SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-470
AMERICAN STANDARD INC.
(Exact name of Registrant as specified in its charter)
Delaware 25-0900465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Centennial Avenue, P.O. Box 6820, Piscataway, NJ 08855-6820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 980-6000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, $.01 par value, outstanding at
April 30, 1999 1,000 shares
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated summary statement of operations of American
Standard Inc. (the "Company") and subsidiaries for the three months ended March
31, 1999 and 1998 has not been audited, but management believes that all
adjustments, consisting of normal recurring items, necessary for a fair
presentation of financial data for those periods have been included. Results for
the first quarter of 1999 are not necessarily indicative of results for the
entire year.
<TABLE>
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF OPERATIONS
(Dollars in millions)
<CAPTION>
Three months ended
March 31,
--------
<S> <C> <C>
1999 1998
------ ------
SALES $1,675 $1,493
------ ------
COST AND EXPENSES
Cost of sales 1,251 1,124
Selling and administrative expenses 300 258
Other income (2) (1)
Interest expense 46 51
------ ------
1,595 1,432
------ ------
INCOME BEFORE INCOME TAXES 80 61
Income taxes 33 25
------ ------
NET INCOME $ 47 $ 36
====== ======
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
<TABLE>
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY BALANCE SHEET
(Dollars in millions)
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 23 $ 65
Accounts receivable 1,090 939
Inventories
Finished products 338 269
Products in process 114 97
Raw materials 111 92
----- -----
563 458
Other current assets 142 129
----- -----
TOTAL CURRENT ASSETS 1,818 1,591
FACILITIES, less accumulated depreciation;
Mar. 1999 - $581; Dec. 1998- $611 1,325 1,241
GOODWILL 1,048 833
OTHER ASSETS 931 885
----- -----
TOTAL ASSETS $5,122 $4,550
====== ======
CURRENT LIABILITIES
Loans payable to banks $1,213 $ 732
Current maturities of long-term debt 164 169
Accounts payable 571 544
Accrued payrolls 204 204
Other accrued liabilities 764 710
----- -----
TOTAL CURRENT LIABILITIES 2,916 2,359
LONG-TERM DEBT 1,483 1,528
RESERVE FOR POSTRETIREMENT BENEFITS 471 478
OTHER LIABILITIES 526 530
----- -----
TOTAL LIABILITIES 5,396 4,895
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT
Preferred stock, Series A, 1,000 shares issued
and outstanding, par value $.01 - -
Common stock, 1,000 shares issued and
outstanding, $.01 par value. - -
Capital surplus 577 571
Accumulated deficit (645) (692)
Foreign currency translation effects (206) (224)
----- -----
TOTAL STOCKHOLDER'S DEFICIT (274) (345)
----- -----
$5,122 $4,550
====== ======
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
<TABLE>
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF CASH FLOWS
(Dollars in millions)
<CAPTION>
Three months ended
March 31,
--------
1999 1998
---- ----
<S> <C> <C>
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Net income $ 47 $ 36
Depreciation 40 32
Amortization of goodwill and other intangibles 12 12
Non-cash interest 2 16
Non-cash stock compensation - 2
Changes in assets and liabilities:
Accounts receivable (112) (50)
Inventories (62) (65)
Accounts payable and other accruals 72 87
Other assets and liabilities (57) (26)
---- ----
Net cash provided (used) by operating activities (58) 44
---- ----
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (34) (48)
Investments in affiliated companies and other businesses (19) (10)
Acquisition of Armitage/Dolomite, net of cash acquired (430) -
Other (8) (6)
---- ----
Net cash used by investing activities (491) (64)
---- ----
FINANCING ACTIVITIES:
Net loan (to) from Parent (2) 5
Proceeds from issuance of long-term debt - 761
Repayments of long-term debt (18) (9)
Net change in revolving credit facility 459 (653)
Net change in other short-term debt 67 1
Financing costs - (30)
Other 2 -
---- ----
Net cash provided by financing activities 508 75
---- ----
Effect of exchange rate changes on cash and
cash equivalents (1) -
---- ----
Net increase (decrease) in cash and cash equivalents (42) 55
Cash and cash equivalents at beginning of period 65 29
---- ----
Cash and cash equivalents at end of period $ 23 $ 84
==== ====
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
AMERICAN STANDARD INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Restructuring and Asset Impairment Charges
In 1998, the Company committed to restructuring plans designed to achieve lower
product costs and improved efficiency. Key elements of the plans include the
transfer of significant manufacturing capacity to locations with lower labor
costs and the sale of certain assets. In connection therewith, the Company
determined that certain long-lived assets were impaired. Accordingly, in the
second half of 1998 the Company recorded charges totaling $200 million ($186
million net of tax benefits), including $185 million for Plumbing Products, $7
million for Air Conditioning Products, $5 million for Automotive Products and $3
million for Medical Systems.
