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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from            to           

Commission file number: 1-14557

U.S. INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

777 S. Flagler Drive; Suite 1108W
West Palm Beach, FL 33401
(Address of principal executive offices)

(561) 514-3838
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes x No o

As of May 1, 2003 U.S. Industries, Inc. had one class of common stock, of which 74,927,552 shares were outstanding.

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U.S. INDUSTRIES, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

U.S. INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share data)
(unaudited)

The accompanying notes are an integral part of these statements.

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U.S. INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

The accompanying notes are an integral part of these statements.

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U.S. INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

The accompanying notes are an integral part of these statements.

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
(unaudited)

Note 1-Basis of Presentation

U.S. Industries, Inc. (“USI” and, together with its subsidiaries, the “Company”) is a leading international producer of bath and plumbing products. The Company serves residential markets through Jacuzzi, Inc.; Sundance Spas, Inc.; Eljer Plumbingware, Inc. and related subsidiaries (“Jacuzzi”) and commercial/institutional markets through Zurn Industries, Inc. (“Zurn”). The Company also manufactures premium RAINBOW® vacuum cleaner systems through Rexair, Inc. (“Rexair”). Certain amounts in the prior period have been reclassified to reflect the discontinuance of certain operations (see Note 13) and to conform them to the presentation used in the current period in accordance with Statement of Financial Accounting Standards No. 144. In April 2003, the Board of Directors authorized, subject to the approval of the Company’s shareholders, a change in the name of U.S. Industries, Inc. to Jacuzzi Brands, Inc.

The Company operates on a 52- or 53-week fiscal year ending on the Saturday nearest to September 30. Any three or six month data contained in this Report on Form 10-Q reflects the results of operations for the 13-week and 26-week periods ended on the Saturday nearest March 31 of the respective year, but are presented as of March 31 for convenience. The Company’s condensed consolidated interim financial statements as of March 31, 2003 and for the 13-week and 26-week periods ending March 31, 2003 (also referred to as the “Second Quarter of 2003” and “First Half of 2003”, respectively) and March 31, 2002 (also referred to as the “Second Quarter of 2002” and “First Half of 2002”, respectively) are unaudited. However, in the Company’s opinion, these financial statements reflect all normal, recurring adjustments necessary to provide a fair presentation of its financial position, results of operations and cash flows for the periods presented. These interim financial statements are condensed, and thus, do not include all of the information and footnotes required by accounting principles generally accepted in the United States for presentation of a complete set of financial statements.

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of the Company and its financial statements, the condensed interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended September 30, 2002, which are included in its 2002 Annual Report on Form 10-K, filed on December 24, 2002.

Note 2- New Accounting Pronouncements

In November 2002, the EITF reached a consensus on Issue 00-21, Multiple-Deliverable Revenue Arrangements (“EITF 00-21”). EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The consensus mandates how to identify whether goods or services or both which are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are “separate units of accounting.” The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of individual items accounted for separately. The final consensus will be applicable to agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. The Company is assessing, but at this point does not believe the adoption of EITF 00-21 will have a material impact on its financial position or results of operations.

In January 2003, the FASB issued Interpretation Number 46, Consolidation of Variable Interest Entities (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of “variable interests” and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company is assessing, but at this point does not believe the adoption of FIN 46 will have a material impact on its financial position or results of operations.

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 3-Inventories

Inventories consist of the following:

Note 4-Goodwill and Other Intangible Assets

As of March 31, 2003, the Company had net goodwill of $229.4 million in the Bath & Plumbing segment, compared to $229.6 million as of September 30, 2002. The decrease in the goodwill balance is primarily due to exchange rate fluctuations. In connection with the Company’s decision to dispose of its swimming pool, pool equipment, hearth and water systems businesses, which were included in the Bath & Plumbing segment (see Note 13), the Company performed an interim impairment test for the remaining goodwill within the reporting unit. The fair value of the remaining portion of the reporting unit exceeded the adjusted carrying value.

Identifiable intangible assets, which are included in the Rexair segment, are comprised of:

Amortizable intangible assets consist of patented technology, which is being amortized over its 10-year useful life. Non-amortizable intangible assets include a trade name and distributor network.

Note 5-Long-Term Debt

Long-term debt consists of the following:

Current maturities of long term debt include the estimated amount of net proceeds from the anticipated sales of the pool, pool equipment, hearth and water systems businesses which will be allocated to pay down debt.

At March 31, 2003, there was $403.2 million committed under the Company’s Restructured Facilities, of which $315.1 million was utilized and the balance of $88.1 million was available. Amounts utilized include $15.3 million of letters of credit outstanding at that date. Approximately $325.6 million of the commitment was for the USI Facility (excluding Rexair), of which approximately $251.8 million had been utilized (including letters of credit outstanding of $14.6 million) and the balance of $73.8 million was available. The Rexair Credit Facility had $77.6 million committed, of which $63.3 million had been utilized (including letters of credit outstanding of $0.7 million) and $14.3 million available for borrowing solely by Rexair. The Company also had letters of credit outstanding with other financial institutions totaling $30.9 million as of March 31, 2003. Approximately $15.1 million has been deposited in escrow for the benefit of the letters of credit holders.

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 5-Long-Term Debt (continued)

The 11.25% Senior Notes were issued in the first quarter of 2003 as the result of an offer to exchange cash and notes with an interest rate of 11.25% payable December 31, 2005 for all outstanding 7.125% Notes due October 2003. In connection with the Exchange Offer, the Company also received consents from a majority of the 7.125% Note holders to amend the indenture to allow the cash deposited into the related cash collateral account to be used to pay the cash consideration in the Exchange Offer. Approximately $238.2 million or 95% of the 7.125% Notes were tendered and accepted for exchange. All Note holders who tendered their 7.125% Notes received an amount of cash and principal amount of New Notes that together equaled the principal amount of the 7.125% Notes tendered. The transaction resulted in $104.8 million paid to the Note holders from the 7.125% Notes escrow account, New Notes issued of $133.4 million and a gross balance remaining of 7.125% Notes amounting to $11.8 million. All other terms of the New Notes are substantially similar to those of the 7.125% Notes. A consent payment of $15 per $1,000 principal amount of the New Notes issued was paid out of the Company’s general working capital to all holders who delivered their consents, resulting in an additional payment to tendering note holders of approximately $2.0 million. These costs were capitalized and will be amortized over the term of the New Notes.

On October 24, 2002, the Company commenced an offer to purchase up to $54.8 million in aggregate principal amount of its outstanding 7.25% Notes due December 1, 2006. In the first quarter of 2003, an amount just shy of 100% of the 7.25% Notes were tendered and accepted for exchange. The transaction resulted in $54.8 million paid to the Note holders from the 7.25% Notes escrow account.

During the first quarter of 2003, the Company received funds of $16.6 million related primarily to the sale of excess real estate and an income tax refund. These funds were applied to reduce the Company’s funded and unfunded senior debt, including $4.0 million deposited into escrow accounts for the benefit of the holders of the Company’s Senior Notes and certain other creditors. In January 2003, the Company received funds totaling $48.3 million related primarily to a federal income tax refund, and in February 2003, the Company received $8.6 million upon granting a license to a non-related party for certain technology which had been the subject of patent litigation. These funds were also applied to reduce the Company’s funded and unfunded senior debt, including $20.4 million deposited into escrow accounts for the benefit of the holders of the Company’s Senior Notes and certain other creditors. The entire $8.6 million received upon the granting of the technology license was recognized as income in the second quarter of 2003 and was included in net sales in the Company’s Condensed Consolidated Statements of Operations.

In October 2002, the Restructured Facilities were amended, extending the maturity of the facilities to October 4, 2004. In conjunction with this amendment, the Company paid $6.9 million in fees. For more detailed information on these facilities (the “Restructured Facilities” or “Restructured Debt Facility”), refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2002. The Restructured Facilities require cumulative permanent reductions of the Company’s senior debt over the term of the facilities. In addition, the Senior Notes and Restructured Facilities contain various financial covenants as well as cross-default and cross-acceleration provisions.

On October 18, 2002, the Company completed the sale of SiTeco Lighting to funds advised by JPMorgan Partners, the private equity arm of JPMorgan Chase & Company. Net proceeds of approximately $103.8 million were applied to reduce the Company’s funded and unfunded senior debt, including $34.0 million deposited into escrow accounts for the benefit of the holders of the Company’s Senior Notes and certain other creditors.

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 6-Commitments and Contingencies

Warranties

The Company records a reserve for future warranty costs based on current unit sales, historical experience and management’s judgment regarding anticipated rates of warranty claims and cost per claim. The adequacy of the recorded warranty liabilities is assessed each quarter and adjustments are made as necessary. The specific terms and conditions of the warranties vary depending on the products sold and the countries in which the Company does business. Changes in the warranty liability during the period are as follows:

Guarantees & Indemnifications

The Company continues to guarantee the lease payments of an Ames True Temper master distribution center. The lease obligation will expire in 2015. The lease payments totaled $3.6 million for fiscal 2002, and increase by 2.25% each year thereafter. In connection with the sale of Ames True Temper in January 2002, the Company obtained a security interest and indemnification from Ames True Temper on the lease that would enable it to exercise remedies in the event of default.

The Company has sold a number of assets and operating entities over the last several years and has, on occasion, provided indemnifications for liabilities relating to product liability, environmental and other claims. The Company has recorded reserves totaling approximately $12.0 million as of March 31, 2003 for asserted and potential unasserted claims related to these liabilities.

Governmental Regulation

The Company’s operating units are subject to numerous foreign, federal, state and local laws and regulations concerning such matters as zoning, health and safety and protection of the environment. If the Company’s operating units violate or fail to completely comply with those laws and regulations, the Company could be fined or otherwise sanctioned by regulators.

Litigation

A number of present and former operating sites, or portions thereof, currently or previously owned and/or leased by current or former operating units of the Company have remedial and investigatory activities underway. In addition, the Company has been named as a Potentially Responsible Party (“PRP”) at a number of “superfund” sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable statutes. The Company accrues an amount for each case when the likelihood of an unfavorable outcome is probable and the amount of loss associated with such unfavorable outcome is reasonably estimable. As of March 31, 2003, the Company had accrued $10.2 million ($0.6 million accrued as current liabilities; $9.6 million as non-current liabilities), including $5.0 million for discontinued operations, for those environmental liabilities. The Company believes that the liability for such matters could reach $14.9 million if it included cases where the likelihood of an unfavorable outcome is only reasonably possible. For more detailed information regarding management’s assessment of this potential liability, refer to the Company’s Annual Report on Form 10-K for the year ended September 30, 2002.

In June 1998, the Company acquired Zurn Industries, Inc., which itself owned various subsidiaries (“Zurn”). Zurn is a wholly-owned subsidiary of the Company. Zurn, along with many other companies, is a co-defendant in numerous asbestos related lawsuits pending in the United States. Plaintiffs’ claims primarily allege personal injuries allegedly caused by exposure to asbestos used primarily in industrial boilers. Zurn did not manufacture asbestos or asbestos components but purchased it from other suppliers. As of March 31, 2003, the number of asbestos claims pending against Zurn was approximately 51,000.

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 6-Commitments and Contingencies (continued)

Since Zurn received its first asbestos claim in the 1980’s, Zurn has settled, agreed to settle or otherwise disposed of approximately 96,000 asbestos claims. Zurn’s insurers have paid or have agreed to pay all settlement costs relating to these claims. Defense costs are currently being paid by Zurn’s insurers without eroding the coverage amounts of its insurance policies.

Zurn estimates that its potential liability for asbestos claims pending against it and for claims estimated to be filed through 2012 is approximately $145 million. This estimate is based on its view of the current and anticipated number of future asbestos claims, the timing and amounts of asbestos payments, the status of ongoing litigation and the potential impact of defense strategies and settlement initiatives. However, there are inherent uncertainties involved in estimating both the number of future asbestos claims as well as future settlement costs, and the actual liability could exceed Zurn’s estimate due to changes in facts and circumstances after the date of the estimate. Zurn’s present estimate of its asbestos liability is predicated on the assumption that its recent vigorous defense strategy will enable it to reduce both its claim frequency and claim severity in the future. While Zurn believes there is evidence, in recent claims settlements, for such an impact of a successful defense strategy, if the defense strategy ultimately is not successful, to the extent assumed by Zurn, the severity and frequency of asbestos claims could increase substantially above Zurn’s estimates. Further, while there is presently no reasonable basis for estimating Zurn’s asbestos liability beyond 2012, such liability may continue beyond 2012, and such liability could be substantial.

Zurn’s analysis of its available insurance to cover its potential asbestos liability is approximately $335 million. This total includes the remaining limits of $68 million in insurance coverage under certain excess policies which were a subject of a settlement of an action commenced by Zurn in the United States District Court of the Western District of Pennsylvania which sought, among other things, a declaration that the insurance coverage limits of certain excess policies provide $68 million in coverage. As part of the settlement, Zurn agreed to pay its insurer $5 million over four years. The first payment in the sum of $1.25 million was paid in March 2003.

Zurn believes, based on its experience in defending and dismissing such claims and the amount of insurance coverage available, that it has sufficient insurance to cover the pending and reasonably estimable future claims. This conclusion was reached after considering Zurn’s experience in asbestos litigation, the insurance payments made to date by Zurn’s insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies. After review of the foregoing with Zurn and its consultants, the Company believes that the resolution of Zurn’s pending and reasonably estimable asbestos claims will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Certain of the Company’s subsidiaries are defendants or plaintiffs in lawsuits that have arisen in the normal course of business. While certain of these matters involve substantial amounts, it is management’s opinion, based on the advice of counsel, that the ultimate resolution of such litigation will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Note 7-Comprehensive Income

The components of comprehensive income are as follows:

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 8 — Earnings Per Share

The Company’s basic and diluted weighted average number of common shares outstanding was 74.5 million and 73.6 million for the second quarter of 2003 and 2002, respectively. For the first half of 2003 and 2002, the Company’s weighted average number of common shares outstanding was 74.5 million and 73.5 million. The following shares were excluded from the Company’s computations of diluted earnings per share because they had an anti dilutive effect (in millions):

Note 9 — Employee Stock Options

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for its stock-based compensation plans. Thus, the Company uses the intrinsic value method to determine the compensation cost for its stock-based awards. The compensation cost that has been charged against income for Stock Plans was $0.5 million and $0.4 million for the second quarters of 2003 and 2002, respectively, and $0.6 million and $0.9 million for the first half of 2003 and 2002, respectively. No other compensation costs have been recognized under the Company’s stock-based compensation plans. Had compensation cost for awards under its stock-based compensation plans been determined using the fair value method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net (loss) income and (loss) income per share would have been reduced to the pro forma amounts presented below:

The fair value of each stock option granted is established on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants in the first half of 2003 and 2002.

	•		expected volatility rates of 63% for 2003 and 58% for 2002
	•		risk-free interest rates of 2.80% for 2003 and 4.85% for 2002
	•		expected option lives of 4 years for both years
	•		expected dividend yield of 0% for both years

Note 10-Income Taxes

During the first quarter 2003, the IRS completed its examination of the federal income tax returns for fiscal 1995 through 1997. As a result of the audit settlement, a tax benefit of $13.6 million was recorded. A substantial portion of the proposed adjustments derived from the spin-off of the Company from Hanson PLC in 1995. In the second quarter of 2003, the Company provided for taxes at a 39% effective rate on income from continuing operations and expects to use this rate through the remainder of fiscal 2003. During the first half of 2002, no income tax benefit was recorded for the loss from continuing operations because of the uncertainty of its ultimate realization.

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 11 — Segment Data

The Company currently operates in two reportable business segments — Bath & Plumbing and Rexair. Prior period segment results have been restated to reflect the discontinuance of the swimming pools, pool equipment, hearth and water systems businesses. The following is a summary of the significant accounts and balances by segment, reconciled to the consolidated totals.

The Company has experienced seasonality in its Bath & Plumbing segment. Sales are affected when weather affects outside construction and installation. Sales of outdoor spas and other products are also sensitive to weather conditions and tend to experience a decrease in sales during the fall and winter months (predominantly the first and second fiscal quarters).

Note 12 — Restructuring Reserves

In March 2003, the Company recorded $3.1 million in severance charges related to management changes at its corporate office. The charges consisted of $2.8 million in cash related charges and $0.3 million in non-cash related charges primarily associated with the accelerated vesting of restricted stock. Approximately $1.3 million of the cash charges were paid in the second quarter of 2003, while substantially all of the remaining balance will be paid in the third quarter of 2003. As of March 31, 2003, the Company has remaining accruals of $9.8 million for restructuring costs. The activity in the restructuring liability accounts by cost category is as follows:

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U.S. INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular amounts in millions)
(unaudited)

Note 12 — Restructuring Reserves (continued)

Approximately $3.3 million of the reserves are included in the balance sheet caption “Accrued expenses and other current liabilities,” while the remaining $6.5 million are recorded in the balance sheet caption “Other liabilities.” The Company expects the remaining accruals to be paid with cash over the periods provided by the severance and lease agreements of two and five years, respectively.

Note 13 — Discontinued Operations

In March 2003, the Board of Directors approved the disposal of the Company’s swimming pool, pool equipment, hearth and water systems businesses. The disposals are expected to occur within the next twelve months. In connection with the disposal plans the Company recorded a charge of $39.9 million, which represents the difference between the historical net carrying value and the estimated net realizable value of the net assets of these businesses less costs to sell. The assets and liabilities of the discontinued businesses are included in assets held for sale and liabilities associated with assets held for sale, respectively.

These operations were previously included in the Company’s Bath & Plumbing segment. The operating results of these businesses are included in income (loss) from discontinued operations for all periods presented, in accordance with Statement of Financial Accounting Standards No. 144. Summarized results of these businesses are as follows: