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, 1997
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 (908) 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, 1997 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 ended March
31, 1997 and 1996 has not been audited, but management believes that all
adjustments, consisting of normal recurring items, necessary for a fair
presentation of financial data for those periods have been included. Results for
the first quarter of 1997 are not necessarily indicative of results for the
entire year.
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF OPERATIONS
(Dollars in millions)
Three months ended
March 31,
1997 1996
----- ----
SALES $1,361 $1,364
------- ------
COST AND EXPENSES
Cost of sales 1,018 1,031
Selling and administrative expenses 236 227
Asset impairment loss - 235
Other expense 5 7
Interest expense 49 52
-- --
1,308 1,552
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 53 (188)
Income taxes 19 17
-- --
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 34 (205)
Extraordinary loss on retirement of debt, net of tax 9 -
--- ---
NET INCOME (LOSS) $ 25 $ (205)
========== ======
<FN>
See accompanying notes
</FN>
Item 1. Financial Statements (continued)
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY BALANCE SHEET
(Dollars in millions)
March 31, December 31,
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 78 $ 60
Accounts receivable 865 800
Inventories
Finished products 282 236
Products in process 80 78
Raw materials 97 95
-- --
459 409
Other current assets 124 117
--- ---
TOTAL CURRENT ASSETS 1,526 1,386
FACILITIES, less accumulated depreciation;
Mar. 1997 - $573; Dec. 1995- $577 987 1006
GOODWILL 828 875
OTHER ASSETS 263 253
--- ---
TOTAL ASSETS $3,604 $3,520
====== ======
CURRENT LIABILITIES
Loans payable to banks $ 358 $ 109
Current maturities of long-term debt 21 73
Accounts payable 434 469
Accrued payrolls 156 152
Other accrued liabilities 535 433
---- ---
TOTAL CURRENT LIABILITIES 1,504 1,236
LONG-TERM DEBT 1,810 1,742
RESERVE FOR POSTRETIREMENT BENEFITS 456 473
OTHER LIABILITIES 263 452
--- ---
TOTAL LIABILITIES 4,033 3,903
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 560 561
Accumulated deficit (747) (771)
Foreign currency translation effects (242) (173)
----- -----
TOTAL STOCKHOLDER'S DEFICIT (429) (383)
---- ----
$3,604 $3,520
====== ======
<FN>
See accompanying notes
</FN>
Item 1. Financial Statements (continued)
AMERICAN STANDARD INC. AND SUBSIDIARIES
UNAUDITED SUMMARY STATEMENT OF CASH FLOWS
(Dollars in millions)
Three months ended
March 31,
---------
1997 1996
---- ----
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Income (loss) before extraordinary item $ 34 $(205)
Asset impairment loss - 235
Depreciation 31 32
Amortization of goodwill 7 7
Non-cash interest 15 16
Non-cash stock compensation 9 8
Changes in assets and liabilities:
Accounts receivable (83) (41)
Inventories (60) (60)
Accounts payable and other accruals 50 13
Other assets and liabilities (18) (7)
---- ---
Net cash (used) provided by operating activities (15) (2)
---- ---
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (38) (36)
Investments in affiliated companies (1) (2)
Other - 19
-- --
Net cash used by investing activities (39) (19)
---- ----
FINANCING ACTIVITIES:
Net loan (to) from Parent (203) 2
Proceeds from issuance of long-term debt 376 -
Repayments of long-term debt (347) (29)
Net change in revolving credit facility 238 (8)
Net change in other short-term debt 13 11
Other (4) (10)
--- ----
Net cash used by financing activities 73 (34)
--- ----
Effect of exchange rate changes on cash and
cash equivalents (1) (1)
--- ---
Net decrease in cash and cash equivalents 18 (56)
Cash and cash equivalents at beginning of period 60 89
--- --
Cash and cash equivalents at end of period $ 78 $ 33
======== =====
<FN>
See accompanying notes
</FN>
AMERICAN STANDARD INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Public Offering of Common Stock and Repurchase of Common Stock
In the first quarter of 1997 the Company completed a secondary offering
(the "Secondary Offering") of 12,429,548 shares of the Company's common stock
owned by Kelso ASI Partners, L.P. ("ASI Partners"), the Company's largest
stockholder at December 31, 1996, and the repurchase (the "Share Repurchase")
by the Company from ASI Partners of 4,628,755 shares of common stock of the
Company. In addition, the Company issued to ASI Partners 5-year warrants to
purchase 3,000,000 shares of the Company's common stock at $55 per share. See
Management's Discussion and Analysis of Financial Position and Results of
Operations - Liquidity and Capital Resources.
