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 September 30, 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 33-64450
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
October 30, 1998 1,000
(shares)
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 and nine
months ended September 30, 1998 and 1997 has not been audited, but management
believes that all adjustments, consisting of normal recurring items, necessary
for a fair representation of financial data for those periods have been
included. Results for the three- and nine-month periods of 1998 are not
necessarily indicative of results for the entire year.
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF OPERATIONS
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----- ----- ----- -----
SALES $1,728 $ 1,519 $5,016 $ 4,469
------- ------- ------- -------
COST AND EXPENSES
Cost of sales 1,298 1,138 3,737 3,319
Selling and administrative expenses 282 236 829 730
Restructuring charge 35 - 35 -
Write-off of purchased research and
development - 90 - 90
Other expense (income) (1) 9 7 21
Interest expense 43 48 145 144
------- ------- ------- -------
1,657 1,521 4,753 4,304
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 71 (2) 263 165
Income taxes 35 31 113 91
------- ------- ------- -------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 36 (33) 150 74
Extraordinary loss on retirement of debt,
net of tax - - 50 24
------- ------- ------- -------
NET INCOME (LOSS) $ 36 $ (33) $ 100 $ 50
======= ====== ====== ======
<FN>
See accompanying notes
</FN>
Item 1. Financial Statements (continued)
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY BALANCE SHEET
(Dollars in millions except share data)
September 30, December 31,
1998 1997
------ ------
CURRENT ASSETS
Cash and cash equivalents $ 57 $ 29
Accounts receivable 1,032 831
Inventories
Finished products 298 255
Products in process 102 87
Raw materials 104 89
------ ------
504 431
Other current assets 115 103
------ ------
TOTAL CURRENT ASSETS 1,708 1,394
FACILITIES, less accumulated depreciation;
Sept. 1998 - $683; Dec. 1997 - $578 1,210 1,139
GOODWILL 875 844
OTHER ASSETS 709 603
------ ------
TOTAL ASSETS $4,502 $3,980
======= ======
CURRENT LIABILITIES
Loans payable to banks $ 742 $ 718
Current maturities of long-term debt 170 30
Accounts payable 488 466
Accrued payrolls 225 180
Other accrued liabilities 599 456
------ ------
TOTAL CURRENT LIABILITIES 2,224 1,850
LONG-TERM DEBT 1,549 1,551
RESERVE FOR POSTRETIREMENT BENEFITS 470 438
OTHER LIABILITIES 477 468
------ ------
TOTAL LIABILITIES 4,720 4,307
STOCKHOLDER'S DEFICIT
Preferred stock, Series A, par
value $.01, 1000 shares
issued and outstanding - -
Common stock $.01 par value, 1,000 shares
issued and outstanding - -
Capital surplus 572 561
Accumulated deficit (575) (675)
Foreign currency translation effects (215) (213)
------ ------
TOTAL STOCKHOLDER'S DEFICIT (218) (327)
------ ------
$4,502 $3,980
====== ======
<FN>
See accompanying notes
</FN>
Item 1. Financial Statements (continued)
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED SUMMARY STATEMENT OF CASH FLOWS
(In millions)
Nine Months Ended
September 30,
1998 1997
---- ----
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Income before extraordinary item $150 $ 74
Write-off of purchased in-process
research and development - 90
Depreciation 98 94
Amortization of goodwill 40 27
Restructuring charges 35 -
Non-cash interest 30 44
Non-cash stock compensation 4 10
Changes in assets and liabilities:
Accounts receivable (177) (92)
Inventories (64) (84)
Accounts payable and other accruals 140 54
Other assets and liabilities (22) 9
---- ----
Net cash provided by operating activities 234 226
---- ----
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (156) (157)
Investments in affiliated companies (16) (1)
Acquisition of medical diagnostic businesses - (212)
Other (3) 5
---- ----
Net cash used by investing activities (175) (365)
---- ----
FINANCING ACTIVITIES:
Net loan (to) from Parent (35) (286)
Proceeds from issuance of long-term debt 1,011 399
Repayments of long-term debt,
including redemption premimums (971) (626)
Net change in revolving credit facility (10) 640
Net change in other short-term debt 8 11
Other (34) (16)
---- ----
Net cash provided (used) by financing activities (31) 122
---- ----
Effect of exchange rate changes on cash and
cash equivalents - (4)
---- ----
Net increase (decrease) in cash and cash equivalents 28 (21)
Cash and cash equivalents at beginning of period 29 60
---- ----
Cash and cash equivalents at end of period $ 57 $ 39
==== ====
<FN>
See accompanying notes
</FN>
AMERICAN STANDARD INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Restructuring Charges
In connection with a previously announced plan for a restructuring of its
European and North American plumbing operations, results for the third
quarter of 1998 include a restructuring charge of $35 million ($29 million
net of tax) related to the planned closure of two Plumbing Products' plants
in Europe. This charge includes $17 million of severance costs for
approximately 425 employees to be terminated and $18 million related
primarily to facility write-downs and lease cancellation. Closure of these
two facilities is expected to be completed by the end of 1998. The overall
restructuring program, which is designed to achieve lower product costs and
improve efficiency, is expected to result in charges of approximately $160 to
$185 million related to employee severance and consolidation of production
facilities. The Company expects to record the remaining charges in the fourth
quarter of 1998.
Note 2. Public Offering of Debt
In the first half of 1998, the Company completed public offerings of $1
billion principal amount of Senior Notes with interest rates ranging from
7-1/8% to 7-5/8% and maturity dates from 2003 to 2010. On June 1, 1998, the
Company used the net proceeds of these offerings (approximately $963 million,
net of underwriting discounts and interest rate hedge termination costs) to
redeem its 10-1/2% Senior Subordinated Discount Debentures and 9-7/8% Senior
Subordinated Notes. The total amount required to complete these redemptions,
including call premiums, was $954 million, net of the effect of the
settlement of certain interest rate swap transactions related to the Senior
Subordinated Discount Debentures. As a result of the redemptions, results for
the nine months ended September 30, 1998 include an extraordinary charge of
approximately $50 million (net of taxes), consisting of call premiums and the
write-off of unamortized debt issuance costs.
Note 3. 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 or loss and foreign
currency translation effects, for the three months and nine months ended
September 30, 1998 was $26 million and $98 million, respectively, and for the
three months and nine months ended September 30, 1997 was $(37) million and
$11 million, respectively.
Note 4. 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 5. Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted 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.
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's sales in the third quarter of 1998 increased 14% to
$1,728 million and operating income increased 4% to $162 million (excluding a
$35 million restructuring charge in the 1998 quarter and a $90 million write-off
of purchased in-process research and development in the 1997 quarter). Operating
income for the first nine months of 1998 was $489 million (excluding the
restructuring charge), an increase of 8% over the $452 million of operating
income in the first nine months of 1997 (excluding the write-off of purchased
in-process research and development).
SUMMARY SEGMENT AND INCOME DATA
(Dollars in millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Sales:
Air Conditioning Products $1,053 $ 919 $3,003 $2,684
Plumbing Products 387 352 1,129 1,062
Automotive Products 265 224 811 699
Medical Systems 23 24 73 24
---- ---- ---- ---
Total sales $1,728 $1,519 $5,016 $4,469
====== ====== ====== ======
Operating income (loss) before restructuring
charges and write-off of purchased
research and development:
Air Conditioning Products $108 $ 98 $308 $285
Plumbing Products 27 31 79 86
Automotive Products 33 31 117 94
Medical Systems (6) (5) (15) (13)
---- ---- ---- ---
162 155 489 452
Restructuring charges and write-off of
purchased research and development:
Plumbing Products restructuring charges (35) - (35) -
Medical Systems write-off of purchased
research and development - (90) - (90)
---- ---- ---- ---
(35) (90) (35) (90)
---- ---- ---- ---
Total operating income 127 65 454 362
Equity in net income of
unconsolidated joint ventures 9 3 21 9
Interest expense (43) (48) (145) (144)
Corporate and other expenses (22) (22) (67) (62)
---- ---- ---- ---
Income (loss) before income taxes
and extraordinary item $ 71 $ (2) $263 $165
==== ===== ==== ====
Results of Operations for the Third Quarter and First Nine Months of 1998
Compared with the Third Quarter and First Nine Months of 1997
The Company's sales in the third quarter of 1998 were $1,728 million,
an increase of $209 million, or 14% (with little effect from foreign exchange),
from $1,519 million in the third quarter of 1997. Sales increased 15% for Air
Conditioning Products, 10% for Plumbing Products and 18% Automotive Products
compared with the third quarter of 1997. Medical Systems contributed sales of
$23 million in the 1998 third quarter compared with $24 million in the prior
year period.
