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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from        to       .
 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, NJ
    
    08855-6820(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code
    
    (732) 980-6000
 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. [X]   Yes    [  ]No Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act) [X]   Yes    [  ]No Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Common stock, $.01 par value, outstanding at April 22, 2004
    
    71,686,454 shares




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TABLE OF CONTENTS  PART 1. FINANCIAL INFORMATIONItem 1. Financial StatementsUNAUDITED SUMMARY CONSOLIDATED STATEMENT OF INCOMEUNAUDITED SUMMARY CONSOLIDATED BALANCE SHEETUNAUDITED SUMMARY CONSOLIDATED STATEMENT OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities, and Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 6. Exhibits and Reports on Form 8-KSIGNATUREINDEX TO EXHIBITSRATIO OF EARNINGS TO FIXED CHARGESCERTIFICATION OF THE CEOCERTIFICATION OF THE CFOCERTIFICATION OF THE CEOCERTIFICATION OF THE CFO    Table of Contents  
 PART 1. FINANCIAL INFORMATION 
 Item 1. Financial Statements American Standard Companies Inc. (the Company) is a Delaware corporation
that owns all the outstanding common stock of American Standard Inc. and
American Standard International Inc. (ASII), both Delaware corporations.
American Standard or the Company as well as we, us and our will refer
to the Company, or to the Company and American Standard Inc. and ASII including
their subsidiaries, as the context requires. 
 AMERICAN STANDARD COMPANIES INC.
UNAUDITED SUMMARY CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions except per share amounts) Three months endedMarch 31,2004
    
    2003Sales
    
    $
    2,185.0
    
    
    $
    1,950.6Costs and expenses:Cost of sales
    
    
    1,604.8
    
    
    
    1,485.8Selling and administrative expenses
    
    
    420.8
    
    
    
    324.1Other expense
    
    
    7.5
    
    
    
    18.0Interest expense
    
    
    29.3
    
    
    
    30.22,062.4
    
    
    
    1,858.1Income before income taxes
    
    
    122.6
    
    
    
    92.5Income taxes
    
    
    38.0
    
    
    
    28.7Net income applicable to common shares
    
    $
    84.6
    
    
    $
    63.8Net income per share:Basic
    
    $
    1.17
    
    
    $
    .88Diluted
    
    $
    1.14
    
    
    $
    .87Average common shares outstandingBasic
    
    
    72,158,123
    
    
    
    72,141,634Diluted
    
    
    74,075,182
    
    
    
    73,379,432
 See accompanying notes 2




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AMERICAN STANDARD COMPANIES INC.
UNAUDITED SUMMARY CONSOLIDATED BALANCE SHEET
(Dollars in millions, except share data) March 31,
    
    December 31,2004
    
    2003Current assets:Cash and cash equivalents
    
    $
    192.3
    
    
    $
    111.7Accounts receivable, less allowance for doubtful
accounts: Mar. 2004 - $42.7; Dec.2003 - $45.3
    
    
    1,138.5
    
    
    
    1,022.8Inventories:Finished products
    
    
    638.3
    
    
    
    571.8Products in process
    
    
    199.4
    
    
    
    181.4Raw materials
    
    
    164.6
    
    
    
    156.7Other current assets
    
    
    441.5
    
    
    
    446.3Total current assets
    
    
    2,774.6
    
    
    
    2,490.7Facilities, less accumulated depreciation:Mar. 2004 - $977.2 ; Dec. 2003 - $963.5
    
    
    1,488.7
    
    
    
    1,515.4Goodwill, less accumulated amortization:Mar. 2004 - $412.4; Dec. 2003 - $413.1
    
    
    1,124.2
    
    
    
    1,140.4Capitalized software costs, less accumulatedamortization: Mar. 2004 - $214.9; Dec. 2003 - $202.6
    
    
    232.6
    
    
    
    239.3Debt issuance costs, net of accumulated amortization:Mar. 2004 - $24.4; Dec. 2003 - $22.4
    
    
    19.2
    
    
    
    21.2Other assets
    
    
    507.9
    
    
    
    471.7Total assets
    
    $
    6,147.2
    
    
    $
    5,878.7Current liabilities:Loans payable to banks
    
    $
    162.1
    
    
    $
    49.8Current portion of long-term debt
    
    
    2.5
    
    
    
    2.5Accounts payable
    
    
    815.9
    
    
    
    684.3Accrued payrolls
    
    
    279.4
    
    
    
    294.3Current portion of warranties
    
    
    160.2
    
    
    
    153.1Taxes on income
    
    
    139.3
    
    
    
    136.0Other accrued liabilities
    
    
    661.8
    
    
    
    713.5Total current liabilities
    
    
    2,221.2
    
    
    
    2,033.5Long-term debt
    
    
    1,731.6
    
    
    
    1,626.8Reserve for post-retirement benefits
    
    
    663.5
    
    
    
    657.4Warranties
    
    
    204.4
    
    
    
    202.9Other liabilities
    
    
    628.6
    
    
    
    644.3Total liabilities
    
    
    5,449.3
    
    
    
    5,164.9Shareholders equity:Preferred stock, 2,000,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    Common stock $.01 par value, 200,000,000 shares
authorized; shares issued and outstanding:71,661,013 in 2004; 72,638,326 in 2003
    
    
    .7
    
    
    
    .7Capital surplus
    
    
    766.1
    
    
    
    755.5Unearned compensation
    
    
    (0.5
    )
    
    
    (0.7
    )Treasury stock
    
    
    (711.0
    )
    
    
    (584.3
    )Retained earnings
    
    
    917.8
    
    
    
    833.2Accumulated other comprehensive income:Foreign currency translation effects
    
    
    (197.7
    )
    
    
    (204.5
    )Deferred gain on hedge contracts, net of tax
    
    
    15.9
    
    
    
    7.1Minimum pension liability adjustment, net of tax
    
    
    (93.4
    )
    
    
    (93.2
    )Total shareholders equity
    
    
    697.9
    
    
    
    713.8$
    6,147.2
    
    
    $
    5,878.7
 See accompanying notes 3




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AMERICAN STANDARD COMPANIES INC.
UNAUDITED SUMMARY CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions) Three months endedMarch 31,2004
    
    2003Cash provided by:Operating Activities:Net income
    
    $
    84.6
    
    
    $
    63.8Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    41.4
    
    
    
    38.3Amortization of capitalized software and other intangibles
    
    
    21.9
    
    
    
    19.1Equity in earnings of unconsolidated joint
ventures, net of dividends received
    
    
    (5.4
    )
    
    
    (1.1
    )Non-cash stock compensation
    
    
    14.9
    
    
    
    16.8Other
    
    
    (.3
    )
    
    
    (1.1
    )Changes in assets and liabilities:Accounts receivable
    
    
    (120.5
    )
    
    
    (155.0
    )Inventories
    
    
    (96.4
    )
    
    
    (87.9
    )Accounts payable
    
    
    126.1
    
    
    
    112.0Other accrued liabilities and taxes
    
    
    (39.4
    )
    
    
    37.2Post-retirement benefits
    
    
    13.3
    
    
    
    11.1Other current and long-term assets
    
    
    (5.0
    )
    
    
    (20.4
    )Other long-term liabilities
    
    
    3.6
    
    
    
    6.6Net cash provided by operating activities
    
    
    38.8
    
    
    
    39.4Investing activities:Purchases of property, plant and equipment
    
    
    (26.4
    )
    
    
    (29.3
    )Investments in affiliated companies and other businesses
    
    
    
    
    
    
    (10.3
    )Investment in computer software
    
    
    (11.7
    )
    
    
    (11.2
    )Loan to unconsolidated joint venture
    
    
    (23.4
    )
    
    
    Other
    
    
    
    
    
    
    .3Net cash used by investing activities
    
    
    (61.5
    )
    
    
    (50.5
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    .1
    
    
    
    32.1Repayments of long-term debt
    
    
    (.2
    )
    
    
    (126.2
    )Net change in revolving credit facilities
    
    
    113.8
    
    
    
    174.0Net change in other short-term debt
    
    
    113.8
    
    
    
    28.2Purchases of treasury stock
    
    
    (143.4
    )
    
    
    (76.0
    )Proceeds from exercise of stock options
    
    
    12.0
    
    
    
    4.5Proceeds from settlement of foreign exchange forward contracts
    
    
    4.7
    
    
    
    17.1Other
    
    
    2.2
    
    
    
