-----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, H0CmPuglDdFE/anM0ktxmvwcwcvcs8jbYlfvkXzy5xQqmdx3SXCZ6I+IUb1jRLHl dDqrFtHOzUO61RWHwXCpVg== 0000950123-96-001408.txt : 19960401 0000950123-96-001408.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950123-96-001408 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN STANDARD COMPANIES INC CENTRAL INDEX KEY: 0000836102 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 133465896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11415 FILM NUMBER: 96540579 BUSINESS ADDRESS: STREET 1: ONE CENTENNIAL AVENUE 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 STREET 2: ONE CENTENNIAL AVENUE CITY: PISCATAWAY STATE: NJ ZIP: 08855-6820 FORMER COMPANY: FORMER CONFORMED NAME: ASI HOLDING CORP DATE OF NAME CHANGE: 19941114 10-K405 1 FORM 10-K ANNUAL REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, 20549 FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 / / Transition Report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . -------------- ------------- Commission File Number 1-11415 AMERICAN STANDARD COMPANIES INC. -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3465896 - ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE CENTENNIAL AVENUE, P.O. BOX 6820, PISCATAWAY, NEW JERSEY 08855-6820 - ------------------------------------------------------------ ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (908) 980-6000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered -------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange, Inc. (and associated Common Stock Rights) Securities registered pursuant to Section 12 (g) of the Act: None. 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. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the Registrant as of the close of business on March 11, 1996 was approximately $1.5 billion based on the closing sale price of the common stock on the New York Stock Exchange consolidated tape on that date. Number of shares outstanding of each of the Registrant's classes of Common Stock, as of the close of business on March 11, 1996: Common Stock, $.01 par value 77,032,003 Shares Documents incorporated by reference: Part of the Form 10-K into Document (Portions only) which document is incorporated. ------------------------ ------------------------------- Annual Report to Stockholders for the year Parts I, II and IV ended December 31, 1995 Definitive Proxy Statement dated March 28, 1996 for use in connection with the Annual Meeting of Stockholders to be held on May 2 , 1996 Part III 2 TABLE OF CONTENTS
PAGE PART I Item 1. Business. 1 Item 2. Properties. 15 Item 3. Legal Proceedings. 16 Item 4. Submission of Matters to a Vote of Security Holders. 16 Executive Officers of the Registrant. 17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 20 Item 6. Selected Financial Data. 21 Item 7. Management' s Discussion and Analysis of Financial Condition and Results of Operations. 22 Item 8. Financial Statements and Supplementary Data. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 22 PART III Item 10. Directors and Executive Officers of the Registrant. 23 Item 11. Executive Compensation. 23 Item 12. Security Ownership of Certain Beneficial Owners and Management. 23 Item 13. Certain Relationships and Related Transactions. 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 24
3 PART I ITEM 1. BUSINESS American Standard Companies Inc. (the "Company") is a Delaware corporation that has as its only significant asset all the outstanding common stock of American Standard Inc., a Delaware corporation ("American Standard Inc."). Hereinafter, "American Standard" or "the Company" will refer to the Company, or to the Company and American Standard Inc., including its subsidiaries, as the context requires. American Standard is a globally-oriented manufacturer of high quality, brand-name products in three major product groups: air conditioning systems (57% of 1995 sales); bathroom and kitchen fixtures and fittings (24% of 1995 sales); and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles (19% of 1995 sales). American Standard is a market leader in each of these business segments in the principal geographic areas in which it competes. The Company's brand names include TRANE(R) and AMERICAN STANDARD(R) for air conditioning systems, AMERICAN STANDARD(R), IDL STANDARD(R), STANDARD(R) and PORCHER(R) for plumbing products and WABCO(R) and PERROT(R) for braking and related systems. The Company emphasizes technologicall advanced products such as air conditioning systems that utilize energy-efficient compressors and environmentally-preferred refrigerants, water-saving plumbing products and commercial vehicle braking and related systems (including antilock braking systems, "ABS") utilizing electronic controls. At December 31, 1995, American Standard had 102 manufacturing facilities in 34 countries. OVERVIEW OF BUSINESS SEGMENTS American Standard operates three business segments: Air Conditioning Products, Plumbing Products and Automotive Products. AIR CONDITIONING PRODUCTS. American Standard is a leading U.S. manufacturer of air conditioning systems for both domestic and export sales, and also manufactures air conditioning systems outside the United States. Air conditioning products are sold primarily under the TRANE(R) and AMERICAN STANDARD(R) names by the Trane Company ("Trane"). Sales to the commercial and residential markets accounted for approximately 75% and 25%, respectively, of Trane's total sales in 1995. Approximately 60% of Trane's sales in 1995 was in the replacement, renovation and repair markets which have been less cyclical than the new residential and commercial construction markets. Management believes that Trane is well positioned for growth because of its high quality, brand-name products, significant existing market shares, the introduction of new product features such as electronic controls, the expansion of its broad distribution network, conversion to products utilizing environmentally-preferred refrigerants and expansion of operations to developing market areas throughout the world, principally the Asia-Pacific area and Latin America. PLUMBING PRODUCTS. American Standard is a leading manufacturer in Europe, the U.S. and a number of other countries of bathroom and kitchen fixtures and fittings for the residential and commercial construction markets and retail sales channels. Plumbing Products manufactures and distributes its products under the AMERICAN STANDARD(R), IDEAL STANDARD(R), 1 4 STANDARD(R) and PORCHER(R) names. Of Plumbing Products' 1995 sales, 71% w derived from operations outside the United States and 29% from within. Management believes that Plumbing Products is well positioned for growth due to the high quality of its brand-name products, significant existing market shares in a number of countries and the expansion of existing operations in developing market areas throughout the world (principally the Far East, Latin America and Eastern Europe). AUTOMOTIVE PRODUCTS. Automotive Products ("WABCO") is a leading manufacturer, primarily in Europe and Brazil, of braking and related systems for the commercial and utility vehicle industry. Its most important products are pneumatic braking systems and related electronic and other control systems (including ABS) marketed under the WABCO(R) name for medium-size and heavy trucks, tractors, buses, trailers and utility vehicles. WABCO supplies vehicle manufacturers such as Mercedes-Benz, Volvo, Iveco (Fiat), RVI (Renault) and Rover. Management believes that WABCO is well positioned to benefit from its strong market positions in Europe and Brazil and increasing demand for ABS and other sophisticated electronic control systems in a number of markets (including the U.S. commercial market, where phase-in of ABS has been mandated beginning in 1997), as well as from the technological advances embodied in the Company's products and its close relationships with a number of vehicle manufacturers. STRATEGY GLOBALIZATION American Standard has historically had a significant global presence. One of its major strategic objectives is to continue to expand that presence through the growth of existing operations and the establishment of new operations in developing market areas in the Far East, Latin America and Eastern Europe. The Company often uses joint ventures with local manufacturing and distribution partners to facilitate risk sharing and to allow the Company to benefit from the additional expertise of local market participants. Air Conditioning Products continues to expand its operations in the Far East, Latin America and Europe. It has recently established a joint venture in Australia and continues to expand its sales forces in the Far East, Latin America, the Middle East and India. In December 1995 the Company completed arrangements for the development and expansion of its air conditioning business in the People's Republic of China ("PRC"), to become an integrated manufacturer, marketer and distributor of a broad range of air conditioning systems and related products for residential and commercial applications. The Company and a minority investor established ASI China Holdings Limited ("ASI China"), in which the Company has an initial ownership interest of 64.4%, and formed A - S Air Conditioning Products Limited ("ASAP"), owned 50.4% by ASI China, to establish or acquire majority ownership in up to five manufacturing joint ventures as well as sales and service businesses in the PRC. The Company contributed to ASAP its 50% interest (valued at $10 million) in a Hong Kong joint venture (which imports and distributes air conditioning products) and has committed to contribute $20 million in cash, $8 million of which had been contributed as of December 31, 1995. The minority investor in ASI China and third-party investors in ASAP have committed to contribute a total of $62 million, $26 million of which had been contributed as of December 31, 1995. As of December 31, 1995, ASAP had acquired majority ownership in three manufacturing joint ventures and in conjunction therewith assumed debt of $21 million. 2 5 Plumbing Products has entered new markets through joint ventures in Eastern Europe, Spain and Portugal and is continuing to expand using this approach. In 1995 operations were expanded in France through the acquisition of Porcher (see "Plumbing Products Segment"). Plumbing Products continues to expand its operations in the PRC through its affiliate, A-S China Plumbing Products Limited ("ASPPL"), in which American Standard has a current ownership position of 28% and effective control over day-to-day operations. ASPPL has expanded its operations to Beijing, Tianjin, Shanghai and Guangzhou in order to provide a full product line of fixtures, fittings, and bathtubs throughout the PRC market. ASPPL has entered into seven joint ventures with local business concerns which, together with one wholly-owned operation, have received business licenses from Chinese government authorities. These include two chinaware manufacturing facilities currently under construction, an existing chinaware manufacturing facility being expanded, two operating fittings plants and two operating steel tub factories. The Company's ownership interest in ASPPL is expected to increase over time to at least 51% of the equity of ASPPL through reinvestment of royalties and management fees and through additional stock purchases. Automotive Products, headquartered in Europe, since 1993 has established a joint venture in the PRC, acquired a business in Spain, is in the process of establishing joint ventures in Eastern Europe and is expanding the volume of business done through its existing joint ventures in Japan and the United States. DEMAND FLOW(R) TECHNOLOGY* To build on its position as a leader in each of its industries and to increase sales and operating income, American Standard began in 1990 to apply Demand Flow methods to all its businesses. Under Demand Flow, products are produced as and when required by the customer, the production process is streamlined, and quality control is integrated into each step of the manufacturing process. The benefits of Demand Flow include better customer service, quicker response to changing market needs, improved quality control, higher productivity, increased inventory turnover rates and reduced requirements for working capital and manufacturing and warehouse space. As part of American Standard's strategy to integrate Demand Flow into all of its operations, most of American Standard's approximately 43,000 employees worldwide have been trained in Demand Flow, which has been implemented in substantially all of American Standard's production facilities. In addition, American Standard is implementing Demand Flow methods in its acquired operations such as Perrot, a German brake manufacturer acquired in January 1994, and Porcher, acquired in 1995. American Standard is also applying Demand Flow to administrative functions and is re-engineering its organizational structure to manage its businesses based on processes instead of functions. American Standard believes that its implementation of Demand Flow methods has achieved significant benefits. Product cycle time (the time from the beginning of the manufacturing of a product to its completion) has been reduced and, on average, inventory turnover rates have more than tripled since 1990. Principally as a result of the implementation of Demand Flow American Standard has reduced inventories by 49% from December 31, 1989 while related sales have grown 57% for the same period. American Standard further believes that as a result of the introduction of Demand Flow employee productivity has risen significantly, customer service - ----------------------------- *Demand Flow is a registered trademark of J-I-T Institute of Technology, Inc. 3 6 has improved and, without reducing production capacity, the Company has been able to free more than three million square feet of manufacturing and warehouse space, allowing for expansion, plant consolidation or other uses. AIR CONDITIONING PRODUCTS SEGMENT Air Conditioning Products began with the 1984 acquisition by the Company of the Trane Company, a manufacturer and distributor of air conditioning products since 1913. Air conditioning products are sold primarily under the TRANE(R) and AMERICAN STANDARD(R) names. In 1995 Trane, with revenues of $2,953 million, accounted for approximately 57% of the Company's sales and 49% of its operating income. Outside the United States, Trane derived 21% of its sales in 1995 from manufacturing operations and 7% from U.S. exports. Approximately 60% of Trane's sales in 1995 was in the replacement, renovation and repair markets, which in general are less cyclical than the new residential and commercial construction markets. Trane manufactures three general types of air conditioning systems. The first, called "unitary," which is sold for residential and commercial applications, is a factory-assembled central air conditioning system which generally encloses in one or two units all the components to cool or heat, clean, dehumidify or humidify, and move air. The second, called "applied," is typically custom-engineered for commercial use and involves field installation of several different components of the air conditioning system. Trane is a world leader in both unitary and applied air conditioning products. The third type, called "mini-split," is a small unitary air conditioning system, generally for residential use, which operates without air ducts. Trane manufactures and distributes mini-split units principally in the Far East and Europe. Product and marketing programs have been, and are being, developed to increase penetration in the growing replacement, repair, and servicing businesses, in which margins are generally higher than on sales of original equipment. Much of the equipment sold in the fast-growing air conditioning markets of the 1960's and 1970's is reaching the end of its useful life. Also, equipment sold in the 1980's is likely to be replaced earlier than originally expected with higher-efficiency products recently developed to meet required efficiency standards and to capitalize on the availability of environmentally-preferred refrigerants. In May 1994 a subsidiary of the Company, Standard Compressors Inc., concluded arrangements for a partnership, Alliance Compressors, formed in December 1993 with Heatcraft Technologies Inc., a subsidiary of Lennox International Inc., for the manufacture of compressors for use in air conditioning and refrigeration equipment. Each partner has a 50% interest in Alliance Compressors, which initially is manufacturing reciprocating compressors in a section of the Company's existing facility in Tyler, Texas. Construction has begun on a new facility in Natchitoches, Louisiana, for the manufacture of a new scroll compressor being developed for use primarily in residential air conditioners. Many of the products manufactured by Trane utilize HCFCs and prior to 1994 utilized CFCs as refrigerants. Various federal and state laws and regulations, principally the 1990 Clean Air Act Amendments, require the eventual phase-out of the production and use of these chemicals because of their possible deleterious effect on the earth's ozone layer if released into the atmosphere. Phase-in of substitute refrigerants will require replacement or modification of much of the air conditioning equipment already installed, which has created a new market opportunity. In order to ensure that the Company's products will be compatible with the substitute refrigerants, Trane has been working closely with the manufacturers that are 4 7 developing substitutes for those refrigerants being phased out. See "General-Regulations and Environmental Matters." Various federal and state statutes, including the National Appliance Energy Conservation Act of 1987, as amended, impose energy efficiency standards for certain of the Company's unitary air conditioning products. Although the Company has been able to meet or exceed such standards to date, stricter standards in the future could require substantial research and development expense and capital expenditures to maintain compliance. At December 31, 1995 Air Conditioning Products had 31 manufacturing plants in 9 countries, employing approximately 19,100 people. Air Conditioning Products comprises three operating groups: Unitary Products, North American Commercial, and International. UNITARY PRODUCTS GROUP Unitary Products, which accounted for 37% of Air Conditioning Products' 1995 sales, manufactures and distributes products for commercial and residential unitary applications in the United States. This group benefits the most from the growth of the replacement market for residential and commercial air conditioning systems. Other major suppliers in the unitary market are Carrier, Rheem, Lennox, Goodman and Intercity Products. Commercial unitary products range from 2 to 120 tons and include combinations of air conditioners, heat pumps, and gas furnaces, along with variable-air-volume equipment and integrated control systems. Typical applications are in retail stores, small-to-medium-size office buildings, manufacturing plants, restaurants, and commercial buildings located in office parks and strip malls. These products are sold through commercial sales offices in 121 locations. Residential central air conditioning products range from 1 to 5 tons and include air conditioners, heat pumps, air handlers, furnaces, and coils. These products are sold through independent wholesale distributors and Company-owned sales offices in over 250 locations to dealers and contractors who sell and install the equipment. During 1994 and 1995 the Unitary Products Group successfully introduced several new, products including a new line of outdoor condensing units for the AMERICAN STANDARD(R) brand; a very high efficiency residential air conditioner; a new furnace line; micro-electronic controlled large rooftop units; rooftop units with special features that appeal to national accounts; and a large rooftop line (27.5 tons to 50 tons). The commercial unitary business also concentrated on enhancements and new capabilities for existing products. The Company also markets an AMERICAN STANDARD(R) brand name product to serve distributors who typically carry other products in addition to air conditioning products. NORTH AMERICAN COMMERCIAL GROUP North American Commercial Group, which accounted for 42% of Air Conditioning Products' 1995 sales, manufactures and distributes products in the United States for sale in the U.S. and Canada for air conditioning applications in larger commercial, industrial, and institutional buildings. Other major suppliers of commercial systems are Carrier, York, and McQuay. North American Commercial Group distributes its products through 95 sales offices. Thirty-four of these offices are Company-owned and 61 are franchised. The Company acquired the 5 8 Toronto, Canada, and St. Louis, Missouri offices in 1994 and the Albany, New York, and Nashville, Tennessee offices in 1995. Through March of 1996 the Company acquired the Grand Rapids, Michigan, Pittsburgh, Pennsylvania, and New Haven, Connecticut, offices and expects to continue to acquire major sales offices from its franchisees. Over the last few years the North American Commercial Group has added additional aftermarket business activities, such as emergency rentals of air conditioning equipment. Also, the group has expanded its line to include components for converting installed centrifugal chiller products to use more environmentally-preferred refrigerants. During 1994 and 1995 the Company continued its introduction of a number of newer products such as the high-efficiency centrifugal chiller, an expanded air cooled series R chiller line, and the new fan coil line. Integrated Comfort Systems continue to grow as a percentage of total sales. Indoor air quality is emerging as a significant new application to be served by the Company's products and services. INTERNATIONAL GROUP The International Group, which accounted for approximately 21% of Trane's 1995 sales, manufactures applied and unitary products in foreign facilities operated by subsidiaries and joint ventures and exports many of the products manufactured in the United States by the Unitary Products and North American Commercial Groups. Like the North American Commercial Group, the International Group has an extensive network of sales and service agencies, both Company-owned and franchised, to provide maintenance and warranty service for its equipment installed around the world. Trane expects to continue the expansion of its presence outside the U.S. In the Asia-Pacific region Trane recently established a joint venture in Australia as well as three manufacturing joint ventures in the PRC (see "Globalization") and expanded its operations in Malaysia. In the early 1990's it purchased an air conditioning manufacturing and distribution firm in Taiwan, and entered into a sales and manufacturing joint venture in Thailand. In Europe, in addition to its plants in Epinal and Charmes, France, the group opened plants in Mirecourt and in Colchester, U.K., in 1992. A joint venture in Egypt commenced operations in 1992 to serve markets in the Middle East. PLUMBING PRODUCTS SEGMENT Plumbing Products manufactures and distributes bathroom and kitchen fixtures and fittings primarily under the IDEAL STANDARD(R), AMERICAN STANDARD(R), STANDARD(R) and PORCHER(R), names. In 1995 Plumbing Products, with revenues of $1,270 million, accounted for 24 % of the Company's sales and 22 % of its operating income. Plumbing Products derived approximately 71 % of its total 1995 sales from operations outside the United States. Of Plumbing Products' sales, 53% consists of vitreous china fixtures, 26% consists of fittings (typically brass), 7% consists of bathtubs, and the remainder consists of related plumbing products. Throughout the world these products are generally sold through wholesalers and distributors and installed by plumbers and contractors. In total the residential market accounts for approximately 75% of Plumbing Products' sales, with the commercial and industrial markets providing the remaining 25%. Plumbing Products operates through four primary geographic groups: European Plumbing Products, U.S. Plumbing Products, Americas International and the Far East Group. Plumbing 6 9 Products' fittings operations, the Worldwide Fittings Group, which has primary responsibility for faucet technology, product development and manufacturing, with manufacturing facilities in Germany, Bulgaria, the U.S., and Mexico. Worldwide Fittings sales and operating results are reported in the four primary geographic groups within which it operates. European Plumbing Products, which sells products primarily under the brand names IDEAL STANDARD(R) and PORCHER(R), manufactures and distributes bathroom and kitchen fixtures and fittings through subsidiaries or joint ventures in Germany, Italy, France, England, Greece, the Czech Republic, Spain, Portugal, and Egypt. In November 1995 the Company acquired substantially all of the remaining outstanding common shares and convertible bonds of Etablissement Porcher ("Porcher"), a French manufacturer and distributor of plumbing products in which the Company previously had an ownership interest of 32.88%. The $25 million cost of the acquisition was funded with a borrowing under the Company' s revolving credit facilities. In addition $31 million of Porcher debt was assumed. In 1995 Porcher had sales of $216 million. U.S. Plumbing Products manufactures bathroom and kitchen fixtures and fittings, selling under the brand names AMERICAN STANDARD(R) and STANDARD(R) in the United States. Americas International manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and STANDARD(R) through its wholly owned operations in Mexico, Canada, and Brazil and its majority-owned subsidiaries in Central America. The Far East Group manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and STANDARD(R) through its wholly owned operations in South Korea, its majority-owned operations in Thailand and the Philippines, and its manufacturing joint venture in Indonesia and is developing a new joint venture in Vietnam. The Company is also significantly expanding its operations in the PRC. See - "Globalization". The market for the Company's plumbing products is divided into the replacement and remodeling market and the new construction market. The replacement and remodeling market accounts for about 60% of the European and U.S. groups' sales but only about 40% of the sales of the Far East group, for which new construction is more important. In the United States and Europe the replacement and remodeling market has historically been more stable than the new construction market and has shown moderate growth over the past several years. In 1995 the new construction market in Europe declined slightly, especially in Germany and France, after recovering somewhat in 1994 and 1993. In the U.S. the new construction market hit its recent low in 1992 but had some recovery through 1995. The new construction market, in which the product selection is made by builders or contractors, is more price-competitive and volume-oriented than the replacement and remodeling market. In the replacement and remodeling market consumers make the model selection and, therefore, this market is more responsive to quality and design than price, making it the principal market for higher-margin luxury products. Although management believes it must continue to offer a full line of fixtures and fittings in order to support its distribution system, Plumbing Products' current strategy is to focus on increasing its sales of higher-margin products in the middle and upper segments of both the remodeling and new construction markets. Plumbing Products also has continued its programs to expand its presence in high-quality showrooms and showplaces featuring its higher-end products in certain major countries. These programs, along with expanded sales training activities, have enhanced the image of the Company's products with interior designers, decorators, consumers and plumbers. 7 10 U.S. Plumbing Products is focusing on the unique needs of the growing mass retail home center industry, using products sourced from several of the Company's manufacturing locations throughout the Americas. This market channel accounted for about 26% of U.S. Plumbing Products' sales in 1995, and this proportion is expected to grow. In an effort to capture a larger share of the replacement and remodeling market, over the last few years Plumbing Products has introduced a variety of new products designed to suit customer tastes in particular countries. New offerings include additional colors and ensembles, bathroom suites from internationally known designers, and electronically controlled products. Faucet technology is centered on anti-leak, anti-scald and other features to meet emerging consumer and legislative requirements. Water-saving fixtures and fittings have been a major focus of Plumbing Products for the past several years, particularly in light of recent water shortages experienced in a number of areas of the U.S. The Company produces one of the most extensive lines of water-saving fixtures available in the United States. Manufacture of water-saving toilets was mandated for residential use by federal law commencing in January 1994 and for commercial use in January 1997. Many of the Company's bathtubs are made from a proprietary porcelain on metal composite, AMERICAST(R), which has gained an increasing share of the worldwide market. Products made from the composite AMERICAST(R) have the durability of cast iron with only one-half the weight and are characterized by improved resistance to breaking and chipping. AMERICAST(R) products are easier to ship, handle and install and are less expensive to produce than cast iron products. Use of this advanced composite was extended to kitchen sinks, bathroom lavatories and acrylic surfaced products during the early 1990's. At December 31, 1995, Plumbing Products employed approximately 18,000 people and, including affiliated companies, had 57 manufacturing plants in 24 countries. In the U.S. Plumbing Products has several important competitors, including Kohler Company and Masco Corporation in selected product lines. There are also important competitors in foreign markets, for the most part operating nationally. Friederich Grohe GmbH, the major manufacturer of fittings in Europe, is a pan-European competitor. In Europe Villeroy Boch and Sanitec are the major fixtures competitors, and in the Far East Toto is the major competitor. AUTOMOTIVE PRODUCTS SEGMENT Operating under the WABCO(R) name, Automotive Products manufactures air brake and related systems for the commercial vehicle industry in Europe and Brazil. WABCO's most important products are pneumatic braking systems and related electronic control and other systems and components (including ABS) for medium-size and heavy trucks, tractors, buses, trailers and utility vehicles. In 1995 WABCO, with sales of $998 million, accounted for 19 % of the Company's sales and 29% of its operating income. The Company believes that WABCO is a worldwide technological leader in the heavy truck and bus braking industry. Electronic controls, first introduced in ABS in the early 1980's, are increasingly applied in other systems sold to the commercial vehicle industry. WABCO's products are sold directly to vehicle and component manufacturers. Spare parts are sold through both original equipment manufacturers and an independent distribution network. Although the business is not dependent on a single or related group of customers, 8 11 sales of truck braking systems are dependent on the demand for heavy trucks. Some of the Company's important customers are Mercedes-Benz, Volvo, Iveco (Fiat), RVI (Renault) and Rover. Principal competitors are Knorr, Robert Bosch, and Bendix. The European market for new trucks, buses, trailers, and replacement parts continued to recover in 1995 following a strong recovery in 1994 after significant declines in 1992 and 1993. European legislation mandating the phase-in of ABS beginning in 1991 has had a positive impact on sales and is expected to continue to do so. The Brazilian market continued its recovery which began in 1993 after declining in 1992. Through 1995 the WABCO(R) ABS system, which the Company believes leads the market, has been installed in approximately one million heavy trucks, buses, and trailers worldwide since 1981. Annual sales volume in Europe has significantly increased in recent years to approximately 175,000 units in 1995 and to 56,000 units annually in other markets, primarily the United States and Japan. In addition, WABCO has developed electronically controlled pneumatic gear shifting systems, electronically controlled air suspension systems, and automatic climate-control and door-control systems for the commercial vehicle industry. These systems have resulted in greater sales per vehicle for WABCO. Significant progress was made in recent years in market acceptance of electronically controlled systems. New products under development are an advanced electronic braking system and additional electronic drive line control systems. In addition, WABCO has developed and implemented an electronic data interchange system, which links certain customers directly to WABCO's information systems, providing timely, accurate information and just-in-time delivery to the customer. WABCO and affiliated companies have 14 manufacturing facilities and 7 sales organizations operating in 17 countries. Principal manufacturing operations are in Germany, France, the United Kingdom, and Brazil. WABCO has joint ventures in the United States with Rockwell International (Rockwell WABCO), in Japan with Sanwa Seiki (SANWAB), in India with TVS Group (Clayton Sundaram) and in the PRC. There is also a licensee in the PRC. In January 1994 the Company acquired Perrot, a German brake manufacturer. Through this acquisition the Company is able to offer complete brake systems for trucks, buses and trailers, especially in the important and growing air-disc brake business. Since 1991 ABS for commercial vehicles has been gaining acceptance in the United States and Japan, where WABCO participates through its joint venture operations. Rockwell WABCO is now a supplier of WABCO systems to Freightliner, Mack, Volvo-GM, Kenworth, Peterbilt and other vehicle manufacturers in North America. SANWAB supplies Hino, Nissan and trailer manufacturers in Japan. In most European countries, ABS has become mandatory for commercial vehicles. In March 1995, the U.S. Department of Transportation, National Highway Traffic Safety Administration, adopted amended federal regulations which require that new medium and heavy vehicles be equipped with antilock brake systems (ABS). These amended regulations will be phased in over a two-year period beginning in March 1997. WABCO believes it is in a good position to take advantage of this opportunity. At December 31, 1995, WABCO employed approximately 5,700 people. 9 12 BUSINESS SEGMENT DATA Information concerning revenues and operating profit and loss attributable to each of the Company's business segments and geographic areas is set forth in the Company's 1995 Annual Report to Stockholders on page 14, "Five Year Financial Summary" under the caption "Segment Data", on pages 15 though 19 under the caption entitled "Management's Discussion and Analysis" and on page 41 under the caption entitled "Segment Data" which are incorporated herein by reference, and information concerning identifiable assets of each of the Company's business segments is set forth on page 41 of the Company's 1995 Annual Report to Stockholders under the caption entitled "Segment Data", which is incorporated herein by reference. GENERAL RAW MATERIALS The Company purchases a broad range of materials and components throughout the world in connection with its manufacturing activities. Major items include steel, copper tubing, aluminum, ferrous and nonferrous castings, clays, motors, and electronics. The ability of the Company's suppliers to meet performance and quality specifications and delivery schedules is important to its operations. The Company is working closely with its suppliers to integrate them into the Demand Flow manufacturing process by developing with them just-in-time supply delivery schedules to coordinate with the Company's customer demand and delivery schedules. The Company expects this closer working relationship to result in better control of inventory quantities and quality and lower related overhead and working capital costs. The energy and materials required for its manufacturing operations have been readily available, and the Company does not foresee any significant shortages. PATENTS, LICENSES AND TRADEMARKS The Company's operations are not dependent to any significant extent upon any single or related group of patents, licenses, franchises or concessions. The Company's operations also are not dependent upon any single trademark, although some trademarks are identified with a number of the Company's products and services and are of importance in the sale and marketing of such products and services. Some of the more important of the Company's trademarks are:
