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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] Transition Report 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, NEW JERSEY 08855-6820
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (732) 980-6000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. (Not applicable; Registrant has outstanding no equity securities
required to be registered under the Securities Exchange Act of 1934.)
Aggregate market value of the voting stock (common stock) held by non-affiliates
of the Registrant: Not applicable; all of the voting stock of the Registrant is
owned by its parent, American Standard Companies Inc.
Number of shares outstanding of each of the Registrant's classes of common
stock, as of the close of business on March 12, 1998:
Common Stock, $.01 par value 1,000 Shares
Documents incorporated by reference: None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (J) (1) (a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
(REDUCED DISCLOSURE FORMAT
PAGE
PART I
Item 1. Business. 3
Item 2. Properties. 8
Item 3. Legal Proceedings. 9
Item 4. Not required under reduced disclosure format as contemplated by
General Instruction J to Form 10-K. --
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters. 10
Item 6. Not required under reduced disclosure format as contemplated by
General Instruction J to Form 10-K. --
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 8. Financial Statements and Supplementary Data. 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 36
PART III
Items 10,11,12, and 13 are not required under reduced disclosure format as
Contemplated by General Instruction J to Form 10-K --
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 36
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ITEM 1. BUSINESS
American Standard Inc. (the "Company") is a Delaware corporation formed
in 1929. All of its outstanding common stock is owned by American Standard
Companies Inc., a Delaware corporation that was formed in 1988 to acquire
American Standard Inc. Hereinafter, "American Standard" or "the Company" will
refer to American Standard Companies Inc. or to American Standard Inc.,
including its subsidiaries, as the context requires.
American Standard is a globally-oriented manufacturer of high quality,
brand-name products in three major product groups: air conditioning systems (60%
of 1997 sales); bathroom and kitchen fixtures and fittings (24% of 1997 sales);
and braking and control systems for medium-sized and heavy trucks, buses,
trailers and utility vehicles (16% of 1997 sales). These percentages exclude the
new Medical Systems segment which had sales of $50 million in the last six
months of 1997, after the acquisition of Sorin and INCSTAR (see below). American
Standard is a market leader in each of its three major business segments in the
principal geographic areas in which it competes. The Company's brand names
include TRANE(R) and AMERICAN STANDARD(R) for air conditioning systems, AMERICAN
STANDARD(R), IDEAL STANDARD(R), STANDARD(R) and PORCHER(R) for plumbing
products, WABCO(R) for braking and related systems and LARA(R), Copalis(R) and
DiaSorin(TM) for Medical diagnostic systems. The Company emphasizes
technologically advanced products such as air conditioning systems that utilize
energy-efficient compressors and environmentally-preferred refrigerants,
water-saving plumbing products and commercial vehicle braking and related
systems (including antilock braking systems, "ABS") utilizing electronic
controls. At December 31, 1997, American Standard had 108 manufacturing
facilities in 35 countries.
OVERVIEW OF BUSINESS SEGMENTS
Through 1996 American Standard operated three business segments: Air
Conditioning Products, Plumbing Products and Automotive Products. In January
1997 the Company announced formation of its Medical Systems segment.
AIR CONDITIONING PRODUCTS. American Standard is a leading U.S.
manufacturer of air conditioning systems for both domestic and export sales, and
also manufactures air conditioning systems outside the United States. Air
conditioning products are sold by the Trane Company ("Trane") primarily under
the TRANE(R) and AMERICAN STANDARD(R) names. Sales to the commercial and
residential markets accounted for approximately 75% and 25%, respectively, of
Trane's total sales in 1997. Approximately 65% of Trane's sales in 1997 were in
the replacement, renovation and repair markets, which have been less cyclical
than the new residential and commercial construction markets. Management
believes that Trane is well positioned for growth because of its high quality,
brand-name products; significant existing market shares; the introduction of new
product features such as electronic controls; the expansion of its broad
distribution network; conversion to products utilizing
environmentally-preferable refrigerants; and expansion of operations in
developing market areas throughout the world, principally the Asia-Pacific area
(although expansion in the Asia-Pacific region outside China is expected to slow
due to the unfavorable economic conditions existing in the region at the
beginning of 1998) and Latin America.
Air Conditioning Products began with the 1984 acquisition by the
Company of the Trane Company, a manufacturer and distributor of air conditioning
products since 1913. In 1997 Trane, with revenues of $3,567 million, accounted
for approximately 60% of the Company's sales and
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60% of its operating income (excluding Medical Systems). Trane derived 28% of
its 1997 sales from outside the United States.
Trane manufactures three general types of air conditioning systems. The
first, called "unitary," is sold for residential and commercial applications,
and is a factory-assembled central air conditioning system which generally
encloses in one or two units all the components to cool or heat, clean, humidify
or dehumidify, and move air. The second, called "applied," is typically
custom-engineered for commercial use and involves on-site installation of
several different components of the air conditioning system. Trane is a world
leader in both unitary and applied air conditioning products. The third type,
called "mini-split," is a small unitary air conditioning system, generally for
residential use, which operates without air ducts. Trane manufactures and
distributes mini-split units in the Far East, Europe, the Middle East and Latin
America.
Trane competes in all of its markets on the basis of service to
customers, product quality and reliability, technological leadership and price.
Product and marketing programs have been, and are being, developed to
increase penetration in the growing replacement, repair, and servicing
businesses, in which margins are generally higher than for sales of original
equipment. Much of the equipment sold in the fast-growing air conditioning
markets of the 1960's and 1970's is reaching the end of its useful life. Also,
equipment sold in the 1980's is likely to be replaced earlier than originally
expected with higher-efficiency products recently developed to meet required
efficiency standards and to capitalize on the availability of
environmentally-preferable refrigerants
At December 31, 1997, Air Conditioning Products had 33 manufacturing
plants in 10 countries employing approximately 22,600 people.
PLUMBING PRODUCTS. American Standard is a leading manufacturer in
Europe, the U.S. and a number of other countries of bathroom and kitchen
fixtures and fittings for the residential and commercial construction markets
and retail sales channels. Plumbing Products manufactures and distributes its
products under the AMERICAN STANDARD(R), IDEAL STANDARD(R), STANDARD(R) and
PORCHER(R) names. Of Plumbing Products' 1997 sales, 72% was derived from
operations outside the United States and 28% from within. Management believes
that Plumbing Products is well positioned for growth due to the high quality
associated with its brand-name products, significant existing market shares in a
number of countries, lower-cost product sourcing from Mexico and Eastern Europe
and the expansion of existing operations in developing market areas throughout
the world, principally the Far East, Latin America and Eastern Europe.
In 1997 Plumbing Products, with revenues of $1,439 million, accounted
for 24 % of the Company's sales and 19 % of its operating income (excluding
Medical Systems). Plumbing Products' sales consist 53% of chinaware fixtures,
23% of fittings (typically brass) and 9% of bathtubs, with the remainder
consisting of related plumbing products. Throughout the world these products are
generally sold through wholesalers and distributors and installed by plumbers
and contractors. In total the residential market accounts for approximately 75%
of Plumbing Products' sales, with the commercial and industrial markets
providing the remainder.
Plumbing Products operates through four primary geographic groups:
European Plumbing Products, U.S. Plumbing Products, Americas International and
the Asia-Pacific Group. Plumbing Products' fittings operations are organized as
the Worldwide Fittings Group, which has primary responsibility for faucet
technology, product development and manufacturing, with manufacturing
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facilities in Germany, Bulgaria, the U.S., and Mexico. Worldwide Fittings' sales
and operating results are reported in the four primary geographic groups within
which it operates.
European Plumbing Products, which sells products primarily under the
brand names IDEAL STANDARD(R) and PORCHER(R), manufactures and distributes
bathroom and kitchen fixtures and fittings through subsidiaries or joint
ventures in Germany, Italy, France, England, Greece, the Czech Republic,
Bulgaria, Egypt and Turkey and distributes products in Spain and Portugal. In
November 1995 the Company acquired Porcher S.A. ("Porcher"), a French
manufacturer and distributor of plumbing products in which the Company
previously had a minority ownership interest.
U.S. Plumbing Products manufactures bathroom and kitchen fixtures and
fittings, selling under the brand names AMERICAN STANDARD(R) and STANDARD(R) in
the United States. Americas International manufactures bathroom and kitchen
fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL
STANDARD(R), and STANDARD(R) through its wholly owned operations in Mexico,
Canada, and Brazil and its joint ventures in Central America and the Dominican
Republic.
The Asia-Pacific Group manufactures bathroom and kitchen fixtures and
fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and
STANDARD(R) through its wholly owned operations in South Korea, its
majority-owned operations in Thailand, the Philippines and Vietnam, and its
manufacturing joint venture in Indonesia. This group is also developing a
wholly-owned marketing operation in Japan. The Asia-Pacific Group also has
operations in China, in which American Standard increased its ownership position
to approximately 55% through the purchase of additional shares from other
investors for $48 million in the fourth quarter of 1997.
At December 31, 1997, Plumbing Products employed approximately 21,500
people and, including affiliated companies, had 57 manufacturing plants in 25
countries, including its Chinese businesses which were consolidated in October
1997.
Plumbing Products competes in most of its markets on the basis of
service to customers, product quality and design, reliability and price.
AUTOMOTIVE PRODUCTS. Automotive Products ("WABCO") is a leading
manufacturer, primarily in Europe and Brazil, of braking and related systems for
the commercial and utility vehicle industry. Its most important products are
pneumatic braking systems and related electronic and other control systems,
including antilock braking systems ("ABS"), marketed under the WABCO(R) name for
medium-size and heavy trucks, tractors, buses, trailers and utility vehicles.
WABCO supplies vehicle manufacturers such as Mercedes-Benz, Volvo, Iveco (Fiat),
RVI (Renault) and Rover. Management believes that WABCO is well positioned to
benefit from its strong market positions in Europe and Brazil and from
increasing demand for ABS and other sophisticated electronic control systems in
a number of markets (including the commercial vehicle market in the United
States, where the mandated phase-in of ABS began in 1997), as well as from the
technological advances embodied in the Company's products and its close
relationships with a number of vehicle manufacturers.
In 1997 WABCO, with sales of $952 million, accounted for 16 % of the
Company's sales and 21% of its total operating income (excluding Medical
Systems). The Company believes that WABCO is a worldwide technological leader in
the heavy truck and bus braking industry. Electronic controls, first introduced
in ABS in the early 1980's, are increasingly applied in other systems sold to
the commercial vehicle industry.
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WABCO's products are sold directly to vehicle and component
manufacturers. Spare parts are sold through both original equipment
manufacturers and an independent distribution network. Although the business is
not dependent on a single or related group of customers, sales of truck braking
systems are dependent on the demand for heavy trucks. Some of the Company's
important customers are Mercedes-Benz, Volvo, Iveco (Fiat), RVI (Renault) and
Rover. Principal competitors are Knorr, Robert Bosch, and Allied Signal. WABCO
competes primarily on the basis of customer service, quality and reliability of
products, technological leadership and price.
Through 1997 the WABCO(R) ABS system, which the Company believes leads
the market, has been installed in approximately 1.6 million heavy trucks, buses,
and trailers worldwide since 1981. Annual sales volume in Europe was
approximately 168,000 units in 1997 (up from 146,000 units in 1996) and 195,000
units (67,000 units in 1996) in other markets, primarily the United States and
Japan. The large increase in other markets was primarily in the United States,
where the mandated phase-in of ABS began in March 1997. In addition, WABCO has
developed an advanced electronic braking system, electronically controlled
pneumatic gear shifting systems, electronically controlled air suspension
systems, and automatic climate-control and door-control systems for the
commercial vehicle industry.
At December 31, 1997, WABCO and affiliated companies employed
approximately 6,100 people and had 13 manufacturing facilities and 8 sales
organizations operating in 17 countries. Principal manufacturing operations are
in Germany, France, the United Kingdom, the Netherlands and Brazil. WABCO has
joint ventures in the United States (Meritor WABCO and WABCO Compressor
Manufacturing Co.), in Japan with Sanwa Seiki (SANWAB), in India with TVS Group
(Sundaram Clayton Ltd.) and in China.
In January 1994 the Company acquired Perrot, a German brake
manufacturer. Through this acquisition the Company is able to offer complete
brake systems for trucks, buses and trailers, especially in the important and
growing air-disc brake business.
MEDICAL SYSTEMS. In anticipation of the acquisition of Sorin and
INCSTAR described below, the Company announced in January 1997, the formation of
its Medical Systems segment to pursue initiatives in the medical diagnostics
field. For several years prior thereto, the Company had been supporting the
development of two small medical diagnostic product companies, Sienna Biotech,
Inc. (Sienna") and Alimenterics, Inc. ("Alimenterics"). Sienna and Alimenterics
have developed medical diagnostic technologies that use lasers for sample
analysis. The Company had invested approximately $40 million in these businesses
through December 31, 1996.
Based upon the progress and prospects of Sienna and Alimenterics, the
Company decided to explore acquisition opportunities to accelerate the
commercialization of its technology and expand the number of diagnostic tests
covered by its products. On June 30, 1997, the Company acquired the European
medical diagnostic business of Sorin Biomedica S.p.A., an affiliate of the Fiat
Group, and INCSTAR Corporation, a U.S. company, for $212 million, including fees
and expenses.
