SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-475
A. O. SMITH CORPORATION
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 23972, Milwaukee, Wisconsin 53223-0972
Telephone: (414) 359-4000
Securities registered pursuant to Section 12(b) of the Act:
Shares of Stock
Outstanding Name of Each Exchange
Title of Each Class February 22, 1995 on Which Registered
Class A Common Stock 5,980,174 American Stock Exchange
(par value $5.00 per
share)
Common Stock 14,933,247 New York Stock Exchange
(par value $1.00 per
share)
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 and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $13,695,637 for Class A Common Stock and $309,138,452 for
Common Stock as of February 22, 1995.
Documents Incorporated by Reference:
1. Portions of the corporation's definitive Proxy Statement dated
March 1, 1995 for an April 5, 1995 Annual Meeting of
Stockholders are incorporated by reference in Part III.
<PAGE>
PART I
ITEM 1 - BUSINESS
A. O. Smith Corporation, a Delaware corporation organized in 1916, its
subsidiaries and its affiliates (hereafter collectively called the
"Corporation" unless the context otherwise requires) are engaged in four
business segments. These segments are Original Equipment Manufacturer
("OEM") Products, Water Products, Fiberglass Products, and Agricultural
Products.
The corporation's principal OEM Products business is the Automotive
Products Company, a supplier of truck and automobile structural components
and assemblies. OEM Products also includes the Electrical Products
Company which produces fractional horsepower and hermetic electric motors.
The Water Products Company is a leading manufacturer of residential and
commercial gas, oil, and electric water heating systems. Smith Fiberglass
Products Inc. manufactures reinforced thermosetting resin piping.
Agricultural Products consists of two units. A. O. Smith Harvestore
Products, Inc. (Harvestore) is a manufacturer of agricultural feed storage
and handling systems, for which AgriStor Credit Corporation (AgriStor)
provides financing, and industrial and municipal water and bulk storage
systems. The corporation intends to sell the agricultural business and is
in the process of liquidating AgriStor. Information regarding industry
segments is provided in Note 13 to the Consolidated Financial Statements
which appear elsewhere herein.
The following table summarizes revenues by segment for the corporation's
operations. This segment summary and all other information presented in
this section should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto which appear elsewhere herein.
Years Ended December 31 (Dollars in Millions)
1994 1993 1992 1991 1990
OEM Products
Automotive Products
Truck frames $ 559.4 $ 487.2 $ 419.1 $318.5 $338.4
Axles 21.7 17.6 36.9 55.2 63.8
Other 141.6 101.5 71.6 52.4 60.1
------- ------- -------- -------- ------
Total Automotive 722.7 606.3 527.6 426.1 462.3
Electrical Products 281.2 242.5 225.6 205.1 222.2
------- ------- -------- -------- ------
Total OEM Products 1,003.9 848.8 753.2 631.2 684.5
Water Products 271.5 248.1 215.2 194.6 197.6
Fiberglass Products 57.9 58.9 43.9 53.9 53.1
Agricultural Products 40.2 38.1 34.0 36.1 42.4
------- ------- -------- -------- ------
Total Corporation $1,373.5 $1,193.9 $1,046.3 $915.8 $977.6
======= ======= ======== ======== ======
OEM PRODUCTS
Automotive Products
Automotive sales in 1994 of $722.7 million, or 53 percent of total
corporation revenues, increased over 19 percent from previous year sales
due to continued strength in the North American market for both the light
and heavy truck segments. As a result of increased volume, Automotive
Products showed improved operating profits over 1993.
Automotive Products has contracts, some of which are subject to economic
price adjustments, to supply frame assemblies and components to Ford,
Chrysler and General Motors in the passenger car and light truck class.
Because of the importance of light vehicle sales to this unit, it is
affected by general business conditions in the North American automotive
industry. The company is also a supplier of truck frames to most domestic
producers of medium and heavy-duty trucks, such as Ford, Navistar
International, General Motors, Freightliner and Paccar.
The largest product group within Automotive Products continues to be truck
frames and components which accounted for slightly more than 77 percent of
Automotive Products' sales and almost 41 percent of the corporation's
revenues. The company continues to hold its lead position in truck frame
manufacturing in the United States and Canada, supplying over 30 percent
of the 1994 market.
In 1994, the Granite City, Illinois, plant began shipping engine cradles
for a new Ford Windstar mini-van and Lincoln Continental, and for the new
Ford Contour and Mercury Mystique. The Milan, Tennessee, plant began
building trailing axles for the Ford mini-van and a new structural
assembly for Toyota U.S.A.
In 1995, the company plans three new product programs and two major
vehicle redesign programs including; full-frame assemblies for the
Chevrolet Tahoe/GMC Yukon and the extended cab version of the Dodge Ram
pickup truck; side rail assemblies for a new Nissan pickup truck; side
rails for a new Ford class 8 truck; and new engine cradles for the 1996
model year Ford Taurus/Mercury Sable.
In February 1995, the company announced it had signed a letter of intent
with China First Auto Works Corporation to form a joint venture company to
manufacture automotive structural products for China's automobile market.
The two organizations are currently preparing a feasibility study and
depending upon the outcome of the study, the new joint venture company
could begin production in January of 1997. Although details of the joint
venture remain to be worked out, A. O. Smith would be the majority
ownership partner.
The company's products are sold in highly competitive markets with its
principal competitors including Dana Corporation, Magna International, and
vertically integrated units of Ford, Chrysler and General Motors.
The following table summarizes sales to the company's three largest
automotive customers:
Years Ended December 31 (Dollars in Millions)
1994 1993 1992 1991 1990
Ford
Sales $325.6 $266.9 $219.3 $177.5 $179.8
Percentage of total
Corporation revenues 23.7% 22.4% 21.0% 19.4% 18.4%
Chrysler
Sales $177.6 $118.2 $ 96.7 $ 75.8 $ 96.8
Percentage of total
Corporation revenues 12.9% 9.9% 9.2% 8.3% 9.9%
General Motors
Sales $135.9 $132.0 $148.1 $115.6 $136.3
Percentage of total
Corporation revenues 9.9% 11.1% 14.2% 12.6% 13.9%
Total 46.5% 43.4% 44.4% 40.3% 42.2%
Electrical Products
The corporation's sales of electric motors which are included in the OEM
Product segment totalled $281.2 million, or 20 percent of total
corporation revenues in 1994. This represents an increase of over 15
percent above the previous year's sales of $242.5 million. The heating,
ventilating, and air conditioning (HVAC) industry entered 1994 with
relatively low finished goods inventories, so that sales growth translated
into increased demand for motors. Electrical Products was able to take
further advantage of the strong HVAC market by securing additional
business in the room air conditioning industry. Sales of hermetic
compressor motors and fractional horsepower fan and blower motors grew
significantly over the prior year.
With its transfer of production to lower cost plants largely complete,
Electrical Products' operations contributed substantially to the company's
improved profits. Its plants were able to handle the higher volumes
without a disproportionate increase in costs, holding fixed costs at 1993
levels. Notable improvements came from the Mebane, North Carolina, plant,
which completed the transfer of hermetic motor production early in 1994
and was able to increase output and on-time performance throughout the
year. The company's Mexican operations set unit production records in
1994.
Product lines include jet pump motors sold to manufacturers of home water
systems, swimming pools, hot tubs and spas plus fan motors used in
furnaces, air conditioners, and ceiling fans as well as fractional
horsepower motors used in other consumer products. Hermetic motors are
sold to U.S. manufacturers of compressors and are used in air conditioning
and refrigeration systems. In addition to selling its products directly
to OEMs, Electrical Products also markets its products through a
distributor network which sells to both OEMs and the related after-market.
Over 50% of the market is derived from the less cyclical replacement
business with the remainder being impacted by general business conditions
in the new construction market.
The company's principal products are sold in highly competitive markets
with its major competitors being Emerson Electric, General Electric,
Magnetek, Inc., Fasco, and vertically integrated customers.
WATER PRODUCTS
Sales in 1994 were a record $271.5 million which represented 20 percent of
total corporation revenues. Sales were up over nine percent compared to
1993 sales of $248.1 million, as the company gained market share in both
residential and commercial water heaters. Operating profits also set new
highs, establishing a record for the fourth time in five years.
Water Products markets residential gas and electric water heaters through
a diverse network of plumbing wholesalers. More than 80 percent of Water
Products' sales is in the less cyclical replacement market although the
new housing market is an important segment as well. The residential water
heater market remains highly competitive with Water Products and three
other manufacturers supplying over 90 percent of market requirements.
Water Products markets commercial water heating systems through a diverse
network of plumbing wholesalers and manufacturers' representatives.
Commercial water heating systems are used in a wide range of applications
including schools, nursing homes, hospitals, prisons, hotels, motels,
laundries, restaurants, stadiums, amusement parks, car washes, and other
large users of hot water. The commercial market is characterized by
competition from a broader range of products and competitors than occurs
in the residential market.
Water Products Company has signed a joint venture letter of intent to
explore the feasibility of manufacturing water heaters in China.
The principal competitors in the Water Products segment are Rheem
Manufacturing, State Industries, Bradford-White and The American Water
Heater Group (formerly SABH, Inc.). Water Products believes it continues
to be the largest manufacturer of commercial water heaters and is closing
on being the third largest manufacturer of residential water heaters in
the United States.
FIBERGLASS PRODUCTS
Sales of Smith Fiberglass Products Inc. totaled $57.9 million in 1994;
down slightly from 1993 sales of $58.9 million. The company overcame
weakness in the domestic oil industry, increased competition in the
important service station market, and a dearth of large orders to post
this performance. In 1994, the company was able to record profits
comparable to 1993 even though 1993 benefitted from a one-time gain
related to a recovery in a patent infringement suit.
Smith Fiberglass manufactures reinforced thermosetting resin piping used
to carry corrosive materials. Typical applications include chemical and
industrial plant piping, oil field piping, and underground distribution at
gasoline service stations. Smith Fiberglass also manufactures high
pressure fiberglass piping systems used in the petroleum production
industry. Its products are sold through a network of distributors.
Smith Fiberglass installed a number of test lines in oil fields in
northeastern China, and the possibility of a joint venture could become a
reality in 1995.
Smith Fiberglass has two principal competitors which are Ameron
Corporation and Fibercast Company.
AGRICULTURAL PRODUCTS
Agricultural Products includes Harvestore and AgriStor. Harvestore sales
in 1994 were $37.4 million, which were about 12 percent higher than 1993
sales of $33.3 million. The increase was attributable to demand for water
and agricultural waste storage systems due to growing environmental
concerns. Harvestore's operating profits improved due to the higher
volumes. AgriStor revenues in 1994 were $2.9 million, down 40 percent
from $4.8 million in 1993. The lower revenues resulted from a decline in
the size of AgriStor's lending portfolio and represents management's
continued progress toward its goal to downsize the agricultural finance
business. Agricultural Products sustained a pretax loss of $5.8 million
between Harvestore and AgriStor operations which includes additional
reserve provisions taken during the year. The net after-tax loss for the
agricultural businesses was $.17 per share for both 1994 and 1993.
Harvestore manufactures and markets agricultural feed storage and handling
systems, and industrial and potable water and bulk storage systems.
Harvestore products are distributed through a network of independent
dealers. AgriStor assists farm customers in the financing of
Harvestore/R/ equipment out of offices in Milwaukee, Wisconsin; Columbus,
Ohio; and Memphis, Tennessee.
Raw Material
Raw materials for the corporation's operations, which consist primarily of
steel, copper and aluminum, are generally available from several sources
in adequate quantities.
Seasonality
The corporation's third quarter revenues and earnings have traditionally
been lower than the other quarters due to Automotive Products' model year
changeovers and customer plant shutdowns.
Research and Development, Patents and Trademarks
The corporation conducts new product and process development at its
Corporate Technology Center in Milwaukee, Wisconsin, and at its operating
unit locations. The objective of this activity is to increase the
competitiveness of A. O. Smith and generate new products to fit the
corporation's market knowledge. Total expenditures for research and
development in 1994, 1993 and 1992 were approximately $9.2 million, $7.6
million, and $6.5 million, respectively.
The corporation owns and uses in its businesses various trademarks, trade
names, patents, trade secrets, and licenses. While a number of these are
important to the corporation, it does not consider a material part of its
business to be dependent on any one of them.
Employees
The corporation and its subsidiaries employed approximately 12,100 persons
in its operations as of December 31, 1994. During 1995, a number of labor
contracts are scheduled to be negotiated. The majority of these contracts
are related to the Automotive Products Company.
Backlog
Normally none of the corporation's operations sustain significant
backlogs. However, the Automotive Products Company has long term
contracts to supply parts to the large auto and truck manufacturers.
Environmental Laws
Compliance with federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of
the environment has not had a material effect and is not expected to have
a material effect upon the capital expenditures, earnings, or competitive
position of the corporation. See ITEM 3.