    2.3Net cash provided by financing activities
    
    
    103.0
    
    
    
    56.0Effect of exchange rate changes on cash and
cash equivalents
    
    
    .3
    
    
    
    (3.2
    )Net increase in cash and cash equivalents
    
    
    80.6
    
    
    
    41.7Cash and cash equivalents at beginning of period
    
    
    111.7
    
    
    
    96.6Cash and cash equivalents at end of period
    
    $
    192.3
    
    
    $
    138.3Cash interest paid
    
    $
    24.2
    
    
    $
    28.8Cash taxes paid (received)
    
    $
    30.0
    
    
    $
    (11.4
    )
 See accompanying notes 4




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AMERICAN STANDARD COMPANIES INC.
NOTES TO FINANCIAL STATEMENTS Note 1. Basis of Financial Statement Presentation The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring items, considered necessary
for a fair presentation of financial data have been included. The results of
operations for interim periods are not necessarily indicative of the results
that may be expected for the entire year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. Preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Management believes the most complex and
sensitive judgments, because of their significance to the consolidated
financial statements, result primarily from the need to make estimates about
the effects of matters that are inherently uncertain. Managements Discussion
and Analysis and Note 2 to the Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the calendar year 2003, describe the
significant accounting estimates and policies used in preparation of the
Consolidated Financial Statements. Actual results in these areas could differ
materially from managements estimates. There have been no significant changes
in the Companys critical accounting estimates during the first quarter of
2004. Note 2. Comprehensive Income Total comprehensive income consisted of the following (dollars in
millions): Three months endedMarch 31,2004
    
    2003Net income
    
    $
    84.6
    
    
    $
    63.8Foreign currency translation effects
    
    
    6.8
    
    
    
    (11.5
    )Deferred gain on hedge
contracts, net of tax
    
    
    8.8
    
    
    
    1.2Minimum pension liability adjustment
    
    
    (.2
    )
    
    
    .3Total comprehensive income
    
    $
    100.0
    
    
    $
    53.8
 Note 3. Earnings Per Share The average number of outstanding shares of common stock used in computing
diluted earnings per share for the three months ended March 31, 2004 and 2003
included 1,917,059 and 1,237,798 average incremental shares, respectively, for
the assumed exercise of stock options. 5




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Note 4. Capital Stock On February 5, 2004, the Board of Directors approved a three-for-one stock
split, subject to shareholder approval of an amendment to the Companys charter
to increase the authorized shares of common stock from 200,000,000 shares to
560,000,000 shares at the Annual Meeting on May 4, 2004. If the amendment is
approved by shareholders, the split will occur effective May 27, 2004, and
therefore the split is not reflected in these financial statements. Following is a summary of shares issued or reacquired during the first
quarter of 2004. Number of Shares of Common StockTreasury
    
    Net SharesTotal Shares
    
    Shares
    
    OutstandingBalance, December 31, 2003
    
    
    83,919,194
    
    
    
    (11,280,868
    )
    
    
    72,638,326Shares issued upon exercise of stock options
    
    
    333
    
    
    
    256,076
    
    
    
    256,409Stock purchased for treasury
    
    
    
    
    
    
    (1,341,000
    )
    
    
    (1,341,000
    )Shares issued to ESOP
    
    
    
    
    
    
    136,190
    
    
    
    136,190Shares issued to ESPP
    
    
    105
    
    
    
    17,388
    
    
    
    17,493Other shares issued or (reacquired), net
    
    
    
    
    
    
    (46,405
    )
    
    
    (46,405
    )Balance, March 31, 2004
    
    
    83,919,632
    
    
    
    (12,258,619
    )
    
    
    71,661,013
 Note 5. 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 11 of Notes to Financial Statements in
the Companys 2003 Annual Report on Form 10-K. 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. 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 these 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. Nor is compensation cost
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. 6




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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. Three Months EndedMarch 31,(Dollars in millions except per share data)
    
    2004
    
    2003Net income, as reported
    
    $
    84.6
    
    
    $
    63.8Deduct: Total stock-based compensation expense
determined under fair value based method for all stock
option awards, net of tax, and discounts under the ESPP
    
    
    (5.1
    )
    
    
    (5.0
    )Pro forma net income
    
    $
    79.5
    
    
    $
    58.8Earnings per share:Basicas reported
    
    $
    1.17
    
    
    $
    0.88Basicpro forma
    
    $
    1.10
    
    
    $
    0.82Dilutedas reported
    
    $
    1.14
    
    
    $
    0.87Dilutedpro forma
    
    $
    1.07
    
    
    $
    0.80
 The weighted average fair values of grants made during the three months
ended March 31, 2004 and 2003 were $31.55 and $20.94, respectively. 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 3.05% in 2004 and 2.92% in 2003; volatility of 27.4% in 2004
and 28.7% in 2003; an expected average life of 5 years in 2004 and 2003; and a
dividend yield of zero. Note 6. 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 $8.5 million and $8.1 million for the three months ended
March 31, 2004 and 2003, respectively. Including those direct charges to
expense and the warranty costs accrued for basic limited warranties (as shown
in the following table, including changes to prior period accruals), total
warranty expense was $40.0 million and $35.1 million for those respective
periods. 7




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Following is a summary of changes in the Companys product warranty
liability for the three months ended March 31, 2004 and 2003. Three Months EndedMarch 31,(Dollars in millions)
    
    2004
    
    2003Balance of basic warranty costs accrued and
deferred income on extended warranty
contracts, beginning of period
    
    $
    356.0
    
    
    $
    315.9Warranty costs accrued
    
    
    33.1
    
    
    
    30.8Deferred income on extended warranty contracts sold
    
    
    14.9
    
    
    
    14.4Warranty claims settled
    
    
    (25.7
    )
    
    
    (27.9
    )Amortization of deferred income
on extended warranty contracts
    
    
    (12.1
    )
    
    
    (11.9
    )Increases (decreases) in warranty estimates made in prior
periods, including foreign exchange translation effects, net
    
    
    (1.6
    )
    
    
    .4Balance of basic warranty costs accrued and deferred
income on extended warranty contracts, end of period
    
    
    364.6
    
    
    
    321.7Current portion included in current liabilities
    
    
    (160.2
    )
    
    
    (122.3
    )Long-term warranty liability
    
    $
    204.4
    
    
    $
    199.4
 The Company has commitments and performance guarantees, including energy
savings guarantees totaling $41 million as of March 31, 2004, extending from
2004 to 2021, under long-term contracts related to its air conditioning
equipment and system controls. Through March 31, 2004 the Company has
experienced no net losses under such energy savings guarantees and considers
the probability of losses to be unlikely. We also guarantee debt of third
parties in the amount of $4 million as of March 31, 2004. 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. See Note 9 of Notes to Financial Statements.
The Company also guarantees other debt obligations issued by other
subsidiaries, including obligations under a $49 million Euro-denominated credit
facility and $37 million of Euro-denominated Senior Bonds (both at March 31,
2004 exchange rates). 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 low-risk-profile products, such as boilers and railroad
brake shoes. The Company believes it has ample insurance and has never had an
unfavorable court judgment. 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 allege a connection between
any Company product and the claimed injury or disease, and/or do not contain
any allegations regarding the type of claimed injury or disease incurred. As a
result, numerous lawsuits have been placed and may remain on inactive or
deferred dockets, which some jurisdictions have established. Through March 31, 2004, there have been 141,393 claims filed against the
Company. At March 31, 2004, there were 116,744 pending claims, compared with
114,583 at the end of 2003, and 95,031 and 50,828 at the end of 2002 and 2001,
respectively, reflecting updated numbers for all prior periods. Since receipt
of its first asbestos claim more than fifteen years ago, through March 31,
2004, the Company has resolved 24,649 claims, and settlements of $39.7 million
have been made, for an average payment per claim of $1,609. These settlement
payments have been paid or reimbursed or are expected to be reimbursed by
insurance. 8