Sorin, INCSTAR and Sienna have been combined into a single operating
group, DiaSorin. DiaSorin has an extensive menu of diagnostic tests as well as a
variety of technologies and platforms. Its products focus on diagnostic tests
for autoimmunity and infectious diseases, obstetrical/gynecological and
gastrointestinal disorders, endocrinology and bone and mineral metabolism. It
develops, manufactures and markets individual test reagents, test kits and
related products used by major hospitals, clinical reference laboratories and
researchers involved in
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diagnosing and treating immunological conditions. DiaSorin also produces and
markets histochemical antisera and natural and synthetic peptides used in
clinical diagnostic and medical research. One of the new core technologies,
which received U.S. Food and Drug Administration ("FDA") clearance in 1997, is
Copalis(R) (for Coupled Particle Light Scattering), a device which enables
multiple tests on a single sample. Development is ongoing to accelerate an
expanded menu of tests using DiaSorin reagents specifically adapted for use with
Copalis.
Alimenterics has developed the Laser Assisted Ratio Analyzer
("LARA(R)") system, an analyzer which allows a gastroenterologist to diagnose
patient disease via the breath rather than by more invasive procedures such as
endoscopy or x-ray. It's first application, the Pylori-Chek(TM), tests for the
presence of Helicobacter pylori bacterium associated with 80% of stomach ulcers.
The analyzer and reagent have received a Positive Opinion from the European
agency for the Evaluation of Medicinal Products. FDA clearance for the LARA
instrument and clearance for the Pylori-Chek k test is expected later in 1998.
In March 1998, the Company entered into an agreement with Astra Pharma inc. of
Canada to market exclusively the LARA System.
DiaSorin has manufacturing facilities in Saluggia, Italy, and
Stillwater, Minnesota, and Alimenterics has a manufacturing facility in Morris
Plains, New Jersey. The principal markets for its products are Western Europe,
the United States and Canada.
The Company believes that the new Medical Systems Segment is well
positioned to develop quickly and effectively its new medical products. The
Company may build this group further through acquisitions of businesses that are
complementary and would permit further acceleration of development and
distribution of its products as well as through further research and development
investments.
Medical Systems had sales of $50 million in the last six months of
1997, after the acquisition of Sorin and INCSTAR, and an operating loss of $20
million (before write-off of purchased research and development).
At December 31, 1997, Medical Systems employed approximately 800
people.
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ITEM 2. PROPERTIES
At December 31, 1997 the Company conducted its manufacturing activities
through 108 plants in 35 countries, of which the principal facilities are as
follows:
BUSINESS SEGMENT LOCATION MAJOR PRODUCTS MANUFACTURED AT LOCATION
Air Conditioning Clarksville, TN Commercial unitary air conditioning
Products Fort Smith, AK Commercial unitary air conditioning
La Crosse, WI Applied air conditioning systems
Lexington, KY Air handling products
Macon, GA Commercial air conditioning systems
Pueblo, CO Applied air conditioning systems
Rushville, IN Air handling products
Trenton, NJ Residential gas furnaces and air handlers
Tyler, TX Residential air conditioning
Waco, TX Water source heat pumps and air handling
Products
Charmes, France Applied air conditioning systems
Epinal, France Unitary air conditioning systems and mini-splits
Ligang, China Applied air conditioning systems
Taicang, China Unitary air conditioning systems and mini-splits
Taipei, Taiwan Unitary air conditioning systems
Sao Paulo, Brazil Unitary air conditioning systems
Plumbing Products Salem, OH Enameled-steel fixtures and acrylic bathtubs
Tiffin, OH Vitreous china
Trenton, NJ Vitreous china
Toronto, Canada Vitreous china and enameled-steel fixtures
Sevlievo, Bulgalria Vitreous china and brass plumbing fittings
Teplice, Czech Republic Vitreous china
Hull, England Vitreous china and acrylic bathtubs
Middlewich, England Vitreous china
Dole, France Vitreous china and acrylic bathtubs
Neuss, Germany Vitreous china
Wittlich, Germany Brass plumbing fittings
Orcenico, Italy Vitreous china
Brescia, Italy Vitreous china
Aguascalientes, Mexico Vitreous china
Mexico City, Mexico Vitreous china, water heaters
Monterrey, Mexico Brass plumbing fittings
Manila, Philippines Vitreous china
Seoul, South Korea Brass plumbing fittings
Bangkok, Thailand Vitreous china
Tianjin, China Vitreous china
Beijing, China Enameled steel fixtures
Shanghai, China Vitreous china and brass plumbing fittings
Guangdong Province, China Vitreous china, brass plumbing fittings and
enameled steel fixtures
Automotive Campinas, Brazil Braking systems
Products Leeds, England Braking systems
Claye-Souilly, France Braking systems
Hanover, Germany Braking systems
Mannheim, Germany Foundation brakes
Medical Systems Salugia, Italy Medical diagnostics products
Stillwater, MN Medical diagnostics products
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Except for the property located in Manila, Philippines, all of the
plants described above are owned by the Company or a subsidiary. Through joint
ventures the company operates one plant in each of Indonesia and India. The
Company considers that its properties are generally in good condition, are well
maintained, and are generally suitable and adequate to carry on the Company's
business.
In 1997 several Air Conditioning Products' plants operated at or near
capacity and others operated moderately below capacity.
In 1997 Plumbing Products' plants worldwide operated at levels of
utilization which varied from country to country but overall were satisfactory.
Automotive Products' plants generally operated at good utilization
levels in 1997.
ITEM 3. LEGAL PROCEEDINGS
In late 1996 the Company received letters from Tyco International Ltd.
("Tyco") proposing to acquire all outstanding shares of the Company's common
stock. The Company's Board of Directors reviewed the Tyco proposals, consulted
with its legal counsel and financial advisors and concluded that the Company
would decline any interest in the proposals and so informed Tyco. There were no
discussions between the Company and Tyco concerning any of the proposals and the
Company contemplates none.
Two persons claiming to be shareholders of the Company, represented by
the same lawyers, filed separate class action and derivative lawsuits in the
Chancery Court of the State of Delaware against the Company, ASI Partners and
the Company's directors alleging breeches of fiduciary duties related to the
Company's rejection of the Tyco proposals, approval of the secondary offering of
Company common stock owned by ASI Partners and the repurchase by the Company of
all shares of Company common stock owned by ASI Partners after such secondary
offering (collectively, the "Stockholder Transactions"). The Stockholder
Transactions were successfully completed in March 1997. The complaints seek
unspecified monetary damages, to enjoin the Stockholder Transactions and demand
that the Company evaluate alternative transactions to maximize shareholder
value. The Company has moved to dismiss the complaints or in the alternative for
Summary Judgment, believes the lawsuits are without merit and intends to contest
them vigorously. The Delaware Court of Chancery has granted a stay of discovery
pending its ruling on the Company's motion to dismiss the complaints.
A person claiming to be a holder of certain public debt securities of
American Standard Inc. filed, and subsequently withdrew, a class action lawsuit
in New York Supreme Court seeking to enjoin the Stockholder Transactions or to
require the Company to redeem such debt securities at the election of the
security holders
For a discussion of German tax issues see Note 6 of Notes to
Consolidated Financial Statements incorporated by reference herein (see Item
14(a) of Part IV hereof).
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's only issued and outstanding common equity, 1,000 shares of common
stock, $.01 par value, is owned by American Standard Companies Inc. There is no
established public trading market for these shares.
There were no dividends declared on the Company's common stock in 1996 or 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(REDUCED DISCLOSURE FORMAT)
The following should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
The Company achieved record sales and operating income (excluding a $90
million write-off of purchased in-process research and development in
connection with the acquisition of medical diagnostics businesses). The
improvement in operating income reflected gains in all three major segments --
Air Conditioning Products, Plumbing Products and Automotive Products -- despite
the adverse effects on Air Conditioning Products of cooler than normal weather
in the U.S. and Europe and the unfavorable effects of foreign exchange. Sales
for 1997 were $6.0 billion, an increase of 3% from $5.8 billion in 1996.
Operating income was $590 million (excluding the write-off of purchased
research and development), an increase of 3% from $573 million in 1996
(excluding an asset impairment charge of $235 million related to the adoption
of a new accounting standard). Income before extraordinary item (excluding the
write-off of purchased research and development) was $210 million, up 11% from
income before extraordinary item (excluding the asset impairment charge) in
1996 of $189 million. Including the write-off of purchased research and
development, income before extraordinary item for 1997 was $120 million.
Operating losses for Medical Systems and equity in net income of
unconsolidated joint ventures for 1996 and prior years have been reclassified to
conform to the 1997 presentation.
Consolidated sales for 1997 were $6,008 million, an increase of $203
million, or 3% (8% excluding the unfavorable effects of changes in foreign
exchange rates), from $5,805 million in 1996. Sales increased 4% for Air
Conditioning Products and 4% for Automotive Products, but declined slightly for
Plumbing Products. The new Medical Systems segment contributed sales of $50
million in 1997.
Consolidated sales for 1996 were $5,805 million, an increase of $584
million, or 11% (12% excluding the unfavorable effects of changes in foreign
exchange rates), from $5,221 million in 1995. Sales increased 16% for Air
Conditioning Products and 14% for Plumbing Products, but declined 8% for
Automotive Products.
Operating income for 1997 (excluding the $90 million write-off of
purchased research and development) was $590 million, an increase of $17
million, or 3% (7% excluding the unfavorable effects of foreign exchange), from
$573 million in 1996 (excluding the $235 million asset impairment charge).
Operating income increased 3% for Air Conditioning Products, 8% for Plumbing
Products and 3% for Automotive Products, while Medical Systems incurred a larger
operating loss.
Operating income for 1996 (excluding the $235 million asset impairment
charge) was $573 million, an increase of $46 million, or 9% (10% excluding the
unfavorable effects of foreign exchange), from $527 million in 1995. Operating
income increased 36% for Air Conditioning Products but decreased 8% for Plumbing
Products and 20% for Automotive Products, while the operating loss for Medical
Systems increased.
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THREE-YEAR FINANCIAL SUMMARY
Year Ended December 31,
(Dollars in millions) 1997 1996 1995
Sales:
Air Conditioning Products $ 3,567 $ 3,437 $ 2,953
Plumbing Products 1,439 1,452 1,270
Automotive Products 952 916 998
Medical Systems 50 -- --
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$ 6,008 $ 5,805 $ 5,221
====================================================================================================
Operating income (loss) before asset impairment loss
and write-off of purchased
research and development:
Air Conditioning Products $ 364 $ 353 $ 259
Plumbing Products 119 110 120
Automotive Products 127 123 155
Medical Systems (20) (13) (7)
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590 573 527
Asset impairment loss and write-off of purchased
research and development (a):
Air Conditioning Products -- (121) --
Plumbing Products -- (114) --
Medical Systems (90) -- --
- ----------------------------------------------------------------------------------------------------
(90) (235) --
- ----------------------------------------------------------------------------------------------------
Total operating income 500 338 527
Equity in net income of unconsolidated joint ventures 12 3 7
- ----------------------------------------------------------------------------------------------------
512 341 534
Interest expense (192) (198) (213)
Corporate items (83) (85) (94)
- ----------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 237 58 227
Income taxes (117) (105) (85)
- ----------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item $ 120 $ (47) $ 142
====================================================================================================
(a) In connection with the June 30, 1997, acquisition of the medical
diagnostics businesses, the value of purchased in-process research and
development was written off in accordance with applicable accounting
rules, resulting in a non-cash charge to income of $90 million. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, resulting in a
non-cash charge of $235 million.
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Sales of Air Conditioning Products increased 4% (5% excluding foreign
exchange effects) to $3,567 million for 1997 from $3,437 million for 1996, as a
result of continued strength in U.S. commercial markets and expanding
international sales. Commercial markets account for approximately 75% of Air
Conditioning Products' total sales. Approximately 65% of total sales are to the
replacement, renovation and repair markets.
Operating income of Air Conditioning Products increased 3% (with little
effect from foreign exchange) to $364 million in 1997 from $353 million in 1996
(excluding the asset impairment charge). The increase was attributable primarily
to increased operating income in the United States due to higher volume.
Sales of Plumbing Products were $1,439 million in 1997 compared with
$1,452 million in 1996, a decrease of $13 million (but an increase of 5%
excluding the unfavorable effects of foreign exchange). The exchange-adjusted
increase primarily reflected higher sales in Latin America and the U.S. and the
effect of consolidating the operations in China since the acquisition of a
majority interest at the end of October 1997. Sales in the U.S. increased as a
result of higher volumes, primarily attributable to expansion by major home
improvement retailers. Sales and market share in the retail market channel have
been growing for several years, a trend the Company believes will continue and
lead to increased sales because of strong product and brand-name recognition.
Sales for international operations increased by 5% excluding foreign exchange
effects, principally attributable to gains in Latin American operations
(primarily Mexico) and the sales of the operations in China (consolidated for
the last two months of 1997). Europe, which continued to experience weak
economic conditions, was flat excluding foreign exchange effects.
Operating income of Plumbing Products was $119 million for 1997 compared
with $110 million for 1996, an increase of 8% (18% excluding the unfavorable
effects of foreign exchange), because of higher operating income for both
international and U.S. operations. The increase in operating income for
international operations in 1997 (excluding foreign exchange effects) was
principally due to improved volumes and margins in Latin America, margin
improvement in Europe (primarily from cost reductions in France) and income
contributed by operations in China (consolidated for the last two months of
1997). These increases were partly offset by the effects of poor economic
conditions in other parts of the Far East. Operating income in the U.S. improved
36%, due to higher sales and lower-cost sourcing from expanded facilities in
Mexico as well as manufacturing and operating cost improvements.
