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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 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                     to                    . Commission file number 1-11415 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 o No Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule
12b-2 of the Exchange Act) x Yes o 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 26, 2005
    
    212,709,652 shares




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUNAUDITED SUMMARY CONSOLIDATED STATEMENT OF INCOMEUNAUDITED SUMMARY CONSOLIDATED BALANCE SHEETUNAUDITED SUMMARY CONSOLIDATED STATEMENT OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSCONSOLIDATING CONDENSED STATEMENTS OF INCOMECONSOLIDATING CONDENSED BALANCE SHEETSCONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWCONSOLIDATING CONDENSED STATEMENTS OF INCOMECONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWCONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2004Summary Segment and Income Statement DataItem 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. Unregistered Sales of Equity Securities, and Use of ProceedsItem 6. Exhibits and Reports on Form 8-K.SIGNATUREINDEX TO EXHIBITSEX-12 RATIO EARNINGS TO FIXED CHARGESEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATIONEX-32.2 CERTIFICATION    Table of Contents  
 PART I. 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 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 31,2005
    
    
    2004Sales
    
    $
    2,340.3
    
    
    $
    2,185.0Costs and expenses and other expense :Cost of sales
    
    
    1,726.4
    
    
    
    1,595.4Selling and administrative expenses
    
    
    450.2
    
    
    
    420.8Other expense
    
    
    7.0
    
    
    
    16.9Interest expense
    
    
    29.6
    
    
    
    29.32,213.2
    
    
    
    2,062.4Income before income taxes
    
    
    127.1
    
    
    
    122.6Income taxes
    
    
    2.2
    
    
    
    38.0Net income applicable to common shares
    
    $
    124.9
    
    
    $
    84.6Net income per share:Basic
    
    $
    0.58
    
    
    $
    0.39Diluted
    
    $
    0.57
    
    
    $
    0.38Cash dividends per share of common stock
    
    $
    0.15
    
    
    $
    0.0Average outstanding common shares:Basic
    
    
    214,032,624
    
    
    
    216,474,369Diluted
    
    
    220,066,401
    
    
    
    222,225,546
 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 31,2005
    
    
    2004Current assets:Cash and cash equivalents
    
    $
    240.1
    
    
    $
    229.4Accounts receivable, less allowance for doubtful
accounts: Mar. 2005 - $44.1; Dec. 2004 - $46.2
    
    
    1,191.7
    
    
    
    1,154.5Inventories:Finished products
    
    
    747.3
    
    
    
    658.0Products in process
    
    
    236.8
    
    
    
    233.2Raw materials
    
    
    232.0
    
    
    
    196.0Proceeds due from debt commitment
    
    
    198.2
    
    
    
    Other current assets
    
    
    441.1
    
    
    
    418.7Total current assets
    
    
    3,287.2
    
    
    
    2,889.8Facilities, less accumulated depreciation:Mar. 2005 - $1,122.1; Dec. 2004 - $1,123.7
    
    
    1,578.8
    
    
    
    1,616.6Goodwill, less accumulated amortization:Mar. 2005 - $416.8; Dec. 2004 - $432.3
    
    
    1,137.2
    
    
    
    1,182.0Capitalized software costs, less accumulated
amortization:Mar. 2005 - $285.0; Dec. 2004 - $274.5
    
    
    222.2
    
    
    
    230.0Debt issuance costs, net of accumulated amortization:Mar. 2005 - $29.5; Dec. 2004 - $28.2
    
    
    14.1
    
    
    
    15.4Long-term asbestos indemnity receivable
    
    
    366.0
    
    
    
    365.1Other assets
    
    
    529.2
    
    
    
    542.9Total assets
    
    $
    7,134.7
    
    
    $
    6,841.8Current liabilities:Loans payable to banks
    
    $
    115.2
    
    
    $
    76.6Current maturities of long-term debt
    
    
    2.5
    
    
    
    2.2Accounts payable
    
    
    905.6
    
    
    
    887.2Accrued payrolls
    
    
    318.5
    
    
    
    331.2Current portion of warranties
    
    
    171.3
    
    
    
    155.1Taxes on income
    
    
    89.3
    
    
    
    130.5Obligation to fund debt commitment
    
    
    198.2
    
    
    
    Other accrued liabilities
    
    
    739.5
    
    
    
    763.9Total current liabilities
    
    
    2,540.1
    
    
    
    2,346.7Long-term debt
    
    
    1,634.2
    
    
    
    1,429.1Post-retirement benefits
    
    
    728.5
    
    
    
    744.1Long-term portion of asbestos indemnity liability
    
    
    680.1
    
    
    
    683.4Warranties
    
    
    237.6
    
    
    
    242.4Other liabilities
    
    
    445.4
    
    
    
    465.8Total liabilities
    
    
    6,265.9
    
    
    
    5,911.5Shareholders equity:Preferred stock, 2,000,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 560,000,000 shares
authorized; shares issued: 251,769,030 in 2005;
251,768,741 in 2004;and shares
outstanding: 212,784,830 in 2005; 214,947,988 in 2004
    
    
    2.5
    
    
    
    2.5Capital surplus
    
    
    806.8
    
    
    
    794.5Treasury stock, at cost: 38,984,200 shares in
2005; 36,820,753 shares in 2004
    
    
    (887.1
    )
    
    
    (760.1
    )Retained Earnings
    
    
    1,239.4
    
    
    
    1,146.6Accumulated other comprehensive income:Foreign currency translation effects
    
    
    (146.0
    )
    
    
    (102.8
    )Deferred gain on hedge contracts, net of tax
    
    
    10.2
    
    
    
    9.3Minimum pension liability adjustment, net of tax
    
    
    (157.0
    )
    
    
    (159.7
    )Total shareholders equity
    
    
    868.8
    
    
    
    930.3Total liabilities and shareholders equity
    
    $
    7,134.7
    
    
    $
    6,841.8
 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 31,2005
    
    
    2004Cash provided (used) by:Operating activities:Net income
    
    $
    124.9
    
    
    $
    84.6Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    46.6
    
    
    
    41.4Amortization of capitalized software and other intangibles
    
    
    22.9
    
    
    
    21.9Equity in earnings of unconsolidated joint
ventures, net of dividends received
    
    
    (7.3
    )
    
    
    (5.4
    )Non-cash stock compensation
    
    
    15.8
    
    
    
    14.9Other
    
    
    (1.3
    )
    
    
    (0.3
    )Changes in assets and liabilities:Accounts receivable
    
    
    (52.5
    )
    
    
    (120.5
    )Inventories
    
    
    (145.5
    )
    
    
    (96.4
    )Accounts payable
    
    
    30.5
    
    
    
    126.1Other accrued liabilities and taxes
    
    
    154.9
    
    
    
    (39.4
    )Post-retirement benefits
    
    
    7.6
    
    
    
    13.3Net asbestos indemnity liability
    
    
    2.4
    
    
    
    (2.8
    )Other current and long-term assets
    
    
    (228.4
    )
    
    
    (7.3
    )Other long-term liabilities
    
    
    (20.6
    )
    
    
    8.7Net cash provided (used) by operating activities
    
    
    (50.0
    )
    
    
    38.8Investing activities:Purchases of property, plant and equipment
    
    
    (43.7
    )
    
    
    (26.4
    )Investments in affiliated companies and other businesses
    
    
    (7.9
    )
    
    
    Investments in capitalized software
    
    
    (10.1
    )
    
    
    (11.7
    )Loan to unconsolidated joint venture, net
    
    
    (1.9
    )
    
    
    (23.4
    )Proceeds from sales of property, plant and equipment
    
    
    5.2
    
    
    
    Other
    
    
    (0.4
    )
    
    
    Net cash used by investing activities
    
    
    (58.8
    )
    
    
    (61.5
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    0.4
    
    
    
    0.1Repayments of long-term debt
    
    
    (0.5
    )
    
    
    (0.2
    )Net change in revolving credit facilities
    
    
    235.1
    
    
    
    113.8Net change in other short-term debt
    
    
    38.6
    
    
    
    113.8Purchases of treasury stock
    
    
    (140.3
    )
    
    
    (143.4
    )Dividend payments
    
    
    (32.1
    )
    
    
    Proceeds from exercise of stock options
    
    
    15.7
    
    
    
    12.0Proceeds from settlement of foreign exchange forward contracts
    
    
    0.2
    
    
    
    4.7Other
    
    
    4.4
    
    
    
    2.2Net cash provided by financing activities
    
    
    121.5
    
    
    
    103.0Effect of exchange rate changes on cash and
cash equivalents
    
    
    (2.0
    )
    
    
    0.3Net increase in cash and cash equivalents
    
    
    10.7
    
    
    
    80.6Cash and cash equivalents at beginning of period
    
    
    229.4
    
    
    
    111.7Cash and cash equivalents at end of period
    
    $
    240.1
    
    
    $
    192.3Cash interest paid
    
    $
    24.2
    
    
    $
    24.2Cash taxes paid
    
    $
    49.6
    
    
    $
    30.0
 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 accordance
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, including 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, 2004. Preparation of the financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the period. 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 2004, describe the most 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 assumptions regarding critical accounting estimates during the first quarter of
2005. All share and per-share amounts and the related shareholders equity accounts in the
accompanying consolidated financial statements and footnotes for all periods reflect the
three-for-one stock split that became effective on May 27, 2004. Note 2. Comprehensive Income Total comprehensive income consisted of the following (dollars in millions): Three months endedMarch 31,2005
    
    
    2004Net income
    
    $
    124.9
    
    
    $
    84.6Foreign currency translation effects
    
    
    (43.2
    )
    
    
    6.8Deferred gain on hedgeContracts, net of tax
    
    
    0.9
    
    
    
    8.8Minimum pension liability adjustment, net of tax
    
    
    2.7
    
    
    
    (0.2
    )Total comprehensive income
    
    $
    85.3
    
    
    $
    100.0
 5




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Note 3. Earnings Per Share Basic earnings per share have been computed using the weighted average number of common shares
outstanding. The average number of outstanding shares of common stock used in computing diluted
earnings per share for the three months ended March 31, 2005 and 2004 included 6,033,777 and
5,751,177 weighted average incremental shares, respectively, for the assumed exercise of stock
options. Note 4. Capital Stock The Companys Board of Directors approved a quarterly dividend of $.15 per share of common
stock. On March 25, 2005 the dividend of $.15 per share of common stock was paid to shareholders of
record as of February 28, 2005. The total dividends paid amounted to $32.1 million. Following is a summary of net shares outstanding and shares issued or reacquired during the
first quarter of 2005. Number of Shares of Common StockTreasury
    
    Net SharesTotal Shares
    
    Shares
    
    OutstandingBalance, December 31, 2004
    
    
    251,768,741
    
    
    
    (36,820,753
    )
    
    
    214,947,988Shares issued upon exercise of stock options
    
    
    
    
    
    
    893,784
    
    
    
    893,784Stock purchased for treasury
    
    
    
    
    
    
    (3,352,800
    )
    
    
    (3,352,800
    )Shares issued to ESOP
    
    
    
    
    
    
    355,249
    
    
    
    355,249Shares issued to ESPP
    
    
    289
    
    
    
    51,402
    
    
    
    51,691Other shares issued or (reacquired), net
    
    
    
    
    
    
    (111,082
    )
    
    
    (111,082
    )Balance, March 31, 2005
    
    
    251,769,030
    
    
    
    (38,984,200
    )
    
    
    212,784,830
 Note 5. Stock-Based Compensation The
Company has three employee stock-based compensation plansthe 2002 Omnibus Incentive Plan, the
Stock Incentive Plan and the Employee Stock Purchase Plan (ESPP), which, are described in Note 12
of Notes to Financial Statements in the Companys 2004 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. Additionally, compensation cost is not
recorded for the 15% discount on shares purchased under the ESPP, which is not considered
compensation expense under APB 25. Compensation cost is recorded for the fair value of restricted
share awards, amortized straight line 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 (dollars in millions except per
share data). Three Months EndedMarch 31,(Dollars in millions except per share data)
    
    2005
    
    
    2004Net income, as reported
    
    $
    124.9
    
    
    $
    84.6Deduct: Total stock-based compensation expense, net of tax,
determined under fair value based method for all stock
option awards and discounts under the ESPP
    
    
    (5.3
    )
    
    
    (5.1
    )Pro forma net income
    
    $
    119.6
    
    
    $
    79.5Earnings per share:Basicas reported
    
    $
    .58
    
    
    $
    .39Basicpro forma
    
    $
    .56
    
    
    $
    .37Dilutedas reported
    
    $
    .57
    
    
    $
    .38Dilutedpro forma
    
    $
    .55
    
    
    $
    .36
 The weighted average fair value per option of grants made during the three months ended
March 31, 2005 and 2004 were $10.14 and $10.52, 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 3.74% in 2005 and 3.05% in
2004; volatility of 23.0% in
2005 and 27.4% in 2004; an expected average life of 5 years in 2005 and 2004; and a dividend yield
of 1.38% in 2005 and zero in 2004. 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 $8.4 million and $8.5 million for the three months ended March 31, 2005
and 2004, respectively. Total warranty expense was $51.8 million and $41.0 million for the three
months ended March 31, 2005 and 2004, respectively. 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, 2005 and 2004 (dollars millions). Three Months EndedMarch 31,(Dollars in millions)
    
    2005
    
    
    2004Balance of basic limited warranty costs accrued and
deferred income on extended warranty
contracts, beginning of period
    
    $
    397.5
    
    
    $
    356.0Warranty costs accrued
    
    
    40.2
    
    
    
    33.1Deferred income on extended warranty contracts sold
    
    
    17.6
    
    
    
    14.9Warranty claims settled
    
    
    (35.6
    )
    
    
    (25.7
    )Amortization of deferred income
on extended warranty contracts
    
    
    (11.3
    )
    
    
    (12.1
    )Increases (decreases) in warranty estimates made in prior
periods, including foreign exchange translation effects, net
    
    
    0.5
    
    
    
    (1.6
    )Balance of basic warranty costs accrued and deferred
income on extended warranty contracts, end of period
    
    
    408.9
    
    
    
    364.6Current portion included in current liabilities
    
    
    (171.3
    )
    
    
    (160.2
    )Long-term warranty liability
    
    $
    237.6
    
    
    $
    204.4
 The Company has commitments and performance guarantees, including energy savings
guarantees totaling $63.6 million as of March 31, 2005, extending from 2005 to 2022, under
long-term service and maintenance contracts related to its air conditioning equipment and system
controls. Through March 31, 2005 the Company has only experienced one insignificant loss under
such energy savings guarantees and considers the probability of any significant future losses to be
unlikely and has therefore not recorded a liability for such guarantees. The Company also
guarantees debt of third parties in the amount of $1.8 million as of March 31, 2005. 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 10 of Notes to Financial Statements. The Company also guarantees other debt obligations
issued by other subsidiaries, including obligations under a $51.7 million Euro-denominated credit
facility and $38.7 million of Euro-denominated Senior Bonds (both at March 31, 2005 exchange
rates). The income tax provision for the first quarter of 2005 was $2.2 million, or 1.7% of pre-tax
income, compared with a provision of $38.0 million, or 31% of pre-tax income in the first quarter
of 2004. The reduction to the effective income tax rate resulted primarily from the resolution of
tax contingencies and the impact of certain non-U.S. tax planning initiatives on prior tax years.
In addition, we have agreed with the tax authorities that a significant tax refund is due the
Company. However, such refund is still subject to final government review. If approved, the Company
will recognize any related financial benefits at that time. As previously reported, in November 2004 the Company was contacted by the European Commission
as part of an industry-wide investigation into alleged infringement of European Union competition
regulations relating to the distribution of bath and kitchen fixtures and fittings in certain
European countries. In February 2005, the Company was named as a defendant in several lawsuits
filed in the United States District Court for the Eastern District of Pennsylvania and in various
state courts in the State of California alleging that the Company and certain of its 8




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competitors conspired to fix prices for fittings and fixtures in the U.S. On February 23,
2005, the Company received a grand jury subpoena from the Antitrust Division of the U.S. Department
of Justice seeking information primarily related to the sale and marketing of bathroom fittings by
its European affiliates from January 1997 to the present. The Company is cooperating fully with these investigations and intends to vigorously defend
itself against these lawsuits. On February 16, 2005, the French Competition Council issued a statement of objections
(notification de griefs) addressed to more than 100 separate enterprises, including a Bath and
Kitchen subsidiary of the Company, and to various trade associations and purchasing organizations
active in the sanitary, heating, air-conditioning and canalization equipment and installation
sectors. The addressees of the statement of objections are alleged to have restricted the
distribution of products to large do-it-yourself retailers and to small installer cooperatives in
France in the period 1993 through 1998 in violation of the French and European Union competition
regulations. The Company is vigorously defending itself against these
allegations. The Company believes that the resolution of the matters described
above would not, individually or in the aggregate, have a material adverse effect on the financial
condition or liquidity of the Company but could be material to the Companys operating results for
the periods in which the liabilities, if any, would be recognized. Over the years, the Company has been named as a defendant in numerous lawsuits alleging
various asbestos-related personal injury claims arising primarily from sales of boilers and
railroad brake shoes. In these asbestos-related lawsuits, the Company is usually named as one of a large group of
defendants, often in excess of one hundred companies. Many of these lawsuits involve multiple
claimants, do not specifically identify the injury or disease for which damages are sought and/or
do not allege a connection between any Company product and a claimed injury or disease. As a
result, numerous lawsuits have been placed and may remain on inactive or deferred dockets, which
some jurisdictions have established. Historically, the Company recorded a liability only for filed asbestos claims. Costs
associated with claims that might be filed against the Company in the future were not recorded
because the Company did not believe its history and experience with asbestos-related litigation was
sufficient to allow it to make a reasonable estimate of this liability. Because of stabilization
in the rate at which new claims are being filed and the Companys added experience in resolving
claims, the Company now believes a reasonable estimate of this liability can be made. In the fourth quarter of 2004, the Company retained Dr. Francine F. Rabinovitz of Hamilton,
Rabinovitz & Alschuler, Inc. (HR&A) to assist it in calculating an estimate of the Companys
total liability for pending and unasserted potential future asbestos-related claims. Dr.
Rabinovitz is a respected expert in performing complex calculations such as this. She has been
involved in a number of asbestos-related valuations of current and future liabilities, and her
valuation methodologies have been accepted by numerous courts. 9




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The
methodology used by HR&A to project the Companys total liability
for pending future asbestos-related claims relied upon and included
the following factors:  

HR&As interpretation of a widely accepted forecast of
the population likely to have been exposed to asbestos

epidemiological studies estimating the number of people likely to
develop asbestos-related diseases

HR&As analysis of the number of people likely to file an
asbestos-related personal injury claim against the Company based on
such epidemiological data and the Companys claims history from
2000-2004

an analysis of the Companys pending cases, by type of
injury claimed

an analysis of the Companys five-year history from
2000-2004 to determine the average settlement value of claims, by
type of injury claimed

an adjustment for inflation in the future average settlement
value of claims, at a 3% annual inflation rate

an analysis of the period over which the Company has and is
likely to resolve asbestos-related claims against it in the future Based on these factors, HR&A calculated a total estimated liability for the Company to resolve
all pending and unasserted potential future claims through 2055, which is HR&As reasonable best
estimate of the time it will take to resolve asbestos-related claims, of $699 million. This amount
is on a pre-tax basis, not discounted for the time-value of money, and excludes legal fees. In
the first quarter of 2005 the Company decreased its recorded liability for asbestos claims by $3
million due to the payment of claims, from $699 million to $696.1 million. As of March 31, 2005, the Company has a receivable for probable asbestos-related insurance
recoveries of $372 million. This represents amounts due to the Company for previously settled and
paid claims and the probable reimbursements relating to its estimated liability for pending and
future claims. In calculating this amount, the Company used the estimated asbestos liability for
pending and projected future claims calculated by HR&A. It also considered the amount of insurance
available, gaps in coverage, applicable deductibles, allocation methodologies, solvency ratings and
credit-worthiness of the insurers, the published dividend rates of insolvent insurers, amounts
already recovered from and the potential for settlements with insurers, and estimated annual legal
fees. The Company is in litigation against certain carriers whose policies it believes provide
coverage for pending claims. The insurance carriers named in this suit are challenging the
Companys right to recovery. While the Company cannot predict the outcome of this litigation with
certainty, the Company believes that the amount recorded is probable of recovery based on its
analysis of the coverage, the applicable law, historical trends in its and other insured parties 10




