offices are leased and/or owned worldwide, and leased facilities are
utilized to supplement our owned warehousing facilities.
Production capacity and the extent of utilization of our facilities are difficult to quantify with
certainty. In any one facility, utilization of our capacity varies periodically depending upon
demand for the product that is being manufactured. We believe our facilities are adequate and
suitable to support the business. Additional incremental investments in plant facilities are made
as appropriate to balance capacity with anticipated demand, improve quality and service, and reduce
costs.
ITEM 3. LEGAL PROCEEDINGS
See Note 32 to the Consolidated Financial Statements, which is incorporated herein by reference,
for a full description of our legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of 2008.
16
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Executive Officer Information
The following information is current as of February 26, 2009. Each executive officer serves a
one-year term until reelected or until his earlier death, resignation, retirement or removal.
Michael D. Lockhart
Age 59 Chairman of the Board, President and Chief Executive Officer since
December 2002. Chairman of the Board and President since March 2001. Chairman
and Chief Executive Officer of our former holding company from August 2000
December 2007. Mr. Lockhart previously served as Chairman and Chief Executive
Officer of General Signal (a diversified manufacturer) headquartered in
Stamford, Connecticut from September 1995 until it was acquired in October
1998. He joined General Signal as President and Chief Operating Officer in
September 1994. From 1981 until 1994, Mr. Lockhart worked for General Electric
in various executive capacities in the GE Credit Corporation (now GE Capital),
GE Transportation Systems and GE Aircraft Engines. Mr. Lockhart is a member of
the Board of Directors of the Norfolk Southern Corporation and a member of the
Business Council for the Graduate School of Business at the University of
Chicago.
F. Nicholas Grasberger, III
Age 45 Senior Vice President and Chief Financial Officer since January 2005.
Previously Vice President and Chief Financial Officer of Kennametal, Inc. (a
manufacturer of cutting tools and wear parts) August 2000 December 2004.
Formerly employed at H. J. Heinz (a global U.S. based food company) for eleven
years, his last title being Treasurer.
Donald A. McCunniff
Age 51 Senior Vice President, Human Resources since March 2006. Previously
Vice President Human Resources, Corporate, Honeywell International (a global
diversified technology and manufacturing company). Joined Honeywell in 1995
and served in various senior level Human Resources positions in Defense and
Space, Electronics, Process Automation, and Aircraft Landing Systems.
Frank J. Ready
Age 47 Executive Vice President and Chief Executive Officer North American
Flooring Products since April 2008. Previously, President and Chief Executive
Officer, North American Flooring Operations, June 2004 April 2008.
Previously Senior Vice President, Sales and Marketing, July 2003 June 2004;
Senior Vice President, Operations, December 2002 July 2003; Senior Vice
President, Marketing, June 2000 December 2002.
Stephen J. Senkowski
Age 57 Executive Vice President and Chief Executive Officer, Armstrong
Building Products & Asia-Pacific Operations since April 2008. Previously,
Executive Vice President since 2004 and President and Chief Executive Officer,
Armstrong Building Products, October 2000 April 2008; Senior Vice President,
Americas, Building Products Operations, April 2000 October 2000;
President/Chief Executive Officer, WAVE (the Companys ceiling grid joint
venture) July 1997 April 2000; Vice President, Innovation Process, Building
Products Operations 1994 July 1997.
Stephen F. McNamara
Age 42 Vice President and Controller since July 2008. Previously, Director,
Internal Audit, November 2005 July 2008; Assistant Controller, October 2001
November 2005; Manager of External Reporting, May 1999 October 2001. Prior
to that he was Assistant Controller with Hunt Corporation (a former
international art and office supply company).
17
Jeffrey D. Nickel
Age 46 Senior Vice President, Secretary and General Counsel since August
2008. Previously Deputy General Counsel Business and Commercial Law,
September 2001 July 2008. Prior to that he worked for Dow Corning
Corporation (specialty chemical company), December 1992 September 2001, his
last title being senior attorney.
18
PART II
|
|
|
ITEM 5. |
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Following AWIs emergence from Chapter 11, AWIs new common shares began trading on the New York
Stock Exchange on October 10, 2006 under the ticker symbol AWI. As of February 19, 2009, there
were approximately 650 holders of record of AWIs Common Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total Year |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price range of common stockhigh |
|
$ |
40.98 |
|
|
$ |
39.44 |
|
|
$ |
40.19 |
|
|
$ |
28.94 |
|
|
$ |
40.98 |
|
Price range of common stocklow |
|
$ |
26.25 |
|
|
$ |
28.92 |
|
|
$ |
27.10 |
|
|
$ |
13.79 |
|
|
$ |
13.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price range of common stockhigh |
|
$ |
56.72 |
|
|
$ |
57.48 |
|
|
$ |
52.47 |
|
|
$ |
44.28 |
|
|
$ |
57.48 |
|
Price range of common stocklow |
|
$ |
41.55 |
|
|
$ |
49.85 |
|
|
$ |
35.04 |
|
|
$ |
38.00 |
|
|
$ |
35.04 |
|
The above figures represent the high and low intra-day sale prices for our common stock as reported
by the New York Stock Exchange.
On February 25, 2008, our Board of Directors declared a special cash dividend of $4.50 per common
share, payable on March 31, 2008, to shareholders of record on March 11, 2008. This special cash
dividend resulted in an aggregate cash payment to our shareholders of $256.4 million. There were
no dividends declared or paid during 2007.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Shares that may |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
yet be |
|
|
|
Total Number |
|
|
Average Price |
|
|
Announced |
|
|
Purchased under |
|
|
|
of Shares |
|
|
Paid per |
|
|
Plans or |
|
|
the Plans or |
|
Period |
|
Purchased |
|
|
Share1 |
|
|
Programs2 |
|
|
Programs |
|
October 131, 2008 |
|
|
29,025 |
|
|
$ |
28.55 |
|
|
|
|
|
|
|
|
|
November 130, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 131, 2008 |
|
|
8,400 |
|
|
$ |
20.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
37,425 |
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
1 |
|
Shares reacquired through the withholding of shares to pay employee tax obligations upon
the vesting of restricted shares previously granted under the 2006 Long Term Incentive Plan. |
|
2 |
|
The Company does not have a share buy-back program. |
19
ITEM 6. SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
|
|
|
|
(Dollars in millions except for per-share data) |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006(1) |
|
|
Year 2005 |
|
|
Year 2004 |
|
Income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,393.0 |
|
|
$ |
3,549.7 |
|
|
$ |
817.3 |
|
|
|
$ |
2,608.6 |
|
|
$ |
3,326.6 |
|
|
$ |
3,279.1 |
|
Cost of goods sold |
|
|
2,632.0 |
|
|
|
2,687.5 |
|
|
|
660.9 |
|
|
|
|
2,030.2 |
|
|
|
2,654.0 |
|
|
|
2,655.6 |
|
Selling, general and administrative expenses |
|
|
579.9 |
|
|
|
611.3 |
|
|
|
143.5 |
|
|
|
|
415.5 |
|
|
|
587.8 |
|
|
|
566.5 |
|
Goodwill and intangibles impairment |
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.4 |
|
Restructuring charges, net |
|
|
0.8 |
|
|
|
0.2 |
|
|
|
1.7 |
|
|
|
|
10.0 |
|
|
|
23.0 |
|
|
|
17.9 |
|
Equity (earnings) from joint ventures |
|
|
(56.0 |
) |
|
|
(46.0 |
) |
|
|
(5.3 |
) |
|
|
|
(41.4 |
) |
|
|
(39.3 |
) |
|
|
(31.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
210.9 |
|
|
|
296.7 |
|
|
|
16.5 |
|
|
|
|
194.3 |
|
|
|
101.1 |
|
|
|
(37.7 |
) |
Interest expense |
|
|
30.8 |
|
|
|
55.0 |
|
|
|
13.4 |
|
|
|
|
5.2 |
|
|
|
7.7 |
|
|
|
7.9 |
|
Other non-operating expense |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
|
1.0 |
|
|
|
1.5 |
|
|
|
3.1 |
|
Other non-operating (income) |
|
|
(10.6 |
) |
|
|
(18.2 |
) |
|
|
(4.3 |
) |
|
|
|
(7.2 |
) |
|
|
(11.8 |
) |
|
|
(6.4 |
) |
Chapter 11 reorganization (income) costs, net |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
(1,955.5 |
) |
|
|
(1.2 |
) |
|
|
6.9 |
|
Income tax expense (benefit) |
|
|
109.0 |
|
|
|
106.4 |
|
|
|
3.8 |
|
|
|
|
726.6 |
|
|
|
(1.2 |
) |
|
|
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
80.4 |
|
|
|
152.8 |
|
|
|
3.3 |
|
|
|
|
1,424.2 |
|
|
|
106.1 |
|
|
|
(70.6 |
) |
Per common share basic (a) |
|
$ |
1.43 |
|
|
$ |
2.73 |
|
|
$ |
0.06 |
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Per common share diluted (a) |
|
$ |
1.42 |
|
|
$ |
2.69 |
|
|
$ |
0.06 |
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Earnings (loss) from discontinued operations |
|
|
0.6 |
|
|
|
(7.5 |
) |
|
|
(1.1 |
) |
|
|
|
(68.4 |
) |
|
|
5.0 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
81.0 |
|
|
$ |
145.3 |
|
|
$ |
2.2 |
|
|
|
$ |
1,355.8 |
|
|
$ |
111.1 |
|
|
$ |
(79.7 |
) |
Per common share basic (a) |
|
$ |
1.44 |
|
|
$ |
2.59 |
|
|
$ |
0.04 |
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Per common share diluted (a) |
|
$ |
1.43 |
|
|
$ |
2.56 |
|
|
$ |
0.04 |
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Dividends declared per share of common stock |
|
$ |
4.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Average number of common shares outstanding
(in millions) |
|
|
57.1 |
|
|
|
56.6 |
|
|
|
55.0 |
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Average number of employees |
|
|
12,500 |
|
|
|
13,500 |
|
|
|
14,500 |
|
|
|
|
14,700 |
|
|
|
14,900 |
|
|
|
15,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data (end of period) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
876.1 |
|
|
$ |
1,003.7 |
|
|
$ |
854.6 |
|
|
|
|
|
|
|
$ |
1,128.0 |
|
|
$ |
985.8 |
|
Total assets |
|
|
3,351.8 |
|
|
|
4,639.4 |
|
|
|
4,152.7 |
|
|
|
|
|
|
|
|
4,602.1 |
|
|
|
4,604.9 |
|
Liabilities subject to compromise |
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
4,869.4 |
|
|
|
4,870.9 |
|
Net long-term debt (b) |
|
|
454.8 |
|
|
|
485.8 |
|
|
|
801.5 |
|
|
|
|
|
|
|
|
21.5 |
|
|
|
29.2 |
|
Shareholders equity (deficit) |
|
|
1,744.3 |
|
|
|
2,437.2 |
|
|
|
2,164.5 |
|
|
|
|
|
|
|
|
(1,319.9 |
) |
|
|
(1,425.3 |
) |
|
|
|
(1) |
|
Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to
the Consolidated Financial Statements. |
|
Notes: |
|
(a) |
|
See definition of basic and diluted earnings per share in Note 2 of the Consolidated
Financial Statements. The common stock of the Predecessor Company was not publicly traded. |
|
(b) |
|
Net long-term debt excludes debt subject to compromise for 2005 and 2004. |
Certain prior year amounts have been reclassified to conform to the current year presentation. See
Note 2 to the Consolidated Financial Statements.
20
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891. When
we refer to we, our and us in this report, we are referring to AWI and its subsidiaries.
References in this report to reorganized Armstrong are to AWI as it was reorganized under the
Plan of Reorganization (POR) on October 2, 2006, and its subsidiaries collectively. We use the
term AWI when we are referring solely to Armstrong World Industries, Inc.
This discussion should be read in conjunction with the financial statements and the accompanying
notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements
based on our current expectations, which are inherently subject to risks and uncertainties. Actual
results and the timing of certain events may differ significantly from those referred to in such
forward-looking statements. We undertake no obligation beyond what is required under applicable
securities law to publicly update or revise any forward-looking statement to reflect current or
future events or circumstances, including those set forth in the section entitled Uncertainties
Affecting Forward-Looking Statements and elsewhere in this Form 10-K.
Financial performance metrics which exclude the translation effect of changes in foreign exchange
rates are not in compliance with U.S. generally accepted accounting principles (GAAP). We
believe that this information improves the comparability of business performance. We calculate the
translation effect of foreign exchange rates by applying constant foreign exchange rates to the
equivalent periods reported foreign currency amounts. We believe that this non-GAAP metric
provides a clearer picture of our operating performance. Furthermore, management evaluates the
performance of the businesses excluding the effects of foreign exchange rates.
In connection with its emergence from bankruptcy on October 2, 2006 (the Effective Date), AWI
adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7). Adopting
fresh-start reporting has resulted in material adjustments to the historical carrying amount of
reorganized Armstrongs assets and liabilities. See Note 3 to the Consolidated Financial
Statements for more information. As a result, our post-emergence financial statements are not
comparable to our pre-emergence financial statements. Despite the lack of comparability, we have
combined the 2006 results of the Predecessor Company (which represent the first nine months of 2006
and include the impact of emergence) with the results of the Successor Company (which represent the
last three months of 2006) to facilitate the year-to-year discussion of operating results in
certain sections of this Form 10-K, including relevant portions of Managements Discussion and
Analysis. The combined financial information for 2006 is merely cumulative and does not give pro
forma effect to the Predecessors results as if the consummation of the POR and the related
fresh-start reporting and other adjustments had occurred at the beginning of the period presented.
Combining pre-emergence and post-emergence results is not in accordance with GAAP.
We maintain a website at http://www.armstrong.com. Information contained on our website is not
necessarily incorporated into this document. Annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about
us are available free of charge through this website as soon as reasonably practicable after the
reports are electronically filed with the Securities and Exchange Commission (SEC). These
materials are also available from the SECs website at www.sec.gov.
21
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
OVERVIEW
We are a leading global producer of flooring products and ceiling systems for use primarily in the
construction and renovation of residential, commercial and institutional buildings. Through our
United States (U.S.) operations and U.S. and international subsidiaries, we design, manufacture
and sell flooring products (primarily resilient and wood) and ceiling systems (primarily mineral
fiber, fiberglass and metal) around the world. We also design, manufacture and sell kitchen and
bathroom cabinets in the U.S. As of December 31, 2008 we operated 40 manufacturing plants in 10
countries, including 25 plants located throughout the U.S. Through WAVE, our joint venture with
Worthington Industries, Inc., we also have an interest in seven additional plants in five countries
that produce suspension system (grid) products for our ceiling systems.
We report our financial results through the following segments: Resilient Flooring, Wood Flooring,
Building Products, Cabinets and Unallocated Corporate. See Results of Operations and Reportable
Segment Results for additional financial information on our consolidated company and our segments.
Our consolidated net sales for 2008 were $3.4 billion, approximately 4% less than consolidated net
sales in 2007. Operating income was $210.9 million in 2008, as compared to $296.7 million in 2007.
Continuing declines in domestic residential markets were exacerbated by increasing weakness in
domestic and international commercial markets. The broad market weakness accelerated significantly
in the last two months of the year. For the year, sales volume declines, input cost inflation and
intangible asset impairments more than offset higher selling prices and lower manufacturing and
selling, general and administrative (SG&A) expenses.
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Resilient Flooring sales declined modestly. Volume declines in the Americas and Europe
offset price and product mix improvements across geographies. Operating income declined
significantly due to lower sales, inflation and cost reduction expenses. |
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Wood Flooring sales continued to decline with weak new residential housing and
renovation markets. Operating income declined significantly as the impact from lower sales
and intangible asset impairments more than offset reduced manufacturing and SG&A expenses. |
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Building Products again generated record sales and operating income despite significant
slowing in the U.S. commercial markets toward the end of the year. Price and product mix
improvements across geographies and volume growth in the Pacific Rim markets offset volume
declines in the Americas and Europe. Operating income grew on higher sales and increased
income from WAVE, despite significant cost inflation. |
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Cabinets had significant declines in sales and operating income due to lower unit
volume. Similar to Wood Flooring, the declines reflect a significant exposure to
residential housing activity. |
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Corporate Unallocated expense declined $37.0 million due to lower incentive compensation
expense and 2007 expenses related to our review of strategic alternatives and Chapter 11
related post-emergence expenses, which were not repeated in 2008. |
During 2008, our cash and cash equivalents decreased by $159.3 million, primarily due to a special
cash dividend of $256.4 million.
22
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Factors Affecting Revenues
For an estimate of our segments 2008 net sales by major markets, see Markets in Item 1. Business
of this Form 10-K.
Markets. We compete in building material markets around the world. The majority of our sales are
in North America and Europe. During 2008, these markets experienced the following:
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According to the U.S. Census Bureau, in 2008, housing starts in the U.S. residential
market declined 32.7% compared to 2007 to 0.90 million units. Housing completions in the
U.S. decreased by 25.8% in 2008 with approximately 1.12 million units completed. The
National Association of Realtors indicated that sales of existing homes decreased 13.7% to
4.90 million units in 2008 from a level of 5.67 million in 2007. |
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According to the U.S. Census Bureau, U.S. retail sales through building materials, garden
equipment and supply stores (an indicator of home renovation activity) decreased 3.97% in
2008 compared 2007. |
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According to the U.S. Census Bureau the rate of growth in the North American key
commercial market, in nominal dollar terms, was 5.6% in 2008. Construction activity in the
office, healthcare, retail and education segments increased 12.3%, 8.6%, -3.6% and 8.3%,
respectively, in 2008, with the rate of growth in all segments being down from 2007 rates. |
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Markets in both Western and Eastern European countries generally slowed over the course
of the year, with most markets down year-over-year by the fourth quarter. |
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Pacific Rim markets also generally began to slow toward the end of the year. |
Quality and Customer Service. Our quality and customer service are critical components of our
total value proposition. In 2008, we experienced no significant quality or customer service
issues.
Pricing Initiatives. We periodically modify prices in response to changes in costs for raw
materials and energy, and to market conditions and the competitive environment. The net impact of
these pricing initiatives improved sales in 2008 compared to 2007.
The most significant of these pricing actions were:
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Resilient Flooring implemented price increases on selected products in March, July and
October 2008. |
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Wood Flooring had no significant pricing actions in 2008. |
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Building Products announced price increases across geographies in each quarter of 2008
due to continuing cost inflation. |
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Cabinets only increase for the year was in February 2008. |
In certain cases, realized price increases are less than the announced price increases because of
competitive reactions and changing market conditions.
We estimate pricing actions increased our total consolidated net sales in 2008 compared to 2007 by
approximately $84 million.
23
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Mix. Each of our businesses offers a wide assortment of products that are differentiated by
style/design and by performance attributes. Pricing for products within the assortment varies.
Changes in the relative quantity of products purchased at the different price points can impact
year-to-year comparisons of net sales and operating income. We estimate mix changes increased our
total consolidated net sales in 2008 by approximately $47 million when compared to 2007.
Factors Affecting Operating Costs
Operating Expenses. Our operating expenses consist of direct production costs (principally raw
materials, labor and energy) and manufacturing overhead costs, costs to purchase sourced products
and SG&A expenses.
Our largest individual raw material expenditures are for lumber and veneers, PVC resins and
plasticizers. Natural gas is also a significant input cost. Fluctuations in the prices of these
inputs are generally beyond our control and have a direct impact on our financial results. In 2008
the net impact of these input costs was approximately $87 million higher than in the same period of
the previous year.
Intangible Asset Impairment. During the fourth quarter of 2008, we recorded a non-cash impairment
charge of $25.4 million to reduce the carrying amount of our Wood Flooring trademarks to their
estimated fair value. The fair value was negatively affected by lower expected future cash flows
due to the decline in the U.S. residential housing market. See Note 12 to the Consolidated
Financial Statements for more information regarding our intangible asset impairment charge.
Cost Reduction Initiatives. During 2008 we recorded $20.0 million of charges (severance of $17.7
million and accelerated depreciation of $2.3 million) primarily related to organizational and
manufacturing changes for our European resilient flooring business and the termination costs for
certain corporate employees. The European organizational changes are due to the decision to
consolidate and outsource several SG&A functions. The manufacturing changes primarily related to
the decision to cease production of automotive carpeting and other specialized textile flooring
products. These charges were recorded as part of cost of goods sold ($7.3 million) and SG&A
expense ($12.7 million). We expect to incur approximately $5 million of additional charges for
severance and accelerated depreciation in 2009 for these initiatives.
During 2004, we implemented several significant manufacturing and organizational programs to
improve our cost structure and enhance our competitive position. We incurred significant costs
from 2004 through 2006 related to these initiatives. Our largest initiative involved ceasing
production of certain products at our Resilient Flooring manufacturing plant in Lancaster,
Pennsylvania, transferring production to other Resilient Flooring plants. All 2004 initiatives
have been fully implemented, and we do not expect to incur additional expenses in future periods
for these initiatives.
In 2006, we incurred $30.1 million of charges ($11.0 million in cost of goods sold, $7.4 million in
SG&A expenses and $11.7 million in restructuring charges) to implement cost reduction initiatives,
with $27.4 million of these charges recorded in the Resilient Flooring segment. Cost of goods sold
includes $0.7 million of fixed asset impairments (incurred in the nine months ended September 30,
2006), $0.3 million of accelerated depreciation (incurred in the nine months ended September 30,
2006) and $10.0 million of other related costs in 2006 ($0.6 million incurred in the three months
ended December 31, 2006 and $9.4 million incurred in the nine months ended September 30, 2006).
In 2006, we also recorded a gain of $14.3 million from the sale of a warehouse which became
available as a result of the Resilient Flooring cost reduction initiatives. This gain was recorded
in SG&A expenses.
See Note 16 to the Consolidated Financial Statements for more information on restructuring charges.
24
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
On-going Cost Improvements. In addition to the above-mentioned cost reduction programs we have an
ongoing focus on continually improving our cost structure. As a result of these cost reduction
initiatives and our on-going improvement efforts, we have realized significant reductions in our
manufacturing conversion costs. Additional charges may be incurred in future periods for further
cost reduction actions.
Fresh Start Reporting. In connection with its emergence from bankruptcy on October 2, 2006, AWI
adopted fresh-start reporting. For administrative convenience, we selected September 30, 2006,
following the close of business, as the date to adopt fresh-start reporting. See Note 3 to the
Consolidated Financial Statements for more information.
Adopting fresh-start reporting resulted in material adjustments to the historical carrying amount
of reorganized Armstrongs assets and liabilities. Certain of these adjustments impacted our
statements of earnings for the periods following emergence, through changes in depreciation and
amortization, costs for benefit plans, costs for hedging-related activity, inventory-related costs
and WAVEs earnings. In 2006, fresh-start reporting impacted fourth quarter earnings. Fresh-start
reporting impacted all periods in 2007, with the fourth quarters impact being different than the
first three quarters due to the revisions made to the fresh-start balance sheet based upon filing
our federal income tax return in September 2007 (see Note 3 to the Consolidated Financial
Statements for more information). Please see page 32 for the dollar impact of fresh-start
reporting by operating expense type for each period.
Review of Strategic Alternatives. On February 15, 2007, we announced that we had initiated a
review of our strategic alternatives. On February 29, 2008, we announced that we have completed
the strategic review process after extensive evaluation of alternatives, including a possible sale
of our individual businesses and the entire company. The Board of Directors concluded that it is
in the best interest of Armstrong and its shareholders to continue to execute our strategic
operating plan under our current structure as a publicly traded company. We incurred costs in
conjunction with this review of $1.2 million in the first quarter of 2008.
See also Results of Operations for further discussion of other significant items affecting
operating costs.
Factors Affecting Cash Flows
Typically, we generate cash in our operating activities. The amount of cash generated in a period
is dependent on a number of factors, including the amount of operating profit generated, the amount
of working capital (such as inventory, receivables and payables) required to operate our businesses
and investments in property, plant & equipment and computer software (PP&E).
During 2008, our cash and cash equivalents decreased by $159.3 million, primarily due to a special
cash dividend of $256.4 million. Net cash from operating activities of $214.2 million was
partially offset by capital expenditures of $95.0 million. During 2007, our cash and cash
equivalents increased by $250.5 million, as net cash from operating activities, including
distributions from WAVE of $117.5 million (which included special distributions of $50.0 million)
and net U.S. federal income tax refunds of $209.1 million, more than offset $300 million of
voluntary debt principal prepayments and capital expenditures of $102.6 million. We also received
$58.8 million in proceeds from a divestiture.
Employees
As of December 31, 2008, we had approximately 12,200 full-time and part-time employees worldwide.
This compares to approximately 12,900 employees as of December 31, 2007. The decline reflects
headcount reductions, primarily in the wood flooring and cabinets segments.
During 2008, we negotiated eight collective bargaining agreements and none of our locations
experienced work stoppages. Throughout 2009, collective bargaining agreements covering
approximately 1,900 employees at five plants are scheduled to expire.
25
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
As part of our ongoing cost reduction efforts, in February 2009 we announced layoffs at
manufacturing facilities in North America impacting approximately 600 employees. The layoffs will
occur in the first and second quarters of 2009.
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements in accordance with U.S. generally accepted
accounting principles (GAAP), we are required to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. We evaluate our estimates and assumptions on an on-going
basis, using relevant information from inside and outside the Company. We believe that our
estimates and assumptions are reasonable. However, actual results may differ from what was
estimated and could have a significant impact on the financial statements.
We have identified the following as our critical accounting estimates. We have discussed these
critical accounting estimates with our Audit Committee.
Fresh-Start Reporting and Reorganization Value As part of our emergence from bankruptcy
on October 2, 2006, we implemented fresh-start reporting in accordance with AICPA Statement of
Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization under the Bankruptcy
Code. Our assets, liabilities and equity were adjusted to fair value. In this regard, our
Consolidated Financial Statements for periods subsequent to October 2, 2006 reflect a new basis of
accounting and are not comparable to our historical consolidated financial statements for periods
prior to October 2, 2006.
Under fresh-start reporting, a reorganization value was determined and allocated to our net assets
based on their relative fair values in a manner similar to the accounting provisions applied to
business combinations under Statement of Financial Accounting Standards No. 141, Business
Combinations. The estimates and assumptions used to derive the reorganization value and allocation
of value to balance sheet accounts were inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which were beyond our control. Modification
to these assumptions could have significantly changed the reorganization value, and hence the
resultant fair values of our assets and liabilities.
The adoption of fresh-start reporting had a material effect on our Consolidated Financial
Statements and was based on assumptions that employed a high degree of judgment. See Notes 1 and 3
to the Consolidated Financial Statements for further information relative to our reorganization and
the assumptions used to value reorganized Armstrong.
U.S. Pension Credit and Postretirement Benefit Costs We maintain pension and
postretirement plans throughout the world, with the most significant plans located in the U.S. The
U.S. defined benefit pension plans were closed to new salaried and salaried production employees on
January 1, 2005. We also froze benefits for certain non-production salaried employees effective
February 28, 2006. Our defined benefit pension and postretirement benefit costs are developed from
actuarial valuations. These valuations are calculated using a number of assumptions. Each
assumption represents managements best estimate of the future. The assumptions that have the most
significant impact on reported results are the discount rate, the estimated long-term return on
plan assets and the estimated inflation in health care costs. These assumptions are generally
updated annually. However, we also updated each of these assumptions and adopted Statement of
Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, as part of adopting fresh-start reporting in accordance with SOP 90-7.
The discount rate is used to determine retirement plan liabilities and to determine the interest
cost component of net periodic pension and postretirement cost. Management utilizes the yield for
Moodys AA-rated long-term corporate bonds as the primary basis for determining the discount rate.
The duration of the securities underlying the Moodys AA-rated bond index is reasonably comparable
to the duration of
26
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
our retirement plan liabilities. As of December 31, 2008, we assumed a discount rate of 5.60%
compared with a discount rate of 5.85% as of December 31, 2007 for the U.S. plans. This decrease
is consistent with the decrease in U.S. corporate bond yields during the year. The effects of the
decreased discount rate will be amortized into earnings as described below. A one-quarter
percentage point decrease in the discount rate to 5.35% would increase 2009 operating income by
$0.7 million, as the resulting decrease in the interest cost component of the pension expense
calculation would more than offset the increased service cost component. A one-quarter percentage
point increase in the discount rate to 5.85% would reduce 2009 operating income by $0.7 million.
We have two U.S. defined benefit pension plans, a qualified funded plan and a nonqualified unfunded
plan. For the funded plan, the expected long-term return on plan assets represents a long-term
view of the future estimated investment return on plan assets. This estimate is determined based
on the target allocation of plan assets among asset classes and input from investment professionals
on the expected performance of the equity and bond markets over 10 to 20 years. Over the last 10
years, the annualized return was approximately 4.3% compared to an average expected return of 8.5%.
The expected long-term return on plan assets used in determining our 2008 U.S. pension credit was
8.0%. The actual return on plan assets achieved for 2008 was -23.9%. In accordance with GAAP,
this deficit will be amortized into earnings as described below. We do not expect to make cash
contributions to the qualified funded plan during 2009. We have assumed a return on plan assets
during 2009 of 8.0%. A one-quarter percentage point increase or decrease in this assumption would
increase or decrease 2009 operating income by approximately $5.3 million. Contributions to the
unfunded plan were $3.2 million in 2008 and were made on a monthly basis to fund benefit payments.
We estimate the contributions to be approximately $3.3 million in 2009. See Note 19 to the
Consolidated Financial Statements for more details.
The qualified funded defined benefit plan, which was previously overfunded, was underfunded in
relation to its benefit obligations at December 31, 2008 primarily due to the impact of lower asset
values in 2008.
The estimated inflation in health care costs represents a long-term view (5-10 years) of the
expected inflation in our postretirement health care costs. We separately estimate expected health
care cost increases for pre-65 retirees and post-65 retirees due to the influence of Medicare
coverage at age 65, as illustrated below:
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Assumptions |
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Actual |
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Post 65 |
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Pre 65 |
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Overall |
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Post 65 |
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Pre 65 |
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Overall |
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2007 |
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12.0 |
% |
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11.5 |
% |
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11.8 |
% |
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(2 |
)% |
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(3 |
)% |
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(2 |
)% |
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2008 |
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11.0 |
% |
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10.5 |
% |
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10.8 |
% |
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(5 |
)% |
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12 |
% |
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0 |
% |
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2009 |
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10.0 |
% |
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9.5 |
% |
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9.8 |
% |
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Actual health care cost increases were lower than expected in 2008, primarily due to favorable
claims experience. In accordance with GAAP, the difference between the actual and expected health
care costs is amortized into earnings as described below. As of December 31, 2008, health care
cost increases are estimated to decrease by 1 percentage point per year until 2014, after which
they are constant at 5%. A one percentage point increase in the assumed health care cost trend
rate would reduce 2009 operating income by $1.4 million, while a one percentage point decrease in
the assumed health care cost trend rate would increase 2009 operating income by $1.3 million. See
Note 19 to the Consolidated Financial Statements for more details.
Actual results that differ from our various pension and postretirement plan estimates are captured
as actuarial gains/losses. When certain thresholds are met, the gains and losses are amortized
into future
27
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
earnings over the expected remaining service period of plan participants, which is approximately
nine years. Changes in assumptions could have significant effects on earnings in future years.
Impairments of Long-Lived Tangible and Intangible Assets In connection with our adoption
of fresh-start reporting upon emerging from Chapter 11, all long-lived tangible and intangible
assets were adjusted to fair value. We periodically review significant tangible and definite-lived
intangible assets for impairment under the guidelines of the Financial Accounting Standards Board
Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144).
In accordance with this Statement, we review our businesses for indicators of impairment such as
operating losses and/or negative cash flows. If an indication of impairment exists, we compare the
carrying amount of the asset group to the estimated undiscounted future cash flows expected to be
generated by the assets. The amount of impairment loss to be recognized is then measured by
comparing the asset groups carrying amount to its fair value. The estimate of an asset groups
fair value is based on discounted future cash flows expected to be generated by the asset group, or
based on managements estimated exit price assuming the assets could be sold in an orderly
transaction between willing parties. If the fair value is less than the carrying value of the
asset group, we record an impairment charge equal to the difference between the fair value and
carrying value of the asset group.
Our indefinite-lived intangibles are primarily trademarks and brand names, which are integral to
our corporate identity and expected to contribute indefinitely to our corporate cash flows.
Accordingly, they have been assigned an indefinite life. We perform annual impairment tests on
these indefinite-lived intangibles under the guidelines of the Financial Accounting Standards Board
Statement No. 142 Goodwill and Other Intangible Assets (FAS 142). These assets undergo more
frequent tests if an indication of possible impairment exists.
The principal assumptions utilized in our estimates for tangible and definite-lived intangible
assets include operating profit adjusted for depreciation and amortization and discount rate. The
principal assumptions utilized in our estimates for indefinite-lived intangible assets include
revenue growth rate, discount rate and royalty rate. Revenue growth rate and operating profit
assumptions are consistent with those utilized in our operating plan and long-term financial
planning process. The discount rate assumption is calculated based upon an estimated weighted
average cost of equity which reflects the overall level of inherent risk and the rate of return an
investor would expect to achieve. Methodologies used for valuing our tangible and intangible
assets did not change from prior periods.
The cash flow estimates used in applying FAS 142 and FAS 144 are based on managements analysis of
information available at the time of the impairment test. Actual cash flows lower than the
estimate could lead to significant future impairments. If subsequent testing indicates that new
fair values have declined, the carrying values would be reduced and our future statements of income
would be impacted.
During the fourth quarter of 2008, we recorded a non-cash impairment charge of $25.4 million to
reduce the carrying amount of our Wood Flooring trademarks to their estimated fair value based on
the results of our annual impairment test. The fair value was negatively affected by lower
expected future cash flows due to the decline in the U.S. residential housing market.
See Notes 10 and 12 to the Consolidated Financial Statements for further information.
Sales-related Accruals We provide direct customer and end-user warranties for our
products. These warranties cover manufacturing defects that would prevent the product from
performing in line with its intended and marketed use. The terms of these warranties vary by
product line and generally provide for the repair or replacement of the defective product. We
collect and analyze warranty claims data with a focus on the historical amount of claims, the
products involved, the amount of time between the warranty claims and the products respective
sales and the amount of current sales.