12
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Sales of Plumbing Products were $1,439 million in 1997 compared with
$1,452 million in 1996, a decrease of $13 million (but an increase of 5%
excluding the unfavorable effects of foreign exchange). The exchange-adjusted
increase primarily reflected higher sales in Latin America and the U.S. and the
effect of consolidating the operations in China since the acquisition of a
majority interest at the end of October 1997. Sales in the U.S. increased as a
result of higher volumes, primarily attributable to expansion by major home
improvement retailers. Sales and market share in the retail market channel have
been growing for several years, a trend the Company believes will continue and
lead to increased sales because of strong product and brand-name recognition.
Sales for international operations increased by 5% excluding foreign exchange
effects, principally attributable to gains in Latin American operations
(primarily Mexico) and the sales of the operations in China (consolidated for
the last two months of 1997). Europe, which continued to experience weak
economic conditions, was flat excluding foreign exchange effects.
Operating income of Plumbing Products was $119 million for 1997 compared
with $110 million for 1996, an increase of 8% (18% excluding the unfavorable
effects of foreign exchange), because of higher operating income for both
international and U.S. operations. The increase in operating income for
international operations in 1997 (excluding foreign exchange effects) was
principally due to improved volumes and margins in Latin America, margin
improvement in Europe (primarily from cost reductions in France) and income
contributed by operations in China (consolidated for the last two months of
1997). These increases were partly offset by the effects of poor economic
conditions in other parts of the Far East. Operating income in the U.S. improved
36%, due to higher sales and lower-cost sourcing from expanded facilities in
Mexico as well as manufacturing and operating cost improvements.
17
15
Sales of Automotive Products for 1997 were $952 million, an increase of
$36 million, or 4% (14% excluding the unfavorable effects of foreign exchange),
from $916 million in 1996. This gain resulted primarily from strengthened
markets in Europe because of increased commercial vehicle production, higher
product content per vehicle and increased export sales. Unit volume of truck and
bus production in Western Europe increased 8%, while aftermarket sales declined
1% for the full year 1997 compared with 1996. Original equipment sales volumes
were higher in almost all markets for commercial vehicle braking and other
control systems, especially in Germany because of product deliveries to a major
truck manufacturer for its new line of heavy-duty trucks. Export sales increased
significantly, primarily from sales of antilock braking systems (ABS) to Meritor
WABCO (formerly Rockwell WABCO), the Company's North American joint venture,
reflecting the first-phase implementation of federal regulations requiring ABS
on all new heavy-duty trucks, together with a rebound in U.S. truck production.
Sales of original equipment also increased in Brazil, where truck production
recovered somewhat from the unusually low level of the prior year.
Operating income for Automotive Products was $127 million in 1997, an
increase of 3% (14% excluding the unfavorable effects of foreign exchange). This
increase reflected the higher volume and improved margins in Europe due to
productivity improvements. These factors were partly offset by the effects of
product mix (higher original equipment and export sales and lower aftermarket in
Europe), lower margins in Brazil (primarily mix) and start-up costs of the new,
majority-owned joint ventures in the U.S. (with Cummins Engine Co.) and China.
Medical Systems sales reflected the acquisition on June 30, 1997, of the
medical diagnostics businesses of Sorin Biomedica S.p.A. and INCSTAR
Corporation. Medical Systems incurred an operating loss (before write-off of
purchased research and development) as costs of development and of integrating
operations more than offset the operating income of the acquired diagnostics
businesses. The write-off of purchased research and development of $90 million
reflects the required accounting in an acquisition for the portion of the
purchase price allocated to the value of purchased in-process research and
development. The operating losses in 1996 and 1995 reflected increased
development costs of the Company's medical diagnostics ventures.
Interest expense decreased $6 million in 1997 compared with 1996, as lower
overall interest rates on debt outstanding under the Company's 1997 Credit
Agreement, together with the redemption of the 11 3/8% Senior Debentures, more
than offset the effect of increased debt arising from share repurchases and the
acquisition of the medical diagnostics businesses. Corporate items for 1997
totaled $83 million, approximately the same level as in 1996. The higher equity
in net income of unconsolidated joint ventures reflects the strong growth of
Automotive Products' North American joint venture with Meritor Automotive Inc.,
benefits from the restructuring of Air Conditioning Products' scroll compressor
joint venture and increased income from the Company's financing joint venture
established in 1996.
The income tax provisions for 1997 and 1996 were $117 million and $105
million, respectively. The effective income tax rate in 1997 was 35.8% on income
before income taxes and extraordinary item of $327 million (excluding the
write-off of purchased research and development on which there was no tax
benefit) compared with an effective rate in 1996 of 35.6% on income before
income taxes and extraordinary item of $293 million (excluding the asset
impairment charge on which there was no tax benefit). The effective tax rates
for both years are somewhat lower than the statutory rates primarily as a result
of higher levels of taxable income in the U.S. which enabled the Company to
recognize previously unrecognized tax benefits. In addition, in 1997 and 1996,
proportionately greater pretax income was earned in the U.S. (at a lower
effective rate) compared to that earned in higher-rate jurisdictions in Europe
and elsewhere. Those benefits were partly offset by the effects of rate
differences and withholding taxes related to foreign operations and
nondeductible goodwill amortization. See Note 6 of Notes to Consolidated
Financial Statements.
As a result of the redemption of debt with refinancing proceeds, 1997
included an extraordinary charge of $24 million (net of taxes of $6 million). In
addition, the first half of 1998 is expected to include an extraordinary charge
of approximately $50 million (net of tax) as a result of the planned redemption
of the 10 1/2% Senior Subordinated Discount Debentures and the 9 7/8% Senior
Subordinated Notes, both of which are callable on or after June 1, 1998.
13
16
17
In January 1997 the Company entered into a new credit agreement (the "1997
Credit Agreement"). The 1997 Credit 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. 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. See Note 9 of Notes to
Consolidated Financial Statements.
The 1997 Credit Agreement provides lower interest rates, significantly
increased borrowing capacity, less restrictive covenants and no scheduled
principal payments until maturity in 2002.
On August 1, 1997, American Standard Companies Inc. and its wholly-owned
subsidiary American Standard Inc. jointly filed a shelf registration statement
(the "1997 Shelf Registration") with the Securities and Exchange Commission
covering $1 billion of debt securities to be offered by American Standard Inc.
and unconditionally guaranteed by American Standard Companies Inc. On January
15, 1998, American Standard Inc. issued $350 million of 7 3/8% Senior Notes Due
2008 and on February 13, 1998, issued $125 million of 7 1/8% Senior Notes Due
2003 and $275 million of 7 5/8% Senior Notes Due 2010 (collectively, the
"Offerings") under the 1997 Shelf Registration, the proceeds of which aggregated
$737 million, net of underwriting discounts and expenses.
The Company currently intends to apply the net proceeds of the Offerings,
together with funds available under the 1997 Credit Agreement, to the redemption
(the "Redemption"), on or after June 1, 1998, of its $740.7 million principal
amount of 10 1/2% Senior Subordinated Discount Debentures and $200 million
principal amount of its 9 7/8% Senior Subordinated Notes. On or after June 1,
1998, the Senior Subordinated Discount Debentures are redeemable at a price of
104.66% of the principal amount, plus accrued interest and the Senior
Subordinated Notes are redeemable at a price of 102.82% of the principal amount,
plus accrued interest. Pending the Redemption, the net proceeds of the Offerings
were used to reduce borrowings (but not commitments) under the revolving portion
of the Company's 1997 Credit Agreement.
Unless amended or waived, the provisions of the 1997 Credit Agreement
would require the Company to apply the proceeds of the Offerings permanently to
reduce the total amount available under the 1997 Credit Agreement, unless the
proceeds of the Offerings are applied to the Redemption prior to December 31,
1998, or to redeem up to $150 million of certain other indebtedness prior to
June 1, 1999. Although the Company intends to redeem the 10 1/2% Senior
Subordinated Discount Debentures, there can be no assurance that market or
economic conditions or the Company's business strategy will not change and,
therefore, there can be no assurance that the proceeds of the Offerings will be
applied towards the Redemption.
In the first quarter of 1997, American Standard Companies Inc. completed
a secondary offering (the "Secondary Offering") of 12,429,548 shares of its
common stock and the repurchase from Kelso ASI Partners, L.P. ("ASI Partners"),
the largest stockholder at December 31, 1996, of 4,628,755 shares of common
stock of American Standard Companies Inc. for $208 million, plus fees and
expenses. In conjunction with the Secondary Offering, ASI Partners distributed
to certain of its partners, 3,780,353 shares of American Standard Companies
Inc. common stock that it owned. In addition, American Standard Companies Inc.
issued to ASI Partners 5-year warrants to purchase 3,000,000 shares of American
Standard Companies Inc. common stock at $55 per share, $10 per share over the
public offering price. All of the shares sold in the Secondary Offering were
previously issued and outstanding shares, and American Standard Companies Inc.
received no proceeds therefrom.
In October 1997, American Standard Companies Inc. completed its
open-market share repurchase program commenced in May 1997 pursuant to which
2,320,900 shares of its common stock were purchased for $100 million. This
transaction and the Share Repurchase referred to above were funded with
borrowings by American Standard Inc. under the 1997 Credit Agreement which were
loaned to American Standard Companies Inc. under a non-interest-bearing demand
note. Such amount is included in other assets.
14
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YEAR 2000 ISSUE
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 which is
Year 2000 compatible. 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 issues and the Company expects that conversion of
all critical business systems will have been completed by mid-1999. In addition
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. 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. 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 Year 2000.
Final cost estimates are not complete, but management does not expect the
incremental costs attributable directly to coping with Year 2000 issues to have
a material adverse effect on the Company's financial position, results of
operations or cash flows. While the Company believes its efforts are adequate to
address its Year 2000 concerns, the Company could be adversely affected if
suppliers, customers and other third parties the Company does business with do
not address this issue successfully. The Company is continuing to assess these
risks and develop solutions to minimize the impact on the Company.
MARKET RISK
The Company is exposed to foreign currency fluctuations and interest rate
changes. From time to time the Company enters into agreements to reduce its
foreign currency and interest rate risks. Such agreements hedge specific
transactions or commitments. The Company does not enter into speculative hedges.
The Company conducts significant non-U.S. operations through subsidiaries
in most of the major countries of Western Europe, Canada, Brazil, Mexico,
Bulgaria, the Czech Republic, Central American countries, China, Malaysia, the
Philippines, South Korea, Thailand, Taiwan, Australia and Egypt. In addition,
the Company conducts business in these and other countries through affiliated
companies and partnerships in which the Company owns 50% or less of the stock
or partnership interest. Because the Company has manufacturing operations in 35
countries, fluctuations in currency exchange rates may have a significant
impact on its financial statements. Such fluctuations have much less effect on
local operating results, however, because the Company for the most part sells
its products within the countries in which they are manufactured. The asset
exposure of foreign operations to the effects of exchange volatility has been
partly mitigated by the denomination in foreign currencies of a portion of the
Company's borrowings.
A portion of the Company's debt bears interest at rates which vary with
changes in the London Interbank Offered Rate (LIBOR). As of December 31, 1997,
$1.1 billion of the Company's total debt bore interest at variable rates. It
has been the Company's practice to maintain a significant portion of its debt
at fixed rates of interest. As of December 31, 1997, approximately 52% of the
Company's total debt was at fixed rates.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the historical
financial data and other statements of historical fact), including, without
limitation, statements as to management's expectations and belief are
forward-looking statements. Forward-looking statements are made based upon
management's expectations and belief concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Company will be those anticipated by
management. Many important factors could cause actual results to differ
materially from management's expectations, including the level of construction
activity in the Company's Air Conditioning Products' and Plumbing Products'
markets; the timing of completion and success in the start-up of new production
facilities; changes in U.S. or international economic conditions, such as
inflation or interest rate fluctuations or recessions in the Company's markets;
pricing changes to the Company's products or those of its competitors, and other
competitive pressures on pricing and sales; integration of acquired businesses;
risks generally relating to the Company's international operations, including
governmental, regulatory or political changes; risks and costs related to the
year 2000 software issue; the planned redemption of debt; the impact of the Far
East economic situation; and transactions or other events affecting the need
for, timing and extent of the Company's capital expenditures.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON
FINANCIAL STATEMENTS
The accompanying consolidated balance sheet at December 31, 1997 and 1996, and
related consolidated statements of operations, stockholder's deficit and cash
flows for the years ended December 31, 1997, 1996 and 1995, have been prepared
in conformity with generally accepted accounting principles, and the Company
believes the statements set forth a fair presentation of financial condition and
results of operations. The Company believes that the accounting systems and
related controls which it maintains are sufficient to provide reasonable
assurance that the financial records are reliable for preparing financial
statements and maintaining accountability for assets. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
control must be related to the benefits derived and that the balancing of those
factors requires estimates and judgment. Reporting on the financial affairs of
the Company is the responsibility of its principal officers, subject to audit by
independent auditors who are engaged to express an opinion on the Company's
financial statements. The Board of Directors has an Audit Committee of outside
Directors which meets periodically with the Company's financial officers,
internal auditors and the independent auditors and monitors the accounting
affairs of the Company.