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##### Table of Contents



settlements with insurers and the likelihood of achieving a settlement with some or all of the
insurers. The aggregate amount of the stated limits in insurance policies available to the Company for
asbestos-related claims, acquired over many years and from many different carriers, is substantial,
significantly exceeding the projected liability against the Company. However, limitations in that
coverage, primarily due to gaps in coverage, deductibles associated
with the policies and settlements for less than the full coverage
limits with carriers in insolvency proceedings and carriers with
questionable credit-worthiness (Gaps, Deductibles and
Discounts,) are expected to result in the projected
total liability to claimants and related expenses exceeding the probable insurance recovery. The
Company settled with most of the insolvent carriers and carriers with poor credit quality whose
policies it believes provide coverage for pending and projected future claims. 85% of the
remaining recorded insurance recovery receivable is with carriers rated A or better by AM Best. The amounts recorded by the Company for asbestos-related liability and insurance-related
receivables are based on currently known facts. The Companys actual expenses or insurance
recoveries could be significantly higher or lower than those recorded if assumptions used in the
Companys or HR&As calculations vary significantly from actual results. Key variables in these
assumptions are identified above and include the number and type of new claims to be filed each
year, the average cost of disposing of each such new claim, average annual defense costs, the
resolution of coverage issues among insurance carriers including allocation methodologies, and the
solvency risk with respect to the Companys insurance carriers. Furthermore, predictions with
respect to these variables are subject to greater uncertainty as the projection period lengthens.
Other factors that may affect the Companys liability and ability to recover under its insurance
policies include uncertainties surrounding the litigation process from jurisdiction to jurisdiction
and from case to case, reforms that may be made by state and federal courts, and the passage of
state or federal tort reform legislation. In February 2005, the Company reached agreement with Equitas, the London-based entity
responsible for certain pre-1993 Lloyds of London policies in its insurance coverage, in the
amount of $84.5 million. During the first quarter of 2005, $10 million of this was received by the
Company to cover past asbestos and environmental costs, and $74.5 million was placed in a trust
until January 3, 2007. If, during the trust period, there is federal legislation that takes asbestos
claims out of the courts and requires Equitas to make a duplicate payment to the asbestos trust,
this money will be used by Equitas for the legislative payment less some allowance to the Company
for claims settlements that may be made or have been made in the period January 1, 2005 through January 3, 2008. If
there is no such legislation by January 3, 2007, the balance of funds in the trust, including accrued
interest, will be disbursed to the Company. 11




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##### Table of Contents



From receipt of its first asbestos claim more than twenty years ago to March 31, 2005, the
Company has resolved 28,819 claims, and settlements of approximately $57.3 million have been made,
for an average payment per claim of $1,989. The table below provides additional information
regarding asbestos-related claims filed against the Company, reflecting updated information for all
periods. Three Months Ended2003
    
    
    2004
    
    
    March 31, 2005
    
    
    Total Pre 3/31/05Open Claims  December 31
    
    
    97,765
    
    
    
    116,260
    
    
    
    124,739
    
    
    
    N/ANew claims filed
    
    
    25,762
    
    
    
    12,645
    
    
    
    5,837
    
    
    
    160,537Claims settled
    
    
    (547
    )
    
    
    (695
    )
    
    
    (95
    )
    
    
    (8,194
    )Claims dismissed
    
    
    (6,705
    )
    
    
    (3,469
    )
    
    
    (2,153
    )
    
    
    (20,625
    )Inactive claims
    
    
    (15
    )
    
    
    (2
    )
    
    
    
    
    
    
    (3,390
    )Open Claims  December 31
    
    
    116,260
    
    
    
    124,739
    
    
    
    
    
    
    
    N/AOpen Claims  March 31
    
    
    
    
    
    
    
    
    
    
    128,328
 Because claims are frequently filed and settled in large groups, the amount and timing of
settlements, as well as the number of open claims, can fluctuate significantly from period to
period. This is demonstrated by the fact that approximately 40% of all claims filed against the
Company were filed in a 20-plus year period prior to 2002, 40% were filed in the 16-month period
from January 2002 through April 2003, and the remaining 20% were spread relatively evenly over the
next 20 months through December 2004. The rate of claims filed in the first quarter of 2005 was
slightly higher than the rate experienced during 2004; however, this increase was offset by an increase
in the number of claims dismissed in the first quarter of 2005. The Company believes that the
dramatic increase in filings in the 16-month period from January 2002 through April 2003 was
influenced by the bankruptcy filings of numerous asbestos defendants in asbestos-related litigation
and the prospect of various forms of state and federal judicial and legislative reforms. Note 7. Effect of Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has recently issued several new Statements
and Interpretations. For the disclosures required by Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, see Note 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 9 of Notes
to Financial Statements. For a discussion of the impact of FASB Staff Position No. 106-2 (SFAS
106-2), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003which addresses the accounting and disclosures required
as a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) enacted on December 8, 2003, see Note 9 of Notes to Financial Statements. Statement No. 151
(FAS 151), Inventory Costs, an Amendment of ARB No. 43, Chapter 4and Statement No. 153 (FAS
153), Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29were issued in 2004. FAS
151 will be effective for the Company in 2006 and requires that the cost of inventory exclude costs
associated with abnormal amounts of idle capacity and spoilage. The Company is currently in the
process of determining the impact. FAS 153 will be effective in mid-2005 and is not expected to
materially impact the Companys financial statements. In
addition, FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations
(FIN 47),
was issued in March 2005. This interpretation will be effective for
the Company in the fourth quarter of 2005 and clarifies that an
entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the
liabilitys fair value can be reasonably estimated. The Company
is currently in the process of determining the impact. Other Statements and Interpretations recently
issued by the FASB that are applicable to the Company have had no impact to the Company upon
adoption. Those statements include No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities;and No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity;Interpretation No. 46, Consolidation of Variable
Interest Entities,parts of which became effective for the Company in the first quarter of 2004.
Statement of Financial Accounting Standard No. 123 (Revised 2004) (FAS 123), Share Based
Payments,was issued on December 16, 2004. The new standard requires companies to recognize 12




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##### Table of Contents



in their financial statements the cost of employee services received in exchange for valuable equity
instruments issued. On April 14, 2005 the Securities Exchange Commission approved a rule delaying
the effective date of FAS 123 for public companies. Under the rule, FAS 123 is now effective for
annual periods beginning after June 15, 2005. The Company plans to adopt FAS 123 in the first
quarter of 2006 with retroactive adjustment for all prior periods presented using the pro-forma
amounts disclosed in Note 5 of Notes to Financial Statements. The impact of adoption of FAS 123
cannot be determined at this time because it requires information including levels of share-based
payments granted in the future. However, had we adopted FAS 123 in prior periods, the impact of
that standard would have approximated the impact as described in the disclosure of pro forma net
income and earnings per share in Note 5 of our consolidated financial statements. 13




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##### Table of Contents



Note 8. Operational Consolidation Charges During 2004 and 2005 the Company incurred charges related to operational consolidation
activities consisting of previously announced plant reductions,
severance, asset impairments and similar expenses as more fully described below. The Company expects to complete these plans by the end of
2005, although certain termination payments and other costs may extend beyond 2005. The following is a summary of the operational consolidation programs outstanding
as of March 31, 2005. Balance
    
    
    Additional
    
    
    Cash
    
    
    Non-Cash
    
    
    Reversal
    
    
    BalanceDec. 31, 2004
    
    
    Charges
    
    
    Payments
    
    
    Write-Off
    
    

of
Charges
    
    
    March 31, 2005Termination
payments and other
employee costs
    
    $
    20.7
    
    
    $
    6.8
    
    
    $
    (11.0
    )
    
    $
    
    
    
    $
    (0.2
    )
    
    $
    16.3Asset impairments
    
    
    
    
    
    
    10.4
    
    
    
    
    
    
    
    (10.4
    )
    
    
    
    
    
    
    Other
    
    
    2.8
    
    
    
    3.2
    
    
    
    (1.2
    )
    
    
    (2.2
    )
    
    
    
    
    
    
    2.6$
    23.5
    
    
    $
    20.4
    
    
    $
    (12.2
    )
    
    $
    (12.6
    )
    
    $
    (0.2
    )
    
    $
    18.9
 The operational consolidation reserve balance at the end of December 31, 2004 consisted
of $19.2 million related to plans initiated in 2004 and $4.3 million related to plans from 2003.
During 2004 the Company incurred charges related to operational consolidation activities in each of
its businesses as more fully described in our Form 10-K for the year ended December 31, 2004. The
total cost of the 2004 actions was $46.4 million and included the elimination of 1,695 jobs. In the first quarter of 2005, the Company recorded $20.4 million of operational
consolidation expenses, $16.8 million was included in cost of
sales and $3.6 million was included in selling and administrative expenses. $14.7
million related to 2005 programs and $5.7 related to programs that were initiated in 2004 as
detailed below. In addition, the Company recorded a $0.2 million operational consolidation benefit
in 2005 associated with the reversal of severance associated with a Bath and Kitchen plan initiated
in 2003. As part of continuing efforts to rationalize manufacturing capabilities and respond to
changing market conditions, Air Conditioning decided to seek a buyer for its Rockingham, NC
manufacturing facility and to close the facility by the end of the third quarter of 2005, if no
buyer is found. Air Conditioning incurred $12.8 million of
operational consolidation expenses during the three months ended March 31, 2005. $10.4 million of
this amount was for the impairment of goodwill and other long-lived assets and $0.1 million was for
severance. The balance of the $2.3 million charge was associated with a plan to transfer production
to a lower cost facility in North America and salaried severance. Air Conditioning expects to
incur an additional $2 million during 2005 to complete the Rockingham plan. Air Conditioning
expended $2.4 million of cash on operational consolidation activities in the first quarter of 2005
of which $1.4 million related to plans initiated in 2005 and $1.0 million related to prior period
plans. Bath and Kitchen incurred $3.9 million of operational consolidation expenses during the three
months ended March 31, 2005, $1.7 million associated with job eliminations and $2.2 million related
to the reorganization of an administrative process that took place in 2004. Bath and Kitchen
expended $5.6 million of cash on operational consolidation activities in the first quarter of 2005
of which $0.7 million related to plans initiated in 2005 and $4.9 million related to prior period
plans. The Vehicle Controls business incurred $3.7 million of operational consolidation expenses
during the three months ended March 31, 2005 associated with the continued relocation of a plant to
a lower cost location and other job elimination programs each of which were initiated in 2004. 14




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##### Table of Contents



Vehicle Controls expects to incur $5.9 million
during 2005 to complete the plans outstanding
mentioned above. Vehicle Controls expended $4.2 million of cash on operational consolidation
activities in the first quarter of 2005 of which $0.2 million related to plans initiated in
2005 and $4 million related to prior period plans. The Company expects that essentially all of the $18.9 million balance as of March 31, 2005
will be utilized by the end of 2005. The accrued termination payments and other employee costs are
for severance and other related payments expected to be made after termination. Note 9. Post-retirement Benefits Post-retirement pension, health and life insurance costs had the following components: Three Months Ended March 31,2005
    
    
    2005
    
    
    2004
    
    
    2004Health &
    
    
    
    
    
    
    Health &Pension
    
    
    Life Ins.
    