Business Segment Trademark ---------------- --------- Air Conditioning Products TRANE(R) AMERICAN STANDARD(R) Plumbing Products AMERICAN STANDARD(R) IDEAL STANDARD(R) STANDARD(R) PORCHER(R) Automotive Products WABCO(R) WABCO WESTINGHOUSE(R) CLAYTON DEWANDRE PERROT(R)
The Company from time to time has granted patent licenses to, and has licensed technology from, other parties. 10 13 RESEARCH AND PRODUCT DEVELOPMENT The Company made expenditures of $133 million in 1995, $123 million in 1994, $114 million in 1993, for research and product development and for product engineering. The expenditures for research and product development only were $49 million in 1995, $44 million in 1994 and $47 million in 1993 and were incurred primarily by Automotive Products and Air Conditioning Products. Automotive Products, which expended the largest amount, has conducted research and development in recent years on advanced electronic braking systems, heavy-duty disc brake systems, and additional electronic control systems for commercial vehicles. Air Conditioning Products' research and development expenditures were primarily related to alternative, environmentally-preferred refrigerants, compressors, heat transfer surfaces, air flow technology, acoustics and micro-electronic controls. Any amount spent on customer sponsored research and development activities in these periods was insignificant. REGULATIONS AND ENVIRONMENTAL MATTERS The Company's U.S. operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air, water and soil and establish standards for the treatment, storage and disposal of solid and hazardous wastes. A number of the Company's plants are in the process of making changes or modifications to comply with such laws and regulations as well as undertaking response actions to address soil and groundwater issues at certain of its facilities. The Company is a party to a number of remedial actions under various federal and state environmental laws and regulations that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which hazardous wastes or materials were disposed or released, including approximately 30 proceedings under the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes in which the Company has been named a potentially responsible party or a third party by a potentially responsible party. Expenditures in 1993, 1994 and 1995 to evaluate and remediate such sites were not material. On the basis of the Company's historical experience and information currently available, the Company believes that these environmental actions will not have a material adverse effect on its financial condition, results of operations or liquidity. Additional sites may be identified for environmental remediation in the future, including properties previously transferred by the Company and with respect to which the Company may have contractual indemnification obligations. The Company cannot estimate at this time the ultimate aggregate costs of all remedial actions because of (a) uncertainties surrounding the nature and application of environmental regulations, (b) the Company's lack of information about additional sites at which it may be listed as a potentially responsible party, (c) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions, (d) the number of contributors and the financial capacity of others to contribute to the cost of remediation at specific sites and (e) the time periods over which remediation may occur. On May 31, 1994, the Company's Salem, Ohio plant received a Request for Information Pursuant to the Clean Air Act from the U.S. Environmental Protection Agency (Region 5). This request was fully complied with by July 22, 1994. During the development of the response, American Standard noted several questions concerning the status of certain air sources. On August 2, 1994, American Standard Inc. proposed to enter consensual "Findings and Orders" with the Ohio Environmental Protection Agency to resolve these questions. On November 17, 1995 the Company reached a verbal agreement with the Ohio EPA which would 11 14 result in the Company being assessed a penalty of $25,000. The Company expects to finalize this agreement in the first half of 1996. The Company's international operations are also subject to various environmental statutes and regulations. Generally, these requirements tend to be no more restrictive than those in effect in the United States. The Company believes it is in substantial compliance with such existing domestic and foreign environmental statutes and regulations. On December 15, 1992 the Company, along with 15 other major manufacturers of plumbing fittings, was sued in the Superior Court of the State of California, County of San Francisco by the State of California. The same companies were sued in a companion case, filed the same day, by the Natural Resources Defense Council and a second environmental group. In each case, plaintiffs sought injunctive relief, civil penalties and compensatory damages, alleging, inter alia, that faucets sold by the parties discharged lead into drinking water in excess of minimum standards allegedly established by Proposition 65. Both cases were settled in November of 1995 for a minimal amount without any admission of liability. The Company agreed that 95% of its fittings sold in California would meet agreed upon lead leachate standards by the year 2000. The majority of the Company's fittings already meet these standards and the Company foresees no difficulties in meeting the settlement deadlines. No penalties, restitution or other damages were paid. In September 1987 the United States became a signatory to an international agreement known as the Montreal Protocol on Substances that Deplete the Ozone Layer (the "Montreal Protocol"). The Montreal Protocol requires its signatories to reduce production and consumption of CFCs. In November 1992 the Montreal Protocol was amended in Copenhagen, Denmark, to phase out all except critical uses of CFCs by January 1, 1996, and to limit consumption of HCFCs beginning in 1996 and phase them out completely by 2030. In 1988 the EPA issued regulations implementing the Montreal Protocol in the United States. Mexico, the Federal Republic of Germany, the United Kingdom, France and other countries have also become signatories to the Montreal Protocol. The manner in which these countries implement the Montreal Protocol and regulate CFCs could differ from the approach taken in the United States. The 1990 Clean Air Act Amendments (the "CAAA") implement the Montreal Protocol by establishing a program for limiting the production and use of CFCs and other ozone-depleting chemicals. Under the CAAA the production and consumption of "Class I substances," including CFCs, are being phased out, and the production of most was discontinued December 31, 1995 pursuant to final action of the EPA. The EPA has taken final action to phase out production of the long-lived HCFCs, such as HCFC-22, for use in new equipment by 2010 and totally by 2020, while adopting the current CAAA schedule for the short-lived HCFCs, such as HCFC-123, by phasing them out for use in new equipment by 2020 and completely out of production in 2030. The Company derived significant revenues in 1993 and prior years from sales of air conditioning products utilizing Class I substances, particularly CFC-11. However, the more recent versions of these products are designed to operate with substitute short-lived Class II substances, such as HCFC-123, which, the Company believes, under current proposals is not likely to be subject to a phase-out accelerated from the 2020/2030 schedule of the CAAA, or with refrigerants that do not affect ozone and are not regulated at all. Beginning with orders accepted after January 1, 1993, Air Conditioning Products ceased selling CFC-11 with any of its products. 12 15 The Company continues to derive substantial revenues from servicing and repairing installed equipment that use Class I substances. The emissions from servicing and repairing of equipment that use Class I substances were regulated by the EPA beginning in mid-1993, although the Company does not expect these regulations to have a material adverse effect on its financial condition or results of operations. The Company believes that these regulations will have the effect of generating additional product sales and parts and service revenues, as existing air conditioning equipment operating on CFCs is converted to operate on environmentally-preferred refrigerants or replaced, although this is likely to happen only over a number of years and the Company is unable to estimate the magnitude or timing of such additional conversion or replacements. In addition, the Company currently offers a number of products that improve the operation of existing installed equipment using alternative refrigerants. Prior to the effectiveness of any prohibition on use of Class I or Class II substances it will be necessary for the Company and its competitors to address the need to substitute permitted refrigerants for the Class I and Class II substances used in their products. Adoption of the new refrigerants will require replacement or modification of much of the air conditioning equipment already installed. The Company has been working closely with the manufacturers of refrigerants that are developing substitutes for the CFCs and HCFCs to be phased out in order to ensure that its products will be compatible with the substitutes. Although the Company believes that its commercial products currently in production will not require substantial modification to use substitutes, residential and light commercial products produced by the Company and its competitors may require modification for substitute refrigerants. EMPLOYEES The Company employed approximately 43,000 people (excluding employees of unconsolidated joint venture companies) at December 31, 1995. The Company has a total of 18 labor union contracts in North America (covering approximately 8,500 employees), six of which expire in 1996 (covering approximately 4,800 employees) and four of which expire in 1997 (covering approximately 1100 employees). One of the contracts expiring in 1996 has already been successfully renegotiated. There can be no assurance that the Company will successfully negotiate the remaining labor contracts expiring during 1996 without work stoppages. However, the Company does not anticipate any problems in renegotiating those contracts that would materially affect its results of operations. In 1994, 230 Plumbing Products employees went on strike for 64 days at the Landsdowne (Toronto), Canada chinaware manufacturing plant. In 1991, 1,200 Air Conditioning Products employees went on strike for 54 days at the LaCrosse, Wisconsin facility and, in 1989, 1,300 Air Conditioning Products workers went on strike for 40 days at the Clarksville, Tennessee facility. Other than these strikes, the Company has not experienced any other significant work stoppages in North America since 1985. The Company also has a total of 40 labor contracts outside North America (covering approximately 18,000 employees). In early 1996 there was a 5-week work stoppage at the two chinaware manufacturing plants of the Philippines plumbing products subsidiary, involving 700 employees, where the Company has announced plans to combine the two facilities. Other than the Philippines work stoppage, the Company has not experienced any significant work stoppage in the last five years outside North America. 13 16 Although the Company believes relations with its employees are generally satisfactory, there can be no assurance that the Company will not experience significant work stoppages in the future or that its relations with employees will continue to be satisfactory. CUSTOMERS The business of the Company taken as a whole is not dependent upon any single customer or a few customers. INTERNATIONAL OPERATIONS The Company conducts significant non-U.S. operations through subsidiaries in most of the major countries of Western Europe, Canada, Brazil, Mexico, Central American countries, the PRC, Malaysia, the Philippines, South Korea, Thailand, Taiwan, Australia and Egypt. In addition, the Company conducts business in these and other countries through affiliated companies and partnerships in which the Company owns 50% or less of the stock or partnership interest. Because the Company has manufacturing operations in 34 countries, fluctuations in currency exchange rates may have a significant impact on its financial statements. Such fluctuations have much less effect on local operating results, however, because the Company for the most part sells its products within the countries in which they are manufactured. The asset exposure of foreign operations to the effects of exchange volatility has been partly offset by the denomination in foreign currencies of a portion of the Company's borrowings. 14 17 ITEM 2. PROPERTIES At December 31, 1995 the Company conducted its manufacturing activities through 102 plants in 34 countries, of which the principal facilities are as follows:
BUSINESS SEGMENT LOCATION MAJOR PRODUCTS MANUFACTURED AT LOCATION ------- -------- --------------------------------------- Air Conditioning Clarksville, TN Commercial unitary air conditioning Products Fort Smith, AK Commercial unitary air conditioning La Crosse, WI Applied air conditioning systems Lexington, KY Air handling products Macon, GA Commercial air conditioning systems Pueblo, CO Applied air conditioning systems Rushville, IN Air handling products Trenton, NJ Residential gas furnaces and air handlers Tyler, TX Residential air conditioning Waco, TX Water source heat pumps and air handling products Charmes, France Applied air conditioning systems Epinal, France Applied air conditioning systems Mirecourt, France Mini-splits and air handling products Plumbing Products Salem, OH Enameled-steel fixtures and acrylic bathtubs Tiffin, OH Vitreous china Trenton, NJ Vitreous china Toronto, Canada Vitreous china and enameled-steel fixtures Hull, England Vitreous china and acrylic bathtubs Middlewich, England Vitreous china Dole, France Vitreous china and acrylic bathtubs Neuss, Germany Vitreous china Wittlich, Germany Brass plumbing fittings Orcenico, Italy Vitreous china Brescia, Italy Vitreous china Mexico City, Mexico Vitreous china, water heaters Monterrey, Mexico Brass plumbing fittings Manila, Philippines Vitreous china Seoul, South Korea Brass plumbing fittings Bangkok, Thailand Vitreous china Automotive Campinas, Brazil Braking equipment Products Leeds, England Braking equipment Claye-Souilly, France Braking equipment Hanover, Germany Braking equipment Mannheim, Germany Foundation brakes
Except for the properties located in Mirecourt, France and Manila, Philippines, all of the plants described above are owned by the Company or a subsidiary. The properties listed above located in the United States, Canada, and the U.K. are subject to mortgages securing the Company's obligations under its bank credit agreement which was amended and restated effective February 9, 1995 (the "1995 Credit Agreement"). The Company is obligated to mortgage the properties listed above located in France (other than the property located in Mirecourt) to secure certain obligations under the 1995 Credit Agreement and related documents. In addition, to the extent required by the respective indentures pursuant to which certain debt securities of American Standard Inc. were issued, the obligations of American 15 18 Standard Inc. under such debt instruments are secured by mortgages on principal U.S. properties equally and ratably with indebtedness under the 1995 Credit Agreement. Through joint ventures, the Company participates in the operation (or is in the process of constructing) up to ten plants in the PRC, and operates one plant in each of Indonesia and India. The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business. In 1995 several Air Conditioning Products' plants operated at or near capacity and others operated moderately below capacity. In 1995 Plumbing Products' plants worldwide operated at levels of utilization which varied from country to country but overall were satisfactory. Automotive Products' plants generally operated moderately below capacity in 1995. ITEM 3. LEGAL PROCEEDINGS American Standard Inc. is the defendant in a lawsuit brought by Entech Sales & Service, Inc., on behalf of an alleged class of contractors engaged in the service and repair of commercial air conditioning equipment. The suit, filed on March 5, 1993 in the United States District Court for the Northern District of Texas, alleges principally that the manner in which Air Conditioning Products distributes repair service parts for its equipment violates the Federal antitrust laws. It demands $680 million in damages (which would be subject to trebling under the antitrust laws) and injunctive relief. American Standard Inc. has filed an answer denying all claims of violation and is defending itself vigorously. In July 1994, the district court denied class certification with respect to two of the three violations alleged in the suit. These alleged violations may now only be asserted by Entech on its own behalf. With respect to the one claim that was certified as a class action, alleging a price fixing conspiracy, management believes, on the basis of the facts known to it that the claim is without merit. In management's opinion the litigation will not have any material adverse effect on the financial position, cash flows, or results of operations of the Company. For a discussion of German tax issues see Note 5 of Notes to Consolidated Financial Statements incorporated by reference herein (see Item 14(a) of Part IV hereof). For a discussion of environmental issues see "Item 1. Business - General - Regulations and Environmental Matters." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's stockholders during the fourth quarter of 1995. 16 19 EXECUTIVE OFFICERS OF THE REGISTRANT In reliance on General Instruction G to Form 10-K, information on executive officers of the Registrant is included in this Part I. The following table sets forth certain information as of March 11, 1996 with respect to each person who is an executive officer of the Company:
Name Age Position with Company ---- --- --------------------- Emmanuel A. Kampouris 61 Chairman, President and Chief Executive Officer, and Director Horst Hinrichs 63 Senior Vice President, Automotive Products, and Director George H. Kerckhove 58 Senior Vice President, Plumbing Products, and Director Fred A. Allardyce 54 Vice President and Chief Financial Officer Alexander A. Apostolopoulos 53 Vice President and Group Executive, Plumbing Products, Americas International Thomas S. Battaglia 53 Vice President and Treasurer Gary A. Brogoch 45 Vice President and Group Executive, Plumbing Products, PRC Roberto Canizares M. 46 Vice President, Air Conditioning Products, Asia Pacific Region Wilfried Delker 55 Vice President and Group Executive, Plumbing Products, Worldwide Fittings Adrian B. Deshotel 50 Vice President, Human Resources Peter Enss 51 Vice President, Automotive Products, Germany Cyril Gallimore 66 Vice President, Systems and Technology Luigi Gandini 57 Vice President, Special Projects Daniel Hilger 55 Vice President, Air Conditioning Products, Middle East and Africa Region Frederick W. Jaqua 74 Vice President, Special Counsel and Assistant Secretary Richard A. Kalaher 55 Vice President, General Counsel and Secretary W. Craig Kissel 45 Vice President and Group Executive, Air Conditioning Products, Unitary Group William A. Klug 63 Vice President and Group Executive, Air Conditioning Products, International Jean-Claude Montauze 49 Vice President, Automotive Products, France G. Eric Nutter 60 Vice President and Group Executive, Plumbing Products, U.S. Raymond D. Pipes 46 Vice President and Group Executive, Plumbing Products, Far East Region Bruce R. Schiller 51 Vice President, Air Conditioning Products, Compressor Business James H. Schultz 47 Vice President and Group Executive, Air Conditioning Products, North American Commercial Group G. Ronald Simon 54 Vice President and Controller Benson I. Stein 58 Vice President, General Auditor Wolfgang Voss 49 Vice President and Group Executive, Plumbing Products, Europe Robert M. Wellbrock 49 Vice President, Taxes
Each officer of the Company is elected by the Board of Directors to hold office until the first Board meeting after the Annual Meeting of Stockholders next succeeding his election. None of the Company's officers has any family relationship with any director or other officer. "Family relationship" for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin. Set forth below is the principal occupation of each of the executive officers named above during the past five years (except as noted, all positions are with the Company and American Standard Inc.). 17 20 Mr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. He is also a director of Daido Hoxan Inc. Mr. Kampouris has served as a director of the Company since July 1988. Mr. Hinrichs was elected Senior Vice President, Automotive Products, in December 1990. Mr. Hinrichs has served as a director of the Company since March 1991. Mr. Kerckhove was elected Senior Vice President, Plumbing Products, in June 1990. Mr. Kerckhove has served as a director of the Company since September 1990. Mr. Allardyce was elected Vice President and Chief Financial Officer in January 1992. Prior thereto he served as Vice President and Controller from February 1983 until December 1991. Mr. Apostolopoulos was elected Vice President and Group Executive, Plumbing Products, Americas International, in December 1990. Mr. Battaglia was elected Vice President and Treasurer in September 1991. Prior thereto he was Assistant Treasurer from June 1977. Mr. Brogoch was elected Vice President and Group Executive, Plumbing Products in the PRC, in December 1994. Prior thereto he served as Vice President of Plumbing Products' operations in the PRC from August 1993 until December 1994. Previously he served as Vice President of Finance and Planning, European Plumbing Products from August 1991 until August 1993 and as Managing Director of the Company's Indonesian joint venture from November 1986 to August 1991. Mr. Canizares was elected Vice President, Air Conditioning Products' Asia Pacific Region, in December 1990. Mr. Delker was elected Vice President and Group Executive, Plumbing Products, Worldwide Fittings, in April 1990. Mr. Deshotel was elected Vice President, Human Resources, in January 1992. Prior thereto he served as Group Vice President, Human Resources, for U.S. Plumbing Products from January 1980 until December 1991. Mr. Enss was elected Vice President, Automotive Products in Germany, in July 1995. Prior thereto he served as Vice President, Business Development, and Group Executive of the WABCO Austrian group of companies from January 1994 to June 1995 and in various executive capacities in the WABCO Automotive Products Group headquarters in Brussels from January 1991 to December 1993. Mr. Gallimore was elected Vice President, Systems and Technology, in December 1990. Mr. Gandini has served as Vice President, Special Projects since October 1995, having been elected Vice President and Group Executive, European Plumbing Products, in July 1990. Mr. Hilger was elected Vice President, Air Conditioning Products, Middle East and Africa Region, in June 1988. Mr. Jaqua was elected Vice President, Special Counsel and Assistant Secretary in March 1995. Prior to that he was Vice President, General Counsel and Secretary since April 1989. 18 21 Mr. Kalaher was elected Vice President, General Counsel and Secretary in March 1995, having served as Acting General Counsel and Acting Secretary since joining the Company in February 1994. Prior thereto, he was Vice President and General Counsel of AMAX Inc. from 1991 to 1994 and Vice President and Associate General Counsel from 1985 to 1991. Mr. Kissel was elected Vice President in charge of Air Conditioning Products' Unitary Products Group in January 1992, becoming Group Executive in March 1994. He served as Vice President, Sales and Distribution, for Air Conditioning Products, from December 1990 until January 1992. Mr. Klug was elected Vice President in 1985 and has been Group Executive in charge of Air Conditioning Products' Trane International since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. Mr. Montauze was elected Vice President, Automotive Products in France, in October 1994. He served as Vice President of Finance and Controller of Automotive Products at the Brussels headquarters from September 1989 until September 1994. Mr. Nutter was elected Vice President and Group Executive, U.S. Plumbing Products, in May 1995. Prior thereto he served as Vice President, Automotive Products in the United Kingdom from January 1992 until April 1995 and as Vice President and General Manager of WABCO Automotive U.K. Limited, the United Kingdom automotive subsidiary of the Company from March 1991 until December 1991 and Group Managing Director of the United Kingdom automotive subsidiary from June 1987 until February 1991. Mr. Pipes was elected Vice President and Group Executive for the Far East Region of Plumbing Products in May 1992. Prior thereto he served as Managing Director of American Standard Inc.'s Philippine subsidiary from May 1990 until April 1992. Mr. Schiller was elected Vice President, Compressor Business (Air Conditioning Products) in March 1994. Prior thereto he served as General Manager, Compressor Business Group, from May 1993 to February 1994 and Manager and then General Manager of the Company's Tyler, Texas, facility from March 1986 to April 1993. Mr. Schultz was elected Vice President and Group Executive, North American Commercial Group of Air Conditioning Products, in 1987. Mr. Simon was elected Vice President and Controller in January 1992. Prior thereto he served as Vice President and Controller of the Air Conditioning Products' North American Commercial Group from December 1984 to December 1991. Mr. Stein was elected Vice President, General Auditor, in March 1994; from December 1986 to February 1994 he was the Company's General Auditor. Mr. Voss was elected Vice President and Group Executive, European Plumbing Products in July 1995, to succeed Mr. Gandini in October 1995. Prior thereto, he served as Process Owner, Order Fulfillment from January 1994 to June 1995, and as Works Manager from January 1991 to December 1993, of the WABCO Automotive company in Germany. Mr. Wellbrock was elected Vice President, Taxes, effective January 1, 1994. Prior thereto he served as Director of Taxes from 1988 through 1993. 19 22 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company is listed on the New York Stock Exchange, Inc. (the "Exchange"). The common stock was first traded on the Exchange on February 3, 1995 concurrent with the underwritten initial public offering of shares of the Company's common stock at an initial price to the public of $20.00 per share (the "Offering"). Prior to the Offering there was no established public trading market for the Company's shares. An Amended and Restated Stockholders Agreement among the Company, Kelso ASI Partners, L.P., the Company's largest stockholder, and certain management investors was adopted in December 1994. In January 1995 the Company adopted a Restated Certificate of Incorporation, Amended Bylaws and a Stockholder Rights Agreement. The Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock, par value $.01 per share, and 2,000,000 shares of preferred stock, par value $.01 per share, of which the Board of Directors designated 900,000 shares as a new series of Junior Participating Cumulative Preferred Stock. Each outstanding share of common stock has associated with it one right to purchase a specified amount of Junior Participating Cumulative Preferred Stock at a stipulated price in certain circumstances relating to changes in ownership of the common stock of the Company. The number of holders of record of the common stock of the Company as of March 11, 1996, was 1,069. No dividends were declared on the Company's common stock in 1994 or 1995. The Company has no separate operations and its ability to pay dividends or repurchase its common stock is dependent entirely upon the extent to which it receives dividends or other funds from American Standard Inc. The terms of the Company's 1995 Credit Agreement and certain indentures governing publicly-traded debt securities of American Standard Inc. restrict the payment of dividends and other extensions of funds by American Standard Inc. to the Company. Set forth below are the high and low sales prices for shares of the Company's common stock in 1995 from February 3, 1995, the date of the Offering, through the end of the first quarter of 1995 and for each full quarterly period thereafter in 1995.