American Standard Inc.
February 16, 1998
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Standard Inc.
We have audited the accompanying consolidated balance sheet of American Standard
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholder's deficit, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Standard Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the Consolidated Financial Statements, in 1996
the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
/s/ Ernst & Young LLP
New York, New York
February 16, 1998
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20
CONSOLIDATED STATEMENT OF OPERATIONS
American Standard Inc.
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
Sales $ 6,007,509 $ 5,804,561 $ 5,221,476
- --------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 4,481,915 4,379,765 3,887,024
Selling and administrative expenses 979,036 905,427 853,783
Write-off of purchased research and development 90,300 -- --
Asset impairment loss -- 235,234 --
Other expense 27,254 28,337 40,489
Interest expense 192,216 198,192 213,326
- --------------------------------------------------------------------------------------------------------
5,770,721 5,746,955 4,994,622
- --------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 236,788 57,606 226,854
Income taxes 116,928 104,324 85,070
- --------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 119,860 (46,718) 141,784
Extraordinary loss on retirement of debt (23,637) -- (30,129)
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 96,223 $ (46,718) $ 111,655
========================================================================================================
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEET
American Standard Inc.
At December 31, (Dollars in thousands, except share data) 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 28,772 $ 59,699
Accounts receivable, less allowance for doubtful accounts - 1997, $30,226; 1996, $28,294 831,285 799,792
Inventories 430,773 408,962
Future income tax benefits 40,756 67,125
Other current assets 62,392 50,796
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 1,393,978 1,386,374
Facilities, at cost, net of accumulated depreciation 1,139,184 1,005,998
Other assets:
Goodwill, net of accumulated amortization - 1997, $225,020; 1996, $221,105 844,238 875,111
Debt issuance costs, net of accumulated amortization - 1997, $11,718; 1996, $13,723 22,516 34,451
Other 579,827 217,681
- -----------------------------------------------------------------------------------------------------------------------------
$ 3,979,743 $ 3,519,615
=============================================================================================================================
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Loans payable to banks $ 718,412 $ 108,856
Current maturities of long-term debt 30,459 72,645
Accounts payable 466,119 469,150
Accrued payrolls 179,635 151,707
Other accrued liabilities 409,800 398,081
Taxes on income 45,717 35,421
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,850,142 1,235,860
Long-term debt 1,550,772 1,741,847
Other long-term liabilities:
Reserve for postretirement benefits 437,651 473,229
Deferred tax liabilities -- 68,157
Other 468,618 384,373
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,307,183 3,903,466
Commitments and contingencies
Stockholder's deficit:
Preferred stock, Series A, $.01 par value, 1,000 shares issued and outstanding -- --
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding -- --
Capital surplus 560,417 560,794
Accumulated deficit (675,264) (771,487)
Foreign currency translation effects (212,593) (173,158)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholder's deficit (327,440) (383,851)
- -----------------------------------------------------------------------------------------------------------------------------
$ 3,979,743 $ 3,519,615
=============================================================================================================================
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
American Standard Inc.
Year Ended December 31, (Dollars in thousands) 1997 1996 1995
Cash provided (used) by:
Operating activities:
Income (loss) before extraordinary item $ 119,860 $ (46,718) $ 141,784
Write-off of purchased in-process research and development 90,300 -- --
Asset impairment loss -- 235,234 --
Depreciation 124,855 117,951 109,999
Amortization of goodwill and other intangibles 39,107 27,580 33,396
Non-cash interest 59,857 61,794 63,930
Non-cash stock compensation 9,930 31,201 29,014
Changes in assets and liabilities:
Accounts receivable (40,652) (25,479) (124,482)
Inventories (22,538) (32,499) 8,236
Accounts payable and accrued payrolls 18,739 (21,356) 53,971
Postretirement benefits 8,578 19,770 33,531
Other long-term liabilities 46,785 24,455 22,419
Other, net (59,437) (39,172) (24,092)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 395,384 352,761 347,706
- --------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property, plant and equipment (245,258) (212,179) (164,193)
Investments in affiliated companies (56,925) (15,321) (42,395)
Acquisition of medical diagnostics businesses (212,270) -- --
Proceeds from disposals of property, plant and equipment 19,099 15,105 19,428
Other 18,696 6,293 4,055
- --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (476,658) (206,102) (183,105)
- --------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of long-term debt 401,538 6,912 469,776
Repayments of long-term debt, including redemption premiums (655,335) (73,429) (1,020,004)
Net change in revolving credit facilities 622,559 (106,332) 124,768
Net change in other short-term debt 8,673 (13,627) (18,312)
Net loan (to) from parent (303,010) 4,069 4,823
Capital contribution from parent -- -- 270,004
Minority partners' contributions to PRC venture 5,920 18,165 26,246
Financing costs and other (24,019) (10,355) (24,466)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 56,326 (174,597) (167,165)
Effect of exchange rate changes on cash and cash equivalents (5,979) (1,067) (1,481)
- --------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (30,927) (29,005) (4,045)
Cash and cash equivalents at beginning of period 59,699 88,704 92,749
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 28,772 $ 59,699 $ 88,704
====================================================================================================================
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
American Standard Inc.
(Dollars in thousands)
Foreign
Currency
Capital Accumulated Translation
Surplus Deficit Effects
Balance at December 31, 1994 $214,634 $(836,424) $(151,721)
Net income -- 111,655 --
American Standard Companies Inc.
common stock purchased (6,877) -- --
Capital contribution of IPO
proceeds from parent 268,993 -- --
Other capital contributions from parent
principally related to ESOP 43,116 -- --
Foreign currency translation -- -- (22,929)
-------- --------- ---------
Balance at December 31, 1995 519,866 (724,769) (174,650)
Net Loss -- (46,718) --
American Standard Companies Inc.
common stock purchased (9,897) -- --
Capital contributions from parent
principally related to ESOP
and stock option exercises 50,825 -- --
Foreign currency translation -- -- 1,492
-------- --------- ---------
Balance at December 31, 1996 560,794 (771,487) (173,158)
Net income -- 96,223 --
American Standard Companies Inc.
common stock purchased (16,937) -- --
Capital contributions from parent,
principally related to ESOP,
stock bonus plans and related
tax benefits 16,560 -- --
Foreign currency translation -- -- (39,435)
-------- --------- ---------
Balance at December 31, 1997 $560,417 $(675,264) $(212,593)
======== ========= =========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE COMPANY
American Standard Inc. (the "Company") is a Delaware corporation incorporated in
1929. All of its outstanding common stock is owned by American Standard
Companies Inc., a Delaware corporation that was formed in 1988 by Kelso and
Company, L.P. ("Kelso") to effect the acquisition of American Standard Inc.
Hereinafter, "American Standard" or "the Company" will refer to the Company,
American Standard Companies Inc., or to American Standard Inc., including its
subsidiaries, as the context requires.
American Standard is a global manufacturer of high quality, brand-name
products in three major product groups: air conditioning systems for commercial,
institutional and residential buildings; bathroom and kitchen fixtures and
fittings; and braking and control systems for medium-sized and heavy trucks,
buses, trailers and utility vehicles. The Company has also recently formed a
medical diagnostics group (see Note 3). Information on the Company's operations
by segment and geographic area is included on pages 11, 33 and 34 of this
report.
NOTE 2. ACCOUNTING POLICIES
Financial Statement Presentation -- The consolidated financial statements
include the accounts of majority-owned subsidiaries; intercompany transactions
are eliminated. Investments in unconsolidated joint ventures are included at
cost plus the Company's equity in undistributed earnings.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. The most significant estimates included in the preparation of the
financial statements are related to postretirement benefits, income taxes,
warranties and asset lives.
Foreign Currency Translation -- Adjustments resulting from translating foreign
functional currency assets and liabilities into U.S. dollars are recorded in a
separate component of stockholder's equity. Gains or losses resulting from
transactions in other than the functional currency are reflected in the
Consolidated Statement of Operations, except for transactions which hedge net
investments in a foreign entity and intercompany transactions of a long-term
investment nature. For operations in countries that have hyper-inflationary
economies, net income includes gains and losses from translating assets and
liabilities at year-end rates of exchange, except for inventories and
facilities, which are translated at historical rates.
The losses from foreign currency transactions and translation losses in
countries with hyper-inflationary economies reflected in expense were $4.2
million in 1997, $2.3 million in 1996, and $4.5 million in 1995.
Revenue Recognition -- Sales are recorded when shipment occurs and title passes
to a customer.
Cash Equivalents -- Cash equivalents include all highly liquid investments with
a maturity of three months or less when purchased.
Inventories -- Inventory costs are determined principally by the use of the
last-in, first-out (LIFO) method, and are stated at the lower of such cost or
realizable value.
Facilities -- The Company capitalizes costs, including interest during
construction, of fixed asset additions, improvements, and betterments that add
to productive capacity or extend the asset life. Maintenance and repair
expenditures are charged against income as incurred. Significant investment
grants are amortized into income over the period of benefit.
Goodwill -- Goodwill is being amortized over 40 years. Effective January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 121
("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Applying the criteria established by FAS
121, the Company concluded that certain assets and related goodwill of its
Canadian, French and Mexican operating units were impaired. As a result, the
Company recorded a non-cash charge of $235 million, approximately 90% of which
was the write-down of goodwill, for which there was no tax benefit. This charge
included $121 million for Air Conditioning Products' operations in Canada and
France, and $114 million for Plumbing Products' operations in Canada and Mexico.
The carrying value of goodwill for each business segment is reviewed if the
facts and circumstances, such as significant declines in sales, earnings or cash
flows or material adverse changes in the business climate, suggest that it may
be impaired. If any impairment is indicated as a result of such reviews, the
Company would measure it using techniques such as
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25
comparing the undiscounted cash flow of the business to its book value including
goodwill or by obtaining appraisals of the related business.
Debt Issuance Costs -- The costs related to the issuance of debt are capitalized
and amortized to interest expense using the effective interest method over the
lives of the related debt.
Warranties -- The Company provides for estimated warranty costs at the time of
sale. Revenues from the sales of extended warranty contracts are deferred and
amortized on a straight-line basis over the terms of the contracts. Warranty
obligations beyond one year are included in other long-term liabilities.
Postretirement Benefits -- Postretirement pension benefits are provided for
substantially all employees of the Company, both in the United States and
abroad. In the United States the Company also provides various postretirement
health care and life insurance benefits for certain of its employees. Such
benefits are accounted for on an accrual basis using actuarial assumptions.
Depreciation -- Depreciation and amortization are computed on the straight-line
method based on the estimated useful life of the asset or asset group.
Research and Development Expenses -- Research and development costs are expensed
as incurred. The Company expended approximately $161 million in 1997, $160
million in 1996, and $146 million in 1995 for research activities and product
development and for product engineering. Expenditures for research and product
development only were $112 million, $101 million and $85 million in the
respective years. Certain expenditures for 1996 and 1995 have been reclassified
to conform with the 1997 classification.
Income Taxes -- Deferred income taxes are determined on the liability method,
and are recognized for all temporary differences between the tax bases of assets
and liabilities and their reported amounts in the consolidated financial
statements. No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested.
Advertising Expense-- The cost of advertising is expensed as incurred. The
Company incurred $111 million, $88 million and $92 million of advertising costs
in 1997, 1996 and 1995, respectively.
Financial Instruments with Off-Balance-Sheet Risk -- The Company from time to
time enters into agreements to reduce its foreign currency and interest rate
risks. Gains and losses from underlying rate changes are included in income
unless the contract hedges a net investment in a foreign entity, a firm
commitment, or related debt instrument, in which case gains and losses are
deferred as a component of foreign currency translation effects in stockholder's
equity or included as a component of the transaction (see Note 9).
Stock Based Compensation -- The Company grants to employees options to acquire a
fixed number of shares of American Standard Companies Inc. common stock with an
exercise price equal to the market value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and intends to continue this method in
the future. Accordingly, the Company recognizes no compensation expense for the
stock option grants.
22
26
NOTE 3. ACQUISITION OF MEDICAL DIAGNOSTICS BUSINESSES
In January 1997 the Company announced formation of its Medical Systems Segment
to pursue initiatives in the medical diagnostics field. For the last several
years the Company has supported the development of two medical diagnostic
ventures focusing on test instruments using laser technology and reagents. On
June 30, 1997, the Company acquired the European medical diagnostics business of
Sorin Biomedica S.p.A., an affiliate of the Fiat Group, and all the outstanding
shares of INCSTAR Corporation, a company based in Stillwater, Minnesota, in
which Sorin Biomedica S.p.A. owned a 52% interest. The aggregate cost of the
acquisitions was approximately $212 million, including fees and expenses, and
was funded with borrowings under the 1997 Credit Agreement. This transaction has
been accounted for as a purchase and, in connection therewith, a portion of the
purchase price totaling $90 million was allocated to the value of in-process
research and development and was charged to operations in the third quarter of
1997. Approximately $64 million of goodwill resulted after allocation of the
purchase price to the fair value of assets acquired and liabilities assumed.
