Back to GetFilings.com
1
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, 1998
[ ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to .
-------------------- ------------------
Commission File Number 1-11415
AMERICAN STANDARD COMPANIES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3465896
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Centennial Avenue, P.O. Box 6820, Piscataway, 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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
(and associated Common Stock Rights)
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 |_|
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. [ ]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant as of the close of business on March 11, 1999
was approximately $2.3 billion based on the closing sale price of the common
stock on the New York Stock Exchange consolidated tape on that date.
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of the close of business on March 11, 1999:
Common Stock, $.01 par value 70,363,953 Shares
Documents incorporated by reference:
Part of the Form 10-K into
Document (Portions only) which document is incorporated.
------------------------ -------------------------------
Annual Report to Stockholders for the year Parts I, II and IV
ended December 31, 1998
Definitive Proxy Statement dated March 29, 1999
for use in connection with the Annual Meeting
of Stockholders to be held on May 6, 1999 Part III
1
2
TABLE OF CONTENTS
Page
PART I
Item 1. Business. 3
Item 2. Properties. 20
Item 3. Legal Proceedings. 21
Item 4. Submission of Matters to a Vote of Security Holders. 23
Executive Officers of the Registrant. 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters. 28
Item 6. Selected Financial Data. 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 30
Item 8. Financial Statements and Supplementary Data. 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 30
PART III
Item 10. Directors and Executive Officers of the Registrant. 31
Item 11. Executive Compensation. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management. 31
Item 13. Certain Relationships and Related Transactions. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 32
Signatures 39
Financial Supplement F-1
2
3
PART I
ITEM 1. BUSINESS
American Standard Companies Inc. (the "Company") is a Delaware corporation
that has as its only significant asset all the outstanding common stock of
American Standard Inc., a Delaware corporation ("American Standard Inc.").
Hereinafter, "American Standard" or "the Company" will refer to the Company, or
to the Company and American Standard Inc., including its subsidiaries, as the
context requires.
American Standard is a global, diversified manufacturer of high quality,
brand-name products in three major product groups: air conditioning systems (59%
of 1998 sales); bathroom and kitchen fixtures and fittings (23% of 1998 sales);
and braking and control systems for medium-sized and heavy trucks, buses,
trailers and utility vehicles (17% of 1998 sales). The Medical Systems segment,
formed in 1997, had sales of $98 million in 1998 (1% of 1998 sales). American
Standard is among the three largest providers of products it manufactures in
each of its three major business segments in the principal geographic areas
where 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), PORCHER(R), ARMITAGE SHANKS(R) and DOLOMITE(R) for
plumbing products, WABCO(R) for braking and related systems and DiaSorin(TM),
Copalis(R) and Pylori-Chek(TM) for Medical diagnostic systems.
One of the ways the Company makes it products more competitive is by
emphasizing technological advancements such as:
o air conditioning systems that utilize energy-efficient compressors
and refrigerants meeting current environmental standards;
o water-saving plumbing products;
o commercial vehicle antilock braking systems ("ABS") and electronic
controls systems;
o innovative medical diagnostic testing using laser technology.
After the February 1999 acquisition of the Bathrooms Division of Blue
Circle Industries PLC, described below, American Standard had 116 manufacturing
facilities in 33 countries.
Overview of Business Segments
Through 1996 American Standard operated three business segments: Air
Conditioning Products, Plumbing Products and Automotive Products. In 1997 the
Company announced formation of its Medical Systems segment.
Air Conditioning Products. American Standard is one of the three largest
U.S. manufacturers 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 1998. Approximately 65% of Trane's sales in 1998 were in
the replacement, renovation and repair markets, which have been less cyclical
than the new residential and commercial construction markets. Air Conditioning
Products derived 74% of its 1998 sales in the U.S. and 26% outside. Management
believes
3
4
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 slowed due to the unfavorable economic
conditions existing in the region since 1997) and Latin America.
Plumbing Products. American Standard is one of the world's three largest
manufacturers 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, and also under the ARMITAGE SHANKS(R) and
DOLOMITE(R) names since the February 1999 acquisition of the Bathrooms Division
of Blue Circle Industries PLC, described below. Of Plumbing Products' 1998
sales, 69% was derived from operations outside the United States and 31% 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, supplying its markets with
lower-cost products manufactured in Mexico, Eastern Europe and the Far East, and
the expansion of existing operations in developing market areas throughout the
world, principally the Far East, Latin America and Eastern Europe, although Far
East growth has slowed because of weak economic conditions existing in the
region.
Automotive Products. Automotive Products ("WABCO") is one of the three
largest manufacturers, of braking and related systems for the commercial and
utility vehicle industry, primarily in Europe and Brazil. 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 DaimlerChrysler, 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 two-year phase-in of ABS began in March 1997),
as well as from the technological advances embodied in the Company's products
and its close relationships with a number of vehicle manufacturers.
Medical Systems. In 1997, the Company formed its Medical Systems segment
to develop and market medical diagnostics technology and equipment under the
DiaSorin(TM), Copalis(R) and Pylori-Chek(TM) names. The Company had previously
supported the development of medical diagnostic products focusing on test
instruments using laser technology and reagents. 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 medical
diagnostics businesses of Sorin Biomedica S.p.A. in Europe and INCSTAR
Corporation in the U.S. for $212 million.
4
5
Strategy
Globalization
American Standard has historically had a significant global presence. One
of its major strategic objectives is to continue to expand that presence through
the growth of existing operations and the establishment of new operations in
developing market areas in the Far East, Latin America, and Eastern Europe. The
Company has frequently structured joint ventures with local manufacturing and
distribution partners to facilitate risk sharing and to allow the Company to
benefit from the additional expertise of local market participants.
Air Conditioning Products plans to continue to expand its operations in
the Far East, the Middle East, Latin America, Brazil and Europe. It also
continues to expand its sales forces in these regions as well as in India. Since
the end of 1995 the Company has been developing and expanding its air
conditioning business in the People's Republic of China ("China"), to become an
integrated manufacturer, marketer and distributor of a broad range of air
conditioning systems and related products for residential and commercial
applications. The Company and a minority investor established ASI China Holdings
Limited ("ASI China"), in which the Company has an ownership interest of 64.4%,
and formed A-S Air Conditioning Products Limited ("ASAP"), owned 57.3% by ASI
China, to establish or acquire majority ownership in up to five manufacturing
joint ventures as well as sales and service businesses in China. As of December
31, 1998, ASAP had acquired majority ownership in three manufacturing joint
ventures. The Company's ownership interest in ASAP is expected to increase
further over time through reinvestment of royalties and management fees and
through additional stock purchases.
Plumbing Products has entered new markets through joint ventures in
Eastern Europe, Spain, Portugal and Vietnam and is continuing to expand using
this approach. In 1997 and 1998 the Company expanded its production capacity in
Bulgaria and in 1995 operations were expanded in France through the acquisition
of Porcher (see "Plumbing Products Segment"). Plumbing Products continues to
expand its operations in China through its affiliate, A-S China Plumbing
Products Limited ("ASPPL"), 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. ASPPL has entered
into six joint ventures with local business concerns which, together with one
wholly-owned operation, have received business licenses from Chinese government
authorities. These include three chinaware manufacturing facilities, two
fittings plants and two steel tub factories. The Company's ownership interest in
ASPPL is expected to increase further over time through reinvestment of
royalties and management fees and through additional stock purchases.
Automotive Products, headquartered in Europe, has a manufacturing
subsidiary in Brazil, a joint venture in China and is in the process of
establishing joint ventures in Eastern Europe. In the United States the Meritor
WABCO joint venture is growing rapidly as federal regulations mandating ABS
phase in over a two-year period which began in March 1997. The Company is also
expanding the volume of business done through its other existing joint venture
in the United States with Cummins Engine Co. (WABCO Compressor Manufacturing
Co., a manufacturing joint venture formed in 1997 to produce air compressors
designed by WABCO), and through another joint venture in Japan. In March 1999,
WABCO acquired the heavy vehicle business of Mando Machinery Corporation in
South Korea, to be operated under a wholly-owned subsidiary, WABCO Korea Inc.
5
6
Demand Flow(R) Technology*
To build on its position as a leader in each of its industries and to
increase sales and operating income, American Standard began in 1990 to apply
Demand Flow to all its businesses. Applying Demand Flow principles, products are
produced as and when required by customers, the production process is
streamlined and quality control is integrated into each step of the
manufacturing process. The benefits of Demand Flow include better customer
service, quicker response to changing market needs, improved quality control,
higher productivity, increased inventory turnover rates and reduced requirements
for working capital and manufacturing and warehouse space.
As part of American Standard's strategy to integrate Demand Flow into all
of its operations, American Standard has trained most of its approximately
57,000 employees worldwide in Demand Flow and has implemented Demand Flow in
substantially all of its production facilities. American Standard is also
applying Demand Flow to administrative functions and is re-engineering its
organizational structure to manage its businesses based on processes instead of
functions.
American Standard believes that its implementation of Demand Flow methods
has achieved significant benefits. Product cycle time (the time from the
beginning of the manufacturing of a product to its completion) has been reduced
and, on average, inventory turnover rates have tripled since 1990 to 9.2 turns.
Principally as a result of the implementation of Demand Flow, American Standard
has reduced inventories (from amounts that would otherwise have been carried) by
approximately 65% from December 31, 1989 through December 31, 1998. American
Standard further believes that as a result of the introduction of Demand Flow
employee productivity has risen significantly, customer service has improved
and, without reducing production capacity, the Company has been able to free
more than three million square feet of manufacturing and warehouse space,
allowing for expansion, plant consolidation or other uses.
Air Conditioning Products Segment
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. Air conditioning products are sold primarily under the
TRANE(R) and AMERICAN STANDARD(R) names. In 1998 Trane, with revenues of $3,940
million, accounted for 60% of the Company's sales and 59% of its segment income
(excluding Medical Systems). Trane derived 26% of its 1998 sales from outside
the United States. Approximately 65% of Trane's sales in 1998 were in the
replacement, renovation and repair markets, which in general are less cyclical
than the new residential and commercial construction markets.
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 one of the
three largest global manufacturers of 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.
- --------
* Demand Flow is a registered trademark of J-I-T Institute of Technology, Inc.
6
7
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 refrigerants
meeting current environmental standards.
Many of the air conditioning products manufactured by Trane utilize HCFCs
and in the past utilized CFCs as refrigerants. Various federal and state laws
and regulations, principally the 1990 Clean Air Act Amendments, require the
eventual phase-out of the production and use of these chemicals because of their
possible deleterious effect on the earth's ozone layer if released into the
atmosphere. Phase-in of substitute refrigerants will require replacement or
modification of much of the air conditioning equipment already installed, which
management believes has created a new market opportunity. In order to ensure
that Company products will be compatible with the substitute refrigerants, Trane
has been working closely with the manufacturers that are developing substitute
refrigerants. See "General --Regulations and Environmental Matters."
Various federal and state statutes, including the National Appliance
Energy Conservation Act of 1987, as amended, impose energy efficiency standards
for certain of the Company's unitary air conditioning products. Although the
Company has been able to meet or exceed such standards to date, stricter
standards in the future could require additional research and development
expense and capital expenditures to maintain compliance.
In December 1993 the Company formed a partnership, Alliance Compressors,
with Heatcraft Technologies Inc., a subsidiary of Lennox International Inc., for
the manufacture of compressors for use in air conditioning and refrigeration
equipment. On December 31, 1996, the partnership was restructured to admit a new
partner, Copesub, Inc., a subsidiary of Emerson Electric Co. Following the
restructuring, the Company and Heatcraft Technologies Inc. each own a 24.5%
partnership interest and Copesub, Inc. owns the balance. Alliance plans to
develop, manufacture, market and sell, primarily to Trane and Lennox, scroll
compressors utilized mainly in residential central air conditioning
applications. Alliance will operate principally from a newly constructed
facility in Natchitoches, Louisiana.
At December 31, 1998 Air Conditioning Products had 31 manufacturing plants
in 9 countries, employing approximately 24,000 people.
Through 1997 Air Conditioning Products was composed of three operating
groups: Unitary Products, North American Commercial, and International. In 1998,
the Company reorganized Air Conditioning Products into two groups: Worldwide
Unitary Systems Group and Worldwide Applied Systems Group. This reorganization
is intended to leverage the strength of the applied business worldwide and to
concentrate efforts on the growing international unitary market opportunity. The
following section describes Air Conditioning Products as it was organized during
1998.
7
8
Worldwide Applied Systems Group
The Worldwide Applied Systems Group ("Applied Systems"), which accounted
for 52% of Air Conditioning Products' 1998 sales, manufactures and distributes
applied air conditioning products throughout the world, including the exporting
of many products manufactured in the U.S. These products are for air
conditioning applications in larger commercial, industrial and institutional
buildings. Approximately 66% of Applied Systems sales are in the U.S. and 34% in
international markets. Other major suppliers of commercial systems are Carrier,
York and McQuay.
In the U.S., Applied Systems distributes its products through 90 sales
offices, 44 of which are Company-owned and 46 of which are franchised. Applied
Systems is continuing the process of acquiring certain commercial sales and
service offices, having acquired six offices in 1998, seven in 1997 and three in
1996. Outside the U.S., Applied Systems also has an extensive network of sales
and service agencies, both Company owned and franchised, to sell products and
provide maintenance and service.
Over the last few years Applied Systems has expanded its aftermarket
business activities to include services such as emergency rentals of air
conditioning equipment. The group has also expanded its line to include
components to convert installed centrifugal chiller products to use refrigerants
meeting current environmental standards.
During 1996, 1997 and 1998 Applied Systems continued its introduction of a
number of new products broadening its line of high-efficiency centrifugal
chillers, expanding the air cooled series R chiller line, and introducing a new
absorption chiller line. Sales of systems that automatically control a
building's air quality continue to grow as a percentage of total sales with new
product introductions such as Tracer Summit and wireless thermostats. Indoor air
quality is emerging as a significant new application to be served by the
Company's products and services.
Worldwide Unitary Systems Group
The Worldwide Unitary Systems Group ("Unitary Systems"), which accounted
for 48% of Air Conditioning Products' 1998 sales, manufactures and distributes
products for commercial and residential unitary applications throughout the
world. Unitary Systems exports many products manufactured in the United States
and also distributes mini-splits manufactured in facilities operated by
subsidiaries and joint ventures outside the U.S. Approximately 82% of Unitary
Systems' sales originated in the U.S. and 18% in international markets. This
group benefits significantly from the growth of the replacement market for
residential and commercial unitary air conditioning systems, particularly in the
U.S. Other major suppliers in the unitary market are Carrier, York, Rheem,
Lennox and Goodman Industries.
Commercial unitary products range from 2 to 120 tons and include
combinations of air conditioners, heat pumps, and gas furnaces, along with
variable-air-volume equipment and integrated control systems. Typical
applications are in retail stores, small-to-medium-size office buildings,
manufacturing plants, restaurants, and commercial buildings located in office
parks and strip malls. In the U.S. these products are sold through commercial
sales offices, independent wholesale distributors and company-owned dealer sales
offices in over 375 locations. Residential central air conditioning products
range from 1 to 5 tons and include air conditioners, heat pumps, air handlers,
furnaces, and coils. In the U.S. these products are sold through independent
wholesale distributors and Company-owned sales offices in over 250 locations to
dealers and contractors who sell and install the equipment. Outside the U.S.,
8
9
Unitary Systems also has an extensive network of sales and service agencies,
both Company-owned and franchised, to provide maintenance and warranty service
for its equipment.
During the past few years, the Unitary Systems Group successfully
introduced several new products including: a line of multi-stage cooling and
heat pump units offering the industry's highest efficiencies; a unique line of
outdoor condensing units for the AMERICAN STANDARD(R) brand; an ultra-high
efficiency gas furnace with variable speed airflow and gas combustion
components; an ultra-high efficiency packaged air conditioner; modulating gas
and variable frequency drive large rooftop units; rooftop units with special
features that appeal to national accounts; and a large rooftop line (27.5 tons
to 50 tons). The commercial unitary business also concentrated on indoor air
quality enhancements and new capabilities for existing products.
Unitary Systems also markets light commercial and residential products
under an AMERICAN STANDARD(R) brand name to serve distributors who typically
carry other products in addition to air conditioning products.
International Expansion
Trane expects to continue the expansion of its presence outside the U.S.
in both applied and unitary systems. In the Asia-Pacific region Trane
established three manufacturing joint ventures in China in 1995 (see
"Globalization") and has had operations in Malaysia since the mid-1980's. Since
the early 1990's it has operated an air conditioning manufacturing and
distribution firm in Taiwan, and a sales and manufacturing joint venture in
Thailand. A Brazilian manufacturing plant and distribution operations were
acquired in 1994. In Europe, the group operates plants in Epinal and Charmes,
France, and in Colchester, U.K. A joint venture in Egypt commenced operations in
1992 to serve markets in the Middle East. Trane is also continuing to expand its
international distribution network.
Plumbing Products Segment
Plumbing Products manufactures and distributes bathroom and kitchen
fixtures and fittings primarily under the IDEAL STANDARD(R), AMERICAN
STANDARD(R), STANDARD(R) and PORCHER(R) names, and also under the ARMITAGE
SHANKS(R) and DOLOMITE(R) names since the February 1999 acquisition of the
Bathrooms Division of Blue Circle Industries PLC, described below. In 1998
Plumbing Products, with revenues of $1,510 million, accounted for 23% of the
Company's sales and 18% of its segment income (excluding Medical Systems).
Plumbing Products derived 69% of its total 1998 sales from operations outside
the United States.
Plumbing Products' sales consist 52% of chinaware fixtures, 24% of
fittings (typically brass) and 11% 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 two primary geographic groups: Americas
Group and the Europe and Far East Group. Plumbing Products' fittings operations
are organized as the Worldwide Fittings Group, with manufacturing facilities in
Germany, the U.K., Bulgaria, the U.S., Mexico, Thailand, South Korea and China.
Worldwide Fittings' sales and operating results are reported in the two primary
geographic groups within which it operates.
9
10
The European portion of the Europe and Far East Group has sold products in
Europe 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, the United Kingdom,
Greece, the Czech Republic, Bulgaria, Egypt and Turkey and distributes products
in other European countries. 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. The unprofitable
distribution portion of Porcher was sold to a major French plumbing distributor
in October 1998. This sale was part of a major restructuring program involving
the closure of five plants in Europe and the shift of manufacturing capacity to
lower-cost facilities in Bulgaria.
On February 2, 1999, the Company acquired for approximately $417 million
the Bathrooms Division of Blue Circle Industries PLC, a manufacturer of ceramic
sanitaryware, brassware and integrated plumbing systems. The acquired business,
which operates principally under the names ARMITAGE SHANKS(R) and CERAMICA
DOLOMITE(R) ("Armitage Dolomite"), had 1998 sales of approximately $290 million
and assets of approximately $250 million at December 31, 1998 (both at December
31, 1998 exchange rates). Armitage Dolomite has 3 major manufacturing facilities
and nine smaller facilities located in England and Italy, and employs
approximately 3,200 people. The primary markets for its products are in England,
Italy, Ireland and Germany. Management believes that Armitage Dolomite products
will complement the Company's current product lines and strengthen its
competitive position in Europe. The acquisition will be accounted for as a
purchase. The Company is in the process of valuing the assets acquired and
liabilities assumed for purposes of allocating the purchase price. This process
is not complete, but based upon preliminary estimates the Company anticipates
that goodwill of approximately $250 million will be recorded.
The Far East portion of the Europe and Far East 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 and Indonesia, and its majority-owned operations in
Thailand, the Philippines and Vietnam. The 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. See - "Globalization". This group is also
developing a wholly-owned marketing operation in Japan.
Plumbing Products' Americas Group manufactures bathroom and kitchen
fixtures and fittings selling under the brand names AMERICAN STANDARD(R) and
STANDARD(R) in the U.S. and under the brand 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 market for the Company's plumbing products is divided into the
replacement and remodeling market and the new construction market. The
replacement and remodeling market accounts for about 60% of the Company's
European and U.S. sales but only about 40% of the sales in the Far East, where
new construction is more important. In the U.S. and Europe the replacement and
remodeling market has historically been more stable than the new construction
market and has shown moderate growth over the past several years. With the
exception of the U.K., the new construction market in Europe has been weak since
1994. In the U.S. the new construction market hit its recent low in 1992 but has
evidenced strong recovery through 1998. The new construction market, in which
builders or contractors make product selection, is more price-competitive and
volume-oriented than the replacement and remodeling market. In the replacement
and remodeling market, consumers make model selections and, therefore, this
market is more responsive to quality and design than price, making it the
10
11
principal market for higher-margin luxury products. Although management believes
it must continue to offer a full line of fixtures and fittings in order to
support its distribution system, Plumbing Products' current strategy is to focus
on increasing its sales of products in the lower and middle segments of both the
remodeling and new construction markets through expansion of manufacturing in
low-cost locations.
Plumbing Products also has continued its programs to expand its presence
in high-quality showrooms and showplaces featuring its higher-end products in
certain major countries. These programs, along with expanded sales training
activities, have enhanced the image of the Company's products with interior
designers, decorators, consumers and plumbers.
In the U.S., Plumbing Products is focusing on the unique needs of the
growing retail home center industry, using products obtained from several of the
Company's lower-cost manufacturing locations throughout the world. This market
channel has become a significant part of U.S. sales and is expected to continue
to grow.
In an effort to capture a larger share of the replacement and remodeling
market, Plumbing Products has introduced a variety of new products designed to
suit customer tastes in particular countries. New offerings include additional
colors and ensembles, bathroom suites from internationally known designers and
electronically controlled products. Faucet technology is centered on anti-leak,
anti-scald and other features to meet emerging consumer and legislative
requirements.
Water-saving fixtures and fittings have been a major focus of Plumbing
Products for the past several years, particularly in light of water shortages
experienced in a number of areas of the U.S. The Company produces an extensive
line of water-saving fixtures in the United States. Manufacture of water-saving
toilets was mandated for residential use by federal law commencing in January
1994 and for commercial use in January 1996.