Operating income for the third quarter of 1998, excluding restructuring
charges of $35 million, was $162 million, an increase of $7 million, or 4% (with
little effect from foreign exchange), from $155 million in the third quarter of
1997 (excluding the $90 million write-off of purchased in-process research and
development). Operating income increased 10% for Air Conditioning Products and
6% for Automotive Products, and decreased 13% for Plumbing Products. Medical
Systems incurred an operating loss of $6 million compared with a loss of $5
million in the year-earlier quarter.
Sales for the first nine months of 1998 were $5,016 million, an
increase of $547 million, or 12% (15% excluding the unfavorable effects of
foreign exchange), from $4,469 million in the first nine months of 1997. The
increase reflected gains of 12% for Air Conditioning Products, 6% for Plumbing
Products, 16% for Automotive Products and sales for Medical Systems of $73
million for nine months in 1998 (compared with sales of $24 million for three
months in 1997 following the June 30, 1997 acquisition of the medical
diagnostics business). Operating income was $489 million for the first nine
months of 1998 (excluding the restructuring charges previously mentioned), an
increase of 8% (11% excluding the unfavorable effects of foreign exchange),
compared with $452 million in the first nine months of 1997 (excluding the
write-off of purchased in-process research and development). Operating income
increased 8% for Air Conditioning Products and 24% for Automotive Products but
declined 9% for Plumbing Products (1% excluding unfavorable foreign exchange
effects). Medical Systems incurred an operating loss of $15 million for the
first nine months of 1998 compared with an operating loss of $13 million for the
first nine months of 1997.
The following discussion of sales and operating income excludes the
effects of the restructuring charges for Plumbing Products in 1998 and the
write-off of purchased in-process research and development for Medical Systems
in 1997, as applicable.
Sales for Air Conditioning Products were $1,053 million for the third
quarter of 1998, an increase of 15% (16% excluding the unfavorable effects of
foreign exchange) from $919 million for the third quarter of 1997. Sales
increased 19% in the U.S. and 7% in international markets (excluding foreign
exchange effects). The U.S gain reflected a strong 26% increase in residential
product sales due to the effect of hotter than normal weather on the replacement
market as well as strong new construction. U.S. sales also benefited from
continued strength in commercial applied and unitary businesses and expanding
sales and service operations. International sales for the third quarter of 1998
increased principally because of higher volumes in Europe and Latin America,
offset partly by declines in China and other Far East countries. The applied
systems business was weakened by curtailments of large overseas construction
projects and competitive pricing pressures worldwide. Sales for Air Conditioning
Products for the first nine months of 1998 increased by 12% to $3,003 million
from $2,684 million in the first nine months of 1997, primarily for the reasons
cited for the third quarter increase, offset somewhat by the adverse effects of
a four-week strike in the first quarter of 1998 at the Lexington, Kentucky, air
handling facility.
Operating income for Air Conditioning Products increased 10% (with
little effect from foreign exchange) to $108 million in the third quarter of
1998 from $98 million in the 1997 third quarter. This primarily reflected the
effects of hotter than normal weather on U.S. residential products and increased
volumes in the U.S commercial unitary business and in Latin America. Partly
offsetting these gains were declines in the applied business, principally
because of margin declines in Europe, a drop in Far East sales volume and
pricing pressures in the U.S. and Far East. Operating income for the first nine
months of 1998 increased 8% (9% excluding unfavorable foreign exchange effects)
to $308 million from $285 million in the first nine months of 1997. This gain
resulted essentially for the reasons mentioned for the third quarter increase,
except that operating income for the applied business increased for the
nine-month period, as first-half gains exceeded the third-quarter decline. In
addition, the first nine months of 1998 were adversely affected by the first
quarter strike at Lexington.
