SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-14557
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U.S. INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 22-3568449
incorporation or organization) (I.R.S.Employer Identification No.)
101 WOOD AVENUE SOUTH
ISELIN, NJ 08830
(Address of principal executive offices)
(732) 767-0700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
As of February 1, 2001, U.S. Industries, Inc. had one class of common stock,
of which 74,279,328 shares were outstanding.
U.S. INDUSTRIES, INC.
INDEX
Page
NO.
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Condensed Statements of Operations
for the Three Months Ended December 31, 2000 and 1999... 1
Consolidated Condensed Balance Sheets, December 31, 2000
and September 30, 2000.................................. 2
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended December 31, 2000 and 1999... 3
Notes to Consolidated Condensed Financial Statements.... 4
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 17
Item 3.Quantitative and Qualitative Disclosures About
Market Risk ............................................ 23
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K........................ 25
SIGNATURES ............................................................... 26
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
U.S. INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2000 1999
---- ----
Net Sales $ 541 $ 791
Operating costs and expenses:
Cost of products sold 371 546
Selling, general and administrative expenses 154 192
Restructuring charges 2 --
-------- --------
Operating income 14 53
Interest expense (20) (23)
Interest income 7 1
Equity earnings in investee 1 --
Other income (expense), net (6) 1
-------- --------
Income (loss) before income taxes and discontinued operations (4) 32
Benefit (provision) for income taxes 2 (12)
-------- --------
Income (loss) from continuing operations (2) 20
Loss from discontinued operations, net of tax benefit
of $1 million (2) --
-------- --------
Net income (loss) $ (4) $ 20
======== ========
Earnings (loss) per basic and diluted share:
Income (loss) from continuing operations $ (0.03) $ 0.23
Loss from discontinued operations, net of tax benefit (0.02) --
-------- --------
Net income (loss) $ (0.05) $ 0.23
======== ========
Cash dividend declared per share $ 0.05 $ 0.05
======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
1
U.S. INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
------------ -------------
2000 2000
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 27 $ 25
Trade receivables, net 447 517
Inventories 533 494
Deferred income taxes 62 62
Other current assets 64 45
------ ------
Total current assets 1,133 1,143
Property, plant and equipment, net 429 420
Other assets 383 388
Goodwill, net 539 541
------ ------
$2,484 $2,492
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 9 $ 29
Current maturities of long-term debt 715 141
Trade accounts payable 166 196
Accrued expenses and other liabilities 199 222
Income taxes payable -- 9
------ ------
Total current liabilities 1,089 597
Long-term debt 383 885
Deferred income taxes 10 10
Other liabilities 246 246
------ ------
Total liabilities 1,728 1,738
Commitments and contingencies
Temporary equity 43 --
Stockholders' equity 713 754
------ ------
$2,484 $2,492
====== ======
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
U.S. INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS-UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2000 1999
---- ----
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (2) $ 20
Adjustments to reconcile income (loss) from continuing operations to
net cash used in operating activities of continuing operations:
Depreciation and amortization 25 29
Provision for doubtful accounts 1 1
Gain on sale of excess real estate -- (3)
Equity earnings in investee (1) --
Changes in operating assets and liabilities,
excluding the effects of acquisitions and dispositions (33) (78)
----- -----
NET CASH USED IN OPERATING ACTIVITIES OF
CONTINUING OPERATIONS (10) (31)
----- -----
Loss from discontinued operations (2) --
----- -----
NET CASH USED IN DISCONTINUED OPERATIONS (2) --
----- -----
NET CASH USED IN OPERATING ACTIVITIES (12) (31)
----- -----
INVESTING ACTIVITIES:
Proceeds from sale of businesses 8 17
Acquisition of companies, net of cash acquired -- (7)
Purchases of property, plant and equipment (24) (22)
Proceeds from sale of excess real estate 3 6
Other investing activities -- (1)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (13) (7)
----- -----
FINANCING ACTIVITIES:
Proceeds from long-term debt 827 619
Repayment of long-term debt (760) (571)
Repayment of notes payable, net (21) --
Payment of collateral on equity instrument contract (18) --
Purchase of treasury stock -- (15)
Payment of dividends (4) (4)
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 24 29
Effect of exchange rate changes on cash and cash equivalents 3 (7)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2 (16)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25 58
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27 $ 42
===== =====
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1-BASIS OF PRESENTATION
U.S. Industries, Inc. ("USI" and, together with its subsidiaries, the
"Company") manufactures and distributes a broad range of consumer and industrial
products through three operating divisions: Bath and Plumbing Products, Lighting
Corporation of America and Hardware and Tools. The Company completed the
disposition of a majority equity interest in its Diversified segment, by means
of two separate transactions, on March 24, 2000. Subsequent to
March 24, 2000, the Company accounts for its retained interest in its
Diversified segment under the equity method of accounting.
The Company has been pursuing a spin-off of its Lighting Corporation of
America business segment and industrial tools business ("LCA Group"). The
lighting businesses include Columbia Lighting, Inc.; Dual-Lite, Inc.;
Prescolite, Inc.; Kim Lighting, Inc.; Architectural Area Lighting, Inc.;
Spaulding Lighting, Inc.; Progress Lighting, Inc.; and SiTeco Holdings GmbH.
The industrial tools business include Spear & Jackson plc and Bowers Group
plc, both of which are currently included in the Hardware and Tools segment.
These entities had combined revenue for the three months ended December 31,
2000 and 1999 of $216 million and $225 million, respectively, and operating
income for those periods of $8 million and $11 million, respectively. The LCA
Group Registration Statement on Form 10 was declared effective by the
Securities and Exchange Commission on January 3, 2001. On December 21, 2000,
the Company announced that the Board of Directors had declared a dividend of
all of the outstanding shares of LCA Group to USI shareholders. If paid, the
dividend will be in the form of one share of LCA Group for each ten shares of
USI held by shareholders of record as of the record date for the spin-off.
The dividend is expected to be tax-free to USI and its shareholders. Payment
of the dividend is conditioned upon completion of new financing arrangements
for LCA Group and USI. On January 25, 2001, the Company announced that the
spin-off of LCA Group would be delayed. Although the spin-off will not be
completed within the time period contemplated by the previously announced
record date, the Company is continuing to pursue the spin-off, completion
of which is subject to satisfaction of the spin-off conditions, further
review by the Board of Directors and the setting of a new record date.
Accordingly, LCA Group is presented as continuing operations in these
financial statement.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
Article 10 of Regulation S-X and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial data for the three months ended December 31, 2000 and 1999
are unaudited and, in the opinion of management, reflect all necessary
adjustments for a fair presentation of the financial position and results of
operations for the interim periods on a consistent basis. Such adjustments were
of a normal and recurring nature. The results of operations for the three month
period ended December 31, 2000 are not necessarily indicative of those for the
full fiscal year ending September 30, 2001. For further information, refer to
the Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2000.
The Company's fiscal year ends on the Saturday nearest to September 30.
All three month data contained in this report reflect results of operations for
the 13-week periods ended on the Saturday closest to December 31, 2000 and 1999,
respectively, but are presented as of December 31 for convenience.
NOTE 2-INVENTORIES
Inventories consist of the following:
(IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
2000 2000
---- ----
(UNAUDITED)
Finished products $ 291 $ 248
Work-in process 69 78
Raw materials 173 168
----- -----
$ 533 $ 494
===== =====
4
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 3-LONG-TERM DEBT
Long-term debt consists of the following:
(IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
2000 2000
---- ----
(UNAUDITED)
7.125% Senior Notes, net $ 248 $ 248
7.25% Senior Notes, net 123 123
Revolving credit facility, US dollar 255 238
Revolving credit facility, foreign currencies 239 239
Commercial paper 44 97
364-day credit facility 120 --
Other short-term borrowings 52 62
Other long-term debt 17 19
------- -------
1,098 1,026
Less current maturities (715) (141)
------- -------
Long-term debt $ 383 $ 885
======= =======
The 7.25% Notes and the 7.125% Notes (collectively, the "Notes"), along
with the Credit Agreement and Credit Facility described below, are joint and
several obligations of the Company, USI Global Corp. ("USI Global") and USI
American Holdings, Inc. ("USIAH"), and are guaranteed by USI Atlantic Corp.
("USI Atlantic") (see Note 12). USI Global and USI Atlantic are wholly-owned
subsidiaries of USI. USIAH is a wholly-owned subsidiary of USI Atlantic. The
Notes place restrictions on liens and subsidiary indebtedness and include
cross default provisions.
The Company has a five year revolving line of credit providing for
borrowings in both US dollars and foreign currency which had original
availability of $750 million (the "Credit Agreement") that terminates on
December 12, 2001. Accordingly, the Company has classified these borrowings as
current maturities. The Credit Agreement was permanently reduced by $100 million
on December 12, 1999 and $150 million on December 12, 2000. As of December 31,
2000, the Company had $6 million available under this revolving line of credit.
During fiscal 1999, the Company commenced a $300 million commercial paper
program, of which $44 million was outstanding at December 31, 2000. The
commercial paper is supported by a $300 million 364-day credit facility (the
"Credit Facility"). This Credit Facility was renewed in October 2000 and the new
termination date is October 26, 2001. At December 31, 2000, the Company had $136
million available under this 364-day facility.
At December 31, 2000, the Company had unused availability of approximately
$171 million, including approximately $142 million of committed availability
under its Credit Agreement and Credit Facility and $29 million under uncommitted
lines of credit. At December 31, 2000, the Company had $51 million outstanding
on its uncommitted lines of credit. In January 2001, the Company's uncommitted
lines of credit, which amounted to $80 million, were terminated. As such, the
Company utilized the availability under its committed facilities to repay the
$51 million that was outstanding on the uncommitted lines of credit at
December 31, 2000.
The Credit Agreement and the Credit Facility (together the "Revolving
Facilities") contain certain covenants that require the Company to comply
with a maximum ratio of funded debt to capital and a consolidated leverage
ratio. As of December 31, 2000 the Company was not in compliance with the
consolidated leverage ratio. As such, the Company obtained a waiver and
amendment to the Revolving Facilities on February 16, 2001. The amended
Revolving Facilities contain revised ratios of funded debt to capital and
consolidated leverage that the Company expects to be in compliance through
the terms of the Revolving Facilities. As a result of the amendment to the
Revolving Facilities, the Company paid a fee to the lenders under the
Revolving Facilities of approximately $1 million and increased the spreads
over London Interbank Offer Rate ("LIBOR") from 22.5 basis points to 175
basis points and the facility fee per annum on the entire facility from 10
basis points to 50 basis points. In addition, although the Revolving
Facilities were previously unsecured, with the amendment, the lenders of the
Revolving Facilities will become secured on April 30, 2001. As a result of
having the Revolving Facilities secured, the Company's long-term notes will
become secured on an equal and ratable basis with such Revolving Facilities.
5
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 4-COMMITMENTS AND CONTINGENCIES
The Company is subject to a wide range of environmental protection laws.
The Company has remedial and investigatory activities underway at approximately
42 sites, of which, the Company has been named as a Potentially Responsible
Party ("PRP") at 13 "superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or comparable
statutes.
It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. This practice is followed whether the claims
are asserted or unasserted. Reserves for estimated losses from environmental
remediation are, depending on the site, based primarily upon internal or third
party environmental studies, and estimates as to the number, participation level
and financial viability of any other PRP, to the extent of contamination and the
nature of required remedial actions. Such reserves are adjusted as further
information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present fair
value. Recoveries of environmental remediation costs from other parties are
recognized as assets when their receipt is deemed probable. Management expects
that the amount accrued will be paid out over the periods of remediation for the
applicable sites which range up to 30 years and that all such reserves are
adequate based on all current data. Each of the sites in question is at various
stages of investigation or remediation; however, no information currently
available reasonably suggests that projected expenditures associated with
remedial action or compliance with environmental laws, for any single site or
for all sites in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
At December 31, 2000, the Company had accrued approximately $11 million
($3 million accrued as current liabilities; $8 million as non-current
liabilities) for known environmental related matters. The Company believes that
the range of liability for such matters is between $3 million and $13 million.
Also, certain of the Company's subsidiaries are defendants or plaintiffs
in other lawsuits that have arisen in the normal course of business. While
certain of these matters involve substantial amounts, it is management's
opinion, based on the advice of counsel, that the ultimate resolution of such
litigation will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
During October 1999, the Company entered into equity instrument
contracts that related to approximately 2.8 million shares of the Company's
common stock. In accordance with the consensus reached by the EITF in Issue
00-19 "Determination of Whether Share Settlement is within the Control of the
Company for Purposes of Applying Issue No. 96-13, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock' ", the Company has recorded temporary equity of $43 million with an
offset to paid in capital, representing the approximate cash settlement
amount of these contracts at December 31, 2000. As of December 31, 2000, the
Company had made collateral payments of approximately $20 million, which are
recorded in the balance sheet caption "Other current assets". These contracts
were settled for an additional $23 million in cash in January 2001 under the
Company's authorized share repurchase programs.
As part of the March 2000 sale of Rexair, Inc. ("Rexair"), the Company
guaranteed Rexair's new $200 million credit facility (the "Rexair Facility")
that matures on March 24, 2005. However, Rexair is primarily responsible for
the repayment of indebtedness under the Rexair Facility. The Rexair Facility
provides that all Rexair free cash flow, as defined, must be used to repay
the outstanding balance of the Rexair Facility. In connection with the
granting of security interests referred to in Note 3, the guarantee of the
Rexair Facility will also become equally and ratably secured. The guarantee
includes cross default provisions. At December 31, 2000, the outstanding
balance on the Rexair Facility was approximately $176 million. As a result of
the Rexair transaction, the Company recorded a deferred gain, which will be
deferred until the release of the guarantee of the Rexair Facility. The
Company's 25% share of the net liabilities of Rexair and the deferred gain
totaling $82 million are included in the balance sheet caption "Other
liabilities".
NOTE 5-SEGMENT DATA
The results of the Diversified segment are included until the March 24,
2000 disposal date, after which the Company's proportionate share of earnings
from the Diversified segment is recorded as equity earnings under the equity
method of accounting. The results of all operations classified as discontinued
are excluded from the table below for all periods presented and are discussed
separately under Disposition of Businesses and Discontinued Operations.
6
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 5-SEGMENT DATA (CONTINUED)
The following table presents information about the Company by segment.
(IN MILLIONS-UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 2000 1999
---------- ---------- --------- ----------
OPERATING
NET SALES INCOME (LOSS)
---------------------- ----------------------
Business Segments:
Bath and Plumbing Products (1) $ 269 $ 302 $ 17 $ 25
Hardware and Tools (2) 82 91 (7) 4
Lighting Corporation of America (3) 190 196 9 9
Diversified - 202 - 19
---------- ---------- --------- ----------
Totals $ 541 $ 791 19 57
========== ==========
Corporate expenses (5) (4)
--------- ----------
Total Operating Income 14 53
Interest expense (20) (23)
Interest income 7 1
Equity earnings in investee 1 -
Other income (expense), net (6) 1
--------- ----------
Income (loss) before income taxes (4) 32
Benefit (provision) for income taxes 2 (12)
--------- ----------
Income (loss) from continuing operations $ (2) $ 20
========= ==========
(1) Operating income for the three months ended December 31, 2000 includes $5
million of charges related to accelerated depreciation and operating
losses associated with the discontinuance of non-profitable lines of
business.
(2) Operating income for the three months ended December 31, 2000 includes $4
million of restructuring and other related charges associated with the
start-up of a new master distribution center.
(3) Operating income for the three months ended December 31, 2000 includes
$1 million of charges related to product sourcing initiatives.
NOTE 6-COMPREHENSIVE INCOME
The components of the Company's comprehensive income were as follows:
(IN MILLIONS - UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2000 1999
---- ----
Net income (loss) $ (4) $ 20
Foreign currency translation adjustment
arising during the period 2 (5)
Reclassification adjustment for translation
realized in net loss 1 -
Derivative Instruments and Hedging
Activities 1 -
---------- ----------
Comprehensive income $ - $ 15
========== ==========
7
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 7-EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share calculation:
(IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
INCOME
FROM
CONTINUING PER SHARE
OPERATIONS SHARES AMOUNT
------------------------------
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999
--------------------------
Earnings per basic share $ 20 85.0 $ 0.23
Effect of dilutive securities
Stock options 0.5
Nonvested restricted stock 1.1
----- ----- ------
Earnings per diluted share $ 20 86.6 $ 0.23
===== ===== ======
Diluted earnings per share data for the three months ended December 31,
2000, is not presented as the result would have been anti-dilutive since the
Company recorded loss from continuing operations for the period. The
weighted average shares used to calculate the basic loss per share for the
three months ended December 31, 2000 was 76.0 million.
Diluted common shares include shares that would be outstanding assuming
the fulfillment of conditions that would remove the restriction on nonvested
shares and the exercise of stock options. Options to purchase approximately
6.4 million shares in the three months ended December 31, 2000 were not
included in the computation of diluted earnings per share as the result would
have been anti-dilutive. Options to purchase approximately 3.1 million shares
in the three months ended December 31, 1999 were not included in the
computation of diluted earnings per share because the options' exercise
prices exceeded the average market price of the common shares for those
periods.
NOTE 8- GOODWILL IMPAIRMENT AND RESTRUCTURING CHARGES
In the first quarter of fiscal 2001, the Company incurred restructuring
charges of $2 million in the Hardware and Tools segment primarily related to
the closure of an existing distribution center in anticipation of operating a
new master distribution center. The charge related to severance costs for the
termination of approximately 118 employees. In addition, the Company incurred
approximately $2 million in start-up costs associated with the new master
distribution center.
During fiscal 2000, the Company conducted a strategic review of certain
operations in the Bath and Plumbing segment. As a result of this strategic
review, the Company decided to dispose of the European HVAC operation and to
exit three product lines at its U.S. Brass operation. In reaching this decision,
the Company considered the profitability of these operations, the fact that the
Company was not a market leader in these businesses, and the fact that
significant investment would be required in order to make these businesses
competitive with no assurance of a reasonable return on this investment.
In September 2000, the Company wrote down the net assets of its European
HVAC operation by recording a charge of $42 million, comprised of $24 million of
goodwill impairment and $18 million of fixed asset impairments. In addition, the
Company also incurred $4 million in inventory related charges. The European HVAC
operation was subsequently sold in November 2000 for approximately $8 million,
which represented its approximate book value.
In September 2000, the Company announced that it was exiting its Valley
line of faucets, the Eastman line of connectors and its Sanitary Dash line of
under the sink pipes. Accordingly, the Company recorded severance and commitment
costs of $4 million and a goodwill impairment charge of $1 million. In addition,
the Company also recorded inventory charges of $16 million as a result of the
discontinuance of the three product lines. The restructuring plan includes the
closure of two manufacturing facilities in Abilene and Plano, Texas and the
termination of approximately 335 employees. The Company anticipates selling its
current inventory and will complete its remaining
8
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 8- GOODWILL IMPAIRMENT AND RESTRUCTURING CHARGES (CONTINUED)
in-process inventory during the second quarter of fiscal 2001. Accordingly, the
Company recorded accelerated depreciation in the first quarter of fiscal 2001 of
approximately $4 million and anticipates additional accelerated depreciation of
approximately $1 million in the second quarter of fiscal 2001 related to the
revised useful lives of fixed assets. Upon completion, all remaining machinery
and equipment will be disposed of and the vacated facilities will be sold.
In January 2000, a decision was made to close the former Zurn Industries
corporate office in Dallas, Texas, which resulted in the termination of 30
employees. The Company recorded a charge of $13 million relating to this
decision, which included severance costs of $2 million, costs of $9 million for
a lease expiring November 2007, and a write-off of $2 million relating to
leasehold improvements and other fixed assets.
The accrued liabilities relating to the cash restructuring charges are
detailed as follows:
(IN MILLIONS - UNAUDITED)
LEASE AND
CONTRACT SEVERANCE
RELATED AND RELATED TOTAL
COSTS COSTS COSTS
---------- ---------- ----------
Balance at September 30, 2000 $ 10 $ 5 $ 15
Cash payments (1) - (1)
Reserve of divested company - (3) (3)
Fiscal 2001 charges - 2 2
---------- ---------- ----------
Balance at December 31, 2000 $ 9 $ 4 $ 13
========== ========== ==========
Approximately $7 million of the reserve is included in the balance sheet
caption "accrued expenses and other liabilities", while the remaining $6 million
is recorded in the balance sheet caption "other liabilities".
The Company expects the remaining cash charges of $13 million to be paid
by the respective lease termination dates not to exceed seven years and over
the periods provided by the severance agreements expected to be paid within two
years.
NOTE 9- DISPOSITION OF BUSINESSES AND DISCONTINUED OPERATIONS
DISPOSITION OF BUSINESSES
In November 2000, the Company sold its European HVAC business. The cash
consideration received for this business totaled $8 million, which approximated
its carrying value. The results of the European HVAC business are included in
the Bath and Plumbing Products segment until the date of disposal.
9
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 9- DISPOSITION OF BUSINESSES AND DISCONTINUED OPERATIONS (CONTINUED)
During the first quarter of fiscal 2000, the Company disposed of assets
relating to its ladder operations and the infant and children footwear
operation. The total proceeds of these separate transactions were $17 million,
which approximated their carrying value. The Company has retained certain
product liabilities of the ladder operations. The results of the ladder
operations and the infant and children footwear operations are included in the
Hardware and Tools and Diversified segments, respectively, until the date of
disposal.
DISCONTINUED OPERATIONS
For the three months ended December 31, 2000, the Company recorded a
loss from discontinued operations of $2 million mainly attributable to the
settlement of certain claims surrounding the previously disposed Power
Systems businesses.
NOTE 10 - RECENT PRONOUNCEMENTS
Effective October 1, 2000, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The Company uses several
types of derivative financial instruments including interest rate swaps, forward
contracts and debt denominated in a foreign currency to hedge its exposure to
volatility in interest rates and currency exchange rates. In accordance with its
risk management policies, the Company formally documents its hedge
relationships, including identification of the hedging instrument and the hedged
items, as well as its risk management objectives and strategies for undertaking
the hedge transaction. The Company also formally assesses, both at inception and
at least quarterly thereafter, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in either the fair value
or cash flows of the hedged item. If a derivative ceases to be a highly
effective hedge, the Company discontinues hedge accounting. The Company does not
enter into derivative instruments for speculation or trading purposes.
Interest Rate Swap
The Company's borrowing activities give rise to interest rate exposure
that impacts its earnings and the economic value of its debt portfolio. The
Company hedged a portion of its variable-rate debt by entering into an interest
rate swap in which the Company agrees to exchange, at specified intervals, the
calculated difference between fixed and variable interest on $200 million of our
debt. This swap, which has a fair value of less than $1 million, was designated
as a cash flow hedge of the underlying variable-rate interest payments and was
recorded as a current asset in our Balance Sheet. Since an assessment of the
hedging relationship revealed no ineffectiveness, the entire unrealized gain,
net of tax, was recorded in Accumulated Other Comprehensive Income (OCI) within
Stockholders' Equity. When the hedged cash flow is realized as interest expense,
the related gain in OCI will be recorded as a reduction of that interest
expense. Amounts in OCI are expected to be reclassified into earnings within the
next twelve months.
Forward Exchange
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. It also enters into foreign currency denominated
inter-company debt. The primary purpose of the Company's foreign currency
hedging activities is to manage the volatility associated with foreign currency
payments to related entities or to vendors for purchases of materials and with
foreign currency collections from customers in the normal course of business.
The Company primarily utilizes forward exchange contracts with maturities of
less than twelve months, which qualify as foreign currency hedges. These hedges
are intended to offset the effect of transaction gains and losses, which arise
when payments or collections in a foreign currency are made or received one to
three months after the asset or liability is generated. The fair value of these
instruments at December 31, 2000 was a $1 million current asset. Since an
assessment of these hedges revealed no ineffectiveness, gains and losses on
these instruments are deferred in accumulated other comprehensive income (OCI),
net of tax, until the underlying transaction gain or loss is recognized in
earnings. Amounts in OCI are expected to be reclassified into earnings within
the next twelve months.
10
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 10 - RECENT PRONOUNCEMENTS (CONTINUED)
Foreign Currency Denominated Debt (Net Investment Hedging)
The Company is exposed to foreign currency risk when the financial
statements of its non-U.S. dollar subsidiaries are translated into the Company's
functional currency. In order to hedge its net investment position in select
subsidiaries, the Company has entered into foreign currency denominated debt.
Since an assessment of these hedges revealed no ineffectiveness, all of the
transaction gains and losses associated with this debt are reflected in
cumulative translation adjustment within stockholders' equity.
NOTE 11 - SUBSEQUENT EVENTS
On February 13, 2001, the Company established a $30 million facility
associated with accounts receivable and received proceeds under the facility of
$29 million.
NOTE 12-SUPPLEMENTAL JOINT ISSUER AND GUARANTOR FINANCIAL INFORMATION
The following represents the supplemental consolidating condensed
financial statements of USI, USI Global and USIAH which are the jointly
obligated issuers of the Notes, and USI Atlantic, which is the guarantor of the
Notes, and their non-guarantor subsidiaries, as of December 31, 2000 and
September 30, 2000 and for the three months ended December 31, 2000 and 1999.
Separate consolidated financial statements of USI, USI Global, USI Atlantic and
USIAH are not presented, as management has determined that they would not be
material to investors.
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
------------------------------------------------------------------------------------
USI USI NONGUARANTOR
USI GLOBAL ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------ -------- ----- ------------ ------------ ------------
Net Sales $ - $ - $ - $ - $ 541 $ - $ 541
Operating costs and expenses:
Cost of products sold - - - - 371 - 371
Selling, general and administrative expenses 5 - - - 149 - 154
Restructuring charges - - - - 2 - 2
-------- ---------- --------- ---------- ---------- ---------- ----------
Operating income (loss) (5) - - - 19 - 14
Interest expense (10) (9) - - (1) - (20)
Interest income 6 - - - 1 - 7
Intercompany interest income (expense), net (4) 12 - - (8) - -
Other income (expense), net (5) 2 - - (3) - (6)
Other intercompany income (expense) - (15) - 15 - - -
Equity in earnings of investees, net 7 2 9 - - (17) 1
-------- ---------- --------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
discontinued operations (11) (8) 9 15 8 (17) (4)
Benefit (provision) for income taxes 7 4 - (6) (3) - 2
-------- ---------- --------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (4) (4) 9 9 5 (17) (2)
Loss from discontinued operation,
net of tax benefit - - - - (2) - (2)
-------- ---------- --------- ---------- ---------- ---------- ----------
Net income (loss) $ (4) $ (4) $ 9 $ 9 $ 3 $ (17) $ (4)
======== ========== ========= ========== ========== ========== ==========
11
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12-SUPPLEMENTAL JOINT ISSUER AND GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------
USI USI NONGUARANTOR
USI GLOBAL ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------ -------- ----- ------------ ------------ ------------
Net Sales $ - $ - $ - $ - $ 791 $ - $ 791
Operating costs and expenses:
Cost of products sold - - - - 546 - 546
Selling, general and administrative expenses 4 - - - 188 - 192
--------- -------- --------- ---------- ---------- ---------- ----------
Operating income (loss) (4) - - - 57 - 53
Interest expense (10) (11) - - (2) - (23)
Interest income - - - - 1 - 1
Intercompany interest income (expense), net 3 17 - - (20) - -
Other income (expense), net - - - - 1 - 1
Other intercompany income (expense) - (15) - 15 - - -
Equity in earnings of investees, net 27 13 9 - - (49) -
--------- -------- --------- ---------- ---------- ---------- ----------
Income before income taxes 16 4 9 15 37 (49) 32
Benefit (provision) for income taxes 4 4 - (6) (14) - (12)
--------- -------- --------- ---------- ---------- ---------- ----------
Net income (loss) $ 20 $ 8 $ 9 $ 9 $ 23 $ (49) $ 20
========= ======== ========= ========== ========== ========== ==========
12
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12-SUPPLEMENTAL JOINT ISSUER AND GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
(IN MILLIONS - UNAUDITED)
AT DECEMBER 31, 2000
--------------------------------------------------------------------------------------
USI USI NONGUARANTOR
USI GLOBAL ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------ -------- ----- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ - $ - $ 27 $ - $ 27
Trade receivables, net - - - - 447 - 447
Inventories - - - - 533 - 533
Deferred income taxes 61 - - - 1 - 62
Other current assets 32 - - - 32 - 64
-------- --------- -------------- ------- -------------- -------- -------
Total current assets 93 - - - 1,040 - 1,133
Property, plant and equipment, net - - - - 429 - 429
Other assets 181 - - 908 202 (908) 383
Goodwill, net - - - - 539 - 539
Deferred income taxes (3) - - - 3 - -
Investments in subsidiaries 1,924 1,427 999 - - (4,350) -
Intercompany receivable (payable), net (789) 574 33 91 91 - -
-------- --------- -------------- ------- -------------- -------- -------
Total assets $ 1,406 $ 2,001 $ 1,032 $ 999 $ 2,304 $(5,258) $2,484
======== ========= ============== ======= ============== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ - $ - $ - $ 9 $ - $ 9
Current maturities of long-term debt 265 444 - - 6 - 715
Trade accounts payable - - - - 166 - 166
Accrued expenses and other liabilities 26 3 - - 170 - 199
Income taxes payable (7) - - - 7 - -
-------- --------- -------------- ------- -------------- -------- -------
Total current liabilities 284 447 - - 358 - 1,089
Long-term debt 249 124 - - 10 - 383
Deferred income taxes 3 - - - 7 - 10
Other liabilities 114 - - - 132 - 246
-------- --------- -------------- ------- -------------- -------- -------
Total liabilities 650 571 - - 507 - 1,728
Commitments and contingencies
Temporary equity 43 - - - - - 43
Stockholders' equity 713 1,430 1,032 999 1,797 (5,258) 713
-------- --------- -------------- ------- -------------- -------- -------
Total liabilities and stockholders' equity $ 1,406 $ 2,001 $ 1,032 $ 999 $ 2,304 $(5,258) $2,484
======== ========= ============== ======= ============== ======== =======
13
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12-SUPPLEMENTAL JOINT ISSUER AND GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
(IN MILLIONS)
AT SEPTEMBER 30, 2000
-------------------------------------------------------------------------------------
USI USI NONGUARANTOR
USI GLOBAL ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------ -------- ----- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ - $ - $ 25 $ - $ 25
Trade receivables, net - - - - 517 - 517
Inventories - - - - 494 - 494
Deferred income taxes 61 - - - 1 - 62
Other current assets 15 - - - 30 - 45
-------- --------- ---------- ------ ------------- ------------- -------------
Total current assets 76 - - - 1,067 - 1,143
Property, plant and equipment, net - - - - 420 - 420
Deferred income taxes (1) - - - 1 - -
Other assets 185 - - 908 203 (908) 388
Goodwill, net - - - - 541 - 541
Investments in subsidiaries 1,217 1,299 984 - - (3,500) -
Intercompany receivable (payable), net (98) 85 32 76 (95) - -
-------- --------- ---------- ------ ------------- ------------- -------------
Total assets $ 1,379 $ 1,384 $ 1,016 $ 984 $ 2,137 $ (4,408) $ 2,492
======== ========= ========== ====== ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ - $ - $ - $ 29 $ - $ 29
Current maturities of long-term debt 158 - - - (17) - 141
Trade accounts payable - - - - 196 - 196
Accrued expenses and other liabilities 29 5 - - 188 - 222
Income taxes payable 7 - - - 2 - 9
-------- --------- ---------- ------ ------------- ------------- -------------
Total current liabilities 194 5 - - 398 - 597
Long-term debt 307 543 - - 35 - 885
Deferred income taxes 6 - - - 4 - 10
Other liabilities 118 - - - 128 - 246
-------- --------- ---------- ------ ------------- ------------- -------------
Total liabilities 625 548 - - 565 - 1,738
Commitments and contingencies
Stockholders' equity 754 836 1,016 984 1,572 (4,408) 754
-------- --------- ---------- ------ ------------- ------------- -------------
Total liabilities and stockholders' equity $ 1,379 $ 1,384 $ 1,016 $ 984 $ 2,137 $ (4,408) $ 2,492
======== ========= ========== ====== ============= ============= =============
14
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12-SUPPLEMENTAL JOINT ISSUER AND GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------
USI USI NONGUARANTOR
USI GLOBAL ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------ -------- ----- ------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES $ (26) $ (6) $-- $-- $ 20 $-- $ (12)
INVESTING ACTIVITIES:
Proceeds from sale of businesses 8 -- -- -- -- -- 8
Purchases of property, plant and equipment -- -- -- -- (24) -- (24)
Proceeds from sale of excess real estate -- -- -- -- 3 -- 3
Net transfers with subsidiaries (9) (17) -- -- -- 26 --
----- ----- --- --- ----- ----- -----
NET CASH USED IN INVESTING ACTIVITIES (1) (17) -- -- (21) 26 (13)
FINANCING ACTIVITIES:
Proceeds from long-term debt 807 20 -- -- -- -- 827
Repayment of long-term debt (758) -- -- -- (2) -- (760)
Repayment of notes payable, net -- -- -- -- (21) -- (21)
Payment of collateral on equity
instrument contract (18) -- -- -- -- -- (18)
Payment of dividends (4) -- -- -- -- -- (4)
Net transfers with parent -- 9 -- -- 17 (26) --
----- ----- --- --- ----- ----- -----
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 27 29 -- -- (6) (26) 24
Effect of exchange rate changes on cash and cash
equivalents -- (6) -- -- 9 -- 3
----- ----- --- --- ----- ----- -----
INCREASE IN CASH AND CASH
EQUIVALENTS -- -- -- -- 2 -- 2
Cash and cash equivalents at beginning of period -- -- -- -- 25 -- 25
----- ----- --- --- ----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $-- $-- $-- $-- $ 27 $-- $ 27
===== ===== === === ===== ===== =====
15
U.S. INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12-SUPPLEMENTAL JOINT ISSUER AND GUARANTOR FINANCIAL INFORMATION
(CONTINUED)
(IN MILLIONS - UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
USI USI NONGUARANTOR
USI GLOBAL ATLANTIC USIAH SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------ -------- ----- ------------ ------------ ------------
NET CASH USED IN OPERATING $ (2) $ (6) $-- $-- $ (23) $-- $ (31)
ACTIVITIES
INVESTING ACTIVITIES:
Proceeds from sale of businesses -- -- -- -- 17 -- 17
Acquisition of companies, net of cash acquired -- -- -- -- (7) -- (7)
Purchases of property, plant and equipment -- -- -- -- (22) -- (22)
Proceeds from sale of excess real estate -- -- -- -- 6 -- 6
Net transfers with subsidiaries (36) (30) -- -- -- 66 --
Other investing activities -- -- -- -- (1) -- (1)
----- ----- --- --- ----- ----- -----
NET CASH USED IN INVESTING
ACTIVITIES (36) (30) -- -- (7) 66 (7)
FINANCING ACTIVITIES:
Proceeds from long-term debt 619 -- -- -- -- -- 619
Repayment of long-term debt (562) -- -- -- (9) -- (571)
Purchase of treasury stock (15) -- -- -- -- -- (15)
Payment of dividends (4) -- -- -- -- -- (4)
Net transfers with parent -- 36 -- -- 30 (66) --
----- ----- --- --- ----- ----- -----
NET CASH PROVIDED BY FINANCING
ACTIVITIES 38 36 -- -- 21 (66) 29
Effect of exchange rate changes on cash and cash
equivalents -- -- -- -- (7) -- (7)
----- ----- --- --- ----- ----- -----
DECREASE IN CASH AND CASH
EQUIVALENTS -- -- -- -- (16) -- (16)
Cash and cash equivalents at beginning of period -- -- -- -- 58 -- 58
----- ----- --- --- ----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $-- $-- $-- $-- $ 42 $-- $ 42
===== ===== === === ===== ===== =====
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As of December 31, 2000, the Company's operations are grouped into three
segments: Bath and Plumbing Products, Hardware and Tools and Lighting
Corporation of America. The Company completed the disposition of a majority
interest in the Diversified segment on March 24, 2000. The results of all
operations classified as discontinued are excluded from the table below for all
periods presented and are discussed separately under Discontinued Operations.
RESULTS OF OPERATIONS
(IN MILLIONS-UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2000 1999
---- -----
NET SALES
Bath and Plumbing Products $ 269 $ 302
Hardware and Tools 82 91
Lighting Corporation of America 190 196
Diversified -- 202
----- -----
TOTAL NET SALES $ 541 $ 791
===== =====
OPERATING INCOME (LOSS)
Bath and Plumbing Products (1) $ 17 $ 25
Hardware and Tools (2) (7) 4
Lighting Corporation of America (3) 9 9
Diversified -- 19
----- -----
19 57
Corporate expenses (5) (4)
----- -----
TOTAL OPERATING INCOME $ 14 $ 53
===== =====
(1) Operating income for the three months ended December 31, 2000 includes $5
million of charges related to accelerated depreciation and operating
losses associated with the discontinuance of non-profitable lines of
business.
(2) Operating income for the three months ended December 31, 2000 includes $4
million of restructuring and other related charges associated with the
start-up of a new master distribution center.
(3) Operating income for the three months ended December 31, 2000 includes
$1 million of charges related to product sourcing initiatives.
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in
the following Management's Discussion or elsewhere in this Quarterly Report
are, or may be deemed to be, forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Various economic and competitive factors could cause
actual results to differ materially from the expectations reflected in such
forward-looking statements, including factors which are outside the control
of the Company, such as interest rates, foreign currency exchange rates,
instability in domestic and foreign financial markets, consumer spending
patterns, availability of consumer and commercial credit, levels of
residential and commercial construction, and changes in raw material costs,
along with the other factors noted in this Report and in other documents
filed by the Company with the Securities and Exchange Commission. In
addition, the Company's future results are subject to uncertainties relating
to the Company's ability to consummate its business strategy, including
realizing market synergies and cost savings from the integration of its
acquired businesses. All subsequent written and oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by the foregoing factors.
17
THREE MONTHS ENDED DECEMBER 31, 2000
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1999
The Company had sales of $541 million and operating income of $14 million
for the quarter ended December 31, 2000, compared to sales of $791 million and
operating income of $53 million for the same period in the prior year. Sales
decreased $250 million (31.6%) and operating income decreased $39 million
(73.6%) compared to the first quarter of fiscal 2000. Sales and operating income
for the quarter ended December 31, 1999 include $202 million and $19 million,
respectively, related to the Diversified businesses which were disposed of in
March 2000. Also, included in operating income for the quarter ended December
31, 2000 are restructuring and other related charges of $10 million.
Excluding the Diversified results and these charges, sales and operating
income for the quarter ended December 31, 2000 decreased $48 million (8.1%)
and $10 million (29.4%), respectively, compared to the first quarter of
fiscal 2000.
Bath and Plumbing Products had sales of $269 million and operating
income of $17 million for the quarter ended December 31, 2000, decreases of
$33 million (10.9%) and $8 million (32.0%), respectively, from the first
quarter of fiscal 2000. Included in operating income for the three months
ended December 31, 2000, is accelerated depreciation and operating losses
amounting to $5 million related to non-profitable lines of business at the US
Brass operations which were discontinued in the fourth quarter of fiscal
2000. Excluding these charges, operating income for the three months ended
December 31, 2000 would have been $22 million, a decrease of $3 million
(12.0%) compared to the same period of fiscal 2000. The decrease in sales is
primarily attributable to lost contribution from the disposals of the
European HVAC and Fire protection businesses, weakness at Spring Ram and the
North American HVAC business, and currency translation. Operating income
decreased due to the lower sales at Spring Ram and the North American HVAC
business, as well as currency translation at the European bath and spa
business.
Hardware and Tools had sales of $82 million and an operating loss of $7
million for the quarter ended December 31, 2000, decreases of $9 million (9.9%)
and $11 million, respectively, from the first quarter of fiscal 2000. Included
in operating income for the three months ended December 31, 2000, is $4 million
of restructuring and other related charges associated with the start up of a new
master distribution center. Excluding these charges, operating loss for the
three months ended December 31, 2000 would have been $3 million, a decrease
of $7 million compared to the same period of fiscal 2000. The decrease in
sales is primarily attributable to lost contribution from the disposals of
the ladder business, the timing of shipments of spring tools, and currency
translation at the U.K. operations, partially offset by strong performance in
the winter tool line. The decrease in operating income is due to the timing
of shipments of spring tools, lower margins at Ames True Temper, and weakness
at the U.K. operations, partially offset by the strong performance in the
winter tool line.
Lighting Corporation of America had sales of $190 million and operating
income of $9 million for the quarter ended December 31, 2000, a decrease in
sales of $6 million (3.1%) and flat operating income compared to the first
quarter of fiscal 2000. Included in operating income for the three months ended
December 31, 2000, is $1 million of charges related to product sourcing
initiatives. Excluding these charges, operating income for the three months
ended December 31, 2000 would have been $10 million, an increase of $1
million (11.1%) compared to the same period of fiscal 2000. The decline in
sales is primarily attributable to lost contribution from the discontinuance
of an unprofitable residential product line, weakness in the commercial and
institutional indoor business, and currency translation at the European
lighting business. The increase in operating income is primarily attributable
to cost control initiatives, lower period costs, and improvement at the
European lighting business, partially offset by the lower sales levels.
A majority interest in the Diversified Operations was disposed of on March
24, 2000. The Company, for the quarter ended December 31, 2000, recorded equity
earnings of $1 million with respect to its retained interest in the Diversified
segment which is included in the statement of operations caption "Equity
earnings in investee."
DISPOSITION OF BUSINESSES
In November 2000, the Company sold its European HVAC business. The cash
consideration received for this business totaled $8 million, which approximated
its carrying value. The results of the European HVAC business are included in
the Bath and Plumbing Products segment until the date of disposal.
18
As part of the March 2000 sale of Rexair, Inc. ("Rexair"), the Company
guaranteed Rexair's new $200 million credit facility (the "Rexair Facility")
that matures on March 24, 2005. However, Rexair is primarily responsible for
the repayment of indebtedness under the Rexair Facility. The Rexair Facility
provides that all Rexair free cash flow, as defined, must be used to repay
the outstanding balance of the Rexair Facility. In connection with the
granting of security interests referred to in Note 3, the guarantee of the
Rexair Facility will also become equally and ratably secured. The guarantee
includes cross default provisions. At December 31, 2000, the outstanding
balance on the Rexair Facility was approximately $176 million. As a result
of the Rexair transaction, the Company recorded a deferred gain, which
will be deferred until the release of the guarantee of the Rexair Facility.
The Company's 25% share of the net liabilities of Rexair and the deferred
gain totaling $82 million are included in the balance sheet caption
"Other liabilities".
During the first quarter of fiscal 2000, the Company disposed of assets
relating to its ladder operations and the infant and children footwear
operation. The total proceeds of these separate transactions were $17 million,
which approximated their carrying value. The company has retained certain
product liabilities of the ladder operations. The results of the ladder
operations and the infant and children footwear operations are included in the
Hardware and Tools and Diversified segments, respectively, until the disposal
date.
DISCONTINUED OPERATIONS
For the three months ended December 31, 2000, the Company recorded a loss
from discontinued operations of $2 million, mainly attributable to the
settlement of certain claims surrounding the previously disposed Power
Systems businesses.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was an expense of $6 million for the three
months ended December 31, 2000, compared to income of $1 million in the
comparable period of fiscal 2000. The current year includes approximately $4
million of expenses related to the write-off of fees associated with the pending
spin-off of the Lighting Corporation of America business segment and the
industrial tools business, while the prior year included a $3 million gain on
real estate sales.
INTEREST AND TAXES
Interest expense was $20 million for the three months ended December 31,
2000, a $3 million (13.0%) decrease from the comparable period of fiscal 2000.
The decrease is a result of lower debt levels due to the sale of the Diversified
businesses. Interest income was $7 million for the quarter ended December 31,
2000, a $6 million increase from the comparable period of fiscal 2000. The
increase in interest income is primarily due to interest earned on the 12.5%
senior notes received on the disposition of the Diversified businesses.
The benefit for income taxes on continuing operations was $2 million for
the quarter ended December 31, 2000, on pre-tax loss of $4 million (an effective
tax rate of approximately 39%) compared to a $12 million provision on pre-tax
income of $32 million (an effective tax rate of approximately 38%) in the
comparable period of fiscal 2000.
19
GOODWILL IMPAIRMENT AND RESTRUCTURING CHARGES
In the first quarter of fiscal 2001, the Company incurred restructuring
charges of $2 million in the Hardware and Tools segment primarily related to
the closure of an existing distribution center in anticipation of operating a
new master distribution center. The charge related to severance costs for the
termination of approximately 118 employees. In addition, the Company incurred
approximately $2 million in start-up costs associated with the new master
distribution center.
During fiscal 2000, the Company conducted a strategic review of certain
operations in the Bath and Plumbing segment. As a result of this strategic
review, the Company decided to dispose of the European HVAC operation and to
exit three product lines at its U.S. Brass operation. In reaching this decision,
the Company considered the profitability of these operations, the fact that the
Company was not a market leader in these businesses, and the fact that
significant investment would be required in order to make these businesses
competitive with no assurance of a reasonable return on this investment.
In September 2000, the Company wrote down the net assets of its European
HVAC operation by recording a charge of $42 million, comprised of $24 million of
goodwill impairment and $18 million of fixed asset impairments. In addition, the
Company also incurred $4 million in inventory related charges. The European HVAC
operation was subsequently sold in November 2000 for approximately $8 million,
which represented its approximate book value.
In September 2000, the Company announced that it was exiting its Valley
line of faucets, the Eastman line of connectors and its Sanitary Dash line of
under the sink pipes. Accordingly, the Company recorded severance and commitment
costs of $4 million and a goodwill impairment charge of $1 million. In addition,
the Company also recorded inventory charges of $16 million as a result of the
discontinuance of the three product lines. The restructuring plan includes the
closure of two manufacturing facilities in Abilene and Plano, Texas and the
termination of approximately 335 employees. The Company anticipates selling its
current inventory and will complete its remaining in-process inventory during
the second quarter of fiscal 2001. Accordingly, the Company recorded accelerated
depreciation in the first quarter of fiscal 2001 of approximately $4 million and
anticipates additional accelerated depreciation of approximately $1 million in
the second quarter of fiscal 2001 related to the revised useful lives of fixed
assets. Upon completion, all remaining machinery and equipment will be disposed
of and the vacated facilities will be sold.
In January 2000, a decision was made to close the former Zurn Industries
corporate office in Dallas, Texas, which resulted in the termination of 30
employees. The Company recorded a charge of $13 million relating to this
decision, which included severance costs of $2 million, costs of $9 million for
a lease expiring November 2007, and a write-off of $2 million relating to
leasehold improvements and other fixed assets.
The accrued liabilities relating to the cash restructuring charges are detailed
as follows:
(IN MILLIONS - UNAUDITED)
LEASE AND
CONTRACT SEVERANCE
RELATED AND RELATED TOTAL
COSTS COSTS COSTS
----- ----- -----
Balance at September 30, 2000 $ 10 $ 5 $ 15
Cash payments (1) - (1)
Reserve of divested company - (3) (3)
Fiscal 2001 charges - 2 2
-------- ------- ------
Balance at December 31, 2000 $ 9 $ 4 $ 13
======== ======= ======
Approximately $7 million of the reserve is included in the balance sheet
caption "accrued expenses and other liabilities", while the remaining $6 million
is recorded in the balance sheet caption "other liabilities".
The Company expects the remaining cash charges of $13 million to be paid
by the respective lease termination dates not to exceed seven years and over the
periods provided by the severance agreements expected to be paid within two
years.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources are cash
and cash equivalents, cash provided from operations and available borrowings
under the Company's revolving credit facilities.
Net cash used in operating activities was $12 million for the three
months ended December 31, 2000 compared to net cash used of $31 million for
the comparable period of the prior year. In the current period, continuing
operations used $10 million compared to $31 million in the comparable period
of the prior year. The change primarily represents a decrease in working
capital requirements in the current quarter at the Bath and Plumbing segment
in addition to the settlement of certain obligations in the prior quarter at
the Bath and Plumbing segment, partially offset by increased working capital
needs at the Hardware and Tools segment due to the transition into a new
master distribution center.
Net cash used in discontinued operations of $2 million for the three
months ended December 31, 2000 relates mainly to the settlement of certain
claims surrounding the previously disposed Power Systems businesses.
Net cash used in investing activities of $13 million for the three months
ended December 31, 2000, consisted of $24 million for capital expenditures,
partially offset by cash proceeds of $8 million received from the sale of the
European HVAC operations and $3 million from the sale of excess real estate. In
the three months ended December 31, 1999, the Company used net cash of $7
million, which primarily consisted of $7 million for acquisitions and $22
million for capital expenditures, partially offset by net proceeds of $17
million for the separate sales of the Company's ladder operations and the infant
and children footwear operation and $6 million from the sale of excess real
estate.
Net cash provided by financing activities was $24 million for the three
months ended December 31, 2000. This included net proceeds of long-term debt
and notes of $46 million, partially offset by dividend payments of $4 million
and payments of collateral on an equity instrument contract of $18 million.
In the corresponding period of the prior year, financing activities provided
net cash of $29 million, which included net proceeds of long-term debt of $48
million, partially offset by net cash used to purchase $15 million of the
Company's common stock for treasury and dividend payments of $4 million.
The Company has a five year revolving line of credit providing for
borrowings in both US dollars and foreign currency which had original
availability of $750 million (the "Credit Agreement") that terminates on
December 12, 2001. Accordingly, the Company has classified these borrowings as
current maturities. The Credit Agreement was permanently reduced by $100 million
on December 12, 1999 and $150 million on December 12, 2000. As of December 31,
2000, the Company had $6 million available under this revolving line of credit.
During fiscal 1999, the Company commenced a $300 million commercial paper
program, of which $44 million was outstanding at December 31, 2000. The
commercial paper is supported by a $300 million 364-day credit facility (the
"Credit Facility"). This Credit Facility was renewed in October 2000 and the new
termination date is October 26, 2001. At December 31, 2000, the Company had $136
million available under this 364-day facility.
At December 31, 2000, the Company had unused availability of
approximately $171 million, including approximately $142 million of committed
availability under its Credit Agreement and Credit Facility and $29 million
under uncommitted lines of credit. At December 31, 2000, the Company had $51
million outstanding on its uncommitted lines of credit. In January 2001, the
Company's uncommitted lines of credit, which amounted to $80 million, were
terminated. As such, the Company utilized the availability under its
committed facilities to repay the $51 million that was outstanding on the
uncommitted lines of credit at December 31, 2000.
The Credit Agreement and the Credit Facility (together the "Revolving
Facilities") contain certain covenants that require the Company to comply
with a maximum ratio of funded debt to capital and a consolidated leverage
ratio. As of December 31, 2000 the Company was not in compliance with the
consolidated leverage ratio. As such, the Company obtained a waiver and
amendment to the Revolving Facilities on February 16, 2001. The amended
Revolving Facilities contain revised ratios of funded debt to capital and
consolidated leverage that the Company expects to be in compliance through
the terms of the Revolving Facilities. As a result of the amendment to the
Revolving Facilities, the Company paid a fee to the lenders under the
Revolving Facilities of approximately $1 million and increased the spreads
over London Interbank Offer Rate ("LIBOR") from 22.5 basis points to 175
basis points and the facility fee per annum on the entire facility from 10
basis points to 50 basis points. In addition, although the Revolving
Facilities were previously unsecured, with the amendment, the lenders of the
Revolving Facilities will become secured on April 30, 2001. As a result of
having the Revolving Facilities secured, the Company's long-term notes will
become secured on an equal and ratable basis with such Revolving Facilities.
21
The Company is in current discussions with banks and anticipates
entering into new long-term financing arrangements prior to the maturity of
the Revolving Facilities. Management believes the amounts expected to be
available under the new financing arrangements will be sufficient to repay
all amounts outstanding under the Revolving Facilities. Management also
believes that these new long-term financing arrangements, along with cash
from operations will adequately support cash needs for working capital and
capital expenditures for the Company's operations.
On February 13, 2001, the Company established a $30 million facility
associated with accounts receivable and received proceeds under the facility
of $29 million.
Total stockholders' equity decreased $41 million from September 30, 2000,
principally due to recognizing temporary equity related to the forward stock
purchase contract outstanding as of December 31, 2000.
During the three months ended December 31, 2000, the Company paid
approximately $1 million related to its restructuring plans announced in fiscal
1998, 1999 and 2000, and expects an additional $7 million to be paid in the next
12 months. There have been no material changes in the nature or costs of the
restructuring.
During fiscal 1999 and 2000, the Board of Directors authorized share
repurchase programs aggregating $350 million. As of December 31, 2000, the
Company had purchased $289 million of its common stock for treasury under the
program, of which all of the shares were purchased in fiscal 1999 and 2000.
During October 1999, the Company entered into equity instrument contracts
that related to approximately 2.8 million shares of its common stock. As of
December 31, 2000, the Company had made collateral payments of approximately
$20 million, which are recorded in the balance sheet caption "Other current
assets". These contracts were settled for an additional $23 million in cash
in January 2001 under the Company's authorized share repurchase programs.
Accordingly, as of February 15, 2001, the Company has purchased $332 million
of its common stock for treasury under its 1999 and 2000 authorized share
repurchase programs.
In August 1999, the Company's shelf registration statement on Form S-3
filed with the Securities and Exchange Commission in order to register $600
million in debt securities became effective. The Company expects to issue debt
securities covered by this registration statement in the future, subject to
market conditions.
The Company has been pursuing a spin-off of its Lighting Corporation of
America business segment and industrial tools business ("LCA Group"). The
lighting businesses include Columbia Lighting, Inc.; Dual-Lite, Inc.;
Prescolite, Inc.; Kim Lighting, Inc.; Architectural Area Lighting, Inc.;
Spaulding Lighting, Inc.; Progress Lighting, Inc.; and SiTeco Holdings GmbH.
The industrial tools business include Spear & Jackson plc and Bowers Group
plc, both of which are currently included in the Hardware and Tools segment.
These entities had combined revenue for the three months ended December 31,
2000 and 1999 of $216 million and $225 million, respectively, and operating
income for those periods of $8 million and $11 million, respectively. The LCA
Group Registration Statement on Form 10 was declared effective by the
Securities and Exchange Commission on January 3, 2001. On December 21, 2000,
the Company announced that the Board of Directors had declared a dividend of
all of the outstanding shares of LCA Group to USI shareholders. If paid, the
dividend will be in the form of one share of LCA Group for each ten shares of
USI held by shareholders of record as of the record date for the spin-off.
The dividend is expected to be tax-free to USI and its shareholders. Payment
of the dividend is conditioned upon completion of new financing arrangements
for LCA Group and USI. On January 25, 2001, the Company announced that the
spin-off of LCA Group would be delayed. Although the spin-off will not be
completed within the time period contemplated by the previously announced
record date, the Company is continuing to pursue the spin-off, completion of
which is subject to satisfaction of the spin-off conditions, further review
by the Board of Directors and the setting of a new record date. Accordingly,
the LCA Group is presented as continuing operations in these financial
statements.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, in the normal course of doing business, is exposed to the
risks associated with changes in interest rates and currency exchange rates. To
limit the risks from such fluctuations, the Company enters into various hedging
transactions that have been authorized pursuant to the Company's policies and
procedures and does not engage in such transactions for trading purposes.
To manage exposure to interest rate movements, the Company uses interest
rate protection agreements. Based on the Company's overall exposure to interest
rate changes, a hypothetical change of 100 basis points across all maturities of
the Company's floating rate debt obligations, after considering interest rate
protection agreements, would change the Company's pre-tax earnings in fiscal
2001 by approximately $6 million.
The Company utilizes foreign currency-denominated borrowings to
selectively hedge its net investments in subsidiaries in foreign countries.
These borrowings at December 31, 2000 are denominated in German marks, British
pounds and Canadian dollars. The Company estimates that a 10% change in the
relevant currency exchange rates is estimated to have an impact of $26 million
on the fair value of such borrowings. This quantification of the Company's
exposure to the market risk of foreign exchange sensitive financial instruments
is necessarily limited, as it does not take into account the offsetting impact
of the Company's underlying investment exposures.
Effective October 1, 2000, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The Company uses several
types of derivative financial instruments including interest rate swaps, forward
contracts and debt denominated in a foreign currency to hedge its exposure to
volatility in interest rates and currency exchange rates. In accordance with its
risk management policies, the Company formally documents its hedge
relationships, including identification of the hedging instrument and the hedged
items, as well as its risk management objectives and strategies for undertaking
the hedge transaction. The Company also formally assesses, both at inception and
at least quarterly thereafter, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in either the fair value
or cash flows of the hedged item. If a derivative ceases to be a highly
effective hedge, the Company discontinues hedge accounting. The Company does not
enter into derivative instruments for speculation or trading purposes.
Interest Rate Swap
The Company's borrowing activities give rise to interest rate exposure
that impacts its earnings and the economic value of its debt portfolio. The
Company hedged a portion of its variable-rate debt by entering into an interest
rate swap in which the Company agrees to exchange, at specified intervals, the
calculated difference between fixed and variable interest on $200 million of our
debt. This swap, which has a fair value of less than $1 million, was designated
as a cash flow hedge of the underlying variable-rate interest payments and was
recorded as a current asset in our Balance Sheet. Since an assessment of the
hedging relationship revealed no ineffectiveness, the entire unrealized gain,
net of tax, was recorded in Accumulated Other Comprehensive Income (OCI) within
Stockholders' Equity. When the hedged cash flow is realized as interest expense,
the related gain in OCI will be recorded as a reduction of that interest
expense. Amounts in OCI are expected to be reclassified into earnings within the
next twelve months.
Forward Exchange
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. It also enters into foreign currency denominated
inter-company debt. The primary purpose of the Company's foreign currency
hedging activities is to manage the volatility associated with foreign currency
payments to related entities or to vendors for purchases of materials and with
foreign currency collections from customers in the normal course of business.
The Company primarily utilizes forward exchange contracts with maturities of
less than twelve months, which qualify as foreign currency hedges. These hedges
are intended to offset the effect of transaction gains and losses, which arise
when payments or collections in a foreign currency are made or received one to
three months after the asset or liability is generated. The fair value of these
instruments at December 31, 2000 was a $1 million current asset. Since an
assessment of these hedges revealed no ineffectiveness, gains and losses on
these instruments are deferred in accumulated other comprehensive income (OCI),
net of tax, until the underlying transaction gain or loss is recognized in
earnings. Amounts in OCI are expected to be reclassified into earnings within
the next twelve months.
23
Foreign Currency Denominated Debt (Net Investment Hedging)
The Company is exposed to foreign currency risk when the financial
statements of its non-U.S. dollar subsidiaries are translated into the Company's
functional currency. In order to hedge its net investment position in select
subsidiaries, the Company has entered into foreign currency denominated debt.
Since an assessment of these hedges revealed no ineffectiveness, all of the
transaction gains and losses associated with this debt are reflected in
cumulative translation adjustment within stockholders' equity.
24
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on December 22, 2000,
responsive to Items 5 and 7 of such form relating to the proposed spin-off
of the lighting and industrial tool businesses of the Company. The
following exhibits were filed: U.S. Industries, Inc. Press Release, dated
December 19, 2000 and U.S. Industries, Inc. Press Release, dated December
21, 2000.
--------------------
25
SIGNATURES
Pursuant to the requirements 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.
U.S. INDUSTRIES, INC.
Date: February 20, 2001
By: /s/ Allan D. Weingarten
----------------------------------------
Allan D. Weingarten
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Nicola Rossi
----------------------------------------
Nicola Rossi
Corporate Controller
(Principal Accounting Officer)
26