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 January 2, 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 February 1, 1999, U.S. Industries, Inc. had one class of common stock,
of which 98,697,717 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 Months Ended December 31, 1998 and 1997 1
Consolidated Balance Sheets, December 31, 1998
and September 30, 1998 2
Consolidated Statements of Cash Flows
for the Three Months Ended December 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
SIGNATURES 20
<PAGE>
PART I. FLNANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 796 $ 744
Operating costs and expenses:
Cost of products sold 556 511
Selling, general and administrative expenses 185 163
-------- --------
Operating income 55 70
Interest expense 18 16
Interest income (1) (2)
-------- --------
Income before income taxes and discontinued operations 38 56
Provision for income taxes 15 24
-------- --------
Income from continuing operations 23 32
Loss from discontinued operations, net of tax - (1)
-------- --------
Net Income $ 23 $ 31
======== ========
Earnings (loss) per basic share:
Income from continuing operations $ 0.24 $ 0.34
Loss from discontinued operations - (0.01)
-------- --------
Net income $ 0.24 $ 0.33
======== ========
Earnings (loss) per diluted share:
Income from continuing operations $ 0.23 $ 0.33
Loss from discontinued operations - (0.01)
-------- --------
Net income $ 0.23 $ 0.32
======== ========
Cash dividend declared per share $ 0.05 $ 0.05
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
-------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 51 $ 44
Trade receivables, net 562 652
Inventories 606 589
Deferred income taxes 81 81
Other current assets 77 77
-------- --------
Total current assets 1,377 1,443
Property, plant and equipment, net 539 538
Deferred income taxes 14 14
Other assets 219 222
Goodwill, net 588 595
-------- --------
$ 2,737 $ 2,812
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 13 $ 15
Current maturities of long-term debt 4 4
Trade accounts payable 204 264
Accrued expenses and other liabilities 274 313
Income taxes payable 54 40
-------- --------
Total current liabilities 549 636
Long-term debt 938 947
Other liabilities 273 269
-------- --------
Total liabilities 1,760 1,852
Commitments and contingencies
Stockholders' equity 977 960
-------- --------
$ 2,737 $ 2,812
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
U.S. INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS-UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 23 $ 32
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 26 24
Provision for doubtful accounts 1 1
Gain on sale of excess real estate - (3)
Changes in operating assets and liabilities,
excluding the effects of acquisitions and dispositions (10) (25)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 40 29
-------- --------
Loss from discontinued operations - (1)
Increase in net assets held for disposition - (34)
-------- --------
NET CASH USED IN DISCONTINUED OPERATIONS - (35)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 40 (6)
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale of net assets held for disposition - 10
Acquisition of companies, net of cash acquired - (34)
Purchases of property, plant and equipment (25) (24)
Proceeds from sale of excess real estate - 6
Proceeds from sales of property, plant and equipment 2 10
Other investing activities 4 4
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (19) (28)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 466 332
Repayment of long-term debt (473) (275)
Repayment of notes payable, net (1) (4)
Payment of dividends (5) (5)
Proceeds from exercise of stock options - 2
Purchase of treasury stock - (20)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (13) 30
-------- --------
Effect of exchange rate changes on cash (1) (2)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7 (6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44 67
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51 $ 61
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 months ended December 31, 1998 and 1997
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 months
period ended December 31, 1998 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 for the year ended September 30, 1998.
The Company's fiscal year ends on the Saturday nearest to September 30.
All three month data contained herein reflect results of operations for the
13-week period and 14-week period ended on the Saturday closest to December 31,
1998 and 1997, respectively, but are presented as of such date for convenience.
NOTE 2-INVENTORIES
Inventories consist of the following:
(IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
1998 1998
---------- ----------
(UNAUDITED)
Finished products $ 314 $ 295
Work-in process 102 111
Raw materials 190 183
---------- ----------
$ 606 $ 589
========== ==========
4
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 3-LONG-TERM DEBT
Long-term debt consists of the following:
(IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
1998 1998
---------- ----------
(UNAUDITED)
7.125% Senior Notes, net $ 247 $ -
7.25% Senior Notes, net 123 123
Revolving credit facility,
US dollar 350 300
Revolving credit facility,
foreign currencies 153 156
Short-term committed note 17 200
Other long-term debt 52 172
---------- ----------
942 951
Less current maturities (4) (4)
---------- ----------
Long-term debt $ 938 $ 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
9). The Notes are redeemable at the option of the Company.
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 36 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
5
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 4-COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. 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 December 31, 1998, the Company had accrued $19 million for known
environmental related matters. The Company believes that the range of liability
for such matters is between $9 million and $27 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
In the quarter ended December 31, 1998, 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 pension liability adjustments, and unrealized gains and
losses on marketable securities classified as available-for-sale. The Company's
total comprehensive income was as follows:
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1998 1997
------ ------
Net income $ 23 $ 31
Foreign currency translation adjustment (2) (3)
------ ------
Total comprehensive income $ 21 $ 28
====== ======
6
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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) (IN MILLIONS EXCEPT PER SHARE)
(UNAUDITED) (UNAUDITED)
INCOME FROM PER INCOME FROM PER
CONTINUING SHARE CONTINUING SHARE
OPERATIONS SHARES AMOUNT OPERATIONS SHARES AMOUNT
---------- ------ ------ ---------- ------ ------
(FOR THE THREE MONTHS ENDED (FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998) DECEMBER 31, 1997)
----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per basic share $ 23 96.6 $ 0.24 $ 32 92.8 $ 0.34
Effect of dilutive securities
Stock options .7 1.7
Nonvested restricted stock .7 1.6
---- ---- ------ ---- ---- ------
Earnings per diluted share $ 23 98.0 $ 0.23 $ 32 96.1 $ 0.33
==== ==== ====== ==== ==== ======
</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 1,900,131
shares in the three months ended December 31, 1998 and options to purchase
32,100 shares in the three months ended December 31, 1997 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.
NOTE 7-RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted beginning in fiscal 2000. The statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
items is recognized in earnings. Management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
NOTE 8-SUBSEQUENT EVENTS
In February of 1999, the Company signed a non-binding letter of intent
relating to the sale of its toy business. The sale, which is subject to final
due diligence, completion of a definitive purchase agreement, regulatory
approval and other closing conditions, is expected to close by April of 1999.
7
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8-SUBSEQUENT EVENTS (CONTINUED)
In January of 1999, the Company entered into a definitive agreement to sell the
remaining interest in its Power Systems Segment for gross proceeds of $30
million. The Company received a deposit of $7 million in conjunction with the
sale which is refundable upon failure to obtain certain government and
contractual approvals. The closing is expected in March 1999.
In February of 1999, the Company reached an agreement with Huffy Corporation,
Inc. to acquire the assets of True Temper Hardware Company for $100 million in
cash. The transaction is subject to post-closing adjustments as well as
customary regulatory review and is expected to be completed in March.
In April of 1999, USIAH transferred substantially all of its assets to a new
wholly owned subsidiary of USI named 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 9-SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The following represents the supplemental consolidating condensed
financial statements of USI 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 December 31, 1998 and September 30, 1998 and
for three months ended December 31, 1998 and 1997. USI Atlantic was the parent
company prior to the Merger in 1998 (see Note 1). Separate consolidated
financial statements for USI, USI Atlantic and USIAH are not presented, as
management has determined that they would not be material to investors. The
Notes are fully and unconditionally guaranteed by USI Atlantic Corp. USIAH and
USI Atlantic are wholly owned subsidiaries of USI.
<TABLE>
<CAPTION>
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
USI NONGUARANTOR
USI ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ - $ - $ - $ 796 $ $ 796
Operating costs and expenses:
Cost of products sold - - - 556 556
Selling, general and
administrative expenses 5 - - 180 185
------------------------------------------------------------------------
Operating income (Loss) (5) - 60 55
Interest expense 6 - 9 3 18
Interest income - - - (1) (1)
Intercompany interest, net (3) (13) 16 -
Equity in earnings of investees, net (28) (20) (17) - 65 -
------------------------------------------------------------------------
Income before income taxes 20 20 21 42 (65) 38
Provision for income taxes (3) - 1 17 15
------------------------------------------------------------------------
Net income $ 23 $ 20 $ 20 $ 25 $ (65) $ 23
========================================================================
</TABLE>
8
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9-SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
USI NONGUARANTOR
ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ - $ 744 $ $ 744
Operating costs and expenses:
Cost of products sold - - 511 511
Selling, general and
administrative expenses 1 6 156 163
-----------------------------------------------------------------------
Operating income (Loss) (1) (6) 77 70
Interest expense - 10 6 16
Interest income - - (2) (2)
Intercompany interest, net - (15) 15 -
Equity in earnings of investees, net (32) (25) - 57 -
-----------------------------------------------------------------------
Income before income taxes and
discontinued operations 31 24 58 (57) 56
Provision for income taxes - - 24 24
-----------------------------------------------------------------------
Income from continuing operations 31 24 34 (57) 32
Loss from discontinued operations,
net of tax - - (1) (1)
-----------------------------------------------------------------------
Net income $ 31 $ 24 $ 33 $ (57) $ 31
=======================================================================
</TABLE>
9
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9-SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
(IN MILLIONS - UNAUDITED)
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------
USI NONGUARANTOR
USI ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ - $ 51 $ $ 51
Trade receivables, net - - - 562 562
Inventories - - - 606 606
Deferred income taxes 45 - - 36 81
Other current assets 3 - - 74 77
-------------------------------------------------------------------------------
Total current assets 48 - - 1,329 - 1,377
Property, plant and equipment, net - - - 539 539
Deferred income taxes 8 - - 6 14
Other assets - - - 219 219
Goodwill, net - - - 588 588
Investments in subsidiaries 1,074 805 1,291 - (3,170) -
Intercompany receivable (payable), net 217 32 186 (435) -
-------------------------------------------------------------------------------
Total assets $1,347 $ 837 $1,477 $2,246 $(3,170) $2,737
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ - $ - $ 13 $ $ 13
Current maturities of long-term debt - - - 4 4
Trade accounts payable 1 - - 203 204
Accrued expenses and other liabilities 8 - 26 240 274
Income taxes payable 47 - 7 54
-------------------------------------------------------------------------------
Total current liabilities 56 26 467 549
Long-term debt 314 - 576 48 938
Other liabilities - - 70 203 273
-------------------------------------------------------------------------------
Total liabilities 370 672 718 1,760
Stockholders' equity 977 837 805 1,528 (3,170) 977
-------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,347 $ 837 $1,477 $2,246 $(3,170) $2,737
===============================================================================
</TABLE>
10
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9-SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
(IN MILLIONS)
AT SEPTEMBER 31, 1998
------------------------------------------------------------------------------
USI NONGUARANTOR
USI ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ - $ 44 $ $ 44
Trade receivables, net - - - 652 652
Inventories - - - 589 589
Deferred income taxes 45 - - 36 81
Other current assets - - 11 66 77
------------------------------------------------------------------------------
Total current assets 45 - 11 1,387 - 1,443
Property, plant and equipment, net - - - 538 538
Deferred income taxes 8 - - 6 14
Other assets - - 7 215 222
Goodwill, net - - - 595 595
Investments in subsidiaries 996 745 1,221 - (2,962) -
Intercompany receivable (payable), net (51) 277 245 (471) -
------------------------------------------------------------------------------
Total assets $ 998 $1,022 $1,484 $2,270 $(2,962) $2,812
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ - $ - $ 15 $ $ 15
Current maturities of long-term debt - - - 4 4
Trade accounts payable - 2 - 262 264
Accrued expenses and other liabilities 5 6 43 259 313
Income taxes payable 33 - - 7 40
------------------------------------------------------------------------------
Total current liabilities 38 8 43 547 - 636
Long-term debt - 270 629 48 947
Other liabilities - - 67 202 269
------------------------------------------------------------------------------
Total liabilities 38 278 739 797 - 1,852
Stockholders' equity 960 744 745 1,473 (2,962) 960
------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 998 $1,022 $1,484 $2,270 $(2,962) $2,812
==============================================================================
</TABLE>
11
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9-SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------
USI NONGUARANTOR
USI ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 10 $ (8) $ 7 $ 31 $ - $ 40
INVESTING ACTIVITIES:
Acquisition of companies, net of cash - - - - -
acquired
Purchases of property, plant and equipment - - - (25) (25)
Proceeds from sale of excess real estate - - - - -
Proceeds from sales of property, plant and - - - 2 2
equipment
Net transfers with subsidiaries (49) - 6 - 43 -
Other investing activities - - - 4 4
--------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (49) - 6 (19) 43 (19)
FINANCING ACTIVITIES:
Proceeds from long-term debt 430 - 36 - 466
Repayment of long-term debt (386) - (87) - (473)
Repayment of notes payable, net - - - (1) (1)
Payment of dividends (5) - - - (5)
Proceeds from exercise of stock options - - - - -
Purchase of treasury stock - - - - -
Net transfers with parent - 8 41 (6) (43) -
--------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 39 8 (10) (7) (43) (13)
Effect of exchange rate changes on cash - - (3) 2 (1)
INCREASE IN CASH AND CASH EQUIVALENTS - - - 7 7
Cash and cash equivalents at beginning of
period - - - 44 44
--------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ - $ - $ 51 $ - $ 51
==========================================================================
</TABLE>
12
<PAGE>
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9-SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------
USI NONGUARANTOR
ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ (7) $ 7 $ (6) - $ (6)
INVESTING ACTIVITIES:
Proceeds from sale of net assets held for - - 10 10
disposition
Acquisition of companies, net of cash - - (34) (34)
acquired
Purchases of property, plant and equipment - - (24) (24)
Proceeds from sale of excess real estate - - 6 6
Proceeds from sales of property, plant and - - 10 10
equipment
Net transfers with subsidiaries 30 (125) - 95 -
Other investing activities - - 4 4
------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 30 (125) (28) 95 (28)
FINANCING ACTIVITIES:
Proceeds from long-term debt - 329 3 332
Repayment of long-term debt - (210) (65) (275)
Repayment of notes payable, net - - (4) (4)
Payment of dividends (5) - - (5)
Proceeds from exercise of stock options 2 - - 2
Purchase of treasury stock (20) - - (20)
Net transfers with parent - (30) 125 (95) -
------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (23) 89 59 (95) 30
Effect of exchange rate changes on cash - (1) (1) (2)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS - (30) 24 (6)
Cash and cash equivalents at beginning of
period - 35 32 67
------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 5 $ 56 $ 61
==================================================================
</TABLE>
13
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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
(IN MILLIONS)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
-------- --------
NET SALES
Bath and Plumbing Products ........... $ 264 $ 227
Lighting Corporation of America....... 192 189
Hardware and Tools.................... 101 69
Diversified........................... 239 259
-------- --------
TOTAL NET SALES.................... $ 796 $ 744
======== ========
OPERATING INCOME
Bath and Plumbing Products ........... $ 24 $ 24
Lighting Corporation of America ...... 11 12
Hardware and Tools.................... 4 3
Diversified........................... 21 38
-------- --------
60 77
Corporate expenses........................ (5) (7)
-------- --------
TOTAL OPERATING INCOME............. $ 55 $ 70
======== ========
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
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<PAGE>
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.
THREE MONTHS ENDED DECEMBER 31, 1998
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997
INTRODUCTION
The Company had sales of $796 million and operating income of $55 million
for the quarter ended December 31, 1998. Sales increased $52 million (6.9%)
and operating income decreased $15 million (21.4%) compared to the first
quarter of fiscal 1998.
The Bath and Plumbing Products Operations had sales of $264 million and
operating income of $24 million for the quarter ended December 31, 1998, a
sales increase of $37 million (16.2%), from the first quarter of fiscal 1998
while operating income remained flat. The increase in sales was primarily
attributable to the first time inclusion of Sundance Spas, acquired in June
1998. Sundance had minimal profit contribution due to normal seasonality.
Increased volume of lower margin products also contributed to the sales
increase while having little impact on operating income. Continued strength
in the European bath operations and improved performance by the North
American HVAC business was offset by reduced contributions from Asia, cost
overruns on certain construction projects, and increased costs and variances
from a model change and plant reconfiguration in the china products business,
competitive market conditions in the European HVAC business and shipping
delays due to system conversion problems at US Brass.
The Lighting Products Operations had sales of $192 million and operating
income of $11 million for the quarter ended December 31, 1998, an increase of
$3 million (1.5%) and a decrease of $1 million (8.3%), respectively. The
sales increase was driven by international commercial business and continued
growth of the domestic residential business. However, the profit contribution
from these businesses did not offset the competitive market conditions and
pricing pressure in the indoor fluorescent and recessed lighting operations
as profits declined modestly from the prior year.
The Hardware and Tools Operations had sales of $101 million and operating
income of $4 million for the quarter ended December 31, 1998, increases of
$32 million (46.3%), and $1 million (33.3%), respectively. The increase in
sales and operating income was primarily the result of a full quarter
inclusion of Spear and Jackson, which was acquired in December 1997, and the
first time inclusion of the metal components business which was acquired in
May 1998, and reduced operating losses at the company's restructured ladder
business. These contributions were largely offset by lower sales and profits
from reduced shipments of winter tools due to decreased snowfall in the
Northeast and Canada in the first quarter, and the inclusion of Hardware and
Tools corporate expenses.
The Diversified Operations had sales of $239 million and operating income
of $21 million for the quarter ended December 31 1998, decreases of $20
million (7.7%) and $17 million (44.7%), respectively. The vacuum cleaner
business experienced lower sales in both the international and domestic
markets, while the toy operations were affected by lower sales in the
European market. Sales at the automotive leather business were lower due to
management's decision to eliminate some low margin business. Results in the
textile operations were lower due to the elimination of the lace product line
in the fourth quarter of the prior fiscal year and lower tricot sales and
margins due to Asian competition. Footwear sales and operating income
decreased due to soft market conditions related to safety shoes and infant
footwear, and the prior year favorable settlement of certain environmental
litigation. The inclusion of the Diversified corporate expenses
15
<PAGE>
had a marginal negative impact on profits. These items were partially offset
by the first time inclusion of the Philips leadframe business acquired in
January 1998.
DISCONTINUED OPERATIONS
For the quarter ended December 31, 1997, the Company recorded operational
losses of $1 million from the Company's outdoor furniture operations.
In January of 1999, the Company entered into a definitive agreement to sell
the remaining interest in its Power Systems Segment for gross proceeds of $30
million. The Company received a deposit of $7 million in conjunction with the
sale which is refundable upon failure to obtain certain government and
contractual approvals. The closing is expected in March 1999.
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 $18 million for the quarter ended December 31, 1998,
a $2 million (12.5%) 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 December 31, 1998, a $1 million decrease from
the comparable period of fiscal 1998.
The provision for income taxes on continuing operations was $15 million
for the quarter ended December 31, 1998, on pre-tax income of $38 million (an
effective tax rate of approximately 40%) as compared to a $24 million
provision on pre-tax income of $56 million (an effective tax rate of
approximately 43%) 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 $40 million
and $29 million for the three months ended December 31, 1998 and 1997,
respectively. The increase in cash flows from continuing operations resulted
from reduced tax payments in the first quarter of fiscal 1999 and the timing
of accounts receivables collection, partially offset by reduced net income
and increased working capital requirements in certain businesses.
Cash used by discontinued operations in the first quarter of fiscal 1998
primarily consists of tax payments in connection with the sale of certain
discontinued operations as well as the seasonal working capital requirements
of the outdoor furniture operations.
Investing activities used net cash of $19 million in the three months
ended December 31, 1998, which primarily consisted of cash used for capital
expenditures. In the three months ended December 31, 1997, the Company used
net cash of $28 million, which included net cash used for the acquisitions of
SiTeco and Spear & Jackson of $34 million and capital expenditures of $24
million, partially offset by the cash proceeds from the sale of Tommy Armour
Golf of $10 million, proceeds from real estate transactions of $6 million and
proceeds from sales of fixed assets of $10 million.
16
<PAGE>
Financing activities used net cash of $13 million in the three months
ended December 31, 1998. This included repayments of long-term debt and notes
payable in excess of proceeds of $8 million, and dividend payments of $5
million. In the corresponding period of the prior year financing activities
provided net cash of $30 million which included net proceeds under long-term
debt and notes payable in excess of repayments of $53 million, the purchase
of $20 million of the Company's common stock for treasury and dividend
payments of $5 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.
During the three months ended December 31, 1998, the Company paid
approximately $6 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 restructing.
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. These purchases may be made at prices deemed acceptable to management.
The funding of the repurchase program will be from cash provided from operations
and available borrowings under the Company's existing credit facilities.
MARKET RISK EXPOSURES
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 December 31, 1998 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 $17 million on the
fair value of such borrowings. This quantification of the Company's exposure
to 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.
17
<PAGE>
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 is expected to be completed by March 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
third party aspect of the project includes, among other things, obtaining
Year 2000 readiness certifications, obtaining Year 2000 disclosures contained
in SEC filings, and where applicable, testing interfaced systems as well as
having discussions with critical vendors in order to determine and mitigate
the risk to the Company from third parties' failures to satisfactorily
address their Year 2000 issues.
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 October 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 December 31, 1998 are approximately $25 million,
of which $4 million was expensed and $21 million was capitalized. Estimated
future costs to complete the Year 2000 program are $16 million, of which $7
million are expected to be expensed as incurred and the remaining $9 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 $5 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 that preliminary
plans will be in place by March 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 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.
18
<PAGE>
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.
OUTLOOK
Assuming the completion of the sale of the Company's toy business and the
continued softness in the Asian and Latin American economies, management
believes that earnings per share from continuing operations for the full year
will be in the range of $1.55 to $1.65.
19
<PAGE>
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: May 17, 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)
20