    
    Pension
    
    
    Life Ins.(Dollars in millions)
    
    Benefits
    
    
    Benefits
    
    
    Benefits
    
    
    BenefitsService cost-benefits earned during the period
    
    $
    13.8
    
    
    $
    2.2
    
    
    $
    12.5
    
    
    $
    2.5Interest cost on the projected benefit obligation
    
    
    20.5
    
    
    
    4.4
    
    
    
    21.2
    
    
    
    4.8Less assumed return on plan assets
    
    
    (18.5
    )
    
    
    
    
    
    
    (15.4
    )
    
    
    Amortization of prior service cost
    
    
    1.5
    
    
    
    (1.1
    )
    
    
    1.6
    
    
    
    (1.1
    )Amortization of net (gain) loss
    
    
    3.3
    
    
    
    1.7
    
    
    
    3.3
    
    
    
    2.1Defined benefit plan cost
    
    $
    20.6
    
    
    $
    7.2
    
    
    $
    23.2
    
    
    $
    8.3Accretion expense reflected
in Other expense (income)
    
    $
    2.0
    
    
    $
    4.4
    
    
    $
    5.8
    
    
    $
    4.8
 Amortization of prior service cost is recorded on the straight-line method over the
average remaining service period of active participants. The Company expects to contribute $53 million to the domestic pension plans and $25 million to
non-U.S. plans in 2005. In the first quarter of 2005, $6.2 million was contributed to foreign plans
and $0.3 million was contributed to domestic plans. In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. SFAS 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 which addresses the accounting and
disclosures required as a result of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) enacted on December 8, 2003. The Act introduces a prescription drug
benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least equivalent to Medicare. Provisions of the Act will
provide eligible plan sponsors with a subsidy that the Company expects to use to decrease the
benefit obligation and net post-retirement benefit cost of its plans. Under the FSP, which was
effective for the Company in the third quarter of 2004, the decrease in the benefit obligation upon
initial adoption was accounted for as an actuarial gain of $0.1 million. 15




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##### Table of Contents



Note 10. Supplemental Consolidating Condensed Financial Information All of the Companys Senior Notes were issued by its 100%-owned subsidiary, American Standard
Inc. (ASI). American Standard Companies Inc. (the Parent Company) and American Standard
International Inc. (ASII) fully and unconditionally guarantee the payment obligations under these
securities (the Companys Public Debt). In lieu of providing separate financial statements for
ASI, the Company has included the accompanying consolidating condensed financial information. The
following supplemental financial information sets forth, on a
consolidating basis, unaudited statements of
income and unaudited statements of cash flows for the three months
ended March 31, 2005 and 2004, and unaudited balance
sheets as of March 31, 2005 and December 31, 2004 for the Parent Company, ASI, ASII and the
subsidiaries of the Parent Company which are not subsidiaries of ASI or ASII (the Other
Subsidiaries). None of the Other Subsidiaries guarantees the Public Debt of ASI. The equity
method of accounting is used to reflect investments of the Parent Company in ASI and Other
Subsidiaries. 
 CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 Parent
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    1,138.6
    
    
    $
    1,315.7
    
    
    $
    3.2
    
    
    $
    (117.2
    )
    
    $
    2,340.3Costs and expenses and other expense:
    
    
    Cost of sales
    
    
    
    
    
    
    835.3
    
    
    
    1,005.2
    
    
    
    3.1
    
    
    
    (117.2
    )
    
    
    1,726.4Selling and administrative expenses
    
    
    
    
    
    
    243.3
    
    
    
    207.8
    
    
    
    (0.9
    )
    
    
    
    
    
    
    450.2Other expense
    
    
    
    
    
    
    28.2
    
    
    
    (20.8
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    7.0Interest expense
    
    
    
    
    
    
    27.4
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    29.6Intercompany interest expense (income)
    
    
    
    
    
    
    2.5
    
    
    
    (2.5
    )
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    
    
    
    
    1,136.7
    
    
    
    1,191.9
    
    
    
    1.8
    
    
    
    (117.2
    )
    
    
    2,213.2Income before income taxes and equity in net
income of consolidated subsidiaries
    
    
    
    
    
    
    1.9
    
    
    
    123.8
    
    
    
    1.4
    
    
    
    
    
    
    
    127.1Income taxes
    
    
    
    
    
    
    (11.4
    )
    
    
    13.6
    
    
    
    
    
    
    
    
    
    
    
    2.2Income before equity
in net income of consolidated subsidiaries
    
    
    
    
    
    
    13.3
    
    
    
    110.2
    
    
    
    1.4
    
    
    
    
    
    
    
    124.9Equity in net income of consolidated subsidiaries
    
    
    124.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124.9
    )
    
    
    Net income
    
    $
    124.9
    
    
    $
    13.3
    
    
    $
    110.2
    
    
    $
    1.4
    
    
    $
    (124.9
    )
    
    $
    124.9
 16




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##### Table of Contents



Note 10. Supplemental Consolidating Condensed Financial Information (continued) 
 CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2005 Parent
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash and cash equivalents
    
    $
    0.4
    
    
    $
    12.6
    
    
    $
    223.7
    
    
    $
    3.4
    
    
    $
    
    
    
    $
    240.1Accounts receivable, net
    
    
    
    
    
    
    472.6
    
    
    
    690.1
    
    
    
    29.0
    
    
    
    
    
    
    
    1,191.7Inventories
    
    
    
    
    
    
    595.9
    
    
    
    620.2
    
    
    
    
    
    
    
    
    
    
    
    1,216.1Proceeds due from debt commitment
    
    
    
    
    
    
    198.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198.2Other current assets
    
    
    
    
    
    
    146.3
    
    
    
    284.3
    
    
    
    10.5
    
    
    
    
    
    
    
    441.1Total current assets
    
    
    0.4
    
    
    
    1,425.6
    
    
    
    1,818.3
    
    
    
    42.9
    
    
    
    
    
    
    
    3,287.2Facilities, net
    
    
    
    
    
    
    575.1
    
    
    
    1,003.7
    
    
    
    
    
    
    
    
    
    
    
    1,578.8Goodwill, net
    
    
    
    
    
    
    102.8
    
    
    
    1,034.4
    
    
    
    
    
    
    
    
    
    
    
    1,137.2Investment in subsidiaries
    
    
    1,975.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,975.5
    )
    
    
    Long-term asbestos indemnity receivable
    
    
    
    
    
    
    366.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366.0Other assets
    
    
    
    
    
    
    543.2
    
    
    
    200.1
    
    
    
    22.2
    
    
    
    
    
    
    
    765.5Total assets
    
    $
    1,975.9
    
    
    $
    3,012.7
    
    
    $
    4,056.5
    
    
    $
    65.1
    
    
    $
    (1,975.5
    )
    
    $
    7,134.7LIABILITIES AND SHAREHOLDERS
(DEFICIT) EQUITYCurrent liabilities:Loans payable to banks
    
    $
    
    
    
    $
    95.0
    
    
    $
    20.2
    
    
    $
    
    
    
    $
    
    
    
    $
    115.2Current maturities of long-term debt
    
    
    
    
    
    
    1.6
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    2.5Obligation to fund debt commitment
    
    
    
    
    
    
    198.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198.2Other current liabilities
    
    
    
    
    
    
    875.2
    
    
    
    1,332.2
    
    
    
    16.8
    
    
    
    
    
    
    
    2,224.2Total current liabilities
    
    
    
    
    
    
    1,170.0
    
    
    
    1,353.3
    
    
    
    16.8
    
    
    
    
    
    
    
    2,540.1Long-term debt
    
    
    
    
    
    
    1,527.1
    
    
    
    107.1
    
    
    
    
    
    
    
    
    
    
    
    1,634.2Reserve for post-retirement benefits
    
    
    
    
    
    
    281.6
    
    
    
    446.9
    
    
    
    
    
    
    
    
    
    
    
    728.5Intercompany accounts, net
    
    
    1,107.1
    
    
    
    142.8
    
    
    
    (1,140.7
    )
    
    
    (109.2
    )
    
    
    
    
    
    
    Long-term portion of asbestos indemnity
liability
    
    
    
    
    
    
    680.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    680.1Other long-term liabilities
    
    
    
    
    
    
    348.9
    
    
    
    198.4
    
    
    
    135.7
    
    
    
    
    
    
    
    683.0Total liabilities
    
    
    1,107.1
    
    
    
    4,150.5
    
    
    
    965.0
    
    
    
    43.3
    
    
    
    
    
    
    
    6,265.9Total shareholders equity (deficit)
    
    
    868.8
    
    
    
    (1,137.8
    )
    
    
    3,091.5
    
    
    
    21.8
    
    
    
    (1,975.5
    )
    
    
    868.8Total liabilities and shareholders equity
(deficit)
    
    $
    1,975.9
    
    
    $
    3,012.7
    
    
    $
    4,056.5
    
    
    $
    65.1
    
    
    $
    (1,975.5
    )
    
    $
    7,134.7
 17




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##### Table of Contents



Note 10. Supplemental Consolidating Condensed Financial Information (continued) 
 CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2005 Parent
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCash provided (used) by:Operating activities:Net income
    
    $
    124.9
    
    
    $
    13.3
    
    
    $
    110.2
    
    
    $
    1.4
    
    
    $
    (124.9
    )
    
    $
    124.9Adjustments to reconcile net income
to net cash provided by operations:Depreciation and amortization
    
    
    
    
    
    
    27.2
    
    
    
    42.3
    
    
    
    
    
    
    
    
    
    
    
    69.5Equity in earnings of affiliates, net
of dividends received
    
    
    
    
    
    
    (4.8
    )
    
    
    (2.5
    )
    
    
    
    
    
