-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IdQfhkgkE++EthfOQHtNq4GXlpuPyJ095WfLkIALpYakhWG9Je5DiRxKxDsjtxMZ 50d66splm5ly/J4auDaVQg== 0000005850-99-000012.txt : 19990813 0000005850-99-000012.hdr.sgml : 19990813 ACCESSION NUMBER: 0000005850-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN STANDARD INC CENTRAL INDEX KEY: 0000005850 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 250900465 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00470 FILM NUMBER: 99685867 BUSINESS ADDRESS: STREET 1: ONE CENTENNIAL AVE STREET 2: P O BOX 6820 CITY: PISCATAWAY STATE: NJ ZIP: 08855-6820 BUSINESS PHONE: 9089806000 MAIL ADDRESS: STREET 1: 1114 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036-7776 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN RADIATOR & STANDARD SANITARY CO DATE OF NAME CHANGE: 19670620 10-Q 1 2ND QTR 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 1-470 AMERICAN STANDARD INC. (Exact name of Registrant as specified in its charter) Delaware 25-0900465 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Centennial Avenue, P.O. Box 6820, Piscataway, NJ 08855-6820 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (732) 980-6000 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value, outstanding at July 31, 1999 1,000 shares PART 1. FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN STANDARD INC. AND SUBSIDIARIES UNAUDITED SUMMARY STATEMENT OF OPERATIONS (Dollars in millions)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ----- - ----- ----- ---- SALES $1,936 $1,795 $3,610 $3,288 ------ ------ ------ ------ COST AND EXPENSES Cost of sales 1,424 1,315 2,675 2,439 Selling and administrative expenses 312 289 612 547 Other (income) expense (1) 9 (4) 8 Interest expense 47 51 93 102 ------ ------ ------ ------ 1,782 1,664 3,376 3,096 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 154 131 234 192 Income taxes 64 53 97 78 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY ITEM 90 78 137 114 Extraordinary loss on retirement of debt, net of tax - 50 - 50 ------ ------ ------ ------ NET INCOME $ 90 $ 28 $ 137 $ 64 ====== ====== ====== ====== See accompanying notes
Item 1. Financial Statements (continued) AMERICAN STANDARD INC. AND SUBSIDIARIES UNAUDITED SUMMARY BALANCE SHEET (Dollars in millions)
June 30, December 31, 1999 1998 ------ ------ CURRENT ASSETS Cash and cash equivalents $ 46 $ 65 Accounts receivable 1,159 939 Inventories Finished products 325 269 Products in process 108 97 Raw materials 112 92 ------ ------ 545 458 Other current assets 142 129 ------ ------ TOTAL CURRENT ASSETS 1,892 1,591 FACILITIES, less accumulated depreciation; June 1999 - $597; Dec. 1998- $611 1,321 1,241 GOODWILL 1,019 833 OTHER ASSETS 960 885 ------ ------ TOTAL ASSETS $5,192 $4,550 ====== ====== CURRENT LIABILITIES Loans payable to banks $ 906 $ 732 Current maturities of long-term debt 16 169 Accounts payable 539 544 Accrued payrolls 217 204 Other accrued liabilities 746 710 ------ ------ TOTAL CURRENT LIABILITIES 2,424 2,359 LONG-TERM DEBT 1,914 1,528 RESERVE FOR POSTRETIREMENT BENEFITS 470 478 OTHER LIABILITIES 528 530 ------ ------ TOTAL LIABILITIES 5,336 4,895 COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S DEFICIT Preferred stock, Series A, 1,000 shares issued and outstanding, par value $.01 - - Common stock, 1,000 shares issued and outstanding, $.01 par value. - - Capital surplus 580 571 Accumulated deficit (555) (692) Foreign currency translation effects (169) (224) ------ ------ TOTAL STOCKHOLDER'S DEFICIT (144) (345) ------ ------ $5,192 $4,550 ====== ====== See accompanying notes
Item 1. Financial Statements (continued) AMERICAN STANDARD INC. AND SUBSIDIARIES UNAUDITED SUMMARY STATEMENT OF CASH FLOWS (Dollars in millions)
Six months ended June 30, 1999 1998 ----- ----- CASH PROVIDED (USED) BY: OPERATING ACTIVITIES: Net income $137 $ 114 Depreciation 80 66 Amortization of goodwill and other intangibles 29 25 Non-cash interest 4 28 Non-cash stock compensation - 4 Changes in assets and liabilities: Accounts receivable (191) (151) Inventories (46) (62) Accounts payable and other accruals 38 148 Other assets and liabilities (22) 9 ----- ----- Net cash provided by operating activities 29 181 ----- ----- INVESTING ACTIVITIES: Purchase of property, plant and equipment (81) (97) Investments in affiliated companies and other businesses (26) (10) Investment in computer software (34) (14) Acquisition of Armitage/Dolomite, net of cash acquired (430) - Other (2) (5) ----- ----- Net cash used by investing activities (573) (126) ----- ----- FINANCING ACTIVITIES: Net loan from Parent 2 5 Proceeds from issuance of long-term debt 460 1,011 Repayments of long-term debt, including redemption premium (171) (966) Net change in revolving credit facility 220 (32) Net change in other short-term debt 16 6 Financing costs and other (3) (35) ----- ----- Net cash provided (used) by financing activities 524 (11) ----- ----- Effect of exchange rate changes on cash and cash equivalents 1 - ----- ----- Net increase (decrease) in cash and cash equivalents (19) 44 Cash and cash equivalents at beginning of period 65 29 ----- ----- Cash and cash equivalents at end of period $ 46 $ 73 ===== ===== See accompanying notes
AMERICAN STANDARD INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Note 1. Basis of Financial Statement Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial data have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain amounts in the 1998 financial statements have been reclassified to conform to the 1999 presentation. Note 2. Restructuring and Asset Impairment Charges In 1998, the Company committed to restructuring plans designed to achieve lower product costs and improved efficiency. Key elements of the plans include the transfer of significant manufacturing capacity to locations with lower labor costs and the sale of certain assets. In connection therewith, the Company determined that certain long-lived assets were impaired. Accordingly, in the second half of 1998 the Company recorded charges totaling $200 million ($186 million net of tax benefits), including $185 million for Plumbing Products, $7 million for Air Conditioning Products, $5 million for Automotive Products and $3 million for Medical Systems. The Plumbing Products charge of $185 million reflects the closure of five plants in Europe and two in North America. The charge includes a loss on the sale of the French distribution operations, costs related to a workforce reduction of approximately 1,600 people and, applying the criteria of FAS 121, write-downs of impaired fixed assets and related goodwill. The Air Conditioning Products charge of $7 million involves the closure of one plant in Australia, one plant in Europe, and a workforce reduction of 115 people. The Automotive Products charge of $5 million primarily reflects a workforce reduction of 75 people in Europe related to having certain machining work done by low-cost outside vendors rather than in the Company's own facilities and the closure of three small plants. A restructuring charge of $3 million was also recorded for Medical Systems, relating to asset write-offs and severance payments. Following is a summary of the restructuring and asset impairment charges accrued and activity through June 30, 1999 (dollars in millions):
