SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-14557
U.S. INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 22-3568449
incorporation or organization) (I.R.S.Employer Identification No.)
101 Wood Avenue South
Iselin, NJ 08830
(Address of principal executive offices)
(732) 767-0700
(Registrant's telephone number, including area code)
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 |_|
As of May 1, 1999, U.S. Industries, Inc. had one class of common stock, of
which 92,535,997 shares were outstanding.
<PAGE>
U.S. INDUSTRIES, INC.
INDEX
Page
No.
---
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Operations for the
Three and Six Months Ended March 31, 1999 and 1998 .......... 1
Consolidated Balance Sheets, March 31, 1999
and September 30, 1998 ...................................... 2
Consolidated Statements of Cash Flows
for the Six Months Ended March 31, 1999 and 1998 ............ 3
Notes to Consolidated Financial Statements .................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................. 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 25
SIGNATURES .................................................................. 26
<PAGE>
PART 1. FINANCIAL INFORMATION.
Item 1. Financial Statements.
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 848 $ 790 $ 1,598 $ 1,485
Operating costs and expenses:
Cost of products sold 594 556 1,120 1,039
Selling, general and administrative expenses 182 159 353 308
------- ------- ------- -------
Operating income 72 75 125 138
Interest expense 19 17 37 33
Interest income (1) (2) (2) (4)
Other income, net -- (1) -- (1)
------- ------- ------- -------
Income before income taxes and discontinued operations 54 61 90 110
Provision for income taxes 22 25 36 46
------- ------- ------- -------
Income from continuing operations 32 36 54 64
Loss from discontinued operations, net of tax (14) (3) (13) --
------- ------- ------- -------
Net Income $ 18 $ 33 $ 41 $ 64
======= ======= ======= =======
Earnings (loss) per basic share:
Income from continuing operations $ 0.33 $ 0.38 $ 0.56 $ 0.68
Loss from discontinued operations (0.14) (0.03) (0.13) --
------- ------- ------- -------
Net income $ 0.19 $ 0.35 $ 0.43 $ 0.68
======= ======= ======= =======
Earnings (loss) per diluted share:
Income from continuing operations $ 0.33 $ 0.37 $ 0.55 $ 0.66
Loss from discontinued operations (0.14) (0.03) (0.13) --
------- ------- ------- -------
Net income $ 0.19 $ 0.34 $ 0.42 $ 0.66
======= ======= ======= =======
Cash dividend declared per share $ 0.05 $ 0.05 $ 0.10 $ 0.10
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
March 31, September 30,
--------- -------------
1999 1998
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 32 $ 44
Trade receivables, net 655 609
Inventories 608 539
Deferred income taxes 74 75
Net assets held for disposition 97 143
Other current assets 74 73
------ ------
Total current assets 1,540 1,483
Property, plant and equipment, net 535 508
Deferred income taxes 16 16
Other assets 208 220
Goodwill, net 617 549
------ ------
$2,916 $2,776
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10 $ 15
Current maturities of long-term debt 3 4
Trade accounts payable 236 247
Accrued expenses and other liabilities 262 301
Income taxes payable 46 40
------ ------
Total current liabilities 557 607
Long-term debt 1,189 947
Other liabilities 270 262
------ ------
Total liabilities 2,016 1,816
Commitments and contingencies
Stockholders' equity 900 960
------ ------
$2,916 $2,776
====== ======
See notes to consolidated financial statements.
2
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions-unaudited)
Six Months Ended
March 31,
---------
1999 1998
---- ----
OPERATING ACTIVITIES:
Income from continuing operations $ 54 $ 64
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
of continuing operations:
Depreciation and amortization 47 37
Provision for doubtful accounts 2 2
Gain on sale of excess real estate -- (3)
Changes in operating assets and liabilities,
excluding the effects of acquisitions and dispositions (87) (79)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF
CONTINUING OPERATIONS 16 21
------- -------
Loss from discontinued operations (13) --
Decrease (increase) in net assets held for disposition 36 (58)
------- -------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 23 (58)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 39 (37)
------- -------
INVESTING ACTIVITIES:
Proceeds from sale of businesses 23 10
Acquisition of companies, net of cash acquired (168) (103)
Purchases of property, plant and equipment (49) (46)
Proceeds from sale of excess real estate -- 9
Proceeds from sales of property, plant and equipment 2 12
Other investing activities, net (3) (2)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (195) (120)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt 1,029 676
Repayment of long-term debt (776) (486)
Repayment of notes payable, net (4) (3)
Payment of dividends (10) (10)
Proceeds from exercise of stock options -- 12
Purchase of treasury stock (80) (35)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 159 154
------- -------
Effect of exchange rate changes on cash (15) (3)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (12) (6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44 67
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32 $ 61
======= =======
See notes to consolidated financial statements.
3
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Note 1-Basis of Presentation
In June of 1998, U.S. Industries, Inc. ("USI") merged with Zurn
Industries, Inc. ("Zurn"), hereafter collectively referred to as the Company, in
a transaction accounted for as a pooling of interest. Accordingly, all periods
are presented as if USI and Zurn had always been combined. The Company
manufactures and distributes a broad range of consumer and industrial products.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information,
Article 10 of Regulation S-X and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial data for the three and six months ended March 31, 1999 and
1998 are unaudited and, in the opinion of management, reflect all necessary
adjustments for a fair presentation of the financial position and results of
operations for the interim periods on a consistent basis. Such adjustments were
of a normal and recurring nature. The results of operations for the three and
six months periods ended March 31, 1999 are not necessarily indicative of those
for the full fiscal year ending October 2, 1999. For further information, refer
to the Consolidated Financial Statements and footnotes thereto included in the
USI Annual Report on Form 10-K\A for the year ended September 30, 1998.
The Company's fiscal year ends on the Saturday nearest to September 30.
All three and six month data contained herein reflect results of operations for
the 13-week periods and 26 and 27 week periods ended on the Saturday closest to
March 31, 1999 and 1998, respectively, but are presented as of such date for
convenience.
Note 2-Inventories
Inventories consist of the following:
(in millions)
March 31, September 30,
--------- -------------
1999 1998
---- ----
(unaudited)
Finished products $ 300 $ 250
Work-in process 113 109
Raw materials 195 180
------ ------
$ 608 $ 539
====== ======
4
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 3-Long-Term Debt
Long-term debt consists of the following:
(in millions)
March 31, September 30,
--------- -------------
1999 1998
---- ----
(unaudited)
7.125% Senior Notes, net $ 247 $ --
7.25% Senior Notes, net 123 123
Revolving credit facility, US dollar 400 300
Revolving credit facility, foreign currencies 161 156
Short-term committed note 212 200
Other long-term debt 49 172
------- ------
1,192 951
Less current maturities (3) (4)
------- ------
Long-term debt $ 1,189 $ 947
======= ======
In October 1998, USI and USI American Holdings, Inc. ("USIAH"), a wholly
owned subsidiary, jointly issued $250 million aggregate principal amount of
Senior Notes due October 15, 2003, which bear interest at 7.125%, payable
semiannualy (the "7.125% Notes"). The net cash proceeds of $247 million, after
transaction fees and discounts, were used to repay a $200 million short-term
note and $47 million in borrowings under uncommitted bank credit lines. In
January 1999, the Company filed a registration statement with the Securities and
Exchange Commission to exchange the 7.125% Notes, which were not registered
under the Securities Act of 1933, for registered notes having substantially the
same terms.
The 7.25% Notes and the 7.125% Notes (collectively, the Notes) and
revolving credit facility are unsecured and guaranteed by USI Atlantic (see Note
11). The Notes are redeemable at the option of the Company.
In April 1999, USIAH transferred substantially all of its assets and
liabilities to a new wholly owned subsidiary of USI named USI Global Corp. in
exchange for preferred stock in USI Global Corp. In connection with the asset
transfer, USI Global Corp. assumed joint and several obligations under the 7.25%
Notes, the 7.125% Notes and the Credit Facility, equally with USI and USIAH.
Neither USI nor USIAH, nor USI Atlantic as guarantor, was released from its
obligations under the 7.25% Notes, the 7.125% Notes or the Credit Agreement in
connection with the transfer of assets to USI Global Corp.
Note 4-Commitments and Contingencies
The Company is subject to a wide range of environmental protection laws.
The Company has remedial and investigatory activities underway at approximately
41 sites. In addition, the Company has been named as a Potentially Responsible
Party ("PRP") at 19 "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or comparable
statutes.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP's, to the extent of contamination and
the nature of required remedial actions. Such reserves are adjusted as further
information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present fair
value. Recoveries of environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable.
5
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 4-Commitments and Contingencies (Continued)
Management expects that the amount accrued will be paid out over the
periods of remediation for the applicable sites which range up to 30 years and
that all such reserves are adequate based on all current data. Each of the sites
in question is at various stages of investigation or remediation; however, no
information currently available reasonably suggests that projected expenditures
associated with remedial action or compliance with environmental laws, for any
single site or for all sites in the aggregate, will have a material adverse
affect on the Company's financial condition, results of operations or cash
flows.
At March 31, 1999, the Company had accrued $18 million for known
environmental related matters. The Company believes that the range of liability
for such matters is between $9 million and $29 million.
In the normal course of business, financial and performance guarantees are
made in connection with engineering and construction contracts and a liability
is recognized when a probable loss occurs.
Also, certain of the Company's subsidiaries are defendants or plaintiffs
in lawsuits that have arisen in the normal course of business. While certain of
these matters involve substantial amounts, it is management's opinion, based on
the advice of counsel, that the ultimate resolution of such litigation will not
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
Note 5-Comprehensive Income
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. Reclassification of financial statements
for prior periods is required. Comprehensive income is net income and other
items, which may include foreign currency translation adjustments, minimum
pensions liability adjustments, and unrealized gains and losses on marketable
securities classified as available-for-sale. The Company's total comprehensive
income was as follows:
<TABLE>
<CAPTION>
(in millions - unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 18 $ 33 $ 41 $ 64
Unrealized gain on marketable securities -- 1 -- 1
Foreign currency translation adjustment (14) (4) (16) (7)
---- ---- ---- ----
Total comprehensive income $ 4 $ 30 $ 25 $ 58
==== ==== ==== ====
</TABLE>
6
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 6-Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share calculation:
<TABLE>
<CAPTION>
(in millions except per share)
(unaudited)
-----------
Income from Income from
Continuing Per Share Continuing Per Share
Operations Shares Amount Operations Shares Amount
----------- ------ --------- ----------- ------ ---------
For the Three Months Ended For the Six Months Ended
March 31, 1999 March 31, 1999
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per basic share $ 32 95.0 $ 0.33 $ 54 95.8 $ 0.56
Effect of dilutive securities
Stock options 0.8 0.7
Nonvested restricted stock 1.0 0.9
---- ---- ------ ---- ---- ------
Earnings per diluted share $ 32 96.8 $ 0.33 $ 54 97.4 $ 0.55
==== ==== ====== ==== ==== ======
<CAPTION>
For the Three Months Ended For the Six Months Ended
March 31, 1998 March 31, 1998
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per basic share $ 36 94.8 $ 0.38 $ 64 93.8 $ 0.68
Effect of dilutive securities
Stock options 1.8 1.7
Nonvested restricted stock 1.3 1.5
---- ---- ------ ---- ---- ------
Earnings per diluted share $ 36 97.9 $ 0.37 $ 64 97.0 $ 0.66
==== ==== ====== ==== ==== ======
</TABLE>
Diluted common shares include shares that would be outstanding assuming
the fulfillment of conditions that would remove the restriction on nonvested
shares and the exercise of stock options. Options to purchase approximately 1.3
million and 1.9 million shares in the three and six months ended March 31, 1999
and options to purchase approximately 0.1 million shares in the three and six
months ended March 31, 1998 were not included in the computation of earnings per
share because the options exercise prices were greater than the average market
price of the common shares.
7
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 7-Merger, Restructuring and Other Related Costs
During fiscal 1998, as a result of reviewing its long-term strategy in
conjunction with the Zurn merger, the Company recorded a restructuring charge in
order to improve efficiency and enhance competitiveness. At March 31, 1999, $12
million of cash related restructuring charges remained in accrued liabilities,
detailed as follows:
<TABLE>
<CAPTION>
(in millions)
Lease and Merger
Contract Severance and Other
Related and Related Related Total
Costs Costs Costs Costs
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
1998 activity:
Initial Charges $ 3 $ 22 $ 27 $ 52
Cash payments - (6) (24) (30)
--- ---- ---- ----
Balance at September 30, 1998 3 16 3 22
1999 activity:
Cash payments (1) (9) - (10)
--- ---- ---- ----
Balance at March 31, 1999 $ 2 $ 7 $ 3 $ 12
=== ==== ==== ====
</TABLE>
Note 8-Acquisitions
In March 1999, the Company purchased the assets of True Temper Hardware
Company ("True Temper") for approximately $100 million in cash, resulting in
goodwill of $27 million. True Temper manufactures lawn and garden tools and
wheelbarrows. The results of True Temper are included in USI Hardware and Tools.