1995: High Low ----- ---- --- First Quarter $ 25 $ 19-5/8 Second quarter 1995 $ 28-1/4 $ 24-1/4 Third quarter 1995 $ 32 $ 26 Fourth quarter 1995 $ 31-7/8 $ 26-1/4
20 23 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (Dollars in millions, except per share data)
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Statement of Operations Data: Sales $ 5,221 $ 4,457 $ 3,830 $ 3,792 $ 3,595 Income (loss) before extraordinary item and cumulative effect of change in accounting method(a)(b) $ 142 $ (77) $ (117) $ (57) $ (111) ============ ============ ============ ============ ============ Per Common Share (c): Income (loss) before extraordinary item and cumulative effect of change in accounting method $ 1.90 $ (1.29) $ (2.11) $ (1.24) $ (2.14) ============ ============ ============ ============ ============ Average number of outstanding common shares 74,671,830 59,933,435 59,313,073 58,636,118 58,338,195 BALANCE SHEET DATA (AT END OF PERIOD): Total assets $ 3,520 $ 3,156 $ 2,987 $ 3,126 $ 3,270 Total debt 2,083 2,364 2,336 2,145 2,180 Exchangeable preferred stock (d) -- -- -- 133 117 Stockholders' deficit (390) (798) (723) (449) (350)
(a) Retirements of debt in connection with the proceeds of the Offering in 1995, an October 1994 borrowing and a 1993 refinancing resulted in extraordinary charges of $30 million, $9 million and $92 million in 1995, 1994 and 1993, respectively, (including call premiums, the write-off of deferred debt issuance costs, and in 1993 the loss on cancellation of foreign currency swap contracts) on which there were no tax benefits (see Notes 5 and 8 of Notes to Consolidated Financial Statements included in the Company's 1995 Annual Report to Stockholders and incorporated herein by reference). (b) The year 1991 included a charge of $32 million (net of income tax effect) for the cumulative effect of the accounting changes related to postretirement benefits other than pensions and warranty contract revenues at January 1, 1991. The cumulative effect of these accounting changes increased the postretirement benefit and warranty accruals at January 1, 1991 by $52 million. (c) Per share data and average number of outstanding common shares and equivalents data reflect the 2.5 to 1 stock split effected in December 1994. (d) In June 1993 the exchangeable preferred stock was exchanged for 12-3/4% Junior Subordinated Debentures which were redeemed on November 21, 1994. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of the financial condition and results of operations of the Company is set forth on pages 15 through 22 of the Company's 1995 Annual Report to Stockholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference from the Company's 1995 Annual Report to Stockholders are the financial statements and related information listed under the heading "1. Financial Statements" in the Index to Financial Statements and Financial Statement Schedules on page 26 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 22 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for information regarding the Company's executive officers, the information called for by this Item is incorporated in this report by reference to the Company's definitive Proxy Statement dated March 28, 1996: under the headings: "Stock Ownership" and "1. Election of Directors", except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. For information concerning the executive officers of the Company, see "Executive Officers of the Registrant" under Part I of this report. None of the Company's directors or officers has any family relationship with any other director or officer. ("Family relationship" for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin.) ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation and related matters is set forth in the Company's definitive Proxy Statement dated March 28, 1996 as follows: under the section entitled "Directors' Fees and Other Arrangements" on page 7 thereof, under the heading entitled "Executive Compensation" on pages 9 through 14 thereof, under the heading entitled "Compensation Committee Interlocks and Insider Participation" on page 17 and under the heading entitled "Certain Relationships and Related Party Transactions" on pages 17 through 19 thereof, and is incorporated herein by reference except for the sections entitled "Management Development and Nominating Committee Report on Compensation of Executive Officers of the Company" and "Performance Graph" appearing on pages 14 through 17 except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning shares of common stock of the Company beneficially owned by management and others is set forth under the heading entitled "Stock Ownership" on pages 3 and 4 in the Company's definitive Proxy Statement dated March 28, 1996 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated in this report by reference to the Company's definitive Proxy Statement dated March 28, 1996 under the section entitled "Certain Relationships and Related Party Transactions", except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. 23 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 and 2. Financial statements and financial statement schedules The financial statements and financial statement schedules are listed in the accompanying index to financial statements on page 26 of this annual report on Form 10-K. The financial statements indicated on the index appearing on page 26 hereof are incorporated herein by reference. 3. Exhibits The exhibits to this Report are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as part of this annual report on Form 10-K. (b) Reports on Form 8-K for the quarter ended December 31, 1995. The Company filed no current reports on Form 8-K during the fourth quarter ended December 31, 1995. 24 27 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. AMERICAN STANDARD COMPANIES INC. By: /s/ EMMANUEL A. KAMPOURIS ---------------------- (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 1996: /s/ Emmanuel A. Kampouris - ----------------------------- (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer; Director (Principal Executive Officer) /s/ FRED A. ALLARDYCE - ----------------------------- (Fred A. Allardyce) Vice President and Chief Financial Officer (Principal Financial Officer) /s/ G. RONALD SIMON - ----------------------------- (G. Ronald Simon) Vice President and Controller (Principal Accounting Officer) /s/ STEVEN E. ANDERSON - ----------------------------- (Steven E. Anderson) Director /s/ HORST HINRICHS - ----------------------------- (Horst Hinrichs) Director /s/ GEORGE H. KERCKHOVE - ----------------------------- (George H. Kerckhove) Director /s/ SHIGERU MIZUSHIMA - ----------------------------- (Shigeru Mizushima) Director /s/ FRANK T. NICKELL - ----------------------------- (Frank T. Nickell) Director /s/ ROGER W. PARSONS - ----------------------------- (Roger W. Parsons) Director /s/ J. DANFORTH QUAYLE - ----------------------------- (J. Danforth Quayle) Director /s/ DAVID M. RODERICK - ----------------------------- (David M. Roderick) Director /s/ JOHN RUTLEDGE - ----------------------------- (John Rutledge) Director /s/ JOSEPH S. SCHUCHERT - ----------------------------- (Joseph S. Schuchert) Director
25 28 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
------------- 1995 ANNUAL REPORT TO STOCKHOLDERS (PAGES) ------------- 1. Financial Statements (incorporated by reference from the Company's 1995 Annual Report to Stockholders) Consolidated Balance Sheet at December 31, 1995, and 1994 26 Years ended December 31, 1995, 1994, and 1993: Consolidated Statement of Operations 25 Consolidated Statement of Cash Flows 27 Consolidated Statement of Stockholders' Deficit 28 Notes to Financial Statements 29-41 Segment Data 14 and 41 Quarterly Data (Unaudited) 42 Report of Independent Auditors 24 --------- FORM 10-K (PAGES) --------- 2. Financial statement schedules, years ended December 31, 1995, 1994, and 1993 I Condensed Financial Information of Registrant 28-31 II Valuation and Qualifying Accounts 32
All other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto. 26 29 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Standard Companies Inc. and in the Registration Statement on Form S-8 pertaining to the Stock Incentive Plan of American Standard Companies Inc. (Registration No. 33-63007) of our report dated February 26, 1996 included in the 1995 Annual Report to Stockholders of American Standard Companies Inc. Our audits also included the financial statement schedules of American Standard Companies Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP New York, New York March 29, 1996 27 30 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (PARENT COMPANY SEPARATELY) (DOLLARS IN THOUSANDS)
Year Ended December 31 1995 1994 1993 ---- ---- ---- Interest income $ 450 $ 219 $ 188 Interest expense 450 219 188 Equity in net loss of subsidiary 111,655 (86,421) (208,567) ------- ------- -------- Net loss $ 111,655 $ (86,421) $(208,567) ======= ======= =======
See notes to financial statements 28 31 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) BALANCE SHEET (PARENT COMPANY SEPARATELY) (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------ ASSETS ------ 1995 1994 ---- ---- Investment in subsidiary $(378,924) $(774,560) Loan receivable from subsidiary 4,823 -- LIABILITIES ----------- Loan payable to subsidiary 629 1,640 Stock repurchase obligation (Note C) 15,333 21,429 STOCKHOLDERS' DEFICIT --------------------- Common stock, $.01 par value, 200,000,000 shares authorized; shares issued and outstanding, 76,733,010 in 1995; 60,932,457 in 1994 767 609 Capital surplus 509,218 194,236 Subscriptions receivable (629) (1,640) Accumulated deficit (724,769) (836,424) Foreign currency translation effects (174,650) (151,721) Minimum pension liability adjustment -- (2,689) --------- --------- Total stockholders' deficit (390,063) (797,629) --------- --------- $(378,924) $(774,560) ========= =========
See notes to financial statements. 29 32 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (PARENT COMPANY SEPARATELY) (DOLLARS IN THOUSANDS)
Year Ended December 31, 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 111,655 $ (86,421) $(208,567) Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in net loss (income) of subsidiary (111,655) 86,421 208,567 --------- --------- --------- Net cash flow from operating activities 0 0 0 --------- --------- --------- Cash provided (used) by investing activities: Investment in subsidiary (279,983) (3,976) (4,585) Loan to subsidiary (4,823) -- -- Purchase of common stock by subsidiary 10,989 16,927 12,194 --------- --------- --------- Net cash provided by investing activities (273,817) 12,951 7,609 --------- --------- --------- Cash provided (used) by financing activities: Proceeds from initial public offering of common stock 280,535 -- -- Other issuances of common stock 4,271 3,976 4,585 Common stock repurchases (10,989) (16,927) (12,194) Repayments on subscriptions receivable 1,011 786 482 Repayment of loan from subsidiary (1,011) (786) (482) --------- --------- --------- Net cash used by financing activities 273,817 (12,951) (7,609) --------- --------- --------- Net change in cash and cash equivalents $ 0 $ 0 $ 0 ========= ========= =========
See notes to financial statements. 30 33 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION ON REGISTRANT -- (CONTINUED) NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY SEPARATELY) (A) The notes to the consolidated financial statements of American Standard Companies Inc. (the "Parent Company"), are an integral part of these condensed financial statements. (B) The Parent Company was organized by Kelso & Company, L.P., a private merchant banking firm, to participate in the acquisition of American Standard Inc. (the "Acquisition") in 1988. American Standard Inc.'s common stock is owned solely by the Parent Company. The Parent Company has no other investments or operations. (C) The Parent Company has sold its common stock to management employees in connection with the Acquisition and issued common stock under various employee benefit and incentive plans including the ESOP. As no public market existed for the stock prior to the initial public offering in the first quarter of 1995 (see Note D), the Parent Company, to provide liquidity to employees who have terminated employment, has made purchases of such employees' stock. Subsequent to December 2, 1994 the Parent Company is no longer obligated to make such purchases. Purchases through December 31, 1994, were based upon fair market value appraisals obtained in connection with the ESOP. The amount paid on such stock purchases is subject to an annual limitation contained in American Standard Inc.'s lending arrangements and debt instruments (the "Annual Limitation" ). As the amount owed to terminated employees has exceeded the Annual Limitation, a liability for the unpaid balance has been recorded on the financial statements of the Parent Company with a concomitant reduction in common stock and capital surplus accounts. (D) In the first quarter of 1995 the Parent Company sold 15,112,300 shares of its common stock in an initial public offering at an initial price to the public of $20 per share. This offering yielded net proceeds of approximately $281 million (including proceeds from the exercised portion of the underwriters' over-allotment option and after deducting underwriting discounts and expenses), which were transferred to American Standard Inc. and used to reduce its indebtedness. Of the total net proceeds transferred, $269 million was contributed to the capital of American Standard Inc. and $12 million was advanced under an intercompany demand note. 31 34 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (DOLLARS IN THOUSANDS)
DESCRIPTION FOREIGN BALANCE ADDITIONS CURRENCY BALANCE BEGINNING CHARGED TO OTHER TRANSLATION END OF OF PERIOD INCOME DEDUCTIONS CHANGES EFFECTS PERIOD 1995: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 19,569 $10,811 $ 6,064 (A) $ 2,662 $ 352 $ 27,330 ============================================================================================================================ Reserve for post-retirement benefits $437,708 $52,190 $(21,808)(B) $(5,761)(C) $ 20,069 $482,398 ============================================================================================================================ 1994: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 15,666 $10,208 $ (6,868)(A) $ 533 $ 30 $ 19,569 ============================================================================================================================ Reserve for post-retirement benefits $387,038 $44,352 $(23,062)(B) $ 3,188 (D) $ 26,192 $437,708 ============================================================================================================================ 1993: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 12,827 $10,118 $ (6,584)(A) $ - $ (695) $ 15,666 ============================================================================================================================ Reserve for post-retirement benefits $368,868 $48,827 $(25,815)(B) $11,832 (E) $(16,674) $387,038 ============================================================================================================================
The reserve for postretirement benefits excludes the activity for currently funded U.S. pension plans. (A) Accounts charged off. (B) Payments made during the year. (C) Includes $6 million reduction in minimum pension liability. (D) Includes $3 million reduction in minimum pension liability primarily offset by $5 million from acquisition of new business. (E) Includes $19 million increase in minimum pension liability offset by a $7 million reduction resulting from curtailment of certain plans. 32 35 AMERICAN STANDARD COMPANIES INC. INDEX TO EXHIBITS (Item 14(a)3 -- Exhibits Required by Item 601 of Regulation S-K and Additional Exhibits (The Commission File Number of American Standard Companies Inc. (formerly ASI Holding Corporation), the Registrant (sometimes hereinafter referred to as "Holding"), and for all Exhibits incorporated by reference, is 1-11415, except those Exhibits incorporated by reference in filings made by American Standard Inc. (the "Company") the Commission File Number of which is 33-64450. Prior to filing its Registration Statement on Form S-2 on November 10, 1994, Holding's Commission File Number was 33-23070.) (3) (i) Restated Certificate of Incorporation of Holding; previously filed as Exhibit 3(i) in Amendment No. 4 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 31, 1995, and herein incorporated by reference. (ii) Amended By-laws of Holding; previously filed as Exhibit 3(ii) in Amendment No. 4 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 31, 1995, and herein incorporated by reference. (4) (i) Form of Common Stock Certificate; previously filed as Exhibit 4(i) in Amendment No. 3 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 5, 1995, and herein incorporated by reference. (ii) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit 4(iii) in the Company's Form 10-K for the fiscal year ended December 31, 1986, and herein incorporated by reference. (iii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the "Resigning Trustee") and Wilmington Trust Company (the "Successor Trustee") relating to resignation of the Resigning Trustee and appointment of the Successor Trustee, under the Indenture referred to in Exhibit (4)(ii) above; previously filed as Exhibit (4)(ii) in Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. 33 36 (iv) Indenture, dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; copy of Indenture previously filed as Exhibit (4)(i) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference. (v) Form of 10-7/8% Senior Notes due 1999 included as Exhibit A to the Indenture described in (4)(iv) above. (vi) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; copy of Indenture previously filed as Exhibit (4)(iii) by the Company in its Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference. (vii) Form of 11-3/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vi) above. (viii) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7/8% Senior Subordinated Notes Due 2001; previously filed as Exhibit (4)(xxxi) in Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. (ix) Form of Note evidencing the 9-7/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in (4)(viii) above. (x) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4)(xxxiii) in Amendment No. 1 to Registration statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. (xi) Form of Debenture evidencing the 10-1/2% Senior Subordinated Discount debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4)(x) above. (xii) Assignment and Amendment Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company, Bankers Trust 34 37 Company, as agent under the 1988 Credit Agreement, the financial institutions named as Lenders in the 1988 Credit Agreement and certain additional Lenders and Chemical Bank, as Administrative Agent and Arranger; previously filed as Exhibit (4)(xiii) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. (xiii) Credit Agreement, dated as of June 1, 1993, among the Company, Holding, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent and Arranger; Bankers Trust Company, The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Deutsche Bank AG, The Long-Term Credit Bank of Japan, Ltd., New York Branch, and NationsBank of North Carolina, N.A., as Managing Agents, and Banque Paribas, Citibank, N.A., and Compagnie Financiere de CIC et de l'Union Europeenne, New York Branch, as Co-Agents (the "1993 Credit Agreement"); previously filed as Exhibit (4)(xiv) in Amendment No. 1 to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. (xiv) First Amendment, Consent and Waiver, dated as of February 10, 1994, to the 1993 Credit Agreement referred to in (4)(xiii) above; previously filed as Exhibit (4)(xvii) by the Company in its Form 10-K for the fiscal year ended December 31, 1993, and herein incorporated by reference. (xv) Second Amendment, dated as of October 21, 1994, to the 1993 Credit Agreement referred to in paragraph (4)(xiii) above; previously filed as Exhibit (4)(xviii) in Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed November 10, 1994, and herein incorporated by reference. (xvi) Assignment and Amendment Agreement dated as of February 9, 1995, among Holding, the Company, certain subsidiaries of the Company, and the financial institutions listed in Schedule I thereto (the "Original Lenders"); the financial institutions listed in Schedule II thereto (the "Continuing Lenders"), including Chemical Bank as Administrative Agent for the Original Lenders and Continuing Lenders and as Collateral Agent for the Original Lenders and Continuing Lenders; previously filed as Exhibit (4)(xvi) in Holding's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (xvii) Amended and Restated Credit Agreement, dated as of February 9, 1995, among Holding, the Company, certain subsidiaries of the Company and the lending institutions listed therein, Chemical Bank, as Administrative Agent; Citibank, N.A. and NationsBank, N.A. (Carolinas), as Senior Managing 35 38 Agents; Bank of America Illinois, The Bank of Nova Scotia, Bankers Trust Company, The Chase Manhattan Bank, N.A., Compagnie Financiere de CIC et de L'Union Europeenne, Credit Suisse, Deutsche Bank AG, The Industrial Bank of Japan Trust Company, The Long-Term Credit Bank of Japan, Limited and The Sumitomo Bank, Ltd., as Managing Agents; and The Bank of New York, Canadian Imperial Bank of Commerce, The Fuji Bank, Limited and The Sanwa Bank Limited, as Co-Agents (the "1995 Credit Agreement"), with exhibits but without schedules. (The 1995 Credit Agreement replaces the 1993 Credit Agreement referred to in Exhibit (4)(xiii) above, but the Security Documents and the Guarantee Documents entered into pursuant to the 1993 Credit Agreement continue in force and effect as amended by the Credit Documents Amendment Agreement dated as of February 9, 1995 described in Exhibit (4)(xviii) below); previously filed as Exhibit (4)(xvii) in Holding's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (Schedules I, II, and III to the 1995 Credit Agreement are previously filed as Exhibit (4)(v) in Holding's Form 10-Q for the quarter ended March 31, 1995, and herein incorporated by reference.) (xviii) Credit Documents Amendment Agreement dated as of February 9, 1995, among holding, the Company, certain domestic and foreign subsidiaries of the Company, and Chemical Bank, as Administrative Agent and as Collateral Agent for the Lenders under the 1995 Credit Agreement, described in Exhibit (4)(xvii) above; previously filed as Exhibit (4)(xviii) in Holding's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (xix) First Amendment, dated as of March 15, 1995, to the 1995 Credit Agreement referred to in (4)(xvii) above; previously filed as Exhibit (4)(vi) in Holding's Form 10-Q for the quarter ended March 31, 1995, and herein incorporated by reference. (xx) Amended and Restated Stockholders Agreement, dated as of December 2, 1994, among Holding, Kelso ASI Partners, L.P. and the Management Stockholders named therein; previously filed as Exhibit 4 (xxi) in Amendment No. 1 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed December 20, 1994, and herein incorporated by reference. (xxi) Rights Agreement, dated as of January 5, 1995, between Holding and Citibank, N.A. as Rights Agent; previously filed as Exhibit (4)(xxv) in Holding's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. 36 39 (10)* (i) American Standard Inc. Long-Term Incentive Compensation Plan, as amended and restated as of February 3, 1995; previously filed as Exhibit (10)(i) by the Company in its Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (ii) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan and Supplemental Incentive Plan, as amended and restated as of February 3, 1995; previously filed as Exhibit (10)(ii) by the Company in its Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (iii) American Standard Inc. Annual Incentive Plan; previously filed as Exhibit (10)(vii) by the Company in its Form 10-K for the fiscal year ended December 31, 1988, and herein incorporated by reference. (iv) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through July 6, 1995; incorporated herein by reference to Exhibit (10)(iv) of Company's Form 10-K for the fiscal year ended December 31, 1995. (v) Consulting Agreement made July 1, 1988, with Kelso & Company, L.P. concerning general management and financial consulting services to Company; previously filed as Exhibit (10)(xviii) in the Company's Form 10-K for the fiscal year ended December 31, 1988, and herein incorporated by reference. (vi) Agreement, dated as of December 2, 1994, among Holding, Company and Kelso & Company, L.P., amending the Consulting Agreement referred to in paragraph (10)(v) above; previously filed as Exhibit (10)(xi) in Amendment No. 1 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed December 20, 1994, and herein incorporated by reference. * Items in this series 10 consist of management contracts or compensatory plans or arrangements with the exception of (10)(v) and (vi). 40 (vii) American Standard Inc. Supplemental Compensation Plan for Outside Directors, as amended through February 3, 1995; previously filed as Exhibit (10)(xii) by Company in its Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (viii) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit (10)(i) in Holding's Form 10-Q for the quarter ended September 30, 1989, and herein incorporated by reference. (ix) Corporate Officers Severance Plan adopted by Company in December, 1990, effective April 27, 1991; previously filed as Exhibit (10)(xix) by Company in its Form 10-K for the fiscal year ended December 31, 1990, and herein incorporated by reference. (x) Estate Preservation Plan, adopted by Company in December, 1990; previously filed as Exhibit (10)(xx) by Company in its Form 10-K for the fiscal year ended December 31, 1990, and herein incorporated by reference. (xi) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10)(x) above; previously filed as Exhibit (10)(xvii) by Company in its Form 10-K for the fiscal year ended December 31, 1993 and herein incorporated by reference. (xii) Summary of terms of Unfunded Deferred Compensation Plan adopted December 2, 1993; previously filed as Exhibit (10)(xviii) by Company in its Form 10-K for the fiscal year ended December 31, 1993 and herein incorporated by reference. (xiii) American Standard Companies Inc. Stock Incentive Plan; previously filed as Exhibit (10)(xx) in Amendment No. 3 to Registration Statement No. 33-56409 under the Securities Act, as amended, filed January 5, 1995, and herein incorporated by reference. (xiv) American Standard Inc. and Subsidiaries 1996-1998 Supplemental Incentive Compensation Plan adopted October 6, 1995; filed as an Exhibit to Holding's definitive Proxy Statement for its 1996 Annual Meeting of Stockholders, and herein incorporated by reference. (xv) Form of Indemnification Agreement; previously filed as Exhibit (10)(xxi) in Amendment No. 3 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 5, 1995, and herein incorporated by reference. 38 41 (13) 1995 Annual Report to Stockholders. (Only those portions specifically incorporated by reference are filed; no other portions of the Annual Report are to be deemed filed.) (21) Listing of Holding's subsidiaries. (27) Financial Data Schedule. 