NOTE 4. OTHER EXPENSE
Other income (expense) was as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996 1995
- --------------------------------------------------------------------------------
Interest income $ 5.9 $ 6.2 $ 8.9
Royalties .7 3.3 4.1
Equity in net income of
unconsolidated joint ventures 11.9 2.6 7.1
Minority interest (10.1) (11.7) (12.2)
Accretion expense (26.7) (29.3) (36.5)
Other, net (9.0) .6 (11.9)
- --------------------------------------------------------------------------------
$(27.3) $(28.3) $(40.5)
================================================================================
NOTE 5. POSTRETIREMENT BENEFITS
The Company sponsors postretirement pension benefit plans covering substantially
all employees, including an Employee Stock Ownership Plan (the "ESOP") for the
Company's U.S. salaried employees and certain U.S. hourly employees. The ESOP is
an individual account, defined contribution plan. Shares of American Standard
Companies Inc. common stock are allocated to the accounts of eligible employees
(primarily through basic allocations of 3% of covered compensation and a
matching Company contribution of up to 6% of covered compensation invested in
the Company's 401(k) savings plan by employees). The Company has funded basic
and matching allocations to the ESOP accounts through weekly contributions of
cash since May 1997. Prior to that date, the Company funded the ESOP with shares
of American Standard Companies Inc. common stock based upon the closing price
each Friday quoted on the New York Stock Exchange. The Company intends to fund
the ESOP in future years through contributions of cash or shares of American
Standard Companies Inc. common stock.
Benefits under defined benefit pension plans on a worldwide basis are
generally based on years of service and employees' compensation during the last
years of employment. In the United States the Company also provides various
postretirement health care and life insurance benefits for certain of its
employees. Funding decisions are based upon the tax and statutory considerations
in each country. Accretion expense is the implicit interest cost associated with
amounts accrued and not funded and is included in "other expense". At December
31, 1997, funded plan assets related to pensions were held primarily in fixed
income and equity funds. Postretirement health and life insurance benefits are
funded as incurred.
23
27
The Company's postretirement plans' funded status and amounts recognized
in the balance sheet at December 31, 1997 and 1996, were:
====================================================================================================================================
1997 1997 1997 1996 1996 1996
(Dollars in millions) Assets in Accumulated Assets in Accumulated
Excess of Benefit Health Excess of Benefit Health
Accumulated Obligations and Life Accumulated Obligations and Life
Benefit in Excess of Insurance Benefit in Excess Insurance
Obligations Assets Benefits Obligations of Assets Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $518.9 $259.1 $ -- $136.8 $604.3 $ --
Non-vested 26.9 17.4 -- 5.5 43.9 --
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 545.8 276.5 -- 142.3 648.2 --
Additional amounts related to projected pay increases 28.1 32.7 -- 24.6 41.4 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total projected benefit obligations 573.9 309.2 191.4 166.9 689.6 179.1
- ------------------------------------------------------------------------------------------------------------------------------------
Assets and book reserves relating to such benefits:
Market value of funded assets 607.5 20.1 -- 208.2 343.4 --
Reserve (asset) for postretirement benefits net of
recognized overfunding (2.6) 295.4 172.2 (42.3) 362.6 165.7
- ------------------------------------------------------------------------------------------------------------------------------------
604.9 315.5 172.2 165.9 706.0 165.7
- ------------------------------------------------------------------------------------------------------------------------------------
Assets and book reserves in excess of (less than)
projected benefit obligations $ 31.0 $ 6.3 $(19.2) $ (1.0) $ 16.4 $(13.4)
====================================================================================================================================
Consisting of:
Unrecognized prior services benefit (cost) $(29.9) $ (2.0) $ 9.5 $ (8.4) $(24.2) $ 7.2
Unrecognized net gain (loss) from changes in
actuarial assumptions and experience 60.9 8.3 (28.7) 7.4 40.6 (20.6)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 31.0 $ 6.3 $(19.2) $ (1.0) $ 16.4 $(13.4)
====================================================================================================================================
At December 31, 1997, the Company's funded domestic plans had assets of
$386 million that were in excess of accumulated benefit obligations of $378
million, whereas in 1996, accumulated benefit obligations were in excess of
assets. As a result, the table above reflects the funded domestic plans in
Assets in Excess of Accumulated Benefit Obligations in 1997 and in Accumulated
Benefit Obligations in Excess of Assets in 1996.
At December 31, 1997, the projected benefit obligation related to health
and life insurance benefits for active employees was $73 million and for
retirees was $118.4 million.
24
28
The projected benefit obligation for postretirement benefits was determined
using the following assumptions:
===========================================================================================================
1997 1997 1996 1996
Domestic Foreign Domestic Foreign
- -----------------------------------------------------------------------------------------------------------
Discount rate 7.00% 3.75%-7.00% 7.50% 4.25%-8.00%
Long-term rate of inflation 2.80% .05%-3.80% 2.80% .05%-3.80%
Merit and promotion increase 1.70% 1.70% 1.70% 1.70%
Rate of return on plan assets 9.00% 4.50%-8.25% 9.00% 4.50%-8.25%
- -----------------------------------------------------------------------------------------------------------
The weighted-average annual assumed rate of increase in the health care
cost trend rate is 6% for 1998 and is assumed to decrease gradually to 5% for
1999 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example, a
change in the assumed rate of one percentage point for each future year would
change the accumulated postretirement benefit obligation as of December 31,
1997, by $13.4 million and the annual postretirement cost by $2.6 million.
Total postretirement costs were:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996 1995
- --------------------------------------------------------------------------------
Pension benefits $ 39.5 $ 41.7 $ 48.3
Health and life
insurance benefits 17.2 17.4 15.5
- --------------------------------------------------------------------------------
Defined benefit plan cost 56.7 59.1 63.8
Defined contribution plan cost,
principally ESOP 32.1 31.2 27.4
- --------------------------------------------------------------------------------
Total postretirement cost,
including accretion expense $ 88.8 $ 90.3 $ 91.2
================================================================================
Postretirement cost had the following components:
====================================================================================================================================
1997 1997 1996 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, (Dollars in millions) Health & Health & Health &
Pension Life Ins. Pension Life Ins. Pension Life Ins.
Benefits Benefits Benefits Benefits Benefits Benefits
Service cost-benefits earned during the period $ 26.3 $ 4.7 $ 24.5 $ 4.7 $ 24.6 $ 3.3
Interest cost on the projected benefit obligation 53.9 12.9 55.6 12.5 58.1 12.8
Less assumed return on plan assets:
Actual return on plan assets (107.4) -- (64.0) -- (107.1) --
Excess deferred 63.2 -- 22.7 -- 69.7 --
- ------------------------------------------------------------------------------------------------------------------------------------
(44.2) -- (41.3) -- (37.4) --
Other, including amortization of prior service cost 3.5 (.4) 2.9 .2 3.0 (.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Defined benefit plan cost $ 39.5 $ 17.2 $ 41.7 $ 17.4 $ 48.3 $ 15.5
====================================================================================================================================
Accretion expense reclassified to "other expense" $ 13.8 $ 12.9 $ 16.8 $ 12.5 $ 23.7 $ 12.8
====================================================================================================================================
25
29
NOTE 6. INCOME TAXES
The Company's income (loss) before income taxes and extraordinary item, and the
applicable provision (benefit) for income taxes were:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996 1995
- --------------------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item:
Domestic $145.7(a) $162.6 $ --
Foreign 91.1(a) (105.0)(b) 226.9
- --------------------------------------------------------------------------------
Pre-tax income $236.8 $ 57.6 $226.9
================================================================================
Provision (benefit) for
income taxes:
Current:
Domestic $ 96.2 $ 48.2 $ 15.7
Foreign 67.5 70.2 69.6
- --------------------------------------------------------------------------------
163.7 118.4 85.3
Deferred:
Domestic (42.9) (4.2) (7.3)
Foreign (3.9) (9.9) 7.1
- --------------------------------------------------------------------------------
(46.8) (14.1) (.2)
- --------------------------------------------------------------------------------
Total provision $116.9 $104.3 $ 85.1
================================================================================
(a) Includes $90 million write-off of purchased research and development:
domestic $32 million; foreign $58 million.
(b) Includes asset impairment loss of $235 million.
A reconciliation between the actual income tax expense provided and the
income taxes computed by applying the statutory federal income tax rate of 35%
in 1997, 1996 and 1995 to the income (loss) before income taxes and
extraordinary item is as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996 1995
- --------------------------------------------------------------------------------
Tax provision at statutory rate $ 82.9 $ 20.2 $ 79.4
Nondeductible write-off
of purchased research
and development 31.6 -- --
Nondeductible asset
impairment loss -- 82.3 --
Nondeductible goodwill
amortization 8.3 8.3 11.9
Rate differences and
withholding taxes related
to foreign operations 14.6 5.5 19.2
State tax provision (benefit) 1.8 1.3 (.5)
Foreign exchange gain (loss) (1.1) (.6) 1.2
Decrease in
valuation allowance (27.4) (13.0) (31.3)
Other, net 6.2 .3 5.2
- --------------------------------------------------------------------------------
Total provision $116.9 $104.3 $ 85.1
================================================================================
The decreases in the valuation allowance of $27.4 million in 1997 and $13
million in 1996 were net of valuation allowances of $ 12.4 million in 1997 and
$10.8 million in 1996, respectively, provided on future tax benefits on certain
foreign operations. In addition to the 1995 valuation allowance decrease shown
above, a valuation allowance of $10.5 million in 1995 was provided for the tax
benefits related to the extraordinary loss on retirement of debt (see Note 9).
26
30
The following table details the gross deferred tax liabilities and assets
and the related valuation allowances:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Facilities (accelerated depreciation,
capitalized interest and purchase
accounting differences) $115.4 $127.3
Inventory (LIFO and purchase
accounting differences) (1.9) 1.0
Employee benefits 6.7 8.1
Foreign investments 50.1 50.1
Other 46.5 37.9
- --------------------------------------------------------------------------------
216.8 224.4
- --------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefits 136.8 134.1
Warranties 66.0 61.1
Alternative minimum tax -- 4.7
Foreign tax credits and
net operating losses 57.6 45.2
Reserves 49.9 54.8
Other 9.9 8.5
Valuation allowances (57.6) (85.0)
- --------------------------------------------------------------------------------
262.6 223.4
- --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 45.8 $ (1.0)
================================================================================
In 1997 and 1996 the valuation allowance with respect to domestic deferred
tax assets was reduced as a result of the reversal of existing domestic deferred
tax benefits and higher levels of taxable income in the U.S. in 1997 and 1996
and projected taxable income in the future. Deferred tax assets related to
foreign tax credits, net operating loss carryforwards and future tax deductions
have been reduced by a valuation allowance since realization is dependent in
part on the generation of future foreign source income as well as on income in
the legal entity which gave rise to tax losses. Other deferred tax assets have
not been reduced by valuation allowances because of carrybacks and existing
deferred tax credits which reverse in the carryforward period. The foreign tax
credits and net operating losses are available for utilization in future years.
In some tax jurisdictions the carryforward period is limited to as little as
five years; in others it is unlimited.
As a result of the allocation of purchase accounting (principally
goodwill) to foreign subsidiaries, the book basis in the net assets of the
foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries'
stock. Such investments are considered permanent in duration, and accordingly no
deferred taxes have been provided on such differences, which are significant. It
is impracticable because of the complex legal structure of the Company and the
numerous tax jurisdictions in which the Company operates to determine such
deferred taxes.
Cash taxes paid were $105 million, $135 million and $90 million, in the
years 1997, 1996 and 1995, respectively.
In connection with examinations of the tax returns of the Company's German
subsidiaries for the years 1984 through 1990, German tax authorities raised
questions regarding the treatment of certain significant matters. In prior years
the Company paid approximately $17 million (at December 31, 1997, exchange
rates) of a disputed German income tax. A suit is pending to obtain a refund of
this tax. In March 1996 the Company received an assessment, which it has
appealed, for additional taxes of approximately $61 million (at December 31,
1997, exchange rates) (principally relating to the period from 1988 to 1990),
plus interest, for the tax return years then under audit. In addition,
significant transactions similar to those which gave rise to such assessment
occurred in years subsequent to 1990. In June 1997, the German tax authorities
commenced an audit of the years 1991 through 1994. Having assessed additional
taxes for the 1988-1990 period, the German tax authorities might, after
completing the current audit, propose tax adjustments for the 1991-1994 period
that could be as much as 50% higher. In addition, based on recent preliminary
indications, the Company believes that the German tax authorities are
considering proposing additional tax adjustments of approximately $44 million
(at December 31, 1997, exchange rates) for the years 1991 to 1994 with respect
to the substantial repayment of an intercompany financing instrument. The
Company is currently unable to predict the time that or extent to which an
assessment, if any, in respect of such potential adjustment would be made. The
Company, on the basis of the opinion of legal counsel, believes the German tax
returns are substantially correct as filed and any such adjustments would be
inappropriate and intends to vigorously contest any adjustments which have been
or may be assessed. Accordingly, the Company has not recorded any loss
contingency at December 31, 1997, with respect to such matters.
27
31
The Company made a partial security deposit in respect of the additional
taxes and interest assessed in March 1996. Approximately $13 million was paid in
January 1997 and, in addition, the Company has applied approximately $7 million
of tax refunds due it with respect to the 1996 tax year to the security deposit.