In March 1999, the Company purchased the assets of the Dual-Lite business
("Dual-Lite") for approximately $47 million in cash, resulting in goodwill of
$36 million. Dual-Lite manufactures emergency lights, and central inverter
systems. The results of Dual-Lite are included in Lighting Corporation of
America.
In January 1999, the Company purchased the Bowers Group PLC ("Bowers") for
approximately $16 million in cash, resulting in goodwill of $10 million. Bowers
manufactures metrology instruments and hardness equipment. The results of Bowers
are included in USI Hardware and Tools.
In January 1999, the Company purchased Atech Turbine Components, Inc.
("Atech") for approximately $7 million in cash, resulting in goodwill of $6
million. Atech repairs and overhauls small aviation engines. The results of
Atech are included in USI Diversified.
The proforma effect of these acquisitions and the aggregate assets
acquired and liabilities assumed is not material. These acquisitions have been
accounted for as purchases, and as such, their results of operations have been
included in the financial statements from the date of acquisition. These
transactions are subject to customary post closing adjustments, and the
allocation of purchase price may be subject to adjustment upon receipt of final
valuation information and management's final estimates as to the fair value of
the respective assets acquired and liabilities assumed.
8
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 9-Discontinued Operations
During April 1999, the Company completed the sale of its investment in
Teardrop Golf. The Company realized a $1 million net of tax gain from the sale,
which will be recorded, as a gain from discontinued operations during the third
quarter of fiscal 1999.
In January of 1999, the Company completed the sale of its remaining
interest in the Power Systems Segment for gross proceeds of approximately $30
million. No gain or loss was recorded on the transaction due to uncertainties
related to contingent liabilities regarding this transaction and other matters.
In the second quarter of fiscal 1999, the Company adopted a formal plan to
dispose of the Ertl Company Inc. ("Ertl"), which was sold in April for gross
proceeds of approximately $105 million subject to a post closing adjustment.
This resulted in a net-of-tax loss of $12 million in March of 1999.
The following is a summary of the operating results of the businesses
classified as discontinued operations:
(in millions-unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales $ 31 $ 59 $ 77 $113
Pre-tax income (loss) $ (3) $ 2 $ (1) $ 7
Amounts classified as net assets held for disposition relate to the
businesses referred to as discontinued operations and primarily consist of the
net assets of Ertl after accrual for the net-of-tax loss on disposition:
<TABLE>
<CAPTION>
(in millions)
March 31, September 30,
--------- -------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net current assets $ 49 $ 68
Property, plant and equipment, net 26 30
Other non-current liabilities, net 22 45
---- ----
Net assets held for disposition $ 97 $143
==== ====
</TABLE>
9
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 10-Subsequent Events
On May 18, 1999, the Company announced that its Board of Directors had
approved a spinoff of its diversified businesses to USI shareholders. Completion
of the spinoff is conditioned upon our receipt of approximately $600 million of
proceeds from new third party financing by the new USI Diversified Company,
principally through its repayment of existing intercompany debt. Completion of
the spinoff is also subject to receipt of a tax ruling from the Internal Revenue
Service that the distribution will be tax free to USI shareholders. The spinoff
will become effective after receipt of the tax ruling. There is no certainty
that the IRS will rule favorably with respect to the Company's request. If the
IRS does not rule favorably, the Company would reconsider its then available
alternatives. The Company anticipates the IRS ruling will be received within
four to six months but no later than one year. The Company will account for its
diversified businesses as discontinued operations if and when we receive a
favorable ruling.
Note 11-Supplemental Guarantor Financial Information
The following represents the supplemental consolidating condensed
financial statements of USI, USI Global and USIAH which are the jointly
obligated issuers of the Notes, and USI Atlantic, which is the guarantor of the
Notes, and their non-guarantor subsidiaries, as of March 31, 1999 and September
30, 1998 and for the three and six months ended March 31, 1999 and 1998. USI
Atlantic was the parent company prior to the Merger in 1998 (see Note 1).
Separate consolidated financial statements of USI, USI Global, USI Atlantic and
USIAH are not presented, as management has determined that they would not be
material to investors.
<TABLE>
<CAPTION>
(in millions-unaudited)
For the Three Months Ended March 31, 1999
--------------------------------------------------------------------------------
USI USI Nonguarantor
USI Global Atlantic USIAH Subsidiaries Eliminations Consolidated
--- ------ -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ -- $-- $ -- $ -- $ 848 $ -- $ 848
Operating costs and expenses:
Cost of products sold -- -- -- -- 594 -- 594
Selling, general and administrative expenses 7 -- -- -- 175 -- 182
----- --- ----- ----- ----- ----- -----
Operating income (loss) (7) -- -- -- 79 -- 72
Interest expense 7 -- -- 9 3 -- 19
Interest income -- -- -- -- (1) -- (1)
Intercompany interest, net (3) -- -- (15) 18 -- --
Equity in earnings of investees, net (24) -- (9) (6) -- 39 --
----- --- ----- ----- ----- ----- -----
Income before income taxes and
discontinued operations 13 -- 9 12 59 (39) 54
Provision for income taxes (5) -- -- 3 24 -- 22
----- --- ----- ----- ----- ----- -----
Income from continuing operations 18 -- 9 9 35 (39) 32
Discontinued operations, net of tax -- -- -- -- (14) -- (14)
----- --- ----- ----- ----- ----- -----
Net income $ 18 $-- $ 9 $ 9 $ 21 $ (39) $ 18
===== === ===== ===== ===== ===== =====
</TABLE>
10
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions-unaudited)
For the Six Months Ended March 31, 1999
---------------------------------------------------------------------------------
USI USI Nonguarantor
USI Global Atlantic USIAH Subsidiaries Eliminations Consolidated
--- ------ -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ -- $ -- $ -- $ -- $ 1,598 $ -- $ 1,598
Operating costs and expenses: --
Cost of products sold -- -- -- -- 1,120 -- 1,120
Selling, general and administrative expenses 12 -- -- -- 341 -- 353
------- ------- ------- ------- ------- ------- -------
Operating income (loss) (12) -- -- -- 137 -- 125
Interest expense 13 -- -- 18 6 -- 37
Interest income -- -- -- -- (2) -- (2)
Intercompany interest, net (6) -- -- (28) 34 -- --
