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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549
 FORM 10-K þ
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004 o
Transition Report to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission File Number 1-11415 AMERICAN STANDARD COMPANIES INC.  Delaware
    
    
    
    13-3465896(State or other jurisdiction of incorporation or organization)
    
    
    
    (I.R.S. Employer Identification No.)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 registeredCommon 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. þ o
 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes þ      No o The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the
Registrant as of the close of business on June 30, 2004 was approximately $8.6 billion based on the
closing sale price of the common stock on the New York Stock Exchange on that date. The company
does not have any non-voting common equity. Number of shares outstanding of each of the Registrants classes of Common Stock, as of the close
of business on February 18, 2005: Common Stock, $.01 par value, 214,501,304 shares. Documents incorporated by reference:
    
    
    
    Part of the Form 10-K intoDocument (Portions only)
    
    
    
    which document is incorporated.Definitive Proxy Statement used in connection with the AnnualMeeting of Shareholders to be held on May 3, 2005
    
    

    Part III




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TABLE OF CONTENTS PagePART
IItem 1. Business
    
    
    1Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 4A. Executive Officers of the Registrant
    
    
    15PART
IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6. Selected Financial Data
    
    
    19Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 8. Financial Statements and Supplementary Data
    
    
    43Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    84Item 9A. Controls and Procedures
    
    
    84Item 9B. Other Information
    
    
    87PART
IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    88Item 11. Executive Compensation
    
    
    88Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    89Item 13. Certain Relationships and Related Transactions
    
    
    91Item 14. Principal Accounting Fees and Services
    
    
    91PART
IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    92Signatures
    
    
    99EX-10.6 SUMMARY OF EMPLOYMENT ARRANGEMENTEX-10.12 TRUST AGREEMENTEX-10.26 SUPPLEMENTAL SAVINGS PLANEX-10.30 CONSULTING AGREEMENTEX-10.31 STOCK OPTION GRANTEX-10.32 STOCK OPTION GRANTEX-10.33 STOCK OPTION GRANTEX-10.34 2005-2007 LONG-TERM INCENTIVE PLAN & 2005 ANNUAL INCENTIVE PLAN GOALSEX-12 RATIO OF EARNINGS TO FIXED CHARGESEX-21 LISTING OF HOLDING'S SUBSIDIARIESEX-23 CONSENT OF ERNST & YOUNG LLPEX-23.1 CONSENT OF HAMILTON, RABINOVITZ & ALSCHULER, INC.EX-24 POWER OF ATTORNEYEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATIONEX-32.2 CERTIFICATION
  Important 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 beliefs, are forward-looking statements. Forward-looking statements
are made based upon managements good faith expectations and beliefs 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. For further information as to important
risks and factors that could cause actual results to differ materially from managements
expectations, see Item 1. Business, Item 3. Legal Proceedings and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations-Information
Concerning Forward-Looking Statements.




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PART I 
 ITEM 1. BUSINESS 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. American Standard or the Company refers to the
Company, or to the Company and American Standard Inc. or American Standard International Inc.
(ASII), its wholly-owned subsidiary, including their subsidiaries, as the context requires. Business Segments American Standard is a global, diversified manufacturer of high-quality, brand-name products
in three major business segments: air conditioning systems and services; bath and kitchen fixtures
and fittings; and vehicle control systems. American Standard is one of the largest providers of
products in each of its three major business segments. An overview of each of the segments follows
below. Air Conditioning Systems and Services Segment (Air Conditioning) Air Conditioning Systems and Services is a global manufacturer of commercial and residential
heating, ventilation and air conditioning (HVAC) equipment, systems and controls. It also provides
aftermarket parts to the HVAC industry, performance contracting for the installation and
maintenance of HVAC systems featuring its products, and service for its products and those of other
manufacturers. Air Conditioning markets and sells its products and services globally under the
TRANEâ name and, for U.S. residential and light commercial applications, under
both the TRANEâ and AMERICAN STANDARDâ names. Air Conditioning, with revenues of $5.345 billion in 2004, accounted for 56% of Company sales
and 56% of its segment income. Approximately 60% of Air Conditionings revenue in 2004 was derived
from sales of equipment, parts and services to the replacement, renovation and repair market
segment, and the remainder was derived from new construction. Revenue from the commercial and
residential markets accounted for approximately 75% and 25%, respectively, of Air Conditionings
total revenue in 2004. In 2004, Air Conditioning derived 27% of its revenue from sales outside the
U.S. For sales by geographic region and end markets, see Managements Discussion and Analysis of
Financial Condition and Results of Operations. The products manufactured by Air Conditioning include chillers and air handlers, light and
large commercial unitary equipment, heat pumps, residential condensing units and furnaces, and fan
coils. Air Conditioning also produces a wide range of HVAC controls: from electromechanical
controls on its equipment, to thermostats that regulate room and building temperature, to
integrated building automation systems that automatically control a buildings performance,
including its energy consumption, air quality and comfort. Air Conditioning has a broad global network of company-owned and independent agents and
distributors distributing its products primarily through two separate distribution channels: a
commercial channel and a dealer channel. The commercial channel is served by 188 company-owned
and independent commercial sales offices (CSOs), about half in the U.S. and Canada and the
remainder throughout Europe, mid-East, Latin America and Asia Pacific regions. CSOs sell equipment,
systems and controls primarily to mechanical contractors and building owners agents, such as
architects and consulting engineers. A growing area is sales direct to building owners, primarily
through national account relationships with owners or operators that manage a distributed network
of facilities such as retail and hospitality chains, federal, state and local governments and
agencies, and process manufacturers (e.g., pharmaceuticals and electronics). In addition to
selling original equipment, the Trane CSOs also manage a network of over 120 parts centers serving
the needs of company-owned and independent HVAC service companies. In North America and Europe,
the CSOs also have an extensive network of service technicians and applications engineers that
provide design, installation, consulting and maintenance services and controls contracting.
Outside the U.S. and 1




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Canada, in addition to servicing the commercial channel, CSOs sell residential products to
independent dealer/installers. In the U.S. and Canada, the dealer channel is served by Company-owned sales offices and
independent wholesale distributors with over 500 stocking locations who sell residential and light
commercial unitary products (up to 25 tons) to dealers and contractors who sell and install the
equipment. Trane brand residential products are also well positioned in the retail sales channel
through an arrangement with Home Depot, the leading home improvement retailer, through which
certain central heating and air conditioning systems are marketed to residential customers. Air Conditioning competes in all of its markets on the basis of the breadth, quality and
reliability of its products and services, technological leadership, energy efficiency, price and
value. Air Conditionings major competitors for residential products in the U.S. are Carrier, York,
Rheem, Lennox and Goodman Industries. Major competitors of Air Conditionings commercial equipment
in the U.S. and Canada are Carrier, York and McQuay. Major competitors of Air Conditionings
control products in the U.S. and Canada are Johnson Controls, Siemens and Honeywell International
Inc. As of December 31, 2004, Air Conditioning Systems and Services employed approximately 26,500
people and had 29 manufacturing plants in 10 countries. Bath and Kitchen Segment Bath and Kitchen is a leading producer of bathroom and kitchen fixtures and fittings in
Europe, the U.S., Central America and Asia. Its products, including sinks, toilets, faucets, tubs,
showers, bathroom furniture and accessories, are marketed through retail and wholesale sales
channels for residential and commercial markets. In 2004, Bath and Kitchen, with revenues of $2.440 billion, accounted for 26% of the Companys
sales and 20% of its segment income. Bath and Kitchen derived 66% of its total 2004 sales from
operations outside the U.S. For sales by geographic region and end markets, see Managements
Discussion and Analysis of Financial Condition and Results of Operations. Bath and Kitchen sales in 2004 were derived 51% from chinaware fixtures, 29% from fittings
(typically brass), 9% from tubs, with the remainder from related bath and kitchen products.
Throughout the world these products are generally sold through wholesalers and installed by
plumbers and contractors. In the U.S., a significant and growing number of products are also sold
through home improvement centers. In total, sales to the residential market account for
approximately 79% of Bath and Kitchen sales, with sales to the commercial and industrial markets
providing the remainder. Bath and Kitchen operates through three primary groups that are regionally focused: Europe,
Americas and Asia Bath and Kitchen sells products in Europe primarily under the brand names IDEAL STANDARD,
JADO, ARMITAGE SHANKS, DOLOMITE and PORCHER. The Company is currently increasing its focus on
expanding the presence and scope of offerings of the Ideal Standard brand. It manufactures and
distributes bathroom and kitchen fixtures and fittings through subsidiaries or joint ventures in
Belgium, Bulgaria, the Czech Republic, Egypt, France, Germany, Greece, Italy, the Netherlands, the
U.K., Spain, and distributes products in other European countries. Bath and Kitchen Americas Group manufactures bathroom and kitchen fixtures and fittings
selling under the brand names AMERICAN STANDARD, STANDARD,PORCHER and JADO
(manufactured in Europe) in the U.S. and under the brand names AMERICAN STANDARD, IDEAL STANDARD,
and STANDARD through the Companys wholly-owned operations in Mexico, Canada and Brazil, its
majority-owned joint venture in Central 2




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America and its unconsolidated joint venture in the Dominican Republic. In Asia, Bath and Kitchen manufactures bathroom and kitchen fixtures and fittings, selling
under the brand names AMERICAN STANDARD, IDEAL STANDARD, and STANDARD through the Companys
wholly-owned operations in South Korea and Indonesia, and its majority-owned operations in Thailand
and Vietnam. The group also operates in China through a majority-owned joint venture, which has
ownership interests in seven joint ventures. The Companys bath and kitchen 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 Americas sales and about 17% of the sales in Asia, where there is more
growth in new construction. In the U.S., the replacement and remodeling markets have shown
substantial growth over the last few years and the Company has benefited from that growth. In
Europe, the replacement and remodeling markets have historically been more stable than the new
construction markets and have shown moderate growth over the past several years. The U.S.
residential new construction market grew strongly in 2004 and the two prior years while the
commercial new construction market grew slightly in 2004 but declined in 2003 and 2002. The
residential new construction and commercial new construction markets in Europe have been rather
static overall, with the exception of Germany, which declined in each of those years. The new
construction market, in which builders or contractors make product selection, is more
price-competitive than the replacement and remodeling market. In the replacement and remodeling
market, consumers make the 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, Bath and Kitchen has become more
competitive, enabling it to increase sales of products in the lower and middle segments of both the
new construction and remodeling markets. In an effort to capture a larger share of the replacement and remodeling market, Bath and
Kitchen has introduced a variety of new product designs, new products with best-in-class
performance characteristics and suites and collections designed to suit a variety of customer
tastes. New offerings include additional colors and ensembles, bathroom suites designed by
internationally known designers and electronically controlled products. The new Champion toilet,
with Americas Best Flushing System, established strong presence and achieved good distribution in
the wholesale and retail channels at product margins that are better than the category average. In
Europe, Bath and Kitchen is increasing its focus on health and wellness through its bathing and
showering businesses via new products, increased functionality and the addition of new consumer
benefits. Faucet technology programs are focused on anti-leak, anti-scald, filtering and other
features to meet emerging consumer and legislative requirements. The total bathroom concept,
which, provides customers and consumers with fully coordinated and
integrated suites of products,
including sinks, toilets, faucets, tubs, showers, bathroom furniture and accessories, has been used
successfully and broadly in Europe and Asia, is being expanded in the U.S. retail channel. Bath and
Kitchen is also continuing programs to expand its presence in high-quality showrooms and showplaces
featuring its higher-end products in certain 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 the U.S., Bath and Kitchen products are marketed through both the wholesale and retail
channels. Sales through the retail home center market channel have become a significant part of
Bath and Kitchen sales (approximately 19% in 2004), but represent only approximately 5% of total
Company sales. Many of the Companys bathtubs sold in the U.S. are made from a proprietary porcelain-on-metal
composite, AMERICASTâ. Products made with AMERICAST have only one-half the weight
of cast iron products and are resistant to breaking and chipping. AMERICAST products are easier 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 and bathroom lavatories. In Europe, a
similar composite called IDEALCAST is also used on acrylic-surfaced products. As of December 31, 2004, Bath and Kitchen employed approximately 27,700 people and, including
affiliated companies, had 63 manufacturing plants in 25 countries. Bath and Kitchen has several major 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. In the U.S., Bath and 3




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Kitchen has several major competitors, including Kohler and, in selected product lines, Masco
(Delta) and Fortune Brands (Moen). Bath and Kitchen competes in most of its markets on the basis of
service to customers, product quality and design, reliability, price and value. Vehicle Control Systems Segment Vehicle Control Systems, operating under the WABCOâ name (WABCO), designs,
manufactures and sells braking and control systems primarily for the worldwide commercial vehicle
industry. WABCOs largest-selling products are pneumatic braking control systems and related
electronic braking controls (ABS and EBS) and conventional components for heavy and
medium-sized trucks, trailers and buses. In 2004 WABCO, with sales of $1.724 billion, accounted for
18% of the Companys sales and 24% of its segment income. 78% of its 2004 revenue was derived from
sales in Europe. The Company believes that WABCO is the worldwide technology leader for braking,
stability, suspension and transmission controls for commercial vehicles. WABCO has a strong
reputation for technological innovation and is a leading systems development partner with several
major vehicle manufacturers. Electronic controls, first introduced in ABS in the early 1980s, are
increasingly applied in other control systems sold to the commercial vehicle industry. WABCO also
supplies electronic suspension controls to the luxury car 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 aftermarket 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), Ford, GMC, Hino, Iveco (Fiat),
MAN, Nissan, Paccar (Paccar and DAF), Scania, Volvo (Volvo and RVI) and Volkswagen. WABCOs
principal competitor is Knorr/Bremse. WABCO competes primarily on the basis of customer service,
quality and reliability of products, global technological leadership, vehicle life-cycle expertise
and price and value. For sales by geographic region and end markets, see Managements Discussion
and Analysis of Financial Condition and Results of Operations. The Western European market for new truck and bus production increased 17% in 2004 following
an increase of 3% in 2003 and a decrease of 8% in 2002. The Brazilian market increased 23% in 2004
following an increase of 10% in 2003 and a decrease of 10% in 2002. During the years 2000 through
2004, WABCO has generally outperformed the heavy vehicle manufacturing markets as a whole,
primarily from increased content per vehicle and improved market penetration. In North America, WABCO markets ABS and other vehicle control products through its fifty
percent-owned, unconsolidated joint venture with Arvin Meritor Automotive Inc. (Meritor WABCO).
In 2004, the North American truck market grew 34% following a 1% increase in 2003. In 2002, the
North American truck market experienced 12% growth as U.S. customers actively purchased vehicles
before the change in diesel engine emissions regulations affecting trucks manufactured after
October 1, 2002. WABCO has developed an advanced electronic braking system, stability control systems,
electronically controlled air suspension systems, automated transmission controls, tire pressure
monitoring, automatic climate-control and door-control systems for the commercial vehicle industry.
These systems have resulted in greater sales per vehicle for WABCO. WABCO participates in the
passenger car market with an advanced, electronically controlled air suspension system now featured
by the three leading German luxury car manufacturers. WABCO has expanded the air suspension system
family to other luxury car and sport utility vehicle manufacturers in Europe and North America. A
leading European truck manufacturer now includes WABCO electronic controls for automated
transmissions in heavy vehicles as standard equipment. The Company believes that automated
transmission control will be increasingly important in the industry. Other new products under
development include further advancements in electronic braking, stability and safety controls, and
driveline-control and suspension-control systems. Vehicle Control Systems is headquartered in Brussels, Belgium. Its principal manufacturing
operations are in Germany, France, the United Kingdom, Poland, the Netherlands, Brazil and South
Korea. In the U.S., the Meritor WABCO joint venture supplies the North American truck
manufacturing market. The Company also has a majority- 4




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owned partnership in the U.S. with Cummins Engine Co. (WABCO Compressor Manufacturing Co., a
manufacturing partnership formed to produce air compressors designed by WABCO), and a
majority-owned joint venture in China with MAFF to produce conventional products for the local
market and export. In addition, WABCO has minority equity investments in joint ventures in India
with TVS Group (Sundaram Clayton Ltd.) and in South Africa (WABCO SA). As of December 31, 2004, WABCO and affiliated companies employed approximately 6,700 people
and had 11 manufacturing facilities and 17 sales organizations operating in 24 countries. Business Segment Data Information concerning sales and segment income 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, all of 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.
Information on backlogs and the seasonal aspects of the Companys business are set forth in
Managements Discussion and Analysis of Financial Condition and Results of Operations, under the
captions Results of Operations by Business Segment and Cyclical and Seasonal Nature of
Business, respectively. Company Goals American Standard has adopted the following performance goals:  
    Sales growth, through:  
    Delivering premier customer service,
    Technological leadership and product innovation based on knowledge to meet changing customer needs,
    Introducing new products, solutions and services,
    Expanding marketing efforts, building brand awareness and differentiation, and
    Geographic expansion.  
    Productivity improvement through:  
    Materials Management programs, and
    Quality and Six Sigma programs.  
    Financial goals to improve asset utilization and return on capital, including:  
    Improving earnings per share, margins and cash flow,
    Maintaining investment grade debt rating,
    Maintaining or lowering the effective tax rate and
    Maintaining or increasing the Companys stock buy-back program and dividend payment Materials Management The Materials Management initiative is centered on leveraging collective buying power
on a global basis to improve purchasing efficiency, reduce the number of suppliers and
improve the supply chain. Materials Management also involves working with suppliers to
develop effective components with lower part counts and easier assembly, resulting in
improved quality and reduced costs. It is also intended to identify opportunities to
substitute lower-cost materials for higher-cost ones, without compromising quality,
durability and safety. With material costs representing a significant portion of total
costs, management believes that continued improvements realized through Materials Management
could result in substantial savings. 5




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Management continues to adopt challenging goals for continuous performance improvement.
In 2004, improvements from Materials Management programs were able to offset increasing
commodity costs related to the purchase of steel, copper, aluminum and energy, which
negatively impacted the Company by $98 million. Incremental benefits from this program were
approximately $37 million in 2004, $100 million in 2003 and $105 million in 2002. The
Company expects to incur approximately $200 million in additional costs from the commodities
mentioned above, in 2005. The Company expects to generate savings from its Materials
Management initiative that will significantly offset these additional costs. Six Sigma Six Sigma is a structured approach to achieving significant productivity improvements
in business and manufacturing processes through data-driven decisions. Originally
introduced to American Standard in 2000, more than 20,000 employees have been trained in Six
Sigma tools that have contributed approximately $170 million in productivity gains. The Company continues to develop and deploy technical experts (called Six Sigma Master
Black Belts, Black Belts and Green Belts) through aggressive training and project deployment
programs. By the end of 2004, the Company had 44 Master Black Belts, 673 Black Belts and
4,302 Green Belts who were certified or in training. To achieve such a designation,
specific projects, timelines, milestones and savings must be achieved. Management is
continually broadening the Six Sigma approach to cover functions beyond manufacturing. In
the past two years it has provided specific Six Sigma training in safety, Materials
Management, transactional analysis and design, deployment of new products, lean
manufacturing, sales/marketing, maintenance and administrative processes. 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. 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 energy. The ability of the
Companys suppliers to meet performance and quality specifications and delivery schedules is
important to the Companys operations. Since 2000, the Company has integrated much of its raw
materials procurement efforts into its Materials Management initiative. The energy and materials
required for its manufacturing operations have been readily available. Although the Company does
not foresee any significant raw material shortages, it does expect to incur higher costs for
certain commodity raw materials in 2005. Also see Company GoalsMaterials Management. 6




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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 Companys trademarks are: Business Segment
    
    TrademarkAir Conditioning Systems and Services
    
    TRANE     âAMERICAN STANDARD     âBath and Kitchen
    
    AMERICAN STANDARD     âIDEAL STANDARD     âSTANDARD     âPORCHER     âJADOÒARMITAGE SHANKS     âDOLOMITE     âAMERICAST     âMELOH     âVENLO     âBORMA     âVENESTA     âSOTTINI     âSANGRA     âVehicle Control Systems
    
    WABCO     â
 The Company from time to time has granted patent licenses to, and has licensed technology
from, other parties. 7




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Research and Product Development The Company made expenditures of $206 million in 2004, $192 million in 2003 and $185 million
in 2002 for research and product development and for product engineering in its three business
segments. The expenditures for research and product development alone were $140 million in 2004,
$128 million in 2003 and $129 million in 2002 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, stability control systems, electronically controlled air suspension systems,
automated transmission controls, tire pressure monitoring, automatic climate-control and
door-control systems for the commercial vehicle industry. Air Conditioning Systems and Services
research and development expenditures were primarily related to alternative refrigerants,
compressors, heat transfer surfaces, airflow technology, acoustics and micro-electronic controls.
Expenditures made by Bath and Kitchen related primarily to enhancing the functionality, performance
and design of its products. Regulations and Environmental Matters The Companys U.S. operations are subject to federal, state and local environmental laws and
regulations. The Company has a number of proactive programs underway to minimize its impact on the
environment and believes that it is in substantial compliance with environmental 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 contribute to the cost of cleaning up, sites at which hazardous wastes or materials
were disposed or released. Remedial actions to which the Company is a party include approximately
28 current proceedings under the Comprehensive Environmental Response, Compensation and Liability
Act (Superfund) and similar state statutes in which the Company has potential liability based
either on a past or current ownership interest in the site requiring remedial actions or based on
disposal or alleged disposal of waste products at the site requiring remedial actions.
Expenditures in 2004, 2003 and 2002 to evaluate and remediate such sites were not material. 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 cleanup 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. On the basis of the Companys historical experience and information
currently available, these environmental actions should not have a material adverse effect on its
financial condition, results of operations or liquidity. 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. Currently, 19 of the Companys international operations have ISO 14001 certification, and
the Company believes it is in substantial compliance with 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 2004, 2003
and 2002 to evaluate and remediate these sites were not material. On the basis of the Companys
historical experience and information currently available, these environmental actions should not
have a material adverse effect on its financial condition, results of operations or liquidity. The Company has derived significant revenues in recent years from sales of Air Conditioning
Systems and Services using chlorofluorocarbons (CFCs) and hydrochloroflurocarbons (HCFCs).
Production of certain CFCs, HCFCs and other chemicals with ozone-depletion potential is being
phased out over various periods under regulations that require use of substitute permitted
refrigerants in new equipment. Also, utilization of new refrigerants will encourage replacement or
modification of 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 or HCFCs, is converted to operate on other 8




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refrigerants or replaced. The Company is unable to estimate the magnitude or timing of these
conversions 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 some of the Companys commercial, residential and
light commercial products will require modification for refrigerant substitutes, the Company does
not expect any significant problems in complying with this changing regulatory environment. 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 air
conditioning systems. The Company is a leader in developing energy-efficient products that meet or
exceed these standards. However, providing more energy-efficient products will require additional
research and development expense and capital expenditures for air conditioning manufacturers to
continue to offer energy-efficient product choices to the customer. The Company believes that it
has adequate financial resources to fund these efforts. Employees The Company employed approximately 61,500 people as of December 31, 2004 (excluding employees
of unconsolidated joint venture companies). The Company has 16 major labor union contracts in the
Americas (covering approximately 11,500 employees); three of which (covering approximately 2,200
employees) expired in 2004 and were renegotiated. Five of these contracts expire in 2005 (covering
approximately 2,200 employees), and three expire in 2006 (covering approximately 2,600 employees).
In addition, five contracts in Mexico (covering 4,500 employees) are negotiated on an annual basis.
There can be no assurance that the Company will negotiate the labor contracts expiring during 2005
without a work stoppage. However, the Company does not anticipate any problems in renegotiating
these contracts that would materially affect operational results. The Company also has 30 major labor contracts outside North America (covering approximately
22,000 employees). The Company does not anticipate any problems in renegotiating these contracts
that would materially affect operational results. In March 2002, 450 Air Conditioning Systems and Services employees went on strike for
approximately three weeks at the Ft. Smith, AR manufacturing facility. Since that time there have
been no significant work stoppages. Although the Company believes relations with its employees are
good, there can be no assurance that the Company will not experience significant work stoppages in
the future. 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 operations through subsidiaries in most of the countries of Western
Europe, Bulgaria, the Czech Republic, Poland, Brazil, Canada, Mexico, Central American countries,
China, Indonesia, Japan, Malaysia, the Philippines, South Korea, Thailand, Taiwan, Vietnam and
Egypt. In addition, the Company conducts business in some of these countries and in 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 28 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, because the Company to a
significant extent sells its products within the countries in which they are manufactured.
However, a growing portion of the Companys products are manufactured in lower-cost locations and
sold in various countries, resulting in increased exposure to foreign exchange effects. The asset
exposure of foreign operations to the effects of exchange volatility has also been partly mitigated
by the denomination in foreign currencies of a portion of the Companys borrowings. The Company is
also subject to political risks related to its foreign operations. 9




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Available Information The
Companys Web site is www.americanstandard.com. Our periodic reports and all amendments
to those reports required to be filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 are available free of charge through the Web site. During the
period covered by this report, the Company posted its periodic reports on Form 10-K and 10-Q and
its current reports on Form 8-K and any amendments to those documents to its Web site as soon as
reasonably practicable after those reports were filed or furnished electronically with the
Securities and Exchange Commission. The Company will continue to post to its Web site such reports
and amendments to those reports as soon as reasonably practicable after those reports are filed
with or furnished to the Securities and Exchange Commission. There were no amendments to the
Companys periodic reports in 2004, 2003 and 2002. Availability of Corporate Governance Principles and Board of Director Committee Charters The Board of Directors has adopted charters for its Audit Committee, Management Development
and Compensation Committee and Corporate Governance and Nominating Committee. The Board has also
adopted Corporate Governance Principles, which include the Companys Definition of Director
Independence. The Corporate Governance Principles and each of the charters are available on the
Companys Web site. These materials, together with the Code of Conduct and Ethics referenced
below, are available in print to any shareholder who requests them in writing by contacting the
Secretary of the Company at One Centennial Avenue, Piscataway, New Jersey 08855. Code of Conduct and Ethics The Companys Code of Conduct and Ethics, which applies to all employees, including all
executive officers and senior financial officers (including the Chief Financial Officer and the
Controller) and directors, is posted on its Web site
www.americanstandard.com. The Code of Conduct
and Ethics is compliant with Item 406 of SEC Regulation S-K and the New York Stock Exchange
corporate governance listing standards. Any changes to the Code of Conduct and Ethics that affect
the provisions required by Item 406 of Regulation S-K will also be disclosed on the Web site. Any
waivers of the Code of Conduct and Ethics for our executive officers, directors or senior financial
officers must be approved by the Companys Audit Committee and those waivers, if any are ever
granted, would be disclosed on our Web site under the caption Exemptions to the Code of Conduct
and Ethics. There have been no waivers to the Code of Conduct and Ethics. New York Stock Exchange Annual Chief Executive Officer Certification The Companys Chief Executive Officer submitted the New York Stock Exchange (NYSE) Annual
CEO Certification as to the Companys compliance with the NYSEs corporate governance listing
standards to the NYSE on May 7, 2004 Sarbanes-Oxley Act Section 302 Certifications The certification of the Chief Executive Officer and Chief Financial Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 have been filed as exhibits to this Form
10-K. 10




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ITEM 2. PROPERTIES As of February 23, 2005, the Company conducted its manufacturing activities through 103 plants
in 28 countries of which the principal facilities are: Business Segment
    
    Location
    
    Major Products Manufactured at LocationAir Conditioning
    
    Clarksville, TN
    
    Commercial unitary air conditioningSystems and Services
    
    Fort Smith, AR
    
    Unitary air conditioningLa Crosse, WI
    
    Applied air conditioning systemsLexington, KY
    
    Air handling productsMacon, GA
    
    Commercial air conditioning systemsPueblo, CO
    
    Applied air conditioning systemsLynn Haven, FL
    
    Commercial unitary air conditioningTrenton, NJ
    
    Residential gas furnaces and air handlersTyler, TX
    
    Residential air conditioningVidalia, GA
    
    Residential air handlersWaco, TX
    
    Water source heat pumps and air handlersColumbia, SC
    
    CoilsMonterrey, Mexico
    
    Reciprocating compressorsCharmes, France
    
    Applied air conditioning systemsGolbey, France
    
    Unitary air conditioning systemsTaicang, China
    
    Applied and unitary air conditioning systemsTaipei, Taiwan
    
    Unitary air conditioning systemsSao Paulo, Brazil
    
    Unitary air conditioning systemsBath and Kitchen
    
    Salem, OH
    
    Enameled-steel fixtures and acrylic bathtubsTiffin, OH
    
    Vitreous chinaJundai, Brazil
    
    Vitreous chinaSevlievo, Bulgaria
    
    Vitreous china and brass fittingsTeplice, Czech Republic
    
    Vitreous chinaHull, England
    
    Vitreous china and acrylic bathtubsRugeley, England
    
    Vitreous china and acrylic bathtubsValencia Spain
    
    Vitreous chinaDole, France
    
    Vitreous chinaRevin, France
    
    Vitreous china and bathtubsWittlich, Germany
    
    Brass fittingsOrcenico, Italy
    
    Vitreous chinaBrescia, Italy
    
    Vitreous chinaTrichiana, Italy
    
    Vitreous chinaAguascalientes, Mexico
    
    Vitreous chinaMexico City, Mexico
    
    Vitreous chinaMonterrey, Mexico
    
    Brass fittingsTlaxcala, Mexico
    
    Vitreous chinaWest Java, Indonesia
    
    Vitreous chinaBeijing, China
    
    Enameled-steel fixturesGuangdong Province, China
    
    Vitreous china, fittings and enameled-steel fixturesShanghai, China
    
    Vitreous china and brass fittingsTianjin, China
    
    Vitreous chinaSeoul, South Korea
    
    Brass fittingsBangkok, Thailand
    
    Vitreous chinaVehicle Control
    
    Campinas, Brazil
    
    Vehicle control systemsSystems
    
    Leeds, England
    
    Vehicle control systemsClaye-Souilly, France
    
    Vehicle control systemsHanover, Germany
    
    Vehicle control systemsMannheim, Germany
    
    Foundation brakesGronau, Germany
    
    Compressors and hydraulicsWroclaw, Poland
    
    Vehicle control systems
 All of the plants described above are owned by the Company or a subsidiary except for the
properties located in Taipei, Taiwan; Monterrey, Mexico (Air Conditioning); 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 2004, the Companys manufacturing plants, taken as a whole, operated moderately below
capacity. The Company also owns or leases warehouse and office space for administrative and sales staff.
The Company headquarters, which is leased, is located in Piscataway, New Jersey. 11




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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 on the claim that
it wrongfully terminated distribution agreements. On August 28, 2002, the appellate court ruled in
favor of the Company and vacated the $18 million judgment. The appellate court also reinstated the
Companys counterclaims, including fraud, and remanded to the trial court limited portions of
Haynes initial claims. Currently, there is no date set for a new trial on such claims. As
previously reported, in November 2004 the Company was contacted by the European Commission
as part of an industry-wide investigation into alleged infringement of European Union competition
regulations relating to the distribution of bath and kitchen fixtures
and fittings in certain European countries. In February 2005, the
Company was named as a defendant in several lawsuits filed in the
United States District Court for the Eastern District of Pennsylvania
and in various state courts in the State of California alleging that
the Company and certain of its competitors conspired to fix prices
for fittings and fixtures in the U.S. On February 23, 2005, the
Company received a grand jury subpoena from the Antitrust Division of
the U.S. Department of Justice seeking information primarily related
to the sale and marketing of bathroom fittings by its European
affiliates from January 1997 to the present. On
February 16, 2005, the French Competition Council issued a
statement of objections (notification de griefs)
addressed to more than 100 separate enterprises, including a Bath and
Kitchen subsidiary of the Company, and to various trade associations
and purchasing organizations active in the sanitary, heating,
air-conditioning and canalization equipment and installation sectors.
The addressees of the statement of objections are alleged to have
restricted the distribution of products to large
do-it-yourself retailers and to small installer
cooperatives in France in the period 1993 through 1998 in violation
of the French and European Union competition regulations. The
Company is cooperating fully with these investigations and intends to
vigorously defend itself against these lawsuits. The Company believes that the resolution of the matters described above would not,
individually or in the aggregate, have a material adverse effect on the financial condition or
liquidity of the Company but could be material to the Companys
operating results for the periods in
which the liabilities, if any, would be recognized. Over the years, the Company has been named as a defendant in numerous lawsuits alleging
various asbestos-related personal injury claims arising primarily from sales of boilers and
railroad brake shoes. In these asbestos-related lawsuits, the Company is usually named as one of a
large group of defendants, often in excess of one hundred companies. Many of these lawsuits
involve multiple claimants, do not specifically identify the injury or disease for which damages
are sought and/or do not allege a connection between any Company product and a claimed injury or
disease. As a result, numerous lawsuits have been placed and may remain on inactive or deferred
dockets, which some jurisdictions have established. Historically, the Company recorded a liability only for filed asbestos claims. Costs
associated with claims that might be filed against the Company in the future were not recorded
because the Company did not believe its history and experience with asbestos-related litigation was
sufficient to allow it to make a reasonable estimate of this liability. Because of stabilization
in the rate at which new claims are being filed and the Companys added experience in resolving
claims, the Company now believes a reasonable estimate of this liability can be made. In the fourth quarter of 2004, the Company retained Dr. Francine F. Rabinovitz of Hamilton,
Rabinovitz & Alschuler, Inc. (HR&A) to assist it in calculating an estimate of the Companys
total liability for pending and unasserted potential future asbestos-related claims. Dr.
Rabinovitz is a respected expert in performing complex calculations such as this. She has been
involved in a number of asbestos-related valuations of current and future liabilities, and her
valuation methodologies have been accepted by numerous courts. The methodology used by HR&A to project the Companys total liability for pending and
unasserted potential future asbestos-related claims relied upon and included the following factors:  
    HR&As interpretation of a widely accepted forecast of the population likely to have
been exposed to asbestos
    epidemiological studies estimating the number of people likely to develop
asbestos-related diseases
    HR&As analysis of the number of people likely to file an asbestos-related personal
injury claim against the Company based on such epidemiological data and the Companys
most recent five-year claims history 12




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
    an analysis of the Companys pending cases, by type of injury claimed
    an analysis of the Companys most recent five-year history to determine the average
settlement value of claims, by type of injury claimed
    an adjustment for inflation in the future average settlement value of claims, at a
3% annual inflation rate
    an analysis of the period over which the Company has and is likely to resolve
asbestos-related claims against it in the future Based on these factors, HR&A calculated a total estimated liability for the Company to resolve
all pending and unasserted potential future claims through 2055, which is HR&As reasonable best
estimate of the time it will take to resolve asbestos-related claims, of $699 million. This amount
is on a pre-tax basis, not discounted for the time-value of money, and excludes legal fees. Based
on HR&As analysis, in the fourth quarter of 2004 the Company increased its recorded liability for
asbestos claims by $616 million, from $83 million to $699 million. As of December 31, 2004, the Company recorded an increase in the receivable for probable
asbestos-related insurance recoveries of $309 million. This represents amounts due to the Company
for previously settled and paid claims and the probable reimbursements relating to its estimated
liability for pending and future claims. In calculating this amount, the Company used the
estimated asbestos liability for pending and projected future claims calculated by HR&A. It also
considered the amount of insurance available, gaps in coverage, applicable deductibles, allocation
methodologies, solvency ratings and credit-worthiness of the insurers, the published dividend rates
of insolvent insurers, amounts already recovered from and the potential for settlements with
insurers, and estimated annual legal fees. In the 4th quarter of 2004, the Company recorded a non-cash charge to income of
$307 million ($188 million after tax), which, is the difference between the amount by which the
Company increased its total estimated liability for pending and projected future asbestos-related
claims and the amount the Company expects to recover from insurers with respect to that increased
liability. This difference is due primarily to gaps in coverage, deductibles associated with the
policies and settlements for less than the full coverage limits with carriers in insolvency
proceedings and carriers with questionable credit-worthiness (Gaps, Deductibles and Discounts).
In addition, because some insurance policy buy-out arrangements result in insurers paying the
Company before liability payments are due to claimants, such settlements typically take into
account the time-value of money and include some discount to reflect the early payment. This
discount also contributes to the gap between the recorded liability and the recorded insurance
receivable. The Company is in litigation against certain carriers whose policies it believes provide
coverage for pending claims. The insurance carriers named in this suit are challenging the
Companys right to recovery. While the Company cannot predict the outcome of this litigation with
certainty, the Company believes that the amount recorded is probable of recovery based on its
analysis of the coverage, the applicable law, historical trends in its and other insured parties
settlements with insurers and the likelihood of achieving a settlement with some or all of the
insurers. The aggregate amount of the stated limits in insurance policies available to the Company for
asbestos-related claims, acquired over many years and from many different carriers, is substantial,
significantly exceeding the projected liability against the Company. However, limitations in that
coverage, primarily due to Gaps, Deductibles and Discounts, are expected to result in the projected
total liability to claimants and related expenses exceeding the probable insurance recovery. The
Company settled with most of the insolvent carriers and carriers with poor credit quality whose
policies it believes provide coverage for pending and projected future claims. 85% of the remaining
recorded insurance recovery receivable will be from carriers rated A or better by AM Best. The amounts recorded by the Company for asbestos-related liability and insurance-related
receivables are based on currently known facts. The Companys actual expenses or insurance
recoveries could be significantly higher or lower than those recorded if assumptions used in the
Companys or HR&As calculations vary significantly 13




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##### Table of Contents



from actual results. Key variables in these assumptions are identified above and include the
number and type of new claims to be filed each year, the average cost of disposing of each such new
claim, average annual defense costs, the resolution of coverage issues among insurance carriers
including allocation methodologies, and the solvency risk with respect to the Companys insurance
carriers. Furthermore, predictions with respect to these variables are subject to greater
uncertainty as the projection period lengthens. Other factors that may affect the Companys
liability and ability to recover under its insurance policies include uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be
made by state and federal courts, and the passage of state or federal tort reform legislation. In 2003, the Company began a program of seeking recovery from excess carriers on the lower
layers of its coverage. By early February 2005, the Company had reached significant settlements on
two elements of this coverage, KWELM Management Services Ltd (KWELM) and Underwriters at Lloyds
London through Equitas (Equitas). In July 2004, the Company agreed to a settlement with KWELM, as agent for various London-based
carriers in bankruptcy, for a small portion of the Companys insurance coverage, of which $29.5
million was received in the third quarter of 2004. In connection with the future liquidation of
the bankruptcy trust the Company may receive additional payments. In February 2005, the Company reached agreement with Equitas, the London-based entity
responsible for certain pre-1993 Lloyds of London policies in its insurance coverage, in the
amount of $84.5 million. During the first quarter of 2005, $10 million of this will be paid
directly to the Company to cover past asbestos and environmental costs, and $74.5 million will be
placed in a trust until January 3, 2007. If during the trust period there is federal legislation
that takes asbestos claims out of the courts and requires Equitas to make a duplicate payment to
the asbestos trust, this money will be used by Equitas for the legislative payment less some
allowance to the Company for claims settlements that may be made in the period January 1, 2005
through January 3, 2008. If there is no such legislation by January 3, 2007, the funds in the
trust, including accrued interest, will be disbursed to the Company. From receipt of its first asbestos claim more than twenty years ago to December 31, 2004, the
Company has resolved 25,389 claims, and settlements of approximately $51 million have been made,
for an average payment per claim of $2,003. The table below provides additional information
regarding asbestos-related claims filed against the Company, reflecting updated information for all
periods. Total pre-2002
    
    
    2003
    
    
    2004
    
    
    12/31/04Open claims  January 1
    
    
    52,985
    
    
    
    97,200
    
    
    
    116,549
    
    
    
    N/ANew Claims filed
    
    
    45,404
    
    
    
    26,295
    
    
    
    12,059
    
    
    
    150,706Claims settled
    
    
    431
    
    
    
    430
    
    
    
    812
    
    
    
    8,090Claims dismissed
    
    
    758
    
    
    
    6,516
    
    
    
    2,479
    
    
    
    17,299Open claims  December 31
    
    
    97,200
    
    
    
    116,549
    
    
    
    125,317
    
    
    
    N/A
 Because claims are frequently filed and settled in large groups, the amount and timing of
settlements, as well as the number of open claims, can fluctuate significantly from period to
period. This is demonstrated by the fact that approximately 40% of all claims filed against the
Company were filed in a 20-plus year period prior to 2002, 40% were filed in the 16-month period
from January 2002 through April 2003, and the remaining 20% were spread relatively evenly over the
next 20 months through December 2004. The Company believes that the dramatic increase in filings
in the 16-month period from January 2002 through April 2003 was influenced by the bankruptcy
filings of numerous asbestos defendants in asbestos-related litigation and the prospect of various
forms of state and federal judicial and legislative reforms. For a discussion of environmental issues see Item 1. BusinessGeneralRegulations and
Environmental Matters. See also Note 14 of Notes to Financial Statements. 14




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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
2004. 
 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information as of February 23, 2005 with respect to
each person who is an executive officer of the Company: Name
    
    Age
    
    Position with CompanyFrederic M. Poses
    
    
    62
    
    
    Chairman and Chief Executive OfficerLawrence B. Costello
    
    
    57
    
    
    Senior Vice President, Human ResourcesG. Peter DAloia
    
    
    60
    
    
    Senior Vice President and Chief Financial OfficerJames E. Dwyer
    
    
    46
    
    
    Senior Vice President, and President, Bath and KitchenMary Elizabeth Gustafsson
    
    
    45
    
    
    Senior Vice President, General Counsel and SecretaryW. Craig Kissel
    
    
    53
    
    
    Senior Vice President, and President, Trane Commercial SystemsJacques Esculier
    
    
    45
    
    
    Vice President, and President, Vehicle Control SystemsR. Scott Massengill
    
    
    42
    
    
    Vice President and TreasurerDavid R. Pannier
    
    
    54
    
    
    Vice President, and President, Residential SystemsRichard S. Paradise
    
    
    43
    
    
    Vice President and Controller
 Each officer of the Company is elected by the Board of Directors to a term of office
expiring on the date of the first Board meeting after the Annual Meeting of Shareholders next
succeeding his or her election or such officers earlier resignation or removal. Set forth below is the principal occupation of each of the executive officers named above
during the past five years. Mr. Poses was elected as a Director in October 1999 and as Chairman and Chief Executive
Officer effective January 1, 2000. Prior to assuming that position, Mr. Poses was President and
Chief Operating Officer at AlliedSignal Inc. (now known as Honeywell). Previously he was President
of AlliedSignals Engineered Materials sector from 1988 to 1998 and served as Director of that
company from 1997 until 1999. Mr. Poses is a Director of Raytheon Company and Centex Corporation. Mr. Costello was elected Senior Vice President, Human Resources, effective June 2000. From
April 1994 until that date, he served in various capacities at Campbell Soup Company, including
Senior Vice President, Global Human Resources. Mr. DAloia was elected Senior Vice President and Chief Financial Officer effective February
2000. Prior to that he was employed by AlliedSignal Inc., 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.
DAloia is a Director of FMC Corporation and AirTran Airways. Mr. Dwyer was elected Senior Vice President of the Company and President, Bath and Kitchen
effective September 2004. Prior to joining the Company, he spent a decade in senior executive roles
with major consumer enterprises, including PepsiCo Inc., where he served as President of Tropicana
Products, North America, Vice President of Merger Integration and Senior Vice President, Marketing
North America during his career. 15




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Ms. Gustafsson was elected Senior Vice President, General Counsel and Secretary of the Company
effective January 2005. From January 2003 until January 2005, Ms. Gustafsson served as chief
counsel for the air conditioning systems and services business of the Company. Upon joining the
Company in September 2001 until January 2003, she served as chief corporate counsel with
responsibility for corporate legal activities for the Company. Prior to joining the Company, Ms.
Gustafsson spent five years with Allied Signal Inc./Honeywell where she held positions of
increasing responsibility including chief counsel to Allied Signal Inc./Honeywells $1 billion
electronic materials business. Mr. Kissel was elected Senior Vice President of the Company in January 1998 and serves as
President of Trane Commercial Systems, effective January 2004. From 1998 through December 2003 he
served as President of Vehicle Control Systems. Before that he was Vice President of Air
Conditioning Systems and Services Unitary Products Group, and later named Group Executive. Mr. Esculier was elected President of Vehicle Control Systems effective January 1, 2004. He
joined the company in June 2002 as Vice President of Tranes International Commercial Systems
business in Europe. Prior to that he spent more than six years in a variety of leadership
positions with AlliedSignal Inc./Honeywell. Mr. Massengill was elected Vice President and Treasurer effective April 2001 and assumed
additional responsibility for Business Services Operations in January 2004. He was Assistant
Treasurer of Bristol-Myers Squibb Company from 1999 to March 2001 and before that was with
AlliedSignal Inc. and Exxon Corporation (now ExxonMobil) in various financial management positions. Mr. Pannier was elected Vice President of the Company in January 1998, and since January 2002
has served as President, Residential Systems. From January 1998 until January 2002 he served as
Group Executive, North American Unitary Products Group. Mr. Paradise was elected Vice President and Controller in July 2002. He joined the Company as
Assistant Controller in February 2000. Prior to that he spent ten years with AlliedSignal Inc.
where he held financial positions of increasing responsibility, including Director of Six Sigma and
Credit, after beginning his career with PricewaterhouseCoopers as an auditor. 16




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PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES 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.
Prior to the offering there was no established public trading market for the Companys shares. The Companys Restated Certificate of Incorporation, as amended, authorizes the Company to
issue up to 560,000,000 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. The Company also has a
Rights Agreement. 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. On May 27, 2004, the Company completed a three-for-one common stock split. As
of February 15, 2005 there were 702 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 a nominee of The Depository Trust Company, a
securities depository for banks and brokerage firms. The Company believes that there are
approximately 65,700 beneficial owners of its common stock as of February 14, 2005. On January 31, 2005, the Companys Board of Directors approved a quarterly cash dividend of
$0.15 per share of outstanding common stock. The quarterly dividend will be paid on March 25, 2005
to all common shareholders of record as of February 28, 2005. Set forth below are the high and low sales prices for shares of the Companys common stock for
each quarterly period in 2003 and 2004. The 2003 and first and second quarter of 2004 prices have
been adjusted for the Companys three-for-one stock split. The split became effective May 27, 2004,
for holders of record as of May 18, 2004. 2003
    
    
    High
    
    
    LowFirst quarter
    
    
    $
    24.06
    
    
    $
    21.28Second quarter
    
    
    $
    26.52
    
    
    $
    22.73Third quarter
    
    
    $
    28.37
    
    
    $
    24.03Fourth quarter
    
    
    $
    34.00
    
    
    $
    28.172004
    

    
    High
    
    
    LowFirst quarter
    
    
    $
    38.33
    
    
    $
    33.10Second quarter
    
    
    $
    40.93
    
    
    $
    33.60Third quarter
    
    
    $
    40.55
    
    
    $
    36.22Fourth quarter
    
    
    $
    41.82
    
    
    $
    34.41
 On February 3, 2005 the Companys Board of Directors approved an additional $400 million to
purchase shares of the Companys common stock in the open market. As of February 11, 2005, the
unexpended authorization on the current program, together with amounts remaining under prior
programs totaled $412,236,204. The Company plans to expend $400 million for share repurchases in
2005. A summary of the repurchase activity for 2004 follows. 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. All share and per-share amounts reflect the
three-for-one stock split effective May 27, 2004. 17




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ISSUER PURCHASES OF EQUITY SECURITIES Total Number
    
    
    Maximum Dollarof Shares
    
    
    Value of SharesPurchased as Part
    
    
    That May Yet BeTotal Number
    
    
    Average
    
    
    of Publicly
    
    
    Purchased Underof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    the PlansPeriod
    
    Purchased
    
    
    Per Share
    
    
    or Programs
    
    
    or Programs (a)December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    313,032,214January 1-January 31 (b)
    
    
    1,120,691
    
    
    $
    34.87
    
    
    
    1,083,000
    
    
    $
    275,270,521February 1-February 29
    
    
    1,740,000
    
    
    $
    35.71
    
    
    
    1,740,000
    
    
    $
    213,138,314March 1-March 31
    
    
    1,200,000
    
    
    $
    37.03
    
    
    
    1,200,000
    
    
    $
    168,699,956Total first quarter
    
    
    4,060,691
    
    
    $
    35.88
    
    
    
    4,023,000April 1-April 30
    
    
    765,000
    
    
    $
    36.32
    
    
    
    765,000
    
    
    $
    140,914,596May 1-May 31
    
    
    1,124,000
    
    
    $
    35.19
    
    
    
    1,124,000
    
    
    $
    101,359,010June 1- June 30
    
    
    221,000
    
    
    $
    38.43
    
    
    
    221,000
    
    
    $
    92,866,217Total second quarter
    
    
    2,110,000
    
    
    $
    35.94
    
    
    
    2,110,000July 1-July 31
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    92,866,217August 1-August 31
    
    
    315,000
    
    
    $
    37.45
    
    
    
    315,000
    
    
    $
    81,070,449September 1-September 30

    
    
    114,000
    
    
    $
    38.31
    
    
    
    114,000
    
    
    $
    76,703,368Total third quarter
    
    
    429,000
    
    
    $
    37.68
    
    
    
    429,000October 1-October 31
    
    
    400,000
    
    
    $
    35.64
    
    
    
    400,000
    
    
    $
    62,446,908November 1-November 30
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    62,446,908December
1-December 31
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    $
    62,446,908Total fourth quarter
    
    
    400,000
    
    
    $
    35.64
    
    
    
    400,000Total through December 31
    
    
    6,999,691
    (c)
    
    
    
    
    
    
    6,962,000
    
    
    $
    62,446,908
   (a)
    
    As of February 11, 2005, the Company had two unexpended authorizations by the Board
of Directors under its share repurchase program. The first, authorized by the Board of
Directors on December 4, 2003, approved the purchase of shares in an amount not to
exceed $250 million, with no expiration date. The unexpended balance of $12,236,204
under that authorization will be used to repurchase shares during the first quarter of
2005. The second, authorized by the Board of Directors on February 3, 2005, approved the
purchase of up to an additional $400 million of common stock
with no expiration date.(b)
    
    Includes 37,691 shares that were returned to the Company by the Chief Executive
Officer to satisfy his withholding tax liabilities upon the vesting of 83,333 shares of
restricted stock.(c)
    
    All share repurchases other than those described in note (b) were effected in accordance
with the Safe Harbor Provisions of Rule 10b-18 of the Securities
and Exchange Act. 18




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA (Dollars in millions, except per share data)
    
    Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Segment and Income Statement Data:Segment sales:Air Conditioning Systems and Services
    
    $
    5,345.5
    
    
    $
    4,974.6
    
    
    $
    4,743.9
    
    
    $
    4,692.2
    
    
    $
    4,726.1Bath and Kitchen
    
    
    2,439.5
    
    
    
    2,234.8
    
    
    
    1,994.4
    
    
    
    1,812.7
    
    
    
    1,803.5Vehicle Control Systems
    
    
    1,723.8
    
    
    
    1,358.2
    
    
    
    1,057.1
    
    
    
    960.4
    
    
    
    1,068.8Total sales
    
    $
    9,508.8
    
    
    $
    8,567.6
    
    
    $
    7,795.4
    
    
    $
    7,465.3
    
    
    $
    7,598.4Segment income:Air Conditioning Systems and Services
    
    $
    556.1
    
    
    $
    521.6
    
    
    $
    537.4
    
    
    $
    515.2
    
    
    $
    531.4Bath and Kitchen
    
    
    196.9
    
    
    
    139.5
    
    
    
    154.7
    
    
    
    147.5
    
    
    
    161.5Vehicle Control Systems
    
    
    231.3
    
    
    
    176.6
    
    
    
    138.7
    
    
    
    124.4
    
    
    
    146.8Total segment income(a)
    
    
    984.3
    
    
    
    837.7
    
    
    
    830.8
    
    
    
    787.1
    
    
    
    839.7Equity in net income of unconsolidated joint ventures
    
    
    28.2
    
    
    
    25.9
    
    
    
    26.6
    
    
    
    18.5
    
    
    
    30.0Asbestos indemnity charge, net of recoveries (b)
    
    
    (320.2
    )
    
    
    (10.0
    )
    
    
    (3.3
    )
    
    
    
    
    
    
    Gain on sale of water heater business (c)
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    57.3Restructuring and asset impairment charges (d)
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    (69.5
    )Interest expense
    
    
    (114.9
    )
    
    
    (117.0
    )
    
    
    (129.0
    )
    
    
    (168.7
    )
    
    
    (198.7
    )Corporate and other expenses (a)
    
    
    (214.5
    )
    
    
    (187.4
    )
    
    
    (168.9
    )
    
    
    (160.6
    )
    
    
    (149.4
    )Income from continuing operations before income
taxes
    
    
    362.9
    
    
    
    549.2
    
    
    
    556.2
    
    
    
    476.3
    
    
    
    509.4Income taxes (a)
    
    
    (49.5
    )
    
    
    (144.0
    )
    
    
    (185.2
    )
    
    
    (181.3
    )
    
    
    (194.2
    )Income from continuing operations
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0
    
    
    $
    295.0
    
    
    $
    315.2Per share:Basic
    
    $
    1.46
    
    
    $
    1.87
    
    
    $
    1.71
    
    
    $
    1.38
    
    
    $
    1.50Diluted
    
    $
    1.42
    
    
    $
    1.83
    
    
    $
    1.68
    
    
    $
    1.35
    
    
    $
    1.45Average number of outstanding common shares:Basic
    
    
    214,835,002
    
    
    
    216,809,658
    
    
    
    217,049,925
    
    
    
    214,359,657
    
    
    
    210,369,855Diluted
    
    
    220,584,135
    
    
    
    221,150,472
    
    

    
    220,924,698
    
    
    
    219,353,988
    
    
    
    216,593,016Balance Sheet Data(at end of period):Total assets
    
    $
    6,841.8
    
    
    $
    5,878.7
    
    
    $
    5,143.8
    
    
    $
    4,831.4
    
    
    $
    4,744.7Total debt
    
    $
    1,507.9
    
    
    $
    1,679.1
    
    
    $
    1,959.2
    
    
    $
    2,212.1
    
    
    $
    2,471.7
    (b) In the fourth quarter of 2004, the Company recorded a $307 million ($188 million, net of
tax benefit, or $.85 per diluted share) charge covering estimated net payments for pending and
future asbestos-related claims. Certain reclassifications were made to prior periods to reflect
asbestos indemnity charges, to be consistent with 2004. For a detailed description of the asbestos
indemnity charge, see Item 3. Legal Proceedings. (c) In 2000, the Company sold its Calorex water heater business for a gain of $57 million ($52
million after tax, or $.24 per diluted share). 19




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##### Table of Contents



(d) In 2000, the Company recorded a net restructuring and asset impairment charge of $70
million ($51 million, net of tax benefits, or $.24 per diluted share). These charges consisted of
$26 million for Air Conditioning Systems and Services, $34 million for Bath and Kitchen and $15
million for Vehicle Control Systems, partly offset by a $5 million reduction of charges taken in
prior years. For a comparative analysis of certain line items in the Segment and Income Statement Data
section of this table, see Managements Discussion and Analysis of Financial Condition and Results
of Operations which follows. 20




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview American Standard has three business segments: Air Conditioning Systems and Services, Bath and
Kitchen and Vehicle Control Systems. The Company achieved record sales and segment income for the
full year of 2004. Sales were $9.509 billion, up 11% from $8.568 billion a year ago and segment
income was $984.3 million up 18% from a year ago. Earnings were $1.42 per diluted share, down 22%
from $1.83 per diluted share a year ago. The Company generated $764.7 million in net cash provided
by operating activities and reduced debt by $171 million to $1.508 billion. Management believes
that the Companys sales growth outperformed or was in line with most of its markets in 2004, with
all segments contributing to the gain. The 18% increase in Segment Income in 2004 as compared with
2003, was driven primarily by a 41% increase in Bath and Kitchen and a 31% increase in Vehicle
Control Systems. The primary drivers of the increase were improved volume and mix, savings from our
Materials Management and Six Sigma programs, benefits from 2003 job eliminations, foreign exchange
and price improvements in Bath and Kitchen. These increases were partially offset by higher raw
material commodity costs, primarily in Air Conditioning and investments and other cost escalations
in all of our businesses. 2004 segment income included $46.1 million ($31.8 million net of a $14.3
million tax benefit, or $.15 per diluted share) of operational consolidation expenses, primarily
for the elimination of 1,694 jobs as compared with 2003 which included expenses of $38.9 million
($27.3 million net of an $11.6 million tax benefit, or $.12 per diluted share) for the elimination
of 870 jobs as a result of streamlining actions initiated in the fourth quarter of 2003. The 2003
job eliminations contributed $30 million of savings in 2004. The 2004 actions are expected to
result in approximately $30 million of savings in 2005. Additionally, the Company expects to incur
approximately $200 million in higher raw material commodity costs in 2005. These costs are expected
to be significantly offset by savings from our Materials Management initiative. The reason for the
decline in earnings per diluted share in 2004 as compared with 2003, was a charge of $307 million
($188 million net of a $119 million tax benefit, or $.85 per diluted share) covering estimated net
payments for pending and future asbestos-related claims, which was recorded in the fourth quarter.
For a detailed description of the asbestos indemnity charge, see Item 3. Legal Proceedings.The
income tax provision for 2004 included a $39.2 million tax benefit ($.18 per diluted share) from
the following items: $18.5 million from the resolution of tax audits, $18 million related to a
reduction in withholding tax liabilities arising from a decision to not distribute the earnings of
certain foreign subsidiaries and $2.7 million related to the benefit recognized on other tax items.
The combined effect of the $39.2 million tax benefits that occurred in 2004, the $119 million tax
benefit related to the asbestos indemnity charge, together with other ongoing tax planning
activities, reduced the effective income tax rate to 13.6% for the year. Without the $39.2 million
of tax benefits discussed above and the asbestos indemnity charge and the related tax benefit, the
tax rate for 2004 would have been 31%. The following discussion and analysis addresses year-over-year changes in the line items shown
in the Summary Segment and Income Statement Data in Item 6, Selected Financial Data.
Year-over-year changes in segment sales and segment income and, in certain cases, segment operating
margins, for 2004 compared with 2003 and 2003 compared with 2002 are presented both with and
without the effects of foreign exchange translation. Presenting results of operations excluding the
translation effects of foreign exchange amounts is not in conformity with generally accepted
accounting principles (GAAP), but management analyzes the data in this manner because it is useful
to them in understanding the operational performance of the business. Management also uses data
adjusted in this manner for purposes of determining incentive compensation. Accordingly, management
believes that presenting the analysis in this manner is also useful to shareholders in
understanding the core business segment operating results and trends. Approximately half of our
business is outside the U.S., therefore changes in exchange rates can have a significant effect on
results of operations when presented in U.S. dollars. Changes in sales and segment income
excluding foreign exchange effects are calculated using current year sales and segment income
translated at prior year exchange rates. These additional measurements are not meant to be a
substitute for measurements prepared in conformity with GAAP, nor to be considered in isolation. For a five-year summary of segment sales and segment income and other income statement
information, refer to Item 6, Selected Financial Data on page 19, and for additional data on
segments refer to Note 15 of Notes to Financial Statements. The following discussion and analysis
addresses year-to-year changes in certain line items shown in the 21




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##### Table of Contents



Segment and Income Statement Data in the Selected Financial Data on page 19. The Geographic
Distribution of Sales is presented based upon country of destination. Results of Operations for 2004 Compared with 2003
and 2003 Compared with 2002 Consolidated sales for 2004 were $9.509 billion, an increase of $941 million or 11% (7%
excluding favorable foreign exchange translation effects), from $8.568 billion in 2003. Sales
increased 7% for Air Conditioning Systems and Services, 9% for Bath and Kitchen and 27% for Vehicle
Control Systems. Segment income for 2004 was $984.3 million, an increase of $146.6 million, or 18% (14%
excluding favorable foreign exchange translation effects), from $837.7 million in 2003. Segment
income increased 7% for Air Conditioning Systems and Services, 41% for Bath and Kitchen and 31% for
Vehicle Control Systems. Segment income for 2004 included $46.1 million of operational
consolidation expenses, primarily for the elimination of 1,694 jobs, comprised of $7.7 million for
Air Conditioning Systems and Services, $33.0 million for Bath and Kitchen and $5.4 million for
Vehicle Control Systems. Segment income for 2003 included $38.9 million of expense for the
elimination of 870 jobs, comprised of $8.4 million for Air Conditioning Systems and Services, $20.8
million for Bath and Kitchen and $9.7 million for Vehicle Control Systems. Consolidated sales for 2003 were $8.568 billion, an increase of $773 million, or 10% (5%
excluding favorable foreign exchange translation effects), from $7.795 billion in 2002. Sales
increased 5% for Air Conditioning Systems and Services, 12% for Bath and Kitchen and 28% for
Vehicle Control Systems. Segment income for 2003 was $837.7 million, an increase of $7 million, or 1% (a decrease of 4%
excluding favorable foreign exchange translation effects), from $830.8 million in 2002. Segment
income increased 27% for Vehicle Control Systems, but decreased 3% for Air Conditioning Systems and
Services and 10% for Bath and Kitchen. Segment income for 2003 included $38.9 million of expense
for the elimination of 870 jobs, comprised of $8.4 million for Air Conditioning Systems and
Services, $20.8 million for Bath and Kitchen and $9.7 million for Vehicle Control Systems. 22




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##### Table of Contents



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 Sales
    
    
    Geographic Distribution of Sales2004
    
    
    2003
    
    
    2002
    
    
    
    
    
    
    2004
    
    
    2003
    
    
    2002Air Conditioning Systems and Services
    
    
    56
    %
    
    
    58
    %
    
    
    61
    %
    
    United States
    
    
    50
    %
    
    
    53
    %
    
    
    57
    %Bath and Kitchen
    
    
    26
    %
    
    
    26
    %
    
    
    26
    %
    
    Europe
    
    
    33
    %
    
    
    31
    %
    
    
    28
    %Vehicle Control Systems
    
    
    18
    %
    
    
    16
    %
    
    
    13
    %
    
    Other
    
    
    17
    %
    
    
    16
    %
    
    
    15
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Segment Percentages of Segment Income
    
    
    Geographic Distribution of Segment Income2004
    
    
    2003
    
    
    2002
    
    
    
    
    
    
    2004
    
    
    2003
    
    
    2002Air Conditioning Systems and Services
    
    
    56
    %
    
    
    62
    %
    
    
    65
    %
    
    United States
    
    
    49
    %
    
    
    53
    %
    
    
    67
    %Bath and Kitchen
    
    
    20
    %
    
    
    17
    %
    
    
    18
    %
    
    Europe
    
    
    33
    %
    
    
    30
    %
    
    
    23
    %Vehicle Control Systems
    
    
    24
    %
    
    
    21
    %
    
    
    17
    %
    
    Other
    
    
    18
    %
    
    
    17
    %
    
    
    10
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Results of Operations by Business Segment Air Conditioning Systems and Services Segment Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Sales
    
    $
    5,345.5
    
    
    $
    4,974.6
    
    
    $
    4,743.9Segment income
    
    $
    556.1
    
    
    $
    521.6
    
    
    $
    537.4
 In 2004, sales of Air Conditioning Systems and Services increased 7% (6% excluding
favorable foreign exchange translation effects). Following is an analysis of changes in sales, segment income and operating margin from 2003 to
2004 showing the effect of foreign exchange translation. Year Ended December 31, 2004Excluding foreignexchange translationPercentage
    
    
    2004
    
    
    Percentage2003
    
    
    2004
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    4,974.6
    
    
    $
    5,345.5
    
    
    
    7
    %
    
    $
    5,288.9
    
    
    
    6
    %Segment income
    
    $
    521.6
    
    
    $
    556.1
    
    
    
    7
    %
    
    $
    554.1
    
    
    
    6
    %Segment operating margin
    
    
    10.5
    %
    
    
    10.4
    %
    
    -0.1 pts.
    
    
    10.5
    %
    
    0.0 pts.
 23




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##### Table of Contents



Distribution of Air Conditioning Salesby Market and Geography2004
    
    
    2003
    
    
    2002Commercial
    
    
    72
    %
    
    
    73
    %
    
    
    74
    %Residential
    
    
    28
    %
    
    
    27
    %
    
    
    26
    %100
    %
    
    
    100
    %
    
    
    100
    %Replacement, Renovation and
Repair
    
    
    58
    %
    
    
    57
    %
    
    
    60
    %Commercial New Construction
    
    
    32
    %
    
    
    34
    %
    
    
    32
    %Residential New Construction
    
    
    10
    %
    
    
    9
    %
    
    
    8
    %100
    %
    
    
    100
    %
    
    
    100
    %U.S.
    
    
    73
    %
    
    
    75
    %
    
    
    77
    %Asia
    
    
    10
    %
    
    
    10
    %
    
    
    9
    %Europe
    
    
    8
    %
    
    
    7
    %
    
    
    7
    %Other
    
    
    9
    %
    
    
    8
    %
    
    
    7
    %100
    %
    
    
    100
    %
    
    
    100
    %
 The sales gain in 2004 was led by an 11% increase in residential air conditioning sales
in the U.S., and a 13% (9% excluding favorable foreign exchange translation effects) increase in
international commercial equipment sales. Sales in commercial parts, services and solutions were up
8% (6% excluding favorable foreign exchange translation effects), sales in North American unitary
were up 5%, in line with North American unitary equipment markets and sales in North American
applied equipment were down 6%. The commercial equipment market in the U.S. was up an estimated 4%
in 2004 (based upon preliminary Air-Conditioning & Refrigeration Institute (ARI) data for
commercial unitary markets and our own estimates for applied markets), following drops of 5% in
2003 and 11% in 2002. 2004 marks the first year that the commercial equipment markets have
increased since 2000. The North American unitary equipment market was up an estimated 5% and the
North American applied equipment market was up an estimated 3% for the year. The increasing demand
for unitary products in the U.S. has led to better pricing. The Company announced commercial
equipment price increases of 2-3% in the second quarter of 2004 and additional price increases of
3-5% in the fourth quarter of 2004. International sales were led by strong sales in Latin America
and Asia. Commercial Equipment markets in Europe and the Middle East continue to improve slowly,
while Asia Pacific markets overall remain strong. Sales in China were stronger in the fourth
quarter of 2004 than in the first three quarters. Equipment prices outside of the U.S. were down
modestly for the year as markets continued to be more competitive. Sales of our U.S. residential products increased 11% in 2004 as compared with 2003. The
residential unitary markets were up an estimated 9% in 2004 based upon data published by ARI.
Residential sales benefited from a strong demand for replacement units and a shift in demand
towards high-efficiency units. Our strong position in the premium, high efficiency residential
market was evidenced by an increase in sales of new, higher efficiency models. We implemented a
price increase of up to 5%, effective December 1, 2004 following a 3% increase in the second
quarter. Additionally, we strengthened our residential distribution as we continued to upgrade our
current dealer network and sign new dealers. Our market share in the residential unitary market was
essentially flat in 2004 as compared with 2003. Inventory levels at our distributors at the end of
2004 are slightly higher than they have been the past few years. Segment income of Air Conditioning Systems and Services in 2004 increased 7% (6% excluding
favorable foreign exchange translation effects) to $556.1 million from $521.6 million in 2003. The
increase in segment income was driven by higher volume and improved mix in the international
commercial equipment business and in residential products, including a favorable shift in customer
demand to higher-capacity, higher-efficiency products with higher margins, and savings from
productivity initiatives. The higher volume, improved mix and productivity savings were moderated
by higher commodity metal prices, investments in new products and technologies and cost
escalations. Overall margins decreased from 10.5% in 2003 to 10.4% in 2004. Segment income for
2004 included $7.7 million of operational consolidation expenses, primarily from the elimination of
205 jobs. Segment income for 24




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##### Table of Contents



2003 included $8.4 million of job elimination costs. Following is an analysis of changes in sales, segment income and operating margin from 2002 to
2003 showing the effect of foreign exchange translation. Year Ended December 31, 2003Excluding foreignexchange translationPercentage
    
    
    2003
    
    
    Percentage2002
    
    
    2003
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    4,743.9
    
    
    $
    4,974.6
    
    
    
    5
    %
    
    $
    4,899.7
    
    
    
    3
    %Segment income
    
    $
    537.4
    
    
    $
    521.6
    
    
    
    -3
    %
    
    $
    517.8
    
    
    
    -4
    %Segment operating margin
    
    
    11.3
    %
    
    
    10.5
    %
    
    -0.8 pts.
    