Note 2. Amendment and Restatement of Bank Credit Agreement
In January 1997 the Company entered into an amended and restated credit
agreement (the "1997 Credit Agreement"), which provided the Company with
senior secured credit facilities aggregating $1.75 billion and which matures
in 2002. The 1997 Credit Agreement provides lower interest costs,
significantly increased borrowing capacity, less restrictive covenants and no
scheduled principal payments until maturity in 2002. See Management's
Discussion and Analysis of Financial Position and Results of Operations -
Liquidity and Capital Resources.
Note 3. Formation of Medical Systems Group
In January 1997 the Company announced formation of its Medical Systems
Group to pursue initiatives in the medical diagnostics field. For the last
several years the Company had supported the development of two small medical
diagnostic products groups focusing on test instruments using laser
technology and reagents, and on March 10, 1997, entered into definitive
agreements to acquire the European medical diagnostic business (the "Sorin
Business" or "Sorin") of Sorin Biomedica S.p.A., an affiliate of the Fiat
Group and all the outstanding shares of INCSTAR Corporation ("Incstar"), a
biotechnology company based in Stillwater, Minnesota, in which Sorin
Biomedica S.p.A. indirectly owned a 52% interest. See Management's Discussion
and Analysis of Financial Position and Results of Operations - Liquidity and
Capital Resources.
Note 4. Impact of New Accounting Pronouncement
Effective December 31, 1997, the Company will adopt Statement of
Financial Accounting Standards No. 128, Earnings per Share, ("FAS 128"),
which will simplify the calculation and presentation of earnings per share
data and require the restatement of earnings per share data for all prior
periods presented. Earlier application is not permitted. Upon the adoption of
FAS 128 at the end of 1997, primary income of $.43 per common share (based
upon 78,800,057 average common and common equivalent shares outstanding) for
the three months ended March 31, 1997, will be restated to reflect basic
income of $.44 per common share (based upon 76,296,122 average common shares
outstanding) and diluted income of $.43 per share (based upon 78,800,057
average diluted shares outstanding). No restatement is necessary for the
three months ended March 31, 1996, as the effect of common stock equivalents
was not material and their inclusion would have been antidilutive to the loss
per share.
Note 5. 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,
1996, 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."
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Sales and operating income in the first quarter of 1997 both increased
3%, compared with the first quarter of 1996, excluding the adverse effects of
foreign exchange and an asset impairment charge recorded in the first quarter
of 1996. In the first quarter of 1996 the Company adopted Statement of
Financial Accounting Standards No. 121 related to impairment of long-lived
assets, resulting in a non-cash charge of $235 million, approximately 90% of
which was the write-down of goodwill, for which there is no tax benefit.
SUMMARY SEGMENT AND INCOME DATA
(Dollars in millions)
(Unaudited)
Three Months Ended
March 31,
---------
1997 1996
---- ----
Sales:
Air Conditioning Products $ 782 $ 758
Plumbing Products 343 348
Automotive Products 236 258
--- --------
Total sales $1,361 $1,364
======= ======
Operating income (loss) before asset impairment loss:
Air Conditioning Products $ 69 $ 61
Plumbing Products 22 19
Automotive Products 32 42
Medical Systems (4) (2)
--- --
119 120
Asset impairment loss:
Air Conditioning Products - (121)
Plumbing Products - (114)
--- ----
- (235)
--- ----
Total operating income (loss) 119 (115)
Interest expense (49) (52)
Corporate items (17) (21)
---- ---
Income (loss) before income taxes and
extraordinary item $ 53 $ (188)
====== =========
Results of Operations for the First Quarter of 1997 Compared with the First
Quarter of 1996
Consolidated sales for the first quarter of 1997 were $1,361 million,
essentially the same as the first quarter of 1996, but increased 3% excluding
the unfavorable effects of foreign exchange. Sales increased 3% for Air
Conditioning Products but decreased 1% for Plumbing Products and 9% for
Automotive Products.
Operating income was $119 million for the first quarter of 1997, down
slightly from $120 million in the first quarter of 1996 (excluding the asset
impairment charge previously mentioned), but up 3% excluding the unfavorable
effects of foreign exchange. Operating income increased 13% for Air Conditioning
Products and 16% for Plumbing Products, but declined 24% for Automotive
Products.