Equity in earnings of investees, net (52) -- (29) (23) -- 104 --
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
discontinued operations 33 -- 29 33 99 (104) 90
Provision for income taxes (8) -- -- 4 40 -- 36
------- ------- ------- ------- ------- ------- -------
Income from continuing operations 41 -- 29 29 59 (104) 54
Discontinued operations, net of tax -- -- -- -- (13) -- (13)
------- ------- ------- ------- ------- ------- -------
Net income $ 41 $ -- $ 29 $ 29 $ 46 $ (104) $ 41
======= ======= ======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions-unaudited)
For the Three Months Ended March 31, 1998
--------------------------------------------------------------
USI Nonguarantor
Atlantic USIAH Subsidiaries Eliminations Consolidated
-------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ -- $ 790 $ -- $ 790
Operating costs and expenses:
Cost of products sold -- -- 556 -- 556
Selling, general and administrative expenses 1 6 152 -- 159
----- ----- ----- ----- -----
Operating income (loss) (1) (6) 82 -- 75
Interest expense -- 12 5 -- 17
Interest income -- -- (2) -- (2)
Intercompany interest, net -- (16) 16 -- --
Other (income) expense, net -- -- (1) -- (1)
Equity in earnings of investees, net (33) (32) -- 65 --
----- ----- ----- ----- -----
Income before income taxes and
discontinued operations 32 30 64 (65) 61
Provision for income taxes (1) (1) 27 -- 25
----- ----- ----- ----- -----
Income from continuing operations 33 31 37 (65) 36
Discontinued operations, net of tax -- -- (3) -- (3)
----- ----- ----- ----- -----
Net income $ 33 $ 31 $ 34 $ (65) $ 33
===== ===== ===== ===== =====
</TABLE>
12
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions-unaudited)
For the Six Months Ended March 31, 1998
---------------------------------------------------------------------
USI Nonguarantor
Atlantic USIAH Subsidiaries Eliminations Consolidated
-------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ -- $ 1,485 $ -- $ 1,485
Operating costs and expenses:
Cost of products sold -- -- 1,039 1,039
Selling, general and administrative
expenses 2 12 294 308
------- ------- ------- ------- -------
Operating income (loss) (2) (12) 152 -- 138
Interest expense -- 22 11 33
Interest income -- -- (4) (4)
Intercompany interest, net -- (31) 31 --
Other (income) expense, net -- -- (1) (1)
Equity in earnings of investees, net (65) (57) -- 122 --
------- ------- ------- ------- -------
Income before income taxes and
discontinued operations 63 54 115 (122) 110
Provision for income taxes (1) (1) 48 46
------- ------- ------- ------- -------
Income from continuing operations 64 55 67 (122) 64
Discontinued operations, net of tax -- -- -- -- --
------- ------- ------- ------- -------
Net income $ 64 $ 55 $ 67 $ (122) $ 64
======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions - unaudited)
At March 31, 1999
--------------------------------------------------------------------
USI USI Nonguarantor Consoli-
USI Global Atlantic USIAH Subsidiaries Eliminations dated
--- ------ -------- ----- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ -- $ 32 $ -- $ 32
Trade receivables, net -- -- -- -- 655 655
Inventories -- -- -- -- 608 608
Deferred income taxes 38 -- -- -- 36 74
Net assets held for disposition -- -- -- -- 97 97
Other current assets 3 -- -- 1 70 74
------- ------- ------- ------- ------- ------- -------
Total current assets 41 -- -- 1 1,498 -- 1,540
Property, plant and equipment, net -- -- -- -- 535 535
Deferred income taxes 10 -- -- -- 6 16
Other assets 7 -- -- -- 201 208
Goodwill, net -- -- -- -- 617 617
Investments in subsidiaries 1,228 47 900 1,175 -- (3,350) --
Intercompany receivable (payable), net 188 -- 33 444 (665) --
------- ------- ------- ------- ------- ------- -------
Total assets $ 1,474 $ 47 $ 933 $ 1,620 $ 2,192 $(3,350) $ 2,916
======= ======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ -- $ -- $ -- $ 10 $ -- $ 10
Current maturities of long-term debt -- -- -- -- 3 3
Trade accounts payable 1 -- -- -- 235 236
Accrued expenses and other liabilities 9 -- -- 28 225 262
Income taxes payable 38 -- -- -- 8 46
------- ------- ------- ------- ------- ------- -------
Total current liabilities 48 -- -- 28 481 -- 557
Long-term debt 526 -- -- 618 45 1,189
Other liabilities -- -- -- 74 196 270
------- ------- ------- ------- ------- ------- -------
Total liabilities 574 -- -- 720 722 -- 2,016
Stockholders' equity 900 47 933 900 1,470 (3,350) 900
------- ------- ------- ------- ------- ------- -------
Total liabilities and stockholders' equity $ 1,474 $ 47 $ 933 $ 1,620 $ 2,192 $(3,350) $ 2,916
======= ======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions)
At September 30, 1998
-----------------------------------------------------------
USI Nonguarantor Consoli-
USI Atlantic USIAH Subsidiaries Eliminations dated
--- -------- ----- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ 44 $ -- $ 44
Trade receivables, net -- -- -- 609 609
Inventories -- -- -- 539 539
Deferred income taxes 45 -- -- 30 75
Net assets held for disposition -- -- -- 143 143
Other current assets -- -- 11 62 73
------- ------- ------- ------- ------- -------
Total current assets 45 -- 11 1,427 -- 1,483
Property, plant and equipment, net -- -- -- 508 508
Deferred income taxes 8 -- -- 8 16
Other assets -- -- 7 213 220
Goodwill, net -- -- -- 549 549
Investments in subsidiaries 996 745 1,221 -- (2,962) --
Intercompany receivable (payable), net (51) 277 245 (471) --
------- ------- ------- ------- ------- -------
Total assets $ 998 $ 1,022 $ 1,484 $ 2,234 $(2,962) $ 2,776
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ -- $ -- $ 15 $ -- $ 15
Current maturities of long-term debt -- -- -- 4 4
Trade accounts payable -- 2 -- 245 247
Accrued expenses and other liabilities 5 6 43 247 301
Income taxes payable 33 -- -- 7 40
------- ------- ------- ------- ------- -------
Total current liabilities 38 8 43 518 -- 607
Long-term debt -- 270 629 48 947
Other liabilities -- -- 67 195 262
------- ------- ------- ------- ------- -------
Total liabilities 38 278 739 761 -- 1,816
Stockholders' equity 960 744 745 1,473 (2,962) 960
------- ------- ------- ------- ------- -------
Total liabilities and stockholders' equity $ 998 $ 1,022 $ 1,484 $ 2,234 $(2,962) $ 2,776
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions - unaudited)
For the Six Months Ended March 31, 1999
-------------------------------------------------------------------------
USI USI Nonguarantor Consol-
USI Global Atlantic USIAH Subsidiaries Eliminations idated
--- ------ -------- ----- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) $ (3) $-- $ (8) $ 15 $ 35 $ -- $ 39
OPERATING ACTIVITIES
INVESTING ACTIVITIES:
Proceeds from sale of businesses -- -- -- -- 23 23
Acquisition of companies, net of cash acquired (121) (47) -- -- -- (168)
Purchases of property, plant and equipment -- -- -- -- (49) (49)