    
    10.6
    %
    
    -0.7 pts.
 The sales gain in 2003 was led by a 10% increase in residential air conditioning sales in
the U.S., and an 8% increase in commercial parts, service and solutions sales. Those increases
were partly offset by lower sales in the North American and European applied equipment markets. In
our commercial air conditioning business, sales performance was in line with the equipment markets
on a global basis. Commercial equipment sales, which account for approximately 45% of the air
conditioning segment sales, continued to feel the effects of a difficult economic environment and
were flat year over year (down 2% excluding favorable foreign exchange translation effects).
Commercial applied equipment sales decreased 3% and commercial unitary equipment sales decreased 1%
on an exchange-adjusted basis, with the unitary business achieving sales gains in the second half
of the year. The commercial equipment market in the U.S. was down an estimated 5% in 2003 (based
upon ARI data), following drops of 11% in 2002 and 8% in 2001. This represents a cumulative
decline of 22% since 2000. Customers continued to defer replacement of equipment, which accounted
for about 57% of our equipment sales, and we estimate that non-residential construction activity in
the U.S. declined approximately 4% year over year. Overall, we believe our share remained stable
in these commercial markets, which, were weak, and price competitive. Sales of parts, services and
solutions continued to grow, with double-digit growth rates outside the U.S. and 4% growth
domestically. Sales of parts and solutions were strongest, as customers have less discretion to
defer those types of purchases, with lower growth in routine services, where customers have more
flexibility to defer spending. Sales outside the U.S., which are substantially commercial, grew
13% (7% excluding favorable foreign exchange translation effects), led by strong growth in Asia. We outperformed the domestic residential unitary market, which was up 2% for 2003 compared
with 2002, based upon data published by ARI. In addition, the furnace market was up an estimated
2%. Residential sales benefited from strong demand for replacement units and a shift in demand
towards high-efficiency units. Our strong position in the premium, high-efficiency market was
evidenced by a substantial sales increase of new higher-efficiency models. Sales of our
high-efficiency furnaces were up approximately 20% for 2003 compared with the prior year. We also
saw growth in our marketing arrangement with Home Depot through which certain residential central
heating and air conditioning systems are offered. The Companys market share for residential
products increased slightly more than one-half percentage point year over year, aided by the
successful introduction of new products. 25




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##### Table of Contents



Segment income of Air Conditioning Systems and Services in 2003 decreased 3% (4% excluding
favorable foreign exchange translation effects) to $521.6 million from $537.4 million in 2002. The
decrease was attributable primarily to lower volume, price, and unfavorable mix in applied and
unitary products in the commercial equipment business. Additionally, segment income for 2003
included $8.4 million of expense for the elimination of 234 jobs primarily in the U.S. The
declines mentioned above were partly offset by improved results in the residential business, from
higher volumes and a favorable shift in customer demand to higher-capacity, higher-efficiency
products with higher margins, and growth in commercial parts, service and solutions. Operating
results also improved in all international operations, where segment income almost doubled. The
positive impact of Materials Management and Six Sigma productivity initiatives offset cost
escalations and investments in new product initiatives. Overall margins decreased from 11.3% in
2002 to 10.5% in 2003. BACKLOGThe worldwide backlog for Air Conditioning Systems and Services as of December 31,
2004, was $663 million, an increase of 15% (13% excluding favorable foreign exchange translation
effects) from December 31, 2003. This increase primarily reflected an increase in commercial
equipment markets in North America. Backlog is not necessarily predictive of future business as it
relates only to some of our products and services. We expect markets to be up slightly in 2005. Bath and Kitchen Segment Year Ended December 31,(Dollars in millions)
    
    

    2004
    
    2003
    
    
    2002Sales
    
    $
    2,439.5
    
    
    $
    2,234.8
    
    
    $
    1,994.4Segment income
    
    $
    196.9
    
    
    $
    139.5
    
    
    $
    154.7
 Following is an analysis of changes in sales, segment income and operating margin from
2003 to 2004 showing the effect of foreign exchange translation. Year Ended December 31, 2004Excluding foreignexchange translationPercentage
    
    
    2004
    
    
    Percentage2003
    
    
    2004
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    2,234.8
    
    
    $
    2,439.5
    
    
    
    9
    %
    
    $
    2,317.2
    
    
    
    4
    %Segment income
    
    $
    139.5
    
    
    $
    196.9
    
    
    
    41
    %
    
    $
    187.8
    
    
    
    35
    %Segment operating margin
    
    
    6.2
    %
    
    
    8.1
    %
    
    1.9 pts.
    
    
    8.1
    %
    
    1.9 pts.
 26




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Distribution of Bath and Kitchen Salesby Market and Geography2004
    
    
    2003
    
    
    2002Residential
    
    
    79
    %
    
    
    80
    %
    
    
    78
    %Commercial
    
    
    21
    %
    
    
    20
    %
    
    
    22
    %100
    %
    
    
    100
    %
    
    
    100
    %Replacement, Renovation and
Repair
    
    
    59
    %
    
    
    60
    %
    
    
    62
    %Residential New Construction
    
    
    26
    %
    
    
    26
    %
    
    
    24
    %Commercial New Construction
    
    
    15
    %
    
    
    14
    %
    
    
    14
    %100
    %
    
    
    100
    %
    
    
    100
    %Europe
    
    
    53
    %
    
    
    50
    %
    
    
    47
    %U.S.
    
    
    34
    %
    
    
    34
    %
    
    
    38
    %Other
    
    
    13
    %
    
    
    16
    %
    
    
    15
    %100
    %
    
    
    100
    %
    
    
    100
    %
 Sales by Bath and Kitchen were $2.440 billion in 2004, an increase of 9% (4% excluding
favorable foreign exchange translation effects), from $2.235 billion in 2003. Sales in the
Americas increased 5% (with little effect from foreign exchange translation), which came on top of
4% growth in 2003 (3% excluding favorable foreign exchange translation effects). Sales in 2004
benefited from sales of our Champion toilet, expanded marketing and promotional efforts and
continued growth in the remodeling market in the U.S. Champion is having a positive impact on sales
and margins in both wholesale and retail channels in the U.S. Both Home Depot and Lowes featured
the Champion product line in circulars, magazines and promotions and we continue to feature
Champion in television advertisements and public relations programs. We believe these programs not
only benefit the Champion product line, but also help create awareness and interest in all American
Standard products. Sales in the retail channel continue to grow, benefiting from our expanded
luxury product offerings. In Europe, where our business is larger and our margin structure is
better, sales increased 12% (2% excluding favorable foreign exchange translation effects). In
Europe, where economic growth is slow, we continued to strengthen our market positions. We launched
new suites and faucets and we introduced new products for the showering and wellness markets, which
are the fastest growing segments in Europe. Additionally, we continued to strengthen our position
in Eastern Europe. In Asia, sales increased 11% (10% excluding favorable foreign exchange
translation effects), off a small but growing base. The new residential market in China grew at a
slower pace in 2004, and our sales were essentially in line with the market. We continued to work
on the development of several new products, product extensions and technologies and increased our
investments in marketing and brand programs. Segment income of Bath and Kitchen was $196.9 million for 2004, an increase of 41% (35%
excluding favorable foreign exchange translation effects) from $139.5 million for 2003. Operating
margin was 8.1%, up from 6.2% in 2003. Segment income and margins for 2004 benefited from volume
and price increases, mix improvement and productivity savings including the benefits of 2003 job
eliminations. We continued to invest in new products with better performance features, new suite
introductions, and our total bathroom strategy. We continued to decrease costs and improve
productivity through Materials Management and Six Sigma initiatives. Segment income in 2004
included $33 million of operational consolidation expenses for the closure of two facilities and
the elimination of 1,338 jobs in the Americas, Europe and Asia. Segment income in 2003 included
$20.8 million of expense for the elimination of 526 jobs in the Americas and Europe. Excluding the
$33 million of operational consolidation expenses in 2004, the $20.8 million of job elimination
expenses in 2003 and foreign exchange translation effects, operating margin would have been up 240
basis points for 2004 as compared to 2003. Following is an analysis of changes in sales, segment income and operating margin from 2002 to
2003 showing the effect of foreign exchange translation. 27




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Year Ended December 31, 2003Excluding foreignexchange translationPercentage
    
    
    2003
    
    
    Percentage2002
    
    
    2003
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    1,994.4
    
    
    $
    2,234.8
    
    
    
    12
    %
    
    $
    2,080.0
    
    
    
    4
    %Segment income
    
    $
    154.7
    
    
    $
    139.5
    
    
    
    -10
    %
    
    $
    126.3
    
    
    
    -18
    %Segment operating margin
    
    
    7.8
    %
    
    
    6.2
    %
    
    -1.6 pts.
    
    
    6.1
    %
    
    -1.7 pts.
 Sales by Bath and Kitchen were $2.235 billion in 2003, an increase of 12% (4% excluding
favorable foreign exchange translation effects), from $1.994 billion in 2002. Sales of $25 million
from a small acquisition in Europe completed in the first quarter of 2003 represented one
percentage point of that gain. Sales in the Americas increased 4% (3% excluding favorable foreign
exchange translation effects), which came on top of 14% growth in 2002 (with little effect from
foreign exchange translation) when sales were helped by the expansion of our jetted-tub program at
Home Depot. Sales in 2003 benefited from our expanded faucet business and the continued success of
our total bathroom concept in the retail channel, selling integrated suites of products.
Examples of these are the Standard Collection at Home Depot, introduced in 2002, and the Sottini
suites, introduced near the end of 2002 at Lowes, both of which continued to experience good sales
growth. In the wholesale channel, sales of luxury faucets increased significantly for the year and
contributed to margin expansion. The Champion toilet, with Americas Best Flushing System,
established strong presence and achieved good distribution in the wholesale channel in the last
half of 2003 at product margins that were better than the category average. Champion had a
positive impact on sales and margins in both wholesale and retail channels in the U.S. In Europe,
where our business is larger and our margin structure is better, sales increased 20% (4% excluding
favorable foreign exchange translation effects). Approximately half of that increase came from a
small acquisition we made in the first quarter of 2003, and half from volume increases in markets
that we estimate were flat overall, year over year. We continued to reinforce our strong market
positions across Europe. In the fourth quarter of 2003, we launched new suites, advertising and
promotional campaigns in France, Italy, the U.K. and Eastern Europe. In Asia, sales increased 14%
(11% excluding favorable foreign exchange translation effects), off a small but growing base. The
new residential market continues to be strong in China, and our sales significantly outgrew the
market, driven by promotional activities surrounding our suites and the refurbishment of retail
outlets. Sales in Korea and Thailand also increased strongly in 2003, resulting from successful
new suite introductions. Segment income of Bath and Kitchen was $139.5 million for 2003, a decrease of 10% (18%
excluding favorable foreign exchange translation effects) from $154.7 million for 2002. Operating
margin was 6.2%, down from 7.8% in 2002. Segment income in 2003 included $20.8 million of expense
for the elimination of 526 jobs in the Americas and Europe. Segment income and margins for 2003
benefited from volume increases and from fixing the operational issues that adversely affected our
results in 2002. Those benefits were more than offset by continued investment in new products with
better performance features, new suite introductions, and our total bathroom strategy,
unfavorable pricing overall and an unfavorable sales mix of lower-margin fittings products. We
continued to decrease costs and improve productivity through Materials Management and Six Sigma
initiatives that offset cost escalations. BACKLOGBacklog is not an important indicator of future business in the plumbing industry,
which typically has a short cycle between customer order and shipment. 28




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Vehicle Control Systems Segment Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Sales
    
    $
    1,723.8
    
    
    $
    1,358.2
    
    
    $
    1,057.1Segment income
    
    $
    231.3
    
    
    $
    176.6
    
    
    $
    138.7
 Following is an analysis of changes in sales, segment income and operating margin from
2003 to 2004 showing the effect of foreign exchange translation. Year Ended December 31, 2004Excluding foreignexchange translationPercentage
    
    
    2004
    
    
    Percentage2003
    
    
    2004
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    1,358.2
    
    
    $
    1,723.8
    
    
    
    27
    %
    
    $
    1,579.7
    
    
    
    16
    %Segment income
    
    $
    176.6
    
    
    $
    231.3
    
    
    
    31
    %
    
    $
    211.2
    
    
    
    20
    %Segment operating margin
    
    
    13.0
    %
    
    
    13.4
    %
    
    0.4 pts.
    
    
    13.4
    %
    
    0.4 pts.
 Distribution of Vehicle Control Systems Salesby Market and Geography2004
    
    
    2003
    
    
    2002OEM Conventional
    
    
    35
    %
    
    
    40
    %
    
    
    39
    %Electronic
    
    
    45
    %
    
    
    36
    %
    
    
    36
    %Aftermarket
    
    
    20
    %
    
    
    24
    %
    
    
    25
    %100
    %
    
    
    100
    %
    
    
    100
    %Europe
    
    
    78
    %
    
    
    78
    %
    
    
    78
    %U.S.
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %Other
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %100
    %
    
    
    100
    %
    
    
    100
    %
 Vehicle Control Systems sales for 2004 were $1.724 billion, an increase of 27% (16%
excluding favorable foreign exchange translation effects), from $1.358 billion in 2003. The
increase, exclusive of foreign exchange translation effects, was attributable primarily to
increased bus and truck production, expanded content per vehicle, including new applications,
continued globalization of our technology and strong growth in our aftermarket business. We had
strong performance in truck and bus brake control systems, transmission control systems, and
compressors. Sales in Europe, our largest market, increased 26% (14% excluding favorable foreign
exchange translation effects) in 2004. Original equipment sales exceeded the European truck and bus
market, which increased an estimated 17%. Sales increased 36% in North America, slightly
outperforming a market that increased an estimated 34%. In Asia and Latin America, our sales also
outperformed truck and bus markets in the year. Our sales continued to grow in line with or
outpace the heavy vehicle manufacturing markets through sales of our new control systems, expanding
penetration on other vehicle platforms, new applications with existing customers, and geographic
expansion in Asia. Segment income in 2004 increased 31% (20% excluding favorable foreign exchange translation
effects) to $231.3 million from $176.6 million in 2003. Segment operating margin was 13.4%, up
from 13.0% in 2003. Segment income in 2004 included $5.4 million of operational consolidation
expenses related to the transfer of production from a facility in Europe to a lower-cost facility
and the associated elimination of 135 jobs. The improvements in segment income and margins,
excluding the favorable effects of foreign exchange translation, 29




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##### Table of Contents



primarily reflected higher volume and savings from Materials Management and Six Sigma
initiatives, which more than offset cost escalations and investments in new products and
technologies. Additionally, we settled a warranty issue with one of our customers in the second
quarter of 2004 that caused us to recognize an additional $14 million of warranty expense. Segment
income in 2003 included $9.7 million of expense for the elimination of 110 jobs in Europe. Following is an analysis of changes in sales, segment income and operating margin from 2002 to
2003 showing the effect of foreign exchange translation. Year Ended December 31, 2003Excluding foreignexchange translationPercentage
    
    
    2003
    
    
    Percentage2002
    
    
    2003
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    1,057.1
    
    
    $
    1,358.2
    
    
    
    28
    %
    
    $
    1,167.7
    
    
    
    10
    %Segment income
    
    $
    138.7
    
    
    $
    176.6
    
    
    
    27
    %
    
    $
    150.4
    
    
    
    8
    %Segment operating margin
    
    
    13.1
    %
    
    
    13.0
    %
    
    -0.1 pts.
    
    
    12.9
    %
    
    -0.2 pts.
 Vehicle Control Systems sales for 2003 were $1.358 billion, an increase of 28% (10%
excluding favorable foreign exchange translation effects), from $1.057 billion in 2002. The
increase was attributable primarily to increased content per vehicle, including new applications,
and continued globalization of our technology. We had strong performance in truck and bus brake
control systems and transmission control systems, and in air suspension systems for luxury cars and
sport utility vehicles. Sales in Europe, our largest market increased 29% (6% excluding favorable
foreign exchange translation effects) in 2003, outperforming the European truck and bus market,
which increased 3%. Sales increased 18% in North America, outperforming a market that increased an
estimated 1%. In Asia and Latin America, our sales also outperformed truck and bus markets in the
year. Our sales continue to outperform the heavy vehicle manufacturing markets through sales of
our new control systems, expanding penetration on other vehicle platforms, new applications with
existing customers, and geographic expansion in Asia. Segment income in 2003 increased 27% (8% excluding favorable foreign exchange translation
effects) to $176.6 million from $138.7 million in 2002. Segment operating margin was 13.0%, down
from 13.1% in 2002. Segment income in 2003 included $9.7 million of expense for the elimination of
110 jobs in Europe. The improvements in segment income and margins primarily reflected volume
leverage, savings from Materials Management and Six Sigma initiatives, and lower warranty costs
incurred in 2003. BACKLOGVehicle Control Systems backlog as of December 31, 2004, was $823 million, an
increase of 24% from December 31, 2003, excluding foreign exchange translation effects, primarily
reflecting an increase in Europe related to market growth and expansion of business in Asia.
Backlog is not necessarily predictive of future business as it relates only to some of our
products. We expect markets in Europe to be up modestly in 2005. Other Income Statement Data (as summarized in Item 6, Selected Financial Data) The $2.3 million increase in equity in net income of unconsolidated joint ventures for 2004
compared with 2003 primarily relates to improved earnings at the Companys Air Conditioning
compressor joint venture. The small decrease in equity in net income of unconsolidated joint
ventures for 2003 compared with 2002 primarily reflects our decision to terminate our receivables
discounting joint venture with TransAmerica in the third quarter of 2002; a decision which has
resulted in lower interest costs. That decrease was partly offset by higher net income for both
our Vehicle Control Systems joint venture in India from higher volume and our Air Conditioning
compressor joint venture in the U.S. from higher volume and improved productivity. 30




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##### Table of Contents



Interest expense decreased by $2.1 million in 2004 as compared to 2003, primarily driven by
lower average debt balances, partially offset by higher interest rates and unfavorable foreign
exchange translation effects. Interest expense decreased by $12.0 million in 2003 compared with
2002 primarily because of lower average debt balances. See Liquidity and Capital Resources and
Note 11 of Notes to Financial Statements. In the fourth quarter of 2004, the Company recorded a $307 million ($188 million net of $119
million tax benefit or $.85 per diluted share) charge covering estimated net payments for pending
and future asbestos-related claims. For a detailed description of the asbestos indemnity charge,
see Item 3. Legal Proceedings. Corporate and other expenses as shown in the Segment and Income Statement Data table in Item
6, were $214.5 million for 2004, compared with $187.4 million for 2003. The increase in 2004 was
primarily due to higher incentive compensation costs, increased provisions for various self-insured
costs, post-retirement and medical costs, higher minority interest expense and foreign exchange
losses related to short-term third party and intercompany debt. Corporate and other expenses were
$187.4 million for 2003, compared with $168.9 million for 2002. The increase in 2003 was due
principally to increased provisions for various self-insured costs, third-party-provided insurance,
post-retirement and medical costs, and higher minority interest expense. The increase in
post-retirement and medical costs includes higher accretion expense on retirement plans. The
increase in accretion expense on retirement plans is attributable primarily to lower assumed
discount rates and projected increases in future medical costs. See Notes 5 and 6 of Notes to
Financial Statements for additional information on accretion expense and foreign exchange
transactions. Those increases were partly offset by lower receivables discounting fees, reflecting
our decision to terminate our receivables discounting joint venture with TransAmerica in the third
quarter of 2002. Corporate and other expenses, shown in the Segment and Income Statement Data
table in Item 6, primarily include some of the expenses classified as selling and administrative
expenses in the Consolidated Statement of Income on page 43. Corporate and other expenses also
include certain items classified in Other expense in the Consolidated Statement of Income (see
Note 5 of Notes to Financial Statements). Year-to-year changes in the significant components of
Other expense are explained by the comments in this paragraph on corporate expenses, or in the
first paragraph of this section on equity in net income of unconsolidated joint ventures. The income tax provisions for 2004, 2003 and 2002 were $49.5 million, $144.0 million and
$185.2 million, respectively. The effective income tax rates were 13.6% of pre-tax income in 2004,
26.2% in 2003 and 33.3% in 2002. The income tax provision for 2004 included a $39.2 million tax
benefit ($.18 per diluted share) from the following items: $18.5 million from the resolution of tax
audits, $18 million related to a reduction in withholding tax liabilities arising from a decision
to not distribute the earnings of certain foreign subsidiaries and $2.7 million related to the
benefit recognized on other tax items. The combined effect of the $39.2 million tax benefits that
occurred in 2004, the $119 million tax benefit related to the asbestos indemnity charge, together
with other ongoing tax planning activities, reduced the effective income tax rate to 13.6% for the
year. Without the $39.2 million of tax benefits discussed above and the asbestos indemnity charge
and the related tax benefit, the tax rate for 2004 would have been 31%. The effective tax rate in
2003 was 26.2%, principally from the resolution in the fourth quarter of 2003 of tax audit issues
and approval of claims for research and development tax credits. Excluding these items, the tax
rate in 2003 would have been 31%. The Company expects that its effective income tax rate in 2005
will be 30% excluding prior year adjustments such as tax audit settlements, etc. See Note 7 of
Notes to Financial Statements and Critical Accounting Policies and Estimates on page 36. Liquidity and Capital Resources Net cash provided by operating activities was $764.7 million for 2004. This compared with net
cash provided by operating activities of $651.2 million for 2003. Major factors contributing to
the increase in 2004 were higher net income (excluding the non-cash asbestos indemnity charge in
the fourth quarter of 2004), higher accounts payable balances primarily due to higher volume and
the timing of payments related to capital expenditures, and proceeds from an insurance settlement
in the third quarter, partially offset by higher tax payments and higher inventory levels. In investing activities, the Company made capital expenditures of $264 million for 2004,
including $216 million on plant and equipment, $2 million of investments in affiliated companies,
and $46 million in computer 31




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##### Table of Contents



software. This compared with capital expenditures of $241 million in 2003, including $171 million
on plant and equipment, $25 million of investments in affiliated companies and other businesses,
and $45 million in computer software. The Company also received $29 million from the sale of
property, plant and equipment in 2004, compared with $23 million in 2003. The 2004 period also
included a $16 million loan, net of payments, to the Companys Air Conditioning compressor joint
venture, which is unconsolidated. Most of the excess of cash provided by operating activities over cash used for investing
activities in 2004 was used to fund financing activities totaling $404.6 million. This included
net cash debt repayments of $204 million. Total Company debt reflected on the balance sheet was
reduced by a net $171 million during 2004, as those cash repayments were partly offset by net
non-cash increases of $33 million, including a $38 million foreign exchange translation effect.
Other financing activities included payment of $253 million for the purchase of 7.0 million shares
of common stock pursuant to the Companys share repurchase program. Those were partly offset by
proceeds realized from the exercise of stock options of $37 million and cash proceeds of $8 million
from the settlement of foreign exchange forward contracts. The net effect of all operating,
investing and financing activities for 2004 was an increase in cash and cash equivalents of $118
million. In 2003, financing activities totaled $420 million, including net debt repayments of $371
million and purchases of 5.9 million shares of the Companys common stock for $150 million, offset
primarily by proceeds realized from the exercise of stock options totaling $55 million. Over the past several years, the Company has reduced its debt outstanding from approximately
$2.6 billion to $1.5 billion. The Company believes that its debt is at an appropriate level and in
2005 the Company intends to use its excess cash to provide a cash return to its investors. This
cash return will be in the form of a quarterly dividend and share repurchases. The Companys Board
of Directors has approved a quarterly dividend of $.15 per share of common stock. The dividend will
be paid on March 25, 2005, to shareholders of record on February 28, 2005. On February 3, 2005 the
Companys Board of Directors also approved an additional $400 million to purchase shares of the
Companys common stock in the open market. As of February 11, 2005, the unexpended authorization
on the current program, together with any amounts remaining under prior programs totaled
$412,236,204. The Company plans to expend approximately $400 million for share repurchases in 2005. The Company has one primary bank credit agreement. That agreement provides the Company and
certain subsidiaries (the Borrowers) with a senior, unsecured, five-year $1 billion
multi-currency revolving credit facility that expires in November 2006. The Company also has a
Euro-denominated, 364-day bank credit agreement of $55 million (at December 31, 2004 exchange
rates) that expires on October 31, 2005, and that was not utilized as of December 31, 2004. Debt
outstanding under that agreement was classified as long-term debt in the balance sheet as of
December 31, 2003, because the Company had the ability and the intent to renew it or to refinance
it with borrowings under the five-year facility. In addition, the Company has other lines of credit
for $325 million. The aggregate borrowings of up to $1 billion provided by the primary bank credit facility can
be used for general corporate purposes, of which up to $250 million may be used for issuing letters
of credit and up to $125 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
can, however, concurrently re-borrow equivalent amounts subject to compliance with certain
conditions contained in the agreement. The Company, American Standard Inc., American Standard International Inc. and certain of their
domestic subsidiaries guarantee obligations under the primary credit agreement. In addition,
certain foreign subsidiaries guarantee obligations of certain foreign subsidiaries that borrow
under that credit agreement. The primary bank credit agreement contains various covenants that limit, among other things,
priority indebtedness, liens, sale and leaseback transactions, subsidiary indebtedness, certain
fundamental business changes and the making of certain investments, loans and advances. 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 credit agreement. See Note 11 of Notes to Financial Statements. 32




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At December 31, 2004, the Companys total indebtedness was $1.508 billion. Annual scheduled
debt maturities were $211 million, $370 million,
$1 million, $306 million and $213 million for the
years 2005 through 2009, respectively and $306 million thereafter. The Company plans to repay the
$208 million of 7 3/8% Senior Notes maturing on April 15, 2005 with borrowings from its bank credit
agreements or under its 1998 Shelf Registration Statement (as described below) and therefore this
amount has been classified as long-term on the balance sheet. The Company had remaining
availability under its primary bank credit agreement at December 31, 2004, of $863 million after
reduction for borrowings of $35 million and $102 million of outstanding letters of credit. The
Company has $11 million available under other bank credit facilities after reduction for borrowings
of $77 million and letters of credit usage of $12 million. In addition, the Company had $225
million available at December 31, 2004, under overdraft facilities that can be withdrawn by the
banks at any time and outstanding letters of credit issued by other banks of $56 million as of
December 31, 2004. See Note 11 of Notes to Financial Statements. The Companys 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 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) and access to public and private debt markets will be sufficient to meet its
expected operating needs and planned capital expenditures for the foreseeable future. The Company redeemed its 7 1/8% Senior Notes on their due date, February 15, 2003, for $129.5
million, including accrued interest with borrowings under its five-year bank credit facility. In
January 2003, a European subsidiary of the Company issued 30 million ($41 million at
December 31, 2004 exchange rates) of 7.59% Guaranteed Senior Bonds due 2013 in a private placement
as part of certain changes in the financial structure and organization of its European
subsidiaries. The proceeds were used to repay borrowings under bank credit agreements. The bonds
are guaranteed by the Company. Debt securities (Senior Notes) sold under the 1998 Shelf Registration are issued by American
Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. and ASII. These
Senior Notes cannot be redeemed prior to their maturity date. 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. Off-Balance Sheet Arrangements 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 arrangements.
Operating leases are employed as an alternative to purchasing certain property, plant and
equipment. Receivables financing arrangements are used to reduce borrowing costs. Future rental
commitments under all non-cancelable operating leases in effect at December 31, 2004, total $562
million. That total represents the equivalent of approximately $467 million of off-balance-sheet
debt, discounted at an assumed rate of 6.0%. See the following table of Aggregate Contractual
Obligations for a summary of amounts due under operating leases. To reduce its borrowing cost, during 2002 the Company established new accounts receivable
financing facilities in Europe and the U.S., and terminated a previously existing arrangement in
the U.S. See Note 8 of Notes to Financial Statements. As part of these facilities, the Company
formed wholly-owned, special-purpose entities (the SPEs) for the sole purpose of buying and
selling receivables generated by the Company. Under these facilities, the Company, irrevocably and
without recourse, transfers all eligible accounts receivable to the SPEs, which in turn, sell them,
or undivided ownership interests in them, to conduits administered by banks. The assets of the
SPEs are not 33




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available to pay the claims of the Company or any of its subsidiaries. The Company retains a
subordinated interest in the receivables sold of approximately 11% in Europe and approximately 46%
in the U.S. The conduits obtain the funds to purchase the receivables, other than the retained
interest, by selling commercial paper to third-party investors. Advances from the conduits to the
SPEs are limited to approximately $550 million (275 million, or approximately $375 million at
December 31, 2004 exchange rates, under the European facility, and $175 million under the U.S.
facility). At December 31, 2004 advances from conduits were $369 million and $135 million under the
European and U.S. facilities, respectively. The Company retains responsibilities for the collection
and administration of receivables subject to these facilities. These facilities are for three
years, subject to annual renewals and for the European facility, the maintenance of specified
debt-rating levels, and for the U.S. facility, the maintenance of certain financial covenants. The
Company is currently in compliance with these covenants. The receivables sold are removed from the
balance sheet since they meet the applicable criteria of Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The Companys retained interest is recorded at fair value in other current assets
in the Companys Consolidated Balance Sheet. To the extent that the cash received and value of the
retained interest is less than the net book value of the receivables sold, losses are recognized at
the time of sale. Those losses amounted to $40.2 million for 2004 and $41.7 million for 2003 and
are included in other expense on the Consolidated Statement of Income. The accounts receivable
financing facility in Europe expires in May 2005 and the U.S. facility expires in September 2005.
The Company has the ability to renew these facilities and intends to renew them upon their
expiration. The Company has commitments and performance guarantees, including energy savings guarantees
totaling $55 million extending from 2005 to 2022, under long-term service and maintenance contracts
related to its air conditioning equipment and system controls. Through 2004 the Company has only
experienced one insignificant loss under such arrangements and considers the probability of any
significant future losses to be unlikely. The Company also guarantees debt of third parties in the
amount of $3 million as of December 31, 2004. Following is a summary of contractual obligations, both on and off the balance sheet as of
December 31, 2004. Aggregate Contractual Obligations
As of December 31, 2004
(Millions of dollars) Payments due by period (1)2006
    
    
    2008
    
    
    BeyondContractual Obligations
    
    Total
    
    
    2005
    
    
    and 2007
    
    
    and 2009
    
    
    2009Long-term debt obligations
(principal plus interest) (2)(3)
    
    $
    1,786
    
    
    $
    356
    
    
    $
    513
    
    
    $
    609
    
    
    $
    308Operating lease obligations (4)
    
    
    562
    
    
    
    134
    
    
    
    202
    
    
    
    122
    
    
    
    104Purchase obligations (5)
    
    
    660
    
    
    
    660
    
    
    
    -
    
    
    
    -
    
    
    
    -Unfunded pension and
post-retirement benefits (6)
    
    
    706
    
    
    
    132
    
    
    
    120
    
    
    
    121
    
    
    
    333Other long-term liabilities
included on the balance sheet (7)
    
    
    94
    
    
    
    45
    
    
    
    23
    
    
    
    12
    
    
    
    14Total
    
    $
    3,808
    
    
    $
    1,327
    
    
    $
    858
    
    
    $
    864
    
    
    $
    759
 Notes to table  (1)
    The amounts and timing of such obligations, as shown in the table may vary
substantially from amounts that will actually be paid in future years. For example,
the actual amount to be paid under long-term debt obligations in 2006 upon expiration
of the Companys primary credit agreement will depend on the amount of debt repaid or
additional amounts borrowed before that date.(2)
    Amounts shown for long-term debt obligations include the associated interest
calculated at the December 31, 2004 rates applicable to each type of debt.(3)
    Obligations under capital leases are not material (approximately $18 million)
and are included in long-term debt obligations. 34




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(4)
    Amounts include future rental commitments under all non-cancelable operating
leases in effect at December 31, 2004. The present value of the $562 million total is
equivalent to approximately $467 million, discounted at an assumed rate of 6.0%.(5)
    In the normal course of business the Company expects to purchase
approximately $4.8 billion in 2005 of materials and services, and estimates that on
average no more than approximately $550 million is outstanding at any one time in the
form of legally binding commitments. The Company spent approximately $4.2 billion,
$4.0 billion and $3.5 billion on materials and services in 2004, 2003 and 2002. The
Company also expects to spend approximately $300 million on capital expenditures for
plant and equipment and $50 million for purchased computer software during 2005, and
estimates that no more than $110 million is committed under legally binding agreements
at any one time.(6)
    Amounts represent undiscounted projected benefit payments to the Companys
unfunded plans over the next ten years, as well as, expected contributions to funded
pension plans for 2005. The expected benefit payments are estimated based on the same
assumptions used to measure the Companys accumulated benefit obligation at the end of
2004 and include benefits attributable to estimated future employee service of current
employees.(7)
    Other long-term liabilities include amounts payable under workers
compensation and general liability claims. Capital Expenditures The Companys capital expenditures for 2004 were $264 million (including $216 million on plant
and equipment, $2 million of investments in affiliated companies and other businesses, and $46
million on computer software), compared with $241 million for 2003 (including $171 million on plant
and equipment, $25 million of investments in affiliated companies and other businesses, and $45
million on computer software). Capital spending on plant and equipment in 2004 was devoted
primarily to equipment for the manufacture of new products and productivity improvements. Capital expenditures for Air Conditioning Systems and Services for 2004 were $112 million
(including $97 million on plant and equipment, $1 million of investments in affiliated companies
and $14 million for computer software), an increase of 24% from 2003 expenditures of $90 million
(including $16 million for computer software). Major expenditures in 2004 primarily related to
projects for new products, product improvements and improvements related to productivity. Bath and Kitchens capital expenditures for 2004 were $77 million (including $58 million on
plant and equipment, $1 million of investments in affiliated companies and $18 million on computer
software), essentially flat with 2003 capital expenditures of $76 million (including $18 million
for computer software). Bath and Kitchen also expended $25 million in 2003 on several small
acquisitions and investments in affiliated companies. Major expenditures on plant and equipment in
2004 included projects related to productivity (process improvements), new products and product
improvements. Capital expenditures for Vehicle Control Systems in 2004 were $69 million (including $58
million on plant and equipment and $11 million for computer software) an increase of 53% from
expenditures of $45 million in 2003 (including $8 million for computer software). Expenditures on
plant and equipment in 2004 were primarily related to capital equipment for new products, cost
reduction and capacity expansion. Corporate headquarters incurred minor amounts of spending on leasehold improvements and
computer software in each of the last two years. The Company believes capital spending in recent 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. Six Sigma
projects have freed up capacity in our manufacturing facilities and are expected to continue to do
so. The Company expects to continue investing to expand and modernize its existing facilities and
invest in its facilities to create capacity for new product development. The Company expects to
make capital expenditures on plant and equipment in 2005 of approximately $300 million, excluding
potential acquisitions and computer software. 35




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Effect of Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has recently issued several new Statements
and Interpretations. For the disclosures required by Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, see Note 12 of Notes to
Financial Statements. For the interim period disclosures required by Statement No. 132 (revised
2003) Employers Disclosures about Pensions and Other Postretirement Benefits,see Note 6 of Notes
to Financial Statements. Some of the disclosure requirements of the revised Statement No. 132
related to foreign plans and certain other matters are not effective until 2005. For a discussion
of the impact of FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which addresses the
accounting and disclosure required as a result of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 enacted on December 8, 2003, see Note 6 of Notes to Financial Statements.
Statement No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4, was issued in 2004.
This statement will be effective for the Company in 2006. The Company is currently in the process
of determining the impact. Other Statements and Interpretations recently issued by the FASB that
are applicable to the Company have had no impact to the Company upon adoption. Those statements
included No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities;and
No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity;Interpretation No. 46, Consolidation of Variable Interest Entities,parts of which became
effective for the Company in the first quarter of 2004. Statement of Financial Accounting Standards
No. 123(revised 2004) (FAS 123), Share Based Payments, was issued on December 16, 2004. The new
standard requires companies to recognize in their financial statements the cost of employee
services received in exchange for valuable equity instruments issued. The Company plans to adopt
FAS 123 in the third quarter of 2005 with retroactive adjustment for all prior periods presented
using the pro-forma amounts disclosed in Note 2 Accounting Policies  Stock-based Compensation. The
Company estimates that the impact of this compensation expense will amount to approximately $.08 -
$.09 per diluted share in 2005. 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. Those judgments and estimates have a significant effect on the financial
statements because they result primarily from the need to make estimates about the effects of
matters that are inherently uncertain. Actual results could differ from those estimates. The
Company frequently re-evaluates its judgments and estimates that 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 uncertainty, judgment and
complexity are post-retirement benefits, warranties, income taxes and commitments and
contingencies. Management has reviewed the following disclosures with the Audit Committee of the
Board of Directors. 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 making its
assumptions. Changes in the related pension and post-retirement benefit costs or liabilities may
occur in the future due to changes in the assumptions. The assumptions as to the expected
long-term rates of return on plan assets are based upon the composition of plan assets, historical
long-term rates of return on similar assets and current and expected market conditions. Similarly,
the discount rate used to calculate the present value of projected benefit obligations is based
upon interest rates on the Moodys AA Corporate Bond Index for U.S. plans and a long-term corporate
bond interest rate for foreign plans. A decrease of one percentage point in the 36




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assumed rate of return on plan assets and a decrease of one percentage point in the discount rate
applied to projected benefit obligations would increase annual pension expense by approximately $30
million. An increase of one percentage point in the assumed health care cost trend rate in each
future year would increase annual health insurance costs by approximately $1 million. See the
disclosures about pension and post-retirement obligations, the composition of plan assets,
assumptions and other matters in Note 6 of Notes to Financial Statements. WarrantiesProducts sold are generally covered by a warranty for periods ranging from one to
ten years and for the lifetime of certain bath and kitchen faucets. 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 expectations 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 or based upon historical
experience. Costs to satisfy obligations under extended warranty contracts are charged to cost of
sales as incurred. Warranty accrual estimates made in prior years can change significantly, and
sometimes unexpectedly, based upon the most current warranty claims information available. Such
changes in estimates increased warranty expense by a net $3 million in 2004, $8 million in 2003,
and $6 million in 2002. See Note 14 of Notes to Financial Statements for a three-year summary of
warranty costs. 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 decrease the net 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 increase
the net deferred tax assets would increase income in the period such determination was made.
Deferred tax assets have been reduced by a valuation allowance of $175 million. A decrease in that
valuation allowance of 10% would increase net income by approximately $17.5 million. The Company
also estimates its effective income tax rate periodically, considering all known factors and the
estimated effects of future events or tax planning strategies that can cause that rate to vary from
the statutory rate. Estimating the outcome of future events is inherently uncertain and final
resolution of those events can cause the effective rate to vary significantly. For example, in the
second quarter of 2004, the Company recognized a $2.7 million tax benefit related to certain tax
items; in the third quarter of 2004, the Company recognized an $18 million tax benefit related to a
reduction in withholding tax liabilities; in the fourth quarter of 2004, the Company resolved
certain tax audit issues and recorded an $18 million tax benefit; and recorded a $119 million tax
benefit related to the asbestos indemnity charge. 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, possibly by significant amounts, due to new developments in any of the
matters. Over the years, the Company has been named as a defendant in numerous lawsuits alleging
various asbestos-related personal injury claims arising primarily from sales of boilers and
railroad brake shoes. In these asbestos-related lawsuits, the Company is usually named as one of a
large group of defendants, often in excess of one hundred companies. Many of these lawsuits
involve multiple claimants, do not specifically identify the injury or disease for which damages
are sought and/or do not allege a connection between any Company product and a claimed injury or
disease. As a result, numerous lawsuits have been placed and may remain on inactive or deferred
dockets, which some jurisdictions have established. 37




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Historically, the Company recorded a liability only for filed asbestos claims. Costs
associated with claims that might be filed against the Company in the future were not recorded
because the Company did not believe its history and experience with asbestos-related litigation was
sufficient to allow it to make a reasonable estimate of this liability. Because of stabilization
in the rate at which new claims are being filed and the Companys added experience in resolving
claims, the Company now believes a reasonable estimate of this liability can be made and
accordingly has recorded this liability and an increase in the associated receivable for probable
asbestos-related recoveries as of December 31, 2004. Key assumptions in determining the Companys
asbestos liability and associated receivable include the amount of insurance available, gaps in
coverage, applicable deductibles, allocation methodologies, solvency ratings and credit-worthiness
of the insurers, the published dividend rates of insolvent insurers, amounts already recovered from
and the potential for settlements with insurers, and estimated annual legal fees. For additional disclosures on asbestos and other contingent liabilities see Item 3. Legal
Proceedings. Cyclical and Seasonal Nature of Business Approximately 60% of Air Conditioning Systems and Services and Bath and Kitchen sales on a
combined basis are to the replacement, remodeling and repair markets that tend to be less cyclical
than other markets. 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. Vehicle Control Systems has generally outperformed the medium-sized
and heavy vehicle markets, primarily from increased content per vehicle and improved market
penetration. Total Company sales and related segment income tend to be seasonally higher in the second and
third quarters of the year because, in the U.S. and other Northern Hemisphere markets, summer 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 related 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 beliefs, are forward-looking statements. Forward-looking statements
are made based upon managements good faith expectations and beliefs 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 sections titled Business, Legal Proceedings and
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 of end market activity in the Companys Air Conditioning Systems and
Services and Bath and Kitchen businesses and the level of truck and bus production in
the Companys Vehicle Control Systems markets;
    the extent to which the Company will be able to realize the estimated savings from
Materials Management and Six Sigma initiatives;
    additional developments may occur that could affect the Companys estimate of
asbestos liabilities and recoveries, such as the nature and number of future claims, the
average cost of disposing of such claims, 38




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average annual defense costs, the amount of insurance recovery, legislation or legal
decisions affecting claims, criteria or payout;
    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 the supply of basic materials such as steel,
aluminum, copper, clays, electronics and energy necessary to avoid disruptions of
operations;
    increased difficulties in obtaining a consistent supply of those basic materials at
pricing levels which will not have an adverse effect on results of operations;
    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;
    the impact on the Company or a segment from the loss of a significant customer or a
few customers;
    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 current products or future products;
    assumptions made related to post-retirement benefits, including rate of return on
plan assets, the discount rate applied to projected benefit obligations and the rate of
increase in the health care cost trend rate;
    changes in laws or different interpretations of laws that may affect the Companys
expected effective tax rate for 2005;
    the outcome of lawsuits and other contingencies;
    transactions or other events affecting the need for, timing and extent of the
Companys capital expenditures; and
    adoption of new accounting pronouncements promulgated by the FASB or other
accounting standard setting agencies. 39




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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 immediately. The Company
generally does not enter commodity hedges extending beyond eighteen months. The notional value of
commodity-forward contracts outstanding as of December 31, 2004 and 2003 was $95 million and $57
million, respectively. A 10% change in the price of commodities hedged would change the fair value
of the hedge contracts by approximately $11 million as of December 31, 2004 and $7 million as of
December 31, 2003. The Company conducts 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 some of these 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 28 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 to a significant extent sells its products
within the countries in which they are manufactured. However, a significant and growing portion of
the Companys products are manufactured in lower-cost locations and sold in various countries,
resulting in increased exposure to foreign exchange effects. The asset exposure of foreign
operations to the effects of exchange volatility has also been partly mitigated by the denomination
in foreign currencies of a portion of the Companys borrowings. The Company is also subject to
political risks in its foreign operations. 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 interest rate swaps are designated
as fair-value hedges of the underlying debt. The fair value of the hedges is recorded in other
long-term assets or liabilities with a corresponding increase or decrease in the debt obligation.
The change in fair values of the hedge instrument and the debt are recorded as equal and offsetting
unrealized gains and losses. The existing fair value hedges are 100% effective and therefore there
is no effect on current earnings from hedge ineffectiveness. The notional value (the value of the
underlying debt) of interest rate swaps outstanding as of December 31, 2004, was $300 million.
Including that $300 million, as of December 31, 2004, approximately $406 million of the Companys
$1.5 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 $3 million as of December 31, 2004. To convert Pounds Sterling financing under the European receivables securitization program to
U.S. dollar equivalent financing, the Company enters into currency-forward contracts that
effectively fix the transaction costs in U.S. dollars. These forward contracts are defined as
speculative hedges and accordingly, changes in the market 40




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value of the contracts are recorded in other income/expense as incurred, with a corresponding
increase or decrease in other assets. The recorded gains or losses are essentially offset by gains
or losses on the Companys Sterling-denominated debt. Use of similar currency-forward contracts on
Euro financing of receivables was discontinued in the third quarter of 2003. The Company has commitments and performance guarantees, including energy savings guarantees
totaling $55 million as of December 31, 2004, extending from 2005 to 2022, under long-term
contracts related to its air conditioning equipment and system controls. Through 2004 the Company
has only experienced one insignificant loss under such arrangements and considers the probability
of any significant future losses to be unlikely. 41




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Report of Independent Registered Public Accounting Firm 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, 2004 and 2003, and the related consolidated statements of income,
consolidated statement of shareholders equity, and consolidated statement of cash flows for each
of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting
Oversight Board (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,
2004 and 2003, and the consolidated results of its operations and its consolidated cash flows for
each of the three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of American Standard Companies Inc.s internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 23, 2005 expressed an unqualified opinion thereon. (ERNST & YOUNG LLP) New York, New York
February 23, 2005 42




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##### Table of Contents



CONSOLIDATED STATEMENT OF INCOME
AMERICAN STANDARD COMPANIES INC. Year Ended December 31,(Amounts in millions, except share data)
    
    2004
    
    
    2003
    
    
    2002Sales
    
    $
    9,508.8
    
    
    $
    8,567.6
    
    
    $
    7,795.4Costs, expenses and other income:Cost of sales
    
    
    6,952.3
    
    
    
    6,477.5
    
    
    
    5,865.2Selling and administrative expenses
    
    
    1,708.5
    
    
    
    1,360.8
    
    
    
    1,187.7Other expense
    
    
    50.0
    
    
    
    53.1
    
    
    
    54.0Asbestos indemnity charge, net of recoveries
    
    
    320.2
    
    
    
    10.0
    
    
    
    3.3Interest expense
    
    
    114.9
    
    
    
    117.0
    
    
    
    129.09,145.9
    
    
    
    8,018.4
    
    
    
    7,239.2Income before income taxes
    
    
    362.9
    
    
    
    549.2
    
    
    
    556.2Income taxes
    
    
    49.5
    
    
    
    144.0
    
    
    
    185.2Net income applicable to common shares
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0Net income per common share:Basic
    
    $
    1.46
    
    
    $
    1.87
    
    
    $
    1.71Diluted
    
    $
    1.42
    
    
    $
    1.83
    
    
    $
    1.68Average outstanding common shares:Basic
    
    
    214,835,002
    
    
    
    216,809,658
    
    
    
    217,049,925Diluted
    
    
    220,584,135
    
    
    
    221,150,472
    
    
    
    220,924,698
 See Notes to Financial Statements. 43




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##### Table of Contents



CONSOLIDATED BALANCE SHEET
AMERICAN STANDARD COMPANIES INC. Year Ended December 31,(Amounts in millions, except share data)
    
    2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    229.4
    
    
    $
    111.7Accounts receivable, less allowance for doubtful
accounts-$46.2 in 2004; $45.3 in 2003
    
    
    1,154.5
    
    
    
    1,022.8Inventories
    
    
    1,087.2
    
    
    
    909.9Future income tax benefits
    
    
    114.5
    
    
    
    161.0Other current assets
    
    
    304.2
    
    
    
    285.3Total current assets
    
    
    2,889.8
    
    
    
    2,490.7Facilities, at cost, net of accumulated depreciation
    
    
    1,616.6
    
    
    
    1,515.4Goodwill, net of accumulated amortization -
$432.3 in 2004; $413.1 in 2003
    
    
    1,182.0
    
    
    
    1,140.4Capitalized software costs, net of accumulated amortization-
$274.5 in 2004; $202.6 in 2003
    
    
    230.0
    
    
    
    239.3Debt issuance costs, net of accumulated amortization- $28.2 in 2004; $22.4 in
2003
    
    
    15.4
    
    
    
    21.2Long-term asbestos indemnity receivable
    
    
    365.1
    
    
    
    59.5Other assets
    
    
    542.9
    
    
    
    412.2TOTAL ASSETS
    
    $
    6,841.8
    
    
    $
    5,878.7LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Loans payable to banks
    
    $
    76.6
    
    
    $
    49.8Current maturities of long-term debt
    
    
    2.2
    
    
    
    2.5Accounts payable
    
    
    887.2
    
    
    
    684.3Accrued payrolls
    
    
    331.2
    
    
    
    294.3Current portion of warranties
    
    
    155.1
    
    
    
    153.1Taxes on income
    
    
    130.5
    
    
    
    136.0Other accrued liabilities
    
    
    763.9
    
    
    
    713.5Total current liabilities
    
    
    2,346.7
    
    
    
    2,033.5Long-term debt
    
    
    1,429.1
    
    
    
    1,626.8Other long-term liabilities:Post-retirement benefits
    
    
    744.1
    
    
    
    657.4Long-term portion of asbestos indemnity liability
    
    
    683.4
    
    
    
    61.5Warranties
    
    
    242.4
    
    
    
    202.9Deferred tax liabilities
    
    
    94.3
    
    
    
    218.5Other
    
    
    371.5
    
    
    
    364.3Total liabilities
    
    
    5,911.5
    
    
    
    5,164.9Commitments and contingenciesShareholders equity:Preferred stock, 2,000,000 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 560,000,000 shares authorized;
shares issued: 251,768,741 in 2004; 251,757,582 in 2003; and shares
outstanding: 214,947,988 in 2004; 217,914,978 in 2003
    
    
    2.5
    
    
    
    2.5Capital surplus
    
    
    794.5
    
    
    
    753.7Unearned compensation
    
    
    
    
    
    
    (0.7
    )Treasury stock, at cost: 36,820,753 shares in 2004; 33,842,604 shares in 2003
    
    
    (760.1
    )
    
    
    (584.3
    )Retained earnings
    
    
    1,146.6
    
    
    
    833.2Accumulated other comprehensive income:Deferred gain on hedge contracts, net of tax
    
    
    9.3
    
    
    
    7.1Foreign currency translation effects
    
    
    (102.8
    )
    
    
    (204.5
    )Minimum pension liability adjustment, net of tax
    
    
    (159.7
    )
    
    
    (93.2
    )Total shareholders equity
    
    
    930.3
    
    
    
    713.8TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    6,841.8
    
    
    $
    5,878.7
 See Notes to Financial Statements. 44




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##### Table of Contents



CONSOLIDATED STATEMENT OF CASH FLOWS
AMERICAN STANDARD COMPANIES INC. Year Ended December 31,(Amounts in millions)
    
    2004
    
    
    2003
    
    
    2002Cash provided (used) by:Operating activities:Net income
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    171.0
    
    
    
    161.8
    
    
    
    150.3Amortization of capitalized software and other
intangibles
    
    
    90.9
    
    
    
    85.0
    
    
    
    62.4Equity in earnings of unconsolidated joint
ventures, net of dividends received
    
    
    (15.8
    )
    
    
    (14.3
    )
    
    
    (13.5
    )Non-cash stock compensation
    
    
    60.9
    
    
    
    60.4
    
    
    
    55.4Deferred income taxes
    
    
    (156.1
    )
    
    
    31.5
    
    
    
    67.2Gain on sale of property, plant and equipment
    
    
    (3.7
    )
    
    
    (7.9
    )
    
    
    (3.3
    )Changes in assets and liabilities:Accounts receivable
    
    
    (86.1
    )
    
    
    (86.3
    )
    
    
    (52.6
    )Inventories
    
    
    (138.4
    )
    
    
    (76.5
    )
    
    
    (89.3
    )Accounts payable
    
    
    157.6
    
    
    
    33.4
    
    
    
    (36.8
    )Other accrued liabilities and taxes
    
    
    53.5
    
    
    
    188.2
    
    
    
    (13.9
    )Post-retirement benefits
    
    
    (19.1
    )
    
    
    (9.4
    )
    
    
    (16.6
    )Net asbestos indemnity liability
    
    
    316.3
    
    
    
    0.2
    
    
    
    (6.4
    )Other current and long-term assets
    
    
    (84.0
    )
    
    
    (102.8
    )
    
    
    81.9Other long-term liabilities
    
    
    77.2
    
    
    
    (17.3
    )
    
    
    (13.6
    )Net cash provided by operating activities before
proceeds from initial sale of receivables
    
    
    737.6
    
    
    
    651.2
    
    
    
    542.2Proceeds from initial sale of receivables, net
    
    
    27.1
    
    
    
    
    
    
    
    81.4Net cash provided by operating activities
    
    
    764.7
    
    
    
    651.2
    
    
    
    623.6Investing activities:Purchases of property, plant and equipment
    
    
    (215.9
    )
    
    
    (170.7
    )
    
    
    (165.1
    )Investments in affiliated companies and other businesses
    
    
    (1.5
    )
    
    
    (25.0
    )
    
    
    (23.6
    )Investments in computer software
    
    
    (46.6
    )
    
    
    (44.9
    )
    
    
    (46.9
    )Loan to unconsolidated joint venture, net
    
    
    (16.2
    )
    
    
    
    
    
    
    Proceeds from dissolution of receivables financing joint
venture
    
    
    
    
    
    
    
    
    
    
    25.8Proceeds from disposal of property, plant and equipment
    
    
    29.4
    
    
    
    23.2
    
    
    
    21.4Other
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Net cash used by investing activities
    
    
    (250.8
    )
    
    
    (217.4
    )
    
    
    (189.5
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    1.1
    
    
    
    33.0
    
    
    
    Repayments of long-term debt, including redemption premiums
    
    
    (2.8
    )
    
    
    (129.6
    )
    
    
    (43.6
    )Net change in revolving credit facilities
    
    
    (228.5
    )
    
    
    (276.4
    )
    
    
    (272.3
    )Net change in other short-term debt
    
    
    26.6
    
    
    
    1.8
    
    
    
    (24.5
    )Purchases of treasury stock
    
    
    (253.0
    )
    
    
    (149.5
    )
    
    
    (141.1
    )Proceeds from exercise of stock options
    
    
    36.9
    
    
    
    54.9
    
    
    
    56.1Proceeds from foreign exchange forward contracts
    
    
    8.5
    
    
    
    38.2
    
    
    
    Other common stock issued or reacquired, net and other
    
    
    6.6
    
    
    
    7.5
    
    
    
    5.4Net cash used by financing activities
    
    
    (404.6
    )
    
    
    (420.1
    )
    
    
    (420.0
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    8.4
    
    
    
    1.4
    
    
    
    .4Net increase in cash and cash equivalents
    
    
    117.7
    
    
    
    15.1
    
    
    
    14.5Cash and cash equivalents at beginning of period
    
    
    111.7
    
    
    
    96.6
    
    
    
    82.1Cash and cash equivalents at end of period
    
    $
    229.4
    
    
    $
    111.7
    
    
    $
    96.6Cash paid during the year for:Interest
    
    $
    107.3
    
    
    $
    114.1
    
    
    $
    125.1Taxes
    
    $
    160.0
    
    
    $
    40.9
    
    
    $
    115.4
 See Notes to Financial Statements. 45




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##### Table of Contents



CONSOLIDATED STATEMENT
OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME AMERICAN STANDARD COMPANIES INC. Accumulated OtherComprehensive IncomeDeferred
    
    
    
    
    
    
    MinimumGain
    
    
    Foreign
    
    
    PensionUnearned
    
    
    
    
    
    
    
    
    
    
    (Loss) on
    
    
    Currency
    
    
    Liability
    
    
    Compre-Common
    
    
    Capital
    
    
    Compen-
    
    
    Treasury
    
    
    Retained
    
    
    Hedge
    
    
    Translation
    
    
    Adjust-
    
    
    hensive(Amounts in millions)
    
    Stock
    
    
    Surplus
    
    
    sation
    
    
    Stock
    
    
    Earnings
    
    
    Contracts
    
    
    Effects
    
    
    ment
    
    
    IncomeBalance at December 31, 2001
    
    $
    2.5
    
    
    $
    705.4
    
    
    $
    (5.2
    )
    
    $
    (505.3
    )
    
    $
    57.0
    
    
    $
    (1.0
    )
    
    $
    (331.8
    )
    
    $
    (11.7
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    371.0Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22.6
    
    
    
    
    
    
    
    22.6Deferred loss on hedge contracts,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Minimum pension liability
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63.5
    )
    
    
    (63.5
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    329.1Treasury stock purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
including tax benefit
    
    
    
    
    
    
    (3.6
    )
    
    
    
    
    
    
    72.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
Employee Stock Ownership Plan
    
    
    
    
    
    
    17.9
    
    
    
    
    
    
    
    34.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
Employee Stock Purchase Plan
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    5.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned
compensationrestricted stock
    
    
    
    
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other common stock issued
or reacquired
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    2.5
    
    
    
    722.6
    
    
    
    (2.3
    )
    
    
    (534.6
    )
    
    
    428.0
    
    
    
    (2.0
    )
    
    
    (309.2
    )
    
    
    (75.2
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    405.2Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104.7
    
    
    
    (2.3
    )
    
    
    102.4Deferred gain on hedge contracts,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.1
    
    
    
    
    
    
    
    
    
    
    
    9.1Minimum pension liability
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.7
    )
    
    
    (15.7
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    501.0Treasury stock purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
including tax benefit
    
    
    
    
    
    
    7.1
    
    
    
    
    
    
    
    61.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
Employee Stock Ownership Plan
    
    
    
    
    
    
    21.1
    
    
    
    
    
    
    
    37.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
Employee Stock Purchase Plan
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    5.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned
compensationrestricted stock
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other common stock issued
or reacquired
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    2.5
    
    
    
    753.7
    
    
    
    (0.7
    )
    
    
    (584.3
    )
    
    
    833.2
    
    
    
    7.1
    
    
    
    (204.5
    )
    
    
    (93.2
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    313.4Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101.7
    
    
    
    (2.3
    )
    
    
    99.4Deferred gain on hedge contracts,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    2.2Minimum pension liability
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64.2
    )
    
    
    (64.2
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    350.8Treasury stock purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
including tax benefit
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    43.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
Employee Stock Ownership Plan
    
    
    
    
    
    
    28.7
    
    
    
    
    
    
    
    31.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to
Employee Stock Purchase Plan
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned
compensationrestricted stock
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation charge upon
acceleration of option vesting
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other common stock issued
or reacquired
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    (4.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    $
    2.5
    
    
    $
    794.5
    
    
    $
    
    
    
    $
    (760.1
    )
    
    $
    1,146.6
    
    
    $
    9.3
    
    
    $
    (102.8
    )
    
    $
    (159.7
    )
 See Notes to Financial Statements. 46




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##### Table of Contents



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. In these notes, 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 segments: air conditioning systems and services for commercial, institutional
and residential buildings; fixtures and fittings for bathrooms and kitchens; and vehicle control
systems for medium-sized and heavy trucks, buses and trailers. 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 2004 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. Some of the most significant
estimates included in the preparation of the financial statements are related to post-retirement
benefits, warranties, income taxes, insurance recoveries, asbestos
indemnity liabilities and commitments and contingencies. Foreign Currency Translation-In accordance with Statement of Financial Accounting Standards
No. 52, 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. Revenue RecognitionIn accordance with Securities and Exchange Commission, Staff Accounting
Bulletin No. 104 and Statement of Accounting Position No. 81-1 and related guidance, sales of
manufactured products are principally recorded when shipment occurs and title passes to a customer.
Revenues from air conditioning equipment and the related installation sold under construction-type
contracts are recorded on the percentage-of-completion method, and amounted to approximately 4% of
total company sales in 2004 and 5% in 2003 and 2002. Revenue under long-term service contracts for
the maintenance of air conditioning equipment is recorded over the term of the contract. Other
service revenues are recorded as the service is performed. Shipping and handling costs are
generally billed to customers and are included in sales. Shipping and Handling CostsShipping and handling costs incurred on sales of products are
included in cost of sales. Cash EquivalentsCash equivalents include all highly liquid investments with maturity of three
months or less when purchased. Allowance for Doubtful AccountsIn determining the allowance for doubtful accounts the Company
analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and
current economic 47




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##### Table of Contents



trends. 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. The Company assesses facilities for impairment when events or circumstances indicate that the
carrying amount of these assets my not be recoverable. Maintenance and repair expenditures are
expensed as incurred. 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 15
years for machinery and equipment. Computer SoftwareIn accordance with Statement of Position 98-1, the Company capitalizes the
costs of obtaining or developing internal-use computer software, including directly related payroll
costs. The Company amortizes those costs over periods up to seven years, beginning when the
software is ready for its intended use. Goodwill and Intangible AssetsIn accordance with Statement of Financial Accounting Standards
No. 142, goodwill and intangible assets deemed to have indefinite lives are not amortized but are
subject to annual impairment tests. The Company assesses long-lived assets for impairment when
events or circumstances indicate that the carrying amount of those assets may not be recoverable.
Other intangible assets are amortized over their useful lives. 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 life of the related debt. WarrantiesThe Company provides for estimated warranty costs at the time of sale of products
sold with a limited warranty. The Company also sells extended warranty contracts on certain
products, and the revenues therefrom are deferred and amortized on a straight-line basis over the
terms of the contracts or based upon historical experience. Costs to satisfy extended warranty
obligations are charged to cost of sales as incurred. See Note 14 for a summary of warranties. 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 in accordance with Statement of
Financial Accounting Standards No. 87 and No. 106 and related guidance. Research and Development ExpensesResearch and development costs are expensed as incurred. The
Company expended approximately $206 million in 2004, $192 million in 2003 and $185 million in 2002
for research activities and product development and for product engineering. Expenditures for
research and product development only were $140 million, $128 million and $129 million in the
respective years. Income TaxesIn accordance with Statement of Financial Accounting Standards No. 109, 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 $126
million, $128 million and $122 million of advertising costs in 2004, 2003 and 2002, 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 5,749,133 in 2004,
4,340,814 in 2003 and 3,874,773 in 2002, primarily from the assumed exercise of stock options
issued under the Companys stock option plans (see Note 12). 48




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##### Table of Contents



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 the Consolidated Statement of Shareholders Equity and
Comprehensive Income. 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 prices 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 has three stock-based compensation plans-the 2002 Omnibus
Incentive Plan, the Stock Incentive Plan and the Employee Stock Purchase Plan (ESPP), which, are
described in Note 12. Under the first two plans, the Company has granted options to employees and
directors to acquire a fixed number of shares of the Companys common stock at a specified price,
and also has made grants of restricted shares. Shareholders approved the 2002 Omnibus Incentive
Plan on May 2, 2002. Under the ESPP, employees are entitled to purchase shares of the Companys
common stock at a discount of 15% from the market price on the date of purchase. The Company
accounts for those plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25),and related Interpretations. Compensation
cost is not recorded for substantially all options granted because the option exercise price was
equal to the market value of the underlying common stock on the date of grant. Compensation cost
is not recorded for the 15% discount on shares purchased under the ESPP, which, is not considered
compensation under APB 25. Compensation cost is recorded for the value of restricted share awards,
amortized over the vesting period of the award. The following table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation,to stock-based employee compensation. Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0Deduct: Total stock-based compensation expense
determined under fair value based method for all
stock option awards, net of tax, and discounts
under the ESPP
    
    
    (17.4
    )
    
    
    (19.9
    )
    
    
    (22.4
    )Pro forma net income
    
    $
    296.0
    
    
    $
    385.3
    
    
    $
    348.6Earnings per share:Basic-as reported
    
    $
    1.46
    
    
    $
    1.87
    
    
    $
    1.71Basic-pro forma
    
    $
    1.38
    
    
    $
    1.78
    
    
    $
    1.61Diluted-as reported
    
    $
    1.42
    
    
    $
    1.83
    
    
    $
    1.68Diluted-pro forma
    
    $
    1.34
    
    
    $
    1.74
    
    
    $
    1.58
 The fair value of the stock options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 3.09%
in 2004, 3.08% in 2003 and 2.49% in 2002; volatility of 28% in 2004, 28% in 2003 and 29% in 2002;
an expected average life of 5 years in 2004, 2003 and 2002; and a dividend yield of zero. All of
the stock options issued in 2004 and prior years carry a dividend yield of zero. 49




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##### Table of Contents



NOTE 3. Effect of Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has recently issued several new Statements
and Interpretations. For the disclosures required by Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, see Note 12 of Notes to
Financial Statements. For the interim period disclosures required by Statement No. 132 (revised
2003) Employers Disclosures about Pensions and Other Postretirement Benefits,see Note 6 of Notes
to Financial Statements. Some of the disclosure requirements of the revised Statement No. 132
related to foreign plans and certain other matters are not effective until 2005. For a discussion
of the impact of FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which addresses the
accounting and disclosure required as a result of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 enacted on December 8, 2003, see Note 6 of Notes to Financial Statements.
Statement No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4, was issued in 2004.
This statement will be effective for the Company in 2006. The Company is currently in the process
of determining the impact. Other Statements and Interpretations recently issued by the FASB that
are applicable to the Company have had no impact to the Company upon adoption. Those statements
included No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities;and
No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity;Interpretation No. 46, Consolidation of Variable Interest Entities,parts of which became
effective for the Company in the first quarter of 2004. Statement of Financial Accounting Standards
No. 123(revised 2004) (FAS 123), Share Based Payments, was issued on December 16, 2004. The new
standard requires companies to recognize in their financial statements the cost of employee
services received in exchange for valuable equity instruments issued. The Company plans to adopt
FAS 123 in the third quarter of 2005 with retroactive adjustment for all prior periods presented
using the pro-forma amounts disclosed in Note 2 Accounting Policies
 Stock-based Compensation. The
Company estimates that the impact of this compensation expense will amount to approximately $.08 -
$.09 per diluted share in 2005. NOTE 4. Operational Consolidation Charges During 2004 the Company incurred charges related to operational consolidation activities in
each of its businesses as more fully described below. The total cost of these actions was $46.4
million ($32.0 million net of taxes, or $.15 per diluted share) and are included in cost of sales.
These actions included the elimination of 1,695 jobs. Air Conditioning incurred $7.7 million of operational consolidation expenses related to the
elimination of jobs globally and the transfer of production to a lower cost facility in North
America. Bath and Kitchen incurred $33.0 million of operational consolidation expenses, comprised of
the following: $6.0 million, consisting of a non-cash asset impairment charges of $2.5 million and
costs related to job eliminations and shutdown costs of $3.5 million related to the closure of a
manufacturing facility in the Philippines owned by Sanitarywares Manufacturing Corp., a public
Philippine company in which American Standard Inc. has a majority ownership interest; $17.5 million
of operational consolidation costs in Europe relating to the closure and sale of a facility in the
second quarter, the transfer of production to lower cost facilities and the centralization of
administrative work; and $9.5 million of operational consolidation expenses in the Americas,
related to the transfer of production to lower cost facilities and the consolidation and
restructuring of administrative functions. As part of an effort to remain cost-competitive and optimize its manufacturing capabilities,
the Vehicle Controls business decided on December 10, 2004, to transfer production of certain
products from its manufacturing facility in Leeds, UK to a facility in Poland. This action resulted
in a charge of approximately $3.4 million, including costs for job elimination expenses,
post-employment benefits for employees and non-cash asset impairment charges. The Company expects
to incur additional employee related costs of approximately $9.0 million in 2005 related to this
action. The company expects the transfer of production to be completed by the end of 2005. The
Company incurred an additional $2.0 million of expenses related to other job eliminations in Europe
for Vehicle Control Systems. 50




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##### Table of Contents



Following is a summary of the 2004 operational consolidation programs and asset impairment
charges (dollars in millions): 2004 Initial
    
