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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

Commission File Number 1-11415

AMERICAN STANDARD COMPANIES INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (732) 980-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None.

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the Registrant as of the close of business on June 30, 2002 was approximately $5.4 billion based on the closing sale price of the common stock on the New York Stock Exchange on that date. The company does not have any non-voting common equity.

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        Number of shares outstanding of each of the Registrant's classes of Common Stock, as of the close of business on February 28, 2003: Common Stock, $.01 par value, 71,948,093 shares.

Documents incorporated by reference:

TABLE OF CONTENTS

PART I

ITEM 1.    BUSINESS

        American Standard Companies Inc. is a global, diversified manufacturer of high-quality, brand-name products in three major product groups: air conditioning systems and services (61% of 2002 sales); bathroom and kitchen fixtures and fittings (26% of 2002 sales); and vehicle control systems for heavy and medium-sized trucks, trailers, buses, luxury cars and sport utility vehicles (13% of 2002 sales). American Standard is one of the largest providers of products in each of its three major business segments. The Company's brand names include TRANE® and AMERICAN STANDARD® for air conditioning systems and services, AMERICAN STANDARD®, IDEAL STANDARD®, STANDARD®, PORCHER®, JADO®, ARMITAGE SHANKS®, DOLOMITE®, MELOH®, VENLO®, VENESTA®, SOTTINI® and BORMA® for bath and kitchen products, and WABCO® for vehicle control systems.

        American Standard Companies Inc. (the "Company") is a Delaware corporation formed in 1988 to acquire all the outstanding common stock of American Standard Inc., a Delaware corporation ("American Standard Inc.") incorporated in 1929. In 1999 the Company completed an internal reorganization in which American Standard Inc. transferred ownership of essentially all its non-U.S. subsidiaries and their intellectual property rights to another wholly-owned subsidiary of the Company, American Standard International Inc., a Delaware corporation ("ASII"). "American Standard" or the "Company" refers to the Company, or to the Company and American Standard Inc. or ASII, including their subsidiaries, as the context requires.

Overview of Business Segments

        American Standard has three business segments: Air Conditioning Systems and Services, Bath and Kitchen and Vehicle Control Systems.

        Air Conditioning Systems and Services ("Air Conditioning").    American Standard is a leading U.S. designer and producer of air conditioning systems and equipment for both domestic and export sales. It also provides control systems, aftermarket service and parts for its products, and performance contracting for the installation and maintenance of heating, ventilation and air conditioning systems. American Standard also manufactures air conditioning systems outside the U.S. Sales to the commercial and residential markets accounted for approximately 74% and 26%, respectively, of Air Conditioning's total sales in 2002. Approximately 60% of Air Conditioning's sales in 2002 were in the replacement, renovation and repair markets. Air Conditioning derived 77% of its 2002 sales in the U.S. and 23% outside. Management believes Air Conditioning is well positioned for growth because of its high-quality, energy-efficient, strong brand-name products; significant existing market presence; the introduction of new products, services and features such as electronic controls; its broad distribution network; conversion to products utilizing refrigerants that meet current or future environmental standards, and expansion of operations throughout the world. Systems capabilities, coupled with equipment, service and parts have allowed Air Conditioning to be active in the growing performance-contracting business as a comfort systems solution provider. In addition, in 2001 the Company entered into an alliance with Daikin, a leading Japanese commercial air conditioning manufacturer, to sell each other's complementary product lines.

        Bath and Kitchen.    The Bath and Kitchen segment, previously known as Plumbing Products, was renamed in 2002 to reflect the new strategic approach of focusing on total customer needs rather than on specific product sales. American Standard is a leading producer of bathroom and kitchen fixtures and fittings in Europe, the U.S. and many countries in Latin America and Asia. Its products are marketed through retail and wholesale sales channels for residential and commercial markets. Of Bath and Kitchen's 2002 sales, 62% were outside the U.S. and 38% within. Management believes Bath and Kitchen is well positioned for growth because of its strong brands, new products and designs, low-cost manufacturing capability, global distribution and logistics capabilities, and focus on its "total bathroom" concept. The total bathroom concept encompasses providing customers with integrated suites of products, including sinks, toilets, faucets, tubs, showers, bathroom furniture and accessories.

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        Vehicle Control Systems.    Vehicle Control Systems ("WABCO") is a leading manufacturer of braking and control systems for the worldwide commercial vehicle industry. Its largest-selling products are braking control systems and related electronic and other control systems. These include antilock and electronic braking systems ("ABS" and "EBS," respectively), and automated transmission controls and suspension control systems, marketed under the WABCO® name for heavy and medium-size trucks, trailers, and buses. WABCO also sells suspension control systems to manufacturers of luxury cars and sport utility vehicles-a growing market. WABCO supplies vehicle manufacturers such as DaimlerChrysler (Mercedes and Freightliner), Volvo (Volvo and RVI), Iveco (Fiat), Scania, PACCAR, Hino, Nissan, Rover and GMC. Management believes that WABCO benefits from its strong market positions in Europe, North America and Brazil and its growing position in Asia. Management also believes WABCO's products are well positioned for growth because of increasing demand for ABS and EBS; sophisticated electronic control systems for automated transmissions; air suspension systems and stability control systems; and automatic climate control and door control systems. WABCO has a strong reputation for technological innovation and is a leading systems development partner with several major vehicle manufacturers.

Company Goals

        American Standard has adopted performance initiatives focused on three areas:

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Sales growth, including:

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Expanding marketing efforts,

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Building brand awareness and differentiation,

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Introducing new products and services, and

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Geographic expansion.




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Margin improvement through:

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Materials Management programs, and

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Six Sigma and other productivity-enhancing actions.




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Financial initiatives, including:

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Effective tax rate reduction,

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Debt reduction, and

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Improved asset utilization and return on capital.

        These initiatives are focused on accomplishing three major performance goals:

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Deliver premier customer service,

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Drive operational excellence, and

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Meet financial objectives.

Premier Customer Service

        American Standard accomplishes its goal of delivering premier customer service by identifying and meeting customer needs with:

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Superior solutions through high-quality products and services,

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Industry-leading order-to-delivery cycle times,

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A global presence to serve global customers,

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Technological leadership and product innovation to meet changing customer needs, and

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An efficient and flexible distribution system.

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Operational Excellence

        Operational performance has been and will continue to be enhanced through Materials Management, the use of Six Sigma techniques, and safety initiatives to:

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Improve design processes,

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Improve manufacturing processes,

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Reduce unit costs, and

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Improve workplace safety,

        resulting in:

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Increased productive capacity,

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Improved quality,

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Improved speed to market, and

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Reduced frequency and severity of accidents.

Materials Management

        The Materials Management initiative is centered on leveraging collective buying power on a global basis to improve purchasing efficiency, reduce the number of suppliers and improve supplier logistics. Materials Management also involves working with suppliers to develop effective components with lower part counts and easier assembly, resulting in reduced costs and improved quality. It is also intended to identify opportunities to substitute higher-cost materials with lower-cost items, without compromising quality, durability and safety. With material costs exceeding 50% of total costs, management believes that improvements realized through Materials Management could result in substantial savings.

        In 2000 and 2001, the Materials Management initiative focused on hiring experienced people, establishing processes and training. In 2002 the focus was on implementation. Management adopted challenging goals for continuous performance improvement. Benefits from this program were approximately $30 million in 2000, $60 million in 2001 and $105 million in 2002. The Company expects increased savings in 2003.

Six Sigma

        Six Sigma is a structured approach to achieving significant productivity improvements in business processes through data-based decisions. Originally introduced to American Standard in 2000, more than 6,500 employees have been trained in Six Sigma tools that have contributed nearly $100 million in productivity gains. During this initial growth phase, productivity gains have nearly doubled each year.

        Following the example of other successful Six Sigma companies, the initial focus was on manufacturing functions. Productivity gains were primarily achieved through the reduction of process variation. These early successes created acceptance that led to the creation of a Six Sigma Fundamentals training course. The course is designed to expose our entire organization to Six Sigma tools and create an environment of empowerment in which each individual believes they can make a contribution and "raise the standard." Six Sigma Fundamentals is being expanded to introduce more than 50% of our employees to Six Sigma and to have more than 25% of our employees complete at least one productivity project in 2003. By 2004, we expect to have trained the entire organization in Six Sigma Fundamentals and to have created an expectation that each American Standard employee contributes to a productivity project annually.

        We continue to develop and deploy technical experts (called Six Sigma Master Black Belts, Black Belts and Green Belts) through aggressive training and project deployment programs. By the end of 2002,

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we had 23 Master Black Belts, 392 Black Belts and 2,139 Green Belts who were certified or in training. Today, we are broadening the Six Sigma approach to cover functions beyond manufacturing. We have recently provided specific Six Sigma training in safety, Materials Management, transactional analysis and design and deployment of new products. Six Sigma tools for lean manufacturing, sales/marketing and maintenance are in the planning stages. Following this path, we are expanding our productivity improvement focus beyond manufacturing process variation to supply chain coordination, eliminating non-value-added transactional steps, more effective new-product introductions, inventory management, sales growth and improving equipment uptime.

Financial Objectives

        The Company sets annual financial performance objectives for sales growth, operating margin improvements, earnings per share growth and cash flow generation. The programs discussed above associated with achieving premier customer service and driving operational excellence are key to achieving these goals. In addition, the Company has established programs to:

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Reduce the effective tax rate,

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Reduce debt, and

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Improve asset utilization and return on capital.

Linkage of Goals with Incentive Compensation Plans

        Management has adopted incentive compensation plans that are directly linked to achievement of the Companywide goals described above. Management believes the attainment of these goals will result in improved financial performance and enhanced shareholder value.

Air Conditioning Systems and Services Segment

        American Standard's Air Conditioning Systems and Services products are marketed under the TRANE® and AMERICAN STANDARD® names. Trane has been a manufacturer and distributor of air conditioning systems since 1913. In 2002, Air Conditioning, with revenues of $4.744 billion, accounted for 61% of Company sales and 65% of segment income. Air Conditioning derived 23% of 2002 sales from outside the U.S. Approximately 60% of Air Conditioning's sales in 2002 were in the replacement, renovation and repair markets.

        Air Conditioning manufactures two general types of air conditioning systems. The first, called "unitary," is sold for residential and commercial applications, and is a factory-assembled central air conditioning system which generally encloses in one or two units all the components to cool, heat, filter, humidify, dehumidify, and move air in a ducted system. The second, called "applied," is typically custom-engineered for commercial use and involves on-site installation of several different components of the air conditioning system. Air Conditioning is one of the largest global manufacturers of both unitary and applied air conditioning systems.

        Air Conditioning competes in all of its markets on the basis of service to customers, product quality and reliability, technological leadership, energy efficiency and price/value.

        Product and marketing programs have been, and are being, developed to increase penetration in the growing replacement, renovation and repair businesses. Much of the equipment sold in the fast-growing air conditioning markets of the 1960s and 1970s has reached the end of its useful life. Also, equipment sold in the 1980's is likely to be replaced earlier than originally expected with higher-efficiency products developed to meet new efficiency standards and to capitalize on the availability of new refrigerants that meet current and future environmental standards.