    
    
    
    
    
    (7.3
    )Non-cash stock compensation
    
    
    
    
    
    
    15.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.8Gain on sale of property, plant and equipment
    
    
    
    
    
    
    0.1
    
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    (1.3
    )Equity in net income of subsidiary
    
    
    (124.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124.9
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    1.1
    
    
    
    (51.7
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    (52.5
    )Inventories
    
    
    
    
    
    
    (102.2
    )
    
    
    (43.3
    )
    
    
    
    
    
    
    
    
    
    
    (145.5
    )Accounts payable
    
    
    
    
    
    
    44.4
    
    
    
    (13.8
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    30.5Other accrued liabilities
    
    
    
    
    
    
    63.0
    
    
    
    98.0
    
    
    
    (6.1
    )
    
    
    
    
    
    
    154.9Post-retirement benefits
    
    
    
    
    
    
    6.2
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    7.6Net asbestos indemnity liability
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.4Other long-term liabilities
    
    
    
    
    
    
    18.8
    
    
    
    (43.7
    )
    
    
    4.3
    
    
    
    
    
    
    
    (20.6
    )Other assets
    
    
    
    
    
    
    (155.0
    )
    
    
    (78.7
    )
    
    
    5.3
    
    
    
    
    
    
    
    (228.4
    )Net cash provided by operating activities
    
    
    
    
    
    
    (69.7
    )
    
    
    16.8
    
    
    
    2.9
    
    
    
    
    
    
    
    (50.0
    )Investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (22.7
    )
    
    
    (21.0
    )
    
    
    
    
    
    
    
    
    
    
    (43.7
    )Investments in affiliated companies
    
    
    
    
    
    
    
    
    
    
    (7.9
    )
    
    
    
    
    
    
    
    
    
    
    (7.9
    )Investments in computer software
    
    
    
    
    
    
    (5.9
    )
    
    
    (4.2
    )
    
    
    
    
    
    
    
    
    
    
    (10.1
    )Loan to unconsolidated joint venture, net
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.9
    )Proceeds from the disposal of property/equipment
    
    
    
    
    
    
    3.1
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    5.2Other
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Net cash used by investing activities
    
    
    
    
    
    
    (27.8
    )
    
    
    (31.0
    )
    
    
    
    
    
    
    
    
    
    
    (58.8
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Repayments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Net change in revolving credit facility
    
    
    
    
    
    
    174.0
    
    
    
    61.1
    
    
    
    
    
    
    
    
    
    
    
    235.1Net change in other short-term debt
    
    
    
    
    
    
    44.0
    
    
    
    (5.4
    )
    
    
    
    
    
    
    
    
    
    
    38.6Purchases of treasury stock
    
    
    (140.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140.3
    )Dividend payments
    
    
    (32.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32.1
    )Net change in intercompany accounts
    
    
    155.2
    
    
    
    (102.1
    )
    
    
    (50.8
    )
    
    
    (2.3
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    15.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.7Proceeds from foreign exchange forward contracts
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Other common stock issued or reacquired, net
    
    
    1.8
    
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.4Net cash used by financing activities
    
    
    0.3
    
    
    
    118.7
    
    
    
    4.8
    
    
    
    (2.3
    )
    
    
    
    
    
    
    121.5Effect of exchange rate changes on
cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    (2.0
    )Net increase (decrease) in cash and cash equivalents
    
    
    0.3
    
    
    
    21.2
    
    
    
    (11.4
    )
    
    
    0.6
    
    
    
    
    
    
    
    10.7Cash and cash equivalents at beginning of year
    
    
    0.1
    
    
    
    (8.6
    )
    
    
    235.1
    
    
    
    2.8
    
    
    
    
    
    
    
    229.4Cash and cash equivalents at end of year
    
    $
    0.4
    
    
    $
    12.6
    
    
    $
    223.7
    
    
    $
    3.4
    
    
    $
    
    
    
    $
    240.1
 18




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##### Table of Contents



Note 10. Supplemental Consolidating Condensed Financial Information (continued) 
 CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    1,094.4
    
    
    $
    1,200.7
    
    
    $
    2.5
    
    
    $
    (112.6
    )
    
    $
    2,185.0Costs and expenses and other expense:Cost of sales
    
    
    
    
    
    
    807.9
    
    
    
    898.3
    
    
    
    1.8
    
    
    
    (112.6
    )
    
    
    1,595.4Selling and administrative expenses
    
    
    
    
    
    
    222.6
    
    
    
    198.2
    
    
    
    
    
    
    
    
    
    
    
    420.8Other expense
    
    
    
    
    
    
    14.8
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    16.9Interest expense
    
    
    
    
    
    
    25.8
    
    
    
    3.5
    
    
    
    
    
    
    
    
    
    
    
    29.3Intercompany interest expense (income)
    
    
    
    
    
    
    1.6
    
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    
    
    
    
    1,072.7
    
    
    
    1,100.5
    
    
    
    1.8
    
    
    
    (112.6
    )
    
    
    2,062.4Income before income taxes and equity in net
income of consolidated subsidiaries
    
    
    
    
    
    
    21.7
    
    
    
    100.2
    
    
    
    0.7
    
    
    
    
    
    
    
    122.6Income taxes
    
    
    
    
    
    
    8.6
    
    
    
    27.4
    
    
    
    2.0
    
    
    
    
    
    
    
    38.0Income before equity
in net income of consolidated subsidiaries
    
    
    
    
    
    
    13.1
    
    
    
    72.8
    
    
    
    (1.3
    )
    
    
    
    
    
    
    84.6Equity in net income of consolidated subsidiaries
    
    
    84.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84.6
    )
    
    
    Net income
    
    $
    84.6
    
    
    $
    13.1
    
    
    $
    72.8
    
    
    $
    (1.3
    )
    
    $
    (84.6
    )
    
    $
    84.6
 19




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##### Table of Contents



Note 10. Supplemental Consolidating Condensed Financial Information (continued) 
 CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCash provided (used) by:Operating activities:Net income
    
    $
    84.6
    
    
    $
    13.1
    
    
    $
    72.8
    
    
    $
    (1.3
    )
    
    $
    (84.6
    )
    
    $
    84.6Adjustments to reconcile net income
to net cash provided (used) by operations:Depreciation and amortization
    
    
    
    
    
    
    23.9
    
    
    
    39.4
    
    
    
    
    
    
    
    
    
    
    
    63.3Equity in earnings of affiliates, 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
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    19.6
    
    
    
    (141.4
    )
    
    
    1.3
    
    
    
    
    
    
    
    (120.5
    )Inventories
    
    
    
    
    
    
    (49.4
    )
    
    
    (47.0
    )
    
    
    
    
    
    
    
    
    
    
    (96.4
    )Accounts payable
    
    
    
    
    
    
    82.0
    
    
    
    43.7
    
    
    
    0.4
    
    
    
    
    
    
    
    126.1Other accrued liabilities and taxes
    
    
    
    
    
    
    19.7
    
    
    
    (56.2
    )
    
    
    (2.9
    )
    
    
    
    
    
    
    (39.4
    )Post-retirement benefits
    
    
    
    
    
    
    11.4
    
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    13.3Net asbestos indemnity liability
    
    
    
    
    
    
    (2.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.8
    )Other current and long-term assets
    
    
    
    
    
    
    2.9
    
    
    
    12.4
    
    
    
    (22.6
    )
    
    
    
    
    
    
    (7.3
    )Other long-term liabilities
    
    
    
    
    
    
    5.2
    
    
    
    2.5
    
    
    
    1.0
    
    
    
    
    
    
    
    8.7Net cash provided (used) by operating activities
    
    
    
    
    
    
    136.7
    
    
    
    (73.8
    )
    
    
    (24.1
    )
    
    
    
    
    
    
    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, net
    
    
    
    
    
    
    (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
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Repayments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Net change in revolving credit facility
    
    
    
    
    
    
    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
    )
    
    
    69.7
    
    
    
    24.6
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    12.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.0Proceeds from settlement of foreign exchange
forward contracts
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.7Other
    
    
    1.5
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2Net cash used by financing activities
    
    
    0.4
    
    
    
    (25.2
    )
    
    
    103.2
    
    
    
    24.6
    
    
    
    
    
    
    
    103.0Effect of
exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Net increase (decrease) in cash and cash equivalents
    
    
    0.4
    
    
    
    72.3
    
    
    
    7.4
    
    
    
    0.5
    
    
    
    
    
    
    
    80.6Cash and cash equivalents at beginning of year
    
    
    0.1
    
    
    
    (70.4
    )
    
    
    179.5
    
    
    
    2.5
    
    
    
    
    
    
    
    111.7Cash and cash equivalents at end of year
    
    $
    0.5
    
    
    $
    1.9
    
    
    $
    186.9
    
    
    $
    3.0
    
    
    $
    
    
    
    $
    192.3
 20




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##### Table of Contents



Note 10. Supplemental Consolidating Condensed Financial Information (continued) 
 CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Company
    
    
    ASI
    
    
    ASII
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    (8.6
    )
    
    $
    235.1
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    229.4Accounts receivable, net
    
    
    
    
    
    
    473.2
    
    
    
    654.2
    
    
    
    27.1
    
    
    
    
    
    
    
    1,154.5Inventories
    
    
    
    
    
    
    493.6
    
    
    
    593.6
    
    
    
    
    
    
    
    
    
    
    
    1,087.2Other current assets
    
    
    
    
    
    
    236.8
    
    
    
    167.7
    
    
    
    14.2
    
    
    
    
    
    
    
    418.7Total current assets
    
    
    0.1
    
    
    
    1,195.0
    
    
    
    1,650.6
    
    
    
    44.1
    
    
    
    
    
    
    
    2,889.8Facilities, net
    
    
    
    
    
    
    570.6
    
    
    
    1,046.0
    
    
    
    
    
    
    
    
    
    
    
    1,616.6Goodwill, net
    
    
    
    
    
    
    107.2
    
    
    
    1,074.8
    
    
    
    
    
    
    
    
    
    
    
    1,182.0Investment in subsidiaries
    
    
    1,871.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,871.3
    )
    
    
    Long-term asbestos indemnity receivable
    
    
    
    
    
    
    365.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365.1Other assets
    
    
    
    
    
    
    519.0
    
    
    
    245.4
    
    
    
    23.9
    
    
    
    
    
    
    