Sales of Air Conditioning Products increased 3% (4% excluding the
unfavorable effects of foreign exchange) to $782 million for the first quarter
of 1997 from $758 million for the comparable quarter of 1996, primarily as a
result of a strong increase in commercial unitary systems in the U.S. and
continued growth in Latin America, partly offset by somewhat lower sales in
Europe due to continuing economic weakness in that market. Sales of commercial
unitary products in the U.S. increased because of improved markets, gains in
market share and higher prices. Latin American sales increased principally
because of market growth, especially in Mexico and Argentina.
Operating income of Air Conditioning Products increased 13% (with
little effect from foreign exchange) to $69 million in the first quarter of 1997
from $61 million in the 1996 quarter (excluding the asset impairment charge),
primarily reflecting higher volumes and improved margins in the U.S. unitary
business and higher volumes in Latin America. Operating results in Europe
decreased slightly from the first quarter of 1996, because of the lower sales.
Sales of Plumbing Products decreased 1% to $343 million in the first
quarter of 1997, from $348 million in the first quarter of 1996. Excluding the
unfavorable effects of foreign exchange, sales increased 2% over the first
quarter of 1996, reflecting sales gains in the U.S., Latin America and the Far
East, partly offset by a sales decline in Europe. U.S. operations achieved a 9%
sales increase on higher volume, primarily through the retail market channel.
Sales increased on higher volumes in Latin America and in the Far East,
reflecting in part that the Philippines had been adversely affected by a
five-week strike in the first quarter of 1996. The decline in Europe was caused
by further market weakness, especially in Italy and Germany.
Operating income of Plumbing Products increased 16% (22% excluding the
unfavorable effects of foreign exchange) to $22 million for the first quarter of
1997 from $19 million for the 1996 period (excluding the asset impairment
charge). Operating income increased primarily because of higher volume in Latin
America and the Far East and the adverse effect in 1996 of the Philippines
strike. Operating income also benefitted from lower-cost product sourcing and
manufacturing cost improvements.
Sales of Automotive Products for the first quarter of 1997 were $236
million, a decrease of 9% (1% excluding the unfavorable effects of foreign
exchange) from $258 million in the first quarter of 1996. Unit volume of truck
and bus production in western Europe declined 14% from a record level in the
first quarter of 1996. In addition, aftermarket sales were slightly lower
overall. These effects were largely offset by increased shipments of anti-lock
braking systems to the U.S. market, where such systems are now mandatory on all
new heavy-duty trucks, and by higher value per truck on new model introductions.
Operating income for Automotive Products for the first quarter of 1997
declined 24% (16% excluding foreign exchange effects) to $32 million from $42
million in the first quarter of 1996. This reflected lower European sales, an
increase in lower-margin shipments to its U.S. joint venture and start-up costs
of the new electronic braking system product line, offset partly by productivity
improvements.
Financial Review
Interest expense decreased in the first quarter of 1997 compared to the
year-earlier quarter as lower overall interest rates on debt outstanding under
the Company's 1997 bank credit agreement more than offset the effect of
increased debt arising from the $208 million repurchase of shares of the
Company's common stock in February 1997. Corporate costs in the first quarter of
1997 declined primarily as a result of increased equity income.
The income tax provision for the first quarter of 1997 was $19 million,
or 36.3% of pretax income compared with a provision of $17 million, also 36.3%
of pretax income (excluding the asset impairment charge on which there is no tax
benefit) in the first quarter of 1996. Those effective tax rates reflect
improvements in U.S. income in both periods, enabling the Company to recognize
previously unrecognized tax benefits.
As a result of the redemption of debt in the first quarter of 1997 upon
completion of the 1997 Credit Agreement, 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 April 15, 1997, the Company called for
redemption of, and on May 15, 1997, redeemed its $250 million aggregate
principal amount of 11-3/8% Senior Debentures due 2004 at a redemption price of
105.69% of the principal amount plus interest accrued to the redemption date. In
connection therewith, the second quarter of 1997 will include an extraordinary
charge of approximately $15 million, net of taxes, including call premiums and
the write-off of unamortized debt issuance costs. The Company intends to fund
such redemption with borrowings under the 1997 Credit Agreement.
Liquidity and Capital Resources
Net cash used by operating activities, after cash interest paid of $11
million, was $15 million for the first quarter of 1997, compared with net cash
used of $2 million for the similar period of 1996. The $13 million decrease
resulted primarily from increased working capital. Inventories, accounts
receivable and other working capital items increased in the first quarter of
both years, reflecting the seasonal pattern typical of the first quarter.