        Many of the air conditioning systems manufactured by Air Conditioning utilize HCFCs, and in the past utilized CFCs as refrigerants. Various domestic and international laws and regulations, principally the 1990 Clean Air Act amendments and the Montreal Protocol, may require the eventual phase-out of the production of these

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refrigerants. Phase-in of substitute refrigerants necessitates replacement or modification of much of the air conditioning equipment already installed, which management believes created a significant, ongoing market opportunity. In order to ensure that Air Conditioning products will be compatible with the substitute refrigerants, Air Conditioning has been working closely with the manufacturers that are developing substitute refrigerants. Air Conditioning has also been active in supporting industrywide efforts to transition to these new refrigerants in an orderly and sensible fashion while giving consideration to key environmental issues such as ozone depletion and global warming (greenhouse gas effects). See "General—Regulations and Environmental Matters."

        Certain federal and state statutes, including the National Appliance Energy Conservation Act of 1987, as amended, impose energy efficiency standards for certain of Air Conditioning's air conditioning systems. Air Conditioning is a leader in developing energy-efficient products that meet or exceed these standards. However, providing more energy-efficient products will require additional research and development expense and capital expenditures for air conditioning manufacturers to continue to offer energy-efficient product choices to the customer.

        The Company, Heatcraft Technologies Inc. (a subsidiary of Lennox International Inc.) and Copesub, Inc., (a subsidiary of Emerson Electric Co.) are partners in Alliance Compressors ("Alliance"), a joint venture that manufactures compressors for use in air conditioning and refrigeration equipment. The Company and Heatcraft Technologies Inc. each own a 24.5% partnership interest and Copesub, Inc. owns the balance. Alliance develops, manufactures, markets and sells, primarily to the Company and Lennox, scroll compressors utilized mainly in residential central air conditioning applications. Alliance operates principally from a facility in Natchitoches, Louisiana.

        In November 2001, the Company entered an alliance with Daikin, a leading Japanese commercial air conditioning manufacturer, to sell each other's complementary product lines. Through the alliance, the Company and Daikin are able to provide their customers a complete line of heating, ventilation and air conditioning products, services and solutions for industrial, commercial and residential markets. Daikin has strong global market positions in ductless commercial air conditioners as well as in small chillers, which complement Air Conditioning's product lines. In 2002 a cross-sourcing arrangement was started in Europe, and we expect a series of other arrangements will be developed in 2003.

        As of December 31, 2002, Air Conditioning Systems and Services employed approximately 25,600 people and had 29 manufacturing plants in 9 countries.

        The Company's air conditioning segment is organized and managed as two operating divisions: Trane Commercial Systems ("TCS"), a global business, and Trane Residential Systems ("TRS"), a North American regional business. TCS manufactures and distributes, on a global basis, commercial applied and commercial unitary equipment, services and parts for commercial and large residential applications. TCS also distributes residential products outside North America. TRS manufactures primarily residential products, and distributes both commercial unitary and residential products in North America. TRS brings focus and emphasis to a separate North American distribution channel through which both commercial unitary and residential products are sold. Since TCS and TRS both sell residential and commercial unitary products, they are not organized on a purely product-line basis. Approximately 15% to 20% of TRS's sales are for commercial applications.

        Management discusses Air Conditioning's operations in Management's Discussion and Analysis of Financial Condition and Results of Operations as a single segment, and provides additional information about its principal product lines—commercial systems and services, and residential systems and services. Following is a description of Air Conditioning's operations by product line.

Commercial Systems and Services

        Commercial systems and services ("commercial systems"), which accounted for 74% of Air Conditioning Systems and Services' 2002 sales, encompasses the manufacture, distribution and servicing of applied and commercial unitary air conditioning systems and parts throughout the world. The Company also provides performance contracting arrangements that guarantee energy savings. These products and services are for air

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conditioning applications in commercial, industrial, institutional and large residential buildings. Approximately 70% of commercial system sales are in the U.S. and 30% in international markets. Other major suppliers of commercial systems are Carrier, York and McQuay.

        In the U.S. and Canada, Air Conditioning markets its commercial systems, parts and services through 85 district sales and service offices, 48 of which are company-owned and 37 of which are franchised. In addition, some commercial unitary products are sold through independent wholesale distributors and dealer sales offices. Outside the U.S., Air Conditioning also has an extensive network of sales and service agencies, both company-owned and franchised, to sell products and provide maintenance, service and parts. Overall, the Company estimates that commercial equipment markets declined in excess of 10% in both 2001 and 2002.

        For commercial systems, Air Conditioning uses its considerable knowledge and expertise to provide completely for its customers' needs. Commercial systems provides equipment, controls, service, parts and performance contracting. During the last five years, Air Conditioning continued to introduce new applied products, broadening its line of high-efficiency centrifugal chillers, introducing new water-cooled series R chillers, expanding the air-cooled series R chiller line and introducing a new absorption chiller, a new water source heat pump and a new line of low-pressure air handlers. Sales of commercial systems that automatically control a building's performance, including energy consumption and air quality, continue to grow as a percentage of total sales with new product introductions such as Tracer Summit® and wireless thermostats. Systems capabilities, combined with equipment, service and parts have allowed Air Conditioning to be active in the performance-contracting business as a comfort systems solution provider with guaranteed energy savings in certain cases. One of the ways Air Conditioning provides complete solutions to customers' heating, ventilation and air conditioning needs is through its EarthWise™ custom-engineered systems. An EarthWise solution combines optimal design of the equipment, systems, software controls and long-term management. An EarthWise system addresses the customers' needs in providing safe, efficient heating and cooling at the lowest possible cost, both for the initial system and over its lifetime. New industrywide guidelines covering chiller efficiency were instituted in October 2001. Management believes that Air Conditioning's chiller efficiency will provide a competitive opportunity as these guidelines are adopted by all 50 states over the next few years.

        During the past five years Air Conditioning also successfully introduced several new commercial unitary products including: an ultra-high-efficiency packaged air conditioner; modulating gas and variable frequency drive large rooftop units; rooftop units with special features that appeal to national accounts; and a large rooftop line (27.5 tons to 50 tons). The commercial unitary business also concentrated on indoor air quality enhancements and new capabilities for existing products. For example, early in 2001, Air Conditioning introduced a new commercial unitary product named Precedent™ with capacities from 2 to 10 tons. Precedent provides improved indoor air quality and higher efficiency, is easier to configure, easier to install and less expensive to manufacture, having 20% fewer parts and being 30% smaller than the products it replaces.

Residential Systems and Services

        Residential systems and services ("residential systems"), which accounted for 26% of Air Conditioning Systems and Services' 2002 sales, encompasses the manufacture, distribution and servicing of unitary air conditioning products and furnaces for residential applications, primarily in North America. Sales of residential systems have benefited significantly from the growth of the replacement market for residential unitary air conditioning systems in North America. The Company estimates that the overall residential air conditioning markets grew by 9% in 2002 and furnace markets grew by 5%, following small declines in 2001. Other major suppliers in the residential market are Carrier, York, Rheem, Lennox and Goodman Industries.

        Residential unitary products range from 1 to 5 tons and include air conditioners, heat pumps, air handlers, furnaces, coils and related controls and accessories. These products are sold through independent wholesale distributors and Company-owned sales offices with over 340 stocking locations to dealers and contractors who sell and install the equipment. Residential products are also well positioned in the retail sales channel through an arrangement with Home Depot, a major home improvement center, through which certain central heating and air conditioning systems are marketed to residential customers.

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        In recent years, Air Conditioning successfully introduced several new residential products including: a line of multi-stage cooling and heat pump units offering the industry's highest efficiencies; a unique line of outdoor condensing units for the AMERICAN STANDARD brand; and an ultra-high-efficiency gas furnace with variable speed airflow and gas combustion components. In the fourth quarter of 2001, Air Conditioning launched a major new residential split-system cooling and heat pump product that competes in a market covering about 50% of the total residential air conditioning market in North America. This new product line, with capacities of 1 to 5 tons, has a very consumer-oriented design and is of higher quality and efficiency. It is also easier to install and operate, utilizes refrigerants which meet current and future environmental standards and costs less to manufacture, requiring 60% fewer parts than the products it replaces.

International Operations

        Air Conditioning has a significant presence outside North America predominantly for the manufacture and distribution of commercial products and related services. In the Asia-Pacific region, Air Conditioning has a manufacturing joint venture in China, operations in Malaysia, Taiwan and Australia, and a sales and manufacturing joint venture in Thailand. In Brazil, the Company has a manufacturing plant and distribution operations. In Europe, Air Conditioning operates plants in Epinal and Charmes, France, and in Colchester, U.K. It also has a joint venture in Egypt that serves markets in the Middle East. Air Conditioning also continues to expand its international distribution network.

e-Business

        Air Conditioning operates a segmentwide e-business initiative that provides contractors, engineers, national accounts and other key customers access to Air Conditioning product and systems data necessary for them to select, purchase and service air conditioning products. This "extranet" initiative, called the Trane ComfortSite™, allows dealers, distributors, contractors and global and national account customers to access all pertinent information on residential and light commercial products and service parts so that they will be able to select, check availability, price, purchase and track delivery of these goods on-line, 24 hours a day, 7 days a week.

Service and Parts Initiatives

        Air Conditioning recognizes the value of providing a convenient and reliable source of repair parts to service air conditioning products and systems. In support of current and future Air Conditioning customers, a significant investment is being made to expand the number of locations and to provide easy access to parts needed to maintain and repair all products that Air Conditioning manufactures and sells on a worldwide basis. In addition, Air Conditioning offers annual service agreements and long-term partnership arrangements to customers.

Bath and Kitchen Segment

        In 2002, Bath and Kitchen, with revenues of $1.994 billion, accounted for 26% of the Company's sales and 18% of its segment income. Bath and Kitchen derived 62% of its total 2002 sales from operations outside the U.S.

        Bath and Kitchen sales were 50% from chinaware fixtures, 13% from fixtures made from acrylics and AMERICAST®, 28% from fittings (typically brass), with the remainder from related bath and kitchen products. Throughout the world these products are generally sold through wholesalers and distributors and installed by plumbers and contractors. In the U.S., a significant and growing number of products are sold through home improvement centers. In total, sales to the residential market account for approximately 78% of Bath and Kitchen sales, with sales to the commercial and industrial markets providing the remainder.

        Bath and Kitchen operates through three primary geographic groups: Europe, Americas and Asia.

        Bath and Kitchen sells products in Europe primarily under the brand names IDEAL STANDARD, JADO, ARMITAGE SHANKS, DOLOMITE, PORCHER, MELOH, VENLO, VENESTA, SOTTINI and BORMA. It manufactures and distributes bathroom and kitchen fixtures and fittings through subsidiaries or joint ventures in

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Germany, Italy, France, the U.K., Greece, the Czech Republic, Bulgaria and Egypt and distributes products in other European countries.

        Bath and Kitchen Americas Group manufactures bathroom and kitchen fixtures and fittings selling under the brand names AMERICAN STANDARD, STANDARD, PORCHER and JADO in the U.S. and under the brand names AMERICAN STANDARD, IDEAL STANDARD, and STANDARD through the Company's wholly owned operations in Mexico, Canada and Brazil and its joint ventures in Central America and the Dominican Republic.

        In Asia, Bath and Kitchen manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD, IDEAL STANDARD, and STANDARD through the Company's wholly owned operations in South Korea and Indonesia, and its majority-owned operations in Thailand, the Philippines and Vietnam. The group also operates in China through a majority-owned joint venture, which has ownership interests in six joint ventures and one wholly owned subsidiary.

        The Company's bath and kitchen products are sold in the replacement and remodeling market and the new construction market. The replacement and remodeling market accounts for about 65% of the Company's European and U.S. sales and about 11% of the sales in Asia, where there is more growth in new construction. In the U.S. the replacement and remodeling markets have shown substantial growth over the last few years and the Company has benefited from that growth. In Europe the replacement and remodeling markets have historically been more stable than the new construction markets and have shown moderate growth over the past several years. The U.S. residential new construction market also evidenced strong growth in 2001 and 2002, but the commercial new construction markets were depressed. The commercial new construction and residential new construction markets in Europe have been rather static overall, with the exception of the U.K., which experienced modest growth, and Germany, which declined. The new construction market, in which builders or contractors make product selection, is more price-competitive and volume-oriented than the replacement and remodeling market. In the replacement and remodeling market, consumers make model selections and, therefore, this market is more responsive to quality and design than price, making it the principal market for higher- margin luxury products. Through expansion of manufacturing in low-cost locations, Bath and Kitchen has become more competitive, enabling it to increase sales of products in the lower and middle segments of both the remodeling and new construction markets.

        In the U.S., Bath and Kitchen products are marketed through both the wholesale and retail channels. Although sales through the retail home center industry market channel have become a significant part of Bath and Kitchen segment sales (approximately 20% of segment sales in 2002), they represent only approximately 5% of total Company sales.

        Bath and Kitchen is also continuing programs to expand its presence in high-quality showrooms and showplaces featuring its higher-end products in certain major countries. These programs, along with expanded sales training activities, have enhanced the image of the Company's products with interior designers, decorators, consumers and plumbers.

        In an effort to capture a larger share of the replacement and remodeling market, Bath and Kitchen has introduced a variety of new products designed to suit customer tastes in particular countries. New offerings include additional colors and ensembles, bathroom suites designed by internationally known designers and electronically controlled products. Faucet technology is centered on anti-leak, anti-scald and other features to meet emerging consumer and legislative requirements. Bath and Kitchen manufactures and sells a faucet (ClearTap™) with an under-the-counter filtering system that delivers clear, filtered water directly from the tap.

        Many of the Company's bathtubs sold in the U.S. are made from a proprietary porcelain-on-metal composite, AMERICAST®. Products made with AMERICAST have only one-half the weight of cast iron products and are resistant to breaking and chipping. AMERICAST products are easier to ship, handle and install and are less expensive to produce than cast iron products. Use of this advanced composite has been extended to kitchen sinks, bathroom lavatories and acrylic-surfaced products.

        As of December 31, 2002, Bath and Kitchen employed approximately 28,600 people and, including affiliated companies, had 66 manufacturing plants in 25 countries and sold products in more than 40 countries.

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        In the U.S., Bath and Kitchen has several major competitors, including Kohler and, in selected product lines, Masco and Fortune Brands (Moen). There are also major competitors in foreign markets, for the most part operating nationally. Friederich Grohe, the major manufacturer of fittings in Europe, is a pan-European competitor. In Europe, Sanitec and Roca are the major fixtures competitors and, in Asia, Toto is the major competitor. Bath and Kitchen competes in most of its markets on the basis of service to customers, product quality and design, reliability and price.

Vehicle Control Systems Segment

        Operating under the WABCO® name, Vehicle Control Systems designs, manufactures and sells braking and control systems primarily for the worldwide commercial vehicle industry. WABCO's largest-selling products are pneumatic braking control systems and related electronic controls ("ABS" and "EBS") and conventional components for trucks, trailers, buses and sport utility vehicles. In 2002 WABCO, with sales of $1.057 billion, accounted for 13% of the Company's sales and 17% of its total segment income. The Company believes that WABCO is the worldwide technology leader for braking, suspension and transmission controls for commercial vehicles. Electronic controls, first introduced in ABS in the early 1980s, are increasingly applied in other control systems sold to the commercial vehicle industry. WABCO also supplies electronic suspension controls to the luxury car market and sport utility vehicle market.

        WABCO's products are sold directly to vehicle and component manufacturers. Spare parts are sold through both original equipment manufacturers and an independent distribution network. Although the business is not dependent on a single or related group of customers, sales of truck braking systems are dependent on the demand for heavy trucks. Some of the Company's largest customers are DaimlerChrysler (Mercedes and Freightliner), Volvo (Volvo and RVI), Iveco (Fiat), Scania, Paccar, Hino, Nissan and Rover. WABCO's principal competitor is Knorr/Bremse. WABCO competes primarily on the basis of customer service, quality and reliability of products, technological leadership and price.

        In North America, WABCO markets ABS and other vehicle control products through its fifty percent-owned joint venture with Arvin Meritor Automotive Inc. ("Meritor WABCO"). Meritor WABCO, which supplies the North American truck manufacturing market, grew significantly from 1997 through 1999, in part because of regulations mandating antilock braking systems on commercial vehicles. Although truck production in North America declined significantly in 2000 and 2001, Meritor WABCO continued to expand its customer base and range of products sold to major truck manufacturers. In 2002, the North American truck market experienced 12% growth as U.S. customers actively purchased vehicles before the change in diesel engine emissions regulations affecting trucks manufactured after October 1, 2002. WABCO also sells non-brake-related products directly to manufacturers in North America.

        The European market for new truck and bus production decreased approximately 8% in both 2002 and 2001, after an improvement of 5% in 2000. The Brazilian market decreased 10% in 2002 and 2% in 2001, after improving sharply in 2000. During the years 2000 through 2002, WABCO has generally outperformed the heavy vehicle manufacturing markets as a whole, primarily from increased content per vehicle and improved market penetration.

        WABCO has developed an advanced electronic braking system, stability control systems, electronically controlled air suspension systems, automated transmission controls and automatic climate-control and door-control systems for the commercial vehicle industry. These systems have resulted in greater sales per vehicle for WABCO. WABCO participates in the passenger car market with an advanced, electronically controlled air suspension system-"Air Glide"-now featured by the two leading German luxury car manufacturers. WABCO has expanded the Air Glide system family to other luxury car and sport utility vehicle manufacturers in Europe and North America. A leading European truck manufacturer now includes WABCO electronic controls for automated transmissions in heavy vehicles as standard equipment. The Company believes that automated transmission control will be increasingly important in the industry. In 2001, WABCO began production of its automated transmission system for a new range of heavy-duty trucks introduced in 2002 in Europe by a global truck manufacturer. Other

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new products under development include further advancements in electronic braking, and stability and safety controls, as well as driveline-control and suspension-control systems.

        Vehicle Control Systems is headquartered in Brussels, Belgium. Its principal manufacturing operations are in Germany, France, the United Kingdom, Poland, the Netherlands, Brazil and South Korea. In the U.S., the Meritor WABCO joint venture supplies the North American truck manufacturing market. The Company also has majority-owned joint ventures, in the U.S. with Cummins Engine Co. (WABCO Compressor Manufacturing Co., a manufacturing joint venture formed in 1997 to produce air compressors designed by WABCO) and in China with MAFF to produce conventional products for the local market and export. In addition, WABCO has minority equity investments in joint ventures in India with TVS Group (Sundaram Clayton Ltd.) and in South Africa.

        As of December 31, 2002, WABCO and affiliated companies employed approximately 6,200 people and had 10 manufacturing facilities and 15 sales organizations operating in 21 countries.

Business Segment Data

        Information concerning revenues and segment profit attributable to each of the Company's business segments and geographic areas is set forth in Item 6, "Selected Financial Data," in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Note 15 of Notes to Financial Statements which are incorporated herein by reference. Information concerning identifiable assets of each of the Company's business segments is set forth in Note 15 of Notes to Financial Statements, which is incorporated herein by reference. Information on backlogs and the seasonal aspects of the Company's business are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the captions "Results of Operations by Business Segment" and "Cyclical and Seasonal Nature of Business," respectively.

General

Raw Materials

        The Company purchases a broad range of materials and components throughout the world in connection with its manufacturing activities. Major items include steel, copper tubing, aluminum, ferrous and nonferrous castings, clays, motors, electronics and natural gas. The ability of the Company's suppliers to meet performance and quality specifications and delivery schedules is important to the Company's operations. Since 2000, the Company has integrated much of its raw materials procurement efforts into its Materials Management initiatives, resulting in lower costs and more efficient supply. The energy and materials required for its manufacturing operations have been readily available, and the Company does not foresee any significant shortages. Also see "Company Goals—Operational Excellence—Materials Management."

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Patents, Licenses and Trademarks

        The Company's operations are not dependent to any significant extent upon any single or related group of patents, licenses, franchises or concessions. The Company's operations also are not dependent upon any single trademark, although some trademarks are identified with a number of the Company's products and services and are of importance in the sale and marketing of such products and services. Some of the more important of the Company's trademarks are:

        The Company from time to time has granted patent licenses to, and has licensed technology from, other parties.

Research and Product Development

        The Company made expenditures of $185 million in 2002, $184 million in 2001 and $176 million in 2000 for research and product development and for product engineering in its three business segments. The expenditures for research and product development alone were $129 million in 2002, $133 million in 2001 and $126 million in 2000 and were incurred primarily by Vehicle Control Systems and Air Conditioning Systems and Services. Vehicle Control Systems, which expended the largest amount, has conducted research and development in recent years on advanced electronic braking systems, heavy-duty disc brake systems, and additional electronic control systems for commercial vehicles. Air Conditioning Systems and Services' research and development expenditures were primarily related to alternative refrigerants, compressors, heat transfer surfaces, air flow technology, acoustics and micro-electronic controls. Any amount spent on customer-sponsored research and development activities in these periods was immaterial.

Regulations and Environmental Matters

        The Company's U.S. operations are subject to federal, state and local environmental laws and regulations. The Company has a number of proactive programs underway to minimize its impact on the environment and believes that it is in substantial compliance with environmental laws and regulations. A number of the Company's

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plants are undertaking responsive actions to address soil and groundwater issues. In addition, the Company is a party to a number of remedial actions under various federal and state environmental laws and regulations that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which hazardous wastes or materials were disposed or released. Remedial actions to which the Company is a party include 22 current proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and similar state statutes in which the Company has potential liability based either on a past or current ownership interest in the site requiring remedial actions or based on disposal or alleged disposal of waste products at the site requiring remedial actions. Expenditures in 2002, 2001 and 2000 to evaluate and remediate such sites were not material. On the basis of the Company's historical experience and information currently available, these environmental actions should not have a material adverse effect on its financial condition, results of operations or liquidity.

        Additional sites may be identified for environmental remediation in the future, including properties previously transferred by the Company and with respect to which the Company may have contractual indemnification obligations. The Company cannot estimate at this time the ultimate aggregate costs of all remedial actions because of (a) uncertainties surrounding the nature and application of environmental regulations, (b) the Company's lack of information about additional sites at which it may be listed as a potentially responsible party, (c) the level of cleanup that may be required at specific sites and choices concerning the technologies to be applied in corrective actions, (d) the number of contributors and the financial capacity of others to contribute to the cost of remediation at specific sites and (e) the time periods over which remediation may occur.

        The Company's international operations are also subject to various environmental statutes and regulations. Generally, these requirements tend to be no more restrictive than those in effect in the U.S. Currently, nine of the Company's international operations have ISO 14001 certification, and the Company believes it is in substantial compliance with existing domestic and foreign environmental statutes and regulations. As in the U.S., a number of the Company's facilities are undertaking responsive actions to address groundwater and soil issues. Expenditures in 2002, 2001 and 2000 to evaluate and remediate these sites were not material. On the basis of the Company's historical experience and information currently available, these environmental actions should not have a material adverse effect on its financial condition, results of operations or liquidity.

