ASD: American Standard Sets the Standard for Turnarounds

By William Trent, CFA of Stock Market Beat

Large Cap Watch List member American Standard Companies (ASD) Reported First-Quarter Results:

American Standard Companies Inc. today announced first-quarter income per diluted share of 84 cents in accordance with Generally Accepted Accounting Principles (GAAP). Net income per diluted share on an adjusted basis was 58 cents, up 35 percent from first quarter a year ago. The company had provided first-quarter net income per diluted share guidance of 45-49 cents on a GAAP basis and 48-52 cents on an adjusted basis. The company is in the process of selling Bath and Kitchen and, in accordance with GAAP, has classified it as a discontinued operation.

Consensus estimates were at the high end of the company’s “adjusted” guidance, partly on fears that the slowing housing market would hurt the company’s housing-related businesses. Instead, the results blew out the top end of guidance. Furthermore, the company issued very positive guidance for the rest of the year:

The company had estimated 2007 net income per diluted share of $3.15-$3.25 on both a GAAP and adjusted basis, representing an increase of 20-24 percent on a GAAP basis and 18-22 percent on an adjusted basis. “With our current market and business outlooks, we expect the company as a whole to do better than previously estimated for the year, with net income per diluted share in the range of $3.63-$3.73 on a GAAP basis and $3.30-$3.40 on an adjusted basis,” said [CEO Fred] Poses.

“For the second quarter, we estimate sales for the company as a whole to be up about 10 percent, and net income per diluted share in the range of 98 cents-$1.04 on a GAAP basis (up 5-12 percent) and $1.03-$1.09 on an adjusted basis (up 12-18 percent),” said Poses.

Consensus estimates were for $1.06 in the second quarter and $3.18 for the year. Having turned around performance in the Bath and Kitchen segment the company is now in the midst of a transformation:

“The various steps for the sale of Bath and Kitchen and the spinoff of WABCO are moving ahead nicely, and we’re on track to complete the separation process by early fall of this year,” said Poses. “We expect to achieve our goal of completing the separation process with both Trane and WABCO emerging as independent companies with investment-grade balance sheets and debt ratios.”

Due to the operational improvements, the company expects to generate more than $700 million in free cash flow this year, up from $441 million in 2006. The share price has rallied strongly since last July, primarily on the strength of the year-end earnings and guidance.

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