We also maintain numerous customer relationships that incorporate different sales incentive
programs (primarily volume rebates and promotions). The rebates vary by customer and usually
include tiered incentives based on the level of customers purchases. Certain promotional
allowances are also tied to
28
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
customer purchase volumes. We estimate the amount of expected annual sales during the course of
the year and use the projected sales amount to estimate the cost of the incentive programs. For
sales incentive programs that are on the same calendar basis as our fiscal calendar, actual sales
information is used in the year-end accruals.
While historical results have not differed materially from our estimated accruals, future
experience related to these accruals could differ significantly from the estimated amounts during
the year. If this occurs, we would adjust our accruals accordingly. Our sales-related accruals
totaled $64.5 million and $79.7 million as of December 31, 2008 and 2007, respectively. We record
the costs of these accruals as a reduction of gross sales.
Income Taxes Our effective tax rate is primarily determined based on our pre-tax income
and the statutory income tax rates in the jurisdictions in which we operate. The effective tax
rate also reflects the tax impacts of items treated differently for tax purposes than for financial
reporting purposes. Some of these differences are permanent, such as expenses that are not
deductible in our tax returns, and some differences are temporary, reversing over time, such as
depreciation expense. Deferred tax assets are also recorded for operating loss, capital loss and
tax credit carryforwards. These temporary differences create deferred income tax assets and
liabilities.
Deferred income tax assets and liabilities are recognized by applying enacted tax rates to
temporary differences that exist as of the balance sheet date. We record valuation allowances to
reduce our deferred income tax assets if it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. As of December 31, 2008, we have recorded
valuation allowances totaling $208.7 million for various state and foreign net operating loss,
capital loss and foreign tax credit carryforwards. While we have considered future taxable income
in assessing the need for the valuation allowances based on our best available projections, if
these estimates and assumptions change in the future or if actual results differ from our
projections, we may be required to adjust our valuation allowances accordingly. Such adjustment
could be material to our Consolidated Financial Statements.
As further described in Note 17 to the Consolidated Financial Statements, our Consolidated Balance
Sheet as of December 31, 2008 includes net deferred income tax assets of $691.9 million. Included
in these amounts are deferred federal and state income tax assets of $357.6 million and $62.1
million, respectively, relating to federal and state net operating loss carryforwards. These net
operating losses arose primarily as a result of the amounts paid to the Asbestos PI Trust in 2006.
We have concluded that all but $23.8 million of these income tax benefits are more likely than not
to be realized in the future.
Inherent in determining our effective tax rate are judgments regarding business plans and
expectations about future operations. These judgments include the amount and geographic mix of
future taxable income, limitations on usage of net operating loss carryforwards after emergence
from bankruptcy, potential tax law changes, the impact of ongoing or potential tax audits, earnings
repatriation plans and other future tax consequences.
In accordance with the requirements for fresh-start reporting pursuant to SOP 90-7, we adopted FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, effective as of
October 2, 2006. We establish reserves for tax positions that management believes are supportable,
but are potentially subject to successful challenge by the applicable taxing authorities. We
review these tax uncertainties in light of the changing facts and circumstances and adjust them
when warranted. We have several tax audits in process in various jurisdictions.
ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN FUTURE PERIODS
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157 Fair Value Measurements (FAS 157), which establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 was generally effective for fiscal years beginning after November
15, 2007. However the effective date for certain non-financial assets and liabilities was deferred
to fiscal
29
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
years beginning after November 15, 2008. We do not expect any material impact from adopting the
remaining portions of FAS 157.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 Revised 2007,
Business Combinations (FAS 141R). FAS 141R revises the original FAS 141, while retaining the
underlying concept that all business combinations be accounted for at fair value. However, FAS
141R changes the methodology of applying this concept in that acquisition costs will generally be
expensed as incurred, non-controlling interests will be valued at fair value, in-process research
and development will be recorded at fair value as an indefinite-lived intangible, restructuring
costs associated with a business combination will generally be expensed subsequent to the
acquisition and changes in deferred income tax asset allowances after the acquisition date
generally will affect income tax expense. This pronouncement applies prospectively to all business
combinations whose acquisition dates are on or after the beginning of the first annual period
subsequent to December 15, 2008. Additionally, under FAS 141R certain future adjustments to
deferred income tax valuation allowances and uncertain tax positions recognized upon our emergence
from bankruptcy will impact future earnings.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Non-controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (FAS
160). FAS 160 requires the recognition of a non-controlling interest (formerly known as a
minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement. It also amends certain of
ARB 51s consolidation procedures for consistency with the requirements of FAS 141R. This
pronouncement is effective for fiscal years, and all interim periods within those fiscal years,
beginning after December 15, 2008. Early adoption is not permitted. We do not expect any material
impact from adopting FAS 160.
In November 2008 the FASB issued Emerging Issues Task Force No. 08-6 (EITF 08-6), Equity Method
Investment Accounting Considerations. EITF 08-6 discusses the accounting for contingent
consideration agreements of an equity method investment and the requirement for the investor to
recognize its share of any impairment charges recorded by the investee. EITF 08-6 requires the
investor to record share issuances by the investee as if it has sold a portion of its investment
with any resulting gain or loss being reflected in earnings. EITF 08-6 is effective prospectively
for interim periods and fiscal years beginning after December 15, 2008. We do not expect a
material impact from the adoption of EITF 08-6.
RESULTS OF OPERATIONS
Unless otherwise indicated, net sales in these results of operations are reported based upon the
location where the sale was made. Certain prior year amounts have been reclassified to conform to
the current year presentation. Please refer to Note 4 to the Consolidated Financial Statements for
a reconciliation of segment operating income to consolidated earnings from continuing operations
before income taxes.
In connection with its emergence from bankruptcy on October 2, 2006 (the Effective Date), AWI
adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7). Adopting
fresh-start reporting has resulted in material adjustments to the historical carrying amount of
reorganized Armstrongs assets and liabilities. See Note 3 to the Consolidated Financial
Statements for more information. As a result, our post-emergence financial statements are not
comparable to our pre-emergence financial statements. Despite the lack of comparability, we have
combined the 2006 results of the Predecessor Company (which represent the first nine months of 2006
and include the impact of emergence) with the results of the Successor Company (which represent the
last three months of 2006) to facilitate the year-to-year discussion of operating results in
certain sections of this Form 10-K. The combined financial information for 2006 is merely
cumulative and does not give pro forma effect to the Predecessors results as if the consummation
of the Plan and the related fresh-start reporting and other adjustments had occurred at the
beginning of the period presented. Combining pre-emergence and post-emergence results is not in
accordance with GAAP.
30
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
2008 COMPARED TO 2007
CONSOLIDATED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change is Favorable/ |
|
|
|
Successor |
|
|
(Unfavorable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
Exchange |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
Reported |
|
|
Rates(1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
2,384.4 |
|
|
$ |
2,614.7 |
|
|
|
(8.8 |
)% |
|
|
(9.1 |
)% |
Europe |
|
|
826.0 |
|
|
|
774.4 |
|
|
|
6.7 |
% |
|
|
0.7 |
% |
Pacific Rim |
|
|
182.6 |
|
|
|
160.6 |
|
|
|
13.7 |
% |
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated Net Sales |
|
$ |
3,393.0 |
|
|
$ |
3,549.7 |
|
|
|
(4.4 |
)% |
|
|
(6.0 |
)% |
Cost of goods sold |
|
|
2,632.0 |
|
|
|
2,687.5 |
|
|
|
|
|
|
|
|
|
SG&A expense |
|
|
579.9 |
|
|
|
611.3 |
|
|
|
|
|
|
|
|
|
Intangible asset impairment |
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net |
|
|
0.8 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Equity earnings |
|
|
(56.0 |
) |
|
|
(46.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
210.9 |
|
|
$ |
296.7 |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
30.8 |
|
|
|
55.0 |
|
|
|
|
|
|
|
|
|
Other non-operating expense |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
Other non-operating (income) |
|
|
(10.6 |
) |
|
|
(18.2 |
) |
|
|
|
|
|
|
|
|
Chapter 11 reorganization (income), net |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
Income tax expense |
|
|
109.0 |
|
|
|
106.4 |
|
|
|
|
|
|
|
|
|
(Gain) loss from discontinued operations |
|
|
(0.6 |
) |
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
81.0 |
|
|
$ |
145.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes favorable foreign exchange rate effect in translation of $56.7 million on
net sales and $2.9 million on operating income. |
Consolidated net sales, excluding the translation effect of changes in foreign exchange rates,
declined 6%. Volume declines more than offset improvements in price realization (as described
previously in Pricing Initiatives) and an improved mix of higher value products.
Net sales in the Americas decreased approximately 9% as volume declines across the segments offset
modest improvements in price realization and product mix in the Building Products and Resilient
Flooring segments.
Excluding the translation effect of changes in foreign exchange rates, net sales in the European
markets grew by $6 million. Both Building Products and Resilient Flooring had modest price
realization and improved product mix to offset lower volume.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim
increased $18 million primarily due to volume growth.
31
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
2008 and 2007 operating expenses were impacted by several significant items. The significant items
which impacted cost of goods sold (COGS), selling, general and administrative expenses (SG&A)
and restructuring charges include:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
|
|
|
|
Successor |
|
Item |
|
Where
Reported |
|
Year 2008 |
|
|
Year 2007 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
COGS |
|
$ |
7.9 |
|
|
$ |
2.1 |
|
Impact on hedging-related activity |
|
COGS |
|
|
|
|
|
|
(5.8 |
) |
Change in depreciation and amortization |
|
SG&A |
|
|
1.5 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
COGS |
|
|
7.3 |
|
|
|
|
|
Fixed asset impairment (3) |
|
COGS |
|
|
2.9 |
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
SG&A |
|
|
12.7 |
|
|
|
|
|
Insurance settlements (4) |
|
SG&A |
|
|
(6.9 |
) |
|
|
(5.0 |
) |
Environmental accrual (5) |
|
SG&A |
|
|
|
|
|
|
1.1 |
|
Chapter 11 related post-emergence (income) expenses(6) |
|
SG&A |
|
|
(1.3 |
) |
|
|
7.1 |
|
Review of strategic alternatives (7) |
|
SG&A |
|
|
1.2 |
|
|
|
8.7 |
|
Intangible asset impairment (8) |
|
Intangible asset |
|
|
|
|
|
|
|
|
|
|
impairment |
|
|
25.4 |
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
Restructuring |
|
|
0.8 |
|
|
|
0.2 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
See Factors Affecting Operating Costs and Notes 15 and 16 for a discussion of the
cost reduction initiatives. |
|
(3) |
|
In 2008 we recorded a fixed asset impairment charge related to certain Resilient
Flooring assets. |
|
(4) |
|
In 2008, we received an insurance settlement related to an environmental matter. In
2007, we received an insurance settlement related to a Cabinets warehouse fire. |
|
(5) |
|
We recorded an increase in the environmental accrual for a previously-owned property. |
|
(6) |
|
These costs represent professional and administrative fees incurred primarily to
resolve remaining claims related to AWIs Chapter 11 Case and distribute proceeds to
creditors, and expenses incurred by Armstrong Holdings, Inc., our former publicly held
parent holding company, as it completed its plan of dissolution. In addition, 2008
includes the impact of the reversal of a contingent liability that was no longer owed to
creditors after our final Chapter 11 distribution was made. |
|
(7) |
|
These expenses were incurred, primarily from advisors, in conducting our review of
strategic alternatives. |
|
(8) |
|
During the fourth quarter of 2008, we recorded a non-cash impairment charge of $25.4
million to reduce the carrying amount of our Wood Flooring trademarks to their estimated
fair value based on the results of our annual impairment test. |
Cost of goods sold in 2008 was 77.6% of net sales, compared to 75.7% in 2007. The year-to-year
increase in the percentages is primarily due to lower sales to cover fixed costs. The change in
the percentages was also impacted by the items detailed in the above table.
SG&A expenses in 2008 were $579.9 million, or 17.1% of net sales compared to $611.3 million or
17.2% of net sales in 2007. The year-to-year change was primarily due to the factors detailed in
the above table offset by a significant decrease in unallocated corporate expense due to lower
incentive compensation costs. In addition, most businesses reduced spending in response to lower
sales volumes.
During the fourth quarter of 2008, we recorded a non-cash impairment charge of $25.4 million to
reduce the carrying amount of our Wood Flooring trademarks to their estimated fair value based on
the results of our annual impairment test. The fair value was negatively affected by lower
expected future cash flows due to the decline in the U.S. residential housing market. See Note 12
to the Consolidated Financial Statements for more information.
32
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Equity earnings, primarily from our WAVE joint venture, were $56.0 million in 2008, as compared to
$46.0 million in 2007. See Note 11 for further information.
We recorded operating income of $210.9 million in 2008, compared to operating income of $296.7
million in 2007.
Interest expense was $30.8 million in 2008, compared to $55.0 million in 2007. The reduction was
primarily due to lower debt balances and lower interest rates in 2008 compared to 2007.
Income tax expense from continuing operations was $109.0 million and $106.4 million in 2008 and
2007, respectively. The effective tax rate for 2008 was 57.6% as compared to a rate of 41.0% for
2007. The effective tax rate for 2008 was higher than 2007 due to additional valuation allowances
on deferred state and foreign income tax assets and interest on uncertain tax positions. Partially
offsetting these items was the tax benefit in 2008 for the costs incurred in 2007 for the review of
strategic alternatives.
REPORTABLE SEGMENT RESULTS
Resilient Flooring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Change is Favorable/
(Unfavorable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
Exchange |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
Reported |
|
|
Rates(1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
786.2 |
|
|
$ |
826.4 |
|
|
|
(4.9 |
)% |
|
|
(5.2 |
)% |
Europe |
|
|
355.1 |
|
|
|
331.9 |
|
|
|
7.0 |
% |
|
|
(0.2 |
)% |
Pacific Rim |
|
|
78.8 |
|
|
|
72.5 |
|
|
|
8.7 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Net Sales |
|
$ |
1,220.1 |
|
|
$ |
1,230.8 |
|
|
|
(0.9 |
)% |
|
|
(3.1 |
)% |
|
|
|
Operating (Loss) Income |
|
$ |
(16.8 |
) |
|
$ |
40.4 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes favorable foreign exchange rate effect in translation of $28.4
million on net sales and $2.5 million on operating income. |
Net sales in the Americas declined $40.2 million. Volume declines due to broad weakness in
residential markets and accelerating declines in commercial markets in the final two months of the
year partially offset price realization and product mix improvement.
Excluding the translation effect of changes in foreign exchange rates, net sales in European
markets were approximately flat as improved price and product mix offset lower volume.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim
grew $4.4 million primarily due to improved product mix and modest price realization.
33
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Operating income decreased significantly due to lower volume in the Americas and global raw
material inflation. In addition, both 2008 and 2007 operating profit were impacted by the
previously described items as detailed in the following table.
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
Item |
|
Year 2008 |
|
|
Year 2007 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
3.3 |
|
|
$ |
0.8 |
|
Impact on hedging-related activity |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
|
14.1 |
|
|
|
|
|
Fixed asset impairment (3) |
|
|
2.9 |
|
|
|
|
|
Environmental accrual (4) |
|
|
|
|
|
|
1.1 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
See Factors Affecting Operating Costs and Note 15 for a discussion of the cost
reduction initiatives. |
|
(3) |
|
In 2008 we recorded a fixed asset impairment charge related to certain Resilient
Flooring assets. |
|
(4) |
|
We recorded an increase in the environmental accrual for a previously-owned property. |
Wood Flooring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Change is |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
(Unfavorable) |
|
Total Segment Net Sales (1) |
|
$ |
624.6 |
|
|
$ |
791.6 |
|
|
|
(21.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income |
|
$ |
(2.4 |
) |
|
$ |
64.3 |
|
|
|
|
|
|
|
|
(1) |
|
Virtually all Wood Flooring products are sold in the Americas, primarily in
the U.S. |
Net sales decreased by $167.0 million due to lower volume driven by continued declines in
residential housing markets.
Operating income declined by $66.7 million, primarily due to significantly lower sales. Reduced
manufacturing and SG&A costs partially offset the decline in sales. In addition, 2008 operating
profit was impacted by previously described items as detailed in the following table.
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
Item |
|
Year 2008 |
|
|
Year 2007 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
1.0 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
Intangible asset impairment (2) |
|
|
25.4 |
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
During the fourth quarter of 2008, we recorded a non-cash impairment charge of $25.4
million to reduce the carrying amount of our Wood Flooring trademarks to their estimated
fair value based on the results of our annual impairment test. |
34
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Building
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Change is Favorable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
Exchange |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
Reported |
|
|
Rates(1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
794.4 |
|
|
$ |
761.5 |
|
|
|
4.3 |
% |
|
|
4.0 |
% |
Europe |
|
|
470.9 |
|
|
|
442.5 |
|
|
|
6.4 |
% |
|
|
1.4 |
% |
Pacific Rim |
|
|
103.8 |
|
|
|
88.1 |
|
|
|
17.8 |
% |
|
|
14.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Net Sales |
|
$ |
1,369.1 |
|
|
$ |
1,292.1 |
|
|
|
6.0 |
% |
|
|
3.8 |
% |
|
|
|
Operating Income |
|
$ |
239.7 |
|
|
$ |
221.4 |
|
|
|
8.3 |
% |
|
|
7.7 |
% |
|
|
|
(1) |
|
Excludes favorable foreign exchange rate effect in translation of $27.4
million on net sales and $1.2 million on operating income. |
The Americas net sales increased $32.9 million. Price increases put in place to offset
inflationary pressure and an improved product mix offset volume declines that accelerated in the
fourth quarter. The improved product mix reflects a continued focus on developing and marketing
high value products which satisfy todays design trends and higher acoustical performance needs.
Excluding the translation effect of changes in foreign exchange rates, net sales in Europe grew by
$6.4 million. The modest sales improvement was primarily due to improved price realization and
volume growth in the emerging markets of Eastern Europe over the first three quarters of the year.
These benefits offset growing volume declines in most Western European markets.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim
grew $13.1 million on volume growth in Australia, China and India. The pace of growth in China and
India significantly slowed in the fourth quarter of the year.
Operating income grew by $18.3 million. Price realization, improved product mix and higher income
from WAVE more than offset inflation in input costs and volume declines. In addition, 2008 and
2007 operating profit were impacted by previously described items as detailed in the following
table.
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
Item |
|
Year 2008 |
|
|
Year 2007 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
4.2 |
|
|
$ |
1.1 |
|
Impact on hedging-related activity |
|
|
|
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
|
|
|
|
|
0.2 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
These expenses relate to the closure of a Building Products plant in The Netherlands.
Production ceased at this plant in 2005. |
35
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Cabinets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Change is |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
(Unfavorable) |
|
Total Segment Net Sales (1) |
|
$ |
179.2 |
|
|
$ |
235.2 |
|
|
|
(23.8 |
)% |
|
|
|
Operating (Loss) Income |
|
$ |
(6.7 |
) |
|
$ |
10.5 |
|
|
|
|
|
|
|
|
(1) |
|
All Cabinet products are sold in the U.S. |
Net sales declined $56.0 million on significant volume declines related to further deterioration in
the U.S. housing markets.
Operating income was $17.2 million worse than the prior year, primarily due to the decline in
sales. In addition, 2007 operating profit was impacted by the previously described item as
detailed in the following table.
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
Item |
|
Year 2008 |
|
|
Year 2007 |
|
Other Significant Items: |
|
|
|
|
|
|
|
|
Insurance settlement(1) |
|
|
|
|
|
$ |
(5.0 |
) |
|
|
|
(1) |
|
We received an insurance settlement related to a warehouse fire. |
Unallocated Corporate
Unallocated corporate expense of $2.9 million in 2008 decreased from $39.9 million in 2007. The
decrease was primarily due to lower incentive compensation expense and reduced costs related to
Chapter 11 and our review of strategic alternatives. In addition to costs related to Chapter 11
and our review of strategic alternatives, 2008 and 2007 operating profit were also impacted by
previously described items as detailed in the following table.
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
Item |
|
Year 2008 |
|
|
Year 2007 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
0.9 |
|
|
$ |
0.6 |
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
|
6.7 |
|
|
|
|
|
Environmental insurance settlement (3) |
|
|
(6.9 |
) |
|
|
|
|
Chapter 11 related post-emergence expenses (4) |
|
|
(1.3 |
) |
|
|
7.1 |
|
Review of strategic alternatives (5) |
|
|
1.2 |
|
|
|
8.7 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
Represents costs for corporate severances, partially offset by related reductions in
stock compensation expense, and restructuring costs. |
|
(3) |
|
We received an insurance settlement related to an environmental matter. |
|
(4) |
|
These costs represent professional and administrative fees incurred primarily to
resolve remaining claims related to AWIs Chapter 11 Case and distribute proceeds to
creditors, and expenses incurred by Armstrong Holdings, Inc., our former publicly held
parent holding company, as it completed its plan of dissolution. In addition, 2008
includes the impact of the reversal of a contingent liability that was no longer owed to
creditors after our final Chapter 11 distribution was made. |
|
(5) |
|
These expenses were incurred, primarily from advisors, in conducting our review of
strategic alternatives. |
36
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow
The Consolidated Statements of Cash Flows combine the cash flows generated from discontinued
operations with the cash flows from continuing operations within operating, investing and financing
activities. Cash flows from discontinued operations were not material for each cash flow category.
The absence of these cash flows from discontinued operations will not materially affect our future
liquidity and capital resources.
As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance
decreased by $159.3 million in 2008 compared to an increase of $250.5 million in 2007.
Operating activities in 2008 provided $214.2 million of net cash, primarily due to cash earnings
and distributions from WAVE of $61.0 million (which includes a special distribution of $5.5
million). These were partially offset by a reduction in accounts payable and accrued expenses of
$88.2 million, primarily due to lower activity and the payment of incentive accruals during the
first quarter of 2008. Operating activities in 2007 provided $575.2 million of net cash, primarily
due to cash earnings, net U.S. federal income tax refunds of $209.1 million and distributions from
WAVE of $117.5 million (which includes special distributions of $50.0 million).
Investing activities in 2008 used $75.7 million of cash primarily due to capital expenditures of
$95.0 million, partially offset by a special distribution from WAVE of $19.5 million, which was
classified as a return of investment. Investing activities in 2007 used $36.7 million of cash
primarily due to capital expenditures of $102.6 million partially offset by proceeds received from
the divestiture of a business of $58.8 million.
Financing activities in 2008 used $277.0 million primarily due to a special cash dividend of $256.4
million. Financing activities used $305.4 million of cash in 2007 primarily due to voluntary
principal debt prepayments of $300 million.
Balance Sheet and Liquidity
Changes in significant balance sheet accounts and groups of accounts from December 31, 2007 to
December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Decrease |
|
Cash and cash equivalents |
|
$ |
355.0 |
|
|
$ |
514.3 |
|
|
$ |
(159.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets, excluding
cash and cash equivalents |
|
|
906.5 |
|
|
|
976.2 |
|
|
|
(69.7 |
) |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
1,261.5 |
|
|
$ |
1,490.5 |
|
|
$ |
(229.0 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in cash and cash equivalents was described above (see Cash Flow). The decrease in
current assets, excluding cash and cash equivalents, is primarily due to lower levels of accounts
receivable due to lower sales in November and December of 2008 compared to the comparative periods
of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Decrease |
|
Property, plant and
equipment, less accumulated
depreciation and amortization
(PP&E) |
|
$ |
954.2 |
|
|
$ |
1,012.8 |
|
|
$ |
(58.6 |
) |
37
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
The decrease in PP&E was primarily due to depreciation of $135.5 million and the effects of foreign
exchange of approximately $20 million. These were partially offset by capital expenditures of
$95.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Decrease |
|
Prepaid pension costs |
|
$ |
0.3 |
|
|
$ |
708.0 |
|
|
$ |
(707.7 |
) |
The decrease in prepaid pension costs occurred primarily because four of our previously overfunded
pension plans became underfunded in relation to their benefit obligations as of December 31, 2008
primarily due to the impact of lower asset values in 2008. Therefore, the net underfunded position
of these pension plans is recorded within Pension Benefit Liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Decrease |
|
Investment in affiliates |
|
$ |
208.2 |
|
|
$ |
232.6 |
|
|
$ |
(24.4 |
) |
The decrease in investments in affiliates was primarily due to distributions from WAVE of $80.5
million (including a special distribution of $25 million) partially offset by equity earnings of
$56.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Deferred income tax assets, current |
|
$ |
14.4 |
|
|
$ |
43.5 |
|
|
$ |
(29.1 |
) |
Deferred income tax assets, noncurrent |
|
|
219.6 |
|
|
|
424.5 |
|
|
|
(204.9 |
) |
Deferred income tax liabilities, current |
|
|
(4.6 |
) |
|
|
(29.5 |
) |
|
|
24.9 |
|
Deferred income tax liabilities, noncurrent |
|
|
(9.0 |
) |
|
|
(471.4 |
) |
|
|
462.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
220.4 |
|
|
$ |
(32.9 |
) |
|
$ |
253.3 |
|
|
|
|
|
|
|
|
|
|
|
See Note 17 for further information on income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Current installments of long-term debt |
|
$ |
40.9 |
|
|
$ |
24.7 |
|
|
$ |
16.2 |
|
Long-term debt, less current installments |
|
|
454.8 |
|
|
|
485.8 |
|
|
|
(31.0 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
495.7 |
|
|
$ |
510.5 |
|
|
$ |
(14.8 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in long-term debt was primarily due to scheduled debt repayments of $20.9 million.
Liquidity
Our liquidity needs for operations vary throughout the year. We retain lines of credit to
facilitate our seasonal needs. On October 2, 2006, Armstrong executed a $1.1 billion senior credit
facility with Bank of America, N.A., JPMorgan Chase Bank, N.A. and Barclays Bank PLC. This
facility was made up of a $300 million revolving credit facility (with a $150 million sublimit for
letters of credit), a $300 million Term Loan A (due in 2011), and a $500 million Term Loan B (due
in 2013). There were no outstanding borrowings under the revolving credit facility, but $49.6
million in letters of credit were outstanding as of December 31, 2008 and, as a result,
availability under the revolving credit facility was $250.4 million.
On December 31, 2008 we also had outstanding letters of credit totaling $10.4 million arranged with
another bank. Letters of credit are issued to third party suppliers, insurance and financial
institutions and typically can only be drawn upon in the event of AWIs failure to pay its
obligations to the beneficiary.
As of December 31, 2008, we have $355.0 million of cash and cash equivalents, $202.5 million in the
U.S. and $152.5 million in various foreign jurisdictions.
38
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
On February 25, 2008, we executed an amendment to our senior credit facility. This amendment (a)
permits us to make Special Distributions, including dividends (such as the special cash dividend
described below) or other distributions (whether in cash, securities or other property) of up to an
aggregate of $500 million at any time prior to February 28, 2009, (b) requires that we maintain
minimum domestic liquidity of at least $100 million as of March 31, June 30, September 30 and
December 31 of each year, which may be comprised of a combination of cash and cash equivalents and
undrawn commitments under our revolving credit facility and (c) increases by 0.25% the borrowing
margins in the pricing grid set forth in the facility for the revolving credit facility and Term
Loan A. We do not anticipate extending the amendment beyond February 28, 2009. As of December 31,
2008 our domestic liquidity was $452.9 million.
In addition to the minimum domestic liquidity covenant, our credit facility contains two other
financial covenants: minimum Interest Coverage (minimum 3.00 to 1.00) and maximum Indebtedness to
EBITDA (Earnings Before Interest Taxes and Depreciation) (maximum 3.75 to 1.00), as defined in the
credit facility (incorporated in this 10-K as Exhibit 10.10). As of December 31, 2008 our
consolidated interest coverage ratio was 12.98 to 1.00 and our indebtedness to EBITDA was 1.24 to
1.00. Management believes that based on current financial projections the likelihood of default
under these covenants is unlikely. Fully borrowing under our revolving credit facility, provided
we maintain minimum domestic liquidity of $100 million, would not violate these covenants.
Prepayments of the loans under the senior credit facility are required unless (a) the Consolidated
leverage ratio is less than or equal to 2.5:1.0, and (b) debt ratings from S&P is BB (stable) or
better and from Moodys is Ba2 (stable) or better. If required, the prepayment amount would be 50%
of Consolidated Excess Cash Flow (as defined in the credit facility, incorporated in this 10-K as
Exhibit 10.10). Mandatory prepayments have not occurred since the inception of the agreement. Our
current debt rating from S&P is BB (stable) and from Moodys is Ba2 (stable).
On February 25, 2008, our Board of Directors declared a special cash dividend of $4.50 per common
share, payable on March 31, 2008, to shareholders of record on March 11, 2008. This special cash
dividend resulted in an aggregate payment to our shareholders of $256.4 million. The Board will
continue to evaluate the return of cash to shareholders based on factors including actual and
forecasted operating results, the outlook for global economies and credit markets, and the
Companys current and forecasted capital requirements.
As of December 31, 2008, our foreign subsidiaries had available lines of credit totaling $32.3
million, of which $2.8 million was used and $4.9 million was available only for letters of credit
and guarantees, leaving $24.6 million of unused lines of credit available for foreign borrowings.
However, these lines of credit are uncommitted, and poor operating results or credit concerns at
the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have
been able to maintain and, as needed, replace credit facilities to support our foreign operations.
In October 2007 we received $178.7 million of federal income tax refunds (see Note 17). Upon
receipt of the refunds, AWI recorded a liability of $144.6 million in the fourth quarter of 2007.
The tax refunds are subject to examination and adjustment by the Internal Revenue Service (IRS)
under its normal audit procedure. We are currently under examination for the 2005 and 2006 tax
years.
We believe that cash on hand and generated from operations, together with lines of credit and the
availability under the $300 million revolving credit facility, will be adequate to address our
foreseeable liquidity needs based on current expectations of our
business operations and for scheduled payments
of debt obligations.
39
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
2007 COMPARED TO 2006
CONSOLIDATED
RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
Combined |
|
|
Change is Favorable/
(Unfavorable) |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
Excluding |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
|
Year 2006 |
|
|
Reported |
|
|
Rates(1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
2,614.7 |
|
|
$ |
606.9 |
|
|
$ |
2,011.3 |
|
|
$ |
2,618.2 |
|
|
|
(0.1 |
)% |
|
|
(0.4 |
)% |
Europe |
|
|
774.4 |
|
|
|
172.2 |
|
|
|
499.4 |
|
|
|
671.6 |
|
|
|
15.3 |
% |
|
|
6.0 |
% |
Pacific Rim |
|
|
160.6 |
|
|
|
38.2 |
|
|
|
97.9 |
|
|
|
136.1 |
|
|
|
18.0 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
Net Sales |
|
$ |
3,549.7 |
|
|
$ |
817.3 |
|
|
$ |
2,608.6 |
|
|
$ |
3,425.9 |
|
|
|
3.6 |
% |
|
|
1.3 |
% |
Cost of goods sold |
|
|
2,687.5 |
|
|
|
660.9 |
|
|
|
2,030.2 |
|
|
|
2,691.1 |
|
|
|
|
|
|
|
|
|
SG&A expense |
|
|
611.3 |
|
|
|
143.5 |
|
|
|
415.5 |
|
|
|
559.0 |
|
|
|
|
|
|
|
|
|
Restructuring
charges, net |
|
|
0.2 |
|
|
|
1.7 |
|
|
|
10.0 |
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
Equity earnings |
|
|
(46.0 |
) |
|
|
(5.3 |
) |
|
|
(41.4 |
) |
|
|
(46.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
296.7 |
|
|
$ |
16.5 |
|
|
$ |
194.3 |
|
|
$ |
210.8 |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
55.0 |
|
|
|
13.4 |
|
|
|
5.2 |
|
|
|
18.6 |
|
|
|
|
|
|
|
|
|
Other non-operating
expense |
|
|
1.4 |
|
|
|
0.3 |
|
|
|
1.0 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
Other non-operating
(income) |
|
|
(18.2 |
) |
|
|
(4.3 |
) |
|
|
(7.2 |
) |
|
|
(11.5 |
) |
|
|
|
|
|
|
|
|
Chapter 11
reorganization
(income), net |
|
|
(0.7 |
) |
|
|
|
|
|
|
(1,955.5 |
) |
|
|
(1,955.5 |
) |
|
|
|
|
|
|
|
|
Income tax expense |
|
|
106.4 |
|
|
|
3.8 |
|
|
|
726.6 |
|
|
|
730.4 |
|
|
|
|
|
|
|
|
|
Loss from
discontinued
operations |
|
|
7.5 |
|
|
|
1.1 |
|
|
|
68.4 |
|
|
|
69.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
145.3 |
|
|
$ |
2.2 |
|
|
$ |
1,355.8 |
|
|
$ |
1,358.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes favorable foreign exchange rate effect in translation of
$78.4 million on net sales and $2.1 million on operating
income. |
Consolidated net sales excluding the translation effect of changes in foreign exchange rates grew
1%. Equal benefits from price realization (approximately $60 million, as described previously in
Pricing Initiatives) and an improved mix of higher value products more than offset low
single-digit volume decline.
Net sales in the Americas was essentially flat. Volume declined in the Wood Flooring and Resilient
Flooring businesses. Net sales of Building Products and Resilient Flooring products benefited from
a richer product mix, and Building Products realized price increases.
Excluding the translation effect of changes in foreign exchange rates, net sales in the European
markets grew by $42 million due to a combination of volume growth, price realization and
higher-value product mix.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim
increased $15 million on volume growth and improved product mix.
40
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Operating expenses in the year 2007 and the three months ended December 31, 2006 were impacted by
the effects of having adopted fresh-start reporting, as a result of AWI emerging from Chapter 11.