    788.3Total assets
    
    $
    1,871.4
    
    
    $
    2,756.9
    
    
    $
    4,016.8
    
    
    $
    68.0
    
    
    $
    (1,871.3
    )
    
    $
    6,841.8LIABILITIES AND SHAREHOLDERS
(DEFICIT) EQUITYCurrent liabilities:Loans payable to banks
    
    $
    
    
    
    $
    51.0
    
    
    $
    25.6
    
    
    $
    
    
    
    $
    
    
    
    $
    76.6Current maturities of long-term debt
    
    
    
    
    
    
    1.6
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    2.2Other current liabilities
    
    
    
    
    
    
    963.1
    
    
    
    1,281.7
    
    
    
    23.1
    
    
    
    
    
    
    
    2,267.9Total current liabilities
    
    
    
    
    
    
    1,015.7
    
    
    
    1,307.9
    
    
    
    23.1
    
    
    
    
    
    
    
    2,346.7Long-term debt
    
    
    
    
    
    
    1,379.5
    
    
    
    49.6
    
    
    
    
    
    
    
    
    
    
    
    1,429.1Reserve for post-retirement benefits
    
    
    
    
    
    
    275.5
    
    
    
    468.6
    
    
    
    
    
    
    
    
    
    
    
    744.1Intercompany accounts, net
    
    
    941.1
    
    
    
    235.4
    
    
    
    (1,082.8
    )
    
    
    (93.7
    )
    
    
    
    
    
    
    Long-term portion of asbestos indemnity
liability
    
    
    
    
    
    
    683.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    683.4Other long-term liabilities
    
    
    
    
    
    
    323.5
    
    
    
    253.4
    
    
    
    131.3
    
    
    
    
    
    
    
    708.2Total liabilities
    
    
    941.1
    
    
    
    3,913.0
    
    
    
    996.7
    
    
    
    60.7
    
    
    
    
    
    
    
    5,911.5Total shareholders equity (deficit)
    
    
    930.3
    
    
    
    (1,156.1
    )
    
    
    3,020.1
    
    
    
    7.3
    
    
    
    (1,871.3
    )
    
    
    930.3Total liabilities and shareholders equity
(deficit)
    
    $
    1,871.4
    
    
    $
    2,756.9
    
    
    $
    4,016.8
    
    
    $
    68.0
    
    
    $
    (1,871.3
    )
    
    $
    6,841.8
 21




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##### Table of Contents



Note 11. Debt On March 29, 2005 the Company executed an agreement with several purchasers to sell senior
notes with a principal amount of $200 million with a maturity
date of April 1, 2015. The commitment to sell these notes is reflected in
other current liabilities and the expected proceeds from the commitment are reflected in other
current assets in the accompanying consolidated balance sheet. The senior notes associated with
this commitment were issued on April 1, 2005 and resulted in proceeds to the Company of $198.2
million. The senior notes bear an interest rate of 5 1/2% and interest is payable semi-annually on
April 1 and October 1 of each year. The Company, at its option, may at any time and from time to
time redeem all or a portion of the senior notes for an amount equal to the principal amount of
the notes redeemed plus a make whole premium. The proceeds from the issuance of the notes were
used to repay the majority of the $208 million of 7 3/8% senior notes that matured on April 15,
2005. 22




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##### Table of Contents



Note 12. Segment Data 
 Summary Segment and Income Statement Data
Dollars in millions
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Sales:Air Conditioning Systems and Services
    
    $
    1,257.2
    
    
    $
    1,163.3Bath and Kitchen
    
    
    604.1
    
    
    
    601.4Vehicle Control Systems
    
    
    479.0
    
    
    
    420.3Total sales
    
    $
    2,340.3
    
    
    $
    2,185.0Segment income:Air Conditioning Systems and Services
    
    $
    87.6
    
    
    $
    93.0Bath and Kitchen
    
    
    44.8
    
    
    
    50.3Vehicle Control Systems
    
    
    69.7
    
    
    
    58.9Total segment income
    
    
    202.1
    
    
    
    202.2Equity in net income of unconsolidated
joint ventures
    
    
    7.8
    
    
    
    6.5209.9
    
    
    
    208.7Interest expense
    
    
    29.6
    
    
    
    29.3Corporate and other expenses
    
    
    53.2
    
    
    
    56.8Income before income taxes
    
    
    127.1
    
    
    
    122.6Income taxes
    
    
    2.2
    
    
    
    38.0Net income applicable to common shares
    
    $
    124.9
    
    
    $
    84.6
 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. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Financial Results Overview Sales, net income and earnings per diluted share in the first quarter of 2005 all increased
when compared to the first quarter of 2004. Earnings were $.57 per diluted share, up 50% from $.38
per diluted share a year ago. Sales were $2.340 billion, up 7% from $2.185 billion a year ago. Net
income rose to $124.9 million from $84.6 million, up 48%. The Company benefited from volume
increases, improved pricing and productivity improvements and the benefits from prior operational
consolidations which were partially offset by continued commodity cost escalations and short term
production issues affecting Bath and Kitchen in Europe. The Company continued to invest in
marketing and new product development. Net income in the first quarter of 2005 included benefits
of $36.4 million associated with the resolution of tax contingencies and the impact of certain
non-U.S. tax planning initiatives on prior tax years. Net income in the quarter included
$20.4 million of operational consolidation expenses ($14.8 million net of $5.6 million of tax
benefits), see Note 8 of Notes to Financial Statements. The following discussion and 23




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##### Table of Contents



analysis addresses year-over-year changes in the line items shown in the Summary Segment and Income
Statement Data in Note 13 of Notes to Financial Statements. Approximately half of the Companys
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. Year-over-year changes in segment sales and
segment income and, in certain cases, segment operating margins, for 2005 compared with 2004 are
presented both with and without the effects of foreign exchange translation. Presenting results of
operations excluding the translation effects of foreign exchange amounts is not in conformity with
generally accepted accounting principles (GAAP), but management analyzes the data in this manner
because it is useful to them in understanding operational performance of the business. Management
also uses data adjusted in this manner for purposes of determining incentive compensation.
Accordingly, management believes that presenting the analysis in this manner is also useful to
shareholders in understanding the core business segment operating results and trends. 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. Following is an analysis of changes in total sales, segment income and operating margin for
the Company for the first quarter of 2005 compared with the first quarter of 2004, showing the
effect of foreign exchange translation. Three Months EndedMarch 31, 2005Three
    
    
    
    
    
    
    
    
    
    
    Excluding foreignMonths
    
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31
    
    
    
    
    
    
    Percentage
    
    
    20052004
    
    
    2005
    
    
    Change
    
    
    Adjusted
    
    
    Percentage change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    2,185.0
    
    
    $
    2,340.3
    
    
    
    7.1
    %
    
    $
    2,288.4
    
    
    
    4.7
    %Segment income
    
    $
    202.2
    
    
    $
    202.1
    
    
    
    0
    %
    
    $
    196.6
    
    
    
    (2.8
    )%Segment operating margin
    
    
    9.3
    %
    
    
    8.6
    %
    
    (0.7) pts.
    
    
    8.6
    %
    
    (0.7)pts.
 Sales in the first quarter of 2005 were $2.340 billion, an increase of 7.1% (4.7%
excluding favorable foreign exchange translation effects) from $2.185 billion in the first quarter
of 2004. Sales increased 8.1% for Air Conditioning Systems and Services, 0.4% for Bath and
Kitchen and 14.0% for Vehicle Control Systems. The Company as a whole benefited from price
increases and volume gains. Segment income was $202.1 million for the first quarter of 2005, essentially flat (down 2.8%
excluding favorable foreign exchange translation effects) with $202.2 million in the first quarter
of 2004. Segment income decreased 5.8% for Air Conditioning Systems and Services, 10.9% for Bath
and Kitchen and increased 18.3% for Vehicle Control Systems. Segment income benefited from price
increases, higher volume and improvements in our productivity initiatives and the benefits
associated with prior operational consolidations, offset by higher investments in marketing and
product development, increased commodity costs and other cost escalations and short-term
production issues affecting Bath and Kitchen in Europe. 2005 segment income also included the
adverse impact of $20.4 million ($14.8 million net of a $5.6 million tax benefit, or 24




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##### Table of Contents



$.07 per
diluted share) of operational consolidation expenses primarily
associated with Air Conditioning Systems and Services decision to seek a buyer for its Rockingham, NC manufacturing
facility and to close the facility by the end of the third quarter if no buyer is found. Following is an analysis of changes in sales, segment income and operating margin for Air
Conditioning Systems and Services for the first quarter of 2005 compared with the first quarter of
2004, showing the effect of foreign exchange translation. Three Months EndedMarch 31, 2005Three
    
    
    
    
    
    
    
    
    
    
    Excluding foreignMonths
    
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31,
    
    
    
    
    
    
    Percentage
    
    
    2005
    
    
    Percentage2004
    
    
    2005
    
    
    Change
    
    
    Adjusted
    
    
    Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    1,163.3
    
    
    $
    1,257.2
    
    
    
    8.1
    %
    
    $
    1,245.3
    
    
    
    7.0
    %Segment income
    
    $
    93.0
    
    
    $
    87.6
    
    
    
    (5.8
    )%
    
    $
    87.1
    
    
    
    (6.3
    )%Segment operating margin
    
    
    8.0
    %
    
    
    7.0
    %
    
    (1.0) pts.
    
    
    7.0
    %
    
    (1.0) pts.
 Sales of Air Conditioning Systems and Services increased 8.1% (7% excluding favorable
foreign exchange translation effects) to $1.257 billion for the first quarter of 2005 from $1.163
billion for the first quarter of 2004. Our commercial equipment sales, which represent about 25%
of total Company sales, increased 8.3% on a global basis. This was the fourth consecutive quarter
of growing commercial equipment sales at an accelerated rate. In addition, the commercial
equipment market benefited from about a 2% price increase during the first quarter of 2005. Within
the commercial equipment segment, global unitary sales were up 10%, and applied sales were up
6.4%. In the first quarter of 2005, there were some pockets of strength in markets that are
important to the Company such as commercial office buildings, which increased 11%; industrial
manufacturing, which increased 14%; and lodging, which increased 19%. Sales were also up modestly,
by 5.6% in the parts, services and solutions business as cold weather in key parts of the U.S. and
Europe limited service activity and the related parts sales. Sales also benefited substantially
from price increases. The Company announced additional price increases in the quarter in each
region in the range of 3-5%. The commercial equipment market in the U.S. was up overall an
estimated 5%-6% year over year, consisting of 1-2% growth in price and 4-5% growth in volume. This
follows a full year 2004 increase of 4%, which did not include increases in price and marked the
first annual increase in the commercial market since the year 2000. In the Americas, total orders
were up 6% following the fourth quarter year over year increase of 26%, as customers pre-bought in
anticipation of the price increase mentioned above. Internationally, markets in Europe were only
up 1-2%, resulting in our sales increasing 1.6%. The Middle East region was very strong. In Asia, the
Chinese market continued to grow while the remainder of the Asia/Pacific region overall remains healthy. Globally,
orders were also up 6% versus the prior year. Internationally, orders were up 5% in the first
quarter, on top of 10% and 20% growth in the first quarter of 2004 and 2003, respectively. We
ended the quarter with a backlog of $690 million, up 7.5% from the first quarter of last year and
4.1% above the fourth quarter of 2004. This marks the fifth consecutive quarter of year over year
backlog growth. 25




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##### Table of Contents



Sales of our residential products continued to grow strongly, up 10.8% year over year. This
increase included gains from price, volume and mix driven by a shift in sales to higher efficiency models. Residential inventory builds are consistent with the anticipated seasonal demand and
inventory levels at distributors are at or below five year averages. Because of our focus on
high-efficiency, premium systems, and foregoing some low margin business, our unitary and light
commercial segments only maintained market share. Segment income of Air Conditioning Systems and Services decreased 5.8% (6.3% excluding
foreign exchange translation effects) to $87.6 million in the first quarter of 2005 from $93.0
million in the first quarter of 2004. Margins were 7.0% in the first quarter of 2005, compared
with 8.0% for the first quarter of 2004. Segment income in 2005 included $12.8 million of
operational consolidation expenses primarily associated with the rationalization of the Rockingham, North
Carolina manufacturing facility. $1.7 million relates to severance, $10.4 million are non-cash
charges associated with asset write-offs and $0.7 million is for other liabilities. These actions
are expected to result in additional charges of approximately $2 million during the remainder of
2005 and will yield cost savings of approximately $1.9 million in 2005 and $3.8 million in 2006.
Strength in price, volume, mix and productivity improvements offset commodity cost increases,
higher labor costs and investments in marketing and product development. While we continued to
achieve results from our productivity initiatives, we would have expected to do better in this
area and are working to improve results from these ongoing initiatives. Following is an analysis of changes in sales, segment income and operating margin for Bath
and Kitchen for the first quarter of 2005 compared with the first quarter of 2004, showing the
effect of foreign exchange translation. Three Months EndedMarch 31, 2005Three
    
    
    
    
    
    
    
    
    
    
    Excluding foreignMonths
    
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31,
    
    
    
    
    
    
    Percentage
    
    
    20052004
    
    
    2005
    
    
    Change
    
    
    Adjusted
    
    
    Percentage Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    601.4
    
    
    $
    604.1
    
    
    
    0.4
    %
    
    $
    587.2
    
    
    
    (2.4
    )%Segment income
    
    $
    50.3
    
    
    $
    44.8
    
    
    
    (10.9
    )%
    
    $
    43.4
    
    
    
    (13.7
    )%Segment operating margin
    
    
    8.4
    %
    
    
    7.4
    %
    
    (1.0)pts.
    
    
    7.4
    %
    
    (1.0)pts.
 Sales of Bath and Kitchen increased 0.4% (down 2.4% excluding favorable foreign exchange
translation effects) to $604.1 million in the first quarter of 2005 from $601.4 million in the
first quarter of 2004. Sales were down 0.4% in Europe which is our largest region, virtually flat
in the Americas and up 3% in Asia (excluding favorable foreign exchange translation effects). The
sales decrease in Europe was primarily the result of product availability issues. Sales in the
Americas were impacted by the timing of orders partially offset by the continued strong
performance of Champion toilets. Segment income of Bath and Kitchen decreased 10.9% (down 13.7% excluding favorable foreign
exchange translation effects) to $44.8 million in the first quarter of 2005 from $50.3 million in
the first quarter of 2004. Margins decreased to 7.4% in the first quarter of 2005 from 8.4% in
the first quarter of 2004 both with and without the effects of foreign exchange translation. 26




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##### Table of Contents



Segment income was adversely impacted by production issues in Europe which translated to higher
costs and lost revenues. The Company has put in place a number of actions to resolve these issues and believes that most of these issues will be resolved by the end of the second quarter. Bath and
Kitchen benefited from favorable pricing and improvements from its productivity initiatives,
which helped offset commodity cost escalations, higher labor costs and increased investments in
marketing and new product development. Segment income in 2005 included $3.9 million of operational
consolidation expenses associated with job eliminations and costs associated with the
reorganization of an administrative process. These actions are expected to yield annualized cost
savings of $0.7 million. The Company expects to complete these
activities by the end of 2005. Following is an analysis of changes in sales, segment income and operating margin for Vehicle
Control Systems for the first quarter of 2005 compared with the first quarter of 2004, showing the
effect of foreign exchange translation. Three Months EndedMarch 31, 2005Three
    
    
    
    
    
    
    
    
    
    
    Excluding foreignMonths
    
    
    
    
    
    
    
    
    
    
    exchange translationEndedMarch 31,
    
    
    
    
    
    
    Percentage
    
    
    20052004
    
    
    2005
    
    
    Change
    
    
    Adjusted
    
    
    Percentage Change(Dollars in millions)
    
    Reported
    
    
    Reported
    
    
    Reported
    
    
    Amount
    
    
    AdjustedSegment sales
    
    $
    420.3
    
    
    $
    479.0
    
    
    
    14.0
    %
    
    $
    456.0
    
    
    
    8.5
    %Segment income
    
    $
    58.9
    
    
    $
    69.7
    
    
    
    18.3
    %
    
    $
    66.1
    
    
    
    12.2
    %Segment operating margin
    
    
    14.0
    %
    
    
    14.6
    %
    
    0.6pts.
    
    
    14.5
    %
    
    0.5pts.
 Sales of Vehicle Control Systems for the first quarter of 2005 were $479 million, an
increase of 14% (8.5% excluding the favorable effects of foreign exchange) from $420.3 million in
the first quarter of 2004. Our strong momentum in this business continued. The improvement was
primarily driven by global increases in truck and bus production, increased content per vehicle,
including new applications, and strong aftermarket growth. Sales in Europe, our largest market,
increased 11.2% (5% excluding the favorable effects of foreign exchange). This increase was
driven by a 12.3% increase (excluding the favorable effects of foreign exchange) 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 8% in the quarter. Total European sales also
benefited from improved aftermarket sales, which increased 13.4% (excluding the favorable effects
of foreign exchange) in the first quarter. The improved overall sales performance in Europe
included the negative impact of some passenger platform expirations and modest performance in the
trailer market. Sales increased 28% in North America, in line with the U.S. truck and bus market
increase of 30%. In Asia and Latin America, our sales increased 10.8% and 42.7%, respectively,
also outperforming the combined growth of the truck and bus markets in those regions. Vehicle
Control Systems backlog at the end of the quarter was $789 million, up 18.3% (13% excluding
favorable foreign exchange translation effects) from the first quarter of last year. Segment income for Vehicle Control Systems for the first quarter of 2005 increased 18.3%
(12.2% excluding favorable foreign exchange translation effects) to $69.7 million from $58.9
million in the first quarter of 2004. Segment margins increased to 14.6% from 14.0% in the 27




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##### Table of Contents



first
quarter of 2004 (14.5% excluding the favorable effects of foreign exchange). Segment income
benefited from volume growth, increased productivity, and benefits from prior operational
consolidations. These gains were partially offset
by higher labor costs and investments in marketing and new product development.
Segment income also included $3.7 million of operational consolidation expenses associated with the
continued relocation of manufacturing activities of a plant to a lower cost location and other job
elimination programs, each of which were initiated in 2004. $3.4 million of the operational
consolidation expenses recognized in 2005 relate to severance. These actions are expected to
result in additional charges of approximately $5.9 million during the remainder of 2005 and will
yield cost savings of $2.9 million in 2005 and $8.5 million in 2006. The Company expects to
complete these plans by 2005. Other Summary Segment and Income Data Items Equity in net income of unconsolidated joint ventures increased to $7.8 million in the first
quarter of 2005 from $6.5 million in the first quarter of 2004. The increase primarily resulted
from the performances of our air conditioning compressor joint venture in the U.S. and our Meritor
WABCO joint venture in the U.S. The improved performance of our Meritor WABCO joint venture was
largely due to an increase in purchases by our European operations. Interest expense increased $0.3 million in the first quarter of 2005 compared with the first
quarter of 2004. The impact of higher interest rates slightly exceeded the benefit of lower
average debt balances. Corporate and other expenses in the first quarter of 2005 decreased $3.6 million from the
first quarter of 2004 due principally to realized foreign exchange transaction gains, lower
asbestos indemnity expenses and favorable post-retirement benefit costs partially offset by higher
insurance costs and fees related to the sale of accounts receivable under our existing receivable
securitization programs. Corporate and other expenses, shown in the Summary Segment and Income
Statement Data table in Note 13 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 (income) in the Unaudited Summary Consolidated Statement of Income.
Period-to-period changes in the significant components of Other expense (income) 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 2005 was $2.2 million, or 1.7% of pre-tax
income, compared with a provision of $38.0 million, or 31% of pre-tax income in the first quarter
of 2004. The reduction to the effective income tax rate resulted primarily from the resolution
of tax contingencies and the impact of certain non-U.S. tax planning initiatives on prior tax
years. In addition, we have agreed with the tax authorities that a significant tax refund is due
the Company. However, such refund is still subject to final government review. If approved, the
Company will recognize any related financial benefits at that time. We expect the Companys effective income tax rate to be in the
range of 29% to 31%, excluding the impact of the resolution of prior
year tax contingencies, changes in tax rules and
regulations and assuming no significant changes in the geographic distribution of the Companys
earnings. 28