    
    Cash
    
    
    Non-Cash
    
    
    BalanceCharge
    
    
    Payments
    
    
    Write-Off
    
    
    Dec. 31, 2004Termination
payments and other
employee costs
    
    $
    35.2
    
    
    $
    (18.8
    )
    
    $
    
    
    
    $
    16.4Asset impairments
    
    
    5.7
    
    
    
    
    
    
    
    (5.7
    )
    
    
    Other
    
    
    5.5
    
    
    
    (2.7
    )
    
    
    
    
    
    
    2.8$
    46.4
    
    
    $
    (21.5
    )
    
    $
    (5.7
    )
    
    $
    19.2
 The Company expects that essentially all of the $19.2 million balance as of December 31, 2004
will be utilized by the end of 2005. The accrued termination payments and other employee costs are
for severance and other related payments expected to be made after termination. The facilities
being closed will be sold and manufacturing equipment will be transferred to other facilities or
scrapped. In the fourth quarter of 2003 the Company incurred charges related to job eliminations in each
of its businesses as more fully described below. The total cost of these actions was $38.9 million
($27.3 million net of taxes, or $.12 per diluted share) and was included in cost of sales. These
actions included the elimination of 870 jobs. Air Conditioning incurred $8.4 million of job elimination charges related to consolidation and
restructuring of administrative functions globally. Bath and Kitchen incurred $20.8 million of job elimination charges comprised of the following:
$8.1 million in the Americas region related to the transfer of production to lower cost facilities
and the restructuring of administrative functions, including the closure of a small manufacturing
facility in the U.S.; and $12.7 million in Europe related to the transfer of production to lower
cost facilities and the consolidation of administrative functions. Vehicle Control Systems incurred $9.7 million of job elimination charges primarily related to
the consolidation and restructuring of administrative functions. Following is a summary of the 2003 job elimination programs and asset impairment charges
(dollars in millions): 2003
    
    
    
    
    
    
    
    
    
    
    Non-Cash
    
    
    Reversal ofInitial
    
    
    

    Cash Payments
    
    Write-Off
    
    
    Charges
    
    
    Balance atCharge
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    Dec. 31, 2004Termination
payments and other
employee costs
    
    $
    37.1
    
    
    $
    (5.1
    )
    
    $
    (26.3
    )
    
    $
    
    
    
    $
    (1.4
    )
    
    $
    4.3Asset impairments
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    Other
    
    
    1.3
    
    
    
    (0.2
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    $
    38.9
    
    
    $
    (5.3
    )
    
    $
    (27.4
    )
    
    $
    (0.5
    )
    
    $
    (1.4
    )
    
    $
    4.3
 The Company expects that essentially all of the $4.3 million balance as of December 31, 2004
will be utilized by the end of 2005. The remaining accrued termination payments and other employee
costs are for severance and other related payments expected to be made after termination. 51




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##### Table of Contents



Subsequent Event As part of continuing efforts to rationalize its manufacturing capabilities and respond to
changing market conditions, the Company announced on February 15, 2005, its decision to seek a
buyer for its Rockingham, NC manufacturing facility and to close the facility by the end of the
third quarter of 2005, if no suitable buyer is found. The Rockingham
plant has approximately 125 employees. The Company estimates the amount of the charge associated with this decision to be no
more than approximately $13 million before tax. The charge is principally comprised of asset
impairments, and likely will be reflected over more than one quarter, with all costs to be incurred
by the third quarter of 2005. NOTE 5. Other Expense Other expense (income) was as follows: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Equity in net income of unconsolidated
joint ventures
    
    $
    (28.2
    )
    
    $
    (25.9
    )
    
    $
    (26.6
    )Minority interest expense
    
    
    18.4
    
    
    
    15.6
    
    
    
    10.7Receivable Discount Fees
    
    
    41.8
    
    
    
    42.5
    
    
    
    47.2Accretion expense on retirement plans
    
    
    33.1
    
    
    
    34.4
    
    
    
    30.3Foreign exchange (gain) loss
    
    
    4.1
    
    
    
    (9.6
    )
    
    
    (6.8
    )Interest income
    
    
    (9.1
    )
    
    
    (2.3
    )
    
    
    (1.7
    )Gain on sale of assets
    
    
    (3.7
    )
    
    
    (7.9
    )
    
    
    (3.3
    )Other, net
    
    
    (6.4
    )
    
    
    6.3
    
    
    
    4.2$
    50.0
    
    
    $
    53.1
    
    
    $
    54.0
 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 $2.3 million increase in equity
in net income of unconsolidated joint ventures for 2004 compared with 2003 primarily relates to
improved earnings at the Companys Air Conditioning compressor joint venture. The small decrease in
equity in net income of unconsolidated joint ventures for 2003 compared with 2002 primarily
reflects our decision to terminate our receivables discounting joint venture with TransAmerica in
the third quarter of 2002; a decision which has resulted in lower interest costs. That decrease
was partly offset by higher net income for both our Vehicle Control Systems joint venture in India
(Sundaram Clayton Ltd.) and our Air Conditioning compressor joint venture in the U.S. from higher
volume and improved productivity. The minority interest expense increase in 2004 as compared with
2003, and 2003 as compared with 2002 reflects higher net income earned by our majority-owned joint
ventures. The foreign exchange(gains) losses  in 2004, 2003 and 2002 relate to short-term third
party and intercompany debt. The increase in interest income in 2004 as compared with 2003
primarily relates to higher average levels of cash and cash equivalents. See Managements
Discussion and Analysis of Financial Condition and Results of Operations-Other Income Statement
Data, for additional information on year-over-year changes in items of other expense (income). NOTE 6. Post-retirement Benefits The Company sponsors post-retirement benefit plans covering substantially all employees,
including an Employee Stock Ownership Plan (the ESOP) and a 401(k) savings plan (the Savings
Plan) for the Companys U.S. salaried employees and certain U.S. hourly employees, a defined
benefit plan for most U.S. employees covered by collective bargaining arrangements, and a pension
plan established in 2003 as described below for certain U.S. salaried and non-union employees. The
ESOP and Savings Plan are individual-account defined contribution plans. Shares of the Companys
common stock held by the ESOP and Savings Plan are allocated to the accounts of eligible employees
through basic allocations of 3% of covered compensation in the ESOP, and a matching Company 52




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##### Table of Contents



contribution to the Savings Plan of up to 6% of covered compensation. The Company will fund the
ESOP and Savings Plan through contributions of either cash or shares of the Companys common stock.
Effective September 1, 2003 the Company established a pension plan for salaried and non-union U.S.
employees (the Cash Balance Plan). Eligible employees may elect to participate in the pension
plan and receive a credit equal to 3% of eligible pay. For these employees the Company match in
the Savings Plan is 50% of the employee contribution (up to a Company match of 3%). For employees
who do not elect to participate in the pension plan, the Company match in the Savings Plan is 100%
of the employee contribution (up to a Company match of 6%). Benefits under defined benefit pension plans on a worldwide basis are generally based on years
of service and either employees compensation during the last years of employment or negotiated
benefit levels. Participants under the Cash Balance Plan receive three percent of their salary per
year. This benefit earns an interest credit approximating Five-year U.S. Treasury Securities and
vests over a three-year period. In the U.S. the Company also provides various post-retirement
health and life insurance benefits for certain of its employees. Certain of the pension plans are
funded, depending on tax and statutory considerations in the country. Post-retirement health and
life insurance benefits are funded as incurred. The following table provides a reconciliation of the changes in pension and post-retirement
health and life insurance benefit obligations and fair value of assets for the years ending
December 31, 2004 and 2003, and a statement of the funded status as of December 31, 2004 and 2003: (Dollars in millions)
    
    2004
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2003Domestic
    
    
    
    
    
    
    
    
    
    
    DomesticDomestic
    
    
    Health &
    
    
    Foreign
    
    
    Domestic
    
    
    Health &
    
    
    ForeignPension
    
    
    Life Ins.
    
    
    Pension
    
    
    Pension
    
    
    Life Ins.
    
    
    PensionBenefits
    
    
    Benefits
    
    
    Benefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsReconciliation of benefit obligation:Obligation at beginning of year
    
    $
    640.2
    
    
    $
    307.6
    
    
    $
    827.8
    
    
    $
    549.0
    
    
    $
    275.7
    
    
    $
    649.6Service cost
    
    
    18.6
    
    
    
    7.8
    
    
    
    35.6
    
    
    
    15.9
    
    
    
    7.9
    
    
    
    25.6Interest cost
    
    
    36.8
    
    
    
    17.4
    
    
    
    47.6
    
    
    
    37.1
    
    
    
    17.4
    
    
    
    34.5Participant contributions
    
    
    
    
    
    
    2.4
    
    
    
    1.7
    
    
    
    
    
    
    
    2.6
    
    
    
    3.5Plan amendements
    
    
    3.6
    
    
    
    (6.0
    )
    
    
    
    
    
    
    9.4
    
    
    
    1.2
    
    
    
    0.2Actuarial loss
    
    
    13.9
    
    
    
    8.6
    
    
    
    85.5
    
    
    
    60.2
    
    
    
    24.4
    
    
    
    45.1Curtailment
    
    
    (0.8
    )
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    (0.5
    )
    
    
    Special termination benefits
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    Benefit payments
    
    
    (37.9
    )
    
    
    (26.0
    )
    
    
    (50.5
    )
    
    
    (32.5
    )
    
    
    (21.1
    )
    
    
    (43.2
    )Medicare Part D subsidy
    
    
    
    
    
    
    (2.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange effects
    
    
    
    
    
    
    
    
    
    
    69.5
    
    
    
    
    
    
    
    
    
    
    
    112.5Other
    
    
    1.5
    
    
    
    
    
    
    
    (2.5
    )
    
    
    
    
    
    
    
    
    
    
    Obligation at end of year
    
    $
    676.4
    
    
    $
    308.7
    
    
    $
    1,014.7
    
    
    $
    640.2
    
    
    $
    307.6
    
    
    $
    827.8Reconciliation of fair value of plan assets:Fair value of plan assets at beginning of year
    
    
    472.1
    
    
    
    
    
    
    
    405.8
    
    
    
    378.0
    
    
    
    
    
    
    
    310.6Actual return on assets
    
    
    58.9
    
    
    
    
    
    
    
    40.6
    
    
    
    76.6
    
    
    
    
    
    
    
    47.8Divestitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Employer contributions
    
    
    56.9
    
    
    
    23.6
    
    
    
    50.3
    
    
    
    50.0
    
    
    
    18.5
    
    
    
    41.6Participant contributions
    
    
    
    
    
    
    2.4
    
    
    
    1.7
    
    
    
    
    
    
    
    2.6
    
    
    
    3.5Benefit payments
    
    
    (37.9
    )
    
    
    (26.0
    )
    
    
    (50.5
    )
    
    
    (32.5
    )
    
    
    (21.1
    )
    
    
    (43.2
    )Foreign exchange effects
    
    
    
    
    
    
    
    
    
    
    36.2
    
    
    
    
    
    
    
    
    
    
    
    48.1Other expenses
    
    
    
    
    
    
    
    
    
    
    (2.6
    )
    
    
    
    
    
    
    
    
    
    
    (3.2
    )Fair value of plan assets at end of year
    
    $
    550.0
    
    
    $
    
    
    
    $
    481.5
    
    
    $
    472.1
    
    
    $
    
    
    
    $
    405.8Funded Status at December 31:Funded status
    
    
    (126.4
    )
    
    
    (308.7
    )
    
    
    (533.2
    )
    
    
    (168.1
    )
    
    
    (307.6
    )
    
    
    (422.0
    )Initial Unfunded
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrecognized prior service cost (benefit)
    
    
    54.9
    
    
    
    (39.5
    )
    
    
    3.6
    
    
    
    59.4
    
    
    
    (38.4
    )
    
    
    5.1Unrecognized net actuarial loss
    
    
    102.2
    
    
    
    138.4
    
    
    
    208.1
    
    
    
    111.9
    
    
    
    139.3
    
    
    
    124.2Net amount recognized
    
    $
    31.3
    
    
    $
    (209.8
    )
    
    $
    (321.5
    )
    
    $
    3.2
    
    
    $
    (206.7
    )
    
    $
    (292.7
    )Amounts Recognized on Balance SheetPrepaid Benefit Cost
    
    
    
    
    
    
    
    
    
    
    20.1
    
    
    
    
    
    
    
    
    
    
    
    66.6Accrued Benefit Liability
    
    
    (120.8
    )
    
    
    (209.8
    )
    
    
    (475.9
    )
    
    
    (159.3
    )
    
    
    (206.7
    )
    
    
    (394.8
    )Intangible Asset
    
    
    54.8
    
    
    
    
    
    
    
    3.3
    
    
    
    62.5
    
    
    
    
    
    
    
    1.9Accumulated Other Comprehensive Income
    
    
    97.3
    
    
    
    
    
    
    
    131.0
    
    
    
    100.0
    
    
    
    
    
    
    
    33.6Net amount recognized
    
    $
    31.3
    
    
    $
    (209.8
    )
    
    $
    (321.5
    )
    
    $
    3.2
    
    
    $
    (206.7
    )
    
    $
    (292.7
    )
 Accrued benefit liabilities recorded on the balance sheet included current liabilities of
$55.5 million and $50.3 million respectively at year end 2004 and 2003. 53




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##### Table of Contents



The following table provides a summary of pension plans with accumulated benefit obligations
in excess of assets as of December 31: 2004
    
    
    2004
    
    
    2003
    
    
    2003(Dollars in millions)
    
    Domestic Plans
    
    
    Foreign Plans
    
    
    Domestic Plans
    
    
    Foreign PlansFor all plans:Accumulated benefit obligation
    
    $
    669.7
    
    
    $
    912.6
    
    
    $
    624.0
    
    
    $
    750.0For pension plans with Accumulated Benefit
Obligations in excess of plan assets:Projected benefit obligation
    
    
    676.4
    
    
    
    947.8
    
    
    
    640.2
    
    
    
    491.8Accumulated benefit obligation
    
    
    669.7
    
    
    
    848.3
    
    
    
    624.0
    
    
    
    460.7Fair value of plan assets
    
    
    550.0
    
    
    
    394.7
    
    
    
    472.1
    
    
    
    95.8Unfunded ABO
    
    $
    119.7
    
    
    $
    453.6
    
    
    $
    151.9
    
    
    $
    364.9Additional Minimum Liability
    
    $
    152.1
    
    
    $
    134.3
    
    
    $
    162.5
    
    
    $
    35.5Increase/(Decrease) in Minimum Liability
included in Other Comprehensive Income
    
    
    (2.6
    )
    
    
    94.6
    
    
    
    9.3
    
    
    
    2.1Deferred tax effects included in above
    
    
    1.0
    
    
    
    (28.8
    )
    
    
    (3.6
    )
    
    
    7.9Net change included in Other
Comprehensive Income
    
    $
    (1.6
    )
    
    $
    65.8
    
    
    $
    5.7
    
    
    $
    10.0
 Total post-retirement costs are shown below: Year ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Domestic Pensions
    
    $
    27.7
    
    
    $
    37.8
    
    
    $
    20.4Foreign Pensions
    
    
    59.0
    
    
    
    38.2
    
    
    
    35.2Health and life insurance benefits
    
    
    26.8
    
    
    
    26.1
    
    
    
    28.3Subtotal
    
    
    113.5
    
    
    
    102.1
    
    
    
    83.9Defined contribution plan cost, principally ESOP
    
    
    60.1
    
    
    
    58.8
    
    
    
    52.6Total post-retirement costs, including
accretion expense
    
    $
    173.6
    
    
    $
    160.9
    
    
    $
    136.5
 Components of post-retirement costs are broken out in the tables below: Pension Benefit Costs
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002Domestic
    
    
    Foreign
    
    
    Domestic
    
    
    Foreign
    
    
    Domestic
    
    
    Foreign(Dollars in millions)
    
    Pensions
    
    
    Pensions
    
    Pensions
    
    
    Pensions
    
    
    Pensions
    
    
    PensionsService cost-benefits earned during period
    
    $
    18.6
    
    
    $
    35.6
    
    
    $
    15.9
    
    
    $
    25.6
    
    
    $
    13.3
    
    
    $
    23.2Interest cost on projected benefit obligation
    
    
    36.8
    
    
    
    47.6
    
    
    
    37.1
    
    
    
    34.5
    
    
    
    35.4
    
    
    
    31.9Less assumed return on plan assets
    
    
    (40.0
    )
    
    
    (33.7
    )
    
    
    (31.0
    )
    
    
    (24.0
    )
    
    
    (32.9
    )
    
    
    (22.0
    )Amortization of prior service cost
    
    
    5.5
    
    
    
    0.7
    
    
    
    5.8
    
    
    
    0.5
    
    
    
    5.1
    
    
    
    0.5Amortization of net (gain) loss
    
    
    2.8
    
    
    
    6.7
    
    
    
    4.4
    
    
    
    1.4
    
    
    
    (0.5
    )
    
    
    (0.3
    )Defined benefit plan cost
    
    
    23.7
    
    
    
    56.9
    
    
    
    32.2
    
    
    
    38.0
    
    
    
    20.4
    
    
    
    33.3Curtailment loss
    
    
    4.0
    
    
    
    2.1
    
    
    
    5.6
    
    
    
    0.2
    
    
    
    
    
    
    
    1.9Net defined benefit plan cost after curtailments
    
    $
    27.7
    
    
    $
    59.0
    
    
    $
    37.8
    
    
    $
    38.2
    
    
    $
    20.4
    
    
    $
    35.2
 54




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##### Table of Contents



Other Post Retirement Benefit Costs
    
    2004
    
    
    2003
    
    
    2002Domestic
    
    
    Domestic
    
    
    DomesticHealth &
    
    
    Health &
    
    
    Health &Life Ins.
    
    
    Life Ins.
    
    
    Life Ins.(Dollars in millions)
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost-benefits earned during period
    
    $
    7.8
    
    
    $
    7.9
    
    
    $
    7.6Interest cost on projected benefit obligation
    
    
    17.4
    
    
    
    17.4
    
    
    
    18.5Amortization of prior service cost
    
    
    (4.3
    )
    
    
    (4.2
    )
    
    
    (1.5
    )Amortization of net loss
    
    
    6.4
    
    
    
    5.1
    
    
    
    3.7Defined benefit plan cost
    
    
    27.3
    
    
    
    26.2
    
    
    
    28.3Curtailment gain
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    Net defined benefit plan cost after curtailments
    
    $
    26.8
    
    
    $
    26.1
    
    
    $
    28.3
 Amortization of prior service cost is computed on the straight-line method over the
average remaining service period of active participants. Major assumptions used in determining the benefit obligation and net cost for post-retirement
plans are presented below as weighted averages: Benefit Obligation at December 31,
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003Domestic Plans
    
    
    Foreign Plans
    
    
    Domestic Plans
    
    
    Foreign PlansDiscount Rate
    
    
    5.75
    %
    
    
    5.0
    %
    
    
    6.0
    %
    
    
    5.5
    %Salary Growth
    
    
    4.1
    %
    
    
    3.5
    %
    
    
    4.5
    %
    
    
    3.1
    %Net Periodic Pension Cost for the yearDiscount Rate
    
    
    6.0
    %
    
    
    5.5
    %
    
    
    6.75
    %
    
    
    5.4
    %Salary Growth
    
    
    4.5
    %
    
    
    3.1
    %
    
    
    4.5
    %
    
    
    3.15
    %Expected Return on Plan Assets
    
    
    8.5
    %
    
    
    7.15
    %
    
    
    8.5
    %
    
    
    5.8
    %
 The assumed rate of return is a long-term investment return that takes into account the
types of assets held by the plan and expected returns for the asset class. Return expectations
reflect forward-looking analysis as well as historical experience. Our asset management strategy
focuses on maintaining a diversified portfolio using various asset classes to generate attractive
returns while managing risk. In determining the target asset allocation for a given plan,
consideration is given to the nature of its liabilities, and portfolios are periodically rebalanced
with reference to the target level. Asset Allocation
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    Target
    
    
    TargetDomestic
    
    
    Foreign
    
    
    Domestic
    
    
    Foreign
    
    
    Domestic
    
    ForeignPlans
    
    
    Plans
    
    
    Plans
    
    
    Plans
    
    
    Plans
    
    PlansEquity Securities
    
    
    68
    %
    
    
    64
    %
    
    
    67
    %
    
    
    74
    %
    
    
    64
    %
    
    
    64

    %Debt Securities
    
    
    31
    %
    
    
    32
    %
    
    
    33
    %
    
    
    21
    %
    
    
    31
    %
    
    
    34
    %Other, including Real Estate
    
    
    1
    %
    
    
    4
    %
    
    
    
    
    
    
    5
    %
    
    
    5
    %
    
    
    2
    %
 The Company makes contributions to pension plans that at a minimum meet all statutory funding
requirements. Contributions in 2004, including payment of benefits incurred by unfunded plans,
totaled $56.9 million to domestic plans and $50.3 million to foreign plans. Similar levels of
contribution are expected for 2005. Expected future benefit payments are shown in the table below: (Dollars in millions)
    
    2005
    

    2006
    

    2007
    
    
    2008
    
    
    2009
    
    
    2010-2014Domestic plans without subsidy
    
    $
    60
    
    
    $
    60
    
    
    $
    73
    
    
    $
    66
    
    
    $
    71
    
    
    $
    399Medicare D subsidy reimbursements
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    3Foreign Plans
    
    
    53
    
    
    
    53
    
    
    
    55
    
    
    
    57
    
    
    
    61
    
    
    
    353
 55




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##### Table of Contents



The weighted-average annual assumed rate of increase in the health care cost trend rate
is 10.0% for 2005 and is assumed to decrease to 9.5% in 2006 and gradually decline to 4.75% by
2017. 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% DecreaseEffect on the health care component of accumulated post-retirement
obligation
    
    $
    12.6
    
    
    $
    (11.3
    )Effect on total of service and interest cost components of net periodic
post-retirement health care benefit costs
    
    
    0.7
    
    
    
    (0.7
    )
 In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. SFAS 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003,
which, addresses the accounting and
disclosure requirements required as a result of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) enacted on December 8, 2003. The Act introduces a
prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health

care benefit plans that provide a benefit that is at least equivalent to Medicare. Provisions of
the Act will provide eligible plan sponsors with a subsidy that the Company expects to use to
decrease the benefit obligation and net post-retirement benefit cost. Under the FSP, which was
effective for the Company in the third quarter of 2004, the decrease in the benefit obligation upon
initial adoption was accounted for as an actuarial gain of $0.1 million. NOTE 7. Income Taxes The Companys income before income taxes and the applicable provision (benefit) for income
taxes were: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Income before income taxes:Domestic
    
    $
    59.4
    
    
    $
    253.4
    
    
    $
    279.5Foreign
    
    
    303.5
    
    
    
    295.8
    
    
    
    276.7$
    362.9
    
    
    $
    549.2
    
    
    $
    556.2Provision for income taxes:Current:Domestic
    
    $
    91.5
    
    
    $
    55.3
    
    
    $
    64.3Foreign
    
    
    87.0
    
    
    
    55.7
    
    
    
    17.8178.5
    
    
    
    111.0
    
    
    
    82.1Deferred:Domestic
    
    
    (130.6
    )
    
    
    12.1
    
    
    
    56.6Foreign
    
    
    1.6
    
    

    
    20.9
    
    
    
    46.5(129.0
    )
    
    
    33.0
    
    
    
    103.1Total provision
    
    $
    49.5
    
    
    $
    144.0
    
    
    $
    185.2
 56




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##### Table of Contents



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 2004, 2003 and 2002 to the
income before income taxes is as follows: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Tax provision at statutory rate
    
    $
    127.0
    
    
    $
    192.2
    
    
    $
    194.7Foreign earnings taxed at other than 35%
    
    
    (84.6
    )
    
    
    (15.3
    )
    
    
    (16.1
    )Increase (Decrease) in valuation allowance
    
    
    49.4
    
    
    
    (13.1
    )
    
    
    (2.5
    )Withholding taxes on undistributed earnings
    
    
    (18.0
    )
    
    
    
    
    
    
    Benefit of tax audit settlements
    
    
    (18.5
    )
    
    
    (26.7
    )
    
    
    State tax provision
    
    
    0.8
    
    
    
    6.7
    
    
    
    7.7Other, net
    
    
    (6.6
    )
    
    
    0.2
    
    
    
    1.4Total provision
    
    $
    49.5
    
    
    $
    144.0
    
    
    $
    185.2
 The increase in the valuation allowance in 2004 was primarily attributable to a net
increase in foreign net operating loss carryforwards, which, are not expected to be utilized,
partially offset by the utilization of foreign tax credits. The decrease in the valuation
allowance in 2003 was primarily attributable to the utilization of foreign tax credits, partially
offset by a net increase in foreign net operating loss carryforwards. The decrease in the valuation
allowance in 2002 was primarily attributable to the utilization of foreign net operating losses and
foreign tax credits. The following table details the gross deferred tax liabilities and assets and the related
valuation allowances: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003Deferred tax liabilities:Facilities (accelerated depreciation, capitalized
interest and purchase accounting differences)
    
    $
    229.7
    
    
    $
    235.9Inventory (LIFO and purchase accounting
differences)
    
    
    23.9
    
    
    
    18.7Employee benefits
    
    
    44.4
    
    
    
    26.9Other
    
    
    136.8
    
    
    
    140.9434.8
    
    
    
    422.4Deferred tax assets:Post-retirement and other employee benefits
    
    
    189.0
    
    
    
    132.4Warranties
    
    
    86.5
    
    
    
    78.8Foreign net operating losses and tax credits
    
    
    180.1
    
    
    
    125.4Reserves
    
    
    89.6
    
    
    
    54.4Asbestos
    
    
    119.0
    
    
    
    Inventory
    
    
    6.4
    
    
    
    2.2Facilities
    
    
    9.7
    
    
    
    33.0Other
    
    
    27.7
    
    
    
    64.1Valuation allowances
    
    
    (174.8
    )
    
    
    (125.4
    )533.2
    
    
    
    364.9Net deferred tax (liabilities) assets
    
    $
    98.4
    
    
    $
    (57.5
    )
 Deferred tax assets related to foreign tax credits (2003) and foreign net operating loss
carry-forwards (2004 and 2003) 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. The foreign tax credits were fully utilized during
2004. The foreign net operating losses are available for utilization in future years. $151
million of the net operating losses has an unlimited life. The carryforward period for the
remaining NOLs varies in number of years by jurisdiction between five and fifteen years. 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. The
Company considers the earnings of all its foreign subsidiaries to be permanently reinvested and as
such no additional U.S. tax cost has been provided on approximately $448 million of 57




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##### Table of Contents



earnings at December 31, 2004. Estimating the tax liability that would arise if these earnings
were remitted is not practicable. The American Jobs Creation Act of 2004 (the Jobs Act), enacted on October 22, 2004, provides
for a temporary 85% dividends received deduction on certain foreign earnings repatriated during
2005. The deduction generally would result in an approximately 5.25% federal tax rate on the
repatriated earnings if certain conditions are satisfied. We have not completed the process of
reevaluating our position with respect to the indefinite reinvestment of foreign earnings to take
into account the possible election of the repatriation provisions contained in the American Jobs
Creation Act of 2004. We expect to complete this analysis by December 2005. During 2004, the effective tax rate was reduced to 13.6% principally as a result of the net
reduction in the provision relating to a foreign tax audit settlement, the reversal of foreign
withholding taxes on undistributed earnings, adjustments to the income tax liabilities of various
foreign subsidiaries, the asbestos indemnity charge and adjustments related to the filing of the
2003 tax returns. The Company recognized a reduction in the tax provision of $26.7 million in the fourth quarter
of 2003 that reduced the effective income tax rate for 2003 to 26.2%. This was principally the
result of resolution on tax audits for the years 1995 through 1998, and the approval of research
and development tax credit claims. In 2002, the Company concluded negotiations with The State Finance Administration for North
Rhine-Westphalia, Germany concerning certain tax issues covering the years 1984 through 1994. On
January 15, 2002, the Company settled all issues for those years by making a cash payment of
approximately $55 million plus $30 million previously deposited in escrow. Since the Company
previously had made provision for those issues, the settlement had no impact on results of
operations. NOTE 8. Accounts Receivable Securitization Agreements To reduce its borrowing cost, in May and September 2002 the Company established accounts
receivable financing facilities in Europe and the U.S. with major international banks. As part
of these facilities, the Company formed wholly-owned, special-purpose entities (in Europe, the
ESPE; in the U.S., the USSPE; collectively, the SPEs) for the sole purpose of buying and
selling receivables generated by the Company. Under these facilities the Company irrevocably and
without recourse, transfers all eligible accounts receivable to the SPEs, which in turn, sell
them, or undivided ownership interests in them, to conduits administered by the banks. The
assets of the SPEs are not available to pay the claims of the Company or any of its subsidiaries.
The Company retains a subordinated interest in the receivables sold of approximately 11% for
ESPE and 46% for USSPE. The conduits obtain the funds to purchase the interests in the
receivables, other than the retained interest, by selling commercial paper to third-party
investors. Advances from the conduits to the SPEs are limited to approximately $550 million
(275 million, or approximately $375 million at December 31, 2004 exchange rates under the
European facility, and $175 million under the U.S. facility). The Company retains
responsibilities for the collection and administration of receivables subject to these
facilities. These facilities have a life of three years, are subject to annual renewals and, for
the European facility, the maintenance of specified debt-rating levels, and for the U.S.
facility, the maintenance of certain financial covenants. The Company is currently in compliance
with these covenants. The accounts receivable financing facility in Europe expires in May 2005
and the U.S. facility expires in September of 2005. The Company has the ability to renew these
facilities and intends to renew them upon their expiration. The receivables sold are removed from the balance sheet since they meet the applicable
criteria of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The Companys retained
interest is recorded at fair value in other current assets in the Companys Consolidated Balance
Sheet. To the extent that the cash received and value of the retained interest is less than the
net book value of the receivables sold, losses are recognized at the time of the sale. Those
losses amounted to $40.2 million, $41.7 million and $21.5 million for the years ended December
31, 2004, 2003 and 2002, respectively. The receivables represented by the retained interest are
exposed to the risk of loss for any uncollectible amounts in the pool of receivables sold under
this arrangement. 58




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On August 31, 2002, the Company terminated its activities in American Standard Financial
Services, a financial services partnership with Transamerica Commercial Finance Corporation that
had previously provided receivables financing in the U.S., and bought back $256 million of trade
receivables. The majority of these receivables were sold to the USSPE. Following is a summary of receivables subject to the financing facilities: December 31, 2004
    
    
    December 31, 2003(Dollars in millions)
    
    ESPE
    
    
    USSPE
    
    
    Total
    
    
    ESPE
    
    
    USSPE
    
    
    TotalOutstanding balances of receivables
sold to SPEs
    
    $
    453.8
    
    
    $
    265.7
    
    
    $
    719.5
    
    
    $
    406.0
    
    
    $
    225.3
    
    
    $
    631.3Net retained interest
    
    $
    51.9
    
    
    $
    122.6
    
    
    $
    174.5
    
    
    $
    65.6
    
    
    $
    97.7
    
    
    $
    163.3Advances from conduits
    
    $
    368.8
    
    
    $
    135.1
    
    
    $
    503.9
    
    
    $
    313.7
    
    
    $
    126.5
    
    
    $
    440.2
 The advances from conduits include amounts due to the conduits under the European and
U.S. accounts receivable facilities for collections of receivables under the servicing agreement.
The increase in advances from conduits was comprised of a $26 million foreign exchange translation
effect and $38 million growth in the amount of receivables financed. Following is a summary of cash flows received or paid on the initial receivables transactions
when the ESPE and USSPE arrangements were established in 2002: (Dollars in millions)
    
    ESPE
    
    
    USSPE
    
    
    TotalCash flows from initial sale of receivables
    
    $
    224.6
    
    
    $
    154.9
    
    
    $
    379.5Less the effect of termination of
previous arrangements
    
    
    (42.5
    )
    
    
    (255.6
    )
    
    
    (298.1
    )Proceeds from initial sale of receivables, net
    
    $
    182.1
    
    
    $
    (100.7
    )
    
    $
    81.4
 As of December 31, 2004 and 2003, the interest rates on amounts outstanding under the
European facility were 2.70% and 2.51%, and under the U.S. facility were 2.24% and 1.07%,
respectively. NOTE 9. Inventories The components of inventories, which are carried principally on a last-in, first-out (LIFO)
basis, are as follows: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003Finished products
    
    $
    658.0
    
    
    $
    570.9Products in process
    
    
    233.2
    
    
    
    181.4Raw materials
    
    
    196.0
    
    
    
    157.6Inventories at cost
    
    $
    1,087.2
    
    
    $
    909.9
 The replacement cost of inventories approximated the LIFO carrying cost in both years. 59




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NOTE 10. Facilities The components of facilities, at cost, are as follows: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003Land
    
    $
    86.2
    
    
    $
    81.3Buildings
    
    
    709.5
    
    
    
    640.0Machinery and equipment
    
    
    1,806.0
    
    
    
    1,656.8Improvements in progress
    
    
    138.6
    
    
    
    100.8Gross facilities
    
    
    2,740.3
    
    
    
    2,478.9Less: accumulated depreciation
    
    
    1,123.7
    
    
    
