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, 1998
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 1-11415
AMERICAN STANDARD COMPANIES INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3465896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Centennial Avenue, P.O. Box 6820, Piscataway, 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, 1998 72,468,122 shares
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
American Standard Companies Inc. is a Delaware corporation organized in
March 1988, and has as its only investment all the outstanding common stock of
American Standard Inc. Hereinafter, "the Company" will refer to American
Standard Companies Inc. or to its subsidiary, American Standard Inc., as the
context requires.
The following summary statement of operations of the Company and
subsidiaries for the three months ended March 31, 1998 and 1997 has not been
audited, but management believes that all adjustments, consisting of normal
recurring items, necessary to a fair presentation of financial data for those
periods have been included. Results for the first three months of 1998 are not
necessarily indicative of results for the entire year.
AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF OPERATIONS
(Dollars in millions except
per share amounts)
Three months ended
March 31,
1998 1997
------ ------
SALES $1,493 $1,361
------ ------
COST AND EXPENSES
Cost of sales 1,124 1,018
Selling and administrative expenses 258 236
Other (income) expense (1) 5
Interest expense 51 49
------ -----
1,432 1,308
------ -----
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 61 53
Income taxes 25 19
------- -------
INCOME BEFORE
EXTRAORDINARY ITEM 36 34
Extraordinary loss on retirement of debt, net of taxes - 9
------- -------
NET INCOME $ 36 $ 25
=======- =======
PER COMMON SHARE
Basic: Income before extraordinary item $ .50 $ .44
Extraordinary loss - (.11)
------- -------
Net income $ .50 $ .33
======= =======
Diluted: Income before extraordinary item $ .49 $ .43
Extraordinary loss - (.11)
------- -------
Net income $ .49 $ .32
======= =======
Average common shares outstanding
Basic 72,096,082 76,296,122
Diluted 74,290,956 78,756,631
See accompanying notes
<PAGE>
Item 1. Financial Statements (continued)
AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES
UNAUDITED SUMMARY BALANCE SHEET
(Dollars in millions
except share data)
March 31, December 31,
1998 1997
--------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 84 $ 29
Accounts receivable 884 831
Inventories
Finished products 289 255
Products in process 102 87
Raw materials 104 89
----- -----
495 431
Other current assets 110 103
----- -----
TOTAL CURRENT ASSETS 1,573 1,394
FACILITIES, less accumulated depreciation:
March 1998 - $599; Dec. 1997 - $578 1,151 1,139
GOODWILL 835 844
OTHER ASSETS 345 292
------ ------
TOTAL ASSETS $3,904 $3,669
====== ======
CURRENT LIABILITIES
Loans payable to banks $ 67 $ 718
Current maturities of long-term debt 22 30
Accounts payable 475 466
Accrued payrolls 184 180
Other accrued liabilities 528 447
------ -----
TOTAL CURRENT LIABILITIES 1,276 1,841
LONG-TERM DEBT 2,315 1,551
RESERVE FOR POSTRETIREMENT BENEFITS 439 438
OTHER LIABILITIES 424 449
----- -----
TOTAL LIABILITIES 4,454 4,279
STOCKHOLDERS' DEFICIT
Preferred stock, 2,000,000 shares authorized,
none issued and outstanding - -
Common stock $.01 par value, 200,000,000
shares authorized, 72,354,974
shares issued and outstanding
in 1998; 71,962,713 in 1997 1 1
Capital surplus and other 589 587
Treasury stock (301) (310)
Accumulated deficit (639) (675)
Foreign currency translation effects (200) (213)
------ ------
TOTAL STOCKHOLDERS' DEFICIT (550) (610)
------ ------
$3,904 $3,669
====== ======
See accompanying notes
<PAGE>
Item 1. Financial Statements (continued)
AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF CASH FLOWS
(Dollars in millions)
Three months ended
March 31,
1998 1997
---- ----
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Income before extraordinary item $ 36 $ 34
Depreciation 32 31
Amortization of goodwill and other intangibles 12 9
Non-cash interest 16 15
Non-cash stock compensation 2 9
Changes in assets and liabilities:
Accounts receivable (50) (83)
Inventories (65) (60)
Accounts payable and other accruals 87 50
Other assets and liabilities (26) (20)
---- ----
Net cash provided (used) by operating activities 44 (15)
---- ----
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (48) (38)
Investments in affiliated companies (10) (1)
Other (6) -
---- ----
Net cash used by investing activities (64) (39)
---- ----
FINANCING ACTIVITIES:
Repurchase of common stock - (208)
Proceeds from issuance of long-term debt 761 376
Repayments of long-term debt (9) (347)
Net change in revolving credit facility (653) 238
Net change in other short-term debt 1 13
Financing costs (30) (8)
Other 5 9
---- ----
Net cash provided by financing activities 75 73
---- ----
Effect of exchange rate changes on cash and
cash equivalents - (1)
---- ----
Net increase in cash and cash equivalents 55 18
Cash and cash equivalents at beginning of period 29 60
---- ----
Cash and cash equivalents at end of period $ 84 $ 78
==== ====
See accompanying notes
<PAGE>
AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Public Offering of Debt
In the first quarter and early April 1998, the Company completed public
offerings of $1 billion principal amount of senior debt securities,
including: (i) $125 million of 7 1/8% Senior Notes due 2003; (ii) $250
million of 7 3/8% Senior Notes due 2005; (iii) $350 million of 7 3/8% Senior
Notes due 2008; and (iv) $275 million of 7 5/8% Senior Notes due 2010. The
Company will use the net proceeds of these offerings (approximately $963
million, net of underwriting discounts and interest rate hedge costs) to
redeem, on June 1, 1998 (the "Redemption"), its 10 1/2% Senior Subordinated
Discount Debentures due 2005 and 9 7/8% Senior Subordinated Notes due 2001.