Balance Paid first Balance Initial Non-cash Paid in Dec. 31 six months June 30 Charge Write-off 1998 1998 of 1999 1999 ------ --------- ----- ------ --------- ---- Termination payments to employees $49.8 $ - $10.4 $39.4 $27.3 $12.1 Other employee costs 33.6 - 4.3 29.3 2.3 27.0 Facilities write-downs (a) 88.3 72.4 - 15.9 .6 15.3 Loss on sale of French distribution business (b) 19.1 14.9 3.6 .6 - .6 Other 9.5 1.4 .2 7.9 2.2 5.7 ------ ----- ----- ----- ----- ----- $200.3 $88.7 $18.5 $93.1 $32.4 $60.7 ====== ===== ===== ===== ===== ===== (a)Includes goodwill write-down of $31.3 million related to the facilities write-down for the French plumbing manufacturing operations. (b) Includes goodwill write-off of $12.3 million.
The initial charge of $200.3 million was comprised of non-cash asset write-offs of $88.7 million and accrued charges of $111.6 million. Of the $60.7 million unpaid balance of accrued charges as of June 30, 1999, the Company expects that most will be paid by the end of 1999 and the remainder in 2000. The accrued termination payments to employees include only severance payments after termination. Other employee-related costs include negotiated supplemental payments to pension funds and other payments to union organizations for the benefit of terminated employees. Of the 1,800 employees being terminated, approximately 1,500 are hourly factory workers and 300 are salaried administrative personnel. As of June 30, 1999, approximately 1,245 employees had been terminated. The facilities being closed and written down include eight owned and four leased manufacturing plants, and the related manufacturing equipment. The owned plants are being held for disposal and, accordingly, were written down to the lower of carrying amount or fair value, less costs to sell. Two of those facilities will be demolished and the land held for sale. Leases on the four rented facilities will be terminated upon payment of obligations specified or negotiated under the lease contracts. Manufacturing equipment being scrapped was written off and equipment being sold has been written down to the lower of carrying amount or fair value, less costs to sell. The net carrying value of land, buildings and equipment held for sale as of June 30, 1999 was $12 million. The closure of certain facilities necessitates the investigation of potential environmental contamination or the legal or regulatory requirement to remediate the facility. In addition, the sale of one facility contractually obligates the Company to demolish and remediate the site. Approximately one-half of other restructuring costs are leasehold termination costs, with the remainder consisting of cash grants forfeited upon closure of a facility in Italy and other miscellaneous costs. Note 3. Acquisition On February 2, 1999, the Company acquired the Bathrooms Division of Blue Circle Industries PLC, a manufacturer of ceramic sanitaryware, brassware and integrated plumbing systems, for approximately $430 million, including fees and expenses and net of cash acquired, with borrowings under the Company's 1997 Credit Agreement. The acquired business consists of two principle businesses, Armitage Shanks, a United Kingdom manufacturer, and Ceramica Dolomite, an Italian manufacturer ("Armitage/Dolomite") and had 1998 sales of approximately $290 million and assets at December 31, 1998 of approximately $250 million. Armitage/Dolomite has 3 large and 9 small facilities located in the United Kingdom and Italy, and employs approximately 3,200 people. The primary markets for its products are in the United Kingdom, Italy, Ireland and Germany. The Company expects to complete its plans to integrate Armitage/Dolomite into existing European operations by the end of 1999. This process could result in additional expenses or increase the amount of goodwill. This acquisition is being accounted for as a purchase. The Company is in the process of valuing the assets acquired and liabilities assumed for purposes of allocating the purchase price. Although the evaluation process is not expected to be completed until the end of 1999, the Company's preliminary estimates indicate that goodwill of approximately $250 million will be recorded. Note 4. Public Offering of Debt On May 28, 1999, American Standard Inc. completed the sale of the equivalent of $460 million of Senior Notes, with an average interest rate of 7.7%, issued in three series: 250 million Euro Senior Notes due 2006; 100 million U.S. Dollar Senior Notes due 2009 and 60 million Sterling Senior Notes due 2009. Net proceeds of $452 million from the offering were applied to refinance borrowings incurred to pay $150 million of 10-7/8% Senior Notes at maturity on May 15, 1999 and to refinance a substantial portion of the purchase price of the February 1999 Armitage/Dolomite acquisition. The May 28, 1999 sale of Senior Notes, which are not subject to redemption, was made pursuant to a shelf registration statement jointly filed by American Standard Companies Inc. and its wholly-owned subsidiary American Standard Inc. covering $1 billion of senior debt (the "1998 Shelf Registration"). Debt securities sold under the 1998 Shelf Registration are issued by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. Note 5. Comprehensive Income Total comprehensive income, consisting of net income or loss and foreign currency translation effects, for the three months ended June 30, 1999 and 1998 was $127 million and $23 million, respectively, and for the six months ended June 30, 1999 and 1998 was $192 million and $72 million, respectively. Note 6. Tax Matters As described in Note 7 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, there are pending German tax issues for the years 1984 through 1990. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Note 7. Impact of Recently Issued Accounting Standards In 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. The Company's use of derivative instruments and hedging activities is minimal and, therefore, management believes that the adoption of Statement No. 133 will not have a significant effect on the Company's results of operations or financial position. Note 8. Segment Data Summary Segment and Income Data (Dollars in millions) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Sales: Air Conditioning Products $ 1,188 $ 1,112 $ 2,130 $ 1,950 Plumbing Products 459 384 873 742 Automotive Products 264 274 556 546 Medical Systems 25 25 51 50 ------- ------- ------- ------- $ 1,936 $ 1,795 $ 3,610 $ 3,288 ======= ======= ======= ======= Segment income (loss): Air Conditioning Products (a) $ 153 $ 139 $ 229 $ 212 Plumbing Products 46 33 80 52 Automotive Products 36 42 76 84 Medical Systems (5) (5) (10) (9) ------- ------- ------- ------- 230 209 375 339 Equity in net income of unconsolidated joint ventures 9 6 17 12 ------- ------- ------- ------- 239 215 392 351 Interest expense 47 51 93 102 Corporate and other expenses 38 33 65 57 ------- ------- ------- ------- Income before income taxes and extraordinary item $ 154 $ 131 $ 234 $ 192 ======= ======= ======= ======= (a)Financing fees paid by Air Conditioning to the Company's financial services joint venture of $7 million and $12 million for the three and six months ended June 30, 1998, respectively, have been reclassified to Corporate expenses upon adoption of the new segment reporting standard as of December 31, 1998
PART 1. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Second Quarter and First Six Months of 1999 Compared with the Second Quarter and First Six Months of 1998 The Company achieved record sales of $1,936 million in the second quarter of 1999, an increase of $141 million, or 8% (9% excluding unfavorable foreign exchange effects), from $1,795 million in the second quarter of 1998. Sales increased 7% for Air Conditioning Products and 20% for Plumbing Products, declined 4% for Automotive Products and were at the same level as the second quarter of 1998 for Medical Systems. Segment income for the second quarter of 1999 was also a record at $230 million, an increase of $21 million, or 10% (12% excluding unfavorable foreign exchange effects), from $209 million in the second quarter of 1998. Segment income increased 10% for Air Conditioning Products and 39% for Plumbing Products but declined 14% for Automotive Products. Medical Systems' segment loss was at the same level as in the second quarter of 1998. Sales for the first half of 1999 were $3,610 million, an increase of $322 million, or 10% (with little overall effect from foreign exchange), from $3,288 million in the first half of 1998. Sales increased 9% for Air Conditioning Products, 18% for Plumbing Products and 2% for Automotive Products, while sales for Medical Systems were at the same level as the first half of 1998. Segment income was $375 million for the first half of 1999, an increase of 11% (12% excluding unfavorable foreign exchange effects), compared with $339 million in the first half of 1998. Segment income increased 8% for Air Conditioning Products and 55% for Plumbing Products but declined 10% for Automotive Products. The segment loss for Medical Systems was $10 million for the first half of 1999 compared with a loss of $9 million for the first half of 1998. Sales of Air Conditioning Products increased 7% (with little overall effect from foreign exchange) to $1,188 million for the second quarter of 1999, from $1,112 million for the second quarter of 1998. Worldwide Applied Systems sales increased 6% due to increases in the U.S. commercial equipment business and a strong performance in sales and service operations, partly offset by a small decline in the international applied business, primarily in Asia. U.S. sales of commercial applied products increased 11% because of higher volumes, reflecting continued strength in the U.S. commercial applied business and the acquisition of sales and service offices. Worldwide Unitary Systems sales increased 8% (with little foreign exchange effect) primarily from higher volumes in U.S. residential and commercial operations and a small increase in the international unitary business. U.S. unitary sales increased 10% reflecting continued strength in the U.S. commercial and residential unitary markets, aided by the effects of warmer-than-normal weather. International unitary sales increased 2% (3% excluding foreign exchange effects) principally as a result of volume improvements in Europe, partly offset by a decline in the Middle East. Sales for Air Conditioning Products for the first half of 1999 increased by 9% (with little foreign exchange effect) to $2,130 million from $1,950 million in the first half of 1998, primarily for the same reasons explaining the second quarter increase and the adverse effect in the first quarter of 1998 of a four-week strike at the Lexington, Kentucky, air handling facility. Segment income of Air Conditioning Products increased 10% (with little effect from foreign exchange) to $153 million in the second quarter of 1999 from $139 million in the second quarter of 1998. Worldwide Applied Systems benefited from improved volume in the U.S., partly offset by weakness in international markets. Worldwide Unitary Systems posted strong growth, primarily in the U.S., as both volume and margins improved over an excellent prior year performance. Segment income for the first half of 1999 increased 8% (with little effect from foreign exchange) to $229 million from $212 million in the first half of 1998, essentially for the reasons mentioned for the second quarter increase and the effect in the first quarter of 1998 of the strike at Lexington, partly offset by the effect of a three-week strike at the Clarksville commercial facility in the first quarter of 1999. Sales of Plumbing Products increased 19% (23% excluding unfavorable foreign exchange effects) to $459 million in the second quarter of 1999, from $384 million in the second quarter of 1998, primarily as a result of gains in Europe and the Americas. The European increase included $76 million of sales as a result of the Armitage/Dolomite acquisition on February 2, 1999 (see Note 2 of Notes to Financial Statements), partly offset by a reduction of $17 million of sales related to the divestiture of French distribution operations in the fourth quarter of 