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.
1
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:
º •
º Sales growth, including:
º •
º Expanding marketing efforts,
º •
º Building brand awareness and differentiation,
º •
º Introducing new products and services, and
º •
º Geographic expansion.
º •
º Margin improvement through:
º •
º Materials Management programs, and
º •
º Six Sigma and other productivity-enhancing actions.
º •
º Financial initiatives, including:
º •
º Effective tax rate reduction,
º •
º Debt reduction, and
º •
º Improved asset utilization and return on capital.
These initiatives are focused on accomplishing three major performance
goals:
º •
º Deliver premier customer service,
º •
º Drive operational excellence, and
º •
º Meet financial objectives.
Premier Customer Service
American Standard accomplishes its goal of delivering premier customer
service by identifying and meeting customer needs with:
º •
º Superior solutions through high-quality products and services,
º •
º Industry-leading order-to-delivery cycle times,
º •
º A global presence to serve global customers,
º •
º Technological leadership and product innovation to meet changing
customer needs, and
º •
º An efficient and flexible distribution system.
2
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:
º •
º Improve design processes,
º •
º Improve manufacturing processes,
º •
º Reduce unit costs, and
º •
º Improve workplace safety,
resulting in:
º •
º Increased productive capacity,
º •
º Improved quality,
º •
º Improved speed to market, and
º •
º 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,
3
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:
º •
º Reduce the effective tax rate,
º •
º Reduce debt, and
º •
º 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
4
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
5
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.
6
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
7
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.
8
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
9
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."
10
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:
Business Segment Trademark
Air Conditioning Systems and Services TRANE
AMERICAN STANDARD
Bath and Kitchen AMERICAN STANDARD
IDEAL STANDARD
STANDARD
PORCHER
JADO
ARMITAGE SHANKS
DOLOMITE
AMERICAST
MELOH
VENLO
BORMA
CLEARTAP™
VENESTA
SOTTINI
Vehicle Control Systems WABCO
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
11
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
12
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
13
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."
14
|