The total amount required to complete the Redemption, including redemption
premiums, is $954 million, net of the effect of the settlement of certain
swap transactions related to the Senior Subordinated Discount Debentures.
Pending the Redemption, the net proceeds of the offerings were applied to the
extent possible to reduce borrowings under the revolving portion of the
Company's $1.75 billion bank credit agreement (the "1997 Credit Agreement")
and the excess was invested in short-term securities. The Redemption will be
funded using approximately $200 million of such short-term securities and
$750 million of borrowings under the revolving portion of the 1997 Credit
Agreement. In accordance with the terms of the 10 1/2% Senior Subordinated
Discount Debentures, on June 1, 1998, interest on the debentures would become
payable in cash. As a result of the Redemption, the Company expects to reduce
its total annual cash interest payments by approximately $24 million compared
to the amount that would otherwise be payable and to reduce its annual net
interest expense by approximately $20 million before taxes. In addition, the
second quarter of 1998 will include an extraordinary charge of approximately
$50 million, net of taxes, related to the Redemption, including call premiums
and the write-off of unamortized debt issuance costs.
Note 2. Comprehensive Income
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. Total
comprehensive income (loss), consisting of net income and foreign currency
translation effects, was $49 million and $(44) million for the three months
ended March 31, 1998 and 1997, respectively.
Note 3. Tax Matters
As described in Note 6 of Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, 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 4. Earnings Per Share
The average number of outstanding common shares used in computing
diluted earnings per share for the first quarter of 1998 and 1997 included
2,194,874 and 2,460,509 average incremental shares, respectively, for the
assumed exercise of stock options.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Sales for the first quarter of 1998 were $1.5 billion, an increase of
10% (14% excluding the adverse effects of foreign exchange) from $1.4 billion
in the first quarter of 1997. Operating income was $125 million, an increase
of 5% (11% excluding the adverse effects of foreign exchange) from $119
million in the first quarter of 1997.
SUMMARY SEGMENT AND INCOME DATA
(Dollars in millions)
(Unaudited)
Three Months Ended
March 31,
---------
1998 1997
Sales: ------ ------
Air Conditioning Products $ 838 $ 782
Plumbing Products 358 343
Automotive Products 272 236
Medical Systems 25 -
----- ------
Total sales $1,493 $1,361
====== ======
Operating income (loss):
Air Conditioning Products $ 68 $ 69
Plumbing Products 19 22
Automotive Products 42 32
Medical Systems (4) (4)
------ ------
125 119
Equity in net income of unconsolidated
joint ventures 6 2
------ ------
131 121
Interest expense (51) (49)
Corporate items (19) (19)
------ ------
Income before income taxes and
extraordinary item $ 61 $ 53
======= =======
<PAGE>
Results of Operations for the First Quarter of 1998 Compared with the
First Quarter of 1997
The Company achieved record first quarter sales of $1,493 million in
1998, an increase of 10% (14% excluding the unfavorable effects of foreign
exchange) from $1,361 million in the first quarter of 1997. Sales increased
7% for Air Conditioning Products, 4% for Plumbing Products and 15% for
Automotive Products, and included $25 million for the new Medical Systems
segment.
Operating income was $125 million for the first quarter of 1998, an
increase of 5% (11% excluding the unfavorable effects of foreign exchange)
from $119 million in the first quarter of 1997. Operating income increased
31% for Automotive Products, was essentially flat for Air Conditioning
Products and declined 14% for Plumbing Products. Medical Systems' operating
loss was at the same level as in the first quarter of 1997.