1998. Excluding the acquisition and the divestiture, sales in Europe and Asia were essentially flat. Sales in the Americas increased 13% (17% excluding unfavorable foreign exchange effects) due to continued strong growth in the U.S. and gains in Latin America. U.S. operations achieved a 16% sales increase on higher volume, primarily through expanding retail and wholesale channels. Sales of Plumbing Products for the first half of 1999 increased 18% (19% excluding unfavorable foreign exchange effects) to $873 million from $742 million in the first half of 1998. This increase was due principally to the same factors affecting second quarter results. Segment income of Plumbing Products for the second quarter of 1999 was $46 million, an increase of 39% (48% excluding unfavorable foreign exchange effects) from $33 million for the 1998 second quarter. The increase was principally attributable to margin improvements from the restructuring of European operations as part of a low-cost sourcing program, the Armitage/Dolomite acquisition and substantial volume improvements in the Americas. The successful restructuring of both the Americas and European Plumbing businesses has substantially lowered their cost structures resulting in improving trends in margins and profitability. Segment income for the first half of 1999 increased 54% (60% excluding unfavorable foreign exchange effects) to $80 million from $52 million in the first half of 1998. The increase resulted primarily for the same reasons as those responsible for the second quarter increase. Sales of Automotive Products for the second quarter of 1999 were $264 million, a decrease of 4% (but an increase of 1% excluding unfavorable foreign exchange effects) from $274 million in the second quarter of 1998. This exchange-adjusted increase resulted primarily from increased shipments of anti-lock braking systems (ABS) to the Company's U.S. braking systems joint venture, higher product content per vehicle on new model introductions in 1998 and sales by the U.S. compressor manufacturing joint venture. Increased export sales to the U.S. in the second quarter of 1999 reflected the full phase-in of regulations requiring ABS on all new heavy-duty trucks and trailers. Sales to European commercial vehicle manufacturers were down slightly in the quarter, as unit volume of truck and bus production in Western Europe decreased 4% from the second quarter of 1998. Brazilian sales also experienced a decline. Sales of Automotive Products for the first half of 1999 increased 2% (4% excluding unfavorable foreign exchange effects) to $556 million from $546 million in the first half of 1998, primarily for the reasons cited for the second quarter increase. Segment income for Automotive Products for the second quarter of 1999 decreased $6 million ($4 million excluding unfavorable foreign exchange effects) to $36 million from $42 million in the second quarter of 1998. This was primarily the result of the weak economy in Brazil, increased product development spending in Europe and product mix reflecting increased export sales. Segment income for Automotive Products for the first half of 1999 was $76 million, a decrease of 10% (8% excluding unfavorable foreign exchange effects) from $84 million in the first half of 1998, principally for the same reasons cited for the second quarter decrease. Medical Systems sales were $25 million in the quarter, the same as the prior year second quarter, reflecting increased sales of new diagnostic products offset by the expected sales declines of older radioimmunoassay products. The segment loss of $5 million was at the same level as the second quarter of 1998. Development costs of new diagnostic products and accelerated virus research continues at a high level. In the first half of 1999 Medical Systems sales were $51 million and the segment loss was $10 million, both essentially the same as for the first half of 1998, primarily for the same reasons as in the second quarter of 1999. Equity in net income of unconsolidated joint ventures increased to $9 million in the second quarter of 1999 from $6 million in the year-earlier quarter, and increased to $17 million in the first half of 1999 from $12 million in the 1998 first half, reflecting the continued strong growth of Automotive Products' U.S. braking systems joint venture. Other Summary Income Data Items Interest expense decreased by $4 million in the second quarter of 1999 and by $9 million in the first half of 1999 compared to the year-earlier quarter and first half, due to lower average interest rates achieved through 1998 and 1999 debt refinancings, which more than offset the effect of increased debt arising principally from the Armitage/Dolomite acquisition. Corporate and other expenses in the second quarter of 1999 were $38 million, $5 million higher than in the prior year second quarter mainly due to higher corporate spending. For the same reasons, in the first half of 1999, corporate and other expenses were $8 million higher than in the first half of 1998. The income tax provision for the second quarter of 1999 was $64 million and for the first half of 1999 was $97 million, or 41.5% of pretax income, compared with provisions of $53 million and $78 million, or 40.5% of pretax income (before extraordinary item) in the comparable periods of 1998. Liquidity and Capital Resources Net cash provided by operating activities, after cash interest paid of $89 million, was $29 million for the first six months of 1999, compared with net cash provided of $181 million for the same period of 1998. The $152 million decrease resulted primarily from unfavorable changes in working capital items principally related to growth of the business, payments against the restructuring reserve, and differences in the timing of accruals and disbursements in the two periods. Accounts receivable and inventories increased in the first six months of both years, reflecting the normal seasonal pattern. The receivables increase was larger in 1999 primarily because of increased sales. The Company made capital expenditures of $107 million for the first six months of 1999, including $26 million of investments in affiliated companies and other businesses (but excluding the Armitage/Dolomite acquisition) compared with capital expenditures of $107 million in the first six months of 1998, including $10 million of investments in affiliated companies. The Company also invested $34 million in computer software in the first six months of 1999, compared with $14 million in