    963.5Net facilities
    
    $
    1,616.6
    
    
    $
    1,515.4
 NOTE 11. Debt The Company has one primary bank credit agreement. That agreement provides the Company and
certain subsidiaries (the Borrowers) with a senior, unsecured, five-year $1 billion
multi-currency revolving credit facility that expires in November 2006. The Company also has a
Euro-denominated, 364-day bank credit agreement of approximately $55 million (at December 31, 2004
exchange rates) that expires on October 31, 2005, and that was not utilized as of December 31,
2004. Debt outstanding of $50 million under that agreement was classified as long-term debt in the
balance sheet as of December 31, 2003, because the Company had the ability and the intent to renew
it or to refinance it with borrowings under the five-year facility. In addition, the Company has
other lines of credit for $325 million. Debt securities (Senior Notes) sold under the 1998 Shelf Registration are issued by American
Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. and ASII. Short-termShort-term borrowings are available under credit facilities and overdraft lines. At
December 31, 2004 and 2003, the Company had $77 million and $50 million, respectively, of such
foreign or domestic short-term debt outstanding at average interest rates of 3.7% and 8.3% per
annum, respectively. The Company also had an additional $225 million of unused overdraft facilities
as of December 31, 2004. The banks may revoke these facilities at any time. Additionally, there
were $56 million of outstanding letters of credit issued by other banks. Average short-term borrowings for 2004 and 2003 were $111 million and $99 million,
respectively, at weighted-average interest rates of 4.3% and 6.5%, respectively. Long-termThe aggregate borrowings of up to $1 billion available under the primary bank credit
agreement can be used for general corporate purposes, of which up to $250 million may be used for
issuing letters of credit and up to $125 million for same-day, short-term borrowings. Each loan
outstanding under this agreement is due at the end of each interest period (a maximum of 12
months). The Company may, however, concurrently borrow equivalent amounts subject to compliance
with certain conditions contained in the agreement. All borrowings under the credit agreement are
therefore classified as long-term. The Company pays a facilities fee of .225% per annum on the five-year facility (whether
available funds are borrowed or not), and borrowings thereunder bear interest generally at the
London Interbank Offered Rate (LIBOR) plus 1.025% per annum. 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, 2004, there were $35 million of borrowings outstanding under the five-year
facility. Remaining availability under that facility at December 31, 2004, after reduction for
$102 million of letters of credit usage was $863 million. At December 31, 2004, the Companys total indebtedness was $1.508 billion, $2 million was
considered short-term, and annual scheduled debt maturities were
$211 million, $370 million, $1
million, $330 million and $213 million for the years 2005
through 2009, respectively and $306 million thereafter. The Company plans to repay the 60




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7 3/8% Senior Notes maturing on April 15, 2005 with borrowings from its bank credit agreements or
under its 1998 Shelf Registration Statement and therefore these notes have been classified as
long-term. Long-term debt is recorded at face amount, net of unamortized discount and the fair value of
interest-rate swaps, and debt denominated in foreign currencies is reported at its U.S. dollar
equivalent as follows: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003Five-year credit agreement expiring 2006
    
    $
    35.0
    
    
    $
    210.0364-day Euro-denominated credit agreement
    
    
    
    
    
    
    50.57 3/8% senior notes due 2005
    
    
    208.5
    
    
    
    210.47.125% Euro senior notes due 2006
    
    
    332.8
    
    
    
    307.67 3/8% senior notes due 2008
    
    
    328.8
    
    
    
    334.68.25% senior notes due 2009
    
    
    97.4
    
    
    
    97.48.25% Sterling senior notes due 2009
    
    
    115.2
    
    
    
    106.37 5/8% senior notes due 2010
    
    
    260.9
    
    
    
    260.87.59% Euro senior bonds due 2013
    
    
    40.9
    
    
    
    37.9Other long-term debt
    
    
    11.8
    
    
    
    13.81,431.3
    
    
    
    1,629.3Less current maturities
    
    
    2.2
    
    
    
    2.5Total long-term debt
    
    $
    1,429.1
    
    
    $
    1,626.8
 The U.S. Dollar equivalent of borrowings outstanding under all bank credit agreements at
December 31, 2004 and 2003, and the effective weighted-average interest rates were: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003Loans at U.S. dollar equivalent at 3.44% in
2004; 2.65% in 2003
    
    $
    35.0
    
    
    $
    260.5
 None of the Senior Notes outstanding as of December 31, 2004, are redeemable by the
Company prior to maturity. In January 2003, a European
subsidiary of the Company issued 30
million ($41 million at December 31, 2004 exchange rates) of 7.59% Guaranteed Senior Bonds due 2013
in a private placement as part of some changes in the financial structure and organization of its
European subsidiaries. The bonds are guaranteed by the Company. The proceeds were used to repay
borrowings under bank credit agreements. During the second half of 2001 the Company entered into 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. The interest rate swaps are designated as
fair-value hedges of the underlying debt. The fair value of the hedges amounted to $11 million and
$19 million as of December 31, 2004 and 2003, respectively, and is recorded in other long-term
assets with a corresponding increase in the debt obligation. The change in fair values of the
hedge instrument and the debt are recorded as equal and offsetting unrealized gains and losses. As
of December 31, 2004, the average effective interest rate on the $300 million of Senior Notes to
which the swaps apply was approximately 4.5%. 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, 2004, 2003 and 2002, were $0.2 million, $0.9 million and $2.6 million, respectively.
Cash interest paid in those years on all outstanding indebtedness
amounted to $107 million $114,
million and $125 , million, respectively. The Company, American Standard Inc., American Standard International Inc. and certain of their
domestic subsidiaries guarantee obligations under the primary bank credit agreement. In addition,
significant foreign subsidiaries guarantee obligations of certain foreign borrowers under the bank
credit agreement. 61




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The primary bank credit agreement contains various covenants that limit, among other things,
priority indebtedness, liens, sale and leaseback transactions, subsidiary indebtedness, certain
fundamental business changes and the making of certain investments, loans and advances. 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 credit agreement. NOTE 12. Capital Stock The Companys Restated Certificate of Incorporation, as amended, authorizes the Company to
issue up to 560,000,000 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. The Company has also
adopted a Rights Agreement. 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. On May 27, 2004 the Company completed a three-for-one common stock split. The Companys Board of Directors has approved a quarterly dividend of $.15 per share of common
stock. The dividend will be paid on March 25, 2005, to shareholders of record on February 28, 2005.
As of December 31, 2004, the unexpended authorization under the Companys share repurchase program
was $62 million. The Company purchased 6,962,000 shares in 2004 for $251 million, 6,005,400 shares
in 2003 for $152 million ($2 million of which was paid in 2004), 6,225,600 shares in 2002 for $141
million, and 24,222,000 shares in prior years for $344 million. On February 3, 2005 the Companys
Board of Directors also approved $400 million to purchase shares of the Companys common stock in
the open market. As of February 11, 2005, the unexpended authorization on the current program,
together with any amounts remaining under prior programs totaled $412,236,204. The Company plans
to expend approximately $400 million for share repurchases in 2005. In 2002 shareholders approved the Omnibus Incentive Plan (the 2002 Omnibus Plan), effective
January 1, 2002, under which awards may be granted to employees and non-employee directors in the
form of stock options, restricted stock, restricted stock units, stock appreciation rights (SARs)
and certain other incentive awards. The maximum number of shares or units that may be issued under
the 2002 Omnibus Plan is 16,500,000, of which no more than 2,475,000 may be used for awards other
than stock options or SARs. The total of stock options and SARs that may be granted to any
individual annually may not exceed 4,500,000 shares, and the number of restricted stock and
restricted unit awards to any individual annually may not exceed 450,000 shares or units. At
December 31, 2004, options to purchase a total of 5,942,191 shares were outstanding and there were
10,299,713 shares available for grant under the 2002 Omnibus Plan. The shares to be issued under
the 2002 Omnibus Plan may be newly issued shares or treasury shares. The Company also has a 1995
Stock Incentive Plan (the 1995 Stock Plan) under which similar awards were granted. At December
31, 2004, options to purchase a total of 11,723,372 shares were outstanding under the 1995 Stock
Plan. The shares to be issued under the 1995 Stock Plan to satisfy outstanding options are
expected to be from available treasury shares. No further awards will be made under the 1995 Stock
Plan. Stock option awards granted under the 2002 Omnibus Plan and the 1995 Stock Plan generally
vest ratably over three years on the anniversary date of the awards and are exercisable generally
over a period of ten years. On February 2, 2005, awards in the form of options to purchase
2,271,875 shares were granted under the 2002 Omnibus Plan. 62




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A summary of stock option activity and related information for 2002, 2003 and 2004 follows: Weighted-
    
    
    Weighted-Shares
    
    
    Average
    
    
    AverageUnderlying
    
    
    Exercise
    
    
    Fair ValueOptions
    
    
    Price
    
    
    Of GrantsOutstanding December 31, 2001
    
    
    17,755,245
    
    
    
    13.88Granted
    
    
    6,807,450
    
    
    
    20.16
    
    
    $
    6.08Exercised
    
    
    (4,954,653
    )
    
    
    11.75Forfeited
    
    
    (572,937
    )
    
    
    16.74Outstanding December 31, 2002
    
    
    19,035,105
    
    
    
    16.61Granted
    
    
    2,967,915
    
    
    
    23.32
    
    
    $
    7.15Exercised
    
    
    (3,704,369
    )
    
    
    14.69Forfeited
    
    
    (330,525
    )
    
    
    19.24Outstanding December 31, 2003
    
    
    17,968,126
    
    
    
    18.07Granted
    
    
    2,658,775
    
    
    
    35.38
    
    
    $
    10.75Exercised
    
    
    (2,259,584
    )
    
    
    16.42Forfeited
    
    
    (701,754
    )
    
    
    23.57Outstanding December 31, 2004
    
    
    17,665,563
    
    
    
    20.67Exercisable at end of year:2002
    
    
    8,667,0302003
    
    
    8,420,8862004
    
    
    9,322,870
 The weighted average fair value of stock option grants was estimated at the date of grant
using the Black-Scholes option-pricing model. For the assumptions used in determining the fair
value, see Note 2, Accounting PoliciesStock-Based Compensation. Following is a summary of options outstanding and exercisable by price range as of December
31, 2004: Options Outstanding
    
    
    Options Exercisable
    
    
    Weighted-Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    AverageAverage
    
    
    
    
    
    
    Average
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    ContractualPrice range
    
    Options
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Life (Years)$6.00$9.00
    
    
    91,835
    
    
    $
    6.67
    
    
    
    91,835
    
    
    $
    6.67
    
    
    
    0.1$9.01$13.00
    
    
    3,833,255
    
    
    
    12.65
    
    
    
    3,833,255
    
    
    
    12.65
    
    
    
    4.7$13.01$19.00
    
    
    2,774,757
    
    
    
    17.63
    
    
    
    2,774,757
    
    
    
    17.63
    
    
    
    5.4$19.01$25.00
    
    
    8,157,683
    
    
    
    20.78
    
    
    
    2,523,266
    
    
    
    20.80
    
    
    
    7.3$25.01$31.00
    
    
    163,334
    
    
    
    26.07
    
    
    
    62,641
    
    
    
    25.84
    
    
    
    8.1$31.01$42.00
    
    
    2,644,699
    
    
    
    35.32
    
    
    
    37,116
    
    
    
    33.45
    
    
    
    9.117,665,563
    
    
    $
    20.67
    
    
    
    9,322,870
    
    
    $
    16.45
    
    
    
    6.7
 On January 1, 2000, the Chief Executive Officer of the Company was granted an award of
750,000 shares of restricted stock under the 1995 Stock Plan. Such shares vested in three equal
annual installments beginning January 1, 2003. Unearned compensation equal to the fair market
value of the shares at the date of grant was recorded as a component of stockholders equity and
was amortized as a charge to compensation expense based upon the vesting schedule, beginning on
January 1, 2000 and ending December 31, 2004. 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 for stock issued under its stock option plans. See Note 2, Accounting
PoliciesStock-Based Compensation for information on compensation expense that would have been
recorded had the Company adopted Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, and its effect on net income and net income per share. 63




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In 1997, shareholders approved the establishment of the Employee Stock Purchase Plan
commencing January 1, 1998. 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 236,211 shares in
2004, 342,423 shares in 2003 and 371,607 shares in 2002 under this plan. In 2002, shareholders
authorized an additional 1,500,000 shares for issuance under this plan. Following is a summary of shares issued or reacquired by the Company for the years ended
December 31, 2004, 2003, and 2002. Number of Shares of Common StockTreasury
    
    
    Net SharesTotal Shares
    
    
    Shares
    
    
    OutstandingBalance, December 31, 2001
    
    
    251,613,072
    
    
    
    (35,391,540
    )
    
    
    216,221,532Shares issued upon exercise of stock options
    
    
    
    
    
    
    4,862,955
    
    
    
    4,862,955Stock purchased for treasury
    
    
    
    
    
    
    (6,225,600
    )
    
    
    (6,225,600
    )Shares issued to ESOP
    
    
    
    
    
    
    2,294,691
    
    
    
    2,294,691Shares issued to ESPP
    
    
    1,344
    
    
    
    370,263
    
    
    
    371,607Other shares issued or (reacquired), net
    
    
    131,604
    
    
    
    184,419
    
    
    
    316,023Balance, December 31, 2002
    
    
    251,746,020
    
    
    
    (33,904,812
    )
    
    
    217,841,208Shares issued upon exercise of stock options
    
    
    10,050
    
    
    
    3,742,698
    
    
    
    3,752,748Stock purchased for treasury
    
    
    
    
    
    
    (6,005,400
    )
    
    
    (6,005,400
    )Shares issued to ESOP
    
    
    
    
    
    
    2,301,579
    
    
    
    2,301,579Shares issued to ESPP
    
    
    1,512
    
    
    
    340,911
    
    
    
    342,423Other shares issued or (reacquired), net
    
    
    
    
    
    
    (317,580
    )
    
    
    (317,580
    )Balance, December 31, 2003
    
    
    251,757,582
    
    
    
    (33,842,604
    )
    
    
    217,914,978Shares issued upon exercise of stock options
    
    
    9,999
    
    
    
    2,250,740
    
    
    
    2,260,739Stock purchased for treasury
    
    
    
    
    
    
    (6,962,000
    )
    
    
    (6,962,000
    )Shares issued to ESOP
    
    
    
    
    
    
    1,598,657
    
    
    
    1,598,657Shares issued to ESPP
    
    
    1,160
    
    
    
    235,051
    
    
    
    236,211Other shares issued or (reacquired), net
    
    
    
    
    
    
    (100,597
    )
    
    
    (100,597
    )Balance, December 31, 2004
    
    
    251,768,741
    
    
    
    (36,820,753
    )
    
    
    214,947,988
 64




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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 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 interest rate swaps, the Company pays a specified variable
interest rate and receives the fixed-rate applicable to the underlying debt. The interest rate
swaps are designated as fair-value hedges of the underlying debt. The fair value of the hedges is
recorded in other long-term assets or liabilities with a corresponding increase or decrease in the
debt obligation. The change in fair values of the hedge instrument and the debt are recorded as
equal and offsetting unrealized gains and losses. The existing fair value hedges are 100%
effective and therefore there is no effect on current earnings from hedge ineffectiveness. 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 at times enters
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. Changes in the fair
value of commodity-derivative instruments qualifying as cash flow hedges are reported in
accumulated other comprehensive income with a corresponding increase or decrease in other assets.
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. Changes in the fair value of
foreign-currency-derivative instruments qualifying as cash flow hedges are reported in accumulated
other comprehensive income. 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
gains or losses on these hedges are reclassified to the income statement when the underlying hedged
items are recorded in income. The Company generally does not enter currency hedges extending
beyond one year. To convert Pounds Sterling financing under the European accounts receivable securitization
program to U.S. dollar equivalent financing, the Company enters into currency-forward contracts
that effectively fix the transaction costs in U.S. dollars. These forward contracts are defined as
speculative and accordingly, changes in the market value of the contracts are recorded in other
income or expense as incurred, with a corresponding increase or decrease in other assets. The
recorded gains or losses are essentially offset by foreign exchange gains or losses on the
Companys Sterling-denominated debt. Similar currency-forward contracts on Euro financing of
receivables was discontinued in the third quarter of 2003. The notional amount and estimated fair value of interest rate swaps and hedging contracts at
December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Notional
    
    
    Fair
    
    
    Notional
    
    
    Fair(Dollars in millions)
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueInterest rate swaps
    
    $
    300.0
    
    
    $
    10.9
    
    
    $
    300.0
    
    
    $
    18.7Commodity-forward contracts
    
    
    94.9
    
    
    
    11.9
    
    
    
    56.9
    
    
    
    9.7Foreign-currency-forward contracts
related to receivables securitization
    
    
    69.2
    
    
    
    1.0
    
    
    
    58.2
    
    
    
    3.2
 65




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The estimated fair value and carrying amounts of other financial instruments were: December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(Dollars in millions)
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueCredit agreement loans
    
    $
    35
    
    
    $
    35
    
    
    $
    210
    
    
    $
    2107 3/8% senior notes due 2005
    
    
    208
    
    
    
    211
    
    
    
    210
    
    
    
    2207.125% Euro senior notes due 2006
    
    
    333
    
    
    
    352
    
    
    
    308
    
    
    
    3287 3/8% senior notes due 2008
    
    
    329
    
    
    
    361
    
    
    
    335
    
    
    
    3668.25% senior notes due 2009
    
    
    97
    
    
    
    113
    
    
    
    97
    
    
    
    1118.25% Sterling senior notes due 2009
    
    
    115
    
    
    
    128
    
    
    
    106
    
    
    
    1067 5/8% senior notes due 2010
    
    
    261
    
    
    
    298
    
    
    
    261
    
    
    
    2927.59% Euro senior bonds due 2013
    
    
    41
    
    
    
    51
    
    
    
    38
    
    
    
    38Other debt obligations
    
    
    12
    
    
    
    12
    
    
    
    14
    
    
    
    14
 The fair values presented above are estimates as of December 31, 2004 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 loans bear interest at floating rates and have terms
representative of current market conditions. The fair values of senior notes 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. Warranties, Guarantees, Commitments and Contingencies Products sold by the Company are covered by a basic limited warranty with terms and conditions
that vary depending upon the product and country in which it was sold. The limited warranty covers
the equipment, parts and labor (in certain cases) necessary to satisfy the warranty obligation for
a period ranging from one to ten years generally, and for the lifetime of certain bath and kitchen
faucets. The Company estimates the costs that may be incurred under its warranty obligations and
records a liability in the amount of such costs at the time product revenue is recognized. Factors
that affect the Companys warranty liability include the number of units sold, historical and
anticipated rates of warranty claims, and cost per claim. At least once a quarter the Company
assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Costs to satisfy warranty claims are charged as incurred to the accrued warranty liability. The Company also sells a variety of extended warranty contracts for up to ten years on certain
air conditioning products. Revenues from the sales of extended warranties are deferred and
amortized on a straight-line basis over the terms of the contracts or based upon historical
experience. Actual costs to satisfy claims on extended warranty contracts are charged to cost of
sales as incurred and were $36 million, $35 million and $29 million for 2004, 2003 and 2002,
respectively. Total warranty expense was $206 million, $175 million and $142 million for 2004,
2003 and 2002, respectively. 66




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Following is a summary of changes in the Companys product warranty liability for the three
years ended December 31, 2004: Year Ended December 31,(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Balance of basic warranty costs accrued and deferred
income on extended warranty contracts, beginning of year
    
    $
    356.0
    
    
    $
    315.9
    
    
    $
    299.9Warranty costs accrued
    
    
    171.9
    
    
    
    138.5
    
    
    
    117.4Deferred income on extended warranty contracts sold
    
    
    68.8
    
    
    
    64.4
    
    
    
    50.7Warranty claims settled
    
    
    (149.2
    )
    
    
    (123.6
    )
    
    
    (115.1
    )Amortization of deferred income
on extended warranty contracts
    
    
    (54.2
    )
    
    
    (46.7
    )
    
    
    (42.9
    )Increases (decreases) in warranty estimates made in prior
years, including foreign exchange translation effects
    
    
    4.2
    
    
    
    7.5
    
    
    
    5.9Balance of basic warranty costs accrued and deferred
income on extended warranty contracts, end of year
    
    
    397.5
    
    
    
    356.0
    
    
    
    315.9Current portion included in current liabilities
    
    
    (155.1
    )
    
    
    (153.1
    )
    
    
    (118.0
    )Long-term warranty liability
    
    $
    242.4
    
    
    $
    202.9
    
    
    $
    197.9
 Future minimum rental commitments under all non-cancelable operating leases with original
terms in excess of one year in effect at December 31, 2004, are: $134 million in 2005; $111 million
in 2006; $91 million in 2007; $67 million in 2008; $55 million in 2009; and $104 million
thereafter, a total of $562 million. Net rental expense for all operating leases was $167 million,
$165 million and $148 million for the years ended December 31, 2004, 2003 and 2002, 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 various sites, including certain facilities in the process of being closed. 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. 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 on the claim that
it wrongfully terminated distribution agreements. On August 28, 2002, the appellate court ruled in
favor of the Company and vacated the $18 million judgment. The appellate court also reinstated the
Companys counterclaims including fraud, and remanded to the trial court limited portions of
Haynes initial claims. Currently, there is no date set for a new trial on such claims. As
previously reported, in November 2004 the Company was contacted by the European Commission
as part of an industry-wide investigation into alleged infringement of European Union competition
regulations relating to the distribution of bath and kitchen fixtures
and fittings in certain European countries. In February 2005, the
Company was named as a defendant in several lawsuits filed in the
United States District Court for the Eastern District of Pennsylvania
and in various state courts in the State of California alleging that
the Company and certain of its competitors conspired to fix prices
for fittings and fixtures in the U.S. On February 23, 2005, the
Company received a grand jury subpoena from the Antitrust Division of
the U.S. Department of Justice seeking information primarily related
to the sale and marketing of bathroom fittings by its European
affiliates from January 1997 to the present. On
February 16, 2005, the French Competition Council issued a
statement of objections (notification de griefs)
addressed to more than 100 separate enterprises, including a Bath and
Kitchen subsidiary of the Company, and to various trade associations
and purchasing organizations active in the sanitary, heating,
air-conditioning and canalization equipment and installation sectors.
The addressees of the statement of objections are alleged to have
restricted the distribution of products to large
do-it-yourself retailers and to small installer
cooperatives in France in the period 1993 through 1998 in violation
of the French and European Union competition regulations. The
Company is cooperating fully with these investigations and intends to
vigorously defend itself against these lawsuits. The Company believes that the resolution of the matters described above would not,
individually or in the aggregate, have a material adverse effect on the financial condition or
liquidity of the Company but could be material to the Companys
operating results for the periods in
which the liabilities, if any, would be recognized. Over the years, the Company has been named as a defendant in numerous lawsuits alleging
various asbestos-related personal injury claims arising primarily from sales of boilers and
railroad brake shoes. In these asbestos-related lawsuits, the Company is usually named as one of a
large group of defendants, often in excess of one hundred companies. Many of these lawsuits
involve multiple claimants, do not specifically identify the injury or disease for which damages
are sought and/or do not allege a connection between any Company product and a 67




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claimed injury or disease. As a result, numerous lawsuits have been placed and may remain on
inactive or deferred dockets, which some jurisdictions have established. Historically, the Company recorded a liability only for filed asbestos claims. Costs
associated with claims that might be filed against the Company in the future were not recorded
because the Company did not believe its history and experience with asbestos-related litigation was
sufficient to allow it to make a reasonable estimate of this liability. Because of stabilization
in the rate at which new claims are being filed and the Companys added experience in resolving
claims, the Company now believes a reasonable estimate of this liability can be made. In the fourth quarter of 2004, the Company retained Dr. Francine F. Rabinovitz of Hamilton,
Rabinovitz & Alschuler, Inc. (HR&A) to assist it in calculating an estimate of the Companys
total liability for pending and unasserted potential future asbestos-related claims. Dr.
Rabinovitz is a respected expert in performing complex calculations such as this. She has been
involved in a number of asbestos-related valuations of current and future liabilities, and her
valuation methodologies have been accepted by numerous courts. The methodology used by HR&A to project the Companys total liability for pending and
unasserted potential future asbestos-related claims relied upon and included the following factors:  
    HR&As interpretation of a widely accepted forecast of the population likely to have
been exposed to asbestos
    epidemiological studies estimating the number of people likely to develop
asbestos-related diseases
    HR&As analysis of the number of people likely to file an asbestos-related personal
injury claim against the Company based on such epidemiological data and the Companys
most recent five-year claims history
    an analysis of the Companys pending cases, by type of injury claimed
    an analysis of the Companys most recent five-year history to determine the average
settlement value of claims, by type of injury claimed
    an adjustment for inflation in the future average settlement value of claims, at a
3% annual inflation rate
    an analysis of the period over which the Company has and is likely to resolve
asbestos-related claims against it in the future Based on these factors, HR&A calculated a total estimated liability for the Company to resolve
all pending and unasserted potential future claims through 2055, which is HR&As reasonable best
estimate of the time it will take to resolve asbestos-related claims, of $699 million. This amount
is on a pre-tax basis, not discounted for the time-value of money, and excludes legal fees. Based
on HR&As analysis, in the fourth quarter of 2004 the Company increased its recorded liability for
asbestos claims by $616 million, from $83 million to $699 million. As of December 31, 2004, the Company recorded an increase in the receivable for probable
asbestos-related insurance recoveries of $309 million. This represents amounts due to the Company
for previously settled and paid claims and the probable reimbursements relating to its estimated
liability for pending and future claims. In calculating this amount, the Company used the
estimated asbestos liability for pending and projected future claims calculated by HR&A. It also
considered the amount of insurance available, gaps in coverage, applicable deductibles, allocation
methodologies, solvency ratings and credit-worthiness of the insurers, the published dividend rates
of insolvent insurers, amounts already recovered from and the potential for settlements with
insurers, and estimated annual legal fees. In the 4th quarter of 2004, the Company recorded a charge to income of $307 million
($188 million after tax), which, is the difference between the amount by which the Company
increased its total estimated liability for pending and projected future asbestos-related claims
and the amount the Company expects to recover from insurers 68




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with respect to that increased liability. This difference is due primarily to gaps in
coverage, deductibles associated with the policies and settlements for less than the full coverage
limits with carriers in insolvency proceedings and carriers with questionable credit-worthiness
(Gaps, Deductibles and Discounts). In addition, because some insurance policy buy-out
arrangements result in insurers paying the Company before liability payments are due to claimants,
such settlements typically take into account the time-value of money and include some discount to
reflect the early payment. This discount also contributes to the gap between the recorded liability
and the recorded insurance receivable. The Company is in litigation against certain carriers whose policies it believes provide
coverage for pending claims. The insurance carriers named in this suit are challenging the
Companys right to recovery. While the Company cannot predict the outcome of this litigation with
certainty, the Company believes that the amount recorded is probable of recovery based on its
analysis of the coverage, the applicable law, historical trends in its and other insured parties
settlements with insurers and the likelihood of achieving a settlement with some or all of the
insurers. The aggregate amount of the stated limits in insurance policies available to the Company for
asbestos-related claims, acquired over many years and from many different carriers, is substantial,
significantly exceeding the projected liability against the Company. However, limitations in that
coverage, primarily due to Gaps, Deductibles and Discounts, are expected to result in the projected
total liability to claimants and related expenses exceeding the probable insurance recovery. The
Company settled with most of the insolvent carriers and carriers with poor credit quality whose
policies it believes provide coverage for pending and projected future claims. 85% of the
remaining recorded insurance recovery receivable will be from carriers rated A or better by AM
Best. The amounts recorded by the Company for asbestos-related liability and insurance-related
receivables are based on currently known facts. The Companys actual expenses or insurance
recoveries could be significantly higher or lower than those recorded if assumptions used in the
Companys or HR&As calculations vary significantly from actual results. Key variables in these
assumptions are identified above and include the number and type of new claims to be filed each
year, the average cost of disposing of each such new claim, average annual defense costs, the
resolution of coverage issues among insurance carriers including allocation methodologies, and the
solvency risk with respect to the Companys insurance carriers. Furthermore, predictions with
respect to these variables are subject to greater uncertainty as the projection period lengthens.
Other factors that may affect the Companys liability and ability to recover under its insurance
policies include uncertainties surrounding the litigation process from jurisdiction to jurisdiction
and from case to case, reforms that may be made by state and federal courts, and the passage of
state or federal tort reform legislation. In 2003, the Company began a program of seeking recovery from excess carriers on the lower
layers of its coverage. In early February 2004, the Company reached significant settlements on two
elements of this coverage, KWELM Management Services Ltd (KWELM) and Underwriters at Lloyds
London through Equitas (Equitas). In July 2004, the Company agreed to a settlement with KWELM, as agent for various London-based
carriers in bankruptcy, for a small portion of the Companys insurance coverage, of which $29.5
million was received in the third quarter of 2004. In connection with the future liquidation of
the bankruptcy trust the Company may receive additional payments. In February 2005, the Company reached agreement with Equitas, the London-based entity
responsible for certain pre-1993 Lloyds of London policies in its insurance coverage, in the
amount of $84.5 million. During the first quarter of 2005, $10 million of this will be paid

directly to the Company to cover past asbestos and environmental costs, and $74.5 million will be
placed in a trust until January 3, 2007. If during the trust period there is federal legislation
that takes asbestos claims out of the courts and requires Equitas to make a duplicate payment to
the asbestos trust, this money will be used by Equitas for the legislative payment less some
allowance to the Company for claims settlements that may be made in the period January 1, 2005
through January 3, 2008. If there is no such legislation by January 3, 2007, the funds in the
trust, including accrued interest, will be disbursed to the Company. From receipt of its first asbestos claim more than twenty years ago to December 31, 2004, the
Company has resolved 25,389 claims, and settlements of approximately $51 million have been made,
for an average payment per 69




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##### Table of Contents



claim of $2,003. The table below provides additional information regarding asbestos-related
claims filed against the Company, reflecting updated information for all periods. Total pre-2002
    
    
    2003
    
    
    2004
    
    
    12/31/04Open claims  January 1
    
    
    52,985
    
    
    
    97,200
    
    
    
    116,549
    
    
    
    N/ANew Claims filed
    
    
    45,404
    
    
    
    26,295
    
    
    
    12,059
    
    
    
    150,706Claims settled
    
    
    431
    
    
    
    430
    
    
    
    812
    
    
    
    8,090Claims dismissed
    
    
    758
    
    
    
    6,516
    
    
    
    2,479
    
    
    
    17,299Open claims  December
31
    
    
    97,200
    
    
    
    116,549
    
    
    
    125,317
    
    
    
    N/A
 Because claims are frequently filed and settled in large groups, the amount and timing of
settlements, as well as the number of open claims, can fluctuate significantly from period to
period. This is demonstrated by the fact that approximately 40% of all claims filed against the
Company were filed in a 20-plus year period prior to 2002, 40% were filed in the 16-month period
from January 2002 through April 2003, and the remaining 20% were spread relatively evenly over the
next 20 months through December 2004. The Company believes that the dramatic increase in filings
in the 16-month period from January 2002 through April 2003 was influenced by the bankruptcy
filings of numerous asbestos defendants in asbestos-related litigation and the prospect of various
forms of state and federal judicial and legislative reforms. The Company has commitments and performance guarantees, including energy savings guarantees
totaling $55 million extending from 2005 to 2022, under long-term service and maintenance contracts
related to its air conditioning equipment and system controls. Through 2004 the Company has only
experienced one insignificant loss under such arrangements and
considers the probability of any significant future
losses to be unlikely. The Company fully and unconditionally guarantees the payment obligations under all the
Companys Senior Notes that were issued by its wholly-owned subsidiary American Standard Inc. The Company also guarantees other debt obligations
issued by other subsidiaries, including obligations under a $55 million Euro-denominated credit
facility and $41 million of Euro-denominated Senior Bonds. See Note 11 of Notes to Financial
Statements. The Company also guarantees debt of third parties in the amount of $3 million as of
December 31, 2004. 70




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NOTE 15. Segments American Standard has three business segments: Air Conditioning Systems and Services, Bath and
Kitchen and Vehicle Control Systems. Air Conditioning Systems and Services is a global manufacturer of commercial and residential
heating, ventilation and air conditioning (HVAC) equipment, systems and controls. It also provides
aftermarket parts to the HVAC industry, performance contracting for the installation and
maintenance of HVAC systems featuring its products, and service for its products and those of other
manufacturers. The Companys air conditioning segment is organized and managed as two operating
divisions: Trane Commercial Systems (TCS), a global business, and Residential Systems (RS), a North
American regional business. TCS manufactures and distributes, on a global basis, commercial
applied and commercial unitary equipment, controls and building automation systems, aftermarket
parts, and outside North America, residential air conditioning products. TCS also installs and
provides services for its products and those of other HVAC manufacturers. RS manufactures
primarily residential HVAC products (air conditioners, furnaces, and related accessories and
controls) and distributes both residential and commercial unitary products in North America through
a separate distribution channel. In 2004, approximately 14% of RS sales were for commercial
applications. TCS and RS manufacturing operations are not organized on a purely product-line basis. Each
manufactures products or components that are sold, or incorporated into products sold, by the
other. In addition, while RS manages the manufacturing operations for residential products sold in
the U.S and Canadian markets, TCS manages the manufacturing, sourcing and distribution of
residential products for all other international markets in which the Company participates. Since TCS and RS manufacturing and distribution have considerable overlap and have similar
economic characteristics, we believe that aggregation of TCS and RS into a single reportable
segment is the most meaningful way to report them. Therefore, in accordance with the aggregation
criteria of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, for segment reporting purposes TCS and RS are aggregated into a
single reportable segment called Air Conditioning Systems and Services The Bath and Kitchen segment designs and produces bathroom and kitchen fixtures and fittings
on a global basis. Its products are marketed through retail and wholesale sales channels for
residential and commercial markets. Vehicle Control Systems designs and manufactures 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. These include antilock and electronic braking systems (ABS
and EBS, respectively), automated transmission controls and suspension control systems for heavy
and medium-sized trucks, buses, and trailers. WABCO also sells suspension control systems to
manufacturers of luxury cars and sport utility vehicles. 71




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In addition to the segment data in the following table, see also the five-year summary in Item
6, Selected Financial Data and Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations. 
 Segment Data Year Ended December 31(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Sales:Air Conditioning Systems and Services
    
    $
    5,345
    
    
    $
    4,975
    
    
    $
    4,744Bath and Kitchen
    
    
    2,440
    
    
    
    2,235
    
    
    
    1,994Vehicle Control Systems
    
    
    1,724
    
    
    
    1,358
    
    
    
    1,057$
    9,509
    
    
    $
    8,568
    
    
    $
    7,795Segment income:Air Conditioning Systems and Services
    
    $
    556
    
    
    $
    522
    
    
    $
    537Bath and Kitchen
    
    
    197
    
    
    
    139
    
    
    
    155Vehicle Control Systems
    
    
    231
    
    
    
    177
    
    
    
    139984
    
    
    
    838
    
    
    
    831Equity in net income of unconsolidated joint
ventures
    
    
    28
    
    
    
    26
    
    
    
    27Interest expense
    
    
    (115
    )
    
    
    (117
    )
    
    
    (129
    )Asbestos
indemnity charge, net of recoveries
    
    
    (320
    )
    
    
    (10
    )
    
    
    (3
    )Corporate and other expenses
    
    
    (214
    )
    
    
    (188
    )
    
    
    (170
    )Income from continuing operations before
income taxes
    
    $
    363
    
    
    $
    549
    
    
    $
    556Sales
 Geographic distribution (a):United States
    
    $
    4,783
    
    
    $
    4,513
    
    
    $
    4,412Europe (countries below are included in this total)
    
    
    3,164
    
    
    
    2,664
    
    
    
    2,168Germany
    
    
    878
    
    
    
    719
    
    
    
    556U.K.
    
