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