the 1998 period. In January 1997 the Company entered into the 1997 Credit Agreement which requires no repayment of principal prior to its expiration in 2002, and provides the Company with senior secured credit facilities aggregating $1.75 billion as follows: (a) a $750 million U.S. dollar revolving credit facility and a $625 million multi-currency revolving credit facility (the "Revolving Facilities"), which by their nature are short-term, and (b) a $375 million multi-currency periodic access credit facility. Up to $500 million of the Revolving Facilities may be used to issue letters of credit. The 1997 Credit Agreement and certain other American Standard Inc. debt instruments contain restrictive covenants and other requirements with which the Company believes it is currently in compliance. In December 1998, the 1997 Credit Agreement was amended principally to permit American Standard to issue up to an additional $500 million principal amount of senior or subordinated unsecured debt securities, and to lower the interest coverage ratios and increase the debt coverage ratios applicable to the Company beginning for periods ending December 31, 1998. The purpose of the amendment was primarily to accommodate the refinancing of $150 million of American Standard's 10-7/8% senior notes due May 15, 1999 and the financing of other proposed capital expenditures, including the acquisition of Armitage/Dolomite described below. On February 2, 1999, the Company acquired the Bathrooms Division of Blue Circle Industries PLC (Armitage/Dolomite), a manufacturer of ceramic sanitaryware, brassware and integrated plumbing systems, for approximately $430 million, including fees and expenses and net of cash acquired, with borrowings under the Company's 1997 Credit Agreement. This acquisition is being accounted for as a purchase. Armitage/Dolomite had 1998 sales of approximately $290 million and assets at December 31, 1998 of approximately $250 million. The acquired business has 3 large and 9 small facilities, located in the United Kingdom and Italy, and employs approximately 3,200 people. The primary markets for its products are in the United Kingdom, Italy, Ireland and Germany. The Company expects to complete its plans to integrate Armitage/Dolomite into existing European operations by the end of 1999. This process could result in additional expenses or increase the amount of goodwill (see Note 3 of Notes to the Financial Statements). At June 30, 1999, the Company had borrowings of $830 million outstanding under the Revolving Facilities. There was $461 million available under the Revolving Facilities after reduction for borrowings and for $84 million of letters of credit usage. The Company's foreign subsidiaries had $74 million available at June 30, 1999, under overdraft facilities that can be withdrawn by the banks at any time. In addition, the Company's operations in China have $32 million available under bank credit facilities after reduction for borrowings of $12 million and letters of credit usage of $11 million. On May 28, 1999, American Standard Inc. completed the sale of the equivalent of $460 million of Senior Notes, with an average interest rate of 7.7%, issued in three series: 250 million Euro Senior Notes due 2006; 100 million U.S. Dollar Senior Notes due 2009 and 60 million Sterling Senior Notes due 2009. Net proceeds of $452 million from the offering were applied to refinance borrowings incurred to pay $150 million of 10-7/8% Senior Notes at maturity on May 15, 1999 and to refinance a substantial portion of the purchase price of the February 1999 Armitage/Dolomite acquisition. The May 28, 1999 sale of Senior Notes, which are not subject to redemption, was made pursuant to the 1998 Shelf Registration (see Note 4 of Notes to Financial Statements). Debt securities sold under the 1998 Shelf Registration are issued by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. The Company intends to use the net proceeds from any future sales of such debt securities under the 1998 Shelf Registration for general corporate purposes, which may include certain investments, acquisitions, additions to working capital or capital expenditures. On May 6, 1999, the Company engaged Goldman Sachs & Co. and Vector Securities International, Inc. as advisors (the "Advisors") to evaluate the potential and prospects for the Company's Medical Systems business and to review and make recommendations to the Company's Board of Directors concerning its strategic options. On July 20, 1999 the Company issued a press release related to the status and progress to date of research that has identified a virus ("SEN-V") present in blood samples of certain humans afflicted with liver diseases of unknown cause (the text of which press release is filed as Exhibit 99 to this Report). The Board of Directors, the Company's management and the Advisors are continuing to explore strategic options for the Company's Medical Systems segment with a view to protect and realize the potential inherent value to stockholders related to its recent findings regarding SEN-V. As described in Note 7 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, there are pending German Tax issues for the years 1984 through 1990. There has been no change in the status of these issues since that report was filed. Year 2000 Readiness Disclosure The following is a Year 2000 Readiness Disclosure in accordance with the Year 2000 Information and Readiness Disclosure Act. Year 2000 compliance plan. The Company has established a comprehensive Year 2000 initiative, having appointed teams responsible for all of its locations worldwide, coordinated by team leaders reporting directly to the business group leaders, and in some cases employing third-party experts. The Vice President of Information Technology, who reports directly to the Chairman and Chief Executive Officer, heads the project. Progress reports are made periodically to the Audit Committee of the Board of Directors. The teams are responsible for assuring that all core business systems and transactions with customers, suppliers, financial institutions and other third parties will be Year 2000 ready. Additionally, a consultant has been retained at corporate headquarters to provide overall guidance and assistance with the compliance plan. Consultants have also been employed at various operating locations to augment the efforts of the local Year 2000 teams or to provide expertise in certain areas. In general, a coordinated approach has been undertaken by the Company's