        The Company has derived significant revenues in recent years from sales of Air Conditioning Systems and Services using chlorofluorocarbons ("CFCs") and hydrochloroflurocarbons ("HCFCs"). Use of certain CFCs, HCFCs and other ozone-depleting chemicals may be phased out over various periods of time under regulations that require use of substitute permitted refrigerants. Also, utilization of new refrigerants will require replacement or modification of much existing air conditioning equipment. The Company believes that these regulations will have the effect of generating additional product sales and parts and service revenues, as existing air conditioning equipment utilizing CFCs or HCFCs, is converted to operate on other refrigerants or replaced. The Company is unable to estimate the magnitude or timing of these conversions or replacements. The Company has been working closely with refrigerant manufacturers that are developing refrigerant substitutes for CFCs and HCFCs, so that the Company's products will be compatible with those substitutes. Although some of the Company's commercial, residential and light commercial products will require modification for refrigerant substitutes, the Company does not expect any significant problems in complying with this changing regulatory environment.

        Certain federal and state statutes, including the National Appliance Energy Conservation Act of 1987, as amended, impose energy efficiency standards for certain of the Company's air conditioning systems. The Company is a leader in developing energy-efficient products that meet or exceed these standards. However, providing more energy-efficient products will require additional research and development expense and capital expenditures for air conditioning manufacturers to continue to offer energy-efficient product choices to the customer.

Employees

        The Company employed approximately 60,000 people as of December 31, 2002 (excluding employees of unconsolidated joint venture companies). The Company has a total of 34 labor union contracts in North America (covering approximately 15,000 employees), ten of which were set to expire in 2003 (covering approximately 4,800 employees), and one of which was successfully renegotiated in February 2003. Twelve of these contracts expire in

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2004 (covering approximately 3,600 employees); and eight expire in 2005 (covering approximately 2,400 employees). There can be no assurance that the Company will successfully negotiate the labor contracts expiring during 2003 without a work stoppage. However, the Company does not anticipate any problems in renegotiating these contracts that would materially affect its results of operations.

        In March 2002, 450 Air Conditioning Systems and Services employees went on strike for approximately three weeks at the Ft. Smith manufacturing facility and in February 2001, 1,200 Air Conditioning Systems and Services employees went on strike for 30 days at the Lexington, Kentucky, manufacturing plant, before new contracts were negotiated.

        The Company also has a total of 30 labor contracts outside North America (covering approximately 18,000 employees). In December 2000, there was a 20-day work stoppage at the chinaware manufacturing plant of the Indonesia Bath and Kitchen subsidiary, involving 950 employees. Other than the Indonesian work stoppage, the Company has not experienced any significant work stoppage in the last five years outside North America.

        Although the Company believes relations with its employees are good, there can be no assurance that the Company will not experience significant work stoppages.

Customers

        The business of the Company taken as a whole is not dependent upon any single customer or a few customers.

International Operations

        The Company conducts significant non-U.S. operations through subsidiaries in most of the major countries of western Europe, the Czech Republic, Bulgaria, Poland, Canada, Brazil, Mexico, Central American countries, China, Malaysia, the Philippines, Indonesia, Japan, South Korea, Thailand, Taiwan, Vietnam and Egypt. In addition, the Company conducts business in these and other countries through affiliated companies and partnerships in which the Company owns 50% or less of the equity interest in the venture.

        Because the Company has manufacturing operations in 29 countries, fluctuations in currency exchange rates may have a significant impact on its financial statements. Such fluctuations have much less effect on local operating results, however, because the Company to a significant extent sells its products within the countries in which they are manufactured. However, a significant and growing portion of the Company's products are manufactured in lower-cost locations and sold in various countries, resulting in increased exposure to foreign exchange effects. The Company is also subject to political risks related to its foreign operations.

Available Information

        The Company's Web site is www.americanstandard.com. Our periodic reports and all amendments to those reports required to be filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are available free of charge through our Web site. During the period covered by this report, the Company posted its periodic reports on Form 10-K and 10-Q and its current reports on Form 8-K and any amendments to those documents to its Web site as soon as reasonably practicable after those reports were filed or furnished electronically with the Securities and Exchange Commission. The Company will continue to post to its Web site such reports and amendments to those reports as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission.

Availability of Corporate Governance Principles and Board of Director Committee Charters

        The Board of Directors has adopted charters for its Audit Committee, Management Development and Compensation Committee and Corporate Governance and Nominating Committee. The Board has also adopted

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Corporate Governance Principles. The Corporate Governance Principles and each of the charters are available on the Company's Web site.

Code of Conduct and Ethics

        The Company's Code of Conduct and Ethics, which applies to all employees, including all executive officers, senior financial officers and Directors, is posted on our Web site. The Code of Conduct and Ethics is compliant with Item 406 of Regulation S-K as required by the SEC and the proposed New York Stock Exchange corporate governance rules. Any changes to the Code of Conduct and Ethics that affect the provisions required by Item 406 of Regulation S-K will also be disclosed on our Web site. Any waivers of the Code of Conduct and Ethics for our officers, directors or senior financial officers must be approved by the Company's Audit Committee and those waivers, if any were ever granted, would be disclosed on our Web site under the caption "Exemptions to the Code of Conduct."

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ITEM 2.    PROPERTIES

        As of February 28, 2003, the Company conducted its manufacturing activities through 109 plants in 29 countries of which the principal facilities are:

        All the plants described above are owned by the Company or a subsidiary except for the properties located in Taipei, Taiwan; West Java, Indonesia; Manila, Philippines; Monterrey, Mexico (air conditioning plant); and Claye-Souilly, France, which are leased. The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business.

        In 2002, the Company's manufacturing plants, taken as a whole, operated moderately below capacity.

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        The Company also owns or leases warehouse and office space for administrative and sales staff. The Company headquarters, which is leased, is located in Piscataway, New Jersey.

ITEM 3.    LEGAL PROCEEDINGS

        In October 1999, in Haynes Trane Service Agency, Inc. and Frederick M. Haynes v. American Standard, Inc., d/b/a The Trane Company, in the United States District Court for the District of Colorado, verdicts were returned against the Company for a total of $18 million on the claim that it wrongfully terminated distribution agreements. On August 28, 2002, the appellate court ruled in favor of the Company and vacated the $18 million judgment. The appellate court also reinstated the Company's counterclaims, including fraud, and remanded to the trial court limited portions of Haynes' initial claims.

        In 2002, the Company concluded negotiations with The State Finance Administration for North Rhine-Westphalia, Germany concerning certain tax issues covering the years 1984 through 1994. On January 15, 2002, the Company settled all issues for 1984 through 1994 by making a cash payment of approximately $55 million plus $30 million previously deposited in escrow. Since the Company previously had made provision for those issues, the settlement had no impact on results of operations.

        Over the years, the Company has been named as a defendant in numerous lawsuits alleging various asbestos-related personal injury claims arising primarily from sales of low-risk-profile products, such as boilers and brake shoes. The Company believes it has ample insurance coverage and has never received an unfavorable court judgment. The Company has recorded both its estimated liability for asbestos claims and its probable recovery from insurance carriers and other indemnifiers for such claims separately on its balance sheet at December 31, 2002. The recorded liability represents obligations that are probable and can be reasonably estimated as of December 31, 2002. The amount of the recorded liability is based on the Company's assessment of current claims, the status of ongoing litigation, defense strategies, settlement initiatives and past experience. The Company's analysis of insurance coverage and recoveries from other indemnifiers includes the insurers' financial strength, the insurance payments made to date, stated deductibles and the advice of insurance coverage counsel. The Company has substantial insurance coverage for future claims that may have been incurred but not yet reported. The Company believes that it is not reasonably possible that a net loss material to the financial condition of the Company has been incurred in excess of the amounts recorded.

        For a discussion of environmental issues see "Item 1. Business—General—Regulations and Environmental Matters." See also Note 14 of Notes to Financial Statements.

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matter was submitted to a vote of the Company's shareholders during the fourth quarter of 2002.

ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth certain information with respect to each person who is an executive officer of the Company:

        Each officer of the Company is elected by the Board of Directors to a term of office expiring on the date of the first Board meeting after the Annual Meeting of Shareholders next succeeding his election.

        Set forth below is the principal occupation of each of the executive officers named above during the past five years.

        Mr. Poses was elected as a director in October 1999 and as Chairman and Chief Executive Officer effective January 1, 2000. Prior to assuming that position, Mr. Poses was President and Chief Operating Officer at AlliedSignal Inc. (now known as Honeywell). Previously he was President of AlliedSignal's Engineered Materials from 1988 to 1998 and served as Director of that company from 1997 until 1999. Mr. Poses is a director of Raytheon Company and Centex Corporation.

        Mr. Costello was elected Senior Vice President, Human Resources, effective June 2000. From April 1994 until that date, he served in various capacities at Campbell Soup Company, including Senior Vice President, Global Human Resources.

        Mr. D'Aloia was elected Senior Vice President and Chief Financial Officer effective February 2000. Prior to that he was employed by AlliedSignal Inc., most recently serving as Vice President-Business Development. He spent 27 years with AlliedSignal Inc. in diverse management positions, including Vice President-Taxes, Vice President and Treasurer, Vice President and Controller, and Vice President and Chief Financial Officer for the Engineered Materials sector.

        Mr. Kissel was elected Senior Vice President of the Company in January 1998 and serves as President of Vehicle Control Systems. Before that he was Vice President of Air Conditioning Systems and Services' Unitary Products Group, and later named Group Executive.

        Mr. McGrath was elected Senior Vice President, General Counsel and Secretary, effective January 2000. From 1996 until that date, he served as Senior Vice President, General Counsel and Secretary of FMC Corporation.

        Mr. Olivié was elected Senior Vice President of the Company in March 2001, to serve as President of its Global Bath and Kitchen sector, effective May 2001. Prior to joining American Standard, Mr. Olivié had been President and Chief Executive Officer of Armstrong Floor Products, the largest business of Armstrong Holdings Inc. He joined Armstrong Holdings Inc. as President of its Worldwide Building Products Operations in 1996 and prior to that, worked for Sara Lee Corporation where he was President of its European sportswear business.

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        Mr. Delker was elected Vice President of the Company in April 1990, and since January 2002 has served as General Manager of Bath and Kitchen, Europe. Before that, he served as Group Executive, Bath and Kitchen, Worldwide Fittings.

        Mr. Massengill was elected Vice President and Treasurer effective April 2001. He was Assistant Treasurer of Bristol-Myers Squibb Company from 1999 to March 2001 and before that was with AlliedSignal Inc. and Exxon Corporation (now ExxonMobil) in various financial management positions.

        Mr. Pannier was elected a Vice President of the Company in January 1998, and since January 2002 has served as President, Trane Residential Systems. From January 1998 until January 2002 he served as Group Executive, North American Unitary Products Group.

        Mr. Paradise was elected Vice President and Controller in July 2002. He joined the Company as Assistant Controller in February 2000. Prior to that he spent ten years with AlliedSignal Inc. in a variety of financial management positions, including Director of Six Sigma and Credit, after beginning his career with PricewaterhouseCoopers (formerly Price Waterhouse) as an auditor.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The common stock of the Company is listed on The New York Stock Exchange (the "Exchange") under the symbol "ASD." The common stock was first traded on the Exchange on February 3, 1995 concurrent with the underwritten initial public offering of shares of the Company's common stock. Prior to the offering there was no established public trading market for the Company's shares.

        In January 1995 the Company adopted a Restated Certificate of Incorporation, Amended Bylaws and a Rights Agreement. The Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock, par value $.01 per share, and 2,000,000 shares of preferred stock, par value $.01 per share, of which the Board of Directors designated 900,000 shares as a new series of Junior Participating Cumulative Preferred Stock. Each outstanding share of common stock has associated with it one right to purchase a specified amount of Junior Participating Cumulative Preferred Stock at a stipulated price in certain circumstances relating to changes in ownership of the common stock of the Company.