39 EX-10.IV 2 EXECUTIVE SUPPLEMENTAL RETIREMENT BENEFIT PROGRAM 1 Exhibit 10 -iv AMERICAN STANDARD INC. EXECUTIVE SUPPLEMENTAL RETIREMENT BENEFIT PROGRAM Restated to include all amendments through July 6, 1995 2 ARTICLE I DEFINITIONS For all purposes of the Program the following definitions shall apply, with words in the masculine gender including, where appropriate, the feminine gender: Actuarial Equivalent means, with respect to any monthly payments referred to in Article IV, the lump sum payment which is the present value as of the date of commencement of such monthly payments, determined using the following actuarial assumptions: (a) Mortality Table - 1983 Basic Group Annuity Mortality Table for males projected to 1988 with Scale H; and (b) Interest - the lesser of (1) 120% of the annual interest rate used by the Pension Benefit Guaranty Corporation to value immediate annuities for plans terminating as of the date as of which the applicant's monthly pension payments would otherwise commence; and (2) the average yield of long-term U.S. Treasury bonds issued during the one month period ending one month before the date as of which the applicant's monthly pension payments would otherwise commence, as published in the Federal Reserve Bulletin under the heading "Composite Index: Over 10 Years (long-term)," such average yield to be rounded to the nearest .25%; provided that, for purposes of calculating a lump sum payment to a Prior Participant or his Surviving Spouse the interest rate applied to calculate that portion of such lump sum attributable to such Prior Participant's Special Years of Service shall be multiplied by sixty and four-tenths percent (60.4%). Average Monthly Earnings of a Participating Employee means his total Compensation for the three (3) calendar Years of Service (or such lesser number of calendar years as may constitute his Years of Service) in his last ten (10) calendar Years of Service (including in such ten (10) calendar years the year in which his Service is broken), during which his total Compensation was the highest, divided by thirty-six (36) (or such lesser number as may constitute the number of calendar months of his Years of Service). Board means the Board of Directors of the Corporation. Code means the Internal Revenue Code of 1986, as amended. Committee means the Committee constituted under Article III, Section 2 hereof. Compensation means, for any calendar year, the total remuneration (other than remuneration that is not treated as "Compensation" under and for purposes of the Retirement Plan) for Service rendered by a Participating Employee during such year, including any annual incentive compensation awarded to him with respect to such year, without regard to the year in which such incentive compensation is received; provided that Compensation shall not include any payments under the American Standard Inc. Management Partners' Bonus Plan or Long-Term Incentive Compensation Plan. 2 3 Corporation means American Standard Inc. and its successors and any predecessor corporation merged with or into, or any business acquired by, American Standard Inc. Employee means an employee of the Corporation or a Subsidiary Company. ESOP Offset means two (2) times the value, as of the date when a Participating Employee's Service is broken, of the Basic Company Contributions to his account under the American-Standard Employee Stock Ownership Plan. Other Post-Retirement Benefits means, with respect to a Participating Employee, his ESOP Offset, plus all amounts paid or payable to him or his Surviving Spouse under or with respect to the Retirement Plan (including any monthly pension payable hereunder because it exceeds the maximum limitation on pension amounts imposed by Section 415 of the Code), the American Standard Profit Sharing Plan and any other non-governmental defined benefit or defined contribution employee pension plan (except the Savings and Stock Ownership Plan of American Standard Inc. and Participating Subsidiary Companies and the American Standard Employee Stock Ownership Plan) to which the Corporation, any Subsidiary Company or any previous employer of such Participating Employee had made contributions, provided that in calculating such amounts the following shall apply: (a) Any Other Post-Retirement Benefit which is offset under the terms of the Retirement Plan shall be offset under this Program; (b) Such amounts shall include lump sum and installment distributions which, together with all Other Post Retirement Benefits, shall be expressed as an Actuarially Equivalent lifetime annuity payable monthly. (c) Such amounts shall exclude benefits to the extent attributable to ontributions made by such Participating Employee; and (d) Such amounts shall reflect reductions for early commencement of benefits, if any. Participating Employee means any Employee (including, unless the context otherwise requires, an Employee who is a Prior Participant) who has been and so long as he remains an officer of the Corporation elected as such by the Board, but such term shall not include the Chairman of the Board on January 1, 1991. Prior Participant means any one of Emmanuel A. Kampouris, William A. Klug and James E. Mack, so long as he is a Participating Employee. Primary Social Security Benefit shall have the meaning ascribed to that term in and by the Retirement Plan. In the event that the Participating Employee provides the Committee with the actual amount of his Social Security Benefit plus the amounts, if any, payable to such Employee under a foreign social insurance or pension system (which is comparable in nature to the U.S. Social Security System) then the total of such amounts if less than the U.S. Primary Social Security Benefit as defined in the Retirement Plan shall be deemed the Participating Employee's Primary Social Security Benefit for the purposes of this Program. Program means the Amended and Restated Executive Supplemental Retirement Benefit Program of American Standard Inc., as set forth in this document and as amended from time to time. Retirement Plan means the Retirement Plan of American Standard Inc. and Participating Subsidiary Companies, as in effect immediately before the amendments thereto made as of June 30, 1988. 3 4 Service and Years of Service shall have the meanings ascribed to those terms in and by the Retirement Plan. Special Average Monthly Earnings of a Prior Participant means his total Compensation for the three (3) calendar Years of Service during which his Compensation was the highest in the ten (10) calendar Years of Service ending with and including the earlier of the year in which his Service is broken and the year 1991, divided by thirty-six (36). Special Years of Service of a Prior Participant means his Years of Service through the earlier of the month immediately preceding the month in which his Service is broken and March, 1991. Subsidiary Company means any corporation organized and existing under the laws of a state, district or territory of the United States at least fifty percent (50%) of whose outstanding voting stock is owned, directly or indirectly, by the Corporation or another Subsidiary Company. Surviving Spouse means the person to whom a Participating Employee or former Participating Employee was legally married on the earlier of the date of his retirement or death. 4 5 ARTICLE II PURPOSE The purpose of the Program is to further the achievement of corporate goals of the Corporation by providing improved retirement income as a component of executive compensation, by providing retirement income not subject to the limits imposed on retirement plans qualified under Section 401(a) of the Code, and by assisting in recruiting and retaining senior executives. 5 6 ARTICLE III AMENDMENT, CONTINUATION, ADMINISTRATION Section 1 - Amendment and Continuation The Board shall have the right to suspend or terminate the Program at any time and, at any time or from time to time, to amend its terms; provided, however, that no such action shall effect a forfeiture or a reduction in the amount of any benefit under the Program that (a) an Employee who had been a Participating Employee for at least twelve (12) months prior to the month in which such action is authorized or (b) the Surviving Spouse of such an Employee would otherwise have been entitled to receive if such Employee had died on, or retired as of the first of the month coinciding with or following, the effective date of such action or, if later, the date of its authorization. Notwithstanding any such suspension, termination or amendment, the Corporation and Subsidiary Companies will at all times be free to establish other programs, similar or different, for the benefit of any Employees. Section 2 - Administration The Program shall be administered by a committee of the Board (the "Committee") which is appointed by the Board. No member of such Committee shall be eligible to participate in the Program. The Committee shall interpret the Program, establish administrative policies, guidelines and rules and designate Participating Employees thereunder, and take any other action necessary or desirable for the proper operation of the Program. All such interpretations, policies, guidelines, rules, designations and actions shall be final and binding upon the Corporation, all Subsidiary Companies, all Employees and all Participating Employees. 6 7 ARTICLE IV ELIGIBILITY FOR AND AMOUNT OF BENEFITS Section 1 - Upon Retirement at or After Age Sixty-five Any Participating Employee who, after completing at least five (5) Years of Service, ceases to be an Employee on or after his sixty-fifth (65th) birthday shall receive from the Corporation, no later than the thirtieth (30th) day of the month coincident with or immediately succeeding his sixty-fifth (65th) birthday (or the month in which he ceases to be an Employee, if later), a single lump sum payment which shall be the Actuarial Equivalent of a monthly payment, commencing with such month and continuing for his lifetime, in an amount equal to the sum of (i) the excess of (a) four percent (4%) of his Average Monthly Earnings, multiplied by the number, not in excess of ten (10), of his Years of Service, plus (b) one percent (1%) of his Average Monthly Earnings, multiplied by the number of his Years of Service accumulated after his first ten (10) Years of Service (to a maximum of twenty percent (20%) of such Average Monthly Earnings), over the sum of (c) such Participating Employee's Other Post-Retirement Benefits, plus (d) his Primary Social Security Benefit; and (ii) the monthly pension, if any, which is not payable to him from the Retirement Plan because of the maximum limitations on pension amounts imposed by Section 415 of the Code. Notwithstanding the foregoing, the Actuarial Equivalent of the monthly payment derived under this Section 1 shall not, with respect to a Prior Participant, be less than the amount that would have been derived A. if clauses (a), (b) and (c) above had read as follows: (a-1) five percent (5%) of his Special Average Monthly Earnings, multiplied by the number, not in excess of ten (10), of his Special Years of Service, plus (b-1) one percent (1%) of his Special Average Monthly Earnings, multiplied by the number of his Special Years of Service accumulated after his first ten (10) Special Years of Service (to a maximum of twenty percent (20%) of such Special Average Monthly Earnings), (c-1) such Prior Participant's Other Post-Retirement Benefits, exclusive of his ESOP Offset, expressed as an Actuarially Equivalent amount payable for the life of the Prior Participant, with fifty percent (50%) continuation of such amount to his Surviving Spouse; B. if, in the case of a Prior Participant who ceases to be an Employee on or before April 27, 1991, his Special Years of Service for purposes of the above clauses (a-1) and (b-1), but not for purposes of calculating his Special Average Monthly Earnings or for any other purpose, meant his Special Years of Service plus, in the case of Mr. Kampouris, three (3) additional Special Years of Service, and in the 7 8 cases of Messrs. Klug and Mack, two (2) additional Special Years of Service (provided that in no case shall any such Prior Participant be deemed, for purposes of this sentence, to have more Special Years of Service than the Years of Service he would have had if his employment had terminated on the first of the month coinciding with or next following his sixty-fifth (65th) birthday); and C. if the monthly amount calculated pursuant to this sentence were payable for the life of such Prior Participant, with continuation for the life of his Surviving Spouse of fifty percent (50%), minus one percent (1%) for each year by which the age of such Surviving Spouse is more than five (5) years lower than that of such Prior Participant, of the sum of the amount determined under clauses (a-1) and (b-1) above, less fifty percent (50%) of the sum of the amount determined under clauses (c-1) and (d) above. Section 2 - Upon Employment Termination Before Age Sixty-five Any Participating Employee who ceases to be an Employee after completing at least five (5) Years of Service, but before his sixty-fifth (65th) birthday shall receive from the Corporation, no later than the thirtieth (30th) day of the month designated in writing by such Participating Employee to the Committee (which month shall not be earlier than the month immediately following his fifty-fifth (55th) birthday), a single lump sum payment which shall be the Actuarial Equivalent of a monthly payment, commencing with the month so designated by such Participating Employee and continuing for his lifetime, in an amount equal to the product of the amounts determined in clauses (a), (b) and (c) below, with such result reduced by the amount in clauses (d) and (e) below and increased by the amount in clause (f) below. (a) The monthly payment that such Participating Employee would have received computed under the below (i) and (ii), if he had remained an Employee (with no change in his Average Monthly Earnings) until, and if he had retired on, his sixty-fifth (65th) birthday: (i) four percent (4%) of his Average Monthly Earnings, multiplied by the number, not in excess of ten (10), of his Years of Service, plus (ii) one percent (1%) of his Average Monthly Earnings, multiplied by the number of his Years of Service accumulated after his first ten (10) Years of Service (to a maximum of twenty percent (20%) of such Average Monthly Earnings); (b) A fraction (i) the numerator of which is the number of his Years of Service, and (ii) the denominator of which is the number of Years of Service he would have accumulated if he had remained an Employee until his sixty-fifth (65th) birthday; (c) The percentage determined according to attained age (in years and completed months) on date of commencement of monthly payments, in accordance with the following table with values for non-integral ages to be determined by interpolation:
Attained Age on Date of Commencement Percentage ---------------------- ---------- 64 .97 63 .93 62 .88
8 9 61 .82 60 .75 59 .68 58 .61 57 .54 56 .47 55 or younger .40
(d) Such Participating Employee's Other Post-Retirement Benefits; (e) Such Participating Employee's Primary Social Security Benefit, multiplied by clauses (b) and (c) above, or the Participating Employee's actual Social Security Benefit (or other comparable benefits), if so provided by the Participating Employee; (f) Such Participating Employee's monthly pension, if any, reduced (if applicable) for early commencement, which is not payable to him from the Retirement Plan because of the maximum limitations on pension amounts imposed by Section 415 of the Code. Notwithstanding the foregoing, the Actuarial Equivalent of the monthly amount derived under this Section 2 shall not, with respect to a Prior Participant, be less than the amount that would have been derived A. if clauses (a) through (c) above had read as follows: (a-1) The monthly payment that such Prior Participant would have received computed under the below (i) and (ii), if he had remained an Employee (with no change in his Special Average Monthly Earnings) until, and if he had retired on, his sixty-fifth (65th) birthday: (i) five percent (5%) of his Special Average Monthly Earnings, multiplied by the number, not in excess of ten (10), of his Special Years of Service, plus (ii) one percent (1%) of his Special Average Monthly Earnings, multiplied by the number of his Special Years of Service accumulated after his first ten (10) Years of Service (to a maximum of 20% of such Special Average Monthly Earnings), (b-1) A fraction (i) the numerator of which is the number of his Special Years of Service, and (ii) the denominator of which is the number of Years of Service he would have accumulated if he had remained an Employee until his sixty-fifth (65th) birthday, (c-1) The percentage determined according to attained age (in years and completed months) on date of commencement of monthly payments, in accordance with the following table with values for non-integral ages to be determined by interpolation:
Attained Age on Date of Commencement Percentage ---------------------- ---------- 64 .93 63 .86 62 .79 61 .72
9 10 60 .65 59 .61 58 .57 57 .53 56 .49 55 .45
(d-1) Such Prior Participant's Other Post-Retirement Benefits, exclusive of his ESOP Offset, expressed as an Actuarial Equivalent amount payable for the life of the Prior Participant, with fifty percent (50%) continuation of such amount to his Surviving Spouse, (e-1) Such Prior Participant's Primary Social Security Benefit, multiplied by clauses (b-1) and (c-1) above, or the Prior Participant's actual Social Security benefit (or other comparable benefits), if so provided by the Prior Participant, B. if, in the case of a Prior Participant who ceases to be an Employee on or before April 27, 1991, his Special Years of Service for purposes of the above clauses (a-1) and (b-1), but not for purposes of calculating his Special Average Monthly Earnings or for any other purpose, meant his Special Years of Service plus, in the case of Mr. Kampouris, three (3) additional Special Years of Service, and in the case of Messrs. Klug and Mack, two (2) additional Special Years of Service (provided that in no case shall any Prior Participant be deemed, for purposes of this sentence, to have more Special Years of Service than he would have had if his employment had terminated on the first of the month coinciding with or next following his sixty-fifth (65th) birthday); and C. if such monthly amount calculated pursuant to this sentence were payable for the life of the Prior Participant, with continuation for the life of his Surviving Spouse of fifty percent (50%), minus one percent (1%) for each year by which the age of such Surviving Spouse is more than five (5) years lower than that of such Prior Participant, of the sum of the amount determined under clauses (a-1) and (b-1) above, less fifty percent (50%) of the sum of the amounts determined under clauses (c-1) and (e) above. Section 3 - Upon Death Before Retirement If a Participating Employee is married, and has accumulated at least five (5) Years of Service when he ceases to be an Employee due to his death, his Surviving Spouse shall receive from the Corporation, no later than the thirtieth (30th) day of the month immediately succeeding the month of his death, a single lump sum payment which shall be the Actuarial Equivalent of a monthly payment, commencing with such succeeding month and continuing for the lifetime of such Surviving Spouse, in an amount equal to the product of the amounts determined in the below clauses (a), (b), (c) and (d), with such result reduced by the amounts in the below clauses (e) and (f). (a) The monthly payment that the Participating Employee would have received computed under the below (i) and (ii), if he had remained an Employee (with no change in his Average Monthly Earnings) until, and if he had retired on, his sixty-fifth (65th) birthday: (i) four percent (4%) of his Average Monthly Earnings, multiplied by the number, not in excess of ten (10), of his Years of Service, plus 10 11 (ii) one percent (1%) of his Average Monthly Earnings, multiplied by the number of his Years of Service accumulated after his first ten (10) Years of Service (to a maximum of 20% of such Average Monthly Earnings), (b) A fraction (i) the numerator of which is the number of his Years of Service, and (ii) the denominator of which is the number of Years of Service he would have accumulated if he had remained an Employee until his sixty-fifth (65th) birthday, (c) Fifty percent (50%), minus one percent (1%) for each full year by which the age of the Surviving Spouse is more than five (5) years lower than that of the Participating Employee, (d) The percentage specified in clause (c) of Section 2 for the Participating Employee's age at the time of his death, (e) The Participating Employee's Other Post-Retirement Benefits, (f) The Participating Employee's Primary Social Security Benefit, multiplied by clauses (b), (c), and (d) above. Notwithstanding the foregoing, the monthly amount derived under this Section 3 shall not, with respect to the Surviving Spouse of a Prior Participant, be less than the amount that would have been derived if clauses (a) through (f) above had read as follows: (a-1) The monthly payment that such Prior Participant would have received computed under the below (i) and (ii), if he had remained an Employee (with no change in his Special Average Monthly Earnings) until, and if he had retired on, his sixty-fifth (65th) birthday: (i) five percent (5%) of his Special Average Monthly Earnings, multiplied by the number, not in excess of ten (10), of his Years of Service, plus (ii) one percent (1%) of his Special Average Monthly Earnings, multiplied by the number of his Special Years of Service accumulated after his first ten (10) Special Years of Service (to a maximum of 20% of such Special Average Monthly Earnings), (b-1) A fraction (i) the numerator of which is the number of his Special Years of Service, and (ii) the denominator of which is the number of Years of Service he would have accumulated if he had remained an Employee until his sixty-fifth (65th) birthday, (c-1) Fifty percent (50%), minus one percent (1%) for each full year by which the age of the Surviving Spouse is more than five (5) years lower than that of the Prior Participant, (d-1) The percentage specified in clause (c-1) of Section 2 for the Prior Participant's age at the time of his death, (e-1) The Prior Participant's Other Post-Retirement Benefits, exclusive of his ESOP Offset, 11 12 (f-1) Such Prior Participant's Primary Social Security Benefit, multiplied by clauses (b-1), (c-1) and (d-1) above, or the Prior Participant's actual Social Security benefit (or other comparable benefits), if so provided by the Prior Participant. Section 4 - Upon Death After Termination of Employment If a Participating Employee described in Section 2 of this Article IV is married when he dies after the termination of his employment but before his receipt of the lump sum payment to which he is entitled under said Section, his Surviving Spouse shall receive from the Corporation, no later than the thirtieth (30th) day of the month immediately following the month of his death, a single lump sum payment which shall be the Actuarial Equivalent of the single lump sum payment that such Participating Employee would have received if the month that he designated for purposes of said Section 2 had been the later of the month of his death and the month of his fifty-fifth (55th) birthday and if he had survived through such month, reduced by fifty percent (50%), minus one percent (1%) for each year by which the age of the Surviving Spouse is more than five (5) years lower than that of the Participating Employee. 12 13 ARTICLE V FORFEITURES AND LIMITATIONS Section 1 - Forfeiture of Benefits Except with respect to the accrued benefit payable hereunder to a Prior Participant (or his Surviving Spouse) based on such Prior Participant's Special Years of Service and his Special Average Monthly Earnings, if the Committee determines that any Participating Employee (or any recipient of a benefit under the Program who had been a Participating Employee) has, while or at any time after he ceased to be an Employee, directly or indirectly engaged in any occupation in competition with, or has wrongfully disclosed trade secrets of or confidential information relating to, or has intentionally done any act materially harmful to the interests of, the Corporation or any Subsidiary Company, the Committee may in its sole discretion terminate or annul the payment of such benefit. Section 2 - Inalienability of Benefits No sale, transfer, anticipation, assignment, pledge or encumbrance of any kind, at law or in equity, of any benefit under this Program shall be permitted or recognized under any circumstances, and no benefit under this Program shall be subject to attachment or other legal process. Section 3 - Other Limitations No benefit payable under the Program shall give rise to any offset or shall be included in any reduction pursuant to Article III or any other provision of the Retirement Plan or have any similar effect on any other benefit payable under any other private benefit plan to which the Corporation or any Subsidiary Company shall have contributed. Otherwise, the Committee may from time to time determine whether the total benefits payable to any individual under the Program and all other private benefit plans to which the Corporation or any Subsidiary Company shall have contributed shall be subject to any limitation as to amount other than as provided elsewhere in the Program and/or in such other private plans, and, if so, shall determine the amount of such limitation. 13 14 Section 4 - Minimum Benefit Effective December 31, 1993, for a Prior Participant, a minimum benefit calculated in accordance with the benefit formulas set forth in Section 1 or 2 of Article IV on the basis of his Special Average Monthly Earnings and Special Years of Service shall be deemed fixed as of December 31, 1993 with respect to all elements of such formulas, including such Prior Participant's Primary Social Security Benefit (which for this purpose shall be determined as if the date of retirement occurred in the year 1993), but excluding the Actuarial Equivalent of such benefit. For any Participating Employee, the portion of his benefit payable under Section 1 or 2 of Article IV which is attributable to his Years of Service and Average Monthly Earnings through December 31, 1993 shall not be less than a minimum, which shall be deemed fixed as of December 31, 1993 and shall be calculated on the basis of (x) a Primary Social Security Benefit determined for a retirement occurring December 31, 1993, but increased by five percent (5%) per annum for each whole calendar year between December 31, 1993 and the actual date of retirement and (y) an ESOP offset determined as of December 31, 1993 and increased by twenty percent (20%) per annum for each whole calendar year between December 31, 1993 and the actual date of retirement. This provision shall not apply, however, to calculation of the Actuarial Equivalent of the portion of a Participating Employee's benefit under Section 1 or 2 of Article VI attributable to Years of Service and Average Monthly Earnings through December 31, 1993. 14 EX-13 3 ANNUAL REPORT 1 EXHIBIT 13 AMERICAN STANDARD COMPANIES INC. 1995 ANNUAL REPORT "OUR COMPANY GROWS STRONGER EVERY YEAR, BETTER ABLE TO OUTPERFORM INDUSTRY COMPETITORS. DEMAND FLOW TECHNOLOGY IS THE FOUNDATION OF OUR SUCCESS." [GRAPHIC OF GLOBE] 2 American Standard is a global, diversified manufacturer. Its operations are comprised of three segments: Air Conditioning, Plumbing Products, and Automotive Products. Air Conditioning Products develops and manufactures Trane(R) and American Standard(R) air conditioning equipment for use in central air conditioning systems for commercial, institutional and residential buildings. Plumbing Products develops and manufactures American Standard(R), Ideal Standard(R), Standard(R) and Porcher(R) bathroom and kitchen fixtures and fittings. Automotive Products develops and manufactures commercial and utility vehicle braking and control systems under the WABCO(R) brand. The Company is a worldwide leader in Demand Flow(R) Technology ("Demand Flow" or "DFT"), having implemented Demand Flow processes in its manufacturing facilities and administrative activities. DFT enhances customer service by reducing manufacturing cycle time, increasing flexibility and improving product quality. It also improves productivity by reducing non-value-added work, increasing inventory turnover, reducing working capital requirements and liberating both manufacturing and warehouse space. American Standard and its 37 joint ventures operate 102 manufacturing facilities in 34 countries. The Company employs approximately 43,000 people worldwide. CONTENTS - ---------------------------------------------------------------------------- Financial Highlights 1 Letter to Stockholders 2 Demand Flow Technology 6 Financial Contents 13 Directors and Officers 43 Demand Flow(R) is a registered trademark of the J-I-T Institute of Technology, Inc. 3 FINANCIAL HIGHLIGHTS
1995 1994 Change - ---------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions except per share amounts) Sales $ 5,221 $ 4,457 17.1% Operating Income (a) $ 534 $ 355 50.4% Operating Margin (a) 10.2% 8.0% 2.2 Income (Loss) Before Extraordinary Item $ 142 $ (77) $ 219 Per Share $ 1.90 $ (1.29) $ 3.19 Demand Flow Performance Inventory Turnover (b) 10.7x 9.7x 1.0x Operating Working Capital as a Percent of Sales (c) 4.9% 4.9% -- Net Cash Provided by Operating Activities $ 348 $ 257 35.4%
