By Steven Feldman
Armstrong World Industries’ new lease on life began Oct. 2 when it exited bankruptcy, nearly six years after it started the process. The reorganized Armstrong is leaner and meaner with a new board of directors and new stock, but most critical to the company’s long-term success is that it is permanently free of the billions of dollars of asbestos liability, present and future, that drove the corporation into bankruptcy in December 2000.

Armstrong emerged from Chapter 11 once its “Fourth Amended Plan of Reorganization, as Modified” became effective two weeks ago. The $2.8 billion plan creates a new corporation—about a third will be owned by unsecured creditors and the balance by a trust formed to pay and administer all asbestos claims.

“We have emerged from Chapter 11 having made significant operational improvements that provide the opportunity to grow and strengthen our business,” said Michael Lockhart, chairman and CEO.

In addition to resolving its asbestos liability, Armstrong used the time in Chapter 11 to restructure its flooring business to make it more competitive, Lockhart said. The vinyl flooring segment saw its profits improve, but eight plants were closed and 1,500 workers were idled. Armstrong also added capacity in its wood flooring business, put more emphasis on the commercial market, cut its debt and strengthened its balance sheet. “We have broadened our product lines and improved product quality and customer service.

“Our solid capital structure, combined with our recent financial performance, means that our employees, customers, distributors, suppliers and other business partners can be assured that the company is on strong financial footing with good prospects, allowing for continued growth and profitability going forward.”

Armstrong has had several consecutive quarters of improved financial performance. In the second quarter of 2006, it nearly doubled its operating income from a year ago (from $36.6 million to $72.5 million). This increase was primarily due to increased manufacturing productivity and a 3% sales increase. For the first six months of 2006, Armstrong’s operating income increased to $120.7 million (compared to $44.3 million for the first six months of 2005). The improvement in operating income was primarily due to higher sales, improved manufacturing productivity and reduced expenses.

Lockhart told the Lancaster New Era that certain sacrifices tempered his feelings about exiting bankruptcy. “While it is a successful end to a long and at times daunting process, I can’t celebrate because look at what’s happened,” citing the toll the bankruptcy took on shareholders and employees. From a shareholder standpoint, Armstrong canceled its old stock, leaving those shareholders with nothing after creditors thwarted Armstrong’s plan to give them options to buy the new stock.

However, Lockhart noted there is one thing worth celebrating. “That is the people who are here have busted their rear ends for six years to get to this point,” he added, calling their effort “a real source of satisfaction for me.”

The many technicalities involved in launching the new Armstrong should be wrapped up by mid October. By then, the new Armstrong will have new financing, and its new stock will begin trading.

Lockhart said he was “pretty optimistic” about the new Armstrong, noting the company has lessened its reliance on the vinyl flooring business and the new housing market—both currently in decline.

Armstrong, which has annual sales of $3.6 billion, initially planned on emerging from bankruptcy three years ago. But its unsecured creditors, who at first had supported Armstrong’s plan, turned against it, filing objections to numerous aspects in hopes of forcing a much bigger payout.

The unsecured creditors managed to knock out the plan’s provision to give the stock options. But in August, a federal judge rejected their argument that the plan unfairly discriminated against them and confirmed the plan, leading finally to the company’s emergence from bankruptcy.

Exit financing

Armstrong expects to receive commitments for $1.1 billion in a senior credit facility, including a $300 million revolving credit facility; a $300 million term loan with a five-year maturity; and a $500 million term loan with a seven-year maturity. The revolving credit facility is immediately available to support Armstrong’s ongoing liquidity needs. Both term loans are expected to be funded on or about Oct. 16 and will be utilized to satisfy distributions under the plan.

Plan provisions

Armstrong has established a trust in accordance with the provisions of section 524(g) of the U.S. Bankruptcy Code to resolve all current and future asbestos personal injury claims. Armstrong is funding the trust by making a one-time contribution of cash, insurance assets and common stock of the reorganized Armstrong. Those assets will be administered by the trust’s trustees and used to pay asbestos claims in accordance with the provisions of the plan and the related trust documents. The reorganized Armstrong will have no role or responsibility in the administration of the trust. Pursuant to the plan, all present and future asbestos personal injury claims must be asserted against the trust, and all asbestos claimants will be permanently enjoined from pursuing their claims against the reorganized Armstrong.

The plan provides for general unsecured creditors to receive a combination of cash and common stock of the reorganized Armstrong on account of their allowed claims. Distributions to unsecured creditors are expected to begin Oct. 17.

The ownership of Armstrong by its former parent, Armstrong Holdings, ended upon Armstrong’s emergence from Chapter 11. All Armstrong stock owned by Armstrong Holdings has been canceled.