Proceeds from sale of excess real estate -- -- -- -- -- --
Proceeds from sales of property, plant and equipment -- -- -- -- 2 2
Net transfers with subsidiaries (42) -- 13 -- -- 29 --
Other investing activities -- -- -- -- (3) (3)
------- --- ------- ------- ------- ------- -------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (163) (47) 13 15 8 29 (195)
FINANCING ACTIVITIES:
Proceeds from long-term debt 765 -- -- 264 -- 1,029
Repayment of long-term debt (509) -- -- (264) (3) (776)
Repayment of notes payable, net -- -- -- -- (4) (4)
Payment of dividends (10) -- -- -- -- (10)
Proceeds from exercise of stock options -- -- -- -- -- --
Purchase of treasury stock (80) -- -- -- -- (80)
Net transfers with parent -- 47 (5) (13) -- (29) --
------- --- ------- ------- ------- ------- -------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES 166 47 (5) (13) (7) (29) 159
Effect of exchange rate changes on cash -- -- -- (2) (13) (15)
------- --- ------- ------- ------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS -- -- -- -- (12) -- (12)
Cash and cash equivalents at beginning of period -- -- -- -- 44 -- 44
------- --- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ -- $-- $ -- $ -- $ 32 $ -- $ 32
======= === ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 11-Supplemental Guarantor Financial Information (Continued)
<TABLE>
<CAPTION>
(in millions - unaudited)
For the Six Months Ended March 31, 1998
------------------------------------------------------------------
USI Nonguarantor
Atlantic USIAH Subsidiaries Eliminations Consolidated
-------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) $ (21) $ (4) $ (12) $ -- $ (37)
OPERATING ACTIVITIES
INVESTING ACTIVITIES:
Proceeds from sale of businesses -- -- 10 10
Acquisition of companies, net of cash acquired -- -- (103) (103)
Purchases of property, plant and equipment -- -- (46) (46)
Proceeds from sale of excess real estate -- -- 9 9
Proceeds from sales of property, plant and equipment -- -- 12 12
Net transfers with subsidiaries 54 (151) -- 97 --
Other investing activities -- -- (2) (2)
----- ----- ----- ----- -----
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES 54 (151) (120) 97 (120)
FINANCING ACTIVITIES:
Proceeds from long-term debt -- 563 113 676
Repayment of long-term debt -- (379) (107) (486)
Repayment of notes payable, net -- -- (3) (3)
Payment of dividends (10) -- -- (10)
Proceeds from exercise of stock options 12 -- -- 12
Purchase of treasury stock (35) (35)
Net transfers with parent -- (63) 160 (97) --
----- ----- ----- ----- -----
NET CASH (USED IN) PROVIDED BY (33) 121 163 (97) 154
FINANCING ACTIVITIES
Effect of exchange rate changes on cash -- (1) (2) (3)
----- ----- ----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS -- (35) 29 -- (6)
Cash and cash equivalents at beginning of period -- 35 32 -- 67
----- ----- ----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ -- $ -- $ 61 $ -- $ 61
===== ===== ===== ===== =====
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In June of 1998, U.S. Industries, Inc. ("USI") merged with Zurn
Industries, Inc. ("Zurn"), hereafter collectively referred to as the Company, in
a transaction accounted for as a pooling of interest. Accordingly, all periods
are presented as if USI and Zurn had always been combined. The Company's
operations are grouped into four segments: USI Bath and Plumbing Products,
Lighting Corporation of America, USI Hardware and Tools and USI Diversified. The
results of all operations sold or classified as discontinued, are excluded from
the table below for all periods presented and are discussed separately under
Discontinued Operations.
Results of Operations
<TABLE>
<CAPTION>
(in millions) (in millions)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales
Bath and Plumbing Products .... $ 294 $ 252 $ 558 $ 479
Lighting Corporation of America 195 190 387 379
Hardware and Tools ............ 154 120 255 189
Diversified ................... 205 228 398 438
------- ------- ------- -------
Total Net Sales ............. $ 848 $ 790 $ 1,598 $ 1,485
======= ======= ======= =======
Operating Income
Bath and Plumbing Products .. $ 33 $ 27 $ 57 $ 51
Lighting Corporation of America 9 12 20 24
Hardware and Tools .......... 13 11 17 14
Diversified ................. 23 31 42 62
------- ------- ------- -------
78 81 136 151
Corporate expenses ............ (6) (6) (11) (13)
------- ------- ------- -------
Total Operating Income .... $ 72 $ 75 $ 125 $ 138
======= ======= ======= =======
</TABLE>
Disclosure Concerning Forward-Looking Statements
All statements, other than statements of historical fact, included in the
following Management's Discussion or elsewhere in this Quarterly Report are, or
may be deemed to be, forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements include, without limitation, the
statements set forth in Outlook, below. Various economic and competitive factors
could cause actual results to differ materially from the expectations reflected
in such forward-looking statements, including factors which are outside the
control of the Company, such as interest rates, foreign currency exchange rates,
instability in domestic and foreign financial markets, consumer spending
patterns, availability of consumer and commercial credit, levels of residential
and commercial construction, levels of automotive production, changes in raw
material costs and Year 2000 issues, along with the other factors noted in this
Report and in other documents filed by the Company with the Securities and
Exchange Commission. In addition, the Company's future results are subject to
uncertainties relating to the Company's ability to consummate its business
strategy, including realizing market synergies and cost savings from the
integration of its acquired businesses. All subsequent written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the foregoing factors.
18
<PAGE>
Three Months Ended March 31, 1999
Compared to Three Months Ended March 31, 1998
Introduction
The Company had sales of $848 million and operating income of $72 million
for the quarter ended March 31, 1999. Sales increased $58 million (7.3%) and
operating income decreased $3 million (4.0%) compared to the second quarter of
fiscal 1998.
The Bath and Plumbing Products Operations had sales of $294 million and
operating income of $33 million for the quarter ended March 31, 1999, increases
of $42 million (16.7%) and $6 million (22.2%), respectively, from the second
quarter of fiscal 1998. The increase in sales and operating income was primarily
due to improved volumes in the domestic and European bath operations and the
June 1998 acquisition of Sundance Spas. Increased sales, merger synergies and a
favorable LIFO inventory adjustment at Zurn all had positive results. The
Company's Asian and Latin American businesses were affected by continued
unfavorable economic conditions partially offset by cost reductions.