(a) 1994 includes $40 million of special charges applicable to consolidation of production facilities, employee severance, other cost reduction actions and a provision for loss on the early disposition of certain assets. (b) Following year's first quarter projected cost of sales annualized divided by adjusted inventories as of December 31. (c) Operating Working Capital as of December 31 divided by annualized fourth quarter sales. Operating Working Capital is defined as net accounts receivable and adjusted inventories less accounts payable, accrued payrolls and other accrued liabilities. SALES - $5.2 Billion BUSINESSES Air Conditioning 57% Plumbing 24% Automotive 19% GEOGRAPHY U.S. 46% Europe 36% Far East and Other 12% U.S. Residential Construction 6% OPERATING INCOME - $534 Million BUSINESSES Air Conditioning 49% Plumbing 22% Automotive 29% GEOGRAPHY U.S. 46% Europe 45% Far East and Other 9% 1 4 TO OUR STOCKHOLDERS 1995 WAS A WATERSHED YEAR FOR OUR COMPANY AS WE COMPLETED OUR FIRST YEAR BACK IN THE PUBLIC ARENA. CONSOLIDATED SALES AND OPERATING INCOME ROSE TO RECORD LEVELS AS WE CONTINUED TO BUILD THE SOLID FOUNDATION NECESSARY TO ACHIEVE OUR STATED CORPORATE PERFORMANCE GOALS FOR OUR EXISTING BUSINESSES: 15 INVENTORY TURNS, 15% OPERATING MARGIN AND ZERO WORKING CAPITAL. APART FROM THESE PERFORMANCE GOALS, WE HAVE ALSO TARGETED A FIVE-YEAR STRETCH GOAL OF $10 BILLION IN CONSOLIDATED SALES BY THE YEAR 2000. SPECIFICALLY.... - - REVENUES ROSE 17% TO $5.2 BILLION. - - OPERATING MARGINS INCREASED BY 2.2 POINTS TO 10.2%, RESULTING IN RECORD INCOME OF $534 MILLION -- A 50% INCREASE FROM THE PRIOR YEAR (35% EXCLUDING SPECIAL CHARGES INCURRED IN 1994). - - INVENTORY TURNS -- A KEY INDICATOR IN OUR COMPANY -- ROSE BY ONE FULL TURN TO 11, AND WORKING CAPITAL IS ONLY 5 CENTS PER DOLLAR OF SALES. - - NET INCOME WAS POSITIVE FOR THE FIRST TIME SINCE OUR COMPANY WENT PRIVATE EIGHT YEARS AGO, REACHING $142 MILLION OR $1.90 PER SHARE. Automotive Products (WABCO) had an outstanding year with impressive across-the-board performance: $1.0 billion in sales, $155 million in operating income and a Company-leading inventory turn rate of 16.5. These achievements were complemented by Air Conditioning Products (Trane) which had another record year. Driven largely by the strength of its commercial business and rapid international growth, particularly in the Far East, Air Conditioning Products achieved $3.0 billion in sales, $259 million in operating income and inventory turns of 10.2. Plumbing Products posted $1.3 billion in sales and $120 million in operating income with inventory turns increasing to 9.0. We are disappointed, however, that year-to-year sales growth was limited to 4% while adjusted operating income declined 8%. With the exception of U.S. Plumbing Products (USPP), whose performance has begun to turn around, this segment had a difficult year in terms of both markets and operations. Markets were weak in Europe, particularly in Germany and France, and the stagnant economies of Canada and Mexico have shown no signs of recovery. Operationally, protracted start up and realignment activities in the U.S., Canada and the Czech Republic further depressed earnings. Despite these difficulties, we are confident that [GRAPH TITLED $600 MILLION REDUCTION IN WORKING CAPITAL] 2 5 performance will improve. The majority of these start-up issues are being resolved, DFT implementation continues and USPP is beginning to contribute to earnings. We also foresee a European recovery, but beginning in late 1996. We continue to work on the areas which will have the most lasting impact on the growth of our businesses: GLOBALIZATION, LEADING MARKET POSITIONS, NEW PRODUCTS AND TECHNOLOGIES AND DEMAND FLOW TECHNOLOGY. GLOBALIZATION Our global expansion efforts remain in high gear, particularly in the Pacific Rim. In China, we have 11 joint ventures -- seven in Plumbing Products, three in Air Conditioning Products and one in Automotive Products. This gives us a solid manufacturing base from which to reach our goal of $1.0 billion of sales in China by the year 2000. Additionally, we acquired an air conditioning business in Australia and are building a new plumbing fittings plant in Thailand. Our new joint venture company in Vietnam will begin manufacturing vitreous china fixtures in early 1997. In Europe, we consolidated our ownership in Etablissements Porcher, the leading plumbing manufacturer in France. Through this acquisition we expect to improve the overall performance of our plumbing business in France. We also acquired Tantofex Limited, a leading kitchen and bathroom fittings manufacturer in the United Kingdom, thus enhancing and expanding our plumbing products business in that country. In Mexico, the acquisition of a new vitreous china plant and the expansion of existing facilities will significantly add to our production capacity. We also have recently completed the acquisition of a plant to manufacture air conditioning products in Brazil. LEADING MARKET POSITIONS We continue to enhance our market positions by developing products and technologies that meet market needs and broaden our product lines. The ban on chlorofluorocarbon (CFC) refrigerants is having a catalytic effect on the commercial air conditioning business worldwide, and demand is growing to retrofit or replace chillers with those using alternate refrigerants. We are meeting this demand in part with our Trane Earth-Wise(TM) CenTraVac(R) chiller, the most energy efficient product on the market based on rating conditions from ARI (Air-Conditioning & Refrigeration Institute). We are investing $100 million to expand manufacturing capacity worldwide to meet the market growth for replacement of chillers using CFCs, an estimated $6 billion market, over the next decade. The manufacture of specialty air handling systems and a new residential product line will further enhance our capacity to grow Trane's market share. 3 6 Our WABCO Automotive Products business is increasing its penetration of markets with a broadening electronic product range. In 1995, this segment's market was helped by growing demand from Eastern Europe which was supplied primarily from the used-vehicle market in Western European countries. Economic difficulties in some Western European countries, however, are expected to slow industry growth in 1996. Phase-in requirements for anti-lock braking systems (ABS) on heavy-duty commercial vehicles manufactured in the U.S. are scheduled to begin in 1997. This will further accelerate the growth of our U.S. joint venture partnership, Rockwell-WABCO, which enjoys a strong market position. NEW PRODUCTS AND TECHNOLOGIES We continue to make significant investments in the research and development of new products and processes. In the latter part of 1996, WABCO will launch its electronic braking or "brake-by-wire" system (EBS), and has already obtained long-term commitments to use EBS from major European truck and bus manufacturers. In like manner, we are securing future business for the new air disc braking system developed by the recently acquired Perrot Bremsen company in Germany. The launch of Trane's new absorption commercial chillers will increase our market share in this growing segment of the air conditioning industry. Leveraging a core competency, we will continue to develop leading edge compression technology for the next generation of air conditioning products. DEMAND FLOW TECHNOLOGY Our Company grows stronger every year, better able to outperform industry competitors. Demand Flow Technology (DFT) is the foundation of our success. It has evolved from a business strategy to a core competency of our Company. DFT permeates everything we do -- our management philosophy, performance measures, compensation and incentives and commitment to training. Its impact on our Company grows each year as the concept evolves. The success we have attained in improving manufacturing productivity and efficiency has inspired us to expand the DFT model to all areas of our operations. Our vision in undertaking this massive change is to become a truly responsive and learning organization. In January of 1995, we took the first steps toward becoming a process-structured Company, one which is organized around processes as opposed to traditional functions. This reorganization is ongoing and is beginning to yield results. Our goal is to respond quickly to the vagaries of our rapidly changing world, constantly 4 7 improving capacity to best serve our customers wherever they may be. This journey is not an easy one, but we are determined. We are indebted to change-leaders like Dr. Michael Hammer who has influenced our transition towards a process organization. We also owe a great deal to our associates worldwide who are embracing this change with enthusiasm. Although our goals -- inventory turns of 15, operating margin of 15% and zero working capital -- may seem unattainable, many of our operations have already reached or surpassed them. DFT is the reason why. The key elements that make up and drive this technology, which we are so passionately committed to, are described in the following pages. The ability to reach these goals depends on our capacity to develop the potential of all associates worldwide. We continue to eliminate both visible and unseen cultural and structural barriers that impede the exchange of information. Removing these barriers will encourage shared learning, thus enhancing our associates' professional growth and our Company's competitiveness. The end result of all our efforts must be the creation of stockholder value. American Standard's future is very exciting. We are expanding into more countries each year. Advanced products and new technologies have positioned us as market leaders throughout the world. Through the application of Demand Flow Technology, we have distinguished ourselves from industry competitors. We have not achieved these accomplishments, however, on our own. Our joint venture partners, suppliers and distributors have also committed themselves to and supported our DFT efforts, for which we thank them, and to our associates worldwide, thank you for your continued dedication to making American Standard a dynamic enterprise. We also thank our customers for their loyalty and patronage. Finally, we thank our stockholders for their confidence in our abilities to excel in all we do. Sincerely yours, Emmanuel A. Kampouris Chairman, President and Chief Executive Officer American Standard Companies Inc. [PHOTO OF EMMANUEL A. KAMPOURIS] 5 8 DEMAND FLOW TECHNOLOGY ... THE FOUNDATION OF OUR SUCCESS. AT WABCO'S AUTOMOTIVE PLANT IN HANNOVER, GERMANY, ORDERS POUR IN DAILY FROM EUROPEAN TRUCK MANUFACTURERS LIKE MERCEDES BENZ, VOLVO AND SCANIA FOR UP TO 2,000 DIFFERENT MODELS OF BRAKING CONTROLS AND COMPONENTS -- ANY OF WHICH CAN BE PRODUCED ON ANY GIVEN DAY. IN LA CROSSE, WISCONSIN, TRANE'S MANUFACTURING UNIT CAN PROCESS, BUILD AND SHIP ORDERS FOR CUSTOM-BUILT CENTRIFUGAL CHILLERS IN JUST 13 WORKING DAYS COMPARED WITH 63 DAYS FIVE YEARS AGO. AT THE IDEAL STANDARD PLUMBING PRODUCTS MEXICAN PLANTS IN SANTA CLARA AND AGUASCALIENTES, MANUFACTURING CYCLE TIMES HAVE BEEN REDUCED FROM 7 DAYS TO 3-1/2 DAYS AND EXPORT DELIVERY CYCLE TIMES HAVE BEEN REDUCED FROM SIX WEEKS TO 10 DAYS. No matter where you are in the world, American Standard companies are uniquely capable of delivering high-quality products in the shortest time and at the lowest possible cost. That's because American Standard is a global pioneer in applying Demand Flow(R) Technology. DFT, a customer-responsive business system, focuses on building quality products by integrating and synchronizing work processes in a continuous flow. DFT optimizes all resources -- people, machines and materials -- within a process providing a mathematically defined solution for maximizing their potential. It is a powerful tool to both evaluate and change work processes. Experimentation and change are constants in DFT, leading to continuous improvement. The flow process is designed to be fast and efficient, enabling our companies to gain competitive advantages by better serving customers through speed in product design and order fulfillment while improving quality and productivity. Few companies have gained competency in company wide application of DFT. American Standard, however, is different. Today, we are the largest global manufacturer successfully applying this powerful technology throughout all its operations. Our company's three businesses -- Air Conditioning, Plumbing and Automotive Products -- excel in virtually every DFT performance measure: inventory turns, manufacturing cycle time reduction, materials and parts management and productivity. Our operating results reflect this heightened performance. Through the worldwide application of DFT, we have significantly improved our performance. MANUFACTURING CYCLE TIME REDUCTION - A COMPETITIVE ADVANTAGE [CHART SHOWING MANUFACTURING CYCLE TIME REDUCTION--A COMPETITIVE ADVANTAGE] 6 9 [GRAPHIC 1] - - Color coded Operational Method Sheets graphically communicate tasks to be performed at each workstation - (red areas) validate work performed at preceding station (TQC check), (yellow) assembly to be performed and (blue) verification of own work before passing unit to next station. The double check on quality at each workstation throughout the manufacturing process minimizes production defects and costly rework. Separate method sheets are prepared for each of three different furnace model families being built concurrently on this production line. [GRAPHIC 2] - - In Demand Flow manufacturing, subassemblies are built on feeder lines simultaneously with main line production. The pace of the subassembly operation is set to maintain a one piece flow with the assembly line. At this work cell, three furnace manifold and burner subassemblies are continuously in preparation because installation into the furnace unit takes one-third the time required to assemble the manifold and burner. [GRAPHIC 3] - - Production team associates tear off a yellow card from a board each time a part is used in the subassembly area. An orange card indicates it is time to replenish the part directly from the supplier. Managing materials in this way shortens the replenishment cycle, and reduces the inventory level and the number of people needed to handle material replenishment. 7 10 RIGHT TIME, RIGHT PLACE American Standard adopted DFT during the cash constrained period following its management-led leveraged buyout. The urgency to maximize cash flow was a powerful motivator to change. The very survival of the Company depended on it. After an extensive review of various process technologies practiced and being developed around the world, we adopted DFT. We believed DFT could inject speed and efficiency into our operations, freeing excess working capital in the process and generating additional cash flow to keep our businesses viable. Adopting the technology forced a radical transformation in how we manage our businesses. We dismantled our decades-old, rigid organizational manufacturing model and created a new one. In a traditional manufacturing environment, as was American Standard's approach for years, production is run in "batches" intended to achieve an efficient level of production and meet forecasted demand. The consequence of this approach is that it takes weeks or months to manufacture products while tying up millions of dollars in excess inventory. Bound by rigid organizational structures and outdated, inflexible computer systems for scheduling raw material delivery and production, our traditional manufacturing approach resulted in merely average performance. CREATING DEMAND FLOW PROCESSES The DFT process starts with an analysis and sequencing of all tasks, labor and machines, necessary to create product. Production cycle times are dramatically reduced by eliminating non-value added activities. Cycle times that used to take weeks to complete are often found to involve only a few hours of actual manufacturing time. Within manufacturing, DFT employs a mathematical model to redesign a plant layout to optimize work flow. Using pre-determined formulae, this model provides a framework to reposition work processes and materials, governs the timing and release of materials into the process and adjusts people resources -- all based on actual customer demand. Simple signaling techniques are integrated with the "flow line" to provide material replenishment and improve process efficiency. DFT's advantage is to optimize the overall flow and quality of products manufactured in an environment where every model can be produced every day. RETHINKING PRODUCTION - DEMAND FLOW MANUFACTURING Only when an order is received does the fulfillment process start to "flow." Parts and materials, positioned for quick assembly, are "pulled through" the manufacturing flow process to create the product ordered. 8 11 [GRAPHIC 4] - - More than 30,000 associates have been trained in DFT concepts and techniques. Through the American Standard College, training efforts now also encompass skills development in process management and team building. [GRAPHIC 5] - - Another training cornerstone is the Trane Graduate Engineer Program. Recruited from the most prominent colleges and universities worldwide, engineering graduates complete an intensive course of study to become commercial systems marketing, design and sales professionals. [GRAPHIC 6] - - A modern training facility recently opened in Taicang, China. The facility is equipped with audio training booths for English language exercises and an array of personal computers for computer skills development. It also includes video conferencing capabilities. 9 12 The pace is rapid. Production is laid out in "cells" consisting of groups of dissimilar machines to maintain a steady, progressive flow of work with quality controlled upon entering and leaving each work station. Subassembly is simultaneous in feeder lines connected to the main flow line at the critical point of integration. High-speed equipment setups and quick tooling changeovers are used when possible to provide flexibility and reduce nonproductive time. Associate teams are cross-trained to work routinely one step ahead and one step behind their own job. This designed flexibility eliminates bottlenecks, balances work flow and improves productivity. Production road maps or "operational method sheets" are used by team members to check both quality and work requirements at each stage in the process. Managing the processes this way ensures consistent quality from product to product and model to model. Production is then shipped to customers within hours or days of order receipt compared with weeks and months using traditional manufacturing systems. DFT eliminates millions of dollars of inventories, substantially reducing manufacturing and warehouse space. DEMAND-BASED MANAGEMENT Once Demand Flow manufacturing processes are in place, a technique known as demand-based management (DBM) is used to manage daily customer demand. DBM uses software linking the key elements of production -- people, orders, materials and equipment. This integrated system provides real-time data for fast, accurate production based on actual demand. Several American Standard companies are pilot testing DBM software in anticipation of a Company-wide roll out. COMPETITIVE ADVANTAGE A new competitive mentality is at work at American Standard. Serving the customer better demands innovative product design, fast product development cycles and faster product manufacturing cycles. Being faster to process an order, manufacture a high-quality product and deliver it to the customer at the lowest possible cost creates a competitive advantage and improves market share. EXPANDING THE PROCESS MODEL With the efficient DFT manufacturing flow process as our guide, American Standard is taking another bold step. We are attacking the "functional silos" rooted in the traditional organizational hierarchy. In their place, you will find a wholly reorganized company structured around processes. Because no other company, to our knowledge, has attempted this level of implementation, we believe the only boundaries on performance improvements are our own limitations. 10 13 [GRAPHIC 7] - - Information sharing, participative decision-making and associate empowerment are critical to our efforts to bring innovation, quality, speed to market and value to the customer. [GRAPHIC 8] - - Open office environments enable better communication and quick response to customer needs. [GRAPHIC 9] - - Actively soliciting customer feedback and channeling it through our business processes gives American Standard companies a distinct competitive advantage. 11 14 American Standard companies worldwide are organizing around five common processes: BUSINESS STRATEGY, NEW PRODUCT DEVELOPMENT, ORDER ACQUISITION OR OBTAINMENT, ORDER FULFILLMENT AND AFTERMARKET OR CUSTOMER SERVICE. This new organization, which is just taking shape, will support specific work flow to enhance servicing our customers. Processes are being identified and then reengineered to support our customers' need for speed, quality and value. Walls are being removed and cross-functional associate teams are collocated to improve communication, work flow and overall process performance. Accounting methods have been updated to provide reporting and measurement aligned with the new flow process organization. New team-based performance incentives are also being created. By expanding this process model, we expect to reduce significantly our overhead costs. TRAINING ... THE PATH TO CHANGE Structurally and culturally, American Standard companies are undergoing tremendous change. Plants and offices have been redesigned and rearranged to accommodate an efficient process flow. Our processes will never truly "flow," however, without changing behaviors. American Standard is fortunate to have a highly skilled and dedicated work force. Through extensive training, we are learning new skills to become more proficient in our roles in a process organization and more involved in our Company's daily business operations. Through DFT, all associates have a more meaningful role in our success. Since first introduced in 1990, DFT manufacturing concepts and techniques have been taught to more than 30,000 associates worldwide; an investment that continues to grow. DFT training emphasized team-based performance, associate empowerment and multi-skill development. The expansion of the process model to all other areas of our operations entails even more training. In July 1995, the American Standard College was chartered. Its mission is to create a dynamic learning environment in which associates can develop the skills and knowledge needed to work in our new process structure. Based in the United States, the college is a "virtual" learning center, moving as needed to meet the training needs of our associates. Course instructors are drawn from our diverse businesses worldwide. The American Standard College collects best practice experiences and disseminates them globally. Our training is already paying big dividends, and we expect an even bigger payoff in the future. For this reason, we are confident in our ability to continually set new performance standards. 12 15 FINANCIAL CONTENTS - -------------------------------------------------------------------------------- Five Year Financial Summary 14 Management's Discussion and Analysis Overview 15 Air Conditioning Products 16 Plumbing Products 17 Automotive Products 19 Financial Review 20 Management's Report on Financial Statements 23 Report of Independent Auditors 24 Financial Statements 25 13 16 FIVE YEAR FINANCIAL SUMMARY
1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, (Dollars in millions, except per share data) SEGMENT DATA Sales: Air Conditioning Products $ 2,953 $ 2,480 $ 2,100 $ 1,892 $ 1,836(c) Plumbing Products 1,270 1,218 1,167 1,170 1,018 Automotive Products 998 759 563 730 741 ------- ------- ------- ------- --------- $ 5,221 $ 4,457 $ 3,830 $ 3,792 $ 3,595 ======= ======= ======= ======= ======= Operating Income: Air Conditioning Products $ 259 $ 182(a) $ 133(a) $ 104 $ 55(c) Plumbing Products 120 111(a) 108(a) 108 66 Automotive Products 155 62(a) 41(a) 88 121 ------- ------- ------- ------- ------- 534 355 282 300 242 Interest expense (213) (259) (278) (289) (286) Corporate items (94) (111)(b) (85) (63) (44) ------- ------- ------- ------- ------- Income (loss) before income taxes, extraordinary item and cumulative effects of changes in accounting principles 227 (15) (81) (52) (88) Income taxes (85) (62)(a) (36) (5) (23) ------- ------- ------- ------- ------- Income (loss) before extraordinary item and cumulative effects of changes in accounting principles $ 142 $ (77) $ (117) $ (57) $ (111) ======= ======= ======= ======= ======= Per share $ 1.90 $ (1.29) $ (2.11) $ (1.24) $ (2.14) ======= ======= ======= ======= ======= OTHER DATA Demand Flow Performance: Inventory turnover (d) 10.7x 9.7x 7.5x 6.0x 4.9x Operating working capital as a percent of sales (e) 4.9% 4.9% 5.9% 7.5% 8.6% Net cash provided by operating activities $ 348 $ 257 $ 201 $ 174 $ 241
(a) Includes $40 million of special charges in 1994 (and the related tax benefit of $7 million) applicable to consolidation of production facilities, employee severance, other cost reduction actions, and a provision for loss on the early disposition of certain assets; and $8 million in 1993 related to plant shutdowns and other cost reduction actions as follows (in millions):
1994 1993 ---- ---- Air Conditioning Products $ 7 $ 5 Plumbing Products 19 1 Automotive Products 14 2 --- --- $40 $ 8 === ===
(b) Includes a one-time special charge of $20 million in 1994 incurred in connection with the amendment of certain agreements in anticipation of the Company's initial public stock offering. (c) Air Conditioning Products included Tyler Refrigeration: sales of $99 million and operating loss of $18 million (including $22 million loss on sale). (d) Following year's first quarter projected cost of sales annualized divided by adjusted inventories as of December 31. (e) Operating working capital as of December 31 divided by annualized fourth quarter sales. Operating working capital is defined as net accounts receivable and adjusted inventories less accounts payable, accrued payrolls and other accrued liabilities. 14 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW The Company achieved record sales and operating income in 1995, a significant improvement compared with 1994, primarily as a result of higher volumes, market share gains and improved margins, especially in the Air Conditioning and Automotive Products segments. In the first quarter of 1995 the Company completed the initial public offering of its common stock (the "IPO"), the net proceeds of which, totaling $281 million, were used to repay indebtedness, contributing to lower interest expense for the year. RESULTS OF OPERATIONS FOR 1995 COMPARED WITH 1994 AND 1994 COMPARED WITH 1993 Consolidated sales for 1995 were $5,221 million, an increase of $764 million, or 17% (15% excluding the favorable effects of changes in foreign exchange rates), from $4,457 million in 1994. Sales increased for all three segments with gains of 19% for Air Conditioning Products, 4% for Plumbing Products and 31% for Automotive Products. Consolidated sales for 1994 of $4,457 million, were up 16% (with little effect from foreign exchange) from $3,830 million in 1993. Sales increased 18% for Air Conditioning Products, 4% for Plumbing Products and 35% for Automotive Products. Operating income for 1995 was $534 million, an increase of $179 million, or 50% (46% excluding the favorable effects of foreign exchange), from $355 million in 1994. Operating income increased 42% for Air Conditioning Products, 8% for Plumbing Products and 150% for Automotive Products. Operating income for 1994 included charges of $26 million related to employee severance, the consolidation of production facilities and the implementation of other cost reduction actions. In 1994 the Company also provided $14 million for losses on operating assets expected to be disposed of prior to the expiration of their originally estimated useful lives. Excluding those special charges from 1994, operating income in 1995 increased 35% (31% excluding favorable foreign exchange effects) from an adjusted operating income of $395 million in 1994. Excluding such special charges and the favorable effects of foreign exchange, operating income increased 38% for Air Conditioning Products and 85% for Automotive Products but declined by 11% for Plumbing Products. Operating income for 1994 was $355 million, an increase of $73 million, or 26% (with little effect from foreign exchange), from $282 million in 1993 as a result of gains in each segment, especially Automotive Products and Air Conditioning Products. The year 1993 included $8 million of special charges for plant shutdowns and other cost reduction actions. Excluding the special charges recorded in the years 1994 and 1993, operating income would have increased to $395 million from $290 million, or 36%, in 1994 over 1993. 15 18 RESULTS OF OPERATIONS BY SEGMENT AIR CONDITIONING PRODUCTS SEGMENT
1995 1994 1993 - ------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Sales: U.S. portion $ 2,347 $ 2,087 $ 1,786 International portion 606 393 314 ------- ------- ------- Total $ 2,953 $ 2,480 $ 2,100 ======= ======= ======= Export sales included in U.S. portion $ 195 $ 172 $ 156 ======= ======= ======= Operating Income (Loss): U.S. portion $ 245 $ 195 $ 148 International portion 14 (13) (15) ------- ------- ------- Total (a) $ 259 $ 182 $ 133 ======= ======= =======