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##### Table of Contents



Liquidity and Capital Resources Cash flow used by operating activities was $50 million in the first quarter of 2005 as
compared to cash flows provided by operating activities of $38.8 million in the first quarter
of 2004, a decrease of $88.8 million. The decrease was primarily driven by higher working capital of
$76.7 million, including higher inventory levels. Inventory management continues to be an
important focus area and the Company plans to make improvements in this area throughout the
remainder of 2005. Net income improved by $40.3 million in the first quarter of 2005 as compared
with the first quarter of 2004, but was offset by higher tax and incentive compensation payments
and the non-cash impact of the resolution of tax contingencies and non-U.S. tax planning
initiatives. In investing activities, we made capital expenditures of $43.7 million for the first quarter
of 2005. This compared with capital expenditures of $26.4 million in the first quarter of 2004.
The increase in capital expenditures resulted from capital outlays associated with our new 13 SEER
air conditioning product offerings, restructuring a product line in the Air Conditioning Systems
and Services segment and expanding our air conditioning compressor manufacturing operations. The
Company also spent $7.9 million to purchase the rights of an operation in Asia previously held by
a minority shareholder. In 2004, the Company made a $23.4 million loan to an unconsolidated joint
venture. The impact of the above
items resulted in essentially the same cash flows from investing activities in 2005 as 2004. In the first quarter of 2005, the excess of cash used by operating and investing activities
was $108.8 million and was funded by cash provided by financing activities of $121.5 million.
Financing activities consisted of net borrowings of $274.1 million and proceeds realized from the
exercise of stock options of $15.7 million. This was partly offset by purchases of approximately
3.2 million shares of our common stock for $140.3 million pursuant to our share repurchase program
and dividend payments of $32.1 million. In the first quarter of 2004 the excess of cash used by
investing activities over cash provided by operating activities totaled $22.7 million and was
funded by net cash provided by financing activities of $103.0 million. Financing activities in
2004 consisted principally of net borrowings of $227.7 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, partly offset by purchases of
approximately 4.0 million shares of our common stock for $143.4 million pursuant to our share
repurchase program. The Company anticipates paying a dividend of $0.15 per share of common stock in the second
quarter of 2005, subject to the approval of the Board of Directors at
its May 3, 2005 Board meeting. The Company has one primary bank credit agreement. That agreement provides the Company and
certain subsidiaries (the Borrowers) with a senior, unsecured, five-year $1 billion
multi-currency revolving credit facility that expires in November 2006. The Company also has a
Euro-denominated, 364-day bank credit agreement of $51.7 million (at March 31, 2005 exchange
rates) that expires on October 31, 2005, that was not fully utilized as of March 31, 2005. Debt
outstanding under that agreement was classified as long-term debt in the balance sheet as of March
31, 2005, because the Company had the ability and the intent to renew it or to refinance it with
borrowings under the five-year facility. In addition, the Company has other lines of credit for
$20.7 million. 29




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##### Table of Contents



The primary bank credit agreement contains various covenants that limit, among other
things, priority indebtedness, liens, sale and leaseback transactions, subsidiary indebtedness, certain
fundamental business changes and the making of certain investments, loans and advances. The
covenants also require the Company to meet certain financial tests: ratio of consolidated debt to
EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization), and consolidated free
cash flow to interest expense. The Company is currently in compliance with
the covenants contained in the credit agreement. On March 29, 2005 the Company executed an agreement with several purchasers to sell senior
notes with a principal amount of $200 million with a maturity
date of April 1, 2015. The commitment to sell these notes is reflected in
other current liabilities and the expected proceeds from the commitment are reflected in other
current assets in the accompanying consolidated balance sheet. The senior notes associated with
this commitment were issued on April 1, 2005 and resulted in proceeds to the Company of $198.2
million. The senior notes bear an interest rate of 5 1/2% and interest is payable semi-annually on
April 1 and October 1 of each year. The Company, at its option, may at any time and from time to
time redeem all or a portion of the senior notes for an amount equal to the principal amount of
the notes redeemed plus a make whole premium. The proceeds from this issuance of the notes were
used by the Company to repay the majority of the $208 million of 7 3/8% senior notes that matured
on April 15, 2005. At March 31, 2005, our total indebtedness was $1,751.9 million. We had remaining borrowing
capacity under our primary bank credit agreement at March 31, 2005, of $702.9 million after
reduction for borrowings of $220.1 million and $77 million of outstanding letters of credit. We
have $8.2 million available under other bank credit facilities after reduction for letters of
credit usage of $12.5 million. In addition, we had $184.6 million available at March 31, 2005,
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 $58.9 million as of March 31, 2005. 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 and access to
public and private debt markets will be sufficient to meet our expected operating needs and
planned capital expenditures for the foreseeable future. Off-Balance Sheet Arrangements The Company employs several means to manage its liquidity and is not dependent upon any one
source of funding. In addition to funds available from operating cash flows, bank credit
agreements and the public debt and equity markets as described above, the Company uses two
principal off-balance sheet techniques: operating leases and receivables financing arrangements.
Operating leases are employed as an alternative to purchasing certain property, plant and
equipment. Receivables financing arrangements are used to reduce borrowing costs. Future rental
commitments under all non-cancelable 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, 2004. To
reduce its borrowing cost, during 2002 the Company established new accounts receivable financing
facilities in Europe and the U.S., and terminated a previously existing arrangement in the U.S.
The facility in Europe expires in May 2005 and the facility in the U.S. expires in September of
2005. The Company anticipates renewing these facilities subject to
Board of Directors approval. 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, 2004. 30




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The Company has commitments and performance guarantees, including energy savings guarantees
totaling $63.6 million extending from 2005 to 2022, under long-term service and maintenance
contracts related to its air conditioning equipment and system controls.
Through March 31, 2005 the Company has only experienced one insignificant loss under such arrangements and considers the
probability of any significant future losses to be unlikely. We
also guarantee debt of third parties in the amount of $1.8 million as of March 31, 2005. Aggregate Contractual Obligations We have contractual obligations for long-term debt, operating leases, purchase obligations,
unfunded pension and post-retirement benefit plans and certain other long-term liabilities that
were summarized in a table of aggregate contractual obligations in our 2004 Annual Report on Form
10-K. There have been no material changes to those obligations since December 31, 2004. See Note
11 of the accompanying notes to financial statements for a discussion of the debt commitment
entered into by the Company during the first quarter of 2005. Information Concerning Forward Looking Statements Certain of the statements contained in this report (other than the historical financial data
and other statements of historical fact), including, without limitation, statements as to
managements expectations and beliefs, are forward-looking statements. Forward-looking statements
are made based upon managements good faith expectations and beliefs concerning future
developments and their potential effect upon the Company. There can be no assurance that future
developments will be in accordance with such expectations or that the effect of future
developments on the Company will be those anticipated by management. Forward-looking statements
can be identified by the use of words such as believe, expect, plans, strategy,
prospects, estimate, project, anticipate, intends and other words of similar meaning in
connection with a discussion of future operating or financial performance. This Report on Form
10-Q 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 end market activity in the Companys Air Conditioning Systems and
Services and Bath and Kitchen businesses and the level of truck and bus production in
the Companys Vehicle Control Systems markets;
    the extent to which the Company will be able to realize the estimated savings from
Materials Management and Six Sigma initiatives;
    additional developments may occur that could affect the Companys estimate of asbestos
liabilities and recoveries, such as the nature and number of future claims, the average
cost of disposing of such claims, average annual defense costs, the amount of insurance
recovery, legislation or legal decisions affecting claims, criteria or payout;
    unpredictable difficulties or delays in the development of new product technology;
    changes in U.S. or international economic conditions, such as inflation, interest rate
fluctuations, foreign exchange rate fluctuations or recessions in the Companys markets; 31




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
    pricing changes to the Companys supplies or products or those of its competitors, and
other competitive pressures on pricing and sales;
    increased difficulties in obtaining the supply of basic materials such as steel,
aluminum, copper, clays, electronics and energy necessary to avoid disruptions of
operations;
    increased difficulties in obtaining a consistent supply of those basic materials at
pricing levels which will not have an adverse effect on results of operations;
    labor relations; integration of acquired businesses;
    difficulties in obtaining or retaining the management and other human resource
competencies that the Company needs to achieve its business objectives;
    the impact on the Company or a segment from the loss of a significant customer or a
few customers;
    risks generally relating to the Companys international operations, including
governmental, regulatory or political changes;
    changes in environmental, health or other regulations that may affect one or more of
the Companys current products or future products;
    assumptions made related to post-retirement benefits, including rate of return on plan
assets, the discount rate applied to projected benefit obligations and the rate of
increase in the health care cost trend rate;
    changes in laws or different interpretations of laws that may affect the Companys
expected effective tax rate for 2005;
    the outcome of lawsuits and other contingencies;
    adoption of new accounting pronouncements promulgated by the FASB or other accounting
standard setting agencies;
    transactions or other events affecting the need for, timing and extent of the
Companys capital expenditures; and
    the extent to which the Company will be able to realize the estimated savings from
operational consolidation programs.   32




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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, 2004. 
 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 changes in our internal control over financial reporting during the most recent fiscal
quarter that have materially affected or are reasonably likely to materially affect, our internal
control over financial reporting. 33




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings There
have been no significant changes since December 31, 2004. See
Note 6 of Notes to Financial Statements for the discussion of
legal proceedings. 34




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Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds 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. On February 3, 2005, the Companys Board of Directors approved
$400 million to purchase shares of the Companys common stock in the open market. As of March
31, 2005, the unexpended authorization on the current program totaled $313,125,967. A summary of
the repurchase activity for the first quarter of 2005 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 (b)
    
    
    1,010,699
    
    
    $
    39.77
    
    
    
    885,700
    
    
    $
    27,219,801February 1-February 28
    
    
    988,900
    
    
    $
    45.05
    
    
    
    988,900
    
    
    $
    382,669,756March 1-March 31
    
    
    1,478,200
    
    
    $
    47.05
    
    
    
    1,478,200
    
    
    $
    313,125,967Total first quarter
    
    
    3,477,799
    (c)
    
    $
    44.54
    
    
    
    3,352,800
  (a) As of December 31, 2004, the Company had one unexpended authorization by the Board
of Directors under its share repurchase program. The authorization by the Board of Directors
on December 4, 2003, approved the purchase of shares in an amount not to exceed $250,000,000
with no expiration date. The unexpended balance of $62,446,908 under that authorization as
of December 31, 2004, was used to repurchase shares in the first quarter of 2005.(b) Includes 124,999 shares that were returned to the Company by the Chief Executive Officer
to satisfy his withholding tax liabilities upon the vesting of 250,000 shares of restricted
stock.(c) 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. 38




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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. Paradise
Vice President and Controller
(Principal Accounting Officer)April
29, 2005
 39




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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
 40