Sales for Plumbing Products increased 10% (11% excluding unfavorable
foreign exchange effects) to $387 million in the third quarter of 1998 from $352
million in the third quarter of 1997. The gain reflected an increase of 18% in
the U.S. and 8% in international sales excluding unfavorable foreign exchange
effects. Sales in the U.S. increased as a result of higher volume, primarily
through expanding major retailers, and continued gains in market share.
International sales increased primarily from moderate volume increases in Europe
and Latin America, and from the effect of including operations in China on a
consolidated basis since the fourth quarter of 1997 following the acquisition of
a majority interest in those operations. The gain in international sales was
partly offset by lower sales in the Far East (excluding China) as a result of
the economic adversity in the region. Sales of Plumbing Products for the first
nine months of 1998 increased 6% (11% excluding foreign exchange effects) to
$1,129 million from $1,062 million in the first nine months of 1997 due
principally to the same factors affecting the third quarter results.
Operating income for Plumbing Products decreased 13% (10% excluding the
unfavorable effects of foreign exchange) to $27 million for the third quarter of
1998 from $31 million for the third quarter of 1997, as declines in
international operations more than offset gains in the U.S. For international
operations, operating income decreased primarily because of the effects of
economic weakness in Asia (excluding China) and transitional costs associated
with implementing the low-cost sourcing program in Europe. Those decreases were
offset partly by higher volume in Latin America and the effect of consolidating
the China plumbing operations. In the U.S., operating income improved because of
higher sales volume. Operating income for the first nine months of 1998
decreased by 8% (1% excluding foreign exchange effects) from the 1997 period,
primarily for the reasons mentioned for the third quarter.
Sales for Automotive Products for the third quarter of 1998 increased
18% (16% excluding the favorable effects of foreign exchange) to $265 million
from $224 million in the third quarter of 1997. This increase resulted primarily
from higher volume, as unit volume of truck and bus production in Western Europe
increased 21% over the third quarter of 1997. In addition, sales increased
because of higher product content per vehicle on new model introductions
launched in 1997, increased shipments of anti-lock braking systems (ABS) to the
Company's U.S. joint venture and improved trailer business in Europe. The
increased sales in the U.S. 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. These gains were partly offset by a volume decline in
Brazil. Sales of Automotive Products for the first nine months of 1998 increased
16% (19% excluding the unfavorable effects of foreign exchange) to $811 million
from $699 million in the first nine months of 1997, primarily for the reasons
cited for the third quarter.
Operating income for Automotive Products for the third quarter of 1998
was $33 million, an increase of 6% (3% excluding the favorable effects of
foreign exchange) from $31 million in the third quarter of 1997. This increase
reflected the higher sales volume in Europe and to the U.S., offset partly by
weaker results in Brazil and increased development and maintenance costs.
Operating income for Automotive Products for the first nine months of 1998 was
$117 million, an increase of 24% (29% excluding the unfavorable effects of
foreign exchange) from $94 million in the first nine months of 1997, principally
from the increased sales volume.
Medical Systems sales decreased $1 million in the third quarter of 1998
to $23 million, reflecting declining markets. The operating loss was $6 million
in the third quarter of 1998 compared with a $5 million loss in the 1997 third
quarter, primarily reflecting the declining markets and increased development
activity, including efforts to obtain U.S. and European regulatory approvals of
new diagnostic products and tests. Sales for Medical Systems for the first nine
months of 1998 were $73 million compared with $24 million for the nine months of
1997, primarily reflecting the acquisition of the medical diagnostics business
in June 1997. The operating loss for the first nine months of 1998 was $15
million compared with an operating loss of $13 million for the 1997 period,
primarily for the reasons cited for the third quarter.
Financial Review
The higher equity in earnings of unconsolidated joint ventures in the
third quarter of 1998 principally reflects the growth of Automotive Products'
U.S. joint venture with Meritor Automotive Inc. Corporate and other expenses
were essentially unchanged. Interest expense decreased $5 million in the third
quarter of 1998 compared to the year-earlier quarter as a result of lower
overall interest rates achieved through refinancings completed in the first half
of 1998 as described below.