(a) Includes special charges of $7 million in 1994 and $5 million in 1993. The U.S. portion of Air Conditioning Products is composed of the Unitary Products Group, the North American Commercial Group (excluding Canada) and exports from the U.S. by the International Group. The international portion consists of the non-U.S.-based operations of the International Group and the Canadian operations of the North American Commercial Group. Sales of Air Conditioning Products increased 19% (with little effect from foreign exchange) to $2,953 million for 1995 from $2,480 million for 1994, as a result of significant sales gains in the U.S. and expanding international sales. The 1995 increase followed a gain of 18% in 1994 from $2,100 million in 1993. Commercial markets account for approximately 75% of Air Conditioning Products' total sales. Over 60% of total sales is to the replacement, renovation and repair markets. Operating income of Air Conditioning Products increased 42% to $259 million in 1995 from $182 million in 1994. The increase was attributable primarily to the effects of higher volumes in both U.S. and international operations and further reflects that 1994 included special charges of $7 million related to the consolidation of production facilities, employee severance and other cost reduction actions. Operating income of Air Conditioning Products increased 37% to $182 million in 1994 from $133 million in 1993. That improvement was principally the result of increased operating income in the United States due to higher sales together with cost reductions. United States -- In 1995 U.S. sales increased 12% over those of 1994. Markets in the U.S. continued to improve in 1995 in both commercial replacement and commercial new-construction. The U.S. portion of sales of commercial products increased because of higher volume resulting from improved markets, accelerated demand for chiller replacement (due to the ban on CFC refrigerant production), higher prices, gains in market share, higher export sales and the acquisition of additional sales offices. The increase in export sales was mainly attributable to higher volumes to the Far East, together with smaller increases in exports to Europe and Latin America. Sales of residential products increased primarily from higher replacement volume, partly offset by the effect of lower prices on certain products due to competitive market conditions. Operating income for the U.S. portion of Air Conditioning AIR CONDITIONING 1995 Sales - $3.0 Billion
BUSINESS MIX GEOGRAPHY MARKETS Commercial 75% U.S. 79% Replacement, Renovation Residential 25% Exports from U.S. 7% and Repair 60% International 21% New Construction 40%
Air Conditioning Products is the Company's largest business segment. While the U.S. commercial business, driven by the replacement, renovation and repair markets, is the largest, the international business, particularly in the Far East, is growing rapidly. 16 19 Products increased 26% in 1995 compared with 1994, as a result of the increased sales of commercial products, reduced by lower operating income on residential products due to competitive pricing pressures and increased raw material costs. In 1994 U.S. sales increased 17% over those of 1993. Sales of commercial products increased 18% because of higher volume (attributable to improved markets, gains in market share, higher export sales, and the acquisition of sales offices) and a shift to newer, larger-capacity, higher-efficiency products. Residential sales were up 15% due to improved replacement and new-construction markets and share gains from the success of new and redesigned products and improved distribution channels. The increased sales, together with cost reductions, resulted in a 32% increase in U.S. operating income in 1994 over 1993. International -- International sales increased 54% (50% excluding foreign exchange effects) in 1995, principally due to expanding operations in the Far East and Latin America (including operations in Thailand, Australia and Brazil which were consolidated beginning in 1995), improved commercial markets and higher volume in Europe. As a result of the higher sales and improved margins, international operations achieved operating income of $14 million compared with an operating loss of $13 million in 1994, reflecting operating improvements achieved in Europe and the reorganization and sale of certain Hong Kong operations in conjunction with establishing operations directly in the People's Republic of China ("PRC"). International sales increased 25% in 1994, due principally to volume increases in the Far East and Latin America. Despite significantly higher sales, international operations incurred an operating loss similar to that of 1993. Latin American and Far East operations declined slightly, reflecting costs of expansion. Offsetting these declines was an improvement in European results, albeit a loss because of poor economic conditions and competitive price pressures. Backlog -- The worldwide backlog for Air Conditioning Products as of December 31, 1995, was $607 million, essentially at the same high level as of a year earlier (excluding the favorable effects of foreign exchange) reflecting continued strong demand for commercial products. PLUMBING PRODUCTS SEGMENT
1995 1994 1993 - --------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Sales: International portion $ 897 $ 884 $ 865 U.S. portion 373 334 302 ------- ------- ------- Total $ 1,270 $ 1,218 $ 1,167 ======= ======= ======= Operating Income (Loss): International portion $ 121 $ 138 $ 131 U.S. portion (1) (27) (23) ------- ------- ------- Total (a) $ 120 $ 111 $ 108 ======= ======= =======
(a) Includes $19 million of special charges in 1994 and $1 million in 1993. The international portion of Plumbing Products is composed of the European Plumbing Products Group, the Americas International Group and the Far East Group. The U.S. portion is generated primarily by the U.S. Plumbing Products Group and by export sales from the U.S. Sales of Plumbing Products increased 4% (with little overall effect from foreign exchange) to $1,270 million in 1995 from $1,218 million in 1994, as sales improved 1% for international operations and 12% for U.S. operations. The sales gain for international operations was primarily attributable to volume and price gains in Italy and to a lesser extent in Greece and the United Kingdom ("U.K."), partly offset by lower sales in Germany, France, Canada and Mexico as a result of weak economic conditions in those countries. Sales in the U.S. increased because of improved markets and expanded distribution through retail sales channels. A basic shift from the wholesale distribution channel to the retail sales channel has been growing in recent years, a trend the Company believes will continue and lead to increased sales because of strong product and brand-name recognition. Retail markets accounted for 26% of total 1995 U.S. plumbing products sales, up from 24% in 1994. Sales of Plumbing Products increased 4% (6% excluding the unfavorable effects of foreign exchange) to $1,218 million in 1994 from $1,167 million in 1993. The exchange-adjusted improvement resulted from sales increases of 4% for international operations and 11% for U.S. operations. The sales gain for international operations was led by volume and price gains 17 20 as economic conditions in several countries (particularly the U.K. and Germany) showed modest improvement over the prior year. Sales also improved in Thailand, Korea and Mexico, all on higher volumes. These increases were offset partly by lower sales in Canada and Brazil where poor economic conditions persisted, and by the effect of the deconsolidation of operations in the PRC, which in April 1994 were contributed to the new joint venture operating in that country. Sales in the U.S. increased as a result of improved markets and an expanded retail customer base. Operating income of Plumbing Products was $120 million for 1995 compared with $111 million for 1994, an increase of 8% (4% excluding foreign exchange effects), because of improved results in the U.S., reduced by lower operating income for international operations. In 1994 operating income for U.S. operations included a provision of $14 million related to certain assets that will be disposed of prior to the expiration of their originally estimated useful lives. Overall Plumbing Products' results were also negatively affected in 1994 by a provision of $5 million related to employee severance and other cost reduction actions. Excluding such provisions and the effects of foreign exchange from 1994, 1995 operating income would have decreased 11% from 1994. The decrease in operating income for international operations in 1995 was principally due to the aforementioned market weakness in Germany, France, Canada and Mexico, start-up expenses of new operations in the Far East, operating difficulties in the Czech Republic and lower profitability in Brazil and Korea. In addition, because Italian and U.K. operations purchase products from Germany, the strength of the Deutschemark against Italian and U.K. currencies resulted in Italian and U.K. product cost increases that could not be fully recovered through pricing. Operating results in the U.S. improved substantially, to near break even, due to higher sales and lower-cost sourcing from expanded facilities in Mexico, partly offset by costs related to the realignment of U.S. manufacturing operations. Operating income of Plumbing Products was $111 million for 1994 compared with $108 million for 1993 as a result of improvements in international operations. Operating income gains reflected the sales improvements and cost reductions in most operations, partly offset by the aforementioned provisions of $19 million in 1994. Provisions of a similar nature in 1993 totaled $1 million. Excluding such provisions, operating income would have increased to $130 million from $109 million, or 19%, in 1994 from 1993. Backlog -- Plumbing Products' backlog as of December 31, 1995, was $152 million, a decrease of 28% from December 31, 1994 (with little effect from foreign exchange), reflecting economic weakness in Europe and because backlogs in the Far East were unusually high at December 31, 1994. PLUMBING 1995 Sales - $1.3 Billion BUSINESS MIX Residential 75% Commercial 25% GEOGRAPHY Europe 50% U.S. 29% Other 11% Far East 10% MARKETS Replacement and Remodeling 60% New Construction 40% Plumbing Products is the most geographically diverse of the Company's three businesses, deriving the majority of its sales from the replacement and remodeling markets in Europe and the Americas and the fast-growing new construction markets in Asia. 18 21 AUTOMOTIVE PRODUCTS SEGMENT
1995 1994 1993 - -------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Sales $998 $759 $563 Operating Income (a) 155 62 41
(a) Includes special charges of $14 million in 1994 and $2 million in 1993. Sales of Automotive Products for 1995 were $998 million, an increase of $239 million, or 31% (20% excluding the favorable effects of foreign exchange), from $759 million in 1994, due to higher volume, partly offset by the effects of lower prices on electronic products. Unit volume of truck and bus production in Western Europe and aftermarket sales improved 23% and 16%, respectively, in 1995. Sales volumes were significantly higher in all markets for commercial vehicle braking and other control systems and in the U.K. for the growing utility vehicle business in that country. In Brazil demand also increased, as truck production grew 11% over the prior year. Sales of Automotive Products for 1994 were $759 million, an increase of $196 million, or 35% (with little effect from foreign exchange), from $563 million in 1993. Unit volume of truck and bus production in Western Europe improved significantly and aftermarket sales grew solidly. Sales of Perrot, a German brake manufacturer which the Company acquired in January 1994, contributed $62 million of the increase. Sales volumes were significantly higher in the U.K. as a result of the growing utility vehicle business in that country, in Sweden where truck manufacturing increased by approximately 50%, and in Brazil, France and Spain where demand also increased. Operating income for Automotive Products was $155 million in 1995, an increase of 150% (85% excluding both the favorable effects of foreign exchange and special charges of $14 million in 1994 related to employee severance and the consolidation of production facilities). This increase was primarily attributable to the substantially higher sales volume as well as higher margins achieved through implementation of manufacturing process improvements, a reduced salaried workforce, productivity gains and other cost reduction actions. Operating income for Automotive Products was $62 million in 1994, an increase of 51% compared with $41 million in 1993 reflecting increased sales volume and the effect of cost reductions, reduced by a loss experienced by Perrot. Operating income for 1994 included the aforementioned special charges of $14 million. Charges of a similar nature in 1993 totaled $2 million. Excluding those charges from the respective years, operating income would have increased to $76 million from $43 million, or 77%, in 1994 over 1993. Backlog -- Automotive Products' backlog as of December 31, 1995, was $356 million, an increase of 3% from December 31, 1994 (excluding the favorable effects of foreign exchange), as a result of the improved demand. AUTOMOTIVE 1995 Sales - $1.0 Billion GEOGRAPHY Europe 94% Export from Europe 12% Brazil 6% MARKETS OEM Conventional 44% Aftermarket 28% Electronic 28% Automotive Products is primarily a European-based business manufacturing original equipment for most of the world's leading producers of trucks, buses and utility vehicles. Aftermarket sales under the WABCO(R) brand serve vehicle owners' add-on and replacement needs. For this segment the electronic products market, including anti-lock braking systems, is the newest and fastest growing. 19 22 FINANCIAL REVIEW 1995 Compared with 1994 and 1994 Compared with 1993 -- Interest expense decreased $46 million in 1995 compared with 1994 because of reduced debt (due to the application of the net proceeds from the IPO and cash flow) together with the effect of lower overall interest rates (see "Liquidity and Capital Resources"). Interest expense for 1994 decreased $19 million compared to 1993 primarily as a result of lower overall interest rates achieved through a 1993 refinancing. Corporate items in 1994 included a special charge of $20 million paid in connection with the amendment of certain agreements in anticipation of the IPO. Excluding that special charge, corporate items increased modestly in 1995 because of higher accretion expense related to postretirement benefits, partly offset by higher equity in net income of unconsolidated joint ventures. Corporate items increased in 1994 principally because of the special charge of $20 million. The income tax provision for 1995 was $85 million at an effective income tax rate of 37.5% on income (before income taxes and extraordinary item) of $227 million. In 1994 the income tax provision was $62 million, despite a loss (before income taxes and extraordinary item) of $15 million; similarly the income tax provision in 1993 was $36 million despite a loss of $81 million. As a result of higher levels of taxable income in the U.S. in 1995 and expected in 1996, the Company was able to recognize previously unrecognized tax benefits. The 1994 and 1993 provisions reflected the taxes payable on profitable foreign operations, while tax benefits were not available to offset losses on U.S. operations. The provision for 1994 as compared with 1993 was adversely affected by less favorable tax treatment with respect to certain foreign items, particularly in Germany. See Note 5 of Notes to Consolidated Financial Statements. As a result of the redemption of debt in 1995, 1994 and 1993 with proceeds of refinancings, those years included extraordinary charges of $30 million, $9 million and $92 million, respectively (including call premiums, the write-off of unamortized debt issuance costs and in 1993 the loss on cancellation of foreign currency swap contracts), on which no tax benefits were recorded. See the following section, "Liquidity and Capital Resources" and Note 8 of Notes to Consolidated Financial Statements for a description of these transactions. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities, after cash interest paid of $161 million, was $348 million for 1995, compared with $257 million for 1994. The $91 million increase resulted primarily from improved operating results, partly offset by the effect of increased receivables (reflecting the higher sales volumes). Excluding inventory increases resulting from acquisitions and despite 17% higher sales, the Company was able to reduce inventories by $8 million and increase the number of inventory turns to 10.7 in 1995 from 9.7 in 1994. After allowing for $183 million of net investing activities (principally capital expenditures of $207 million, including $42 million of investments in affiliated companies -- see "Capital Expenditures"), net cash flow used for financing activities amounted to $167 million. In the first quarter of 1995 the Company completed the 1995 Refinancing begun in the fourth quarter of 1994 consisting of the October Borrowing, the IPO and the 1995 Credit Agreement (see Note 8 of Notes to Consolidated Financial Statements for a description and definitions). The October Borrowing (totaling $325 million) was used primarily to redeem $317 million of high interest rate bonds with lower-rate bank debt; the net proceeds of the IPO (totaling $281 million) were used to repay indebtedness; and the proceeds of the 1995 Credit Agreement (which provided a secured, multi-currency, multi-borrower facility aggregating $1.0 billion) replaced outstanding borrowings under the Company's previous bank credit agreement, including the October Borrowing. 20 23 Total debt decreased by $281 million in 1995 summarized as follows (dollars in millions):
- -------------------------------------------------------------- Increase (Decrease) Debt repayments from proceeds of IPO $(281) Debt repayments from other cash flows (168) Accretion on subordinated discount debentures 57 Debt assumed in acquisitions of Porcher and Air Conditioning joint ventures in the PRC 52 Other, primarily foreign exchange effect 59 ----- Net decrease in debt $(281) =====
The 1995 Credit Agreement provides reduced borrowing rates, increased borrowing capacity, less restrictive covenants and lower annual scheduled debt maturities through 2001. Upon achieving certain financial ratios in mid-1995, the Company obtained an interest rate reduction of .25% and in March 1996 achieved an additional interest rate reduction of .25%. At December 31, 1995, the Company's total indebtedness was $2.1 billion and annual scheduled debt maturities were $73 million, $74 million, $84 million, $233 million and $101 million for the years 1996 through 2000, respectively. The Company believes that the amounts available from operating cash flows, funds available under its revolving credit facilities and future debt or equity financings will be sufficient to meet its expected cash needs and planned capital expenditures for the foreseeable future. The 1995 Credit Agreement provides American Standard Inc. and certain subsidiaries with a secured facility aggregating $1.0 billion including revolving credit facilities (the "Revolving Facilities") which provide for aggregate borrowings of up to $550 million, of which up to $200 million may consist of outstanding letters of credit. In addition, up to $40 million of the Revolving Facilities may be used for same day short-term borrowings. Each of its outstanding revolving loans is due at the end of the respective interest period (a maximum of six months). The Company may, however, concurrently reborrow the outstanding obligations subject to compliance with applicable conditions of the 1995 Credit Agreement. At December 31, 1995, the Company had outstanding borrowings of $180 million under the Revolving Facilities. There was $312 million available under the Revolving Facilities after reduction for borrowings and for $58 million of outstanding letters of credit. In addition, at December 31, 1995, the Company's foreign subsidiaries had $90 million available under overdraft facilities which can be withdrawn by the banks at any time. The Revolving Facilities are short-term borrowings by their terms, and because a portion of the long-term debt under the Company's previous bank credit agreement was replaced with borrowings under the Revolving Facilities, a significantly larger portion of the Company's debt is now classified as short-term. The 1995 Credit Agreement contains various covenants that limit, among other things, mergers and asset sales, indebtedness, dividends on and redemptions of capital stock of the Company, voluntary prepayment of certain other indebtedness, rental expense, liens, capital expenditures, investments or acquisitions, the use of proceeds from asset sales, intercompany transactions and transactions with affiliates and certain other business activities. The covenants also require the Company to meet certain financial tests. Certain other American Standard Inc. debt instruments also contain financial and other covenants. The Company believes it is currently in compliance with the covenants contained in the 1995 Credit Agreement and other debt instruments. In November 1995 the Company acquired by means of a tender offer substantially all of the remaining outstanding common shares and convertible bonds of Etablissements Porcher ("Porcher"), a French manufacturer and distributor of plumbing products in which the Company previously had an ownership interest of 32.88%. The $25 million cost of the acquisition was funded with a borrowing under the Company's Revolving Facilities. In addition $31 million of Porcher debt was assumed. During 1995 Porcher had sales of $216 million and was accounted for as an unconsolidated joint venture. In December 1995 the Company completed arrangements for the development and expansion of its air conditioning business in the PRC, to become an integrated manufacturer, marketer and distributor of a broad range of air conditioning systems and related products for residential and commercial applications. The Company and a minority investor established ASI China Holdings Limited ("ASI China"), in which the Company has an ownership interest of 64.4%, and formed A-S Air Conditioning Products Limited ("ASAP"), owned 50.4% by ASI China, to establish or acquire majority ownership in up to five manufacturing joint ventures as well as sales and service 21 24 businesses in the PRC. The Company contributed to ASAP its 50% interest (valued at $10 million) in a Hong Kong joint venture (which imports and distributes air conditioning products) and has committed to contribute $20 million in cash, $8 million of which had been contributed as of December 31, 1995. The minority investor in ASI China and third-party investors in ASAP have committed to contribute a total of $62 million, of which $26 million had been contributed as of December 31, 1995. As of December 31, 1995, ASAP had acquired majority ownership in three manufacturing joint ventures and in conjunction therewith assumed debt of $21 million. The Company does not currently intend to pay dividends and is limited in the amount it may pay under the terms of both the 1995 Credit Agreement and certain publicly-traded debt securities. For a discussion of certain tax matters, see Note 5 of Notes to Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING STANDARD In March 1995 the FASB issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company will adopt FAS 121 in the first quarter of 1996 and is in the process of accumulating the necessary data but has not completed all of the analyses required. FAS 121 requires companies to review long-lived assets, including related goodwill, for impairment at the lowest level for which there are identifiable, independently generated cash flows. Events and circumstances in some operating units, primarily in Canada, Mexico and France, indicate that the assets and the related goodwill might be impaired. Based upon preliminary indications, the Company believes that it will incur a non-cash charge of about $200 million. CAPITAL EXPENDITURES The Company's capital expenditures for 1995 were $207 million compared with $130 million for 1994. The increase for 1995 related primarily to investments in affiliated companies ($42 million in 1995, compared with $24 million in 1994), expansion of manufacturing capacity, modernization of recent acquisitions, equipment for new products and the continuing implementation of Demand Flow. The Company believes capital spending in recent years has been sufficient for maintenance purposes, important product and process redesigns, expansion projects and strategic investments. The Company expects capital expenditures in 1996, excluding investments in affiliated companies, to approximate the 1995 spending level. Capital expenditures for Air Conditioning Products for 1995 were $70 million, including $11 million of investments in affiliates, an increase of 56% over the $45 million of capital spending in 1994. Major expenditures included investments in affiliates in the PRC and projects related to the expansion of manufacturing capacity for large chillers, implementation of Demand Flow and new products. Plumbing Products' capital expenditures for 1995 were $93 million, including $31 million of investments in affiliated companies (primarily Porcher), compared with capital expenditures of $55 million in 1994 (including investments of $10 million in affiliated companies), an increase of 69% (75% excluding the effects of foreign exchange). Expenditures for 1995 included cash investments in Porcher and affiliates in the PRC, expansion of capacity in Mexico, expansion in Far East operations and modernization of the Czech Republic operations. Capital expenditures for Automotive Products in 1995 were $44 million, compared with 1994 capital expenditures of $30 million, an increase of 47% (38% excluding the effects of foreign exchange). Major projects included completion of a test track in Germany, continued implementation of Demand Flow and cost-reduction projects. CYCLICALITY; SEASONALITY The preponderance of Air Conditioning Products and Plumbing Products sales are to the replacement, remodeling, and repair markets. In 1995, only about 6% of the Company's sales were associated with new housing in the United States and about 12% were associated with new commercial construction in the United States, both of which are cyclical. The Company's geographic diversity mitigates the effects of fluctuations in individual new construction markets outside the United States. Approximately two-thirds of Automotive Products' sales are dependent on production levels of medium-sized and heavy trucks and buses, particularly in Europe, which have been cyclical. Total Company sales tend to be seasonally higher in the second and third quarters of the year because a significant percentage of Air Conditioning Products' sales is attributable to residential and commercial construction activity, which is generally higher in the second and third quarters of the year, and because summer is the peak season for sales of air conditioning products. 22 25 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The accompanying consolidated balance sheet at December 31, 1995 and 1994, and related consolidated statements of operations, stockholders' deficit and cash flows for the years ended December 31, 1995, 1994 and 1993, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls which it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of outside Directors which meets periodically with the Company's financial officers, internal auditors and the independent auditors and monitors the accounting affairs of the Company. Emmanuel A. Kampouris Chairman, President and Chief Executive Officer Fred A. Allardyce Vice President and Chief Financial Officer G. Ronald Simon Vice President and Controller February 26, 1996 23 26 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders American Standard Companies Inc. We have audited the accompanying consolidated balance sheet of American Standard Companies Inc. as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Standard Companies Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP New York, New York February 26, 1996 24 27 CONSOLIDATED STATEMENT OF OPERATIONS
American Standard Companies Inc. 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in thousands except share data) Sales $ 5,221,476 $ 4,457,465 $ 3,830,462 ------------ ------------ ------------ Costs and expenses: Cost of sales 3,887,024 3,377,271 2,902,562 Selling and administrative expenses 853,783 778,550 692,229 Other expense 40,489 57,381 38,281 Interest expense 213,326 259,437 277,860 ------------ ------------ ------------ 4,994,622 4,472,639 3,910,932 ------------ ------------ ------------ Income (loss) before income taxes and extraordinary item 226,854 (15,174) (80,470) Income taxes 85,070 62,512 36,165 ------------ ------------ ------------ Income (loss) before extraordinary item 141,784 (77,686) (116,635) Extraordinary loss on retirement of debt (30,129) (8,735) (91,932) ------------ ------------ ------------ Net income (loss) 111,655 (86,421) (208,567) Preferred dividend -- -- (8,624) ------------ ------------ ------------ Net income (loss) applicable to common shares $ 111,655 $ (86,421) $ (217,191) ============ ============ ============ Per common share: Income (loss) before extraordinary item $ 1.90 $ (1.29) $ (2.11) Extraordinary loss on retirement of debt (.40) (.15) (1.55) ------------ ------------ ------------ Net income (loss) $ 1.50 $ (1.44) $ (3.66) ============ ============ ============ Average number of outstanding common shares 74,671,830 59,933,435 59,313,073 ============ ============ ============