Year 2000 teams worldwide, with "best practices" shared among teams. The principal phases of the initiative include: * Inventory - identification of all technology and systems, including imbedded technology in manufacturing and other operating and control systems that could be affected by the Year 2000 issue. This phase is essentially complete. * Assessment - testing and evaluating whether remediation is necessary and prioritizing tasks based on whether the system is evaluated as "critical", the size of the system and the perceived risk. This phase is ongoing but was essentially complete by the end of the first quarter of 1999. * Remediation and Testing - Remediation includes the replacement or modification of non-compliant technology with technology that is Year 2000 compliant. Remediation of core systems was more than 95% complete as of June 30, 1999, and remediation of the remainder will be completed in the third quarter of 1999. Remediation of non-core systems is approximately 85% completed as of June 30, 1999, and remediation of the remainder will be completed in the third and fourth quarters of 1999. Wherever possible, new or modified systems will be tested in a Year 2000 environment from the beginning of the transaction process to the end. However, since in many cases, mainframe systems have been replaced with vendor provided software that has already been fully tested for Year 2000 compliance, testing of those systems is not expected to reveal any problems. Most systems will be fully tested by the end of the third quarter. However, testing is expected to continue for some systems during the fourth quarter of 1999. * Contingency planning - development of contingency plans in situations where there is substantial risk that compliance will not be achieved at any Company location or by any critical supplier in time to avoid Year 2000 problems. Substantially all contingency plans are expected to be in place by the end of the third quarter of 1999. * Third party relationships - communicating and working with suppliers, customers and other third parties with whom the Company does business to minimize the potential adverse effects of Year 2000 problems. This includes evaluating new and previously sold products that incorporate equipment controls with imbedded technology to identify and resolve any problems that customers may have with Company products as a result of the arrival of the year 2000. State of readiness. Management believes that substantial progress has been made towards the objective of having all core business systems Year 2000 compliant. We define substantial progress as the fact that at June 30, 1999, approximately 90% of the Company's Year 2000 plan has been completed. When situations are identified where there is substantial risk that any important objectives of the project will not be met, the Company has dedicated and will continue to dedicate additional resources. For several years the Company has been converting most of its mainframe computer applications and systems worldwide to client server technology and, in conjunction therewith, has been installing software that is Year 2000 compliant. For all systems other than mainframe, software that is Year 2000 compliant is also being installed, including desktop applications. Most of these initiatives were undertaken irrespective of Year 2000 considerations and, with few exceptions, implementation would have been completed before the year 2000. All such installations scheduled for completion in 1999 will be completed by the end of the third quarter of 1999. For those installations not scheduled to be completed until the year 2000, revisions have been made to existing systems to ensure readiness. Third-party relationships. The Company has initiated communications with suppliers, customers and other third parties to identify and assess Year 2000 risks and to develop solutions that will minimize any adverse impact on the Company. Over 75% of the Company's suppliers have responded. The Company expects to resolve timely any identified problems with critical or non-responding suppliers and to develop contingency plans where possible. The Company's manufacturing facilities are highly dependent on public utilities, especially electrical power, natural gas, water and communications companies. There is a risk that suppliers or others on whom the Company relies will not successfully address Year 2000 issues. Should one or more critical suppliers be unable to supply us with products or services at any of the Company's 120 manufacturing locations, and the Company or the supplier not have established appropriate contingency plans, such failure could result in the inability of the Company, at that location, to deliver products on a timely basis and have a material adverse effect on the results of operations at that location. The Company does not believe that it has material Year 2000 exposure with respect to products sold to customers. The only Company products containing imbedded electronic systems subject to Year 2000 issues are commercial air conditioning and medical products. The Company has evaluated the imbedded electronic control systems in products sold to its commercial air conditioning systems and medical products customers. Computer controls for commercial air conditioning systems and medical products have been checked and replaced or modified where necessary. This process is essentially completed for air conditioning products and will be completed for medical products in the third quarter of 1999. The Company is evaluating delivery commitments to customers, product warranties and representations made with respect to Year 2000 compliance of its products. Management believes that it is adequately addressing such issues and that, subject to the considerations described above, any potential material liability to third parties for Year 2000 failures in its products or inability to deliver products timely is remote. Risks and contingency plans. Management believes that the Company's most reasonably likely worst case scenario is some short-term, localized disruptions of systems, manufacturing operations, facilities or suppliers that will affect individual business operations, rather than broad-based, systemic, or long-term problems affecting operating segments or groups of operations. The most significant uncertainties relate to critical suppliers, particularly electrical power, water, natural gas and communications companies, and suppliers of parts and materials that are vital to the continuity of operations. The Company believes that the greatest risks of such disruptions exist outside the U.S. and Western Europe, where approximately 14% of the Company's sales occur, and that such disruptions, if any, will not have a material effect on the Company's results of operations or financial position. Contingency plans are being formulated and put in place, where possible, for all critical suppliers. These measures include finding alternative sources of supply, purchasing safety stocks of certain parts and materials and forming emergency response teams at each operating location to deal with any problems which develop. Costs. The Company's estimated cost to become Year 2000 compliant is approximately $22 million. Of this, approximately $15 million are costs being charged to expense as incurred, including internal and external labor to repair or modify existing software, and costs of consultants employed at various locations to assist with implementation of the Company's plan. The balance of estimated costs represent replacement hardware and software which is being capitalized. Through June 30, 1999, approximately $16 million had been expended, of which $11 million had been charged to expense. These costs are generally not incremental to existing information technology budgets, as existing internal resources were redeployed and the costs of consultants employed are less than 10% of total Year 2000 costs. The costs of implementing client server technology and other software changes made for reasons other than the Year 2000 and which were not accelerated are not included in these estimates. There were no significant deferrals of information technology projects because of the Company's response to Year 2000 issues. Information technology planning has incorporated client server and Year 2000 initiatives for several years and, therefore, there has been little effect on the Company's operations because of unexpected deferrals of projects important to growth or competitiveness. All costs are being funded from operating cash flows or other resources available to the Company. Based upon information currently available and current estimates, management believes that the Company's costs to become Year 2000 compliant will not have a material adverse effect on the Company's financial position, results of operations or cash flows in future periods. Total costs, anticipated impact and the expected dates to complete the various phases of the project are based on management's best estimates using information currently available and certain assumptions about future events. However, no assurance can be given that actual results will be consistent with such estimates and, therefore, actual costs, impacts and completion dates could differ materially from those plans. See "Disclosure Regarding Forward Looking Statements". ----------------------- Disclosure Regarding Forward Looking Statements Comments in this Quarterly Report on Form 10-Q contain certain forward-looking statements that are based on management's good faith expectations and belief concerning future developments. Actual results may differ materially from these expectations as a result of many factors, relevant examples of which are set forth in the Company's 1998 Annual Report on Form 10-K and in the "Management's Discussion and Analysis" section of the Company's 1998 Annual Report to Shareholders and Quarterly Reports on Form 10-Q. PART II. OTHER INFORMATION Item 1. Legal Proceedings. For a discussion of German tax issues see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part I of this report which is incorporated herein by reference. Item 5. Other Information. For a discussion of the public sale of the equivalent of $460 million of Senior Notes pursuant to the Company's shelf registration statement covering $1 billion of senior debt securities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part I, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying Index to Exhibits are filed as part of this quarterly report on Form 10-Q. (b) Reports on Form 8-K. (i) The Company filed a Current Report on Form 8-K dated April 29, 1999, that described: 1. The announcement of the Company's earnings for the first quarter of 1999. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN STANDARD INC. /s/ G. Ronald Simon Vice President and Controller (Principal Accounting Officer) August 12, 1999 AMERICAN STANDARD INC. INDEX TO EXHIBITS Exhibit No. Description (12) Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (99) Press release dated July 20, 1999. EX-12 2 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 AMERICAN STANDARD INC. COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
For the Six Months Ended For the Years Ended December 31, June 30, -------------------------------- ---------- 1994 1995 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- ------ ---- Income (loss) from continuing operations before taxes $(15.2) $226.9 $57.6 $236.8 $165.4 $191.8 $233.9 Equity in net (income) loss of associated companies net of dividends received 1.1 11.0 11.8 (2.9) (3.6) (3.0) (5.9) Amortization of capitalized interest 1.0 1.1 1.3 1.4 1.6 .8 .9 Interest expense 259.4 213.3 198.2 192.2 188.4 101.8 93.2 Rental expense factor 17.6 23.0 27.3 25.0 26.5 13.4 15.0 ------- ------- ------- ------- ------- ------- ------- Earnings available for fixed charges $263.9 $475.3 $296.2 $452.5 $378.3 $304.8 $337.1 ======= ======= ======= ======= ======= ======= ======= Interest expense $259.4 $213.3 $198.2 $192.2 $188.4 $101.8 $ 93.2 Capitalized interest 2.9 4.0 3.9 3.8 4.5 2.0 1.7 Rental expense factor 17.6 23.0 27.3 25.0 26.5 13.4 15.0 ------- ------- ------- ------- ------- ------- ------- Fixed charges $279.9 $240.3 $229.4 $221.0 $219.4 $117.2 $109.9 ======= ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (a) - (b) 2.0 1.3 2.0 1.7 2.6 3.1 a) For the purpose of computing the ratio of earnings to fixed charges, fixed charges consist of interest on debt (including capitalized interest), amortization of debt discount and expense, and a portion of rentals determined to be representative of interest. Earnings consist of consolidated net income before income taxes, plus fixed charges other than capitalized interest but including the amortization thereof, adjusted by the excess or deficiency of dividends over income of entities accounted for by the equity method. b) Earnings were insufficient to cover fixed charges for the year ended December 31, 1994 by $16.0 million.
