================================================================================
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, 2001
[ ] Transition Report to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
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 Identification No.)
incorporation or organization)
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 February 28,
2002 was approximately $4.6 billion based on the closing sale price of the
common stock on the New York Stock Exchange on that date.
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of the close of business on February 28, 2002: Common Stock, $.01 par
value, 72,085,254 Shares.
Documents incorporated by reference: Part of the Form 10-K into
Document (Portions only) which document is incorporated.
------------------------ -------------------------------
Definitive Proxy Statement used in connection
with the Annual Meeting of Shareholders to
be held on May 2, 2002 Part III
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 4A. Executive Officers of the Registrant 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 31
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 61
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners
and Management 62
Item 13. Certain Relationships and Related Transactions 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 63
Signatures 69
PART I
ITEM 1. BUSINESS
American Standard Companies Inc. is a global, diversified manufacturer
of high quality, brand-name products in three major product groups: air
conditioning systems and services (63% of 2001 sales); bathroom and kitchen
fixtures and fittings (24% of 2001 sales); and vehicle control systems for heavy
and medium-sized trucks, buses, trailers, luxury cars and sport utility vehicles
(13% of 2001 sales). American Standard is one of the largest providers of
products and services in each of its three major business segments. 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), JADO(R), ARMITAGE SHANKS(R), DOLOMITE(R), MELOH(R), VENLO(R) and
BORMA(R) for plumbing products, and WABCO(R) for vehicle control systems.
American Standard Companies Inc. (the "Company") is a Delaware
corporation formed in 1988 to acquire all the outstanding common stock of
American Standard Inc., a Delaware corporation ("American Standard Inc.")
incorporated in 1929. In 1999 the Company completed an internal reorganization
in which American Standard Inc. transferred ownership of essentially all its
non-U.S. subsidiaries and their intellectual property rights to another
wholly-owned subsidiary of the Company, American Standard International Inc., a
Delaware corporation ("ASII"). "American Standard" or "the Company" refers to
the Company, or to the Company and American Standard Inc. or ASII, including
their subsidiaries, as the context requires.
American Standard has adopted performance initiatives focused on three
areas:
o Sales growth, including:
- Expanding marketing efforts,
- Building brand awareness and differentiation,
- Introducing new products and services,
- Geographic expansion.
o Margin improvement through:
- Materials Management programs,
- Six Sigma and other productivity enhancing actions.
o Financial initiatives, including:
- Tax rate reduction,
- Debt reduction,
- Improved asset utilization and return on capital.
Actions that the Company is taking in support of these initiatives are
discussed below.
OVERVIEW OF BUSINESS SEGMENTS
American Standard has three business segments: Air Conditioning Systems
and Services, Plumbing Products and Vehicle Control Systems.
AIR CONDITIONING SYSTEMS AND SERVICES. American Standard is a leading
U.S. designer and producer of air conditioning systems and equipment for both
domestic and export sales. It also provides control systems, aftermarket service
and parts for its products, and performance contracting for the installation and
maintenance of heating, ventilation and air conditioning systems. American
Standard also manufactures air conditioning systems outside the U.S. Air
Conditioning Systems and Services ("Trane") products are sold primarily under
the TRANE(R) and AMERICAN STANDARD(R) names. Sales to the commercial and
residential markets accounted for approximately 80% and 20%, respectively, of
Trane's total sales in 2001. Approximately 64% of Trane's sales in
1
2001 were in the replacement, renovation and repair markets. Trane derived 76%
of its 2001 sales in the U.S. and 24% outside. Management believes Trane is well
positioned for growth because of its high quality, high efficiency brand-name
products; significant existing market shares; the introduction of new products,
services and 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, especially in Latin America and the Asia-Pacific area. In
addition, the Company has entered an important strategic alliance with Daikin,
the leading Japanese air conditioning manufacturer, to sell each other's highly
complementary product lines.
PLUMBING PRODUCTS. American Standard is a leading producer of bathroom
and kitchen fixtures and fittings in Europe, the U.S. and several countries in
Latin America and Asia. Its products are marketed through retail and wholesale
sales channels for residential and commercial markets. Plumbing Products
manufactures and distributes its products under the AMERICAN STANDARD(R), IDEAL
STANDARD(R), STANDARD(R) and PORCHER(R), JADO(R), ARMITAGE SHANKS(R),
DOLOMITE(R), MELOH(R), VENLO(R) and BORMA(R) names. Of Plumbing Products' 2001
sales, 64% was derived from operations outside the U.S. Management believes
Plumbing Products is well positioned for growth because of its strong brands,
significant existing market shares in a number of countries, new products and
designs, and low-cost manufacturing capability.
VEHICLE CONTROL SYSTEMS. Vehicle Control Systems ("WABCO") is a leading
manufacturer of braking and control systems for the worldwide commercial vehicle
industry. Its largest-selling products are braking control systems and related
electronic and other control systems, including antilock and electronic braking
systems ("ABS" and "EBS", respectively), automated transmission controls and
suspension control systems, marketed under the WABCO(R) name for heavy and
medium-size trucks, buses, and trailers. WABCO also sells suspension control
systems to manufacturers of luxury cars and sport utility vehicles. WABCO
supplies vehicle manufacturers such as DaimlerChrysler (Mercedes and
Freightliner), Volvo, Iveco (Fiat), Scania, RVI (Renault), PACCAR, Hino, Nissan,
Rover and GMC. Management believes that WABCO benefits from its strong market
positions in Europe, North America and Brazil and its growing position in Asia.
Management also believes WABCO's products are well positioned because of
increasing demand for ABS and EBS; sophisticated electronic control systems for
automated transmissions; air suspension systems and stability control systems;
and automatic climate control and door control systems. WABCO has a strong
reputation for technological innovation and is a leading systems development
partner with several major vehicle manufacturers.
COMPANY GOALS
The Company has three major performance goals designed to enhance
shareholder value. The initiatives described above, coupled with the Company's
demonstrated ability to achieve and sustain strong market positions, produce
high quality products, employ efficient business processes and capitalize on its
low-cost manufacturing capability, are the principal elements in achieving these
goals.
o Deliver premier customer service,
o Drive operational excellence, and
o Meet financial objectives.
PREMIER CUSTOMER SERVICE
American Standard plans to accomplish its goal of delivering premier
customer service by identifying and meeting customer needs with:
o Superior products, services and solutions,
o Industry-leading order-to-delivery cycle times,
o A global presence to serve global customers,
o Technological leadership and product innovation to meet
changing customer needs, and
o An efficient and flexible distribution system.
2
OPERATIONAL EXCELLENCE
Operational performance will be enhanced through the use of Six Sigma
techniques, Demand Flow Technology and Materials Management to:
o Improve design processes,
o Improve manufacturing processes,
o Reduce unit costs,
resulting in:
o Increased productive capacity,
o Improved quality, and
o Improved speed to market.
SIX SIGMA
Six Sigma is a structured approach to significantly improve
work processes. Applications range, for example, from improving yields
on the first pass of products through the manufacturing process in a
vitreous chinaware plant to eliminating non-value-added steps in
administrative processes. Statistical and qualitative tools are used to
diagnose performance deficiencies, identify and measure improvement
opportunities and implement improved work methods to sustain
performance gains.
Management introduced Six Sigma initiatives across the Company
in 2000, with the objective of improving both manufacturing and
administrative processes. These objectives complement and leverage the
efficiencies of Demand Flow (described below) and significantly reduce
process defects. Technical experts (called Six Sigma Master Black
Belts, Black Belts and Green Belts) are being developed and deployed
through aggressive training and project deployment programs. By the end
of 2001, the Company had 20 Master Black Belts, 340 Black Belts and 995
Green Belts that were certified or in training. By the end of 2002 the
Company expects that approximately 480 Master Black Belts and Black
Belts, and 1,800 Green Belts will have been certified or will be in
training. Benefits have been realized with respect to improved process
cycle times and increased productivity resulting in improved customer
service. In 2001 the Company realized approximately $35 million in
benefits and expects to realize incremental savings in 2002.
DEMAND FLOW(R)TECHNOLOGY*
American Standard has applied Demand Flow to its businesses.
With Demand Flow principles, augmented by Six Sigma 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.
---------------------
* Demand Flow is a registered trademark of J-I-T Institute of
Technology, Inc.
3
MATERIALS MANAGEMENT
The Materials Management initiative is centered on leveraging
the collective buying power of our multiple business units on a global
basis to improve purchasing efficiency, reduce the number of vendors
and improve supplier logistics. Materials Management also involves
working with vendors to develop effective components with lower part
counts and easier assembly, resulting in reduced costs and improved
quality. With material costs exceeding 50% of the cost of sales,
management believes that improvements realized through Materials
Management could result in substantial savings.
In 2000 and 2001, the Materials Management initiative focused
on hiring experienced people, establishing processes and training.
Management adopted challenging goals for continuous performance
improvement. Benefits from this program were modest in 2000 but grew
significantly in 2001 with realized benefits of approximately $60
million. The Company expects increased savings in 2002.
FINANCIAL OBJECTIVES
The Company sets annual financial performance objectives for sales
growth, operating margin improvements, earnings per share growth and cash flow
generation. The programs discussed above associated with achieving premier
customer service and driving operational excellence are key to achieving these
objectives. In addition, the Company has established programs to:
o Reduce the effective tax rate through the use of various tax
planning alternatives,
o Reduce debt and interest expense, and
o Improve asset utilization and return on capital.
LINKAGE OF GOALS WITH INCENTIVE COMPENSATION PLANS
Management has adopted incentive compensation plans that are directly
linked to achievement of the Company-wide goals described above. Management
believes the attainment of these goals will result in improved financial
performance and enhanced shareholder value.
AIR CONDITIONING SYSTEMS AND SERVICES SEGMENT
Air Conditioning Systems and Services became an American Standard
business with the 1984 acquisition of the Trane Company, a manufacturer and
distributor of air conditioning systems since 1913. Air conditioning systems are
sold primarily under the TRANE(R) and AMERICAN STANDARD(R) names. In 2001 Trane,
with revenues of $4,692 million, accounted for 63% of Company sales and 65% of
its segment income. Trane derived 24% of its 2001 sales from outside the U.S.
Approximately 64% of Trane's sales in 2001 were in the replacement, renovation
and repair markets.
Trane manufactures two 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 in a ducted system. 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 largest global manufacturers of both unitary and applied air conditioning
systems.
Trane competes in all of its markets on the basis of service to
customers, product quality and reliability, technological leadership and
price/value.
Product and marketing programs have been, and are being, developed to
increase penetration in the growing replacement, repair, and servicing
businesses. Much of the equipment sold in the fast-growing air conditioning
markets of the 1960's and 1970's has been reaching the end of its useful life.
Also, equipment sold in the 1980's is
4
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 new refrigerants which meet current and future
environmental standards.
Many of the air conditioning systems manufactured by Trane utilize
HCFCs and in the past utilized CFCs as refrigerants. Various domestic and
international laws and regulations, principally the 1990 Clean Air Act
Amendments and the Montreal Protocol, require the eventual phase-out of the
production and use of these refrigerants because of their possible deleterious
effect on the earth's ozone layer if released into the atmosphere. Phase-in of
substitute refrigerants necessitates replacement or modification of much of the
air conditioning equipment already installed, which management believes created
a significant, on-going market opportunity. In order to ensure that Trane
products will be compatible with the substitute refrigerants, Trane has been
working closely with the manufacturers that are developing substitute
refrigerants. Trane has also been active in supporting industry-wide efforts to
transition to these new fluids in an orderly and sensible fashion while
balancing key environmental issues such as ozone depletion on one hand and
global warming (greenhouse gas effects) on the other. 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 Trane's unitary Air Conditioning Systems and Services. Although
Trane has been able to meet or exceed such standards to date, stricter standards
in the future will require additional research and development expense and
capital expenditures to both maintain compliance and continue to offer customers
choices.
The Company, Heatcraft Technologies Inc. (a subsidiary of Lennox
International Inc.) and Copesub, Inc., (a subsidiary of Emerson Electric Co.)
are partners in Alliance Compressors ("Alliance"), a joint venture that
manufactures compressors for use in air conditioning and refrigeration
equipment. The Company and Heatcraft Technologies Inc. each own a 24.5%
partnership interest and Copesub, Inc. owns the balance. Alliance develops,
manufactures, markets and sells, primarily to Trane and Lennox, scroll
compressors utilized mainly in residential central air conditioning
applications. Alliance operates principally from a facility in Natchitoches,
Louisiana.
In November 2001 the Company entered a comprehensive global strategic
alliance with Daikin, a leading Japanese air conditioning manufacturer, to sell
each other's highly complementary product lines. Through the alliance, the
Company and Daikin will be able to provide their customers a complete line of
heating, ventilation and air conditioning products, services and solutions for
industrial, commercial and residential markets. Daikin has strong global market
positions in ductless residential and commercial air conditioners as well as
small chillers, which complement Trane's product lines. In 2002 a cross-sourcing
arrangement will be started in Europe and in the longer term a series of other
agreements will be developed for North and South America, the Asia Pacific
region, the Middle East, Africa, India and China. In Japan, a cooperative
relationship in the applied market is also planned.
In 2000, Air Conditioning Systems and Services sold its Calorex water
heater business for $68 million. Calorex was a non-core business that generated
approximately $40 million in annual sales.
At December 31, 2001, Trane had 29 manufacturing plants in 9 countries,
employing approximately 25,300 people.
In describing segment results, since 2000 the Company has classified
its air conditioning operations as "Commercial" (commercial applied equipment
and services and commercial unitary equipment and services) and "Residential"
(residential unitary equipment and services). The Company believes this grouping
is the most meaningful because commercial applied and commercial unitary
products are closely related in terms of markets, customers and distribution
channels, whereas the residential market and distribution channel are distinctly
different. Previously, the Company classified air conditioning operations as
Applied or Unitary in describing its segment results.
5
COMMERCIAL SYSTEMS AND SERVICES
Commercial Systems and Services ("Commercial Systems"), which accounted
for 80% of Air Conditioning Systems and Services' 2001 sales, manufactures and
distributes applied and commercial unitary air conditioning systems and parts
throughout the world and provides related services. These products are for air
conditioning applications in commercial, industrial and institutional buildings.
Approximately 70% of Commercial Systems sales are in the U.S. and 30% in
international markets. Other major suppliers of commercial systems are Carrier,
York, Daikin and McQuay.
In the U.S. and Canada, Commercial Systems markets its products, parts
and services through 86 District offices, 48 of which are company-owned and 38
of which are franchised. Commercial Systems is continuing the process of
acquiring certain commercial sales and service offices, having acquired two
offices in 2001, one in 2000, five in 1999, six in 1998, seven in 1997 and three
in 1996. In addition, some commercial unitary products are sold through
independent wholesale distributors and dealer sales offices. Outside the U.S.,
Commercial Systems also has an extensive network of sales and service agencies,
both company-owned and franchised, to sell products and provide maintenance and
service.
Commercial Systems emphasizes becoming the total solution for its
customers' needs, providing equipment, controls, service, parts and performance
contracting. During the last four years, Commercial Systems continued to
introduce new applied products, broadening its line of high-efficiency
centrifugal chillers, introducing new water cooled series R chillers, expanding
the air cooled series R chiller line and introducing a new absorption chiller, a
new water source heat pump and a new line of low pressure air handlers. Sales of
systems that automatically control a building's performance, including energy
consumption and 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 has emerged as a significant application to be served by the
Company's products and services. Systems capabilities, coupled with equipment,
service and parts have allowed Trane to be active in the performance contracting
business as a comfort systems solution provider. One of the ways Trane provides
complete solutions to customers heating, ventilation and air conditioning needs
is through its EarthWise(TM) custom-engineered systems. An EarthWise(TM)
solution combines optimal design of the equipment, systems, software controls
and long-term management. An EarthWise(TM) system addresses the customer's needs
in providing safe, efficient heating and cooling at the lowest possible cost,
both for the initial system and over its lifetime. New industry-wide guidelines
covering chiller efficiency were instituted in October 2001. Management believes
that Trane's superior chiller efficiency will provide a competitive opportunity
as these guidelines are adopted by all 50 states over the next two or three
years.
During the past five years Commercial Systems also successfully
introduced several new commercial unitary products including: 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. Early in 2001, Commercial Systems introduced
a new commercial unitary product named Precedent(TM) with capacities from 2 to
10 tons. Precedent provides improved indoor air quality and higher efficiency,
is easier to configure, easier to install and less expensive to manufacture,
having 20% fewer parts and being 30% smaller than the products it replaces.
RESIDENTIAL SYSTEMS AND SERVICES
Residential Systems and Services ("Residential Systems"), which
accounted for 20% of Air Conditioning Systems and Services' 2001 sales,
manufactures and distributes products and provides related services for
residential applications, primarily in North America. This group benefits
significantly from the growth of the replacement market for residential unitary
air conditioning systems in North America. Other major suppliers in the
residential market are Carrier, York, Rheem, Lennox and Goodman Industries.
Residential unitary products range from 1 to 5 tons and include air
conditioners, heat pumps, air handlers, furnaces, coils and related controls and
accessories. These products are sold through independent wholesale distributors
and Company-owned sales offices with over 340 stocking locations to dealers and
contractors who sell
6
and install the equipment. Residential Systems is also well positioned in the
retail sales channel through arrangements with Home Depot, a major home
improvement center, and Sears, a major merchandiser, through which certain
residential central heating and air conditioning systems are marketed.
Since 1998, Residential Systems 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; and an ultra-high efficiency gas furnace
with variable speed airflow and gas combustion components. In the fourth quarter
of 2001, Residential Systems launched a major new residential split system
cooling and heat pump product that will compete in a market covering about 50%
of the total residential air conditioning market in North America. This new
product line, with capacities of one to five tons, has a very consumer-oriented
design and is of higher quality and efficiency. It is also easier to install,
safer to operate, utilizes environmentally preferable refrigerants and is lower
cost to manufacture, requiring 60% fewer parts than the products it replaces.
INTERNATIONAL OPERATIONS
Trane has a significant presence outside North America. In the
Asia-Pacific region Trane has a manufacturing joint venture in China, operations
in Malaysia and 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.
e-BUSINESS
In 1999 Trane launched a segment-wide e-business initiative aimed at
providing contractors, engineers, national accounts and other key customers
access to Trane product and systems data necessary for them to select, purchase
and service Trane products. This "extranet" initiative, called the Trane
ComfortSite(TM), allows dealers, distributors, contractors and global and
national account customers to access all pertinent information on residential
and light commercial products and service parts so that they will be able to
select, check availability, price, purchase and track delivery of these goods
on-line, 24 hours a day, 7 days a week.
SERVICE PARTS INITIATIVES
Trane recognizes the value of providing a convenient and reliable
source of repair parts to service all products and systems it manufactures. In
support of current and future Trane customers, a significant investment is being
made to expand the number of locations and provide easy access to parts needed
to maintain and repair all products that Trane manufactures and sells on a
worldwide basis. In addition, Trane offers annual service agreements and
long-term partnership arrangements to customers.
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), PORCHER(R), JADO(R), ARMITAGE SHANKS(R), DOLOMITE(R),
MELOH(R), VENLO(R) and BORMA(R) names. In 2001, Plumbing Products, with revenues
of $1,813 million, accounted for 24% of the Company's sales and 19% of its
segment income. Plumbing Products derived 64% of its total 2001 sales from
operations outside the U.S.
Plumbing Products' sales were 54% from chinaware fixtures, 28% from
fittings (typically brass) and 8% from 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 the U.S., a significant and growing number of products are sold
through home improvement centers. In total the residential market accounts for
approximately 75% of Plumbing Products' sales, with the commercial and
industrial markets providing the remainder.
7
Plumbing Products operates through three primary geographic groups:
Europe, Americas and Asia.
The Company sells products in Europe primarily under the brand names
IDEAL STANDARD(R), JADO(R), ARMITAGE SHANKS(R), DOLOMITE(R), PORCHER(R),
MELOH(R), VENLO(R) and BORMA(R). It manufactures and distributes bathroom and
kitchen fixtures and fittings through subsidiaries or joint ventures in Germany,
Italy, France, the U.K., Greece, the Czech Republic, Bulgaria and Egypt and
distributes products in other European countries.
Plumbing Products' Americas Group manufactures bathroom and kitchen
fixtures and fittings selling under the brand names AMERICAN STANDARD(R),
STANDARD(R), PORCHER(R) and JADO(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.
In Asia the Company 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 operates in China through a majority-owned joint venture which has
ownership interests in six joint ventures and one wholly-owned subsidiary. See
"Globalization".
The Company's plumbing products are sold in 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 Asia, where there is more growth in new
construction. 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 evidenced strong growth in the mid and late 1990's and
through the first half of 2000 before declining in the second half. Although the
new construction market did not grow in 2001, it remained at a high level. 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 principal market for higher-margin luxury
products. Through expansion of manufacturing in low-cost locations, Plumbing
Products has become more competitive, enabling it to increase sales of products
in the lower and middle segments of both the remodeling and new construction
markets.
In the U.S., Plumbing Products are marketed through both the wholesale
and retail channels. The growing retail home center industry market channel has
become a significant part of U.S. sales and is expected to continue to grow in
the future, despite the economic slowdown.
Plumbing Products is also continuing 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 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 designed by 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. Plumbing Products recently introduced a faucet
(ClearTap(TM)) with an under-the-counter filtering system which delivers clear,
safe water directly from the tap.
Many of the Company's bathtubs sold in the U.S. are made from a
proprietary porcelain on metal composite, AMERICAST(R). Products made with
AMERICAST(R) have the durability of cast iron with only one-half the weight and
are characterized by greater resistance to breaking and chipping. AMERICAST(R)
products are easier
8
to ship, handle and install and are less expensive to produce than cast iron
products. Use of this advanced composite has been extended to kitchen sinks,
bathroom lavatories and acrylic surfaced products.
As of December 31, 2001, Plumbing Products employed approximately
28,000 people and, including affiliated companies, had 66 manufacturing plants
in 25 countries and sells products in more than 40 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 Asia, 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.
VEHICLE CONTROL SYSTEMS SEGMENT
Operating under the WABCO(R) name, Vehicle Control Systems designs,
manufactures and sells brake and control systems primarily for the worldwide
commercial vehicle industry. WABCO's largest selling products are pneumatic
braking control systems and related electronic controls ("ABS" and "EBS") and
conventional components for tractors, buses, trailers and sport utility
vehicles. In 2001 WABCO, with sales of $960 million, accounted for 13% of the
Company's sales and 16% of its total segment income. The Company believes that
WABCO is the worldwide technology leader for braking, suspension and
transmission controls for commercial vehicles. Electronic controls, first
introduced in ABS in the early 1980's, are increasingly applied in other control
systems sold to the commercial vehicle industry. In 1995 WABCO began supplying
electronic suspension controls to the luxury car market and sport utility
vehicle market.
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
largest customers are DaimlerChrysler (Mercedes and Freightliner), Volvo, Iveco
(Fiat), Scania, RVI (Renault), Paccar, Hino, Nissan and Rover. WABCO's principal
competitor is Knorr/Bremse. WABCO competes primarily on the basis of customer
service, quality and reliability of products, technological leadership and
price.
In North America, WABCO markets ABS and other vehicle control products
through its 50%-owned joint venture with Meritor Automotive Inc. ("Meritor
WABCO"). Meritor WABCO, which supplies the North American truck manufacturing
market, grew significantly from 1997 through 1999, in part because of
regulations mandating antilock braking systems on commercial vehicles. Although
truck production in North America declined significantly in 2000 and 2001,
Meritor WABCO continued to expand its customer base and range of products sold
to major truck manufacturers. WABCO also sells non-brake-related products
directly to manufacturers in North America.
The European market for new trucks, buses, trailers, and replacement
parts decreased 9% in 2001, following an improvement of 5% in 2000. The
Brazilian market decreased 2% after improving sharply in 2000. The North
American market declined significantly in 2000 and 2001, following very
significant increases in 1998 and 1999.
WABCO has developed an advanced electronic braking system, stability
control systems, electronically controlled air suspension systems, automated
transmission controls 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 EBS. In 1998 WABCO entered the passenger car market
with an advanced, electronically controlled air suspension system -"Air Glide"-
now featured by the two leading German luxury car manufacturers. WABCO has
expanded the Air Glide system family to other luxury car and sport utility
vehicle manufacturers in Europe and North America. In 1997 WABCO and a leading
European truck manufacturer introduced electronic controls for automated
transmissions in heavy vehicles as standard equipment. The Company
9
believes that automated transmission control will be increasingly important in
the industry. In 2001 WABCO began production of its automated transmission
system for a new range of heavy-duty trucks being introduced in 2002 in Europe
by a global truck manufacturer. Other new products under development include
further advancements in electronic braking, stability and safety controls, as
well as driveline control and suspension control systems.
Vehicle Control Systems, headquartered in Europe, has manufacturing
subsidiaries in Brazil and Poland and a joint venture in China. In the U.S. the
Meritor WABCO joint venture grew rapidly from 1997 through 1999 as federal
regulations mandating ABS were fully phased in as of March 1999. However, in
2000 and 2001, the North American truck manufacturing market declined
significantly. The Company also has a majority-owned joint venture in the U.S.
with Cummins Engine Co. (WABCO Compressor Manufacturing Co., a manufacturing
joint venture formed in 1997 to produce air compressors designed by WABCO), and
a sales and distribution joint venture in Japan. In March 1999, WABCO acquired
the heavy vehicle manufacturing business of Mando Machinery Corporation in South
Korea.
At December 31, 2001, WABCO and affiliated companies employed
approximately 6,300 people and had 13 manufacturing facilities and 13 sales
organizations operating in 21 countries. Principal manufacturing operations are
in Germany, France, the United Kingdom, Poland, the Netherlands and Brazil.
WABCO has joint ventures in the U.S. (Meritor WABCO and WABCO Compressor
Manufacturing Co.), in Japan with Sanwa Seiki (WABCO Japan), in India with TVS
Group (Sundaram Clayton Ltd.) and in China.
DISCONTINUED OPERATIONS
In the fourth quarter of 2000, the Company completed the sale of the
Medical Systems segment pursuant to a plan approved by the Company's Board of
Directors in the fourth quarter of 1999. The 1999 loss from discontinued
operations of $126 million consists of a loss from operations of $14 million,
net of tax benefit and a loss on disposition of $112 million, net of tax
benefit. Operating results, net assets and cash flows of the discontinued
Medical Systems segment have been reported separately from continuing operations
in the Consolidated Financial Statements which appear in Item 8 of Part II of
this report.
BUSINESS SEGMENT DATA
Information concerning revenues and segment profit attributable to each
of the Company's business segments and geographic areas is set forth in Item 6,
"Selected Financial Data," in "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations," and in Note 15 of Notes to
Financial Statements which are incorporated herein by reference. Information
concerning identifiable assets of each of the Company's business segments is set
forth in Note 15 of Notes to 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, electronics and natural gas. The ability of the Company's
suppliers to meet performance and quality specifications and delivery schedules
is important to operations. The Company has integrated most of its important
suppliers 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 energy and materials required for its
manufacturing operations have been readily available, and the Company does not
foresee any significant shortages. Also see "Company Goals - Operational
Excellence - Materials Management."
10
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 Systems and Services TRANE(R)
AMERICAN STANDARD(R)
Plumbing Products AMERICAN STANDARD(R)
IDEAL STANDARD(R)
STANDARD(R)
PORCHER(R)
JADO(R)
ARMITAGE SHANKS(R)
DOLOMITE(R)
MELOH(R)
VENLO(R)
BORMA(R)
CLEARTAP(TM)
Vehicle Control Systems WABCO(R)
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 $184 million in 2001, $176 million in
2000 and $156 million in 1999 for research and product development and for
product engineering in its three business segments. The expenditures for
research and product development alone were $133 million in 2001, $126 million
in 2000 and $103 million in 1999 and were incurred primarily by Vehicle Control
Systems and Air Conditioning Systems and Services. Vehicle Control Systems,
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 Systems and Services' 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
11
contribute to the cost of cleaning up, sites at which hazardous wastes or
materials were disposed or released, including 24 proceedings under the
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 2001, 2000 and 1999 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 U.S. The Company believes it is
in substantial compliance with such existing domestic and foreign environmental
statutes and regulations. As in the U.S., a number of the Company's facilities
are undertaking responsive actions to address groundwater and soil issues.
Expenditures in 2001, 2000 and 1999 to evaluate and remediate these sites were
not material.
The Company derived significant revenues in past years from sales of
Air Conditioning Systems and Services using chlorofluorocarbons ("CFCs"), and in
2000 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 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, residential and light commercial products may
require modification for refrigerant substitutes, the costs of introducing
alternative refrigerants 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 Systems and Services.
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.
EMPLOYEES
The Company employed approximately 60,000 people as of December 31,
2001 (excluding employees of unconsolidated joint venture companies). The
Company has a total of 16 labor union contracts in North America (covering
approximately 12,100 employees), nine of which expire in 2002 (covering
approximately 7,600 employees), three of which expire in 2003 (covering
approximately 1,500 employees) and three of which expire in 2004 (covering
approximately 2,500 employees). There can be no assurance that the Company will
successfully negotiate the labor contracts expiring during 2002 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 February 2001, 1,200 Air Conditioning Systems and Services employees
went on strike for 30 days at the Lexington, Kentucky, manufacturing plant. In
January 1999, 1,900 Air Conditioning Systems and Services
12
employees went on strike for 22 days at the Clarksville, Tennessee,
manufacturing plant. In February 1998, 1,100 Air Conditioning Systems and
Services 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. 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 30 labor contracts outside North
America (covering approximately 18,000 employees). In December 2000, there was a
20-day work stoppage at the chinaware manufacturing plant of the Indonesia
Plumbing Products subsidiary, involving 950 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 Indonesian and Philippines
work stoppages, 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 good,
there can be no assurance that the Company will not experience significant work
stoppages.
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, Poland, 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 29 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 offset
by the denomination in foreign currencies of a portion of the Company's
borrowings.
13
ITEM 2. PROPERTIES
As of December 31, 2001, the Company conducts its manufacturing
activities through 108 plants in 29 countries of which the principal facilities
are:
Business Segment Location Major Products Manufactured at Location
---------------- -------- ---------------------------------------
Air Conditioning Clarksville, TN Commercial unitary air conditioning
Systems and Services Fort Smith, AR 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
Taicang, China Applied and Unitary air conditioning systems
Taipei, Taiwan Unitary air conditioning systems
Sao Paulo, Brazil Unitary air conditioning systems
Plumbing Products Paintsville, KY Brass plumbing fittings
Salem, OH Enameled-steel fixtures and acrylic bathtubs
Tiffin, OH Vitreous china
Toronto, Canada 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
Monterrey, Mexico Brass plumbing fittings
Tlaxcala, Mexico Vitreous China
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
Vehicle Control Campinas, Brazil Vehicle Control Systems
Systems Leeds, England Vehicle Control Systems
Claye-Souilly, France Vehicle Control Systems
Hanover, Germany Vehicle Control Systems
Mannheim, Germany Foundation brakes
Wroclaw, Poland Vehicle Control Systems
All the plants described above are owned by the Company or a subsidiary
except for the properties located in Taipei, Taiwan, West Java, Indonesia,
Manila, Philippines, Seoul, South Korea and Claye-Souilly, France which are
leased. 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 2001 the Company's manufacturing plants operated moderately below
capacity.
14
The Company also owns or leases warehouse and office space for
administrative and sales staff. The Company headquarters is located in
Piscataway, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
In October 1999, in Haynes Trane Service Agency, Inc. and Frederick M.
Haynes v. American Standard, Inc., d/b/a The Trane Company, in the United States
District Court for the District of Colorado, verdicts were returned against the
Company for a total of $18 million in respect of claims of wrongful termination
of a distributorship agreement. The Company appealed the verdict to the United
States Court of Appeals for the Tenth Circuit. The Company believes material
errors were made at the trial level and that the captioned matter was wrongly
decided.
The Company had been in discussions and negotiations with The State
Finance Administration for the North Rhine-Westphalia, Germany (the "German Tax
Authority") concerning certain tax issues covering the years 1984-1994. For the
years 1984-1990, the Company received a tax assessment from the German Tax
Authority in the amount of $90 million. For years 1991-1994, the Company
anticipated a further assessment for an amount substantially greater than that
assessed for 1984-1990. On January 15, 2002, the Company settled all issues for
all years (1984-1994) for a current cash payment of approximately $55 million
plus $30 million previously deposited in escrow. Since the Company has
adequately reserved for all issues, the settlement will have no future impact on
operating results.
Over the years the Company has been named as defendant in cases
claiming personal injury from asbestos. The Company does not consider that it
has any significant financial risk because: it has never had to pay any of its
money to claimants; it has ample insurance coverage with small yearly
deductibles; and the products that have been named in claims have a low-risk
profile and/or no direct linkage to the specific claim.
For a discussion of environmental issues see "Item 1. Business -
General - Regulations and Environmental Matters." See also Note 14 of Notes to
Financial Statements
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 1, 2002
with respect to each person who is an executive officer of the Company:
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Frederic M. Poses 59 Chairman and Chief Executive Officer, and Director
Lawrence B. Costello 54 Senior Vice President, Human Resources
G. Peter D'Aloia 57 Senior Vice President and Chief Financial Officer
W. Craig Kissel 50 Senior Vice President, Vehicle Control Systems
J. Paul McGrath 61 Senior Vice President, General Counsel and
Secretary
Marc R. Olivie 48 Senior Vice President, Plumbing Products
Wilfried Delker 61 Vice President and General Manager, Plumbing
Products, Europe
R. Scott Massengill 39 Vice President and Treasurer
David R. Pannier 51 Vice President, Trane Residential Systems
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
Shareholders next succeeding his election.
15
Set forth below is the principal occupation of each of the executive
officers named above during the past five years.
Mr. Poses was elected to the Board of American Standard Companies Inc.
in October 1999, and he was elected Chief Executive Officer effective January 1,
2000. Prior to that, beginning in 1998, he was President and Chief Operating
Officer of AlliedSignal Inc. (now known as Honeywell), having spent his entire
30-year business career with that corporation. He was also a Director and Vice
Chairman of AlliedSignal from 1997 until October 1999.
Mr. Costello joined the Company as Senior Vice President, Human
Resources, effective June 1, 2000. From April 1994 until that date, he served in
various capacities at Campbell Soup Company, including Vice President, Global
Human Resources.
Mr. D'Aloia was elected Senior Vice President and Chief Financial
Officer effective February 1, 2000. Prior to that he was employed by
AlliedSignal Inc. (now known as Honeywell), most recently serving as Vice
President - Business Development. He spent 27 years with AlliedSignal Inc. in
diverse management positions, including Vice President - Taxes, Vice President
and Treasurer, Vice President and Controller, and Vice President and Chief
Financial Officer for the Engineered Materials sector.
Mr. Kissel was elected Senior Vice President, Vehicle Control Systems
in January 1998. Prior thereto he was Vice President of Air Conditioning Systems
and Services' Unitary Products Group since January 1992, becoming Group
Executive in March 1994.
Mr. McGrath joined the Company as Senior Vice President, General
Counsel and Secretary, effective January 17, 2000. From 1996 until that date, he
served as Senior Vice President, General Counsel and Secretary of FMC
Corporation.
Mr. Olivie was elected Senior Vice President of the Company on March 1,
2001, to serve as President of its Global Plumbing Products sector, effective
May 1, 2001. He had been President and Chief Executive Officer of Armstrong
Floor Products, the largest business of Armstrong Holdings Inc. He joined that
company as President of its Worldwide Building Products Operations in 1996 and
prior thereto, worked for Sara Lee Corporation where he was President of its
European sportswear business.
Mr. Delker was elected a Vice President in April 1990, and since
January 2002, has served as General Manager of Plumbing Products, Europe. From
April 1990 until January 2002, he served as Group Executive, Plumbing Products,
Worldwide Fittings.
Mr. Massengill joined the Company effective April 1, 2001, as Vice
President and Treasurer. He was Assistant Treasurer of Bristol-Myers Squibb
Company from 1999 to March 2001 and prior thereto, he spent four years from 1996
to 1999 with AlliedSignal Inc. in various financial management positions.
Mr. Pannier was elected a Vice President in January 1998 and since
January 2002 has served as Vice President, Trane Residential Systems. From
January 1998 until January 2002 he served as Group Executive, North American
Unitary Products Group. 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.
16
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") under the symbol "ASD". 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.
As of March 12, 2002 there were 836 holders of record of the Company's common
stock. A significant number of the outstanding shares of common stock which are
beneficially owned by individuals or entities are registered in the name of Cede
& Co. Cede & Co. is a nominee of The Depository Trust Company, a securities
depository for banks and brokerage firms. The Company believes that there are
approximately 36,000 beneficial owners of its common stock.
No dividends have been declared on the Company's common stock since the
Offering, and the Company does not currently intend to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a description of the Company's
stock repurchase program.
Set forth below are the high and low sales prices for shares of the
Company's common stock for each quarterly period in 2000 and 2001.
2000 High Low
---- ---- ---
First quarter $45.81 $34.31
Second quarter 46.94 37.50
Third quarter 49.75 41.00
Fourth quarter 49.50 38.50
2001
----
First quarter $62.25 $46.75
Second quarter 67.46 56.40
Third quarter 70.90 51.24
Fourth quarter 68.97 52.45
17
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share data) Year Ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Segment and Income Data:
Segment sales:
Air Conditioning Systems and Services $4,692 $4,726 $4,337 $3,940 $3,567
Plumbing Products 1,813 1,803 1,755 1,510 1,439
Vehicle Control Systems 960 1,069 1,098 1,106 952
------ ------ ------ ------ ------
Total sales $7,465 $7,598 $7,190 $6,556 $5,958
====== ====== ====== ====== ======
Segment income:
Air Conditioning Systems and Services $ 515 $ 531 $ 453 $ 386 $ 386
Plumbing Products 148 162 164 119 119
Vehicle Control Systems 124 147 134 153 127
------ ------ ------ ------ ------
Total segment income (a) 787 840 751 658 632
Equity in net income of unconsolidated joint 19 30 37 27 12
ventures
Gain on sale of Calorex (b) - 57 - - -
Restructuring and asset impairment charges (c) - (70) (15) (197) -
Interest expense (169) (199) (188) (188) (192)
Corporate expenses (a) (161) (149) (134) (110) (105)
------ ------ ------ ------ ------
Income from continuing operations before income
taxes and extraordinary item 476 509 451 190 347
Income taxes (181) (194) (187) (141) (124)
------ ------ ------ ------ ------
Income from continuing operations before
extraordinary item $ 295 $ 315 $ 264 $ 49 $ 223
====== ====== ====== ====== ======
Per share:
Basic $4.13 $4.49 $3.74 $ .68 $3.03
Diluted $4.04 $4.36 $3.63 $ .66 $2.93
Average number of outstanding common shares:
Basic 71,453,219 70,123,285 70,524,145 71,729,541 73,801,220
Diluted 73,117,996 72,197,672 72,666,406 73,672,018 76,167,486
Balance Sheet Data (at end of period):
Total assets $4,831 $4,745 $4,686 $4,107 $3,718
Total debt 2,212 2,472 2,643 2,428 2,300
(a) In 2001 the Company recorded expenses of $53 million ($36 million
net of taxes, or $.49 per diluted share) related to the elimination of
approximately 1,700 salaried positions, including $13 million for Air
Conditioning Systems and Services, $14 million for Plumbing Products, $16
million for Vehicle Control Systems and $10 million for corporate headquarters.
(b) In 2000, the Company sold its Calorex water heater business for a gain
of $57 million ($52 million net of taxes, or $.72 per diluted share).
(c) In 2000, the Company recorded a net restructuring and asset impairment
charge of $70 million ($51 million, net of tax benefits, or $.71 per diluted
share). These charges consisted of $26 million for Air Conditioning Systems and
Services, $34 million for Plumbing Products and $15 million for Vehicle Control
Systems, partly offset by a $5 million reduction of charges taken in prior
years. In 1999, the Company recorded restructuring and asset impairment charges
of $15 million ($9 million, net of tax benefits, or $.13 per diluted share). The
1999 charges consisted of restructuring charges of $30 million principally for
Vehicle Control Systems and a $13 million impairment charge relating to a
minority equity interest in a non-core business, partly offset by a reduction of
charges taken in 1998 to restructure North American Plumbing Products
operations. In 1998, the Company recorded restructuring and asset impairment
charges of $197 million ($183 million, net of tax benefits, or $2.49 per diluted
share), including $185 million for Plumbing Products, $7 million for Air
Conditioning Systems and Services and $5 million for Vehicle Control Systems.
See Note 5 of Notes to Financial Statements in Item 8 and Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Item 7.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
The Company faced weak economies and significantly weaker markets for
air conditioning and vehicle control products in the U.S. and many other parts
of the world in 2001. Foreign exchange effects were also unfavorable. Despite
these challenging conditions which resulted in a slight decline in sales
overall, management believes the Company outperformed its markets. Sales for
2001 were $7,465 million, a decrease of 2% from $7,598 million in 2000, but flat
excluding the unfavorable effects of foreign exchange. Segment income was $787
million, a decrease of 6% from $840 million in 2000, (a decrease of 5% excluding
the unfavorable effects of foreign exchange). Because of the weak economic
conditions, the Company eliminated approximately 1,700 salaried positions in the
fourth quarter of 2001, resulting in a pre-tax expense of $53 million, $43
million of which was included in segment income and $10 million in corporate
expenses. Excluding the job elimination expense, segment income declined by only
1%. Income from continuing operations in 2001 was $295 million, or $4.04 per
diluted share, including the job elimination expense of $53 million ($36 million
net of tax benefits, or $.49 per diluted share). This compares with income from
continuing operations in 2000 of $315 million, or $4.36 per diluted share,
including a gain on the sale of the Calorex water heater business of $57 million
($52 million net of taxes, or $.72 per diluted share), essentially offset by net
restructuring and asset impairment charges of $70 million ($51 million net of
tax benefits, or $.71 per diluted share). Excluding the job elimination expense
from 2001 and the gain, restructuring and asset impairment charges from 2000,
income from continuing operations increased 5% to $331 million, or $4.53 per
share in 2001 from $314 million, or $4.35 per share in 2000.
In the discussion that follows, the year-over-year changes in segment
income are presented both with and without the effects of the job elimination
expense, restructuring and asset impairment charges and foreign exchange
translation. Management believes that presenting the analysis excluding those
effects is important in assessing the overall performance of the business on a
comparable basis from year to year.
For a five-year summary of segment sales and income and other income
statement information, refer to Item 6, "Selected Financial Data" on page 18,
and for additional data on segments refer to Note 15 of Notes to Financial
Statements on page 53.
RESULTS OF OPERATIONS FOR 2001 COMPARED WITH 2000
AND 2000 COMPARED WITH 1999
Consolidated sales for 2001 were $7,465 million, a decrease of $133
million, or 2% (but essentially flat excluding the unfavorable effects of
changes in foreign exchange), from $7,598 million in 2000. Sales decreased 1%
for Air Conditioning Systems and Services and 10% for Vehicle Control Systems,
but increased 1% for Plumbing Products.
Segment income for 2001 was $787 million, a decrease of $53 million, or
6% (5% excluding the unfavorable effects of foreign exchange), from $840 million
in 2000. Segment income decreased 3% for Air Conditioning Systems and Services,
9% for Plumbing Products and 16% for Vehicle Control Systems. Segment income for
2001 included a $43 million expense for the elimination of 1,640 salaried
positions including $13 million for Air Conditioning Systems and Services, $14
million for Plumbing Products and $16 million for Vehicle Control Systems.
Excluding those job elimination expenses, segment income was $830
million, a decrease of 1%, and up 1% excluding the unfavorable effects of
foreign exchange. Excluding both the job elimination expenses and the effects of
foreign exchange, segment income decreased 1% for Air Conditioning Systems and
Services but increased 5% for Plumbing Products and 1% for Vehicle Control
Systems.
Consolidated sales for 2000 were $7,598 million, an increase of $408
million, or 6% (10% excluding the
19
unfavorable effects of changes in foreign exchange), from $7,190 million in
1999. Sales increased 9% for Air Conditioning Systems and Services and 3% for
Plumbing Products, but declined 3% for Vehicle Control Systems.
Segment income for 2000 was $840 million, an increase of $89 million,
or 12% (15% excluding the unfavorable effects of foreign exchange), from $751
million in 1999. Segment income increased 17% for Air Conditioning Systems and
Services and 9% for Vehicle Control Systems but decreased 1% for Plumbing
Products.
Following are tables showing the percentage of total sales and segment
income for each of the company's business segments and the geographic
distribution of sales and segment income.
SEGMENT PERCENTAGES OF 2001 SALES GEOGRAPHIC DISTRIBUTION OF 2001 SALES
--------------------------------- -------------------------------------
Air Conditioning Systems and Services 63% United States 57%
Plumbing Products 24% Europe 27%
Vehicle Control Systems 13% Other 16%
---- ----
100% 100%
==== ====
SEGMENT PERCENTAGES OF GEOGRAPHIC DISTRIBUTION OF
2001 SEGMENT INCOME 2001 SEGMENT INCOME
---------------------- --------------------------
Air Conditioning Systems and Services 65% United States 65%
Plumbing Products 19% Europe 22%
Vehicle Control Systems 16% Other 13%
---- ----
100% 100%
==== ====
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
AIR CONDITIONING SYSTEMS AND SERVICES BUSINESS SEGMENT
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
--------------------- ---- ---- ----
Sales $4,692 $4,726 $4,337
Segment income $ 515 $ 531 $ 453
In 2001, sales of Air Conditioning Systems and Services decreased 1%
(but were essentially flat excluding foreign exchange effects) to $4,692 million
from $4,726 million for 2000. Worldwide commercial applied and commercial
unitary sales decreased 2% in 2001 primarily on lower volume, offset partly by
growth in the service, parts and solutions business. Residential air
conditioning sales increased 6%, primarily from a favorable mix of premium,
high-efficiency units. This performance in our residential business was
substantially better than the air conditioning markets as a whole. Management
believes that in the U.S., the commercial unitary markets were down 10%, the
applied equipment markets down approximately 6%, residential air conditioning
markets down 5% and residential furnace markets down 2%. In 2000, sales of Air
Conditioning Systems and Services increased 9% (10% excluding foreign exchange
effects) to $4,726 million from $4,337 million for 1999. Worldwide commercial
applied and commercial unitary sales increased 9% in 2000 and residential air
conditioning sales increased 8%, both primarily on higher volume.
20
DISTRIBUTION OF AIR CONDITIONING 2001 SALES
BY MARKET AND GEOGRAPHY
-----------------------
Commercial 80% U.S. 76%
Residential 20% Europe 6%
100% Other 18%
==== ----
100%
----
Replacement, Renovation and Repair 64%
Commercial New Construction 30%
Residential New Construction 6%
----
100%
Segment income of Air Conditioning Systems and Services in 2001
decreased 3% (with little effect from foreign exchange) to $515 million from
$531 million in 2000. The decrease was attributable primarily to lower volumes
in the U.S. in commercial applied and commercial unitary products and a $13
million expense for the elimination of 570 salaried positions, partly offset by
improvements in the international commercial business, especially Asia. Overall
margins decreased from 11.2% in 2000 to 11.0% in 2001. Benefits from Materials
Management and Six Sigma initiatives of $32 million together with benefits from
restructuring programs were essentially offset by escalations in labor and other
costs and increased spending on product development and marketing to benefit
future growth.
Excluding the job elimination expense, segment income decreased by $3
million, or less than 1%, and margins improved to 11.3%. Segment income of Air
Conditioning Systems and Services in 2000 increased 17% (with little effect from
foreign exchange) to $531 million from $453 million in 1999. The increase was
attributable primarily to higher volumes and margins in the U.S. in commercial
applied and commercial unitary products, and to a lesser extent to improved
volumes and margins in the international commercial business. Overall margins
improved from 10.4% in 1999 to 11.2% in 2000.
In 2001 worldwide commercial applied and commercial unitary sales
decreased 2% (1% excluding foreign exchange effects) due to lower volume in the
commercial equipment business. The decrease resulted principally from lower
commercial equipment volumes in the U.S., as commercial construction projects
slowed and replacement programs were deferred. That decline was substantially
offset by growth in the U.S. service, parts and solutions business. Sales
outside the U.S., which are substantially commercial, were up 3% when adjusted
for foreign exchange, with gains in Asia, Europe and Canada. Residential sales
in the U.S. increased 6%, benefiting from the Company's strong position in the
premium, high-efficiency market, expanding distribution (including Sears and
Home Depot in the retail channel). The market trend toward higher-efficiency
cooling and furnace units evident in 2000 continued in 2001. The residential
business gain was achieved despite the residential market decline and generally
cooler-than-normal weather in the U.S. during the summer.
Segment income for the worldwide commercial business decreased 8% in
2001, excluding the job elimination expense and with little effect from foreign
exchange. This was primarily as a result of lower equipment volume in the U.S.,
partly offset by a significant gain in the U.S. service, parts and solutions
business, and improved profitability in international operations, principally
Asia and Canada. Segment income for the residential business increased 23% in
2001, excluding the job elimination expense, primarily from favorable efficiency
and channel mix.
In 2000 worldwide commercial applied and commercial unitary sales
increased 9% (10% excluding foreign exchange effects) due to significant gains
in the U.S. equipment and service businesses, as well as in Asia. This
double-digit growth globally (excluding exchange) was a strong performance
relative to market growth. U.S. sales of commercial products increased because
of higher volumes, reflecting growth in the U.S. replacement, renovation and
repair markets. Sales outside the U.S. improved significantly in Asia outside of
China, and grew solidly in Latin America and Europe. Residential sales in the
U.S. increased 8% because of market share gains and overall growth in the market
for the year. The gain was achieved despite the adverse effects of
cooler-than-normal weather in the
21
Midwest and Northeast and weaker markets in the second half of 2000. The
residential business performed significantly better than the market as a whole
in 2000.
Segment income for the worldwide commercial business increased 25% in
2000 (with little effect from foreign exchange), primarily as a result of higher
volume and cost improvements in the U.S., and improved profitability in
international operations. Segment income for the residential business was flat
in 2000 compared with 1999, as volume and productivity gains were offset by
costs of designing and developing a new generation of residential air
conditioners.
BACKLOG - The worldwide backlog for Air Conditioning Systems and Services as of
December 31, 2001, was $656 million, a decrease of 3% from the year-earlier
level, excluding foreign exchange effects. This decrease primarily reflected a
decline in commercial equipment markets in Asia and Latin America, partly offset
by increases in North America and Europe.
PLUMBING PRODUCTS BUSINESS SEGMENT
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
--------------------- ---- ---- ----
Sales $1,813 $1,803 $1,755
Segment income $ 148 $ 162 $ 164
Sales by Plumbing Products were $1,813 million in 2001, an increase of
1% (4% excluding the unfavorable effects of foreign exchange), from $1,803
million in 2000. The increase (excluding exchange) primarily reflected 4% sales
gains for both Europe and the Americas, partly offset by a 4% decline in Asia.
The European increase reflected volume increases primarily from the acquisition
of two small fittings manufacturers. Otherwise, European sales were up 1%. The
overall European economy was slightly weaker than in the prior year. The
Americas increase reflected growth of 5% in the U.S., while Latin America was
flat, excluding exchange effects. The increase in the U.S. was relatively strong
considering that the economy was weak and markets declined. Sales through the
retail channel expanded. Record sales of faucets were achieved in 2001 as market
share in the retail channel increased.
DISTRIBUTION OF PLUMBING PRODUCTS 2001 SALES
BY MARKET AND GEOGRAPHY
-----------------------
Residential 75% Europe 47%
Commercial 25% U.S. 37%
---- Other 16%
100% ----
100%
Replacement, Renovation and Repair 60%
New Construction 40%
----
100%
====
Segment income of Plumbing Products was $148 million for 2001, down
from $162 million for 2000, but increased 4% excluding the $14 million expense
for the elimination of 530 salaried positions and the unfavorable effects of
foreign exchange. The increase (excluding the job elimination expense and
foreign exchange) primarily reflected gains in Europe and the Americas, partly
offset by a decline in Asia. Benefits from Materials Management and Six Sigma
initiatives of $44 million were essentially offset by escalations in labor and
other costs and increased spending on product development and marketing to
benefit future growth. Overall margins declined from 9.0% in 2000 to 8.9% in
2001.
22
Sales by Plumbing Products were $1,803 million in 2000, an increase of
3% (9% excluding the unfavorable effects of foreign exchange), from $1,755
million in 1999. The increase (excluding exchange) primarily reflected a 13%
sales gain in the Americas and a 7% gain for Europe, with Asia contributing a
small increase. Sales in the Americas increased despite a slowing in the U.S.
market in the second half of the year. U.S. sales increased 18%, primarily on
higher volume from market share gains in fittings and fixtures. Latin American
sales declined slightly. European sales increased primarily on higher volume,
including market share gains.
Segment income of Plumbing Products was $162 million for 2000, down
from $164 million for 1999, but increased 3% excluding the unfavorable effects
of foreign exchange. The increase (excluding exchange) primarily reflected gains
in Europe and Asia, mostly offset by a decline in the Americas. Overall margins
declined from 9.3% in 1999 to 9% in 2000.
BACKLOG - Plumbing Products' backlog as of December 31, 2001, was $94 million, a
decrease of 8% from December 31, 2000 (excluding foreign exchange effects).
Backlog is not an important indicator of future business in the plumbing
industry which typically has a short cycle between customer order and shipment.
VEHICLE CONTROL SYSTEMS BUSINESS SEGMENT
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
--------------------- ------ ------ -----
Sales $960 $1,069 $1,098
Segment income $124 $ 147 $ 134
Vehicle Control Systems' sales for 2001 were $960 million, a decrease
of 10% (6% excluding the unfavorable effects of foreign exchange), from $1,069
million in 2000. The decrease resulted primarily because of a significant
deterioration in the North American commercial vehicle market and a softening in
European markets. Unit volumes of truck and bus production decreased 35% in the
U.S. and 8% in Western Europe compared with 2000. Vehicle Control Systems' sales
generally declined less than the markets, as new products, new applications with
existing customers, geographic expansion and market penetration tempered the
effects of the cyclical nature of the commercial vehicle markets. Sales in
Europe (excluding export sales to the Company's U.S. marketing joint venture)
were down 5% from 2000 in a market that declined 8%. Similarly, sales of
anti-lock braking systems to the U. S. marketing joint venture declined less
than the markets in which the Company participates. The U.S and European
declines were partly offset by significant volume expansion in Asia and an
increase (excluding foreign exchange) in Brazil. Sales by the U.S. compressor
manufacturing business also increased.
DISTRIBUTION OF VEHICLE CONTROL SYSTEMS 2001 SALES
BY MARKET AND GEOGRAPHY
-----------------------
OEM Conventional 39% Europe 80%
Electronic 38% U.S. 10%
Aftermarket 23% Other 10%
Segment income in 2001 decreased 16% (11% excluding unfavorable foreign
exchange effects) to $124 million from $147 million in 2000. This primarily
reflected lower volumes and the $16 million expense for the elimination of 540
positions.
Excluding the $16 million job elimination expense and the unfavorable
effects of foreign exchange, segment income decreased by 5% and margins improved
from 13.8% in 2000 to 14.6% in 2001. Margins are benefiting from a structural
reduction in cost as labor-intensive production continues to be shifted to the
new facility in Poland and from productivity enhancements including benefits of
$19 million from Six Sigma and Materials Management initiatives.
23
Vehicle Control Systems' sales for 2000 were $1,069 million, a decrease
of 3% (but an increase of 10% excluding the unfavorable effects of foreign
exchange), from $1,098 million in 1999. The increase (excluding foreign exchange
effects) resulted from improved market demand, increased penetration with core
products, new vehicle control system products (higher content per vehicle) and
significant volume expansion in Asia. Unit volumes of truck and bus production
increased 5% in Western Europe in 2000 compared with 1999. Sales also increased
significantly in Brazil, primarily as a result of a sharp increase in that
country's commercial vehicle production. Additionally, sales by the U.S.
compressor manufacturing business increased. These gains were partly offset by
decreased shipments of anti-lock braking systems (ABS) to the Company's U.S.
braking systems joint venture, as U.S. truck production declined 19%.
Segment income in 2000 increased 10% (27% excluding unfavorable foreign
exchange effects) to $147 million in 2000, from $134 million in 1999. This
primarily reflected higher volumes in Europe and Asia, together with a smaller
gain in Brazil. Margins also benefited from productivity enhancements, Materials
Management initiatives and lower warranty expense. Margins improved from 12.2%
in 1999 to 13.8% in 2000. The increase in segment income, however, was partly
offset by decreased equity income from the U.S. marketing joint venture because
of the significant decline in North American commercial vehicle production in
2000.
BACKLOG - Vehicle Control Systems' backlog as of December 31, 2001, was $382
million, an increase of 5% from December 31, 2000 (excluding foreign exchange
effects), primarily reflecting expansion of business in Asia and a modest
increase in Europe which continued to experience weak markets.
OTHER STATEMENT OF INCOME ITEMS
The decreases in equity in net income of unconsolidated joint ventures
for 2001 compared with 2000 and 2000 compared with 1999 primarily reflects lower
income in Vehicle Control Systems' North American braking systems marketing
joint venture because of a significant reduction in truck builds. In 1999 and
for several years prior, that business experienced exceptionally strong growth.
Earnings of Air Conditioning Systems and Services' compressor manufacturing
joint venture and the Company's financial services joint venture were
essentially even with 2000 which was somewhat improved over 1999 results.
In 2000, the Company sold its Calorex water heater business for $68
million, resulting in a gain of $57 million ($52 million net of tax). Calorex
was a non-core business that generated approximately $40 million in annual
sales.
In 2000, the Company announced a worldwide restructuring program which
included improving efficiency through the transfer of production to locations
with lower product costs, the closure of manufacturing and administrative
facilities, outsourcing production of certain products, capitalizing on
synergistic opportunities in several businesses and termination costs related to
upgrading the effectiveness of the organization. This program is designed to
enhance shareholder value and improve the Company's competitive position in its
markets. In connection therewith, in the fourth quarter of 2000 the Company
recorded a net restructuring and asset impairment charge of $70 million ($51
million net of tax benefits, or $.71 per diluted share). This charge was
comprised of $26 million for Air Conditioning Systems and Services, $34 million
for Plumbing Products and $15 million for Vehicle Control Systems, net of a $5
million reversal of restructuring charges recorded previously for the 1998-1999
restructuring program as the Company was able to complete the activities at
lower cost than originally estimated (see below). The Air Conditioning Systems
and Services charge included costs related to a workforce reduction of 700
people to integrate international operations, costs of lease obligations no
longer to be used, and an asset impairment charge. The Plumbing Products charge
included an asset impairment write-down related to the closure of one plant in
the U.S. and a related workforce reduction of 250 people related to the transfer
of production to other facilities in the U.S. and Mexico. The Plumbing Products
charge also included termination costs for a workforce reduction of 350 people
related to the centralization and realignment of certain functions in Western
Europe, the Americas and Asia to eliminate redundancies. The Vehicle Control
Systems charge primarily reflects the transfer of production to the lower-labor
cost facility in Poland and consolidation of certain operations and
administrative functions in Western Europe to eliminate redundancies, resulting
in a net workforce reduction of 450 people.
24
In 2001 the majority of the actions described above were completed for
substantially the same amounts as originally accrued. With respect to the other
actions the Company was able to settle certain items on more favorable terms
than expected and others on less favorable terms. Additionally, the scope of
certain activities was expanded and of others reduced. For Air Conditioning
Systems and Services, the Company was able to terminate certain employees on
more favorable terms than originally contemplated and terminate lease
obligations more favorably than expected, resulting in a $5 million reversal of
the accrual. However, the Company incurred additional costs of $4 million,
principally related to discontinuing certain product lines in Europe. This
additional cost was charged to expense in 2001. For Vehicle Control Systems the
Company did not undertake all of the planned consolidation activities with
respect to administrative functions in Western Europe and therefore reversed $4
million of the 2000 accrual. However, the planned transfer of production to
Poland was expanded and accelerated, resulting in additional costs of $11
million, primarily for severance, which was charged to expense in 2001. Plumbing
Products terminated fewer people than planned, resulting in a $3 million
reversal of an accrual in 2000. However, in 2001 Plumbing Products incurred
additional restructuring costs, principally severance of $2 million in North
America. The Company expects that essentially all of the December 31, 2001
balance of $6.3 million related to the 2000 restructuring program will be
utilized by mid-2002. This program is expected to achieve annual savings of
approximately $40 million, on a pre-tax basis. The Company realized a portion of
such annual benefits in 2001 and expects substantial realization in 2002 and
full realization in 2003 and thereafter. See Note 5 of Notes to Financial
Statements in Item 8.
As of December 31, 2001, the Company had completed the 1998-1999
restructuring program. The $5.5 million balance of accrued charges remaining for
the program as of December 31, 2000, were intended for the termination of
employees in a certain country in conjunction with the transfer of production to
Poland. During 2001 the Company decided not to terminate these employees and
therefore the remaining balance of $5.5 million was reversed into income.
However, the Company incurred additional charges in 2001 for the termination of
employees in other countries in connection with the move to Poland.
The 1998-1999 restructuring program commenced in 1998 when the Company
committed to plans designed to achieve lower product costs and improved
operating efficiency. Accordingly, in 1998 the Company recorded charges totaling
$197 million ($183 million net of tax benefits). During the fourth quarter of
1999 the Company recorded a $15 million restructuring and asset impairment
charge that reflected several changes to the original plan. Those changes
resulted in a reversal in 1999 of $29 million of amounts accrued in 1998 and
additional charges of $31 million. The 1999 charge also included a $13 million
impairment charge related to a minority equity interest in a non-core business.
In addition, in 2000 the Company determined that it would terminate fewer people
than originally expected under this plan, resulting in the reversal of $5.6
million of charges. See Note 5 of Notes to Financial Statements.
Interest expense decreased by $30 million in 2001compared with 2000,
because of lower average debt balances and lower average interest rates
(including the effect of interest rate swaps), as debt was repaid and rates on
variable-rate borrowings under the Company's bank credit agreements declined
during the year. Interest expense increased by $11 million in 2000 compared with
1999, primarily due to higher interest rates. See "Liquidity and Capital
Resources" and Note 11 of Notes to Financial Statements.
Corporate expenses for 2001 were $161 million, compared with $149
million in 2000 and $134 million in 1999. The increase in 2001 was principally
due to expenses of $10 million related to the elimination of 40 salaried
positions. In addition, the Company incurred higher costs related to expanding
the scope and leadership of the corporate office, and higher pension-related and
foreign exchange costs, partly offset by lower charges for incentive
compensation and various other items. Corporate expenses for 2000 were $149
million, compared with $134 million in 1999 and $110 million in 1998. The
increase in 2000 was principally due to increased minority interest in the
higher net income of our consolidated joint ventures, increased receivables
discount fees paid to the financial services joint venture as a result of higher
sales, and the cost of expanding the scope of corporate office functions.
The income tax provisions for 2001, 2000 and 1999 were $181 million,
$194 million and $187 million, respectively. The effective income tax rates were
38.0% of pre-tax income in 2001, 38.1% in 2000 and 41.5% in 1999. The rate in
2001 was 37.5% excluding the effect of the expense for termination of salaried
employees. The rate in 2000 was 39.75% excluding the effects of the Calorex sale
and the restructuring and asset impairment
25
charges. The rates in 2001 and 2000 were lower than in 1999 because of various
initiatives, an internal reorganization at the end of 1999 of the Company's
subsidiary ownership that was more tax efficient than the previous structure
and, for 2000, a lower-than-normal rate on the gain from the sale of the Calorex
water heater business. The 2001, 2000 and 1999 rates also reflect the effects of
rate differences and withholding taxes related to foreign operations,
nondeductible goodwill amortization and higher state income taxes in the U.S.
See Note 8 of Notes to Financial Statements. The Company expects that its
effective income tax rate in 2002 will be reduced to 33.3% as a result of
various tax planning initiatives. That expected rate includes the favorable
effect of the new accounting standard for goodwill, without which the rate for
2002 would be 35%.
In the fourth quarter of 2000, the Company completed the sale of its
Medical Systems businesses pursuant to authorization by the Board of Directors
of the Company in 1999. Accordingly, in 1999 Medical Systems was reported as a
discontinued operation in the accompanying Consolidated Statement of Income and
the Consolidated Statement of Cash Flows. All prior periods presented have been
restated to reflect this classification, including applicable footnotes. The
loss from discontinued operations in 1999 included a loss from operations of $14
million, net of income tax benefit and an estimated loss on disposition of $112
million, net of income tax benefit. The loss on disposition included estimated
operating losses in 2000 projected through the date of sale.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities, after cash interest paid of
$169 million, was $496 million for 2001, compared with $458 million for 2000 and
$474 million for 1999. The Company was able to produce a higher level of cash
flow from operations in 2001 because net income included increased non-cash
charges, such as higher non-cash compensation expenses and higher depreciation
and amortization, partly offset by an increase in net working capital items
(accounts receivable, inventories, accounts payable and accrued liabilities).
Accounts receivable decreased in 2001 compared with an increase in 2000
primarily because sales leveled off or declined slightly in most of our
businesses in the last quarter of 2001, whereas in 2000 sales increased 6% in
local currencies. The inventory increase in both years reflected a decision to
increase certain air conditioning and plumbing products inventories to serve
customers better. The inventory increase in 2001 was lower than in 2000 because
growth in the business was significantly lower in 2001 than in 2000. Accounts
payable and accruals decreased in 2001 (a use of cash) and increased in 2000 (a
source of cash) and reflected less growth of the business in 2001 and timing
differences in payments. Investing activities in 2001 totaled $214 million,
principally due to capital expenditures of $203 million, including $37 million
of investments in affiliated companies and other businesses (see "Capital
Expenditures"), partly offset by proceeds of $38 million from sale and leaseback
transactions and sales of miscellaneous assets. This compares with investing
activities in 2000 of $211 million, principally due to capital expenditures of
$259 million, including $40 million of investments in affiliated companies and
other businesses, partly offset by proceeds from the Calorex and medical segment
sales. The Company also invested $58 million in computer software in 2001,
compared with $65 million in 2000 and $86 million in 1999. The excess of cash
provided by operating activities over cash used for investing activities was
used to fund financing activities in 2001 of $283 million, primarily net debt
repayments of $231 million, purchases of treasury stock of $116 million and the
buy-back of outstanding warrants for the purchase of 3 million shares of the
Company's common stock held by Kelso ASI Partners, L. P. for $35 million. This
compares with financing activities in 2000 of $221 million, primarily net debt
repayments of $95 million and purchases of treasury stock of $148 million. The
company purchased approximately 1.9 million shares of its common stock in 2001
pursuant to the Company's share repurchase program, compared with the purchase
of approximately 3.6 million shares in 2000. Financing activities also included
proceeds realized from the exercise of stock options of $97 million in 2001,
compared with $22 million in 2000.
On November 6, 2001, the Company entered into two new bank credit
agreements, which replaced the 1997 Credit Agreement (see Note 11 of Notes to
Financial Statements). The new agreements provide the Company with senior
unsecured revolving credit facilities aggregating $1.3 billion as follows: (a) a
five-year, $1 billion multi-currency facility which expires in 2006 and (b) a
364-day, $300 million U.S. dollar facility which expires November 5, 2002, with
an option to renew for an additional 364 days.
The aggregate borrowings of up to $1.3 billion provided by the new
facilities can be used for general corporate purposes, of which up to $250
million may be used for issuing letters of credit and up to $150 million for
same-day, short-term borrowings. Each loan outstanding under these facilities is
due at the end of each interest
26
period (a maximum of 12 months). The Company can, however, concurrently reborrow
the outstanding obligations subject to compliance with certain conditions
contained in the new agreements.
The Company, American Standard Inc., American Standard International
Inc. and certain of their domestic subsidiaries guarantee obligations under the
new credit agreements. In addition, significant foreign subsidiaries guarantee
obligations of certain foreign borrowers under the new credit agreements.
The new credit agreements contain various covenants that limit, among
other things, indebtedness, liens, sale and leaseback transactions, subsidiary
indebtedness including preferred stock, mergers, consolidations, dissolutions
and asset sales, investments or acquisitions, dividends and redemptions of
capital stock, loans and advances, and certain other business activities. The
covenants also require the Company to meet certain financial tests: ratio of
consolidated debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization), and consolidated free cash flow to interest expense. The Company
is currently in compliance with the covenants contained in the new credit
agreements. See Note 11 of Notes to Financial Statements.
At December 31, 2001, the Company's total indebtedness was $2.2 billion
and annual scheduled debt maturities were $11 million, $202 million, $9 million,
$217 million and $950 million for the years 2002 through 2006, respectively. The
Company had remaining availability under its new bank credit agreements at
December 31, 2001, of $399 million after reduction for borrowings of $791
million and $110 million of outstanding letters of credit. The Company's
operations in China have $34 million available under bank credit facilities
after reduction for borrowings of $16 million and letters of credit usage of $5
million. In addition, the Company's other foreign subsidiaries had $87 million
available at December 31, 2001, under overdraft facilities that can be withdrawn
by the banks at any time. In the first quarter of 2002, the Company's
availability under its bank credit agreements was reduced when the Company
increased its borrowings due to seasonal working capital requirements, the
redemption of its 9 1/4% Sinking Fund Debentures for $38.7 million, payment of
$55 million in settlement of the German tax issues and investments in sales
offices of $22 million. See Notes 8 and 11 of Notes to Financial Statements. The
Company believes that remaining availability under the credit agreements and
other sources of liquidity are sufficient to meet normal cyclical working
capital requirements.
The Company chose to reduce the total funding provided under its new
bank credit agreements compared with the 1997 Credit Agreement because improved
cash flows, the reduction in total debt outstanding and an improved credit
rating have made alternative sources of financing more readily available to the
Company. The Company believes that the amounts available from operating cash
flows, funds available under its new credit agreements and future borrowings
under the remaining $540 million of a $1 billion shelf registration statement
filed with the Securities and Exchange Commission in 1998 (the "1998 Shelf
Registration") will be sufficient to meet its expected operating needs and
planned capital expenditures for the foreseeable future.
The Company employs several means to manage its liquidity and is not
dependent upon any one source of funding. In addition to funds available from
operating cash flows, bank credit agreements and the public debt and equity
markets as described above, the Company uses two principal off-balance sheet
techniques: operating leases and receivables financing. Operating leases are
employed as an alternative to purchasing certain property, plant and equipment.
Future rental commitments under all non-cancelable leases in effect at December
31, 2001, are: $107 million in 2002; $94 million in 2003; $77 million in 2004;
$59 million in 2005; $48 million in 2006; and $72 million thereafter, a total of
$457 million. That total represents the equivalent of approximately $365 million
of off-balance sheet debt, discounted at an assumed rate of 7.5%. See Note 14 of
Notes to Financial Statements. The Company is a partner in American Standard
Financial Services, a financial services partnership with Transamerica
Commercial Finance Corporation. Under this arrangement, the Company sells
certain receivables to the joint venture on a non-recourse basis for a fee and
finances certain purchases of inventory by customers, thus accelerating the cash
flow from realization of the receivables. The uncollected balance of receivables
sold or financed typically fluctuates between approximately $170 million and
$250 million during the year and was $179 million as of December 31, 2001. To
achieve lower borrowing rates, the Company plans to terminate the partnership
with Transamerica in 2002 and establish new arrangements for the sale of
receivables in the U.S. In addition, the Company plans to establish similar
arrangements for sale of receivables in several major countries in Europe.
Pursuant to the 1998 Shelf Registration, on May 28, 1999, the Company
completed the sale of the
27
equivalent of $460 million of Senior Notes, with an average interest rate of
7.7%, issued in three series: 250 million Euro Senior Notes due 2006; 100
million U.S. Dollar Senior Notes due 2009 and 60 million Sterling Senior Notes
due 2009. Net proceeds of $452 million from the offering were applied to
refinance borrowings incurred to pay $150 million of 10 7/8% Senior Notes at
maturity on May 15, 1999 and to refinance a substantial portion of the purchase
price of the Armitage/Dolomite acquisition described below. These Senior Notes
are not subject to redemption. Debt securities sold under the 1998 Shelf
Registration are issued by American Standard Inc. and unconditionally guaranteed
by American Standard Companies Inc. The Company intends to use the net proceeds
from any future sales of such debt securities under the 1998 Shelf Registration
for general corporate purposes, which may include refinancing existing debt as
it matures, certain investments, acquisitions, additions to working capital or
capital expenditures.
In 1999 the Company acquired the Bathrooms Division of Blue Circle
Industries PLC, a manufacturer of ceramic sanitaryware, brassware and integrated
plumbing systems, for $427 million, including fees and expenses and net of cash
acquired. The acquired business consists of two principal businesses, Armitage
Shanks, a U.K. manufacturer, and Ceramica Dolomite, an Italian manufacturer
("Armitage/Dolomite"). These operations have been completely integrated with the
Company's European plumbing operations.
In conjunction with a secondary public offering of the Company's common
stock in 1997, the Company issued to Kelso ASI Partners, L.P., warrants to
purchase 3 million shares of the Company's common stock at $55 per share. In the
second quarter of 2001 the Company bought back these warrants for $35 million.
In 1998 and 2000 the Company's Board of Directors approved plans to
purchase up to $400 million of the Company's common stock to offset the dilutive
effect of issuing shares of common stock pursuant to the Company's stock option
plan and other incentive and benefit plans funded with shares of stock. Pursuant
to these authorizations, the Company purchased 1,921,050 shares in 2001 for $116
million, 3,559,900 shares in 2000 for $148 million and 113,600 shares in 1999
for $4 million. As of December 31, 2001, the unexpended authorization was $48
million. On February 7, 2002, the Board authorized additional share repurchases
of up to $150 million. The Company intends to apply approximately one-third of
its free cash flow to the share repurchase program.
The Company 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. On January 15, 2002, the Company
settled all issues for all years (1984-1994) for a current cash payment of
approximately $55 million plus $30 million previously deposited in escrow. Since
the Company has adequately reserved for all issues, the settlement will have no
future impact on operating results. See Note 8 of Notes to Financial Statements.
CAPITAL EXPENDITURES
The Company's capital expenditures for 2001 were $203 million
(including $37 million of investments in affiliated companies), compared with
$259 million for 2000. Capital spending in 2001 was devoted primarily to
equipment for the manufacture of new products and productivity improvements.
Capital expenditures for Air Conditioning Systems and Services for 2001
were $101 million (including $14 million of investments in affiliated
companies), a decrease of 13% from 2000 expenditures of $116 million (including
$23 million of investments in affiliated companies). Major expenditures in 2001
primarily related to projects for new products and product improvements and
improvements related to productivity.
Plumbing Products' capital expenditures for 2001 were $72 million
(including investments in affiliated companies of $23 million), a decrease of
27% from 2000 capital expenditures of $99 million (including investments in
affiliated companies of $14 million). Major expenditures in 2001 included
expansion of plants in Mexico and Bulgaria and projects related to new products
and product improvements.
Capital expenditures for Vehicle Control Systems in 2001 were $30
million compared with $44 million (including investments in affiliated companies
of $3 million). Expenditures in 2001 were primarily related to ongoing
construction on the new facility in Poland.
28
The Company believes capital spending in recent years, although
somewhat lower in 2000 and 2001 than in recently preceding years, has been
sufficient to maintain efficient production capacity, to implement important
product and process redesigns, to expand capacity to meet increased demand and
to make strategic investments and acquisitions. The Company expects to continue
investing to expand and modernize its existing facilities and to consider
entering into joint ventures and making complementary acquisitions. The Company
expects to make capital expenditures in 2002 of approximately $180 million,
excluding potential acquisitions and capitalized computer software.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the non-amortization provisions of FAS 142 is expected to result in an increase
in net income of approximately $30 million, or $.40 per share annually. During
the first half of 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite-lived intangible assets and has not
yet determined what effect, if any, the results of these tests will have on the
results of operations or financial position of the Company. However, based upon
a preliminary evaluation, the Company believes that no impairment will result.
Refer to Note 2 of Notes to Financial Statements under the heading "Goodwill."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of financial statements
in conformity with those accounting principles requires management to make
judgments and estimates that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. The Company frequently re-evaluates its judgments and estimates
which are based upon historical experience and on various other assumptions that
are believed to be reasonable under the circumstances.
The Company believes that of its significant accounting policies (see
Note 2 of Notes to Financial Statements), the ones that may involve a higher
degree of judgment and complexity are post-retirement benefits, warranties,
goodwill, income taxes and commitments and contingencies.
Post-retirement benefits - The Company has significant pension and
post-retirement benefit costs and liabilities that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates, expected return on plan assets, mortality rates, merit and promotion
increases and the health care cost trend rate. The Company is required to
consider current market conditions, including changes in interest rates and
health care costs, in selecting these assumptions. Changes in the related
pension and post-retirement benefit costs or liabilities may occur in the future
due to changes in the assumptions.
Warranties - Products sold are generally covered by a warranty for
periods ranging from one to ten years. At the time of sale the Company accrues a
warranty reserve for estimated costs to provide equipment, parts or services to
satisfy warranty obligations. The Company's estimate of costs to service its
warranty obligations is based on historical experience and expectation of future
conditions. To the extent the Company experiences changes in warranty claim
activity or costs associated with servicing those claims, its warranty accrual
is adjusted accordingly. The Company also sells extended warranty contracts for
up to 10 years on some of its products. Revenues from the sales of extended
warranties are deferred and amortized on a straight-line basis over the terms of
the contracts except when historical evidence indicates otherwise.
29
Goodwill - In assessing the recoverability of the Company's goodwill
and other intangibles the Company must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or their related assumptions change the
fair value of these assets in the future, the Company may be required to record
impairment charges for them. On January 1, 2002 the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
and will analyze its goodwill for impairment issues during the first six months
of 2002, and then on a periodic basis thereafter. During the year ended December
31, 2001, the Company did not record any impairment losses related to goodwill
and other intangible assets.
Income taxes - The Company records a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the Company were to determine that it would
not be able to realize all or part of its net deferred tax assets in the future,
an adjustment to the deferred tax assets would be charged to income in the
period such determination was made. Likewise, should the Company determine that
it would be able to realize its deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Commitments and Contingencies - The Company is subject to proceedings,
lawsuits and other claims related to environmental, asbestos, labor, product and
other matters. The Company is required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of liability to be recorded, if any, for
these contingencies is made after careful analysis of each individual issue. The
liability recorded may change in the future due to new developments in any of
the matters.
CYCLICAL AND SEASONAL NATURE OF BUSINESS
Approximately 65% of Air Conditioning Systems and Services and Plumbing
Products sales are to the replacement, remodeling and repair markets which tend
to be less cyclical than other markets. In 2001, only about 6% of the Company's
sales were associated with new housing in the U.S. and about 12% were associated
with new commercial construction in the U.S., both of which are cyclical. The
Company's geographic diversity mitigates the effects of fluctuations in
individual new construction markets. Vehicle Control Systems' sales are
dependent to a large extent on production levels of medium-sized and heavy
trucks and buses, particularly in Europe and the U.S., 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 in the U.S.
and other Northern Hemisphere markets is the peak season for sales of Air
Conditioning Systems and Services. In addition, a significant percentage of Air
Conditioning Systems and Services' sales are attributable to U.S. residential
and commercial construction activity, which is generally higher in the second
and third quarters of the year.
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. Forward-looking statements can be identified by the use of words
such as "believe," "expect," "plans," "strategy," "prospects," "estimate,"
"project," "anticipate" "intends" and other words of similar meaning in
connection with a discussion of future operating or financial performance. This
Report on Form 10-K includes important information as to risk factors in the
"Notes to Financial Statements" under the headings "Restructuring and Asset
Impairment Charges," "Tax Matters," and in the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Many
important factors could cause actual results to differ materially from
management's expectations, including the level
30
of construction activity in the Company's Air Conditioning Systems and Services'
and Plumbing Products' markets and the level of truck and bus production in the
Company's Vehicle Control Systems markets; the ability of the Company to
implement its restructuring programs as planned; the extent to which the Company
will be able to realize the estimated savings from the salaried workforce
reduction, and from Materials Management and Six Sigma initiatives; the timing
of completion and success in the start-up of new production facilities;
unpredictable difficulties or delays in the development of new product
technology; changes in U.S. or international economic conditions, such as
inflation, interest rate fluctuations, foreign exchange 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; increased difficulties in obtaining a consistent supply of
basic materials like steel, aluminum, copper, clays, electronics and natural gas
at stable pricing levels; labor relations; integration of acquired businesses;
difficulties in obtaining or retaining the management and other human resource
competencies that the Company needs to achieve its business objectives; 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; changes in laws or different interpretations of laws that
may affect the Company's expected effective tax rate for 2002; transactions or
other events affecting the need for, timing and extent of the Company's capital
expenditures; the extent of and the costs at which the Company effects
repurchases of its common stock; and the extent to which the Company reduces
outstanding debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is exposed to fluctuations in the price of major raw
material commodities used in the manufacturing process, foreign currency
fluctuations and interest rate changes. From time to time the Company enters
into hedge agreements to reduce its risks related to commodity price, foreign
currency and interest rates. Such agreements hedge only specific transactions or
commitments. To minimize the risk of counter-party nonperformance, such
agreements are made only through major financial institutions with significant
experience in such financial instruments.
To minimize the risk of fluctuations in the market price of major raw
material commodities, such as copper and aluminum used in the manufacturing
process, the Company may enter commodity forward contracts to effectively fix
the cost of the commodity. Maturity dates of the contracts are scheduled to
coincide with market purchases of the commodity. Cash proceeds or payments
between the Company and the counter-party at maturity of the contracts are
recognized as an adjustment to the cost of the commodity purchased, to the
extent the hedge is effective. Charges or credits resulting from ineffective
hedges are recognized in income. The Company generally does not enter commodity
hedges extending beyond eighteen months. The notional value of commodity forward
contracts outstanding as of December 31, 2001 and 2000, was $63 million and $82
million, respectively. A 10% change in the price of commodities hedged would
change the fair value of the hedge contracts by approximately $6 million as of
December 31, 2001 and $8 million as of December 31, 2000.
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, Poland, Central American countries, China,
Malaysia, the Philippines, Indonesia, South Korea, Thailand, Taiwan 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 29 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.
However, since the Company sells certain finished products in
currencies different than the currency of the subsidiary that manufactured the
products, the Company is exposed to foreign currency risk on such transactions.
The Company hedges some of this risk by entering foreign currency forward
contracts that effectively fix the
31
transaction cost. Cash settlement proceeds or payments upon maturity of the
contracts are included in the price of the transaction hedged, to the extent the
hedge is effective. Charges or credits resulting from ineffective hedges are
recognized in income. The Company generally does not enter currency hedges
extending beyond one year. The notional value of foreign exchange forward
contracts outstanding as of December 31, 2001 and 2000, was $19 million and $24
million, respectively. A 10% change in the exchange rate of the currencies
hedged would change the fair value of the contracts by approximately $2 million
as of December 31, 2001 and December 31, 2000. See Note 13 to the financial
statements for more information on financial instruments.
To manage the balance between floating interest rate debt and fixed
interest rate debt, the Company has entered into interest rate swaps that
effectively convert fixed-rate debt to variable-rate debt. The maturity date of
these swap contracts coincides with the maturity date of the underlying debt.
Under these swaps, the Company pays a specified variable interest rate and
receives the fixed rate applicable to the underlying debt. The income/loss on
the swaps is accrued as earned and recorded as a reduction/increase in interest
expense accrued on the fixed-rate debt. The notional value (the value of the
underlying debt) of interest rate swaps outstanding as of December 31, 2001, was
$300 million. Including that $300 million, as of December 31, 2001, $1.1 billion
of the Company's $2.2 billion total debt bore interest at variable rates based
upon the London Interbank Offered Rate (LIBOR). A 10% change in swap rates would
change the fair value of the interest rate swaps by approximately $8 million as
of December 31, 2001.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated balance sheet at December 31, 2001 and
2000, and related consolidated statements of income, shareholders' deficit and
cash flows for the years ended December 31, 2001, 2000 and 1999, 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.
/s/ FREDERIC M. POSES /s/ G. PETER D'ALOIA
FREDERIC M. POSES G. PETER D'ALOIA
CHAIRMAN AND SENIOR VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
FEBRUARY 8, 2002
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of American Standard Companies Inc.
We have audited the accompanying consolidated balance sheet of American
Standard Companies Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' deficit, and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
NEW YORK, NEW YORK
FEBRUARY 8, 2002
33
CONSOLIDATED STATEMENT OF INCOME
AMERICAN STANDARD COMPANIES INC.
Year Ended December 31,
------------------------------------------
(Dollars in millions, except share data) 2001 2000 1999
---------------------------------------------------------- -------- -------- --------
Sales $7,465.3 $7,598.4 $7,189.5
Costs, expenses and other income:
Cost of sales 5,617.5 5,727.7 5,406.6
Selling and administrative expenses 1,194.1 1,167.9 1,146.3
Restructuring and asset impairment charges - 69.6 14.7
Gain on sale of Calorex - (57.3) -
Other expense (income) 8.7 (17.6) (17.4)
Interest expense 168.7 198.7 187.8
-------- -------- --------
6,989.0 7,089.0 6,738.0
-------- -------- --------
Income from continuing operations before
income taxes 476.3 509.4 451.5
Income taxes 181.3 194.2 187.4
-------- -------- --------
Income from continuing operations 295.0 315.2 264.1
Discontinued operations:
Loss from operations, net of income tax benefit - - 13.8
Loss from disposal, net of income tax benefit - - 112.0
-------- -------- --------
Loss from discontinued operations - - 125.8
-------- -------- --------
Net income applicable to common shares $ 295.0 $ 315.2 $ 138.3
======== ======== =======
Per common share:
Basic:
Income from continuing operations $ 4.13 $ 4.49 $ 3.74
Loss from discontinued operations - - (1.78)
-------- -------- --------
Net income $ 4.13 $ 4.49 $ 1.96
======== ======== ========
Diluted:
Income from continuing operations $ 4.04 $ 4.36 $ 3.63
Loss from discontinued operations - - (1.73)
-------- -------- --------
Net income $ 4.04 $ 4.36 $ 1.90
======== ======== ========
Average outstanding common shares:
Basic 71,453,219 70,123,285 70,524,145
Diluted 73,117,996 72,197,672 72,666,406
See Notes to Financial Statements.
34
CONSOLIDATED BALANCE SHEET
AMERICAN STANDARD COMPANIES INC.
Year Ended December 31,
-----------------------
(Dollars in millions, except share data) 2001 2000
---------------------------------------------------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 82.1 $ 85.4
Accounts receivable, less allowance for doubtful
accounts - $35.4 in 2001; $36.7 in 2000 998.3 1,026.6
Inventories 657.1 606.3
Future income tax benefits 62.1 60.8
Other current assets 96.8 99.4
-------- --------
Total current assets 1,896.4 1,878.5
Facilities, at cost, net of accumulated depreciation 1,362.8 1,382.7
Other assets:
Goodwill, net of accumulated amortization -
$342.6 in 2001; $310.4 in 2000 929.0 934.8
Debt issuance costs, net of accumulated amortization -
$13.2 in 2001; $21.0 in 2000 31.6 33.2
Other 611.6 515.5
-------- --------
$4,831.4 $4,744.7
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Loans payable to banks $ 58.7 $ 83.7
Current maturities of long-term debt 11.4 12.4
Accounts payable 604.1 660.1
Accrued payrolls 265.2 215.3
Other accrued liabilities 576.0 686.6
Taxes on income 172.9 148.5
-------- --------
Total current liabilities 1,688.3 1,806.6
Long-term debt 2,142.0 2,375.6
Other long-term liabilities:
Post-retirement benefits 489.5 408.3
Deferred tax liabilities 85.1 45.2
Other 516.6 501.9
-------- --------
Total liabilities 4,921.5 5,137.6
Commitments and contingencies
Shareholders' 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: 2001 - 72,071,944; 2000 - 69,532,574 .7 .7
Capital surplus 707.2 617.8
Unearned compensation (5.2) (8.0)
Treasury stock (505.3) (453.4)
Retained earnings (accumulated deficit) 57.0 (238.0)
Accumulated other comprehensive income:
Foreign currency translation effects (331.8) (312.0)
Deferred loss on hedge contracts, net of tax (1.0) -
Minimum pension liability adjustment, net of tax (11.7) -
-------- --------
Total shareholders' deficit (90.1) (392.9)
-------- --------
$4,831.4 $4,744.7
======== ========
See Notes to Financial Statements.
35
CONSOLIDATED STATEMENT OF CASH FLOWS
AMERICAN STANDARD COMPANIES INC.
Year Ended December 31,
------------------------------------
(Dollars in millions) 2001 2000 1999
--------------------------------------------------------- ------ ------ ------
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Net income $295.0 $315.2 $138.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 153.9 146.8 148.3
Amortization of goodwill and other intangibles 78.4 66.6 53.7
Non-cash stock compensation 60.1 5.8 -
Job elimination expenses accrued but unpaid 46.5 - -
Deferred income taxes 43.7 (3.0) 28.3
Restructuring and asset impairment
charges accrued (paid), net (50.3) 52.1 (7.3)
Loss from discontinued operations - - 125.8
Gain on Sale of Calorex - (57.3) -
Changes in assets and liabilities:
Accounts receivable 7.3 (75.0) (58.5)
Inventories (57.9) (116.1) (20.5)
Accounts payable (49.1) 105.4 36.2
Other accrued liabilities (3.8) (30.5) 62.4
Post-retirement benefits 8.9 (15.5) 14.6
Other long-term liabilities 6.7 (14.9) (16.1)
Other assets (43.6) 95.7 6.4
------ ------ ------
Net cash provided by continuing operations 495.8 475.3 511.6
Net cash (used) by discontinued operations - (17.2) (37.8)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 495.8 458.1 473.8
------ ------ ------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (166.5) (218.9) (274.5)
Investments in affiliated companies and other businesses (36.9) (40.2) (479.8)
Investments in computer software (58.3) (65.3) (85.5)
Proceeds from sale and leasebacks 26.6 - -
Proceeds from the sale of Calorex - 67.7 -
Proceeds from the sale of Medical segment - 30.8 -
Proceeds from disposal of property, plant and equipment 11.4 16.7 17.0
Other 9.3 (1.8) (13.0)
------ ------ ------
NET CASH (USED) BY INVESTING ACTIVITIES (214.4) (211.0) (835.8)
------ ------ ------
FINANCING ACTIVITIES:
Repayments of long-term debt, including redemption premiums (27.7) (127.2) (198.1)
Net change in revolving credit facilities (179.0) 31.7 51.7
Net change in other short-term debt (24.0) .5 21.4
Proceeds from issuance of long-term debt - - 483.5
Purchases of treasury stock (116.5) (147.5) (4.2)
Purchase of warrants (35.2) - -
Proceeds from exercise of stock options 96.9 21.7 7.0
Financing costs and other 2.7 .1 .1
------ ------ ------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (282.8) (220.7) 361.4
Effect of exchange rate changes on cash and cash equivalents (1.9) (2.2) (1.2)
------ ------ ------
Net increase (decrease) in cash and cash equivalents (3.3) 24.2 (1.8)
Cash and cash equivalents at beginning of period 85.4 61.2 63.0
------ ------ ------
Cash and cash equivalents at end of period $ 82.1 $ 85.4 $ 61.2
====== ====== ======
Cash paid during the year for:
Interest $169.0 $199.0 $180.6
Taxes $105.0 $125.9 $146.1
See Notes to Financial Statements.
36
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
AMERICAN STANDARD COMPANIES INC.
Accumulated Other
Comprehensive Income
--------------------
Retained Minimum
Earnings Deferred Foreign Pension Compre-
Unearned (Accumu- Loss on Currency Liability hensive
Common Capital Compen- Treasury lated Hedge Translation Adjust- Income
(Dollars in millions) Stock Surplus sation Stock Deficit) Contracts Effects ment (Loss)
--------------------- --------- --------- -------- --------- ---------- --------- ----------- -------- --------
BALANCE AT DECEMBER 31, 1998 $ .7 $594.0 $ - $(379.6) $(691.5) $ - $(224.6) $ -
Net income - - - - 138.3 - - - $ 138.3
Foreign currency translation - - - - - - 48.9 - 48.9
-------
Total comprehensive income $ 187.2
=======
Treasury stock purchased - - - (4.2) - - - -
Stock options exercised
including tax benefit - 8.1 - - - - - -
Common stock issued to
Employee Stock Purchase Plan - (2.7) - 10.2 - - - -
Other common stock issued - (4.3) - 10.2 - - - -
----- ------ ----- ------- ----- ----- ------- ------
BALANCE AT DECEMBER 31, 1999 .7 595.1 - (363.4) (553.2) - (175.7) -
Net income - - - - 315.2 - - - $ 315.2
Foreign currency translation - - - - - - (136.3) - (136.3)
--------
Total comprehensive income $ 178.9
=======
Treasury stock purchased - - - (147.5) - - - -
Stock options exercised
including tax benefit - 29.5 - - - - - -
Treasury shares issued to
acquire sales offices - (5.5) - 32.1 - - - -
Common stock issued to
Employee Stock Purchase Plan - (2.1) - 9.5 - - - -
Common stock issued to
Employee Stock Ownership Plan - - - 3.0 - - - -
Issuance of restricted stock - (.6) (10.8) 11.4 - - - -
Amortization of unearned
compensation - restricted stock - - 2.8 - - - - -
Compensation charge upon
acceleration of option vesting - 2.5 - - - - - -
Other common stock issued - (1.1) - 1.5 - - - -
----- ------ ----- ------- ----- ----- ------- ------
BALANCE AT DECEMBER 31, 2000 .7 617.8 (8.0) (453.4) (238.0) - (312.0) -
Net income - - - - 295.0 - - - $ 295.0
Foreign currency translation - - - - - - (19.8) - (19.8)
Deferred loss on hedge contracts - - - - - (1.0) - - (1.0)
Minimum pension liability
adjustment, net of taxes - - - - - - - (11.7) (11.7)
-------
Total comprehensive income $ 262.5
=======
Treasury stock purchased - - - (116.5) - - - -
Warrants purchased - (35.2) - - - - - -
Stock options exercised
including tax benefit - 106.4 - 20.2 - - - -
Common stock issued to
Employee Stock Ownership Plan - 14.3 - 41.1 - - - -
Common stock issued to
Employee Stock Purchase Plan - .4 - 6.7 - - - -
Amortization of unearned
compensation - restricted stock - - 2.8 - - - - -
Compensation charge upon
acceleration of option vesting - 1.1 - - - - - -
Other common stock issued
or reacquired - 2.4 - (3.4) - - - -
----- ------ ----- ------- ----- ----- ------- ------
BALANCE AT DECEMBER 31, 2001 $ .7 $707.2 $(5.2) $(505.3) $57.0 $(1.0) $(331.8) $(11.7)
===== ====== ===== ======= ===== ===== ======= ======
See Notes to Financial Statements.
37
NOTES TO FINANCIAL STATEMENTS
AMERICAN STANDARD COMPANIES INC.
NOTE 1. DESCRIPTION OF COMPANY
American Standard Companies Inc. (the "Company") is a Delaware
corporation and owns all the outstanding common stock of American Standard Inc.
and American Standard International Inc. ("ASII"), both Delaware corporations.
Hereinafter, "American Standard" or "the Company" will refer to the Company, or
to the Company and American Standard Inc. and ASII, including their
subsidiaries, as the context requires.
American Standard is a global diversified manufacturer of high quality,
brand-name products in three major business groups: air conditioning systems and
services for commercial, institutional and residential buildings; plumbing
fixtures and fittings for bathrooms and kitchens; and vehicle control systems
for medium-sized and heavy trucks, buses, trailers, sport utility vehicles and
luxury cars.
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. Certain
reclassifications of amounts reported in prior years have been made to conform
to the 2001 classifications.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
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
post-retirement benefits, warranties, goodwill, income taxes and commitments and
contingencies.
FOREIGN CURRENCY TRANSLATION - Adjustments resulting from translating
foreign functional currency assets and liabilities into U.S. dollars are
recorded in a separate component of shareholders' equity. Gains or losses
resulting from transactions in other than the functional currency are reflected
in the Consolidated Statement of Income, 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 $2.6
million in 2001, $3.4 million in 2000 and $1.2 million in 1999.
REVENUE RECOGNITION - For manufactured products, sales are recorded
when shipment occurs and/or title passes to a customer. For air conditioning
equipment sold under long-term contracts, revenue is recorded on the
percentage-of-completion basis. Revenues related to the installation of air
conditioning equipment are recorded upon completion of the installation. Revenue
under long-term service contracts on air conditioning equipment is recorded over
the term of the contract. Other service revenues are recorded as the service is
performed.
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 expensed as incurred.
COMPUTER SOFTWARE - The Company capitalizes the costs of obtaining or
developing computer software, including directly related payroll costs. The
Company amortizes those costs predominantly over five to seven years,
38
beginning when the software is ready for its intended use.
GOODWILL - Through December 31, 2001, goodwill has been amortized over
40 years. In 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. The Company will apply the new rules beginning in the first
quarter of 2002. Application of the non-amortization provisions of FAS 142 is
expected to result in an increase in net income of approximately $30 million, or
$.40 per share annually. During the first half of 2002, the Company will perform
the first of the required impairment tests of goodwill and indefinite-lived
intangible assets and has not yet determined what effect, if any, the results of
these tests will have on the results of operations or financial position of the
Company. However, based upon a preliminary evaluation, the Company believes that
no impairment will result.
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
except when historical evidence indicates otherwise. Warranty obligations beyond
one year are included in other long-term liabilities.
POST-RETIREMENT BENEFITS - Post-retirement benefits are provided for
substantially all employees of the Company, both in the U.S. and abroad. In the
U.S. the Company also provides various post-retirement health care and life
insurance benefits for certain of its employees. Such benefits are accounted for
on an accrual basis using actuarial assumptions.
DEPRECIATION - Depreciation and amortization are computed on the
straight-line method based on the estimated useful life of the asset or asset
group, which is 40 years for buildings and 5 to 10 years for machinery and
equipment.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
expensed as incurred. The Company expended approximately $184 million in 2001,
$176 million in 2000 and $156 million in 1999 for research activities and
product development and for product engineering. Expenditures for research and
product development only were $133 million, $126 million and $103 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 $127 million, $123 million and $105 million of advertising
costs in 2001, 2000 and 1999, respectively.
EARNINGS PER SHARE - Basic earnings per share have been computed using
the weighted-average number of common shares outstanding. The average number of
outstanding common shares used in computing diluted earnings per share included
average incremental shares of 1,664,777 in 2001, 2,074,387 in 2000 and 2,142,261
in 1999, primarily from the assumed exercise of stock options issued under the
Company's Stock Incentive Plan (see Note 12).
COMPREHENSIVE INCOME - Comprehensive income consists of net income,
deferred gains or losses on hedge contracts, foreign currency translation
adjustments and minimum pension liability adjustments, and is presented in
39
the Consolidated Statement of Shareholders' 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 risk related to foreign
currency, commodity price and interest rates. Gains and losses from underlying
rate or price 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 included as a component of foreign currency
translation effects in shareholders' equity or included as a component of the
transaction. Gains or losses from ineffective hedges are included in income (see
Note 13).
STOCK BASED COMPENSATION - The Company grants to employees and outside
Directors 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. DISCONTINUED OPERATIONS
In the fourth quarter of 1999, the Board of Directors of the Company
approved a plan for the sale of the Medical Systems segment. Accordingly,
Medical Systems is reported as a discontinued operation in the accompanying
Consolidated Statement of Income and Consolidated Statement of Cash Flows.
Summarized results of the discontinued Medical Systems segment are as
follows (dollars in millions):
Year Ended
December 31,
1999
------------
Sales $ 97.2
======
Loss from operations before income tax benefit $(22.6)
Income tax benefit 8.8
------
Loss from operations (13.8)
Loss on sale, including provision for operating losses in 2000
to the date of sale, net of income tax benefit (112.0)
------
Loss from discontinued operations $(125.8)
=======
NOTE 4. ACQUISITION OF ARMITAGE/DOLOMITE
In February 1999 the Company acquired the Bathrooms Division of Blue
Circle Industries PLC, a manufacturer of ceramic sanitaryware, brassware and
integrated plumbing systems, for $427 million, including fees and expenses and
net of cash acquired. The acquired business consisted of two principal
businesses, Armitage Shanks, a U.K. manufacturer, and Ceramica Dolomite, an
Italian manufacturer ("Armitage/Dolomite"). The primary markets for its products
are in the U.K., Italy, Ireland and Germany. These operations have been
integrated with the Company's European plumbing operations.
This transaction was accounted for as a purchase and the results of
operations have been included in the accompanying financial statements since the
date of acquisition. The purchase price was allocated based upon the fair value
of the assets acquired and liabilities assumed at the date of acquisition. This
resulted in an excess of purchase price over the value of net assets acquired
(goodwill) of $300 million. See Note 2, "Goodwill" for the effect of the new
accounting standard on goodwill that is effective beginning in 2002.
NOTE 5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
2000 RESTRUCTURING PROGRAM
In 2000, the Company announced a worldwide restructuring program which
includes improving efficiency through the transfer of production to locations
with lower product costs, the closure of manufacturing and
40
administrative facilities, outsourcing production of certain products,
capitalizing on synergistic opportunities in several businesses and termination
costs related to upgrading the effectiveness of the organization. In connection
with this program, in the fourth quarter of 2000 the Company recorded a net
restructuring and asset impairment charge of $70 million ($51 million net of tax
benefits, or $.71 per diluted share). This charge was comprised of $26 million
for Air Conditioning Systems and Services, $34 million for Plumbing Products and
$15 million for Vehicle Control Systems, offset by a $5 million reversal of
restructuring charges recorded previously for the 1998-1999 restructuring
program as the Company was able to complete the activities at lower cost than
originally estimated (see below). The Air Conditioning Systems and Services
charge included costs related to a workforce reduction of 700 people to
integrate international operations, costs of lease obligations on properties no
longer to be used, and asset impairment charges. The Plumbing Products charge
included an asset impairment write-down related to the closure of one plant in
the U.S. and a related workforce reduction of 250 people related to the transfer
of production to other facilities in the U.S. and Mexico. The Plumbing Products
charge also included termination costs for a workforce reduction of 350 people
related to the centralization and realignment of certain functions in Western
Europe, the Americas and Asia to eliminate redundancies. The Vehicle Control
Systems charge primarily reflects the transfer of production to the lower-labor
cost facility in Poland and consolidation of certain operations and
administrative functions in Western Europe to eliminate redundancies, resulting
in a net workforce reduction of 450 people.
In 2001 the majority of the actions described above were completed for
substantially the same amounts as originally accrued. With respect to the other
actions the Company was able to settle certain items on more favorable terms
than expected and others on less favorable terms. Additionally, the scope of
certain activities was expanded and of others reduced. For Air Conditioning
Systems and Services, the Company was able to terminate certain employees on
more favorable terms than originally contemplated and terminate lease
obligations more favorably than expected, resulting in a $5 million reversal of
the accrual. However, the Company incurred additional costs of $4 million,
principally related to discontinuing certain product lines in Europe. This
additional cost was charged to expense in 2001. For Vehicle Control Systems the
Company did not undertake all of the planned consolidation activities with
respect to administrative functions in Western Europe and therefore reversed $4
million of the 2000 accrual. However, the planned transfer of production to
Poland was expanded and accelerated, resulting in additional costs of $11
million, primarily for severance, which was charged to restructuring expense in
2001. Plumbing Products terminated fewer people than planned, resulting in a $3
million reversal of the 2000 accrual. However, in 2001 Plumbing Products
incurred additional restructuring costs, principally severance of $2 million in
North America.
Following is a summary of the 2000 restructuring program and asset
impairment charges through December 31, 2001 (dollars in millions):
Initial Non-Cash Balance Charges Charges Charges Balance
Charge Write-off Dec. 31, Accrued Reversed Paid in Dec. 31,
2000 in 2000 2000 in 2001 in 2001 2001 2001
---- ------- ---- ------- ------- ---- ----
Termination payments and
other employee costs $47.4 $ - $47.4 $11.7 $(9.4) $(44.8) $4.9
Asset impairments 24.1 (24.1) - - - - -
Other 3.7 3.7 6.1 (2.9) (5.5) 1.4
----- ------ ----- ----- ------ ------ ----
$75.2 $(24.1) $51.1 $17.8 $(12.3) $(50.3) $6.3
===== ====== ===== ===== ====== ====== ====
The Company expects that essentially all of the $6.3 million balance as
of December 31, 2001 related to the 2000 restructuring program will be utilized
by mid-2002. The remaining accrued termination payments and other employee costs
are for severance and other related payments due to terminated employees.
1998-1999 RESTRUCTURING PROGRAM
As of December 31, 2001, the Company had completed the 1998-1999
restructuring program. The $5.5 million balance of accrued charges remaining for
the program as of December 31, 2000, (see table below) were intended for the
termination of employees in a certain country in conjunction with the transfer
of production to Poland. During 2001 the Company decided not to terminate these
employees and therefore the remaining balance of $5.5 million was reversed into
income. However, the Company incurred additional charges in 2001 for the
termination of employees in other countries in connection with the move to
Poland. These charges are reflected in the table above.
The 1998-1999 restructuring program commenced in 1998 when the Company
committed to plans designed
41
to achieve lower product costs and improved operating efficiency. Accordingly,
in 1998 the Company recorded charges totaling $197 million ($183 million net of
tax benefits) comprised of $185 million for Plumbing Products, $7 million for
Air Conditioning Systems and Services and $5 million for Vehicle Control
Systems. The Plumbing Products charge included 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 1,500 people. The Air Conditioning Systems and
Services charge reflected the closure of one plant in Australia, one plant in
Europe and a workforce reduction of 100 people. The Vehicle Control Systems'
charge related to the closure of three plants in Europe and a workforce
reduction of 75 people.
During the fourth quarter of 1999 the Company recorded a $15 million
restructuring and asset impairment charge that reflected several elements. The
Company decided not to close one of its plumbing plants in North America. This
reduced the number of people to be terminated in North America by approximately
280. The Company also was able to sell the other North American plumbing plant
on more favorable terms than initially contemplated. Those two principal
reductions and other smaller reductions to original estimates resulted in a
reversal in 1999 of $29 million of amounts accrued in 1998. Management also
expanded its restructuring plans for Vehicle Control Systems and decided to
transfer additional manufacturing capacity to a facility in Poland, where labor
costs are lower. This resulted in additional charges of $17 million for the
closure of five manufacturing facilities in Europe and one in Japan, the
termination of approximately 550 employees in Europe and 25 in Japan. In
addition, certain estimated charges recorded in 1998 were increased to reflect
current estimates, resulting in additional charges incurred in 1999 of $14
million. Those increases included changes in severance and other
employee-related costs (especially in Spain where significantly higher payments
were required) and higher facilities closure costs. The 1999 charge also
included a $13 million impairment charge related to a minority equity interest
in a non-core business. In addition, in 2000 the Company determined that it
would terminate fewer people than originally expected under this plan, resulting
in the reversal of $5.6 million of charges.
Following is a summary of the 1998-1999 restructuring program and asset
impairment charges and activity through December 31, 2001 (dollars in millions):
Reversal of
Balance Charges Non-cash Payments Charges Balance
Dec. 31, Accrued Write-off ---------------- ------------------------ Dec. 31,
1998 In 1999 1999 1999 2000 1999 2000 2001 2001
---- ------- ---- ---- ---- ---- ---- ---- ----
Termination payments and
other employee costs $67.6 $20.5 $ - $(50.0) $(13.1) $(13.9) $(5.6) $(5.5) $ -
Asset impairments 15.9 8.9 (8.9) (4.7) (1.3) (9.9) - - -
Impairment of investment
in non-core business - 12.6 (12.6) - - - - - -
Other 7.9 1.4 - (1.2) (3.1) (5.0) - - -
----- ----- ------ ------ ------ ------ ----- ----- ---
$91.4 $43.4 $(21.5) $(55.9) $(17.5) $(28.8) $(5.6) $(5.5) $ -
===== ===== ====== ====== ====== ====== ===== ===== ===
NOTE 6. OTHER INCOME (EXPENSE)
Other income (expense) was as follows:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
----------------------------------- ---- ---- ----
Interest Income $ 2.2 $ 3.6 $ 4.7
Equity in net income of unconsolidated
Joint ventures 18.5 30.0 36.9
Minority interest (7.6) (9.4) 2.6
Accretion expense (16.1) (10.7) (14.4)
Foreign exchange loss (11.5) (4.3) (5.9)
Other, net 5.8 8.4 (6.5)
------ ------- ------
$(8.7) $ 17.6 $ 17.4
====== ======= ======
The Company has investments in affiliates that are accounted for on the
equity method. The most significant of these investments is in 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, trailer, bus and sport utility vehicle manufacturers and providing
aftermarket distribution for Vehicle Control Systems. The decrease in equity in
net income of unconsolidated joint ventures in 2001 was attributable to the
significant decline in the U.S. truck manufacturing market and correspondingly,
a reduction in the net income of Meritor/WABCO.
42
NOTE 7. POST-RETIREMENT BENEFITS
The Company sponsors post-retirement 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). From
May 1997 through November 2000, the Company funded basic and matching
allocations to the ESOP accounts through weekly contributions of cash. Prior to
May 1997 and subsequent to November 2000, 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 will fund the ESOP in future years through contributions of either
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 U.S. the Company also provides various
post-retirement health care and life insurance benefits for certain of its
employees. Funding decisions are based upon the tax and statutory considerations
in each country. At December 31, 2001, funded plan assets related to pensions
were held primarily in fixed income and equity funds. Post-retirement health and
life insurance benefits are funded as incurred.
The following table provides a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ending
December 31, 2001 and 2000, and a statement of the funded status as of December
31, 2001 and 2000:
2001 2001 2001 2000 2000 2000
----------- ------------ ----------- ------------ ------------ ----------
DOMESTIC Domestic
DOMESTIC HEALTH & FOREIGN Domestic Health & Foreign
PENSION LIFE INS. PENSION Pension Life Ins. Pension
(Dollars in millions) BENEFITS BENEFITS BENEFITS Benefits Benefits Benefits
----------------------------------------- ----------- ------------ ----------- ------------ ------------ ----------
Reconciliation of benefit obligation:
Obligation at beginning of year $ 454.2 $ 206.7 $ 544.1 $ 418.4 $ 193.1 $ 559.7
Service cost 12.2 6.6 19.9 10.5 5.4 22.8
Interest cost 34.4 14.2 28.1 31.8 14.6 30.5
Participant contributions - 3.6 2.7 - 4.8 3.7
Plan amendments 18.4 1.2 - .6 - .1
Actuarial loss 23.4 66.7 14.6 41.9 8.4 10.4
Divestitures - - (.7) - - (3.7)
Benefit payments (32.0) (18.5) (33.2) (49.0) (19.6) (35.0)
Foreign exchange effects - - (18.2) - - (44.4)
-------- -------- -------- ------- -------- --------
Obligation at end of year $ 510.6 $ 280.5 $ 557.3 $ 454.2 $ 206.7 $ 544.1
======== ======== ======== ======= ======== ========
Reconciliation of fair value of plan
assets:
Fair value of plan assets at beginning
of year $ 449.7 $ - $ 367.9 $ 497.7 $ - $ 406.0
Actual return (loss) on assets (34.6) - (23.5) (19.0) - 4.2
Divestitures - - - - - (8.6)
Employer contributions 2.3 14.9 26.3 20.0 14.8 26.7
Participant contributions - 3.6 2.7 - 4.8 3.7
Benefit payments (32.0) (18.5) (33.2) (49.0) (19.6) (35.0)
Other expenses - - (2.4) - - (1.3)
Foreign exchange effects - - (10.9) - - (27.8)
-------- -------- -------- ------- -------- --------
Fair value of plan assets at end of year $ 385.4 $ - $ 326.9 $ 449.7 $ - $ 367.9
======== ======== ======== ======= ======== ========
Funded Status at December 31:
Funded status $(125.2) $(280.5) $(230.4) $ (4.5) $(206.7) $(176.2)
Unrecognized prior service cost
(benefit) 50.7 (4.5) 5.7 37.0 (6.4) 6.2
Unrecognized net actuarial (gain) loss 34.6 98.4 20.0 (59.1) 21.3 (39.4)
-------- -------- -------- ------- -------- --------
Net amount recognized $ (39.9) $(186.6) $(204.7) $(26.6) $(191.8) $(209.4)
======== ======== ======== ======= ======== ========
43
The following table provides a summary of pension 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:
2001 2001 2000 2000
----------------- ----------------- ----------------- ------------------
ASSETS IN ACCUMULATED Assets In Accumulated
EXCESS OF BENEFIT Excess of Benefit
ACCUMULATED OBLIGATIONS Accumulated Obligations
BENEFIT IN EXCESS OF Benefit In Excess of
(Dollars in millions) OBLIGATIONS ASSETS Obligations Assets
------------------------------------------- ----------------- ----------------- ----------------- ------------------
Domestic pension benefits:
Projected benefit obligation $ - $510.6 $440.5 $13.7
Accumulated benefit obligation - 491.8 433.8 8.0
Fair value of plan assets - 385.4 449.7 -
Accrued benefit liabilities - (108.8) (18.3) (8.3)
Intangible asset - 49.7 - -
Accumulated other comprehensive income - 19.2 - -
Foreign pension benefits:
Projected benefit obligation $290.1 $267.2 $271.7 $272.4
Accumulated benefit obligation 247.9 242.7 239.0 246.9
Fair value of plan assets 312.1 14.8 350.0 17.9
Prepaid benefit costs (accrued benefit 57.1 (261.8) 56.1 (265.5)
liabilities)
For certain domestic plans for which the accumulated benefit obligation
exceeded the total of plan assets, in 2001 the Company recorded an additional
minimum liability of $68.9 million as part of its reserve for post-retirement
benefits. In connection therewith, an intangible asset was recorded in Other
Assets for $49.7 million as of December 31, 2001, to the extent of unrecognized
prior service cost, and accumulated other comprehensive income (in shareholders'
equity/deficit) was charged $19.2 million ($11.7 million net of tax).
The projected benefit obligation for post-retirement benefits was
determined using the following assumptions:
2001 2001 2000 2000
------------ ------------ ------------ ------------
DOMESTIC FOREIGN Domestic Foreign
------------ ------------ ------------ ------------
Assumptions as of December 31:
Discount rate 7.25% 4.25%-6.50% 7.50% 4.50%-7.00%
Long-term rate of inflation 2.80% .05%-2.80% 2.80% 0.30%-2.30%
Merit and promotion increase 1.70% 1.70% 1.70% 1.70%
Rate of return on plan assets for the year 9.00% 5.00%-7.00% 9.00% 4.75%-7.25%
The weighted-average annual assumed rate of increase in the health care
cost trend rate is 5% for 2001 and is assumed to increase to 10% in 2002 and
gradually decline to 5% over the next 10 years. 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 post-retirement
obligation $28.7 $(24.4)
Effect on total of service and interest cost components of net periodic
post-retirement health care benefit costs $3.3 $(2.7)
Total post-retirement costs were:
Year ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
------------------------------------------- ---- ---- ----
Pension benefits $32.5 $29.1 $51.8
Health and life insurance benefits 20.1 19.3 20.4
------ ----- ------
Defined benefit plan cost 52.6 48.4 72.2
Defined contribution plan cost, principally ESOP 55.4 49.7 46.2
------ ----- ------
Total post-retirement costs, including
accretion expense $108.0 $98.1 $118.4
====== ===== ======
44
Post-retirement cost had the following components:
Year Ended December 31,
-------------------------------------------------------------------------
2001 2001 2000 2000 1999 1999
----------- ------------ ----------- ------------ ----------- ----------
HEALTH & Health & Health &
PENSION LIFE INS. Pension Life Ins. Pension Life Ins.
(Dollars in millions) BENEFITS BENEFITS Benefits Benefits Benefits Benefits
----------------------------------------------------- ------------ ----------- ------------ ----------- ----------
Service cost-benefits earned during the
period $ 32.1 $6.6 $ 33.3 $5.4 $41.1 $6.5
Interest cost on the projected benefit
obligation 62.5 14.2 62.3 14.6 57.1 13.7
Less assumed return on plan assets (60.6) - (68.8) - (56.1) -
Amortization of prior service cost 4.9 (.7) 4.3 (0.7) 4.9 (.8)
Amortization of net (gain) loss (6.4) - (3.8) - 4.8 1.0
----- ----- ------ ----- ------ -----
Defined benefit plan cost 32.5 20.1 27.3 19.3 51.8 20.4
----- ----- ------ ----- ------ -----
Curtailment loss - - 1.8 - - -
----- ----- ------ ----- ------ -----
Net defined benefit plan cost after $32.5 $20.1 $ 29.1 $19.3 $ 51.8 $20.4
====== ====== ======= ====== ======= =====
curtailments
Accretion expense (income) reflected
in "other income (expense)" $ 1.9 $14.2 $ (3.9) $14.6 $ .7 $13.7
===== ===== ====== ===== ====== =====
Amortization of prior service costs is computed on the straight-line
method over the average remaining service period of active participants.
NOTE 8. INCOME TAXES
The Company's income from continuing operations before income taxes and
the applicable provision (benefit) for income taxes were:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
------------------------------------ ------ ------ -----
Income from continuing operations
before income taxes:
Domestic $326.5 $268.9 (a) $298.1
Foreign 149.8 240.5 (a) 153.4
------ ------ ------
$476.3 $509.4 $451.5
====== ====== ======
Provision (benefit) for income taxes:
Current:
Domestic $116.8 $109.5 $116.9
Foreign 20.8 87.7 42.2
------ ------ ------
137.6 197.2 159.1
------ ------ ------
Deferred:
Domestic 18.1 12.5 17.2
Foreign 25.6 (15.5) 11.1
------ ------ ------
43.7 (3.0) 28.3
------ ------ ------
Total provision $181.3 $194.2 $187.4
====== ====== ======
(a) Includes $57.3 million gain on sale of Mexican water heater business in
2000: domestic $7.9 million; foreign $49.4 million. Associated taxes of $5.7
million were all foreign. Also includes $69.6 million of restructuring expense
in 2000: domestic $25.0 million; foreign $44.6 million. Associated tax benefits
were $18.9 million: domestic $10.1 million; foreign $8.8 million.
45
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 2001, 2000 and 1999 to the income before income taxes is as follows:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000 1999
------------------------------------------- ------ ------ -----
Tax provision at statutory rate $166.7 $178.3 $158.0
Increase (decrease) in valuation allowance (6.8) (12.0) 35.7
Nondeductible goodwill amortization and
Goodwill write-offs 7.5 7.1 7.5
Foreign tax effects (.9) 12.0 (21.4)
State tax provision 9.9 7.3 1.5
Other, net 4.9 1.5 6.1
------ ------ ------
Total provision $181.3 $194.2 $187.4
====== ====== ======
The decrease in the valuation allowance in 2001 was primarily
attributable to utilization of a domestic capital loss carryforward. The
decrease in the valuation allowance in 2000 was primarily attributable to the
utilization of foreign net operating loss carryforwards. The increase in the
valuation allowance in 1999 was primarily attributable to the generation of
foreign net operating loss carryforwards (primarily related to restructuring
charges in 1998) that were not expected to be realized.
The following table details the gross deferred tax liabilities and
assets and the related valuation allowances:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000
------------------------------------------------ ------ -----
Deferred tax liabilities:
Facilities (accelerated depreciation, capitalized
Interest and purchase accounting differences) $ 163.4 $ 148.3
Inventory (LIFO and purchase accounting 18.2 6.0
differences)
Employee benefits 14.2 11.8
Other 90.3 71.4
------ ------
286.1 237.5
------ ------
Deferred tax assets:
Post-retirement benefits 129.4 123.5
Warranties 88.2 98.4
Foreign net operating losses, tax credits and
Capital losses 116.0 122.7
Reserves 103.1 95.4
Other 6.5 5.0
Valuation allowances (116.0) (122.7)
------ ------
327.2 322.3
------ ------
Net deferred tax assets $ 41.1 $ 84.8
====== ======
Deferred tax assets related to foreign tax credits, foreign net
operating loss carry-forwards and domestic capital 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 and capital gains. The foreign tax credits,
net operating losses and capital 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.
Cash taxes paid were $105 million, $126 million and $146 million in
2001, 2000 and 1999, respectively.
The Company has been in discussions and negotiations with The State
Finance Administration for the North Rhine-Westphalia, Germany (the "German Tax
Authority") concerning certain tax issues covering the years 1984-1994. For the
years 1984-1990, the Company received a tax assessment from the German Tax
Authority in the amount of $90 million. For years 1991-1994, the Company
anticipated a further assessment for an amount
46
substantially greater than that assessed for 1984-1990. On January 15, 2002, the
Company settled all issues for all years (1984-1994) for a current cash payment
of approximately $55 million plus $30 million previously deposited in escrow.
Since the Company has adequately reserved for all issues, the settlement will
have no future impact on results of operations.
NOTE 9. INVENTORIES
The components of inventories, which are carried on a last-in,
first-out (LIFO) basis, are as follows:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000
--------------------------- ------ -----
Finished products $378.1 $353.8
Products in process 135.3 116.9
Raw materials 143.7 135.6
------ ------
Inventories at cost $657.1 $606.3
====== ======
The current replacement cost of inventories exceeded the LIFO carrying
cost by approximately $18 million in both years.
NOTE 10. FACILITIES
The components of facilities, at cost, are as follows:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000
--------------------------- -------- --------
Land $ 78.0 $ 81.7
Buildings 587.0 526.8
Machinery and equipment 1,243.3 1,238.1
Improvements in progress 112.3 139.8
-------- --------
Gross facilities 2,020.6 1,986.4
Less: accumulated depreciation 657.8 603.7
-------- --------
Net facilities $1,362.8 $1,382.7
======== ========
NOTE 11. DEBT
On November 6, 2001, the Company entered into two new bank credit
agreements, which replaced the 1997 credit agreement (the "1997 Credit
Agreement"). The new credit agreements provide the Company and certain
subsidiaries (the "Borrowers") with senior unsecured revolving credit
facilities, aggregating $1.3 billion, available to all Borrowers as follows: (a)
a five-year, $1 billion multi-currency revolving credit facility which expires
in 2006 and (b) a 364-day, $300 million U.S. dollar revolving credit facility
which expires November 5, 2002 with an option to renew for an additional 364
days.
On May 28, 1999, American Standard Inc. completed the sale of the
equivalent of $460 million of Senior Notes, with an average interest rate of
7.7%, issued in three series: 250 million Euro Senior Notes due 2006; 100
million U.S. Dollar Senior Notes due 2009 and 60 million Sterling Senior Notes
due 2009. Net proceeds of $452 million from the offering were applied to
refinance borrowings incurred to pay $150 million of 10 7/8 % Senior Notes at
maturity on May 15, 1999 and to refinance a substantial portion of the purchase
price of a business acquired in 1999. The May 28, 1999 sale of Senior Notes,
which are not subject to redemption, was made pursuant to a shelf registration
statement jointly filed by American Standard Companies Inc. and its wholly-owned
subsidiary American Standard Inc. covering $1 billion of senior debt (the "1998
Shelf Registration"). Debt securities sold under the 1998 Shelf Registration are
issued by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc. The Company intends to use the net proceeds from any
future sales of such debt securities under the 1998 Shelf Registration for
general corporate purposes, which may include certain investments, acquisitions,
additions to working capital or capital expenditures.
SHORT-TERM - Short-term borrowings are available outside the U.S. under
informal credit facilities and are typically in the form of overdrafts. At
December 31, 2001, the Company had $42 million of such foreign short-term debt
outstanding at an average interest rate of 6.64% per annum. The Company also had
an additional $87 million of unused foreign facilities. The banks may revoke
these facilities at any time. The Company also has credit facilities
47
for its operations in China totaling $55 million, of which $16 million was
outstanding as of December 31, 2001, with remaining availability of $34 million
after $5 million letters-of-credit usage.
Average short-term borrowings for 2001, 2000 and 1999 were $85 million,
$88 million and $1,004 million, respectively, at weighted-average interest rates
of 7.60%, 8.45% and 5.30%, respectively. Total short-term borrowings outstanding
at December 31, 2001, 2000 and 1999 were $59 million, $84 million and $737
million, respectively, at weighted-average interest rates of 6.6%, 8.3% and
6.4%, respectively. Short-term borrowings were higher in 1999 and average
interest rates were lower that year because revolving credit borrowings under
the 1997 Credit Agreement were classified as short-term in that year and
borrowings thereunder carried much lower rates than other short-term borrowings.
LONG-TERM - The aggregate borrowings of up to $1.3 billion available
under the new credit facilities can be used for general corporate purposes, of
which up to $250 million may be used for issuing letters of credit and up to
$150 million for same-day, short-term borrowings. Each loan outstanding under
these facilities is due at the end of each interest period (a maximum of 12
months). The Company may, however, concurrently reborrow the outstanding
obligations subject to compliance with certain conditions contained in the
agreements. All borrowings under the new credit agreements are therefore
classified as long-term.
The Company pays a facilities fee of .225% per annum on the five-year
facility and .175% per annum on the 364-day facility (whether or not borrowed),
and borrowings thereunder bear interest generally at the London Interbank
Offered Rate ("LIBOR") plus 1.025% and 1.075% per annum, respectively. These
LIBOR spreads are subject to adjustment should the Company's debt rating change.
The Company also pays 1.025% per annum plus issuance fees for letters of credit.
At December 31, 2001, there were $725 million of borrowings outstanding
under the five-year facility and $66 million outstanding under the 364-day
facility. Remaining availability under these facilities at December 31, 2001,
after reduction for $110 million of letters of credit usage was $399 million.
The amounts of long-term debt maturing in years 2002 through 2006 are:
2002 - $11.4 million; 2003 - $202.0 million; 2004 - $9.0 million; 2005 - $217.2
million and 2006 - $949.9 million.
Long-term debt is recorded at face amount, net of unamortized discount,
and debt denominated in foreign currencies is reported at its U.S. dollar
equivalent as follows:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000
--------------------------------------------- -------- --------
Five-year credit agreement $ 725.0 $ -
364-day credit agreement 66.0 -
1997 Credit Agreement - 990.4
9 1/4% sinking fund debentures, due
in installments from 2002 to 2006 37.5 60.0
7 1/8% senior notes due 2003 124.9 124.8
7 3/8% senior notes due 2005 207.6 207.4
7.125% Euro senior notes due 2006 216.0 225.3
7 3/8% senior notes due 2008 318.2 318.2
8.25% senior notes due 2009 97.4 97.4
8.25% Sterling senior notes due 2009 86.1 88.1
7 5/8% senior notes due 2010 260.6 260.5
Other long-term debt 14.1 15.9
-------- --------
2,153.4 2,388.0
Less current maturities 11.4 12.4
-------- --------
Total long-term debt $2,142.0 $2,375.6
======== ========
48
The U.S. Dollar equivalent of borrowings outstanding under the new
credit facilities at December 31, 2001, and under the 1997 Credit Agreement at
December 31, 2000, and the effective weighted-average interest rates were:
Year Ended December 31,
-----------------------
(Dollars in millions) 2001 2000
------------------------------------------------- ------ ------
U.S. dollar loans at 2.96% in 2001; 6.94% in 2000 $791.0 $618.2
Deutschemark loans at 5.67% in 2000 - 342.6
Dutch guilder loans at 5.65% in 2000 - 29.6
------ ------
Total credit agreement loans $791.0 $990.4
====== ======
On January 8, 2002, the company redeemed all of the 9 1/4% Sinking Fund
Debentures, at a redemption price 102.313% of the face amount of the bonds plus
unpaid interest up to the redemption date. The total redemption price of $38.7
million, including accrued interest of $.4 million, was paid with lower-cost
borrowings under the new credit agreements.
None of the Senior Notes outstanding as of December 31, 2001, is
redeemable by the Company prior to maturity.
During the second half of 2001 the Company entered interest rate swaps
that effectively convert fixed-rate debt to variable-rate debt on $225 million
of the 7 3/8% Senior Notes due 2008 and $75 million of the 7 3/8% Senior Notes
due 2005. The maturity date of the interest rate swaps coincides with the
maturity date of the underlying debt. Under these swaps, the Company pays a
specified variable interest rate and receives the fixed rate applicable to the
underlying debt. The interest income/expense on the swaps is accrued as earned
and recorded as a reduction/increase of the interest expense accrued on the
fixed-rate debt. As of December 31, 2001, the average effective interest rate on
the $300 million of Senior Notes to which the swaps apply was 3.85%. See Note 13
for additional information on the interest rate swaps.
Interest costs capitalized as part of the cost of constructing
facilities for the years ended December 31, 2001, 2000 and 1999, were $4.8
million, $2.0 million and $3.3 million, respectively. Cash interest paid in
those years on all outstanding indebtedness amounted to $169 million, $199
million and $181 million, respectively.
The Company, American Standard Inc., American Standard International
Inc. and certain of their domestic subsidiaries guarantee obligations under the
new credit agreements. In addition, significant foreign subsidiaries guarantee
obligations of certain foreign borrowers under the new credit agreements.
The new credit agreements contain various covenants that limit, among
other things, indebtedness, liens, sale and leaseback transactions, subsidiary
indebtedness including preferred stock, mergers, consolidations, dissolutions
and asset sales, investments or acquisitions, dividends and redemptions of
capital stock, loans and advances, and certain other business activities. The
covenants also require the Company to meet certain financial tests: ratio of
consolidated debt to EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization), and consolidated free cash flow to interest expense. The Company
believes it is currently in compliance with the covenants contained in the new
credit agreements.
NOTE 12. 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 the second quarter of 2001, the Company bought back warrants for the
purchase of 3 million shares of the Company's common stock held by Kelso ASI
Partners, L. P. for $35 million.
In 1998 and 2000, the Company's Board of Directors approved plans to
purchase up to $400 million of the Company's common stock to offset the dilutive
effect of issuing shares of common stock pursuant to the Company's
49
stock option plan and other incentive and benefit plans funded with shares of
stock. Pursuant to these authorizations, the Company purchased 1,921,050 shares
in 2001 for $116 million, 3,559,900 shares in 2000 for $148 million and 113,600
shares in 1999 for $4 million. As of December 31, 2001, the unexpended
authorization was $48 million. On February 7, 2002, the Board authorized
additional share repurchases of up to $150 million.
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. The Board of Directors authorized increases of 1.9 million shares in 2000
and 5 million shares in 1998 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 14,504,475, 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 1999,
2000 and 2001 follows:
Weighted- Weighted-
Average Average
Exercise Fair Value
Shares Price Of Grants
------ ----- ---------
Outstanding December 31, 1998 6,384,152 $28.69
Granted 2,445,750 35.00 $13.97
Exercised (352,491) 23.54
Forfeited (178,876) 36.34
----------
Outstanding December 31, 1999 8,298,535 30.61
Granted 1,295,200 39.80 $16.03
Exercised (1,175,696) 22.62
Forfeited (154,570) 35.33
----------
OUTSTANDING DECEMBER 31, 2000 8,263,469 33.06
GRANTED 1,538,350 57.14 $19.76
EXERCISED (3,612,289) 28.51
FORFEITED (271,115) 44.55
----------
OUTSTANDING DECEMBER 31, 2001 5,918,415 $41.64
EXERCISABLE AT END OF YEAR:
1999 4,634,288
2000 5,055,723
2001 3,200,295
On January 1, 2000, the Chief Executive Officer of the Company was
granted an award of 250,000 shares of restricted stock. Such shares vest in
three equal annual installments beginning January 1, 2003. On February 7, 2002,
awards in the form of options to purchase 1,842,050 shares were granted.
Exercise prices for options outstanding as of December 31, 2001, ranged
from $20 to $69.50. The weighted-average remaining contractual life of those
options is 7.3 years. As of December 31, 2001, there were 2,109,111 shares
available for grant under the plan and other incentive bonus plans.
The Company has elected to follow Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for stock options and
accordingly has recognized no compensation expense. Had compensation cost been
determined based upon the fair value at the grant date for awards consistent
with the methodology prescribed by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net income and
net income per diluted share in 2001 would have decreased by $16.6 million and
$.23, respectively; net income and net income per diluted share in 2000 would
have decreased by $16.2 million and $.22, respectively; and the net income and
net income per diluted share in 1999 would have decreased by $13.7 million and
$.19, respectively. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: risk-free interest rate of 4.4% in 2001, 5.12% in 2000 and 6.8% in
1999; volatility of 30% in 2001, 31% in 2000 and 31% in 1999; an expected life
of 5 years in 2001, 6 years in 2000 and 5 years in 1999; and a dividend yield of
zero. These estimated expense amounts are not necessarily indicative of amounts
in years beyond 2001.
50
In 1997, shareholders approved the establishment of the Employee Stock
Purchase Plan commencing January 1, 1998. The Company has implemented 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 per employee. 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. Employees purchased 139,727 shares in 2001, 209,354
shares in 2000 and 229,368 shares in 1999 under this plan.
NOTE 13. FINANCIAL INSTRUMENTS
From time to time, the Company enters into transactions to manage its
financial market risk, including commodity price, foreign exchange and interest
rate risk. These transactions involve off-balance sheet contracts and financial
instruments with financial risk. To minimize the risk of counter-party
nonperformance, such agreements are made only through major financial
institutions with significant experience in such financial instruments. Such
agreements hedge only specific transactions or commitments.
To manage the balance between floating interest rate debt and fixed
interest rate debt, the Company enters into interest rate swaps that effectively
convert fixed-rate debt to variable-rate debt. The maturity date of these swap
contracts coincides with the maturity date of the underlying debt. Under these
interest rate swaps, the Company pays a specified variable interest rate and
receives the fixed rate applicable to the underlying debt. The interest
income/expense on the swaps is accrued as earned and recorded as a
reduction/increase of the interest expense accrued on the fixed-rate debt.
To minimize the risk of fluctuations in the market price of major raw
material commodities, such as copper and aluminum used in the manufacturing
process, the Company may enter commodity forward contracts to effectively fix
the cost of the commodity. Maturity dates of the contracts are scheduled to
coincide with market purchases of the commodity. Cash proceeds or payments
between the Company and the counter-party at maturity of the contracts are
recognized as an adjustment to the cost of the commodity purchased, to the
extent the hedge is effective. The Company generally does not enter commodity
hedges extending beyond eighteen months.
Since the Company sells certain finished products in currencies
different than the currency of the subsidiary that manufactured the products,
the Company is exposed to foreign currency risk on such transactions. The
Company hedges some of this risk by entering foreign currency forward contracts
that effectively fix the transaction cost. Cash settlement proceeds or payments
upon maturity of the contracts are included in the price of the transaction
hedged, to the extent the hedge is effective. The Company generally does not
enter currency hedges extending beyond one year.
The notional amount and estimated fair value of interest rate swaps and
hedging contracts at December 31, 2001 and 2000 are as follows:
2001 2000
--------------------- -----------------------
NOTIONAL FAIR Notional Fair
(Dollars in millions) VALUE VALUE Value Value
------------------------------- ------ ----- ------ -----
Interest rate swaps $300.0 $1.6 $ - $ -
Commodity forward contracts 63.2 (2.4) 81.6 (1.6)
Foreign currency forward contracts 18.7 .6 23.5 (.8)
51
The estimated fair value of other financial instruments at December 31,
2001 and their carrying amounts were:
CARRYING FAIR
(Dollars in millions) VALUE VALUE
--------------------- ----- -----
Credit agreement loans $791 $791
9 1/4% sinking fund debentures 38 38
7 1/8% senior notes due 2003 125 127
7 3/8% senior notes due 2005 208 212
7.125% Euro senior notes due 2006 216 220
7 3/8% senior notes due 2008 318 318
8.25% senior notes due 2009 97 101
8.25% Sterling senior notes due 2009 86 88
7 5/8% senior notes due 2010 261 261
Other debt obligations 14 14
The fair values presented above are estimates as of December 31, 2001
and are not necessarily indicative of amounts for which the Company could settle
such instruments currently or indicative of the intent or ability of the Company
to dispose of or liquidate them.
The fair values of the Company's credit agreement loans were estimated
by the Company to approximate their carrying value since the credit agreement
was recently negotiated. 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 debt obligations are not significant
and were estimated by the Company to approximate their carrying value.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments under all non-cancelable leases with
original terms in excess of one year in effect at December 31, 2001, are: $107
million in 2002; $94 million in 2003; $77 million in 2004; $59 million in 2005;
$48 million in 2006; and $72 million thereafter, a total of $457 million. Net
rental expenses for all operating leases were $140 million, $127 million and $87
million for the years ended December 31, 2001, 2000, and 1999, 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,
including certain facilities in the process of being closed (see Note 5). In
those instances where it is probable as a result of such proceedings that the
Company will incur costs that 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.
In October 1999, verdicts were returned against the Company totaling
$18 million related to claims of a terminated sales agent and distributor of air
conditioning equipment. The Company is currently seeking relief from the
verdicts at the trial court level and, if necessary, will appeal the verdicts,
believing that substantial errors were made during the trial and that the issues
before the trial court were wrongly decided.
Over the years the Company has been named as defendant in cases
claiming personal injury from asbestos. The Company does not consider that it
has any significant financial risk because: it has never had to pay any of its
money to claimants; it has ample insurance coverage with small yearly
deductibles; and the products that have been named in claims have a low-risk
profile and/or no direct linkage to the specific claim.
The Company has commitments and performance guarantees, including
energy savings guarantees, under long-term service and maintenance contracts
related to its air conditioning equipment and system controls. Through 2001 the
Company has experienced no losses under such arrangements.
52
NOTE 15. SEGMENTS
In addition to the segment data in the following table, see also the
five-year summary in Item 6, "Selected Financial Data" on page 18 and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 19 through 30.
SEGMENT DATA
(Dollars in millions) 2001 2000 1999
---------------------------------------------- ------ ------ ------
SALES:
Air Conditioning Systems and Services $4,692 $4,726 $4,337
Plumbing Products 1,813 1,803 1,755
Vehicle Control Systems 960 1,069 1,098
------ ------ ------
$7,465 $7,598 $7,190
====== ====== ======
SEGMENT INCOME:
Air Conditioning Systems and Services $ 515 $ 531 $ 453
Plumbing Products 148 162 164
Vehicle Control Systems 124 147 134
------ ------ ------
787 840 751
Equity in net income of unconsolidated joint
ventures 19 30 37
Gain on sale of business - 57 -
Restructuring and asset impairment charges - (70) (15)
Interest expense (169) (199) (188)
Corporate expenses (161) (149) (134)
------ ------ ------
Income from continuing operations before
income taxes $ 476 $ 509 $ 451
====== ====== ======
SALES - GEOGRAPHIC DISTRIBUTION (a):
United States $4,265 $4,308 $3,840
Europe (countries below included in total) 2,128 2,170 2,270
Germany 520 599 695
U.K. 433 463 515
France 419 421 372
Italy 300 309 333
Other 1,413 1,423 1,295
Eliminations (341) (303) (215)
------ ------ ------
Total sales $7,465 $7,598 $7,190
====== ====== ======
SEGMENT INCOME--GEOGRAPHIC DISTRIBUTION:
United States $ 515 $ 567 $ 505
Europe 173 206 215
Other 99 67 31
------ ------ ------
Total segment income $ 787 $ 840 $ 751
====== ====== ======
(a) Revenues from external customers are classified by country of origin.
(Dollars in millions) 2001 2000 1999
-------------------------------------------- ------ ------ -----
ASSETS
Air Conditioning Systems and Services $2,177 $2,116 $2,028
Plumbing Products 1,694 1,666 1,673
Vehicle Control Systems 590 665 684
------ ------ ------
Total identifiable assets $4,461 $4,447 $4,385
====== ====== ======
Geographic distribution:
United States $1,809 $1,707 $1,567
Europe 1,774 1,833 1,946
Other 878 907 872
------ ------ ------
Total identifiable assets 4,461 4,447 4,385
Prepaid charges 32 33 42
Cash and cash equivalents 82 85 61
Net assets of discontinued operations held for sale - - 51
Corporate assets 256 180 147
------ ------ ------
Total assets $4,831 $4,745 $4,686
====== ====== ======
GOODWILL INCLUDED IN ASSETS:
Air Conditioning Systems and Services $ 202 $ 224 $ 224
Plumbing Products 484 435 460
Vehicle Control Systems 243 276 307
------ ------ ------
Total goodwill $ 929 $ 935 $ 991
====== ====== ======
53
SEGMENT DATA (CONTINUED)
(Dollars in millions) 2001 2000 1999
---------------------------------------------- ------ ------ -------
CAPITAL EXPENDITURES AND INVESTMENTS
Air Conditioning Systems and Services $ 101 $ 116 $ 155
Plumbing Products 72 99 123
Vehicle Control Systems 30 44 49
----- ------ ------
Total capital expenditures and investments $ 203 $ 259 $ 327
===== ===== =====
DEPRECIATION AND AMORTIZATION:
Air Conditioning Systems and Services $ 82 $ 75 $ 71
Plumbing Products 89 85 80
Vehicle Control Systems 57 50 51
Corporate 4 3 -
----- ----- -----
Total depreciation and amortization $ 232 $ 213 $ 202
===== ===== =====
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION
All of the Company's Senior Notes and the 9 1/4% Sinking Fund
Debentures were issued by its wholly owned subsidiary, American Standard Inc.
("ASI"). American Standard Companies Inc. (the "Parent Company") fully and
unconditionally guarantees the payment obligations under these securities (the
Company's "Public Debt"). In lieu of providing separate audited financial
statements for ASI, the Company has included the accompanying audited
consolidating condensed financial information. Management believes that separate
financial statements of ASI are not material to investors. The following
supplemental financial information sets forth, on an unconsolidated basis,
statements of income and statements of cash flows for the years ended December
31, 2001, 2000 and 1999, and balance sheets as of December 31, 2001 and 2000 for
the Parent Company, ASI, and the subsidiaries of the Parent Company which are
not subsidiaries of ASI (the "Other Subsidiaries"). None of the Other
Subsidiaries guarantees the Public Debt of ASI. On December 31, 1999 the Company
completed an internal reorganization whereby ASI transferred ownership of all
the Other Subsidiaries and their intellectual property rights to another wholly
owned subsidiary, American Standard International Inc. Therefore, prior to
December 31, 1999, there were no Other Subsidiaries. The equity method of
accounting is used to reflect investments of the Parent Company in ASI and Other
Subsidiaries.
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
Other Consoli-
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
----------------------------------------------------- ------- --- ------ ------ -----
Sales $4,319.3 $3,384.4 $(238.4) $7,465.3
-------- -------- ------- --------
Costs and expenses:
Cost of sales 3,289.5 2,566.4 (238.4) 5,617.5
Selling and administrative expenses 643.1 551.0 1,194.1
Other expense 6.3 2.4 8.7
Interest expense 140.9 27.8 168.7
Intercompany interest expense (income)
14.7 (14.7) -
-------- -------- ------- --------
Total expenses 4,094.5 3,132.9 (238.4) 6,989.0
-------- -------- ------- --------
Income from continuing operations before income taxes
and equity in net income of consolidated 224.8 251.5 476.3
subsidiaries
Income taxes 89.0 92.3 - 181.3
-------- -------- ------- --------
Income from continuing operations before equity
in net income of consolidated subsidiaries 135.8 159.2 295.0
Equity in net income of consolidated subsidiaries $295.0 - - (295.0) -
------ -------- -------- ------- --------
Net income $295.0 $ 135.8 $ 159.2 $(295.0) $ 295.0
====== ======== ======== ======= ========
54
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2001
Other Consoli-
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
----------------------------------------------------- ------- --- ------ ------ -----
ASSETS
Current assets:
Cash and cash equivalents $ 3.1 $ 79.0 $ 82.1
Accounts receivable, net $ .5 464.6 533.2 998.3
Inventories 310.0 347.1 657.1
Other current assets 108.3 50.6 158.9
------ -------- -------- --------
Total current assets .5 886.0 1,009.9 1,896.4
Facilities, net 544.8 818.0 1,362.8
Goodwill, net 134.2 794.8 929.0
Investment in subsidiaries 454.7 - - $(454.7) -
Other assets 438.3 204.9 643.2
------ -------- -------- -------- --------
Total assets $455.2 $2,003.3 $2,827.6 $(454.7) $4,831.4
====== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Loans payable to banks $ .1 $ 58.6 $ 58.7
Current maturities of long-term debt 10.0 1.4 11.4
Other current liabilities 865.6 1,618.2
-------- -------- --------
752.6
Total current liabilities 875.7 812.6 1,688.3
Long-term debt 2,137.8 4.2 2,142.0
Reserve for post-retirement benefits 282.2 207.3 489.5
Intercompany accounts, net $545.3 20.7 (566.0) -
Other long-term liabilities 315.7 286.0 601.7
------ -------- -------- -------- --------
Total liabilities 545.3 3,632.1 744.1 $ - 4,921.5
------ -------- -------- -------- --------
Total shareholders' (deficit) equity (90.1) (1,628.8) 2,083.5 (454.7) (90.1)
------ -------- -------- -------- --------
Total liabilities and shareholders' (deficit)
equity $455.2 $2,003.3 $2,827.6 $(454.7) $4,831.4
====== ======== ======== ======== ========
55
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2001
Other Consoli-
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
----------------------------------------------------- ------- ------ ------ ------ ------
Cash provided (used) by:
Operating activities:
Net income $295.0 $135.8 $159.2 $(295.0) $295.0
Adjustments to reconcile net income
to net cash provided by operations:
Restructuring and asset impairment
charges accrued (paid), net (13.6) (36.7) (50.3)
Depreciation and amortization 100.8 131.5 232.3
Non-cash stock compensation 60.1 60.1
Job elimination expenses accrued but unpaid 17.8 28.7 46.5
Deferred income taxes 25.3 18.4 43.7
Equity in net income of subsidiary (295.0) 295.0 -
Changes in assets and liabilities:
Accounts receivable .6 27.4 (20.7) 7.3
Inventories 17.0 (74.9) (57.9)
Accounts payable (.4) (30.2) (18.5) (49.1)
Other accrued liabilities (32.3) 28.5 (3.8)
Post-retirement benefits 8.6 .3 8.9
Other long-term liabilities (18.4) 25.1 6.7
Other assets (5.1) (38.5) (43.6)
------ ------ ------ ------ ------
Net cash provided (used) by operating activities .2 293.2 202.4 - 495.8
------ ------ ------ ------ ------
Investing activities:
Purchase of property, plant and equipment (91.1) (75.4) (166.5)
Investments in affiliated companies (.4) (36.5) (36.9)
Investments in computer software (29.4) (28.9) (58.3)
Proceeds from sale and leasebacks 21.0 5.6 26.6
Proceeds from the disposal of property/equipment 6.5 4.9 11.4
Other 6.4 2.9 9.3
------ ------ ------ ------ ------
Net cash used by investing activities - (87.0) (127.4) - (214.4)
------ ------ ------ ------ ------
Financing activities:
Repayments of long-term debt (25.0) (2.7) (27.7)
Net change in revolving credit facility 286.3 (465.3) (179.0)
Net change in other short-term debt .1 (24.1) (24.0)
Purchases of treasury stock (116.5) (116.5)
Purchase of warrants (35.2) (35.2)
Net change in intercompany accounts 47.4 (479.0) 431.6 -
Proceeds from exercise of stock options 96.9 96.9
Financing costs and other 7.1 (4.4) 2.7
------ ------ ------ ------ ------
Net cash provided by financing activities (.3) (222.0) (60.5) - (282.8)
Effect of exchange rate changes on
cash and cash equivalents (1.9) (1.9)
------ ------ ------ ------ ------
Net increase(decrease) in cash and cash equivalents (.1) (15.8) 12.6 - (3.3)
Cash and cash equivalents at beginning of year .1 18.9 66.4 - 85.4
------ ------ ------ ------ ------
Cash and cash equivalents at end of year $ - $ 3.1 $ 79.0 $ - $ 82.1
====== ====== ====== ====== ======
56
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
Other Consoli-
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
---------------------------------------------------------------- ------- ---------- -------- ------
Sales $4,274.5 $3,524.0 $(200.1) $7,598.4
-------- -------- -------- -------
Costs and expenses:
Cost of sales 3,249.4 2,678.4 (200.1) 5,727.7
Selling and administrative expenses 618.5 549.4 1,167.9
Restructuring and asset impairment charges 25.0 44.6 69.6
Gain on sale of Calorex - (57.3) (57.3)
Other (income) expense (18.6) 1.0 (17.6)
Interest expense 166.1 32.6 198.7
Intercompany interest expense (income) - - - -
------- ------- -------- -------
Total expenses 4,040.4 3,248.7 (200.1) 7,089.0
------- ------- -------- -------
Income from continuing operations before income taxes
and equity in net income of consolidated
subsidiaries 234.1 275.3 - 509.4
Income taxes 92.6 101.6 194.2
------- ------- -------- -------
Income from continuing operations before equity
in net income of consolidated subsidiaries 141.5 173.7 - 315.2
Equity in net income of consolidated subsidiaries $315.2 - - (315.2) -
------ ------- ------- -------- -------
Net income $315.2 $ 141.5 $ 173.7 $(315.2) $ 315.2
====== ======= ======= ======== =======
CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2000
Other Consoli-
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
----------------------------------------------------- ------- ------- ---------- ---------- -------
ASSETS
Current assets:
Cash and cash equivalents $ .1 $ 18.9 $ 66.4 $ 85.4
Accounts receivable, net 1.2 492.0 533.4 1,026.6
Inventories 326.9 279.4 606.3
Other current assets 100.5 59.7 160.2
------ -------- -------- --------
Total current assets 1.3 938.3 938.9 1,878.5
Facilities, net 516.4 866.3 1,382.7
Goodwill, net 142.5 792.3 934.8
Investment in subsidiaries 100.1 - - $(100.1) -
Other assets 410.0 138.7 548.7
------ -------- -------- -------- --------
Total assets $101.4 $2,007.2 $2,736.2 $(100.1) $4,744.7
====== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Loans payable to banks $ 83.7 $ 83.7
Current maturities of long-term debt $ 10.1 2.3 12.4
Other current liabilities 907.2 1,710.5
-------- -------- --------
803.3
Total current liabilities 917.3 889.3 1,806.6
Long-term debt 1,888.9 486.7 2,375.6
Reserve for post-retirement benefits 192.7 215.6 408.3
Intercompany accounts, net $494.3 455.9 (950.2) -
Other long-term liabilities 355.1 192.0 547.1
------ -------- -------- -------- --------
Total liabilities 494.3 3,809.9 833.4 $ - 5,137.6
------ -------- -------- -------- --------
Total shareholders' (deficit) equity (392.9) (1,802.7) 1,902.8 (100.1) (392.9)
------ -------- -------- -------- --------
Total liabilities and shareholders' (deficit)
equity $101.4 $2,007.2 $2,736.2 $(100.1) $4,744.7
====== ======== ======== ======== ========
57
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2000
Other Consoli-
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
----------------------------------------------------- ------- ------- ---------- ---------- -------
Cash provided (used) by:
Operating activities:
Net income $315.2 $141.5 $173.7 $(315.2) $ 315.2
Adjustments to reconcile net income
to net cash provided by operations:
Restructuring and asset impairment
charges accrued (paid), net 25.0 27.1 52.1
Gain on sale of Calorex (57.3) (57.3)
Depreciation and amortization 76.7 136.7 213.4
Non-cash stock compensation 5.8 5.8
Deferred income taxes (41.2) 38.2 (3.0)
Equity in net income of subsidiary (315.2) 315.2 -
Changes in assets and liabilities:
Accounts receivable (38.9) (36.1) (75.0)
Inventories (82.9) (33.2) (116.1)
Accounts payable 68.7 36.7 105.4
Other accrued liabilities 92.3 (122.8) (30.5)
Post-retirement benefits (16.8) 1.3 (15.5)
Other long-term liabilities (6.2) (8.7) (14.9)
Other assets 61.8 33.9 95.7
------ ------ ------ ------- -------
Net cash provided (used) by continuing operations - 285.8 189.5 - 475.3
------ ------ ------ ------- -------
Net cash used by discontinued operations - (17.2) - - (17.2)
------ ------ ------ ------- -------
Net cash provided (used) by operating activities - 268.6 189.5 - 458.1
------ ------ ------ ------- -------
Investing activities:
Purchase of property, plant and equipment (87.2) (131.7) (218.9)
Investments in affiliated companies (17.1) 17.1 (40.2) (40.2)
Investments in computer software (38.0) (27.3) (65.3)
Proceeds from sales of businesses 30.8 67.7 98.5
Other 11.4 3.5 14.9
------ ------ ------ ------- -------
Net cash used by investing activities (17.1) (65.9) (128.0) - (211.0)
------ ------ ------ ------- -------
Financing activities:
Repayments of long-term debt (121.9) (5.3) (127.2)
Net change in revolving credit facility (103.3) 135.0 31.7
Net change in other short-term debt .5 .5
Purchases of treasury stock (147.5) (147.5)
Net change in intercompany accounts 143.0 30.3 (173.3) -
Proceeds from exercise of stock options 21.7 21.7
Other .1 .1
------ ------ ------ ------- -------
Net cash provided by financing activities 17.2 (194.9) (43.0) - (220.7)
------ ------ ------ ------- -------
Effect of exchange rate changes on
cash and cash equivalents - - (2.2) - (2.2)
------ ------ ------ ------- -------
Net increase in cash and cash equivalents .1 7.8 16.3 - 24.2
Cash and cash equivalents at beginning of year - 11.1 50.1 - 61.2
------ ------ ------ ------- -------
Cash and cash equivalents at end of year $ .1 $ 18.9 $ 66.4 $ - $ 85.4
====== ====== ====== ======= =======
58
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
Consoli-
Parent Elimin- dated
(Dollars in millions) Company ASI ations Total
---------------------------------------------------- ------- ------- ---------- ---------
Sales $7,189.5 $7,189.5
-------- --------
Costs and expenses:
Cost of sales 5,406.6 5,406.6
Selling and administrative expenses 1,146.3 1,146.3
Restructuring and asset impairment charges 14.7 14.7
Other income (17.4) (17.4)
Interest expense 187.8 187.8
-------- --------
Total expenses 6,738.0 6,738.0
-------- --------
Income from continuing operations before income taxes and
equity in net income of consolidated subsidiary 451.5 451.5
Income taxes 187.4 187.4
-------- --------
Income from continuing operations before equity in net
income of consolidated subsidiary 264.1 264.1
Loss from discontinued operations 125.8 125.8
Equity in net income of subsidiary $138.3 - $(138.3) -
------ -------- ------- --------
Net income $138.3 $ 138.3 $(138.3) $ 138.3
====== ======== ======= ========
59
NOTE 16. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 1999
Other Consoli
Parent Subsid- Elimin- dated
(Dollars in millions) Company ASI iaries ations Total
----------------------------------------------------- ------- ------ ------ ------- ------
Cash provided (used) by:
Operating activities:
Net income $138.3 $138.3 $(138.3) $138.3
Adjustments to reconcile net income
to net cash provided by operations:
Restructuring and asset impairment
charges accrued (reversed/paid), net (7.3) (7.3)
Loss from discontinued operations 125.8 125.8
Depreciation and amortization 202.1 202.1
Deferred income taxes 28.3 28.3
Equity in net income of subsidiary (138.3) - 138.3 -
Changes in assets and liabilities:
Accounts receivable (58.5) (58.5)
Inventories (20.5) (20.5)
Accounts payable 36.2 36.2
Other accrued liabilities 62.4 62.4
Post-retirement benefits 14.6 14.6
Other long-term liabilities (16.1) (16.1)
Other assets 6.3 6.3
------ ------ ------- ------
Net cash provided by continuing operations - 511.6 - 511.6
Net cash (used) by discontinued operations (37.8) (37.8)
------ ------ ------- ------
Net cash provided by operating activities - 473.8 - 473.8
------ ------ ------- ------
Investing activities:
Purchase of property, plant and equipment (274.5) (274.5)
Investments in affiliated companies (8.1) (52.8) 8.1 (52.8)
Investments in computer software (85.5) (85.5)
Acquisitions of businesses (427.0) (427.0)
Other 4.0 4.0
------ ------ ------- ------
Net cash used by investing activities (8.1) (835.8) 8.1 (835.8)
------ ------ ------- ------
Financing activities:
Proceeds from issuance of long-term debt 483.5 483.5
Repayments of long-term debt (198.1) (198.1)
Net change in revolving credit facility 51.7 51.7
Net change in other short-term debt 21.4 21.4
Purchases of treasury stock (4.2) (4.2) 4.2 (4.2)
Decrease in loan from subsidiary (4.9) 4.9 -
Cash transferred (to) from affiliate (50.1) $50.1 -
Other 17.2 7.1 (17.2) 7.1
------ ------ ------ ------- ------
Net cash provided by financing activities 8.1 311.3 50.1 (8.1) 361.4
------ ------ ------ ------- ------
Effect of exchange rate changes on cash and
cash equivalents (1.2) (1.2)
------ ------ ------ ------- ------
Net increase (decrease) in cash and cash equivalents - (51.9) 50.1 - (1.8)
Cash and cash equivalents at beginning of year - 63.0 63.0
------ ------ ------ ------- ------
Cash and cash equivalents at end of year $ - $ 11.1 $ 50.1 $ - $ 61.2
====== ====== ====== ======= ======
60
QUARTERLY DATA (UNAUDITED)
YEAR 2001
(Dollars in millions, except per share data) FIRST SECOND THIRD FOURTH(a)
------------------------------------------------ ---------- ---------- --------- -----------
Sales $1,790.7 $2,039.4 $1,885.0 $1,750.2
Cost of sales 1,356.6 1,497.6 1,416.2 1,347.1
Income before income taxes 104.2 191.5 144.0 36.6
Income taxes 39.1 71.8 54.0 16.4
-------- -------- -------- --------
Net income $ 65.1 $ 119.7 $ 90.0 $ 20.2
======== ======== ======== ========
Net income per common share:
Basic $ .92 $ 1.68 $ 1.25 $ .28
Diluted $ .90 $ 1.63 $ 1.23 $ .27
Average number of common shares (thousands):
Basic 70,600 71,503 71,837 71,865
Diluted 72,640 73,462 73,448 73,262
Range of prices on common stock:
High $ 62.25 $ 67.46 $ 70.90 $ 68.97
Low $ 46.75 $ 56.40 $ 51.24 $ 52.45
YEAR 2000
(Dollars in millions, except per share data) First Second Third Fourth(b)
------------------------------------------------ ---------- ---------- --------- ----------
Sales $1,822.0 $2,046.2 $1,960.8 $1,769.4
Cost of sales 1,380.6 1,502.8 1,474.8 1,369.4
Income before income taxes 100.1 178.6 147.7 83.0
Income taxes 40.0 71.0 58.8 24.4
-------- -------- -------- --------
Net income $ 60.1 $ 107.6 $ 88.9 $ 58.6
======== ======== ======== ========
Net income per common share:
Basic $ .85 $ 1.54 $ 1.28 $ .85
Diluted $ .82 $ 1.48 $ 1.23 $ .82
Average number of common shares (thousands):
Basic 71,025 70,263 69,806 69,409
Diluted 73,060 72,761 72,382 71,602
Range of prices on common stock:
High $ 45.81 $ 46.94 $ 49.75 $ 49.50
Low $ 34.31 $ 37.50 $ 41.00 $ 38.50
The sum of each line for the four quarters does not necessarily equal
the amount reported for the full year because of rounding and, for per share
amounts, because of the effect of averaging the shares used in the calculation.
(a) The fourth quarter of 2001 included an expense of $53 million ($36
million, net of taxes) related to the elimination of approximately
1,700 salaried positions.
(b) The fourth quarter of 2000 included a gain on the sale of a
business of $57 million ($52 million, net of taxes) and net
restructuring charges of $70 million ($51 million, net of tax
benefit).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction G(3) to Form 10-K, the information required by
Item 10 with respect to the Directors of the Company set forth under the heading
"Directors" in the Company's definitive proxy statement to be filed within 120
days following the end of the fiscal year covered by this report is incorporated
herein by reference.
The information required by Item 10 with respect to the Executive
Officers of the Company has been included in Part I of this Form 10-K (as Item
4A) in reliance on Instruction G(3) of Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K.
Pursuant to instruction G(3) to Form 10-K, information concerning
compliance with Section 16(a) of the Securities Act of 1933 by officers and
directors of the Company set forth under the heading entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement to be filed within 120 days following the end of the fiscal year
covered by this report is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Instruction G(3) to Form 10-K, information concerning
executive compensation and related matters set forth under the heading entitled
"Directors' Fees and Other Arrangements", "Executive Compensation" and
"Compensation Committee Interlocks and Insider Participation" in the Company's
definitive proxy statement to be filed within 120 days following the end of the
fiscal year covered by this report is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G(3) to Form 10-K, information concerning
shares of common stock of the Company beneficially owned by management and
others set forth under the heading entitled "Common Stock Ownership of Officers,
Directors and Significant Shareholders" in the Company's definitive proxy
statement to be filed within 120 days following the end of the fiscal year
covered by this report is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G(3) to Form 10-K, information concerning
certain relationships and related party transactions set forth under the heading
entitled "Certain Relationships and Related Party Transactions" in the Company's
definitive proxy statement to be filed within 120 days following the end of the
fiscal year covered by this report is incorporated herein by reference.
62
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 64 hereof are incorporated herein by reference.
3. Exhibits
The exhibits to this Report are listed on the accompanying index
to exhibits and are incorporated herein by reference or are filed
as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, the company filed no
Current Reports on Form 8-K.
63
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
COVERED BY
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
Page No.
1. Financial Statements:
Consolidated Balance Sheet at
December 31, 2001, and 2000 35
Years ended December 31, 2001, 2000 and 1999:
Consolidated Statement of Income 34
Consolidated Statement of Cash Flows 36
Consolidated Statement of Shareholders' Deficit 37
Notes to Financial Statements 38-60
Segment Data 18, 53-54
Quarterly Data (Unaudited) 61
Report of Independent Auditors 33
2. Report of Independent Auditors on Financial Statement Schedules 70
3. Financial statement schedules, years ended
December 31, 2001, 2000, and 1999
I Condensed Financial Information of Registrant 71-73
II Valuation and Qualifying Accounts 74
All other schedules have been omitted because the information is not applicable
or is not material or because the information required is included in the
financial statements or the notes thereto.
64
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 and Restated By-laws of Holding, previously filed as
Exhibit (3)(ii) in Holding's Form 10-K for the fiscal year ended
December 31, 1999, 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) First Supplemental Indenture, dated as of February 1, 2000 among
the Company, Holding and Wilmington Trust Company, as Trustee,
previously filed as Exhibit (4)(iv) in Holding's Form 10-K for the
fiscal year ended December 31, 1999, and herein incorporated by
reference.
(v) 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.
(vi) 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.
(vii) 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.
(viii) 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%
65
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.
(ix) 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.
(x) Fourth Supplemental Indenture dated as of May 28, 1999 to the
Indenture dated as of January 15, 1998 among the Company, Holding
and The Bank of New York relating to the 8.25% Senior Notes due;
previously filed as Exhibit (4)(x) in Holding's Form 10-K for the
fiscal year ended December 31, 1999, and herein incorporated by
reference.
(xi) Fifth Supplemental Indenture dated as of May 28, 1999 to the
Indenture dated as of May 28, 1999 among the Company, Holding and
The Bank of New York relating to the 8.25% Senior Notes due 2009;
previously filed as Exhibit (4)(xi) in Holding's Form 10-K for the
fiscal year ended December 31, 1999, and herein incorporated by
reference.
(xii) Sixth Supplemental Indenture dated as of May 28, 1999 to the
Indenture dated as of May 28, 1999 among the Company, Holding and
The Bank of New York relating to the 7.125% Senior Notes due 2006,
previously filed as Exhibit (4)(xii) in Holding's Form 10-K for
the fiscal year ended December 31, 1999, and herein incorporated
by reference.
(xiii) Rights Agreement, dated as of January 5, 1995, between Holding and
Citibank N.A. as Rights Agent; previously filed as Exhibit (4)
(xxv) to Holding's Form 10-K for the fiscal year ended December
31, 1994, and herein incorporated by reference.
(10)* (i) Employment Agreement of Frederic M. Poses, previously filed as
Exhibit (10) to Holding's Form 10-Q for the third quarter ended
September 30, 1999, and herein incorporated by reference.
(ii) Amendment of Employment Agreement of Frederic M. Poses referred to
in Exhibit (10) (I) above, previously filed as Exhibit (10)(xix)
in Holding's Form 10-K for the fiscal year ended December 31,
1999, and herein incorporated by reference.
(iii) Amended and Restated Employment Agreement of Frederic M. Poses
dated as of February 7, 2002, filed herewith.
(iv) Employment Agreement of J. Paul McGrath dated December 17, 1999,
previously filed as Exhibit (10)(iii) to Holding's Form 10-K for
the fiscal year ended December 31, 2000, and herein incorporated
by reference.
(v) Employment Agreement of G. Peter D'Aloia dated December 3, 1999,
previously filed as Exhibit (10)(iv) to Holding's Form 10-K for
the fiscal year ended December 31, 2000, and herein incorporated
by reference.
(vi) Employment Agreement of Lawrence B. Costello dated May 1, 2000,
filed herewith.
(vii) Employment Agreement of Marc Olivie dated March 2, 2001 and
revised March 19, 2001, filed herewith.
(viii) Severance Agreement of James Schultz dated November 2, 2001, filed
herewith.
* Items in this section 10 constitute management contracts or compensatory plans
or arrangements with the exception of (10) (xxi), (xxii), (xxiii) and (xxiv).
66
(ix) 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.
(x) American Standard Companies Inc. Long-Term Incentive Compensation
Plan, as amended and restated as of May 3, 2001, filed herewith.
(xi) Trust Agreement for American Standard Companies Inc. Long-Term
Incentive Compensation Plan and American Standard Companies Inc.
Supplemental Incentive Compensation Plan, as amended and restated
in its entirety as of May 4, 2000; previously filed as Exhibit
(10)(vii) to Holding's Form 10 -K for the year ended December 31,
2000, and herein incorporated by reference.
(xii) American Standard Inc. Annual Incentive Plan, as amended and
restated as of May 4, 2000; previously filed as Exhibit
(10)(viii) to Holding's Form 10 -K for the year ended December
31, 2000, and herein incorporated by reference.
(xiii) American Standard Inc. Executive Supplemental Retirement Benefit
Program, restated to include all amendments through December 6,
2001, filed herewith.
(xiv) 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.
(xv) Trust Agreement for the American Standard Inc. Supplemental
Compensation 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.
(xvi) American Standard Companies Inc. Corporate Officer Severance
Plan, as amended and restated as of May 4, 2000; previously filed
as Exhibit (10)(xii) to Holding's Form 10 -K for the year ended
December 31, 2000, and herein incorporated by reference.
(xvii) American Standard Companies Inc. Deferred Compensation Plan, as
amended and restated as of January 1, 2002, filed herewith.
(xviii) American Standard Companies Inc. Stock Incentive Plan, as amended
through December 7, 2000, previously filed as Exhibit (10)(xiv)
to Holding's Form 10 -K for the year ended December 31, 2000, and
herein incorporated by reference.
(xix) Addendum to Stock Incentive Plan referred to in Exhibit (10)
(xviii) above to comply with local regulations in the United
Kingdom with respect to options granted in that country,
previously filed as Exhibit (10)(xii) in Holding's Form 10-K for
the fiscal year ended December 31, 1999, and herein incorporated
by reference.
(xx) Addendum to Stock Incentive Plan referred to in Exhibit (10)
(xviii) above to comply with local regulations in France with
respect to options granted in that country, previously filed as
Exhibit (10)(xiii) in Holding's Form 10-K for the fiscal year
ended December 31, 1999, and herein incorporated by reference.
(xxi) 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.
(xxii) Share Purchase Agreement dated February 2,1999 among Blue Circle
Industries PLC; Blue Circle Bathrooms Limited; Blue Circle Home
Products BV; Blue Circle Home Products Beteiligungs-GmbH and
Ideal Standard Limited; Ideal Standard S.r.l.; WABCO Standard
GmbH and U.S. Plumbing Products Inc.; Ideal Standard IBV Limited;
WABCO Standard Export Inc.; previously filed as Exhibit 2 in
Holding's Form 8-K, dated December 22, 1998, filed February 12,
1999, and herein incorporated by reference.
67
(xxiii) Five-Year Credit Agreement, dated as of November 6, 2001, among
Holding, the Company, American Standard International Inc.,
certain subsidiaries of Holding and the financial institutions
listed therein, The Chase Manhattan Bank, as Administrative
Agent, Issuing Bank and Swingline Lender; Chase Manhattan
International Limited, as London Agent and Italian Agent; Bank of
America, N.A., Citibank, N.A. and Deutsche Bank AG as Syndication
Agents; The Industrial Bank of Japan Trust Company and Lloyds TSB
Bank PLC as Documentation Agents; and JP Morgan as Advisor, Lead
Arranger and Book Manager; previously filed as Exhibit (10)(i) to
Holding's Form 10-Q for the quarter ended September 30, 2001, and
herein incorporated by reference.
(xxiv) 364-Day Credit Agreement, dated as of November 6, 2001, among the
Holding, the Company, American Standard International Inc.,
certain subsidiaries of the Holding and the financial
institutions listed therein, The Chase Manhattan Bank, as
Administrative Agent and Swingline Lender; Bank of America, N.A.,
Citibank, N.A. and Deutsche Bank AG as Syndication Agents; The
Industrial Bank of Japan Trust Company and Lloyds TSB Bank PLC as
Documentation Agents; and JP Morgan as Advisor, Lead Arranger and
Book Manager; previously filed as Exhibit (10)(ii) to Holding's
Form 10-Q for the quarter ended September 30, 2001, and herein
incorporated by reference.
(12) Ratio of Earnings to Fixed Charges, filed herewith.
(21) Listing of Holding's subsidiaries, filed herewith.
(23) Consent of Ernst & Young LLP, filed herewith.
(24) (i) Power of Attorney (F. Poses), filed herewith.
(ii) Power of Attorney (S. Anderson, J. Cohon, E. Hagenlocker, J.
Hardymon, R. Parsons, J.D. Quayle and D. Roderick), filed
herewith.
68
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/ FREDERIC M. POSES
---------------------
(Frederic M. Poses)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
March 21, 2002
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/ FREDERIC M. POSES Chairman and Chief Executive Officer;
----------------------- Director
(Frederic M. Poses) (Principal Executive Officer)
/s/ G. PETER D'ALOIA Senior Vice President and Chief Financial
----------------------- Officer (Principal Financial Officer)
(G. Peter D'Aloia)
/s/ *
-----------------------
(Steven E. Anderson) Director
/s/ *
-----------------------
(Jared L. Cohon) Director
/s/ *
-----------------------
(Edward E. Hagenlocker) Director
/s/ *
-----------------------
(James F. Hardymon) Director
/s/ *
-----------------------
(Roger W. Parsons) Director
/s/ *
-----------------------
(J. Danforth Quayle) Director
/s/ *
-----------------------
(David M. Roderick) Director
*By /s/ J. PAUL MCGRATH
-------------------
J. Paul McGrath
Attorney-in-fact
69
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of American
Standard Companies Inc. as of December 31, 2001 and 2000, and for each of the
three years in the period ended December 31, 2001, and have issued our report
thereon dated February 8, 2002. 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 LLP
New York, New York
February 8, 2002
70
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME (PARENT COMPANY SEPARATELY)
(Dollars in millions)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Equity in net income (loss) of subsidiaries $ 295.0 $ 315.2 $ 138.3
------- ------- -------
Net income (loss) $ 295.0 $ 315.2 $ 138.3
======= ======= =======
See notes to financial statements.
BALANCE SHEET (PARENT COMPANY SEPARATELY)
(Dollars in millions)
December 31,
------------
ASSETS
2001 2000
------ ------
Cash $ .1
Accounts receivable $ .5 1.2
Investment in subsidiaries 454.7 100.1
------ ------
Total assets $455.2 $101.4
====== ======
LIABILITIES
Loans payable to subsidiaries $545.3 $494.3
SHAREHOLDERS' DEFICIT
Common stock, $.01 par value, 200,000,000 shares authorized:
issued and outstanding, 72,071,944 shares in 2001;
69,532,574 shares in 2000
.7 .7
Capital surplus 707.2 617.8
Unearned compensation (5.2) (8.0)
Treasury stock (505.3) (453.4)
Retained earnings (accumulated deficit) 57.0 (238.0)
Accumulated other comprehensive income:
Foreign currency translation effects (331.8) (312.0)
Deferred loss on hedge contracts, net of tax (1.0) -
Minimum pension liability adjustment, net of tax (11.7) -
------ ------
Total shareholders' deficit (90.1) (392.9)
------ ------
$455.2 $101.4
====== ======
See notes to financial statements.
71
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS (PARENT COMPANY SEPARATELY)
(Dollars in millions)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 295.0 $ 315.2 $ 138.3
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Equity in net loss (income) of subsidiary (295.0) (315.2) (138.3)
Changes in:
Accounts receivable .6 - -
Accounts payable and accruals (.4) - -
------- ------- -------
Net cash flow from operating activities .2 - -
------- ------- -------
Cash provided (used) by
investing activities:
Investment in subsidiary - (17.1) (8.1)
------- ------- -------
Net cash provided (used) by
investing activities - (17.1) (8.1)
------- ------- -------
Cash provided (used) by financing activities:
Purchases of treasury stock (116.5) (147.5) (4.2)
Purchase of warrants (35.2)
Issuance of common stock 96.9 21.7 17.2
Loan from subsidiary 47.4 143.0 (4.9)
Other 7.1 - -
------- ------- -------
Net cash provided (used) by
financing activities (.3) 17.2 8.1
------- ------- -------
Net change in cash and cash equivalents (.1) .1 -
Cash and cash equivalents beginning of year .1 - -
------- ------- -------
Cash and cash equivalents end of year $ - $ .1 $ -
======= ======= =======
See notes to financial statements.
72
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
OF 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.
American Standard Inc.'s common stock is owned solely by the Parent
Company. On December 31, 1999, the Parent Company became the sole owner of
all the common stock of American Standard International Inc. as a result of
a reorganization of subsidiary ownership within the Company.
(C) On July 9, 1998, the Company's Board of Directors approved a plan to
purchase up to $300 million of the Company's common stock, not to exceed
$100 million per plan year, during the three-year plan period ending July
2001. In September 2000, the Board of Directors extended the Company's
authorization to repurchase up to $100 million of its common stock for the
plan year ended July 9, 2002. Pursuant to these authorizations, the Company
purchased 1,921,050 shares in 2001 for $116 million, 3,559,900 shares in
2000 for $148 million and 113,600 shares in 1999 for $4 million. As of
December 31, 2001, the unexpended authorization was $48 million. On
February 7, 2002, the Board authorized additional share repurchases of up
to $150 million, effective immediately, with no time constraints. These
purchases were funded with borrowings by American Standard Inc. under its
bank credit agreement and loaned to the Parent Company under a
non-interest-bearing intercompany demand note.
73
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands)
Foreign
Balance Additions Currency Balance
Beginning Charged to Other Translation End of
Description of Period Income Deductions Changes Effects Period
----------- --------- ------ ---------- ------- ------- ------
2001:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $36,741 $17,700 $(15,804)(A) $(2,200) $ (991) $35,446
======= ======= ============ ======== ======= =======
Reserve for post-retirement
benefits $408,272 $52,584 $(43,479)(B) $81,686 (C) $(9,599) $489,464
======== ======= ============ ======= ======== ========
2000:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $45,903 $14,663 $(12,629)(A) $ (8,888) $(2,308) $36,741
======= ======= ======== ========= ======== =======
Reserve for post-retirement
benefits $436,106 $48,460 $(64,089)(B) $ 5,890 (C) $(18,095) $408,272
======== ======= ======== ========= ========= ========
1999:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $33,264 $23,520 $(10,468)(A) $ 1,412 $(1,825) $45,903
======= ======= ======== ======== ======== =======
Reserve for post-retirement
benefits $468,197 $71,562 $(56,107)(B) $ (4,866)(C) $(42,680) $ 436,106
======== ======= ======== ======== ========= =========
The reserve for post-retirement benefits excludes the current portion of U.S.
pension plans.
(A) Accounts charged off.
(B) Employer contributions made during the year.
(C) Includes accrual of additional minimum liability and the effects of
acquisitions and dispositions in 2001 as well as reclassifications to or from
current liabilities or current assets in all years.
74