Income taxes for the nine months ended September 30, 1998 reflect an
estimated effective income tax rate of 40% of pretax income (excluding
restructuring charges) compared with an effective rate for the 1997 period of
36% of pretax income (excluding the write-off of purchased in-process research
and development). The lower effective tax rate in 1997 resulted from the
utilization of certain previously unrecognized tax benefits. No similar benefits
are available in 1998. The income tax provision for the third quarter of 1998
was $41 million, or 39.1% of pretax income excluding restructuring charges,
compared with an effective rate of 35.3% of pretax income (excluding the
write-off of purchased in-process research and development) in the third quarter
of 1997. The effective rate in the third quarter of 1998 reflects the
year-to-date adjustment to 40% from the 40.5% rate used in the first half of the
year.
On June 1, 1998, the Company redeemed its 10-1/2% Senior Subordinated
Discount Debentures and its 9-7/8% Senior Subordinated Notes with the proceeds
of offerings of $1 billion principal amount of Senior Notes as described below.
As a result of these redemptions, results for the nine months ended September
30, 1998 included an extraordinary charge of $50 million, net of income taxes,
attributable to related call premiums and the write-off of unamortized debt
issuance costs. The nine months ended September 30, 1997, also included an
extraordinary charge of $24 million, net of income taxes, related to the
redemption of the Company's 11-3/8% Senior Debentures and retirement of debt
upon completion of the Company's 1997 Credit Agreement.
Liquidity and Capital Resources
Net cash provided by operating activities, after cash interest paid of
$98 million, was $234 million for the first nine months of 1998, compared with
net cash provided of $226 million for the similar period of 1997. The $8 million
increase resulted primarily from higher earnings (excluding the restructuring
charges from 1998 and the write-off of purchased research and development from
1997). The Company made capital expenditures of $172 million for the first nine
months of 1998, including $16 million of investments in affiliated companies,
compared with capital expenditures of $158 million in the first nine months of
1997, including $1 million of investments in affiliated companies (excluding the
acquisition of the medical diagnostics business).
In the first half of 1998, the Company completed public offerings of $1
billion principal amount of Senior Notes with interest rates ranging from 7-1/8%
to 7-5/8% and maturity dates from 2003 to 2010. On June 1, 1998, the Company
used the net proceeds of these offerings (approximately $963 million, net of
underwriting discounts and interest rate hedge costs) to redeem its 10-1/2%
Senior Subordinated Discount Debentures and 9-7/8% Senior Subordinated Notes.
The total amount required to complete these redemptions, including call
premiums, was $954 million, net of the effect of the settlement of certain
interest rate swap transactions related to the Senior Subordinated Discount
Debentures. As a result of the redemptions, the Company expects to reduce its
annual net interest expense on the debt refinanced by approximately $20 million
before taxes.
On July 9, 1998, the Company's Board of Directors approved the
repurchase by the Company's parent (American Standard Companies Inc.), of up to
$300 million of its common stock, not to exceed $100 million per year, during
the three year period ending July 2001. During the first nine months of 1998,
the parent company repurchased 1.4 million shares of its common stock for $48
million, of which 1.2 million shares were purchased for $40 million in the third
quarter pursuant to this plan.
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 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.
At September 30, 1998, the Company had borrowings of $688 million
outstanding under the Revolving Facilities. There was $626 million available
under the Revolving Facilities after reduction for borrowings and for $61
million of letters of credit usage. The Company's foreign subsidiaries had $75
million available at September 30, 1998, under overdraft facilities that can be
withdrawn by the banks at any time. In addition, the Company's operations in
China have $36 million available under bank credit facilities after reduction
for borrowings of $10 million and letters of credit usage of $11 million.
The Company has previously disclosed that the restructuring of its
European and North American plumbing operations would entail a special charge of
approximately $160 to $185 million related to employee severance and
consolidation of production facilities. In the third quarter of 1998 the Company
recorded a restructuring charge of $35 million ($29 million net of tax) related
to the announced closure of two European Plumbing Products facilities. The
Company expects to record the remaining charges in the fourth quarter of 1998.
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.
Year 2000 Readiness Disclosure
The following is a Year 2000 Readiness Disclosure in accordance with
the Year 2000 Information and Readiness Disclosure Act.