The Lighting Products Operations had sales of $195 million and operating
income of $9 million for the quarter ended March 31, 1999, an increase of $5
million (2.6%) and a decrease of $3 million (25.0%), respectively. The decline
in operating income is due to weakness in the Company's European operations,
primarily due to weather and economic conditions in Germany and difficult market
conditions in the commercial indoor fluorescent and recessed lighting
businesses. These shortfalls were partially offset by improvements in the
Company's residential, architectural and outdoor lighting businesses.
The Hardware and Tools Operations had sales of $154 million and operating
income of $13 million for the quarter ended March 31, 1999, increases of $34
million (28.3%), and $2 million (18.2%), respectively. The strong improvement is
due to increased sales of spring and winter tools, the March 1999 acquisition of
True Temper, the May 1998 acquisition of the metal components fabrication
business and reduced losses at the ladder operations. These improvements were
partially offset by losses in connection with the elimination of a facility at
the window operations. Spear & Jackson's results were comparable to the prior
year, however the division is being affected by weak economic conditions in the
UK retail and industrial markets.
The Diversified Operations had sales of $205 million and operating income
of $23 million for the quarter ended March 31, 1999, decreases of $23 million
(10.1%) and $8 million (25.8%), respectively. The vacuum cleaner business
continued to experience lower sales in both the domestic and international
markets. Sales in the textile business were affected by the elimination of the
lace product line in the fourth quarter of the prior fiscal year and reduced
shipments of active wear fabrics. The automotive leather business experienced
lower sales and improved operating income as a result of reduced scrap pricing
and management's decision to eliminate low-margin business. Operating income at
the footwear operations declined due to pricing pressures in the infant shoe
line, lower volumes in safety shoes and discount selling programs.
Discontinued Operations
During April 1999, the Company completed the sale of its investment
in Teardrop Golf. The Company realized a $1 million net of tax gain from the
sale, which will be recorded, as a gain from discontinued operations during the
third quarter of fiscal 1999.
The Company had a loss from discontinued operations of $14 million, net of
tax, consisting of the estimated loss on disposal of Ertl of $12 million and a
loss from the operations of Ertl of $2 million during the quarter.
In January of 1999, the Company completed the sale of its remaining
interest in the Power Systems Segment for gross proceeds of approximately $30
million. No gain or loss was recorded on the transaction due to uncertainties
related to contingent liabilities regarding this transaction and other matters.
For the quarter ended March 31, 1998, the Company had a loss from
discontinued operations of $3 million, net of tax, consisting of a loss on
disposal of $4 million and income from operations of discontinued operations of
$1 million. Discontinued operations as of March 31, 1998 consisted of Ertl and
the Company's outdoor furniture operations.
19
<PAGE>
Management does not expect discontinued operations to have a material
impact on the future operations or liquidity of the Company.
Interest and Taxes
Interest expense was $19 million for the quarter ended March 31, 1999, a
$2 million (11.8%) increase from the comparable period of fiscal 1998. The
increase is primarily due to higher average level of outstanding debt, partially
offset by a lower average interest rate. Interest income was $1 million for the
quarter ended March 31, 1999, a $1 million decrease from the comparable period
of fiscal 1998.
The provision for income taxes on continuing operations was $22 million
for the quarter ended March 31, 1999, on pre-tax income of $54 million (an
effective tax rate of approximately 40%) as compared to a $25 million provision
on pre-tax income of $61 million (an effective tax rate of approximately 41%) in
the comparable period of fiscal 1998. The decrease in the effective tax rate is
attributable to continued tax planning.
Six Months Ended March 31, 1999
Compared to Six Months Ended March 31, 1998
The Company had sales of $1,598 million and operating income of $125
million for the six months ended March 31, 1999. Sales increased $113 million
(7.6%) and operating income decreased $13 million (9.4%) compared to the same
period of fiscal 1998.
The Bath and Plumbing Products Operations had sales of $558 million and
operating income of $57 million for the six months ended March 31, 1999,
increases of $79 million (16.5%) and $6 million (11.8%), respectively, from the
same period of fiscal 1998. Continued strength in the domestic and European bath
operations increased sales and profits. The June 1998 acquisition of Sundance
Spas increased sales, while Asia and Latin America continued to have a negative
affect on results. The Zurn Plumbing Operations were impacted by a strong first
quarter in the North American HVAC business, competitive market conditions in
the European HVAC business and increased first quarter costs and variances from
a model change and plant reconfiguration which improved during the second
quarter.
The Lighting Products Operations had sales of $387 million and operating
income of $20 million for the six months ended March 31, 1999, an increase of $8
million (2.1%) and a decrease of $4 million (16.7%), respectively. Continued
weakness and pricing pressure in the domestic indoor fluorescent and recessed
lighting markets and economic and weather conditions in Germany had a negative
affect on results, while strength in the outdoor and residential lighting
businesses improved sales and contributed to operating income.
The Hardware and Tools Operations had sales of $255 million and operating
income of $17 million for the six months ended March 31, 1999, increases of $66
million (34.9%), and $3 million (21.4%), respectively. Ames operating results
were flat due to a difficult first quarter offset by a second quarter
turnaround. Spear & Jackson, acquired in December 1997, contributed to the
increase in sales, but weak economic conditions caused operating income to be
flat. True Temper acquired in March of 1999, had a positive affect on sales,
while the inclusion of the metal components fabrication business acquired in May
1998, contributed to both sales and operating income. The ladder operations
contributed increased sales volume and reduced costs improving operating income.
Operating losses were incurred as a result of the elimination of a facility at
the window operations.
The Diversified Operations had sales of $398 million and operating income
of $42 million for the six months ended March 31, 1999, decreases of $40 million
(9.1%) and $20 million (32.3%), respectively. Lower sales in both the domestic
and international vacuum cleaner markets negatively impacted operating income.
Lower sales due to soft market conditions for safety shoes and infant footwear
reduced operating income at the footwear operations, while the inclusion of a
non-recurring favorable environmental settlement in the prior year also affected
comparability. The elimination of the lace product line in the fourth quarter of
the prior fiscal year, pricing pressures and reduced shipments of active wear
fabrics resulted in lower sales in the textile operations. Sales at the
automotive business were lower due to management's decision to eliminate some
low margin business while operating income increased due to reduced costs,
partially offset by lower scrap pricing.
20
<PAGE>
Discontinued Operations
During the six months ended March 31, 1999, the Company had a loss from
discontinued operations of $13 million, net of tax, consisting of the estimated
loss on disposal of Ertl of $12 million and a loss from the operations of Ertl
of $1 million.