        As of February 28, 2003 there were 808 holders of record of the Company's common stock. A significant number of the outstanding shares of common stock which are beneficially owned by individuals or entities are registered in the name of a nominee of The Depository Trust Company, a securities depository for banks and brokerage firms. The Company believes that there are approximately 36,000 beneficial owners of its common stock.

        No dividends have been declared on the Company's common stock since the initial public offering, and the Company does not currently intend to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for a description of the Company's stock repurchase program.

        Set forth below are the high and low sales prices for shares of the Company's common stock for each quarterly period in 2001 and 2002.

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ITEM 6. SELECTED FINANCIAL DATA

(a)

In 2001 the Company recorded expenses of $53 million ($36 million net of taxes, or $.49 per diluted share) related to the elimination of approximately 1,700 salaried positions, including $13 million for Air Conditioning Systems and Services, $14 million for Bath and Kitchen, $16 million for Vehicle Control Systems and $10 million for corporate headquarters.

(b)

In 2000, the Company sold its Calorex water heater business for a gain of $57 million ($52 million net of taxes, or $.72 per diluted share).

(c)

In 2000, the Company recorded a net restructuring and asset impairment charge of $70 million ($51 million, net of tax benefits, or $.71 per diluted share). These charges consisted of $26 million for Air Conditioning Systems and Services, $34 million for Bath and Kitchen and $15 million for Vehicle Control Systems, partly offset by a $5 million reduction of charges taken in prior years. See Note 4 of Notes to Financial Statements. In 1999, the Company recorded restructuring and asset impairment charges of $15 million ($9 million, net of tax benefits, or $.13 per diluted share). The 1999 charges consisted of restructuring charges of $30 million principally for Vehicle Control Systems and a $13 million impairment charge relating to a minority equity interest in a non-core business, partly offset by a reduction of charges taken in 1998 to restructure North American Bath and Kitchen operations. In 1998, the Company recorded restructuring and asset impairment charges of $197 million ($183 million, net of tax benefits, or $2.49 per diluted share), including $185 million for Bath and Kitchen, $7 million for Air Conditioning Systems and Services and $5 million for Vehicle Control Systems.

        For a comparative analysis of certain line items in the Segment and Income Statement Data section of this table, see Management's Discussion and Analysis of Financial Condition and Results of Operations on the following pages.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        The Company faced weak markets for commercial air conditioning equipment and weak economies in the U.S. and many other parts of the world in 2002. Despite the challenging economic conditions, management believes the Company outperformed its markets. Sales for 2002 increased to $7.795 billion from $7.465 billion in 2001, an increase of 4% (3% excluding the favorable effects of foreign exchange). Segment income was $831 million, an increase of 6% from $787 million in 2001 (an increase of 5% excluding the favorable effects of foreign exchange). Net income increased 26% in 2002 to $371 million, and earnings per diluted share increased 25% to $5.04, compared with net income in 2001 of $295 million, or $4.04 per diluted share. The improvements in 2002 results reflected the inclusion in 2001 of a pre-tax expense of $53 million ($36 million net of tax benefits, or $.49 per diluted share) for the elimination of 1,700 salaried positions, $43 million of which was included in segment income and $10 million in corporate expenses. The improvement in 2002 also included the effect of adopting the new goodwill accounting standard as of January 1, 2002, which eliminated the amortization of goodwill, thereby increasing segment income in 2002 by approximately $32 million ($30 million net of tax benefits, or $.40 per diluted share). If 2001 were adjusted to exclude the job elimination expense and goodwill amortization, segment income for 2002 would have decreased by 4%, and net income and diluted earnings per share would have increased by 3% and 2%, respectively. See Note 2 of Notes to Financial Statements for a comparative summary of the effects of the goodwill accounting change on net income and net income per share for 2002, 2001 and 2000.

        In the discussion that follows, the year-over-year changes in segment income are presented both with and without the effects of the job elimination expense in 2001, goodwill amortization and foreign exchange translation. Management believes that presenting the analysis excluding those effects is helpful in assessing the overall performance of the business on a comparative basis from year to year. Sales are presented based upon country of destination.

        For a five-year summary of segment sales and income and other income statement information, refer to Item 6, "Selected Financial Data" on page 20, and for additional data on segments refer to Note 15 of Notes to Financial Statements on page 59. The following discussion and analysis addresses year-to-year changes in certain line items shown in the Segment and Income Statement Data in the Selected Financial Data on page 20.

Results of Operations for 2002 Compared with 2001 and 2001 Compared with 2000

        Consolidated sales for 2002 were $7.795 billion, an increase of $330 million, or 4% (3% excluding the favorable effects of changes in foreign exchange rates), from $7.465 billion in 2001. Sales increased 1% for Air Conditioning Systems and Services, 10% for Bath and Kitchen and 10% for Vehicle Control Systems.

        Segment income for 2002 was $831 million, an increase of $44 million, or 6% (5% excluding the favorable effects of foreign exchange), from $787 million in 2001. Segment income increased 4% for Air Conditioning Systems and Services, 5% for Bath and Kitchen and 12% for Vehicle Control Systems. Segment income for 2001 included a $43 million expense for the elimination of 1,640 salaried positions including $13 million for Air Conditioning Systems and Services, $14 million for Bath and Kitchen and $16 million for Vehicle Control Systems. Segment income in 2001 also included goodwill amortization of $32 million-$8 million for Air Conditioning Systems and Services, $14 million for Bath and Kitchen and $10 million for Vehicle Control Systems.

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        Excluding those job elimination expenses and goodwill amortization from 2001, segment income in 2002 would have decreased 4% with little overall effect from foreign exchange. Excluding job elimination expenses, goodwill amortization and the effects of foreign exchange, segment income was essentially flat for Air Conditioning Systems and Services, and decreased 14% for Bath and Kitchen and 9% for Vehicle Control Systems.

        Consolidated sales for 2001 were $7.465 billion, a decrease of $133 million, or 2% (but essentially flat excluding the unfavorable effects of changes in foreign exchange), from $7.598 billion in 2000. Sales decreased 1% for Air Conditioning Systems and Services and 10% for Vehicle Control Systems, but increased 1% for Bath and Kitchen.

        Segment income for 2001 was $787 million, a decrease of $53 million, or 6% (5% excluding the unfavorable effects of foreign exchange), from $840 million in 2000. Segment income decreased 3% for Air Conditioning Systems and Services, 9% for Bath and Kitchen and 16% for Vehicle Control Systems. Segment income for 2001 included a $43 million expense for salaried job eliminations. Excluding those job elimination expenses, segment income was $830 million, a decrease of 1%, and up 1% excluding the unfavorable effects of foreign exchange. Excluding both the job elimination expenses and the effects of foreign exchange, segment income decreased 1% for Air Conditioning Systems and Services but increased 5% for Bath and Kitchen and 1% for Vehicle Control Systems.

        Following are tables showing the percentage of total sales and segment income for each of the Company's business segments and the geographic distribution of sales and segment income.

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Results of Operations by Business Segment

Air Conditioning Systems and Services Segment

        In 2002, sales of Air Conditioning Systems and Services increased 1% (with little effect from foreign exchange) to $4.744 billion from $4.692 billion for 2001. Overall performance in our air conditioning businesses was better than the air conditioning markets as a whole, other than for large commercial unitary products.

        The sales gain in 2002 was led by residential air conditioning sales in the U.S., which increased 14%, and commercial parts, service and solutions sales, which increased 9%, partly offset by a decrease in commercial equipment sales, which declined 7%. For residential air conditioning, strong demand for replacement units and warmer-than-normal summer weather in most parts of the U.S. combined to lift the residential air conditioning market, we believe, an estimated 9%. In addition, the furnace market was up an estimated 5%. Residential sales also benefited from our strong position in the premium, high-efficiency market evidenced by a substantial sales increase of new higher-efficiency models. Our market share for residential products increased 0.5 percentage points year over year, aided by the successful introduction of our new products. Sales of parts, services and solutions continued to grow and were aided modestly by the acquisition of a sales office in the first quarter of 2002. Commercial equipment sales, which account for about half of the air conditioning segment sales, continued to feel the effects of a difficult economic environment, and were down 7% for the year. Commercial unitary equipment sales decreased 13% and commercial applied equipment sales decreased 3%. Overall, we believe our share remained stable in these commercial markets which remain weak and price competitive. We believe non-residential building construction in the U.S. declined over 10% in 2002. In North America, school and health care markets continued to show strength while manufacturing and office building markets were severely depressed. Sales outside North America, which are substantially commercial, were essentially flat year over year (in local currencies), reflecting strong growth in China offset by declines in other Asian countries, Europe and Latin America.

        Segment income of Air Conditioning Systems and Services in 2002 increased 4% (with little effect from foreign exchange) to $537 million from $515 million in 2001. The increase was attributable primarily to the residential business, from higher volumes and a favorable shift in customer demand to higher-capacity, higher-efficiency products with higher margins, and growth in commercial parts, service and solutions. Operating results also improved in Europe and China. These gains were partly offset by volume, price and mix declines in commercial applied and commercial unitary products. The positive impact of Materials Management and Six Sigma productivity initiatives more than offset cost escalations and investments in new product initiatives. In addition, 2002 also benefited from the lack of goodwill amortization ($8 million in 2001) and because 2001 included

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$13 million of expense for salaried job eliminations. Overall margins increased from 11.0% in 2001 to 11.3% in 2002. If goodwill amortization and job elimination expenses were excluded from 2001, segment income would have increased by $1 million, or less than 1%, and margins would have decreased to 11.3% from 11.4%.

        In 2001, sales of Air Conditioning Systems and Services decreased 1% (but were essentially flat excluding foreign exchange effects) to $4.692 billion from $4.726 billion for 2000. Worldwide commercial applied and commercial unitary sales decreased 2% in 2001 primarily on lower volume, offset partly by growth in the parts, service and solutions business. Residential air conditioning sales increased 6%, primarily from a favorable mix of premium, high-efficiency units. This performance in our residential business was substantially better than the air conditioning markets as a whole.

        Segment income of Air Conditioning Systems and Services in 2001 decreased 3% (with little effect from foreign exchange) to $515 million from $531 million in 2000. The decrease was attributable primarily to lower volumes in the U.S. in commercial applied and commercial unitary products and a $13 million expense for salaried job eliminations. Overall margins decreased from 11.2% in 2000 to 11.0% in 2001.

BACKLOG—The worldwide backlog for Air Conditioning Systems and Services as of December 31, 2002, was $601 million, a decrease of 9% from $663 million as of December 31, 2001, excluding foreign exchange effects. This decrease primarily reflected a decline in commercial equipment markets in North America.

Bath and Kitchen Segment

        Sales by Bath and Kitchen were $1.994 billion in 2002, an increase of 10% (8% excluding the favorable effects of foreign exchange), from $1.813 billion in 2001. The increase was the result of gains in each of the major geographical areas in which Bath and Kitchen operates. Sales in the Americas increased 14% (with little effect from foreign exchange), led by strong growth in North America from continued strong demand in replacement and home improvement markets. Sales benefited from increased faucet sales, the continued rollout of an expanded Whirlpool tub program at Home Depot stores and growth in sales to Lowe's home improvement stores. Sales through the retail channel increased 28% and sales to wholesalers increased 3%. Sales in Canada increased 20% from higher volume as markets improved. In Europe, sales were up 6% (2% excluding favorable foreign exchange effects) as we were able to gain market share in a difficult economic environment. European sales also benefited from three small fittings businesses acquired in 2001. In Asia, sales increased 15% (21% in local currencies), off a small but growing base.