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The Company has recorded an obligation of $66 million as of March 31,
2004, that represents the Companys estimated payments to claimants associated
with pending asbestos claims. It also has recorded a related asset of $42
million that represents the probable recoveries from insurance companies for
such payments to claimants. The amount of the estimated obligations is based
on the claims resolved, the assessment of claims pending, the status of ongoing
litigation, defense and settlement strategies, and an assessment of other
entities responsibilities for the claims. The amount of the probable
recoveries is based on an analysis of insurance coverage, the insurers
financial strength and insurance payments made to date. Additional developments may occur that could affect the Companys estimate
of asbestos liabilities and recoveries, such as the nature of future claims,
the average payment to claimants and the amount of insurance recovery. No
liability has been recorded for unknown asbestos claims. However, the Company
has substantial insurance coverage for future claims. The Company believes that
it is not reasonably possible that a net loss material to the liquidity and
financial condition of the Company has been incurred. Note 7. Effect of Other 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 5 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 8 of Notes to Financial Statements. Some of the disclosure
requirements of the revised Statement No. 132 related to foreign plans, interim
periods and certain other matters are not effective until mid-2004. For a
discussion of the impact of FASB Staff Position No. 106-1 (SFAS 106-1),
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 which addresses the accounting
and disclosure implications that are expected to arise as a result of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) enacted on December 8, 2003, see Note 8 of Notes to Financial
Statements. Other Statements and Interpretations recently issued by the FASB
that are applicable to the Company have had little or no immediate effect on
the Company. 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,
had no impact. 9




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Note 8. Post-retirement Benefits In January 2004, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) No. SFAS 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 which addresses the accounting and disclosure
implications that are expected to arise 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.
The benefit obligation and net post-retirement benefit cost of an employer that
provides post-retirement prescription drug coverage will be decreased by
provisions of the Act, but the accounting for those effects is uncertain.
Under the FSP, companies have a one-time election to defer the effects of the
new legislation in financial statements for years ending after December 7,
2003. Companies that elect to defer the effects of the Act must defer
recognition of the effects until the FASB issues clarifying guidance on how the
legislation should be interpreted. The Company has elected to defer the
effects of the Act. All measures of the benefit obligation and net
post-retirement benefit costs included in the financial statements do not
reflect the effects of the Act. The Company is reviewing the provisions of the
Act in conjunction with the Companys post-retirement benefit plan. Post-retirement pension, health and life insurance costs had the following
components: Three Months Ended March 31,2004
    
    2004
    
    2003
    
    2003Health &
    
    
    
    
    
    Health &Pension
    
    Life Ins.
    
    Pension
    
    Life Ins.(Dollars in millions)
    
    Benefits
    
    Benefits
    
    Benefits
    
    BenefitsService cost-benefits earned during the period
    
    $
    12.5
    
    
    $
    2.5
    
    
    $
    10.8
    
    
    $
    2.0Interest cost on the projected benefit obligation
    
    
    21.2
    
    
    
    4.8
    
    
    
    17.7
    
    
    
    4.3Less assumed return on plan assets
    
    
    (15.4
    )
    
    
    
    
    
    
    (12.3
    )
    
    
    Amortization of prior service cost
    
    
    1.6
    
    
    
    (1.1
    )
    
    
    1.5
    
    
    
    (1.2
    )Amortization of net loss
    
    
    3.3
    
    
    
    2.1
    
    
    
    1.5
    
    
    
    1.2Defined benefit plan cost
    
    $
    23.2
    
    
    $
    8.3
    
    
    $
    19.2
    
    
    $
    6.3Accretion expense reflected
in Other expense
    
    $
    5.8
    
    
    $
    4.8
    
    
    $
    5.4
    
    
    $
    4.3
 Amortization of prior service cost is computed on the straight-line method
over the average remaining service period of active participants. The Company expects to contribute $50 million to the domestic pension
plans in the third quarter of 2004. 10




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##### Table of Contents



Note 9. 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) fully and unconditionally guarantees the payment
obligations under these securities (the Companys Public Debt). In lieu of
providing separate financial statements for ASI, the Company has included the
accompanying 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 three months
ended March 31, 2004 and 2003, and balance sheets as of March 31, 2004 and
December 31, 2003 for the Parent Company, ASI, and the subsidiaries of the
Parent Company which are not subsidiaries of ASI (the Other Subsidiaries).
None of the Other Subsidiaries guarantees the ASI Public Debt. 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 THREE MONTHS ENDED MARCH 31, 2004
(Unaudited) Parent
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    ASI
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    
    
    
    
    $
    1,094.4
    
    
    $
    1,203.2
    
    
    $
    (112.6
    )
    
    $
    2,185.0Costs and expenses:Cost of sales
    
    
    
    
    
    
    814.5
    
    
    
    902.9
    
    
    
    (112.6
    )
    
    
    1,604.8Selling and administrative expenses
    
    
    
    
    
    
    222.6
    
    
    
    198.2
    
    
    
    
    
    
    
    420.8Other (income) expense
    
    
    
    
    
    
    8.2
    
    
    
    (0.7
    )
    
    
    
    
    
    
    7.5Interest expense
    
    
    
    
    
    
    25.8
    
    
    
    3.5
    
    
    
    
    
    
    
    29.3Intercompany interest expense (income)
    
    
    
    
    
    
    1.6
    
    
    
    (1.6
    )
    
    
    
    
    
    
    Total expenses
    
    
    
    
    
    
    1,072.7
    
    
    
    1,102.3
    
    
    
    (112.6
    )
    
    
    2,062.4Income before income taxes and equity in
net income of consolidated subsidiaries
    
    
    
    
    
    
    21.7
    
    
    
    100.9
    
    
    
    
    
    
    
    122.6Income taxes
    
    
    
    
    
    
    8.6
    
    
    
    29.4
    
    
    
    
    
    
    
    38.0Income before equity in net income of
consolidated subsidiaries
    
    
    
    
    
    
    13.1
    
    
    
    71.5
    
    
    
    
    
    
    
    84.6Equity in net income of consolidated
subsidiaries
    
    $
    84.6
    
    
    
    
    
    
    
    
    
    
    
    (84.6
    )
    
    
    Net income
    
    $
    84.6
    
    
    $
    13.1
    
    
    $
    71.5
    
    
    $
    (84.6
    )
    
    $
    84.6
 11




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##### Table of Contents



Note 9. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2004
(Unaudited) Parent
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    ASI
    
    Subsidiaries
    
    Eliminations
    
    TotalASSETSCurrent assets:Cash and cash equivalents
    
    $
    .5
    
    
    $
    1.9
    
    
    $
    189.9
    
    
    
    
    
    
    $
    192.3Accounts receivable, net
    
    
    
    
    
    
    461.3
    
    
    
    677.2
    
    
    
    
    
    
    
    1,138.5Inventories
    
    
    
    
    
    
    472.0
    
    
    
    530.3
    
    
    
    
    
    
    
    1,002.3Other current assets
    
    
    
    
    
    
    300.2
    
    
    
    141.3
    
    
    
    
    
    
    
    441.5Total current assets
    
    
    .5
    
    
    
    1,235.4
    
    
    
    1,538.7
    
    
    
    
    
    
    
    2,774.6Facilities, net
    
    
    
    
    
    
    567.4
    
    
    
    921.3
    
    
    
    
    
    
    
    1,488.7Goodwill, net
    
    
    
    
    
    
    107.1
    
    
    
    1,017.1
    
    
    
    
    
    
    
    1,124.2Investment in subsidiaries
    
    
    1,558.2
    
    
    
    
    
    
    
    
    
    
    $
    (1,558.2
    )
    
    
    Other assets
    
    
    
    
    
    
    517.0
    
    
    
    242.7
    
    
    
    
    
    
    
    759.7Total assets
    
    $
    1,558.7
    
    
    $
    2,426.9
    
    
    $
    3,719.8
    
    
    $
    (1,558.2
    )
    
    $
    6,147.2LIABILITIES AND SHAREHOLDERS
(DEFICIT) EQUITYCurrent liabilities:Loans payable to banks
    
    
    
    
    
    $
    75.0
    
    
    $
    87.1
    
    
    
    
    
    
    $
    162.1Current maturities of long-term debt
    
    
    
    
    
    
    1.5
    
    
    
    1.0
    
    
    
    
    
    
    
    2.5Other current liabilities
    
    
    
    
    
    
    959.7
    
    
    
    1,096.9
    
    
    
    
    
    
    
    2,056.6Total current liabilities
    
    
    
    
    
    
    1,036.2
    
    
    
    1,185.0
    
    
    
    
    
    
    
    2,221.2Long-term debt
    
    
    
    
    
    
    1,603.7
    
    
    
    127.9
    
    
    
    
    
    
    
    1,731.6Reserve for postretirement benefits
    
    
    
    
    
    
    341.6
    
    
    
    321.9
    
    
    
    
    
    
    
    663.5Intercompany accounts, net
    
    $
    860.8
    
    
    
    123.9
    
    
    
    (984.7
    )
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    466.9
    
    
    
    366.1
    
    
    
    
    
    
    
    833.0Total liabilities
    
    
    860.8
    
    
    
    3,572.3
    
    
    
    1,016.2
    
    
    $
    
    
    
    
    5,449.3Total shareholders (deficit) equity
    
    
    697.9
    
    
    
    (1,145.4
    )
    
    
    2,703.6
    
    
    
    (1,558.2
    )
    
    
    697.9Total liabilities and shareholders
equity
    
    $
    1,558.7
    
    
    $
    2,426.9
    
    
    $
    3,719.8
    
    
    $
    (1,558.2
    )
    
    $
    6,147.2
 12




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##### Table of Contents



Note 9. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(Unaudited) Parent
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    ASI
    
    Subsidiaries
    
    Eliminations
    
    TotalCash provided by:Operating activities:Net income
    
    $
    84.6
    
    
    $
    13.1
    
    
    $
    71.5
    
    
    $
    (84.6
    )
    
    $
    84.6Adjustments to reconcile net income to net
cash provided by operations:Depreciation and amortization
    
    
    
    
    
    
    23.9
    
    
    
    39.4
    
    
    
    
    
    
    
    63.3Equity in earnings of unconsolidated joint
ventures, net of dividends received
    
    
    
    
    
    
    (3.5
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    (5.4
    )Non-cash stock compensation
    
    
    
    
    
    
    14.9
    
    
    
    
    
    
    
    
    
    
    
    14.9Equity in net income of subsidiaries
    
    
    (84.6
    )
    
    
    
    
    
    
    
    
    
    
    84.6
    
    
    
    Other
    
    
    
    
    
    
    (.3
    )
    
    
    
    
    
    
    
    
    
    
    (.3
    )Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    19.6
    
    
    
    (140.1
    )
    
    
    
    
    
    
    (120.5
    )Inventories
    
    
    
    
    
    
    (49.4
    )
    
    
    (47.0
    )
    
    
    
    
    
    
    (96.4
    )Accounts payable
    
    
    
    
    
    
    82.0
    
    
    
    44.1
    
    
    
    
    
    
    
    126.1Other accrued liabilities and taxes
    
    
    
    
    
    
    19.7
    
    
    
    (59.1
    )
    
    
    
    
    
    
    (39.4
    )Post-retirement benefits
    
    
    
    
    
    
    11.4
    
    
    
    1.9
    
    
    
    
    
    
    
    13.3Other current and long-term assets
    
    
    
    
    
    
    5.2
    
    
    
    (10.2
    )
    
    
    
    
    
    
    (5.0
    )Other long-term liabilities
    
    
    
    
    
    
    .1
    
    
    
    3.5
    
    
    
    
    
    
    
    3.6Net cash provided by
operating activities
    
    
    
    
    
    
    136.7
    
    
    
    (97.9
    )
    
    
    
    
    
    
    38.8Investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (9.2
    )
    
    
    (17.2
    )
    
    
    
    
    
    
    (26.4
    )Investments in computer software
    
    
    
    
    
    
    (6.6
    )
    
    
    (5.1
    )
    
    
    
    
    
    
    (11.7
    )Loan to unconsolidated joint venture
    
    
    
    
    
    
    (23.4
    )
    
    
    
    
    
    
    
    
    
    
    (23.4
    )Net cash used by investing activities
    
    
    
    
    
    
    (39.2
    )
    
    
    (22.3
    )
    
    
    
    
    
    
    (61.5
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    .1
    
    
    
    
    
    
    
    .1Repayments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (.2
    )
    
    
    
    
    
    
    (.2
    )Net change in revolving credit facilities
    
    
    
    
    
    
    119.0
    
    
    
    (5.2
    )
    
    
    
    
    
    
    113.8Net change in other short-term debt
    
    
    
    
    
    
    75.0
    
    
    
    38.8
    
    
    
    
    
    
    
    113.8Purchases of treasury stock
    
    
    (143.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143.4
    )Net change in intercompany accounts
    
    
    130.3
    
    
    
    (224.6
    )
    
    
    94.3
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    12.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.0Proceeds from settlement of foreign exchange
forward contracts
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    4.7Other
    
    
    1.5
    
    
    
    .7
    
    
    
    
    
    
    
    
    
    
    
    2.2Net cash provided (used) by financing activities
    
    
    .4
    
    
    
    (25.2
    )
    
    
    127.8
    
    
    
    
    
    
    
    103.0Effect of exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    .3
    
    
    
    
    
    
    
    .3Net increase in cash and cash equivalents
    
    
    .4
    
    
    
    72.3
    
    
    
    7.9
    
    
    
    
    
    
    
    80.6Cash and cash equivalents a
beginning of period
    
    
    .1
    
    
    
    (70.4
    )
    
    
    182.0
    
    
    
    
    
    
    
    111.7Cash and cash equivalents at end of period
    
    $
    .5
    
    
    $
    1.9
    
    
    $
    189.9
    
    
    $
    
    
    
    $
    192.3
 13




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##### Table of Contents



Note 9. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited) Parent
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    ASI
    
    Subsidiaries
    
    Eliminations
    
    TotalSales
    
    
    
    
    
    $
    1,034.7
    
    
    $
    1,017.5
    
    
    $
    (101.6
    )
    
    $
    1,950.6Costs and expenses:Cost of sales
    
    
    
    
    
    
    805.4
    
    
    
    782.0
    
    
    
    (101.6
    )
    
    
    1,485.8Selling and administrative expenses
    
    
    
    
    
    
    181.6
    
    
    
    142.5
    
    
    
    
    
    
    
    324.1Other expense
    
    
    
    
    
    
    .5
    
    
    
    17.5
    
    
    
    
    
    
    
    18.0Interest expense
    
    
    
    
    
    
    27.6
    
    
    
    2.6
    
    
    
    
    
    
    
    30.2Intercompany interest expense (income)
    
    
    
    
    
    
    3.1
    
    
    
    (3.1
    )
    
    
    
    
    
    
    Total expenses
    
    
    
    
    
    
    1,018.2
    
    
    
    941.5
    
    
    
    (101.6
    )
    
    
    1,858.1Income before income taxes and equity in
net income of consolidated subsidiaries
    
    
    
    
    
    
    16.5
    
    
    
    76.0
    
    
    
    
    
    
    
    92.5Income taxes
    
    
    
    
    
    
    5.5
    
    
    
    23.2
    
    
    
    
    
    
    
    28.7Income before equity in net income of
consolidated subsidiaries
    
    
    
    
    
    
    11.0
    
    
    
    52.8
    
    
    
    
    
    
    
    63.8Equity in net income of consolidated
subsidiaries
    
    $
    63.8
    
    
    
    
    
    
    
    
    
    
    
    (63.8
    )
    
    
    Net income
    
    $
    63.8
    
    
    $
    11.0
    
    
    $
    52.8
    
    
    $
    (63.8
    )
    
    $
    63.8
 14




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##### Table of Contents



Note 9. Supplemental Consolidating Condensed Financial Information (continued) CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited) Parent
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    ASI
    
    Subsidiaries
    
    Eliminations
    
    TotalCash provided (used) by:Operating activities:Net income
    
    $
    63.8
    
    
    $
    11.0
    
    
    $
    52.8
    
    
    $
    (63.8
    )
    
    $
    63.8Adjustments to reconcile net income to net
cash provided (used) by operations:Depreciation and amortization
    
    
    
    
    
    
    23.8
    
    
    
    33.6
    
    
    
    
    
    
    
    57.4Equity in earnings of unconsolidated joint
ventures, net of dividends received
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Non-cash stock compensation
    
    
    
    
    
    
    16.8
    
    
    
    
    
    
    
    
    
    
    
    16.8Equity in net income of subsidiaries
    
    
    (63.8
    )
    
    
    
    
    
    
    
    
    
    
    63.8
    
    
    
    Other
    
    
    
    
    
    
    (1.5
    )
    
    
    .4
    
    
    
    
    
    
    
    (1.1
    )Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (7.0
    )
    
    
    (148.0
    )
    
    
    
    
    
    
    (155.0
    )Inventories
    
    
    
    
    
    
    (51.9
    )
    
    
    (36.0
    )
    
    
    
    
    
    
    (87.9
    )Accounts payable
    
    
    
    
    
    
    63.7
    
    
    
    48.3
    
    
    
    
    
    
    
    112.0Other accrued liabilities and taxes
    
    
    
    
    
    
    (16.0
    )
    
    
    53.2
    
    
    
    
    
    
    
    37.2Post-retirement benefits
    
    
    
    
    
    
    10.4
    
    
    
    .7
    
    
    
    
    
    
    
    11.1Other assets
    
    
    
    
    
    
    (12.9
    )
    
    
    (7.5
    )
    
    
    
    
    
    
    (20.4
    )Other long-term liabilities
    
    
    
    
    
    
    (2.2
    )
    
    
    8.8
    
    
    
    
    
    
    
    6.6Net cash provided by
operating activities
    
    
    
    
    
    
    34.2
    
    
    
    5.2
    
    
    
    
    
    
    
    39.4Investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (11.6
    )
    
    
    (17.7
    )
    
    
    
    
    
    
    (29.3
    )Investments in affiliated companies and
other businesses
    
    
    
    
    
    
    
    
    
    
    (10.3
    )
    
    
    
    
    
    
    (10.3
    )Investments in computer software
    
    
    
    
    
    
    (5.9
    )
    
    
    (5.3
    )
    
    
    
    
    
    
    (11.2
    )Other
    
    
    
    
    
    
    
    
    
    
    .3
    
    
    
    
    
    
    
    .3Net cash used by investing activities
    
    
    
    
    
    
    (17.5
    )
    
    
    (33.0
    )
    
    
    
    
    
    
    (50.5
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    32.1
    
    
    
    
    
    
    
    32.1Repayments of long-term debt
    
    
    
    
    
    
    (125.2
    )
    
    
    (1.0
    )
    
    
    
    
    
    
    (126.2
    )Net change in revolving credit facilities
    
    
    
    
    
    
    177.5
    
    
    
    (3.5
    )
    
    
    
    
    
    
    174.0Net change in other short-term debt
    
    
    
    
    
    
    25.0
    
    
    
    3.2
    
    
    
    
    
    
    
    28.2Purchases of treasury stock
    
    
    (76.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76.0
    )Net change in intercompany accounts
    
    
    70.3
    
    
    
    (78.3
    )
    
    
    8.0
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    4.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.5Proceeds from settlement of foreign exchange
forward contracts
    
    
    
    
    
    
    17.1
    
    
    
    
    
    
    
    
    
    
    
    17.1Other
    
    
    1.5
    
    
    
    .8
    
    
    
    
    
    
    
    
    
    
    
    2.3Net cash provided (used) by financing activities
    
    
    .3
    
    
    
    16.9
    
    
    
    38.8
    
    
    
    
    
    
    
    56.0Effect of exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    (3.2
    )Net increase (decrease) in cash and
cash equivalents
    
    
    .3
    
    
    
    33.6
    
    
    
    7.8
    
    
    
    
    
    
    
    41.7Cash and cash equivalents a
beginning of period
    
    
    
    
    
    
    (22.9
    )
    
    
    119.5
    
    
    
    
    
    
    
    96.6Cash and cash equivalents at end of period
    
    $
    .3
    
    
    $
    10.7
    
    
    $
    127.3
    
    
    $
    
    
    
    $
    138.3
 15




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##### Table of Contents



Note 9. 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
    
    iaries
    
    ations
    
    TotalASSETSCurrent assets:Cash and cash equivalents
    
    $
    .1
    
    
    $
    (70.4
    )
    
    $
    182.0
    
    
    
    
    
    
    $
    111.7Accounts receivable, net
    
    
    
    
    
    
    481.7
    
    
    
    541.1
    
    
    
    
    
    
    
    1,022.8Inventories
    
    
    
    
    
    
    422.6
    
    
    
    487.3
    
    
    
    
    
    
    
    909.9Other current assets
    
    
    
    
    
    
    256.5
    
    
    
    189.8
    
    
    
    
    
    
    
    446.3Total current assets
    
    
    .1
    
    
    
    1,090.4
    
    
    
    1,400.2
    
    
    
    
    
    
    
    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
    )
    
    
    Other assets
    
    
    
    
    
    
    510.6
    
    
    
    221.6
    
    
    
    
    
    
    
    732.2Total assets
    
    $
    1,441.2
    
    
    $
    2,320.3
    
    
    $
    3,558.3
    
    
    $
    (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
    
    
    
    1,117.8
    
    
    
    
    
    
    
    1,981.2Total current liabilities
    
    
    
    
    
    
    864.9
    
    
    
    1,168.6
    
    
    
    
    
    
    
    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
    
    
    
    (978.8
    )
    
    
    
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    481.5
    
    
    
    365.7
    
    
    
    
    
    
    
    847.2Total liabilities
    
    
    727.4
    
    
    
    3,413.4
    
    
    
    1,024.1
    
    
    $
    
    
    
    
    5,164.9Total shareholders equity (deficit)
    
    
    713.8
    
    
    
    (1,093.1
    )
    
    
    2,534.2
    
    
    
    (1,441.1
    )
    
    
    713.8Total liabilities and shareholders equity (deficit)
    
    $
    1,441.2
    
    
    $
    2,320.3
    
    
    $
    3,558.3
    
    
    $
    (1,441.1
    )
    
    $
    5,878.7
 16




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##### Table of Contents



Note 10. Segment Data Summary Segment and Income Statement Data
Dollars in millions
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Sales:Air Conditioning Systems and Services
    
    $
    1,163.3
    
    
    $
    1,083.7Bath and Kitchen
    
    
    601.4
    
    
    
    542.9Vehicle Control Systems
    
    
    420.3
    
    
    
    324.0Total sales
    
    $
    2,185.0
    
    
    $
    1,950.6Segment income:Air Conditioning Systems and Services
    
    $
    93.0
    
    
    $
    83.0Bath and Kitchen
    
    
    50.3
    
    
    
    35.1Vehicle Control Systems
    
    
    58.9
    
    
    
    46.7Total segment income
    
    
    202.2
    
    
    
    164.8Equity in net income of unconsolidated
joint ventures
    
    
    6.5
    
    
    
    4.5208.7
    
    
    
    169.3Interest expense
    
    
    29.3
    
    
    
    30.2Corporate and other expenses
    
    
    56.8
    
    
    
    46.6Income before income taxes
    
    
    122.6
    
    
    
    92.5Income taxes
    
    
    38.0
    
    
    
    28.7$
    84.6
    
    
    $
    63.8
 For a comparative analysis of this Summary Segment and Income Statement
Data, see Managements Discussion and Analysis of Financial Condition and
Results of Operations on the following pages. 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview We achieved record first-quarter sales, segment income, net income and
earnings per diluted share in the first quarter of 2004. Earnings were $1.14
per diluted share, up 31% from $0.87 per diluted share a year ago. Sales were
$2.185 billion, up 12% from $1.951 billion a year ago. Net income rose to
$84.6 million from $63.8 million, up 33%. All three business segments
contributed to the gains, which were aided by favorable foreign translation
effects. We achieved those results in an economic environment that we believe
improved overall, although tentatively, but still lagged in some important
markets. The North American market for commercial applied air conditioning
equipment remained weak. We continued to face weak economic conditions in
Europe, which restrained our air conditioning, bath and kitchen and vehicle
controls aftermarket businesses there. The U.S. economy appeared to
strengthen, which helped our U.S. residential air conditioning and bath and
kitchen businesses. Demand for commercial unitary air conditioning in the
U.S. also improved. Truck manufacturing in Europe and North America was
strong. Segment income for the first quarter of 2004 was $202.2 million, an
increase of 23%, from strong improvements in all segments, aided by favorable
foreign exchange translation effects. Excluding favorable foreign exchange
translation effects, segment income for the quarter increased 14% over the
2003 quarter. The income tax provision for 2004 reflected an estimated
effective annual income tax rate of 31%, the same as the 2003 rate. The following discussion and analysis addresses year-over-year changes in
the line items shown in the Summary Segment and Income Statement Data in Note
10 of Notes to Financial Statements. Year-over-year changes in segment sales
and segment income and, in certain cases, segment operating margins, for 2004
compared with 2003 are presented both with and without the effects of foreign
exchange translation. Presenting results of operations excluding certain
recorded 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 past financial performance and prospects
for the future. 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. Management consistently analyzes sales, segment
income and segment operating margins with and without the effects of foreign
exchange translation and believes these comparisons are useful to
shareholders. 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. 18




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##### Table of Contents



Following is an analysis of changes in total sales, segment income and
operating margin for the Company for the first quarter of 2004 compared with
the first quarter of 2003, showing the effect of foreign exchange translation. Three Months EndedMarch 31, 2004Excluding foreignThreeMonths
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31
    
    
    
    
    
    Percentage
    
    20042003
    
    2004
    
    Change
    
    Adjusted
    
    Percentage change(Dollars in millions)
    
    Reported
    
    Reported
    
    Reported
    
    Amount
    
    AdjustedSegment sales
    
    $
    1,950.6
    
    
    $
    2,185.0
    
    
    
    12
    %
    
    $
    2,062.0
    
    
    
    6
    %Segment income
    
    $
    164.8
    
    
    $
    202.2
    
    
    
    23
    %
    
    $
    188.4
    
    
    
    14
    %Segment operating margin
    
    
    8.4
    %
    
    
    9.3
    %
    
    
    0.9
    pts.
    