Many of the Company's bathtubs are made from a proprietary porcelain on
metal composite, AMERICAST(R), which has gained an increasing share of the
worldwide market. Products made with AMERICAST(R) have the durability of cast
iron with only one-half the weight and are characterized by improved resistance
to breaking and chipping. AMERICAST(R) products are easier to ship, handle and
install and are less expensive to produce than cast iron products. Use of this
advanced composite was extended to kitchen sinks, bathroom lavatories and
acrylic surfaced products during the early 1990's.
After the acquisition of Armitage Dolomite in February 1999, Plumbing
Products employed approximately 26,000 people and, including affiliated
companies, had 67 manufacturing plants in 25 countries.
In the U.S., Plumbing Products has several important competitors,
including Kohler and, in selected product lines, Masco. There are also important
competitors in foreign markets, for the most part operating nationally.
Friederich Grohe, the major manufacturer of fittings in Europe, is a
pan-European competitor. In Europe, Sanitec and Roca are the major fixtures
competitors and, in the Far East, Toto is the major competitor. Plumbing
Products competes in most of its markets on the basis of service to customers,
product quality and design, reliability and price.
Automotive Products Segment
Operating under the WABCO(R) name, Automotive Products manufactures air
brake and related systems for the commercial vehicle industry in Europe and
Brazil. WABCO's most
11
12
important products are pneumatic braking systems and related electronic control
and other systems and components (including ABS) for medium-size and heavy
trucks, tractors, buses, trailers and utility vehicles. In 1998 WABCO, with
sales of $1,106 million, accounted for 17% of the Company's sales and 23% of its
total segment 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.
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 DaimlerChrysler, 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.
The European market for new trucks, buses, trailers, and replacement parts
improved in 1998 and 1997 after a decline in 1996 from a somewhat higher level
in 1995. The Brazilian market weakened in 1998 after having recovered strongly
in 1997 from a significant decline in 1996.
Through 1998 the WABCO(R) ABS system, which the Company believes leads the
market, has been installed in approximately 2.3 million heavy trucks, buses, and
trailers worldwide since 1981. 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. These systems have
resulted in greater sales per vehicle for WABCO. During 1997 a major European
truck manufacturer introduced its new heavy-duty truck line which incorporated a
significant number of WABCO products, including the electronic braking system
("EBS"). In 1998 WABCO entered the passenger car market with an advanced,
electronically controlled air suspension system now featured by the two leading
German luxury car manufacturers. New products under development include
additional electronic driveline control systems. In addition, WABCO has
developed and implemented an electronic data interchange system, which links
certain customers directly to WABCO's information systems, providing timely,
accurate information and just-in-time delivery to the customer.
At December 31, 1998, WABCO and affiliated companies employed
approximately 6,300 people and had 15 manufacturing facilities and 10 sales
organizations operating in 20 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.
Since 1991 ABS for commercial vehicles has been gaining acceptance in the
United States and Japan, where WABCO participates through its joint venture
operations. Meritor WABCO is now a supplier of WABCO systems to Freightliner,
Mack, Volvo, Kenworth, Peterbilt and other vehicle manufacturers in North
America. SANWAB supplies Hino, Nissan and trailer manufacturers in Japan. In
most European countries, ABS has become mandatory for
12
13
commercial vehicles. In March 1995, the U.S. Department of Transportation,
National Highway Traffic Safety Administration, adopted amended federal
regulations which require that new medium and heavy vehicles be equipped with
ABS. These amended regulations were phased in over a two-year period that began
in March 1997. These regulations created an important market opportunity for
WABCO products that has led to significantly increased sales in the U.S.
13
14
Medical Systems Segment
Following the 1997 acquisition of Sorin and INCSTAR described below, the
Company formed its Medical Systems segment to develop and market medical
diagnostics technology and equipment. The Company had previously supported the
development of two medical diagnostics product companies, Sienna Biotech, Inc.
(Sienna") and Alimenterics, Inc. ("Alimenterics").
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., and
INCSTAR Corporation, a U.S. company, for $212 million, including fees and
expenses.
In 1998 Sorin, INCSTAR and Sienna were 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 blood virus 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, private and public laboratories and
researchers involved in 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
DiaSorin's 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 to be performed
simultaneously on a single sample. Work is ongoing to expand the menu of tests
using DiaSorin reagents specifically adapted for use with Copalis.
Alimenterics has developed the Pylori-Chek(TM) urea-based breath test, for
which it has acquired a U.S. patent. The test allows a physician to diagnose
patient disease via the breath rather than by more invasive procedures such as
endoscopy. The Pylori-Chek(TM) tests for the presence of Helicobacter pylori
bacterium associated with 80% of stomach ulcers. FDA clearance for the
Pylori-Chek(TM) test was received in January 1999, and the Company, under the
DiaSorin name, is developing a sales and marketing program intended to achieve
rapid penetration in the U.S. Market.
In February 1999 DiaSorin scientists discovered a previously unidentified
virus that in initial tests appears to be associated with advanced liver disease
of as yet unknown cause. The virus has been found in the blood of a high
percentage of intravenous drug users. The prevalence of the virus in healthy
blood donors is low. Recognizing the difficulty of linking a new viral agent to
diseases of unknown cause and the potential significance of these findings to
blood banking, DiaSorin intends to expeditiously extend its studies to assess
the biological significance of the virus and has invited clinical investigators
to participate in studies of the virus. Patent applications covering this
discovery have been filed. Its future commercialization potential, however, is
considered speculative at present and will depend , among other things, on
issuance of the patents applied for and confirmation of the linkage between the
virus and diseases of currently unknown cause.
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 their products are Western Europe and the
United States.
Medical Systems had sales of $98 million in 1998 and a segment
operating loss of $21 million.
14
15
At December 31, 1998, Medical Systems employed approximately 800 people.
Business Segment Data
Information concerning revenues and segment profit and loss attributable
to each of the Company's business segments and geographic areas is set forth in
the Company's 1998 Annual Report to Stockholders on page 14, "Five-Year
Financial Summary", under the caption "Segment Data", on pages 15 though 20
under the caption entitled "Management's Discussion and Analysis", and on page
46 in Note 14 of Notes to Consolidated Financial Statements which are
incorporated herein by reference. Information concerning identifiable assets of
each of the Company's business segments is set forth on page 47 of the Company's
1998 Annual Report to Stockholders in Note 14 of notes to Consolidated Financial
Statements, which is incorporated herein by reference.
General
Raw Materials
The Company purchases a broad range of materials and components throughout
the world in connection with its manufacturing activities. Major items include
steel, copper tubing, aluminum, ferrous and nonferrous castings, clays, motors
and electronics. The ability of the Company's suppliers to meet performance and
quality specifications and delivery schedules is important to operations. The
Company is working closely with its suppliers to integrate them into the Demand
Flow manufacturing process by developing with them just-in-time supply delivery
schedules to coordinate with the Company's customer demand and delivery
schedules. The Company expects this closer working relationship to result in
better control of inventory quantities and quality and lower related overhead
and working capital costs. The energy and materials required for its
manufacturing operations have been readily available, and the Company does not
foresee any significant shortages.
15
16
Patents, Licenses and Trademarks
The Company's operations are not dependent to any significant extent upon
any single or related group of patents, licenses, franchises or concessions. The
Company's operations also are not dependent upon any single trademark, although
some trademarks are identified with a number of the Company's products and
services and are of importance in the sale and marketing of such products and
services. Some of the more important of the Company's trademarks are:
Business Segment Trademark
---------------- ---------
Air Conditioning Products TRANE(R)
AMERICAN STANDARD(R)
Plumbing Products AMERICAN STANDARD(R)
IDEAL STANDARD(R)
STANDARD(R)
PORCHER(R)
ARMITAGE SHANKS(R)
DOLOMITE(R)
Automotive Products WABCO(R)
WABCO WESTINGHOUSE(R)
CLAYTON DEWANDRE(R)
PERROT(R)
Medical Systems DiaSorin(TM)
Copalis(R)
Pylori-Chek(TM)
The Company from time to time has granted patent licenses to, and has
licensed technology from, other parties.
Research and Product Development
The Company made expenditures of $167 million in 1998, $161 million in
1997 and $160 million in 1996 for research and product development and for
product engineering in its four business segments. The expenditures for research
and product development alone were $105 million in 1998, $112 million in 1997
and $101 million in 1996 and were incurred primarily by Automotive Products and
Air Conditioning Products. Automotive Products, which expended the largest
amount, has conducted research and development in recent years on advanced
electronic braking systems, heavy-duty disc brake systems, and additional
electronic control systems for commercial vehicles. Air Conditioning Products'
research and development expenditures were primarily related to alternative
refrigerants with less impact on the environment, compressors, heat transfer
surfaces, air flow technology, acoustics and micro-electronic controls. Any
amount spent on customer sponsored research and development activities in these
periods was insignificant.
Regulations and Environmental Matters
The Company's U.S. operations are subject to federal, state and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the air, water and soil and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. The Company
believes that it is in substantial compliance with such laws and regulations. A
number of the Company's plants are undertaking responsive actions to address
soil and groundwater issues. In addition, the Company is a party to a number of
remedial actions under various federal and state environmental laws and
regulations that impose liability on companies to clean up, or contribute to the
cost of cleaning up, sites at which hazardous wastes or materials were disposed
or released, including 24 proceedings under the
16
17
Comprehensive Environmental Response, Compensation and Liability Act (Superfund)
and similar state statutes in which the Company has been named a potentially
responsible party or a third party by a potentially responsible party.
Expenditures in 1996, 1997 and 1998 to evaluate and remediate such sites were
not material. On the basis of the Company's historical experience and
information currently available, the Company believes that these environmental
actions will not have a material adverse effect on its financial condition,
results of operations or liquidity.
Additional sites may be identified for environmental remediation in the
future, including properties previously transferred by the Company and with
respect to which the Company may have contractual indemnification obligations.
The Company cannot estimate at this time the ultimate aggregate costs of all
remedial actions because of (a) uncertainties surrounding the nature and
application of environmental regulations, (b) the Company's lack of information
about additional sites at which it may be listed as a potentially responsible
party, (c) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions, (d) the
number of contributors and the financial capacity of others to contribute to the
cost of remediation at specific sites and (e) the time periods over which
remediation may occur.
The Company's international operations are also subject to various
environmental statutes and regulations. Generally, these requirements tend to be
no more restrictive than those in effect in the United States. The Company
believes it is in substantial compliance with such existing domestic and foreign
environmental statutes and regulations.
The Company derived significant revenues in past years from sales of air
conditioning products using chlorofluorocarbons ("CFCs"), and in 1998 and prior
years from sales of products using hydrochloroflurocarbons ("HCFCs"). Use of
CFCs, HCFCs and other ozone-depleting chemicals is to be phased out over various
periods of time under regulations that will require use of substitute permitted
refrigerants. Also, utilization of new refrigerants will require replacement or
modification of much of the existing air conditioning equipment. The Company
believes that these regulations will have the effect of generating additional
product sales and parts and service revenues, as existing air conditioning
equipment utilizing CFCs is converted to operate on environmentally preferred
refrigerants or replaced, although such conversion or replacement is expected to
occur only over a period of years, and the Company is unable to estimate the
magnitude or timing of such additional conversion or replacements. The Company
has been working closely with refrigerant manufacturers that are developing
refrigerant substitutes for CFCs and HCFCs, so that the Company's products will
be compatible with those substitutes. Although the Company believes that its
commercial products currently in production will not require substantial
modification to use substitutes, residential and light commercial products
produced by the Company and its competitors may require modification for
refrigerant substitutes. The costs of introducing alternative refrigerants are
expected to be reflected in product pricing and accordingly are not expected to
have a material adverse impact on the Company.
Certain federal and state statutes, including the National Appliance
Energy Conservation Act of 1987, as amended, impose energy efficiency standards
for certain of the Company's unitary air conditioning products. Although the
Company has been able to meet or exceed such standards to date, stricter
standards in the future could require additional research and development
expense and capital expenditures to maintain compliance.
The development, testing and distribution of medical products are subject
to extensive regulation, including, in the United States, approvals by the FDA.
Moreover, the medical test market is highly competitive and many companies with
such products have substantially greater
17
18
resources and experience than the Company. There is no assurance the Company's
products will be successfully developed or marketed.
Employees
The Company employed approximately 57,000 people after the acquisition of
Armitage Dolomite on February 2, 1999, described above (excluding employees of
unconsolidated joint venture companies). The Company has a total of 18 labor
union contracts in North America (covering approximately 9,100 employees), eight
of which expire in 1999 (covering approximately 5,100 employees), two of which
expire in 2000 (covering approximately 700 employees) and two of which expire in
2001 (covering 2,500 employees. Two of the contracts expiring in 1999 have
already been renegotiated. There can be no assurance that the Company will
successfully negotiate the remaining labor contracts expiring during 1999
without a work stoppage. However, the Company does not anticipate any problems
in renegotiating these contracts that would materially affect its results of
operations.
In January 1999, 1,900 Air Conditioning Products employees went on strike
for 22 days at the Clarksville, Tennessee, manufacturing plant. In February 1998
1,100 Air Conditioning Products employees went on strike for 30 days at the
Lexington, Kentucky, manufacturing plant. In 1997, 150 employees went on strike
for 77 days at the Rushville, Indiana, air conditioning plant, and in 1994, 230
Plumbing Products employees went on strike for 64 days at the Landsdowne
(Toronto), Canada chinaware manufacturing plant. Other than these strikes, the
Company has not experienced any significant work stoppages in North America in
the last five years.
The Company also has a total of 40 labor contracts outside North America
(covering approximately 18,000 employees). In early 1996 there was a 5-week work
stoppage at the two chinaware manufacturing plants of the Philippines plumbing
products subsidiary, involving 700 employees, where the Company combined the two
facilities. Other than the Philippines work stoppage, the Company has not
experienced any significant work stoppage in the last five years outside North
America.
Although the Company believes relations with its employees are generally
satisfactory, there can be no assurance that the Company will not experience
significant work stoppages in the future or that its relations with employees
will continue to be satisfactory.
Customers
The business of the Company taken as a whole is not dependent upon any
single customer or a few customers.
International Operations
The Company conducts significant non-U.S. operations through subsidiaries
in most of the major countries of Western Europe, the Czech Republic, Bulgaria,
Canada, Brazil, Mexico, Central American countries, China, Malaysia, the
Philippines, Indonesia, South Korea, Thailand, Taiwan, Vietnam 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 equity interest in the venture.
Because the Company has manufacturing operations in 33 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
18
19
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 offset by the denomination in foreign
currencies of a portion of the Company's borrowings.
19
20
ITEM 2. PROPERTIES
The Company conducts its manufacturing activities through 116 plants in 33
countries (after the Armitage Dolomite acquisition in February 1999), of which
the principal facilities are:
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 handlers
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, Bulgaria Vitreous china and brass plumbing fittings
Teplice, Czech Republic Vitreous china
Hull, England Vitreous china and acrylic bathtubs
Middlewich, England Vitreous china
Rugeley, England Vitreous china and acrylic bathtubs
Wolverhampton, England Brass plumbing fittings
Dole, France Vitreous china
Revin, France Vitreous china and bathtubs
Wittlich, Germany Brass plumbing fittings
West Java, Indonesia Vitreous china
Orcenico, Italy Vitreous china
Brescia, Italy Vitreous china
Trichiana, 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, plumbing fittings and bathtubs
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 Saluggia, Italy Medical diagnostics products
Stillwater, MN Medical diagnostics products
20
21
Except for the property located in Manila, Philippines which is leased,
all of the plants described above are owned by the Company or a subsidiary. 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 1998 several Air Conditioning Products' plants operated at or near
capacity and others operated moderately below capacity.
In 1998 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 1998.
ITEM 3. LEGAL PROCEEDINGS
As a result of audits of the Company's German subsidiaries by The State
Finance Administration for the State of North Rhine-Westphalia, Germany for the
periods 1984 through 1990 and 1991 through 1994, the Company previously received
two assessments for the 1984-1990 audit period which the Company has been
contesting. The Company believes, based on the opinion of our external German
legal counsel, that its German tax returns are substantially correct as filed
and that any adjustments would be inappropriate. Unless the Company is otherwise
able to reach a satisfactory resolution of these matters with the German tax
authorities, the Company intends to contest vigorously the pending assessments
and any other amounts that may be assessed.
The first assessment was issued in 1992 and was for approximately $18
million of combined corporation and trade taxes and claimed a disallowance of a
deduction of interest expense related to an intercompany finance instrument.
Later in 1992 the amount of the assessment was deposited with the German tax
authorities as security for the disputed tax and a suit to recover that amount
was promptly commenced and is currently pending before the Tax Court for the
State of North Rhine-Westphalia in Cologne, Germany. As a result of making the
deposit, no interest will accrue on the amount under dispute. The second
assessment, received in March 1996, was for approximately $65 million of
combined corporation and trade taxes. Were the Company not to prevail in its
dispute of this assessment, the Company could be required to pay interest on the
assessed amount of approximately $16 million as of December 31, 1998. Interest
on assessed and unpaid taxes accrues, on a non-compounding basis, at the rate of
six percent per annum commencing fifteen months after the end of the tax year
for which the tax is assessed. The second assessment claimed primarily that
earnings of a Dutch subsidiary should have been recognized as income taxable in
Germany. In early 1997, the German tax authority agreed to accept a partial
deposit of $18 million in respect of the second assessment and the Company
commenced an administrative appeal of the assessment with the German tax
authority. The amounts paid in 1992 and 1997 were recorded as assets on the
Company's consolidated balance sheets because the Company, expecting to prevail
in litigation of these matters, would recover such amounts and, therefore,
appropriately accounted for them as receivables. This position is based upon the
opinion of the Company's external German legal counsel, referred to above, that
the Company's German tax returns are substantially correct as filed and that
adjustments would be inappropriate.
In 1998, in connection with the development of the Company's plan to
restructure certain of its European plumbing operations, including some located
in Germany, the Company entered into discussions with certain German regulatory
authorities which could have resulted in an offer to settle the primary issue
under dispute with respect to the second assessment, including all
21
22
corporation and trade taxes and accrued interest. To facilitate further
discussions, certain agreed supplemental audit procedures were commenced in the
second half of 1998 and completed in December 1998. In January 1999, it became
evident that these efforts would not result in a settlement of any of the
disputed taxes. In addition, on January 22, 1999 the Company's appeal of the
second assessment and any offer of settlement was rejected. In February 1999,
the Company filed notice of appeal with the German Tax Court and moved to join
its appeal of the first assessment with the appeal of the second assessment. In
addition, the Company requested an order from the German tax authority staying
its obligation to pay the amount of the second assessment during the pendency of
the appeal. On March 15, 1999, the staying order was granted. The Company has
agreed to leave the amount already deposited with the German tax authority
pending final resolution of the dispute. In the ordinary course, it is
anticipated that litigation of the Company's appeal before the State Tax Court
will require five to seven years and that any appeal thereafter to the federal
Supreme German Tax Court would require an additional two or three years.
Although the Company's proposal of settlement was rejected, the Company has
continued to pursue settlement on the terms of the proposal.
As a result of the replacement in Germany of the Christian Democratic
party by the Social Democratic party following national elections in September
1998, the Company's discussions with German regulatory authorities and the
completion of the supplemental audit in the fourth quarter of 1998 proving to be
inconclusive, and the rejection by the German tax authorities of the Company's
appeal request and settlement efforts in January 1999, the Company has recorded
a loss contingency as of December 31, 1998 in the amount of the deposits related
to the first and second assessments, related trade taxes and accrued interest
thereon, which amount represents the amount for which the Company would have
been willing to settle the issue related to the second assessment. Based on the
opinion of the Company's external German legal counsel referred to above, the
Company intends to vigorously contest and to litigate these disputed German tax
matters, and no additional contingency with respect to such matters has been
recorded.
With respect to the 1991-1994 audit period, the Company engaged in
significant transactions similar to those that gave rise to the assessments in
the prior audit period and, with respect to a matter related to the intercompany
instrument at issue in connection with the first assessment, the German tax
auditors have proposed an adjustment of approximately $47 million. In addition,
because the German tax authorities assessed additional taxes for the 1984-1990
audit period they might, after completing their audit of the later period,
propose further adjustments for the 1991-1994 audit period related to the
subject matter of the second assessment that might be as much as fifty percent
higher than the amount of the assessments in the first audit period. Although
the Company is unable to predict when the audit of its German tax returns for
the 1991-1994 period will be complete or the amount of any additional taxes that
may be assessed, the Company believes the audit may be completed prior to the
end of 1999.
If all matters currently under review by the German tax authorities were
made the subject of assessments and either no orders staying the payment of such
amounts following assessment or during the pendency of our appeal were granted
or the Company was finally determined to owe the full amount of all such taxes,
the Company could be required to pay all assessed amounts plus accrued interest
thereon. The total amount of any payments made with respect to the tax matters
described above, and the timing thereof, could have a material adverse effect on
the Company's liquidity, cash flow and/or results of operation and,
consequently, impair the Company's competitive position. In addition, the
Company might need to raise additional capital and no assurance can be given as
to the availability of debt or equity financing if such need were to arise. See
Note 7 of Notes to Consolidated Financial Statements incorporated by reference
herein (see Item 14(a) of Part IV hereof).
22
23
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 sought
unspecified monetary damages, to enjoin the Stockholder Transactions and
evaluation by the Company of alternative transactions to maximize shareholder
value. The Company moved to dismiss the complaints or in the alternative for
Summary Judgment. On March 30, 1999 the plaintiffs in both actions voluntarily
stipulated to settle their claims.
For a discussion of environmental issues see "Item 1. Business -
General - Regulations and Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of 1998.