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        Segment income of Bath and Kitchen was $155 million for 2002, an increase of 5% (2% excluding foreign exchange effects) from $148 million for 2001. Overall margins declined from 8.2% in 2001 to 7.8% in 2002. Segment income in 2002 benefited from the lack of goodwill amortization ($14 million in 2001) and because 2001 included $14 million of expense for salaried job eliminations. Excluding goodwill amortization, job elimination expense and the favorable effects of foreign exchange from 2001, segment income would have decreased 14%. This decrease in segment income on a comparable basis is attributable primarily to operational issues and our investment spending in new product development and marketing programs. We made improvements in the operational issues identified in the second quarter of 2002 in a U.S. plant and its associated distribution centers, as well as at a plant in France, but we expect a continuing, though declining, impact in the first and second quarters of 2003. We continued to decrease costs and improve productivity through Materials Management and Six Sigma initiatives that offset cost escalations. Excluding the effect of goodwill amortization and job eliminations expense, segment income decreased in Latin America and Europe, but increased in the U.S. and Asia and Canada, and overall margins declined from 9.7% in 2001 to 7.8% in 2002.

        Sales by Bath and Kitchen were $1.813 billion in 2001, an increase of 1% (4% excluding the unfavorable effects of foreign exchange), from $1.803 billion in 2000. The increase (excluding exchange) primarily reflected 4% sales gains for both Europe and the Americas, partly offset by a 4% decline in Asia. The European increase reflected volume increases primarily from the acquisition of two small fittings manufacturers. Otherwise, European sales were up 1%. The Americas increase reflected growth of 5% in the U.S., while Latin America was flat, excluding exchange effects.

        Segment income of Bath and Kitchen was $148 million for 2001, down from $162 million for 2000, but increased 4% excluding a $14 million job elimination expense and the unfavorable effects of foreign exchange. The increase (excluding the job elimination expense and foreign exchange) primarily reflected gains in Europe and the Americas, partly offset by a decline in Asia. Benefits from Materials Management and Six Sigma initiatives were essentially offset by escalations in labor and other costs and increased spending on product development and marketing to benefit future growth. Overall margins declined from 9.0% in 2000 to 8.9% in 2001.

BACKLOG—Bath and Kitchen's backlog as of December 31, 2002, was $167 million, an increase of 64% from $102 million as of December 31, 2001 (excluding foreign exchange effects). Backlog is not an important indicator of future business in the plumbing industry, which typically has a short cycle between customer order and shipment.

Vehicle Control Systems Segment

        Vehicle Control Systems' sales for 2002 were $1.057 billion, an increase of 10% (6% excluding the favorable effects of foreign exchange), from $960 million in 2001. The increase resulted primarily because of a significant increase in sales from Europe to our North American marketing joint venture. The North American truck market experienced 11% growth as U.S. customers actively purchased vehicles before the change in diesel engine emissions regulations affecting truck engines manufactured after October 1, 2002. Sales in the U.S. increased 23%, modestly outperforming the market. Sales in Europe, our largest market, grew 8% (3% in local currencies), excluding sales to the North American marketing joint venture, primarily as a result of higher content per vehicle and higher aftermarket sales. This increase was achieved despite a decrease in unit volumes of truck and bus production in western Europe of 8% in 2002. Sales increased 19% (21% in local currencies) in Asia and decreased 10% (increased 9% in local currencies) in Latin America. Our sales continue to outperform the heavy vehicle manufacturing markets through sales of our new control systems, expanding penetration on other vehicle platforms, new applications with existing customers, and geographic expansion in Asia.

25

        Segment income in 2002 increased 12% (10% excluding favorable foreign exchange effects) to $139 million from $124 million in 2001. Segment income in 2002 benefited from the lack of goodwill amortization ($10 million in 2001) and because 2001 included $16 million of expense for salaried job eliminations. Excluding goodwill amortization and job elimination expenses from 2001, and the favorable effects of foreign exchange, segment income would have decreased 9%. This decline in local currencies primarily reflected lower pricing and higher warranty expense, which more than offset the effect of the volume increases discussed above. Segment income in 2001 also benefited from a one-time sale to a customer to help them deal with a product recall caused by another supplier. Productivity improvements from Six Sigma and Materials Management initiatives overcame other cost escalations. Margins increased from 12.9% in 2001 to 13.2% in 2002.

        Vehicle Control Systems' sales for 2001 were $960 million, a decrease of 10% (6% excluding the unfavorable effects of foreign exchange), from $1.069 billion in 2000. The decrease resulted primarily from a significant deterioration in the North American commercial vehicle market and a softening in European markets. Unit volumes of truck and bus production decreased 35% in the U.S. and 8% in western Europe compared with 2000. Vehicle Control Systems' sales generally declined less than the markets, as new products, new applications with existing customers, geographic expansion and market penetration tempered the effects of the cyclical nature of the commercial vehicle markets. Sales in Europe (excluding export sales to the Company's U.S. marketing joint venture) were down 5% from 2000 in a market that declined 8%. Similarly, sales of anti-lock braking systems to the U.S. marketing joint venture declined less than the markets in which the Company participates. The U.S and European declines were partly offset by significant volume expansion in Asia and an increase (excluding foreign exchange) in Brazil. Sales by the U.S. compressor manufacturing business also increased.

        Segment income in 2001 decreased 16% (11% excluding unfavorable foreign exchange effects) to $124 million from $147 million in 2000. This primarily reflected lower volumes and the $16 million expense for the elimination of 540 positions. Excluding the job elimination expense and the unfavorable effects of foreign exchange, segment income decreased by 5% and margins improved from 13.8% in 2000 to 14.6% in 2001. Margins benefited from a structural reduction in cost as labor-intensive production was shifted to the new facility in Poland and from productivity enhancements including benefits from Six Sigma and Materials Management initiatives.

BACKLOG—Vehicle Control Systems' backlog as of December 31, 2002, was $468 million, an increase of 7% from $436 million as of December 31, 2001 (excluding foreign exchange effects), primarily reflecting expansion of business in Asia and a modest increase in Europe.

Other Income Statement Data (as summarized in Item 6, Selected Financial Data)

        The increase in equity in net income of unconsolidated joint ventures for 2002 compared with 2001 primarily reflects higher net income for our Vehicle Control Systems' joint venture in India, driven by strong sales in local markets, and higher net income for our Air Conditioning compressor joint venture in the U.S. from improved productivity. The decrease in 2001 compared with 2000 resulted from lower income in Vehicle Control Systems' North American braking systems marketing joint venture because of a significant reduction in truck builds.

        Interest expense decreased by $40 million in 2002 compared with 2001, and by $30 million in 2001 compared with 2000, because of lower average debt balances and lower average interest rates (including the effect of interest rate swaps). Debt was repaid and rates on variable-rate borrowings under the Company's bank credit agreements declined during 2002 and 2001. See "Liquidity and Capital Resources" and Note 11 of Notes to

26

Financial Statements.

        Corporate and other expenses for 2002 were $173 million compared with $161 million for 2001 and $149 million for 2000. The increase in 2002 was due principally to higher pension, medical and insurance costs, the cost of expanding the scope of corporate office functions, higher incentive compensation and higher minority interest elimination, offset partly by improvements on foreign exchange transactions. The increase in pension and medical costs includes higher accretion expense on unfunded obligations under retirement plans. The increase in accretion expense on retirement plans is attributable primarily to a lower return on assets in pension plans in the last two years and increases in future medical costs. The Company recorded a net gain on foreign exchange transactions in 2002 as opposed to a loss in 2001, primarily as a result of an increase in the value of the Euro. See Notes 5 and 6 of Notes to Consolidated Financial Statements for additional information on accretion expense and foreign exchange transactions. The increase in 2001 was due principally to expenses of $10 million related to the elimination of 40 salaried positions. In addition, the Company incurred higher costs related to expanding the scope of corporate office functions, and higher pension-related and foreign exchange costs, partly offset by lower charges for incentive compensation and various other items. Corporate and other expenses, shown in the Segment and Income Statement Data table in Item 6, primarily include some of the expenses classified as selling and administrative expenses in the Consolidated Statement of Income on page 38. Corporate and other expenses also include certain items classified in Other expense (income) in the Consolidated Statement of Income (see Note 5 of Notes to Financial Statements). Period-to-period changes in the significant components of Other expense (income) are explained by the comments in this paragraph on corporate expenses, or in the first paragraph of this section on equity in net income of unconsolidated joint ventures.

        The income tax provisions for 2002, 2001 and 2000 were $185 million, $181 million and $194 million, respectively. The effective income tax rates were 33.3% of pre-tax income in 2002, 38.0% in 2001 and 38.1% in 2000. The rate in 2001 was 37.5% excluding the effect of the expense for termination of salaried employees. The rate in 2000 was 39.75% excluding the effects of the water heater business sale and the restructuring and asset impairment charges. The rates have decreased since 2000 because of various initiatives, and an internal reorganization at the end of 1999 of the Company's subsidiary ownership that was more tax efficient than the previous structure. The rates also reflect the effects of rate differences and withholding taxes related to foreign operations, nondeductible goodwill amortization (for 2001 and 2000 only) and higher state income taxes in the U.S. See Note 7 of Notes to Financial Statements. The Company expects that its effective income tax rate in 2003 will be reduced to between 31% and 32% as a result of various tax planning initiatives.

        In 2000, the Company sold its Calorex water heater business for $68 million, resulting in a gain of $57 million ($52 million net of tax).

        In 2000, the Company announced a worldwide restructuring program which included improving efficiency through the transfer of production to locations with lower product costs, the closure of manufacturing and administrative facilities, outsourcing production of certain products, capitalizing on synergistic opportunities in several businesses and employee termination costs. In connection with that program, the Company recorded a net restructuring and asset impairment charge of $70 million ($51 million net of tax benefits, or $.71 per diluted share). This program was essentially completed by the end of 2002. See Note 4 of Notes to Financial Statements.

Liquidity and Capital Resources

        Net cash provided by operating activities, excluding net proceeds from the initial sales of receivables, was $542 million for 2002. This compared with $496 million of net cash provided for 2001. Net proceeds from the initial sale of receivables under a new financing arrangement in Europe in 2002, less a decrease in receivables sold under a new financing arrangement in the U.S. in 2002 increased cash provided by operating activities in 2002 by $81 million to $624 million (see Note 8 of Notes to Financial Statements). Other factors contributing to the increase were higher net income, partly offset by a $55 million payment as part of the German tax settlement, a $50 million contribution to the Company's U.S. pension plan and payments of job elimination costs accrued in 2001.

        In investing activities, the Company made capital expenditures of $189 million for 2002, including $24 million of investments in affiliated companies and other businesses. This compared with capital expenditures

27

of $203 million in 2001, including $37 million of investments in affiliated companies and other businesses. The Company also invested $47 million in computer software in 2002, compared with $58 million in 2001, received a return of invested capital and accumulated earnings of $26 million from the dissolution of the U.S. receivables financing joint venture, and $21 million from the sale of property, plant and equipment. The 2001 period included proceeds of $27 million from sale and leaseback transactions.