See notes to consolidated financial statements. 25 28 CONSOLIDATED BALANCE SHEET
American Standard Companies Inc. 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- At December 31, (Dollars in thousands except share data) ASSETS Current assets Cash and cash equivalents $ 88,704 $ 92,749 Accounts receivable, less allowance for doubtful accounts - 1995, $27,330; 1994, $19,569 771,024 595,239 Inventories 362,340 323,220 Future income tax benefits 29,645 22,379 Other current assets 43,213 30,956 ----------- ----------- Total current assets 1,294,926 1,064,543 Facilities, at cost, net of accumulated depreciation 924,492 812,684 Other assets Goodwill, net of accumulated amortization - 1995, $249,410; 1994, $208,973 1,081,622 1,053,042 Debt issuance costs, net of accumulated amortization - 1995, $8,638; 1994, $23,928 39,267 64,095 Other 179,340 161,754 ----------- ----------- $ 3,519,647 $ 3,156,118 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Loans payable to banks $ 240,040 $ 70,271 Current maturities of long-term debt 72,908 141,640 Accounts payable 438,170 350,489 Accrued payrolls 171,378 140,297 Other accrued liabilities 338,138 329,174 Taxes on income 45,968 46,822 ----------- ----------- Total current liabilities 1,306,602 1,078,693 Long-term debt 1,770,098 2,152,291 Other long-term liabilities Reserve for postretirement benefits 482,398 437,708 Deferred tax liabilities 44,761 37,650 Other 305,851 247,405 ----------- ----------- Total liabilities 3,909,710 3,953,747 Commitments and contingencies Stockholders' deficit Preferred stock, 2,000,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value, 200,000,000 shares authorized; 76,733,010 shares issued and outstanding in 1995; 60,932,457 in 1994 767 609 Capital surplus 509,218 194,236 Subscriptions receivable (629) (1,640) Accumulated deficit (724,769) (836,424) Foreign currency translation effects (174,650) (151,721) Minimum pension liability adjustment -- (2,689) ----------- ----------- Total stockholders' deficit (390,063) (797,629) ----------- ----------- $ 3,519,647 $ 3,156,118 =========== ===========
See notes to consolidated financial statements. 26 29 CONSOLIDATED STATEMENT OF CASH FLOWS
American Standard Companies Inc. 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in thousands) Cash provided (used) by: Operating activities: Income (loss) before extraordinary item $ 141,784 $ (77,686) $ (116,635) Depreciation (including asset loss provision in 1994) 109,999 122,944 106,041 Amortization of goodwill 33,396 31,472 30,807 Non-cash interest 63,930 67,837 76,492 Non-cash stock compensation 29,014 28,479 25,679 Changes in assets and liabilities: Accounts receivable (124,482) (69,991) (48,680) Inventories 8,236 13,092 47,321 Accounts payable and accrued payrolls 53,971 63,413 40,124 Postretirement benefits 33,531 21,290 22,687 Other long-term liabilities 22,419 32,795 13,271 Other, net (24,092) 22,941 3,734 ----------- ----------- ----------- Net cash provided by operating activities 347,706 256,586 200,841 ----------- ----------- ----------- Investing activities: Purchases of property, plant and equipment (164,193) (105,741) (90,474) Investments in affiliated companies (42,395) (23,971) (7,556) Proceeds from disposals of property, plant and equipment 19,428 14,783 4,003 Other 4,055 (2,071) 4,514 ----------- ----------- ----------- Net cash used by investing activities (183,105) (117,000) (89,513) ----------- ----------- ----------- Financing activities: Net proceeds from issuance of common stock 280,535 -- -- Minority partners' contributions to PRC venture 26,246 -- -- Proceeds from issuance of long-term debt 469,776 336,160 1,405,557 Repayments of long-term debt, including redemption premiums (1,026,723) (439,762) (1,427,989) Net change in revolving credit facilities 124,768 30,816 7,000 Net change in other short-term debt (18,312) (10,044) (61,600) Common stock repurchases (10,989) (16,927) (12,194) Financing costs and other (12,466) (2,441) (76,762) ----------- ----------- ----------- Net cash used by financing activities (167,165) (102,198) (165,988) Effect of exchange rate changes on cash and cash equivalents (1,481) 2,124 (3,652) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (4,045) 39,512 (58,312) Cash and cash equivalents at beginning of period 92,749 53,237 111,549 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 88,704 $ 92,749 $ 53,237 =========== =========== ===========
See notes to consolidated financial statements. 27 30 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
American Standard Companies Inc. - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Foreign Currency Common Capital Subscriptions ESOP Accumulated Translation Stock Surplus Receivable Shares Deficit Effects Balance at December 31, 1992 $ 621 $ 191,979 $ (3,316) $ (9,527) $(541,436) $ (86,872) Net loss -- -- -- -- (208,567) -- Common stock repurchased (10) (16,662) -- -- -- -- Common stock issued 3 4,582 -- -- -- -- Payments on subscriptions -- -- 728 -- -- -- ESOP shares allocated to employees -- 17,094 -- 5,196 -- -- Stock dividend on exchange- able preferred stock -- (8,624) -- -- -- -- Foreign currency translation -- -- -- -- -- (62,348) --------- --------- --------- --------- --------- --------- Balance at December 31, 1993 614 188,369 (2,588) (4,331) (750,003) (149,220) Net loss -- -- -- -- (86,421) -- Common stock repurchased (7) (13,244) -- -- -- -- Common stock issued 2 3,974 -- -- -- -- Payments on subscriptions -- -- 948 -- -- -- ESOP shares allocated to employees -- 15,137 -- 4,331 -- -- Foreign currency translation -- -- -- -- -- (2,501) --------- --------- --------- --------- --------- --------- Balance at December 31, 1994 609 194,236 (1,640) -- (836,424) (151,721) Net income -- -- -- -- 111,655 -- Common stock repurchased -- (781) -- -- -- -- Initial public offering of common stock 151 280,384 -- -- -- -- Other common stock issued 7 35,379 -- -- -- -- Payments on subscriptions -- -- 1,011 -- -- -- Foreign currency translation -- -- -- -- -- (22,929) --------- --------- --------- --------- --------- --------- Balance at December 31, 1995 $ 767 $ 509,218 $ (629) $ -- $(724,769) $(174,650) ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements. 28 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF THE COMPANY American Standard Companies Inc. (the "Company") is a Delaware corporation that has as its only significant asset all the outstanding common stock of American Standard Inc., a Delaware corporation ("American Standard Inc."). Hereinafter, "American Standard" or "the Company" will refer to the Company, or to the Company and American Standard Inc., including its subsidiaries, as the context requires. American Standard is a global manufacturer of high quality, brand-name products in three major product groups: air conditioning systems, bathroom and kitchen fixtures and fittings; and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles. Information on the Company's operations by segment and geographic area is included on pages 14, 40 and 41 of this report. NOTE 2. ACCOUNTING POLICIES Financial Statement Presentation -- The consolidated financial statements include the accounts of majority-owned subsidiaries; intercompany transactions are eliminated. Investments in unconsolidated joint ventures are included at cost plus the Company's equity in undistributed earnings. Certain amounts in the financial statements and notes thereto for 1994 and 1993 have been reclassified to conform with the 1995 presentation. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The most significant estimates included in the preparation of the financial statements are related to post-retirement benefits, income taxes, warranties and asset lives. Foreign Currency Translation -- Adjustments resulting from translating foreign functional currency assets and liabilities into U.S. dollars are recorded in a separate component of stockholders' equity. Gains or losses resulting from transactions in other than the functional currency are reflected in the Consolidated Statement of Operations, except for transactions which hedge net investments in a foreign entity and intercompany transactions of a long-term investment nature. For operations in countries that have hyper-inflationary economies, net income includes gains and losses from translating assets and liabilities at year-end rates of exchange, except for inventories and facilities, which are translated at historical rates. The losses from foreign currency transactions and translation losses in countries with hyper-inflationary economies reflected in expense were $4.5 million in 1995, $9.9 million in 1994 and $21.9 million in 1993. Revenue Recognition -- Sales are recorded when shipment to a customer occurs. Cash Equivalents -- Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. Inventories -- Inventory costs are determined principally by the use of the last-in, first-out (LIFO) method, and are stated at the lower of such cost or realizable value. Facilities -- The Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income. Significant investment grants are amortized into income over the period of benefit. Goodwill -- Goodwill is being amortized over 40 years. The carrying value of goodwill for each business segment is reviewed if the facts and circumstances, such as significant declines in sales, earnings or cash flows or material adverse changes in the business climate, suggest that it may be impaired. If any impairment is indicated as a result of such reviews, the Company would measure it using techniques such as comparing the undiscounted cash flow of the business to its book value including goodwill or by obtaining appraisals of the related business. 29 32 Impact of Recently Issued Accounting Standards -- In March 1995 the FASB issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. See "Recently Issued Accounting Standard" in Management's Discussion and Analysis. Debt Issuance Costs -- The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. Warranties -- The Company provides for estimated warranty costs at the time of sale. Revenues from the sales of extended warranty contracts are deferred and amortized on a straight-line basis over the terms of the contracts. Warranty obligations beyond one year are included in other long-term liabilities. Postretirement Benefits -- Postretirement pension benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and life insurance benefits for certain of its employees. Such benefits are accounted for on an accrual basis using actuarial assumptions. Depreciation -- Depreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group. Research and Development Expenses -- Research and development costs are expensed as incurred. The Company expended approximately $133 million in 1995, $123 million in 1994, and $114 million in 1993 for research activities and product development and for product engineering. Expenditures for research and product development only were $49 million, $44 million, and $47 million in the respective years. Income Taxes -- Deferred income taxes are determined on the liability method, and are recognized for all temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. No provision is made for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested. Advertising Expense -- The cost of advertising is expensed as incurred. The Company incurred $92 million, $84 million and $76 million of advertising costs in 1995, 1994 and 1993, respectively. Earnings Per Share -- Earnings per share have been computed using the weighted average number of common shares outstanding. The dilutive effect of options outstanding under the Company's Stock Incentive Plan is not material. Financial Instruments with Off-Balance-Sheet Risk -- The Company from time to time enters into agreements to reduce its foreign currency and interest rate risks. Gains and losses from underlying rate changes are included in income unless the contract hedges a net investment in a foreign entity, a firm commitment, or related debt instrument, in which case gains and 30 33 losses are deferred as a component of foreign currency translation effects in stockholders' equity or included as a component of the transaction. At December 31, 1995 and 1994, the Company did not have material foreign currency or interest rate agreements outstanding. Stock Based Compensation -- The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and intends to continue this method in the future. Accordingly, the Company recognizes no compensation expense for the stock option grants. NOTE 3. OTHER EXPENSE Other income (expense) was as follows:
1995 1994 1993 - -------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Interest income $ 8.9 $ 8.2 $ 8.5 Royalties 4.1 3.5 2.6 Equity in net income (loss) of unconsolidated joint ventures 7.1 4.0 (0.1) Minority interest (12.2) (13.3) (14.0) Accretion expense (36.5) (26.1) (30.5) Other, net (a) (11.9) (33.7) (4.8) ------- ------- ------- $ (40.5) $ (57.4) $ (38.3) ======= ======= =======
(a) The 1994 amount includes a one-time special charge of $20 million incurred in connection with the amendment of certain agreements in anticipation of the initial public offering. NOTE 4. POSTRETIREMENT BENEFITS The Company sponsors postretirement pension benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the "ESOP") for the Company's U.S. salaried employees and certain U.S. hourly employees. The ESOP is an individual account, defined contribution plan. As a result of the IPO in the first quarter of 1995, the valuation of ESOP shares has been based on the closing price for shares of the Company's common stock quoted on the New York Stock Exchange. Through December 31, 1994, the valuation of the ESOP shares had been determined by independent appraisals. By December 31, 1994, all of the common stock initially acquired by the ESOP was allocated to the accounts of eligible employees (primarily through basic allocations of 3% of covered compensation and a matching Company contribution of up to 6% of covered compensation invested in the Company's 401(k) savings plan by employees). In 1995 the Company funded basic and matching allocations to the ESOP accounts through contributions of shares of the Company's common stock. The Company intends to fund the ESOP in future years through contributions of cash or shares of the Company's common stock. Benefits under defined benefit pension plans on a worldwide basis are generally based on years of service and employees' compensation during the last years of employment. In the United States the Company also provides various postretirement health care and life insurance benefits for certain of its employees. Funding decisions are based upon the tax and statutory considerations in each country. Accretion expense is the implicit interest cost associated with amounts accrued and not funded and is included in "other expense". At December 31, 1995, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are funded as incurred. 31 34 The Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1995 and 1994 were:
1995 1995 1995 1994 1994 1994 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Assets in Accumulated Assets in Accumulated Excess of Benefit Health and Excess of Benefit Health and Accumulated Obligations Life Accumulated Obligations Life Benefit in Excess of Insurance Benefit in Excess Insurance Obligations Assets Benefits Obligations of Assets Benefits Actuarial present value of benefit obligations: Vested $124.8 $613.5 $ -- $106.8 $528.9 $ -- Non-vested 2.6 44.2 -- 5.1 29.1 -- ------ ------ ------ ------ ------ ------ Accumulated benefit obligations 127.4 657.7 -- 111.9 558.0 -- Additional amounts related to projected pay increases 25.9 39.4 -- 15.8 34.1 -- ------ ------ ------ ------ ------ ------ Total projected benefit obligations 153.3 697.1 186.9 127.7 592.1 160.5 ------ ------ ------ ------ ------ ------ Assets and book reserves relating to such benefits: Market value of funded assets 184.7 325.9 -- 160.5 271.4 -- Reserve (asset) for postretirement benefits net of recognized overfunding (39.6) 361.3 161.0 (37.6) 309.8 158.7 Additional minimum liability -- 9.7 -- -- 15.5 -- ------ ------ ------ ------ ------ ------ 145.1 696.9 161.0 122.9 596.7 158.7 ------ ------ ------ ------ ------ ------ Assets and book reserves in excess of (less than) projected benefit obligations $ (8.2) $ (.2) $(25.9) $ (4.8) $ 4.6 $ (1.8) ====== ====== ====== ====== ====== ====== Consisting of: Unrecognized prior services benefit (cost) $ (9.7) $ (5.8) $ 9.8 $ (8.0) $ .7 $ 10.7 Unrecognized net gain (loss) from changes in actuarial assumptions and experience 1.5 5.6 (35.7) 3.2 1.2 (12.5) Pension liability adjustment to stockholders' deficit -- -- -- -- 2.7 -- ------ ------ ------ ------ ------ ------ $ (8.2) $ (.2) $(25.9) $ (4.8) $ 4.6 $ (1.8) ====== ====== ====== ====== ====== ======
At December 31, 1995, the projected benefit obligation related to health and life insurance benefits for active employees was $71.9 million and for retirees was $115.0 million. For certain plans, the additional minimum liability recorded by the Company as part of its reserve for postretirement benefits was $9.7 million at December 31, 1995 ($15.5 million at December 31, 1994). The additional minimum liability is the excess of the accumulated benefit obligation over plan assets and accumulated benefit provisions. In connection with providing for the additional minimum liability, an intangible asset was recorded, to the extent of unrecognized prior service costs, which amounted to $9.7 million at December 31, 1995 ($12.8 million at December 31, 1994). The net charge in stockholders' deficit was zero at December 31, 1995 ($2.7 million at December 31, 1994). 32 35 The projected benefit obligation for postretirement benefits was determined using the following assumptions:
1995 1995 1994 1994 - -------------------------------------------------------------------------------------------- Domestic Foreign Domestic Foreign Discount rate 7.00% 4.25%-8.25% 8.25% 5.75%-9.25% Long-term rate of inflation 2.80% 1.55%-5.05% 2.80% 1.75%-5.25% Merit and promotion increase 1.70% 1.70% 1.70% 1.70% Rate of return on plan assets 9.00% 6.00%-9.50% 8.50% 7.25%-8.35%
The weighted-average annual assumed rate of increase in the health care cost trend rate is 8% for 1996 and is assumed to decrease gradually to 5% for 1999 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a change in the assumed rate of one percentage point for each future year would change the accumulated postretirement benefit obligation as of December 31, 1995, by $13.5 million and the annual postretirement cost by $1.6 million. Total postretirement costs were:
1995 1994 1993 - --------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Pension benefits $48.3 $35.9 $37.5 Health and life insurance benefits 15.5 16.3 17.8 ----- ----- ----- Defined benefit plan cost 63.8 52.2 55.3 Defined contribution plan cost, principally ESOP 27.4 24.7 22.4 ----- ----- ----- Total postretirement cost, including accretion expense $91.2 $76.9 $77.7 ===== ===== =====
Postretirement cost had the following components:
1995 1995 1994 1994 1993 1993 - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Health & Health & Health & Pension Life Ins. Pension Life Ins. Pension Life Ins. Benefits Benefits Benefits Benefits Benefits Benefits Service cost-benefits earned during the period $ 24.6 $ 3.3 $23.6 $ 3.8 $20.1 $ 3.4 Interest cost on the projected benefit obligation 58.1 12.8 47.0 12.3 50.6 14.1 Less assumed return on plan assets: Actual loss (return) on plan assets (107.1) -- 13.0 -- (78.8) -- Excess (shortfall) deferred 69.7 -- (49.5) -- 42.9 -- ------ ----- ----- ----- ------ ----- (37.4) -- (36.5) -- (35.9) -- Other, including amortization of prior service cost 3.0 (.6) 1.8 .2 2.7 .3 ------ ----- ----- ----- ----- ----- Defined benefit plan cost $ 48.3 $15.5 $35.9 $16.3 $37.5 $17.8 ====== ===== ===== ===== ===== ===== Accretion expense reclassified to "other expense" $ 23.7 $12.8 $13.8 $12.3 $16.4 $14.1 ====== ===== ===== ===== ===== =====
33 36 NOTE 5. INCOME TAXES The Company's income (loss) before income taxes and extraordinary item, and the applicable provision (benefit) for income taxes were:
1995 1994 1993 - --------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Income (loss) before income taxes and extraordinary item: Domestic $ -- $(157.0) $(168.4) Foreign 226.9 141.8 87.9 ------ ------- ------- Pre-tax income (loss) $226.9 $(15.2) $ (80.5) Provision (benefit) for income taxes: Current: Domestic $ 15.7 $ 10.5 $ 12.4 Foreign 69.6 57.7 43.0 ------ ------- ------- 85.3 68.2 55.4 Deferred: Domestic (7.3) .8 1.1 Foreign 7.1 (6.5) (20.3) ------ ------- ------- (.2) (5.7) (19.2) ------ ------- ------- Total provision $ 85.1 $ 62.5 $ 36.2 ====== ======= =======
A reconciliation between the actual income tax expense provided and the income taxes computed by applying the statutory federal income tax rate of 35% in 1995, 1994 and 1993 to the income (loss) before income taxes and extraordinary item is as follows:
1995 1994 1993 - ------------------------------------------------------------------------------------ Year Ended December 31, (Dollars in millions) Tax provision (benefit) at statutory rate $79.4 $(5.3) $(28.2) Nondeductible goodwill amortization 11.9 10.0 10.4 Nondeductible ESOP allocations 3.5 6.8 6.1 Rate differences and withholding taxes related to foreign operations 19.2 47.1 18.7 Foreign exchange 1.2 (4.3) (7.0) State tax benefits (.5) (5.3) (5.5) Other, net 1.7 (7.9) 8.7 Increase (decrease) in valuation allowance (31.3) 21.4 33.0 ----- ----- ------ Total provision $85.1 $62.5 $ 36.2 ===== ===== ======
In addition to the 1995 valuation allowance decrease of $31.3 million and the 1994 and 1993 valuation allowance increases of $21.4 million and $33.0 million, respectively, shown above, valuation allowances of $10.5 million, $3.2 million and $32.1 million, respectively, were also provided for the tax benefits related to the extraordinary losses on retirement of debt (see Note 8). The following table details the gross deferred tax liabilities and assets and the related valuation allowances:
1995 1994 - ------------------------------------------------------------------ At December 31, (Dollars in millions) Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $138.8 $142.3 Inventory (LIFO and purchase accounting differences) 10.3 15.4 Employee benefits 3.5 .6 Foreign investments 50.1 50.1 Other 44.8 31.1 ------ ------ 247.5 239.5 ------ ------ Deferred tax assets: Postretirement benefits 132.7 128.2 Warranties 53.8 35.7 Alternative minimum tax 16.7 19.4 Foreign tax credits and net operating losses 34.4 44.0 Reserves 69.5 69.0 Other 23.3 46.7 Valuation allowances (98.0) (118.8) ------ ------ 232.4 224.2 ------ ------ Net deferred tax liabilities $ 15.1 $ 15.3 ====== ======
Deferred tax assets related to foreign tax credits, net operating loss carryforwards and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. 34 37 In 1995 the valuation allowance was reduced as a result of the reversal of existing deferred tax benefits and higher levels of taxable income in the U.S. in 1995 and expected in 1996. Although realization is not assured, management believes it is more likely than not that all of the resulting net deferred tax asset will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited. As a result of the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes. Cash taxes paid were $90 million, $70 million, and $41 million in the years 1995, 1994 and 1993, respectively. In connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. In prior years the Company paid approximately $21 million (at December 31, 1995 exchange rates) of a disputed German income tax. A suit is pending to obtain a refund of this tax. In March 1996 the Company received an assessment, which it has appealed, for additional taxes of approximately $80 million (at December 31, 1995 exchange rates) (principally relating to the 1988 to 1990 period), plus interest, for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such assessment occurred in years subsequent to 1990. Having assessed additional taxes for the 1988-1990 period, the German tax authorities might, after future tax audits, propose tax adjustments for years 1991 to 1993 that could be as much as 50% higher. The Company, on the basis of the opinion of legal counsel, believes the German tax returns are substantially correct as filed and any such adjustments would be inappropriate and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company has not recorded any loss contingency at December 31, 1995 with respect to such matters. Under German law, the authorities may demand immediate payment of the amount assessed prior to final resolution of the issues. The Company believes, on the basis of the opinion of legal counsel, that it is highly likely that a suspension of payment pending final resolution would be obtained. If immediate payment were required, the Company expects that it would be able to make such payment from available sources of liquidity or credit support. As a result of German tax legislation, first effective in 1994, the Company's tax provision in Germany was higher in 1994 and in 1995 and will continue to be in the future. As a result of this German tax legislation and the related additional tax provisions, the Company believes its tax exposure to the major issues under the audit referred to above will be reduced for 1994, 1995 and future years. American Standard Inc. makes substantial interest payments to its indirect wholly-owned Netherlands subsidiary. Prior to 1995, these interest payments had been exempt from U.S. withholding tax under an income tax treaty between the United States and the Netherlands. Under a provision in a new treaty such interest payments starting in 1995 could have become subject to a 15% U.S. withholding tax, except that the Company received a favorable ruling from the IRS making a determination that no U.S. withholding tax was imposed for 1995. The Company believes, based on the ruling exempting 1995 interest payments from U.S. withholding tax, that its request for a subsequent ruling covering such interest payments in 1996 (and later years) should also receive favorable IRS action. If the subsequent IRS ruling request is not resolved favorably, additional withholding taxes of approximately $8 million per year could be imposed on the Company commencing in 1996. In such case the Company would consider alternatives designed to mitigate the increased withholding taxes; however, there is no assurance that such alternatives could be found. 35 38 NOTE 6. INVENTORIES The components of inventories are as follows:
1995 1994 - --------------------------------------------------------------- At December 31, (Dollars in millions) Finished products $190.7 $160.2 Products in process 84.7 82.5 Raw materials 86.9 80.5 ------ ------ Inventories at cost $362.3 $323.2 ====== ======
The carrying cost of inventories approximates current cost. NOTE 7. FACILITIES The components of facilities, at cost, are as follows:
1995 1994 - ------------------------------------------------------------------- At December 31, (Dollars in millions) Land $ 74.3 $ 65.8 Buildings 356.3 325.7 Machinery and Equipment 888.3 776.2 Improvements in progress 119.2 75.2 -------- -------- Gross facilities 1,438.1 1,242.9 Less: accumulated depreciation 513.6 430.2 -------- -------- Net facilities $ 924.5 $ 812.7 ======== ========