Despite the overall increase in inventories, average inventory turnover in the
first quarter of 1997 improved six-tenths of a turn compared with the 1996
quarter. The Company made capital expenditures of $39 million for the first
quarter of 1997, including $1 million of investments in affiliated companies
compared with capital expenditures of $38 million in the first quarter of 1996,
including $2 million of investments in affiliated companies.
In January 1997 the Company entered into the 1997 Credit Agreement.
This agreement, which expires 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") and (b) a $375 million
multi-currency periodic access credit facility. Up to $500 million of the
Revolving Facilities may be used for the issuance of letters of credit.
Borrowings under the Revolving Facilities by their terms are short-term. 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. The 1997 Credit Agreement provides lower
interest costs, significantly increased borrowing capacity, less restrictive
covenants and no scheduled principal payments until maturity in 2002.
At March 31, 1997, the Company's total indebtedness was $2.2 billion
and annual scheduled debt maturities were $18 million, $26 million, $164
million, $13 million and $212 million, for the years 1997 through 2001,
respectively. At March 31, 1997, the Company had outstanding borrowings of $305
million under the Revolving Facilities. There was $1,015 million available under
the Revolving Facilities after reduction for borrowings and for $55 million of
letters of credit usage. In addition, at March 31, 1997, the Company's foreign
subsidiaries had $49 million available under overdraft facilities which can be
withdrawn by the banks at any time.
On May 5, 1997, the Company announced a plan to repurchase from time to
time in the open market up to $100 million of its common stock during the next
twelve months. It is anticipated that shares repurchased pursuant to the plan
will be available in connection with the exercise of stock options and other of
the Company's incentive compensation programs.
In the first quarter of 1997 the Company completed (i) the Secondary
Offering of 12,429,548 shares of the Company's common stock owned by ASI
Partners (including 1,621,245 shares sold pursuant to the underwriters'
over-allotment option) and (ii) the Share Repurchase by the Company from ASI
Partners, the Company's largest stockholder at December 31, 1996, of 4,628,755
shares of the Company's common stock for $208 million. In conjunction with the
Secondary Offering, ASI Partners distributed to certain of its partners
3,780,353 shares (the "Share Distribution") of the Company's common stock that
it owned. In addition, the Company issued to ASI Partners 5-year warrants to
purchase 3,000,000 shares of the Company's common stock at $55 per share, $10
per share over the public offering price in the Secondary Offering. After the
Secondary Offering, the Share Distribution and the Share Repurchase, ASI
Partners owned no common stock of the Company and is no longer entitled to
designate any of the Company's directors. All of the shares sold in the
Secondary Offering were previously issued and outstanding shares, and the
Company received no proceeds therefrom.
In January 1997 the Company announced formation of its Medical Systems
Group to pursue initiatives in the medical diagnostics field. For the last
several years the Company has supported the development of two small medical
diagnostic products groups focusing on test instruments using laser technology
and reagents. The Company had invested an aggregate of approximately $40 million
in the development of these businesses through December 31, 1996, including $13
million of development expenses incurred in 1996. Based upon the progress and
prospects of those two businesses, the Company decided to explore acquisitions
to accelerate the commercialization of its technology and expand the number of
diagnostic tests covered by its products. Accordingly, on March 10, 1997, the
Company entered into definitive agreements to acquire the European medical
diagnostic business of Sorin Biomedica S.p.A., an affiliate of the Fiat Group
and, by means of a merger, all the outstanding shares of INCSTAR Corporation, a
biotechnology company based in Stillwater, Minnesota, in which Sorin Biomedica
S.p.A. indirectly owns a 52% interest. Sales in 1996 were approximately $80
million for the Sorin Business and approximately $40 million for Incstar. The
aggregate cost of the acquisitions, which the Company anticipates completing in
the second quarter of 1997, is expected to be approximately $220 million,
including fees and expenses, and will be funded with borrowings under the 1997
Credit Agreement.
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, 1996,
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.
(a) On May 5, 1997, the Company announced its plan to repurchase, from
time to time in the open market, during the next twelve months up to $100
million of its common stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - - Liquidity and Capital
Resources" in Part 1, which is incorporated herein by reference.
(b) On May 15, 1997, the Company redeemed its 11-3/8% Senior Debentures due
2004. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Review " 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. During the quarter ended March 31, 1997, the
Company filed no 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.
/s/ G. Ronald Simon
(Vice President and Controller)
(also signing as Principal
Accounting Officer)
May 15, 1997
AMERICAN STANDARD INC.
INDEX TO EXHIBITS
Exhibit No. Description
(27) Financial Data Schedule