For the six months ended March 31, 1998, the Company had a net loss on
disposal of discontinued operations of $4 million and income from operations of
discontinued operations of $4 million. Discontinued operations as of March 31,
1998 consisted of Ertl and the Company's outdoor furniture operations.
Interest and Taxes
Interest expense was $37 million for the six months ended March 31, 1999,
a $4 million (12.1%) increase from the comparable period of fiscal 1998. The
increase is primarily due to higher average level of outstanding debt, partially
offset by a lower average interest rate. Interest income was $2 million for the
six months ended March 31, 1999, a $2 million decrease from the comparable
period of fiscal 1998.
The provision for income taxes on continuing operations was $36 million
for the six months ended March 31, 1999, on pre-tax income of $90 million (an
effective tax rate of approximately 40%) as compared to a $46 million provision
on pre-tax income of $110 million (an effective tax rate of approximately 42%)
in the comparable period of fiscal 1998. The decrease in the effective tax rate
is attributable to continued tax planning.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
and cash equivalents, cash provided from operations and available borrowings
under the Company's revolving credit facility.
Cash from operating activities of continuing operations was $16 million
and $21 million for the six months ended March 31, 1999 and 1998, respectively.
The decrease in cash flows from continuing operations resulted from a decrease
in income from continuing operations and increased working capital requirements
in certain businesses, offset by non cash depreciation and amortization.
Cash provided by discontinued operations of $23 million for the six months
ended March 31, 1999, was a result of reduced working capital requirements at
Ertl. Cash used by discontinued operations of $58 million for six months ended
March 31, 1998 consisted of tax payments related to the sale of certain
discontinued operations and seasonal working capital requirements of the outdoor
furniture operations.
Investing activities used net cash of $195 million in the six months ended
March 31, 1999, which primarily consisted of net cash of $168 million used for
acquisitions, $49 million of capital expenditures, offset by the net proceeds
from the sale of the remaining interest in the Power System Segment. In the six
months ended March 31, 1998, the Company used net cash of $120 million, which
primarily consisted of net cash of $103 million used for acquisitions, $46
million of capital expenditures, offset by $10 million in proceeds from the sale
of Tommy Armour Golf, $12 million from the sale of property, plant and
equipment, and $9 million from the sale of excess real estate.
Financing activities provided net cash of $159 million in the six months
ended March 31, 1999. This included proceeds from long-term debt in excess of
repayments of $253 million, dividend payments of $10 million, and the purchase
of $80 million of the Company's common stock for treasury. In the corresponding
period of the prior year financing activities provided net cash of $154 million
which included proceeds from long-term debt in excess of repayments of $190
million, the purchase of $35 million of the Company's common stock for treasury,
$12 million in proceeds from the exercise of options and dividend payments of
$10 million.
In October 1998, USI and USI American Holdings, Inc. jointly issued $250
million aggregate principal amount of Senior Notes due October 15, 2003, which
bear interest at 7.125%, payable semiannualy (the "7.125% Notes"). The net cash
proceeds of $247 million, after transaction fees and discounts, were used to
repay a $200 million short-term note and $47 million in borrowings under
uncommitted bank credit lines. In January 1999, the Company filed a registration
statement with the Securities and Exchange Commission to exchange the 7.125%
Notes, which were not registered under the Securities Act of 1933, for
registered notes having substantially the same terms.
21
<PAGE>
During the six months ended March 31, 1999, the Company paid approximately
$10 million, principally severance, related to its restructuring plan announced
in fiscal 1998. There have been no material changes in the nature or costs of
the restructuring.
In February 1999, the Board of Directors authorized a share repurchase
program to permit the purchase of up to $100 million of the outstanding stock of
the Company, which was completed by April 1999. In April 1999, the Board of
Directors authorized a second share repurchase program to permit the purchase of
up to an additional $100 million of the outstanding stock of the Company. These
purchases may be made at prices deemed acceptable to management. The funding for
the repurchase program will be from cash provided from operations and available
borrowings under the Company's existing credit facilities.
Year 2000 Readiness Disclosure
Many computer systems and other equipment with embedded technology use
only two digits to define the applicable year and may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in failures
or miscalculations causing disruptions of normal business activities and
operations (the "Year 2000 issue").
The Company is actively addressing the Year 2000 issue. The compliance
program is led by information technology staff at each operating company, with
assistance from the finance and manufacturing staffs and outside technology
consultants where necessary. Progress is being monitored by each operating
company president and reported to USI management. The Company uses outside
technology consultants to provide independent reviews of Year 2000 readiness.
The independent reviews of Year 2000 readiness by these consultants have been
completed for most operating companies, with the remaining reviews scheduled for
completion by June 1999.
The Company's Year 2000 efforts focus on three areas: information
technology ("IT") related systems and processes, such as operating systems,
applications and programs; embedded logic ("non-IT") systems and processes, such
as manufacturing machinery, telecommunications equipment and security devices;
and compliance efforts of third parties (such as customers, suppliers and
service providers). Within each of the IT and non-IT areas, the project spans
four phases: assessment of programs and devices to identify those that are
affected by the Year 2000 issue; development of remediation strategies; testing
such strategies; and implementing the solutions.
The Company is presently evaluating each of its critical and principal
customers, supplier, service providers and other business associates to
determine each of such party's Year 2000 readiness status. The evaluation of
each third party includes a request for a Year 2000 readiness certification.
Then, depending upon each party's response, evaluation procedures may be
expanded to include obtaining Year 2000 disclosures contained in SEC filings of
those third parties, where available; testing interfaced systems; holding
face-to-face discussions with third parties; and developing and refining
contingency plans to address the possibility of a third party failure to
complete their year 2000 initiatives on a timely basis. The Company anticipates
that this evaluation will be ongoing through the remainder of 1999.
The Company has completed an assessment of its critical IT systems and, as
a result, the operating companies have decided to modify, upgrade or replace
portions of their systems. The remediation efforts achieved significant progress
to date, and remain underway. The Company expects that the remediation, testing
and implementation of all critical IT systems will be completed by November
1999. The Company is continuing the process of assessing and remediating
critical non-IT systems, as well, and expects that the assessment, remediation,
testing and implementation phases with respect to such systems will be completed
by the fourth quarter of calendar year 1999.
Year 2000 costs for computer equipment, software and outside consultants
incurred through March 31, 1999 are approximately $30 million, of which $5
million was expensed and $25 million was capitalized. Estimated future costs to
complete the Year 2000 program are $12 million, of which $6 million are expected
to be expensed as incurred and the remaining $6 million are expected to be
capitalized. These costs have been, and will continue to be, funded from
operating cash flow and available credit facilities. Most of the costs are for
new systems and improved functionality. These costs include approximately $6
million of internal payroll costs for employees who are involved in the Year
2000 program.