NOTE 8. DEBT The 1995 Refinancing -- In the first quarter of 1995 the Company completed a major refinancing (the "1995 Refinancing") consisting of: (i) the October 1994 amendment to the Company's 1993 credit agreement ("1993 Credit Agreement") which provided an additional term loan of $325 million (the "October Borrowing"), the proceeds of which were used to redeem $317 million in aggregate principal amount of the Company's 14-1/4% Subordinated Discount Debentures Due 2003 and 12-3/4% Junior Subordinated Debentures Due 2003 and to pay redemption premiums of $4.4 million and debt issuance and other costs in November 1994; (ii) the IPO (see Note 9), the net proceeds of which, totaling $281 million, were used to repay indebtedness; and (iii) the February 1995 amendment and restatement of the 1993 Credit Agreement (as so amended and restated, the "1995 Credit Agreement"), which provided a secured multi-currency, multi-borrower credit facility aggregating $1.0 billion, the proceeds of which were used to replace outstanding borrowings under the 1993 Credit Agreement. The 1995 Credit Agreement provides American Standard Inc. and certain subsidiaries (the "Borrowers") an aggregate, secured facility of $1.0 billion available to all Borrowers as follows: (a) a $100 million U.S. Dollar Term Loan Facility (the "Term Loan Facility") which expires in 2000; (b) a $250 million U.S. Dollar Revolving Credit Facility and a $300 million Multi-currency Revolving Credit Facility (the "Revolving Facilities") which expire in 2002; and (c) a $350 million Multi-currency Periodic Access Credit Facility (the "Periodic Access Facility") which expires in 2002. The 1995 Credit Agreement provides lower interest costs, increased borrowing capacity, less restrictive covenants and lower annual scheduled debt maturities through 2001. Each of the outstanding revolving loans is due at the end of each interest period (a maximum of six months). The Company may, however, concurrently reborrow the outstanding obligations subject to compliance with applicable conditions of the 1995 Credit Agreement. Borrowings under the Term Loan Facility bear interest at the London interbank offered rate ("LIBOR") plus 1.5% and borrowings under the Periodic Access Facility bear interest at LIBOR plus 1.75%. Loans under the Revolving Facilities bear interest at the prime rate plus .75% or LIBOR plus 1.75%. These initial rates are subject to reduction in the event the Company attains certain financial ratios. As a result of the redemption of debt in 1995, 1994 and 1993 the Consolidated Statement of Operations included extraordinary charges of $30 million, $9 million and $92 million, respectively (including call premiums, the write-off of deferred debt issuance costs, and in 1993 the loss on cancellation of foreign currency swap contracts) on which no tax benefit was recorded (see Note 5). 36 39 Short-term -- The Revolving Facilities under the 1995 Credit Agreement provide for aggregate borrowings of up to $550 million, of which up to $200 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings. The Company pays a commitment fee of 0.375% per annum on the unused portion of the Revolving Facilities and a fee of 1.75% plus issuance fees for letters of credit. At December 31, 1995, there were $180 million of borrowings outstanding under the Revolving Facilities and $58 million of letters of credit. Remaining availability under the Revolving Facilities was $312 million. Borrowings under the Revolving Facilities are short-term by their terms and since approximately $218 million of long-term debt under the 1993 Credit Agreement was replaced with loans under the Revolving Facilities, a significantly larger amount of debt has been classified as short-term subsequent to the 1995 Refinancing. Average borrowings under the revolving credit facilities available under bank credit agreements for 1995, 1994, and 1993, were $278 million, $73 million, and $39 million, respectively. Each Revolving Facilities borrowing is due at the end of the respective interest period (a maximum of six months). The Company may, however, concurrently reborrow such amounts subject to compliance with applicable conditions of the 1995 Credit Agreement. Other short-term borrowings are available outside the United States under informal credit facilities and are typically in the form of overdrafts. At December 31, 1995, the Company had $60 million of such foreign short-term debt outstanding at an average interest rate of 10.96% per annum. The Company also had an additional $91 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time. Average short-term borrowings for 1995, 1994 and 1993 were $334 million, $119 million and $118 million, respectively, at weighted average interest rates of 7.85%, 9.40% and 8.97%, respectively. Total short-term borrowings outstanding at December 31, 1995, 1994 and 1993 were $240 million, $70 million, and $38 million, respectively, at weighted average interest rates of 7.9%, 10.7%, and 10.3%, respectively. Long-term -- Long-term debt was as follows:
1995 1994 - ----------------------------------------------------------------------- At December 31, (Dollars in millions) Bank credit agreements $ 432.1 $ 940.0 9-1/4% sinking fund debentures, due in installments from 1997 to 2016 150.0 150.0 10-7/8% senior notes due 1999 150.0 150.0 11-3/8% senior debentures due 2004 250.0 250.0 9-7/8% senior subordinated notes due 2001 200.0 200.0 10-1/2% senior subordinated discount debentures (net of unamortized discount of $162.2 million in 1995; $221.4 million in 1994) due in installments from 2003 to 2005 578.5 529.3 Other long-term debt 82.4 74.6 -------- -------- 1,843.0 2,293.9 Less current maturities 72.9 141.6 -------- -------- $1,770.1 $2,152.3 ======== ========
As of December 31, 1995, the amounts of long-term debt maturing in years 1996 through 2000 were: 1996-$73 million; 1997-$74 million; 1998-$84 million; 1999-$233 million; and 2000-$101 million. Interest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1995, 1994, and 1993, were $4.0 million, $2.9 million, and $2.7 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $161 million, $186 million, and $198 million, respectively. 37 40 The 1995 Credit Agreement loans and effective weighted average interest rates in effect at December 31, 1995, were:
- -------------------------------------------------------------------------------- U.S. Dollar Equivalent (Dollars in millions) Periodic access loans: Deutschemark loans at 5.39% $282.5 British sterling loans at 8.23% 34.8 Dutch guilder loans at 5.23% 24.8 ------ Total periodic access loans 342.1 Term loans: U.S. dollar loans at 6.91% 90.0 ------ Total 1995 Credit Agreement long-term loans 432.1 Revolver loans at 6.9% 179.8 ------ Total 1995 Credit Agreement loans $611.9 ======
The 1993 Credit Agreement loans and effective weighted average interest rates in effect at December 31, 1994 were as follows:
- -------------------------------------------------------------------------------- U.S. Dollar Equivalent (Dollars in millions) Periodic access loans at 8.23% $174.6 Term loans at 8.68% 765.4 ------ Total 1993 Credit Agreement long-term loans 940.0 Revolver loans at 9.7% 38.0 ------ Total 1993 Credit Agreement loans $978.0 ======
The 9-7/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10-1/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on and after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the 9-7/8% Senior Subordinated Notes and on the 10-1/2% Senior Subordinated Discount Debentures (together the "Senior Subordinated Debt") is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the credit agreements, the 9-1/4% Sinking Fund Debentures, the 10-7/8% Senior Notes, and the 11-3/8% Senior Debentures (the said notes and debentures together the "Senior Securities"). The 9-1/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 104.625% in 1996 to 100% in 2006 and thereafter. The 10-7/8% Senior Notes are not redeemable by the Company. The 11-3/8% Senior Debentures are redeemable at the option of the Company, in whole or in part, on or after May 15, 1997, at redemption prices declining from 105.69% in 1997 to 100% on May 15, 2002, and thereafter. Obligations under the 1995 Credit Agreement are guaranteed by American Standard Inc. and significant domestic subsidiaries of American Standard Inc. (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by U.S., Canadian, and U.K. properties, plant and equipment; by liens on receivables, inventories, intellectual property and other intangibles; and by a pledge of the stock of American Standard Inc. and nearly all shares of subsidiary stock. In addition, the obligations of American Standard Inc. under the Senior Securities are secured, to the extent required by the related indentures, by mortgages on the principal U.S. properties of American Standard Inc. equally and ratably with the indebtedness under the 1995 Credit Agreement. The 1995 Credit Agreement contains various covenants that limit, among other things, mergers and asset sales, indebtedness, dividends on and redemption of capital stock of the Company, voluntary prepayment of certain other indebtedness, of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, the use of proceeds from asset sales, intercompany transactions and transactions with affiliates and certain other business activities. The covenants also require the Company to meet certain financial tests. The Company believes it is currently in compliance with the covenants contained in the 1995 Credit Agreement. 38 41 The indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales and certain other business activities. The Company believes it is currently in compliance with the covenants of those indentures. In November 1995 the Company acquired substantially all of the remaining outstanding common shares and convertible bonds of Etablissement Porcher ("Porcher"), a French manufacturer and distributor of plumbing products in which the Company previously had an ownership interest of 32.88%. The $25 million cost of the acquisition was funded with a borrowing under the Revolving Facilities. In addition $31 million of Porcher debt was assumed. In 1995 Porcher had sales of $216 million and was accounted for as an unconsolidated joint venture. In December 1995 the Company completed arrangements to establish air conditioning operations in the People's Republic of China ("PRC") through a holding company, A-S Air Conditioning Products Limited ("ASAP") in which a 64.4% owned subsidiary has a 50.4% ownership interest. The Company contributed to ASAP its 50% interest (valued at $10 million) in a Hong Kong joint venture (which imports and distributes air conditioning products) and is committed to contribute $20 million in cash, $8 million of which had been contributed as of December 31, 1995. Minority investors are committed to contribute $62 million, of which $26 million had been contributed as of December 31, 1995. In conjunction with the acquisition by ASAP of majority ownership positions in three manufacturing joint ventures, ASAP assumed debt of $21 million. NOTE 9. CAPITAL STOCK In the first quarter of 1995 American Standard Companies Inc. sold 15,112,300 shares of its common stock at $20 per share in its initial public offering (the "IPO"), which yielded net proceeds of $281 million (including proceeds from the exercised portion of the underwriters' over-allotment option and after deducting underwriting discounts and expenses) which were used to reduce indebtedness. The IPO and an amended bank credit agreement were both part of a major refinancing completed in the first quarter of 1995 (see Note 8). In September 1995 the Company completed a secondary offering (the "Secondary Offering" and together with the IPO, the "Offerings") of 22,500,000 shares of its common stock, substantially all of which shares were owned by Kelso ASI partners, L.P., ("ASI Partners"), the Company's largest stockholder. All of the shares sold in the Secondary Offering were previously issued and outstanding shares, and the Company received no proceeds therefrom. After the Offerings, ASI Partners owned approximately 27% of the outstanding common stock of the Company and for so long as ASI Partners continues to own at least 20% of the outstanding common stock, will retain the right to designate four nominees for election to the Company's eleven member Board of Directors. In December 1994 the Company adopted an Amended and Restated Stockholders Agreement and in January 1995 adopted a Restated Certificate of Incorporation, Amended By-laws and a Stockholder Rights Agreement. The Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock, par value $.01 per share and 2,000,000 shares of preferred stock, par value $.01 per share of which the Board of Directors designated 900,000 shares as a new series of Junior Participating Cumulative Preferred Stock. Each outstanding share of common stock has associated with it one right to purchase a specified amount of Junior Participating Cumulative Preferred Stock at a stipulated price in certain circumstances relating to changes in the ownership of the common stock of the Company. In January 1995 the Company established the Stock Incentive Plan (the "Stock Plan") under which awards may be granted to officers and other key executives and employees in the form of stock options, stock appreciation rights, restricted stock, or restricted units. The maximum number of shares or units that may be issued under the Stock Plan is 7,604,475. Stock options to purchase 4,998,000 shares at the initial public offering price of $20 per share were awarded to 39 42 approximately 900 employees in the first quarter of 1995. The awards vest ratably over three years and are exercisable over a period of ten years. A summary of changes in stock options during 1995 is as follows:
- --------------------------------------------------------------------------------------- Number Price of Shares per Share Initial awards granted in February 1995 4,998,000 $ 20.00 Other awards granted 8,000 $20.00-$26.50 Cancelled (32,000) $ 20.00 --------- Outstanding at December 31,1995 4,974,000 $20.00-$26.50 ========= As of December 31, 1995: Options exercisable None Available for grant 2,630,475
NOTE 10. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of selected financial instruments at December 31, 1995, approximates carrying amounts except as follows:
- -------------------------------------------------------------------------------- (Dollars in millions) Carrying Fair Amount Value 10-7/8% senior notes $150 $165 11-3/8% senior debentures 250 276 9-7/8% senior subordinated notes 200 216 10-1/2% senior subordinated discount debentures 579 635 9-1/4% sinking fund debentures 150 155
The fair values presented above are estimates as of December 31, 1995, and are not necessarily indicative of amounts the Company could realize or settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments. The fair values of the Company's 1995 Credit Agreement loans are estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures and sinking fund debentures are based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value. NOTE 11. RELATED PARTY TRANSACTIONS In 1993 and 1994 the Company paid Kelso and Company, L.P. ("Kelso"), an affiliate of ASI Partners, the Company's largest shareholder, an annual fee of $2.75 million for providing management consulting and advisory services. In December 1994 the Company paid Kelso a one-time fee of $20 million in connection with the amendment of certain agreements in anticipation of the Company's IPO, including an amendment eliminating future payments of the $2.75 million annual fee but providing for the continuation of such services. NOTE 12. COMMITMENTS AND CONTINGENCIES Future minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1995, were: 1996 - $54 million; 1997 - - $46 million; 1998 - $38 million; 1999 - $29 million; 2000 - $25 million; and thereafter - $46 million. Net rental expenses for operating leases were $59 million, $45 million, and $34 million for the years ended December 31, 1995, 1994, and 1993, respectively. The Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable as a result of such proceedings that the Company will incur costs which can be reasonably determined, the Company has recorded a liability. The Company believes that these legal, tax and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows or results of operations. The tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 5). NOTE 13. SEGMENT DATA Identifiable assets as of December 31, 1995, 1994 and 1993 and sales and operating income by geographic location for the years then ended are shown in the following tables. Sales and operating income by segment are shown in the Segment Data section of the Five Year Financial Summary on page 14. 40 43
Segment Data 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) Sales-Geographic distribution: United States $ 2,809 $ 2,465 $ 2,096 $ 1,877 $ 1,890 Europe 1,917 1,572 1,315 1,588 1,491 Other 692 550 483 392 317 Eliminations (197) (130) (64) (65) (103) ------- ------- ------- ------- ------- Total sales $ 5,221 $ 4,457 $ 3,830 $ 3,792 $ 3,595 ======= ======= ======= ======= ======= Operating Income-Geographic distribution: United States $ 244 $ 168 $ 125 $ 96 $ 13 Europe 243 144 118 180 206 Other 47 43 39 24 23 ------- ------- ------- ------- ------- Total operating income $ 534 $ 355 $ 282 $ 300 $ 242 ======= ======= ======= ======= ======= Assets Air Conditioning Products $ 1,432 $ 1,223 $ 1,167 $ 1,156 $ 1,174 Plumbing Products 1,088 957 960 1,002 1,069 Automotive Products 805 755 652 722 828 ------- ------- ------- ------- ------- Total identifiable assets $ 3,325 $ 2,935 $ 2,779 $ 2,880 $ 3,071 ======= ======= ======= ======= ======= Geographic distribution: United States $ 1,075 $ 1,025 $ 1,013 $ 1,016 $ 1,015 Europe 1,557 1,343 1,196 1,370 1,577 Other 693 567 570 494 479 ------- ------- ------- ------- ------- Total identifiable assets 3,325 2,935 2,779 2,880 3,071 Prepaid charges 39 64 78 51 37 Future income tax benefits 30 22 25 33 8 Cash and cash equivalents 89 93 53 113 108 Corporate assets 37 42 52 49 46 ------- ------- ------- ------- ------- Total assets $ 3,520 $ 3,156 $ 2,987 $ 3,126 $ 3,270 ======= ======= ======= ======= ======= Goodwill included in assets: Air Conditioning Products $ 334 $ 331 $ 337 $ 351 $ 369 Plumbing Products 302 295 296 320 363 Automotive Products 446 427 393 431 476 ------- ------- ------- ------- ------- Total goodwill $ 1,082 $ 1,053 $ 1,026 $ 1,102 $ 1,208 ======= ======= ======= ======= ======= Capital expenditures: Air Conditioning Products $ 70 $ 45 $ 38 $ 33 $ 46 Plumbing Products 93 55 46 48 40 Automotive Products 44 30 14 27 24 ------- ------- ------- ------- ------- Total capital expenditures $ 207 $ 130 $ 98 $ 108 $ 110 ======= ======= ======= ======= ======= Depreciation and amortization: Air Conditioning Products $ 51 $ 51 $ 53 $ 55 $ 56 Plumbing Products 50 64(a) 49 49 48 Automotive Products 42 39 35 37 34 ------- ------- ------- ------- ------- Total depreciation and amortization $ 143 $ 154 $ 137 $ 141 $ 138 ======= ======= ======= ======= =======
(a) Includes an asset loss provision of $14 million. 41 44
Quarterly Data (Unaudited) 1995 - ---------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except share data) First Second Third Fourth Sales $ 1,223.2 $ 1,370.8 $ 1,316.3 $ 1,311.2 Cost of sales 909.1 1,008.5 975.1 994.3 Income before income taxes and extraordinary item 45.4 85.0 67.0 29.5 Income taxes 18.9 35.5 23.6 7.1 ---------- ---------- ---------- ---------- Income before extraordinary item 26.5 49.5 43.4 22.4 Extraordinary loss on retirement of debt (30.1) -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (3.6) $ 49.5 $ 43.4 $ 22.4 ========== ========== ========== ========== Per common share: Income before extraordinary item $ .38 $ .65 $ .57 $ .29 Extraordinary loss on retirement of debt (.43) -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (.05) $ .65 $ .57 $ .29 ========== ========== ========== ========== Average number of common shares (thousands) 69,889 75,987 76,191 76,553 Range of prices on common stock: High $ 25 $ 28 1/4 $ 32 $ 31 7/8 Low $ 19 5/8 $ 24 1/4 $ 26 $ 26 1/4
1994 - ------------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except share data) First Second(a) Third Fourth(b) Sales $ 989.6 $ 1,130.5 $ 1,188.8 $ 1,148.6 Cost of sales 746.3 857.3 883.5 890.2 Income (loss) before income taxes and extraordinary item 3.4 3.5 26.2 (48.3) Income taxes 16.7 14.9 15.1 15.8 ---------- ---------- ---------- ---------- Income (loss) before extraordinary item (13.3) (11.4) 11.1 (64.1) Extraordinary loss on retirement of debt -- -- -- (8.7) ---------- ---------- ---------- ---------- Net income (loss) $ (13.3) $ (11.4) $ 11.1 $ (72.8) ========== ========== ========== ========== Per common share: Income (loss) before extraordinary item $ (.22) $ (.19) $ .19 $ (1.07) Extraordinary loss on retirement of debt -- -- -- (.15) ---------- ---------- ---------- ---------- Net income (loss) $ (.22) $ (.19) $ .19 $ (1.22) ========== ========== ========== ========== Average number of common shares (thousands) 59,804 59,977 59,954 59,999
(a) Results for the second quarter of 1994 included pre-tax charges of $40 million ($33 million after tax) related to employee severance, consolidation of production facilities, the implementation of cost reduction actions, and a provision for losses on operating assets expected to be disposed of prior to the expiration of their originally estimated useful lives. (b) The fourth quarter of 1994 included a one-time special charge of $20 million in connection with the amendment of certain agreements in anticipation of the initial public offering of the Company's common stock. 42 45 BOARD OF DIRECTORS Emmanuel A. Kampouris (C-Chairman) Chairman, President and Chief Executive Officer American Standard Companies Inc. Steven E. Anderson (A) (B) Retired National Partner in Charge - Industries KPMG Peat Marwick New York, NY Horst Hinrichs (C) Senior Vice President, Automotive Products American Standard Companies Inc. George H. Kerckhove (C) Senior Vice President, Plumbing Products American Standard Companies Inc. Shigeru Mizushima President, Chief Operating Officer and Director Daido Hoxan Inc. Tokyo, Japan Frank T. Nickell President and Director Kelso & Companies, Inc. New York, NY Roger W. Parsons (A-Chairman) (B) Group Managing Director Rea Brothers Group PLC London, United Kingdom J. Danforth Quayle (A) (B) Former Vice President of the United States Chairman, Circle Investors, Inc. Indianapolis, IN David M. Roderick Chairman Earle M. Jorgensen Company Brea, CA Retired Chairman USX Corporation Pittsburgh, PA John Rutledge Chairman Rutledge & Company, Inc. Founder and Chairman Claremont Economics Institute Greenwich, CT Joseph S. Schuchert (B-Chairman) (C) Chairman, Chief Executive Officer and Director Kelso & Companies, Inc. New York, NY Member of: (A) Audit Committee (B) Management Development and Nominating Committee (C) Executive Committee 43 46 OFFICERS Emmanuel A. Kampouris Chairman, President and Chief Executive Officer Horst Hinrichs Senior Vice President, Automotive Products George H. Kerckhove Senior Vice President, Plumbing Products Fred A. Allardyce Vice President and Chief Financial Officer Alexander A. Apostolopoulos Vice President and Group Executive, Plumbing Products, Americas International Thomas S. Battaglia Vice President and Treasurer Gary A. Brogoch Vice President and Group Executive, Plumbing Products, PRC Roberto Canizares M. Vice President, Air Conditioning Products, Asia-Pacific Region Wilfried Delker Vice President and Group Executive, Plumbing Products, Worldwide Fittings Adrian B. Deshotel Vice President, Human Resources Peter Enss Vice President, Automotive Products, Germany Cyril Gallimore Vice President, Systems and Technology Luigi Gandini Vice President, Special Projects Daniel Hilger Vice President, Air Conditioning Products, Middle East and Africa Region Frederick W. Jaqua Vice President, Special Counsel and Assistant Secretary Richard A. Kalaher Vice President, General Counsel and Secretary W. Craig Kissel Vice President and Group Executive, Air Conditioning Products, Unitary Products Group William A. Klug Vice President and Group Executive, Air Conditioning Products, International Jean-Claude Montauze Vice President, Automotive Products, France G. Eric Nutter Vice President and Group Executive, Plumbing Products, U.S. Raymond D. Pipes Vice President and Group Executive, Plumbing Products, Far East Bruce R. Schiller Vice President, Air Conditioning Products, Compressor Business James H. Schultz Vice President and Group Executive, Air Conditioning Products, North American Commercial Group G. Ronald Simon Vice President and Controller Benson I. Stein Vice President, General Auditor Wolfgang Voss Vice President and Group Executive, Plumbing Products, Europe Robert M. Wellbrock Vice President, Taxes 44 47 CORPORATE INFORMATION Corporate Headquarters P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 (908) 980-6000 Annual Meeting May 2, 1996, at 10:00 AM (EDT) Embassy Suites Hotel 121 Centennial Avenue Piscataway, NJ Transfer Agent and Registrar Citibank, N.A. 120 Wall Street New York, NY 10043 Stock Exchange Listing New York Stock Exchange Ticker Symbol: ASD Additional Information A copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission is available without charge. A copy may be requested from: Investor Relations Department P.O. Box 6820 One Centennial Ave. Piscataway, NJ 08855-6820 (908) 980-6038 45 48 AMERICAN ------ STANDARD ------ COMPANIES P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 (908) 980-6000 EX-21 4 LISTING OF HOLDING'S SUBSIDIARIES 1 (21) PARENTS AND SUBSIDIARIES AMERICAN STANDARD COMPANIES INC. (DELAWARE) - REGISTRANT
Subsid- iaries* U.S. SUBSIDIARIES: American Standard Inc. (Delaware) - Immediate Parent The American Chinaware Company (Delaware) American Standard Credit Inc. (Delaware) American Standard International Inc. (Delaware) Amstan Trucking Inc. (Delaware) A-S Energy, Inc. (Texas) A-S Thai Holdings Ltd. (Delaware) It Holdings Inc. (Delaware) Reefco Inc. (Delaware) Standard Compressors Inc. (Delaware) Standard Sanitary Manufacturing Company (Delaware) The Trane Company (Delaware) Trane Export, Inc. (Delaware) WABCO Automotive Control Systems Inc. (Delaware) WABCO Company (Pennsylvania) World Standard Ltd. (Delaware) (American Standard Inc., American Standard International Inc., WABCO Company and Standard Sanitary Manufacturing Company - Immediate Parents) Nether Holdings Inc. (Delaware) FOREIGN SUBSIDIARIES: Air Conditioning Products (Wabco Standard French Holdings SNC - Immediate Parent) Societe Trane (France) (The Trane Company - Immediate Parent) Trane S.A. (Switzerland) (American Standard (U.K.) Limited - Immediate Parent) Trane Limited (U.K.) Trane (United Kingdom) Limited Trane (Scotland) Limited Transportation Products (WABCO Standard GmbH, Nether Holdings Inc., Reefco Inc. and Ideal Standard S.p.A. - Immediate Parents) WABCO Standard TRANE B.V. (Netherlands) WABCO Standard French Holdings SNC (France) WABCO Westinghouse S.A. (France) WABCO Westinghouse Equipements Automobiles SNC (France) WABCO Westinghouse AB (Sweden) WABCO Westinghouse AG (Switzerland) WABCO Westinghouse G.m.b.H. (Austria) WABCO Westinghouse S.A.-N.V. (Belgium) WABCO Westinghouse B.V. (Netherlands) 1
15 2 (Ideal Standard S.p.A. and Nether Holdings Inc. - Immediate Parents) American Standard (U.K.) Limited (England) Clayton Dewandre Holdings Limited (England) WABCO Automotive UK Limited (England) The Bridge Foundry Company Limited (England) (Ideal Standard S.p.A.- Immediate Parent) WABCO Westinghouse Automotive Products S.p.A. (Italy)
PARENTS AND SUBSIDIARIES - (Continued) Subsid- iaries* Transportation Products - (Continued) (Wabco Standard Trane Inc. - Immediate Parent) Westinghouse Air Brake Brasil S.A. (Brazil) (Nether Holdings Inc., American Standard International Inc., Standard Sanitary Manufacturing Company - Immediate Parents) WABCO-Standard GmbH (Germany) WABCO GmbH (Germany) Perrot Bremsen GmbH (Germany) Building Products (American Standard Inc. - Immediate Parent) American Standard Sanitaryware (Thailand) Public Company Limited (Thailand) EBS Eczacibasi Banyo Kuvetleri Sanayi Ve Ticaret A.S. (Turkey) Egyptian American Sanitary Wares Co. S.A.E. (Egypt) American Standard Philippine Holdings Inc. (Philippines) Sanitary Wares Manufacturing Corporation (Philippines) Waterex Inc. (Japan) (Wabco Standard French Holdings SNC - Immediate Parent) Ideal-Standard S.A. (France) (Westinghouse Air Brake Brasil S.A. - Immediate Parent) Ideal Standard Wabco Industria e Comercio Ltda. (Brazil) (a) (American Standard (U.K.) Limited - Immediate Parent) Ideal-Standard Limited (England) (Nether Holdings Inc. - Immediate Parent) WABCO Standard Trane Inc. (Canada) (b) Ideal-Standard, S.A. de C.V. (Mexico) 1 (Nether Holdings Inc., WABCO Standard Trane B.V. - Immediate Parents) Ideal Standard S.p.A. (Italy) Ideal Standard S.A. (Greece) Sanistan B.V. (Netherlands) (Nether Holdings Inc., American Standard International Inc. and Standard Sanitary Manufacturing Company - Immediate Parents) WABCO-Standard GmbH (Germany)
16 3 Ideal-Standard GmbH (Germany) American Standard Korea, Inc. (Korea) Miscellaneous Standard Europe (EEIG)(France) (c) All of the companies listed above operate under their company names and use one or more of the trademarks listed under "Patents and Trademarks" of Item 1 of this annual report on Form 10-K. * The number shown under this heading indicates other subsidiaries, not listed by name herein, which are in the same line of business. The name of the immediate parent of such subsidiary or subsidiaries appears opposite the number. 17 4 PARENTS AND SUBSIDIARIES - (Continued) (a) This subsidiary participates in Building Products and Transportation Products. (b) This subsidiary participates in Building Products and Air Conditioning Products. (c) A European Economic Interest Grouping organized by certain French and Italian subsidiaries of the Company. There are omitted from the table a number of minor or inactive or name-saving subsidiaries, all of which together would not constitute a significant subsidiary. 18 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 83,528 5,176 798,354 27,330 362,340 1,294,926 1,438,052 513,560 3,519,647 1,306,602 1,770,098 0 0 0 (390,063) 3,519,647 5,221,476 5,221,476 3,687,024 3,687,024 40,489 4,922 213,326 226,854 85,070 141,784 0 (30,129) 0 111,655 1.50 0
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