The tax authorities have granted a staying order for the balance of the
additional taxes and interest assessed in March 1996, under which no further
payment or other security will be required from the Company before litigation of
the matter or a final resolution. During litigation, the Company would expect
renewal of the staying order. Upon final resolution, the Company will be
obligated to pay any tax liability in excess of the security deposit or the
Company will receive a refund of any excess security deposit (with interest
accruing on the additional tax from the date of the assessment or the refund
amount from the date of deposit, respectively).
As a result of German tax legislation, first effective in 1994, the
Company's tax provision in Germany was higher in 1995, 1996 and 1997 and will
continue to be in the future. As a result of this German tax legislation and the
related additional tax provisions, the Company believes its tax exposure to the
major issues under the audit referred to above will be reduced starting in 1994
and continuing thereafter.
NOTE 7. INVENTORIES
The components of inventories are as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996
- --------------------------------------------------------------------------------
Finished products $255.0 $235.8
Products in process 86.8 77.7
Raw materials 89.0 95.5
- --------------------------------------------------------------------------------
Inventories at cost $430.8 $409.0
================================================================================
The carrying cost of inventories approximates current cost.
NOTE 8. FACILITIES
The components of facilities, at cost, are as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1997 1996
- --------------------------------------------------------------------------------
Land $ 72.0 $ 79.0
Buildings 442.2 382.3
Machinery and Equipment 1,093.3 971.0
Improvements in progress 109.2 150.2
- --------------------------------------------------------------------------------
Gross facilities 1,716.7 1,582.5
Less: accumulated depreciation 577.5 576.5
- --------------------------------------------------------------------------------
Net facilities $1,139.2 $1,006.0
================================================================================
NOTE 9. DEBT
In January 1997, the Company entered into the 1997 Credit Agreement, an
amendment and restatement of the 1995 Credit Agreement. The 1997 Credit
Agreement, which expires in 2002, provides American Standard Inc. and certain
subsidiaries (the "Borrowers") with senior secured credit facilities aggregating
$1.75 billion to all Borrowers 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 (the "Periodic Access Facility").
The 1997 Credit Agreement provides lower interest rates, significantly
increased borrowing capacity, less restrictive covenants and no scheduled
principal payments until maturity in 2002. Each of the outstanding revolving
loans is due at the end of each interest period (a maximum of six months). The
Company may, however, concurrently reborrow the outstanding obligations subject
to compliance with applicable conditions of the 1997 Credit Agreement.
Borrowings under the Revolving Facilities and the Periodic Access Facility bear
interest at the London interbank offered rate ("LIBOR") plus 0.875%, which is
.375% lower than rates under the 1995 Credit Agreement. This initial rate is
subject to adjustment and may be reduced in the event the Company attains
improved financial ratios. In July 1997, the Company achieved an interest rate
reduction of 0.125%.
Excluding the 1997 Credit Agreement which expires in 2002, the amounts of
long-term debt maturing in years 1998 through 2002 are: 1998-$30 million;
1999-$166 million; 2000-$15 million; 2001-$212 million and 2002 - $11 million.
28
32
On August 1, 1997, American Standard Companies Inc. and its wholly-owned
subsidiary American Standard Inc. jointly filed a shelf registration statement
(the "Shelf Registration") with the Securities and Exchange Commission covering
$1 billion of debt securities to be offered by American Standard Inc. and
unconditionally guaranteed by American Standard Companies Inc. On January 15,
1998, American Standard Inc. issued $350 million of 7 3/8% Senior Notes Due 2008
and on February 13, 1998, issued $125 million of 7 1/8% Senior Notes Due 2003
and $275 million of 7 5/8% Senior Notes Due 2010 (collectively, the "Offerings")
under the Shelf Registration, the proceeds of which aggregated $737 million, net
of underwriting discounts and expenses.
The Company currently intends to apply the net proceeds of the Offerings,
together with funds available under the 1997 Credit Agreement, to the redemption
(the "Redemption"), on or after June 1, 1998, of its $740.2 million principal
amount of 10 1/2% Senior Subordinated Discount Debentures and $200 million
principal amount of its 9 7/8% Senior Subordinated Notes. On or after June 1,
1998, the Senior Subordinated Discount Debentures are redeemable at a price of
104.66% of the principal amount, plus accrued interest and the Senior
Subordinated Notes are redeemable at a price of 102.82% of the principal amount,
plus accrued interest. Pending the Redemption, the net proceeds of the Offerings
were used to reduce borrowings (but not commitments) under the revolving portion
of the Company's 1997 Credit Agreement.
Unless amended or waived, the provisions of the 1997 Credit Agreement
would require the Company to apply the proceeds of the Offerings permanently to
reduce the total amount available under the 1997 Credit Agreement, unless the
proceeds of the Offerings are applied to the Redemption prior to December 31,
1998, or to redeem up to $150 million of certain other indebtedness prior to
June 1, 1999. Although the Company intends to redeem the 10 1/2% Senior
Subordinated Discount Debentures, there can be no assurance that market or
economic conditions or the Company's business strategy will not change and,
therefore, there can be no assurance that the proceeds of the Offerings will be
applied towards the Redemption.
On May 15, 1997, the Company redeemed the $250 million aggregate principal
amount of its 11 3/8% Senior Debentures (at a redemption price of 105.69% of the
principal amount plus interest accrued to the redemption date) with lower-rate
borrowings under the 1997 Credit Agreement.
As a result of the redemption of debt in 1997 and 1995, the Consolidated
Statement of Operations included extraordinary charges of $24 million (net of
taxes of $6 million) and $30 million (with no tax benefit), respectively
(including call premiums and the write-off of deferred debt issuance costs - see
Note 6). In addition, it is expected that the first half of 1998 will include an
extraordinary charge of approximately $50 million as a result of the planned
redemption of the 10 1/2% Senior Subordinated Discount Debentures and the 9 7/8%
Senior Subordinated Notes, both of which are callable on or after June 1, 1998.
Short-term -- The Revolving Facilities under the 1997 Credit Agreement provide
for aggregate borrowings of up to $1.375 billion for general corporate purposes,
of which up to $500 million may be used for the issuance of letters of credit
and $40 million of which is available for same-day short-term borrowings. The
Company pays a commitment fee of 0.20% per annum on the unused portion of the
Revolving Facilities and a fee of 0.875% per annum plus issuance fees for
letters of credit. At December 31, 1997, there were $672 million of borrowings
outstanding under the Revolving Facilities and $61 million of letters of credit.
Remaining availability under the Revolving Facilities was $642 million, which is
available to redeem certain outstanding public debt securities of American
Standard Inc. and for other general corporate purposes. Borrowings under the
Revolving Facilities by their terms are short-term. Average borrowings under the
revolving credit facilities available under bank credit agreements for 1997,
1996 and 1995 were $574 million, $215 million and $278 million, respectively.
Other short-term borrowings are available outside the United States under
informal credit facilities and are typically in the form of overdrafts. At
December 31, 1997, the Company had $40 million of such foreign
29
33
short-term debt outstanding at an average interest rate of 11% per annum. The
Company also had an additional $81 million of unused foreign facilities. These
facilities may be withdrawn by the banks at any time. In 1997 the Company also
established credit facilities for its operations in China totaling $58 million,
of which $6 million was outstanding as of December 31, 1997, with remaining
availability of $41 million after $11 million letters of credit usage.
Average short-term borrowings for 1997, 1996 and 1995 were $639 million,
$284 million and $334 million respectively, at weighted average interest rates
of 6.38%, 7.33% and 7.85%, respectively. Total short-term borrowings outstanding
at December 31, 1997, 1996 and 1995 were $718 million, $109 million and $240
million, respectively, at weighted average interest rates of 6.0%, 7.5%, and
7.9%, respectively.
Long-term -- Long-term debt was as follows:
================================================================================
At December 31, (Dollars in millions)
1997 1996
- --------------------------------------------------------------------------------
Credit Agreements $ 354.1 $ 363.6
9 1/4% sinking fund debentures, due in
installments from 1998 to 2016 127.5 150.0
10 7/8% senior notes due 1999 150.0 150.0
11 3/8% senior debentures due 2004 -- 250.0
9 7/8% senior subordinated notes due 2001 200.0 200.0
10 1/2% senior subordinated discount
debentures (net of unamortized
discount of $23.9 million in 1997;
$77.5 million in 1996) due in
installments from 2003 to 2005 686.7 633.1
Other long-term debt 63.0 67.7
- --------------------------------------------------------------------------------
1,581.3 1,814.4
Less current maturities 30.5 72.6
- --------------------------------------------------------------------------------
$1,550.8 $1,741.8
================================================================================
Interest costs capitalized as part of the cost of constructing facilities
for the years ended December 31, 1997, 1996, and 1995, were $3.8 million, $3.9
million and $4.0 million, respectively. Cash interest paid for those same years
on all outstanding indebtedness amounted to $135 million, $140 million and $161
million, respectively.
The U.S. Dollar equivalent of the 1997 and 1995 Credit Agreement loans and
the effective weighted average interest rates were:
================================================================================
At December 31, (Dollars in millions)
1997 1996
- --------------------------------------------------------------------------------
Periodic access loans:
Deutschemark loans at 4.44%
in 1997; 4.56% in 1996 $ 324.5 $ 263.7
British sterling loans at 7.44% in 1996 -- 5.1
Dutch guilder loans at 4.44%
in 1997; 4.31% in 1996 29.6 24.8
- --------------------------------------------------------------------------------
Total periodic access loans 354.1 293.6
Term loans:
U.S. dollar loans at 6.63% in 1996 -- 70.0
- --------------------------------------------------------------------------------
Total Credit Agreement long-term loans 354.1 363.6
Revolver loans at 5.7% in 1997;
5.6% in 1996 672.0 67.2
- --------------------------------------------------------------------------------
Total Credit Agreement loans $1,026.1 $ 430.8
================================================================================
The 9 1/4% Sinking Fund Debentures are redeemable at the Company's option,
in whole or in part, at redemption prices declining from 103.7% in 1998 to 100%
in 2006 and thereafter. The 10 7/8% Senior Notes are not redeemable by the
Company.
The 9 7/8% Senior Subordinated Notes may be redeemed at the Company's
option, in whole or in part, on or after June 1, 1998, at redemption prices
declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10
1/2% Senior Subordinated Discount Debentures may be redeemed at the Company's
option, in whole or in part, on or after June 1, 1998, at redemption prices
declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The
payment of the principal and interest on the 9 7/8% Senior Subordinated Notes
and on the 10 1/2% Senior Subordinated Discount Debentures is subordinated in
right of payment to the payment when due of all Senior Debt (as defined in the
related indenture) of the Company, including all indebtedness under the credit
agreements, the 9 1/4% Sinking Fund Debentures and the 10 7/8% Senior Notes.
30
34
At December 31, 1997, the Company held swap agreements to hedge the
redemption value of a portion of its 10 1/2% Senior Subordinated Discount
Debentures and effectively converted such debt to an average fixed interest rate
of approximately 7%. The redemption value hedged by the swaps is the fair value
of the debt at the commencement of the swaps. The swaps mature in June 1998 and
have a notional value of $147 million, which approximates their fair value as of
December 31, 1997. In anticipation of the Offerings under the Company's 1997
Shelf Registration, at December 31, 1997, the Company held forward contracts to
hedge the risk of interest rate fluctuations in advance of the issuance of
Senior Notes. Those contracts, which had a notional value of $350 million (and a
fair value of $368 million at December 31, 1997), effectively fixed the interest
rate on the 7 3/8% Senior Notes at 7.89%. Similarly, in February 1998 the
Company entered into forward contracts (with a notional value of $150 million)
to hedge interest rate fluctuations, which had little effect on the interest
rate on the 7 1/8% and 7 5/8% Senior Notes issued February 13, 1998. In
addition, in anticipation of expected future offerings under the 1997 Shelf
Registration, the Company has entered similar forward contracts with a notional
value of $150 million to hedge interest rates. The swap and forward contract
counterparties are major financial institutions and the Company does not
anticipate non-performance by counterparties.
Obligations under the 1997 Credit Agreement are guaranteed by the Company,
American Standard Companies Inc. and significant domestic subsidiaries of
American Standard Inc. (with foreign borrowings also guaranteed by certain
foreign subsidiaries) and are secured by a pledge of the stock of American
Standard Inc. and its subsidiaries.
The 1997 Credit Agreement contains various covenants that limit, among
other things, mergers and asset sales, indebtedness, dividends on and redemption
of capital stock of the Company, voluntary prepayment of certain other
indebtedness of the Company (including its outstanding debentures and notes),
rental expense, liens, capital expenditures, investments or acquisitions, the
use of proceeds from asset sales, intercompany transactions and transactions
with affiliates and certain other business activities. The covenants also
require the Company to meet certain financial tests. The Company believes it is
currently in compliance with the covenants contained in the 1997 Credit
Agreement.
The indentures related to the Company's debentures and notes contain
various covenants which, among other things, limit debt and preferred stock of
the Company and its subsidiaries, dividends on and redemption of capital stock
of the Company and its subsidiaries, redemption of certain subordinated
obligations of the Company, the use of proceeds from asset sales and certain
other business activities. The Company believes it is currently in compliance
with the covenants of those indentures.
NOTE 10. CAPITAL STOCK
In the first quarter of 1995 American Standard Companies Inc. sold 15,112,300
shares of its common stock at $20 per share in its initial public offering (the
"IPO"), yielding net proceeds of $281 million (including proceeds from the
exercised portion of the underwriters' over-allotment option and after deducting
underwriting discounts and expenses) which were used to reduce indebtedness.