Adopting fresh-start reporting resulted in material adjustments to the historical carrying amount
of reorganized Armstrongs assets and liabilities. Certain of these adjustments impacted our
statements of earnings for the periods following emergence, through changes in the items noted in
the chart below. The amounts represent the post-emergence change in these items. Net sales were
not impacted by fresh-start reporting. In addition, 2007 and 2006 operating expenses were impacted
by several other significant items. The fresh-start and other significant items, which impacted
cost of goods sold (COGS), selling, general and administrative expenses (SG&A), restructuring
charges and equity earnings, include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
Item |
|
Where
Reported |
|
|
Year 2007 |
|
|
December 31,
2006 |
|
|
September 30,
2006 |
|
Fresh-Start:
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
COGS |
|
$ |
(2.1 |
) |
|
$ |
(1.3 |
) |
|
|
|
|
Change in costs for benefit plans |
|
COGS |
|
|
(20.2 |
) |
|
|
(4.6 |
) |
|
|
|
|
Impact on hedging-related activity |
|
COGS |
|
|
(5.8 |
) |
|
|
(1.0 |
) |
|
|
|
|
Inventory-related costs |
|
COGS |
|
|
|
|
|
|
29.6 |
|
|
|
|
|
Change in depreciation and amortization |
|
SG&A |
|
|
11.6 |
|
|
|
2.8 |
|
|
|
|
|
Change in costs for benefit plans |
|
SG&A |
|
|
(11.3 |
) |
|
|
(2.3 |
) |
|
|
|
|
Inventory-related costs (WAVE) |
|
Equity Earnings |
|
|
|
|
|
|
3.7 |
|
|
|
|
|
Expenses from WAVE step-up |
|
Equity Earnings |
|
|
6.7 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business interruption claim(2) |
|
COGS |
|
|
|
|
|
|
(4.7 |
) |
|
|
|
|
Cost reduction initiatives expenses(3) |
|
COGS |
|
|
|
|
|
|
0.7 |
|
|
$ |
10.3 |
|
Product warranty accrual(4) |
|
COGS |
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Contribution to Armstrong Foundation(5) |
|
SG&A |
|
|
|
|
|
|
|
|
|
|
5.0 |
|
Liability settlement related to a divested
business(6) |
|
SG&A |
|
|
|
|
|
|
|
|
|
|
2.8 |
|
Patent infringement settlement(7) |
|
SG&A |
|
|
|
|
|
|
|
|
|
|
(8.6 |
) |
Cost reduction initiatives expenses(3) |
|
SG&A |
|
|
|
|
|
|
|
|
|
|
7.4 |
|
Gain on sale of properties(8) |
|
SG&A |
|
|
|
|
|
|
|
|
|
|
(17.0 |
) |
Insurance settlement(9) |
|
SG&A |
|
|
(5.0 |
) |
|
|
|
|
|
|
|
|
Environmental accrual(10) |
|
SG&A |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
Chapter 11 related post-emergence
expenses(11) |
|
SG&A |
|
|
7.1 |
|
|
|
4.6 |
|
|
|
|
|
Review of strategic alternatives(12) |
|
SG&A |
|
|
8.7 |
|
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses(3) |
|
Restructuring |
|
|
0.2 |
|
|
|
1.6 |
|
|
|
10.1 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
In the fourth quarter of 2006, we received the final payment for a business
interruption claim. |
|
(3) |
|
See Factors Affecting Operating Costs and Note 16 for a discussion on the cost
reduction expenses. |
|
(4) |
|
The majority of the product warranty accrual increase was from revising certain
assumptions that were used in prior periods when estimating the accrual. |
|
(5) |
|
We made a contribution to the Armstrong Foundation (a community giving program funded
by Armstrong) in the third quarter of 2006. |
|
(6) |
|
We settled a liability related to a previously divested business in the third quarter
of 2006 for an amount greater than what was previously accrued. |
|
(7) |
|
In the first quarter of 2006, we recorded a gain from the settlement of a patent
infringement case. |
|
(8) |
|
During the year 2006, we recorded a gain from the sale of two buildings. |
|
(9) |
|
We received an insurance settlement related to a Cabinets warehouse fire. |
|
(10) |
|
We recorded an increase in the environmental accrual for a previously-owned property. |
41
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
|
|
|
(11) |
|
These costs represent professional and administrative fees incurred primarily to
resolve remaining claims related to AWIs Chapter 11 Case and distribute proceeds to
creditors, and expenses incurred by Armstrong Holdings, Inc. as it completed its plan of
dissolution. |
|
(12) |
|
These expenses were incurred, primarily from advisors, in conducting our review of
strategic alternatives. |
Cost of goods sold in 2007 was 75.7% of net sales, compared to 78.6% in 2006. The year-to-year
change in the percentages is primarily due to the items detailed in the above table. In addition,
2007 benefited from higher selling prices, primarily in Building Products, and better manufacturing
performance across most segments, which more than offset raw material inflation in Building
Products and Wood Flooring.
SG&A expenses in 2007 were $611.3 million, or 17.2% of net sales compared to $559.0 million or
16.3% of net sales in 2006. The year-to-year change in the percentages was primarily due to the
factors detailed in the above table. In addition, unallocated corporate expense increased due to
higher benefit plan costs. Building Products increased spending to support its sales growth, but
at a rate below the growth in sales.
Equity earnings, primarily from our WAVE joint venture, were $46.0 million in 2007, as compared to
$46.7 million in 2006. Equity earnings in 2007 and 2006 were impacted by the items as detailed in
the above table. See Note 11 for further information.
We recorded operating income of $296.7 million in 2007, compared to operating income of $210.8
million in 2006.
Interest expense was $55.0 million in 2007, compared to $18.6 million in 2006. Interest expense in
both years was impacted by debt incurred as part of emerging from Chapter 11, although for only
three months in 2006. In accordance with SOP 90-7, we did not record contractual interest expense
on prepetition debt while in Chapter 11. This unrecorded interest expense was $57.6 million in
2006. Unrecorded interest expense reflects the amount of interest expense we would have incurred
under the original maturities of prepetition debt.
Net Chapter 11 reorganization income in 2007 was $0.7 million compared to $1,955.5 million recorded
in 2006. See Note 1 to the Consolidated Financial Statements for a detailed breakout of the 2007
and 2006 amounts.
Income tax expense was $106.4 million and $730.4 million in 2007 and 2006, respectively. The
effective tax rate for 2007 was 41.0% as compared to a rate of 33.8% for 2006. Excluding the
effect of fresh-start reporting and POR-related settlement adjustments, the 2006 effective tax rate
was 38.3%. The effective tax rate for 2007 was higher than 2006 due to increased state income
taxes, taxes on foreign source income and a reduced Medicare subsidy, partially offset by a
reduction in nondeductible professional fees related to our Chapter 11 emergence and the review of
strategic alternatives.
42
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
REPORTABLE SEGMENT RESULTS
Resilient Flooring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change is Favorable/ |
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
Combined |
|
|
(Unfavorable) |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
Excluding |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
As |
|
|
Exchange |
|
|
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
|
Year 2006 |
|
|
Reported |
|
|
Rates(1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
826.4 |
|
|
$ |
187.0 |
|
|
$ |
662.6 |
|
|
$ |
849.6 |
|
|
|
(2.7 |
)% |
|
|
(3.1 |
)% |
Europe |
|
|
331.9 |
|
|
|
74.2 |
|
|
|
223.2 |
|
|
|
297.4 |
|
|
|
11.6 |
% |
|
|
2.0 |
% |
Pacific Rim |
|
|
72.5 |
|
|
|
17.3 |
|
|
|
43.6 |
|
|
|
60.9 |
|
|
|
19.0 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Net
Sales |
|
$ |
1,230.8 |
|
|
$ |
278.5 |
|
|
$ |
929.4 |
|
|
$ |
1,207.9 |
|
|
|
1.9 |
% |
|
|
(1.1 |
)% |
|
|
|
Operating Income
(Loss) |
|
$ |
40.4 |
|
|
$ |
(1.2 |
) |
|
$ |
12.6 |
|
|
$ |
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes favorable foreign exchange rate effect in translation of
$35.9 million on net sales and $1.5 million on operating
income. |
Net sales in the Americas declined $23.2 million. Volume declined at a mid-single digit rate due
to weakness in residential products, pricing was flat and product mix improved on growth in the
sales of higher-value laminate and vinyl sheet products.
Excluding the translation effect of changes in foreign exchange rates, net sales in the European
markets grew $6.4 million, primarily due to increased volume.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim
grew $7.2 million, primarily due to volume growth.
Operating income improved significantly, despite soft sales, due to lower manufacturing costs and
reduced SG&A expenses. In addition, both 2007 and 2006 operating profit were impacted by the
previously described items as detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
Item |
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
Fresh-Start:
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
(1.0 |
) |
|
$ |
(0.8 |
) |
|
|
|
|
Change in costs for benefit plans |
|
|
(5.5 |
) |
|
|
(0.8 |
) |
|
|
|
|
Impact on hedging-related activity |
|
|
(1.5 |
) |
|
|
(0.2 |
) |
|
|
|
|
Inventory-related costs |
|
|
|
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Business interruption claim (2) |
|
|
|
|
|
|
(4.7 |
) |
|
|
|
|
Cost reduction initiative expenses (3) |
|
|
|
|
|
|
0.8 |
|
|
$ |
26.6 |
|
Gain on sale of properties (4) |
|
|
|
|
|
|
|
|
|
|
(17.0 |
) |
Environmental accrual (5) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
In the fourth quarter of 2006, we received the final payment for a business
interruption claim. |
|
(3) |
|
See Factors Affecting Operating Costs for a discussion on the cost reduction
expenses. |
|
(4) |
|
During 2006, we recorded a gain from the sale of two buildings. |
|
(5) |
|
We recorded an increase in the environmental accrual for a previously-owned property. |
43
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Wood Flooring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
Change is |
|
|
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
|
Year 2006 |
|
|
(Unfavorable) |
|
Total Segment Net
Sales
(1) |
|
$ |
791.6 |
|
|
$ |
192.6 |
|
|
$ |
645.0 |
|
|
$ |
837.6 |
|
|
|
(5.5 |
)% |
|
|
|
Operating Income |
|
$ |
64.3 |
|
|
$ |
(0.2 |
) |
|
$ |
46.2 |
|
|
$ |
46.0 |
|
|
|
|
|
(1) |
|
Virtually all Wood Flooring products are sold in the Americas,
primarily in the U.S. |
Net sales decreased by $46.0 million due to lower volume driven by declines in the residential
housing market.
Operating income increased by $18.3 million due to the previously described items as detailed in
the following table. In addition, declining sales volume and raw material inflation more than
offset improved manufacturing productivity. 2007 operating income included a $2.7 million SG&A
expense for an increase to the reserve for doubtful accounts receivable related to a distributor.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
Item |
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
(13.3 |
) |
|
$ |
(3.4 |
) |
|
|
|
|
Inventory-related costs |
|
|
|
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
|
|
|
|
|
1.4 |
|
|
$ |
0.7 |
|
Product warranty accrual (3) |
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
These expenses related primarily to the shutdown of manufacturing plants in Nashville,
Tennessee and Searcy, Arkansas. |
|
(3) |
|
The majority of the product warranty accrual increase was from revising certain
assumptions that were used in prior periods when estimating the accrual. |
44
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Building Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
Combined |
|
|
Change is Favorable |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
Excluding |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
Effects of |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
As |
|
|
Exchange |
|
|
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
|
Year 2006 |
|
|
Reported |
|
|
Rates(1) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
761.5 |
|
|
$ |
170.8 |
|
|
$ |
529.3 |
|
|
$ |
700.1 |
|
|
|
8.8 |
% |
|
|
8.3 |
% |
Europe |
|
|
442.5 |
|
|
|
98.0 |
|
|
|
276.2 |
|
|
|
374.2 |
|
|
|
18.3 |
% |
|
|
9.1 |
% |
Pacific Rim |
|
|
88.1 |
|
|
|
20.9 |
|
|
|
54.3 |
|
|
|
75.2 |
|
|
|
17.2 |
% |
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Net
Sales |
|
$ |
1,292.1 |
|
|
$ |
289.7 |
|
|
$ |
859.8 |
|
|
$ |
1,149.5 |
|
|
|
12.4 |
% |
|
|
8.7 |
% |
|
|
|
Operating Income |
|
$ |
221.4 |
|
|
$ |
24.9 |
|
|
$ |
152.9 |
|
|
$ |
177.8 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes favorable foreign exchange rate effect in translation of
$40.7 million on net sales and $3.5 million on operating
income. |
The Americas net sales increased $61.4 million. The improvement was primarily driven by price
increases across the majority of channels and a more favorable mix of products. The improved
product mix reflects a continued focus on developing and marketing high value products which
satisfy todays design trends and higher acoustical performance needs.
Excluding the translation effect of changes in foreign exchange rates, net sales in Europe grew by
$35.9 million. The sales improvement was driven equally by volume growth and improved pricing
across both Western and Eastern Europe.
Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim
grew $7.5 million on strong sales in India, Australia and China.
Operating income increased by $43.6 million due to sales growth and improved manufacturing
productivity. These benefits were partially offset by inflation in direct production costs and by
increased investment in SG&A to support the sales growth. In addition, both 2007 and 2006
operating profit were impacted by the previously described items as detailed in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
Item |
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
22.1 |
|
|
$ |
5.2 |
|
|
|
|
|
Change in costs for benefit plans |
|
|
(6.3 |
) |
|
|
(1.3 |
) |
|
|
|
|
Impact on hedging-related activity |
|
|
(4.3 |
) |
|
|
(0.8 |
) |
|
|
|
|
Inventory-related costs |
|
|
|
|
|
|
9.2 |
|
|
|
|
|
Inventory-related costs (WAVE) |
|
|
|
|
|
|
3.7 |
|
|
|
|
|
Expenses from WAVE step-up |
|
|
6.7 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
|
0.2 |
|
|
|
0.1 |
|
|
$ |
0.6 |
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
These expenses related to the closure of a plant in The Netherlands. |
45
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Cabinets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
Change is |
|
|
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
|
Year 2006 |
|
|
Favorable |
|
Total Segment Net
Sales
(1) |
|
$ |
235.2 |
|
|
$ |
56.5 |
|
|
$ |
174.4 |
|
|
$ |
230.9 |
|
|
|
1.9 |
% |
Operating Income |
|
$ |
10.5 |
|
|
$ |
0.2 |
|
|
$ |
6.1 |
|
|
$ |
6.3 |
|
|
|
|
|
|
|
|
(1) |
|
All Cabinet products are sold in the U.S. |
Net sales grew $4.3 million as growth in the first half of the year was largely offset by declines
in the second half related to deterioration in the U.S. housing market.
Operating income grew $4.2 million due to the previously described items as detailed in the
following table. In addition, operating income was reduced by manufacturing inefficiencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction)
in Expenses |
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
Item |
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
(0.3 |
) |
|
$ |
0.1 |
|
|
|
|
|
Inventory-related costs |
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance settlement(2) |
|
|
(5.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
We received an insurance settlement related to a warehouse fire. |
46
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Unallocated Corporate
Unallocated corporate expense of $39.9 million in 2007 increased from $30.7 million in 2006 ($7.2
million in the three months ended December 31, 2006 and $23.5 million in the nine months ended
September 30, 2006). The changes were primarily due to higher benefit plan costs and the
previously described items as detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
Item |
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
$ |
2.0 |
|
|
$ |
0.3 |
|
|
|
|
|
Change in costs for benefit plans |
|
|
(19.7 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses (2) |
|
|
|
|
|
|
|
|
|
$ |
(0.1 |
) |
Contribution to Armstrong Foundation (3) |
|
|
|
|
|
|
|
|
|
|
5.0 |
|
Liability settlement related to a divested business (4) |
|
|
|
|
|
|
|
|
|
|
2.8 |
|
Patent infringement settlement (5) |
|
|
|
|
|
|
|
|
|
|
(8.6 |
) |
Chapter 11 related post-emergence expenses(6) |
|
|
7.1 |
|
|
|
4.6 |
|
|
|
|
|
Review of strategic alternatives (7) |
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
These costs related primarily to cost reduction actions that were initiated in prior
years. |
|
(3) |
|
We made a contribution to the Armstrong Foundation (a community giving program funded
by Armstrong) in the third quarter of 2006. |
|
(4) |
|
We settled a liability related to a previously divested business in the third quarter
of 2006 for an amount greater than what was previously accrued. |
|
(5) |
|
In the first quarter of 2006, we recorded a gain from the settlement of a patent
infringement case. |
|
(6) |
|
These costs represent professional and administrative fees incurred primarily to
resolve remaining claims related to AWIs Chapter 11 Case and distribute proceeds to
creditors, and expenses incurred by Armstrong Holdings, Inc. as it completed its plan of
dissolution. |
|
(7) |
|
These expenses were incurred, primarily from advisors, in conducting our review of
strategic alternatives. |
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow
The Consolidated Statements of Cash Flows combine the cash flows generated from discontinued
operations with the cash flows from continuing operations within operating, investing and financing
activities. Cash flows from discontinued operations were not material for each cash flow category.
The absence of these cash flows from discontinued operations will not materially affect our future
liquidity and capital resources.
As shown on the Consolidated Statements of Cash Flows, our cash and cash equivalents balance
increased by $250.5 million in 2007 compared to a decrease of $338.4 million in 2006.
Operating activities in 2007 provided $575.2 million of net cash, primarily due to cash earnings,
net U.S. federal income tax refunds of $209.1 million and distributions from WAVE of $117.5
million. In 2006 operating activities used $633.0 million ($95.1 million provided in the three
months ended December 31, 2006 and $728.1 million used in the nine months ended September 30, 2006)
primarily due to the settlement of liabilities subject to compromise (excluding prepetition debt)
of $832.7 million.
Investing activities in 2007 used $36.7 million of cash primarily due to capital expenditures of
$102.6 million partially offset by proceeds received from the divestiture of a business of $58.8
million. In 2006 investing activities used $172.0 million ($40.3 million used in the three months
ended December 31, 2006 and $131.7 million used in the nine months ended September 30, 2006) due to
capital expenditures of
47
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
$138.5 million and cash paid for acquisitions of $60.5 million, which were
partially offset by proceeds from the sale of assets of $39.1 million. Year-to-year, capital
expenditures decreased approximately $36 million as all our businesses were able to reduce their
investments, partially due to prior years spending, while still maintaining our operations.
Financing activities used $305.4 million of cash in 2007 primarily due to voluntary principal debt
prepayments of $300 million. In 2006 financing activities provided $459.9 million ($8.1 million
used in the three months ended December 31, 2006 and $468.0 million provided in the nine months
ended September 30, 2006) due to the receipt of $800 million from the issuance of new debt upon
emergence partially offset by payments of $300.7 million made as part of discharging the
debt-related portion of liabilities subject to compromise.
OFF-BALANCE SHEET ARRANGEMENTS
No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.
CONTRACTUAL OBLIGATIONS
As part of our normal operations, we enter into numerous contractual obligations that require
specific payments during the term of the various agreements. The following table includes amounts
ongoing under contractual obligations existing as of December 31, 2008. Only known payments that
are dependent solely on the passage of time are included. Obligations under contracts that contain
minimum payment amounts are shown at the minimum payment amount. Contracts that have variable
payment structures without minimum payments are excluded. Purchase orders that are entered into in
the normal course of business are also excluded because they are generally cancelable and not
legally binding. Amounts are presented below based upon the currently scheduled payment terms.
Actual future payments may differ from the amounts presented below due to changes in payment terms
or events leading to payments in addition to the minimum contractual amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
$ |
40.9 |
|
|
$ |
32.3 |
|
|
$ |
234.8 |
|
|
$ |
3.5 |
|
|
$ |
184.1 |
|
|
$ |
0.1 |
|
|
$ |
495.7 |
|
Scheduled Interest Payments (1) |
|
|
15.0 |
|
|
|
16.1 |
|
|
|
16.8 |
|
|
|
10.2 |
|
|
|
8.1 |
|
|
|
|
|
|
|
66.2 |
|
Capital Lease Obligations (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
Operating Lease Obligations (2) |
|
|
14.9 |
|
|
|
10.6 |
|
|
|
6.7 |
|
|
|
3.5 |
|
|
|
2.1 |
|
|
|
4.7 |
|
|
|
42.5 |
|
Unconditional Purchase Obligations (3) |
|
|
13.8 |
|
|
|
12.6 |
|
|
|
1.7 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
28.5 |
|
Other
Long-Term Obligations (4), (5) |
|
|
9.3 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
$ |
93.9 |
|
|
$ |
72.0 |
|
|
$ |
260.1 |
|
|
$ |
17.6 |
|
|
$ |
194.3 |
|
|
$ |
4.9 |
|
|
$ |
642.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For debt with variable interest rates, we projected future interest payments based
on January 31, 2009 interest rates. |
|
(2) |
|
Capital and operating lease obligations include the minimum lease payments due under
existing lease agreements with noncancelable lease terms in excess of one year. |
|
(3) |
|
Unconditional purchase obligations include (a) purchase contracts whereby we must
make guaranteed minimum payments of a specified amount regardless of how little material is
actually purchased (take or pay contracts) and (b) service agreements. Unconditional
purchase obligations exclude contracts entered into during the normal course of business that
are non-cancelable and have fixed per unit fees, but where the monthly commitment varies based
upon usage. Cellular phone contracts are an example. |
|
(4) |
|
Other long-term obligations include payments under severance agreements. |
|
(5) |
|
Other long-term obligations does not include $174.4 million of liabilities under FIN
48. Of this amount, $146.4 million relates to the utilization of a 10-year carryback of net
operating losses created by funding the Asbestos PI Trust under AWIs POR in October 2006.
Due to the uncertainty relating to this and other positions, we are unable to reasonably
estimate the ultimate amount or timing of the settlement of these issues. See Note 17 to the
Consolidated Financial Statements for more information. |
48
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
We have issued financial guarantees to assure payment on behalf of our subsidiaries in the event of
default on various debt and lease obligations in the table above. We have not issued any
guarantees on behalf of joint-venture or unrelated businesses.
We are party to supply agreements, some of which require the purchase of inventory remaining at the
supplier upon termination of the agreement. The last such agreement will expire in 2010. Had
these agreements terminated at December 31, 2008, Armstrong would have been obligated to purchase
approximately $17.5 million of inventory. Historically, due to production planning, we have not
had to purchase material amounts of product at the end of similar contracts. Accordingly, no
liability has been recorded for these guarantees.
As part of our executive compensation plan, certain current and former executives participate in a
split-dollar insurance program where we are responsible for remitting the premiums. Since 1998,
the program was closed to new participants. As of December 31, 2008, we carried a cash surrender
value asset of $9.0 million related to this program. Should we discontinue making premium
payments, the insured executives have the right to the entire policy cash surrender value. In
light of the Sarbanes-Oxley Act, we believe it is inappropriate to make the premium payments for
three of the executives participating in this plan. As a result, we have required these three
individuals to make the premium payments to continue the policy.
We utilize lines of credit and other commercial commitments in order to ensure that adequate funds
are available to meet operating requirements. Letters of credit are issued to third party
suppliers, insurance and financial institutions and typically can only be drawn upon in the event
of our failure to pay our obligations to the beneficiary. This table summarizes the commitments we
have available for use as of December 31, 2008. Letters of credit are currently arranged through
our revolving credit facility. Certain letters of credit arranged with another bank prior to our
Chapter 11 filing remain outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less |
|
|
|
|
|
|
|
|
|
|
Other Commercial |
|
Amounts |
|
|
Than 1 |
|
|
1 3 |
|
|
4 5 |
|
|
Over 5 |
|
Commitments |
|
Committed |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
|
|
Letters of Credit |
|
$ |
60.0 |
|
|
$ |
49.6 |
|
|
$ |
10.4 |
|
|
|
|
|
|
|
|
|
In addition, we have lines of credit for certain international operations totaling $32.3 million,
of which $2.8 million was used and $4.9 million was only available for letters or credit and
guarantees, leaving $24.6 million available to ensure funds are available to meet operating
requirements.
In disposing of assets, AWI and some subsidiaries have entered into contracts that included various
indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and
other litigation. Some of these contracts have exposure limits, but many do not. Due to the
nature of the indemnities, it is not possible to estimate the potential maximum exposure under
these contracts. For contracts under which an indemnity claim has been received, a liability of
$5.8 million has been recorded as of December 31, 2008. See Note 32 of the Consolidated Financial
Statements for additional information.
RELATED PARTIES
See Note 31 of the Consolidated Financial Statements for a discussion of our relationship with
WAVE.
Related party transactions with executives and outside directors are discussed in Item 13 Certain
Relationships and Related Transactions, and Director Independence.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and
commodity prices that could impact our results of operations and financial condition. We use
forward swaps and option contracts to hedge currency and commodity exposures. We regularly monitor
developments in the capital markets and only enter into currency and commodity transactions with
established counterparties having investment-grade ratings. Exposure to individual counterparties
is controlled, and thus we consider the risk of counterparty default to be negligible. Forward
swap and option contracts are entered into for periods consistent with underlying exposure and do
not constitute positions independent of those exposures. We use derivative financial instruments
as risk management tools and not for speculative trading purposes. In addition, derivative
financial instruments are entered into with a diversified group of major financial institutions in
order to manage our exposure to potential nonperformance on such instruments.
Interest Rate Sensitivity
Armstrong is subject to interest rate variability on its Term Loan A, Term Loan B, revolving credit
facility and other borrowings. There were no borrowings under the revolving credit facility as of
December 31, 2008. A hypothetical increase of one-quarter percentage point in interest rates from
December 31, 2008 levels would increase 2009 interest expense by approximately $1.2 million.
The table below provides information about our long-term debt obligations as of December 31, 2008,
including payment requirements and related weighted-average interest rates by scheduled maturity
dates. The information is presented in U.S. dollar equivalents, which is our reporting currency.
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|
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|
Successor Company |
|
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|
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|
Scheduled maturity date |
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After |
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|
|
|
($ millions) |
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Total |
|
As of December 31, 2008 |
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|
Long-term debt: |
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|
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|
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|
|
|
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|
|
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|
|
|
|
|
|
Fixed rate |
|
$ |
9.9 |
|
|
<$ |
0.1 |
|
|
<$ |
0.1 |
|
|
<$ |
0.1 |
|
|
<$ |
0.1 |
|
|
<$ |
0.1 |
|
|
$ |
10.0 |
|
Avg. interest rate |
|
|
6.19 |
% |
|
|
5.22 |
% |
|
|
5.63 |
% |
|
|
5.63 |
% |
|
|
5.63 |
% |
|
|
5.63 |
% |
|
|
6.19 |
% |
|
|
|
Variable rate |
|
$ |
31.0 |
|
|
$ |
32.3 |
|
|
$ |
234.8 |
|
|
$ |
3.5 |
|
|
$ |
184.1 |
|
|
|
|
|
|
$ |
485.7 |
|
Avg. interest rate |
|
|
1.91 |
% |
|
|
2.04 |
% |
|
|
2.01 |
% |
|
|
2.26 |
% |
|
|
2.26 |
% |
|
|
|
|
|
|
2.10 |
% |
In February 2009 we entered into interest rate swaps with a total notional amount of $100 million
that mature in December 2009. Under the terms of the swaps, we receive 1-month LIBOR and pay a
fixed rate over the hedged period. These swaps are designated as cash flow hedges to hedge against
changes in LIBOR for a portion of our variable rate debt.
50
Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)
Exchange Rate Sensitivity
We manufacture and sell our products in a number of countries throughout the world and, as a
result, are exposed to movements in foreign currency exchange rates. To a large extent, our global
manufacturing and sales provide a natural hedge of foreign currency exchange rate movement. We
have used foreign currency forward exchange contracts to reduce our remaining exposure. At
December 31, 2008, our major foreign currency exposures are to the Euro, the Canadian dollar and
the British pound. A 10% change of all currencies against the U.S. dollar compared to December 31,
2008 levels would impact our 2009 earnings before income taxes by approximately $3 million,
including the impact of current foreign currency forward exchange contracts.
We also use foreign currency forward exchange contracts to hedge exposures created by
cross-currency intercompany loans.
The table below details our outstanding currency instruments as of December 31, 2008.
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|
|
On balance sheet foreign exchange related derivatives |
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|
|
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|
|
|
|
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|
Successor Company |
|
Maturing in: |
|
As of December 31, 2008 |
|
2009 |
|
|
2010 |
|
|
Total |
|
Notional amounts (millions) |
|
$ |
120.0 |
|
|
$ |
1.7 |
|
|
$ |
121.7 |
|
Assets at fair value (millions) |
|
$ |
7.3 |
|
|
$ |
0.1 |
|
|
$ |
7.4 |
|
Commodity Price Sensitivity
We purchase natural gas for use in the manufacture of ceiling tiles and other products, as well as
to heat many of our facilities. As a result, we are exposed to movements in the price of natural
gas. We have a policy of reducing North American natural gas cost volatility through derivative
instruments, including forward swap contracts, purchased call options and zero-cost collars. A 10%
increase in North American natural gas prices compared to December 31, 2008 prices would increase
our expenses by approximately $0.9 million. The table below provides information about our natural
gas contracts as of December 31, 2008 that are sensitive to changes in commodity prices. Notional
amounts are in millions of Btus (MMBtu), while the contract price ranges are shown as the price
per MMBtu..
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|
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|
|
|
On balance sheet commodity related derivatives |
|
|
|
Successor Company |
|
Maturing in: |
|
As of December 31, 2008 |
|
2009 |
|
|
2010 |
|
|
Total |
|
Contract amounts (MMBtu) |
|
|
4,350,000 |
|
|
|
1,580,000 |
|
|
|
5,930,000 |
|
Contract price range ($/MMBtu) |
|
|
$7.60 $13.45 |
|
|
|
$6.31 $10.40 |
|
|
|
$6.31 $13.45 |
|
Liabilities at fair value (millions) |
|
|
($12.2) |
|
|
|
($1.3) |
|
|
|
($13.5) |
|
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA
Quarterly Financial Information for the Years Ended December 31, 2008 and 2007 (Unaudited)
The following consolidated financial statements are filed as part of this Annual Report on Form
10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the Years Ended December 31, 2008 (Successor Company) and
2007 (Successor Company), the Three Month Period Ended December 31, 2006 (Successor Company) and
the Nine Month Period Ended September 30, 2006(1) (Predecessor Company)
Consolidated Balance Sheets as of December 31, 2008 (Successor Company) and 2007 (Successor
Company)
Consolidated Statements of Shareholders Equity (Deficit) for the Years Ended December 31, 2008
(Successor Company) and 2007 (Successor Company), the Three Month Period Ended December 31, 2006
(Successor Company) and the Nine Month Period Ended September 30, 2006(1) (Predecessor
Company)
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 (Successor Company) and
2007 (Successor Company), the Three Month Period Ended December 31, 2006 (Successor Company) and
the Nine Month Period Ended September 30, 2006(1) (Predecessor Company)
Notes to Consolidated Financial Statements
Schedule II for the Years Ended December 31, 2008 (Successor Company) and 2007 (Successor Company),
the Three Month Period Ended December 31, 2006 (Successor Company) and the Nine Month Period Ended
September 30, 2006(1) (Predecessor Company)
|
|
|
(1) |
|
The financial statements for the nine month period ended September 30, 2006 include
the effects of the Plan of Reorganization and fresh-start reporting in accordance with SOP 90-7
(see Note 3 to the Consolidated Financial Statements). |
52
QUARTERLY FINANCIAL INFORMATION
ARMSTRONG WORLD INDUSTRIES, INC. (unaudited)
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|
Successor Company |
|
(millions except for per share data) |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
828.2 |
|
|
$ |
926.8 |
|
|
$ |
929.6 |
|
|
$ |
708.4 |
|
Gross profit |
|
|
185.9 |
|
|
|
225.2 |
|
|
|
211.7 |
|
|
|
138.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations |
|
|
15.1 |
|
|
|
52.4 |
|
|
|
39.1 |
|
|
|
(26.2 |
) |
Per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.27 |
|
|
$ |
0.93 |
|
|
$ |
0.69 |
|
|
$ |
(0.46 |
) |
Diluted |
|
$ |
0.26 |
|
|
$ |
0.91 |
|
|
$ |
0.69 |
|
|
$ |
(0.46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
15.2 |
|
|
|
52.4 |
|
|
|
38.9 |
|
|
|
(25.5 |
) |
Per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.27 |
|
|
$ |
0.93 |
|
|
$ |
0.69 |
|
|
$ |
(0.45 |
) |
Diluted |
|
$ |
0.27 |
|
|
$ |
0.91 |
|
|
$ |
0.69 |
|
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price range of common stockhigh |
|
$ |
40.98 |
|
|
$ |
39.44 |
|
|
$ |
40.19 |
|
|
$ |
28.94 |
|
Price range of common stocklow |
|
$ |
26.25 |
|
|
$ |
28.92 |
|
|
$ |
27.10 |
|
|
$ |
13.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share |
|
$ |
4.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
863.4 |
|
|
$ |
920.6 |
|
|
$ |
913.3 |
|
|
$ |
852.4 |
|
Gross profit |
|
|
201.6 |
|
|
|
233.4 |
|
|
|
229.2 |
|
|
|
198.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
30.7 |
|
|
|
52.7 |
|
|
|
48.4 |
|
|
|
21.0 |
|
Per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.55 |
|
|
$ |
0.94 |
|
|
$ |
0.86 |
|
|
$ |
0.37 |
|
Diluted |
|
$ |
0.55 |
|
|
$ |
0.93 |
|
|
$ |
0.85 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
26.0 |
|
|
|
51.6 |
|
|
|
48.1 |
|
|
|
19.6 |
|
Per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.47 |
|
|
$ |
0.92 |
|
|
$ |
0.86 |
|
|
$ |
0.35 |
|
Diluted |
|
$ |
0.46 |
|
|
$ |
0.91 |
|
|
$ |
0.85 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price range of common stockhigh |
|
$ |
56.72 |
|
|
$ |
57.48 |
|
|
$ |
52.47 |
|
|
$ |
44.28 |
|
Price range of common stocklow |
|
$ |
41.55 |
|
|
$ |
49.85 |
|
|
$ |
35.04 |
|
|
$ |
38.00 |
|
There were no dividends paid in 2007.
Note: The net sales and gross profit amounts reported above are reported on a continuing operations
basis. The sum of the quarterly earnings per share data may not equal the total year amounts due
to changes in the average shares outstanding and, for diluted data, the exclusion of the
antidilutive effect in certain quarters.
53
Fourth Quarter 2008 Compared With Fourth Quarter 2007
Net sales of $708.4 million in the fourth quarter of 2008 decreased from net sales of $852.4
million in the fourth quarter of 2007, a decrease of 16.9%. Excluding the unfavorable effects of
foreign exchange rates of $27.5 million, net sales decreased 13.8%. Continuing declines in
domestic residential markets were exacerbated by escalating weakness in domestic and international
commercial markets. Resilient Flooring net sales decreased 10.9%, excluding the unfavorable
effects of foreign exchange rates. Volume declines due to broad weakness in residential markets
and accelerating declines in commercial markets primarily offset product mix improvement. Wood
Flooring net sales decreased by 34.1% primarily due to lower volume driven by continued declines in
residential housing markets. Building Products net sales decreased by 2.5%, excluding the
unfavorable effects of foreign exchange rates of $14.6 million. Improved product mix and better
price realization offset volume declines across all geographies. Cabinets net sales decreased by
27% on significant volume declines related to further deterioration in the U.S. housing markets.