For the past several years the Company has been in the process of
converting most of its computer applications and systems worldwide to client
server technology and in conjunction therewith has been installing software that
is Year 2000 compliant. For other systems, software that is Year 2000 compliant
is being installed. Most of these initiatives would have been undertaken
irrespective of any Year 2000 considerations. Substantial progress has been made
on these installations and many of the individual projects have been completed.
Total completion of these initiatives is expected by mid-1999.
The Company has established a comprehensive Year 2000 initiative,
having appointed teams for each operating group worldwide, coordinated by a team
leader reporting directly to the business group leader, and in some cases
employing third-party experts. These teams are responsible for assuring that all
core business systems will be fully functional for the year 2000, including
transactions with customers, suppliers, financial institutions and other third
parties. This evaluation includes the software installed in the projects
referred to above that were undertaken for business reasons other than Year 2000
considerations. In general, a coordinated approach was undertaken by the
Company's operating groups worldwide, with "best practices" shared among groups.
The principal phases of the initiative include: inventorying affected technology
and systems, including third-party relationships and imbedded software in
manufacturing systems; assessing the impact of Year 2000 issues and prioritizing
tasks based on size and perceived risk; replacement or modification of
non-compliant technology; testing; and developing contingency plans. The Company
is also reviewing its new and previously sold products that incorporate
equipment controls to identify and resolve any problems that such products may
have as a result of the arrival of the year 2000.
The Company has initiated communications with significant suppliers,
customers and other third parties to identify and assess Year 2000 risks and to
develop solutions that will minimize the impact on the Company. This process is
incomplete, but the Company expects timely to resolve any problems with critical
third parties or to develop contingency plans, and management does not believe
that third-party problems will have a material adverse effect on the Company's
operations. However, no assurance can be given that third party suppliers or
others on whom the Company relies will address such issues successfully.
The several phases of the project are in varying degrees of completion,
and management believes that substantial and satisfactory progress has been made
towards the objective of having all business systems Year 2000 compliant by
mid-1999. Overall, management estimates that the project is 70% complete. In
circumstances where there is substantial risk that any important objectives will
not be met, the Company will dedicate additional resources or develop and
implement appropriate contingency plans.
The Company's estimated cost to become Year 2000 compliant is
approximately $17 million, of which $7 million had been expended through
September 30, 1998. The costs of implementing client server technology and other
software changes referred to in the first paragraph of this section are not
included in these cost estimates. In addition, these costs are generally not
incremental to existing information technology budgets, as existing internal
resources were redeployed. All costs are being funded from operating cash flows
or other resources available to the Company. 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. Based
upon information currently available and current estimates, management does not
believe that the Company's costs to become Year 2000 compliant will have a
material adverse effect on the Company's financial position, results of
operations or cash flows in future periods.
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 1997 Annual Report on Form 10-K
and in the "Management's Discussion and Analysis" section of the Company's 1997
Annual Report to Shareholders and Quarterly Reports on Form 10-Q.
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 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. During the quarter ended September 30, 1998,
the Company filed no Current Reports on Form 8-K.
.
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.
By: G. Ronald Simon
Vice President and Controller
(Principal Accounting Officer)
November 13, 1998
AMERICAN STANDARD INC.
INDEX TO EXHIBITS
(The File Number of the Registrant, American Standard Inc. is 33-64450)
Exhibit No. Description
3 (i) Restated Certificate of Incorporation of American Standard
Inc.
(ii) Amended By-laws of American Standard Inc.
4.1 Indenture, dated as of Jan. 15, 1998, among American Standard,
Inc., American Standard Companies Inc. and
The Bank of New York, Trustee
4.2 Third Supplemental Indenture dated as of April 13, 1998 to
the Indenture dated as of January 15, 1998 among
American Standard Inc., American Standard Companies
Inc. and The Bank of New York relating to the 7-3/8%
Senior Notes due 2005.
4.3 Third Amendment dated as of August 7,
1998 to the Amended and Restated
Credit Agreement dated as of January
31, 1997 among American Standard
Companies Inc., American Standard
Inc., certain subsidiaries of
American Standard Inc., the financial
institutions party thereto and the
Chase Manhattan Bank, as
Administrative Agent.
(27) Financial Data Schedule