    
    9.1
    %
    
    
    0.7
    pts.
 Sales in the first quarter of 2004 were $2.185 billion, an increase of
12% (6% excluding favorable foreign exchange translation effects) from $1.951
billion in the first quarter of 2003. Sales increased 7% for Air Conditioning
Systems and Services, 11% for Bath and Kitchen and 30% for Vehicle Control
Systems. Segment income was $202.2 million for the first quarter of 2004, an
increase of 23% (14% excluding favorable foreign exchange translation effects)
from $164.8 million in the first quarter of 2003. Segment income increased
12% for Air Conditioning Systems and Services, 43% for Bath and Kitchen and
26% for Vehicle Control Systems. Following is an analysis of changes in sales, segment income and
operating margin for Air Conditioning Systems and Services for the first
quarter of 2004 compared with the first quarter of 2003, showing the effect of
foreign exchange translation. Three Months EndedMarch 31, 2004Excluding foreignThreeMonths
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31
    
    
    
    
    
    Percentage
    
    2004
    
    Percentage2003
    
    2004
    
    Change
    
    Adjusted
    
    change(Dollars in millions)
    
    Reported
    
    Reported
    
    Reported
    
    Amount
    
    AdjustedSegment sales
    
    $
    1,083.7
    
    
    $
    1,163.3
    
    
    
    7
    %
    
    $
    1,140.9
    
    
    
    5
    %Segment income
    
    $
    83.0
    
    
    $
    93.0
    
    
    
    12
    %
    
    $
    92.6
    
    
    
    12
    %Segment operating margin
    
    
    7.7
    %
    
    
    8.0
    %
    
    
    0.3
    pts.
    
    
    8.1
    %
    
    
    0.4
    pts.
 Sales of Air Conditioning Systems and Services increased 7% (5% excluding
favorable foreign exchange translation effects) to $1.163 billion for the
first quarter of 2004 from $1.084 billion for the first quarter of 2003. This
increase resulted primarily from continued strength in residential product
sales, improvements in commercial unitary and international markets, and
continuing growth in the parts, services and solutions business. Those
positives were partly offset by lower sales in the North American and European
applied equipment market, which continued to be weak and price competitive. The commercial equipment market in the U.S. was up overall an estimated
5% in the quarter, based upon preliminary data published by ARI
(Air-Conditioning & Refrigeration Institute 19




---



##### Table of Contents



for commercial unitary markets and our own estimates for applied markets),
following full year decreases of 4% in 2003, 11% in 2002, and 8% in 2001. The
3-year period 2001 through 2003 experienced a cumulative decline of 21%, in an
industry that services virtually all sectors of the economy. In the first
quarter of 2004, there were some pockets of strength, including office
buildings, hospitals, and the public sector. Internationally, markets in
Europe were weak, while the Middle East experienced some market growth. In
Asia, the Chinese market continued to grow while the Asia/Pacific region
overall remains healthy. Our commercial equipment sales, which represent
about 25% of total Company sales, increased 2% on a global basis (declined 1%
excluding foreign exchange translation effects). Improvements in our
commercial unitary product line, which was up 8% (6% excluding foreign
exchange translation effects), helped offset weakness in the European
equipment market and the applied equipment market in the U.S. In the applied
business, we did not pursue low-margin business and therefore sacrificed some
share in the quarter. The increasing demand for unitary products in the U.S.
has also led to better pricing. Several companies in the industry, including
us, have announced price increases in the range of 2% to 3% on both unitary
and applied equipment, beginning in the second quarter. These increases may
help to offset some of the raw material cost escalations we are experiencing.
Using orders as a barometer of our future business, we continued to experience
an uneven domestic order pattern, as orders were up 2% versus the prior year,
following a fourth quarter decrease of 5%. Internationally, orders were up
10% in the first quarter, on top of more than 20% order growth in the first
quarter of 2003. We ended the quarter with a backlog of $642 million, down
modestly from the first quarter of last year and 4% ahead of fourth quarter
levels, both excluding foreign exchange effects. Global sales in our parts, services and solutions business grew 11% (8%
excluding foreign exchange translation effects) in the first quarter, in line
with our expectations both for 2004 and for the long term, and somewhat
stronger than the 5% growth we experienced in 2003. Sales of our residential products continued to grow stronglyup 11% on
top of a 12% increase in the first quarter of last year. We continue to
outperform the domestic residential unitary market, which we estimate was up 2
to 3% for the first quarter of this year, and the furnace market in the U.S.
grew an estimated 9% in the quarter (based upon preliminary ARI data for
residential unitary and GAMA  Gas Appliance Manufacturers Association  data
for furnaces). Our distributors experienced strong sell-through of our
products to dealers in the quarter, resulting in their inventory levels
remaining low versus historical levels. In addition, combined factory and
distributor inventory levels ended the first quarter approximately even with
the average levels since 1992, even though the market has grown substantially.
In the marketplace, consumers continue to look for reliability and efficiency
options. Our high-efficiency product lines capitalize on this demand. Trane
and American Standard high efficiency units offer consumers significant energy
cost savings and we enjoyed favorable product mix in the quarter as furnaces,
split units and air handler sales shifted from lower to higher-efficiency
products. We further strengthened our residential distribution as we
continued to upgrade our current dealer network, sign up new dealers, and grow
the Home Depot referral program. Sales through the Home Depot program
continue to gain momentum, growing 45% in the quarter, and represent less than
5% of our total residential sales. Our overall share position in residential
air conditioning products grew in the quarter, and we are on track to meet our
annual goal of a one-half percentage point share increase. Segment income of Air Conditioning Systems and Services increased 12%
(with little effect from foreign exchange translation) to $93.0 million in the
first quarter of 2004 from $83.0 million in the first quarter of 2003.
Margins were 8.0% in the first quarter of 2004, compared with 7.7% for 20




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##### Table of Contents



the first quarter of 2003 and up 40 basis points excluding foreign exchange
translation effects. We continued to achieve strong results from our
productivity initiatives, which offset cost escalations. Volume and mix
performance more than offset price deterioration in our applied commercial
equipment business. Following is an analysis of changes in sales, segment income and
operating margin for Bath and Kitchen for the first quarter of 2004 compared
with the first quarter of 2003, showing the effect of foreign exchange
translation. Three Months EndedMarch 31, 2004Excluding foreignThreeMonths
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31
    
    
    
    
    
    Percentage
    
    2004
    
    Percentage2003
    
    2004
    
    Change
    
    Adjusted
    
    change(Dollars in millions)
    
    Reported
    
    Reported
    
    Reported
    
    Amount
    
    AdjustedSegment sales
    
    $
    542.9
    
    
    $
    601.4
    
    
    
    11
    %
    
    $
    556.2
    
    
    
    2
    %Segment income
    
    $
    35.1
    
    
    $
    50.3
    
    
    
    43
    %
    
    $
    45.2
    
    
    
    29
    %Segment operating margin
    
    
    6.5
    %
    
    
    8.4
    %
    
    
    1.9
    pts.
    
    
    8.1
    %
    
    
    1.6
    pts.
 Sales of Bath and Kitchen increased 11% (2% excluding favorable foreign
exchange translation effects) to $601.4 million in the first quarter of 2004,
from $542.9 million in the first quarter of 2003. The increase was the result
of gains in all three major geographic areas in which Bath and Kitchen
operates. In Europe, our sales grew 18% (3% excluding favorable foreign
exchange translation effects) in markets that were flat. We are continuing to
reinforce our strong market positions across the continent. In the first
quarter we launched new suites, advertising and promotional campaigns in
France, Italy, the U.K., and Eastern Europe. In the Americas, first quarter
sales were up 2% (1% excluding foreign exchange translation effects) on top of
a 9% increase (10% excluding foreign exchange translation effects) in the
first quarter of last year. First quarter results benefited from strong
introductory sales of our new Champion toilet and the continued success of our
luxury faucet program, both of which also contributed to margin expansion in
the quarter. Champion was featured in the Home Depot catalogue, supported by
in-store, direct mail marketing, and advertising programs. At Lowes, we
rolled out a new retail suite, and the Champion has been launched in the
second quarter, coinciding with our national media program. We continue to
reduce emphasis on low-margin product lines, even though there may be a
short-term impact on sales growth. In Asia, sales rose 18% (15% excluding
favorable foreign exchange translation effects) off a small but growing base,
aided by continued promotional activities surrounding our suites. Segment income of Bath and Kitchen increased 43% (29% excluding favorable
foreign exchange translation effects) to $50.3 million for the first quarter
of 2004 from $35.1 million for the 2003 first quarter. Margins increased to
8.4% in the first quarter of 2004 from 6.5% in the first quarter of 2003 (up
160 basis points excluding favorable foreign exchange translation effects),
and on track to achieve the 9% target we set for the full year. Margins
benefited from volume, positive mixprimarily from sales of Champion, and
from the absence of the operational issues that burdened our results in the
first half of last year. In addition, productivity improvements offset cost
escalations and our additional investments in new products, suites and
marketing programs. The improvement in margins is expected to be driven by
the same things that drove better margins in the first quarter: new product
introductions, better mix, and continuing productivity gains. In addition,
the second quarter will benefit from our 2003 streamlining 21




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##### Table of Contents



programs. As we continue to increase our marketing investment for the
Champion in North America, we will continue improving this business and its
margins. Following is an analysis of changes in sales, segment income and
operating margin for Vehicle Control Systems for the first quarter of 2004
compared with the first quarter of 2003, showing the effect of foreign
exchange translation. Three Months EndedMarch 31, 2004Excluding foreignThreeMonths
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31
    
    
    
    
    
    Percentage
    
    2004
    
    Percentage2003
    
    2004
    
    Change
    
    Adjusted
    
    change(Dollars in millions)
    
    Reported
    
    Reported
    
    Reported
    
    Amount
    
    AdjustedSegment sales
    
    $
    324.0
    
    
    $
    420.3
    
    
    
    30
    %
    
    $
    364.9
    
    
    
    13
    %Segment income
    
    $
    46.7
    
    
    $
    58.9
    
    
    
    26
    %
    
    $
    50.5
    
    
    
    8
    %Segment operating margin
    
    
    14.4
    %
    
    
    14.0
    %
    
    
    -0.4
    pts.
    
    
    13.8
    %
    
    
    -0.6
    pts.
 Sales of Vehicle Control Systems for the first quarter of 2004 were
$420.3 million, an increase of 30% (13% excluding the favorable effects of
foreign exchange) from $324.0 million in the first quarter of 2003. Our
strong momentum in this business continued. The improvement resulted
primarily because of increased truck manufacturing in our major markets,
increased content per vehicle, including new applications, and continued
globalization of our technology. Sales in Europe, our largest market,
increased 29% (10% excluding the favorable effects of foreign exchange),
excluding sales to the North American marketing joint venture. That increase
was driven by a 17% increase in sales to our truck and bus original equipment
manufacturing customers, outperforming the Western European truck and bus
market, which we believe grew an estimated 9% in the quarter. Total European
sales were tempered by a sluggish aftermarket, which is significantly
influenced by general economic conditions. Sales increased 49% in North
America, outperforming the U.S. truck manufacturing market increase of 38% as
we continued to penetrate the market. In Latin America, our sales also
outperformed truck and bus markets in the quarter, consistent with our
long-term objectives in this segment. This business continues to perform as
sales are growing in truck and bus brake control and transmission control
systems, trailer systems, luxury car and SUV air suspension systems. Segment income for Vehicle Control Systems for the first quarter of 2004
increased 26% (8% excluding favorable foreign exchange translation effects) to
$58.9 million from $46.7 million in the first quarter of 2003. Segment income
increased less than our sales increase as volume growth and productivity were
partly offset by increased warranty expense, labor cost escalations, and
additional investments we made in the business. In addition, the impact of
selling to the Meritor Wabco joint venture in U.S. dollars also negatively
affected income and margins. Without this foreign exchange-related affect,
margins would have been flat instead of down 60 basis points. Margins
decreased from 14.4% in the first quarter of 2003 to 14.0% in the first
quarter of 2004, principally as a result of increased warranty expense. Other Summary Segment and Income Data Items Equity in net income of unconsolidated joint ventures increased to $6.5
million in the first quarter of 2004 from $4.5 million in the first quarter of
2003. The increase primarily resulted from the performance of our air
conditioning compressor joint venture in the U.S. and our truck brake joint
venture in India. The Meritor Wabco joint venture in the U.S. did not
contribute to the 22




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##### Table of Contents



equity income improvement due to the adverse impact of foreign exchange on
products purchased from our European operations. Interest expense decreased $.9 million in the first quarter of 2004
compared with the first quarter of 2003 primarily due to lower average debt
balances. Corporate and other expenses in the first quarter of 2004 increased $10.2
million from the first quarter of 2003 due principally to realized foreign
exchange transaction effects, and increased provisions for post-retirement
costs, self insurance and incentive compensation. Corporate and other
expenses, shown in the Summary Segment and Income Statement Data table in Note
10 of Notes to Financial Statements, primarily include some of the expenses
classified as selling and administrative expenses in the Unaudited Summary
Consolidated Statement of Income on page 2. Corporate and other expenses also
include certain items classified in Other expense in the Unaudited
Summary Consolidated Statement of Income. Period-to-period changes in the
significant components of Other expense are explained by the comments
in this paragraph on corporate expenses, and in the first paragraph of this
section on equity in net income of unconsolidated joint ventures. The income tax provision for the first quarter of 2004 was $38.0 million,
or 31% of pre-tax income, compared with a provision of $28.7 million, or 31%
of pre-tax income in the first quarter of 2003. The effective income tax rate
of 31% is the estimated effective rate for the year 2004. Liquidity and Capital Resources Cash flow continues to increase. Our earnings increased and we used our
working capital more effectively. Our cash flow from operations is normally
low or negative in the first quarter due to the seasonality of some of our
businesses. Operating activities provided net cash of $38.8 million for the
first quarter of 2004, compared with net cash provided of $39.4 million for
the same period of 2003. Higher net income and lower net working capital
usage were essentially offset by all other changes in cash flow which
represented $67 million more usage than in the first quarter of 2003. That
increase was primarily attributable to higher cash tax payments in 2004
because in the first quarter of 2003 we experienced a low cash tax rate and
received a refund of taxes. In addition, in 2004 we had payments of job
elimination expenses accrued at the end of 2003 and higher incentive
compensation payments than in 2003. In investing activities, we made capital expenditures of $26.4 million
for the first quarter of 2004. This compared with capital expenditures of
$39.6 million in the 2003 first quarter, including $10.3 million of
investments in affiliated companies and other businesses. We also invested
$11.7 million in computer software in the first quarter of 2004, compared with
$11.2 million in the 2003 period. We also made a loan of $23.4 million to our
unconsolidated Alliance Compressors joint venture in the first quarter of
2004. In the first quarter of 2004, the excess of cash used by investing
activities over net cash provided by operating activities was $22.7 million
and was funded out of cash provided by financing activities of $103 million.
Financing activities consisted of net borrowings of $227.5 million, proceeds
realized from the exercise of stock options of $12 million, proceeds from
settlement of foreign exchange forward contracts of $4.7 million, and other
miscellaneous transactions. Those were partly offset by purchases of
approximately 1.3 million shares of our common stock for $143.4 million
pursuant to our share repurchase program. In the first quarter of 2003 the
excess of cash used by investing activities over cash provided by operating
activities totaled $11.1 million and was funded by net cash provided by
financing activities of $56.0 million. 23




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##### Table of Contents



Financing activities in 2003 consisted principally of net borrowings of $108.1
million, proceeds realized from the exercise of stock options, proceeds from
settlement of foreign exchange forward contracts of $17.1 million, and other
miscellaneous transactions, partly offset by purchases of approximately 1.1
million shares of our common stock for $76.0 million pursuant to our share
repurchase program. We have 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. We did not renew a related 364-day, U.S. dollar revolving
credit facility of $150 million when it expired on November 4, 2003, because
amounts available under the five-year facility and other sources of financing
available were considered sufficient for Company needs. We also have a
Euro-denominated, 364-day bank credit agreement of $49 million (at March 31,
2004 exchange rates) that expires on October 31, 2004, and that was fully
utilized as of March 31, 2003. Debt outstanding under that agreement was
classified as long-term debt in the balance sheet as of March 31, 2004,
because we have the ability and the intent to renew it or to refinance it with
borrowings under the five-year facility. In addition, we have other non-U.S.
lines of credit for $22 million. The primary credit agreement contains various covenants that limit, among
other things, indebtedness, liens, sale and leaseback transactions, subsidiary
indebtedness including preferred stock, mergers, consolidations, dissolutions
and asset sales, investments or acquisitions, dividends and redemptions of
capital stock, loans and advances, and certain other business activities. The
covenants also require the Company to meet certain financial tests: ratio of
consolidated debt to EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization), and consolidated free cash flow to interest expense. We are
currently in compliance with the covenants contained in the credit agreement. At March 31, 2004, our total indebtedness was $1.896 billion. We had
remaining borrowing capacity under our primary bank credit agreement at March
31, 2004, of $565 million after reduction for borrowings of $323 million and
$112 million of outstanding letters of credit. We have $12 million available
under other bank credit facilities after reduction for letters of credit usage
of $10 million. In addition, we had $117 million available at March 31, 2004,
under overdraft facilities that can be withdrawn by the banks at any time. In
addition, we had other outstanding letters of credit issued by other banks of
$51 million as of March 31, 2004. We believe that the amounts available from operating cash flows, funds
available under our 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 will be sufficient to meet our
expected operating needs and planned capital expenditures for the foreseeable
future. Off-Balance Sheet Arrangements We employ several means to manage our liquidity and are 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, we
use two principal off-balance sheet techniques: operating leases and
receivables financing. Operating leases are employed as an alternative to
purchasing certain property, plant and equipment. Future rental commitments
under all non-cancelable leases have not changed significantly from the
amounts disclosed in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. To reduce 24




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our borrowing cost, during 2002 we established new accounts receivable
financing facilities in Europe and the U.S., and terminated a previously
existing arrangement in the U.S. The amounts of receivables sold under these
securitization programs have not changed significantly from the amounts
disclosed in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. We have commitments and performance guarantees, including energy savings
guarantees totaling $41 million extending from 2004 to 2021, under long-term
contracts related to our air conditioning equipment and system controls.
Through March 31, 2004 we have experienced no net losses under such energy
savings guarantees and consider the probability of losses to be unlikely. We
also guarantee debt of third parties in the amount of $4 million as of March
31, 2004. We have contractual obligations for long-term debt, leases, purchase
obligations, unfunded pension and post-retirement benefits and certain other
long-term liabilities that were summarized in a table of aggregate contractual
obligations as of December 31, 2003, in our 2003 Annual Report on Form 10-K.
There have been no material changes in those obligations since December 31,
2003. Disclosure Regarding 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 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 construction activity in the Companys Air
Conditioning Systems and Services and Bath and Kitchen markets 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 of
future claims, the average payment to claimants, the amount of
insurance recovery or legislation affecting claims, criteria or
payout;
    
    unpredictable difficulties or delays in the development of new
product technology; 25




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
    
    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 natural gas
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 2004;
    
    transactions or other events affecting the need for, timing and
extent of the Companys capital expenditures. 26




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Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the disclosure on this matter made in
the Companys Annual Report on Form 10-K for the year ended December 31, 2003. 
 Item 4. 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 significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previously mentioned evaluation. 27




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PART II. OTHER INFORMATION 
 Item 1. 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. 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 low-risk-profile products, such as boilers and
railroad brake shoes. The Company believes it has ample insurance and has
never had an unfavorable court judgment. 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 allege a connection
between any Company product and the claimed injury or disease, and/or do not
contain any allegations regarding the type of claimed injury or disease
incurred. As a result, numerous lawsuits have been placed and may remain on
inactive or deferred dockets, which some jurisdictions have established. Through March 31, 2004, there have been 141,393 claims filed against the
Company. At March 31, 2004, there were 116,744 pending claims, compared with
114,583 at the end of 2003, and 95,031 and 50,828 at the end of 2002 and 2001,
respectively, reflecting updated numbers for all prior periods. Since receipt
of its first asbestos claim more than fifteen years ago, through March 31,
2004, the Company has resolved 24,649 claims, and settlements of $39.7 million
have been made, for an average payment per claim of $1,609. These settlement
payments have been paid or reimbursed or are expected to be reimbursed by
insurance. The Company has recorded an obligation of $66 million as of March 31,
2004, that represents the Companys estimated payments to claimants associated
with pending asbestos claims. It also has recorded a related asset of $42
million that represents the probable recoveries from insurance companies for
such payments to claimants. The amount of the estimated obligations is based
on the claims resolved, the assessment of claims pending, the status of
ongoing litigation, defense and settlement strategies, and an assessment of
other entities responsibilities for the claims. The amount of the probable
recoveries is based on an analysis of insurance coverage, the insurers
financial strength and insurance payments made to date. Additional developments may occur that could affect the Companys
estimate of asbestos liabilities and recoveries, such as the nature of future
claims, the average payment to claimants and the amount of insurance recovery.
No liability has been recorded for unknown asbestos claims. However, the
Company has substantial insurance coverage for future claims. The Company
believes that it is not reasonably possible that a net loss material to the
liquidity and financial condition of the Company has been incurred. 28




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Item 2. Changes in Securities, and Use of Proceeds and Issuer Purchases of Equity Securities The Companys Board of Directors has on several occasions since 1998
approved expenditures under a program to purchase shares of the Companys
common stock in the open market. The Company has continually stated publicly
since 1998 its intention to repurchase shares of its common stock pursuant to
those authorizations. As of December 31, 2003, the unexpended authorization
on the current program was $313,032,214. A summary of the repurchase activity
for the first quarter of 2004 follows. 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)January 1-January 31
    
    
    361,000
    
    
    $
    104.60
    
    
    
    361,000
    
    
    $
    275,270,521February 1-February 29
    
    
    580,000
    
    
    $
    107.12
    
    
    
    580,000
    
    
    $
    213,138,314March 1-March 31
    
    
    400,000
    
    
    $
    111.10
    
    
    
    400,000
    
    
    $
    168,699,956Total first quarter
    
    
    1,341,000
    (b)
    
    $
    107.65
    
    
    
    1,341,000
 (a) As of December 31, 2003, 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 February 6, 2003, approved the
purchase of shares in an amount not to exceed $150, 000,000 with no
expiration date. The unexpended balance of $63,032,214 under that
authorization as of December 31, 2003, was used to repurchase shares in
the first quarter of 2004. The second, authorized by the Board on
December 4, 2003, approved the purchase of shares in an amount not to
exceed $250,000,000, with no expiration date. The Company intends to
repurchase stock under this program in the future. (b) All share repurchases were effected in accordance with the safe harbor
provisions of Rule 10b-18 of the Securities Exchange Act. 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying Index to Exhibits are filed
as part of this quarterly report on Form 10-Q. (b) Reports on Form 8-K: During the quarter ended March 31, 2004, the Company filed a Current
Report on Form 8-K dated January 26, 2004, and furnished information
under Items 9 and 12. This Form 8-K contained, as an exhibit, a
press release pertaining to the financial results of the Company for
the quarter and year ended December 31, 2003. 29




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AMERICAN STANDARD COMPANIES INC./s/ Richard S. ParadiseRichard S. ParadiseVice President and Controller(Principal Accounting Officer)April 30, 2004
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AMERICAN STANDARD COMPANIES INC. 
 INDEX TO EXHIBITS (The File Number of the Registrant, American Standard Companies Inc. is 1-11415) Exhibit No.
    
    Description12
    
    Ratio of Earnings to Fixed Charges31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 31