Net sales decreased 18.1% in the Americas. Excluding the unfavorable effects of foreign exchange
rates of $20.9 million, Europe net sales decreased 7.4% and Pacific Rim sales increased 3.3%.
2008 and 2007 operating expenses were impacted by several significant items. The significant items
which impacted cost of goods sold (COGS), selling, general and administrative expenses (SG&A)
and restructuring charges include:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Reduction) in Expenses |
|
|
|
Where |
|
|
|
|
|
|
|
Item |
|
Reported |
|
|
2008 |
|
|
2007 |
|
Fresh-Start: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in depreciation and amortization |
|
COGS |
|
$ |
1.9 |
|
|
$ |
2.1 |
|
Impact on hedging-related activity |
|
COGS |
|
|
|
|
|
|
(1.2 |
) |
Change in depreciation and amortization |
|
SG&A |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost reduction initiatives expenses(2) |
|
COGS |
|
|
4.8 |
|
|
|
|
|
Fixed asset impairment(3) |
|
COGS |
|
|
2.9 |
|
|
|
|
|
Cost reduction initiatives expenses(2) |
|
SG&A |
|
|
2.3 |
|
|
|
|
|
Insurance settlements |
|
SG&A |
|
|
(6.9 |
) |
|
|
(5.0 |
) |
Environmental accrual |
|
SG&A |
|
|
|
|
|
|
1.1 |
|
Chapter 11 related post-emergence expenses |
|
SG&A |
|
|
|
|
|
|
0.3 |
|
Review of strategic alternatives |
|
SG&A |
|
|
|
|
|
|
3.8 |
|
Intangible asset impairment |
|
Intangible asset impairment |
|
|
|
25.4 |
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 for more information on fresh-start reporting. |
|
(2) |
|
See Factors Affecting Operating Costs and Notes 15 and 16 for a discussion of the
cost reduction expenses. |
|
(3) |
|
In 2008 we recorded a fixed asset impairment charge related to certain Resilient
Flooring assets. |
For the fourth quarter of 2008, the cost of goods sold was 80.5% of net sales, compared to 76.8% in
2007. The 3.7 percentage point increase is primarily due to lower sales to cover fixed costs. The
change in the percentages was also impacted by the items detailed in the above table.
SG&A expenses for the fourth quarter of 2008 were $127.2 million as compared to $157.8 million for
the fourth quarter of 2007. The year-to-year change was primarily due to the factors detailed in
the above table offset by a significant decrease in unallocated corporate expense due to lower
compensation costs. In addition, most businesses reduced spending in response to lower sales
volumes.
During the fourth quarter of 2008, we recorded a non-cash impairment charge of $25.4 million to
reduce the carrying amount of our Wood Flooring trademarks to their estimated fair value based on
the results of our annual impairment test. The fair value was negatively affected by lower
expected future cash flows due to the decline in the U.S. residential housing market. See Note 12
to the Consolidated Financial Statements for more information.
54
Operating loss from continuing operations of $6.5 million in the fourth quarter of 2008 compared to
operating income of $51.1 million in the fourth quarter of 2007.
Income tax expense from continuing operations for the fourth quarter of 2008 was $14.6 million on a
pre-tax loss of $11.6 million versus $26.1 million on pre-tax income of $47.1 million in 2007. The
effective tax rate for the fourth quarter was higher than the comparable 2007 period primarily due
to additional valuation allowances on state and foreign deferred income tax assets.
55
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended. Our internal control over financial reporting was designed to
provide reasonable assurance to management and our Board of Directors regarding the reliability of
financial reporting and the fair presentation of our financial statements.
With the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our
management concluded that our internal control over financial reporting was effective as of
December 31, 2008.
KPMG LLP, an independent registered public accounting firm, audited our internal control over
financial reporting. Their audit report can be found on page 57.
|
|
|
/s/ Michael D. Lockhart
Michael D. Lockhart
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
/s/ F. Nicholas Grasberger III
F. Nicholas Grasberger III
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
/s/ Stephen F. McNamara
Stephen F. McNamara
|
|
|
Vice President and Corporate Controller |
|
|
56
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have audited Armstrong World Industries, Inc. and subsidiaries (the Company) internal control
over financial reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Armstrong World Industries, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of the Company as listed in the
accompanying index on page 52, and our report dated February 25, 2009 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 25, 2009
57
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have audited the consolidated financial statements of Armstrong World Industries, Inc. and
subsidiaries (the Company) as listed in the accompanying index on page 52. In connection with
our audits of the consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index on page 52. These consolidated financial statements
and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Armstrong World Industries, Inc. and subsidiaries as
of December 31, 2008 and 2007 for the Successor Company, and the results of their operations and
their cash flows for the years ended December 31, 2008 and 2007 and the three months ended
December 31, 2006 for the Successor Company, and for the nine months ended September 30, 2006 for
the Predecessor Company, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Notes 1 and 3 to the consolidated financial statements, on August 18, 2006, the
Bankruptcy Court confirmed the Companys Plan of Reorganization (the Plan), related to its Chapter
11 bankruptcy proceeding. The Plan became effective on October 2, 2006 and Armstrong World
Industries, Inc. emerged from the Chapter 11 bankruptcy proceeding. In connection with its
emergence from the Chapter 11 bankruptcy proceeding, the Company adopted fresh-start reporting
pursuant to Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code as of October 2, 2006. As a result, the financial statements of the Successor
Company are presented on a different basis than those of the Predecessor Company and, therefore,
are not comparable in all respects. As described in Note 3 to the consolidated financial
statements, the Company has reflected the effects of the Plan and fresh-start reporting in the
Predecessor Company for the nine month period ended September 30, 2006. As discussed in Note 2 to
the consolidated financial statements, upon adoption of fresh-start reporting, the Company adopted
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 and Statement of Financial Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No.
87, 88, 106, and 132(R).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 25, 2009 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 25, 2009
58
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
(amounts in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
Year |
|
|
Year |
|
|
Months |
|
|
|
Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
2006(1) |
|
Net sales |
|
$ |
3,393.0 |
|
|
$ |
3,549.7 |
|
|
$ |
817.3 |
|
|
|
$ |
2,608.6 |
|
Cost of goods sold |
|
|
2,632.0 |
|
|
|
2,687.5 |
|
|
|
660.9 |
|
|
|
|
2,030.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
761.0 |
|
|
|
862.2 |
|
|
|
156.4 |
|
|
|
|
578.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
579.9 |
|
|
|
611.3 |
|
|
|
143.5 |
|
|
|
|
415.5 |
|
Intangible asset impairment |
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net |
|
|
0.8 |
|
|
|
0.2 |
|
|
|
1.7 |
|
|
|
|
10.0 |
|
Equity earnings from joint ventures |
|
|
(56.0 |
) |
|
|
(46.0 |
) |
|
|
(5.3 |
) |
|
|
|
(41.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
210.9 |
|
|
|
296.7 |
|
|
|
16.5 |
|
|
|
|
194.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (unrecorded contractual interest
of $0.0, $0.0, $0.0 and $57.6, respectively) |
|
|
30.8 |
|
|
|
55.0 |
|
|
|
13.4 |
|
|
|
|
5.2 |
|
Other non-operating expense |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
|
1.0 |
|
Other non-operating (income) |
|
|
(10.6 |
) |
|
|
(18.2 |
) |
|
|
(4.3 |
) |
|
|
|
(7.2 |
) |
Chapter 11 reorganization (income), net |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
(1,955.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
189.4 |
|
|
|
259.2 |
|
|
|
7.1 |
|
|
|
|
2,150.8 |
|
Income tax expense |
|
|
109.0 |
|
|
|
106.4 |
|
|
|
3.8 |
|
|
|
|
69.6 |
|
Income tax expense on settlement and fresh-start adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
80.4 |
|
|
|
152.8 |
|
|
|
3.3 |
|
|
|
|
1,424.2 |
|
Gain (loss) from discontinued operations, net of tax of $0.4,
$0.3, $0.9 and $(8.7), respectively |
|
|
0.6 |
|
|
|
(7.5 |
) |
|
|
(1.1 |
) |
|
|
|
(68.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
81.0 |
|
|
$ |
145.3 |
|
|
$ |
2.2 |
|
|
|
$ |
1,355.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock, continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.43 |
|
|
$ |
2.73 |
|
|
$ |
0.06 |
|
|
|
|
n/a |
|
Diluted |
|
$ |
1.42 |
|
|
$ |
2.69 |
|
|
$ |
0.06 |
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) per share of common stock, discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.02 |
) |
|
|
|
n/a |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.02 |
) |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.44 |
|
|
$ |
2.59 |
|
|
$ |
0.04 |
|
|
|
|
n/a |
|
Diluted |
|
$ |
1.43 |
|
|
$ |
2.56 |
|
|
$ |
0.04 |
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
56.4 |
|
|
|
56.0 |
|
|
|
55.0 |
|
|
|
|
n/a |
|
Diluted |
|
|
56.6 |
|
|
|
56.7 |
|
|
|
55.3 |
|
|
|
|
n/a |
|
|
|
|
(1) |
|
Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to
the Consolidated Financial Statements. |
See
accompanying notes to consolidated financial statements beginning on
page 63.
59
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
(amounts in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
355.0 |
|
|
$ |
514.3 |
|
Accounts and notes receivable, net |
|
|
247.9 |
|
|
|
300.7 |
|
Inventories, net |
|
|
544.0 |
|
|
|
543.5 |
|
Deferred income taxes |
|
|
14.4 |
|
|
|
43.5 |
|
Income tax receivable |
|
|
22.0 |
|
|
|
25.3 |
|
Other current assets |
|
|
78.2 |
|
|
|
63.2 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,261.5 |
|
|
|
1,490.5 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, less accumulated depreciation
and amortization of $278.9 and $158.9, respectively |
|
|
954.2 |
|
|
|
1,012.8 |
|
|
|
|
|
|
|
|
|
|
Prepaid pension costs |
|
|
0.3 |
|
|
|
708.0 |
|
Investment in affiliates |
|
|
208.2 |
|
|
|
232.6 |
|
Intangible assets, net |
|
|
626.3 |
|
|
|
686.5 |
|
Deferred income taxes |
|
|
219.6 |
|
|
|
424.5 |
|
Other noncurrent assets |
|
|
81.7 |
|
|
|
84.5 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,351.8 |
|
|
$ |
4,639.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
1.3 |
|
|
$ |
3.9 |
|
Current installments of long-term debt |
|
|
40.9 |
|
|
|
24.7 |
|
Accounts payable and accrued expenses |
|
|
337.0 |
|
|
|
428.2 |
|
Income tax payable |
|
|
1.6 |
|
|
|
0.5 |
|
Deferred income taxes |
|
|
4.6 |
|
|
|
29.5 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
385.4 |
|
|
|
486.8 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current installments |
|
|
454.8 |
|
|
|
485.8 |
|
Postretirement and postemployment benefit liabilities |
|
|
312.8 |
|
|
|
318.6 |
|
Pension benefit liabilities |
|
|
211.4 |
|
|
|
205.5 |
|
Other long-term liabilities |
|
|
62.4 |
|
|
|
67.8 |
|
Income taxes payable |
|
|
164.7 |
|
|
|
159.4 |
|
Deferred income taxes |
|
|
9.0 |
|
|
|
471.4 |
|
Minority interest in subsidiaries |
|
|
7.0 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
|
1,222.1 |
|
|
|
1,715.4 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share, authorized 200
million shares; issued 57,049,495 shares in 2008 and
56,828,754 shares in 2007 |
|
|
0.6 |
|
|
|
0.6 |
|
Capital in excess of par value |
|
|
2,024.7 |
|
|
|
2,112.6 |
|
Retained earnings |
|
|
66.7 |
|
|
|
147.5 |
|
Accumulated other comprehensive (loss) income |
|
|
(347.7 |
) |
|
|
176.5 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,744.3 |
|
|
|
2,437.2 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
3,351.8 |
|
|
$ |
4,639.4 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements beginning on
page 63.
60
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Shareholders Equity
(amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended |
|
|
|
Nine Months Ended |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
December 31, 2006 |
|
|
|
September 30, 2006(1) |
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
0.6 |
|
|
|
|
|
|
$ |
0.6 |
|
|
|
|
|
|
$ |
0.6 |
|
|
|
|
|
|
|
$ |
51.9 |
|
|
|
|
|
Cancellation of Predecessor
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51.9 |
) |
|
|
|
|
Issuance of Successor common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
0.6 |
|
|
|
|
|
|
$ |
0.6 |
|
|
|
|
|
|
$ |
0.6 |
|
|
|
|
|
|
|
$ |
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in excess of par value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
2,112.6 |
|
|
|
|
|
|
$ |
2,099.8 |
|
|
|
|
|
|
$ |
2,097.6 |
|
|
|
|
|
|
|
$ |
172.6 |
|
|
|
|
|
Elimination of additional paid
in capital due to cancellation
of Predecessor common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172.6 |
) |
|
|
|
|
Paid in capital associated with
issuance of Successor common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,097.6 |
|
|
|
|
|
Share-based employee compensation |
|
|
7.2 |
|
|
|
|
|
|
|
12.8 |
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends in excess of retained
earnings |
|
|
(95.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,024.7 |
|
|
|
|
|
|
$ |
2,112.6 |
|
|
|
|
|
|
$ |
2,099.8 |
|
|
|
|
|
|
|
$ |
2,097.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction for ESOP loan guarantee: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
(142.2 |
) |
|
|
|
|
Cancellation of Predecessor ESOP
loan guarantee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
(accumulated deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
147.5 |
|
|
|
|
|
|
$ |
2.2 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
(910.8 |
) |
|
|
|
|
Net earnings for period |
|
|
81.0 |
|
|
$ |
81.0 |
|
|
|
145.3 |
|
|
$ |
145.3 |
|
|
|
2.2 |
|
|
$ |
2.2 |
|
|
|
|
1,355.8 |
|
|
$ |
1,355.8 |
|
Dividends |
|
|
(161.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of Predecessor
retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(445.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
66.7 |
|
|
|
|
|
|
$ |
147.5 |
|
|
|
|
|
|
$ |
2.2 |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
(loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
176.5 |
|
|
|
|
|
|
$ |
61.9 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
37.1 |
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
(42.1 |
) |
|
|
|
|
|
|
30.8 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
18.5 |
|
|
|
|
|
Derivative gain (loss), net |
|
|
1.4 |
|
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
(9.5 |
) |
|
|
|
|
Pension and postretirement
adjustments |
|
|
(483.5 |
) |
|
|
|
|
|
|
89.2 |
|
|
|
|
|
|
|
59.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss)
income |
|
|
(524.2 |
) |
|
|
(524.2 |
) |
|
|
114.6 |
|
|
|
114.6 |
|
|
|
61.9 |
|
|
|
61.9 |
|
|
|
|
8.3 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of Predecessor
accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(347.7 |
) |
|
|
|
|
|
$ |
176.5 |
|
|
|
|
|
|
$ |
61.9 |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
|
|
|
$ |
(443.2 |
) |
|
|
|
|
|
$ |
259.9 |
|
|
|
|
|
|
$ |
64.1 |
|
|
|
|
|
|
|
$ |
1,364.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less treasury stock at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
(528.5 |
) |
|
|
|
|
Elimination of Predecessor
treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
528.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
1,744.3 |
|
|
|
|
|
|
$ |
2,437.2 |
|
|
|
|
|
|
$ |
2,164.5 |
|
|
|
|
|
|
|
$ |
2,098.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to
the Consolidated Financial Statements. |
See
accompanying notes to consolidated financial statements beginning on
page 63.
61
Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006(1) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
81.0 |
|
|
$ |
145.3 |
|
|
$ |
2.2 |
|
|
|
$ |
1,355.8 |
|
Adjustments to reconcile net earnings to net cash provided by
(used by) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
149.8 |
|
|
|
137.8 |
|
|
|
32.2 |
|
|
|
|
101.2 |
|
Asset impairments |
|
|
28.3 |
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
Deferred income taxes |
|
|
74.0 |
|
|
|
79.6 |
|
|
|
1.8 |
|
|
|
|
726.2 |
|
Share-based compensation |
|
|
7.5 |
|
|
|
12.7 |
|
|
|
2.2 |
|
|
|
|
|
|
Gain on sale of assets |
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
(17.1 |
) |
Equity earnings from affiliates, net |
|
|
(56.0 |
) |
|
|
(46.0 |
) |
|
|
(5.3 |
) |
|
|
|
(41.4 |
) |
Distributions from equity affiliates |
|
|
61.0 |
|
|
|
117.5 |
|
|
|
25.0 |
|
|
|
|
18.0 |
|
U.S. pension credit |
|
|
(63.0 |
) |
|
|
(59.4 |
) |
|
|
(15.7 |
) |
|
|
|
(34.3 |
) |
Insurance proceeds environmental recovery |
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related insurance recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0 |
|
Cash effect of hedging activities |
|
|
2.6 |
|
|
|
(5.0 |
) |
|
|
(3.1 |
) |
|
|
|
(2.8 |
) |
Gain on discharge of debt and liabilities subject to compromise |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
(1,510.8 |
) |
Non-cash fresh-start adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(389.5 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
42.8 |
|
|
|
29.4 |
|
|
|
47.4 |
|
|
|
|
(66.5 |
) |
Inventories |
|
|
(16.1 |
) |
|
|
(12.7 |
) |
|
|
54.8 |
|
|
|
|
(12.7 |
) |
Other current assets |
|
|
(7.2 |
) |
|
|
(7.5 |
) |
|
|
(5.1 |
) |
|
|
|
2.0 |
|
Other noncurrent assets |
|
|
(2.6 |
) |
|
|
1.2 |
|
|
|
0.4 |
|
|
|
|
(11.0 |
) |
Accounts payable and accrued expenses |
|
|
(88.2 |
) |
|
|
0.9 |
|
|
|
(7.0 |
) |
|
|
|
20.9 |
|
Income taxes payable |
|
|
9.7 |
|
|
|
208.6 |
|
|
|
(4.6 |
) |
|
|
|
(64.7 |
) |
Other long-term liabilities |
|
|
(10.2 |
) |
|
|
(16.6 |
) |
|
|
(1.8 |
) |
|
|
|
(10.5 |
) |
Cash distributed under the POR |
|
|
(3.1 |
) |
|
|
(14.5 |
) |
|
|
(28.6 |
) |
|
|
|
(804.1 |
) |
Other, net |
|
|
(6.0 |
) |
|
|
5.8 |
|
|
|
0.3 |
|
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used by) operating activities |
|
|
214.2 |
|
|
|
575.2 |
|
|
|
95.1 |
|
|
|
|
(728.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment and computer software |
|
|
(95.0 |
) |
|
|
(102.6 |
) |
|
|
(40.3 |
) |
|
|
|
(98.2 |
) |
Divestitures (acquisitions) |
|
|
(0.8 |
) |
|
|
58.8 |
|
|
|
|
|
|
|
|
(60.5 |
) |
Return of investment from equity affiliate |
|
|
19.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of equity affiliate |
|
|
|
|
|
|
(5.2 |
) |
|
|
|
|
|
|
|
(4.3 |
) |
Loan to affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.3 |
) |
Proceeds from insurance |
|
|
|
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of assets |
|
|
0.6 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
39.1 |
|
Purchase of minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) investing activities |
|
|
(75.7 |
) |
|
|
(36.7 |
) |
|
|
(40.3 |
) |
|
|
|
(131.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in short-term debt, net |
|
|
(2.5 |
) |
|
|
|
|
|
|
2.8 |
|
|
|
|
(15.2 |
) |
Issuance of long-term debt |
|
|
5.4 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
800.0 |
|
Payments of long-term debt |
|
|
(20.9 |
) |
|
|
(309.2 |
) |
|
|
(0.2 |
) |
|
|
|
(15.5 |
) |
Payments under the POR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300.7 |
) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
(10.7 |
) |
|
|
|
|
|
Financing costs |
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special dividend paid |
|
|
(256.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities |
|
|
(277.0 |
) |
|
|
(305.4 |
) |
|
|
(8.1 |
) |
|
|
|
468.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(20.8 |
) |
|
|
17.4 |
|
|
|
1.3 |
|
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(159.3 |
) |
|
$ |
250.5 |
|
|
$ |
48.0 |
|
|
|
$ |
(386.4 |
) |
Cash and cash equivalents at beginning of period |
|
$ |
514.3 |
|
|
$ |
263.8 |
|
|
$ |
215.8 |
|
|
|
$ |
602.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
355.0 |
|
|
$ |
514.3 |
|
|
$ |
263.8 |
|
|
|
$ |
215.8 |
|
Cash and cash equivalents at end of period from discontinued operations |
|
|
|
|
|
|
|
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period from continuing operations |
|
$ |
355.0 |
|
|
$ |
514.3 |
|
|
$ |
252.5 |
|
|
|
$ |
215.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to the Consolidated Financial Statements. |
See
accompanying notes to consolidated financial statements beginning on
page 63.
62
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 1. BUSINESS AND CHAPTER 11 REORGANIZATION
Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891.
On December 6, 2000, AWI 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 AWIs asbestos-related liability. Also filing under Chapter 11
were two of AWIs wholly-owned subsidiaries, Nitram Liquidators, Inc. (Nitram) and Desseaux
Corporation of North America, Inc. (Desseaux).
On October 2, 2006, AWIs plan of reorganization (POR) became effective, and AWI emerged from
Chapter 11. The POR excludes AWIs Nitram and Desseaux subsidiaries which pursued separate
resolutions of their Chapter 11 cases (see below).
When we refer to we, our and us in this report, we are referring to AWI and its subsidiaries.
References in this report to reorganized Armstrong are to AWI as it was reorganized under the
POR on October 2, 2006, and its subsidiaries collectively. We use the term AWI when we are
referring solely to Armstrong World Industries, Inc.
Resolution of Disputed Claims
All claims in AWIs Chapter 11 case that remained open as of the end of 2007 have been resolved and
closed. In February 2008 AWI made a final distribution to general unsecured creditors of AWI under
the POR. Distributions were not made for creditors who did not provide required information to
AWI. These remaining claimants had until October 24, 2008 to provide the needed information. Some
distributions remained unclaimed and, accordingly, AWI recognized a gain of $0.7 million in the
fourth quarter of 2008, which was classified within selling, general and administrative (SG&A)
expenses. The Bankruptcy Court closed AWIs Chapter 11 case on September 2, 2008. No further
distributions will be made.
Asbestos PI Trust
On October 2, 2006, the Asbestos PI Trust was created to address AWIs 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 AWIs pre-Filing use of, or other activities involving, asbestos are channeled to
the Asbestos PI Trust. See Note 32 under Asbestos-Related Litigation for more information on the
Asbestos PI Trust.
Matters Concerning AHI
Armstrong Holdings, Inc. (AHI) was a Pennsylvania corporation and was the publicly held parent
holding company of AWI. AHIs only operation was its indirect ownership, through Armstrong
Worldwide, Inc. (AWWD, a Delaware corporation), of all of the capital stock of AWI. Upon AWIs
POR becoming effective on October 2, 2006, all then-current shares of AWI were cancelled, and AHI
was not entitled to any distribution under the POR in respect of its former equity interest in AWI.
On August 23, 2006, AHI announced that it and AWWD had pending claims in AWIs Chapter 11 case
(collectively, the AHI Claim). The AHI Claim related to intercompany charges and credits among
the companies. During 2007 AHI and AWI reached, and the Bankruptcy Court approved, a settlement on
all intercompany claim and tax matters. Under the settlement, AWI paid AHI approximately $22
million in cash and 98,697 shares of AWI common stock. The settlement gave AWI the right to make
all relevant tax elections and file all required tax returns on behalf of the Armstrong group of
companies for all relevant tax periods during which the two companies were affiliated, and to
receive and retain all related tax refunds.
A final federal income tax return for AHI and AWI on a consolidated basis was filed in September
2007. AHI and AWI reported substantial tax losses in this final joint tax return for these
companies. As
63
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
permitted by its settlement with AHI, AWI chose to carry back its losses for ten
years in the return. See Note 17 for further information.
Resolution of Nitram and Desseaux Cases
In September 2007, Nitram and Desseaux proposed a joint plan of liquidation to the Bankruptcy
Court. On December 17, 2007, the Bankruptcy Court approved the Joint Amended Plan of Liquidation
(the Joint Plan). The Joint Plan became effective December 28, 2007. Armstrong contributed $0.2
million to the estate of Nitram and Desseaux in 2007. Armstrong and its subsidiaries subordinated
their claims to those of other unsecured creditors under the Joint Plan and received no
distribution from the bankruptcy estate in this case.
Claimants alleging personal injury claims under the Joint Plan are allowed to proceed only against
the pre-existing insurance coverage assets of Nitram and will not share in any distribution of
general assets.
Deadlines under the Joint Plan for claimants to file claims based on rejected executory contracts
or unexpired leases, for administrative claims and for final fee applications passed in January
2008. An initial distribution to unsecured creditors was made in the first quarter of 2008 for the
amount of $0.1 million, and the Bankruptcy Court closed both cases on August 26, 2008. After all
the assets in the bankruptcy estate (other than insurance assets available to personal injury
claimants) were distributed, Nitram and Desseaux were dissolved. Certificates of Dissolution were
filed with the State of Delaware in December 2008.
As a result of the Joint Plan becoming effective on December 28, 2007, Armstrong recorded a $1.3
million gain from the discharge of liabilities subject to compromise in 2007. The gain was
recorded as a Chapter 11 Reorganization activity (see below).
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 was implemented in the accompanying
consolidated financial statements.
SOP 90-7 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,
we recorded the following Chapter 11 reorganization activities during 2007 and 2006. There was no
income or expense recorded in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees |
|
$ |
0.6 |
|
|
$ |
|
|
|
|
$ |
30.2 |
|
Interest (income) |
|
|
|
|
|
|
|
|
|
|
|
(15.0 |
) |
(Gain) from discharge of
liabilities subject to
compromise |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
(1,510.8 |
) |
(Gain) from fresh-start reporting |
|
|
|
|
|
|
|
|
|
|
|
(459.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Chapter 11 reorganization
(income), net |
|
$ |
(0.7 |
) |
|
$ |
|
|
|
|
$ |
(1,955.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Professional fees represent legal and financial advisory fees and expenses that were incurred
directly as a result of the Filing. 2007 charges relate to Nitram and Desseaux.
64
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Interest income represents income earned from short-term investments between the Filing date and
AWIs emergence date.
Pursuant to SOP 90-7, AWI and its subsidiaries adopted fresh-start reporting upon AWI emerging from
Chapter 11. The conditions required in order for AWI to adopt fresh-start reporting were met on
October 2, 2006. For administrative convenience, we selected September 30, 2006, following the
close of business, as the date to adopt fresh-start reporting. Consequently, the impact of
emergence, including the gain on settlement of liabilities subject to compromise and the gain on
fresh-start reporting, is reflected in the Predecessor Company for the nine months ended September
30, 2006 and the results of operations beginning October 1, 2006 are reflected within the Successor
Company. We recorded gains of $1,510.8 million and $459.9 million from discharging the liabilities
subject to compromise and adopting fresh-start reporting, respectively. See Note 3 for more
information on the impact of the implementation of the POR and fresh-start reporting.
AWI recorded $2.0 million of income for 2008 and incurred $7.1 million and $4.6 million of expenses
during the year 2007 and the three months ended December 31, 2006, respectively, for Chapter 11
related post-emergence activities. Pursuant to SOP 90-7, these expenses were reported as SG&A
expenses.
Reversal of POR-Related Contingent Liability
The POR stipulated that any money received from insurance companies post-emergence for certain
environmental matters was owed to the unsecured creditors if the money was received prior to the
final distribution being made to the general unsecured creditors. At emergence, we had a $2.1
million receivable for expected insurance recoveries. We also recorded a $2.1 million liability to
reflect the PORs requirement to pay any received money to the creditors. Since emergence and up
to the final distribution date, we had not received any environmental-related money from the
insurance companies. With the final distribution made in the first quarter of 2008, we no longer
owed any recoveries to the creditors. Accordingly, the $2.1 million liability was reversed in the
first quarter of 2008 as a reduction of SG&A expenses. See Note 32 for further discussion relating
to environmental insurance recoveries.
Review of Strategic Alternatives
On February 15, 2007, we announced that we had initiated a review of our strategic alternatives.
On February 29, 2008, we announced that we had completed the strategic review process after
extensive evaluation of alternatives, including a possible sale of our individual businesses and
the entire company. The Board of Directors concluded that it is in the best interest of Armstrong
and its shareholders to continue to execute our strategic operating plan under our current
structure as a publicly traded company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy. The consolidated financial statements and accompanying data in this
report include the accounts of AWI and its majority-owned subsidiaries. All significant
intercompany transactions have been eliminated from the consolidated financial statements.
Use of Estimates. These financial statements are prepared in accordance with U.S. generally
accepted accounting principles. The statements include management estimates and judgments, where
appropriate. Management utilizes estimates to record many items including asset values, allowances
for bad debts, inventory obsolescence and lower of cost or market charges, warranty, workers
compensation, general liability and environmental claims and income taxes. When preparing an
estimate, management determines the amount based upon the consideration of relevant information.
Management may confer with outside parties, including outside counsel. Actual results may differ
from these estimates.
65
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Reclassifications. Our policy is to record distributions from equity investments using the
equity in earnings method and report returns on investments as cash flows from operating
activities. Accordingly, Distributions from equity affiliates in the 2006 Consolidated
Statements of Cash Flows was reclassified from cash flows from investing activities to cash flows
from operating activities. The amounts reclassified were $25.0 million in the three months ended
December 31, 2006 and $18.0 million for the nine months ended September 30, 2006.
Certain amounts in the Consolidated Statements of Earnings were reclassified from selling, general
and administrative expenses to cost of goods sold. The amounts reclassified were $2.2 million in
the year ended December 31, 2007, $0.5 million in the three months ended December 31, 2006 and $1.5
million in the nine months ended September 30, 2006.
We also reclassified $10.5 million in the December 31, 2007 Consolidated Balance Sheet from
Accounts payable and accrued expenses to Accounts and notes, receivable, net. This
reclassification resulted in a reclassification of $2.3 in the 2007 Consolidated Statement of Cash
Flows from changes in accounts payable and accrued expenses to changes in receivables. Amounts
reclassified in the 2006 Consolidated Balance Sheet from Accounts payable and accrued expenses to
Accounts and notes receivable, net resulted in a reclassification of $2.2 million in the three
months ended December 31, 2006 and $0.5 million in the nine months ended September 30, 2006 in the
Consolidated Statement of Cash Flows from changes in accounts payable and accrued expenses to
changes in receivables.
Certain other amounts in the prior years Consolidated Financial Statements and related notes
thereto have been recast to conform to the 2008 presentation.
Revenue Recognition. We recognize revenue from the sale of products when persuasive
evidence of an arrangement exists, title and risk of loss transfers to the customers, prices are
fixed and determinable, and it is reasonably assured the related accounts receivable is
collectible. Our sales terms primarily are FOB shipping point. We have some sales terms that are
FOB destination. Our products are sold with normal and customary return provisions. Sales
discounts are deducted immediately from the sales invoice. Provisions, which are recorded as a
reduction of revenue, are made for the estimated cost of rebates, promotional programs and
warranties. We defer recognizing revenue if special sales agreements, established at the time of
sale, warrant this treatment.
Sales
Incentives. Sales incentives are reflected as a reduction of net sales.
Shipping and Handling Costs. Shipping and handling costs are reflected in cost of goods
sold.
Advertising Costs. We recognize advertising expenses as they are incurred.
Research and Development Costs. We recognize research and development costs as they are
incurred.
Pension and Postretirement Benefits. We have benefit plans that provide for pension,
medical and life insurance benefits to certain eligible employees when they retire from active
service. Generally, for plans that maintain plan assets, our practice is to fund the actuarially
determined current service costs and the amounts necessary to amortize prior service obligations
for the pension benefits over periods ranging up to 30 years, but not in excess of the funding
limitations.
Taxes. The provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes to reflect the expected future tax consequences of events
recognized in the financial statements. Deferred income tax assets and liabilities are recognized
by applying enacted tax
rates to temporary differences that exist as of the balance sheet date which result from
differences in the timing of reported taxable income between tax and financial reporting.
Taxes collected from customers and remitted to governmental authorities are reported on a net
basis.
66
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Earnings per Common Share. Basic earnings per share is computed by dividing the earnings by
the weighted average number of shares of common stock outstanding during the period. Diluted
earnings per common share reflects the potential dilution of securities that could share in the
earnings.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and short-term
investments that have maturities of three months or less when purchased.
Concentration of Credit. We principally sell products to customers in the building products
industries in various geographic regions. Net sales to The Home Depot, Inc. were $285.3 million in
the nine months ended September 30, 2006, which is in excess of 10% of our consolidated net sales
for that period. Net sales to The Home Depot were less than 10% of consolidated net sales in the
years 2008 and 2007 and the three months ended December 31, 2006. Net sales to The Home Depot were
recorded in our Resilient Flooring, Wood Flooring and Building Products segments. No other
customers accounted for 10% or more of our total consolidated net sales.
There are no significant concentrations of credit risk other than with The Home Depot, Inc. and
Lowes Companies, Inc. who together represented approximately 20% and 23% of our net trade
receivables as of December 31, 2008 and 2007, respectively. We monitor the creditworthiness of our
customers and generally do not require collateral.
Receivables. We sell the vast majority of our products to select, pre-approved customers
using customary trade terms that allow for payment in the future. Customer trade receivables,
customer notes receivable and miscellaneous receivables (which include supply related rebates and
claims to be received, unpaid insurance claims from litigation and other), net of allowances for
doubtful accounts, customer credits and warranties are reported in accounts and notes receivable,
net. Notes receivable from divesting certain businesses are included in other current assets and
other non-current assets based upon the payment terms.
We establish credit worthiness prior to extending credit. We estimate the recoverability of
current and non-current receivables each period. This estimate is based upon triggering events and
new information in the period, which can include the review of any available financial statements
and forecasts, as well as discussions with legal counsel and the management of the debtor company.
As events occur which impact the collectability of the receivable, all or a portion of the
receivable is reserved. Account balances are charged off against the allowance when the potential
for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to
our customers.
Inventories. Inventories are valued at the lower of cost or market. Inventories also
include certain samples used in ongoing sales and marketing activities. Cash flows from the sale
of inventory and the related cash receipts are classified as operating cash flows on the
Consolidated Statements of Cash Flows. See Note 8 for further information on our accounting for
inventories.