Sales of Air Conditioning Products increased 7% (9% excluding the
unfavorable effects of foreign exchange) to $838 million for the first
quarter of 1998 from $782 million for the first quarter of 1997. This
improvement reflects continued strength in the U.S. commercial unitary and
applied businesses, together with increased revenues from the growing sales
and service operations. Sales of commercial products increased primarily on
higher volumes, despite the adverse effects of a four-week strike at the
Lexington, Kentucky air handling facility. Sales of residential unitary
products in the U.S. were flat as dealers, cautioned by the
cooler-than-normal summer weather of 1997, were reluctant to carry large
inventories in advance of the summer cooling season. International sales
increased 8% (16% excluding foreign exchange effects) as a result of volume
improvements in Europe, the Middle East and Latin America.
Operating income of Air Conditioning Products decreased $1 million
(with little effect from foreign exchange) to $68 million in the first
quarter of 1998 from $69 million in the 1997 quarter. Improvements in the
U.S. commercial and residential businesses were offset by the effects of the
four-week strike, economic weakness in the Far East and continued competitive
pricing pressures in Europe.
Sales of Plumbing Products increased 4% (12% excluding the unfavorable
effects of foreign exchange) to $358 million in the first quarter of 1998,
from $343 million in the first quarter of 1997. This increase primarily
reflected higher sales in the U.S., Latin America and the effect of
consolidating the operations in China since the fourth quarter of 1997. U.S.
operations achieved a 10% sales increase on higher volume, primarily through
expanding major retailers. Excluding the unfavorable effects of foreign
exchange, international sales increased 12% on higher volumes in Latin
America and Europe, partly offset by significantly lower sales in the Far
East (excluding China) as a result of the adverse economic conditions in that
area.
Operating income of Plumbing Products decreased $3 million to $19
million for the first quarter of 1998 from $22 million for the 1997 period,
but increased $1 million excluding the unfavorable effects of foreign
exchange. The exchange-adjusted increase in operating income resulted
primarily because of higher volume in the U.S. and Latin America and the
consolidation of the China operations, partly offset by the effects of
economic weakness in the rest of the Far East and inefficiencies associated
with transitioning the Company's European operations to a low-cost sourcing
program.
<PAGE>
Sales of Automotive Products for the first quarter of 1998 were $272
million, an increase of 15% (23% excluding the unfavorable effects of foreign
exchange) from $236 million in the first quarter of 1997. This increase
resulted primarily from higher volume, as unit volume of truck and bus
production in western Europe increased 18% over the first quarter of 1997. In
addition, sales increased because of higher product content per vehicle on
new model introductions launched in 1997 and increased shipments of anti-lock
braking systems (ABS) to the Company's U.S. marketing joint venture.
Increased sales in the U.S. in the first quarter of 1998 reflected the
phase-in of regulations requiring ABS on all new heavy-duty trucks and
trailers together with an increased level of heavy truck production.
Operating income for Automotive Products for the first quarter of 1998
increased 31% (40% excluding the unfavorable effects of foreign exchange) to
$42 million from $32 million in the first quarter of 1997. This reflected
higher overall sales and improved margins in the European operations, partly
offset by lower margins in Brazil and start-up costs of the new
majority-owned compressor manufacturing joint venture in the U.S.
Medical Systems sales were $25 million in the first quarter of 1998,
reflecting the acquisition of the diagnostic business in June 1997 and
initial small shipments of the new diagnostic products. The operating loss of
$4 million was at the same level as the first quarter of 1997. Development
costs of new diagnostic products were offset by the operating results of the
diagnostic business acquired in June 1997. Progress continues on U.S. and
European regulatory approvals of new diagnostic products and tests.
Equity in net income of unconsolidated joint ventures increased to $6
million in the first quarter of 1998 from $2 million in the year-earlier
quarter, reflecting the strong growth of Automotive Products' U.S. marketing
joint venture and increased earnings from the Company's financing joint
venture established in 1996.
Financial Review
Interest expense increased $2 million in the first quarter of 1998
compared to the year-earlier quarter principally due to the increased debt
arising from the 1997 share repurchases and the acquisition of the medical
diagnostic business. Corporate and other expenses in the first quarter of
1998 were at the same level as a year earlier.
The income tax provision for the first quarter of 1998 was $25 million,
or 40.5% of pretax income, compared with a provision of $19 million, or 36.3%
of pretax income in the first quarter of 1997. The lower effective tax rate
in 1997 resulted from utilization of certain previously unrecognized tax
benefits. No similar benefits are available in 1998.
As a result of the redemption of debt in the first quarter of 1997 upon
completion of a refinancing, the first quarter of 1997 included an
extraordinary charge of $9 million, net of taxes, attributable to the
write-off of unamortized debt issuance costs. On June 1, 1998, the Company
<PAGE>
will redeem its outstanding 10-1/2% Senior Subordinated Discount Debentures
and 9-7/8% Senior Subordinated Notes with the proceeds of four senior note
offerings completed in early 1998 as described below. In connection
therewith, the second quarter of 1998 will include an extraordinary charge of
approximately $50 million, net of taxes, including call premiums and the
write-off of unamortized debt issuance costs.
Liquidity and Capital Resources
Net cash provided by operating activities, after cash interest paid of
$18 million, was $44 million for the first quarter of 1998, compared with net
cash used of $15 million for the similar period of 1997. The $59 million
improvement resulted primarily from favorable changes in working capital
items despite growth of the business. Although accounts receivable and
inventories increased in the first quarter of both years, reflecting normal
seasonality, the receivables increase was not as large in 1998 as in 1997, in
part because of increased receivables financing through the Company's
financial services joint venture. The inventory increase was approximately
the same as in 1997. The Company made capital expenditures of $58 million for
the first quarter of 1998, including $10 million of investments in affiliated
companies compared with capital expenditures of $39 million in the first
quarter of 1997, including $1 million of investments in affiliated companies.
In the first quarter and early April 1998, the Company completed public
offerings of $1 billion principal amount of senior debt securities,
including: (i) $125 million of 7 1/8% Senior Notes due 2003; (ii) $250
million of 7 3/8% Senior Notes due 2005; (iii) $350 million of 7 3/8% Senior
Notes due 2008; and (iv) $275 million of 7 5/8% Senior Notes due 2010. The
Company will use the net proceeds of these offerings (approximately $963
million, net of underwriting discounts and interest rate hedge costs) to
redeem, on June 1, 1998 (the "Redemption"), its 10 1/2% Senior Subordinated
Discount Debentures due 2005 and 9 7/8% Senior Subordinated Notes due 2001.
The total amount required to complete the Redemption, including redemption
premiums, is $954 million, net of the effect of the settlement of certain
swap transactions related to the Senior Subordinated Discount Debentures.
Pending the Redemption, the net proceeds of the offerings were applied to the
extent possible to reduce borrowings under the revolving portion of the
Company's $1.75 billion bank credit agreement (the "1997 Credit Agreement")
and the excess was invested in short-term securities. The Redemption will be
funded using approximately $200 million of such short-term securities and
$750 million of borrowings under the revolving portion of the 1997 Credit
Agreement. In accordance with the terms of the 10 1/2% Senior Subordinated
Discount Debentures, on June 1, 1998, interest on the debentures would become
payable in cash. As a result of the Redemption, the Company expects to reduce
its total annual cash interest payments by approximately $24 million compared
to the amount that would otherwise be payable and to reduce its annual net
interest expense by approximately $20 million before taxes.
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.
<PAGE>
At March 31, 1998, the Company had borrowings of $15 million
outstanding under the Revolving Facilities. There was $1.3 billion available
under the Revolving Facilities after reduction for borrowings and for $60
million of letters of credit usage. The Company's foreign subsidiaries had
$84 million available at March 31, 1998, under overdraft facilities that can
be withdrawn by the banks at any time. In addition, the Company's operations
in China have $39 million available under bank credit facilities after
reduction for borrowings of $8 million and letters of credit usage of $11
million.
As described in Note 6 of Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, 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.
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 public offerings of senior debt securities totaling
$1 billion under the Company's debt shelf registration filed jointly by
American Standard Companies Inc. and its wholly-owned subsidiary, American
Standard Inc., 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 January
9, 1998 related to changes in the Company's management and
certain business matters.
(ii) The Company filed a Current Report on Form 8-K dated February
6, 1998 related to the announcement of the Company's earnings
for the year ended December 31, 1997.
(iii) The Company filed a Current Report on Form 8-K dated February
10, 1998 related to the Company's adoption of Statement of
Financial Accounting Standards No. 128, concerning
computation of earnings per share.
<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 COMPANIES INC.
/s/ G. Ronald Simon
Vice President and Controller
(Principal Accounting Officer)
May 12, 1998
<PAGE>
AMERICAN STANDARD COMPANIES INC.
INDEX TO EXHIBITS
(The File Number of the Registrant, American Standard Companies Inc. is 1-11415)
Exhibit No. Description
(27) Financial Data Schedule
<PAGE>
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<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 84
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<RECEIVABLES> 915
<ALLOWANCES> 31
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<PP&E> 1,750
<DEPRECIATION> 599
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<BONDS> 2,315
0
0
<COMMON> 1
<OTHER-SE> (550)
<TOTAL-LIABILITY-AND-EQUITY> 3,904
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</TABLE>