23
24
EXECUTIVE OFFICERS OF THE REGISTRANT
In reliance on General Instruction G to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The following
table sets forth certain information as of March 11, 1999 with respect to each
person who is an executive officer of the Company:
Name Age Position with Company
Emmanuel A. Kampouris 64 Chairman, President and Chief Executive Officer, and Director
Horst Hinrichs 66 Vice Chairman and Director
Fred A. Allardyce 57 Senior Vice President, Medical Systems
W. Craig Kissel 48 Senior Vice President , Automotive Products
Giancarlo Aimetti 62 Vice President, Automotive Products, Order Obtainment, Aftermarket
Alexander A. Apostolopoulos 56 Vice President, Plumbing Products, Product and Business Development
Thomas S. Battaglia 56 Vice President and Treasurer
Gary A. Brogoch 48 Vice President and Group Executive, Plumbing Products, Asia Pacific
Michael C.R. Broughton 58 Vice President, Automotive Products, Leeds Operations
Roberto Caizares M. 49 Vice President, Air Conditioning Products, Worldwide Applied Systems, Distribution
Wilfried Delker 58 Vice President and Group Executive, Plumbing Products, Worldwide Fittings
Adrian B. Deshotel 54 Vice President, Human Resources
Peter Enss 54 Vice President, Automotive Products, Order Obtainment, Original Equipment
Luigi Gandini 60 Vice President, Special Products
Daniel Hilger 58 Vice President, Air Conditioning Products, Middle East and Africa
Richard A. Kalaher 58 Vice President, General Counsel and Secretary
George H. Kerckhove 61 Vice President and Chief Financial Officer and Director
Alberto Loreti 48 Vice President and Group Executive, Plumbing Products, Europe
Jean-Claude Montauze 52 Vice President, Automotive Products, Claye-Souilly, Operations
G. Eric Nutter 63 Vice President and Group Executive, Americas Plumbing Products Group
David R. Pannier 48 Vice President and Group Executive, Air Conditioning Products, North American Unitary Products
Raymond D. Pipes 49 Vice President, Investor Relations
James H. Schultz 50 Vice President and Group Executive, Air Conditioning Products, Worldwide Applied Systems
G. Ronald Simon 57 Vice President and Controller
Benson I. Stein 61 Vice President, Medical Systems, Operations
Wolfgang Voss 52 Vice President, Automotive Products, Order Fulfillment
Robert M. Wellbrock 52 Vice President, Taxes
Each officer of the Company is elected by the Board of Directors to hold
office until the first Board meeting after the Annual Meeting of Stockholders
next succeeding his election.
None of the Company's officers has any family relationship with any
director or other officer. "Family relationship" for this purpose means any
relationship by blood, marriage or adoption, not more remote than first cousin.
24
25
Set forth below is the principal occupation of each of the executive
officers named above during the past five years (except as noted, all positions
are with the Company and American Standard Inc.).
Mr. Kampouris was elected Chairman in December 1993 and President and
Chief Executive Officer in February 1989. Mr. Kampouris has served as a director
of the Company since July 1988.
Mr. Hinrichs was elected Vice Chairman in January 1998 to assist the
Chairman with special strategic and operational assignments. In April 1998 he
assumed oversight of the Air Conditioning Products' International Unitary
Systems business. Prior thereto he served as Senior Vice President, Automotive
Products, since December 1990. Mr. Hinrichs has served as a director of the
Company since March 1991.
Mr. Allardyce was elected Senior Vice President, Medical Systems, in
January 1998. Prior thereto he served as Vice President and Chief Financial
Officer since January 1992.
Mr. Kissel was elected Senior Vice President, Automotive Products in
January 1998. Prior thereto he was Vice President of Air Conditioning Products'
Unitary Products Group since January 1992, becoming Group Executive in March
1994.
Mr. Aimetti was elected a Vice President in January 1997. In February 1999
he became Vice President, Automotive Products, Order Obtainment Aftermarket. He
served as Vice President in charge of the Austrian Group of Automotive Products
from January 1997 until February 1999. Prior thereto he served as Business
Leader of the Austrian Group from 1995 to 1996, and had been Managing Director
and General Manager of WABCO Automotive Company in Italy since 1979.
Mr. Apostolopoulos was elected a Vice President in December 1990. In
December 1998 he became Vice President, Product and Business Development for
Plumbing Products. From December 1990 to September 1998 he served as Vice
President and Group Executive, Plumbing Products, Americas International.
Mr. Battaglia was elected Vice President and Treasurer in September 1991.
Mr. Brogoch was elected Vice President in December 1994, and has served as
Group Executive of the Asia Pacific Plumbing Group since the consolidation of
the Far East and China Plumbing Groups in February 1997. Prior thereto he was
Group executive of the China Plumbing Group from December 1994 until February
1997. He served as Vice President of Plumbing Products' operations in China from
August 1993 until December 1994.
Mr. Broughton was elected a Vice President in January 1997. In February
1999 he became Vice President, Automotive Products, Leeds, Operations. He served
as Vice President in charge of the United Kingdom operations of Automotive
Products from January 1997 until February 1999. Prior thereto he served as
Managing Director (Business Leader) of that Group from May 1995 to December
1996, and as Process Owner, Order Fulfillment from 1993 to May 1995.
Mr. Caizares was elected Vice President in December 1990. In January 1998
he was given responsibility for the Air Conditioning Products Sector's
International Applied Business. Prior thereto, from December 1990, he was in
charge of the Trane Asia Pacific Region.
Mr. Delker was elected Vice President and Group Executive, Plumbing
Products, Worldwide Fittings, in April 1990.
Mr. Deshotel was elected Vice President, Human Resources, in January 1992.
25
26
Mr. Enss was elected a Vice President in July 1995. In February 1999 he
became Vice President, Automotive Products , Order Obtainment, Original
Equipment. He served as Vice President in charge of the German operations of
Automotive Products from July 1995 until February 1999. Prior thereto he served
as Vice President, Business Development, and Group Executive of the WABCO
Austrian group of companies from January 1994 to June 1995.
Mr. Gandini has served as Vice President, Special Projects since October
1995, having been elected Vice President and Group Executive, European Plumbing
Products, in July 1990.
Mr. Hilger was elected Vice President, Air Conditioning Products, Middle
East and Africa Region, in June 1988.
Mr. Kalaher was elected Vice President, General Counsel and Secretary in
March 1995, having served as Acting General Counsel and Acting Secretary since
joining the Company in February 1994. Prior thereto, he was Vice President and
General Counsel of AMAX Inc. from 1991 to 1994.
Mr. Kerckhove was elected Vice President and Chief Financial Officer in
January 1998. Prior thereto he was Senior Vice President, Plumbing Products,
since June 1990. Mr. Kerckhove has served as a director of the Company since
September 1990.
Mr. Loreti was elected Vice President and Group Executive, Plumbing
Products, Europe, in March 1999. From November 1996 until March 1999 he was
Business Leader of the Company's Sanifrance operations in France and of the
Italian plumbing company. Prior thereto he was Managing Director and General
Manager of the Italian plumbing company since 1990.
Mr. Montauze was elected a Vice President in October 1994. In February
1999 he became Vice President, Automotive Products, Claye-Souilly Operations. He
served as Vice President in charge of the French operations of Automotive
Products from October 1994 until February 1999. Prior thereto he served as Vice
President of Finance and Controller of Automotive Products at the Brussels
headquarters from September 1989 until September 1994.
Mr. Nutter was elected Vice President and Group Executive, U.S. Plumbing
Products, in May 1995 and has been Vice President and Group Executive, Plumbing
Products, Americas, since January 1998. Prior thereto he served as Vice
President, Automotive Products, United Kingdom from January 1992.
Mr. Pannier was elected Vice President and Group Executive, North American
Unitary Products Group in January 1998. He served as Coach of Unitary Products
Group Marketing and Sales from July 1995 until December 1997, and prior thereto
as Vice President, Residential Marketing from November 1991 until July 1995.
Mr. Pipes was elected as Vice President in May 1992, and has been Vice
President, Investor Relations since January 1998. Prior thereto he was
responsible for Corporate Development programs since February 1997 and served as
Group Executive for the Far East Region of Plumbing Products from May 1992 until
February 1997.
Mr. Schultz was elected a Vice President in 1987 and has been Vice
President and Group Executive, Worldwide Applied Systems, Air Conditioning
Products since January 1998. Prior thereto he served as Group Executive, North
American Commercial Group of Air Conditioning Products, since 1987.
Mr. Simon was elected Vice President and Controller in January 1992.
Mr. Stein was elected a Vice President in March 1994, and has been Vice
President, Medical Systems, Operations since January 1998. Prior thereto he was
Vice President, General Auditor.
26
27
Mr. Voss was elected a Vice President in July 1995. In February 1999 he
became Vice President, Automotive Products, Order Fulfillment. He served as Vice
President and Group Executive, European Plumbing Products from July 1995 until
February 1999. Prior thereto, he served as Process Owner, Order Fulfillment of
the WABCO Automotive company in Germany from January 1994 to June 1995.
Mr. Wellbrock was elected Vice President, Taxes, effective January 1,
1994.
27
28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is listed on The New York Stock Exchange
(the "Exchange"). The common stock was first traded on the Exchange on February
3, 1995 concurrent with the underwritten initial public offering of shares of
the Company's common stock at an initial price to the public of $20.00 per share
(the "Offering"). Prior to the Offering there was no established public trading
market for the Company's shares.
In January 1995 the Company adopted a Restated Certificate of
Incorporation, Amended Bylaws and a Stockholder Rights Agreement. The Restated
Certificate of Incorporation authorizes the Company to issue up to 200,000,000
shares of common stock, par value $.01 per share, and 2,000,000 shares of
preferred stock, par value $.01 per share, of which the Board of Directors
designated 900,000 shares as a new series of Junior Participating Cumulative
Preferred Stock. Each outstanding share of common stock has associated with it
one right to purchase a specified amount of Junior Participating Cumulative
Preferred Stock at a stipulated price in certain circumstances relating to
changes in ownership of the common stock of the Company.
The number of holders of record of the common stock of the Company as of
March 11, 1999, was 1,035.
No dividends have been declared on the Company's common stock since the
Offering. The Company has no separate operations and its ability to pay
dividends or repurchase its common stock is dependent entirely upon the extent
to which it receives dividends or other funds from American Standard Inc. The
terms of the Company's 1997 Credit Agreement and certain indentures governing
publicly-issued debt securities of American Standard Inc. restrict the payment
of dividends and other extensions of funds by American Standard Inc. to the
Company.
Set forth below are the high and low sales prices for shares of the
Company's common stock for each quarterly period in 1997 and 1998.
1997: High Low
----- -------- -----
First quarter $ 47-3/4 $ 37-3/4
Second quarter $ 51 $ 41-1/8
Third quarter $ 51-5/8 $ 37-11/16
Fourth quarter $ 41-1/8 $ 34-5/8
1998:
-----
First quarter $ 48-1/4 $ 37-3/8
Second quarter $ 49-1/4 $ 39-7/8
Third quarter $ 48-7/16 $ 24-5/16
Fourth quarter $ 37-7/8 $ 21-5/8
28
29
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(Dollars in millions, except per share data)
Year Ended December 31
----------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales $ 6,654 $ 6,008 $ 5,805 $ 5,221 $ 4,457
============ ============ ============ ============ ============
Segment income (a) $ 637 $ 612 $ 592 $ 544 $ 363
Equity in net income of
unconsolidated joint
ventures 27 12 3 7 4
Restructuring and asset
impairment charges (b) (200) -- -- -- --
Write-off of purchased
research and development (b) -- (90) -- -- --
Asset impairment loss (b) -- -- (235) -- --
Interest expense (188) (192) (198) (213) (259)
Corporate expenses (110) (105) (104) (111) (123)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes
and extraordinary item 166 237 58 227 (15)
Income taxes (132) (117) (105) (85) (62)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary
item (c) $ 34 $ 120 $ (47) $ 142 $ (77)
============ ============ ============ ============ ============
Per Common Share:
Income (loss) before
extraordinary item:
Basic $ .47 $ 1.62 $ (.60) $ 1.90 $ (1.29)
============ ============ ============ ============ ============
Diluted $ .46 $ 1.57 $ (.60) $ 1.87 $ (1.29)
============ ============ ============ ============ ============
Average number of outstanding
common shares:
Basic 71,729,541 73,801,220 77,986,511 74,671,830 59,933,435
Diluted 73,672,018 76,167,486 77,986,511 75,823,854 59,933,435
Balance Sheet Data (at end of
period):
Total assets $ 4,156 $ 3,764 $ 3,520 $ 3,520 $ 3,156
Total debt 2,428 2,300 1,923 2,083 2,364
Stockholders' deficit (701) (610) (380) (390) (798)
(a) Financing fees related to the sale of receivables by Air Conditioning
Products of $13 million, $17 million, $19 million, $22 million and $23
million for each of the years from 1994 through 1998, respectively, have
been reclassified to Corporate expenses from segment income upon adoption
of the new segment reporting standard as of December 31, 1998.
(b) In 1998 the Company recorded restructuring and asset impairment charges of
$200 million ($186 million, net of tax, or $2.52 per diluted share). In
connection with the 1997 acquisition of the medical diagnostics
businesses, the value of purchased in-process research and development was
written off, resulting in a non-cash charge to income of $90 million, or
$1.19 per diluted share. Effective January 1, 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, resulting in a non-cash charge of $235 million, or $2.95 per diluted
share.
(c) Retirements of debt in connection with debt refinancing in 1998 and 1997,
the initial public offering in 1995 and an October 1994 borrowing resulted
in extraordinary charges of $50 million (net of taxes of $7 million) in
1998, $24 million (net of taxes of $6 million) in 1997, and $30 million
and $9 million in 1995 and 1994, respectively, on which there were no tax
benefits. These charges included call premiums and the write-off of
deferred debt issuance costs (see Notes 7 and 10 of Notes to Consolidated
Financial Statements included in the Company's 1998 Annual Report to
Stockholders and incorporated herein by reference).
29
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of the financial condition and
results of operations of the Company is set forth on pages F-2 through F-14 of
the Financial Supplement included herein and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference are the financial statements and related
information listed in the Index to Financial Statements and Financial Statement
Schedules on page F-1 of the Financial Supplement included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
30
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Company's executive officers, the
information called for by this Item is incorporated in this report by reference
to the Company's definitive Proxy Statement dated March 29 1999: under the
headings: "Stock Ownership" and "1. Election of Directors", except for
information not deemed to be "soliciting material" or "filed" with the SEC,
information subject to Regulations 14A or 14C under the Exchange Act or
information subject to the liabilities of Section 18 of the Exchange Act.
For information concerning the executive officers of the Company, see
"Executive Officers of the Registrant" under Part I of this report.
None of the Company's directors or officers has any family relationship
with any other director or officer. ("Family relationship" for this purpose
means any relationship by blood, marriage or adoption, not more remote than
first cousin.)
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation and related matters is set
forth in the Company's definitive Proxy Statement dated March 29, 1999 as
follows: under the section entitled "Directors' Fees and Other Arrangements" on
page 7 thereof, under the heading entitled "Executive Compensation" on pages 9
through 13 thereof, under the heading entitled "Compensation Committee
Interlocks and Insider Participation" on page 16 and under the heading entitled
"Certain Relationships and Related Party Transactions" on pages 17 thereof, and
is incorporated herein by reference except for the sections entitled "Management
Development and Nominating Committee Report on Compensation of Executive
Officers of the Company" and "Performance Graph" appearing on pages 13 through
16 except for information not deemed to be "soliciting material" or "filed" with
the SEC, information subject to Regulations 14A or 14C under the Exchange Act or
information subject to the liabilities of Section 18 of the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning shares of common stock of the Company beneficially
owned by management and others is set forth under the heading entitled "Stock
Ownership" on pages 3 and 4 in the Company's definitive Proxy Statement dated
March 29, 1999 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated in this report by
reference to the Company's definitive Proxy Statement dated March 29, 1999 under
the section entitled "Certain Relationships and Related Party Transactions",
except for information not deemed to be "soliciting material" or "filed" with
the SEC, information subject to Regulations 14A or 14C under the Exchange Act or
information subject to the liabilities of Section 18 of the Exchange Act.
31
32
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
listed in the Index to Financial Statements and Financial
Statement Schedules on page F-1 of the Financial Supplement
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, 1998, the company filed
no Current Reports on Form 8-K.
32
33
AMERICAN STANDARD COMPANIES 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 Companies Inc. (formerly ASI
Holding Corporation), the Registrant (sometimes hereinafter referred to as
"Holding"), and for all Exhibits incorporated by reference, is 1-11415, except
those Exhibits incorporated by reference in filings made by American Standard
Inc. (the "Company") the Commission File Number of which is 33-64450. 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 Holding; previously
filed as Exhibit 3(i) in Holding's Form 10-Q for the quarter ended
September 30, 1998 and herein incorporated by reference.
(ii) Amended By-laws of Holding, previously filed as Exhibit (3) (ii) in
Holding's Form 10-Q for the quarter ended September 30, 1998, and
herein incorporated by reference.
(4) (i) Form of Common Stock Certificate; previously filed as Exhibit
4(i) in Amendment No. 3 to Registration Statement No. 33-56409 of
Holding, filed January 5, 1995, and herein incorporated by
reference.
(ii) 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.
(iii) 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) (ii) 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.
(iv) 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
33
34
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.
(v) Form of 10-7/8% Senior Note due 1999 included as Exhibit A to the
Indenture described in (4) (iv) above.
(vi) 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
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.
(vii) 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) (vi) above.
(viii)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.
(ix) 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) (viii) above.
(x) 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.
(xi) 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;
previously filed as Exhibit (4)(xi) in Holding's Form 10-K for the
fiscal year ended December 31, 1997, and herein incorporated by
reference.
(xii) 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; previously filed as Exhibit (4)(xii) in
Holding's Form 10-K for the fiscal year ended December 31, 1997, and
herein incorporated by reference.
(xiii)Indenture dated as of January 15, 1998 among the Company, Holding
and The Bank of New York, Trustee; previously filed as Exhibit 4.1
in Holding's Form 10- Q for the quarter ended September 30, 1998,
and herein incorporated by reference.
34
35
(xiv) Third Supplemental Indenture dated as of April 13, 1998 to the
Indenture dated as of January 15, 1998 among the Company, Holding
and The Bank of New York relating to the 7-3/8% Senior Notes due
2005; previously filed as Exhibit 4.2 in Holding's Form 10-Q for the
quarter ended September 30, 1998 and herein incorporated by
reference.
(xv) 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, filed February 5, 1997, and herein incorporated by
reference.
(xvi) 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; previously filed as Exhibit 4 (a) to Holding's
Report on Form 8-K dated October 24, 1997, and herein incorporated
by reference.
(xvii)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; previously filed as Exhibit 4 (b) to
Holding's Report on Form 8-K dated October 24, 1997, and herein
incorporated by reference.
(xviii)Third Amendment dated as of August 7, 1998 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; previously filed as Exhibit 4.3 in
Holding's Form 10-Q for the quarter ended September 30, 1998, and
herein incorporated by reference.
(xix) 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.
35
36
(10)* (i) The American Standard Companies Inc. Employee Stock Purchase
Plan; previously filed as Exhibit (10)(i) in Holding's Form 10-K for
the fiscal year ended December 31, 1997, and herein incorporated by
reference.
(ii) American Standard Inc. Long-Term Incentive Compensation Plan, as
amended and restated on December 5, 1996; incorporated herein by
reference to Exhibit (10) (i) of Company's Form 10-K for the fiscal
year ended December 31, 1996.
(iii) Trust Agreement for American Standard Inc. Long-Term Incentive
Compensation Plan and American Standard Companies Inc. Supplemental
Incentive Compensation Plan, as amended and restated on December 5,
1996; incorporated herein by reference to Exhibit (10) (ii) of
Company's Form 10-K for the fiscal year ended December 31, 1996.
(iv) American Standard Inc. Annual Incentive Plan, as amended and
restated on December 5, 1996; incorporated herein by reference to
Exhibit (10) (iii) of Company's Form 10-K for the fiscal year ended
December 31, 1996.
(v) American Standard Inc. Executive Supplemental Retirement Benefit
Program, as restated to include all amendments through July 6, 1995;
incorporated herein by reference to Exhibit (10) (iv) of Company's
Form 10-K for the fiscal year ended December 31, 1995.
(vi) American Standard Inc. Supplemental Compensation Plan for Outside
Directors, as amended through December 4, 1997; incorporated herein
by reference to Exhibit (10) (v) to the Company's Form 10-K for the
fiscal year ended December 31, 1997, and herein incorporated by
reference.
(vii) Trust Agreement for the American Standard Inc. Supplemental
Compenation Plan for Outside Directors, dated March 7, 1996;
incorporated herein by reference to Exhibit (10) (vi) to the
Company's Form 10-K for the fiscal year ended December 31, 1997.
(viii)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.
(ix) American Standard Companies Inc. Corporate Officer Severance Plan,
as amended and restated on December 5, 1996; previously filed as
Exhibit (10) (vii) in Holding's Form 10-K for the fiscal year ended
December 31, 1996, and herein incorporated by reference.
*Items in this section 10 consist of management contracts or compensatory plans
or arrangements with the exception of (10) (xvi) and (xvii).
36
37
(x) Estate Preservation Plan, adopted by Company 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.
(xi) 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.
(xii) 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.
(xiii)American Standard Companies Inc. Stock Incentive Plan, as amended
and restated on February 2, 1999, with Addenda to comply with local
regulations in the United Kingdom and France with respect to options
granted in those countries, filed herewith.
(xiv) 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) to
Holding's Form 10-K for the fiscal year ended December 31, 1996, and
herein incorporated by reference.
(xv) American Standard Companies Inc. and Subsidiaries 1997-1999
Supplemental Incentive Plan as described in the American Standard
Companies Inc. Notice of Annual Meeting of Stockholders and Proxy
Statement, May 7, 1998, on pages 11 and 18 and herein
incorporated by reference. The plan was amended on March 4, 1999
to extend the performance period through the year 2000 and modify
the target conditions for the achievement of awards under the
Plan and is now called the American Standard Companies Inc. and
Subsidiaries 1997-2000 Supplemental Incentive Plan.
(xvi) Form of Indemnification Agreement; previously filed as Exhibit (10)
(xxi) in Amendment No. 3 to Registration Statement No. 33-56409,
filed January 5, 1995, and herein incorporated by reference.
(xvii)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 Registration Statement No.
333-18015, filed December 17, 1996, and herein incorporated by
reference.
(xviii)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) (xvi) above; previously filed as Exhibit
(10) (ii) to Registration Statement No. 333-18015, filed December
17, 1996, and herein incorporated by reference.
37
38
(21) Listing of Holding's subsidiaries.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule.
(99) (i) Press release dated February 24, 1999.
(ii) Press release dated March 9, 1999.
38
39
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 COMPANIES INC.
By: /s/ EMMANUEL A. KAMPOURIS
----------------------------
(Emmanuel A. Kampouris)
Chairman, President and Chief Executive Officer
March 31, 1999
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:
/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
39
40
Financial Supplement
AMERICAN STANDARD COMPANIES INC.
Annual Report on Form 10-K
For the Year Ended December 31, 1998
41
FINANCIAL SUPPLEMENT
To
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
AMERICAN STANDARD COMPANIES INC.
Index to Financial Statements
and Financial Statement Schedules
(Pages)
Five-Year Financial Summary F-2
Management's Discussion and Analysis F-3 to F-15
Management's Report on Financial Statements F-16
Report of Independent Auditors F-16
Consolidated Balance sheet at
December 31, 1998 and 1997 F-18
For the years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Operations F-17
Consolidated Statement of Cash Flows F-19
Consolidated Statement of Stockholders' Deficit F-20
Notes to Consolidated Financial Statements F-21 to F-35
Segment Data F-34
Quarterly Data (Unaudited) F-36
Report of Independent Auditors on financial statement schedules F-37
Financial statement schedules, years ended
December 31, 1998, 1997 and 1996
i Condensed Financial Information of Registrant F-38 to F-41
ii Valuation and Qualifying Accounts F-42
F-1
42
FIVE-YEAR FINANCIAL SUMMARY
===================================================================================================================
Year Ended December 31, (Dollars
in millions, except per share data) 1998 1997 1996 1995 1994
SEGMENT DATA
Sales:
Air Conditioning Products $ 3,940 $ 3,567 $ 3,437 $ 2,953 $ 2,480
Plumbing Products 1,510 1,439 1,452 1,270 1,218
Automotive Products 1,106 952 916 998 759
Medical Systems 98 50 -- -- --
- -------------------------------------------------------------------------------------------------------------------
$ 6,654 $ 6,008 $ 5,805 $ 5,221 $ 4,457
===================================================================================================================
Segment income (loss):
Air Conditioning Products(a) $ 386 $ 386 $ 372 $ 276 $ 195
Plumbing Products 119 119 110 120 111
Automotive Products 153 127 123 155 62
Medical Systems (21) (20) (13) (7) (5)
- -------------------------------------------------------------------------------------------------------------------
637 612 592 544 363
Equity in net income of unconsolidated joint ventures 27 12 3 7 4
Restructuring and asset impairment charges(b) (200) -- -- -- --
Write-off of purchased research and development(b) -- (90) -- -- --
Asset impairment loss(b) -- -- (235) -- --
Interest expense (188) (192) (198) (213) (259)
Corporate expenses (110) (105) (104) (111) (123)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item 166 237 58 227 (15)
Income taxes (132) (117) (105) (85) (62)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item $ 34 $ 120 $ (47) $ 142 $ (77)
===================================================================================================================
Per share:
Basic $ .47 $ 1.62 $ (.60) $ 1.90 $ (1.29)
Diluted $ .46 $ 1.57 $ (.60) $ 1.87 $ (1.29)
===================================================================================================================
OTHER DATA
Net cash provided by operating activities $ 413 $ 395 $ 353 $ 348 $ 257
Demand Flow Performance:
Average inventory turnover(c)(e) 9.2x 9.0x 9.4x 8.4x 7.5x
Operating working capital as a percent of sales(d)(e) 2.9% 4.7% 4.9% 4.9% 4.9%
(a) Financing fees related to the sale of receivables by Air Conditioning
Products of $13 million, $17 million, $19 million, $22 million and $23
million for each of the years from 1994 through 1998, respectively, have
been reclassified to Corporate expenses from segment income upon adoption of
the new segment reporting standard as of December 31, 1998.
(b) In 1998 the Company recorded restructuring and asset impairment charges of
$200 million ($186 million, net of tax benefits, or $2.52 per diluted
share), including $185 million for Plumbing Products, $7 million for Air
Conditioning Products, $5 million for Automotive Products and $3 million for
Medical Systems. In 1997 in connection with the acquisition of the medical
diagnostics businesses, the value of purchased in-process research and
development was written off resulting in a non-cash charge of $90 million,
or $1.19 per diluted share. In 1996, upon the adoption of the accounting
standard on impairment of assets, the Company incurred a non-cash charge of
$235 million, or $2.95 per diluted share. See Notes 3 and 4 of Notes to
Consolidated Financial Statements.
(c) Twelve-month average inventory turnover, exclusive of significant
acquisitions, with each month calculated using the following three month's
cost of sales annualized, divided by inventories as of each month end.
(d) Operating working capital as of December 31, excluding Medical Systems,
divided by annualized fourth quarter sales. Operating working capital is
defined as net accounts receivable and adjusted inventories less accounts
payable, accrued payrolls and other accrued liabilities.
(e) These Demand Flow performance measurements use amounts determined
differently than they would be under generally accepted accounting
principles and may not necessarily be used by other companies. The Company
believes these measurements are important to understanding performance under
Demand Flow Technology.
F-2
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
OVERVIEW
The Company achieved record sales and segment income in 1998 as a result of
strong performance by the Automotive Products and Worldwide Unitary Air
Conditioning businesses and continued improvement in the Americas Plumbing
Products business. These results were attained despite continued economic
weakness in the Far East, global pricing pressure in Worldwide Applied Air
Conditioning and the unfavorable effects of foreign exchange. Sales for 1998
were $6.7 billion, an increase of 11% from $6.0 billion in 1997. Segment income
was $637 million, an increase of 4% from $612 million in 1997, and up 6%
excluding the unfavorable effects of foreign exchange. Income before
extraordinary item in 1998 was $34 million, or $.46 per diluted share. This
included restructuring charges of $200 million ($186 million, net of tax
benefits, or $2.52 per diluted share). This compares with income before
extraordinary item in 1997 of $120 million, or $1.57 per diluted share,
including the write-off of purchased research and development of $90 million
($1.19 per diluted share), on which there was no tax benefit. Excluding such
restructuring charges and write-off, income before extraordinary item increased
5% to $220 million in 1998 from $210 million in 1997.
In accordance with the requirements of the new segment reporting standard
adopted in 1998, the Company has changed its reporting of segment data to
reflect its internal management method of reporting and, as required, has
restated all prior periods presented for comparability. Accordingly, items
which are excluded from segment income for internal management reporting, such
as restructuring charges in 1998, the write-off of purchased research and
development in 1997 and asset impairment charges in 1996, are excluded from
segment income. Financing fees related to the sale of receivables by Air
Conditioning Products in the U.S. for all years presented have been
reclassified to corporate expenses since they are also excluded from the new
measurement of segment income. The Company continues to have four reportable
segments under this new standard - Air Conditioning Products, Plumbing
Products, Automotive Products and Medical Systems. The segment data reflect the
realigned organizational structure for Air Conditioning Products into Worldwide
Applied Systems and Worldwide Unitary Systems, and for Plumbing Products into
the Americas group and the Europe and Far East group. See Note 14 of Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR 1998 COMPARED WITH 1997 AND 1997 COMPARED WITH
1996
Consolidated sales for 1998 were $6,654 million, an increase of $646 million, or
11% (13% excluding the unfavorable effects of changes in foreign exchange
rates), from $6,008 million in 1997. Sales increased 10% for Air Conditioning
Products, 5% for Plumbing Products and 16% for Automotive Products. Medical
Systems sales were $98 million for the full year 1998 compared to $50 million
for 1997 which included sales subsequent to the June 30, 1997 acquisition of the
medical diagnostic businesses.
================================================================================
F-3
44
================================================================================
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 Medical Systems segment contributed sales of $50 million.
Segment income for 1998 was $637 million, an increase of $25 million, or
4% (6% excluding the unfavorable effects of foreign exchange), from $612 million
in 1997. Segment income increased 20% for Automotive Products, and was flat for
Air Conditioning Products and Plumbing Products, while Medical Systems incurred
a loss similar to that of 1997.
Segment income for 1997 was $612 million, an increase of $20 million, or
3% (7% excluding the unfavorable effects of foreign exchange), from $592 million
in 1996. Segment income increased 4% for Air Conditioning Products, 8% for
Plumbing Products and 3% for Automotive Products, while Medical Systems incurred
a larger loss compared with 1996.
RESULTS OF OPERATIONS BY SEGMENT
================================================================================
AIR CONDITIONING PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Sales:
Worldwide Applied Systems $2,034 $1,879 $1,878
Worldwide Unitary Systems 1,906 1,688 1,559
- --------------------------------------------------------------------------------
Total $3,940 $3,567 $3,437
================================================================================
Segment income:
Worldwide Applied Systems $ 148 $ 201 $ 198
Worldwide Unitary Systems 238 185 174
- --------------------------------------------------------------------------------
Total $ 386 $ 386 $ 372
================================================================================
Sales of Air Conditioning Products increased 10% (12% excluding foreign exchange
effects) to $3,940 million for 1998 from $3,567 million for 1997. Worldwide
Applied Systems sales increased 8% and Worldwide Unitary Systems sales increased
13%. In 1997 sales of Air Conditioning Products increased 4% (5% excluding
foreign exchange effects) to $3,567 million from $3,437 million for 1996.
Worldwide Applied Systems sales were flat and Worldwide Unitary Systems sales
increased 8%. Commercial markets account for approximately 75% of Air
Conditioning Products' total sales. Approximately 65% of total sales is to the
replacement, renovation and repair markets.
Segment income of Air Conditioning Products in 1998 was $386 million, at
the same level as in 1997, but increased 1% excluding the unfavorable effects of
foreign exchange. Gains in Worldwide Unitary Systems were substantially offset
by declines in Worldwide Applied Systems. Segment income of Air Conditioning
Products increased 4% (with little effect from foreign exchange) to $386 million
in 1997 from $372 million in 1996. The increase was attributable primarily to
higher volume in the U.S. in commercial applied and unitary products.
Worldwide Applied Systems -- In 1998 Worldwide Applied Systems' sales increased
8% (10% excluding foreign exchange effects) to $2,034 million from $1,879
million in 1997 as a result of strong market growth and higher volumes in the
U.S. and higher volumes in Europe and the Middle East. Applied Systems' sales in
the U.S. increased 15% over those of 1997 primarily because of acquisitions and
expansion of commercial sales and service operations and increased equipment
sales, partly offset by the effects of competitive pricing pressures on
chillers. Outside the U.S., Applied Systems' sales increased in most regions,
substantially offset by lower volumes in the Far East, where economic weakness
continues, and the adverse effects of foreign exchange. Segment income for
Worldwide Applied Systems decreased 27% in 1998 to $148 million from $201
million in 1997 as a result of global
================================================================================
F-4
45
================================================================================
pricing pressure, lower margins in Europe, lower volumes in the Far East and a
strike at the Lexington air handling products facility in the first quarter of
1998.
In 1997 Worldwide Applied Systems' sales were $1,879 million, essentially
the same as 1996 sales of $1,878 million, but 2% higher excluding foreign
exchange effects. This primarily reflected higher volume in the U.S. from
improved markets, the acquisition of additional commercial sales and service
businesses and modest growth in the Middle East and Europe, offset by a decrease
in the Far East because of economic weakness. Segment income increased 2% (3%
excluding foreign exchange effects) to $201 million in 1997 from $198 million in
1996, primarily because of the increased U.S. volume. That gain was partly
offset, however, by lower income in Europe and the Middle East.
Worldwide Unitary Systems -- In 1998 sales of Worldwide Unitary Systems
increased 13% (14% excluding foreign exchange effects) to $1,906 million from
$1,688 million in 1997. Sales in the U.S. for unitary commercial and residential
products increased 14% in 1998 driven by strong new construction and increased
replacement demand due to warmer-than-normal summer weather. Outside the U.S.,
improved sales of unitary systems were led by strong increases in Europe and
Latin America. Segment income for Worldwide Unitary Systems increased 29% (with
little effect from foreign exchange) to $238 million from $185 million in 1997,
principally reflecting higher U.S. volume and margin increases.
In 1997 sales of Worldwide Unitary Systems increased 8% (9% excluding
foreign exchange effects) to $1,688 million from $1,559 million in 1996. Markets
in the U.S. for commercial unitary products grew in 1997 for both replacement
and new construction, resulting in significantly higher sales volume. That
improvement was partly offset by lower residential products sales because of
cooler-than-normal summer weather in many parts of the U.S. Overseas, sales of
unitary products increased 16% (24% excluding foreign exchange effects)
primarily from significantly higher volumes in Latin America and less
significant volume gains in most other markets. Segment income for Worldwide
Unitary Systems increased 6% (with little effect from foreign exchange) to $185
million in 1997 from $174 million in 1996, primarily as a result of the
increased volume of commercial products, partly offset by the weather-related
declines in U.S. residential unitary operations and the adverse effects of
economic weakness in the Far East.
Backlog -- The worldwide backlog for Air Conditioning Products as of December
31, 1998, was $651 million, an increase of 1% from the year-earlier level,
excluding foreign exchange effects. This increase reflected improvement in the
U.S., partly offset by decreases in the Far East.
================================================================================
PLUMBING PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Sales:
Europe and Far East $ 843 $ 852 $ 917
Americas 667 587 535
- --------------------------------------------------------------------------------
Total $1,510 $1,439 $1,452
================================================================================
Segment income:
Europe and Far East $ 60 $ 75 $ 79
Americas 59 44 31
- --------------------------------------------------------------------------------
Total $ 119 $ 119 $ 110
================================================================================
Sales by Plumbing Products were $1,510 million in 1998, an increase of 5% (9%
excluding the unfavorable effects of foreign exchange), from $1,439 million in
1997. The increase (excluding exchange) reflected a 17% sales gain for the
Americas and a 4% gain for Europe and Far East. Sales of Plumbing Products were
$1,439 million in 1997 compared with $1,452 million in 1996, a decrease of 1%
(but an increase of 5% excluding the unfavorable effects of foreign exchange).
This exchange-adjusted increase was attributable to gains of 10% in the Americas
and 2% in Europe and Far East.
================================================================================
F-5
46
================================================================================
Segment income of Plumbing Products was $119 million for 1998, the same as
for 1997, but increased 5% excluding the unfavorable effects of foreign
exchange, because of a 40% gain in the Americas, partly offset by a 16% decline
in Europe and Far East. Segment 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 improvements for both the
Americas and for Europe and Far East.
Americas -- In 1998 Plumbing Products sales in the Americas increased 14% (17%
excluding foreign exchange effects) to $667 million from $587 million in 1997.
Sales in the U.S. grew 15% due to strong markets and market share gains,
primarily attributable to higher volumes with major home improvement retailers
and expansion in the wholesale channel. In addition, sales increased 10% in
Latin America, primarily on higher volume in Mexico. The Company believes that
the multi-year trend of sales and market share growth in the U.S. retail market
channel will continue and lead to increased Company sales because of strong
product and brand-name recognition. The increase in segment income for the
Americas was primarily due to higher volumes and the benefits of lower-cost
sourcing from expanded facilities in Mexico.
In 1997 sales in the Americas increased 10% (with little effect from
foreign exchange) to $587 million from $535 million in 1997. This increase
resulted principally from higher volumes in the U.S., primarily in the retail
market channel, and from smaller gains in Mexico and Brazil. The 43% increase in
segment income for the Americas reflected a significant improvement in the U.S.
due to higher sales and lower-cost sourcing from facilities in Mexico, as well
as improvements in Latin America.
Europe and Far East -- In 1998 sales for Europe and Far East were $843 million,
a decrease of 1% (but an increase of 4% excluding foreign exchange effects)
compared with sales of $852 million in 1997. The exchange-adjusted increase was
principally attributable to the effect of consolidating operations in China
following acquisition of a majority interest in the fourth quarter of 1997.
Other Far East operations continued to suffer from adverse economic conditions
in the region. Europe was flat excluding foreign exchange effects because of
weak economic conditions and the loss of sales by the distribution business of
Porcher which was sold in the fourth quarter of 1998. Segment income declined
20% (16% excluding foreign exchange), principally due to the effects of weak
economic conditions in most parts of the Far East and restructuring-related
inefficiencies in Europe, despite a gain in China.
In 1997 sales for Europe and Far East decreased by 7% but increased by 2%
excluding foreign exchange effects. The exchange-adjusted increase was
principally attributable to the sales of the operations in China (consolidated
since the last quarter of 1997). Europe was flat due to weak economic
conditions. Segment income in 1997 decreased 5% (but increased 7% excluding
foreign exchange effects). The exchange-adjusted increase was principally due to
margin improvement in Europe (primarily from cost reductions in France) and
income contributed by operations in China (consolidated since the last quarter
of 1997). These increases were partly offset by the effects of weak economic
conditions in other parts of the Far East.
Backlog -- Plumbing Products' backlog as of December 31, 1998, was $142 million,
an increase of 13% from December 31, 1997 (excluding foreign exchange effects),
reflecting improvements in Europe and Far East.
================================================================================
AUTOMOTIVE PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Sales $1,106 $ 952 $ 916
Segment income $ 153 $ 127 $ 123
Sales of Automotive Products for 1998 were $1,106 million, an increase of 16%
(18% excluding the unfavorable effects of foreign exchange), from $952 million
in 1997. This gain was driven 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 16% compared with 1997. Original equipment sales
volumes were higher in almost all markets for commercial vehicle braking and
other control systems, including increased sales to trailer manufacturers.
Export sales from Europe more than doubled, primarily from sales of antilock
braking systems (ABS) to the Company's North American braking systems joint
venture, reflecting the effect of the second year of the three-year phase-in of
U.S. regulations requiring ABS on all new heavy-duty trucks and strong
commercial vehicle production. Sales of original equipment declined in Brazil,
where truck production declined due to weak economic conditions.
F-6
47
================================================================================
Sales of Automotive Products for 1997 were $952 million, an increase of 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 1997
compared with 1996. Original equipment sales volumes were higher, 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 ABS to the Company's North American braking systems joint venture
reflecting the effect of the first year of the three-year phase-in of U.S.
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.
Segment income for Automotive Products was $153 million in 1998, an
increase of 20% (22% excluding the unfavorable effects of foreign exchange).
This increase was principally in Europe and resulted from the higher volume and
improved margins due to productivity improvements. These factors were partly
offset by the effects of product mix (higher original equipment and export sales
in Europe), higher development and maintenance costs in Europe, lower volume in
Brazil and start-up costs of the new, majority-owned joint ventures in the U.S.
and China.
Segment 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. These
factors were partly offset by the effects of product mix, lower margins in
Brazil and start-up costs of the majority-owned joint ventures in the U.S. and
China.
Backlog -- Automotive Products' backlog as of December 31, 1998, was $440
million, an increase of 14% from December 31, 1997 (excluding the unfavorable
effects of foreign exchange), reflecting improved markets.
================================================================================
MEDICAL SYSTEMS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Sales $ 98 $ 50 $ --
Segment loss $(21) $(20) $(13)
Medical Systems sales were $98 million in 1998 and $50 million in 1997
reflecting the June 30, 1997, acquisition of the medical diagnostics businesses
of Sorin Biomedica S.p.A. and INCSTAR Corporation. New product sales were strong
but offset by the expected sales decline in older radio immunoassay product
markets. A continued high level of development costs for new diagnostic tests
and the effect of declining older-product markets resulted in a loss of $21
million in 1998, nearly the same as the $20 million loss in 1997. The segment
loss in 1996 reflected development costs of the Company's medical diagnostics
ventures.
OTHER FINANCIAL SUMMARY ITEMS
In 1998 the Company committed to restructuring plans designed to achieve lower
product costs and improved operating efficiency. Accordingly, the Company
recorded charges totaling $200 million ($186 million net of tax benefits)
comprised of $185 million for Plumbing Products, $7 million for Air Conditioning
Products, $5 million for Automotive Products and $3 million for Medical Systems.
The Plumbing Products charge includes costs related to the closure of five
plants in Europe and two in North America, a loss on the sale of the French
plumbing distribution operations, write-off of related goodwill and a workforce
reduction of approximately 1,600 people. The Air Conditioning Products charge
reflects the closure of one plant in Australia, one plant in Europe and a
workforce reduction of 115 people. The Automotive Products charge relates to the
closure of three plants in Europe and a workforce reduction of 75 people. A
restructuring charge was
F-7
48
================================================================================
also recorded for Medical Systems, relating to asset write-offs and severance
payments. The charge of $200 million is comprised of non-cash asset write-downs
of $89 million and accrued charges of $111 million, of which approximately $18
million were paid during 1998. Of the $93 million unpaid balance of the accrued
charges as of December 31, 1998, the Company expects that $75 million will be
paid by the end of 1999. See Note 4 of Notes to Consolidated Financial
Statements.
In 1997 the Company acquired the European medical diagnostic businesses of
Sorin Biomedica S.p.A. and INCSTAR Corporation for approximately $212 million.
This transaction was accounted for as a purchase, and in connection therewith,
the portion of the purchase price allocated to the value of in-process research
and development was written off, resulting in a non-cash charge of $90 million,
on which there was no tax benefit. See "Liquidity and Capital Resources and Note
3 of Notes to Consolidated Financial Statements.
In 1996 the Company adopted the new accounting standard for the impairment
of long-lived assets. Applying the criteria established by that standard, 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 increase in equity in net income of unconsolidated joint ventures for
1996 through 1998 reflects the strong growth of Automotive Products' North
American braking systems joint venture, benefits from the restructuring of Air
Conditioning Products' scroll compressor joint venture in 1997 and increased
income from the Company's financing joint venture.
Interest expense decreased $4 million in 1998 compared with 1997, as lower
average interest rates achieved through debt refinancing more than offset the
effect of increased debt arising from share repurchases and the medical
diagnostics businesses acquisition in June 1997. On June 1, 1998, the Company
redeemed the $741 million principal amount of its 10 1/2% Senior Subordinated
Discount Debentures and the $200 million principal amount of its 9 7/8% Senior
Subordinated Notes with lower-rate Senior Notes, as described below. During 1998
the Company purchased $84 million of its common stock and during 1997 purchased
$311 million of its common stock and acquired the medical diagnostics businesses
for $212 million (see "Liquidity and Capital Resources"). Interest expense for
1997 decreased $6 million compared with 1996 because lower overall interest
rates more than offset the effect of increased debt from the share repurchases
and the medical diagnostics businesses acquisition.
Corporate expenses for 1998 totaled $110 million, compared with $105
million in 1997 and $104 million in 1996 and reflect increased finance fees
related to the sale of receivables to the Company's financial services joint
venture.
The income tax provisions for 1998, 1997 and 1996 were $132 million, $117
million and $105 million, respectively. Those provisions reflect an unusually
high effective tax rate because there is little tax benefit on the restructuring
charges in 1998, and no tax benefits on the write-off of purchased research and
development in 1997 and asset impairment charges in 1996. Excluding those
special charges, the effective income tax rate was 40% in 1998, 35.8% in 1997
and 35.6% in 1996. The 1998 rate reflects foreign tax effects that include a
loss contingency related to certain German tax matters, substantially offset by
reversal of a U.S. deferred tax liability related to foreign investments. The
rates for 1997 and 1996 are somewhat lower than normal statutory rates,
primarily the result of higher levels of taxable income in the U.S., which
enabled the Company to recognize previously unrecognized tax benefits. No
similar benefits were available in 1998. Partly offsetting this are the effects
of rate differences and withholding taxes related to foreign operations and
nondeductible goodwill amortization. See Note 7 of Notes to Consolidated
Financial Statements. The Company expects that its effective income tax rate in
1999 will be somewhat higher than in 1998, because of higher foreign taxes and
higher U.S. state taxes.
As a result of the redemption of debt in 1998 and 1997 with refinancing
proceeds, those years included extraordinary charges of $50 million (net of
taxes of $7 million) and $24 million (net of taxes of $6 million), respectively,
including call premiums and the write-off of unamortized debt issuance costs.
See the following section, "Liquidity and Capital Resources" and Note 10 of
Notes to Consolidated Financial Statements for a description of these
transactions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities, after cash interest paid of $140
million, was $413 million for 1998, compared with $395 million for 1997. The $18
million increase resulted primarily from higher income before extraordinary item
(excluding from 1998 the $200 million restructuring charge and from 1997 the $90
million non-cash write-off of purchased research and development). Operating
working capital as a percentage of sales (excluding Medical Systems) improved to
2.9% in 1998, from 4.7% in 1997, primarily as a result of improved net working
capital in foreign operations and the sale of the French plumbing distribution
business. Average inventory turnover for 1998 was approximately
F-8
49
================================================================================
two-tenths of a turn higher than the average turnover for 1997, primarily
attributable to ongoing improvements under Demand Flow Technology. Net investing
activities totaled $263 million, principally capital expenditures of $278
million (including $22 million of investments in affiliated companies) - see
"Capital Expenditures." Net cash used by financing activities of $113 million
reflected net incremental borrowing which, together with cash provided by
operations, funded the net investing activities and the share repurchases.
In January 1997 the Company entered into the 1997 Credit Agreement. This
agreement, which requires no repayment of principal prior to its expiration in
2002, provides the Company with senior secured credit facilities aggregating
$1.75 billion as follows: (a) a $750 million U.S. dollar revolving credit
facility and a $625 million multi-currency revolving credit facility (the
"Revolving Facilities"), which by their nature are short term and (b) a $375
million multi-currency periodic access credit facility. Up to $500 million of
the Revolving Facilities may be used to issue letters of credit. The 1997 Credit
Agreement and certain other American Standard Inc. debt instruments contain
restrictive covenants and other requirements, with which the Company believes it
is currently in compliance. See Note 10 of Notes to Consolidated Financial
Statements.
As of December 22, 1998, the Company completed an amendment to its 1997
Credit Agreement. The amendment principally permits American Standard to issue
up to an additional $500 million principal amount of senior or subordinated
unsecured debt securities, and lowers the interest coverage ratios and increases
the debt coverage ratios applicable to the Company beginning for periods ending
December 31, 1998. The purpose of the amendment was primarily to accommodate the
refinancing of $150 million of American Standard's 10 7/8% senior notes due May
15, 1999 and the financing of other proposed capital expenditures, including the
acquisition of the Bathrooms Division of Blue Circle Industries PLC described
below.
In the first half of 1998, the Company completed public offerings of $1
billion principal amount of Senior Notes with interest rates ranging from 7 1/8%
to 7 5/8% and maturity dates from 2003 to 2010. On June 1, 1998, the Company
used the net proceeds of these offerings (approximately $963 million, net of
underwriting discounts and interest rate hedge costs) to redeem its 101/2%
Senior Subordinated Discount Debentures and 9 7/8% Senior Subordinated Notes.
The total amount required to complete these redemptions, including call
premiums, was $954 million, net of the effect of settlement of certain interest
rate swap transactions related to the Senior Subordinated Discount Debentures.
On November 25, 1998, American Standard Companies Inc. and its
wholly-owned subsidiary American Standard Inc. jointly filed a shelf
registration statement with the Securities and Exchange Commission (SEC), which
was amended on February 16, 1999, and which is being reviewed by the SEC and has
not yet been declared effective, covering $750 million of debt securities to be
offered by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc. (the "1998 Shelf Registration"). The Company intends to
use the net proceeds from the sale of such debt securities for general corporate
purposes, which may include the repayment of outstanding debt, including debt
incurred to finance the acquisition of the Bathrooms Division of Blue Circle
Industries PLC, as well as for stock repurchases, certain investments,
acquisitions, additions to working capital or capital expenditures.
On February 2, 1999, the Company acquired the Bathrooms Division of Blue
Circle Industries PLC, a manufacturer of ceramic sanitaryware, brassware and
integrated plumbing systems, for approximately $417 million with borrowings
under the Company's 1997 Credit Agreement. The acquired business had 1998 sales
of approximately $290 million (at December 31, 1998 exchange rates) and assets
at December 31, 1998 of approximately $250 million (at December 31, 1998
exchange rates). The acquired business has 3 major facilities and 9 smaller
facilities, located in the United Kingdom and Italy, and employs approximately
3,200 people. The primary markets for its products are in the United Kingdom,
Italy, Ireland and Germany. This transaction will be accounted for as a
purchase. The Company is in the process of valuing the assets acquired and
liabilities assumed for purposes of allocating the purchase price. This process
is not complete, but based upon preliminary estimates, the Company anticipates
that goodwill of approximately $250 million will be recorded. Temporary
refinancing of $60 million of the indebtedness incurred to fund the acquisition
was obtained pursuant to a short-term Credit Agreement dated as of February 2,
1999 between American Standard Companies Inc., American Standard Inc. and
Goldman Sachs Credit Partners L.P. (the "Temporary Facility"). The indebtedness
under the Temporary Facility is senior unsecured debt of American Standard Inc.,
and is guaranteed by American Standard Companies Inc. Interest accrues on the
amount borrowed under the Temporary Facility at the rate of 7 3/8% per annum
until March 22, 1999 and at rates that increase on a quarterly basis thereafter.
It is anticipated that the outstanding principal amount under the Temporary
Facility will be repaid with proceeds from the sale of debt securities to be
offered to the public from time to time following the effectiveness of the shelf
registration statement described above.
The Company believes that the amounts available from operating cash flows,
funds available under its 1997
F-9
50
================================================================================
Credit Agreement and future borrowings under the 1998 Shelf Registration will be
sufficient to meet its expected operating needs and planned capital expenditures
for the foreseeable future. Any material increase in the Company's need for cash
above current expectations, however, could require the Company to take actions
such as curtailing capital expenditures, incurring additional indebtedness and
related costs, issuing additional equity securities or selling assets, any or
all of which actions could reduce the Company's liquidity and earnings and the
scope of its strategic competitive options. Obligations under the 1997 Credit
Agreement are guaranteed by the Company, American Standard 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 nearly all shares of subsidiary stock.
At December 31, 1998, the Company's total indebtedness was $2.4 billion
and annual scheduled debt maturities, excluding the 1997 Credit Agreement, were
$169 million, $30 million, $12 million, $13 million and $134 million for the
years 1999 through 2003, respectively. The Company had remaining availability
under the 1997 Credit Agreement of approximately $638 million after reduction
for borrowings and for $61 million of outstanding letters of credit. The
Company's foreign subsidiaries had $86 million available at December 31, 1998,
under overdraft facilities which can be withdrawn by the banks at any time. In
addition, the Company's operations in China have $5 million available under bank
credit facilities after reduction for borrowings of $10 million and letters of
credit usage of $11 million.
In 1997 the Company completed a secondary public offering of 12,429,548
shares of the Company's common stock owned by Kelso ASI Partners, L.P. ("ASI
Partners"), then the Company's largest stockholder. In conjunction therewith,
the Company purchased from ASI Partners 4,628,755 shares of the Company's common
stock for $208 million, plus fees and expenses, and issued to ASI Partners
warrants, expiring in February 2002, to purchase 3,000,000 shares of the
Company's common stock at $55 per share (the "Exercise Price"). The warrants
entitle holders to receive cash or shares, at the Company's option, based on the
difference between the market value of the Company's common stock and the
Exercise Price. All shares sold in the secondary public offering were previously
issued and outstanding, and the Company received no proceeds therefrom (see Note
11 of Notes to Consolidated Financial Statements).
On July 9, 1998, the Company's Board of Directors approved the purchase of
up to $300 million of the Company's common stock, not to exceed $100 million per
year, during the three-year period ending July 2001. During 1998, the Company
purchased 2.7 million shares of its common stock for $84 million, 2.5 million of
which shares were purchased for $75 million pursuant to this plan. During 1997
the Company purchased 6.9 million shares of its common stock for $311 million,
including the above-referenced shares purchased from ASI Partners.
In January 1997 the Company formed its Medical Systems Segment to develop
and market medical diagnostics technology and equipment. The Company had
previously supported the development of two medical diagnostics ventures
focusing on test instruments using laser technology and reagents. On June 30,
1997, the Company acquired the European medical diagnostic businesses of Sorin
Biomedica S.p.A. and INCSTAR Corporation. The aggregate cost of the acquisitions
was approximately $212 million, including fees and expenses, and was funded with
borrowings under the 1997 Credit Agreement. The transaction was accounted for as
a purchase, and $90 million of the purchase price was allocated to the value of
in-process research and development and written off (for which there was no tax
benefit). Approximately $69 million of goodwill resulted after allocation of the
purchase price to the fair value of assets acquired and liabilities assumed. See
"Purchased In-process Research and Development" below.
The Company is a partner in American Standard Financial Services, a
financial services partnership with Transamerica Commercial Finance Corporation.
The partnership offers inventory and consumer financing, and plans to provide
commercial leasing and other lending programs. Programs thus far implemented
have enhanced the Company's cash flow and equity income.
The Company does not currently intend to pay dividends and is limited in
the amount it may pay under the terms of the 1997 Credit Agreement, the
Temporary Facility and certain of its publicly-traded debt securities.
The Company has previously disclosed that German tax authorities have
raised questions regarding the treatment of certain significant matters in
connection with examinations of the tax returns of the Company's German
subsidiaries for the years 1984 through 1994. Having proposed to settle one of
the issues under dispute, the Company has recorded a loss contingency as of
December 31, 1998. See Note 7 of Notes to Consolidated Financial Statements.
CAPITAL EXPENDITURES
The Company's capital expenditures for 1998 were $278 million (including
investments in affiliated companies) compared with $302 million for 1997. The
decrease for 1998 related primarily to lower capital expenditures for Air
Conditioning Products and Plumbing Products. Capital spending in 1998 was
devoted primarily to shifting production to lower-cost locations, expansion of
manufacturing capacity to meet demand, equipment for new products, the
F-10
51
================================================================================
acquisition of additional ownership interests in affiliated companies, and the
continuing implementation of Demand Flow.
Capital expenditures for Air Conditioning Products for 1998 were $91
million, including $5 million of investments in affiliated companies, a decrease
of 11% from the $102 million of capital spending in 1997. Major expenditures
included completion of the expansion of the operations in China, acquisition of
an additional equity interest in the Malaysia affiliate, projects related to new
products and product improvements and improvements related to Demand Flow and
productivity. In addition, Air Conditioning Products spent $17 million for the
acquisition of sales offices.
Plumbing Products' capital expenditures for 1998 were $126 million,
compared with capital expenditures of $154 million in 1997 (including
investments in affiliated companies of $51 million), a decrease of 18%.
Expenditures in 1998 included acquisition of additional equity in Thailand and
Indonesia ventures, and completion of a chinaware plant and expansion of the
fittings plant in Bulgaria.
Capital expenditures for Automotive Products in 1998 were $50 million,
compared with $42 million in 1997, an increase of 19%. Major projects included
expenditures related to capacity expansion in Europe to serve the U.S. market.
Capital expenditures for Medical Systems in 1998 were $11 million,
compared with $4 million in 1997. Expenditures in 1998 were primarily for
equipment and computer software. On June 30, 1997, the Company acquired the
medical diagnostics businesses for $212 million, as described above in Liquidity
and Capital Resources.
The Company believes capital spending in recent years has been sufficient
for maintenance purposes, important product and process redesigns, expansion
projects and strategic investments and acquisitions. The Company expects to
continue to invest in the expansion and modernization of its existing facilities
and affiliated companies and to consider entering into joint ventures and making
complementary acquisitions. The Company expects to make capital expenditures in
1999, including acquisitions of U.S. air conditioning commercial sales and
service operations, of approximately $250 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Management believes that
the adoption of Statement No. 133 will not have a significant effect on the
Company's results of operations or financial position.
CYCLICAL AND SEASONAL NATURE OF BUSINESS
The preponderance of Air Conditioning Products and Plumbing Products sales are
to the replacement, remodeling and repair markets. In 1998, only about 6% of the
Company's sales were associated with new housing in the United States and about
12% were associated with new commercial construction in the United States, both
of which are cyclical. The Company's geographic diversity mitigates the effects
of fluctuations in individual new construction markets outside the United
States. Approximately 40% of Automotive Products' sales are dependent on
production levels of medium-sized and heavy trucks and buses, particularly in
Europe, which have been cyclical.
Total Company sales and related segment income tend to be seasonally
higher in the second and third quarters of the year because summer is the peak
season for sales of air conditioning products. In addition, a significant
percentage of Air Conditioning Products' sales are attributable to residential
and commercial construction activity, which is generally higher in the second
and third quarters of the year.
YEAR 2000 READINESS DISCLOSURE
The following is a Year 2000 Readiness Disclosure in accordance with the Year
2000 Information and Readiness Disclosure Act.
Year 2000 compliance plan. The Company has established a comprehensive Year 2000
initiative, having appointed teams responsible for all of its locations
worldwide, coordinated by team leaders reporting directly to the business group
leaders, and in some cases employing third-party experts. The Vice President of
Information Technology, who reports directly to the Chairman and Chief Executive
Officer, heads the project. Progress reports are made periodically to the Audit
Committee of the Board of Directors. The teams are responsible for assuring that
all core business systems and transactions with customers, suppliers, financial
institutions and other third parties will be Year 2000 ready. Additionally, a
consultant has been retained at corporate headquarters to provide overall
guidance and assistance with the compliance plan. Consultants have also been
employed at various operating locations to augment the efforts of the local Year
2000 teams or to provide expertise in certain areas. In general, a coordinated
approach has been undertaken by the Company's Year 2000 teams worldwide, with
"best practices" shared among teams. The principal phases of the initiative
include:
Inventory -- identification of all technology and systems, including
imbedded technology in manufacturing and other operating and control
systems that could be affected by the Year 2000 issue. This phase is
essentially complete.
F-11
52
================================================================================
Assessment -- testing and evaluating whether remediation is necessary and
prioritizing tasks based on whether the system is evaluated as "critical",
the size of the system and the perceived risk. This phase is ongoing but
is expected to be essentially complete by the end of the first quarter of
1999.
Remediation and Testing -- Remediation includes the replacement or
modification of non-compliant technology with technology that is Year 2000
compliant. All new or modified systems are expected to be tested in a Year
2000 environment from the beginning of the transaction process to the end.
Completion is expected by mid-1999 for all core systems. Existing non-core
systems will be replaced or modified and tested, or contingency plans will
be put in place to minimize or eliminate the effect of Year 2000 problems.
Completion of non-core systems is expected in the third and fourth
quarters of 1999.
Contingency planning -- development of contingency plans in situations
where there is substantial risk that compliance will not be achieved at
any Company location or by any critical supplier in time to avoid Year
2000 problems. Contingency plans are expected to be in place by mid-1999.
Third party relationships -- communicating and working with suppliers,
customers and other third parties with whom the Company does business to
minimize the potential adverse effects of Year 2000 problems. This
includes evaluating new and previously sold products that incorporate
equipment controls with imbedded technology to identify and resolve any
problems that customers may have with Company products as a result of the
arrival of the year 2000.
State of readiness. Management believes that substantial progress has been made
towards the objective of having all core business systems Year 2000 compliant.
The project's phases are in varying degrees of completion. We define substantial
progress as the fact that at December 31, 1998, approximately 80% of the
Company's Year 2000 plan has been completed. When situations are identified
where there is substantial risk that any important objectives of the project
will not be met, the Company has dedicated and will continue to dedicate
additional resources.
For several years the Company has been converting most of its mainframe
computer applications and systems worldwide to client server technology and, in
conjunction therewith, has been installing software that is Year 2000 compliant.
For all systems other than mainframe, software that is Year 2000 compliant is
also being installed, including desktop applications. Most of these initiatives
were undertaken irrespective of any Year 2000 considerations and, except for a
few instances, implementation would have been completed before the year 2000.
Substantial progress has been made on these installations and many of the
individual projects have been completed. Completion of most others is expected
by mid-1999. For those installations not expected to be completed until the year
2000, revisions are being made to existing systems to ensure readiness.
Third-party relationships. The Company has initiated communications with
suppliers, customers and other third parties to identify and assess Year 2000
risks and to develop solutions that will minimize any adverse impact on the
Company. Over one-half, in number, of the Company's suppliers have responded,
and the Company expects to resolve timely any identified problems with critical
or non-responding suppliers or to develop contingency plans where possible. The
Company's manufacturing facilities are highly dependent on public utilities,
especially electrical power, natural gas, water and communications companies.
There is a risk that suppliers or others on whom the Company relies will not
successfully address Year 2000 issues. Should one or more critical suppliers be
unable to supply us with products or services at any of the Company's 120
manufacturing locations, and the Company or the supplier not have established
appropriate contingency plans, such failure could result in the inability of the
Company, at that location, to deliver products on a timely basis and have a
material adverse effect on the results of operations at that location.
The Company does not believe that it has material Year 2000 exposure with
respect to products sold to customers. The only Company products containing
imbedded electronic systems subject to Year 2000 issues are commercial air
conditioning and medical products. The Company is evaluating imbedded electronic
control systems in products sold to customers of its commercial air conditioning
systems and medical products. Computer controls for commercial air conditioning
systems and medical products are being checked and replaced where necessary.
This process is expected to be complete by mid-1999.
F-12
53
================================================================================
The Company is evaluating delivery commitments to customers, product
warranties and representations made with respect to Year 2000 compliance of its
products. Management believes that it is adequately addressing such issues and
that, subject to the considerations described above, any potential material
liability to third parties for Year 2000 failures in its products or inability
to deliver products timely is remote.
Risks and contingency plans. Management believes that the Company's most
reasonably likely worst case scenario is some short-term, localized disruptions
of systems, manufacturing operations, facilities or suppliers that will affect
individual business operations, rather than broad-based, systemic, or long-term
problems affecting operating segments or groups of operations. The most
significant uncertainties relate to critical suppliers, particularly electrical
power, water, natural gas and communications companies, and suppliers of parts
and materials that are vital to the continuity of operations. Contingency plans
are being formulated and put in place, where possible, for all critical
suppliers. These measures include finding alternative sources of supply and
purchasing safety stocks of parts and materials if failure of a supplier is
expected, and forming emergency response teams at each operating location to
deal with any problems which develop.
Costs. The Company's estimated cost to become Year 2000 compliant is
approximately $21 million. Of this, approximately $14 million are costs being
charged to expense as incurred, including internal and external labor to repair
or modify existing software, and costs of consultants employed at various
locations to assist with implementation of the Company's plan. The balance of
estimated costs represent replacement hardware and software to be capitalized.
Through December 31, 1998, approximately $9 million had been expended, of which
$6 million had been charged to expense. These costs are generally not
incremental to existing information technology budgets, as existing internal
resources were redeployed and the costs of consultants employed are less than
10% of total Year 2000 costs. The costs of implementing client server technology
and other software changes made for reasons other than the Year 2000 and which
were not accelerated are not included in these estimates. There were no
significant deferrals of information technology projects because of the
Company's response to Year 2000 issues. Information technology planning has
incorporated client server and Year 2000 initiatives for several years and,
therefore, there has been little effect on the Company's operations because of
unexpected deferrals of projects important to growth or competitiveness. All
costs are being funded from operating cash flows or other resources available to
the Company. Based upon information currently available and current estimates,
management believes that the Company's costs to become Year 2000 compliant will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows in future periods. Total costs, anticipated impact
and the expected dates to complete the various phases of the project are based
on management's best estimates using information currently available and certain
assumptions about future events. However, no assurance can be given that actual
results will be consistent with such estimates and, therefore, actual costs,
impacts and completion dates could differ materially from those plans. See
"Disclosure Regarding Forward Looking Statements".
EFFECT OF THE EURO
The Company is currently evaluating the effects of the new European monetary
unit ("Euro") on the Company's operations as a result of the pending conversion
of many European currencies to the Euro. Changes are being made to existing
systems and procedures to complete a smooth and timely transition with minimal
disruption to operations or financial records. The Company believes that
conversion to the Euro will not have a significant effect on the Company's
financial position or results of operations. Costs related to the conversion are
not expected to be material and are being expensed as incurred.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
The portion of American Standard's Medical Systems segment formerly known as
INCSTAR Corporation ("Incstar") focuses on the assessment and monitoring of
diseases and related therapeutics, including: autoimmune, bone and mineral
(osteoporosis), infectious disease (HIV and hepatitis), nutritional status,
endocrine functionality, renal disease and dialysis, and transplantation. Its
products include individual test reagents and test-kits used for clinical
diagnostic and medical research purposes that are considered "open system"
(i.e., that work with many instruments, both proprietary and non-proprietary).
At the time of its acquisition in June 1997, Incstar was principally engaged in
the manufacture of individual test reagents and test-kits using radioactive
isotopic assays, non-isotopic immunoassays and enzyme-linked immunosorbant
assays.
F-13
54
================================================================================
The portion of American Standard's Medical Systems segment formerly known
as Sorin Diagnostics S.r.l. ("Sorin") performs research and development
activities and produces test-kits for advanced DNA probe technology and the
detection of blood diseases and other substances via enzyme and radioactive
immunoassay.
Test kit manufacturers are required to submit a pre- market notification
submission to the U.S. Food and Drug Administration ("FDA") for each new
diagnostic product. Medical devices in the U.S. are regulated by and must have
approval from the FDA prior to marketing and selling any device or related
product. Investigation Device Exemption is required in order to market medical
devices, and Pre-Market Approval or Pre-Market Notification Approval is required
prior to commercial distribution of a device. Similar requirements exist in
other countries in which the Medical Systems segment does business.
In connection with the purchases of Incstar and Sorin, the Company made
allocations of the purchase price to acquired in-process technology. These
amounts were expensed as non-recurring charges on the acquisition date because
the acquired in-process technology had not yet reached technological feasibility
and had no alternative future uses. All Incstar and Sorin products under
development at the time of the acquisition which had not achieved technological
feasibility and had not received Pre-Market Approval or Pre-Market Notification
Approval were classified as in-process technology. Management believed that
these products under development had significant technological hurdles to
overcome to reach technological feasibility, such as the ability to perform
multiple tests simultaneously and confirm the results, and provide analysis of
the diagnosed condition status as acute or chronic. Certain in-process projects
contained a portion of core technology as many are second generation products.
The proportionate share of developed or in-process technology for each product
was determined based on the innovative content of each R&D project and its
reliance on core technology.
Each of the in-process projects was categorized into the following phases:
Research; Feasibility; Development; Clinical; and Filing in order to determine
the stage of development and the efforts necessary to complete. The in-process
projects were in the areas of: Bone and Mineral; Transplantation; Infectious
Diseases; Autoimmunity; Serum Proteins; and Prenatal Screening.
At the time of the acquisition, management anticipated the total costs to
complete the development of the Incstar and Sorin technologies at approximately
$10.4 million and $12.0 million, respectively. These costs were anticipated to
be incurred through the first quarter of the year 2000. Total research and
development expenditures on in-process technologies since the date of
acquisition through December 31, 1998, were approximately $5.5 million.
Revenue growth rates for the acquired medical diagnostic businesses used
in the valuation of the in-process technology started at 28% and declined to 4%
during the course of the estimation period which was from the date of the
acquisition (July 1, 1997) through 2010. Revenues for these businesses from the
date of the acquisition (July 1, 1997) through December 31, 1998 have remained
relatively flat, reflecting a decline in revenues related to the
radioimmunoassay product lines substantially offset by an increase in revenues
in the non-isotopic assay product lines. The industry has been shifting away
from the use of radioimmunoassay products in favor of non-isotopic assay
products.
Operating expense percentages used in the valuation of the in-process
technology ranged from 80% to 60% during the course of the estimation period.
Operating expense percentages for these businesses from the date of the
acquisition (July 1, 1997) through December 31, 1998 were in excess of 100%
reflecting the rapidly declining market for radioimmunoassay products and the
impact of delays experienced in the development and delivery to market of the
in-process technologies. The causes for the delays are further described below.
Revenues projected to be derived from in-process technologies for the
period from July 1, 1997 (date of acquisition) to December 31, 1998 were
significantly less than originally projected. This shortfall in revenue is
attributable to delays experienced in the development and delivery to market of
the technologies which were in process at the time of acquisition of the
businesses by American Standard. The delays are attributable to two principal
factors. Based upon a reevaluation of the business strategy in early 1998, the
newly appointed senior management concluded that it was more advantageous to
modify the in-process technologies from use on an open platform basis to use on
the Company's proprietary equipment, Copalis. As a result, project schedules
were extended substantially to allow for training on the new diagnostic
equipment and adaptation of the in-process technologies. Additionally, to a
lesser extent, the process of integrating the separately acquired medical
businesses of Sorin and Incstar with the smaller medical technology development
operation already owned by American Standard, to form one cohesive operation
managed by American Standard, resulted
F-14
55
================================================================================
in the loss of some technical expertise which in turn caused disruptions in the
development efforts. The length of delay will vary by each discrete product as
the development and roll-out is influenced by a variety of factors including
allocation of resources, prioritization of business objectives and shifts in use
of changing technologies within the marketplace; however, on average the delays
are expected to range from 18 to 24 months. If the in-process projects
contemplated in the valuation of the acquired medical businesses are not
successfully developed, future revenue and profitability of the Company may be
adversely affected. Additionally, the amount of the Incstar and Sorin purchase
price allocated to goodwill may become impaired.
The discount rate selected for the in-process technologies was 26% for
both Incstar and Sorin. In selecting appropriate discount rates, consideration
was given to (i) the weighted average cost of capital ("WACC"; 17%) and (ii) the
weighted average return on assets (approximately 20% to 24%). The discount rate
utilized for the in-process technologies was determined to be higher than
American Standard's WACC because the in-process technologies had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than American Standard's WACC, management has reflected the risk
premium associated with achieving the forecasted cash flows associated with
these projects.
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, Indonesia, 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 33 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, 1998,
$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, 1998, approximately 53% 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 good faith 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 such 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 supplies or products or those of its
competitors, and other competitive pressures on pricing and sales; labor
relations; integration of acquired businesses; risks generally relating to the
Company's international operations, including governmental, regulatory or
political changes; changes in environmental, health or other regulations that
may affect one or more of the Company's products or potential products and the
inability to obtain regulatory approvals for one or more of the Company's
potential products; changes in laws or different interpretations of laws
including the risk that German judicial authorities will disagree with the
opinions of the Company's German legal counsel; 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.
F-15
56
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
================================================================================
The accompanying consolidated balance sheet at December 31, 1998 and 1997, and
related consolidated statements of operations, stockholders' deficit and cash
flows for the years ended December 31, 1998, 1997 and 1996, 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.
Emmanuel A. Kampouris
Chairman, President and
Chief Executive Officer
George H. Kerckhove
Vice President and
Chief Financial Officer
G. Ronald Simon
Vice President and
Controller
February 19, 1999
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
American Standard Companies Inc.
We have audited the accompanying consolidated balance sheet of American Standard
Companies Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1998. 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 Companies Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
February 19, 1999
F-16
57
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
American Standard Companies Inc.
Year Ended December 31, (Dollars
in thousands, except share data) 1998 1997 1996
Sales $ 6,653,881 $ 6,007,509 $ 5,804,561
- ---------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 5,002,771 4,481,915 4,379,765
Selling and administrative expenses 1,092,921 979,036 905,427
Restructuring and asset impairment charges 200,300 -- --
Write-off of purchased research and development -- 90,300 --
Asset impairment loss -- -- 235,234
Other expense 4,076 27,254 28,337
Interest expense 188,437 192,216 198,192
- ---------------------------------------------------------------------------------------------------------
6,488,505 5,770,721 5,746,955
- ---------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 165,376 236,788 57,606
Income taxes 131,784 116,928 104,324
- ---------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 33,592 119,860 (46,718)
Extraordinary loss on retirement of debt, net of taxes (49,909) (23,637) --
- ---------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shares $ (16,317) $ 96,223 $ (46,718)
=========================================================================================================
Per common share:
Basic:
Income (loss) before extraordinary item $ .47 $ 1.62 $ (.60)
Extraordinary loss on retirement of debt, net of taxes (.70) (.32) --
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ (.23) $ 1.30 $ (.60)
=========================================================================================================
Diluted:
Income (loss) before extraordinary item $ .46 $ 1.57 $ (.60)
Extraordinary loss on retirement of debt, net of taxes (.68) (.31) --
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ (.22) $ 1.26 $ (.60)
=========================================================================================================
Average outstanding common shares:
Basic 71,729,541 73,801,220 77,986,511
Diluted 73,672,018 76,167,486 77,986,511
See notes to consolidated financial statements.
F-17
58
CONSOLIDATED BALANCE SHEET
================================================================================
American Standard Companies Inc.
At December 31, (Dollars in thousands, except share data) 1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 64,824 $ 28,772
Accounts receivable, less allowance for doubtful
accounts - 1998, $34,991; 1997, $30,226 938,846 831,285
Inventories 458,099 430,773
Future income tax benefits 42,751 40,048
Other current assets 86,741 62,392
- -------------------------------------------------------------------------------------------
Total current assets 1,591,261 1,393,270
Facilities, at cost, net of accumulated depreciation 1,240,959 1,139,184
Other assets:
Goodwill, net of accumulated amortization - 1998,
$250,893; 1997, $225,020 832,789 844,238
Debt issuance costs, net of accumulated amortization - 1998,
$9,542; 1997, $11,718 40,225 22,516
Other 450,930 364,842
- -------------------------------------------------------------------------------------------
$ 4,156,164 $ 3,764,050
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Loans payable to banks $ 731,972 $ 718,412
Current maturities of long-term debt 168,682 30,459
Accounts payable 544,489 466,119
Accrued payrolls 203,554 179,635
Other accrued liabilities 586,493 400,871
Taxes on income 115,395 45,717
- -------------------------------------------------------------------------------------------
Total current liabilities 2,350,585 1,841,213
Long-term debt 1,527,518 1,550,772
Other long-term liabilities:
Reserve for postretirement benefits 477,938 437,651
Deferred tax liabilities 48,327 94,961
Other 452,780 449,236
- -------------------------------------------------------------------------------------------
Total liabilities 4,857,148 4,373,833
Commitments and contingencies
Stockholders' deficit:
Preferred stock, 2,000,000 shares authorized;
none issued and outstanding
Common stock, $.01 par value, 200,000,000 shares
authorized; shares issued and outstanding - 1998,
69,924,615; 1997, 71,962,713 699 720
Capital surplus 594,041 586,968
Subscriptions receivable -- (61)
Treasury stock (379,607) (309,553)
Accumulated deficit (691,581) (675,264)
Foreign currency translation effects (224,536) (212,593)
- -------------------------------------------------------------------------------------------
Total stockholders' deficit (700,984) (609,783)
- -------------------------------------------------------------------------------------------
$ 4,156,164 $ 3,764,050
===========================================================================================
See notes to consolidated financial statements.
F-18
59
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
American Standard Companies Inc.
Year Ended December 31, (Dollars in thousands) 1998 1997 1996
Cash provided (used) by:
Operating activities:
Income (loss) before extraordinary item $ 33,592 $ 119,860 $ (46,718)
Non-cash restructuring charges 88,688 -- --
Write-off of purchased in-process research and development -- 90,300 --
Asset impairment loss -- -- 235,234
Depreciation 134,529 124,855 117,951
Amortization of goodwill and other intangibles 55,519 39,107 27,580
Non-cash interest 31,599 59,857 61,794
Non-cash stock compensation 6,228 9,930 31,201
Changes in assets and liabilities:
Accounts receivable (94,133) (40,652) (25,479)
Inventories (31,562) (22,538) (32,499)
Accounts payable and accrued payrolls 90,033 18,739 (21,356)
Postretirement benefits 14,721 8,578 19,770
Other long-term liabilities (1,002) 46,785 24,455
Other, net 84,530 (59,437) (39,172)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 412,742 395,384 352,761
- -----------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property, plant and equipment (255,300) (245,258) (212,179)
Investments in affiliated companies (22,432) (56,925) (15,321)
Acquisition of medical diagnostics businesses -- (212,270) --
Proceeds from disposals of property, plant and equipment 30,743 19,099 15,105
Other (16,507) 18,696 6,293
- -----------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (263,496) (476,658) (206,102)
- -----------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of long-term debt 1,012,129 401,538 6,912
Repayments of long-term debt, including redemption premiums (996,578) (655,335) (73,429)
Net change in revolving credit facilities (23,860) 622,559 (106,332)
Net change in other short-term debt 4,912 8,673 (13,627)
Purchases of treasury stock (83,667) (310,654) --
Proceeds from exercise of stock options 7,724 7,644 4,069
Minority partners' contributions to PRC venture -- 5,920 18,165
Financing costs and other (33,984) (24,019) (10,355)
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (113,324) 56,326 (174,597)
Effect of exchange rate changes on cash and cash equivalents 130 (5,979) (1,067)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 36,052 (30,927) (29,005)
Cash and cash equivalents at beginning of period 28,772 59,699 88,704
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 64,824 $ 28,772 $ 59,699
===========================================================================================================
See notes to consolidated financial statements.
F-19
60
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
================================================================================
American Standard Companies Inc.
(Dollars in thousands) Foreign
Currency Compre-
Common Capital Subscriptions Treasury Accumulated Translation hensive
Stock Surplus Receivable Stock Deficit Effects Income
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 767 $ 509,218 $ (629) $ -- $(724,769) $(174,650)
Net loss -- -- -- -- (46,718) -- $ (46,718)
Foreign currency translation -- -- -- -- -- 1,492 1,492
---------
Total comprehensive income $ (45,226)
=========
Stock options exercised
including tax benefit 2 5,342 -- -- -- --
Common stock repurchased 17 49,313 -- -- -- --
Payments on subscriptions -- -- 234 -- -- --
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 786 563,873 (395) -- (771,487) (173,158)
Net income -- -- -- -- 96,223 -- $ 96,223
Foreign currency translation -- -- -- -- -- (39,435) (39,435)
---------
Total comprehensive income $ 56,788
=========
Treasury stock purchased (70) -- -- (310,654) -- --
Stock options exercised
including tax benefit 4 8,717 -- -- -- --
Other common stock issued
and tax benefits -- 14,378 -- 1,101 -- --
Payments on subscriptions -- -- 334 -- -- (39,435)
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 720 586,968 (61) (309,553) (675,264) (212,593)
Net loss -- -- -- -- (16,317) -- $ (16,317)
Foreign currency translation -- -- -- -- -- (11,943) (11,943)
---------
Total comprehensive income $ (28,260)
=========
Treasury stock purchased (28) -- -- (88,707) -- --
Stock options exercised
including tax benefit 4 11,910 -- -- -- --
Common stock issued to
Employee Stock Purchase Plan 2 (2,486) -- 8,711 -- --
Other common stock issued 1 (2,351) -- 9,942
Payments on subscriptions -- -- 61 -- -- --
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 699 $ 594,041 $ -- $(379,607) $(691,581) $(224,536)
================================================================================================================
See notes to consolidated financial statements.
F-20
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. DESCRIPTION OF THE COMPANY
American Standard Companies Inc. (the "Company") is a Delaware corporation that
has as its only significant asset all the outstanding common stock of American
Standard Inc., a Delaware corporation ("American Standard Inc."). Hereinafter,
"American Standard" or "the Company" will refer to the Company, or to the
Company and 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; plumbing fixtures and fittings for
bathrooms and kitchens; and braking and control systems for medium-sized and
heavy trucks, buses, trailers and utility vehicles. In 1997 the Company formed a
medical diagnostics segment (see Note 3). Information on the Company's
operations by segment and geographic area is included on pages 14, 46 and 47 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 stockholders' 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 $6.5
million in 1998, $4.2 million in 1997 and $2.3 million in 1996.
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.
Goodwill -- Goodwill is being amortized over 40 years. The carrying value 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 this review indicates that goodwill will not
be recoverable, as determined based on the estimated undiscounted cash flows of
the entity acquired, impairment is measured by comparing the carrying value of
goodwill to fair value. Fair value is determined based on quoted market values,
discounted cash flows or appraisals. In addition, the Company assesses
long-lived assets for impairment under Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Under those rules, goodwill associated
with assets acquired in a purchase business combination is included in
impairment evaluations when events or circumstances indicate that the carrying
amount of those assets may not be recoverable.
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.
F-21
62
================================================================================
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 $167 million in 1998, $161
million in 1997 and $160 million in 1996 for research activities and product
development and for product engineering. Expenditures for research and product
development only were $105 million, $112 million and $101 million in the
respective years.
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 $91 million, $111 million and $88 million of advertising costs
in 1998, 1997 and 1996, respectively.
Earnings Per Share -- Basic earnings per share have been computed using the
weighted average number of common shares outstanding. For 1998 and 1997 the
average number of outstanding common shares used in computing diluted earnings
per share included 1,942,477 and 2,366,266 average incremental shares,
respectively, from the assumed exercise of stock options issued under the
Company's Stock Incentive Plan (see Note 11). For 1996, the computation of
diluted earnings per share excludes 1,767,399 potentially dilutive shares
because inclusion would have been antidilutive to the per-share loss before
extraordinary item and the per-share net loss.
Comprehensive Income -- In 1998, the Company adopted Statements of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statement of Stockholders'
Deficit. The Company's investments in its foreign subsidiaries are considered to
be permanently invested and no provision for income taxes on the related foreign
exchange translation adjustments of those subsidiaries has been recorded.
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 stockholders'
equity or included as a component of the transaction (see Note 10).
Stock Based Compensation -- The Company grants to employees options to acquire a
fixed number of shares of the Company's common stock with an exercise price
equal to the market value of the shares at the date of grant. Accordingly, the
Company recognizes no compensation expense for stock option grants under APB
Opinion No. 25, Accounting for Stock Issued to Employees.
NOTE 3. ACQUISITION OF MEDICAL DIAGNOSTICS BUSINESSES
In January 1997 the Company formed its Medical Systems Segment to develop and
market medical diagnostics technology and equipment. The Company had previously
supported the development of two medical diagnostics ventures focusing on test
instruments using laser technology and reagents. On June 30, 1997, the Company
acquired the European medical diagnostic business of Sorin Biomedica S.p.A. and
INCSTAR Corporation. The aggregate cost of the acquisitions was approximately
$212 million, including fees and expenses, and was funded with borrowings under
the 1997 Credit Agreement. The transaction was accounted for as a purchase, and
$90 million of the purchase price was allocated to the value of in-process
research and development and written off in the third quarter of 1997 (for which
there was no tax benefit). Approximately $69 million of goodwill resulted after
allocation of the purchase price to the fair value of assets acquired and
liabilities assumed. Since the acquisition was not material to the Company's
financial position or results of operations, pro forma financial information is
not presented.
NOTE 4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In 1998, the Company committed to restructuring plans designed to achieve lower
product costs and improved efficiency. Key elements of the plans include the
transfer of significant manufacturing capacity to locations with lower labor
costs and the sale of certain assets. In connection therewith, the Company
determined that certain long-lived assets were impaired. Accordingly, in 1998
the Company recorded charges totaling $200 million ($186 million net of tax
benefits, or $2.52 per diluted share), including $185 million for Plumbing
F-22
63
================================================================================
Products, $7 million for Air Conditioning Products, $5 million for Automotive
Products and $3 million for Medical Systems.
The Plumbing Products charge of $185 million reflects the closure of five
plants in Europe and two in North America. The charge includes a loss on the
sale of the French plumbing distribution operations, costs related to a
workforce reduction of approximately 1,600 people and, applying the criteria of
FAS 121, write-downs of impaired fixed assets and related goodwill.
The Air Conditioning Products charge of $7 million involves the closure of
one plant in Australia, one plant in Europe, and a workforce reduction of 115
people. The Automotive Products charge of $5 million primarily reflects a
workforce reduction of 75 people in Europe related to having certain machining
work done by low-cost outside vendors rather than in the Company's own
facilities and the closure of three small plants. A restructuring charge of $3
million was also recorded for Medical Systems, relating to asset write-offs and
severance payments.
The Company recorded $35 million ($29 million net of tax) of these charges
in the third quarter of 1998 and $165 million ($157 million net of tax) in the
fourth quarter of 1998.
Components of the restructuring and asset impairment charges are (dollars
in millions):
================================================================================
Balance
Initial Non-cash Paid Dec. 31,
Charge Write-off in 1998 1998
- --------------------------------------------------------------------------------
Termination payments
to employees $ 49.8 $ -- $ 10.4 $ 39.4
Other employee
related costs 33.6 -- 4.3 29.3
Facilities:
Write-downs, including
related goodwill of
$31.3 million(a) 72.4 72.4 -- --
Site preparation costs 15.9 -- -- 15.9
Loss on sale of French
distribution business,
including goodwill of
$12.3 million 19.1 14.9 3.6 .6
Other 9.5 1.4 .2 7.9
- --------------------------------------------------------------------------------
$200.3 $ 88.7 $ 18.5 $ 93.1
================================================================================
(a) The goodwill write-down of $31.3 million related to the facilities
write-down was associated with the French plumbing manufacturing operations.
Based on the Company's decision to restructure its French plumbing business,
which included the sale of its distribution business and the closure of
three manufacturing facilities, management determined that the long-lived
assets, including goodwill, of its remaining French manufacturing operations
might have been impaired. Accordingly, management estimated the undiscounted
future cash flows of these operations to be less than the carrying amount of
the long-lived assets. This resulted in a write-down which included $31.3
million of goodwill.
Closure of all facilities affected is expected to be completed by the end
of 1999. The charge of $200.3 million is comprised of non-cash asset write-downs
of $88.7 million and accrued charges of $111.6 million. Of the $93.1 million
unpaid balance of accrued charges as of December 31, 1998, the Company expects
that $75 million will be paid by the end of 1999 and the remainder in 2000.
The accrued termination payments to employees include only severance
payments after termination. Other employee related costs include negotiated
supplemental payments to pension funds and other payments to union organizations
for the benefit of terminated employees. Of the 1,800 employees being
terminated, approximately 1,500 are hourly factory workers and 300 are salaried
administrative personnel. As of December 31, 1998, approximately 260 employees
had been terminated.
The facilities being closed and written down include eight owned and four
leased manufacturing plants, and the related manufacturing equipment. The owned
plants are being held for disposal and, accordingly, were written down to the
lower of carrying amount or fair value, less costs to sell. Two of those
facilities will be demolished and the land held for sale. Leases on the four
rented facilities will be terminated upon payment of obligations specified or
negotiated under the lease contracts. Manufacturing equipment being scrapped was
written off and equipment being sold has been written down to the lower of
carrying amount or fair value, less costs to sell. The net carrying value of
land, buildings and equipment held for sale as of December 31, 1998 was $13
million. The closure of certain facilities necessitates the investigation of
potential environmental contamination or the legal or regulatory requirement to
remediate the facility. In addition, the sale of one facility contractually
obligates the Company to demolish and remediate the site. These costs are
included in site preparation costs in the table above.
The French plumbing distribution business was sold in October 1998 as part
of the restructuring plan. In 1998 that business generated $80 million of sales
and an operating loss of $6 million.
Approximately one-half of other restructuring costs is leasehold
termination costs, with the remainder consisting of cash grants forfeited upon
closure of a facility in Italy, inventory write-off and other miscellaneous
costs.
The tax benefit on the total charge is at lower than normal rates because
the goodwill write-off is not deductible for tax purposes and in certain
countries the tax benefits on these charges are not expected to be realized.
F-23
64
================================================================================
NOTE 5. OTHER EXPENSE
Other income (expense) was as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Interest Income $ 6.9 $ 5.9 $ 6.2
Equity in net income of
unconsolidated joint ventures 27.4 11.9 2.6
Minority interest (1.5) (10.1) (11.7)
Accretion expense (22.9) (26.7) (29.3)
Foreign exchange gain (loss) (6.7) (2.2) 2.1
Other, net (7.3) (6.1) 1.8
- --------------------------------------------------------------------------------
$ (4.1) $ (27.3) $ (28.3)
================================================================================
The Company has investments in affiliates that are accounted for on the
equity method. The more significant of these investments is Meritor WABCO
Vehicle Control Systems ("Meritor/WABCO"). Meritor/WABCO, in which the Company
has a 50% equity ownership, is a U.S. sales and marketing organization serving
truck and bus manufacturers and aftermarket distribution for Automotive
Products' anti-lock braking systems.
Following is summarized financial information for Meritor/WABCO:
================================================================================
For the Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Condensed statement of operations
Sales $226.2 $113.2 $ 66.5
Gross profit 63.7 31.8 17.1
Net income 47.2 19.6 6.7
Company's equity in net income 23.6 9.8 3.4
As of December 31,
1998 1997
- --------------------------------------------------------------------------------
Condensed balance sheet
Current assets $55.1 $34.6
Noncurrent assets 2.4 2.3
Current liabilities 35.7 18.3
Net assets 21.8 18.6
Company's equity in net assets 10.9 9.3
NOTE 6. POSTRETIREMENT BENEFITS
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("FAS 132"), which improves and standardizes disclosures
about pensions and other postretirement benefits. FAS 132 addresses disclosure
issues only and does not change the measurement or recognition provisions
required in Statements No. 87, Employers' Accounting for Pensions, No. 88,
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
For Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions.
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 the Company's common stock held by the ESOP 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 the Company's common stock based upon the closing
price each Friday for shares of the Company's common stock quoted on the New
York Stock Exchange. The Company intends to fund the ESOP in future years
through contributions of cash or shares of the Company's 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, 1998, 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.
F-24
65
================================================================================
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ending December 31,
1998 and 1997, and a statement of the funded status as of December 31, 1998 and
1997:
================================================================================
1998 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Domestic Domestic
Domestic Health & Foreign Domestic Health & Foreign
Pension Life Ins. Pension Pension Life Ins. Pension
Benefits Benefits Benefits Benefits Benefits Benefits
Reconciliation of benefit obligation
Obligation at beginning of year $407.0 $191.4 $476.1 $373.9 $179.1 $482.6
Service cost 9.5 5.8 21.2 8.4 4.7 17.9
Interest cost 28.2 13.1 25.6 26.9 12.9 27.0
Participant contributions -- 4.0 2.1 -- 4.7 1.7
Plan amendments 6.9 -- -- 0.1 0.1 1.6
Actuarial loss 21.5 3.4 18.0 20.9 5.3 24.2
Acquisitions -- -- -- 3.6 -- --
Benefit payments (27.6) (15.9) (27.7) (26.8) (15.4) (32.4)
Foreign exchange effects -- -- 19.3 -- -- (46.5)
- ---------------------------------------------------------------------------------------------------------------------------
Obligation at end of year $445.5 $201.8 $534.6 $407.0 $191.4 $476.1
===========================================================================================================================
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year $386.0 $ -- $241.6 $323.0 $ -- $228.6
Actual return on assets 69.9 -- 27.5 72.8 -- 34.6
Employer contributions 11.7 11.9 21.0 17.0 10.7 23.6
Participant contributions -- 4.0 2.1 -- 4.7 1.7
Benefit payments (27.6) (15.9) (27.7) (26.8) (15.4) (32.4)
Foreign exchange effects -- -- (2.1) -- -- (14.5)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $440.0 $ -- $262.4 $386.0 $ -- $241.6
===========================================================================================================================
Funded Status at December 31
Funded status $ (5.5) $(201.8) $(272.2) $(21.0) $(191.4) $(234.5)
Unrecognized prior service cost 27.7 (8.8) 8.2 23.7 (9.5) 8.2
Unrecognized net actuarial (gain) loss (72.5) 31.4 (8.2) (56.4) 28.7 (12.8)
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $(50.3) $(179.2) $(272.2) $(53.7) $(172.2) $(239.1)
===========================================================================================================================
F-25
66
================================================================================
The following tables provide a summary of plans with assets in excess of
accumulated benefit obligations and plans with accumulated benefit obligations
in excess of assets for the foreign and domestic pension benefits as of December
31:
================================================================================
1998 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------
Assets in Accumulated Assets in Accumulated
Excess of Benefit Excess of Benefit
Accumulated Obligations Accumulated Obligations
Benefit in Excess of Benefit in Excess of
Obligations Assets Obligations Assets
Domestic pension benefits
Projected benefit obligation $ 421.2 $ 24.3 $ 385.1 $ 21.9
Accumulated benefit obligation 413.7 18.1 378.0 16.5
Fair value of plan assets 440.0 -- 386.0 --
Accrued benefit liabilities (30.9) (19.4) (36.5) (17.2)
Foreign pension benefits
Projected benefit obligation $ 214.4 $ 320.2 $ 188.8 $ 287.3
Accumulated benefit obligation 191.1 289.9 167.8 260.0
Fair value of plan assets 240.1 22.3 221.5 20.1
Prepaid benefit costs (accrued benefit liabilities) 39.4 (311.6) 39.1 (278.2)
- --------------------------------------------------------------------------------
The projected benefit obligation for postretirement benefits was determined
using the following assumptions:
================================================================================
1998 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------
Domestic Foreign Domestic Foreign
Weighted-average assumptions as of December 31:
Discount rate 6.75% 3.00%-6.50% 7.00% 3.75%-7.00%
Long-term rate of inflation 2.80% 0.5%-1.80% 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% 4.00%-8.25% 9.00% 4.50%-8.25%
The weighted-average annual assumed rate of increase in the health care
cost trend rate is 5% for 1999 and is assumed to remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. A change in the assumed rate of one percentage point
for each future year would have the following effects:
================================================================================
(Dollars in millions)
1% Increase 1% Decrease
- --------------------------------------------------------------------------------
Effect on the health care component of
accumulated postretirement obligation $14.1 $13.2
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $ 2.8 $ 2.5
================================================================================
F-26
67
================================================================================
Total postretirement costs were:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Pension benefits $ 42.1 $ 39.5 $ 41.7
Health and life insurance benefits 18.8 17.2 17.4
- --------------------------------------------------------------------------------
Defined benefit plan cost 60.9 56.7 59.1
Defined contribution plan cost,
principally ESOP 39.9 32.1 31.2
- --------------------------------------------------------------------------------
Total postretirement cost, including
accretion expense $100.8 $ 88.8 $ 90.3
- --------------------------------------------------------------------------------
Postretirement cost had the following components:
================================================================================
1998 1998 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------
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 $ 30.7 $ 5.8 $ 26.3 $ 4.7 $ 24.5 $ 4.7
Interest cost on the projected benefit obligation 53.8 13.1 53.9 12.9 55.6 12.5
Less assumed return on plan assets:
Actual return on plan assets (97.4) -- (107.4) -- (64.0) --
Excess asset gain deferred 49.4 -- 63.2 -- 22.7 --
- ------------------------------------------------------------------------------------------------------------------
(48.0) -- (44.2) -- (41.3) --
Amortization of prior service cost 4.0 (.7) 3.0 (.7) 2.2 (.6)
Amortization of net (gain) loss .4 .6 .5 .3 .7 .8
- ------------------------------------------------------------------------------------------------------------------
Defined benefit plan cost 40.9 18.8 39.5 17.2 41.7 17.4
- ------------------------------------------------------------------------------------------------------------------
Curtailment loss 1.2 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
No defined benefit plan cost after curtailments $ 42.1 $ 18.8 $ 39.5 $ 17.2 $ 41.7 $ 17.4
==================================================================================================================
Accretion expense reclassified to "other expense" $ 9.8 $ 13.1 $ 13.8 $ 12.9 $ 16.8 $ 12.5
==================================================================================================================
Amortization of prior service costs are computed on the straight-line method
over the average remaining service period of active participants.
F-27
68
================================================================================
NOTE 7. 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)
1998 1997 1996
- --------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item:
Domestic $183.2(a) $145.7(b) $162.6
Foreign (17.8)(a) 91.1(b) (105.0)(c)
- --------------------------------------------------------------------------------
$165.4 $236.8 $ 57.6
================================================================================
Provision (benefit) for income taxes:
Current:
Domestic $ 82.2 $ 96.2 $ 48.2
Foreign 113.9 67.5 70.2
- --------------------------------------------------------------------------------
196.1 163.7 118.4
Deferred:
Domestic (67.3) (42.9) (4.2)
Foreign 3.0 (3.9) (9.9)
- --------------------------------------------------------------------------------
(64.3) (46.8) (14.1)
- --------------------------------------------------------------------------------
Total provision $131.8 $116.9 $104.3
================================================================================
(a) Includes $200.3 million of restructuring expense in 1998: domestic $22
million; foreign $178.3 million. Associated tax benefits were $14.5 million:
domestic $8.5 million; foreign $6.0 million.
(b) Includes $90.3 million write-off of purchased research and development in
1997: domestic $32 million; foreign $58 million.
(c) Includes a foreign asset impairment loss in 1996 of $235.2 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 1998, 1997 and 1996 to the income (loss) before income taxes and
extraordinary item is as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
Tax provision at statutory rate $ 57.9 $ 82.9 $ 20.2
Increase (decrease) in valuation
allowance 41.4 (27.4) (13.0)
Nondeductible goodwill amortization
and goodwill write-offs 23.5 8.3 8.3
Reversal of deferred taxes on
foreign investments (50.1) -- --
Other foreign tax effects 53.5 14.6 5.5
Nondeductible write-off of purchased
research and development -- 31.6 --
Nondeductible asset impairment loss -- -- 82.3
State tax provision 1.3 1.8 1.3
Other, net 4.3 5.1 (.3)
- --------------------------------------------------------------------------------
Total provision $131.8 $116.9 $104.3
================================================================================
The increase in the valuation allowance in 1998 of $41.4 million was
primarily attributable to the generation of foreign net operating loss
carryforwards (related to restructuring charges) that are not expected to be
realized. The decrease in the valuation allowance in 1997 of $27.4 million, net
of a $12.4 million valuation allowance on the generation of foreign net
operating loss carryforwards and foreign tax credit carryforwards, was primarily
attributable to the fact that management believes it is more likely than not
that all of the net domestic deferred tax assets will be realized. The decrease
in the valuation allowance in 1996 of $13.0 million was net of a $10.8 million
valuation allowance provided on future tax benefits on certain foreign
operations.
In 1991, in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" the Company provided $50.1 million of
deferred U.S. taxes with respect to a transaction which had the effect of
reducing the U.S. tax basis, but not the book basis of its investment in a
foreign subsidiary. Under existing U.S. tax law, no mechanism was available in
1991 or future years to eliminate this outside book and tax basis difference
without incurring $50.1 million of U.S. tax cost. Therefore, the Company
provided $50.1 million to reflect this future U.S. tax liability. In December
1998 the Company completed legal
F-28
69
================================================================================
reorganizations of certain foreign operations. These reorganizations, coupled
with two new U.S. tax law changes that were made effective from January 1997 and
July 1998, respectively, provided the Company with the opportunity to make a tax
election to treat, for U.S. tax purposes only, certain significant foreign
operations as a branch rather than a subsidiary without incurring any U.S. tax
cost. This election gives the Company greater future consistency with respect to
U.S. and foreign taxation of the subject businesses. This election also
eliminated the difference between the book and tax basis in the foreign
subsidiary. As a result, the $50.1 million deferred U.S. tax provided in 1991
was reversed as of December 31, 1998. The other foreign tax effects in 1998 of
$53.5 million include a loss contingency related to certain German tax matters,
rate differences and withholding taxes.
The following table details the gross deferred tax liabilities and assets
and the related valuation allowances:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Facilities (accelerated depreciation, capitalized
interest and purchase accounting differences) $122.0 $115.4
Inventory (LIFO and purchase accounting
differences) (2.3) (1.9)
Employee benefits 7.0 6.7
Foreign investments -- 50.1
Other 49.0 46.5
- --------------------------------------------------------------------------------
175.7 216.8
- --------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefits 133.5 136.8
Warranties 76.3 66.0
Foreign net operating losses and
tax credits 99.0 57.6
Reserves 69.9 49.9
Other 6.1 9.9
Valuation allowances (99.0) (57.6)
- --------------------------------------------------------------------------------
285.8 262.6
- --------------------------------------------------------------------------------
Net deferred tax assets $110.1 $ 45.8
================================================================================
In 1997, the valuation allowance with respect to U.S. deferred tax assets
was entirely eliminated because of higher levels of taxable income in the U.S.
in 1997 and in 1998. Deferred tax assets related to foreign tax credits and
foreign net operating loss carryforwards 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. 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 $117 million, $105 million, and $135 million in the
years 1998, 1997 and 1996, respectively.
As a result of audits of the Company's German subsidiaries by The State
Finance Administration for the State of North Rhine Westphalia, Germany (the
"German Tax Authority") for the periods 1984 through 1990 and 1991 through 1994,
the Company has previously received two assessments for the 1984-1990 audit
period which the Company has been contesting. The Company believes, based on the
opinion of external German legal counsel, that the Company's German tax returns
are substantially correct as filed and that any adjustments would be
inappropriate. Unless the Company is otherwise able to reach a satisfactory
resolution of these matters with the German Tax Authorities, the Company intends
to contest vigorously the pending assessments and any other amounts that may be
assessed.
The first assessment was issued in 1992 for approximately $18 million of
combined corporation and trade taxes and claimed a disallowance of a deduction
of interest expense related to an intercompany finance instrument. Later in 1992
the amount of the assessment was deposited with the German tax authorities as
security for the disputed tax and a suit to recover that amount was promptly
commenced and is currently pending before the Tax Court for the State of North
Rhine-Westphalia in Cologne, Germany. As a result of making the deposit, no
interest will accrue on the amount under dispute. The second assessment,
received in March 1996, was for approximately $65 million of combined
corporation and trade taxes. Were the Company not to prevail in its dispute of
this assessment, the Company could be required to pay interest on the assessed
amount of approximately $16 million as of December 31, 1998. Interest on
assessed and unpaid taxes accrues, on a non-compounding basis, at the rate of
six percent per annum commencing fifteen months after the end of the tax year
for which the tax is assessed. The second assessment claimed
F-29
70
================================================================================
primarily that earnings of a Dutch subsidiary should have been recognized as
income taxable in Germany. In early 1997, the German tax authority agreed to
accept a partial deposit of $18 million in respect of the second assessment and
the Company commenced an administrative appeal of the assessment with the German
tax authority. The amounts paid in 1992 and 1997 were recorded as assets on the
Company's consolidated balance sheets because the Company, expecting to prevail
in litigation of these matters, would recover such amounts and, therefore,
appropriately accounted for them as receivables. This position is based upon the
opinion of the Company's external German legal counsel, referred to above, that
the Company's German tax returns are substantially correct as filed and that
adjustments would be inappropriate.
In 1998, in connection with the development of the Company's plan to
restructure certain of its European plumbing operations, including some located
in Germany, the Company entered into discussions with certain German regulatory
authorities which could have resulted in an offer to settle the primary issue
under dispute with respect to the second assessment, including all corporation
and trade taxes and accrued interest. To facilitate further discussions, certain
agreed supplemental audit procedures were commenced in the second half of 1998
and completed in December 1998. In January 1999, it became evident that these
efforts would not result in a settlement of any of the disputed taxes. In
addition, on January 22, 1999 the Company's appeal of the second assessment and
any offer of settlement was rejected. In February 1999, the Company filed notice
of appeal with the German Tax Court and moved to join the Company's appeal of
the first assessment with its appeal of the second assessment. In addition, the
Company requested an order from the German tax authority staying the obligation
to pay the amount of the second assessment during the pendency of the Company's
appeal. On March 15, 1999, the staying order was granted. The Company has agreed
to leave the amount already deposited with the German tax authority pending
final resolution of the dispute. In the ordinary course, it is anticipated that
litigation of the Company's appeal before the State Tax Court will require five
to seven years and that any appeal thereafter to the federal Supreme German Tax
Court would require an additional two or three years. Although the Company's
proposal of settlement was rejected, the Company has continued to pursue
settlement on the terms of the proposal.
As a result of the replacement in Germany of the Christian Democratic
party by the Social Democratic party following national elections in September
1998, the Company's discussions with German regulatory authorities and the
completion of the supplemental audit in the fourth quarter of 1998 proving to be
inconclusive, and the rejection by the German tax authorities of the Company's
appeal request and settlement efforts in January 1999, the Company has recorded
a loss contingency as of December 31, 1998 in the amount of the deposits related
to the first and second assessments, related trade taxes and accrued interest
thereon, which amount represents the amount for which the Company would have
been willing to settle the issue related to the second assessment. Based on the
opinion of the Company's external German legal counsel referred to above, the
Company intends to vigorously contest and to litigate these disputed German tax
matters, and no additional contingency with respect to such matters has been
recorded.
With respect to the 1991-1994 audit period, the Company engaged in
significant transactions similar to those that gave rise to the assessments in
the prior audit period and, with respect to a matter related to the intercompany
instrument at issue in connection with the first assessment, the German tax
auditors have proposed an adjustment of approximately $47 million. In addition,
because the German tax authorities assessed additional taxes for the 1984-1990
audit period they might, after completing their audit of the later period,
propose further adjustments for the 1991-1994 audit period related to the
subject matter of the second assessment that might be as much as fifty percent
higher than the amount of the assessments in the first audit period. Although
the Company is unable to predict when the audit of its German tax returns for
the 1991-1994 period will be complete or the amount of any additional taxes that
may be assessed, the Company believes the audit may be completed prior to the
end of 1999.
If all matters currently under review by the German tax authorities were
made the subject of assessments and either no orders staying the payment of such
amounts following assessment or during the pendency of the Company's appeal were
granted or the Company was finally determined to owe the full amount of all such
taxes, the Company could be required to pay all assessed amounts plus accrued
interest thereon, together with the amount of all related trade taxes. The total
amount of any payments made with respect to the tax matters described above, and
the timing thereof, could have a material adverse effect on the Company's
liquidity, cash flow and/or results of operation and, consequently, impair the
Company's competitive position. In addition, the Company might need to raise
additional capital and no assurance can be given as to the availability of debt
or equity financing if such need were to arise.
F-30
71
================================================================================
NOTE 8. INVENTORIES
The components of inventories are as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
Finished products $269.1 $255.0
Products in process 97.3 86.8
Raw materials 91.7 89.0
- --------------------------------------------------------------------------------
Inventories at cost $458.1 $430.8
================================================================================
The carrying cost of inventories approximates current cost.
NOTE 9. FACILITIES
The components of facilities, at cost, are as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
Land $ 73.8 $ 72.0
Buildings 471.8 442.2
Machinery and Equipment 1,193.6 1,093.3
Improvements in progress 112.9 109.2
- --------------------------------------------------------------------------------
Gross facilities 1,852.1 1,716.7
Less: accumulated depreciation 611.1 577.5
- --------------------------------------------------------------------------------
Net facilities $1,241.0 $1,139.2
================================================================================
NOTE 10. DEBT
In January 1997 the Company entered into the 1997 Credit Agreement which
requires no repayment of principal prior to its expiration in 2002. This
agreement provides the Company 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").
Each loan outstanding under the Revolving Facilities 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 0.75%. This rate is subject to
adjustment and will change based on the Company's financial leverage ratio.
Excluding the 1997 Credit Agreement which expires in 2002, the amounts of
long-term debt maturing in years 1999 through 2003 are: 1999 - $169 million;
2000 - $30 million; 2001 - $12 million; 2002 - $13 million and 2003 - $134
million.
As of December 22, 1998, the Company completed an amendment to the 1997
Credit Agreement permitting American Standard to issue up to an additional $500
million in aggregate principal amount of senior or subordinated unsecured debt
securities, lowering the interest coverage ratios and increasing the debt
coverage ratios applicable to the Company beginning for periods ending December
31, 1998. The purpose of the amendment was principally to accommodate the
refinancing of $150 million of American Standard's 10 7/8% senior notes due May
15, 1999 and the financing of capital expenditures, including the acquisition of
the Bathrooms Division of Blue Circle Industries PLC. See Note 15 of Notes to
Consolidated Financial Statements.
In the first half of 1998, the Company completed public offerings of $1
billion principal amount of Senior Notes with interest rates ranging from 7 1/8%
to 7 5/8% and maturity dates from 2003 to 2010. On June 1, 1998, the Company
used the net proceeds of these offerings (approximately $963 million, net of
underwriting discounts and interest rate hedge costs) to redeem its 10 1/2%
Senior Subordinated Discount Debentures and 9 7/8% Senior Subordinated Notes.
The total amount required to complete these redemptions, including call
premiums, was $954 million, net of the effect of the settlement of certain
interest rate swap transactions related to the Senior Subordinated Discount
Debentures.
On November 25, 1998, American Standard Companies Inc. and its
wholly-owned subsidiary American Standard Inc. jointly filed a shelf
registration statement with the Securities and Exchange Commission (SEC) which
was amended on February 16, 1999 and which is being reviewed by the SEC and has
not yet been declared effective, covering $750 million of debt securities to be
offered by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc. The Company intends to use the net proceeds from the
sale of such debt securities for general corporate purposes, which may include
the repayment of outstanding debt, including debt incurred to finance the
acquisition of the Bathrooms Division of Blue Circle Industries PLC, as well as
for stock repurchases, certain investments, acquisitions, additions to working
capital or capital expenditures.
As a result of the redemption of debt in 1998 and 1997, the Consolidated
Statement of Operations included extraordinary charges of $50 million (net of
taxes of $7 million) and $24 million (net of taxes of $6 million), respectively
including call premiums and the write-off of deferred debt issuance costs.
Short-term -- The Revolving Facilities 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 currently pays a
commitment fee of 0.1875% per annum on the
F-31
72
================================================================================
unused portion of the Revolving Facilities and a fee of 0.75% per annum plus
issuance fees for letters of credit. At December 31, 1998, there were $673
million of borrowings outstanding under the Revolving Facilities and $61 million
of letters of credit. Remaining availability under the Revolving Facilities was
$638 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 1998, 1997 and 1996 were $509 million, $574 million and $215
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, 1998, the Company had $60 million of such foreign short-term debt
outstanding at an average interest rate of 10% per annum. The Company also had
an additional $86 million of unused foreign facilities. These facilities may be
withdrawn by the banks at any time. The Company also has credit facilities for
its operations in China totaling $26 million, of which $10 million was
outstanding as of December 31, 1998, with remaining availability of $5 million
after $11 million letters of credit usage.
Average short-term borrowings for 1998, 1997 and 1996 were $571 million,
$639 million and $284 million, respectively, at weighted average interest rates
of 5.60%, 6.38% and 7.33%, respectively. Total short-term borrowings outstanding
at December 31, 1998, 1997 and 1996 were $732 million, $718 million and $109
million, respectively, at weighted average interest rates of 5.10%, 6.0% and
7.5%, respectively.
Long-term -- Long-term debt was as follows:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
1997 Credit Agreement $ 394.5 $ 354.1
9 1/4% sinking fund debentures, due in
installments from 1999 to 2012 105.0 127.5
10 7/8% senior notes due 1999 150.0 150.0
7 1/8% senior notes due 2003 125.0 --
7 3/8% senior notes due 2005 250.0 --
7 3/8% senior notes due 2008 350.0 --
7 5/8% senior notes due 2010 275.0 --
9 7/8% senior subordinated notes due 2001 -- 200.0
10 1/2% senior subordinated discount
debentures (net of unamortized
Discount of $23.9 million in 1997) -- 686.7
Other long-term debt 46.7 63.0
- --------------------------------------------------------------------------------
1,696.2 1,581.3
Less current maturities 168.7 30.5
- --------------------------------------------------------------------------------
$1,527.5 $1,550.8
================================================================================
Interest costs capitalized as part of the cost of constructing facilities
for the years ended December 31, 1998, 1997, and 1996, were $4.5 million, $3.8
million and $3.9 million, respectively. Cash interest paid for those same years
on all outstanding indebtedness amounted to $140 million, $135 million and $140
million, respectively.
The U.S. Dollar equivalent of the 1997 Credit Agreement loans and the
effective weighted average interest rates were:
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
Periodic access loans:
Deutschemark loans at 4.38% in 1998;
4.44% in 1997 $ 362.7 $ 324.5
Dutch guilder loans at 4.33% in 1998;
4.44% in 1997 31.8 29.6
- --------------------------------------------------------------------------------
Total Credit Agreement long-term loans 394.5 354.1
Revolver loans at 4.7% in 1998; 5.7% in 1997 672.7 672.0
- --------------------------------------------------------------------------------
Total Credit Agreement long-term loans $1,067.2 $1,026.1
================================================================================
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 1999 to 100%
in 2006 and thereafter. The Company may, however, on any sinking fund payment
date, elect to redeem an additional $15 million principal amount of the sinking
fund debentures. The 10 7/8% Senior Notes are not redeemable by the Company but
are due May 15, 1999. The Senior Notes with due dates in 2003, 2005, 2008 and
2010 are not redeemable by the Company prior to maturity.
Obligations under the 1997 Credit Agreement are guaranteed by the Company,
American Standard 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, as amended.
F-32
73
================================================================================
Certain of 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 11. CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the Company to issue up to
200,000,000 shares of common stock, par value $.01 per share and 2,000,000
shares of preferred stock, par value $.01 per share of which the Board of
Directors designated 900,000 shares as a new series of Junior Participating
Cumulative Preferred Stock. Each outstanding share of common stock has
associated with it one right to purchase a specified amount of Junior
Participating Cumulative Preferred Stock at a stipulated price in certain
circumstances relating to changes in the ownership of the common stock of the
Company.
In 1997 the Company completed a secondary public offering of 12,429,548
shares of the Company's common stock owned by ASI Partners, then the Company's
largest shareholder. In conjunction therewith, the Company purchased from ASI
Partners 4,628,755 shares of the Company's common stock for $208 million plus
fees and expenses. The Company financed the share purchase with borrowings under
the 1997 Credit Agreement. All of the shares sold in the secondary offering were
previously issued and outstanding, and the Company received no proceeds
therefrom. In addition, the Company also issued to ASI Partners warrants
expiring in February 2002 to purchase 3,000,000 shares of common stock of the
Company at $55 per share (the "Exercise Price"). The warrants entitle holders to
receive cash or shares, at the Company's option, based on the difference between
the market value of the Company's common stock and the Exercise Price. 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 the Company's stock options as described below.
On July 9, 1998, the Company's Board of Directors approved the purchase of
up to $300 million of the Company's common stock, not to exceed $100 million per
year, during the three-year period ending July 2001. During 1998, the Company
purchased 2,675,750 shares of its common stock for $84 million, of which
2,479,450 shares were purchased for $75 million pursuant to this plan. During
1997 the Company purchased 6,949,655 shares of its common stock for $311
million, including the shares purchased from ASI Partners.
The Company has a 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 1998 the Board of Directors authorized an increase of 5 million shares
under the plan to be issued from available treasury shares. The maximum number
of shares or units that may be issued under the Stock Plan and other incentive
bonus plans is 12,604,475, of which 7,604,475 may be granted as incentive stock
options. Stock option awards granted under the Stock Plan 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 1996, 1997
and 1998 follows:
================================================================================
Weighted- Weighted-
Average Average
Exercise Fair Value
Shares Price of Grants
- --------------------------------------------------------------------------------
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
Granted 1,426,000 40.77 $ 15.26
Exercised (460,016) 20.42
Forfeited (101,517) 32.29
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1998 6,384,152 28.69
- --------------------------------------------------------------------------------
Exercisable at end of year:
1996 1,422,539 20.01
1997 2,661,450 20.04
1998 4,162,423 22.15
In addition, on February 2, 1999, the Company granted awards in the form
of options to purchase 1,466,500 shares.
Exercise prices for options outstanding as of December 31, 1998, ranged
from $20 to $47.22. The weighted-average remaining contractual life of those
options is 7.1 years. As of December 31, 1998, there were 5,133,850 shares
available for grant under the plan and other incentive bonus plans.
F-33
74
================================================================================
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 loss and net loss per diluted share in 1998 would have
increased by $9.5 million and $.13, respectively; net income and net income per
diluted share in 1997 would have decreased by $12.1 million and $.16,
respectively; and the net loss and net loss per diluted share in 1996 would have
increased by $8.2 million and $.10, respectively. 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 5.1% in 1998,
5.6% in 1997 and 6.3% in 1996; volatility of 32% in 1998, 25% in 1997 and 23% in
1996; an expected life of 5 years in 1998 and 1997, and 6 years in 1996; and a
dividend yield of zero. These estimated expense amounts are not necessarily
indicative of amounts in years beyond 1998.
In 1997 shareholders approved the establishment of the Employee Stock
Purchase Plan commencing January 1, 1998. The Company intends to implement the
plan in as many countries worldwide as is reasonably practical, given the
applicable regulations in such countries. Upon enrollment, employees purchase
shares of the Company's common stock at the end of each calendar quarter,
through payroll deductions, at a discount of 15% from the market price, as
quoted on the New York Stock Exchange on the last trading day of each calendar
quarter. Annual purchases are limited to a maximum of $21,250. Shares purchased
under the plan are deposited with a custodian and must be held for one year
before they may be sold. The Company funds the plan as soon as practicable after
the close of each quarter with either treasury shares or newly issued shares, at
the Company's discretion. In 1998 employees purchased 197,078 shares under this
plan.
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of all of the Company's financial instruments at
December 31, 1998, approximate their carrying amounts. The fair values of the
Company's 1997 Credit Agreement loans were estimated using indicative market
quotes obtained from a major bank. The fair values of senior notes, and sinking
fund debentures were based on indicative market quotes obtained from a major
securities dealer. The fair values of other loans were estimated by the Company
to approximate their carrying value.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments under the terms of all noncancellable
operating leases in effect at December 31, 1998, are: 1999 - $62 million; 2000 -
$50 million; 2001 - $43 million; 2002 - $35 million, 2003 - $31 million and
thereafter - $55 million. Net rental expenses for operating leases were $69
million, $64 million and $70 million for the years ended December 31, 1998,
1997, and 1996, 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 7).
The Company has a minority equity investment in and guarantees $7 million
of the indebtedness of a company with operations unrelated to the Company's
businesses.
NOTE 14. SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" as of
December 31, 1998. In accordance with the requirements of this new standard, the
Company has changed its reporting of segment data to reflect its internal
management method of reporting and, as required, has restated all prior periods
presented for comparability. Accordingly, items which are excluded from segment
income for internal management reporting, such as restructuring charges in 1998,
the write-off of purchased research and development in 1997 and an asset
impairment charge in 1996, are excluded from segment income. Financing fees
related to the sale of receivables by Air Conditioning Products in the U.S. for
all years presented have been reclassified to Corporate expenses since they also
are excluded from the new measurement of segment income. In addition, the
segment data reflect the realigned organizational structure for Air Conditioning
Products into Worldwide Applied Systems Group and Worldwide Unitary Systems, and
for Plumbing Products into the Americas group and Europe and Far East group. See
also the Five-Year Financial Summary on page 14 and Management's Discussion and
Analysis on pages 15 through 23.
F-34
75
================================================================================
SEGMENT DATA
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Sales:
Air Conditioning Products $ 3,940 $ 3,567 $ 3,437
Plumbing Products 1,510 1,439 1,452
Automotive Products 1,106 952 916
Medical Systems 98 50 --
- --------------------------------------------------------------------------------
$ 6,654 $ 6,008 $ 5,805
================================================================================
Segment income (loss):
Air Conditioning Products $ 386 $ 386 $ 372
Plumbing Products 119 119 110
Automotive Products 153 127 123
Medical Systems (21) (20) (13)
- --------------------------------------------------------------------------------
637 612 592
Equity in net income of unconsolidated
joint ventures 27 12 3
Restructuring charges (200) -- --
Write-off of purchased research and
development -- (90) --
Asset impairment loss -- -- (235)
Interest expense (188) (192) (198)
Corporate expenses (110) (105) (104)
- --------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item $ 166 $ 237 $ 58
================================================================================
Sales-Geographic distribution (a):
United States $ 3,426 $ 3,002 $ 2,856
Europe 2,129 1,955 2,050
Germany (included in Europe) 706 596 560
Other 1,269 1,194 1,041
Eliminations (170) (143) (142)
- --------------------------------------------------------------------------------
Total sales $ 6,654 $ 6,008 $ 5,805
================================================================================
Segment income-Geographic distribution:
United States $ 419 $ 364 $ 342
Europe 172 165 171
Other 46 83 79
- --------------------------------------------------------------------------------
Total segment income $ 637 $ 612 $ 592
================================================================================
Assets
Air Conditioning Products $ 1,807 $ 1,577 $ 1,474
Plumbing Products 1,094 1,092 1,042
Automotive Products 766 676 747
Medical Systems 181 170 6
- --------------------------------------------------------------------------------
Total identifiable assets $ 3,848 $ 3,515 $ 3,269
================================================================================
Geographic distribution:
United States $ 1,520 $ 1,363 $ 1,173
Europe 1,491 1,394 1,433
Other 837 758 663
- --------------------------------------------------------------------------------
Total identifiable assets 3,848 3,515 3,269
- --------------------------------------------------------------------------------
Prepaid charges 40 23 34
Cash and cash equivalents 65 29 60
Corporate assets 203 197 157
- --------------------------------------------------------------------------------
Total assets $ 4,156 $ 3,764 $ 3,520
================================================================================
Goodwill included in assets:
Air Conditioning Products $ 199 $ 196 $ 203
Plumbing Products 201 229 247
Automotive Products 359 350 419
Medical Systems 74 69 6
- --------------------------------------------------------------------------------
Total goodwill $ 833 $ 844 $ 875
================================================================================
Capital expenditures
Air Conditioning Products $ 91 $ 102 $ 93
Plumbing Products 126 154 88
Automotive Products 50 42 46
Medical Systems 11 4 --
- --------------------------------------------------------------------------------
Total capital expenditures $ 278 $ 302 $ 227
================================================================================
Depreciation and amortization:
Air Conditioning Products $ 66 $ 63 $ 51
Plumbing Products 59 53 50
Automotive Products 51 43 43
Medical Systems 14 5 --
- --------------------------------------------------------------------------------
Total depreciation and
amortization $ 190 $ 164 $ 144
================================================================================
(a) Revenues from external customers are classified by country of origin.
NOTE 15. SUBSEQUENT EVENT (UNAUDITED)
On February 2, 1999, the Company acquired the Bathrooms Division of Blue Circle
Industries PLC, a manufacturer of ceramic sanitaryware, brassware and integrated
plumbing systems, for approximately $417 million with borrowings under the
Company's 1997 Credit Agreement. On February 8, 1999, the Company temporarily
refinanced $60 million of such indebtedness with the proceeds of a borrowing
under a short-term loan facility provided by Goldman Sachs Credit Partners L.P.
The acquired business had 1998 sales of approximately $290 million (at December
31, 1998 exchange rates) and assets at the end of 1998 of approximately $250
million (at December 31, 1998 exchange rates). The acquired business has 3 major
facilities and 9 smaller facilities, located in the United Kingdom and Italy,
and employs approximately 3,200 people. The primary markets for its products are
in the United Kingdom, Italy, Ireland and Germany.
This transaction will be accounted for as a purchase. The Company is in
the process of valuing the acquired assets and liabilities for purposes of
allocating the purchase price. This process is not complete, but based upon
preliminary estimates the Company anticipates that goodwill of approximately
$250 million will be recorded.
F-35
76
================================================================================
QUARTERLY DATA (UNAUDITED)
1998
- ---------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data) First Second Third(a)(b) Fourth(a)
Sales $ 1,493.3 $ 1,794.8 $ 1,727.9 $ 1,637.9
Cost of sales 1,124.2 1,315.2 1,297.9 1,265.5
Income (loss) before income taxes and extraordinary item 60.9 130.9 71.6 (98.0)
Income taxes 24.7 53.0 35.5 18.6
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 36.2 77.9 36.1 (116.6)
Extraordinary loss on retirement of debt -- (49.9) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 36.2 $ 28.0 $ 36.1 $ (116.6)
===============================================================================================================
Per common share:
Basic
Income (loss) before extraordinary item $ .50 $ 1.08 $ .50 $ (1.66)
Extraordinary loss on retirement of debt -- (.69) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ .50 $ .39 $ .50 $ (1.66)
===============================================================================================================
Diluted
Income (loss) before extraordinary item $ .49 $ 1.04 $ .49 $ (1.66)
Extraordinary loss on retirement of debt -- (.67) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ .49 $ .37 $ .49 $ (1.66)
===============================================================================================================
Average number of common shares (thousands):
Basic 72,096 72,473 72,150 70,215
Diluted 74,291 74,972 74,207 70,215
Range of prices on common stock:
High $ 48 1/4 $ 49 1/4 $ 48 7/16 $ 37 7/8
Low $ 37 3/8 $ 39 7/8 $ 24 5/16 $ 21 5/8
1997
- ---------------------------------------------------------------------------------------------------------------
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 (loss) 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 (loss) 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
===============================================================================================================
Per common share:
Basic
Income (loss) before extraordinary item $ .44 $ .99 $ (.46) $ .64
Extraordinary loss on retirement of debt (.11) (.20) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ .33 $ .79 $ (.46) $ .64
===============================================================================================================
Diluted
Income (loss) before extraordinary item $ .43 $ .96 $ (.46) $ .62
Extraordinary loss on retirement of debt (.11) (.20) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ .32 $ .76 $ (.46) $ .62
===============================================================================================================
Average number of common shares (thousands):
Basic 76,296 74,034 72,985 71,947
Diluted 78,757 76,565 72,985 74,020
Range of prices on common stock:
High $ 47 3/4 $ 51 $ 51 5/8 $ 41 1/8
Low $ 37 3/4 $ 41 1/8 $ 37 11/16 $ 34 5/8
(a) The third quarter of 1998 included restructuring charges of $35 million ($29
million, net of tax benefits). The fourth quarter of 1998 included a
restructuring charge of $165 million ($157 million, net of tax benefits).
(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.
F-36
77
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of American Standard
Companies Inc. as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon dated
February 19, 1998. Our audits also included the financial statement schedules
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young
New York, New York
February 19, 1999
F-37
78
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (Parent Company Separately)
(Dollars in thousands)
Year Ended December 31,
1998 1997 1996
-------- -------- --------
Interest income $ -- $ 1,432 $ 747
Interest expense -- (1,432) (747)
Equity in net income (loss) of subsidiary (16,317) 96,223 (46,718)
-------- -------- --------
Net income (loss) $(16,317) $ 96,223 $(46,718)
======== ======== ========
See notes to financial statements.
F-38
79
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
REGISTRANT - (Continued)
BALANCE SHEET (Parent Company Separately)
(Dollars in thousands)
December 31,
------------
ASSETS
1998 1997
--------- ---------
Investment in subsidiary $(332,364) $(318,906)
Loan receivable from subsidiary 25,701 19,777
LIABILITIES
Loan payable to subsidiary 394,321 310,654
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 200,000,000 shares authorized;
shares issued and outstanding, 69,924,615 in 1998; 71,962,713 in 1997 699 720
Capital surplus 594,041 586,968
Subscriptions receivable -- (61)
Treasury stock (379,607) (309,553)
Accumulated deficit (691,581) (675,264)
Foreign currency translation effects (224,536) (212,593)
--------- ---------
Total stockholders'deficit (700,984) (609,783)
--------- ---------
$(306,663) $(299,129)
========= =========
See notes to financial statements.
F-39
80
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS (Parent Company Separately)
(Dollars in thousands)
Year Ended December 31,
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (16,317) $ 96,223 $ (46,718)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Equity in net loss (income) of subsidiary 16,317 (96,223) 46,718
--------- --------- ---------
Net cash flow from operating activities 0 0 0
--------- --------- ---------
Cash provided (used) by investing activities:
Investment in subsidiary (1,156) (2,647) (19,400)
Loan to subsidiary (5,924) (9,716) (5,177)
Purchase of common stock by subsidiary -- 16,937 10,000
--------- --------- ---------
Net cash provided (used) by investing activities (7,080) 4,574 (14,577)
--------- --------- ---------
Cash provided (used) by financing activities:
Purchases of treasury stock (83,667) (310,654) --
Other issuance of common stock 7,080 12,363 24,577
Common stock repurchases -- (16,937) (10,000)
Repayments on subscriptions receivable 61 334 234
Loan from subsidiary 83,667 310,654 --
Repayment of loan from subsidiary (61) (334) (234)
--------- --------- ---------
Net cash provided (used) by financing activities 7,080 (4,574) 14,577
--------- --------- ---------
Net change in cash and cash equivalents $ 0 $ 0 $ 0
========= ========= =========
See notes to financial statements.
F-40
81
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
ON REGISTRANT -- (Continued)
NOTES TO FINANCIAL STATEMENTS (Parent Company Separately)
(A) The notes to the consolidated financial statements of American Standard
Companies Inc. (the "Parent Company"), are an integral part of these
condensed financial statements.
(B) The Parent Company was organized in 1988 to acquire American Standard Inc.
(the "Acquisition"). American Standard Inc.'s common stock is owned solely
by the Parent Company. The Parent Company has no other investments or
operations.
(C) In the first quarter of 1997, the Parent Company completed a secondary
offering of 12,429,548 shares of its common stock owned by Kelso ASI
Partners, L.P., ("ASI Partners") and the Parent Company's largest
shareholder as of December 31, 1996. In conjunction with the secondary
offering, the Parent Company purchased 4,628,755 shares of its common
stock from ASI Partners for $208 million, plus fees and expenses. In
addition, in October 1997 the company 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. Both of these
purchases were funded with borrowings by American Standard Inc. under
American Standard Inc.'s 1997 Credit Agreement which were loaned to the
Parent Company under a non-interest-bearing intercompany demand note.
(D) In 1998, the Parent Company's Board of Directors approved the purchase of
up to $300 million of the Parent Company's common stock, not to exceed
$100 million per year, during the three-year period ending July 2001.
During 1998 the Parent Company purchased 2.7 million shares of its common
stock for $83.7 million, 2.5 million of which shares were purchased for
$75 million pursuant to this plan. These purchases were funded with
borrowings by American Standard Inc.'s 1997 Credit Agreement which were
loaned to the Parent Company under a non-interest-bearing intercompany
demand note.
F-41
82
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
Description Foreign
Balance Additions Currency Balance
Beginning Charged to Other Translation End of
of Period Income Deductions Changes Effects Period
1998:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $ 30,226 $ 15,236 $ (8,289)(A) $ (1,274) $ (908) $ 34,991
========================================================================================================
Reserve for post-retirement
benefits $437,651 $ 60,219 $(44,514)(B) $ 3,191(C) $ 21,391 $477,938
========================================================================================================
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)(D) $(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)(E) $(18,735) $473,229
========================================================================================================
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) Primarily includes reclassification from current liabilities.
(D) Includes reclassifications to current liabilities, offset by effect of
acquisition of new businesses.
(E) Includes $10 million reduction in minimum pension liability.
F-42