Property and Depreciation. Property, plant and equipment in place as of September 30, 2006
was set equal to fair value as of our emergence date and are currently stated at that value less
accumulated depreciation and amortization. Property, plant and equipment acquired after our
emergence date is stated at acquisition cost less accumulated depreciation and amortization.
Depreciation charges for financial reporting purposes are determined on a straight-line basis at
rates calculated to provide for the full depreciation of assets at the end of their useful lives.
Machinery and equipment includes manufacturing equipment (depreciated over 3 to 15 years), computer
equipment (3 to
5 years) and office furniture and equipment (5 to 7 years). Within manufacturing equipment, assets
that are subject to quick obsolescence or wear out quickly, such as tooling and engraving
equipment, are depreciated over shorter periods (3 to 7 years). Heavy production equipment, such
as conveyors and production presses, are depreciated over longer periods (15 years). Buildings are
depreciated over 15 to
67
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
30 years, depending on factors such as type of construction and use.
Certain buildings existing at our emergence date are depreciated over shorter periods. Computer
software is depreciated over 3 to 7 years.
Impairment losses are recorded when indicators of impairment are present, such as operating losses
and/or negative cash flows. If an indication of impairment exists, we compare the carrying amount
of the asset group to the estimated undiscounted future cash flows expected to be generated by the
assets. The amount of impairment loss to be recognized is then measured by comparing the asset
groups carrying amount to its fair value. The estimate of an asset groups fair value is based on
discounted future cash flows expected to be generated by the asset group, or based on managements
estimated exit price assuming the assets could be sold in an orderly transaction between willing
parties, or estimated salvage value if no sale is assumed. If the fair value is less than the
carrying value of the asset group, we record an impairment charge equal to the difference between
the fair value and carrying value of the asset group. Impairments of assets related to our
manufacturing operations are recorded in cost of goods sold. When assets are disposed of or
retired, their costs and related depreciation are removed from the financial statements and any
resulting gains or losses normally are reflected in cost of goods sold or SG&A expenses.
Plant and equipment held under capital leases are stated at the present value of the minimum lease
payments. Plant and equipment held under capital leases and leasehold improvements are amortized
on a straight line basis over the life of the lease plus any specific option periods.
Asset Retirement Obligations. We recognize the fair value of obligations associated with
the retirement of tangible long-lived assets in the period in which they are incurred. Upon
initial recognition of a liability, the discounted cost is capitalized as part of the related
long-lived asset and depreciated over the corresponding assets useful life. Over time, accretion
of the liability is recognized as an operating expense to reflect the change in the liabilitys
present value.
Intangible Assets. Effective with our emergence from Chapter 11 on October 2, 2006 and as
part of fresh-start reporting, Predecessor Company goodwill was eliminated from our balance sheet
and intangible assets were revalued. See Note 3 for further information. Intangible assets with
determinable useful lives are amortized over their respective estimated useful lives.
We periodically review significant definite-lived intangible assets for impairment under the
guidelines of the Financial Accounting Standards Board Statement No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS 144). In accordance with FAS 144, we review
our businesses for indicators of impairment such as operating losses and/or negative cash flows.
If an indication of impairment exists, we compare the carrying amount of the asset group to the
estimated undiscounted future cash flows expected to be generated by the assets. The amount of
impairment loss to be recognized is then measured by comparing the asset groups carrying amount to
its fair value. The estimate of an asset groups fair value is based on discounted future cash
flows expected to be generated by the asset group, or based on managements estimated exit price
assuming the assets could be sold in an orderly transaction between willing parties. If the fair
value is less than the carrying value of the asset group, we record an impairment charge equal to
the difference between the fair value and carrying value of the asset group.
Our indefinite-lived intangibles are primarily trademarks and brand names, which are integral to
our corporate identity and expected to contribute indefinitely to our corporate cash flows.
Accordingly, they have been assigned an indefinite life. We perform annual impairment tests on
these indefinite-lived intangibles under the guidelines of the Financial Accounting Standards Board
Statement No. 142
Goodwill and Other Intangible Assets (FAS 142). These assets undergo more frequent tests if an
indication of possible impairment exists.
68
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The principal assumptions utilized in our estimates for definite-lived intangible assets include
operating profit adjusted for depreciation and amortization and discount rate. The principal
assumptions utilized in our estimates for indefinite-lived intangible assets include revenue growth
rate, discount rate and royalty rate. Revenue growth rate and operating profit assumptions are
consistent with those utilized in our operating plan and long-term financial planning process. The
discount rate assumption is calculated based upon an estimated weighted average cost of equity
which reflects the overall level of inherent risk and the rate of return an investor would expect
to achieve. Methodologies used for valuing our intangible assets did not change from prior
periods.
See Note 12 for disclosure on intangible assets.
Foreign Currency Transactions. Assets and liabilities of our subsidiaries operating
outside the United States which account in a functional currency other than U.S. dollars are
translated using the period end exchange rate. Revenues and expenses are translated at exchange
rates effective during each month. Foreign currency translation gains or losses are included as a
component of accumulated other comprehensive income (loss) within shareholders equity. Gains or
losses on foreign currency transactions are recognized through the statement of earnings.
Financial Instruments and Derivatives. From time to time, we use derivatives and other
financial instruments to offset the effect of currency, interest rate and commodity price
variability. See Note 21 for further discussion.
Stock-based Employee Compensation. For awards with only service and performance conditions
that have a graded vesting schedule, we recognize compensation expense on a straight-line basis
over the vesting period for the entire award. See Note 25 for additional information on
stock-based employee compensation.
Recently Adopted Accounting Standards
In connection with AWIs emergence from Chapter 11 on October 2, 2006, reorganized Armstrong
adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). As a result of
the application of fresh-start reporting in 2006, changes in accounting principles that would have
been required in reorganized Armstrongs financial statements within the twelve months following
our emergence date were required to be adopted at the time fresh-start reporting was adopted.
Accordingly, effective October 2, 2006 we adopted Financial Accounting Standards Board
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes and Statement of
Financial Accounting Standards No. 158 (FAS 158), Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans. We adopted no new accounting standards in 2007. In 2008
we adopted the effective provisions of FASBs Statement No. 157 (FAS 157), Fair Value
Measurements and FASBs Emerging Issues Task Force Issue No 06-10 Accounting for Collateral
Assignment Split-Dollar Life Insurance Agreements. See Note 21 for further discussion regarding
our adoption of FAS 157.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157 Fair Value Measurements (FAS 157), which establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 was generally effective for fiscal years beginning after November
15, 2007. However the effective date for certain non-financial assets and liabilities was deferred
to fiscal years beginning after November 15, 2008. We do not expect any material impact from
adopting the remaining provisions of FAS 157.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 Revised 2007,
Business Combinations (FAS 141R). FAS 141R revises the original FAS 141, while retaining the
underlying concept that all business combinations be accounted for at fair value. However, FAS
69
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
141R changes the methodology of applying this concept in that acquisition costs will generally be
expensed as incurred, non-controlling interests will be valued at fair value, in-process research
and development will be recorded at fair value as an indefinite-lived intangible, restructuring
costs associated with a business combination will generally be expensed subsequent to the
acquisition and changes in deferred income tax asset allowances after the acquisition date
generally will affect income tax expense. This pronouncement applies prospectively to all business
combinations whose acquisition dates are on or after the beginning of the first annual period
subsequent to December 15, 2008. Additionally, under FAS 141R certain future adjustments to
deferred income tax valuation allowances and uncertain tax positions recognized upon our emergence
from bankruptcy will impact future earnings.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Non-controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (FAS
160). FAS 160 requires the recognition of a non-controlling interest (formerly known as a
minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement. It also amends certain of
ARB 51s consolidation procedures for consistency with the requirements of FAS 141R. This
pronouncement is effective for fiscal years, and all interim periods within those fiscal years,
beginning after December 15, 2008. Early adoption is not permitted. We do not expect any material
impact from adopting FAS 160.
In November 2008 the FASB issued Emerging Issues Task Force No. 08-6 (EITF 08-6), Equity Method
Investment Accounting Considerations. EITF 08-6 discusses the accounting for contingent
consideration agreements of an equity method investment and the requirement for the investor to
recognize its share of any impairment charges recorded by the investee. EITF 08-6 requires the
investor to record share issuances by the investee as if it has sold a portion of its investment
with any resulting gain or loss being reflected in earnings. EITF 08-6 is effective prospectively
for interim periods and fiscal years beginning after December 15, 2008. We do not expect a
material impact from the adoption of EITF 08-6.
NOTE 3. PLAN OF REORGANIZATION AND FRESH-START REPORTING
In connection with its emergence from bankruptcy on October 2, 2006 (the Effective Date), AWI
adopted fresh-start reporting in accordance with SOP 90-7. For administrative convenience, we
selected September 30, 2006, following the close of business, as the date to adopt fresh-start
reporting. Consequently, the impact of emergence, including the gain on settlement of liabilities
subject to compromise and the gain on fresh-start reporting, is reflected in the Predecessor
Company for the nine months ended September 30, 2006 and the results of operations beginning
October 1, 2006 are reflected within the Successor Company. Adopting fresh-start reporting
resulted in material adjustments to the historical carrying amount of reorganized Armstrongs
assets and liabilities. In addition, all accounting standards that were required to be adopted in
the financial statements within twelve months following the adoption of fresh-start reporting were
adopted as of October 2, 2006. As a result, our post emergence financial statements are not
comparable with our pre-emergence financial statements.
In applying fresh-start reporting as of the Effective Date, the reorganization value of reorganized
Armstrong was determined to be $2.94 billion. The approach used to determine reorganized
Armstrongs reorganization value, as defined in SOP 90-7, was primarily based on a discounted cash
flow approach, while also using a comparable company guideline method as a test for reasonableness
of the derived value. These analyses are necessarily based on a variety of estimates and
assumptions which, though considered reasonable by management, may not be realized and are
inherently subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond AWIs control.
Fresh-start reporting required us to allocate this reorganization value to our assets and
liabilities based upon their estimated fair values in accordance with procedures specified by
Statement of Financial
Accounting Standards No. 141, Business Combinations (FAS 141). Adjustments necessary to state
our balance sheet accounts at fair value were made such that the newly assigned fair values of our
assets and liabilities fully reflected the emerged entitys reorganization value. No goodwill was
assigned
70
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
at emergence. In accordance with FAS 141, we completed our final allocation of
reorganization value upon finalization of our analysis of net operating loss carryback
alternatives.
In this regard, the initial tax balances for the October 2, 2006 fresh-start balance sheet were
calculated assuming that we would elect to carry back our net operating loss (NOL) two years when
filing the 2006 tax returns. During 2007, we continued to evaluate carry back alternatives prior
to filing our federal income tax returns in September 2007. Upon completion of this analysis, we
decided to file a ten-year carryback. See Note 17 for more information. Since the realizable book
value of the NOL based upon a ten-year carryback was different from the calculation based upon a
two-year carryback, adjustments to the fresh-start balance sheet were recorded in the third and
fourth quarters of 2007 to reflect the ten-year value, as well as for other tax related
adjustments.
Collectively, the adjustments described above were re-allocated to other assets and liabilities in
2007 as follows:
|
|
|
|
|
Deferred income tax asset current |
|
$ |
6.8 |
|
Property, plant & equipment |
|
|
54.3 |
|
Income tax receivable |
|
|
7.7 |
|
Investment in affiliates |
|
|
12.6 |
|
Other intangibles |
|
|
28.6 |
|
Deferred income tax asset- non current |
|
|
(89.3 |
) |
|
|
|
|
Total assets |
|
$ |
20.7 |
|
|
|
|
|
Accrued expenses |
|
$ |
(0.6 |
) |
Income tax payable current |
|
|
1.6 |
|
Deferred income tax liability non current |
|
|
(21.7 |
) |
|
|
|
|
Total liabilities |
|
$ |
(20.7 |
) |
|
|
|
|
NOTE 4. NATURE OF OPERATIONS
Resilient Flooring produces and sources a broad range of floor coverings primarily for homes and
commercial and institutional buildings. Manufactured products in this segment include vinyl sheet,
vinyl tile and linoleum flooring. In addition, our Resilient Flooring segment sources and sells
laminate flooring products, ceramic tile products, adhesives, installation and maintenance
materials and accessories. Resilient Flooring products are offered in a wide variety of types,
designs and colors. We sell these products worldwide to wholesalers, large home centers,
retailers, contractors and to the manufactured homes industry.
Wood Flooring produces and sources wood flooring products for use in new residential construction
and renovation, with some commercial applications in stores, restaurants and high-end offices. The
product offering includes pre-finished solid and engineered wood floors in various wood species,
and related accessories. Virtually all of our Wood Flooring sales are in North America. Our Wood
Flooring products are generally sold to independent wholesale flooring distributors and large home
centers. Our products are principally sold under the brand names Bruce®, Hartco®, Robbins®,
Timberland®, Armstrong®, HomerWood® and Capella®.
Building Products produces suspended mineral fiber, soft fiber and metal ceiling systems for use
in commercial, institutional and residential settings. In addition, our Building Products segment
sources complementary ceiling products. Our products, which are sold worldwide, are available in
numerous colors, performance characteristics and designs, and offer attributes such as acoustical
control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories
are sold to ceiling systems contractors and to resale distributors. Residential ceiling products
are sold primarily in North
America to wholesalers and retailers (including large home centers). Suspension system (grid)
products manufactured by WAVE are sold by both Armstrong and our WAVE joint venture.
71
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Cabinets produces kitchen and bathroom cabinetry and related products, which are used primarily
in the U.S. residential new construction and renovation markets. Through our system of
Company-owned and independent distribution centers and through direct sales to builders, our
Cabinets segment provides design, fabrication and installation services to single and multi-family
homebuilders, remodelers and consumers under the brand names Armstrong® and Bruce®. All of
Cabinets sales are in the U.S.
Unallocated Corporate includes assets, liabilities, income and expenses that have not been
allocated to the business units. Balance sheet items classified as Unallocated Corporate are
primarily deferred income tax assets, cash and cash equivalents, the Armstrong brand name and the
U.S. prepaid pension cost/liability. Expenses for our corporate departments and certain benefit
plans are allocated to the reportable segments based on known metrics, such as time reporting,
headcount, square-footage or net sales. The remaining items, which cannot be attributed to the
reportable segments without a high degree of generalization, are reported in Unallocated Corporate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
Resilient |
|
|
Wood |
|
|
Building |
|
|
|
|
|
|
Unallocated |
|
|
|
|
For the year ended 2008 |
|
Flooring |
|
|
Flooring |
|
|
Products |
|
|
Cabinets |
|
|
Corporate |
|
|
Total |
|
Net sales to external customers |
|
$ |
1,220.1 |
|
|
$ |
624.6 |
|
|
$ |
1,369.1 |
|
|
$ |
179.2 |
|
|
|
|
|
|
$ |
3,393.0 |
|
Equity (earnings) from joint ventures |
|
|
|
|
|
|
|
|
|
|
(56.0 |
) |
|
|
|
|
|
|
|
|
|
|
(56.0 |
) |
Segment operating (loss) income(1) |
|
|
(16.8 |
) |
|
|
(2.4 |
) |
|
|
239.7 |
|
|
|
(6.7 |
) |
|
|
(2.9 |
) |
|
|
210.9 |
|
Restructuring charges, net of reversals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
0.8 |
|
Segment assets |
|
|
670.2 |
|
|
|
470.9 |
|
|
|
1,049.6 |
|
|
|
71.2 |
|
|
|
1,089.9 |
|
|
|
3,351.8 |
|
Depreciation and amortization |
|
|
49.8 |
|
|
|
12.6 |
|
|
|
64.8 |
|
|
|
2.4 |
|
|
|
20.2 |
|
|
|
149.8 |
|
Asset impairments |
|
|
2.9 |
|
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.3 |
|
Investment in affiliates |
|
|
0.1 |
|
|
|
|
|
|
|
208.1 |
|
|
|
|
|
|
|
|
|
|
|
208.2 |
|
Capital additions |
|
|
26.4 |
|
|
|
11.8 |
|
|
|
41.1 |
|
|
|
3.7 |
|
|
|
12.0 |
|
|
|
95.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
Resilient |
|
|
Wood |
|
|
Building |
|
|
|
|
|
|
Unallocated |
|
|
|
|
For the year ended 2007 |
|
Flooring |
|
|
Flooring |
|
|
Products |
|
|
Cabinets |
|
|
Corporate |
|
|
Total |
|
Net sales to external customers |
|
$ |
1,230.8 |
|
|
$ |
791.6 |
|
|
$ |
1,292.1 |
|
|
$ |
235.2 |
|
|
|
|
|
|
$ |
3,549.7 |
|
Equity loss (earnings) from joint ventures |
|
|
|
|
|
|
0.6 |
|
|
|
(46.6 |
) |
|
|
|
|
|
|
|
|
|
|
(46.0 |
) |
Segment operating income (loss)(1) |
|
|
40.4 |
|
|
|
64.3 |
|
|
|
221.4 |
|
|
|
10.5 |
|
|
|
(39.9 |
) |
|
|
296.7 |
|
Restructuring charges, net of reversals |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Segment assets |
|
|
734.8 |
|
|
|
509.7 |
|
|
|
1,129.2 |
|
|
|
82.5 |
|
|
|
2,183.2 |
|
|
|
4,639.4 |
|
Depreciation and amortization |
|
|
44.0 |
|
|
|
10.9 |
|
|
|
59.3 |
|
|
|
2.6 |
|
|
|
21.0 |
|
|
|
137.8 |
|
Investment in affiliates |
|
|
0.1 |
|
|
|
|
|
|
|
232.5 |
|
|
|
|
|
|
|
|
|
|
|
232.6 |
|
Capital additions |
|
|
29.9 |
|
|
|
17.8 |
|
|
|
37.7 |
|
|
|
4.4 |
|
|
|
11.8 |
|
|
|
101.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
Resilient |
|
|
Wood |
|
|
Building |
|
|
|
|
|
|
Unallocated |
|
|
|
|
December 31, 2006 |
|
Flooring |
|
|
Flooring |
|
|
Products |
|
|
Cabinets |
|
|
Corporate |
|
|
Total |
|
Net sales to external customers |
|
$ |
278.5 |
|
|
$ |
192.6 |
|
|
$ |
289.7 |
|
|
$ |
56.5 |
|
|
|
|
|
|
$ |
817.3 |
|
Equity loss (earnings) from joint ventures |
|
|
|
|
|
|
0.2 |
|
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
(5.3 |
) |
Segment operating income (loss)(1) |
|
|
(1.2 |
) |
|
|
(0.2 |
) |
|
|
24.9 |
|
|
|
0.2 |
|
|
|
(7.2 |
) |
|
|
16.5 |
|
Restructuring charges, net of reversals |
|
|
0.3 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
Segment assets |
|
|
690.1 |
|
|
|
498.9 |
|
|
|
1,152.6 |
|
|
|
81.8 |
|
|
|
1,729.3 |
|
|
|
4,152.7 |
|
Depreciation and amortization |
|
|
10.5 |
|
|
|
2.3 |
|
|
|
13.9 |
|
|
|
0.7 |
|
|
|
4.8 |
|
|
|
32.2 |
|
Investment in affiliates |
|
|
|
|
|
|
4.0 |
|
|
|
290.6 |
|
|
|
|
|
|
|
|
|
|
|
294.6 |
|
Capital additions |
|
|
10.3 |
|
|
|
10.2 |
|
|
|
12.1 |
|
|
|
1.5 |
|
|
|
4.1 |
|
|
|
38.2 |
|
72
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
Resilient |
|
|
Wood |
|
|
Building |
|
|
|
|
|
|
Unallocated |
|
|
|
|
September 30, 2006 |
|
Flooring |
|
|
Flooring |
|
|
Products |
|
|
Cabinets |
|
|
Corporate |
|
|
Total |
|
Net sales to external customers |
|
$ |
929.4 |
|
|
$ |
645.0 |
|
|
$ |
859.8 |
|
|
$ |
174.4 |
|
|
|
|
|
|
$ |
2,608.6 |
|
Equity loss (earnings) from joint ventures |
|
|
|
|
|
|
0.1 |
|
|
|
(41.5 |
) |
|
|
|
|
|
|
|
|
|
|
(41.4 |
) |
Segment operating income (loss)(1) |
|
|
12.6 |
|
|
|
46.2 |
|
|
|
152.9 |
|
|
|
6.1 |
|
|
|
(23.5 |
) |
|
|
194.3 |
|
Restructuring charges, net of reversals |
|
|
9.6 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
10.0 |
|
Depreciation and amortization |
|
|
35.2 |
|
|
|
15.0 |
|
|
|
27.7 |
|
|
|
2.1 |
|
|
|
17.8 |
|
|
|
97.8 |
|
Asset impairment |
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
Capital additions |
|
|
20.8 |
|
|
|
23.9 |
|
|
|
34.1 |
|
|
|
3.8 |
|
|
|
10.0 |
|
|
|
92.6 |
|
The table above excludes amounts related to discontinued operations.
|
|
|
(1) |
|
Segment operating income (loss) is the measure of segment profit or loss reviewed by
the chief operating decision maker. The sum of the segments operating income (loss) equals the
total consolidated operating income as reported on our income statement. The following reconciles
our total consolidated operating income to earnings from continuing operations before income taxes.
These items are only measured and managed on a consolidated basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006(1) |
|
Segment operating income |
|
$ |
210.9 |
|
|
$ |
296.7 |
|
|
$ |
16.5 |
|
|
|
$ |
194.3 |
|
Interest expense |
|
|
30.8 |
|
|
|
55.0 |
|
|
|
13.4 |
|
|
|
|
5.2 |
|
Other non-operating expense |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
|
1.0 |
|
Other non-operating (income) |
|
|
(10.6 |
) |
|
|
(18.2 |
) |
|
|
(4.3 |
) |
|
|
|
(7.2 |
) |
Chapter 11 reorganization (income), net |
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
(1,955.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
$ |
189.4 |
|
|
$ |
259.2 |
|
|
$ |
7.1 |
|
|
|
$ |
2,150.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the effects of the Plan of Reorganization and fresh-start reporting. See Note 3 to
the Consolidated Financial Statements. |
Accounting policies of the segments are the same as those described in the summary of significant
accounting policies.
73
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The sales in the table below are allocated to geographic areas based upon the location of the
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
Geographic Areas |
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Net trade sales |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2,177.4 |
|
|
$ |
2,409.7 |
|
|
$ |
560.7 |
|
|
|
$ |
1,825.2 |
|
Canada |
|
|
166.0 |
|
|
|
167.1 |
|
|
|
36.7 |
|
|
|
|
157.6 |
|
Other Americas |
|
|
43.4 |
|
|
|
38.5 |
|
|
|
8.8 |
|
|
|
|
25.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas |
|
$ |
2,386.8 |
|
|
$ |
2,615.3 |
|
|
$ |
606.2 |
|
|
|
$ |
2,008.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
$ |
185.7 |
|
|
$ |
164.6 |
|
|
$ |
41.0 |
|
|
|
$ |
115.6 |
|
United Kingdom |
|
|
134.7 |
|
|
|
140.4 |
|
|
|
31.6 |
|
|
|
|
94.6 |
|
Other Europe |
|
|
464.1 |
|
|
|
422.2 |
|
|
|
91.2 |
|
|
|
|
270.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Europe |
|
$ |
784.5 |
|
|
$ |
727.2 |
|
|
$ |
163.8 |
|
|
|
$ |
480.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pacific Rim |
|
$ |
221.7 |
|
|
$ |
207.2 |
|
|
$ |
47.3 |
|
|
|
$ |
119.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net trade sales |
|
$ |
3,393.0 |
|
|
$ |
3,549.7 |
|
|
$ |
817.3 |
|
|
|
$ |
2,608.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets (property, plant and equipment), net |
|
Successor Company |
|
at December 31 |
|
2008 |
|
|
2007 |
|
Americas: |
|
|
|
|
|
|
|
|
United States |
|
$ |
709.9 |
|
|
$ |
747.0 |
|
Other Americas |
|
|
14.7 |
|
|
|
21.2 |
|
|
|
|
|
|
|
|
Total Americas |
|
$ |
724.6 |
|
|
$ |
768.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe: |
|
|
|
|
|
|
|
|
Germany |
|
$ |
112.0 |
|
|
$ |
108.7 |
|
Other Europe |
|
|
68.6 |
|
|
|
85.0 |
|
|
|
|
|
|
|
|
Total Europe |
|
$ |
180.6 |
|
|
$ |
193.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pacific Rim |
|
$ |
49.0 |
|
|
$ |
50.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets, net |
|
$ |
954.2 |
|
|
$ |
1,012.8 |
|
|
|
|
|
|
|
|
NOTE 5. ACQUISITIONS
On April 3, 2006 we purchased certain assets and assumed certain liabilities of HomerWood, Inc., a
hardwood flooring company. On May 1, 2006 we purchased certain assets and assumed certain
liabilities of Capella Engineered Wood, LLC, a hardwood flooring company, and of its parent
company, Capella, Inc. The combined purchase price of these acquisitions was $61.5 million. Both
acquisitions were financed from existing cash balances. Both investments expanded Armstrongs wood
flooring product offerings. The acquisitions were accounted for under the purchase method of
accounting in the second quarter of 2006.
74
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
On August 20, 2007 we purchased the remaining 50% interest in Kunshan Holding Limited for $5.2
million, at which time it became a wholly-owned subsidiary. The acquisition was accounted for
under the purchase method of accounting during the third quarter of 2007.
On February 18, 2008 we acquired the assets of Bowmans Australia Pty Ltd. to complement our
Australian Building Products business for total consideration of $0.8 million.
The allocation of the purchase price to the fair value of tangible and identifiable intangible
assets acquired in each of these acquisitions has been completed.
NOTE 6. DISCONTINUED OPERATIONS
On May 31, 2000 Armstrong completed its sale of all entities, assets and certain liabilities
comprising its Insulation Products segment. During the fourth quarter of 2006, we recorded a net
gain of $1.7 million due to the settlement of various legal disputes. During the first quarter of
2008, we recorded a gain of $1.0 million ($0.6 million net of income tax) arising from the
settlement of a legal dispute. In accordance with Financial Accounting Standards Board (FASB)
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144),
these adjustments were classified as discontinued operations since the original divestiture was
reported as discontinued operations.
On March 27, 2007 we entered into an agreement to sell Tapijtfabriek H. Desseaux N.V. and its
subsidiaries the principal operating companies in our European Textile and Sports Flooring
business. These companies were first classified as discontinued operations at October 2, 2006 when
they met the criteria of FAS 144. The sale transaction was completed in April 2007 and total
proceeds of $58.8 million were received during 2007. Certain post completion adjustments specified
in the agreement were disputed by the parties after the sale. The matter was referred to an
independent expert for a final and binding determination. On December 30, 2008 a final decision
was reached with all disputed items awarded in our favor. The disputed amount was recorded as a
receivable since April 2007 with the interest receivable recorded in December 2008 (included as part
of Other current assets). Full payment of $8.0 million was received in January 2009.
During
2008 we incurred post completion expenses which were offset by the
interest income recorded
in the fourth quarter of 2008.
Prior period results within the Consolidated Statement of Earnings have been recast to reflect the
results of discontinued operations. The segment results in Note 4 exclude the amounts related to
discontinued operations. The Consolidated Statements of Cash Flows do not separately report the
cash flows of the discontinued operations, as these cash flows were not material to any cash flow
category.
75
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Net sales, pre-tax loss and net loss from discontinued operations of Tapijtfabriek H. Desseaux N.V.
and its subsidiaries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
September 30, |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
|
2006 |
|
|
2006(1) |
|
Net sales |
|
$ |
|
|
|
$ |
59.8 |
|
|
|
$ |
66.7 |
|
|
$ |
187.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued operations |
|
$ |
|
|
|
$ |
(1.4 |
) |
|
|
$ |
(2.8 |
) |
|
$ |
(6.7 |
) |
Fresh-start reporting adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70.4 |
) |
(Loss) gain on expected disposal of
discontinued operations |
|
|
|
|
|
|
(5.8 |
) |
|
|
|
2.6 |
|
|
|
|
|
Income tax (expense) benefit |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
(0.9 |
) |
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) from discontinued operations |
|
$ |
|
|
|
$ |
(7.5 |
) |
|
|
$ |
(1.1 |
) |
|
$ |
(68.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the effects of fresh-start reporting. |
NOTE 7. ACCOUNTS AND NOTES RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Customer receivables |
|
$ |
287.1 |
|
|
$ |
342.2 |
|
Customer notes |
|
|
6.7 |
|
|
|
7.6 |
|
Miscellaneous receivables |
|
|
8.6 |
|
|
|
14.6 |
|
Less allowance for discounts and losses |
|
|
(54.5 |
) |
|
|
(63.7 |
) |
|
|
|
|
|
|
|
Net accounts and notes receivable |
|
$ |
247.9 |
|
|
$ |
300.7 |
|
|
|
|
|
|
|
|
The decrease in accounts and notes receivable is primarily due to lower sales in November and
December 2008 as compared to the comparable periods of 2007.
Generally, we sell our products to select, pre-approved customers whose businesses are affected by
changes in economic and market conditions. We consider these factors and the financial condition
of each customer when establishing our allowance for losses from doubtful accounts.
76
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 8. INVENTORIES
Following are the components of our inventories:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Finished goods |
|
$ |
371.2 |
|
|
$ |
355.7 |
|
Goods in process |
|
|
39.6 |
|
|
|
39.7 |
|
Raw materials and supplies |
|
|
152.7 |
|
|
|
160.7 |
|
Less LIFO and other reserves |
|
|
(19.5 |
) |
|
|
(12.6 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
544.0 |
|
|
$ |
543.5 |
|
|
|
|
|
|
|
|
Approximately 63% and 65% of our total inventory in 2008 and 2007, respectively, was valued on a
LIFO (last-in, first-out) basis. Inventory values were lower than would have been reported on a
total FIFO (first-in, first-out) basis by $8.9 million and $2.4 million at the end of 2008 and
2007, respectively.
The distinction between the use of different methods of inventory valuation is primarily based on
geographical locations and/or legal entities rather than types of inventory. The following table
summarizes the amount of inventory that is not accounted for under the LIFO method.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
International locations |
|
$ |
171.3 |
|
|
$ |
158.8 |
|
Cabinets |
|
|
22.3 |
|
|
|
27.3 |
|
Wood flooring |
|
|
1.3 |
|
|
|
1.0 |
|
Resilient flooring |
|
|
1.0 |
|
|
|
1.1 |
|
U.S. sourced products |
|
|
3.4 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
199.3 |
|
|
$ |
190.7 |
|
|
|
|
|
|
|
|
Substantially all of our international locations use the FIFO method of inventory valuation (or
other methods which closely approximate the FIFO method) primarily because either the LIFO method
is not permitted for local tax and/or statutory reporting purposes, or the entities were part of
various acquisitions that had adopted the FIFO method prior to our acquisition. In these
situations, a conversion to LIFO would be highly complex and involve excessive cost and effort to
achieve under local tax and/or statutory reporting requirements.
The sourced products represent certain finished goods sourced from third party manufacturers,
primarily from foreign suppliers.
NOTE 9. OTHER CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Prepaid expenses |
|
$ |
34.5 |
|
|
$ |
36.4 |
|
Fair value of derivative asset |
|
|
11.7 |
|
|
|
0.8 |
|
Receivable related to discontinued operations |
|
|
8.0 |
|
|
|
7.8 |
|
Assets held for sale |
|
|
7.8 |
|
|
|
7.9 |
|
Other |
|
|
16.2 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
78.2 |
|
|
$ |
63.2 |
|
|
|
|
|
|
|
|
77
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 10. PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Land |
|
$ |
129.0 |
|
|
$ |
131.7 |
|
Buildings |
|
|
296.5 |
|
|
|
287.6 |
|
Machinery and equipment |
|
|
722.8 |
|
|
|
664.6 |
|
Computer software |
|
|
36.2 |
|
|
|
36.2 |
|
Construction in progress |
|
|
48.6 |
|
|
|
51.6 |
|
Less accumulated depreciation and amortization |
|
|
(278.9 |
) |
|
|
(158.9 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
$ |
954.2 |
|
|
$ |
1,012.8 |
|
|
|
|
|
|
|
|
Pursuant to SOP 90-7 upon adopting fresh-start reporting in 2006 we recorded a $242.6 million
reduction to reflect the fair value of our net property, plant and equipment. In the third and
fourth quarters of 2007, we recorded additional adjustments to increase the estimated fair value of
net property, plant and equipment on our October 2, 2006 fresh-start balance sheet by $54.3 million
($48.8 million to machinery and equipment and $5.5 million to land). See Note 3 for further
information.
See Note 2 for discussion of policies related to property and depreciation and asset retirement
obligations.
NOTE 11. EQUITY INVESTMENTS
Investments in affiliates of $208.2 million at December 31, 2008 reflected the equity interest in
our 50% investment in our WAVE joint venture.
On August 20, 2007 we purchased the remaining 50% interest in Kunshan Holding Limited (Kunshan)
for $5.2 million, at which time it became a wholly-owned subsidiary. Our equity investment in
Kunshan at December 31, 2006 of $4.0 million along with our additional investments was reclassified
as part of the purchase accounting for the subsidiary.
The decrease in the investment balance from December 31, 2007 of $24.4 million is due to
distributions from WAVE of $80.5 million (including a special distribution of $25.0 million in
December 2008), partially offset by our equity interest in WAVEs earnings. We use the equity in
earnings method to determine the appropriate classification of these distributions within our
Consolidated Statements of Cash Flows. During 2008 WAVE distributed amounts in excess of our
capital contributions and proportionate share of retained earnings. Accordingly, $19.5 million of
the distributions were reflected as a return of investment in cash flows from investing activity in
our Consolidated Statement of Cash Flows. The remaining $61.0 million was recorded within cash
flows from operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
|
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Affiliate |
|
Income Statement Classification |
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
WAVE |
|
Equity earnings from joint venture |
|
|
$ |
56.0 |
|
|
$ |
46.6 |
|
|
$ |
5.5 |
|
|
|
$ |
41.5 |
|
Kunshan |
|
Equity loss from joint venture |
|
|
|
|
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
|
(0.1 |
) |
78
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
We account for our WAVE joint venture using the equity method of accounting. Our recorded
investment in WAVE was higher than our 50% share of the carrying values reported in WAVEs
consolidated financial statements by $213.0 million as of December 31, 2008 and $219.7 million as
of December 31, 2007. These differences are due to our adopting fresh-start reporting upon
emerging from Chapter 11, while WAVEs consolidated financial statements do not reflect fresh-start
reporting. The differences are comprised of the following fair value adjustments to assets:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Property, plant and equipment |
|
$ |
2.8 |
|
|
$ |
3.9 |
|
Other intangibles |
|
|
179.7 |
|
|
|
185.3 |
|
Goodwill |
|
|
30.5 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
Total |
|
$ |
213.0 |
|
|
$ |
219.7 |
|
|
|
|
|
|
|
|
Other intangibles include customer relationships, trademarks and developed technology. Customer
relationships are amortized over 20 years and developed technology is amortized over 15 years.
Trademarks have an indefinite life.
See Exhibit 99 for WAVEs consolidated financial statements. Condensed financial data for WAVE is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Current assets |
|
$ |
132.5 |
|
|
$ |
131.0 |
|
Non-current assets |
|
|
32.8 |
|
|
|
30.9 |
|
Current liabilities |
|
|
21.6 |
|
|
|
28.9 |
|
Other non-current liabilities |
|
|
156.8 |
|
|
|
104.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
2006 |
|
Net sales |
|
$ |
421.8 |
|
|
$ |
380.0 |
|
|
$ |
88.6 |
|
|
$ |
260.2 |
|
Gross profit |
|
|
160.2 |
|
|
|
134.9 |
|
|
|
21.3 |
|
|
|
102.8 |
|
Net earnings |
|
|
125.4 |
|
|
|
107.0 |
|
|
|
21.9 |
|
|
|
83.0 |
|
See discussion in Note 31 for additional information on this related party.
NOTE 12. INTANGIBLE ASSETS
Pursuant to SOP 90-7 we recorded the estimated fair value of intangibles, not including goodwill,
of $673.6 million upon adopting fresh-start reporting. In the third and fourth quarters of 2007,
we recorded additional adjustments to increase the estimated fair value of intangibles, not
including goodwill, by $28.6 million ($16.6 million to trademarks, $8.2 million to customer
relationships and $3.8 million to developed technology). See Note 3 for a discussion of these
adjustments.
During the fourth quarter of 2008, we completed our annual impairment analysis as required by
Financial Accounting Standards Board Statement No. 142 Goodwill and Other Intangible Assets
(FAS 142). We determined that the carrying value of our Wood Flooring trademarks was in excess
of their fair value, due to lower sales caused by the decline in the U.S. residential housing
market. We determined the fair value of these intangible assets by utilizing a discounted cash
flow analysis that incorporated projections of revenue and cash flows. Based on the result of the
analysis, we recorded a non-cash impairment
charge of $25.4 million in the fourth quarter of 2008. See Note 2 for a discussion of our
accounting policy for intangible assets.
79
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Further adjustments were made to the carrying value of intangibles during the fourth quarter of
2008. These adjustments were primarily tax-related.
The following table details amounts related to our intangible assets as of December 31, 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Estimated |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Useful Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Amortizing intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
20 years |
|
$ |
171.4 |
|
|
$ |
19.2 |
|
|
$ |
173.3 |
|
|
$ |
10.5 |
|
Developed technology |
|
15 years |
|
|
81.0 |
|
|
|
12.0 |
|
|
|
81.7 |
|
|
|
6.6 |
|
Other |
|
Various |
|
|
9.5 |
|
|
|
0.3 |
|
|
|
12.4 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
261.9 |
|
|
$ |
31.5 |
|
|
$ |
267.4 |
|
|
$ |
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizing intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names |
|
Indefinite |
|
|
395.9 |
|
|
|
|
|
|
|
437.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
|
|
|
|
$ |
657.8 |
|
|
|
|
|
|
$ |
704.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Amortization
Expense and Impairment
Charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 |
|
|
|
|
|
$ |
39.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset impairment |
|
|
|
|
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007 |
|
|
|
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The annual amortization expense expected for the years 2009 through 2013 is as follows:
|
|
|
|
|
2009 |
|
$ |
14.1 |
|
2010 |
|
|
14.1 |
|
2011 |
|
|
14.1 |
|
2012 |
|
|
14.1 |
|
2013 |
|
|
14.1 |
|
80
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 13. OTHER NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash surrender value of Company owned life insurance policies |
|
$ |
53.5 |
|
|
$ |
52.9 |
|
Other |
|
|
28.2 |
|
|
|
31.6 |
|
|
|
|
|
|
|
|
Total other non-current assets |
|
$ |
81.7 |
|
|
$ |
84.5 |
|
|
|
|
|
|
|
|
NOTE 14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Payables, trade and other |
|
$ |
179.3 |
|
|
$ |
231.2 |
|
Employment costs |
|
|
107.1 |
|
|
|
130.7 |
|
Other |
|
|
50.6 |
|
|
|
66.3 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
337.0 |
|
|
$ |
428.2 |
|
|
|
|
|
|
|
|
The decrease in accounts payable and accrued expenses is primarily due to a reduction in trade
payables due to lower activity and lower accruals for employee incentive compensation.
NOTE 15. SEVERANCES AND RELATED COSTS
In 2008 we recorded $7.4 million of severance and related expenses to reflect the termination costs
for certain corporate employees. We also recorded a reduction of our stock compensation expense of
$1.5 million in the first quarter of 2008 related to stock grants that were forfeited by these
employees. These costs were recorded as SG&A expenses.
During 2008 we recorded $14.1 million of severance and other related charges primarily related to
organizational and manufacturing changes for our European resilient flooring business. The
organizational changes are due to the decision to consolidate and outsource several SG&A functions.
The manufacturing changes related primarily to the decision to cease production of automotive
carpeting and other specialized textile flooring products. These charges were recorded as part of
cost of goods sold ($7.3 million) and SG&A expenses ($6.8 million). None of the severance payments
were made as of December 31, 2008.
81
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 16. RESTRUCTURING AND OTHER ACTIONS
Net restructuring charges of $0.8 million, $0.2 million, $1.7 million and $10.0 million were
recorded in the year 2008, the year 2007, the three months ended December 31, 2006 and the nine
months ended September 30, 2006, respectively. The following table summarizes these charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
Predecessor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
Employees |
|
|
|
|
Action Title |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
|
Impacted |
|
|
Segment |
|
Lancaster Plant |
|
|
|
|
|
|
|
|
|
$ |
0.5 |
|
|
|
$ |
9.6 |
|
|
|
450 |
|
|
Resilient Flooring |
|
Other initiatives |
|
$ |
0.8 |
|
|
$ |
0.2 |
|
|
|
1.2 |
|
|
|
|
0.4 |
|
|
|
|
|
|
Various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.8 |
|
|
$ |
0.2 |
|
|
$ |
1.7 |
|
|
|
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lancaster Plant: These charges related to the fourth quarter 2004 decision to cease
commercial flooring production at Lancaster, Pennsylvania in 2006. We made this decision because
of changes in the level and structure of demand for vinyl flooring products, we had excess capacity
in other plants and Lancaster was our highest cost plant. Commercial flooring production
requirements are being serviced in part by our other facilities around the world. We recorded no
costs in 2008 or 2007 related to this initiative, but recorded the following costs in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
Company |
|
|
|
Company |
|
|
|
Three |
|
|
|
Nine |
|
|
|
Months |
|
|
|
Months |
|
|
|
Ended |
|
|
|
Ended |
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
2006 |
|
|
|
2006 |
|
Non-cash restructuring charges for
enhanced retirement benefits |
|
$ |
0.5 |
|
|
|
$ |
8.5 |
|
Severance and related costs |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
Total restructuring charges |
|
$ |
0.5 |
|
|
|
$ |
9.6 |
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation |
|
|
|
|
|
|
$ |
0.3 |
|
Other related costs |
|
$ |
0.5 |
|
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
$ |
0.5 |
|
|
|
$ |
9.6 |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of warehouse |
|
|
|
|
|
|
$ |
(14.3 |
) |
Other related costs |
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
Total SG&A expenses |
|
|
|
|
|
|
$ |
(6.9 |
) |
Other related costs recorded in cost of goods sold related primarily to commercial flooring site
clean-up and maintenance costs and costs to redesign the remaining portions of the plant to
function without the commercial flooring site. Other related costs in SG&A expenses primarily
related to the donation of the commercial flooring site to an outside party.
We have incurred project-to-date restructuring charges of $27.4 million related to costs for
enhanced retirement benefits ($23.7 million) and severance and related employee costs ($3.7
million). We do not expect to incur any additional restructuring or other charges related to this
initiative in the future.
82
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The following table summarizes activity in the restructuring accruals for 2007 and 2008. Net
charges in the table may not agree with the income statement due to non-cash charges for enhanced
retirement benefits that did not affect the restructuring accrual amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Related |
|
|
|
|
|
|
|
|
|
Costs |
|
|
Leases |
|
|
|
|
|
|
Lancaster |
|
|
Other |
|
|
U.K. |
|
|
|
|
Successor Company: |
|
Plant |
|
|
Initiatives |
|
|
Lease |
|
|
Total |
|
December 31, 2006 |
|
$ |
0.4 |
|
|
$ |
1.7 |
|
|
$ |
4.9 |
|
|
$ |
7.0 |
|
Cash payments |
|
|
(0.4 |
) |
|
|
(1.8 |
) |
|
|
(0.5 |
) |
|
|
(2.7 |
) |
Net charges |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
Other |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
4.5 |
|
|
$ |
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
Net charges |
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
0.8 |
|
Other |
|
|
|
|
|
|
(0.1 |
) |
|
|
(1.2 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
3.4 |
|
|
$ |
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in Other are related to the effects of foreign currency translation.
The remaining balance of $3.4 million as of December 31, 2008 relates to a noncancelable U.K.
operating lease, which extends through 2017.
NOTE 17. INCOME TAXES
The tax effects of principal temporary differences between the carrying amounts of assets and
liabilities and their tax bases are summarized in the table below. Management believes it is more
likely than not that results of future operations will generate sufficient taxable income to
realize deferred tax assets, net of valuation allowances, including the remaining federal net
operating losses of $357.6 million principally resulting from payments to the Asbestos PI Trust in
2006 under the POR that may be carried forward for the remaining 18 years. In arriving at this
conclusion, we considered the profit before tax generated for the years 1996 through 2008, as well
as future reversals of existing taxable temporary differences and projections of future profit
before tax.
We have provided valuation allowances for certain deferred state and foreign income tax assets,
foreign tax credits and other basis adjustments of $208.7 million. We have $1,404.2 million of
state net operating loss carryforwards with expirations between 2009 and 2028, and $393.7 million
of foreign net operating loss carryforwards, that are available for carryforward indefinitely.
Our valuation allowances decreased from 2007 by a net amount of $16.3 million. This includes a
decrease of $35.9 million for foreign tax credits and capital loss carryforwards, an increase for
certain deferred state income tax assets of $15.2 million, and an increase for foreign tax loss
carryforwards of $4.4 million. The decrease in the foreign tax credits was primarily due to the
expiration of prior foreign tax credits. The increase in the valuation allowance for certain
deferred state income tax assets of $15.2 million was primarily due to a reduction in the amount of
future reversals of existing taxable temporary differences. The increase in the valuation
allowance for foreign tax loss carryforwards was primarily due to additional unbenefitted losses
partially offset by foreign currency translation adjustments that also reduced the related deferred
income tax assets. We estimate we will need to generate future taxable income of approximately
$1,021.8 million for federal income tax purposes and $1,165.4 million for state income tax purposes
in order to fully realize the net deferred income tax assets discussed above.
83
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
Deferred income tax assets (liabilities) |
|
2008 |
|
|
2007 |
|
Postretirement and postemployment benefits |
|
$ |
170.4 |
|
|
$ |
169.1 |
|
Pension benefit liabilities |
|
|
32.2 |
|
|
|
21.5 |
|
Net operating losses |
|
|
529.8 |
|
|
|
573.8 |
|
Foreign tax credit carryforwards |
|
|
70.7 |
|
|
|
105.3 |
|
Capital losses |
|
|
15.2 |
|
|
|
16.7 |
|
Other |
|
|
82.3 |
|
|
|
86.3 |
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
|
900.6 |
|
|
|
972.7 |
|
Valuation allowances |
|
|
(208.7 |
) |
|
|
(225.0 |
) |
|
|
|
|
|
|
|
Net deferred income tax assets |
|
|
691.9 |
|
|
|
747.7 |
|
|
|
|
|
|
|
|
Intangibles |
|
|
(289.7 |
) |
|
|
(316.3 |
) |
Accumulated depreciation |
|
|
(102.2 |
) |
|
|
(117.6 |
) |
Prepaid pension costs |
|
|
|
|
|
|
(268.4 |
) |
Tax on unremitted earnings |
|
|
(48.7 |
) |
|
|
(51.0 |
) |
Inventories |
|
|
(18.9 |
) |
|
|
(20.6 |
) |
Other |
|
|
(12.0 |
) |
|
|
(6.7 |
) |
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
(471.5 |
) |
|
|
(780.6 |
) |
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities) |
|
$ |
220.4 |
|
|
$ |
(32.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes have been classified in the Consolidated
Balance Sheet as: |
|
|
|
|
|
|
|
|
Deferred income tax assets current |
|
$ |
14.4 |
|
|
$ |
43.5 |
|
Deferred income tax assets noncurrent |
|
|
219.6 |
|
|
|
424.5 |
|
Deferred income tax liabilities current |
|
|
(4.6 |
) |
|
|
(29.5 |
) |
Deferred income tax liabilities noncurrent |
|
|
(9.0 |
) |
|
|
(471.4 |
) |
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities) |
|
$ |
220.4 |
|
|
$ |
(32.9 |
) |
|
|
|
|
|
|
|
84
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Details of taxes |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Earnings from continuing
operations before income
taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
171.0 |
|
|
$ |
221.4 |
|
|
$ |
34.0 |
|
|
|
$ |
1,950.1 |
|
Foreign |
|
|
18.4 |
|
|
|
42.1 |
|
|
|
(6.4 |
) |
|
|
|
196.0 |
|
Eliminations |
|
|
|
|
|
|
(4.3 |
) |
|
|
(20.5 |
) |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
189.4 |
|
|
$ |
259.2 |
|
|
$ |
7.1 |
|
|
|
$ |
2,150.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
8.3 |
|
|
$ |
4.8 |
|
|
|
|
|
|
|
$ |
(13.2 |
) |
Foreign |
|
|
21.3 |
|
|
|
17.4 |
|
|
$ |
1.8 |
|
|
|
|
14.6 |
|
State |
|
|
5.4 |
|
|
|
4.6 |
|
|
|
0.2 |
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
35.0 |
|
|
|
26.8 |
|
|
|
2.0 |
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
46.5 |
|
|
|
72.5 |
|
|
|
3.7 |
|
|
|
|
761.6 |
|
Foreign |
|
|
(1.1 |
) |
|
|
1.5 |
|
|
|
(1.7 |
) |
|
|
|
(6.2 |
) |
State |
|
|
28.6 |
|
|
|
5.6 |
|
|
|
(0.2 |
) |
|
|
|
(29.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
74.0 |
|
|
|
79.6 |
|
|
|
1.8 |
|
|
|
|
726.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
$ |
109.0 |
|
|
$ |
106.4 |
|
|
$ |
3.8 |
|
|
|
$ |
726.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, we had $137.5 million of book basis (including unremitted earnings) in excess
of tax basis in the shares of certain foreign subsidiaries for which no deferred income taxes have
been provided because we consider the underlying earnings to be permanently reinvested. This basis
difference could reverse through a sale of the subsidiaries, the receipt of dividends from the
subsidiaries, as well as various other events. It is not practical to calculate the residual
income tax which would result if these basis differences reversed due to the complexities of the
tax law and the hypothetical nature of the calculations. We do, however, estimate that
approximately $2.0 million in foreign withholding taxes would be payable if the underlying earnings
were to be distributed.
85
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Reconciliation to U.S. statutory tax rate |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Continuing operations tax at statutory rate |
|
$ |
66.3 |
|
|
$ |
90.7 |
|
|
$ |
2.5 |
|
|
|
$ |
752.8 |
|
State income taxes (benefit), net of federal benefit |
|
|
8.1 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
(30.2 |
) |
Increases in valuation allowances on deferred state
income tax assets |
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases in valuation allowances on deferred
foreign income tax assets |
|
|
14.2 |
|
|
|
6.0 |
|
|
|
4.8 |
|
|
|
|
35.7 |
|
Tax on foreign and foreign-source income |
|
|
(0.9 |
) |
|
|
(1.7 |
) |
|
|
(5.0 |
) |
|
|
|
(1.1 |
) |
Bankruptcy reorganization expenses |
|
|
|
|
|
|
0.4 |
|
|
|
2.0 |
|
|
|
|
8.8 |
|
Interest on uncertain tax positions |
|
|
5.9 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
Permanent book/tax differences |
|
|
(2.4 |
) |
|
|
(0.4 |
) |
|
|
(0.8 |
) |
|
|
|
(25.8 |
) |
Permanent fresh-start adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
Permanent settlement adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.6 |
) |
Tax on unremitted earnings |
|
|
3.9 |
|
|
|
2.9 |
|
|
|
0.3 |
|
|
|
|
26.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense at effective rate |
|
$ |
109.0 |
|
|
$ |
106.4 |
|
|
$ |
3.8 |
|
|
|
$ |
726.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the year ended December 31, 2007 includes a benefit of $5.0 million (net
of federal benefit) for legislative changes in New York and Texas and $1.0 million for the
reduction in the German income tax rate.
As previously described, we funded the Asbestos PI Trust in 2006 resulting in certain significant
tax adjustments that impacted the effective tax rate for the nine months ended September 30, 2006.
We reduced valuation allowances of approximately $29.2 million related to certain state net
operating losses and deferred income tax assets as available evidence, including pre-tax profit
projections and new deferred tax liabilities on fresh-start adjustments, indicated that it is more
likely than not that these benefits will be realized. In addition, as part of fresh-start
reporting, several significant balance sheet accounts were adjusted resulting in a permanent book
versus tax difference which had an impact on the effective tax rate. These adjustments were
primarily the reduction in the carrying value of nondeductible goodwill as well as certain other
foreign currency translation accounts.
The effective tax rate for the three months ended December 31, 2006, reflects a tax benefit of $1.5
million related to a change in German tax law that allows for a recovery of previously frozen
imputation tax credits. This benefit was more than offset, however, by foreign losses incurred
during the quarter for which a full valuation allowance is required.
In accordance with the requirements for fresh-start reporting pursuant to SOP 90-7, we adopted FIN
48 effective as of October 2, 2006. The transition adjustments, although not material in the
aggregate, were shown as an adjustment to the October 2, 2006 fresh-start balance sheet.
We have $174.4 million of Unrecognized Tax Benefits (UTB) as of December 31, 2008. Of this
amount, $160.0 million, if recognized in future periods, would impact the reported effective tax
rate. The remaining amount of $14.4 million, if recognized in future periods, would be fully
reduced by additional valuation allowances.
In October 2007 we received $178.7 million in refunds for federal income taxes paid over the
preceding ten years. The refunds result from the carryback of a portion of net operating losses
created by the funding of the Asbestos PI Trust in October 2006. The tax refunds are subject to
examination and
86
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
adjustment by the Internal Revenue Service (IRS) under its normal audit procedures. Upon receipt
of the refunds, AWI recorded a liability of $144.6 million in the fourth quarter of 2007 pending
completion of the IRS audit. Any tax losses disallowed for a ten-year carryback would be available
to carry forward. This amount is included in the table of UTBs below.
It is reasonably possible that certain UTBs may increase or decrease within the next twelve months
due to tax examination changes, settlement activities, expirations of statute of limitations, or
the impact on recognition and measurement considerations related to the results of published tax
cases or other similar activities. Over the next twelve months, we estimate that UTBs may
decrease by $0.3 million due to statutes expiring and increase by $1.7 million due to uncertain tax
positions expected to be taken on tax returns.
With our adoption of FIN 48, we elected to continue our prior practice of accounting for all
interest and penalties on uncertain income tax positions as income tax expense. As a result, we
have reported $10.0 million of interest and penalty exposure as accrued income tax in the
Consolidated Balance Sheet as of December 31, 2008, of which $6.4 million was recognized as income
tax during 2008.
We have significant operations in over 26 countries and file income tax returns in approximately 80
tax jurisdictions, in some cases for multiple legal entities per jurisdiction. Generally, we have
open tax years subject to tax audit scrutiny on average of between three years and six years. We
have not materially extended any open statutes of limitation for any significant location and have
reviewed and accrued for, where necessary, tax liabilities for open periods. We are currently
under examination by the IRS for the 2005 and 2006 tax years. In addition to those years, the tax
years 2007 and 2008 are subject to future potential tax adjustments. All tax years prior to 2005
have been settled. We also have examinations in progress in Germany and Canada. We have evaluated
the need for tax reserves for these audits as part of our FIN 48 evaluation process.
We had the following activity for UTBs for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current |
|
|
|
|
|
|
|
|
|
Income Taxes |
|
|
NOL |
|
|
|
|
|
|
Payable |
|
|
Carryforward |
|
|
Total |
|
Unrecognized tax benefits at
December 31, 2007 |
|
$ |
13.6 |
|
|
$ |
167.1 |
|
|
$ |
180.7 |
|
Gross change for current year
positions |
|
|
0.8 |
|
|
|
|
|
|
|
0.8 |
|
Increases for prior period positions |
|
|
0.4 |
|
|
|
3.0 |
|
|
|
3.4 |
|
Decrease for prior period positions |
|
|
|
|
|
|
(8.0 |
) |
|
|
(8.0 |
) |
Decrease due to settlements and
payments |
|
|
(0.9 |
) |
|
|
|
|
|
|
(0.9 |
) |
Decrease due to statute expirations |
|
|
(1.6 |
) |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at
December 31, 2008 |
|
$ |
12.3 |
|
|
$ |
162.1 |
|
|
$ |
174.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Other taxes |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Payroll taxes |
|
$ |
75.6 |
|
|
$ |
77.1 |
|
|
$ |
16.9 |
|
|
|
$ |
55.3 |
|
Property, franchise and capital stock taxes |
|
|
15.4 |
|
|
|
18.3 |
|
|
|
4.6 |
|
|
|
|
12.3 |
|
87
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 18. DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
year-end |
|
|
|
|
|
|
year-end |
|
|
|
2008 |
|
|
interest rate |
|
|
2007 |
|
|
interest rate |
|
Term Loan A due 2011 |
|
$ |
281.3 |
|
|
|
2.01 |
% |
|
$ |
296.3 |
|
|
|
6.22 |
% |
Term Loan B due 2013 |
|
|
193.5 |
|
|
|
2.26 |
% |
|
|
195.5 |
|
|
|
6.72 |
% |
Foreign banks due 2008 |
|
|
1.3 |
|
|
|
4.75 |
% |
|
|
3.4 |
|
|
|
5.83 |
% |
Bank loans due through 2012 |
|
|
10.8 |
|
|
|
6.02 |
% |
|
|
8.2 |
|
|
|
5.30 |
% |
Industrial development bonds due 2009 |
|
|
10.0 |
|
|
|
1.60 |
% |
|
|
10.0 |
|
|
|
3.77 |
% |
Capital lease obligations due through 2018 |
|
|
0.1 |
|
|
|
5.03 |
% |
|
|
0.4 |
|
|
|
4.89 |
% |
Other |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
7.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
497.0 |
|
|
|
2.19 |
% |
|
|
514.4 |
|
|
|
6.34 |
% |
Less current portion and short-term debt |
|
|
42.2 |
|
|
|
3.00 |
% |
|
|
28.6 |
|
|
|
6.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, less current portion |
|
$ |
454.8 |
|
|
|
2.12 |
% |
|
$ |
485.8 |
|
|
|
6.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 2, 2006, Armstrong executed a $1.1 billion senior credit facility arranged by Banc of
America Securities LLC, J.P. Morgan Securities, Inc., and Barclays Capital. This facility is made
up of a $300 million revolving credit facility (with a $150 million sublimit for letters of
credit), a $300 million Term Loan A, and a $500 million Term Loan B. This $1.1 billion senior
credit facility is secured by U.S. personal property (excluding land and buildings), the capital
stock of material U.S. subsidiaries, and a 65% pledge of the stock of our material foreign
subsidiaries.
The senior credit facility includes three financial covenants which do not permit the ratio of
consolidated EBITDA to consolidated interest expense to be less than 3.00 to 1.00, the ratio of
consolidated funded indebtedness to consolidated EBITDA (earnings before interest, taxes,
depreciation and amortization) (Consolidated Leverage Ratio) to be greater than 3.75 to 1.00 and
that there is a minimum domestic liquidity of $100 million, as defined by the credit agreement
(incorporated in this 10-K as Exhibit 10.10). We are in compliance with these covenants. As of
December 31, 2008 our consolidated interest coverage ratio was 12.98 to 1.00, our indebtedness to
EBITDA was 1.24 to 1.00 and our domestic liquidity was $452.9 million. We believe that the
likelihood of default under these covenants is unlikely. Fully borrowing under our revolving
credit facility, provided we maintain minimum domestic liquidity of $100 million, would not violate
these covenants.
The Revolving Credit and Term Loan A portions are currently priced at a spread of 1.50% over LIBOR
and the Term Loan B portion is priced at 1.75% over LIBOR for its entire term. The Term Loan A and
Term Loan B were both fully drawn down (net of scheduled and voluntary principal payments) and are
currently priced on a variable interest rate basis. The unpaid balances of Term Loan A ($281.3
million) and Term Loan B ($193.5 million) of the credit facility may be prepaid without penalty at
the maturity of their respective interest reset periods. Any amounts prepaid may not be
reborrowed.
Prepayments of the loans under the senior credit facility are required unless (a) the Consolidated
leverage ratio is less than or equal to 2.5:1.0, and (b) debt ratings from S&P is BB (stable) or
better and from Moodys is Ba2 (stable) or better. If required, the prepayment amount would be 50%
of Consolidated Excess Cash Flow (as defined in the agreement). Mandatory prepayments have not
occurred since the inception of the agreement. Our current debt rating from S&P is BB (stable) and
from Moodys is Ba2 (stable).
Approximately $2.2 million of the remaining $22.2 million of debt as of December 31, 2008 was
secured with buildings and other assets. The credit lines at our foreign subsidiaries are subject
to immaterial annual commitment fees.
As of December 31, 2007, approximately $4.1 million of the $22.7 million of total debt outstanding
was secured with buildings and other assets.
88
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
Scheduled payments of long-term debt: |
|
| |
2009 |
|
$ |
40.9 |
|
2010 |
|
|
32.3 |
|
2011 |
|
|
234.8 |
|
2012 |
|
|
3.5 |
|
2013 |
|
|
184.1 |
|
2014 and later |
|
|
0.1 |
|
We utilize lines of credit and other commercial commitments in order to ensure that adequate funds
are available to meet operating requirements. On December 31, 2008, we had a $300 million
revolving credit facility with a $150 million sublimit for letters of credit, of which $49.6
million was outstanding. There were no outstanding borrowings under the revolving credit facility.
Availability under this facility totaled $250.4 million as of December 31, 2008. As of December
31, 2008, our foreign subsidiaries had available lines of credit totaling $32.3 million, of which
$2.8 million was used and $4.9 million was only available for letters of credit and guarantees,
leaving $24.6 million of unused lines of credit available for foreign borrowings.
On December 31, 2008, we had outstanding letters of credit totaling $60.0 million, of which $49.6
million was issued under the revolving credit facility and $10.4 was arranged with another bank.
Letters of credit are issued to third party suppliers, insurance and financial institutions and
typically can only be drawn upon in the event of AWIs failure to pay its obligations to the
beneficiary.
NOTE 19. PENSION AND OTHER BENEFIT PROGRAMS
We have defined benefit pension plans and postretirement medical and insurance benefit plans
covering eligible employees worldwide. We also have defined-contribution pension plans for
eligible employees. Benefits from defined benefit pension plans, which cover most employees
worldwide, are based primarily on an employees compensation and years of service. We fund our
pension plans when appropriate. The U.S. defined benefit pension plans were closed to new salaried
and salaried production employees on January 1, 2005. We also froze benefits for certain
non-production salaried employees effective February 28, 2006. We fund postretirement benefits on
a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by
means of deductibles and contributions.
UNITED STATES PLANS
The following tables summarize the balance sheet impact of the pension and postretirement benefit
plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The
pension benefits disclosures include both the Retirement Income Plan (RIP) and the Retirement
Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in
excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.
89
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
We use a December 31 measurement date for our U.S. defined benefit plans.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
U.S. defined-benefit pension plans |
|
Year 2008 |
|
|
Year 2007 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation as of beginning of period |
|
$ |
1,712.6 |
|
|
$ |
1,705.4 |
|
Service cost |
|
|
17.4 |
|
|
|
16.9 |
|
Interest cost |
|
|
97.8 |
|
|
|
96.3 |
|
Plan amendments |
|
|
3.4 |
|
|
|
|
|
Actuarial loss |
|
|
36.2 |
|
|
|
8.7 |
|
Benefits paid |
|
|
(111.7 |
) |
|
|
(114.7 |
) |
|
|
|
|
|
|
|
Benefit obligation as of end of period |
|
$ |
1,755.7 |
|
|
$ |
1,712.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets as of beginning of period |
|
$ |
2,355.7 |
|
|
$ |
2,238.7 |
|
Actual return on plan assets (loss) gain |
|
|
(545.6 |
) |
|
|
228.5 |
|
Employer contribution |
|
|
3.2 |
|
|
|
3.2 |
|
Benefits paid |
|
|
(111.7 |
) |
|
|
(114.7 |
) |
|
|
|
|
|
|
|
Fair value of plan assets as of end of period |
|
$ |
1,701.6 |
|
|
$ |
2,355.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans |
|
$ |
(54.1 |
) |
|
$ |
643.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
U.S. defined-benefit pension plans |
|
Year 2008 |
|
|
Year 2007 |
|
Weighted-average assumptions used to
determine benefit obligations
at end of period: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.60 |
% |
|
|
5.85 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to
determine net periodic benefit cost for
the period: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.85 |
% |
|
|
5.75 |
% |
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
90
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
U.S. defined-benefit retiree health and life insurance plans |
|
Year 2008 |
|
|
Year 2007 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation as of beginning of period |
|
$ |
337.0 |
|
|
$ |
390.6 |
|
Service cost |
|
|
1.7 |
|
|
|
1.8 |
|
Interest cost |
|
|
18.9 |
|
|
|
19.1 |
|
Plan participants contributions |
|
|
6.2 |
|
|
|
6.7 |
|
Actuarial loss (gain) |
|
|
1.4 |
|
|
|
(50.3 |
) |
Benefits paid, gross |
|
|
(32.6 |
) |
|
|
(33.3 |
) |
Medicare subsidy receipts |
|
|
1.7 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
Benefit obligation as of end of period |
|
$ |
334.3 |
|
|
$ |
337.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets as of beginning of period |
|
|
|
|
|
|
|
|
Employer contribution |
|
$ |
24.7 |
|
|
$ |
24.2 |
|
Plan participants contributions |
|
|
6.2 |
|
|
|
6.7 |
|
Benefits paid, gross |
|
|
(32.6 |
) |
|
|
(33.3 |
) |
Medicare subsidy receipts |
|
|
1.7 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
Fair value of plan assets as of end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans |
|
$ |
(334.3 |
) |
|
$ |
(337.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
U.S. defined-benefit retiree health and life insurance plans |
|
Year 2008 |
|
|
Year 2007 |
|
Weighted-average discount rate used to
determine benefit obligations
at end of period |
|
|
5.60 |
% |
|
|
5.85 |
% |
Weighted-average discount rate used to
determine net periodic benefit cost for
the period |
|
|
5.85 |
% |
|
|
5.75 |
% |
Investment Policies
The RIPs primary investment objective is to increase the ratio of RIP assets to liabilities by
maximizing the long-term return on investments while minimizing the likelihood of cash
contributions over the next 5-10 years. This is to be achieved by (a) investing primarily in
publicly-traded equities, (b) limiting return volatility by diversifying investments among
additional asset classes with differing expected rates of return and return correlations, and (c)
investing a portion of RIP assets in a bond portfolio whose duration is roughly equal to the
duration of RIP liabilities. Derivatives may be used either to implement investment positions
efficiently or to hedge risk but not to create investment leverage.
91
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Each asset class utilized by the RIP has a defined asset allocation target and allowable range.
The table below shows the asset allocation target and the December 31, 2008 and 2007 position for
each asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Target Weight at |
|
|
Position at December 31, |
|
Asset Class |
|
December 31, 2008 |
|
|
2008 |
|
|
2007 |
|
Domestic equity |
|
|
41 |
% |
|
|
30 |
% |
|
|
38 |
% |
International equity |
|
|
22 |
% |
|
|
17 |
% |
|
|
24 |
% |
High yield bonds |
|
|
5 |
% |
|
|
4 |
% |
|
|
4 |
% |
Long duration bonds |
|
|
25 |
% |
|
|
40 |
% |
|
|
27 |
% |
Real estate |
|
|
7 |
% |
|
|
7 |
% |
|
|
6 |
% |
Other fixed income |
|
|
0 |
% |
|
|
2 |
% |
|
|
1 |
% |
The difference between the target and actual positions as of December 31, 2008 is due to poor
performance of the equity investments, not an intentional shift in
asset allocation. In light of current
market conditions, we are reevaluating our target asset allocations.
Basis of Rate-of-Return Assumption
Long-term asset class return assumptions are determined based on input from investment
professionals on the expected performance of the asset classes over 10 to 20 years. The forecasts
were averaged to come up with consensus passive return forecasts for each asset class. An
incremental component was added for the expected return from active management based both on the
RIPs experience and on historical information obtained from the RIPs investment consultants.
These forecast gross returns were reduced by estimated management fees and expenses, yielding a
long-term return forecast of 8.00% per annum.
Amounts
recognized in assets and liabilities at year end consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health and Life |
|
|
|
Pension Benefits |
|
|
Insurance Benefits |
|
|
|
Successor Company |
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Prepaid pension costs |
|
|
|
|
|
$ |
687.8 |
|
|
|
|
|
|
|
|
|
Accounts payable and
accrued expenses |
|
$ |
(3.3 |
) |
|
|
(3.4 |
) |
|
$ |
(31.7 |
) |
|
$ |
(30.2 |
) |
Postretirement and
postemployment benefit
liabilities |
|
|
|
|
|
|
|
|
|
|
(302.6 |
) |
|
|
(306.8 |
) |
Pension benefit liabilities |
|
|
(50.8 |
) |
|
|
(41.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(54.1 |
) |
|
$ |
643.1 |
|
|
$ |
(334.3 |
) |
|
$ |
(337.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amounts recognized in accumulated other comprehensive income at year end consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health and Life |
|
|
|
Pension Benefits |
|
|
Insurance Benefits |
|
|
|
Successor Company |
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net actuarial loss (gain) |
|
$ |
627.2 |
|
|
$ |
(129.8 |
) |
|
$ |
(46.2 |
) |
|
$ |
(50.5 |
) |
Prior service cost |
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive loss
(income) |
|
$ |
630.3 |
|
|
$ |
(129.8 |
) |
|
$ |
(46.2 |
) |
|
$ |
(50.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
No amounts in accumulated other comprehensive loss (income) are expected to be amortized into the
pension credit in 2009. We expect to amortize $1.3 million of previously unrecognized net
actuarial gains into postretirement benefit cost in 2009.