        Most of the excess of cash provided by operating activities over cash used for investing activities in 2002 was used to fund financing activities totaling $420 million. This included net cash debt repayments of $337 million. Total Company debt reflected on the balance sheet was reduced by a net $253 million during 2002, as those cash repayments were partly offset by non-cash increases, including a $56 million foreign exchange translation effect and a $26 million change in the value of interest rate swaps on certain debt. Other investing activities included the purchase of $141 million of common stock, partly offset by proceeds realized from the exercise of stock options of $56 million. The Company purchased 2.1 million shares of the Company's common stock pursuant to the Company's share repurchase program. The net effect of all operating, investing and financing activities for 2002 was an increase in cash and cash equivalents of $15 million. This compares with financing activities of $283 million in 2001, including net debt repayments of $231 million and purchases of 1.9 million shares of the Company's common stock for $116 million, offset by proceeds realized from the exercise of stock options totaling $97 million. In 2001 the Company also bought back warrants for the purchase of 3 million shares of the Company's common stock held by Kelso ASI Partners, L.P. for $35 million.

        The Company has two primary bank credit agreements. The agreements provide the Company with senior unsecured revolving credit facilities aggregating $1.15 billion as follows: (a) a five-year, $1 billion multi-currency facility which expires in 2006 and (b) a 364-day U.S. dollar facility that was amended and restated on November 5, 2002 in the amount of $150 million with an expiration date of November 4, 2003. The 364-day facility has an option to renew for an additional 364 days. The Company also has a Euro-denominated, 364-day bank credit agreement of approximately $42 million (at December 31, 2002 exchange rates) that was fully utilized as of December 31, 2002. Debt outstanding under that agreement was classified as long-term debt in the balance sheet as of December 31, 2002, because the Company had the ability and the intent to renew it or to refinance it with borrowings under the five-year facility.

        The aggregate borrowings of up to $1.15 billion provided by the new facilities can be used for general corporate purposes, of which up to $250 million may be used for issuing letters of credit and up to $125 million for same-day, short-term borrowings. Each loan outstanding under these facilities is due at the end of each interest period (a maximum of 12 months). The Company can, however, concurrently reborrow the outstanding obligations subject to compliance with certain conditions contained in the new agreements.

        The Company, American Standard Inc., American Standard International Inc. and certain of their domestic subsidiaries guarantee obligations under the credit agreements. In addition, significant foreign subsidiaries guarantee obligations of certain foreign borrowers under the credit agreements.

        The credit agreements contain various covenants that limit, among other things, indebtedness, liens, sale and leaseback transactions, subsidiary indebtedness including preferred stock, mergers, consolidations, dissolutions and asset sales, investments or acquisitions, dividends and redemptions of capital stock, loans and advances, and certain other business activities. The covenants also require the Company to meet certain financial tests: ratio of consolidated debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and consolidated free cash flow to interest expense. The Company is currently in compliance with the covenants contained in the credit agreements. See Note 11 of Notes to Financial Statements.

        At December 31, 2002, the Company's total indebtedness was $1.959 billion and annual scheduled debt maturities were $130 million, $43 million, $214 million, $737 million and $1 million for the years 2003 through 2007, respectively. The amount due in 2003 includes $125 million of 7 1/8% Senior Notes which were redeemed on their due date, February 15, 2003. The Company had remaining availability under its bank credit agreements at December 31, 2002, of $573 million after reduction for borrowings of $482 million and $95 million of outstanding letters of credit. The Company has $16 million available under other bank credit facilities after reduction for borrowings of $42 million and letters of credit usage of $7 million. In addition, the Company's other foreign

28

subsidiaries had $241 million available at December 31, 2002, under overdraft facilities that can be withdrawn by the banks at any time. See Note 11 of Notes to Financial Statements.

        The Company's improved cash flows, the reduction in total debt outstanding and an improved credit rating have made alternative sources of financing more readily available to the Company. The Company believes that the amounts available from operating cash flows, funds available under its credit agreements and future borrowings under the remaining $540 million of a $1 billion shelf registration statement filed with the Securities and Exchange Commission in 1998 (the "1998 Shelf Registration") will be sufficient to meet its expected operating needs and planned capital expenditures for the foreseeable future.

        On January 8, 2002, the Company redeemed all of the 9 1/4% Sinking Fund Debentures, at a redemption price 102.313% of the face amount of the bonds plus unpaid interest up to the redemption date. The total redemption cost of $38.7 million, including accrued interest of $.4 million, was paid with lower-cost borrowings under the Company's bank credit agreements.

        The Company redeemed its 7 1/8% Senior Notes on their due date, February 15, 2003, for $129.5 million, including accrued interest. Those notes were classified as long-term debt as of December 31, 2002 because the Company had the ability and the intent to fund their redemption with borrowings under the five-year facility.

        In January 2003, a European subsidiary of the Company issued €30 million ($31 million) of 7.59% Guaranteed Senior Bonds due 2013 in a private placement as part of some changes in the financial structure and organization of its European subsidiaries. The bonds are guaranteed by the Company. The proceeds were used to repay borrowings under bank credit agreements.

        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. Operating leases are employed as an alternative to purchasing certain property, plant and equipment. Future rental commitments under all non-cancelable leases in effect at December 31, 2002, are: $118 million in 2003; $92 million in 2004; $73 million in 2005; $59 million in 2006; $51 million in 2007; and $58 million thereafter, a total of $451 million. That total represents the equivalent of approximately $365 million of off-balance-sheet debt, discounted at an assumed rate of 7.5%.

        To reduce its borrowing cost, during 2002 the Company established new accounts receivable financing facilities in Europe and the U.S., and terminated a previously existing arrangement in the U.S. See Note 8 of Notes to Financial Statements. As part of these facilities, the Company formed wholly owned, special-purpose entities (the "SPEs") for the sole purpose of buying and selling receivables generated by the Company. Under these facilities, the Company, irrevocably and without recourse, transfers all eligible accounts receivable to the SPEs which in turn, sell them, or undivided ownership interests in them, to conduits administered by banks. The assets of the SPEs are not available to pay the claims of the Company, American Standard Inc., or any other entity. The Company retains a subordinated interest in the receivables sold of approximately 10% to 15% in Europe and 40% in the U.S. The conduits obtain the funds to purchase the receivables, other than the retained interest, by selling commercial paper to third-party investors. Advances from the conduits to the SPEs are limited to approximately $435 million (€250 million, or approximately $260 million at current exchange rates under the European facility, and $175 million under the U.S. facility). The Company retains responsibilities for the collection and administration of receivables subject to these facilities. These facilities are for three years, subject to annual renewals and for the European facility, the maintenance of specified debt-rating levels, and for the U.S. facility, the maintenance of certain financial covenants. The Company is currently in compliance with these covenants. The receivables sold are removed from the balance sheet since they meet the applicable criteria of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Company's retained interest is recorded at fair value in other current assets in the Company's Consolidated Balance Sheet. Losses are recognized when the receivables are sold to the extent that the cash and value of the retained interest is less than the net book value of the receivables sold. Those losses amounted to $21.5 million for 2002, and were recorded in cost of sales in the Consolidated Statement of Income and in Corporate and other expenses in the Segment and Income Statement Data on page 20.

29

        In addition, on August 31, 2002, the Company terminated its activities in American Standard Financial Services, a financial services partnership with Transamerica Commercial Finance Corporation that had previously provided receivables financing in the U.S., and bought back $256 million of trade receivables. The proceeds from the initial sale of receivables under the new European and U.S. arrangements, net of the effect of termination of previously existing arrangements, resulted in an increase in cash flows of $81 million. In connection with terminating its interest in the partnership with Transamerica, the Company realized cash proceeds of $26 million.

        Debt securities (Senior Notes) sold under the 1998 Shelf Registration are issued by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. These Senior Notes are not subject to redemption. The Company intends to use the net proceeds from any future sales of such debt securities under the 1998 Shelf Registration for general corporate purposes, which may include refinancing existing debt as it matures, certain investments, acquisitions, additions to working capital or capital expenditures.

        In conjunction with a secondary public offering of the Company's common stock in 1997, the Company issued to Kelso ASI Partners, L.P. warrants to purchase 3 million shares of the Company's common stock at $55 per share. In the second quarter of 2001 the Company bought back these warrants for $35 million.

        The Company's Board of Directors has approved plans to purchase up to $700 million of the Company's common stock (including $150 million approved on February 6, 2003) to offset the dilutive effect of issuing shares of common stock pursuant to the Company's stock option plans and other incentive and benefit plans funded with shares of stock. Pursuant to these authorizations, the Company purchased 2,075,200 shares in 2002 for $141 million, 1,921,050 shares in 2001 for $116 million, 3,559,900 shares in 2000 for $148 million, 113,600 shares in 1999 for $4 million, and 2,675,750 shares in prior years for $84 million. As of February 6, 2003, the unexpended authorization was $183 million, after purchases of 350,000 shares for $24 million in 2003 through that date.

        In 2002, the Company concluded negotiations with The State Finance Administration for North Rhine-Westphalia, Germany concerning certain tax issues covering the years 1984 through 1994. On January 15, 2002, the Company settled all issues for those years by making a cash payment of approximately $55 million plus $30 million previously deposited in escrow. Since the Company previously had made provision for those issues, the settlement had no impact on results of operations. See Note 7 of Notes to Financial Statements.

Capital Expenditures

        The Company's capital expenditures for 2002 were $189 million (including $24 million of investments in affiliated companies), compared with $203 million for 2001. Capital spending in 2002 was devoted primarily to equipment for the manufacture of new products and productivity improvements.

        Capital expenditures for Air Conditioning Systems and Services for 2002 were $93 million (including $24 million of investments in affiliated companies), a decrease of 8% from 2001 expenditures of $101 million (including $14 million of investments in affiliated companies). Major expenditures in 2002 primarily related to projects for new products and product improvements and improvements related to productivity.

        Bath and Kitchen's capital expenditures for 2002 were $61 million, a decrease of 15% from 2001 capital expenditures of $72 million (including investments in affiliated companies of $23 million). Major expenditures in 2001 included expansion of plants in Mexico and Bulgaria and projects related to new products, and product and process improvements.

        Capital expenditures for Vehicle Control Systems in 2002 were $35 million compared with $30 million in 2001, an increase of 17%. Expenditures in 2002 were primarily related to expansion of Polish operations, including capital equipment for new products and process improvements.

        The Company believes capital spending in recent years, although somewhat lower in 2001 and 2002 than in recently preceding years, has been sufficient to maintain efficient production capacity, to implement important product and process redesigns, to expand capacity to meet increased demand and to make strategic investments and

30

acquisitions. Six Sigma projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. The Company expects to continue investing to expand and modernize its existing facilities and to consider entering into joint ventures and making complementary acquisitions. The Company expects to make capital expenditures in 2003 of approximately $200 million, excluding potential acquisitions and capitalized computer software.

Effect of Recently Issued Accounting Standards

        The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. For the disclosures required by that Statement, see Note 2 of Notes to Financial Statements, Accounting Policies-Stock-Based Compensation. The FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. For the disclosures required by that Interpretation, see Note 14 of Notes to Financial Statements. In January 2003 the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. That interpretation will have little effect on the Company since the three variable interest entities in which the Company has an interest are fully consolidated in the Company's financial statements. Other recently issued FASB statements that are applicable to the Company have little or no immediate effect and will have an effect in the future only in the event the Company enters into transactions governed by those statements. Those statements included No. 143, Accounting for Asset Retirement Obligations; No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 (leases), and Technical Corrections; and No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

Critical Accounting Policies and Estimates

        The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The Company frequently re-evaluates its judgments and estimates which are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

        The Company believes that of its significant accounting policies (see Note 2 of Notes to Financial Statements), the ones that may involve a higher degree of judgment and complexity are post-retirement benefits, warranties, goodwill, income taxes and commitments and contingencies.