The Company is developing contingency plans to address the possibility of
failure by the Company or third parties to complete their Year 2000 initiatives
on a timely basis. The Company expects the plans to be completed by June 1999,
with further refinements anticipated through the end of calendar year 1999 based
on the Company's ongoing evaluation of its readiness as well as the status of
compliance by third parties. Such contingency plans may include
22
<PAGE>
using alternative processes, such as manual procedures to substitute for
non-compliant systems; arranging for alternate suppliers and service providers;
increasing inventory levels; and developing procedures internally and in
conjunction with significant third parties to address compliance issues as they
arise.
No amount of preparation and testing can guarantee Year 2000 compliance.
However, the Company believes it is taking appropriate preventive measures and
will be successful in avoiding any material adverse effect on the Company's
operations or financial condition. Nevertheless, the Company recognizes that
failing to resolve its Year 2000 issues on a timely basis would, in a worst case
scenario, significantly limit its ability to manufacture and distribute its
products and process its daily business transactions for a period of time,
especially if such failure is coupled with third party or infrastructure
failures. Similarly, the ability to conduct operations without interruption
after calendar 1999 may be significantly affected by the failure of one or more
significant suppliers, customers or components of the infrastructure to conduct
their respective operations without interruption after 1999. Because of the
difficulty of assessing the Year 2000 compliance of such third parties, the
Company considers the potential disruptions caused by such parties to present
the most reasonably likely worst-case scenarios. Adverse effects on the Company
could include business disruption, increased costs, loss of sales and other
similar ramifications.
The costs of the Company's Year 2000 initiatives, the dates on which the
Company believes that it will complete such activities and the Company's
evaluation of third-party effects are estimates and subject to change. Actual
results could differ from those currently anticipated. Factors that could cause
such differences include, but are not limited to, the availability of key Year
2000 personnel, the Company's ability to respond to unforeseen Year 2000
complications, the readiness of third parties, the accuracy of third party
assurances regarding Year 2000 compliance and similar uncertainties.
Recent Development
On May 18, 1999, the Board of Directors of the Company announced that it
had approved a spinoff of its diversified businesses to the Company's
shareholders. These businesses include Rexair, Inc. ("Rainbow" brand vacuum
cleaners); Garden State Tanning, Inc. and Leon Plastics, Inc. (automotive
interiors); EJ Footwear Corp. (including Georgia Boot Inc., Trimfoot Co. (infant
footwear) and Lehigh Safety Shoe Company (industrial protective footwear));
Huron Inc. and Bearing Inspection, Inc. (precision engineering products); Bilt
Best Products, Inc.; Native Textiles Inc. and Jade Technologies Singapore Ltd.
These entities had combined revenues and operating income of $889 million and
$32 million (including nonrecurring, unusual and other related charges of $75
million). Excluding USI Diversified and corporate expenses of $32 million, we
had revenues of $2.2 billion and operating income of $142 million (including
nonrecurring and unusual charges of $75 million).
It is anticipated that the Company will receive approximately $600 million
of proceeds from new third party financings by the new Diversified company,
principally through its repayment of existing intercompany debt owed to the
Company. The Company will use these proceeds to reduce its outstanding debt,
make acquisitions for its core businesses and continue its share repurchase
program. Completion of the spinoff is conditioned upon the new USI Diversified
Company obtaining the third party financing. Completion of the spinoff is also
subject to the receipt of a ruling from the Internal Revenue Service that the
distribution will be tax free to Company shareholders. There is no certainty
that the IRS will rule favorably with respect to the Company's request. If the
IRS does not rule favorably, the Company would reconsider its then available
alternatives. The Company anticipates the IRS ruling will be received within
four to six months but no later than one year. The Company will account for its
diversified businesses as discontinued operations if and when we receive a
favorable ruling. Mr. John Raos, President and Chief Operating Officer of the
Company, will resign his position to become Chairman and Chief Executive Officer
of the Diversified company. It is expected that an Information Statement about
the new company will be filed with the Commission in June, providing additional
details.
Outlook
Management remains comfortable that earnings per diluted share from
continuing operations for the full year will be in the range of $1.55 to $1.65.
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
The Company, in the normal course of doing business, is exposed to the
risks associated with changes in interest rates and currency exchange rates. To
limit the risks from such fluctuations, the Company enters into various hedging
transactions that have been authorized pursuant to the Company's policies and
procedures and does not engage in such transactions for trading purposes.
To manage exposure to interest rate movements the Company uses interest
rate protection agreements. Based on the Company's overall exposure to interest
rate changes, a hypothetical change of 100 basis points across all maturities of
the Company's floating rate debt obligations, after considering interest rate
protection agreements, would be immaterial to the Company's pre-tax earnings in
fiscal 1999.
The Company utilized foreign currency-denominated borrowings to
selectively hedge its net investments in subsidiaries in foreign countries. Such
borrowings at March 31, 1999 are denominated in German marks, British pounds,
Dutch guilders and Hong Kong dollars. A 10% change in the relevant currency
exchange rates is estimated to have an impact of $18 million on the fair value
of such borrowings. This quantification of the Company's exposure to
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the market risk of foreign exchange sensitive financial instruments is
necessarily limited, as it does not take into account the offsetting impact of
the company's underlying investment exposures.
The Company is also exposed to foreign currency exchange risk related to
its international operations as well as its U.S. businesses which import or
export goods. The Company has made limited use of financial instruments to
manage this risk.
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PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1(a) First Supplemental Indenture, dated as of April 30, 1999, among the
Company, USI Global Corp., USI American Holdings, Inc., USI
Atlantic Corp. and The First National Bank of Chicago, as Trustee.*
4.1(b) Second Supplemental Indenture, dated as of April 30, 1999, among
the Company, USI Global Corp., USI American Holdings, Inc., USI
Atlantic Corp. and The Chase Manhattan Bank, as Trustee.*
10.1 First Amendment and Consent, dated as of April 22, 1999, among the
Company, USI American Holdings, Inc., USI Atlantic Corp., USI
Global Corp., Various Banks named therein, Bank of America National
Trust and Savings Association, as Issuing Bank, Swingline Bank and
Agent, and BA Securities, Inc., as Arranger.*
27.1 Financial Data Schedule*
- ----------
* Previously filed.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements 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.
U.S. INDUSTRIES, INC.
Date: June 9, 1999
/s/ James O'Leary
-------------------------------------
James O'Leary
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Robert P. Noonan
-------------------------------------
Robert P. Noonan
Corporate Controller
(Principal Accounting Officer)
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