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 46 0 1,196 37 545 1,892 1,918 597 5,192 2,424 1,914 0 0 0 (144) 5,192 3,610 3,610 2,675 2,675 (4) 10 93 234 97 137 0 0 0 137 0 0
EX-99 4 PRESS RELEASE Piscataway, NJ - July 20, 1999 - DiaSorin Inc., the Medical Systems Division of American Standard Companies Inc. (NYSE: ASD), today reported its discovery of a new virus linked to liver disease of previously unknown cause. The virus, SEN-V, was discovered by Dr. Daniele Primi and his research team at the DiaSorin Biomolecular Research Center in Brescia, Italy. The newly discovered virus is highly associated with acute and chronic hepatitis, probably accounting for a majority of cases of viral hepatitis of unknown origin. Viral hepatitis is a serious health problem with as many as 5.2 million people in the United States infected with acute or chronic viral hepatitis. While statistical data on incidence varies from country to country, five viruses (A,B,C,D,E) are known to cause 80-90% of the cases worldwide, but 10-20% are of unknown origin. The newly discovered virus is blood-borne, placing transfused patients and intravenous drug users at risk. While no blood screening system exists currently for the new virus, appropriate screening of blood and blood products in the future may control its spread. In this regard, it is estimated that worldwide approximately 50 million units of blood are drawn annually. Dr. Harvey Alter, a world authority on hepatitis research and Chief of the Infectious Diseases Section, Department of Transfusion Medicine at the Clinical Center, National Institutes of Health (NIH), Bethesda, MD, independently confirmed the clinical significance of the new virus. "These data suggest that this new virus accounts for a significant proportion of transfusion-associated hepatitis of unknown origin. Though the data are preliminary, it is striking that such a high percentage (approximately 80%) of these cases demonstrated new SEN-V infection in association with transfusion and that the incidence of infection in various control populations was very low (1-8%). A great deal of work remains to be done to confirm and expand these findings, but thus far this is the best candidate virus to account for previously unexplained hepatitis that I have observed." Professor Mario Rizzetto, an internationally recognized expert on viral hepatitis from the University of Torino, Italy, also helped to confirm Dr. Primi's findings through epidemiological and clinical studies during early phases of the project. Research to date includes analysis of nearly 600 sera. In 31 cases of non-A/non-E hepatitis, the virus was found in 68% of chronic cases and 83% of post-transfusion cases. The prevalence of the virus in the general population is less than one per cent. Dr. Primi and his research team have characterized the unique genomic sequences of the new virus and developed prototype assays. DiaSorin filed patent applications covering this discovery in 1998. The research team is conducting additional research to isolate and characterize the viral particle. Expanded clinical studies are also being conducted in collaboration with the National Institutes of Health to understand further the dynamics of immune response and the clinical implications of the virus. Initial studies reveal that approximately 30% of HIV patients are also infected with the new virus. DiaSorin expects to publish these results in the next several months. "DiaSorin's growing pipeline of innovative medical diagnostics - including breath testing and the Copalis(R) multiplex technology for near patient diagnostics(R) - is fueled by the trailblazing work of our research center," said Dr. Jorge A. Leon, Chief Scientific Officer for American Standard's Medical Systems Group. "The discovery of new infectious agents using molecular biology and immunology techniques gives DiaSorin a distinct advantage in developing diagnostic solutions and new therapeutic targets for the world's health care problems in the next century." Fred Allardyce, Senior Vice President of American Standard's Medical Systems Group commented, "Under the leadership of Dr. Primi, DiaSorin's research team based in Brecia, Italy, is using the most advanced techniques to identify new viruses. The discovery of this new virus has significant clinical implications. It could refine the diagnostic evaluation of liver disease, and, when used as a screening test, could improve the safety of the blood supply." Because of the far-reaching implications of the discovery and interest throughout the worldwide community, DiaSorin has established an electronic mailing list for updates on the virus as new information becomes available. Those interested can register at www.diasorin.com. American Standard is the global, diversified manufacturer of Trane(R) and American Standard(R) air conditioning products, American Standard(R), Ideal Standard(R), Standard(R) , Porcher(R), Armitage Shanks(R) and Dolomite(R) plumbing products, WABCO(R) commercial and utility vehicle braking and control systems, Copalis(R) and Pylori-Chek (TM) medical diagnostic systems and DiaSorin(TM) medical diagnostic products. -----END PRIVACY-ENHANCED MESSAGE-----