        Post-retirement benefits—The Company has significant pension and post-retirement benefit costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, merit and promotion increases and the health care cost trend rate. The Company is required to consider current market conditions, including changes in interest rates and health care costs, in selecting these assumptions. Changes in the related pension and post-retirement benefit costs or liabilities may occur in the future due to changes in the assumptions. A decrease of one percentage point in the assumed rate of return on plan assets and a commensurate decrease in the discount rate applied to projected benefit obligations would increase annual pension expense by approximately $20 million. An increase of one percentage point in the assumed health care cost trend rate in each future year would increase annual health insurance costs by approximately $23 million.

        Warranties—Products sold are generally covered by a warranty for periods ranging from one to ten years for most products, and for the lifetime of certain bath and kitchen faucets. At the time of sale the Company accrues a warranty reserve for estimated costs to provide equipment, parts or services to satisfy warranty obligations. The Company's estimate of costs to service its warranty obligations is based on historical experience and expectation of future conditions. To the extent the Company experiences changes in warranty claim activity or costs associated with servicing those claims, its warranty accrual is adjusted accordingly. The Company also sells extended warranty contracts for up to 10 years on some of its products. Revenues from the sales of extended warranties are deferred and amortized on a straight-line basis over the terms of the contracts or based upon historical experience.

31

Changes in estimates to warranty accruals made in prior years can vary significantly, and sometimes unexpectedly. Such changes in estimates decreased warranty expense by a net $8 million in 2001 and increased it by a net $6 million in 2002. See Note 14 of Notes to Financial Statements in Item 8 for a three-year summary of warranty costs.

        Goodwill——In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change the fair value of these assets in the future, the Company may be required to record impairment charges for them. On January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and analyzed its goodwill for impairment during 2002, and will make similar evaluations on a periodic basis in the future. During 2002, the Company performed the required impairment tests of goodwill and indefinite-lived intangible assets and determined that there was no impairment.

        Income taxes—The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Deferred tax assets have been reduced by a valuation allowance of $114 million. A decrease in that valuation allowance of 10% would increase net income by approximately $11 million.

        Commitments and Contingencies—The Company is subject to proceedings, lawsuits and other claims related to environmental, asbestos, labor, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of liability to be recorded, if any, for these contingencies is made after careful analysis of each individual issue. The liability recorded may change in the future due to new developments in any of the matters.

Cyclical and Seasonal Nature of Business

        Approximately 60% of Air Conditioning Systems and Services and Bath and Kitchen sales on a combined basis are to the replacement, remodeling and repair markets that tend to be less cyclical than other markets. In 2002, only about 7% of the Company's sales were associated with new housing in the U.S. and about 13% with new commercial construction in the U.S., both of which are cyclical. The Company's geographic diversity mitigates the effects of fluctuations in individual new construction markets. Vehicle Control Systems' sales are dependent to a large extent on production levels of medium-sized and heavy trucks and buses, particularly in Europe and the U.S., which have been cyclical.

        Total Company sales and related segment income tend to be seasonally higher in the second and third quarters of the year because summer in the U.S. and other Northern Hemisphere markets is the peak season for sales of Air Conditioning Systems and Services. In addition, a significant percentage of Air Conditioning Systems and Services' sales are attributable to U.S. residential and commercial construction activity, which is generally higher in the second and third quarters of the year.

Information Concerning Forward-Looking Statements

        Certain of the statements contained in this report (other than the historical financial data and other statements of historical fact), including, without limitation, statements as to management's expectations and beliefs, are forward-looking statements. Forward-looking statements are made based upon management's good faith expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with such expectations or that the effect of future developments on the Company will be those anticipated by management. Forward-looking statements can be

32

identified by the use of words such as "believe," "expect," "plans," "strategy," "prospects," "estimate," "project," "anticipate" "intends" and other words of similar meaning in connection with a discussion of future operating or financial performance. This Report on Form 10-K includes important information as to risk factors in the "Notes to Financial Statements" under the headings "Restructuring and Asset Impairment Charges," "Tax Matters," and in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Many important factors could cause actual results to differ materially from management's expectations, including:

•

the level of construction activity in the Company's Air Conditioning Systems and Services' and Bath and Kitchen markets and the level of truck and bus production in the Company's Vehicle Control Systems markets;



•

the extent to which the Company will be able to realize the estimated savings from Materials Management and Six Sigma initiatives;



•

unpredictable difficulties or delays in the development of new product technology;



•

changes in U.S. or international economic conditions, such as inflation, interest rate fluctuations, foreign exchange rate fluctuations or recessions in the Company's markets;



•

pricing changes to the Company's supplies or products or those of its competitors, and other competitive pressures on pricing and sales;



•

increased difficulties in obtaining the supply of steel necessary to avoid disruptions of operations at pricing levels which will not have an unduly adverse effect on results of operations;



•

increased difficulties in obtaining a consistent supply of other basic materials like aluminum, copper, clays, electronics and natural gas at stable pricing levels;



•

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 ability of the Company to effectively and timely implement remedial programs to overcome operational issues in Bath and Kitchen's U.S. and French operations;



•

the impact on the Company or a segment from the loss of a 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 products or potential products;



•

the extent to which the Company will incur future asbestos claims and the extent to which it can recover the cost of those claims from its insurance carriers or other parties, or changes in legislation affecting claims criteria;



•

changes in laws or different interpretations of laws that may affect the Company's expected effective tax rate for 2003;



•

transactions or other events affecting the need for, timing and extent of the Company's capital expenditures;



•

the extent of and the costs at which the Company effects repurchases of its common stock; and



•

the extent to which the Company reduces outstanding debt.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

        The Company is exposed to fluctuations in the price of major raw material commodities used in the manufacturing process, foreign currency fluctuations and interest rate changes. From time to time the Company enters into hedge agreements to reduce its risks related to commodity price, foreign currency and interest rates. Such agreements hedge only specific transactions or commitments. To minimize the risk of counter-party nonperformance, such agreements are made only through major financial institutions with significant experience in such financial instruments.

        To minimize the risk of fluctuations in the market price of major raw material commodities, such as copper and aluminum used in the manufacturing process, the Company may enter commodity-forward contracts to effectively fix the cost of the commodity. Maturity dates of the contracts are scheduled to coincide with market purchases of the commodity. Cash proceeds or payments between the Company and the counter-party at maturity of the contracts are recognized as an adjustment to the cost of the commodity purchased, to the extent the hedge is effective. Charges or credits resulting from ineffective hedges are recognized in income. The Company generally does not enter commodity hedges extending beyond eighteen months. The notional value of commodity-forward contracts outstanding as of December 31, 2002 and 2001, was $65 million and $63 million, respectively. A 10% change in the price of commodities hedged would change the fair value of the hedge contracts by approximately $6 million as of December 31, 2002 and $6 million as of December 31, 2001.

        The Company conducts significant non-U.S. operations through subsidiaries in most of the major countries of western Europe, Canada, Brazil, Mexico, Bulgaria, the Czech Republic, Poland, Central American countries, China, Malaysia, the Philippines, Indonesia, South Korea, Thailand, Taiwan and Egypt. In addition, the Company conducts business in these and other countries through affiliated companies and partnerships in which the Company owns 50% or less of the stock or partnership interest. Because the Company has manufacturing operations in 29 countries, fluctuations in currency exchange rates may have a significant impact on its financial statements. Such fluctuations have much less effect on local operating results, however, because the Company to a significant extent sells its products within the countries in which they are manufactured. However, a significant and growing portion of the Company's products are manufactured in lower-cost locations and sold in various countries, resulting in increased exposure to foreign exchange effects. The asset exposure of foreign operations to the effects of exchange volatility has also been partly mitigated by the denomination in foreign currencies of a portion of the Company's borrowings. The Company is also subject to political risks in its foreign operations.

        Since the Company sells certain finished products in currencies different than the currency of the subsidiary that manufactured the products, the Company is exposed to foreign currency risk on such transactions. The Company hedges some of this risk by entering foreign-currency-forward contracts that effectively fix the transaction cost. Cash settlement proceeds or payments upon maturity of the contracts are included in the price of the transaction hedged, to the extent the hedge is effective. Charges or credits resulting from ineffective hedges are recognized in income. The Company generally does not enter currency hedges extending beyond one year. The notional value of foreign exchange forward contracts outstanding as of December 31, 2002 and 2001, was $5 million and $19 million, respectively. A 10% change in the exchange rate of the currencies hedged would change the fair value of the contracts by approximately $1 million as of December 31, 2002 and $2 million as of December 31, 2001. See Note 13 of Notes to Financial Statements for more information on financial instruments.

        To manage the balance between floating interest rate debt and fixed interest rate debt, the Company has entered into interest rate swaps that effectively convert fixed-rate debt to variable-rate debt. The maturity date of these swap contracts coincides with the maturity date of the underlying debt. Under these swaps, the Company pays a specified variable interest rate and receives the fixed rate applicable to the underlying debt. The interest rate swaps are designated as fair-value hedges of the underlying debt. The fair value of the hedges is recorded in other long-term assets or liabilities with a corresponding increase or decrease in the debt obligation. The change in fair values of the hedge instrument and the debt are recorded as equal and offsetting unrealized gains and losses. The existing fair value hedges are 100% effective and therefore there is no effect on current earnings from hedge

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ineffectiveness. The notional value (the value of the underlying debt) of interest rate swaps outstanding as of December 31, 2002, was $300 million. Including that $300 million, as of December 31, 2002, approximately $900 million of the Company's $2.0 billion total debt bore interest at variable rates based upon the London Interbank Offered Rate (LIBOR). A 10% change in swap rates would change the fair value of the interest rate swaps by approximately $4.2 million as of December 31, 2002.

        To convert Euro and Pounds Sterling financing under the European receivables securitization program to U.S. dollar equivalent financing, the Company enters into currency-forward contracts that effectively fix the transaction costs in U.S. dollars. These forward contracts are defined as speculative hedges and accordingly, changes in the market value of the contracts are recorded in other income/expense as incurred, with a corresponding increase or decrease in other assets. The recorded gains or losses are essentially offset by gains or losses on the Company's Euro-and Sterling-denominated debt.

        The Company has commitments and performance guarantees, including energy savings guarantees totaling $35 million extending from 2003 to 2020, under long-term service and maintenance contracts related to its air conditioning equipment and system controls. Through 2002 the Company has experienced no net losses under such arrangements and considers the probability of losses to be unlikely.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management's Report on Financial Statements

        The accompanying consolidated balance sheet at December 31, 2002 and 2001, and related consolidated statements of income, shareholders' equity (deficit) and cash flows for the years ended December 31, 2002, 2001 and 2000, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls which it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of outside Directors which meets periodically with the Company's financial officers, internal auditors and the independent auditors and monitors the accounting affairs of the Company.

Frederic M. Poses Chairman and Chief Executive Officer		G. Peter D'Aloia Senior Vice President and Chief Financial Officer		Richard S. Paradise Vice President and Controller
February 5, 2003

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Report of Independent Auditors

The Board of Directors and Shareholders of American Standard Companies Inc.

        We have audited the accompanying consolidated balance sheet of American Standard Companies Inc. as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Standard Companies Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

        As disclosed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.

New York, New York
February 5, 2003

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CONSOLIDATED STATEMENT OF INCOME

AMERICAN STANDARD COMPANIES INC.

See Notes to Financial Statements.

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CONSOLIDATED BALANCE SHEET

AMERICAN STANDARD COMPANIES INC.

See Notes to Financial Statements.

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CONSOLIDATED STATEMENT OF CASH FLOWS

AMERICAN STANDARD COMPANIES INC.

See Notes to Financial Statements.

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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
AMERICAN STANDARD COMPANIES INC.