92
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The accumulated benefit obligation for the U.S. defined benefit pension plans was $1,734.2 million
and $1,690.9 million at December 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
U.S. pension plans with benefit obligations in excess of assets |
|
2008 |
|
|
2007 |
|
Projected benefit obligation, December 31 |
|
$ |
1,755.7 |
|
|
$ |
44.7 |
|
Accumulated benefit obligation, December 31 |
|
|
1,734.2 |
|
|
|
43.5 |
|
Fair value of plan assets, December 31 |
|
|
1,701.6 |
|
|
|
|
|
The increase in U.S. pension plans with benefit obligation in excess of assets occurred primarily
because the RIP, which was previously overfunded, was underfunded in relation to its benefit
obligations at December 31, 2008.
The
components of pension credit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
U.S. defined-benefit pension plans |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Service cost of benefits earned during the period |
|
$ |
17.4 |
|
|
$ |
16.9 |
|
|
$ |
3.4 |
|
|
|
$ |
13.6 |
|
Interest cost on projected benefit obligation |
|
|
97.8 |
|
|
|
96.3 |
|
|
|
24.3 |
|
|
|
|
69.4 |
|
Expected return on plan assets |
|
|
(175.3 |
) |
|
|
(169.4 |
) |
|
|
(42.5 |
) |
|
|
|
(121.5 |
) |
Amortization of prior service cost |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
6.7 |
|
Amortization of net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension credit |
|
$ |
(59.8 |
) |
|
$ |
(56.2 |
) |
|
$ |
(14.8 |
) |
|
|
$ |
(30.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded separate charges of $0.5 million in the three months ended December 31, 2006 and $8.5
million in the nine months ended September 30, 2006 within restructuring expense for special
termination benefits related to the closure of certain operations at a manufacturing plant in
Lancaster, Pennsylvania. See Note 16 for further information.
The
components of postretirement benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
U.S. defined-benefit retiree health and life |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
insurance plans |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Service cost of benefits earned during the period |
|
$ |
1.7 |
|
|
$ |
1.8 |
|
|
$ |
0.7 |
|
|
|
$ |
1.8 |
|
Interest cost on accumulated postretirement
benefit obligation |
|
|
18.9 |
|
|
|
19.1 |
|
|
|
5.4 |
|
|
|
|
14.9 |
|
Amortization of prior service benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.8 |
) |
Amortization of net actuarial (gain) loss |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost |
|
$ |
19.1 |
|
|
$ |
20.0 |
|
|
$ |
6.1 |
|
|
|
$ |
21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
For measurement purposes, average rates of annual increase in the per capita cost of covered health
care benefits of 9.5% for pre-65 retirees and 10.0% for post-65 retirees were assumed for 2009,
decreasing 1% per year to an ultimate rate of 5%. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One percentage point |
|
U.S. retiree health and life insurance benefit plans |
|
Increase |
|
|
Decrease |
|
Effect on total of service and interest cost components |
|
$ |
0.5 |
|
|
$ |
(0.5 |
) |
Effect on postretirement benefit obligation |
|
|
7.9 |
|
|
|
(7.7 |
) |
We expect to contribute $3.3 million to our U.S. defined benefit pension plans and $31.7 million to
our U.S. postretirement benefit plans in 2009.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid over the next ten years for our U.S. plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health and |
|
|
Retiree Health |
|
|
|
|
|
|
|
Life Insurance |
|
|
Medicare Subsidy |
|
|
|
Pension Benefits |
|
|
Benefits, Gross |
|
|
Receipts |
|
2009 |
|
$ |
116.4 |
|
|
$ |
34.5 |
|
|
$ |
(2.8 |
) |
2010 |
|
|
117.6 |
|
|
|
35.7 |
|
|
|
(3.0 |
) |
2011 |
|
|
120.7 |
|
|
|
36.4 |
|
|
|
(3.2 |
) |
2012 |
|
|
120.1 |
|
|
|
35.8 |
|
|
|
(3.4 |
) |
2013 |
|
|
122.4 |
|
|
|
33.8 |
|
|
|
(3.7 |
) |
20142018 |
|
|
635.9 |
|
|
|
153.6 |
|
|
|
(20.7 |
) |
NON-U.S. PLANS
We have defined benefit pension plans covering employees in a number of foreign countries that
utilize assumptions which are consistent with, but not identical to, those of the U.S. plans. The
following tables summarize the balance sheet impact of foreign pension benefit plans, as well as
the related benefit obligations, assets, funded status and rate assumptions.
Effective with our adoption of FAS 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, on October 2, 2006, we use a December 31 measurement date for all of
our non-U.S. defined benefit plans. Prior to our adoption of FAS 158, we used a December 31
measurement date for most of our non-U.S. defined benefit plans.
94
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
Non-U.S. defined-benefit plans |
|
Year 2008 |
|
|
Year 2007 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation as of beginning of period |
|
$ |
403.0 |
|
|
$ |
406.5 |
|
Service cost |
|
|
5.6 |
|
|
|
6.9 |
|
Interest cost |
|
|
21.3 |
|
|
|
19.2 |
|
Plan participants contributions |
|
|
2.1 |
|
|
|
2.2 |
|
Foreign currency translation adjustment |
|
|
(50.2 |
) |
|
|
29.2 |
|
Actuarial gain |
|
|
(28.1 |
) |
|
|
(38.0 |
) |
Benefits paid |
|
|
(24.5 |
) |
|
|
(23.0 |
) |
|
|
|
|
|
|
|
Benefit obligation as of end of period |
|
$ |
329.2 |
|
|
$ |
403.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets as of beginning of period |
|
$ |
246.0 |
|
|
$ |
229.9 |
|
Actual return on plan assets (loss) gain |
|
|
(39.8 |
) |
|
|
7.8 |
|
Employer contributions |
|
|
18.9 |
|
|
|
17.8 |
|
Plan participants contributions |
|
|
2.1 |
|
|
|
2.2 |
|
Foreign currency translation adjustment |
|
|
(46.6 |
) |
|
|
11.3 |
|
Benefits paid |
|
|
(24.5 |
) |
|
|
(23.0 |
) |
|
|
|
|
|
|
|
Fair value of plan assets as of end of period |
|
$ |
156.1 |
|
|
$ |
246.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans |
|
$ |
(173.1 |
) |
|
$ |
(157.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
Non-U.S. defined-benefit plans |
|
Year 2008 |
|
|
Year 2007 |
|
Weighted-average assumptions used to determine
benefit obligations at end of period: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.9 |
% |
|
|
5.5 |
% |
Rate of compensation increase |
|
|
3.4 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine
net periodic benefit cost for the period: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.5 |
% |
|
|
4.7 |
% |
Expected return on plan assets |
|
|
6.7 |
% |
|
|
6.6 |
% |
Rate of compensation increase |
|
|
3.5 |
% |
|
|
3.2 |
% |
Investment Policies
Each of the funded non-US pension plans primary investment objective is to earn sufficient
long-term returns on investments both to increase the ratio of the assets to liabilities in order
for the plans to meet their benefits obligations, and to minimize required cash contributions to
the plans. This is to be achieved by (a) investing primarily in publicly-traded equities, (b)
limiting return volatility by diversifying investments among additional asset classes with
differing expected rates of return and return correlations, and (c) utilizing long duration bonds
to limit the volatility of the plans asset/liability ratios.
95
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Each of the plans has a targeted asset allocation for each asset class. The table below shows, for
each asset class, the weighted average of the several plans asset allocation targets and positions
at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Target Weight at |
|
|
Position at December 31, |
|
Asset Class |
|
December 31, 2008 |
|
|
2008 |
|
|
2007 |
|
Equities |
|
|
58 |
% |
|
|
56 |
% |
|
|
61 |
% |
Long duration bonds |
|
|
24 |
% |
|
|
26 |
% |
|
|
23 |
% |
Other fixed income |
|
|
10 |
% |
|
|
12 |
% |
|
|
10 |
% |
Real estate |
|
|
8 |
% |
|
|
6 |
% |
|
|
6 |
% |
Basis of Rate-of-Return Assumption
Long-term asset class return forecasts were obtained from investment professionals. The forecasts
were averaged to come up with consensus passive return forecasts for each asset class. These
forecast asset class returns were weighted by the plans target asset class weights, yielding a
long-term return forecast of 6.7% for the year ended December 31, 2008 and 6.6% for the year ended
December 31, 2007.
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets consist of: |
|
|
|
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
Prepaid pension costs |
|
$ |
0.3 |
|
|
$ |
20.2 |
|
Accounts payable and accrued expenses |
|
|
(12.8 |
) |
|
|
(13.0 |
) |
Pension benefit liabilities |
|
|
(160.6 |
) |
|
|
(164.2 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(173.1 |
) |
|
$ |
(157.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amounts recognized in accumulated other comprehensive income at year end consist of: |
|
|
|
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
Net actuarial (gain) |
|
$ |
(14.1 |
) |
|
$ |
(41.7 |
) |
Prior service cost (credit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (income) |
|
$ |
(14.1 |
) |
|
$ |
(41.7 |
) |
|
|
|
|
|
|
|
We expect to amortize $0.5 million of previously unrecognized net actuarial losses into pension
cost in 2009.
The accumulated benefit obligation for the non-U.S. defined benefit pension plans was $309.0
million and $376.0 million at December 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
Non-U.S. pension plans with benefit obligations in excess of assets |
|
2008 |
|
|
2007 |
|
Projected benefit obligation, December 31 |
|
$ |
328.3 |
|
|
$ |
177.2 |
|
Accrued benefit obligation, December 31 |
|
|
308.1 |
|
|
|
172.0 |
|
Fair value of plan assets, December 31 |
|
|
154.9 |
|
|
|
|
|
The increase in non-U.S. pension plans with benefit obligation in excess of assets occurred
primarily because three of our previously overfunded plans were underfunded in relation to their
benefit obligations at December 31, 2008.
96
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of pension cost are as follows: |
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Non-U.S. defined-benefit plans |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Service cost of benefits earned during the period |
|
$ |
5.6 |
|
|
$ |
6.9 |
|
|
$ |
1.7 |
|
|
|
$ |
5.1 |
|
Interest cost on projected benefit obligation |
|
|
21.3 |
|
|
|
19.2 |
|
|
|
4.5 |
|
|
|
|
12.3 |
|
Expected return on plan assets |
|
|
(16.0 |
) |
|
|
(15.4 |
) |
|
|
(3.6 |
) |
|
|
|
(8.6 |
) |
Amortization of transition obligation (asset) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Amortization of net actuarial gain |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
10.4 |
|
|
$ |
10.7 |
|
|
$ |
2.6 |
|
|
|
$ |
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to contribute $18.3 million to our non-U.S. defined benefit pension plans in 2009.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid over the next ten years:
|
|
|
|
|
|
|
Pension Benefits |
|
2009 |
|
$ |
21.1 |
|
2010 |
|
|
20.9 |
|
2011 |
|
|
21.9 |
|
2012 |
|
|
20.8 |
|
2013 |
|
|
22.7 |
|
20142018 |
|
|
119.8 |
|
Costs for other worldwide defined contribution benefit plans and multiemployer pension plans were
$14.8 million in 2008, $15.2 million in 2007, $3.3 million in the three months ended December 31,
2006 and $9.6 million in the nine months ended September 30, 2006.
NOTE 20. FINANCIAL INSTRUMENTS
We do not hold or issue financial instruments for trading purposes. The estimated fair values of
our financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
(millions at December 31) |
|
amount |
|
|
fair value |
|
|
amount |
|
|
fair value |
|
Assets/(Liabilities): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion |
|
$ |
(495.7 |
) |
|
$ |
(405.0 |
) |
|
$ |
(510.5 |
) |
|
$ |
(502.0 |
) |
Foreign currency contract obligations |
|
|
7.4 |
|
|
|
7.4 |
|
|
|
(5.0 |
) |
|
|
(5.0 |
) |
Natural gas contracts |
|
|
(13.5 |
) |
|
|
(13.5 |
) |
|
|
(1.5 |
) |
|
|
(1.5 |
) |
The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued
expenses, short-term debt and current installments of long-term debt approximate fair value because
of the short-term maturity of these instruments. The fair value estimates of long-term debt were
based upon quotes from major financial institutions taking into consideration current rates offered
to us for debt of the same remaining maturities. The fair value estimates of foreign currency
contract obligations are
97
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
estimated from national exchange quotes. The fair value estimates of natural gas contracts are
estimated by obtaining quotes from major financial institutions.
As discussed in Note 2, we adopted FAS 157 effective January 1, 2008, with respect to the fair
value measurement and disclosure of financial assets and liabilities. FAS 157 defines fair value
as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. FAS 157 establishes a three-level
fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy
requires entities to maximize the use of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities. This includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant unobservable inputs.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
2008 |
|
|
2007 |
|
|
|
Fair value based on |
|
|
|
Quoted, |
|
|
Other |
|
|
Quoted, |
|
|
Other |
|
|
|
active |
|
|
observable |
|
|
active |
|
|
observable |
|
|
|
markets |
|
|
inputs |
|
|
markets |
|
|
inputs |
|
(millions at December 31) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 1 |
|
|
Level 2 |
|
Assets/(Liabilities): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
contract obligations |
|
$ |
7.4 |
|
|
|
|
|
|
$ |
(5.0 |
) |
|
|
|
|
Natural gas contracts |
|
|
|
|
|
$ |
(13.5 |
) |
|
|
|
|
|
$ |
(1.5 |
) |
We do not have any financial derivative assets or liabilities that are valued using Level 3
(unobservable) inputs.
NOTE 21. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and
commodity prices that could impact our results of operations and financial condition. We use
forward swaps and option contracts to hedge currency and commodity exposures. We regularly monitor
developments in the capital markets and only enter into currency and swap transactions with
established counterparties having investment grade ratings. Exposure to individual counterparties
is controlled and derivative financial instruments are entered into with a diversified group of
major financial institutions. Forward swaps and option contracts are entered into for periods
consistent with underlying exposure and do not constitute positions independent of those exposures.
At inception, we formally designate and document our derivatives as either (1) a hedge of a
forecasted transaction or cash flow hedge, or (2) a hedge of the fair value of a recognized
liability or asset or fair value hedge. We also formally assess, both at inception and at least
quarterly thereafter, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in either the fair value or cash flows of the hedged item. If it
is determined that a derivative ceases to be a highly effective hedge, or if the anticipated
98
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
transaction is no longer likely to occur, we discontinue hedge accounting, and any deferred gains
or losses are recognized in earnings. We use derivative financial instruments as risk management
tools and not for speculative trading purposes.
Interest Rate Risk There were no open interest rate derivatives as of December 31, 2008
and 2007. In February 2009 we entered into interest rate swaps with a total notional amount of
$100 million that mature in December 2009. Under the terms of the swaps, we receive 1-month LIBOR
and pay a fixed rate over the hedged period. These swaps are designated as cash flow hedges to
hedge against changes in LIBOR for a portion of our variable rate debt.
Currency Rate Risk We manufacture and sell our products in a number of countries
throughout the world and, as a result, are exposed to movements in foreign currency exchange rates.
To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency
exchange rate movement, as foreign currency expenses generally offset foreign currency revenues.
We manage our cash flow exposures on a net basis and use derivatives to hedge our unmatched foreign
currency cash inflows and outflows. At December 31, 2008, our major foreign currency exposures are
to the Euro, the Canadian dollar, and the British pound.
We use foreign currency forward exchange contracts to reduce our exposure to the risk that the
eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and
purchases from foreign suppliers, will be adversely affected by changes in exchange rates. These
derivative instruments are used for forecasted transactions and are classified as cash flow hedges.
Cash flow hedges are executed quarterly for up to 15 months forward and allow us to further reduce
our overall exposure to exchange rate movements, since the gains and losses on these contracts
offset losses and gains on the transactions being hedged. Gains and losses on these instruments
are deferred in other comprehensive income until the underlying transaction is recognized in
earnings. The net fair value of these instruments at December 31, 2008 was an asset of $6.4
million. A gain of $6.4 million is included in other comprehensive income related to changes in
the fair value of our foreign currency forward exchange contracts, $6.3 million of which is
expected to be recorded to earnings in the next twelve months. The earnings impact is reported in
either net sales or cost of goods sold to match the underlying transaction being hedged. The
earnings impact of these type of hedges was a total gain of less than $0.3 million recorded during
2008. The earnings impact of the ineffective portion of these hedges was not material during 2008.
There were no circumstances where hedge treatment was discontinued during 2008.
We also use foreign currency forward exchange contracts to hedge exposures created by
cross-currency intercompany loans. The underlying intercompany loans are classified as short-term
and translation adjustments related to these loans are recorded in other non-operating income or
expense. The offsetting gains and losses on the related derivative contracts are also recorded in
other non-operating income or expense. These transactions are generally executed on a six-month
rolling basis and are offset or increased as repayment or additional intercompany loans are
extended. The fair value of these instruments at December 31, 2008 was an asset of $1.0 million.
During 2008, the net earnings impact of these transactions was a gain of $0.3 million recorded in
other non-operating income.
Our foreign currency hedges are typically forward sale or forward buy contracts whose prices
are actively traded and that are readily identifiable in the global currency markets. The current
market values of forward currency positions are highly calculable (quotable) at any point in time
by pegging the current, observable, spot rate for the currency to an ultimate contract maturity
date. Consequently, the pricing we use to measure our foreign exchange hedges are based on
observable inputs and are thus Level 1 pricing inputs as defined in the FAS 157 hierarchy.
Commodity Price Risk We purchase natural gas for use in the manufacture of ceiling tiles
and other products and to heat many of our facilities. As a result, we are exposed to movements in
the price of natural gas. We have a policy of reducing cost volatility for North American natural
gas purchases by purchasing natural gas forward contracts, purchased call options, and zero-cost
collars up to 15 months forward to reduce our overall exposure to natural gas price movements.
There is a high correlation
99
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
between the hedged item and the hedged instrument. The gains and
losses on these transactions offset
losses and gains on the transactions being hedged. These instruments are designated as cash flow
hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive
income to the extent effective, and reclassified into cost of goods sold in the period during which
the underlying products are sold. The mark-to-market gains or losses on ineffective portions of
hedges are recognized in cost of goods sold immediately. There were no circumstances where hedge
treatment was discontinued during 2008. The fair value of these instruments at December 31, 2008
was a $13.5 million liability. There is also a loss of $13.2 million included in other
comprehensive income related to changes in the fair value of our natural gas hedge contracts, of
which $12.0 million is expected to be recorded to earnings in the next twelve months. A loss of
$1.2 million is expected to be recorded to earnings in 2010. The earnings impact of hedges that
matured during 2008, recorded in cost of goods sold, was $1.2 million of income. The earnings
impact of the ineffective portion of these hedges was not material during 2008.
Our natural gas contracts derive their basis in the NYMEX or other commodity exchanges, but are
transacted over-the-counter and tailored to suit the specific trade parameters (i.e.: maturity,
size, underlying Btus) required by our North American operations. Thus, instead of having
precisely observable inputs, the pricing is based upon similar, generic pricing of other
market-traded contracts.
We use two sources to derive the fair value of our natural gas hedges. First, each of our
counterparties provides us with indicative fair values as calculated from their own proprietary
models. Second, we have developed our own methodology to derive a fair value for our natural gas
hedges based on the Black-Scholes option valuation model. We obtain market information including
current time to maturity, risk free rates, implied volatility and the current forward price. We
have compared our own derived fair values with those provided by our counterparties and have noted
the differences are immaterial. Accordingly, we consider the fair values used for our Natural Gas
hedges to be fairly stated and the pricing inputs used for those fair values to be within the
Level 2 category of the FAS 157 hierarchy.
There have been no changes to the valuation techniques used during the periods presented.
NOTE 22. GUARANTEES
In disposing of assets, AWI and some subsidiaries have entered into contracts that included various
indemnity provisions, covering such matters as taxes, environmental liabilities and asbestos and
other litigation. Some of these contracts have exposure limits, but many do not. Due to the
nature of the indemnities, it is not possible to estimate the potential maximum exposure under
these contracts. For contracts under which an indemnity claim has been received, a liability of
$5.8 million has been recorded as of December 31, 2008. See Note 32 of the Consolidated Financial
Statements for additional information.
100
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 23. 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. The terms of these warranties vary by product and generally 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 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
Balance at beginning of period |
|
$ |
17.6 |
|
|
$ |
21.2 |
|
Reductions for payments |
|
|
(24.9 |
) |
|
|
(24.5 |
) |
Current period warranty accruals |
|
|
25.1 |
|
|
|
21.4 |
|
Preexisting warranty accrual changes |
|
|
(1.2 |
) |
|
|
(0.9 |
) |
Effects of foreign exchange translation |
|
|
(0.3 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
16.3 |
|
|
$ |
17.6 |
|
|
|
|
|
|
|
|
The warranty reserve is recorded as a reduction of sales and accounts receivable.
NOTE 24. OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Long-term deferred compensation arrangements |
|
$ |
30.4 |
|
|
$ |
35.7 |
|
U.S. workers compensation |
|
|
13.4 |
|
|
|
15.8 |
|
Environmental liabilities |
|
|
6.5 |
|
|
|
7.0 |
|
Other |
|
|
12.1 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
Total other long-term liabilities |
|
$ |
62.4 |
|
|
$ |
67.8 |
|
|
|
|
|
|
|
|
NOTE 25. STOCK-BASED COMPENSATION PLANS
Predecessor Company
Awards under the Predecessor Companys stock-based compensation plans were made in the form of
stock options, stock appreciation rights in conjunction with stock options, performance restricted
shares, stock awards and restricted stock awards. All of the Predecessor Company plans were
terminated upon AWI emerging from Chapter 11 on October 2, 2006.
Options were granted to purchase shares at prices not less than the closing market price of the
shares on the dates the options were granted. The options generally became exercisable in one to
three years and expired 10 years from the date of grant.
101
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
Predecessor Company |
|
Changes in AHI option shares outstanding |
|
|
Nine Months Ended |
|
(thousands except for share price) |
|
|
September 30, 2006 |
|
Option shares at beginning of period |
|
|
|
1,987.3 |
|
Options granted |
|
|
|
|
|
Option shares exercised |
|
|
|
|
|
Options forfeited |
|
|
|
(23.8 |
) |
Options expired |
|
|
|
(189.8 |
) |
|
|
|
|
|
Option shares at end of period |
|
|
|
1,773.7 |
|
|
|
|
|
|
|
Option shares exercisable at end of period |
|
|
|
1,773.7 |
|
Shares available for grant |
|
|
|
5,029.0 |
|
|
|
|
|
|
|
Weighted average price per share: |
|
|
|
|
|
Options outstanding |
|
|
$ |
24.67 |
|
Options exercisable |
|
|
$ |
24.67 |
|
Although the plans under which these options were issued were terminated upon AWIs emerging from
Chapter 11, the existing option contracts remained enforceable against AHI until AHIs liquidation
in December 2007. Reorganized Armstrong has no further liability under these plans.
Restricted stock awards were used for the purposes of recruitment, special recognition and
retention of key employees. As of September 30, 2006, no award of restricted stock shares had been
granted since 2000. As of September 30, 2006, there were 111,463 restricted shares of AHI common
stock outstanding with 596 accumulated dividend equivalent shares. These awards expired upon AWIs
emerging from Chapter 11 on October 2, 2006.
Successor Company
As of October 2, 2006, the Board of Directors of reorganized AWI adopted and the then sole
shareholder of AWI approved, reorganized Armstrongs 2006 Long-Term Incentive Plan (2006 Plan).
The 2006 Plan authorizes us to issue stock options, stock appreciation rights, restricted stock
awards, stock units, performance-based awards and cash awards to officers and key employees. No
more than 5,349,000 common shares may be issued under the 2006 Plan, and the 2006 Plan will
terminate on October 2, 2016, after which time no further awards may be made. As of December 31,
2008, 3,092,888 shares were available for future grants under the 2006 plan.
For grants made between our Chapter 11 emergence on October 2, 2006 and October 17, 2006, options
were granted to purchase shares at a price equal to the volume weighted average closing price of
the shares for the period October 18, 2006 through October 31, 2006. For grants made on or after
October 18, 2006, options were granted to purchase shares at prices equal to the closing market
price of the shares on the dates the options were granted. The options generally become
exercisable in two to four years and expire 10 years from the date of grant.
102
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
average |
|
|
Aggregate |
|
|
|
Number of |
|
|
average |
|
|
remaining |
|
|
intrinsic |
|
|
|
shares |
|
|
exercise |
|
|
contractual |
|
|
value |
|
|
|
(thousands) |
|
|
price |
|
|
term (years) |
|
|
(millions) |
|
Option shares outstanding at beginning of period |
|
|
1,569.8 |
|
|
$ |
38.99 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
195.7 |
|
|
|
29.73 |
|
|
|
|
|
|
|
|
|
Option adjustment for March dividend (see below) |
|
|
95.8 |
|
|
|
29.16 |
|
|
|
|
|
|
|
|
|
Option shares exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(328.4 |
) |
|
|
(31.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares outstanding at end of period |
|
|
1,532.9 |
|
|
$ |
29.85 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares exercisable at end of period |
|
|
505.8 |
|
|
|
29.85 |
|
|
|
7.9 |
|
|
|
|
|
Option shares expected to vest |
|
|
936.6 |
|
|
|
30.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
average |
|
|
Aggregate |
|
|
|
Number of |
|
|
average |
|
|
remaining |
|
|
intrinsic |
|
|
|
shares |
|
|
exercise |
|
|
contractual |
|
|
value |
|
|
|
(thousands) |
|
|
price |
|
|
term (years) |
|
|
(millions) |
|
Option shares outstanding at beginning of period |
|
|
1,592.0 |
|
|
$ |
38.42 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
64.1 |
|
|
|
52.38 |
|
|
|
|
|
|
|
|
|
Option shares exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(86.3 |
) |
|
|
(38.47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares outstanding at end of period |
|
|
1,569.8 |
|
|
$ |
38.99 |
|
|
|
8.8 |
|
|
$ |
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares exercisable at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares expected to vest |
|
|
1,516.4 |
|
|
|
|
|
|
|
|
|
|
$ |
2.5 |
|
We have reserved sufficient authorized shares to allow us to issue new shares upon exercise of all
outstanding options. When options are actually exercised, we will issue new shares, use treasury
shares (if available), acquire shares held by investors, or a combination of these alternatives in
order to satisfy the option exercises.
103
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
The fair value of option grants was estimated on the date of grant using the Black-Scholes option
pricing model. The weighted average assumptions for the years 2008 and 2007 and the three months
ended December 31, 2006 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
Weighted-average grant date
fair value of options granted
(dollars per option) |
|
$ |
12.21 |
|
|
$ |
20.64 |
|
|
$ |
15.51 |
|
|
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate of return |
|
|
3.2 |
% |
|
|
4.8 |
% |
|
|
4.6 |
% |
|
Expected volatility |
|
|
29.8 |
% |
|
|
30.2 |
% |
|
|
33.2 |
% |
|
Expected term (in years) |
|
|
6.0 |
|
|
|
6.0 |
|
|
|
6.5 |
|
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
The risk free rate of return is determined based on the implied yield available on zero coupon U.S.
Treasury bills at the time of grant with a remaining term equal to the expected term of the option.
Because reorganized Armstrongs stock has been trading for only a short period of time, the
expected volatility is established based on an average of the actual historical volatilities of the
stock prices of a peer group of companies. The expected life is the midpoint of the average
vesting period and the contractual life of the grant. For the same reasons mentioned earlier we
are using an allowable simplified method to determine an appropriate expected term for our option
valuation assumptions. The expected dividend yield is assumed to be zero because, at the time of
each grant, we had no plans to declare a dividend. The assumptions outlined above are applicable
to all option grants.
Under the terms of the 2006 Long Term Incentive Plan (the Plan), the Management Development and
Compensation Committee (the Committee) of our Board of Directors is required to make equitable
adjustments to stock option grants if there is a change in our capital structure. The special cash
dividend qualified as a change to our capital structure under the terms of the Plan. We used the
Black-Scholes option pricing model to determine the fair value of the awards before and after the
special cash dividend, using consistent assumptions for the risk free rate of return, expected
term, expected volatility and expected dividend yield. The stock prices used in the before and
after calculations were $35.10 (the closing price on March 6, 2008, the day before the ex-dividend
date) and $29.37 (the closing price on March 7, 2008, the ex-dividend date), respectively. For all
option grants, the fair value of the award before and after the dividend remained the same.
Therefore, in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based
Payment, there was no incremental cost recognized in our financial statements due to these award
modifications. The following changes were made to the options outstanding as a result of this
change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Grant Terms |
|
|
Adjusted Grant Terms |
|
|
|
Number of |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Options granted in 2006 |
|
|
1,445,700 |
|
|
$ |
38.42 |
|
|
|
1,520,024 |
|
|
$ |
29.37 |
|
Options granted in 2007 |
|
|
64,100 |
|
|
|
52.38 |
|
|
|
64,100 |
|
|
|
39.88 |
|
Options granted in 2008 |
|
|
110,370 |
|
|
|
34.00 |
|
|
|
131,904 |
|
|
|
28.45 |
|
104
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
In addition to options, we also granted restricted stock and restricted stock units. These awards
generally have vesting periods of two to four years. A summary of these awards follows:
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Non-Vested Stock Awards |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average fair |
|
|
|
Number of |
|
|
value at grant |
|
|
|
Shares |
|
|
date |
|
January 1, 2007 |
|
|
530,650 |
|
|
$ |
36.96 |
|
Granted |
|
|
91,559 |
|
|
|
52.38 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(31,275 |
) |
|
|
(39.12 |
) |
|
|
|
|
|
|
|
December 31, 2007 |
|
|
590,934 |
|
|
$ |
39.24 |
|
Granted |
|
|
307,866 |
|
|
|
32.61 |
|
Vested |
|
|
(152,945 |
) |
|
|
36.89 |
|
Forfeited |
|
|
(138,369 |
) |
|
|
37.54 |
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
607,486 |
|
|
$ |
36.86 |
|
In 2008 and 2007, we granted 58,390 and 37,900 performance restricted shares, respectively, to the
company CEO, which entitles him to receive a specified number of shares of reorganized Armstrongs
common stock on various vesting dates, provided certain cumulative financial targets are achieved
over the three-year performance period. We estimated the fair value of performance share awards
based on the market price of the underlying stock on the date of grant.
In addition to the equity awards described above, as of December 31, 2007 we had granted 81,244
phantom shares under the 2006 Phantom Stock Unit Plan to non-employee directors which will be
settled in the future for cash. During 2008, 50,320 of the phantom shares were converted to
restricted stock units leaving a balance of 30,924 phantom shares outstanding at December 31, 2008.
These awards generally have vesting periods of one to three years, and as of December 31, 2008,
24,924 shares were vested. The awards are generally payable six months following the directors
separation from service. The total liability recorded for these shares as of December 31, 2008 was
$0.9 million.
During 2008, we adopted the 2008 Directors Stock Unit Plan. The 2006 Phantom Stock Unit Plan is
still in place; however, no additional shares will be granted under that plan. Under the 2008
Directors Stock Unit Plan we currently have 111,950 restricted stock units outstanding. In 2008,
we granted 61,630 restricted stock units to non-employee directors and as noted above 50,320 shares
were converted from phantom shares. These awards generally have vesting periods of one to three
years, and as of December 31, 2008, 38,320 shares were vested. The awards are generally payable
six months following the directors separation from service. The awards under the stock unit plans
are not reflected in the Non-Vested Stock Awards table above.
We recognize compensation expense on a straight-line basis over the vesting period. Share-based
compensation cost was $8.1 million ($5.2 million net of tax benefit) in 2008, $13.6 million ($9.1
million net of tax benefit) in 2007 and $2.5 million ($1.5 million net of tax benefit) in the three
months ended December 31, 2006. The decrease in share-based compensation cost from 2007 to 2008 is
the result of an increase in forfeitures in 2008. Share-based compensation expense is recorded as
a component of SG&A expenses. There has been no cash flow impact to date of these awards.
As of December 31, 2008, there was $24.4 million of total unrecognized compensation cost related to
non-vested share-based compensation arrangements. That cost is expected to be recognized over a
weighted-average period of 2.1 years.
105
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 26. EMPLOYEE COMPENSATION
Employee compensation is presented in the table below. Charges for severance costs and early
retirement incentives to terminated employees that were otherwise recorded as restructuring charges
have been excluded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
Employee compensation cost |
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Wages, salaries and incentive compensation |
|
$ |
718.1 |
|
|
$ |
755.8 |
|
|
$ |
180.0 |
|
|
|
$ |
555.6 |
|
Payroll taxes |
|
|
75.6 |
|
|
|
77.1 |
|
|
|
16.9 |
|
|
|
|
55.3 |
|
Pension expense (credits), net |
|
|
(34.6 |
) |
|
|
(30.3 |
) |
|
|
(8.9 |
) |
|
|
|
(9.7 |
) |
Insurance and other benefit costs |
|
|
77.5 |
|
|
|
84.0 |
|
|
|
23.3 |
|
|
|
|
64.2 |
|
Stock-based compensation |
|
|
8.1 |
|
|
|
13.6 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
844.7 |
|
|
$ |
900.2 |
|
|
$ |
213.8 |
|
|
|
$ |
665.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 27. LEASES
We rent certain real estate and equipment. Several leases include options for renewal or purchase,
and contain clauses for payment of real estate taxes and insurance. In most cases, management
expects that in the normal course of business, leases will be renewed or replaced by other leases.