    
    594
    
    
    
    537
    
    
    
    496France
    
    
    358
    
    
    
    313
    
    
    
    262Italy
    
    
    460
    
    
    
    400
    
    
    
    333Other (countries below are included in this total)
    
    
    1,562
    
    
    
    1,391
    
    
    
    1,215China
    
    
    239
    

    
    
    223
    
    
    
    194Canada
    
    
    221
    
    
    
    205
    
    
    
    174Total sales
    
    $
    9,509
    
    
    $
    8,568
    
    
    $
    7,795Segment
income  Geographic distribution:United States
    
    $
    485
    
    
    $
    445
    
    
    $
    559Europe
    
    
    326
    
    
    
    253
    
    
    
    193Other
    
    
    173
    
    
    
    140
    
    
    
    79Total segment income
    
    $
    984
    
    
    $
    838
    
    
    $
    831
   (a)
    
    Revenues from external customers are classified
by country of destination. 72




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##### Table of Contents



Segment Data (continued) As of December 31(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002AssetsAir Conditioning Systems and Services
    
    $
    2,623
    
    
    $
    2,389
    
    
    $
    2,206Bath and Kitchen
    
    
    2,194
    
    
    
    2,099
    
    
    
    1,833Vehicle Control Systems
    
    
    1,122
    
    
    
    906
    
    
    
    702Total identifiable assets
    
    $
    5,939
    
    
    $
    5,394
    
    
    $
    4,741Geographic distribution:United States
    
    $
    2,304
    
    
    $
    2,101
    
    
    $
    1,950Europe (countries below are included in this total)
    
    
    2,716
    
    
    
    2,401
    
    
    
    1,931Germany
    
    
    764
    
    
    
    586
    
    
    
    489U.K.
    
    
    388
    
    
    
    361
    
    
    
    317France
    
    
    294
    
    
    
    326
    
    
    
    320Italy
    
    
    456
    
    
    
    374
    
    
    
    237Other
    
    
    919
    
    
    
    892
    
    
    
    860Total identifiable assets
    
    
    5,939
    
    
    
    5,394
    
    
    
    4,741Cash and cash equivalents
    
    
    230
    
    
    
    112
    
    
    
    97Prepaid charges
    
    
    15
    
    
    
    21
    
    
    
    27Corporate assets
    
    
    658
    
    
    
    352
    
    
    
    279Total assets
    
    $
    6,842
    
    
    $
    5,879
    
    
    $
    5,144Goodwill included in assets:Air Conditioning Systems and Services
    
    $
    222
    
    
    $
    222
    
    
    $
    214Bath and Kitchen
    
    
    605
    
    
    
    586
    
    
    
    509Vehicle Control Systems
    
    
    355
    
    
    
    332
    
    
    
    290Total goodwill
    
    $
    1,182
    
    
    $
    1,140
    
    
    $
    1,013
 Year Ended December 31(Dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Capital expenditures, including investments
and computer software:Air Conditioning Systems and Services
    
    $
    112
    
    
    $
    90
    
    
    $
    109Bath and Kitchen
    
    
    78
    
    
    
    101
    
    
    
    77Vehicle Control Systems
    
    
    69
    
    
    
    45
    
    
    
    46Corporate
    
    
    5
    
    
    
    4
    
    
    
    3Total capital expenditures
    
    $
    264
    
    
    $
    240
    
    
    $
    235Depreciation and amortization:Air Conditioning Systems and Services
    
    $
    90
    
    
    $
    85
    
    
    $
    80Bath and Kitchen
    
    
    93
    
    
    
    94
    
    
    
    82Vehicle Control Systems
    
    
    69
    
    
    
    58
    
    
    
    46Corporate
    
    
    10
    
    
    
    10
    
    
    
    5Total depreciation and amortization
    
    $
    262
    
    
    $
    247
    
    
    $
    213
 73




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NOTE 16. Supplemental Consolidating Condensed Financial Information All of the Companys Senior Notes were issued by its 100%-owned subsidiary, American Standard
Inc. (ASI). American Standard Companies Inc. (the Parent Company) and American Standard
International Inc. (ASII) fully and unconditionally guarantee 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, 2004, 2003 and 2002, and balance sheets as of December 31, 2004 and 2003 for the
Parent Company, ASI, ASII, and the subsidiaries of the Parent Company which are not subsidiaries of
ASI or ASII (the Other Subsidiaries). None of the Other Subsidiaries guarantees the Public Debt
of ASI. 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, 2004 Other
    
    
    
    
    
    
    Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Subsid-
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    iaries
    
    
    ations
    
    
    TotalSales
    
    
    
    
    
    $
    4,806.8
    
    
    $
    5,134.1
    
    
    $
    11.0
    
    
    $
    (443.1
    )
    
    $
    9,508.8Costs and expenses:Cost of sales
    
    
    
    
    
    
    3,532.9
    
    
    
    3,848.9
    
    
    
    13.6
    
    
    
    (443.1
    )
    
    
    6,952.3Selling and administrative expenses
    
    
    
    
    
    
    931.1
    
    
    
    781.4
    
    
    
    0.7
    
    
    
    (4.7
    )
    
    
    1,708.5Other expense
    
    
    
    
    
    
    68.1
    
    
    
    (19.8
    )
    
    
    (2.2
    )
    
    
    3.9
    
    
    
    50.0Asbestos indemnity charge, net of recoveries
    
    
    
    
    
    
    320.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320.2Interest expense
    
    
    
    
    
    
    103.9
    
    
    
    11.0
    
    
    
    
    
    
    
    
    
    
    
    114.9Intercompany interest expense (income)
    
    
    
    
    
    
    3.9
    
    
    
    (2.2
    )
    
    
    (2.5
    )
    
    
    0.8
    
    
    
    Total expenses
    
    
    
    
    
    
    4,960.1
    
    
    
    4,619.3
    
    
    
    9.6
    
    
    
    (443.1
    )
    
    
    9,145.9Income from continuing operations before income
taxes and equity in net income of consolidated
subsidiaries
    
    
    
    
    
    
    (153.3
    )
    
    
    514.8
    
    
    
    1.4
    
    
    
    
    
    
    
    362.9Income taxes
    
    
    
    
    
    
    (39.6
    )
    
    
    88.7
    
    
    
    0.4
    
    
    
    
    
    
    
    49.5Income from continuing operations before equity
in net income of consolidated subsidiaries
    
    
    
    
    
    
    (113.7
    )
    
    
    426.1
    
    
    
    1.0
    
    
    
    
    
    
    
    313.4Equity in net income of consolidated subsidiaries
    
    $
    313.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (313.4
    )
    
    
    Net income
    
    $
    313.4
    
    
    $
    (113.7
    )
    
    $
    426.1
    
    
    $
    1.0
    
    
    $
    (313.4
    )
    
    $
    313.4
 74




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NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2004 Other
    
    
    
    
    
    
    Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Subsid-
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    iaries
    
    
    ations
    
    
    TotalASSETSCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    (8.6
    )
    
    $
    235.1
    
    
    $
    2.8
    
    
    
    
    
    
    $
    229.4Accounts receivable, net
    
    
    
    
    
    
    473.2
    
    
    
    654.2
    
    
    
    27.1
    
    
    
    
    
    
    
    1,154.5Inventories
    
    
    
    
    
    
    493.6
    
    
    
    593.6
    
    
    
    
    
    
    
    
    
    
    
    1,087.2Other current assets
    
    
    
    
    
    
    236.8
    
    
    
    167.7
    
    
    
    14.2
    
    
    
    
    
    
    
    418.7Total current assets
    
    
    0.1
    
    
    
    1,195.0
    
    
    
    1,650.6
    
    
    
    44.1
    
    
    
    
    
    
    
    2,889.8Facilities, net
    
    
    
    
    
    
    570.6
    
    
    
    1,046.0
    
    
    
    
    
    
    
    
    
    
    
    1,616.6Goodwill, net
    
    
    
    
    
    
    107.2
    
    
    
    1,074.8
    
    
    
    
    
    
    
    
    
    
    
    1,182.0Investment in subsidiaries
    
    
    1,871.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,871.3
    )
    
    
    Long-term
asbestos indemnity receivable
    
    
    
    
    
    
    365.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365.1Other assets
    
    
    
    
    
    
    519.0
    
    
    
    245.4
    
    
    
    23.9
    
    
    
    
    
    
    
    788.3Total assets
    
    $
    1,871.4
    
    
    $
    2,756.9
    
    
    $
    4,016.8
    
    
    $
    68.0
    
    
    $
    (1,871.3
    )
    
    $
    6,841.8LIABILITIES AND SHAREHOLDERS
(DEFICIT) EQUITYCurrent liabilities:Loans payable to banks
    
    
    
    
    
    $
    51.0
    
    
    $
    25.6
    
    
    $
    
    
    
    
    
    
    
    $
    76.6Current maturities of long-term debt
    
    
    
    
    
    
    1.6
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    2.2Other current liabilities
    
    
    
    
    
    
    963.1
    
    
    
    1,281.7
    
    
    
    23.1
    
    
    
    
    
    
    
    2,267.9Total current liabilities
    
    
    
    
    
    
    1,015.7
    
    
    
    1,307.9
    
    
    
    23.1
    
    
    
    
    
    
    
    2,346.7Long-term debt
    
    
    
    
    
    
    1,379.5
    
    
    
    49.6
    
    
    
    
    
    
    
    
    
    
    
    1,429.1Reserve for post-retirement benefits
    
    
    
    
    
    
    275.5
    
    
    
    468.6
    
    
    
    
    
    
    
    
    
    
    
    744.1Intercompany accounts, net
    
    $
    941.1
    
    
    
    235.4
    
    
    
    (1,082.8
    )
    
    
    (93.7
    )
    
    
    
    
    
    
    Long-term portion of asbestos indemnity
liability
    
    
    
    
    
    
    683.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    683.4Other long-term liabilities
    
    
    
    
    
    
    323.5
    
    
    
    253.4
    
    
    
    131.3
    
    
    
    
    
    
    
    708.2Total liabilities
    
    
    941.1
    
    
    
    3,913.0
    
    
    
    996.7
    
    
    
    60.7
    
    
    $
    
    
    
    
    5,911.5Total shareholders equity (deficit)
    
    
    930.3
    
    
    
    (1,156.1
    )
    
    
    3,020.1
    
    
    
    7.3
    
    
    
    (1,871.3
    )
    
    
    930.3Total liabilities and shareholders equity
(deficit)
    
    $
    1,871.4
    
    
    $
    2,756.9
    
    
    $
    4,016.8
    
    
    $
    68.0
    
    
    $
    (1,871.3
    )
    
    $
    6,841.8
 75




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##### Table of Contents



NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2004 Other
    
    
    
    
    
    
    Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Subsid-
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    iaries
    
    
    ations
    
    
    TotalCash provided (used) by:Operating activities:Net income
    
    $
    313.4
    
    
    $
    (113.7
    )
    
    $
    426.1
    
    
    $
    1.0
    
    
    $
    (313.4
    )
    
    $
    313.4Adjustments to reconcile net income
to net cash provided by operations:Depreciation and amortization
    
    
    
    
    
    
    98.5
    
    
    
    163.4
    
    
    
    
    
    
    
    
    
    
    
    261.9Equity in earnings of affiliates, net
of dividends received
    
    
    
    
    
    
    (8.1
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    
    
    
    
    (15.8
    )Non-cash stock compensation
    
    
    
    
    
    
    60.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60.9Deferred income taxes
    
    
    
    
    
    
    (123.3
    )
    
    
    (30.0
    )
    
    
    (2.8
    )
    
    
    
    
    
    
    (156.1
    )Gain on sale of property, plant and equipment
    
    
    
    
    
    
    (3.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.7
    )Equity in net income of subsidiary
    
    
    (313.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313.4
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    7.5
    
    
    
    (91.6
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (86.1
    )Inventories
    
    
    
    
    
    
    (71.0
    )
    
    
    (67.4
    )
    
    
    
    
    
    
    
    
    
    
    (138.4
    )Accounts payable
    
    
    
    
    
    
    74.9
    
    
    
    82.4
    
    
    
    0.3
    
    
    
    
    
    
    
    157.6Other accrued liabilities
    
    
    
    
    
    
    32.6
    
    
    
    17.1
    
    
    
    3.8
    
    
    
    
    
    
    
    53.5Post-retirement benefits
    
    
    
    
    
    
    (26.9
    )
    
    
    7.8
    
    
    
    
    
    
    
    
    
    
    
    (19.1
    )Net asbestos indemnity liability
    
    
    
    
    
    
    316.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316.3Other long-term liabilities
    
    
    
    
    
    
    22.5
    
    
    
    39.6
    
    
    
    15.1
    
    
    
    
    
    
    
    77.2Other assets
    
    
    
    
    
    
    (45.8
    )
    
    
    (18.1
    )
    
    
    (20.1
    )
    
    
    
    
    
    
    (84.0
    )Net cash provided by operating activities before
proceeds from initial sale of receivables
    
    
    
    
    
    
    220.7
    
    
    
    521.6
    
    
    
    (4.7
    )
    
    
    
    
    
    
    737.6Proceeds from initial sale of receivables, net
    
    
    
    
    
    
    27.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27.1Net cash provided by operating activities
    
    
    
    
    
    
    247.8
    
    
    
    521.6
    
    
    
    (4.7
    )
    
    
    
    
    
    
    764.7Investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (75.0
    )
    
    
    (140.9
    )
    
    
    
    
    
    
    
    
    
    
    (215.9
    )Investments in affiliated companies
    
    
    
    
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Investments in computer software
    
    
    
    
    
    
    (24.7
    )
    
    
    (21.9
    )
    
    
    
    
    
    
    
    
    
    
    (46.6
    )Loan to unconsolidated joint venture, net
    
    
    
    
    
    
    (16.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.2
    )Proceeds from the disposal of property/equipment
    
    
    
    
    
    
    26.8
    
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    29.4Net cash used by investing activities
    
    
    
    
    
    
    (89.1
    )
    
    
    (161.7
    )
    
    
    
    
    
    
    
    
    
    
    (250.8
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    1.1Repayments of long-term debt
    
    
    
    
    
    
    (1.1
    )
    
    
    (1.7
    )
    
    
    
    
    
    
    
    
    
    
    (2.8
    )Net change in revolving credit facility
    
    
    
    
    
    
    (135.0
    )
    
    
    (93.5
    )
    
    
    
    
    
    
    
    
    
    
    (228.5
    )Net change in other short-term debt
    
    
    
    
    
    
    51.0
    
    
    
    (24.4
    )
    
    
    
    
    
    
    
    
    
    
    26.6Purchases of treasury stock
    
    
    (253.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (253.0
    )Net change in intercompany accounts
    
    
    208.4
    
    
    
    (19.7
    )
    
    
    (193.6
    )
    
    
    4.9
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    36.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.9Proceeds from foreign exchange forward contracts
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.5Other common stock issued or reacquired, net
    
    
    7.7
    
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.6Net cash used by financing activities
    
    
    
    
    
    
    (96.9
    )
    
    
    (312.6
    )
    
    
    4.9
    
    
    
    
    
    
    
    (404.6
    )Effect of exchange rate changes on
cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    8.4
    
    
    
    
    
    
    
    
    
    
    
    8.4Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    61.8
    
    
    
    55.7
    
    
    
    0.2
    
    
    
    
    
    
    
    117.7Cash and cash equivalents at beginning of year
    
    
    0.1
    
    
    
    (70.4
    )
    
    
    179.4
    
    
    
    2.6
    
    
    
    
    
    
    
    111.7Cash and cash equivalents at end of year
    
    $
    0.1
    
    
    $
    (8.6
    )
    
    $
    235.1
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    229.4
 76




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##### Table of Contents



NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2003 Other
    
    
    
    
    
    
    Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Subsid-
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    iaries
    
    
    ations
    
    
    TotalSales
    
    
    
    
    
    $
    4,583.7
    
    
    $
    4,445.8
    
    
    $
    7.9
    
    
    $
    (469.8
    )
    
    $
    8,567.6Costs and expenses:Cost of sales
    
    
    
    
    
    
    3,505.4
    
    
    
    3,432.9
    
    
    
    9.0
    
    
    
    (469.8
    )
    
    
    6,477.5Selling and administrative expenses
    
    
    
    
    
    
    754.8
    
    
    
    605.3
    
    
    
    0.7
    
    
    
    
    
    
    
    1,360.8Other expense
    
    
    
    
    
    
    33.1
    
    
    
    20.8
    
    
    
    (0.8
    )
    
    
    
    
    
    
    53.1Asbestos
indemnity charge, net of recoveries
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0Interest expense
    
    
    
    
    
    
    105.4
    
    
    
    11.6
    
    
    
    
    
    
    
    
    
    
    
    117.0Intercompany interest expense (income)
    
    
    
    
    
    
    2.3
    
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    
    
    
    
    4,411.0
    
    
    
    4,068.3
    
    
    
    8.9
    
    
    
    (469.8
    )
    
    
    8,018.4Income from continuing operations before income
taxes and equity in net income of consolidated
subsidiaries
    
    
    
    
    
    
    172.7
    
    
    
    377.5
    
    
    
    (1.0
    )
    
    
    
    
    
    
    549.2Income taxes
    
    
    
    
    
    
    (2.1
    )
    
    
    145.0
    
    
    
    1.1
    
    
    
    
    
    
    
    144.0Income from continuing operations before equity
in net income of consolidated subsidiaries
    
    
    
    
    
    
    174.8
    
    
    
    232.5
    
    
    
    (2.1
    )
    
    
    
    
    
    
    405.2Equity in net income of consolidated subsidiaries
    
    $
    405.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405.2
    )
    
    
    Net income
    
    $
    405.2
    
    
    $
    174.8
    
    
    $
    232.5
    
    
    $
    (2.1
    )
    
    $
    (405.2
    )
    
    $
    405.2
 77




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##### Table of Contents



NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2003 Other
    
    
    
    
    
    
    Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Subsid-
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    iaries
    
    
    ations
    
    
    TotalASSETSCurrent assets:Cash and cash equivalents
    
    $
    .1
    
    
    $
    (70.4
    )
    
    $
    179.4
    
    
    $
    2.6
    
    
    
    
    
    
    $
    111.7Accounts receivable, net
    
    
    
    
    
    
    481.7
    
    
    
    516.0
    
    
    
    25.1
    
    
    
    
    
    
    
    1,022.8Inventories
    
    
    
    
    
    
    422.6
    
    
    
    487.3
    
    
    
    
    
    
    
    
    
    
    
    909.9Other current assets
    
    
    
    
    
    
    256.5
    
    
    
    181.3
    
    
    
    8.5
    
    
    
    
    
    
    
    446.3Total current assets
    
    
    .1
    
    
    
    1,090.4
    
    
    
    1,364.0
    
    
    
    36.2
    
    
    
    
    
    
    
    2,490.7Facilities, net
    
    
    
    
    
    
    582.1
    
    
    
    933.3
    
    
    
    
    
    
    
    
    
    
    
    1,515.4Goodwill, net
    
    
    
    
    
    
    137.2
    
    
    
    1,003.2
    
    
    
    
    
    
    
    
    
    
    
    1,140.4Investment in subsidiaries
    
    
    1,441.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,441.1
    )
    
    
    Long-term asbestos indemnity receivable
    
    
    
    
    
    
    59.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59.5Other assets
    
    
    
    
    
    
    451.1
    
    
    
    214.8
    
    
    
    6.8
    
    
    
    
    
    
    
    672.7Total assets
    
    $
    1,441.2
    
    
    $
    2,320.3
    
    
    $
    3,515.3
    
    
    $
    43.0
    
    
    $
    (1,441.1
    )
    
    $
    5,878.7LIABILITIES AND SHAREHOLDERS
(DEFICIT) EQUITYCurrent liabilities:Loans payable to banks
    
    
    
    
    
    $
    
    
    
    $
    49.8
    
    
    $
    
    
    
    
    
    
    
    $
    49.8Current maturities of long-term debt
    
    
    
    
    
    
    1.5
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    2.5Other current liabilities
    
    
    
    
    
    
    863.4
    
    
    
    1,098.8
    
    
    
    19.0
    
    
    
    
    
    
    
    1,981.2Total current liabilities
    
    
    
    
    
    
    864.9
    
    
    
    1,149.6
    
    
    
    19.0
    
    
    
    
    
    
    
    2,033.5Long-term debt
    
    
    
    
    
    
    1,489.2
    
    
    
    137.6
    
    
    
    
    
    
    
    
    
    
    
    1,626.8Reserve for post-retirement benefits
    
    
    
    
    
    
    326.4
    
    
    
    331.0
    
    
    
    
    
    
    
    
    
    
    
    657.4Intercompany accounts, net
    
    $
    727.4
    
    
    
    251.4
    
    
    
    (894.0
    )
    
    
    (84.8
    )
    
    
    
    
    
    
    Long-term portion of asbestos indemnity
liability
    
    
    
    
    
    
    61.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61.5Other long-term liabilities
    
    
    
    
    
    
    420.0
    
    
    
    249.4
    
    
    
    116.3
    
    
    
    
    
    
    
    785.7Total liabilities
    
    
    727.4
    
    
    
    3,413.4
    
    
    
    973.6
    
    
    
    50.5
    
    
    $
    
    
    
    
    5,164.9Total shareholders equity (deficit)
    
    
    713.8
    
    
    
    (1,093.1
    )
    
    
    2,541.7
    
    
    
    (7.5
    )
    
    
    (1,441.1
    )
    
    
    713.8Total liabilities and shareholders equity
(deficit)
    
    $
    1,441.2
    
    
    $
    2,320.3
    
    
    $
    3,515.3
    
    
    $
    43.0
    
    
    $
    (1,441.1
    )
    
    $
    5,878.7
 78




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##### Table of Contents



NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2003 Other
    
    
    
    
    
    
    Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Subsid-
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    iaries
    
    
    ations
    
    
    TotalCash provided (used) by:Operating activities:Net income
    
    $
    405.2
    
    
    $
    174.8
    
    
    $
    232.5
    
    
    $
    (2.1
    )
    
    $
    (405.2
    )
    
    $
    405.2Adjustments to reconcile net income
to net cash provided by operations:Depreciation and amortization
    
    
    
    
    
    
    95.6
    
    
    
    151.2
    
    
    
    
    
    
    
    
    
    
    
    246.8Equity in earnings of affiliates, net
of dividends received
    
    
    
    
    
    
    (6.7
    )
    
    
    (7.6
    )
    
    
    
    
    
    
    
    
    
    
    (14.3
    )Non-cash stock compensation
    
    
    
    
    
    
    60.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60.4Deferred income taxes
    
    
    
    
    
    
    10.1
    
    
    
    21.4
    
    
    
    
    
    
    
    
    
    
    
    31.5Gain on sale of property, plant and equipment
    
    
    
    
    
    
    0.8
    
    
    
    (8.7
    )
    
    
    
    
    
    
    
    
    
    
    (7.9
    )Equity in net income of subsidiary
    
    
    (405.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405.2
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (28.8
    )
    
    
    (32.4
    )
    
    
    (25.1
    )
    
    
    
    
    
    
    (86.3
    )Inventories
    
    
    
    
    
    
    (68.7
    )
    
    
    (7.8
    )
    
    
    
    
    
    
    
    
    
    
    (76.5
    )Accounts payable
    
    
    
    
    
    
    25.5
    
    
    
    7.7
    
    
    
    0.2
    
    
    
    
    
    
    
    33.4Other accrued liabilities
    
    
    
    
    
    
    (5.6
    )
    
    
    175.1
    
    
    
    18.7
    
    
    
    
    
    
    
    188.2Post-retirement benefits
    
    
    
    
    
    
    (7.1
    )
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    (9.4
    )Net asbestos indemnity liability
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Other long-term liabilities
    
    
    
    
    
    
    (57.8
    )
    
    
    (75.8
    )
    
    
    116.3
    
    
    
    
    
    
    
    (17.3
    )Other assets
    
    
    
    
    
    
    125.7
    
    
    
    (230.9
    )
    
    
    2.4
    
    
    
    
    
    
    
    (102.8
    )Net cash provided by operating activities
    
    
    
    
    
    
    318.4
    
    
    
    222.4
    
    
    
    110.4
    
    
    
    
    
    
    
    651.2Investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (66.7
    )
    
    
    (104.0
    )
    
    
    
    
    
    
    
    
    
    
    (170.7
    )Investments in affiliated companies
    
    
    
    
    
    
    
    
    
    
    (25.0
    )
    
    
    
    
    
    
    
    
    
    
    (25.0
    )Investments in computer software
    
    
    
    
    
    
    (23.2
    )
    
    
    (21.7
    )
    
    
    
    
    
    
    
    
    
    
    (44.9
    )Proceeds from the disposal of Property/Equipment
    
    
    
    
    
    
    6.0
    
    
    
    17.2
    
    
    
    
    
    
    
    
    
    
    
    23.2Net cash used by investing activities
    
    
    
    
    
    
    (83.9
    )
    
    
    (133.5
    )
    
    
    
    
    
    
    
    
    
    
    (217.4
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    
    
    
    
    33.0Repayments of long-term debt
    
    
    
    
    
    
    (126.0
    )
    
    
    (3.6
    )
    
    
    
    
    
    
    
    
    
    
    (129.6
    )Net change in revolving credit facility
    
    
    
    
    
    
    (308.0
    )
    
    
    31.6
    
    
    
    
    
    
    
    
    
    
    
    (276.4
    )Net change in other short-term debt
    
    
    
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    1.8Purchases of treasury stock
    
    
    (149.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149.5
    )Net change in intercompany accounts
    
    
    87.7
    
    
    
    102.9
    
    
    
    (82.6
    )
    
    
    (108.0
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    54.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54.9Proceeds from foreign exchange forward contracts
    
    
    
    
    
    
    38.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38.2Financing costs and other
    
    
    7.0
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.5Net cash used by financing activities
    
    
    0.1
    
    
    
    (292.4
    )
    
    
    (19.8
    )
    
    
    (108.0
    )
    
    
    
    
    
    
    (420.1
    )Effect of exchange rate changes on
cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    1.4Net increase (decrease) in cash and cash equivalents
    
    
    0.1
    
    
    
    (57.9
    )
    
    
    70.5
    
    
    
    2.4
    
    
    
    
    
    
    
    15.1Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    (22.9
    )
    
    
    119.5
    
    
    
    
    
    
    
    
    
    
    
    96.6Cash and cash equivalents at end of year
    
    $
    0.1
    
    
    $
    (80.8
    )
    
    $
    190.0
    
    
    $
    2.4
    
    
    $
    
    
    
    $
    111.7
 79




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##### Table of Contents



NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002 Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    ations
    
    
    TotalSales
    
    
    
    
    
    $
    4,457.1
    
    
    $
    3,654.2
    
    
    $
    (315.9
    )
    
    $
    7,795.4Costs and expenses:Cost of sales
    
    
    
    
    
    
    3,405.0
    
    
    
    2,776.1
    
    
    
    (315.9
    )
    
    
    5,865.2Selling and administrative expenses
    
    
    
    
    
    
    637.9
    
    
    
    549.8
    
    
    
    
    
    
    
    1,187.7Other expense
    
    
    
    
    
    
    55.0
    
    
    
    (1.0
    )
    
    
    
    
    
    
    54.0Asbestos indemnity charge, net of recoveries
    
    
    
    
    
    
    3.3
    
    
    
    
    
    
    
    
    
    
    
    3.3Interest expense
    
    
    
    
    
    
    119.9
    
    
    
    9.1
    
    
    
    
    
    
    
    129.0Intercompany interest expense (income)
    
    
    
    
    
    
    (0.6
    )
    
    
    0.6
    
    
    
    
    
    
    
    Total expenses
    
    
    
    
    
    
    4,220.5
    
    
    
    3,334.6
    
    
    
    (315.9
    )
    
    
    7,239.2Income from continuing operations before income taxes
and equity in net income of consolidated subsidiaries
    
    
    
    
    
    
    236.6
    
    
    
    319.6
    
    
    
    
    
    
    
    556.2Income taxes
    
    
    
    
    
    
    72.1
    
    
    
    113.1
    
    
    
    
    
    
    
    185.2Income from continuing operations before equity
in net income of consolidated subsidiaries
    
    
    
    
    
    
    164.5
    
    
    
    206.5
    
    
    
    
    
    
    
    371.0Equity in net income of consolidated subsidiaries
    
    $
    371.0
    
    
    
    
    
    
    
    
    
    
    
    (371.0
    )
    
    
    Net income
    
    $
    371.0
    
    
    $
    164.5
    
    
    $
    206.5
    
    
    $
    (371.0
    )
    
    $
    371.0
 80




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##### Table of Contents



NOTE 16. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2002 Consoli-Parent
    
    
    
    
    
    
    
    
    
    
    Elimin-
    
    
    dated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    ations
    
    
    TotalCash provided (used) by:Operating activities:Net income
    
    $
    371.0
    
    
    $
    164.5
    
    
    $
    206.5
    
    
    $
    (371.0
    )
    
    $
    371.0Adjustments to reconcile net income
to net cash provided by operations:Depreciation and amortization
    
    
    
    
    
    
    87.6
    
    
    
    125.1
    
    
    
    
    
    
    
    212.7Equity in earnings of affiliates, net of
dividends received
    
    
    
    
    
    
    (8.4
    )
    
    
    (5.1
    )
    
    
    
    
    
    
    (13.5
    )Non-cash stock compensation
    
    
    
    
    
    
    55.4
    
    
    
    
    
    
    
    
    
    
    
    55.4Deferred income taxes
    
    
    
    
    
    
    77.6
    
    
    
    (10.4
    )
    
    
    
    
    
    
    67.2Gain on sale of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (3.3
    )
    
    
    
    
    
    
    (3.3
    )Equity in net income of subsidiary
    
    
    (371.0
    )
    
    
    
    
    
    
    
    
    
    
    371.0Changes in assets and liabilities:Accounts receivable
    
    
    0.5
    
    
    
    46.5
    
    
    
    (99.6
    )
    
    
    
    
    
    
    (52.6
    )Inventories
    
    
    
    
    
    
    (43.5
    )
    
    
    (45.8
    )
    
    
    
    
    
    
    (89.3
    )Accounts payable
    
    
    
    
    
    
    (40.3
    )
    
    
    3.5
    
    
    

    
    
    
    
    (36.8
    )Other accrued liabilities
    
    
    
    
    
    
    145.4
    
    
    
    (159.3
    )
    
    
    
    
    
    
    (13.9
    )Post-retirement benefits
    
    
    
    
    
    
    (17.9
    )
    
    
    1.3
    
    
    
    
    
    
    
    (16.6
    )Net asbestos indemnity liability
    
    
    
    
    
    
    (6.4
    )
    
    
    
    
    
    
    
    
    
    
    (6.4
    )Other long-term liabilities
    
    
    
    
    
    
    36.7
    
    
    
    (50.3
    )
    
    
    
    
    
    
    (13.6
    )Other assets
    
    
    
    
    
    
    (133.1
    )
    
    
    215.0
    
    
    
    
    
    
    
    81.9Net cash provided by operating activities before
proceeds from initial sale of receivables
    
    
    0.5
    
    
    
    364.1
    
    
    
    177.6
    
    
    
    
    
    
    
    542.2Proceeds from initial sale of receivables, net
    
    
    
    
    
    
    (100.7
    )
    
    
    182.1
    
    
    
    
    
    
    
    81.4Net cash provided by operating activities
    
    
    0.5
    
    
    
    263.4
    
    
    
    359.7
    
    
    
    
    
    
    
    623.6Investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (70.1
    )
    
    
    (95.0
    )
    
    
    
    
    
    
    (165.1
    )Investments in affiliated companies
    
    
    
    
    
    
    (22.0
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    (23.6
    )Investments in computer software
    
    
    
    
    
    
    (24.6
    )
    
    
    (22.3
    )
    
    
    
    
    
    
    (46.9
    )Proceeds from dissolution of receivables financing
Joint venture
    
    
    
    
    
    
    25.8
    
    
    
    
    
    
    
    
    
    
    
    25.8Proceeds from the disposal of property/equipment
    
    
    
    
    
    
    6.6
    
    
    
    14.8
    
    
    
    
    
    
    
    21.4Other
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Net cash used by investing activities
    
    
    
    
    
    
    (85.4
    )
    
    
    (104.1
    )
    
    
    
    
    
    
    (189.5
    )Financing activities:Repayments of long-term debt
    
    
    
    
    
    
    (40.8
    )
    
    
    (2.8
    )
    
    
    
    
    
    
    (43.6
    )Net change in revolving credit facility
    
    
    
    
    
    
    (313.0
    )
    
    
    40.7
    
    
    
    
    
    
    
    (272.3
    )Net change in other short-term debt
    
    
    
    
    
    
    (0.1
    )
    
    
    (24.4
    )
    
    
    
    
    
    
    (24.5
    )Purchases of treasury stock
    
    
    (141.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141.1
    )Net change in intercompany accounts
    
    
    77.2
    
    
    
    155.5
    
    
    
    (232.7
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    56.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56.1Financing costs and other
    
    
    7.3
    
    
    
    (5.6
    )
    
    
    3.7
    
    
    
    
    
    
    
    5.4Net cash used by financing activities
    
    
    (0.5
    )
    
    
    (204.0
    )
    
    
    (215.5
    )
    
    
    
    
    
    
    (420.0
    )Effect of exchange rate changes on
cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (26.0
    )
    
    
    40.5
    
    
    
    
    
    
    
    14.5Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    3.1
    
    
    
    79.0
    
    
    
    
    
    
    
    82.1Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    (22.9
    )
    
    $
    119.5
    
    
    $
    
    
    
    $
    96.6
 81




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##### Table of Contents



Quarterly Data (Unaudited) Year 2004 (Dollars in millions, except per share data)
    
    First
    
    
    Second (a)
    
    
    Third (a)
    
    
    Fourth (a)Sales
    
    $
    2,185.0
    
    
    $
    2,575.3
    
    
    $
    2,396.1
    
    
    $
    2,352.4Cost of sales
    
    
    1,591.3
    
    
    
    1,871.2
    
    
    
    1,720.6
    
    
    
    1,769.2Income (loss) before income taxes
    
    
    122.6
    
    
    
    227.8
    
    
    
    200.0
    
    
    
    (187.5
    )Income taxes
    
    
    38.0
    
    
    
    68.1
    
    
    
    44.0
    
    
    
    (100.6
    )Net income (loss)
    
    $
    84.6
    
    
    $
    159.7
    
    
    $
    156.0
    
    
    $
    (86.9
    )Net income (loss) per common share:Basic
    
    $
    .39
    
    
    $
    .75
    
    
    $
    .73
    
    
    $
    (.41
    )Diluted
    
    $
    .38
    
    
    $
    .73
    
    
    $
    .71
    
    
    $
    (.41
    )Average number of common shares (thousands):Basic
    
    
    216,474
    
    
    
    214,235
    
    
    
    214,184
    
    
    
    214,458Diluted
    
    
    222,226
    
    
    
    220,035
    
    
    
    219,924
    
    
    
    214,458Range of prices on common stock:High
    
    $
    38.33
    
    
    $
    40.93
    
    
    $
    40.55
    
    
    $
    41.82Low
    
    $
    33.10
    
    
    $
    33.60
    
    
    $
    36.22
    
    
    $
    34.41
 Year 2003 (Dollars in millions, except per share data)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth (b)Sales
    
    $
    1,950.6
    
    
    $
    2,265.0
    
    
    $
    2,234.4
    
    
    $
    2,117.7Cost of sales
    
    
    1,473.5
    
    
    
    1,688.4
    
    
    
    1,669.9
    
    
    
    1,645.7Income before income taxes
    
    
    92.5
    
    
    
    194.0
    
    
    
    177.6
    
    
    
    85.1Income taxes
    
    
    28.7
    
    
    
    60.1
    
    
    
    55.1
    
    
    
    .2Net income
    
    $
    63.8
    
    
    $
    133.9
    
    
    $
    122.5
    
    
    $
    84.9Net income per common share:Basic
    
    $
    .29
    
    
    $
    .62
    
    
    $
    .56
    
    
    $
    .39Diluted
    
    $
    .29
    
    
    $
    .61
    
    
    $
    .55
    
    
    $
    .38Average number of common shares (thousands):Basic
    
    
    216,425
    
    
    
    215,620
    
    
    
    217,031
    
    
    
    218,141Diluted
    
    
    220,138
    
    
    
    219,623
    
    
    
    221,337
    
    
    
    223,475Range of prices on common stock:High
    
    $
    24.06
    
    
    $
    26.52
    
    
    $
    28.37
    
    
    $
    34.00Low
    
    $
    21.28
    
    
    $
    22.73
    
    
    $
    24.03
    
    
    $
    28.17
 (a) The second quarter of 2004 includes operational consolidation expenses of $13.1
million ($9.0 million after tax, or $.04 per diluted share) comprised of $12.9 million for Bath and
Kitchen and $0.2 million for Vehicle Control Systems; the third quarter of 2004 includes
operational consolidation expenses of $6.8 million ($4.7 million after tax, or $.02 per diluted
share) comprised of $0.7 million for Air Conditioning Systems and Services, $5.1 million for Bath
and Kitchen and $1.0 million for Vehicle Control Systems and the fourth quarter of 2004 includes
operational consolidation expenses of $26.5 million ($18.3 million after tax, or $.08 per diluted
share) comprised of $7.0 million for Air Conditioning Systems and Services, $15.0 million for Bath
and Kitchen, $4.2 million for Vehicle Control Systems and $0.3 million in Corporate and Other
expense. Income taxes include a tax benefit of $14.4 million related to those expenses. The fourth
quarter of 2004 includes a $307 million ($188 million net of a $119 million tax benefit, or $.85
per diluted share) charge covering estimated payments for pending and future asbestos-related
claims. For a detailed description of the asbestos indemnity charge, see Item 3. Legal Proceedings.
Income taxes in the second quarter of 2004 include a tax benefit of $2.7 million ($.01 per diluted 82




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share) related to the benefit recognized on certain tax items, income taxes in the third
quarter of 2004 include $18 million ($.08 per diluted share) related to a reduction in withholding
tax liabilities arising from a decision to not distribute the earnings of certain foreign
subsidiaries and income taxes in the fourth quarter include a tax benefit of $18.5 million ($.08
per diluted share) from the resolution of tax audits, and a $119 million tax benefit related to the
asbestos indemnity charge. (b) The fourth quarter of 2003 includes expenses of $38.9 million ($27.3 million after tax, or
$.12 per diluted share) related to the elimination of 870 jobs, comprised of $8.4 million for Air
Conditioning Systems and Services, $20.8 million for Bath and Kitchen and $9.7 million for Vehicle
Control Systems. Income taxes include a tax benefit of $11.6 million related to those expenses.
Income taxes in the fourth quarter of 2003 also included a $26.7 million benefit ($.12 per diluted
share) principally because of the resolution of tax audits and approval of claims for research and
development tax credits. 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. 83




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES The Company has established a Disclosure Controls Committee that assists the Chief Executive
Officer and Chief Financial Officer in their evaluation of the Companys disclosure controls and
procedures. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their
evaluation as of the end of the period covered by this report, that our disclosure controls and
procedures, as defined in the Securities Exchange Act of 1934, Rule 13a-15(e), are effective to
ensure that the information required to be disclosed in the reports that the Company files or
submits under the Securities Act of 1934 is recorded, processed summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and forms. There have been
no changes in our internal control over financial reporting during the most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting. 84




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Managements Report On Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. The Companys internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. The Companys internal control over financial reporting includes those
policies and procedures that:  (i)
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company,(ii)
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company, and(iii)
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies and procedures included in such controls may
deteriorate. The Company conducted an evaluation of the effectiveness of our internal control over
financial reporting based upon the framework in Internal Control  Integrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon such
evaluation, our management concluded that our internal control over financial reporting was
effective as of December 31, 2004. The Companys assessment of the effectiveness of our internal control over financial
reporting, as of December 31, 2004, has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their attestation report which is included
immediately below. American Standard Companies Inc. February 23, 2005 85




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Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of American Standard Companies Inc. We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that American Standard Companies Inc. maintained
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). American Standard Companies Inc.s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that American Standard Companies Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on the COSO criteria. Also, in our opinion, American Standard
Companies Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2004 consolidated financial statements of American Standard
Companies Inc. and our report dated February 23, 2005 expressed an unqualified opinion thereon. (ERNST & YOUNG LLP)
 New York, New York February 23, 2005 86




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ITEM 9B. OTHER INORMATION Mr. McGrath served as Senior Vice President of the Company from January 1, 2005 until his
retirement on February 11, 2005. Through December 31, 2004, Mr. McGrath served as Senior Vice
President, General Counsel and Secretary of the Company. On February 23, 2005, the Company entered
into a one year consulting agreement with Mr. McGrath under which he will be paid $100,000 to
provide consulting services to the Company. 87




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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 compensation committee
interlocks and insider participation set forth under the heading 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. Pursuant to instruction G(3) to Form 10-K, information concerning the independence of our
Audit Committee and audit committee financial expert disclosure set forth under the headings Board
of Directors Meetings, Committees of the Board and Related Matters  Board Matters and Committee
Membership,  Committees of the Board  Audit Committee and Audit Committee Matters  Audit
Committee Membership Standards 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. 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. Information regarding our Code of Conduct and Ethics set forth under the caption Code of
Conduct and Ethics in Item 1 of Part I of this Form 10-K 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 headings entitled, Board of Directors Meetings, Committees of
the Board and Related Matters  2004 Compensation of Non-Management Directors, 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. 88




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS Common Stock Ownership of Officers, Directors and Significant Shareholders 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 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. Equity Compensation Plan Information The following table sets forth certain information regarding the Companys equity compensation
plans as of December 31, 2004: (a)
    
    
    
    (b)
    
    
    
    (c)Number of securitiesremaining available forNumber of securities to be
    
    
    
    Weighted-average
    
    
    
    future issuance underissued upon exercise of
    
    
    
    exercise price of
    
    
    
    equity compensation plansoutstanding options,
    
    
    
    outstanding options,
    
    
    
    (excluding securitiesPlan category
    
    
    warrants and rights
    
    
    
    warrants and rights
    
    
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    
    8,123,725
    (1)
    
    
    $
    24.31
    
    
    
    
    11,441,744
    (2)Equity compensation
plans not approved
by security holders
    
    
    
    10,010,310
    (3)
    
    
    $
    16.84
    
    
    
    
    3,032,305
    (4)Total
    
    
    
    18,134,035
    
    
    
    
    
    
    
    
    
    14,474,049
    (2) Includes
10,299,713 shares available for issuance under the 2002 Omnibus Plan. In addition to
options, warrants or rights, the 2002 Omnibus Plan also provides for not more than 2,475,000 awards
that may be issued in the form of restricted stock or restricted units. Also includes 1,142,031
shares available for issuance under the American Standard Companies Inc. Employee Stock Purchase
Plan. (3) Includes options to purchase 9,541,838 shares under the 1995 Stock Incentive Plan; 50,331 share
equivalents credited to participants accounts under the American Standard Companies Inc. Deferred
Compensation Plan (the Deferred Compensation Plan); and
418,141 share equivalents credited to
participants accounts under the American Standard Inc. Supplemental Savings Plan (the
Supplemental Savings Plan). Descriptions of the material features of the 1995 Stock Incentive
Plan, the Deferred Compensation Plan and the Supplemental Savings Plan appear below. (4) Includes 2,949,669 shares remaining available for issuance under the Deferred Compensation
Plan; and 82,636 shares remaining available for issuance under the American Standard Companies Inc.
Supplemental Compensation for Outside Directors (the Directors Plan). A description of the
material features of the Directors Plan appears below. 89




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1995 Stock Incentive Plan The 1995 Stock Incentive Plan was approved by the Companys shareholders in 1995, with
22,813,425 shares authorized for issuance under the Plan. Under the 1995 Stock Incentive Plan,
awards may be granted to officers and other key executives and employees, in the form of incentive
or non-qualified stock options, stock appreciation rights, restricted stock and restricted units.
Non-employee directors are eligible to receive awards other than incentive stock options. The
exercise price of an option may not be less than the fair market value of the underlying stock on
the date of grant and no option may have a term of more than ten years. Options awarded under the
Plan generally vest ratably over three years. In the event of a change of control of the Company,
any outstanding stock options will become immediately exercisable and may be cashed out at the
discretion of the participant, and the restricted period will lapse as to any outstanding
restricted stock or restricted units. The Board of Directors of the Company subsequently approved 20.7 million additional shares for
issuance under the Plan. The authorization of additional shares under the Plan did not require the
approval of shareholders and was not submitted for their approval. In February 2002, the Board of
Directors of the Company authorized the 2002 Omnibus Plan as a replacement for the 1995 Stock
Incentive Plan and submitted the 2002 Omnibus Plan to shareholders for their approval. With the
approval of the 2002 Omnibus Plan by shareholders in May 2002, no further awards will be issued
under the 1995 Stock Incentive Plan, which expired on May 2, 2002 except with respect to awards
outstanding on such date. Deferred Compensation Plan The Deferred Compensation Plan is an unfunded plan under which certain executive employees may
defer receipt of all or part of long-term incentive awards and annual incentive awards and portions
of base salary and commissions. Non-employee directors are also eligible to defer annual retainer
and meeting fees. Participants may choose to invest their deferrals into either share equivalents
of Company stock or an interest-bearing cash account. Should the participant choose to defer into
share equivalents, allocations to the share account are based on the fair market value of the
shares on the date the deferred compensation would otherwise have been paid, without a discount of
any kind. At the time of the deferral, the participant chooses the date and form of distribution,
which, can begin upon termination of employment, up to three years after termination of employment,
or in a given year while still employed. Amounts deferred may be distributed earlier than scheduled
upon the occurrence of certain triggering events. In the event of a change of control of the
Company, all obligations under the Plan must be fully funded by the Company. Supplemental Savings Plan The Supplemental Savings Plan is an unfunded plan for the benefit of those ESOP, Savings Plan
and Pension Plan participants, other than executive officers, whose ESOP, Savings-Plan and
Pension-Plan-eligible compensation exceeds the limits of Section 401(a)(17) of the Internal Revenue
Code. Participants in the ESOP and Savings Plan are credited annually with share equivalents of
American Standard stock in an amount that is meant to roughly compensate them for employer
contributions to the Employee Stock Ownership and Savings Plan(s) which are lost due to the limits
of Section 401(a)(17). Participants in the Pension Plan are credited annually with cash in an
amount intended to compensate them for employer contributions to the Pension Plan, which, are lost
due to the limits of Section 401(a)(17). The cash contributions earn interest at the same rate used
to credit cash balances in the Pension Plan. In determining contributions credited under the
Supplemental Savings Plan, only compensation up to $235,000 is considered. In order to receive a
Plan allocation for a given year, participants must be employed with the Company on December 31 of
such year. For participants who are hired on or after January 1, 2004, there is a three-year
vesting requirement under the Plan. Upon termination of employment participants receive a
distribution from the Plan, in shares with respect to their vested share account balances and in
cash with respect to their vested cash account balances. The Plan is designed as a parallel excess
plan within the meaning of the New York Stock Exchange rules regarding shareholder approval of
equity compensation plans. Shares are available for issuance under the Plan as needed in connection
with the operation of the ESOP and the Savings Plan. 90




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Directors Plan The Directors Plan is intended to promote an equity interest in the Company by its
non-employee directors. Under the terms of the Directors Plan, each non-employee director, upon
initial election to the Board, is allocated $100,000 worth of Company stock, based on the fair
market value of the stock on the date immediately preceding the directors election to the board,
which is deposited in a grantors trust for the benefit of the director. In addition, directors
have credited to their plan accounts annually, on the day prior to the annual meeting of the
Companys shareholders, that number of shares of common stock equal in value to $35,000 based on
the closing price of the Companys stock that day. These shares are distributed to the directors
upon their leaving their position as director. Shares allocated to a directors account are voted
by the trustee as instructed by each director. In the event of change of control of the Company,
the directors are entitled to an immediate distribution of their plan assets from the trust, which,
at their option, can be in either shares or the cash value of the shares. 
 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. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Pursuant to Instruction G(3) to Form 10-K, information concerning principal accounting fees
and services set forth under the heading   Audit Committee Matters  Audit Committees Pre-approved
Policies and Procedures and Audit and Non-Audit Fees 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. 91




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PART IV 
 ITEM 15. 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 the following page 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 The following Current Reports on Form 8-K were filed by the Company since September 30, 2004:  (i)
    Current Report on Form 8-K filed on October 7, 2004 reporting information under
Items 1.01 and 9.01.(ii)
    Current Report on Form 8-K filed on October 18, 2004 reporting information
under Items 2.02, 7.01 and 9.01.(iii)
    Current Report on Form 8-K filed on November 22, 2004 reporting information
under Items 1.01 and 9.01.(iv)
    Current Report on Form 8-K filed on December 16, 2004 reporting information
under Items 1.01 and 9.01.(v)
    Current Report on Form 8-K filed February 1, 2005 reporting information under
Items 2.02, 7.01 and 9.01.(vi)
    Current Report on Form 8-K filed February 4, 2005 reporting information under
Item 1.01.(vii)
    Current Report on Form 8-K filed February 22, 2005 reporting information under
Item 2.05 and 2.06. 92




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INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
COVERED BY
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Page No.1. Financial Statements:Consolidated Balance Sheet at December 31, 2004 and 2003
    
    
    44Years ended December 31, 2004, 2003 and 2002:Consolidated Statement of Income
    
    
    43Consolidated Statement of Cash Flows
    
    
    45Consolidated Statement of Shareholders Equity and Other Comprehensive Income
    
    
    46Notes to Financial Statements
    
    
    47Segment Data
    
    
    19, 71-73Quarterly Data (Unaudited)
    
    
    82Report of Independent Auditors
    
    
    422. Report of Independent `Registered Public Accounting Firm on Financial Statement Schedules
    
    
    863. Financial statement schedules, years ended December 31, 2004, 2003, and 2002I Condensed Financial Information of Registrant
    
    
    101II Valuation and Qualifying Accounts
    
    
    104
 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. 93




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AMERICAN STANDARD COMPANIES INC. INDEX TO EXHIBITS
(Item 15(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.) 3.1
    
    Restated Certificate of Incorporation of Holding; previously filed as Exhibit 3(i) to Holdings Form 10-Q for the quarter ended September 30, 1998, and herein incorporated by
reference.3.2
    
    Amendment to the Restated Certificate of Incorporation of Holding, previously filed as Exhibit 3 to Holdings Form 10-Q for the quarter ended June 30, 2004, and herein
incorporated by reference.3.3
    
    Amended and Restated By-laws of Holding; previously filed as Exhibit (3)(ii) to Holdings Form 10-K for the fiscal year ended December 31, 1999, and herein incorporated by
reference.4.1
    
    Form of Common Stock Certificate previously filed as Exhibit (4)(i) to Holdings Form 10-K for the fiscal year ended December 31, 2002 and herein incorporated by reference.4.2
    
    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.4.3
    
    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.4.4
    
    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.4.5
    
    Form of Senior Debt Indenture dated
as of January 15, 1998 among the Company, Holding and The Bank
of New York, Trustee; filed as Exhibit (4)(i) to Amendment
No. 1 to Registration Statement No. 333-32627 filed
September 19, 1997, and herein incorporated by reference.4.6
    
    Indenture dated as of January 15, 1998 among the Company, Holding and The Bank of New York, Trustee; previously filed as Exhibit 4.1 to Holdings Form 10-
Q for the quarter ended September 30, 1998, and herein incorporated by reference.4.7
    
    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) to Holdings Form 10-K for the fiscal year ended December 31, 1997, and herein
incorporated by reference.4.8
    
    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% Senior Notes due 2010, guaranteed by Holding; previously filed as Exhibit (4)(xii) to Holdings Form 10-K for the fiscal year
 94




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ended December 31, 1997, and herein incorporated by reference.4.9
    
    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 to Holdings Form 10-Q for the quarter ended September 30, 1998, and herein
incorporated by reference.4.10
    
    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) to Holdings Form 10-K for the fiscal year ended December 31, 1999, and herein
incorporated by reference.4.11
    
    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) to Holdings Form 10-K for the fiscal year ended December 31, 1999, and
herein incorporated by reference.4.12
    
    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) to Holdings Form 10-K for the fiscal year ended December 31, 1999, and
herein incorporated by reference.4.13
    
    Seventh Supplemental Indenture dated as of November 19, 2004 to the Indenture dated as of May 28, 1999 among the Company, Holding and The Bank of New York,
previously filed as Exhibit 4.01 to Holdings Form 8-K dated November 19, 2004, and herein incorporated by reference.4.14
    
    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.4.15
    
    Amendment No. 1 to Rights Agreement, dated as of January 13, 2003 between American Standard Companies Inc. and The Bank of New York, as Rights Agent;
previously filed as Exhibit (1)(a) to Holdings Form 8-A/A (Amendment No. 2) filed on August 20 2003, and herein incorporated by reference.4.16
    
    Amendment No. 2 to Rights Agreement dated as of February 6, 2003, between American Standard Companies Inc. and The Bank of New York, as Rights Agent,
previously filed as Exhibit (1)(b) to Holdings Form 8-A/A (Amendment No. 2) filed on August 20, 2003 and herein incorporated by reference.4.17
    
    Amendment No. 3 to Rights Agreement dated August 20, 2003, between American Standard Companies Inc. and The Bank of New York, as Rights Agent, previously
filed as Exhibit (1)(b) to Holdings Form 8-A/A (Amendment No. 2) filed on August 20, 2003 and herein incorporated by reference.4.18
    
    Guaranty executed and delivered November 19, 2004, made by American Standard International Inc. to the Bank of New York, previously filed as Exhibit 4.02
to Holdings Form 8-K dated November 19, 2004, and herein incorporated by reference.10.1*
    
    Amended and Restated Employment Agreement of Frederic M. Poses dated as of February 7, 2002; previously filed as Exhibit (10)(iii) to Holdings Form 10-K
for the fiscal year ended December 31, 2001, and herein incorporated by reference.10.2*
    
    Amendment to Employment Agreement of Frederic M. Poses dated October 6, 2004, previously filed as Exhibit 10.1 to Holdings Form 8-K dated October 6, 2004,
and herein incorporated by reference.10.3*
    
    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.
 95




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##### Table of Contents



10.4*
    
    Summary of Employment Arrangement with J. Paul McGrath; previously filed as Exhibit 10.4 to Holdings Form 10-Q for the quarter ended June 30, 2004, and
herein incorporated by reference.10.5*
    
    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.10.6*
    
    Summary of Employment Arrangement with G. Peter DAloia, filed herewith.10.7*
    
    Employment Agreement of Lawrence B. Costello dated May 1, 2000;
previously filed as Exhibit (10)(vi) to Holdings Form 10-K for the
fiscal year ended December 31, 2001, and herein incorporated by
reference.10.8*
    
    Employment Agreement of James E. Dwyer; previously filed as Exhibit
99.1to Holdings Form 10-Q for the quarter ended September 30, 2004,
and herein incorporated by reference.10.9*
    
    Employment Agreement of Marc Olivié dated March 2, 2001 and revised
March 19, 2001; previously filed as Exhibit (10)(vii) in Holdings Form
10-K for the fiscal year ended December 31, 2001, and herein
incorporated by reference.10.10*
    
    Separation Letter between Marc Olivié and American Standard Companies
Inc. dated January 13, 2004, previously filed as Exhibit 10.6 to
Holdings Form 10-K for the fiscal year ended December 31, 2003, and
herein incorporated by reference.10.11*
    
    The American Standard Companies Inc. Employee Stock Purchase Plan,
amended and restated as of July 1, 2002; previously filed as Exhibit
(10)(viii) to Holdings Form 10-K for the fiscal year ended December
31, 2002 and herein incorporated by reference.10.12*
    
    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 February 3, 2005), filed herewith.10.13*
    
    American Standard Inc. Executive Supplemental Retirement Benefit Program, Restated to include all
amendments through July 10, 2003, previously filed as Exhibit 10.10 to Holdings Form 10-K for the
fiscal year ended December 31, 2003, and herein incorporated by reference.10.14*
    
    American Standard Companies Inc. Supplemental Compensation Plan for Outside Directors (as amended
and restated effective October 7, 2004), previously filed as Exhibit 10 to Holdings Form 10-Q for
the quarter ended September 30, 2004, and herein incorporated by reference.10.15*
    
    Trust Agreement for the American Standard Companies Inc. Supplemental
Compensation Plan for Outside Directors, Amended and Restated as of
October 2, 2003, previously filed as Exhibit 10.12 to Holdings Form
10-K for the fiscal year ended December 31, 2003, and herein
incorporated by reference.10.16*
    
    American Standard Companies Inc. Corporate Officer Severance Plan (as
Amended and Restated as of July 8, 2004), previously filed as Exhibit
10 to Holdings Form 10-Q for the quarter ended July 10, 2004, and
herein incorporated by reference.10.17*
    
    American Standard Companies Inc. Deferred Compensation Plan (as Amended
and Restated as of January 1, 2004), previously filed as Exhibit 10.14
to Holdings Form 10-K for the fiscal year ended December 31, 2003, and
herein incorporated by reference.10.18*
    
    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 fiscal year ended December 31, 2000, and
herein incorporated by reference.
 96




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10.19*
    
    Addendum to Stock Incentive Plan to comply with local regulations in
the United Kingdom with respect to options granted in that country;
previously filed as Exhibit (10)(xii) to Holdings Form 10-K for the
fiscal year ended December 31, 1999, and herein incorporated by
reference.10.20*
    
    Addendum to Stock Incentive Plan referred to comply with local regulations in France with respect to options granted in that
country; previously filed as Exhibit (10)(xiii) to Holdings Form 10-K for the fiscal year ended December 31, 1999, and herein
incorporated by reference.10.21*
    
    Second Addendum for French Participants to Stock Incentive Plan in governing options granted to participants in France on or
after May 16, 2001, previously filed as Exhibit (10)(xix) to Holdings Form 10-K for the fiscal year ended December 31, 2002
and herein incorporated by reference.10.22*
    
    Addendum to Stock Incentive Plan for Canadian participants to comply with local regulation in Canada with respect to options
granted in that country, previously filed as Exhibit 10.2 to Holdings Form 10-Q for the quarter ended June 30, 2004 and herein
incorporated by reference. (Plan previously filed as Exhibit (10)(xix) to Holdings Form 10-K for the fiscal year ended
December 31, 2002 and herein incorporated by reference.)10.23*
    
    American Standard Companies Inc. 2002 Omnibus Incentive Plan; previously filed as Exhibit (10) to Holdings Form 10-Q for the
quarter ended March 31, 2002, and herein incorporated by reference.10.24*
    
    Addendum to the 2002 Omnibus Incentive Plan governing options granted to participants in Canada with respect to options granted
in that country, previously filed as Exhibit 10.1 to Holdings Form 10-Q for the Quarter ended June 30, 2004. (Plan filed as
Exhibit (10) to Holdings Form 10-Q for the quarter ended March 31, 2002 and herein incorporated by reference.10.25*
    
    Addendum to the 2002 Omnibus Incentive Plan governing options granted to participants in France, previously filed as Exhibit
(10)(xxi) to Holdings Form 10-K for the fiscal year ended December 31, 2002 and herein incorporated by reference.10.26*
    
    American Standard Inc. Supplemental Savings Plan (as Amended and Restated as of February 3, 2005), filed herewith.10.27
    
    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.10.28
    
    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 Holdings Form 10-Q for the quarter ended September 30, 2001, and herein incorporated by reference.10.29
    
    First Amendment dated as of November 5, 2002, to the Five-Year Credit Agreement, dated as of November 6, 2001, among Holding, the Company, American
Standard International Inc., the Borrowing Subsidiaries from time to time party thereto and the Lenders from time to time party thereto; JPMorgan Chase
Bank, as Administrative Agent, as Issuing Bank and as Swingline Lender; and J. P. Morgan Europe Limited, as London Agent and as Belgian Agent; previously
filed as Exhibit (10)(i) to Holdings Form 10-Q for the quarter ended September 30, 2002, and herein incorporated by reference.10.30*
    
    Consulting Agreement dated as of February 23, 2005, between the Company and J. Paul McGrath, filed herewith.
 97




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10.31*
    
    American Standard Companies Inc. Stock Option Grant to J. Paul McGrath, dated July 7, 2004, filed herewith.10.32*
    
    American Standard Companies Inc. Stock Option Grant to G. Peter DAloia, dated July 7, 2004, filed herewith.10.33*
    
    American Standard Companies Inc. Stock Option Grant to G. Peter DAloia, dated February 2, 2005, filed herewith.10.34*
    
    2005-2007 Long-Term Incentive Plan and 2005 Annual Incentive Plan Goals, filed herewith.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.23.1
    
    Consent of Hamilton, Rabinovitz and Alschuler, Inc., filed herewith.24
    
    Power of Attorney (Steven E. Anderson, Jared L. Cohon, Paul J. Curlander, Steven F. Goldstone, Edward E. Hagenlocker, James F. Hardymon, and Ruth Ann
Marshall), filed herewith.31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.32.1
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.32.2
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
   *
    
    Management compensatory plan or arrangement. 98




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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. POSESFrederic M. PosesChairman and Chief Executive Officer
 February 24, 2005 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
(Principal Executive Officer)Frederic M. Poses/s/ G. PETER DALOIA
    
    Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)G. Peter DAloia/s/ RICHARD S. PARADISE
    
      Vice President and Controller(Principal Accounting Officer)Richard S. Paradise*Steven E. Anderson
    
    Director*Jared L. Cohon
    
    Director*Paul J. Curlander
    
    Director*Steven F. Goldstone
    
    Director*Edward E. Hagenlocker
    
    Director*James F. Hardymon
    
    Director*Ruth Ann Marshall
    
    Director* /s/ MARY ELIZABETH GUSTAFSSONMary Elizabeth GustafssonAttorney-in-fact
 99




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES We have audited the consolidated financial statements of American Standard Companies Inc. as
of December 31, 2004 and 2003, and for each of the three years in the period ended December 31,
2004, and have issued our report thereon dated February 23, 2005. Our audits also included the
financial statement schedules listed in Item 15(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. (ERNST & YOUNG LLP)
 New York, New York
February 23, 2005 100




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SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (Parent Company Separately)
(Dollars in millions) Year Ended December 31,2004
    
    
    2003
    
    
    2002Equity in net income of subsidiaries
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0Net income
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0
 See notes to financial statements. BALANCE SHEET (Parent Company Separately)
(Dollars in millions) December 31,2004
    
    
    2003ASSETSCash
    
    $
    0.1
    
    
    $
    .1Investment in subsidiaries
    
    
    1,871.3
    
    
    
    1,441.1Total assets
    
    $
    1,871.4
    
    
    $
    1,441.2LIABILITIESLoans payable to subsidiaries
    
    $
    941.1
    
    
    $
    727.4SHAREHOLDERS EQUITYCommon stock, $.01 par value, 560,000,000 shares
authorized: issued and outstanding, 214,947,988 shares in
2004; 217,914,978 shares in 2003
    
    
    2.5
    
    
    
    2.5Capital surplus
    
    
    794.5
    
    
    
    753.7Unearned compensation
    
    
    
    
    
    
    (0.7
    )Treasury stock
    
    
    (760.1
    )
    
    
    (584.3
    )Retained earnings
    
    
    1,146.6
    
    
    
    833.2Accumulated other comprehensive income:Foreign currency translation effects
    
    
    (102.8
    )
    
    
    (204.5
    )Deferred loss on hedge contracts, net of tax
    
    
    9.3
    
    
    
    7.1Minimum pension liability adjustment, net of tax
    
    
    (159.7
    )
    
    
    (93.2
    )Total shareholders equity
    
    
    930.3
    
    
    
    713.8Total liabilities and shareholders equity
    
    $
    1,871.4
    
    
    $
    1,441.2
 See notes to financial statements. 101




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SCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) STATEMENT OF CASH FLOWS (Parent Company Separately)
(Dollars in millions) Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    313.4
    
    
    $
    405.2
    
    
    $
    371.0Adjustments to reconcile net income to
net cash provided by operating activities:Equity in net income of subsidiaries
    
    
    (313.4
    )
    
    
    (405.2
    )
    
    
    (371.0
    )Changes in:Accounts receivable
    
    
    
    
    
    
    
    
    
    
    .5Accounts payable and accruals
    
    
    
    
    
    
    
    
    
    
    Net cash flow from operating activities
    
    
    
    
    
    
    
    
    
    
    .5Cash provided (used) by
investing activities:Investment in subsidiaries
    
    
    
    
    
    
    
    
    
    
    Net cash provided (used) by
investing activities
    
    
    
    
    
    
    
    
    
    
    Cash provided (used) by financing activities:Purchases of treasury stock
    
    
    (253.0
    )
    
    
    (149.5
    )
    
    
    (141.1
    )Purchase of warrants
    
    
    
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    36.9
    
    
    
    54.9
    
    
    
    56.1Loan from subsidiary
    
    
    208.4
    
    
    
    87.7
    
    
    
    77.2Other
    
    
    7.7
    
    
    
    7.0
    
    
    
    7.3Net cash provided (used) by
financing activities
    
    
    
    
    
    
    .1
    
    
    
    (.5
    )Net change in cash and cash equivalents
    
    
    
    
    
    
    .1
    
    
    
    Cash and cash equivalents beginning of year
    
    
    .1
    
    
    
    
    
    
    
    Cash and cash equivalents end of year
    
    $
    .1
    
    
    $
    .1
    
    
    $
    
 See notes to financial statements. 102




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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 owns 100% of the outstanding shares of common stock American Standard Inc.
and 100% of the shares of common stock of American Standard International Inc.  (C)
    The Companys Board of Directors has approved a quarterly dividend of $.15 per share of
common stock. The dividend will be paid on March 25, 2005, to shareholders of record on
February 28, 2005. On February 3, 2005 the Companys Board of Directors also approved $400
million to purchase shares of the Companys common stock in the open market. As of February
11, 2005, the unexpended authorization on the current program, together with any amounts
remaining under prior programs totaled $412,236,204. The Company plans to expend
approximately $400 million for share repurchases in 2005. 103




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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands) ForeignBalance
    
    
    Additions
    
    
    
    
    
    
    
    
    
    
    Currency
    
    
    BalanceBeginning
    
    
    Charged to
    
    
    
    
    
    
    Other
    
    
    Translation
    
    
    End ofDescription
    
    of Period
    
    
    Income
    
    
    Deductions
    
    
    Changes
    
    
    Effects
    
    
    Period2004:Reserve deducted from assets:Allowance for doubtful
accounts receivable
    
    $
    45,308
    
    
    $
    16,743
    
    
    $
    (17,800
    )(A)
    
    $
    550
    
    
    $
    1,434
    
    
    $
    46,2352003:Reserve deducted from assets:Allowance for doubtful
accounts receivable
    
    $
    38,112
    
    
    $
    25,709
    
    
    $
    (18,420
    )(A)
    
    $
    (1,814
    )
    
    $
    1,721
    
    
    $
    45,3082002:Reserve deducted from assets:Allowance for doubtful
accounts receivable
    
    $
    35,446
    
    
    $
    22,524
    
    
    $
    (8,627
    )(A)
    
    $
    (12,434
    )
    
    $
    1,203
    
    
    $
    38,112
   (A)
    Accounts charged off.
 104