The Plumbing Products charge of $185 million reflects the closure of five plants
in Europe and two in North America. The charge includes a loss on the sale of
the French plumbing distribution operations, costs related to a workforce
reduction of approximately 1,600 people and, applying the criteria of FAS 121,
write-downs of impaired fixed assets and related goodwill.
The Air Conditioning Products charge of $7 million involves the closure of one
plant in Australia, one plant in Europe, and a workforce reduction of 115
people. The Automotive Products charge of $5 million primarily reflects a
workforce reduction of 75 people in Europe related to having certain machining
work done by low-cost outside vendors rather than in the Company's own
facilities and the closure of three small plants. A restructuring charge of $3
million was also recorded for Medical Systems, relating to asset write-offs and
severance payments.
Following is a summary of the restructuring and asset impairment charges accrued
and activity through March 31, 1999 (dollars in millions):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance Paid first Balance
Initial Non-cash Paid in Dec. 31 quarter March 31
Charge Write-off 1998 1998 of 1999 1999
------ --------- ----- ------ -------- ----
Termination payments
to employees $49.8 $ - $10.4 $39.4 $11.5 $27.9
Other employee costs 33.6 - 4.3 29.3 2.6 26.7
Facilities write-downs (a) 88.3 72.4 - 15.9 .1 15.8
Loss on sale of French
distribution business (b) 19.1 14.9 3.6 .6 - .6
Other 9.5 1.4 .2 7.9 .3 7.6
----- ----- ----- ----- ----- ------
$200.3 $88.7 $18.5 $93.1 $14.5 $78.6
====== ===== ===== ===== ===== =====
<FN>
(a)Includes goodwill write-down of $31.3 million related to the facilities
write-down for the French plumbing manufacturing operations.
(b) Includes goodwill write-off of $12.3 million.
</FN>
</TABLE>
Closure of all facilities affected is expected to be completed by the end of
1999. The initial charge of $200.3 million was comprised of non-cash asset
write-downs of $88.7 million and accrued charges of $111.6 million. Of the $78.6
million unpaid balance of accrued charges as of March 31, 1999, the Company
expects that $50 million will be paid by the end of 1999 and the remainder in
2000.
<PAGE>
The accrued termination payments to employees include only severance payments
after termination. Other employee related costs include negotiated supplemental
payments to pension funds and other payments to union organizations for the
benefit of terminated employees. Of the 1,800 employees being terminated,
approximately 1,500 are hourly factory workers and 300 are salaried
administrative personnel. As of March 31, 1999, approximately 900 employees had
been terminated.
The facilities being closed and written down include eight owned and four leased
manufacturing plants, and the related manufacturing equipment. The owned plants
are being held for disposal and, accordingly, were written down to the lower of
carrying amount or fair value, less costs to sell. Two of those facilities will
be demolished and the land held for sale. Leases on the four rented facilities
will be terminated upon payment of obligations specified or negotiated under the
lease contracts. Manufacturing equipment being scrapped was written off and
equipment being sold has been written down to the lower of carrying amount or
fair value, less costs to sell. The net carrying value of land, buildings and
equipment held for sale as of March 31, 1999 was $12 million. The closure of
certain facilities necessitates the investigation of potential environmental
contamination or the legal or regulatory requirement to remediate the facility.
In addition, the sale of one facility contractually obligates the Company to
demolish and remediate the site.