In December 1996, the Company, Kelso & Company, L.P. ("Kelso") and ASI
Partners entered into an agreement (the "Stock Disposition Agreement") providing
for: (i) the sale by ASI Partners of 12,429,548 shares of American Standard
Companies Inc. common stock (including 1,621,245 shares sold pursuant to the
underwriters' over-allotment option) in a secondary offering (the "Secondary
Offering") completed in the first quarter of 1997; and (ii) the repurchase by
American Standard Companies Inc. from ASI Partners of all shares of American
Standard Companies Inc. common stock to be owned by ASI Partners after the
distribution (the "Share Distribution") by ASI Partners of 3,780,353 shares of
such stock to certain of its partners at their election. Accordingly, in
conjunction with the Secondary Offering, American Standard Companies Inc.
purchased 4,628,755 shares of its common stock from ASI partners for $208
million (the "Share Repurchase"). The Company financed the Share Repurchase (to
be held as treasury shares) with borrowings under the 1997 Credit Agreement.
American Standard Companies Inc. had previously completed a secondary offering
in September 1995 (together with the Secondary Offering, the "Secondary
Offerings") for 22,500,000 shares of its common stock, substantially all of
which were owned by ASI Partners. After the Secondary Offerings, the Share
Distribution and the Share Repurchase, ASI Partners owned no common stock of
American Standard Companies Inc. and is no longer entitled to designate any of
the Company's directors. All of the shares sold in the Secondary Offerings were
previously issued and outstanding shares, and the Company received no proceeds
therefrom.
31
35
In accordance with the Stock Disposition Agreement, American Standard
Companies Inc. also issued to ASI Partners 5-year warrants to purchase 3,000,000
shares of common stock of American Standard Companies Inc. at $55 per share (the
"Exercise Price"), $10 per share over the public offering price. The warrants
entitle holders to receive cash or shares, at the Company's option, based on the
difference between the then market value of American Standard Companies Inc.
common stock and the Exercise Price. The warrants will be exercisable between
January 31, 1998, and February 11, 2002. The estimated fair value of these
warrants at the date issued was $9.34 per share using a Black-Scholes option
pricing model and assumptions similar to those used for valuing American
Standard Companies Inc. stock options as described below.
On October 6, 1997, American Standard Companies Inc. completed its
open-market share repurchase program commenced in May 1997 pursuant to which
2,320,900 shares of its common stock were purchased for $100 million, and will
be held as treasury stock. This transaction and the Share Repurchase referred
to above were funded with borrowings by American Standard Inc. under the 1997
Credit Agreement which were loaned to American Standard Companies Inc. under a
non-interest-bearing demand note. Such amount is included in other assets.
In January 1995 American Standard Companies Inc. established the Stock
Incentive Plan (the "Stock Plan") under which awards may be granted to officers
and other key executives and employees in the form of stock options, stock
appreciation rights, restricted stock or restricted units in shares of common
stock of American Standard Companies Inc. The maximum number of shares or units
that may be issued under the Stock Plan and other incentive bonus plans is
7,604,475. The awards vest ratably over three years on the anniversary date of
the awards and are exercisable over a period of ten years.
A summary of stock option activity and related information for 1995, 1996
and 1997 follows:
================================================================================
Weighted- Weighted-
Average Average
Exercise Fair Value
Shares Price of Grants
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1994 -- --
Granted 5,006,000 $ 20.01 $ 7.51
Exercised -- --
Forfeited (32,000) 20.00
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1995 4,974,000 20.01
Granted 18,000 32.66 $ 12.26
Exercised (230,483) 20.00
Forfeited (60,343) 20.00
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1996 4,701,174 20.06
Granted 1,273,250 41.33 $ 14.13
Exercised (396,224) 20.00
Forfeited (58,515) 22.36
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1997 5,519,685 24.93
Exercisable at end of year:
1995 None --
1996 1,422,539 20.01
1997 2,661,450 20.04
32
36
In addition, on February 2, 1998, the Company granted awards in the form
of options to purchase 1,419,750 shares.
Exercise prices for options outstanding as of December 31, 1997, ranged
from $20 to $47.22. The weighted-average remaining contractual life of those
options is 7.5 years. As of December 31, 1997, there were 1,458,083 shares
available for grant under the plan and other incentive bonus plans.
The Company has elected to follow APB 25 and related interpretations in
accounting for stock options and accordingly has recognized no compensation
expense. Had compensation cost been determined based upon the fair value at the
grant date for awards consistent with the methodology prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
the Company's net income in 1997 would have decreased by $12.1 million; the net
loss in 1996 would have increased by $8.2 million; and net income in 1995 would
have decreased by $7.4 million. The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.6% in 1997 and 6.3% in 1996 and 1995;
volatility of 25% in 1997 and 23% in 1996 and 1995; an expected life of 5 years
in 1997 and 6 years in 1996 and 1995; and a dividend yield of zero. These
estimated expense amounts are not necessarily indicative of amounts in years
beyond 1997 because they are heavily influenced by the large number of options
granted in 1995 in connection with the IPO which fully vest at the beginning of
1998.
NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at December 31, 1997,
approximate carrying amounts except as follows:
================================================================================
(Dollars in millions)
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
10 7/8% senior notes $150 $158
9 7/8% senior subordinated notes 200 208
10 1/2% senior subordinated
discount debentures 687 722
9 1/4% sinking fund debentures 150 156
The fair values presented above are estimates as of December 31, 1997, and
are not necessarily indicative of amounts for which the Company could settle
currently or indicative of the intent or ability of the Company to dispose of or
liquidate such instruments.
The fair values of the Company's 1997 Credit Agreement loans, which
approximate their carrying values, were estimated using indicative market quotes
obtained from a major bank. The fair values of senior notes, senior debentures,
senior subordinated notes, senior subordinated discount debentures and sinking
fund debentures were based on indicative market quotes obtained from a major
securities dealer. The fair values of other loans approximate their carrying
value.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments under the terms of all noncancellable
operating leases in effect at December 31, 1997, are: 1998 - $59 million; 1999 -
$48 million; 2000 - $37 million; 2001 - $26 million; 2002 - $23 million and
thereafter - $30 million. Net rental expenses for operating leases were $64
million, $70 million and $59 million for the years ended December 31, 1997,
1996, and 1995, respectively.
The Company and certain of its subsidiaries are parties to a number of
pending legal and tax proceedings. The Company is also subject to federal, state
and local environmental laws and regulations and is involved in environmental
proceedings concerning the investigation and remediation of numerous sites. In
those instances where it is probable as a result of such proceedings that the
Company will incur costs which can be reasonably determined, the Company has
recorded a liability. The Company believes that these legal, tax and
environmental proceedings will not have a material adverse effect on its
consolidated financial position, cash flows or results of operations.
The tax returns of the Company's German subsidiaries are currently under
examination by the German tax authorities (see Note 6).
NOTE 13. SEGMENT DATA
Identifiable assets as of December 31, 1997, 1996 and 1995 and sales and
operating income by geographic location for the years then ended are shown in
the following tables. Sales and operating income by segment are shown in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 10.
33
37
SEGMENT DATA
Year Ended December 31, (Dollars in millions) 1997 1996 (c) 1995 (c)
Sales-Geographic distribution:
United States $ 3,002 $ 2,856 $ 2,526
Europe 1,955 2,050 1,951
Other 1,194 1,041 860
Eliminations (143) (142) (116)
- ------------------------------------------------------------------------------------------------------------
Total sales $ 6,008 $ 5,805 $ 5,221
============================================================================================================
Operating income-Geographic distribution:
United States $ 310 $ 323 $ 216
Europe 109 102 242
Other 81 (87) 69
- ------------------------------------------------------------------------------------------------------------
Total operating income $ 500(a) $ 338(b) $ 527
============================================================================================================
Assets
Air Conditioning Products $ 1,579 $ 1,480 $ 1,432
Plumbing Products 1,097 1,066 1,088
Automotive Products 701 775 805
Medical Systems 170 6 --
- ------------------------------------------------------------------------------------------------------------
Total identifiable assets $ 3,547 $ 3,327 $ 3,325
============================================================================================================
Geographic distribution:
United States $ 1,372 $ 1,186 $ 1,075
Europe 1,413 1,460 1,557
Other 762 681 693
- ------------------------------------------------------------------------------------------------------------
Total identifiable assets 3,547 3,327 3,325
Prepaid charges 23 34 39
Future income tax benefits 41 67 30
Cash and cash equivalents 29 60 89
Corporate assets 340 32 37
- ------------------------------------------------------------------------------------------------------------
Total assets $ 3,980 $ 3,520 $ 3,520
============================================================================================================
Goodwill included in assets:
Air Conditioning Products $ 196 $ 203 $ 334
Plumbing Products 229 247 302
Automotive Products 350 419 446
Medical Systems 69 6 --
- ------------------------------------------------------------------------------------------------------------
Total goodwill $ 844 $ 875 $ 1,082
============================================================================================================
Capital expenditures including investments in affiliates:
Air Conditioning Products $ 102 $ 93 $ 70
Plumbing Products 154 88 93
Automotive Products 42 46 44
Medical Systems 4 -- --
- ------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 302 $ 227 $ 207
============================================================================================================
Depreciation and amortization:
Air Conditioning Products $ 63 $ 51 $ 51
Plumbing Products 53 50 50
Automotive Products 43 43 42
Medical Systems 5 -- --
- ------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 164 $ 144 $ 143
============================================================================================================
(a) Includes $90 million write-off of purchased research and development, of
which $58 million is in Europe and $32 million in the United States (see
Note 3).
(b) Includes asset impairment charge of $235 million, of which $166 million is
included in Other and $69 million in Europe (see Note 2).
(c) Amounts related to Medical Systems for years 1995 and 1996 have been
reclassified to conform to the 1997 presentation.
34
38
QUARTERLY DATA (UNAUDITED)
1997
- ------------------------------------------------------------------------------------------------------------
(Dollars in millions) First (a) Second Third (b) Fourth
Sales $1,360.7 $1,589.3 $1,519.0 $1,538.6
Cost of sales 1,017.5 1,163.2 1,138.2 1,163.0
Income before income taxes and extraordinary item 52.9 113.9 (2.5) 72.5
Income taxes 19.2 40.4 31.0 26.3
- ------------------------------------------------------------------------------------------------------------
Income before extraordinary item 33.7 73.5 (33.5) 46.2
Extraordinary loss on retirement of debt (8.5) (15.1) -- --
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 25.2 $ 58.4 $ (33.5) $ 46.2
============================================================================================================
1996
- ------------------------------------------------------------------------------------------------------------
Sales $1,364.3 $1,518.3 $1,485.1 $1,436.9
Cost of sales 1,031.0 1,135.9 1,115.1 1,097.8
Income before income taxes and extraordinary item (188.3) 91.9 84.1 69.9
Income taxes 17.0 33.3 29.1 24.9
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (205.3) $ 58.6 $ 55.0 $ 45.0
============================================================================================================
(a) The first quarter of 1996 included a non-cash asset impairment charge of
$235 million, on which there was no tax benefit.
(b) The third quarter of 1997 included a non-cash write-off of purchased
research and development of $90 million, on which there was no tax
benefit.
35
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
Not required under reduced disclosure format as contemplated by General
Instruction J to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial statements and financial statement schedules
The financial statements and financial statement schedules are listed
in the accompanying index to financial statements on page 38 of this
annual report on Form 10-K. The financial statements indicated on the
index appearing on page 38 hereof are incorporated herein by reference.
3. Exhibits
The exhibits to this Report are listed on the accompanying index to
exhibits and are incorporated herein by reference or are filed as part
of this annual report on Form 10-K.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, the company filed a Current
Report on Form 8-K describing the First and Second Amendments to the
1997 Credit Agreement. The First Amendment permits the Company to (i)
repurchase shares of its common stock in an amount not to exceed $308
million, and (ii) use proceeds of loans under the 1997 Credit Agreement
to redeem the Company's 10-7/8% Senior Notes and to refinance such
loans prior to June 30, 1998. The Second Amendment permits the Company
to issue up to $1 billion of debt securities and to use the proceeds
therefrom to redeem its 10-1/2% Senior Subordinated Discount Debentures
or its 9-7/8% Senior Subordinated Notes or its 10-7/8% Senior Notes
and, pending such redemptions, to prepay temporarily loans outstanding
under the 1997 Credit Agreement.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN STANDARD INC.