Rental expense was $22.8 million in the year 2008, $22.7 million in the year 2007, $5.5 million in
the three months ended December 31, 2006 and $15.9 million in the nine months ended September 30,
2006. Future minimum payments at December 31, 2008, by year and in the aggregate, having
noncancelable lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
Operating |
|
Scheduled minimum lease payments |
|
Leases |
|
2009 |
|
$ |
14.9 |
|
2010 |
|
|
10.6 |
|
2011 |
|
|
6.7 |
|
2012 |
|
|
3.5 |
|
2013 |
|
|
2.1 |
|
Thereafter |
|
|
4.7 |
|
|
|
|
|
Total |
|
$ |
42.5 |
|
|
|
|
|
106
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 28. SHAREHOLDERS EQUITY
There were no Successor Company treasury shares at December 31, 2008 or December 31, 2007.
The balance of each component of accumulated other comprehensive (loss) income as of December 31,
2008 and 2007 is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Foreign currency translation adjustments |
|
$ |
(9.4 |
) |
|
$ |
32.7 |
|
Derivative (loss), net |
|
|
(3.3 |
) |
|
|
(4.7 |
) |
Pension and postretirement adjustments |
|
|
(335.0 |
) |
|
|
148.5 |
|
|
|
|
|
|
|
|
Accumulated
other comprehensive (loss) income |
|
$ |
(347.7 |
) |
|
$ |
176.5 |
|
|
|
|
|
|
|
|
The amounts and related tax effects allocated to each component of other comprehensive (loss)
income during 2008 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company |
|
|
|
Pre-tax |
|
|
|
|
|
|
After tax |
|
|
|
Amount |
|
|
Tax Benefit |
|
|
Amount |
|
Foreign currency translation adjustments |
|
$ |
(49.2 |
) |
|
$ |
7.1 |
|
|
$ |
(42.1 |
) |
Derivative gain (loss), net |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
1.4 |
|
Pension and postretirement adjustments |
|
|
(792.0 |
) |
|
|
308.5 |
|
|
|
(483.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income |
|
$ |
(840.5 |
) |
|
$ |
316.3 |
|
|
$ |
(524.2 |
) |
|
|
|
|
|
|
|
|
|
|
NOTE 29. SUPPLEMENTAL FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Selected operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and repair costs |
|
$ |
111.3 |
|
|
$ |
116.9 |
|
|
$ |
27.6 |
|
|
|
$ |
88.3 |
|
Research and development costs |
|
|
38.8 |
|
|
|
44.0 |
|
|
|
11.5 |
|
|
|
|
32.4 |
|
Advertising costs |
|
|
29.6 |
|
|
|
36.2 |
|
|
|
6.1 |
|
|
|
|
22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss, net of hedging activity |
|
$ |
1.1 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
0.2 |
|
|
|
0.7 |
|
|
$ |
0.3 |
|
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1.3 |
|
|
$ |
1.4 |
|
|
$ |
0.3 |
|
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
10.5 |
|
|
$ |
15.3 |
|
|
$ |
4.0 |
|
|
|
$ |
2.9 |
|
Foreign currency translation gain, net of hedging activity |
|
|
0.1 |
|
|
|
2.5 |
|
|
|
0.3 |
|
|
|
|
4.2 |
|
Other |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10.6 |
|
|
$ |
18.2 |
|
|
$ |
4.3 |
|
|
|
$ |
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
NOTE 30. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
Year 2008 |
|
|
Year 2007 |
|
|
2006 |
|
|
|
2006 |
|
Interest paid |
|
$ |
23.7 |
|
|
$ |
47.8 |
|
|
$ |
9.9 |
|
|
|
$ |
0.7 |
|
Income taxes (refunded) paid, net |
|
|
25.7 |
|
|
|
(181.4 |
) |
|
|
7.5 |
|
|
|
|
56.6 |
|
NOTE 31. RELATED PARTIES
We purchase grid products from WAVE, our 50%-owned joint venture with Worthington Industries. The
total amount of these purchases was approximately $98 million in the year 2008, $88 million in the
year 2007, $22 million in the three months ended December 31, 2006 and $54 million in the nine
months ended September 30, 2006. We also provide certain selling, promotional and administrative
processing services to WAVE for which we receive reimbursement. Those services amounted to $16.1
million in the year 2008, $15.0 million in the year 2007, $3.4 million in the three months ended
December 31, 2006 and $10.3 million in the nine months ended September 30, 2006. The net amounts
due from us to WAVE for all of our relationships were $2.8 million and $5.8 million at the end of
2008 and 2007, respectively. See Note 11 for additional information.
NOTE 32. LITIGATION AND RELATED MATTERS
ASBESTOS-RELATED LITIGATION
On October 2, 2006 AWIs plan of reorganization, which was confirmed by order dated August 18,
2006, became effective, and AWI emerged from Chapter 11. The following summarizes how the
asbestos-related litigation matters were impacted by AWIs emergence. See Note 1 for additional
information.
Prior to December 6, 2000, AWI 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 AWIs asbestos-related
liability.
Two of AWIs domestic subsidiaries also commenced Chapter 11 proceedings at the time of the Filing.
AWIs other direct and indirect subsidiaries and affiliates, including Armstrong Wood Products
Inc. (formerly Triangle Pacific Corp.), WAVE (Armstrongs 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 were not resolved in AWIs Chapter 11 Case except for any
asbestos-related liability that also relates, directly or indirectly, to the pre-Filing activities
of AWI.
Upon AWIs POR becoming effective on October 2, 2006, the Asbestos PI Trust was created for the
purpose of addressing and resolving AWIs personal injury (including wrongful death)
asbestos-related liability. As of October 2, 2006, all present and future asbestos-related
personal injury claims against AWI, including contribution claims of co-defendants, arising
directly or indirectly out of AWIs pre-Filing use of or other
activities involving asbestos, were
channeled to the Asbestos PI Trust.
As part of the POR, in accordance with an injunction issued under Section 524(g) of the Bankruptcy
Code and entered in connection with the POR, various entities are protected from present and future
asbestos-related personal injury claims. These entities include, among others, reorganized
Armstrong, AHI, AWIs subsidiaries and other affiliates (as defined in the POR), and their
respective officers and directors. Now that it has emerged from Chapter 11, AWI does not have any
responsibility for these claims (including
claims against AWI based solely on its ownership of a subsidiary or other affiliate), nor does it
participate
108
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
in their resolution. Accordingly, AWI has no recorded liability for asbestos-related
personal injury claims as of December 31, 2008 and December 31, 2007.
On October 2, 2006, pursuant to the POR becoming effective, AWI transferred to the Asbestos PI
Trust rights arising under liability insurance policies issued to AWI with respect to
asbestos-related personal injury claims. As of October 2, 2006, resolution of asbestos-related
personal injury insurance matters is the responsibility of the Asbestos PI Trust. As part of
accounting for emergence, AWI reflected the transfer of these rights to the Asbestos PI Trust.
Therefore, there is no recorded insurance asset in respect of asbestos claims as of December 31,
2008 and December 31, 2007.
Asbestos-related personal injury claims against the affiliates and subsidiaries of AWI covered by
the POR will 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 AWIs ownership of the subsidiaries or other affiliates (as distinguished from
independent activities of the subsidiaries or affiliates). Currently, one asbestos-related
personal injury lawsuit against a subsidiary of AWI allegedly arising out of such independent
activities is pending. This claim will not be channeled to the Asbestos PI Trust under the POR.
The subsidiary denies liability and is aggressively defending the matter. AWI has not recorded any
liability for this matter. Management does not expect that any sum that may be paid in connection
with this matter will be material to reorganized Armstrong.
In addition, workers compensation claims brought against AWI or its subsidiaries or other
affiliates will not be channeled to the Asbestos PI Trust. These claims remain subject to the
workers compensation process. Historically, workers compensation claims against AWI and its
subsidiaries have not been significant in number or amount. AWI honored its obligations with
respect to such claims during the Chapter 11 Case and following emergence. 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 nine pending workers compensation claims, and
a UK subsidiary has eleven employer liability claims involving alleged asbestos exposure.
There is uncertainty as to the effectiveness of the 524(g) injunction in precluding the assertion
in foreign jurisdictions of asbestos-related personal injury claims, proceedings related thereto or
the enforcement of judgments rendered in such proceedings.
Management believes that AWI, its subsidiaries and other affiliates are not subject to any
asbestos-related personal injury claims that will not be channeled to the Asbestos PI Trust under
the POR that, individually or collectively, would be material in amount to reorganized Armstrong.
ENVIRONMENTAL MATTERS
Environmental Expenditures
Our manufacturing and research facilities are affected by various federal, state and local
requirements relating to the discharge of materials and the protection of the
environment. We make expenditures necessary for compliance with applicable environmental
requirements at each of our operating facilities. Regulatory requirements continually change,
therefore we cannot predict with certainty future expenditures associated with compliance with
environmental requirements.
Environmental Remediation
Summary
We are actively involved in proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), and similar state Superfund laws at four off-site
locations. We have also been investigating and/or remediating environmental contamination
allegedly resulting from past industrial activity at five domestic and five foreign current or
former plant sites. In most cases, we are one of many potentially responsible parties (PRPs)
which have potential liability for the required investigation and remediation of each site. In
some cases, we have agreed to jointly fund that required investigation and remediation, while at
some sites, we dispute the liability, the proposed remedy or the
109
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
proposed cost allocation among the PRPs. We may also have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies.
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 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 other parties, whether liability is being disputed, the terms of any existing agreements and
experience with similar matters, and the impact of AWIs emergence from Chapter 11 upon the
validity of the claim.
Effects of Chapter 11
Upon AWIs emergence from Chapter 11 on October 2, 2006, AWIs environmental liabilities with
respect to properties that AWI does not own or operate (such as formerly owned sites, or landfills
to which AWIs waste was taken) were discharged. Claims brought by a federal or state agency
alleging that AWI should reimburse the claimant for money that it spent cleaning up a site which
AWI does not own or operate, and claims by private parties, such as other PRPs with respect to
sites with multiple PRPs, were discharged upon emergence. Now that it has emerged from Chapter 11,
AWI does not have any responsibility for these claims. Environmental obligations with respect to
AWIs subsidiaries and to property that they currently own or operate have not been discharged.
In addition to the right to sue for reimbursement of the money it spends, however, CERCLA also
gives the federal government the right to sue for an injunction compelling a defendant to perform a
cleanup. Several state statutes give similar injunctive rights to those states. While we believe
such rights against AWI were also discharged upon AWIs emergence from Chapter 11, there does not
appear to be controlling judicial precedent in that regard. Thus, according to some cases, while a
governmental agencys right to require AWI to reimburse it for the costs of cleaning up a site may
be dischargeable, the same government agencys right to compel us to spend our money cleaning up
the same site may not be discharged even though the financial impact to AWI would have been the
same in both instances if the liability had not been discharged.
Specific Events
Upon emergence, AWI resolved its environmental liabilities at 45 sites through its Chapter 11 Case.
The liabilities at 38 sites were resolved through the global environmental settlement (Global
Settlement) with the Department of Justice (DOJ) and the U.S. Environmental Protection Agency
(EPA) with respect to CERCLA liability. The Global Settlement, which was approved by the
Bankruptcy Court in October 2005 and further amended in July 2007, provided EPA an approved proof
of claim in the amount of $9.2 million, which included $7.8 million with respect to the Peterson
Puritan site. At one CERCLA site, however, AWI will continue to participate in the cleanup under a
previously approved Consent Decree. In addition to the federal claims resolved by the Global
Settlement, AWIs emergence from Chapter 11 also resolved its environmental liabilities with
respect to claims asserted by the state and/or private parties at seven other sites.
AWI is subject to an order of the Oregon Department of Environmental Quality (DEQ) to investigate
and remediate hazardous substances present at its St. Helens, Oregon facility which was previously
owned by Kaiser Gypsum Company, Inc. (Kaiser) and then Owens Corning Fiberglas Corp. (OC).
Costs and responsibilities for the remedial investigation and remedy design are being shared with
Kaiser pursuant to an agreement between AWI and Kaiser. Contributions to these costs are also
being made available by DEQ pursuant to its settlement with OC for OCs liabilities for the
property.
DEQ subsequently approached AWI to perform investigations in Scappoose Bay adjacent to the St.
Helens, Oregon facility. AWI has denied liability for any contamination in Scappoose Bay.
However,
110
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
Kaiser entered into an agreement with DEQ to conduct such investigations in the Bay and
AWI and OC have cooperated with Kaiser and provided a portion of the funding for the investigation, without
waiving any defenses to liability. AWI continues to deny all liability for any contamination of
the adjacent bay. We are not currently able to estimate with reasonable certainty any amounts we
may incur with respect to the bay, although it is possible that such amounts may be material.
During the first quarter of 2008, we received a Notice and Finding of Violation from the U.S. EPA,
Region 6 and also a Notice of Enforcement from the Texas Commission on Environmental Quality,
relating to air emissions from our Center, Texas hardwood flooring manufacturing facility. The
Finding of Violation from the U.S. EPA has been resolved. We have reached an agreement with the
state of Texas. However, documents signed by Texas have not yet been received. Both matters have
been resolved with total settlement amounts under $0.1 million.
Summary of Financial Position
Liabilities of $6.5 million and $7.0 million at December 31, 2008 and December 31, 2007,
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 new information as it becomes available. These liabilities are
undiscounted.
The estimated liabilities above do not take into account any claims for recoveries from insurance
or third parties. In the fourth quarter of 2008, AWI concluded a settlement with an insurance
carrier and the U.S. EPA for the reimbursement of funds for environmental costs related to
specific, identified sites. This arrangement included a recovery by AWI from the carrier, a
payment from AWI to the carrier for retrospective premiums and a payment from AWI to the EPA. This
matter has been concluded, and we recorded a gain of $6.9 million within SG&A during the fourth
quarter of 2008. It is our policy to record probable recoveries that are either available through
settlement or anticipated to be recovered through negotiation or litigation, as assets in the
Consolidated Balance Sheets. The amount of the recorded asset for estimated recoveries was zero
and $2.1 million at December 31, 2008 and December 31, 2007, respectively.
Actual costs to be incurred at identified sites may vary from our estimates. Based on our current
knowledge of the identified sites, we are not able to estimate with reasonable certainty future
costs which may exceed amounts already recognized.
PATENT INFRINGEMENT CLAIMS
We are a defendant in a lawsuit claiming patent infringement related to some of our laminate
flooring products. We are being defended and indemnified by our supplier for costs and potential
damages related to the litigation. The jury verdict has held the asserted patent claims to be
non-infringed and invalid for a number of reasons. The plaintiff has filed an appeal.
In the second quarter of 2007, a second lawsuit claiming patent infringement related to some of our
laminate flooring products was settled without cost to us. We obtained a release with respect to
past damages accruing up to June 30, 2008. Pursuant to its indemnity obligations, our supplier
bore the costs of the litigation. With respect to certain laminate flooring products manufactured
for AWI since July 1, 2008, the prior claims could be reasserted with full availability to AWI of
all defenses previously raised. In such a case, AWI is the beneficiary of limited indemnities for
litigation costs and potential damages.
During the first quarter of 2006, a favorable settlement of a patent infringement case totaling
$8.6 million was recorded within SG&A expenses. This case, in which we were the plaintiff, related
to a previously divested business. We received the proceeds in the second quarter of 2006.
111
Armstrong World Industries, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
(dollar amounts in millions)
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 believe there is a reasonable possibility that a loss exceeding amounts
already recognized would be material.
NOTE 33. 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.
112
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and our chief financial
officer, performed an evaluation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of the
end of the period covered by this Annual Report on Form 10-K. Our chief executive officer and our
chief financial officer have concluded that our disclosure controls and procedures were effective
to ensure that information required to be disclosed in reports we file or submit under the Exchange
Act is (1) recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our
management, including our chief executive officer and our chief financial officer, to allow their
timely decisions regarding required disclosure.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2008 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Managements Report on Internal Control over Financial Reporting and the Report of Independent
Registered Public Accounting Firm are incorporated by reference to Item 8.
ITEM 9B. OTHER INFORMATION
On
February 24, 2009 Stephen J. Senkowski, executive vice president
and chief executive officer of Armstrong Building Products & Asia-Pacific Operations, announced he will retire effective
April 1, 2009. He will be succeeded by F. Nicholas
Grasberger III, who joined Armstrong as senior vice president and chief financial officer in 2005. An interim chief financial officer will be named shortly.
The Board of Directors established Monday, June 22, 2009 as the date for the Companys annual
meeting of shareholders. Shareholders of record at the close of trading on March 27, 2009 will be
entitled to vote at that meeting. Pursuant to Article II, Section 5 of the Companys Bylaws, if a
shareholder other than the Asbestos Personal Injury Settlement Trust should wish to propose
business to come before that meeting, written notice of such business must be received by the
Corporate Secretary of the Company no later than March 25, 2009. Any such notice should be
addressed to the attention of: Jeffrey D. Nickel, Corporate Secretary, Armstrong World Industries,
Inc., 2500 Columbia Avenue, Lancaster, PA 17603. It is recommended that any notice be sent via
means that will provide confirmation of the delivery date.
113
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10, other than information regarding the executive officers of the
Company which is presented in Item 4A. Executive Officers of the Company, is incorporated by
reference to the sections entitled Code of Ethics, Board of Directors, Nominating and
Governance Committee, Audit Committee and Audit Committee Expert, Management Development and
Compensation Committee, Director Information and Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys proxy statement for its 2009 annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the sections entitled
Compensation Discussion and Analysis, Compensation Committee Report, Summary Compensation
Table, Grants of Plan-Based Awards, Outstanding Equity Awards at Fiscal Year-End, Option
Exercises and Stock Vested, Pension Benefits, Nonqualified Deferred Compensation, Potential
Payments Upon Termination or Change in Control, Compensation Committee Interlocks and Insider
Participation and Compensation of Directors in the Companys proxy statement for its 2009 annual
meeting of shareholders.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by Item 12 is incorporated by reference to the sections entitled Security
Ownership of Certain Beneficial Owners, Security Ownership of Management and Equity
Compensation Plan Information in the Companys proxy statement for its 2009 annual meeting of
shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the sections entitled Certain
Relationships and Related Transactions and Director Independence in the Companys proxy
statement for its 2009 annual meeting of shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the section entitled Audit
Committee Report in the Companys proxy statement for its 2009 annual meeting of shareholders.
114
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. |
|
The financial statements and schedule of Armstrong World Industries, Inc. filed as a part
of this 2008 Annual Report on Form 10-K is listed in the Index to Financial Statements and
Schedules on page 52. |
|
2. |
|
The financial statements required to be filed pursuant to Item 15 of Form 10-K are: |
|
|
|
Worthington Armstrong Venture consolidated financial statements for the years
ended December 31, 2008, 2007 and 2006 (filed herewith as Exhibit 99) |
|
3. |
|
The following exhibits are filed as part of this 2008 Annual Report on Form 10-K: |
|
|
|
Exhibit No. |
|
Description |
|
|
|
No. 2
|
|
Armstrong World Industries, Inc.s Fourth Amended Plan of Reorganization, as amended by
modifications through May 23, 2006 is incorporated by reference from the 2005 Annual Report
on Form 10-K wherein it appeared as Exhibit 2.3. |
|
|
|
No. 3.1
|
|
Amended and Restated Certificate of Incorporation of Armstrong World Industries, Inc.
is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006,
wherein it appeared as Exhibit 3.1. |
|
|
|
No. 3.2
|
|
Armstrong World Industries, Inc.s Bylaws are incorporated by reference from the
Current Report on Form 8-K dated October 2, 2006, wherein they appeared as Exhibit 3.2. |
|
|
|
No. 10.1
|
|
Management Achievement Plan for Key Executives, effective as of November 28, 1983, as
amended April 30, 2007 and December 8, 2008, is filed with this Report. * |
|
|
|
No. 10.2
|
|
Retirement Benefit Equity Plan, effective January 1, 2005, as amended October 29, 2007
and December 8, 2008 is filed with this Report. * |
|
|
|
No. 10.3
|
|
Bonus Replacement Retirement Plan, effective as of January 1, 1998, as amended January
1, 2007, is incorporated by reference from the 2007 Annual Report on Form 10-K wherein it
appeared as Exhibit 10.9.* |
|
|
|
No. 10.4
|
|
Employment Agreement with Michael D. Lockhart, as amended, is incorporated by
reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008,
wherein it appeared as Exhibit 10.8. * |
|
|
|
No. 10.5
|
|
Hiring Agreement with F. Nicholas Grasberger III dated January 6, 2005 is incorporated
by reference from the Current Report filed on Form 8-K/A on January 6, 2005, wherein it
appeared as Exhibit 10.1. * |
|
|
|
No. 10.6
|
|
Indemnification Agreement with F. Nicholas Grasberger III dated January 6, 2005 is
incorporated by reference from the Current Report filed on Form 8-K/A on January 6, 2005,
wherein it appeared as Exhibit 10.3. * |
115
|
|
|
Exhibit No. |
|
Description |
|
|
|
No. 10.7
|
|
Armstrong World Industries, Inc.s Nonqualified Deferred Compensation Plan effective
January 2005 is incorporated by reference from the 2005 Annual Report on Form 10-K wherein it
appeared as Exhibit 10.29. * |
|
|
|
No. 10.8
|
|
Schedule of Armstrong World Industries, Inc. Nonemployee Director Compensation is
incorporated by reference from the 2006 Annual Report on Form 10-K wherein it appeared as
Exhibit 10.19. * |
|
|
|
No. 10.9
|
|
Indemnification Agreement with Donald A. McCunniff dated March 13, 2006 is
incorporated by reference from the Current Report filed on Form 8-K on March 14, 2006,
wherein it appeared as Exhibit 10.2. * |
|
|
|
No. 10.10
|
|
Credit Agreement, dated as of October 2, 2006, by and among the Company, certain
subsidiaries of the Company as guarantors, Bank of America, N.A., as Administrative Agent,
the other lenders party thereto, JP Morgan Chase Bank, N.A. and Barclays Bank PLC, as
Co-Syndication Agents and LaSalle Bank National Association and the Bank of Nova Scotia, as
Co-Documentation Agents, is incorporated by reference from the Current Report on Form 8-K
dated October 2, 2006, wherein it appeared as Exhibit 10.1. |
|
|
|
No. 10.11
|
|
The Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust
Agreement dated as of October 2, 2006, by and among Armstrong World Industries, Inc. and, as
trustees, Anne M. Ferazzi, Harry Huge, Paul A. Knuti, Lewis R. Sifford and Thomas M. Tully is
incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein
it appeared as Exhibit 10.2. |
|
|
|
No. 10.12
|
|
Stockholder and Registration Rights Agreement, dated as of October 2, 2006, by and
between Armstrong World Industries, Inc. and the Armstrong World Industries, Inc. Asbestos
Personal Injury Asbestos Trust is incorporated by reference from the Current Report on Form
8-K dated October 2, 2006, wherein it appeared as Exhibit 10.3. |
|
|
|
No. 10.13
|
|
Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan, as amended February
23, 2009, is filed with this Report. * |
|
|
|
No. 10.14
|
|
Form of Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan Stock Option
Agreement is incorporated by reference from the Current Report on Form 8-K dated October 2,
2006, wherein it appeared as Exhibit 10.5. * |
|
|
|
No. 10.15
|
|
Form of Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan Restricted
Stock Award Agreement is incorporated by reference from the Current Report on Form 8-K dated
October 2, 2006, wherein it appeared as Exhibit 10.6. * |
|
|
|
No. 10.16
|
|
Form of Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan notice of
restricted stock and/or option award is incorporated by reference from the Current Report on
Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.7. * |
|
|
|
No. 10.17
|
|
Form of Indemnification Agreement for directors and officers of Armstrong World
Industries, Inc. is incorporated by reference from the Current Report on Form 8-K dated
October 2, 2006, wherein it appeared as Exhibit 10.8. * A Schedule of Participating
Directors and Officers is incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended June 30, 2008 wherein it appeared as Exhibit 10.28. |
|
|
|
No. 10.18
|
|
2006 Phantom Stock Unit Plan as amended December 8, 2008, is filed with this Report. * |
116
|
|
|
Exhibit No. |
|
Description |
|
|
|
No. 10.19
|
|
2006 Phantom Stock Unit Agreement is incorporated by reference from the Current
Report on Form 8-K dated October 23, 2006, wherein it appeared as Exhibit 10.3. A Schedule
of Participating Directors is incorporated by reference from the 2006 Annual Report on Form
10-K wherein it appeared as Exhibit 10.36. * |
|
|
|
No. 10.20
|
|
2007 Award under the 2006 Phantom Stock Unit Agreement and the Schedule of
Participating Directors are incorporated by reference from the Current Report on Form 8-K
dated October 22, 2007, wherein they appeared as Exhibits 10.1 and 10.2, respectively. * |
|
|
|
No. 10.21
|
|
Stipulation and Agreement with Respect to Claims of Armstrong Holdings, Inc. and
Armstrong Worldwide, Inc.; and Motion for Order Approving Stipulation and Agreement are
incorporated by reference from the Current Report on Form 8-K dated February 26, 2007,
wherein they appeared as Exhibits 99.2 and 99.3, respectively. |
|
|
|
No. 10.22
|
|
Share Purchase Agreement dated March 27, 2007, between the Company and NPM Capital
N.V. and Flagstone Beheer B.V. for the sale of Tapijtfabriek H. Desseaux N.V. and its
subsidiaries is incorporated by reference from the 2006 Annual Report on Form 10-K wherein it
appeared as Exhibit 10.38. |
|
|
|
No. 10.23
|
|
Form of Armstrong World Industries, Inc. grant letter used in connection with the
equity grant of stock options and performance restricted shares under the 2006 Long-Term
Incentive Plan to Michael D. Lockhart is incorporated by reference from the 2007 Annual
Report on Form 10-K wherein it appeared as Exhibit 10.34. * |
|
|
|
No. 10.24
|
|
Form of Armstrong World Industries, Inc. grant letter used in connection with awards
of restricted stock under the 2006 Long-Term Incentive Plan is incorporated by reference from
the 2007 Annual Report on Form 10-K wherein it appeared as
Exhibit 10.35. * |
|
|
|
No. 10.25
|
|
Amendment No. 1, dated February 25, 2008, to the Credit Agreement, dated October 2,
2006, by and among the Company, certain subsidiaries of the Company as guarantors, Bank of
America, N.A., as Administrative Agent, the other lenders party thereto, JP Morgan Chase
Bank, N.A. and Barclays Bank PLC, as Co-Syndication Agents and LaSalle Bank National
Association and the Bank of Nova Scotia, as Co-Documentation Agents, is incorporated by
reference from the 2007 Annual Report on Form 10-K wherein it appeared as Exhibit 10.36. |
|
|
|
No. 10.26
|
|
Form of Armstrong World Industries, Inc. grant letter used in connection with award
of stock options under the 2006 Long-Term Incentive Plan is incorporated by reference from
the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 wherein it appeared as
Exhibit 10.37. * |
|
|
|
No. 10.27
|
|
2008 Directors Stock Unit Plan as amended December 8, 2008 is filed with this Report. * |
|
|
|
No. 10.28
|
|
Form of 2008 Service Commencement Award to each of Stan A. Askren and Jon A. Boscia
is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 wherein it appeared as Exhibit 10.34. * |
|
|
|
No. 10.29
|
|
Form of 2008 Award under the
2008 Director Stock Unit Plan is incorporated by reference
from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 wherein it
appeared as Exhibit 10.35. * |
|
|
|
No. 10.30
|
|
Schedule of Participating Directors to the 2008 award under the 2008 Directors Stock
Unit Plan is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2008 wherein it appeared as Exhibit 10.36. * |
117
|
|
|
Exhibit No. |
|
Description |
|
|
|
No. 10.31
|
|
Form of Change in Control Agreement with certain officers is incorporated by
reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008
wherein it appeared as Exhibit 10.37. * |
|
|
|
No. 10.32
|
|
Schedule of Participating Officers to the Form of Change in Control Agreement is
incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 wherein it appeared as Exhibit 10.38. * |
|
|
|
No. 10.33
|
|
Form of Change in Control Agreement with Michael D. Lockhart is incorporated by
reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008
wherein it appeared as Exhibit 10.39. * |
|
|
|
No. 11
|
|
Computation of Earnings Per Share. |
|
|
|
No. 21
|
|
Armstrong World Industries, Inc.s Subsidiaries. |
|
|
|
No. 23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
No. 23.2
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
No. 24
|
|
Power of Attorney and Authorizing Resolution. |
|
|
|
No. 31.1
|
|
Certification of Principal Executive Officer required by Rule 13a-15(e) or 15d-15(e)
of the Securities Exchange Act. |
|
|
|
No. 31.2
|
|
Certification of Principal Financial Officer required by Rule 13a-15(e) or 15d-15(e)
of the Securities Exchange Act. |
|
|
|
No. 32.1
|
|
Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section
1350 (furnished herewith). |
|
|
|
No. 32.2
|
|
Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section
1350 (furnished herewith). |
|
|
|
No. 99
|
|
Worthington Armstrong Venture consolidated financial statements for years ended December
31, 2008, 2007, and 2006. |
|
|
|
* |
|
Management Contract or Compensatory Plan. |
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
ARMSTRONG WORLD INDUSTRIES, INC.
(Registrant)
|
|
|
By: |
/s/ Michael D. Lockhart
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
Date: February 26, 2009 |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has
been signed below by the following persons on behalf of the registrant Armstrong and in the
capacities and on the dates indicated.
Directors and Principal Officers of the registrant AWI:
|
|
|
Name |
|
Title |
Michael D. Lockhart
|
|
Chairman and Chief Executive Officer (Principal Executive Officer) |
|
|
|
F. Nicholas Grasberger III
|
|
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
|
|
|
Stephen F. McNamara
|
|
Vice President and Controller (Chief Accounting Officer) |
|
|
|
Stanley A. Askren
|
|
Director |
|
|
|
Jon A. Boscia
|
|
Director |
|
|
|
James J. Gaffney
|
|
Director |
|
|
|
Robert C. Garland
|
|
Director |
|
|
|
Judith R. Haberkorn
|
|
Director |
|
|
|
James J. OConnor
|
|
Director |
|
|
|
Russell F. Peppet
|
|
Director |
|
|
|
Arthur J. Pergament
|
|
Director |
|
|
|
John J. Roberts
|
|
Director |
|
|
|
Alexander M. Sanders, Jr.
|
|
Director |
|
|
|
|
|
|
|
|
|
By: |
/s/ Michael D. Lockhart
|
|
|
|
(Michael D. Lockhart, as attorney-in-fact |
|
|
|
for AWI directors and on his own behalf)
As of February 26, 2009 |
|
|
|
|
|
By: |
/s/ F. Nicholas Grasberger III
|
|
|
|
(F. Nicholas Grasberger III) |
|
|
|
As of February 26, 2009 |
|
|
|
|
|
By: |
/s/ Stephen F. McNamara
|
|
|
|
(Stephen F. McNamara) |
|
|
|
As of February 26, 2009 |
|
119
SCHEDULE II
Armstrong World Industries, Inc.
Valuation and Qualifying Reserves of Accounts Receivable
(amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
|
Successor Company |
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
Nine |
|
|
|
Year |
|
|
Year |
|
|
Months |
|
|
|
Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
2006 |
|
Provision for Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
11.8 |
|
|
$ |
10.6 |
|
|
$ |
10.8 |
|
|
|
$ |
10.8 |
|
Additions charged to earnings |
|
|
8.6 |
|
|
|
10.3 |
|
|
|
1.4 |
|
|
|
|
5.2 |
|
Deductions |
|
|
(9.6 |
) |
|
|
(9.1 |
) |
|
|
(1.6 |
) |
|
|
|
(4.1 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
10.8 |
|
|
$ |
11.8 |
|
|
$ |
10.6 |
|
|
|
$ |
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Discounts and Warranties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
51.9 |
|
|
$ |
56.2 |
|
|
$ |
54.3 |
|
|
|
$ |
44.0 |
|
Additions charged to earnings |
|
|
225.6 |
|
|
|
228.6 |
|
|
|
51.0 |
|
|
|
|
192.6 |
|
Deductions |
|
|
(233.8 |
) |
|
|
(232.9 |
) |
|
|
(49.1 |
) |
|
|
|
(182.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
43.7 |
|
|
$ |
51.9 |
|
|
$ |
56.2 |
|
|
|
$ |
54.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Provision for Discounts, Warranties and Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
63.7 |
|
|
$ |
66.8 |
|
|
$ |
65.1 |
|
|
|
$ |
54.8 |
|
Additions charged to earnings |
|
|
234.2 |
|
|
|
238.9 |
|
|
|
52.4 |
|
|
|
|
197.8 |
|
Deductions |
|
|
(243.4 |
) |
|
|
(242.0 |
) |
|
|
(50.7 |
) |
|
|
|
(186.4 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
54.5 |
|
|
$ |
63.7 |
|
|
$ |
66.8 |
|
|
|
$ |
65.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit Index
|
|
|
Exhibit No. |
No. 10.1
|
|
Management Achievement Plan for Key Executives, effective as of
November 28, 1983, as amended April 30, 2007 and December 8,
2008. |
|
|
|
No. 10.2
|
|
Retirement Benefit Equity Plan, effective January 1, 2005, as
amended October 29, 2007 and December 8, 2008. |
|
|
|
No. 10.13
|
|
Armstrong World Industries, Inc. 2006 Long-Term Incentive Plan,
as amended February 23, 2009. |
|
|
|
No. 10.18
|
|
2006 Phantom Stock Unit Plan, as amended December 8, 2008. |
|
|
|
No. 10.27
|
|
2008 Directors Stock Unit Plan, as amended December 8, 2008. |
|
|
|
No. 11
|
|
Computation of Earnings Per Share. |
|
|
|
No. 21
|
|
Armstrong World Industries, Inc.s Subsidiaries. |
|
|
|
No. 23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
No. 23.2
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
No. 24
|
|
Power of Attorney and Authorizing Resolution. |
|
|
|
No. 31.1
|
|
Certification of Principal Executive Officer required by Rule
13a-15(e) or 15d-15(e) of the Exchange Act. |
|
|
|
No. 31.2
|
|
Certification of Principal Financial Officer required by Rule
13a-15(e) or 15d-15(e) of the Exchange Act. |
|
|
|
No. 32.1
|
|
Certification of Chief Executive Officer required by Rule 13a
and 18 U.S.C. Section 1350. |
|
|
|
No. 32.2
|
|
Certification of Chief Financial Officer required by Rule 13a
and 18 U.S.C. Section 1350. |
|
|
|
No. 99
|
|
Worthington Armstrong Venture consolidated financial statements
as of December 31, 2008 and 2007 and for the years ended
December 31, 2008, 2007 and 2006. |