Approximately one-half of other restructuring costs is leasehold termination
costs, with the remainder consisting of cash grants forfeited upon closure of a
facility in Italy and other miscellaneous costs.
Note 2. Acquisition
On February 2, 1999, the Company acquired the Bathrooms Division of Blue Circle
Industries PLC, a manufacturer of ceramic sanitaryware, brassware and integrated
plumbing systems, for approximately $430 million, including fees and expenses
and net of cash acquired, with borrowings under the Company's 1997 Credit
Agreement. On February 8, 1999, The Company refinanced $60 million of such
indebtedness with the proceeds of a borrowing under a short-term loan facility
provided by Goldman Sachs Credit Partners L.P. The acquired business consists of
two main businesses, Armitage Shanks, a United Kingdom manufacturer, and
Ceramica Dolomite, an Italian manufacturer ("Armitage/Dolomite") and had 1998
sales of approximately $290 million and assets at December 31, 1998 of
approximately $250 million. Armitage/Dolomite has 3 major facilities and 9
smaller facilities, located in the United Kingdom and Italy, and employs
approximately 3,200 people. The primary markets for its products are in the
United Kingdom, Italy, Ireland and Germany. The Company is formulating plans to
integrate Armitage/Dolomite into existing European operations and expects to
complete this process by the end of 1999. This process may result in action
being taken which could result in additional costs or increase the amount of
goodwill.
This acquisition is being accounted for as a purchase. The Company is in the
process of valuing the assets acquired and liabilities assumed for purposes of
allocating the purchase price. Although the evaluation process is not expected
to be completed until the end of 1999, the Company's preliminary estimates
indicate that goodwill of approximately $250 million will be recorded.
<PAGE>
Note 3. Public Offering of Debt
On May 4, 1999, the Securities and Exchange Commission ("SEC") declared
effective a shelf registration statement jointly filed by American Standard
Companies Inc. and its wholly-owned subsidiary American Standard Inc. covering
$1 billion of senior debt securities (the "1998 Shelf Registration"). The debt
securities to be sold under the 1998 Shelf Registration will be issued by
American Standard Inc. and unconditionally guaranteed by American Standard
Companies Inc. The Company intends to use the net proceeds from the sale of such
debt securities for general corporate purposes, which may include the repayment
of outstanding debt, including debt incurred to finance the acquisition of the
Bathrooms Division of Blue Circle Industries PLC, as well as certain
investments, acquisitions, additions to working capital or capital expenditures.
Note 4. Comprehensive Income
Total comprehensive income (loss), consisting of net income or loss and foreign
currency translation effects, for the three months ended March 31, 1999 and 1998
were $65 million and $49 million, respectively.
Note 5. Tax Matters
As described in Note 7 of Notes to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, there
are pending German tax issues for the years 1984 through 1990. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Note 6. Impact of Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Company's use of
derivative instruments and hedging activities is minimal, and therefore
management believes that the adoption of Statement No. 133 will not have a
significant effect on the Company's results of operations or financial position.
<PAGE>
Note 7. Segment Data
<TABLE>
Summary Segment and Income Data
Dollars in millions
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
--------
1999 1998
Sales: ------ ------
<S> <C> <C>
Air Conditioning Products $ 942 $ 838
Plumbing Products 415 358
Automotive Products 292 272
Medical Systems 26 25
------ ------
Total sales $1,675 $1,493
====== ======
Segment income (loss):
Air Conditioning Products $ 76 $ 73
Plumbing Products 34 19
Automotive Products 39 42
Medical Systems (4) (4)
------ ------
Total segment income 145 130
Equity in net income of unconsolidated
joint ventures 8 6
------ ------
153 136
Interest expense (46) (51)
Corporate items (27) (24)
------ ------
Income before income taxes $ 80 $ 61
====== ======
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the First Quarter of 1999 Compared with the First
Quarter of 1998
The Company achieved record first quarter sales of $1,675 million in
1999, an increase of 12% from $1,493 million in the first quarter of 1998
(with little effect from foreign exchange). Sales increased 12% for Air
Conditioning Products, 16% for Plumbing Products and 7% for Automotive
Products, while sales for Medical Systems were essentially at the same level
as the first quarter of 1998.
Segment income was $145 million for the first quarter of 1999, an
increase of 12% from $130 million in the first quarter of 1998 (with little
effect from foreign exchange). Segment income increased 4% for Air
Conditioning Products and 79% for Plumbing Products, but declined 7% for
Automotive Products. Medical Systems' segment loss was at the same level as
in the first quarter of 1998.
Sales of Air Conditioning Products increased 12% (with little overall
effect from foreign exchange) to $942 million for the first quarter of 1999
from $838 million for the first quarter of 1998. Worldwide Applied Systems
sales increased 16% (15% excluding foreign exchange effects) due to strong
performance in the U.S. commercial equipment business and sales and service
operations, partly offset by a small decline in the international applied
business, primarily in Asia. U.S. sales of commercial applied products
increased 24% because of higher volumes, reflecting continued strength in the
U.S. commercial applied business and the adverse effect in the first quarter
of 1998 of a four-week strike at the Lexington, Kentucky, air handling
facility. Worldwide Unitary Systems sales increased 8% primarily from higher
volumes in U.S. residential and commercial operations. U.S. unitary sales
increased 9% reflecting continued strength in the U.S. commercial and
residential unitary markets. International unitary sales increased 4% (2%
excluding foreign exchange effects) principally as a result of volume
improvements in Europe, partly offset by declines in Latin America and the
Middle East.
Segment income of Air Conditioning Products increased 4% (with little
effect from foreign exchange) to $76 million in the first quarter of 1999
from $73 million in the first quarter of 1998. Worldwide Applied Systems
benefited from improved volume in the U.S., which was offset by weakness in
international markets. Worldwide Unitary Systems posted strong growth in the
U.S. from both volume and margin improvement despite the effect of a
three-week strike at the Clarksville commercial facility. International
unitary results declined due to weakness in Latin America and Middle East
markets.
Sales of Plumbing Products increased 16% (with little effect from
foreign exchange) to $415 million in the first quarter of 1999, from $358
million in the first quarter of 1998 as a result of gains in Europe and the
Americas. The European increase included $54 million of sales as a result of
the Armitage/Dolomite acquisition on February 2, 1999 (see Note 2 of Notes to
Financial Statements), partly offset by a reduction of $16 million of sales
related to the divestiture of Porcher distribution in the fourth quarter of
1998. Sales in the Americas increased 11% (17% excluding foreign exchange
effects) due to strong growth in the U.S. and gains in Latin America
(excluding foreign exchange). U.S. operations achieved an 18% sales increase
on higher volume, primarily through expanding major retailers.
<PAGE>
Segment income of Plumbing Products increased 79% to $34 million for
the first quarter of 1999 from $19 million for the 1998 first quarter. The
increase was principally attributable to benefits from the restructuring of
European operations to a low-cost sourcing program, the Armitage/Dolomite
acquisition and substantial volume improvements in the Americas.
Sales of Automotive Products for the first quarter of 1999 were $292
million, an increase of 7% (6% excluding the favorable effects of foreign
exchange) from $272 million in the first quarter of 1998. This increase
resulted primarily from higher volume, as unit volume of truck and bus
production in Western Europe increased 4% over the first quarter of 1998. In
addition, sales increased because of higher product content per vehicle on
new model introductions launched in 1998 and increased shipments of anti-lock
braking systems (ABS) to the Company's U.S. braking systems joint venture.
Increased sales in the U.S. in the first quarter of 1999 reflected the
continued phase-in of regulations requiring ABS on all new heavy-duty trucks
and trailers. These gains were partly offset by a sharp decline in Brazilian
sales.
Segment income for Automotive Products for the first quarter of 1999
decreased $3 million (with little effect from foreign exchange) to $39
million from $42 million in the first quarter of 1998. This reflected the
weak economy in Brazil and increased product development spending in the
European operations.
Medical Systems sales were $26 million in the quarter, essentially the
same as the prior year first quarter, reflecting increased sales of new
diagnostic products offset by the expected sales declines of older
radioimmunoassay products. The segment loss of $4 million was at the same
level as the first quarter of 1998. Development costs of new diagnostic
products continues at a high level and efforts continue to obtain U.S. and
European regulatory approvals of new diagnostic products and tests.
Equity in net income of unconsolidated joint ventures increased to $8
million in the first quarter of 1999 from $6 million in the year-earlier
quarter, reflecting the continued strong growth of Automotive Products' U.S.
braking systems joint venture.
Other Summary Income Data Items
Interest expense decreased $5 million in the first quarter of 1999
compared to the year-earlier quarter principally due to lower average
interest rates achieved through 1998 debt refinancings, which more than
offset the effect of increased debt arising principally from the
Armitage/Dolomite acquisition. Corporate and other expenses in the first
quarter of 1999 were $27 million, $3 million higher than in the prior year
first quarter mainly due to increased minority interest in net income of
consolidated joint ventures and higher corporate spending.
<PAGE>
The income tax provision for the first quarter of 1999 was $33 million,
or 41.5% of pretax income, compared with a provision of $25 million, or 40.5%
of pretax income in the first quarter of 1998.
Liquidity and Capital Resources
Net cash used by operating activities, after cash interest paid of $47
million, was $58 million for the first quarter of 1999, compared with net
cash provided of $44 million for the same period of 1998. The $102 million
decrease resulted primarily from unfavorable changes in working capital items
primarily related to growth of the business. Accounts receivable and
inventories increased in the first quarter of both years, reflecting the
normal seasonal pattern. The receivables increase was larger in 1999
primarily because of increased sales. The inventory increase was
approximately the same as in 1998. The Company made capital expenditures of
$53 million for the first quarter of 1999, including $19 million of
investments in affiliated companies and other businesses (but excluding the
Armitage/Dolomite acquisition) compared with capital expenditures of $58
million in the first quarter of 1998, including $10 million of investments in
affiliated companies.
In January 1997 the Company entered into the 1997 Credit Agreement.
This agreement, which requires no repayment of principal prior to its
expiration in 2002, provides the Company with senior secured credit
facilities aggregating $1.75 billion as follows: (a) a $750 million U.S.
dollar revolving credit facility and a $625 million multi-currency revolving
credit facility (the "Revolving Facilities"), which by their nature are
short-term, and (b) a $375 million multi-currency periodic access credit
facility. Up to $500 million of the Revolving Facilities may be used to issue
letters of credit. The 1997 Credit Agreement and certain other American
Standard Inc. debt instruments contain restrictive covenants and other
requirements with which the Company believes it is currently in compliance.
As of December 22, 1998, the Company completed an amendment to its 1997
Credit Agreement. The amendment principally permits American Standard to
issue up to an additional $500 million principal amount of senior or
subordinated unsecured debt securities, and lowers the interest coverage
ratios and increases the debt coverage ratios applicable to the Company
beginning for periods ending December 31, 1998. The purpose of the amendment
was primarily to accommodate the refinancing of $150 million of American
Standard's 10 7/8% senior notes due May 15, 1999 and the financing of other
proposed capital expenditures, including the acquisition of Armitage/Dolomite
described below.
On February 2, 1999, the Company acquired the Bathrooms Division of
Blue Circle Industries PLC (Armitage/Dolomite), a manufacturer of ceramic
sanitaryware, brassware and integrated plumbing systems, for approximately
$430 million, including fees and expenses and net of cash acquired, with
borrowings under the Company's 1997 Credit Agreement. Armitage/Dolomite had
1998 sales of approximately $290 million and assets at December 31, 1998 of
approximately $250 million. The acquired business has 3 major facilities and
9 smaller facilities, located in the United Kingdom and Italy, and employs
approximately 3,200 people. The primary markets for its products are in the
United Kingdom, Italy, Ireland and Germany. The Company plans to integrate
Armitage/Dolomite into existing European operations by the end of 1999. This
process may result in action being taken which could result in additional
costs or increase the amount of goodwill. This acquisition is being accounted
<PAGE>
for as a purchase. The Company is in the process of valuing the assets
acquired and liabilities assumed for purposes of allocating the purchase
price. Although the evaluation process is not expected to be completed until
the end of 1999, the Company's preliminary estimates indicate that goodwill
of approximately $250 million will be recorded. Temporary refinancing of $60
million of the indebtedness incurred to fund the acquisition was obtained
pursuant to a short-term Credit Agreement dated as of February 2, 1999
between American Standard Companies Inc., American Standard Inc. and Goldman
Sachs Credit Partners L.P. (the "Temporary Facility"). The indebtedness under
the Temporary Facility is senior unsecured debt of American Standard Inc.,
and is guaranteed by American Standard Companies Inc. Interest accrued on the
amount borrowed under the Temporary Facility at the rate of 7-3/8% per annum
until March 22, 1999 and at increased rates thereafter, currently 7.925%. It
is anticipated that the outstanding principal amount under the Temporary
Facility will be repaid with proceeds from the sale of debt securities to be
offered to the public following the effectiveness of the shelf registration
statement described above.
At March 31, 1999, the Company had borrowings of $1,087 million
outstanding under the Revolving Facilities. There was $210 million available
under the Revolving Facilities after reduction for borrowings and for $78
million of letters of credit usage. The Company's foreign subsidiaries had
$87 million available at March 31, 1999, under overdraft facilities that can
be withdrawn by the banks at any time. The Company also had $60 million of
borrowings outstanding under the Temporary Facility as described above.
On May 4, 1999, the Securities and Exchange Commission ("SEC") declared
effective a shelf registration statement jointly filed by American Standard
Companies Inc. and its wholly-owned subsidiary American Standard Inc.
covering $1 billion of senior debt securities (the "1998 Shelf
Registration"). The debt securities to be sold under the 1998 Shelf
Registration will be issued by American Standard Inc. and unconditionally
guaranteed by American Standard Companies Inc. The Company intends to use the
net proceeds from the sale of such debt securities for general corporate
purposes, which may include the repayment of outstanding debt, including debt
incurred to finance the acquisition of the Bathrooms Division of Blue Circle
Industries PLC, as well as for certain investments, acquisitions, additions
to working capital or capital expenditures.
The Company plans to offer and sell up to $500 million of senior notes
in May 1999 under the 1998 Shelf Registration. Pending completion of that
offering, temporary financing of up to $150 million, at the same interest
rates applicable under the Temporary Facility described above, has been
obtained from Goldman Sachs Credit Partners L.P. to pay principal and
interest at maturity on the 10 7/8% senior notes due May 15, 1999. To the
exent borrowings are made under this temporary financing, they will be repaid
from the proceeds of the sale of senior notes under the 1998 Shelf
Registration.
<PAGE>
On May 6, 1999, the Company announced that it had engaged Goldman Sachs
& Co. and Vector Securities International, Inc. as advisors to evaluate the
potential and prospects for the Company's Medical Systems business and to
review and make recommendations to the Company's Board of Directors
concerning its strategic options.
As described in Note 7 of Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998, there are pending German Tax issues for the years 1984 through 1990.
There has been no change in the status of these issues since that report was
filed.
Year 2000 Readiness Disclosure
The following is a Year 2000 Readiness Disclosure in accordance with
the Year 2000 Information and Readiness Disclosure Act.
Year 2000 compliance plan. The Company has established a comprehensive
Year 2000 initiative, having appointed teams responsible for all of its
locations worldwide, coordinated by team leaders reporting directly to the
business group leaders, and in some cases employing third-party experts.
The Vice President of Information Technology, who reports directly to the
Chairman and Chief Executive Officer, heads the project. Progress reports
are made periodically to the Audit Committee of the Board of Directors. The
teams are responsible for assuring that all core business systems and
transactions with customers, suppliers, financial institutions and other
third parties will be Year 2000 ready. Additionally, a consultant has been
retained at corporate headquarters to provide overall guidance and
assistance with the compliance plan. Consultants have also been employed at
various operating locations to augment the efforts of the local Year 2000
teams or to provide expertise in certain areas. In general, a coordinated
approach has been undertaken by the Company's Year 2000 teams worldwide,
with "best practices" shared among teams. The principal phases of the
initiative include:
Inventory - identification of all technology and systems, including
imbedded technology in manufacturing and other operating and control
systems that could be affected by the Year 2000 issue. This phase is
essentially complete.
Assessment- testing and evaluating whether remediation is necessary
and prioritizing tasks based on whether the system is evaluated as
"critical", the size of the system and the perceived risk. This phase
is ongoing but was essentially complete by the end of the first
quarter of 1999.
Remediation and Testing - Remediation includes the replacement or
modification of non-compliant technology with technology that is Year
2000 compliant. All new or modified systems are expected to be tested
in a Year 2000 environment from the beginning of the transaction
process to the end. Completion is expected by mid-1999 for all core
systems. Existing non-core systems will be modified and tested, or
contingency plans will be put in place to minimize or eliminate the
effect of Year 2000 problems. Completion of non-core systems is
expected in the third and fourth quarters of 1999.
<PAGE>
Contingency planning - development of contingency plans in situations
where there is substantial risk that compliance will not be achieved
at any Company location or by any critical supplier in time to avoid
Year 2000 problems. Contingency plans are expected to be in place by
mid-1999.
Third party relationships - communicating and working with suppliers,
customers and other third parties with whom the Company does business
to minimize the potential adverse effects of Year 2000 problems. This
includes evaluating new and previously sold products that incorporate
equipment controls with imbedded technology to identify and resolve
any problems that customers may have with Company products as a result
of the arrival of the year 2000.
State of readiness. Management believes that substantial progress has
been made towards the objective of having all core business systems Year 2000
compliant. The project's phases are in varying degrees of completion. We
define substantial progress as the fact that at March 31, 1999, approximately
85% of the Company's Year 2000 plan has been completed. When situations are
identified where there is substantial risk that any important objectives of
the project will not be met, the Company has dedicated and will continue to
dedicate additional resources.
For several years the Company has been converting most of its mainframe
computer applications and systems worldwide to client server technology and,
in conjunction therewith, has been installing software that is Year 2000
compliant. For all systems other than mainframe, software that is Year 2000
compliant is also being installed, including desktop applications. Most of
these initiatives were undertaken irrespective of any Year 2000
considerations and, except for a few instances, implementation would have
been completed before the year 2000. Substantial progress has been made on
these installations and many of the individual projects have been completed.
Completion of most others is expected by mid-1999. For those installations
not expected to be completed until the year 2000, revisions are being made to
existing systems to ensure readiness.
Third-party relationships. The Company has initiated communications
with suppliers, customers and other third parties to identify and assess Year
2000 risks and to develop solutions that will minimize any adverse impact on
the Company. Over 75%, in number, of the Company's suppliers have responded,
and the Company expects to resolve timely any identified problems with
critical or non-responding suppliers or to develop contingency plans where
possible. The Company's manufacturing facilities are highly dependent on
public utilities, especially electrical power, natural gas, water and
communications companies. There is a risk that suppliers or others on whom
the Company relies will not successfully address Year 2000 issues. Should one
or more critical suppliers be unable to supply us with products or services
at any of the Company's 120 manufacturing locations, and the Company or the
supplier not have established appropriate contingency plans, such failure
could result in the inability of the Company, at that location, to deliver
products on a timely basis and have a material adverse effect on the results
of operations at that location.
<PAGE>
The Company does not believe that it has material Year 2000 exposure
with respect to products sold to customers. The only Company products
containing imbedded electronic systems subject to Year 2000 issues are
commercial air conditioning and medical products. The Company is evaluating
imbedded electronic control systems in products sold to customers of its
commercial air conditioning systems and medical products. Computer controls
for commercial air conditioning systems and medical products are being
checked and replaced where necessary. This process is expected to be complete
by mid-1999.
The Company is evaluating delivery commitments to customers, product
warranties and representations made with respect to Year 2000 compliance of
its products. Management believes that it is adequately addressing such
issues and that, subject to the considerations described above, any potential
material liability to third parties for Year 2000 failures in its products or
inability to deliver products timely is remote.
Risks and contingency plans. Management believes that the Company's
most reasonably likely worst case scenario is some short-term, localized
disruptions of systems, manufacturing operations, facilities or suppliers
that will affect individual business operations, rather than broad-based,
systemic, or long-term problems affecting operating segments or groups of
operations. The most significant uncertainties relate to critical suppliers,
particularly electrical power, water, natural gas and communications
companies, and suppliers of parts and materials that are vital to the
continuity of operations. Contingency plans are being formulated and put in
place, where possible, for all critical suppliers. These measures include
finding alternative sources of supply and purchasing safety stocks of parts
and materials if failure of a supplier is expected, and forming emergency
response teams at each operating location to deal with any problems which
develop.
Costs. The Company's estimated cost to become Year 2000 compliant is
approximately $22 million. Of this, approximately $15 million are costs being
charged to expense as incurred, including internal and external labor to
repair or modify existing software, and costs of consultants employed at
various locations to assist with implementation of the Company's plan. The
balance of estimated costs represent replacement hardware and software to be
capitalized. Through March 31, 1999, approximately $12 million had been
expended, of which $8 million had been charged to expense. These costs are
generally not incremental to existing information technology budgets, as
existing internal resources were redeployed and the costs of consultants
employed are less than 10% of total Year 2000 costs. The costs of
implementing client server technology and other software changes made for
reasons other than the Year 2000 and which were not accelerated are not
included in these estimates. There were no significant deferrals of
information technology projects because of the Company's response to Year
2000 issues. Information technology planning has incorporated client server
and Year 2000 initiatives for several years and, therefore, there has been
little effect on the Company's operations because of unexpected deferrals of
projects important to growth or competitiveness. All costs are being funded
from operating cash flows or other resources available to the Company. Based
upon information currently available and current estimates, management
believes that the Company's costs to become Year 2000 compliant will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows in future periods. Total costs, anticipated impact
<PAGE>
and the expected dates to complete the various phases of the project are
based on management's best estimates using information currently available
and certain assumptions about future events. However, no assurance can be
given that actual results will be consistent with such estimates and,
therefore, actual costs, impacts and completion dates could differ materially
from those plans. See "Disclosure Regarding Forward Looking Statements".
-----------------------
Disclosure Regarding Forward Looking Statements
Comments in this Quarterly Report on Form 10-Q contain certain
forward-looking statements that are based on management's good faith
expectations and belief concerning future developments. Actual results may
differ materially from these expectations as a result of many factors,
relevant examples of which are set forth in the Company's 1998 Annual Report
on Form 10-K and in the "Management's Discussion and Analysis" section of the
Company's 1998 Annual Report to Shareholders and Quarterly Reports on Form
10-Q.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of German tax issues see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in Part I of this report which is incorporated herein by
reference.
Item 5. Other Information.
For a discussion of the Company's shelf registration statement filed
jointly by American Standard Companies Inc. and its wholly-owned subsidiary,
American Standard Inc. covering $1 billion of senior debt securities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Part I, which is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits listed on the accompanying Index to Exhibits
are filed as part of this quarterly report on Form 10-Q.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K dated February
12, 1999, that described:
1. The acquisition of the Bathrooms Division of Blue
Circle Industries PLC.
2. The short-term credit agreement entered into between
American Standard Companies Inc., American Standard
Inc. and Goldman Sachs Credit Partners L.P. for the
temporary refinancing of $60 million of the purchase
price of the Bathrooms Division of Blue Circle
Industries PLC.
3. The announcement of the Company's earnings for the year
ended December 31, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN STANDARD INC.
------------------------
G. Ronald Simon
Vice President and Controller
(Principal Accounting Officer)
May 13, 1999
<PAGE>
AMERICAN STANDARD INC.
INDEX TO EXHIBITS
Exhibit No. Description
(27) Financial Data Schedule
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 1,127
<ALLOWANCES> 37
<INVENTORY> 563
<CURRENT-ASSETS> 1,818
<PP&E> 1,906
<DEPRECIATION> 581
<TOTAL-ASSETS> 5,122
<CURRENT-LIABILITIES> 2,916
<BONDS> 1,483
0
0
<COMMON> 0
<OTHER-SE> (274)
<TOTAL-LIABILITY-AND-EQUITY> 5,122
<SALES> 1,675
<TOTAL-REVENUES> 1,675
<CGS> 1,251
<TOTAL-COSTS> 1,251
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 80
<INCOME-TAX> 33
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