By: /s/ EMMANUEL A. KAMPOURIS
(Emmanuel A. Kampouris)
Chairman, President and Chief Executive Officer
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1998:
/s/ EMMANUEL A. KAMPOURIS
(Emmanuel A. Kampouris) Chairman, President and Chief Executive
Officer; Director
(Principal Executive Officer)
/s/ GEORGE H. KERCKHOVE
(George H. Kerckhove) Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ G. RONALD SIMON
(G. Ronald Simon) Vice President and Controller
(Principal Accounting Officer)
/s/ STEVEN E. ANDERSON
(Steven E. Anderson) Director
/s/ HORST HINRICHS
(Horst Hinrichs) Director
/s/ SHIGERU MIZUSHIMA
(Shigeru Mizushima) Director
/s/ ROGER W. PARSONS
(Roger W. Parsons) Director
/s/ J. DANFORTH QUAYLE
(J. Danforth Quayle) Director
/s/ DAVID M. RODERICK
(David M. Roderick) Director
/s/ JOSEPH S. SCHUCHERT
(Joseph S. Schuchert) Director
41
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
COVERED BY
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
1. Financial Statements
Consolidated Balance Sheet at
December 31, 1997, and 1996 18
Years ended December 31, 1997, 1996, and 1995:
Consolidated Statement of Operations 17
Consolidated Statement of Cash Flows 19
Consolidated Statement of Stockholder's Deficit 20
Notes to Financial Statements 21-33
Segment Data 11 and 34
Quarterly Data (Unaudited) 35
Report of Independent Auditors 16
2. Report of Independent Auditors 38
Financial statement schedule, years ended
December 31, 1997, 1996, and 1995
II Valuation and Qualifying Accounts 39
All other schedules have been omitted because the information is not applicable
or is not material or because the information required is included in the
financial statements or the notes thereto.
42
REPORT OF INDEPENDENT AUDITORS
We have audited he consolidated financial statements of American Standard Inc.
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated February 16,
1998 (included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule of American Standard Inc. listed in
Item 14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
February 16, 1998
43
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
DESCRIPTION FOREIGN
BALANCE ADDITIONS CURRENCY BALANCE
BEGINNING CHARGED TO OTHER TRANSLATION END OF
OF PERIOD INCOME DEDUCTIONS CHANGES EFFECTS PERIOD
1997:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $ 28,294 $ 14,212 $ (9,581)(A) $ 500 $ (3,199) $ 30,226
======== ======== ======== ======== ======== ========
Reserve for post-retirement
benefits $473,229 $ 57,751 $(44,808)(B) $ (6,375)(C) $(42,146) $437,651
======== ======== ======== ======== ======== ========
1996:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $ 27,330 $ 11,225 $(10,158)(A) $ 304 $ (407) $ 28,294
======== ======== ======== ======== ======== ========
Reserve for post-retirement
benefits $482,398 $ 60,730 $(40,960)(B) $(10,204)(D) $(18,735) $473,229
======== ======== ======== ======== ======== ========
1995:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $ 19,569 $ 10,811 $ (6,064)(A) $ 2,662 $ 352 $ 27,330
======== ======== ======== ======== ======== ========
Reserve for post-retirement
benefits $437,708 $ 52,190 $(21,808)(B) $ (5,761)(E) $ 20,069 $482,398
======== ======== ======== ======== ======== ========
The reserve for postretirement benefits excludes the activity for currently
funded U.S. pension plans.
(A) Accounts charged off.
(B) Payments made during the year.
(C) Includes reclassification to current liabilities, offset by effect of
acquisition of new businesses.
(D) Includes $10 million reduction in minimum pension liability
(E) Includes $6 million reduction in minimum pension liability.
44
AMERICAN STANDARD INC.
INDEX TO EXHIBITS
(ITEM 14(a)3 - EXHIBITS REQUIRED BY ITEM 601
OF REGULATION S-K AND ADDITIONAL EXHIBITS)
(The Commission File Number of American Standard Inc., the Registrant (sometimes
hereinafter referred to as the "Company"), and for all Exhibits incorporated by
reference, is 33-64450, except those Exhibits incorporated by reference in
filings made by American Standard Companies Inc. (formerly named ASI Holding
Corporation) ( "Holding") the Commission File Number of which is 1-11415; prior
to filing its Registration Statement on Form S-2 on November 10, 1994, Holding's
Commission File Number was 33-23070.)
(3) (i) Restated Certificate of Incorporation of American Standard
Inc. (the Company"); previously filed as Exhibit (3) (i) in
the Company's Form 10-Q for the quarter ended June 30, 1995,
and herein incorporated by reference.
(ii) Amended By-laws of the Company, as amended February 24, 1997,
effective May 1, 1997; previously filed as Exhibit (3) (ii) to
the Company's Form 10-K for the fiscal year ended December 31,
1996, and herein incorporated by reference.
(4) (i) Indenture, dated as of November 1, 1986, between the Company
and Manufacturers Hanover Trust Company, Trustee, including
the form of 9-1/4% Sinking Fund Debenture Due 2016 issued
pursuant thereto on December 9, 1986, in the aggregate
principal amount of $150,000,000; previously filed as Exhibit
(4) (iii) to the Company's Form 10-K for the fiscal year ended
December 31, 1986, and herein incorporated by reference.
(ii) Instrument of Resignation, Appointment and Acceptance, dated
as of April 25, 1988 among the Company, Manufacturers Hanover
Trust Company (the Resigning Trustee") and Wilmington Trust
Company (the Successor Trustee"), relating to resignation of
the Resigning Trustee and appointment of the Successor Trustee
under the Indenture referred to in Exhibit (4) (i) above;
previously filed as Exhibit (4) (ii) to Registration Statement
No. 33- 64450 of the Company, filed June 16, 1993, and herein
incorporated by reference.
(iii) Indenture dated as of May 15, 1992, between the Company and
First Trust National Association, Trustee, relating to the
Company's 10-7/8% Senior Notes due 1999, in the aggregate
principal amount of $150,000,000; previously filed as Exhibit
(4) (i) to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1992, and herein incorporated by
reference.
(iv) Form of 10-7/8% Senior Note due 1999 included as Exhibit A to
the Indenture described in (4) (iii) above.
(v) Form of Indenture, dated as of June 1, 1993, between the
Company and United States Trust Company of New York, as
Trustee, relating to the Company's 9-7/8% Senior Subordinated
Notes Due 2001; previously
45
filed as Exhibit (4) (xxxi) to Amendment No. 1 to Registration
Statement No. 33-61130 of the Company filed May 10, 1993, and
herein incorporated by reference.
(vi) Form of Note evidencing the 9-7/8% Senior Subordinated Notes
Due 2001 included as Exhibit A to the Form of Indenture
referred to in (4) (v) above.
(vii) Form of Indenture, dated as of June 1, 1993, between the
Company and United States Trust Company of New York, as
Trustee, relating to the Company's 10-1/2% Senior Subordinated
Discount Debentures Due 2005; previously filed as Exhibit (4)
(xxxiii) to Amendment No. 1 to Registration Statement No.
33-61130 of the Company, filed May 10, 1993, and herein
incorporated by reference.
(viii) Form of Debenture evidencing the 10-1/2% Senior Subordinated
Discount Debentures Due 2005 included as Exhibit A to the Form
of Indenture referred to in (4) (vii) above.
(ix) Form of Senior Debt Indenture dated as of January 15, 1998
among the Company, Holding and The Bank of New York; filed as
Exhibit (4) (i) to Amendment No. 1 to Registration Statement
No. 333-32627 filed September 19, 1997, and herein
incorporated by reference.
(x) First Supplemental Indenture dated as of January 15, 1998
between the Company, Holding and The Bank of New York,
relating to the Company's 7.375% Senior Notes due 2008,
guaranteed by Holding; incorporated herein by reference to
Exhibit (4) (xi) of Holding's Form 10-K for the fiscal year
ended December 31, 1997.
(xi) Second Supplemental Indenture dated as of February 13, 1998
between the Company, Holding and The Bank of New York relating
to the Company's 7-1/8% Senior Notes due 2003 and 7-5/8%
Senior Notes due 2010, guaranteed by Holding; incorporated
herein by reference to Exhibit (4) (xii) of Holding's Form
10-K for the fiscal year ended December 31, 1997.
(xii) Amended and Restated Credit Agreement, dated as of January 31,
1997, among Holding, the Company, certain subsidiaries of the
Company and the financial institutions listed therein, The
Chase Manhattan Bank, as Administrative Agent; Citibank, N.
A., as Documentation Agent; The Bank of Nova Scotia and
NationsBank, N. A., as Co-Syndication Agents; Bankers Trust
Company, Deutsche Bank AG, The Industrial Bank of Japan Trust
Company, The Sanwa Bank Limited, New York Branch and The
Sumitomo Bank, Ltd., as Senior Managing Agents; and The Bank
of New York, Banque Paribas, CIBC Inc., CIBC Wood Gundy plc,
Compagnie Financiere de CIC et de L'Union Europeenne, Credit
Lyonnais, New York Branch, Fleet National Bank, The Long Tem
Credit Bank of Japan, Limited and The Toronto-Dominion Bank,
as Managing Agents; previously filed as Exhibit (4) (xviii) to
Amendment No. 2 to Registration Statement No. 333-18015 of
Holding, filed February 5, 1997, and herein incorporated by
reference.
(xiii) First Amendment dated as of May 22, 1997 to the Amended and
Restated Credit Agreement dated as of January 31, 1997 among
Holding, the Company, certain subsidiaries of the Company, the
financial institutions party thereto and The Chase Manhattan
Bank, as administrative agent; filed as Exhibit 4 (a) to
Holding's Report on Form 8-K dated October 24, 1997.
(xiv) Second Amendment dated as of August 20, 1997 to the Amended
and Restated Credit Agreement dated as of January 31, 1997
among Holding, the Company, certain subsidiaries of the
Company, the financial institutions party thereto and The
Chase Manhattan Bank, as administrative agent; filed as
Exhibit 4 (b) to Holding's Report on Form 8-K dated October
24, 1997.
46
(xv) Rights Agreement, dated as of January 5, 1995, between Holding
and Citibank, N.A. as Rights Agent; previously filed as
Exhibit (4) (xxv) to Holding's Form 10-K for the fiscal year
ended December 31, 1994, and herein incorporated by reference.
(10) *(i) American Standard Inc. Long-Term Incentive Compensation Plan,
as amended and restated on December 5, 1996; previously filed
as Exhibit (10) (i) to the Company's Form 10-K for the fiscal
year ended December 31, 1996, and herein incorporated by
reference.
(ii) Trust Agreement for American Standard Inc. Long-Term Incentive
Compensation Plan and American Standard Companies Inc.
Supplemental Incentive Plan, as amended and restated on
December 5, 1996; previously filed as Exhibit (10) (ii) to the
Company's Form 10-K for the fiscal year ended December 31,
1996, and herein incorporated by reference.
(iii) American Standard Inc. Annual Incentive Plan, as amended and
restated on December 5, 1996; previously filed as Exhibit (10)
(iii) to the Company's Form 10-K for the fiscal year ended
December 31, 1996, and herein incorporated by reference.
(iv) American Standard Inc. Executive Supplemental Retirement
Benefit Program, as restated to include all amendments through
July 6, 1995; previously filed as Exhibit (10) (iv) to the
Company's Form 10-K for the fiscal year ended December 31,
1995, and herein incorporated by reference.
(v) American Standard Inc. Supplemental Compensation Plan for
Outside Directors, as amended through December 4, 1997; filed
herewith.
(vi) Trust Agreement for the American Standard Inc. Supplemental
Compensation Plan for Outside Directors, dated March 7, 1996;
filed herewith.
(vii) ASI Holding Corporation 1989 Stock Purchase Loan Program;
previously filed as Exhibit (10) (i) to Holding's Form 10-Q
for the quarter ended September 30, 1989, and herein
Incorporated by reference.
(viii) American Standard Companies Inc. Corporate Officer Severance
Plan, as amended and restated on December 5, 1996; previously
filed as Exhibit (10) (vii) to Holding's Form 10-K for the
fiscal year ended December 31, 1996, and herein incorporated
by reference.
(ix) Estate Preservation Plan adopted in December, 1990; previously
filed as Exhibit (10) (xx) to the Company's Form 10-K for the
fiscal year ended December 31, 1990, and herein incorporated
by reference.
(x) Amendment adopted in March 1993 to Estate Preservation Plan
referred to in (10) (ix) above; previously filed as Exhibit
(10) (xvii) to the Company's Form 10-K for the fiscal year
ended December 31, 1993, and herein incorporated by reference.
(xi) Summary of terms of Unfunded Deferred Compensation Plan,
adopted December 2, 1993; previously filed as Exhibit (10)
(xviii) to the Company's Form 10-K for the fiscal year ended
December 31, 1993, and herein incorporated by reference.
* Items in this series 10 consist of management contracts or compensatory plans
or arrangements with exception of (10)(xiv) and (xv).
47
(xii) American Standard Companies Inc. Stock Incentive Plan, as
amended and restated on December 5, 1996; previously filed as
Exhibit (10) (xi) in Holding's Form 10-K for the fiscal year
ended December 31, 1996, and herein incorporated by reference.
(xiii) American Standard Companies Inc. and Subsidiaries 1996-1998
Supplemental Incentive Compensation Plan, as amended and
restated on December 5, 1996; previously filed as Exhibit (10)
(xiii) in Holding's Form 10-K for the fiscal year ended
December 31, 1996, and herein incorporated by reference.
(xiv) Stock Disposition Agreement, dated as of December 16, 1996,
among Holding, Kelso & Company, L. P. and Kelso ASI Partners,
L. P.; previously filed as Exhibit (10) (i) to Holding's
Registration Statement No. 333-18015, filed December 17, 1996,
and herein incorporated by reference.
(xv) Form of Warrant Agreement between Holding and Citibank, N. A.
as Warrant Agent, included as Annex A to the Stock Disposition
Agreement described in (10) (xiii) above; previously filed as
Exhibit (10) (ii) to Holding's Registration Statement No.
333-18015, filed December 17, 1996, and herein incorporated by
reference.
(21) List of Company's subsidiaries.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule