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22 Nov 2004
MOODY'S UPGRADES AMERICAN STANDARD INC'S DEBT RATINGS (GTD. SR. UNSECURED TO Baa3): RATING OUTLOOK STABLE
Approximately $1.4 billion of Long Term Debt Affected
New York, November 22, 2004 -- Moody's Investors Service upgraded the guaranteed senior unsecured
debt ratings of American Standard Inc., (ASI), a wholly
owned subsidiary of American Standard Companies Inc. (ASD),
guarantor of ASI's debt issuances, to Baa3 from Ba2.
In a related rating action, Moody's withdrew ASI's Ba1
senior implied rating and its Ba2 Issuer rating. The rating outlook
The upgrade reflects the de-leveraging of ASI and its guarantor
ASD on a consolidated basis, and improving operating performance
and coverage ratios. A further factor in the upgrade is ASI's
as well as ASD's demonstrated sustained free cash flow generating
ability in recent years, despite the economic slowdown that has
been experienced, particularly in the commercial air conditioning
segment. The upgrade also reflects the providing of an American
Standard International Inc. (ASII), guarantee to the rated
debt securities issued by ASI and the consequent parity that now exists
with the $1.0 billion bank credit facility.
The stable outlook reflects Moody's expectation that ASD will continue
to focus on maintaining a less leveraged capital structure, exhibit
ongoing earnings sustainability and growth and be cash flow generative
(operating cash flow minus capital expenditures). Further margin
improvement, de-leveraging and continued free cash flow generation
could favorably impact the outlook and rating over time. The outlook
could be adversely impacted by a re-leveraging of the company,
institution of a new strategy that would materially change the ability
to be free cash flow generative or significantly divert cash flow to shareholders,
or by adverse developments in ASI's asbestos exposures. Moody's
notes that ASD and other manufacturers involved in the bathroom and kitchen
fitting and fixtures business in Europe are the subject of an EU investigation
into price fixing. Moody's expects that such investigation
will be protracted and will monitor developments as they occur.
The rating also recognizes ASD's excellent market positions in its
three core businesses, together with its geographic and product
diversity. In addition, its balance between new and replacement
products sales is a further favorable factor. These business strengths
all help to generate significant and relatively consistent levels of operating
cash flow through economic cycles and are viewed as characteristics of
an investment grade profile.
ASD is the holding company for American Standard Inc., through
which all operations in the US are conducted and American Standard International
Inc., which holds essentially all the international operations
(principally domiciled in Europe). Through these subsidiaries,
ASD operates in three core business segments: Air Conditioning Systems
and Services, Bath and Kitchen, and Vehicle Control Systems
(predominately sells to the European commercial vehicle market).
Moody's notes that air conditioning, ASD's largest segment
accounting for 58% of sales in 2003, experienced margin pressure
in recent years due to the weakness in commercial construction markets.
However, the company's presence in residential air conditioning,
along with a good balance of service and replacement sales helped to mitigate
the negative impact. The replacement nature of many of its products,
particularly bath and kitchen, has also played well with ASD's
efforts to strengthen its ties to some of the larger retail chains and
big-box home centers. ASD's bath and kitchen segment,
although generally lower margin and price competitive, has also
benefited from its global nature and level of sales into the replacement,
renovation and repair markets, while ASD's vehicle control
segment has consistently demonstrated double-digit operating margins.
On a consolidated basis, Moody's believes ASD will continue
to be exposed to overall cyclical economic swings but will, over
time, continue to demonstrate acceptable financial performance,
targeting operating margins (after corporate and other expense) in the
Due to its good competitive position within its markets, ASD's
businesses also generate significant and relatively consistent levels
of operating cash flow, which have been utilized, in part,
to help reduce balance sheet debt to $1.7 billion at September
30, 2004, and improve debt protection metrics. The
company has been focused in recent years on reducing debt to a level approximating
$1.5 billion by year-end 2004 and has applied roughly
two thirds of free cash flow to debt reduction and the balance to share
repurchases. ASD has advised that balance sheet debt will be about
$1.5 billion at year end 2004. Adjusting debt for
off-balance sheet receivables sold of approximately $440
million, ASD's leverage, as measured by total debt to
LTM EBITDA, was 2.0 times, down from 2.6 times
at year end 2002. Free cash flow, relative to total debt,
was also strong at 19%. Although ASD does not currently
pay dividends, share buybacks have absorbed approximately $282
million of cash in the last 12 months, thereby limiting growth in
its capital base, which was negative for a number of years following
the company's management buyout in 1988. Going forward Moody's
expects that any use of cash or debt incurred will be considered within
the overall context of maintaining a more conservative capital structure.
The operating and financial strengths notwithstanding, concerns
to the rating remain. The company (ASI) is party to a number of
lawsuits regarding asbestos, with 122,989 pending claims at
September 30, 2004. The claims relate to products such as
boilers and railroad products, predominately brake shoes,
which are encapsulated in the braking system. The company's
experience over a 15 year period to date has resulted in the resolution
of 24,847 claims and $49.5 million in settlement payments.
Based upon an analysis of its claims, insurance coverage and experience
to date, a $72.9 million obligation has been recorded
for payments to claimants associated with pending claims with a $51
million offsetting asset recorded reflective of expected insurance recoveries
for such payments to claimants. Although ASI's expectation
is of a level that can be accommodated without undue impairment to its
financial condition, initiatives exist to deal with asbestos on
a federal basis, and several jurisdictions have taken steps to tighten
the requirements for cases that can be brought before the courts,
uncertainty still surrounds this area.
Ratings upgraded are:
American Standard Inc (all as guaranteed by American Standard Companies
and American Standard International Inc.): $250 million
7.375% senior notes to Baa3 from Ba2, EUR 250 million,
7.125% Eurobonds to Baa3 from Ba2, $350 million,
7.375% senior notes to Baa3 from Ba2, $100
million 8.25% global bonds to Baa3 from Ba2, GBP 60
million 8.25% Eurobonds to Baa3 from Ba2, $275
million 7.625% senior notes to Baa3 from Ba2, senior
unsecured shelf to (P)Baa3 from (P)Ba2.
Ratings withdrawn are:
American Standard Inc., Ba1 Senior Implied Rating,
Ba2 Issuer Rating
Headquartered in Piscataway, New Jersey, American Standard
Companies Inc. had revenues of $8.6 billion in 2003.
Revenues at American Standard Inc. were $4.6 billion,
while American Standard International Inc. reported revenues of
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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