Foreign Sales
Total export sales from the U.S. were $114 million, $71 million, and $48
million in 1994, 1993, and 1992, respectively. The increase in export
sales from 1993 to 1994 was largely attributable to increased Automotive
Products Company exports to Canada. The amount of revenue and operating
profit derived from, or the assets attributable to, sales outside the
North American geographic area are not a substantial portion of total
corporation operations.
ITEM 2 - PROPERTIES
The corporation manufactures its products in 35 locations worldwide.
These facilities have an aggregate floor space of approximately 8,930,000
square feet and are owned by the corporation with the exception of the
following leased facilities: three Automotive Products plants, including
a plant of approximately 149,000 square feet in Corydon, Indiana, a plant
of approximately 123,000 square feet in Rockford, Illinois and a third
plant of approximately 41,000 square feet located in Barrie, Ontario,
Canada; a Water Products Company plant with floor space of approximately
84,000 square feet located in Seattle, Washington and a second plant of
approximately 100,000 square feet in El Paso, Texas; and a Smith
Fiberglass plant in Little Rock, Arkansas, with floor space of
approximately 45,000 square feet. A 258,000 square foot facility for the
Electrical Products Company in Mt. Sterling, Kentucky, a 533,000 square
foot facility for the Automotive Products Company in Milan, Tennessee, and
a 263,000 square foot facility for the Smith Fiberglass plant in Little
Rock, Arkansas are being acquired on a lease-purchase basis and have been
capitalized for accounting purposes.
Of the corporation's facilities, thirteen are foreign plants with
approximately 1,145,000 square feet of space, including approximately
442,000 square feet which are leased.
The manufacturing plants presently operated by the corporation are listed
below by industry segment. This data excludes five plants operated by a
Mexican affiliate.
United States Foreign
OEM Products
-Automotive Products Milwaukee, WI; Milan, TN; Barrie, Canada
(5,026,000 sq. ft.) Granite City, IL; Belcamp,
MD; Corydon, IN; Rockford,
IL (2); Bellevue, OH; Bowling
Green, KY; Williston, FL
-Electrical Products Tipp City, OH; Mebane, NC; Bray, Ireland;
(1,641,000 sq. ft.) Upper Sandusky, OH; Acuna, Mexico;
Mt. Sterling, KY Monterrey, Mexico;
Juarez, Mexico (5)
Water Products McBee, SC; Seattle, WA; Stratford, Canada (2);
(1,402,000 sq. ft.) El Paso, TX; Florence, KY Veldhoven,
The Netherlands;
Juarez, Mexico
Fiberglass Products Little Rock, AR (2);
(437,000 sq. ft.) Wichita, KS
Agricultural Products DeKalb, IL
(424,000 sq. ft.)
The principal equipment at the corporation's facilities consist of
presses, welding, machining, slitting and other metal fabricating
equipment, winding machines, and furnace and painting equipment. The
corporation regards its plant and equipment as well-maintained and
adequate for its needs. Multishift operations are used where necessary.
ITEM 3 - LEGAL PROCEEDINGS
As of December 31, 1994, the corporation and A. O. Smith Harvestore
Products, Inc. (Harvestore), a subsidiary of the corporation, were
defendants in 23 cases alleging damages for economic losses claimed to
have arisen out of alleged defects in Harvestore animal feed storage
equipment. Some plaintiffs are seeking punitive as well as compensatory
damages. The corporation believes that a significant number of these
claims were related to the deteriorated general farm economy, including
those filed in 1994. In 1994, seven new cases were filed and ten cases
were concluded. The corporation and Harvestore continue to vigorously
defend these cases.
Two of the 23 pending cases contain class action allegations. One of the
cases is a New York State court action which names the corporation,
Harvestore, and two of its dealers as defendants. The court has not
certified the class and has granted the defendants' motions dismissing
some of the plaintiffs' allegations. The plaintiffs are appealing the
court's rulings.
The second case is pending in the Federal District Court for the Southern
District of Ohio. It was filed in August 1992 and the court, in March
1994, conditionally certified it as a class action on behalf of purchasers
and lessees of Harvestore structures manufactured by the corporation and
Harvestore. A Notice of the certification was mailed to the purported
class members in the third quarter of 1994, with approximately 5,500 "opt
out" forms being filed with the court by the August 31, 1994 deadline, the
impact of which is unknown. Discovery in the case is ongoing and a trial
of the liability issues only is scheduled to begin on October 16, 1995.
Damages would be tried at a later date and only after a liability finding.
Based on the facts currently available to management and its prior
experience with lawsuits alleging damages for economic loss resulting from
use of the Harvestore animal feed storage equipment, management is
confident that the class action suits can be defeated and that the
lawsuits do not represent a material threat to the corporation. The
corporation believes that any damages, including any punitive damages,
arising out of the pending cases are adequately covered by insurance and
recorded reserves. No range of reasonably possible losses can be
estimated because, in most instances, the complaint is silent as to the
amount of the claim or states it as an unspecified amount in excess of the
jurisdictional minimum. The corporation reevaluates its exposure
periodically and makes adjustment of its reserves as appropriate.
A lawsuit for damages and declaratory judgments in the Circuit Court of
Milwaukee County, State of Wisconsin, in which the corporation and
Harvestore are plaintiffs is pending against three insurance companies for
failure to pay in accordance with liability insurance policies issued to
the corporation. The insurers have failed to pay, in full or in part,
certain judgments, settlements, and defense costs incurred in connection
with pending and closed lawsuits alleging damages for economic losses
claimed to have arisen out of alleged defects in Harvestore animal feed
storage equipment. While the corporation has, in part, assumed
applicability of this coverage, an adverse judgment should not be material
to its financial condition.
As part of its routine business operations, the corporation disposes of
and recycles or reclaims certain industrial waste materials, chemicals and
solvents at disposal and recycling facilities which are licensed by
appropriate federal, state and local agencies. In some instances, when
those facilities are operated such that hazardous substances contaminate
the soil and groundwater, the United States Environmental Protection
Agency ("EPA") will designate the contaminated sites as Superfund sites,
and will designate those parties which are believed to have contributed
hazardous materials to the sites as potentially responsible parties
("PRPs"). Under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA" or the "Superfund" law) and similar state
laws, each PRP that contributes hazardous substances to a Superfund site
is jointly and severally liable for the costs associated with cleaning up
the site. Typically, PRPs negotiate with the EPA and those state
environmental agencies that are involved in the matter regarding the
selection and implementation of a plan to clean up the Superfund site and
the terms and conditions under which the PRPs will be involved in process.
PRPs also negotiate with each other regarding allocation of each PRP's
share of the clean up costs.
The corporation has compiled information regarding the cost to clean up
all of the sites where the corporation has been designated a PRP by the
EPA or a comparable state agency. The following estimates include amounts
that have already been spent at the sites and estimates of amounts that
will be spent to complete remediation activities. The corporation
estimates that the total cost to clean up all of the sites is
approximately $252.5 million. The corporation's estimate of the portion
of the total for which the corporation is or may be responsible is
approximately $4.3 million, of which $3.5 million has already been paid by
the corporation and its insurance companies. The balance of the estimated
cleanup costs is believed to be adequately covered by insurance and
reserves which have been established by the corporation. To the best of
the corporation's knowledge, the insurers have the financial ability to
pay any such covered claims, and the corporation has not incorporated any
insurance proceeds in the calculation of its reserves for which recovery
is not considered probable. The corporation reevaluates its exposure
periodically and makes adjustment of its reserves as appropriate. With
the exception of the former mining site in Colorado discussed below, the
amount allocated to the corporation at any specific site, or in the
aggregate for all sites, is not expected to be material. A judgment as to
materiality of the corporation's exposure at the former mining site in
Colorado is premature given the early stage of the investigation, the
uncertainty regarding appropriate remediation and its costs, and the
potential liability of governmental agencies in this case. Accordingly,
it is impossible at this time to reasonably estimate the corporation's
liability at this site, if any.
The corporation is currently involved as a PRP in judicial and
administrative proceedings initiated on behalf of the EPA seeking to clean
up the environment at fifteen Superfund sites and to recover costs the EPA
has or will incur as a result of the clean up. Certain state
environmental agencies have also asserted claims to recover their clean up
costs in some of these actions. The sites are as follows:
Two separate sites in Kentucky involving related storage and disposal
facilities. Proceedings were commenced on behalf of the EPA in the
United States District Court for the District of Kentucky, Louisville
Division in March 1988 with respect to these sites. A consent decree
allocating liability among the PRPs for costs of remediation at the
sites and the response costs of the EPA and the Commonwealth of
Kentucky was executed by the corporation in September 1993. The
consent decree was lodged by the Court in 1994 and the corporation
paid the entire amount allocated to it as its share of the clean up
costs. The corporation remains liable for a share of the cost
overruns, but none are anticipated at this time.
A site in Indiana used for storage, treatment, recycling, and disposal
of waste chemicals. In January 1984, the Company and several other
PRPs became parties to an action that had been pending in the United
States District Court for the District of Indiana since January 1980
regarding this site. In July 1988, the corporation executed a consent
decree allocating liability among the PRPs for costs of remediation at
the site and the EPA's response costs. Remediation is well underway
at the site.
A municipal landfill in Michigan is the subject of a proceeding that
was filed on behalf of the EPA in the United States District Court for
the Western District of Michigan in this case in April 1991. In 1994,
the EPA became concerned that conditions at the site may be
deteriorating and required that actions be taken to remove the point
source contaminants immediately. The actions the EPA required were
taken and the point source contaminants were removed by the end of
1994. Work to determine the extent to which a long term groundwater
remedy may be required will be undertaken in 1995.
A county owned incinerator, ash disposal lagoon, and landfill in Ohio.
A proceeding was commenced on behalf of the EPA in the United States
District Court for the Southern District of Ohio, Western Division
regarding this site in December 1989. The final remedy has been
selected and the consent decree, which was executed by the PRPs and
the EPA, was entered by the Court in March 1993. Work on the remedy
began shortly after the consent decree was entered and has been
progressing on schedule.
An industrial and municipal waste landfill in Wisconsin. Separate
proceedings were commenced on behalf of the EPA and the State of
Wisconsin in the United States District Court for the Eastern District
of Wisconsin in November 1991 relative to this site. The two actions
were consolidated into a single matter in 1992. The consent decree
entered into by the PRPs, the EPA, and the State of Wisconsin divides
the site into two operable units, the first of which deals with soil
remediation and an interim groundwater remedy and the second of which
is anticipated to deal with the long term groundwater remedy. The cap
on the landfill was completed in 1994 and work on the interim
groundwater remedy is underway. At this time, the extent to which
long term groundwater treatment will be required with respect to the
second operable unit has not been determined.
A drum disposal site in Wisconsin. In September 1992, the corporation
joined a group of PRPs that attempted to negotiate with other PRPs and
the EPA to come to agreement as to the respective liabilities of the
PRPs involved at the site, the implementation of a plan to clean up
the site, and the terms and conditions under which the PRPs would be
involved in the process. In May 1993, after those negotiations
stalled, the EPA issued an order to 17 of the PRPs, one of which was
the corporation, under Section 106 of CERCLA requiring them to take
certain measures to clean up the site. Since then, negotiations
resumed and settlement was reached among the PRPs with respect to
some, but not all of the issues related to liability under the Section
106 order. In 1994, the cap on the landfill was completed and
construction of the groundwater monitoring and treatment system began.
A former mining site in Colorado. The corporation held the majority
of stock of a Colorado mining operation for a period of time beginning
in 1936 and ending in 1942. Because of that stock ownership, the
corporation was notified by the EPA in March 1993 that it is a PRP at
the site. Estimates of clean up costs at this site have been as high
as $120,000,000. The corporation believes that a large majority of
those costs relate to contamination caused by a corporation that
worked the mine in the 1980s, and the EPA has indicated that it does
not believe the corporation is responsible to remediate the damage
caused by those operations. The EPA is not bound by that initial
determination and may seek to impose joint and several liability upon
the PRPs at the site. However, the corporation believes that it has
valid defenses to any liability at this site.
A manufacturing facility in Indiana. In January 1994, the corporation
received a general notice of potential liability from the EPA
concerning a plant site the corporation operated in Indiana for a
brief period of time in the mid-1980s. A viable business has a valid
obligation to the corporation to investigate and remediate
contamination at this site at the cost and expense of the other
business and that business has been working with the EPA to remediate
the facility. The EPA has not required the corporation to take any
action with respect to the site following the corporation's response
to the EPA's initial requests for information about its involvement at
the site. Accordingly, the corporation intends to monitor activity at
the facility, but does not anticipate further involvement at this
time.
A drum recycling facility. In 1992, the EPA commenced an action
against a small group of PRPs in the United States District Court for
the Western District of Michigan to recover its response costs and
require the PRPs to clean up a Superfund site in Michigan. Those PRPs
filed a motion for summary judgment in this matter claiming they were
not responsible for cleaning up the site. The Court granted the
motion and the government has appealed. Those PRPs had previously
commenced a third party contribution action against approximately
eighty other parties which were involved at the subject site but were
not named as defendants in the EPA's action. The corporation became a
third party defendant to that action in January 1994. If the summary
judgment is upheld by the Court of Appeals, the action against the
corporation and the other third party defendants will be dismissed.
CERCLA provides that the EPA has authority to enter into de minimis
settlement agreements with those PRPs that are believed to have
contributed relatively small ("de minimis") amounts of materials to a
Superfund site as compared to major contributors at the site. The
corporation has settled its liability at sites in Indiana and Arkansas as
a de minimis party. Under those settlement agreements, the corporation
may have additional liability to participate in cleaning up the affected
site under certain circumstances, such as: changes in the scope of
remedial action are required to the extent that costs to clean up the site
are substantially increased, or new information is discovered that
indicates that the corporation contributed more or different materials to
the site than was previously believed. There is no information at this
time which would indicate that the corporation will incur any material
additional liability at either site. Further, the corporation has joined
with similarly situated PRPs to negotiate settlements as de minimis
parties at three sites in Indiana and Illinois.
Over the past several years, the corporation has self-insured a portion of
its product liability loss exposure and other business risks. The
corporation has established reserves which it believes are adequate to
cover incurred claims. For the year ended December 31, 1994, the
corporation had $60 million of third-party product liability insurance for
individual losses in excess of $1.5 million and for aggregate losses in
excess of $10 million.
Reference also Note 12 in the Notes to the Consolidated Financial
Statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of 1994. The voting results from the Annual Meeting of
Stockholders held on April 13, 1994 were previously reported in the
corporation's quarterly report on Form 10-Q for the quarter ended June 30,
1994.
EXECUTIVE OFFICERS OF THE CORPORATION
Pursuant to General Instruction of G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this report in lieu of
being included in the company's Proxy Statement for its 1995 Annual
Meeting of Stockholders.
ROBERT J. O'TOOLE
Chairman of the Board of Directors, President, and Chief Executive
Officer
Mr. O'Toole, 54, became chairman of the board of directors on March
31, 1992. He is a member of the Investment Policy Committee of the
board. He was elected chief executive officer in March 1989. He was
elected president, chief operating officer and a director in 1986.
From November 1990 to May 1992, he served as head of the A. O. Smith
Automotive Products Company, a division of the corporation. Mr.
O'Toole joined the corporation in 1963. He is a director of Firstar
Bank Milwaukee, N.A.
GLEN R. BOMBERGER
Executive Vice President, Chief Financial Officer, and Director
Mr. Bomberger, 57, has been a director and executive vice president
and chief financial officer of the corporation since 1986. He is a
member of the Investment Policy Committee of the board of directors.
Mr. Bomberger joined the corporation in 1960. He is currently a
director and vice president-finance of Smith Investment Company. He
is a director of Portico Funds, Inc.
JOHN A. BERTRAND
President - A. O. Smith Electrical Products Company
Mr. Bertrand, 56, has been president of A. O. Smith Electrical
Products Company, a division of the corporation, since 1986. Mr.
Bertrand joined the corporation in 1960.
CHARLES J. BISHOP
Vice President - Corporate Technology
Dr. Bishop, 53, has been vice president-corporate technology since
1985. Dr. Bishop joined the corporation in 1981.
DONALD M. HEINRICH
Vice President - Business Development
Mr. Heinrich, 42, was elected vice president-business development in
October 1992. Previously, from 1990 to 1992, he was president of DM
Heinrich & Co., a financial advisory firm. From 1983 to 1990, he was
senior vice president of Shearson Lehman Brothers, an investment
banking firm.
JOHN J. KITA
Treasurer and Controller
Mr. Kita, 39, was elected treasurer and controller on February 6,
1995. Prior thereto, he served as assistant treasurer since he joined
the corporation in 1988.
SAMUEL LICAVOLI
President - A. O. Smith Automotive Products Company
Mr. Licavoli, 53, was appointed president of A. O. Smith Automotive
Products Company, a division of the corporation, in May 1992.
Previously, from 1988 to 1992, he was senior vice president, and from
1984 to 1988, vice president of operations for Walker Manufacturing
Company's OEM division, an automotive products company.
ALBERT E. MEDICE
Vice President - Europe
Mr. Medice, 51, was elected vice president - Europe on February 6,
1995. Previously, from 1990 to 1995, he was the general manager of A.
O. Smith Electric Motors (Ireland) Ltd., a subsidiary of the
corporation. Mr. Medice joined the corporation in 1986 as vice
president-marketing for its Electrical Products Company division.
EDWARD J. O'CONNOR
Vice President - Human Resources and Public Affairs
Mr. O'Connor, 54, has been vice president-human resources and public
affairs for the corporation since 1986. He joined the corporation in
1970.
W. DAVID ROMOSER
Vice President, General Counsel and Secretary
Mr. Romoser, 51, was elected vice president, general counsel and
secretary in March 1992. Prior thereto, he was vice president,
general counsel and secretary from 1988 to 1992 and general counsel
and secretary from 1982 to 1988 of Amsted Industries Incorporated, a
manufacturer of railroad, building and construction and industrial
products.
JAMES C. SCHAAP
President - A. O. Smith Harvestore Products, Inc.
Mr. Schaap, 53, has been president of A. O. Smith Harvestore Products,
Inc., a subsidiary of the corporation, since 1988. He joined the
corporation in 1977.
WILLIAM V. WATERS
President - Smith Fiberglass Products Inc.
Mr. Waters, 60, has been president of Smith Fiberglass Products Inc.,
a subsidiary of the corporation, since 1988. He joined the
corporation in 1960.
MICHAEL W. WATT
President - A. O. Smith Water Products Company
Mr. Watt, 50, was named president of A. O. Smith Water Products
Company, a division of the corporation, on January 1, 1994.
Previously, he was executive general manager from June 1988 to
June 1991 and president from June 1991 to September 1993 of SABH
International Group, a manufacturer of water heaters.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Class A Common Stock of A. O. Smith
Corporation stock is listed on the American Stock Exchange. As of
December 14, 1994, the Common Stock began trading on the New York
Stock Exchange. The symbols for these classes of the corporation's
stock are: SMCA for the Class A Common Stock and SMC for the Common
Stock. Firstar Trust Company, P. O. Box 2077, Milwaukee, Wisconsin
53201 serves as the registrar, stock transfer agent and the dividend
reinvestment agent for both classes of the corporation's stock.
Quarterly Common Stock Price Range
1994 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Class A Common
High 39-1/4 34-1/2 30 27-1/8
Low 30-3/8 24-3/4 24-1/2 21-1/2
Common Stock
High 40 34-1/2 29-7/8 27-1/8
Low 30 25 23-3/4 21-1/8
1993 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Class A Common
High 22-7/16 26-1/2 30 35-7/8
Low 17-7/16 19-1/16 23-1/4 26-3/4
Common Stock
High 22-5/8 26-7/8 30 35-3/4
Low 17-3/8 18-1/2 23-1/8 26-1/2
(b) Holders. As of January 31, 1995, the approximate number of
holders of Class A Common Stock and Common Stock were 700 and 1300,
respectively.
(c) Dividends. Dividends paid on the common stock are shown in
Note 14 to the Consolidated Financial Statements appearing elsewhere
herein. The corporation's credit agreements contain certain
conditions and provisions which restrict the corporation's payment of
dividends. Under the most restrictive of these provisions, retained
earnings of $93.1 million were unrestricted as of December 31, 1994.
ITEM 6 - SELECTED FINANCIAL DATA
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net Revenues $1,373,546 $1,193,870 $1,046,345 $915,833 $977,586
Earnings (loss)
Continuing operations 57,347 42,678 27,206 3,450 22,397
Cumulative effect of
accounting changes -- -- (44,522) -- --
Net earnings (loss) 57,347 42,678 (17,316) 3,450 22,397
Net earnings (loss)
applicable to common
stock 57,347 42,678 (18,172) 25 18,824
Primary earnings (loss)
per share of common stock
Earnings before cumula-
tive effect of
accounting changes $2.75 $2.08 $1.40 $ .00 $1.19
Realization of tax credits .00 .00 .08 .00 .00
------ ------ ------ ----- -----
Earnings before effect of
postretirement benefits 2.75 2.08 1.48 .00 1.19
Change in postretirement
benefits, net of taxes .00 .00 (2.44) .00 .00
----- ----- ----- ----- -----
Net earnings (loss) $2.75 $2.08 $(.96) $ .00 $1.19
===== ===== ===== ===== =====
Fully diluted earnings
(loss) per share of common
stock
Earnings before cumulative
effect of accounting
changes $2.75 $2.08 $ 1.33 $ .00 $1.12
Realization of tax credits .00 .00 .08 .00 .00
----- ----- ------ ----- -----
Earnings before effect of
postretirement benefits 2.75 2.08 1.41 .00 1.12
Change in postretirement
benefits, net of taxes .00 .00 (2.25)* .00 .00
----- ----- ----- ----- -----
Net earnings (loss) $2.75 $2.08 $(.84)* $ .00 $1.12
===== ===== ===== ===== =====
Total assets 847,857 823,099 768,987 754,332 788,292
Long-term debt, including
finance subsidiary 166,126 190,574 236,621 249,186 244,710
Total stockholders'
equity 312,745 269,630 244,656 266,897 265,429
Cash dividends per
common share .50 .42** .40 .40 .40
<FN>
* For 1992, the net loss per share amounts are antidilutive because of the conversion of preferred stock.
** Excludes special dividend of .25 per share (split adjusted).
</TABLE>
As discussed in Notes 9 and 10 to the Consolidated Financial Statements,
the corporation changed its method of accounting for postretirement
benefits other than pensions and income taxes effective January 1, 1992.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Review
A. O. Smith Corporation achieved record earnings of $57.3 million or $2.75
per share in 1994 versus $42.7 million or $2.08 per share in 1993.
Automotive Products, Electrical Products, and Water Products established
new sales records in 1994. Details of individual unit performance will be
discussed later in this section.
Working capital at December 31, 1994 was $113.6 million compared to $80.7
million and $62.6 million at December 31, 1993 and 1992, respectively.
Higher sales in 1994 resulted in increased working capital requirements,
particularly for accounts receivable, customer tooling, and inventory,
which were modestly offset by a related increase in trade payables. Higher
sales in 1993 versus 1992 also led to increased working capital
requirements, particularly for accounts receivable and inventory, which
were partially offset by related increases in trade payables and accrued
wages and benefits.
Capital expenditures in 1994 were the highest ever recorded at $76.1
million compared to $54.7 million in 1993 and $46.9 million in 1992.
Production equipment acquired under a master operating lease agreement
totalled $12.7 million in 1994, $10.9 million in 1993, and $8.1 million in
1992. Capital spending increased in 1994 due to new Automotive Products
Company programs.
The corporation projects it will use approximately $80 million of
internally generated funds and $10 million of production equipment leases
to support 1995 capital acquisitions of $90 million. The majority of this
money will be spent by Automotive Products Company to support new product
programs.
Long-term debt, excluding debt of the finance subsidiary, decreased from
$148.9 million at the end of 1993 to $136.8 million at the end of 1994.
The long-term debt of the finance subsidiary has been reduced from
$41.7 million at December 31, 1993 to $29.4 million at December 31, 1994
as the planned liquidation of AgriStor Credit corporation continued. As a
result of these reduced debt levels and 1994 earnings, the debt-to-equity
ratio, excluding the finance subsidiary, decreased from 55.2 percent at
December 31, 1993 to 43.7 percent at the end of 1994. The corporation
anticipates that, assuming no major acquisitions, debt and debt-to-equity
levels will decline further during 1995.
On April 5, 1994, a $12.5 million term loan automatically converted from
an 8.9 percent fixed rate to a floating interest rate and the maturity was
extended from April 1996 to April 1999. In addition, on June 15, 1994, the
corporation put in place a $140 million revolving credit agreement which
replaced a $115 million A. O. Smith facility and a $30 million AgriStor
Credit Corporation facility. The term of the agreement was extended two
years to April 3, 1998. The agreement contains lower fees, reduced
borrowing rates, and fewer restrictive covenants.
The corporation uses futures contracts to fix the cost of portions of its
expected raw materials needs, primarily for copper and aluminum, with the
objective of reducing risk due to market price fluctuations. In addition,
the corporation enters into foreign currency forward contracts to minimize
the effect of fluctuating foreign currencies on its income. Differences
between the corporation's fixed price and current market prices on raw
materials contracts are included as part of inventory cost when the
contracts mature. Differences between the corporation's fixed price and
current market prices on currency contracts are recognized in the same
period in which gains or losses from the transactions being hedged are
recognized and, accordingly, no net gain or loss is realized when
contracts mature. The corporation does not engage in speculation in its
derivatives strategies. The effect of these programs was not material on
the results of operations for 1994, 1993, or 1992.
At the present time, the corporation is not a party to any contracts to
manage its exposure to interest rate changes related to its borrowing. The
corporation does not expect interest rate movements to significantly
affect its liquidity or operating results in the foreseeable future. At
December 31, 1994, the corporation's floating rate debt amounted to 43
percent of its total obligations, including lease obligations.
At its December 13, 1994 meeting, the A. O. Smith Corporation Board of
Directors proposed an increase in the amounts of authorized Common and
Class A Stock to 60 million and 14 million shares respectively. This
proposal was made in light of the limitations of the corporation's current
authorizations and to provide for flexibility in potential future
financing. The proposal will be submitted to shareholders for a vote at
the corporation's regular annual meeting to be held on April 5, 1995.
On December 14, 1994, the A. O. Smith Common Stock (SMC) moved from the
American Stock Exchange back to the New York Stock Exchange after an
absence of ten years. This move was made to enhance the recognition of the
corporation's Common Stock.
At its April 14, 1994 meeting, A. O. Smith Corporation's Board of
Directors increased the regular quarterly dividend by 18 percent to $.13
per share on its common stocks (Class A and Common) for the last three
quarterly dividend payments of 1994, resulting in a total of $.50 per
share being paid versus $.42 per share in 1993. A. O. Smith Corporation
has paid dividends on its common stock for 55 consecutive years.
Results of Operations
Revenues in 1994 were $1.37 billion establishing a record and surpassing
1993 revenues of $1.19 billion by 15 percent and 1992 revenues of $1.05
billion by 30 percent. Revenues in all of the corporation's product
operations increased significantly in 1994 with the exception of
Fiberglass Products where sales were slightly less than 1993. The impact
of a strong economy and excellent customer demand was particularly evident
in the OEM segment of the corporation, which is comprised of the
Automotive Products and Electrical Products companies and accounted for
over 86 percent of the increased revenues in 1994.
The corporation's gross profit margin in 1994 was 15.4 percent, reflecting
a trend of continued improvement from gross margins of 14.9 percent, 13.6
percent, and 11.1 percent in 1993, 1992, and 1991, respectively. The
combination of increased volume and improved manufacturing efficiencies at
Electrical Products was the major impetus to the increased margin.
Overtime and other costs to meet higher volumes along with higher new
product launch costs at Automotive prevented additional growth in its 1994
margin.
The Automotive Products Company achieved record sales of $722.7 million in
1994 surpassing the previous record of $606.3 million established in 1993
by $116.4 million or 19.2 percent. Sales in 1992 were $527.6 million.
The reasons for the record setting performance were twofold. First, the
North American automotive market experienced its best year since 1988
despite rising interest rates and limited inventories of popular models.
As in the recent past, strong sales of light trucks in this market
resulted in sustained demand for full frame assemblies and other light
truck-related products manufactured by the Automotive Products Company.
Second, significant growth within the heavy truck industry resulted in
near-capacity production schedules for the company to meet the demand for
heavy truck frame rails.
Operating profits at Automotive were higher in 1994 than 1993, and have
been trending upward since 1991. Although profits improved in 1994, the
increase was substantially less than might be expected when considering
the significant increase in Automotive's volume. The impact of costs
associated with the launch of new product programs and other major model
revisions adversely affected profit margins. The heavy order volume and
associated costs required to meet very high customer demand at the
manufacturing plants resulted in a further erosion of margins. The
company continues to aggressively address production capacity
considerations, and, as the life cycle of new product programs progresses,
margins should improve.
Automotive continues to benefit from being a supplier for vehicles that
have been well-received by the car-buying public. The outlook for 1995
suggests that it will be as challenging as 1994, with three new product
programs and two major vehicle redesign efforts scheduled. Although
margins on existing product should improve in 1995, the heavy schedule of
new product introductions may initially have an adverse impact on overall
margins in 1995. As 1995 progresses, expanded capacities should help
alleviate this pressure.
Late last year, the company was informed that it would not be
participating in the GMT-800 program which is the replacement business for
General Motors' light trucks and represents less than 10 percent of the
corporation's business. The loss of this business affects the 1999 model
year with the full impact not being recognized by the company until the
year 2000. The company is confident that this business can be replaced
with other programs that exist with domestic and international customers.
Equity in the earnings of the corporation's 40 percent owned Mexican
affiliate, Metalsa S.A., was $1.6 million in 1994 compared to $2.3 million
and $3.5 million in 1993 and 1992, respectively. In 1994, Metalsa's sales
were approximately the same as the prior year as the Mexican economy
remained weak. Earnings in 1994 were lower than 1993 due to restructuring
and product launch costs. Due to lower sales, product mix, and
restructuring costs, 1993 earnings were lower than 1992. The net assets
of Metalsa are translated in U.S. dollars using current exchange rates,
with the resulting translation adjustments reflected as a separate
component of stockholders' equity. Due to the decline in the value of the
peso in late 1994, the corporation recorded a translation adjustment in
1994 of $7.5 million. There were no similar adjustments in 1993, as the
value of the peso was fairly constant. Metalsa has a program in place to
hedge certain of its accounts denominated in foreign currencies. To the
extent foreign currency exposures are not hedged by Metalsa in 1995,
further erosion of the value of the peso will result in transaction
losses, its share of which the corporation would include in earnings.
It appears as if the Mexican automotive industry may experience a
significant decline in sales in 1995. Metalsa is taking steps to deal
with this possibility including reducing its labor force. The corporation
anticipates that its equity in earnings will be lower in 1995. At this
time, given the uncertainties surrounding the Mexican economy, it is
difficult to project the extent to which earnings may be reduced.
1994 was a turnaround year for the Electrical Products Company. Sales in
1994 increased $38.7 million or almost 16 percent to a record $281.2
million from 1993 sales of $242.5 million. Sales in 1992 were
$225.6 million. Many of the markets that utilize electric motors in their
products experienced a significant recovery in 1994. Enhancing the impact
of this recovery was the relatively low finished goods inventory level at
which some of these markets entered 1994. This favorable impact was
especially noticeable in the heating, ventilating, and air conditioning
market, where sales growth resulted in increased demand for electric
motors due to the lack of inventory. Sales of air conditioning units were
further bolstered by the combination of increased housing starts in early
1994 and warm summer weather resulting in record unit volume. Favorable
general economic conditions resulted in substantial growth in most of the
other segments of the business, including motors for garage door openers,
pumps, and swimming pools and spas. Sales of replacement motors increased
significantly due to new merchandising and inventory strategies employed
by the company. Exports were also a source of increased revenues for
Electrical Products as aggressive pursuit of the international markets
continued in 1994.
Profits for the Electrical Products Company in 1994 were substantially
higher than the depressed earnings recorded in 1993 and over 75 percent
higher than 1992 earnings. Earnings in 1993 were adversely impacted by
several million dollars of costs associated with transferring motor
production to lower cost facilities. The significantly improved earnings
performance of Electrical Products was the direct result of increased
volume coupled with the completion of the aforementioned program, which
transferred production and greatly reduced manufacturing costs.
Current projections for 1995 are positive as first quarter orders are at
higher levels than the same period last year.
Sales for the Water Products Company established a record for the third
consecutive year in 1994, increasing more than nine percent to $271.5
million from the previous record of $248.1 million in 1993. Sales in 1992
were $215.2 million. While a portion of the sales increase was due to the
underlying growth of seven percent in the domestic water heater industry,
Water Products outperformed this growth by gaining market share in both
the residential and commercial segments of the business. Water Products'
strong position in the plumbing wholesale channel of distribution resulted
in continued penetration of the domestic residential market which is
comprised predominantly of replacement units.
Earnings for the Water Products Company increased significantly in 1994
and established a record for the fourth time in the last five years. The
impact of the increased residential volume and favorable pricing on
commercial product more than offset the impact of volume reductions
experienced in the standard commercial product.
New industrial and commercial product introductions scheduled for 1995
should provide incremental future market penetration. The possibility of
designing and manufacturing water heaters for the Chinese market is closer
to reality, as the company signed a letter of intent in the People's
Republic of China in the third quarter of 1994. Earnings in the first
quarter of 1995 may fall short of 1994's first quarter, due to some shift
in demand to the fourth quarter of 1994 in anticipation of an announced
price increase January 1, 1995.
Smith Fiberglass Products Inc. 1994 sales of $57.9 million declined
slightly from the record of $58.9 million established in 1993, but
remained substantially higher than 1992 sales of $43.9 million. The major
factors responsible for the slight decrease in 1994 sales levels include:
weakness in the domestic oil industry; increased competition in the
service station market; and the lack of large orders similar to those
shipped in 1993. The chemical and industrial market demonstrated
significant growth in 1994 as sales were over 50 percent higher than in
1993. Some of this growth was attributed to the introduction of the
reformulated Chem Thread(R) line which is specifically designed for
chemical processing applications.
Earnings for Fiberglass Products in 1994 were about equal to those in 1993
and almost double the 1992 earnings despite the slight drop in volume.
The prospects for 1995 are good. Although a gradual decline in the
service station market is anticipated as compliance with federal
regulations is near completion, a number of recent developments provide
the basis for an optimistic outlook. International demand for fiberglass
pipe should increase as existing metallic pipe in older oil fields begins
to corrode and requires replacement. Smith Fiberglass installed a number
of test lines in oil fields in northeastern China, and the possibility of
a joint venture could become a reality in 1995.
Revenues for agricultural products were $40.2 million in 1994, an increase
of $2.1 million and $6.2 million over 1993 and 1992, respectively. The
recent emphasis on environmental issues has stimulated demand for the
Aquastore/R/ and Slurrystore/R/ product lines manufactured by A. O. Smith
Harvestore Products, Inc. (Harvestore). These structures are primarily
used for water storage, waste water treatment, and animal waste storage.
Harvestore also increased its presence in the international markets in
1994 and is seeking ISO-9001 certification in 1995 to enhance its
international marketing activities. Harvestore's 1994 earnings were much
improved over both 1993 and 1992 as a result of higher volume. Revenues
for AgriStor Credit Corporation were $2.9 million, $4.8 million and $6.4
million in 1994, 1993, and 1992, respectively. This trend of decreasing
revenues reflects management's commitment to an expeditious liquidation of
this finance subsidiary. Interest costs and administrative expenses have
declined consistently throughout the liquidation process, however
recognition of costs associated with non-performing contracts resulted in
AgriStor's 1994 loss exceeding those of the prior two years. The net
after-tax loss for the agricultural businesses was $.17 per share for both
1994 and 1993.
Selling, general, and administrative expense for the corporation in 1994
was $108.9 million compared to $96.5 million and $86.0 million in 1993 and
1992, respectively. The majority of the increase during this period was
caused by higher employee incentive and profit sharing accruals, increased
commissions and other expenses in support of additional sales volume, bad
debt provisions, and re-marketing costs associated with repossessed
equipment within the agricultural segment. As a percent of sales,
selling, general, and administrative expenses have declined steadily from
8.2 percent in 1992 to 7.9 percent in 1994.
Interest expense in 1994 was $12.1 million and compares favorably to
interest of $13.4 million in 1993 and $17.9 million in 1992. The decline
in interest expense in 1994 reflected the reduction in debt levels whereas
the decline from 1992 to 1993 was a function of both lower debt and
declining interest rates.
The corporation's effective income tax rate decreased to 38.3 percent in
1994 from 41 percent in 1993 and 39 percent in 1992. The lower rate in
1994 was caused by the recognition of research and development and foreign
tax credits.The rise in the rate from 1992 to 1993 was due to the one
percent federal rate increase including the cumulative impact on prior
years.
For purposes of determining 1994 net periodic pension expenses, a discount
rate of 7.75 percent was used. An increase in the discount rate to 8.5
percent was made as of year-end to determine the benefit obligations at
December 31, 1994. The assumed rate of return on plan assets was 10.25
percent in 1994 and 1993. Management estimates that the effect of the
discount rate change in combination with other components of periodic
pension expense will not be significant for 1995. As to postretirement
benefits other than pensions, an increase in the discount rate assumption
to 8.5 percent also was made. This discount rate change also is
anticipated to have only a minimal impact on future expense.
A. O. Smith Corporation achieved record net earnings of $57.3 million or
$2.75 per share in 1994, eclipsing the previous records of $42.7 million
or $2.08 per share established in 1993. In 1992, the corporation earned
$28 million or $1.41 per fully diluted share before recognition of a $46.1
million one-time after-tax charge for postretirement benefits. The 1992
net loss including this one-time adjustment was $18.2 million or $.84 per
fully diluted share.
Entering 1994, the corporation believed the foundation was in place to set
sales and earnings records for a second consecutive year. As evidenced by
the financial results for 1994, the corporation was able to achieve this
goal in a convincing manner. The challenge of a third consecutive
record-setting year lies ahead. The corporation's success in meeting this
aggressive objective will depend upon the impact that factors such as
interest rate levels, housing starts, union contract negotiations, and the
volatility within the Mexican economy have on the markets served by A. O.
Smith Corporation.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements: Form 10-K
Page Number
Report of Independent Auditors . . . . . . . . . . . 23
Consolidated Balance Sheet at December 31, 1994
and 1993 . . . . . . . . . . . . . . . . . . . . . 24
For each of the three years in the period ended
December 31, 1994:
- Consolidated Statement of Operations
and Retained Earnings . . . . . . . . . . . . . 25
- Consolidated Statement of Cash Flows . . . . . 26
Notes to Consolidated Financial Statements . . . 27-42
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
A. O. Smith Corporation
We have audited the accompanying consolidated balance sheet of A. O. Smith
Corporation as of December 31, 1994 and 1993 and the related consolidated
statements of operations and retained earnings and cash flows for each of
the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedule listed in the Index in Item
14(a). These financial statements and schedule are the responsibility of
the corporation's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 A. O.
Smith Corporation at December 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Notes 9 and 10 to the financial statements, the
corporation changed its method of accounting for post retirement benefits
other than pensions and income taxes effective January 1, 1992.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 17, 1995
<PAGE>
CONSOLIDATED BALANCE SHEET
December 31 (dollars in thousands)
Assets 1994 1993
Current Assets
Cash and cash equivalents $ 8,485 $ 11,902
Trade receivables 132,630 126,949
Finance subsidiary receivables
and leases 16,361 19,151
Customer tooling 24,489 15,471
Inventories 110,863 89,804
Deferred income taxes 28,100 27,614
Other current assets 8,592 12,987
-------- --------
Total Current Assets 329,520 303,878
Investments in and advances to
affiliated companies 17,326 23,669
Deferred model change 18,638 22,095
Finance subsidiary receivables and
leases 37,842 53,481
Other assets 42,751 44,962
Net property, plant, and equipment 401,780 375,014
-------- --------
Total Assets $847,857 $823,099
======== ========
Liabilities
Current Liabilities
Trade payables $101,153 $ 99,320
Accrued payroll and pension 36,641 38,347
Postretirement benefit obligation 9,573 8,950
Accrued liabilities 59,241 59,448
Income taxes 2,060 2,707
Long-term debt due within one year 3,775 8,819
Finance subsidiary long-term debt due
within one year
3,480 5,598
-------- --------
Total Current Liabilities 215,923 223,189
Long-term debt 136,769 148,851
Finance subsidiary long-term debt 29,357 41,723
Postretirement benefit obligation 72,388 69,773
Product warranty 15,089 12,981
Deferred income taxes 54,445 41,281
Other liabilities 11,141 15,671
-------- --------
Total Liabilities 535,112 553,469
Commitments and contingencies
(notes 6 and 12)
Stockholders' Equity
Preferred Stock -- --
Class A Common Stock (shares issued
6,035,541 and 6,084,845) 30,178 30,424
Common Stock (shares issued 15,664,109
and 15,614,805) 15,664 15,615
Capital in excess of par value 68,209 65,950
Retained earnings 224,467 177,543
Cumulative foreign currency translation
adjustments (8,035) (841)
Pension liability adjustment (9,653) (9,141)
Treasury stock at cost (8,085) (9,920)
--------- ---------
Total Stockholders' Equity 312,745 269,630
--------- ---------
Total Liabilities and Stockholders'
Equity $847,857 $823,099
========= =========
See accompanying notes which are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31 (dollars in thousands, except per share amounts)
Operations 1994 1993 1992
Net revenues $1,373,546 $1,193,870 $1,046,345
Cost of products sold 1,162,096 1,015,397 903,615
--------- --------- --------
Gross profit 211,450 178,473 142,730
Selling, general, and
administrative expenses 108,862 96,524 86,026
Interest expense 12,085 13,431 17,897
--------- -------- --------
90,503 68,518 38,807
Provision for income taxes 34,707 28,124 15,122
--------- -------- --------
Earnings before equity in
earnings of affiliated companies 55,796 40,394 23,685
Equity in earnings of affiliated
companies 1,551 2,284 3,521
-------- -------- -------
Earnings Before Cumulative Effect
of Changes in Accounting Principles 57,347 42,678 27,206
Tax credits realizable under FAS
No. 109 resulting from reclassi-
fication of agricultural
businesses -- -- 1,600
--------- -------- --------
Earnings before effect of
postretirement benefits 57,347 42,678 28,806
Change in method of accounting
for postretirement benefits, net
of tax benefit of $28,873 -- -- (46,122)
--------- --------- --------
Net Earnings (Loss) 57,347 42,678 (17,316)
Preferred dividends ($.531
per share in 1992) -- -- (856)
--------- --------- --------
Net Earnings (Loss) Applicable
to Common Stock 57,347 42,678 (18,172)
Retained Earnings
Balance at beginning of year 177,543 147,065 172,869
Cash dividends on common stock (10,423) (12,200) (7,632)
-------- --------- --------
Balance at End of Year $ 224,467 $ 177,543 $147,065
======== ========= ========
Primary Earnings (Loss) Per Share
of Common Stock
Earnings before cumulative effect
of accounting changes $2.75 $2.08 $1.40
Realization of tax credits of
agricultural businesses -- -- .08
------ ----- ------
Earnings before effect of
postretirement benefits 2.75 2.08 1.48
Change in postretirement benefits,
net of taxes -- -- (2.44)
------ ----- -----
Net earnings (loss) $2.75 $2.08 $(.96)
====== ===== =====
Fully Diluted Earnings (Loss) Per
Share of Common Stock
Earnings before cumulative effect
of accounting changes $2.75 $2.08 $1.33
Realization of tax credits of
agricultural businesses -- -- .08
------ ----- ------
Earnings before effect of
postretirement benefits 2.75 2.08 1.41
Change in postretirement benefits,
net of taxes -- -- (2.25)
----- ----- -----
Net earnings (loss) $2.75 $2.08 $(.84)
===== ===== =====
See accompanying notes which are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in thousands)
Cash Flow from Operating Activities 1994 1993 1992
Net earnings (loss) $ 57,347 $ 42,678 $(17,316)
Adjustments to reconcile net
earnings (loss) to net cash provided
by operating activities:
Depreciation 49,160 42,607 39,458
Cumulative effect of change in
method of accounting for
postretirement benefits -- -- 74,995
Deferred income taxes 14,296 11,800 (22,928)
Equity in earnings of affiliates,
net of dividends (751) 516 (1,456)
Deferred model change and software
amortization 8,078 9,080 9,520
Net change in current assets and
liabilities (29,415) (1,310) (16,454)
Net change in noncurrent assets and
liabilities 13,401 4,640 (4,617)
Other 7,357 5,340 6,465
-------- -------- -------
Cash Provided by Operating Activities 119,473 115,351 67,667
-------- -------- -------
Cash Flow from Investing Activities
Capital expenditures (76,133) (54,703) (46,947)
Deferred model change expenditures (7,921) (1,586) (4,169)
Other (699) (562) (437)
-------- -------- --------
Cash Used by Investing Activities (84,753) (56,851) (51,553)
-------- -------- --------
Cash Flow before Financing Activities 34,720 58,500 16,114
Cash Flow from Financing Activities
Long-term debt incurred -- 30,000 --
Long-term debt retired (17,126) (53,020) (2,760)
Finance subsidiary net long-term
debt retired (14,484) (21,417) (13,682)
Proceeds from common stock issued 1,902 3,167 4,539
Purchase of common and redemption of
preferred stock includes fees associated
with conversion, stock dividends, and
odd lot buy back (138) (1,380) (746)
Tax benefit from exercise of stock
options 2,132 2,227 2,159
Dividends paid (10,423) (12,200) (8,488)
------- ------- -------
Cash Used by Financing Activities (38,137) (52,623) (18,978)
Net increase (decrease) in cash
and cash equivalents (3,417) 5,877 (2,864)
Cash and cash equivalents--beginning
of year 11,902 6,025 8,889
------- ------- -------
Cash and Cash Equivalents--End of Year $ 8,485 $11,902 $ 6,025
======= ======= =======
See accompanying notes which are an integral part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation. The consolidated financial
statements include the accounts of the corporation and its wholly-owned
subsidiaries including the corporation's agricultural businesses which are
being held for sale or liquidation.
Foreign Currency Translation. Financial statements for the corporation's
subsidiaries outside of the United States are translated into U.S. dollars
at year-end exchange rates for assets and liabilities and weighted average
exchange rates for revenues and expenses. The resulting translation
adjustments are recorded as a component of stockholders' equity.
Inventory valuation. Domestic inventories are carried at lower of cost or
market determined on the last-in, first-out (LIFO) method. Inventories of
foreign subsidiaries and supplies are determined using the first-in,
first-out (FIFO) method.
Derivative instruments. The corporation enters into futures contracts to
fix the cost of certain raw material purchases, principally copper and
aluminum, with the objective of minimizing cost risk due to market
fluctuations. Any differences between the corporation's fixed price and
current market prices are included as part of the inventory cost when the
contracts mature. As of December 31, 1994, the corporation had contracts
covering approximately 88 percent of its copper and 76 percent of its
aluminum requirements for 1995, with varying maturities in 1995, the
longest duration of which is December 1995. These futures contracts limit
the impact from both favorable and unfavorable price changes. The effect
of these programs was not material on the results of operations for 1994,
1993, or 1992.
As a result of having various foreign operations, the corporation is
exposed to the effect of foreign currency rate fluctuations on the U.S.
dollar value of its foreign subsidiaries. Further, the corporation and
its subsidiaries conduct business in various foreign currencies. To
minimize the effect of fluctuating foreign currencies on its income, the
corporation enters into foreign currency forward contracts. The contracts
are used to hedge known foreign currency transactions on a continuing
basis for periods consistent with the corporation's exposures. The
corporation does not engage in speculation. The difference between market
and contract rates is recognized in the same period in which gains or
losses from the transactions being hedged are recognized and, accordingly,
no net gain or loss is anticipated when the contracts mature.
The following table summarizes, by currency, the corporation's forward
exchange contracts.
December 31 1994 1993
(dollars in thousands) --------------------- ---------------------
Market vs Market vs
Forward Contract Forward Contract
Contracts Difference Contracts Difference
Currency
Contracts to buy
U.S. dollars $ 2,400 $ (52) $ 3,472 $ 165
British pounds 4,489 (61) 6,472 180
Canadian dollars 5,714 (17) 16,140 (50)
Italian lire 3,801 (67) -- --
Mexican pesos 17,418 (4,058) -- --
Contracts to sell
German marks 3,587 (205) -- --
U.S. dollars 3,840 (275) 8,840 370
French francs 2,591 (34) 1,264 (32)
------- ------- ------- -----
$43,840 $(4,769) $36,188 $ 633
======= ======= ======= =====
The contracts in place at December 31, 1994 and 1993 amounted to 58 and 85
percent, respectively, of the corporation's anticipated subsequent year
exposure for those currencies hedged.
Property, plant, and equipment. Property, plant, and equipment are stated
at cost. Depreciation is computed primarily by the straight-line method.
Deferred model change. Tool costs not reimbursed by customers and
expenses associated with significant model changes are amortized over the
estimated model life which ranges from four to ten years, with the shorter
periods associated with automobile structural components and the longer
periods associated with structural components for trucks.
Finance subsidiary. Finance charges for retail contracts receivable are
recognized as income as installments become due using the interest method.
For direct finance leases, income is recognized based upon a constant rate
of return on the unrecovered lease investment over the term of the related
lease.
Revenue recognition. The corporation recognizes revenue upon shipment of
product to the customer.
Income taxes. The corporation accounts for income taxes using the
liability method prescribed by FAS No. 109.
Research and development. Research and development costs are charged to
expense as incurred and amounted to approximately $9.2, $7.6, and $6.5
million during 1994, 1993, and 1992, respectively.
Earnings (loss) per share of common stock. Primary per share amounts are
determined by dividing earnings (loss) applicable to common shareholders
by the weighted average number of shares of common stock and materially
dilutive common stock equivalents (stock options) outstanding.
Fully diluted per share amounts include the dilutive effect, if any, of
the assumed conversion in 1992 of the outstanding preferred stock into
common stock with appropriate adjustments being made to earnings (loss)
applicable to common stock for dividends on the preferred stock. For
1992, fully diluted net loss per share amounts are anti-dilutive because
of the preferred stock conversion.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the 1994 presentation.
2. Statement of Cash Flows
For purposes of the consolidated statement of cash flows, cash and cash
equivalents include investments with original maturities of three months
or less. Supplemental cash flow information is as follows:
Years ended December 31 1994 1993 1992
(dollars in thousands)
Change in current assets and liabilities:
Trade receivables and customer
tooling $(15,131) $(35,008) $(17,340)
Finance subsidiary receivables 2,790 529 3,845
Inventories (21,059) (17,054) 2,862
Other current assets 6,180 (5,297) 1,327
Trade payables 1,833 37,214 1,501
Accrued liabilities, payroll,
and pension (972) 16,274 (9,242)
Current income tax accounts-net (3,056) 2,032 593
------- ------- -------
$(29,415) $ (1,310) $(16,454)
======= ======= =======
3. Inventories
December 31 (dollars in thousands) 1994 1993
Finished products $ 55,331 $ 53,337
Work in process 48,886 37,215
Raw materials 41,709 36,371
Supplies 7,457 5,228
------- -------
153,383 132,151
Allowance to state inventories at LIFO cost 42,520 42,347
-------- -------
$110,863 $ 89,804
======== =======
During 1992, inventory reductions in certain operations resulted in
liquidations of certain LIFO inventory quantities acquired at lower costs
in prior years as compared with 1992 costs, the effect of which reduced
the 1992 net loss by $2.8 million.
4. Investments in and Advances to Affiliated Companies
Investments in affiliates in which ownership is 50 percent or less are
accounted for under the equity method. The corporation's equity in the
undistributed earnings of such affiliates at December 31, 1994, amounted
to approximately $16.1 million. In 1993, the corporation advanced $1.2
million to its Mexican affiliate with repayment due in 1996 and interest
at 5 percent due quarterly. In 1994, due to the decline in the value of
the peso, the corporation recorded as a component of stockholders' equity,
translation adjustments of approximately $7.5 million. During 1994, 1993,
and 1992, the corporation received dividends of $.8, $2.8, and $1.3
million, respectively, from such affiliates.
5. Property, Plant, and Equipment
December 31 (dollars in thousands) 1994 1993
Land $ 7,527 $ 7,538
Buildings 186,320 183,485
Equipment 687,870 632,763
-------- --------
881,717 823,786
Less accumulated depreciation 479,937 448,772
-------- --------
$401,780 $375,014
======== ========
Interest on borrowed funds during construction of $.8, $1.1, and $.8
million was capitalized in 1994, 1993, and 1992, respectively. As of
December 31, 1994, the corporation has pledged $3.8 million of net
property, plant, and equipment under long-term debt obligations.
6. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands) 1994 1993
Bank credit lines, average year-end interest
rate of 7.1% for 1994 and 3.8% for 1993 $ 15,308 $ 17,382
Commercial paper, average year-end interest
rate of 5.9% for 1994 and 3.5% for 1993 71,577 92,996
8.75% notes, payable annually through 1997 10,700 14,275
6.4% variable rate term loan, expiring in
April 1999 12,500 12,500
Long-term notes, expiring through 2003,
average year-end interest rate of 6.8%
for 1994 and 1993 30,000 30,000
Other notes, expiring through 2012, average
year-end interest rate of 6.9% for 1994 and
6.8% for 1993 33,296 37,838
-------- --------
173,381 204,991
Less amount due within one year 7,255 14,417
-------- --------
$166,126 $190,574
======== ========
In June 1994, the corporation put in place a $140 million multi-year
revolving credit agreement with a group of ten banks. The agreement
replaced a $115 million A. O. Smith facility and a $30 million AgriStor
facility. The agreement extends through April 3, 1998. In addition to
lower fees and lower borrowing rates, the agreement contains fewer
restrictive covenants. At its option, the corporation maintains either
cash balances or pays fees for bank credit and services.
In April 1994, the $12.5 million term loan agreement automatically
converted from an 8.9 percent fixed rate to a floating interest rate. The
interest rate is set at 37.5 basis points over LIBOR, and the loan may be
repaid at anytime without penalty.
In 1993, the corporation entered into two loan facilities with insurance
companies totalling $65 million. Through December 31, 1994, the
corporation had drawn down, under ten year terms, $30 million under these
facilities.
The corporation's credit agreement and term loans contain certain
conditions and provisions which restrict the corporation's payment of
dividends. Under the most restrictive of these provisions, retained
earnings of $93.1 million were unrestricted as of December 31, 1994.
Borrowings under the bank credit lines and in the commercial paper market
are supported by the revolving credit agreement and have been classified
as long-term. It has been the corporation's practice to renew or replace
the credit agreement so as to maintain the availability of debt on a long-
term basis and to provide 100 percent backup for its borrowings in the
commercial paper market.
Long-term debt, maturing within each of the five years subsequent to
December 31, 1994, is as follows: 1995--$7.3; 1996--$5.0; 1997--$11.9;
1998--$12.2; 1999--$8.1 million.
The corporation sold, without recourse and at market rates, certain
automotive-related receivables totalling $27.5 million at December 31,
1994, compared to $16.0 million at December 31, 1993. The receivables
sale program is scheduled to expire on April 30, 1996, unless mutually
extended.
Future minimum payments under noncancelable operating leases total $113.7
million and are due as follows: 1995--$21.8; 1996--$19.6; 1997--$17.6;
1998--$16.8; 1999--$13.7; thereafter--$24.2 million. Rent expense,
including payments under operating leases, was $30.8, $28.2, and $27.5
million in 1994, 1993, and 1992, respectively.
Interest paid by the corporation was $13.3, $14.0, and $18.4 million in
1994, 1993, and 1992 respectively.
7. Stockholders' Equity
As of December 31, 1994, there were 7 million shares of Class A Common
Stock $5 par value, 24 million shares of Common Stock $1 par value, and 3
million shares of preferred stock $1 par value authorized. The Common
Stock has equal dividend rights with Class A Common Stock and is entitled,
as a class, to elect 25 percent of the board of directors and has 1/10th
vote per share on all other matters.
On February 1, 1993, the Board of Directors declared a special $.25 per
share dividend payable on March 22 to Common Stockholders of record March
8. No special dividend was declared on the Class A Common Stock. During
1993, 2,009,683 shares of Class A Common Stock, including 623,362 shares
held in Treasury, were converted by the holders into Common Stock. An
additional 49,304 shares of Class A Common Stock were converted into
Common Stock during 1994. Regular dividends paid on the Class A Common
and Common Stock amounted to $.50, $.42, and $.40 per share in 1994, 1993,
and 1992, respectively.
Changes in certain components of stockholders' equity are as follows:
<TABLE>
<CAPTION>
Capital in Treasury Stock
Class A Excess of ----------------------
(dollars in thousands) Preferred Common Common Par Value Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $ 1,725 $ 25,197 $ 3,535 $ 75,124 738,461 $ 13,478
Redemption of preferred stock (1,725) -- 1,901 (3,452) (113,300) (2,530)
Exercise of stock options -- -- 331 4,178 (1,799) (30)
Tax benefit from exercise of
stock options -- -- -- 2,159 -- --
-------- ------- ------- ------- ------- -------
Balance at December 31, 1992 -- 25,197 5,767 78,009 623,362 10,918
Conversion of Class A Common Stock -- (10,048) 2,010 7,746 -- --
Exercise of stock options (net of
21,200 shares surrendered as
stock option proceeds) -- -- 43 1,056 (183,300) (1,267)
Purchase of treasury shares -- -- -- -- 5,930 269
Tax benefit from exercise of
stock options -- -- -- 2,227 -- --
Two-for-one stock split -- 15,275 7,795 (23,088) 566,792 --
-------- ------- -------- ------- --------- --------
Balance at December 31, 1993 -- 30,424 15,615 65,950 1,012,784 9,920
Conversion of Class A Common
Stock -- (246) 49 197 -- --
Exercise of stock options (net of
4,845 shares surrendered as
stock option proceeds) -- -- -- (70) (218,755) (1,835)
Tax benefit from exercise of
stock options -- -- -- 2,132 -- --
------- ------- ------- ------- ------- -------
Balance at December 31, 1994 $ -- $ 30,178 $ 15,664 $ 68,209 794,029 $ 8,085
======= ======= ======= ======= ======= =======
</TABLE>
In 1993, 5,930 shares of treasury stock were acquired under a purchase
offer made to holders of less than 100 shares of Class A Common Stock and
Common Stock.
At December 31, 1994, 3,460 and 790,569 shares of Class A Common Stock and
Common Stock, respectively, were held as treasury stock.
8. Stock Options
During 1990, the corporation adopted a Long-Term Executive Incentive
Compensation Plan (1990 Plan). The 1990 Plan initially reserved 1 million
shares of Common Stock for granting of nonqualified and incentive stock
options. In April 1994, shareholders approved a proposal to reserve an
additional 1 million shares of Common Stock. Each option entitles the
holder, upon exercise, to obtain one share of Common Stock. In addition,
the corporation has a Long-Term Executive Incentive Compensation Plan
(1980 Plan) which has terminated except as to outstanding options.
Options under both plans become exercisable one year from date of grant
and, for active employees, expire ten years after date of grant. The
number of shares available for granting of options at December 31, 1994
and 1993 was 659,600 and 25,400 respectively.
Changes in option shares (all Common Stock) were as follows:
Years ended December 31 1994 1993 1992
Outstanding at beginning
of year 1,009,800 1,184,200 1,627,200
Granted
1994--$21.563 and $25.81
per share 177,400
1993--$27.50 per share 188,400
1992--$11.125 to $15.188
per share 232,200
Exercised
1994--$7.00 to $13.00
per share (223,600)
1993--$6.375 to $15.188
per share (362,800)
1992--$6.375 to $9.563
per share (666,200)
Canceled or expired -- -- (9,000)
-------- --------- ---------
Outstanding at End of Year
(1994--$7.00 to $27.50
per share) 963,600 1,009,800 1,184,200
======= ========= =========
Exercisable at December 31, 1994 786,200
=======
9. Retirement Plans
The corporation and its domestic subsidiaries have noncontributory defined
benefit pension plans covering all employees. Plans covering salaried
employees provide benefits that are based on an employee's years of
service and compensation. Plans covering hourly employees provide
benefits of stated amounts for each year of service. The corporation's
funding policy is to contribute amounts which are actuarially determined
to provide the plans with sufficient assets to meet future benefit payment
requirements consistent with the funding requirements of federal laws and
regulations. Plan assets consist primarily of marketable equities and
debt securities. The corporation also has several foreign pension plans,
none of which are material.
The following tables present the components of pension expense, the funded
status, and the major assumptions used to determine these amounts for
domestic pension plans:
<TABLE>
<CAPTION>
Years ended December 31 (dollars in thousands)
1994 1993 1992
------------------ ---------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Components of pension
expense:
Service cost--
benefits earned
during the year $ 6,759 $ 6,261 $ 5,581
Interest cost on
projected benefit
obligation 27,111 27,400 27,067
Return on plan
assets:
Actual return $ 1,748 $(42,270) $(25,140)
Deferral of
investment return
in excess of
(less than)
expected return (37,180) 9,145 (8,802)
------- ------- -------
(35,432) (33,125) (33,942)
Net amortization and
deferral 651 569 353
------- ------- -------
Net periodic pension
expense (income) $ (911) $ 1,105 $ (941)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31 (dollars in thousands)
1994 1993
-------------------------- ---------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit obligation $145,488 $166,962 $138,138 $182,531
======== ======== ======== ========
Accumulated benefit
obligation $155,817 $198,485 $147,018 $212,145
======== ======== ======== ========
Projected benefit obligation $171,074 $198,694 $174,210 $212,755
Plan assets at fair value 219,026 155,924 232,188 162,516
------- ------- -------- -------
Plan assets in excess of
(less than) projected
benefit obligation 47,952 (42,770) 57,978 (50,239)
Unrecognized net transition
(asset) obligation at
January 1, 1986 (12,053) 12,316 (14,061) 13,882
Unrecognized net (gain) loss 3,189 16,111 (11,480) 15,669
Prior service cost not yet
recognized in periodic
pension cost 3,641 9,766 4,244 10,657
Adjustment required to recognize
minimum liability<F1> -- (37,984) -- (39,598)
------- ------- -------- --------
Prepaid pension asset (liability) $ 42,729 $(42,561) $ 36,681 $(49,629)
======= ======= ======== =======
Net asset (liability) recognized
in consolidated balance sheet $ 168 $(12,948)
======= =======
<FN>
<F1>The provisions of FAS No. 87, "Employers' Accounting for Pensions," require the recognition of an additional minimum
liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. This amount has
been recorded as a long-term liability with an offsetting intangible asset. Because the asset recognized may not exceed the
amount of unrecognized prior service cost and transition obligation on an individual plan basis, the balance, net of tax
benefits, is reported as a separate reduction of stockholders' equity at December 31, 1994 and 1993, as follows:
(dollars in thousands) 1994 1993
Minimum liability adjustment $37,984 $39,598
Intangible asset 22,082 24,539
------- -------
15,902 15,059
Tax benefit 6,249 5,918
------- -------
Pension liability adjustment to
stockholders' equity $ 9,653 $ 9,141
======= =======
</TABLE>
Major assumptions at year-end:
1994 1993 1992
Discount rate 8.50% 7.75% 8.75%
Rate of increase in compensation level 4.50% 4.00% 5.50%
Expected long-term rate of return
on assets 10.25% 10.25% 10.50%
Net periodic pension cost is determined using the assumptions as of the
beginning of the year. The funded status is determined using the
assumptions as of the end of the year.
The corporation has a defined contribution profit sharing and retirement
plan covering salaried nonunion employees which provides for annual
corporate contributions of 35 percent to 140 percent of qualifying
contributions made by participating employees. The amount of the
corporation's contribution in excess of 35 percent is dependent upon the
corporation's profitability. The amount of the contribution was $5.2,
$4.0, and $2.3 million for 1994, 1993, and 1992, respectively.
Postretirement Benefits other than Pensions
The corporation has several unfunded defined benefit postretirement plans
covering certain hourly and salaried employees which provide medical and
life insurance benefits from retirement to age 65. Salaried employees
retiring after January 1, 1995 will be covered by an unfunded defined
contribution plan with benefits based on years of service. Certain hourly
employees retiring after January 1, 1996 will be subject to a maximum
annual benefit limit. Salaried employees hired after December 31, 1993
are not eligible for postretirement medical benefits.
Effective January 1, 1992, the corporation adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Net periodic postretirement benefit cost included the following
components:
December 31 (dollars in thousands) 1994 1993
Service cost--benefits attributed to
employee service during the year $ 1,847 $1,841
Interest cost on accumulated post-
retirement benefit obligation 7,477 6,959
Amortization of unrecognized net loss 816 --
------- ------
Net periodic postretirement benefit cost $10,140 $8,800
======= ======
The following table sets forth the plans' status as reflected in the
consolidated balance sheet:
December 31 (dollars in thousands) 1994 1993
Accumulated postretirement benefit obligation:
Retirees $51,066 $52,176
Fully eligible active plan participants 12,724 12,948
Other active plan participants 35,333 35,939
------- ------
99,123 101,063
Unrecognized net loss
(17,162) (22,340)
------- -------
Accrued postretirement benefit cost $81,961 $78,723
======= =======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation (APBO) was 10 percent in 1992, declining
by 1 percent per year to 6 percent in 1996. The weighted average discount
rate used in determining the APBO was 8.50 percent and 7.75 percent at
December 31, 1994 and 1993, respectively. If the health care cost trend
rate was increased by 1 percent, the APBO at December 31, 1994 would
increase by $3.3 million and net periodic postretirement benefit cost for
1994 would increase by $.3 million.
10. Income Taxes
Effective January 1, 1992, the corporation adopted FAS No. 109,
"Accounting for Income Taxes."
The components of the provision for income taxes consisted of the
following:
Years ended December 31
(dollars in thousands) 1994 1993 1992
Current:
Federal $15,470 $11,208 $ 4,916
State 4,095 1,955 1,449
Foreign 2,384 3,109 1,466
Cumulative effect of rate change -- 836 --
Deferred 14,301 11,297 7,879
Business tax credits (1,543) (281) (588)
------- ------- -------
Provision for income taxes $34,707 $28,124 $15,122
======= ======= =======
The tax provision differs from the statutory U.S. federal rate due to the
following items:
Years ended December 31 1994 1993 1992
(dollars in thousands)
Provision at federal statutory rate $31,676 $23,981 $13,195
Cumulative effect of rate change -- 836 --
Foreign income taxes 245 637 286
State income and franchise taxes 3,996 3,056 1,864
Business and foreign tax credits (1,877) (631) (588)
Non-deductible items 542 287 325
Other 125 (42) 40
------- ------- -------
Provision for income taxes $34,707 $28,124 $15,122
======= ====== ======
The domestic and foreign components of income from operations before
income taxes were as follows:
Years ended December 31 1994 1993 1992
(dollars in thousands)
Domestic $84,358 $60,407 $34,776
Foreign 6,145 8,111 4,031
------ ------ -------
$90,503 $68,518 $38,807
====== ====== ======
Taxes paid amounted to $21.7, $12.2, and $5.4 million in 1994, 1993, and
1992, respectively.
The corporation has the following carryforwards for federal income tax
purposes:
- Tax credits of $2.6 million which expire from 2002 through
2007.
- Alternative Minimum Tax credits of $6.1 million which do not
expire.
No provision for U.S. income taxes has been made on the undistributed
earnings of foreign subsidiaries as such earnings are considered to be
permanently invested. At December 31, 1994, the undistributed earnings
amounted to $16.3 million. It is not practical to determine the income
tax liability that would result had such earnings been repatriated. The
amount of withholding taxes that would be payable upon such repatriation
is estimated to be $.6 million.
No provision for U.S. income taxes has been made on the cumulative net
translation gains and other items of equity investees. At December 31,
1994, the amount of unrecognized U.S. tax liability for the net
translation gains and other items of $10.3 million amounted to $3.6
million.
The approximate tax effects of temporary differences between income tax
and financial reporting are as follows:
<TABLE>
<CAPTION>
December 31 (dollars in thousands)
1994 1993
----------------------- -------------------------
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Finance subsidiary leases $ -- $(13,717) $ -- $(19,999)
Group health insurance and
postretirement obligations 36,484 -- 35,214 --
Employee benefits 4,128 (10,122) 3,465 (6,031)
Product liability and warranty 8,017 -- 7,592 --
Bad debts 4,633 -- 7,111 --
Tax over book depreciation -- (51,474) -- (48,388)
Deferred model change -- (11,603) -- (11,150)
Equity in affiliates -- (1,336) -- (1,068)
Tax carryforwards 9,597 -- 22,331 --
All other -- (952) -- (2,744)
------- -------- -------- --------
$62,859 $(89,204) $75,713 $(89,380)
======= ======== ======== ========
Net liability $(26,345) $(13,667)
======== ========
</TABLE>
These deferred tax assets and liabilities are classified in the balance
sheet as current or long-term based on the balance sheet classification of
the related assets and liabilities. The balances are as follows:
1994 1993
Current deferred income tax assets $ 28,100 $ 27,614
======== ========
Long-term deferred income tax liabilities $(54,445) $(41,281)
======== ========
11. Agricultural Businesses
The corporation's strategic plan is to concentrate its resources in
nonagricultural businesses and withdraw from the agricultural market. The
strategy includes plans to sell the agricultural business and to phase out
AgriStor Credit Corporation (AgriStor), a wholly-owned finance subsidiary.
Due to the uncertainties which continue to impact the farm sector, it is
not possible to predict when the sale of the agricultural business will
occur. The corporation is continuing to phase out AgriStor's operations
in an orderly manner.
The corporation's consolidated balance sheet includes AgriStor. A
condensed, consolidated balance sheet of AgriStor is presented below:
December 31 (dollars in thousands) 1994 1993
Assets
Cash and cash equivalents $ 2,636 $ 3,680
Retail contracts receivable 24,506 29,049
Net investment in leases 29,697 43,583
Other assets 2,819 5,715
------- -------
Total Assets $59,658 $ 82,027
======= =======
Liabilities and stockholder's equity
Long-term debt due within one year $ 3,480 $ 5,598
Other liabilities 14,591 17,560
Long-term debt 29,357 41,723
Stockholder's equity 12,230 17,146
------- -------
Total Liabilities and Stockholder's
Equity $59,658 $ 82,027
======= ========
The retail contracts receivable and net investment in leases are net of
bad debt reserves totalling $10.0 and $14.6 million at December 31, 1994
and 1993, respectively. AgriStor is the lessor in the direct finance
leasing of Harvestore(R) equipment. The equipment has an estimated
economic life of 15 years and is leased under agreements with original
terms of 5 to 12 years.
There is no quoted market price available for the retail contracts and
leases. Management believes fair value approximates book value. While
some maturities extend beyond the year 2000, the portfolio is
predominantly of two to three year duration carrying an average interest
rate of 7.0 percent.
As discussed in Note 6, in 1994 the corporation put in place a revolving
credit agreement which replaced separate facilities of the corporation
and AgriStor. At the same time, AgriStor terminated its commercial paper
program. Certain of AgriStor's financing needs are now being provided by
the corporation. In addition, at December 31, 1994, AgriStor had
outstanding a $2.5 million term loan with a final maturity in 1995.
AgriStor Credit Corporation - Canada (AgriStor Canada) had outstanding a
$5.5 million Canadian dollar denominated note ($3.9 million U.S. dollar
equivalent) with a final maturity in 1998. AgriStor Canada also had a
$10.0 million Canadian dollar denominated ($7.1 million U.S. dollar
equivalent) credit facility to meet its borrowing needs, none of which
was outstanding at December 31, 1994. Long-term debt maturing subsequent
to December 31, 1994, is as follows: 1995--$3.5; 1996--$1.0; 1997--$1.0;
1998--$1.0 million.
A condensed consolidated statement of operations of AgriStor is presented
below. The 1994 statement of operations reflects repossession and
contract settlement costs that previously were not recognized until final
disposition of repossessed structures.
Years Ended December 31 1994 1993 1992
(dollars in thousands)
Revenues $ 2,876 $ 4,783 $ 6,354
Interest expense 2,849 3,794 5,984
General and administrative expenses 1,696 2,951 3,250
Bad debt provision 4,800 1,750 1,442
Repossession costs 2,698 -- --
------- ------- -------
Total expenses 12,043 8,495 10,676
------- ------- -------
Loss before income taxes $(9,167) $(3,712) $(4,322)
======= ======= =======
The finance subsidiary provided cash before financing activities of $14.5,
$21.4, and $13.7 million in 1994, 1993, and 1992, respectively.
12. Litigation and Insurance Matters
As of December 31, 1994, the corporation and A. O. Smith Harvestore
Products, Inc. (Harvestore), a subsidiary of the corporation, were
defendants in 23 cases alleging damages for economic losses claimed to
have arisen out of alleged defects in Harvestore animal feed storage
equipment. Some plaintiffs are seeking punitive as well as compensatory
damages. The corporation believes that a significant number of these
claims were related to the deteriorated general farm economy, including
those filed in 1994. In 1994, seven new cases were filed and ten cases
were concluded. The corporation and Harvestore continue to vigorously
defend these cases.
Two of the 23 pending cases contain class action allegations. One of the
cases is a New York state court action which names the corporation,
Harvestore, and two of its dealers as defendants. The court has not
certified the class and has granted the defendants' motions dismissing
some of the plaintiffs' allegations. The plaintiffs are appealing the
court's rulings.
The second case is pending in the Federal District Court for the Southern
District of Ohio. It was filed in August 1992 and the court, in March
1994, conditionally certified it as a class action on behalf of purchasers
and lessees of Harvestore structures manufactured by the corporation and
Harvestore. A notice of the certification was mailed to the purported
class members in the third quarter of 1994, with approximately 5,500 "opt
out" forms being filed with the court by the August 31, 1994 deadline, the
impact of which is unknown. Discovery in the case is ongoing and a trial
of the liability issues only is scheduled to begin on October 16, 1995.
Damages would be tried at a later date and only after a liability finding.
Based on the facts currently available to management and its prior
experience with lawsuits alleging damages for economic loss resulting
from use of the Harvestore animal feed storage equipment, management is
confident that the class action suits can be defeated and that the
lawsuits do not represent a material threat to the corporation. The
corporation believes that any damages, including any punitive damages,
arising out of the pending cases are adequately covered by insurance and
recorded reserves. No range of reasonably possible losses can be
estimated because, in most instances, the complaint is silent as to the
amount of the claim or states it as an unspecified amount in excess of the
jurisdictional minimum. The corporation reevaluates its exposure
periodically and makes adjustment of its reserves as appropriate.
A lawsuit for damages and declaratory judgments in the Circuit Court of
Milwaukee County, State of Wisconsin, in which the corporation and
Harvestore are plaintiffs is pending against three insurance companies for
failure to pay in accordance with liability insurance policies issued to
the corporation. The insurers have failed to pay, in full or part,
certain judgments, settlements, and defense costs incurred in connection
with pending and closed lawsuits alleging damages for economic losses
claimed to have arisen out of alleged defects in Harvestore animal feed
storage equipment. While the corporation has, in part, assumed
applicability of this coverage, an adverse judgment should not be material
to its financial condition.
The corporation is involved in other litigation and claims which arise in
the ordinary course of its business including governmental proceedings
regarding the disposal of hazardous waste at sites which are in various
stages of the remediation process. For some of the sites, total costs for
remediation are not available because the final remedy has not been
selected or for other reasons. Further, the ultimate liability of the
corporation, if any, has not been determined at all of the sites. As a
result, it is impossible at this time to estimate the total cost of
remediation for all of the sites. The total estimated cleanup costs
identified at this time for all parties at all sites involving claims
filed by the Environmental Protection Agency or similar state agencies
where the corporation has been designated a potentially responsible party
is approximately $252.5 million. The estimated portion of the total for
which the corporation is or may be responsible is approximately $4.3
million, of which $3.5 million has been contributed towards the cleanup
costs by the corporation and its insurance companies. The balance of the
identified potential cleanup costs is covered by insurance and established
reserves set by the corporation which are believed to be adequate to cover
the corporation's obligations with respect to the unpaid balance of the
claims. To the best of the corporation's knowledge, the insurers have the
financial ability to pay any such covered claims and the corporation has
not incorporated any insurance proceeds in the calculation of its reserves
for which recovery is not considered probable. The corporation
reevaluates its exposure periodically and makes adjustment of its reserves
as appropriate.
In March 1992, a subsidiary of the corporation, Smith Fiberglass Products
Inc. (Smith Fiberglass), won a patent infringement suit filed against a
competitor. A judgment was entered in favor of Smith Fiberglass. The
judgment was appealed by the defendant. However, the Court of Appeals
affirmed the award and Smith Fiberglass recognized the judgment which
amounted to $1.9 million after recognition of legal fees as income in the
second quarter of 1993.
A legal action against a supplier of certain automotive equipment alleging
breach of warranty was settled in December 1992. The corporation recorded
the settlement, net of expenses, of $1.1 million as income in 1992.
A lawsuit initiated by the corporation in connection with previously
concluded antitrust action involving a former subsidiary was terminated in
the second quarter of 1993 with a favorable settlement of $2.8 million.
Over the past several years, the corporation has self-insured a portion of
its product liability loss exposure and other business risks. The
corporation has established reserves which it believes are adequate to
cover incurred claims. For the year ended December 31, 1994, the
corporation had $60 million of third-party product liability insurance for
individual losses in excess of $1.5 million and for aggregate losses in
excess of $10 million.
13. Operations by Segment
<TABLE>
<CAPTION>
Years ended December 31 (dollars in millions)
Net Revenues<F1> Earnings (Loss)
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OEM Products
Auto and truck structural
components, fractional
horsepower, and hermetic
electric motors $1,003.9 $848.8 $753.2 $631.2 $684.5 $92.2 $70.2 $52.8 $12.0 $38.7
Water Products
Water heaters and water
heating systems and
protective industrial
coatings 271.5 248.1 215.2 194.6 197.6 30.1 26.5 18.2 11.0 20.4
Agricultural Products
Agricultural feed storage
systems, agricultural
financing, municipal
and industrial storage
systems 40.2 38.1 34.0 36.1 42.4 (5.8) (4.8) (4.5) (3.6) (11.0)
Fiberglass Products
Fiberglass reinforced
piping systems 57.9 58.9 43.9 53.9 53.1 9.2 9.5 4.7 10.2 12.2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$1,373.5 $1,193.9 $1,046.3 $915.8 $977.6 125.7 101.4 71.2 29.6 60.3
======= ======= ======= ===== =====
General corporate and
research and develop-
ment expense (26.0) (23.3) (20.5) (14.1) (16.1)
Interest expense<F2> ( 9.2) ( 9.6) (11.9) (13.0) (15.7)
----- ----- ----- ----- -----
Earnings Before Income
Taxes, Equity in Earnings
of Affiliated Companies,
and Cumulative Effect of
Accounting Changes $90.5 $68.5 $38.8 $ 2.5 $ 28.5
==== ==== ==== ==== =====
<FN>
<F1> Revenues are primarily from the North American area. Major customers for the Original Equipment Manufacturers (OEM)
segment are Ford, Chrysler, and General Motors which accounted for $325.6, $177.6, and $135.9 million in 1994; $266.9,
$118.2, and $132.0 million in 1993; $219.3, $96.7, and $148.1 million in 1992; $177.5, $75.8, and $115.6 million in
1991; and $179.8, $96.8, and $136.3 million in 1990 of this segment's revenues.
<F2> Interest expense of the finance subsidiary of $2.9, $3.8, $6.0, $7.9, and $9.2 million in 1994, 1993, 1992, 1991, and
1990, respectively, has been included in the Agricultural Products segment loss.
</TABLE>
Further discussion of the segment results, including Automotive Products
and Electrical Products which comprise the OEM segment, can be found under
"Management's Discussion and Analysis--Results of Operations."
<TABLE>
<CAPTION>
(dollars in millions)
Capital
Identifiable Depreciation Expenditures
Total Assets (Years ended (Years ended
(December 31) December 31) December 31)
1994 1993 1992 1994 1993 1992 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive Products $361.9 $322.4 $302.7 $27.4 $21.1 $20.6 $58.0 $31.5 $25.4
Electrical Products 158.9 161.0 148.7 12.7 12.0 10.1 8.1 14.8 14.0
Water Products 127.8 119.0 105.5 6.0 5.9 5.7 4.8 3.5 4.5
Agricultural Products 82.0 102.5 107.6 1.3 1.4 1.3 1.1 1.2 .6
Fiberglass Products 31.6 27.3 25.1 1.4 1.9 1.4 3.5 3.5 2.1
Investments in
affiliated companies 17.3 23.8 22.9 -- -- -- -- -- --
Corporate assets 68.4 67.1 56.5 .4 .3 .4 .6 .2 .3
----- ----- ----- ----- ----- ----- ----- ----- -----
Total $847.9 $823.1 $769.0 $49.2 $42.6 $39.5 $76.1 $54.7 $46.9
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
14. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1994 1993 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $339.8 $296.1 $350.2 $315.8 $332.7 $272.8 $350.8 $309.2
Gross profit 53.4 48.1 58.5 51.9 46.3 35.1 53.3 43.4
Net earnings 15.7 13.0 18.0 15.1 10.1 5.5 13.5 9.1
Net earnings per share .76 .64 .86 .74 .48 .27 .65 .44
Common dividends declared .11 .10* .13 .10 .13 .11 .13 .11
* Excludes $.25 special dividend on Common Stock (see note 7).
</TABLE>
Net earnings per share is computed separately for each period and,
therefore, the sum of such quarterly per share amounts may differ from the
total for the year.
See note 6 for restrictions on the payment of dividends.
The fourth quarter of 1994 includes, on an after-tax basis, approximately
$.4 million of charges for additions to bad debt reserves partially offset
by inventory adjustments.
The fourth quarter of 1993 includes, on an after-tax basis, approximately
$2.3 million of charges for additions to product liability and bad debt
reserves and writedown of certain assets partially offset by inventory
adjustments.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of Directors" in the
corporation's definitive Proxy Statement dated March 1, 1995 for the
Annual Meeting of Stockholders to be held April 5, 1995 is incorporated
herein by reference. The information required regarding Executive
Officers of the Corporation is included in Part I of this Form 10-K under
the caption "Executive Officers of the Corporation."
The information included under the heading "Compliance with Section 16(a)
of the Securities Exchange Act" in the corporation's definitive Proxy
Statement dated March 1, 1995 for the Annual Meeting of Stockholders to be
held on April 5, 1995 is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
corporation's definitive Proxy Statement dated March 1, 1995 for the April
5, 1995 Annual Meeting of Stockholders is incorporated herein by
reference, except for the information required by paragraphs (i), (k) and
(l) of Item 402(a)(8) of Regulation S-K.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the headings "Principal Stockholders" and
"Security Ownership of Directors and Management" in the corporation's
Proxy Statement dated March 1, 1995 for the April 5, 1995 Annual Meeting
of Stockholders is incorporated hereby by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the headings "Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider
Participation" in the corporation's Proxy Statement dated March 1, 1995
for the April 5, 1995 Annual Meeting of Stockholders is incorporated
herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
Form 10-K
Page Number
The following consolidated financial statements
of A. O. Smith Corporation are included in Item 8:
Consolidated Balance Sheet at December 31, 1994 and 1993 24
For each of the three years in the period ended
December 31, 1994:
- Consolidated Statement of Operations
and Retained Earnings 25
- Consolidated Statement of Cash Flows 26
Notes to Consolidated Financial Statements 27-42
The following consolidated financial statement schedule of
A. O. Smith Corporation is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts 48
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
Financial statements of Metalsa S.A., an affiliate in which the
corporation has a 40 percent investment, are omitted since it does not
meet the significant subsidiary test of Rule 3-09 of Regulation S-X.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1994.
(c) Exhibits
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities
Exchange Act of 1934, as amended, the corporation will, upon request and
upon payment of a reasonable fee not to exceed the rate at which such
copies are available from the Securities and Exchange Commission, furnish
copies of any of the following exhibits to its security holders.
Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 14(c) of Form 10-K are listed below
as Exhibits 10(a) through 10(h).
Form 10-K
Page Number
(3)(i) Restated Certificate of Incorporation of the corporation
as amended and restated January 26, 1993 incorporated
by reference to the Form 8-K report dated February 8,
1993 filed by the corporation . . . . . . . . . . . . . . . N/A
(3)(ii) By-laws of the corporation as amended February 5, 1990
incorporated by reference to the Annual Report on Form
10-K for the year ended December 31, 1989 . . . . . . . . . N/A
(4) (a) Certain long-term debt is described in Note 6 to the
Consolidated Financial Statements. The corporation agrees
to furnish to the Commission, upon request, copies of any
instruments defining rights of holders of long-term debt
described in Note 6 . . . . . . . . . . . . . . . . . . . . N/A
(b) Extension and First Amendment, dated as of June 15,
1994, $140 Million Credit Agreement incorporated by
reference to the quarterly report on Form 10-Q for the
quarter ended June 30, 1994 . . . . . . . . . . . . . . . . N/A
(c) Term Loan Agreement dated April 5, 1994 between A. O.
Smith Corporation and NBD Bank, N.A., incorporated by
reference to the quarterly report on Form 10-Q for the
quarter ended ended March 31, 1994 . . . . . . . . . . . . N/A
(d) A. O. Smith Corporation Restated Certificate of
Incorporation dated January 26, 1993 (incorporated by
reference to Exhibit (3)(i) hereto) . . . . . . . . . . . . N/A
(e) Note Purchase and Medium-Term Note Agreement, dated
July 23, 1993 between A. O. Smith Corporation and
Metropolitan Life Insurance Company, incorporated by
reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993 . . . . . . . . . . . . . . . . N/A
(f) Note and Agreement dated May 14, 1993 between A. O.
Smith Corporation and The Prudential Insurance Company of
America, incorporated by reference to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993 . . . . . N/A
(10) Material Contracts
(a) 1990 Long-Term Executive Compensation Plan
incorporated by reference to the corporation's Proxy
Statement dated March 3, 1994 for an April 13, 1994 Annual
Meeting of Stockholders . . . . . . . . . . . . . . . . . . N/A
(b) 1980 Long-Term Executive Incentive Compensation Plan
incorporated by reference to the corporation's Proxy
Statement dated March 1, 1988 for an April 6, 1988 Annual
Meeting of Shareholders . . . . . . . . . . . . . . . . . . N/A
(c) Executive Incentive Compensation Plan, as amended,
incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1992 . . . . . N/A
(d) Letter Agreement dated December 15, 1979, as amended
by the Letter Agreement dated November 9, 1981, between
the corporation and Thomas I. Dolan incorporated by
reference to Amendment No. 2 to the Annual Report on Form
10-K for the year ended December 31, 1984 . . . . . . . . . N/A
(e) Supplemental Benefit Plan, as amended, incorporated
by reference to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 . . . . . . . . . . . . N/A
(f) Executive Life Insurance Plan, incorporated by
reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 . . . . . . . . . . . . . . . N/A
(g) Corporate Directors' Deferred Compensation Plan, as
amended, incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 . . . N/A
(h) Non-employee Directors' Retirement Plan incorporated
by reference to the quarterly report on Form 10-Q for the
quarter ended June 30, 1991 . . . . . . . . . . . . . . . . N/A
(11) Computation of Earnings Per Common Share . . . . . . . . . 49
(21) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 50
(23) Consent of Independent Auditors . . . . . . . . . . . . . . 51
(24) (a) Power of Attorney - Arthur O. Smith incorporated by
reference to the Annual Report on Form 10-K for the year
ended December 31, 1980 . . . . . . . . . . . . . . . . . . N/A
(b) Power of Attorney - Tom H. Barrett incorporated by
reference to the Annual Report on Form 10-K for the year
ended December 31, 1981 . . . . . . . . . . . . . . . . . . N/A
(c) Power of Attorney - Russell G. Cleary incorporated by
reference to the Annual Report on Form 10-K for the year
ended December 31, 1984 . . . . . . . . . . . . . . . . . . N/A
(d) Power of Attorney - Lee W. Jennings incorporated by
reference to the Annual Report on Form 10-K for the year
ended December 31, 1986 . . . . . . . . . . . . . . . . . . N/A
(e) Power of Attorney - Donald J. Schuenke incorporated
by reference to the Annual Report on Form 10-K for the
year ended December 31, 1988 . . . . . . . . . . . . . . . N/A
(f) Power of Attorney - Dr. Agnar Pytte incorporated by
reference to the Annual Report on Form 10-K for the year
ended December 31, 1990 . . . . . . . . . . . . . . . . . . N/A
(g) Power of Attorney - Thomas I. Dolan incorporated by
reference to the Annual Report on Form 10-K for the year
ended December 31, 1992 . . . . . . . . . . . . . . . . . . N/A
(27) Financial Data Schedule . . . . . . . . . . . . . . . . . . N/A
N/A = Not Applicable
<PAGE>
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking
shall be incorporated by reference into registrant's Registration
Statements on Form S-8 Nos. 2-72542 filed on May 26, 1981, Post-Effective
Amendment No. 1, filed on May 12, 1983, Post-Effective Amendment No. 2,
filed on December 22, 1983, Post-Effective Amendment No. 3, filed on March
30, 1987; 33-19015 filed on December 11, 1987; 33-21356 filed on April 21,
1988; Form S-8 No. 33-37878 filed November 16, 1990; and Form S-8 No. 33-
56827 filed December 13, 1994.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by
a director, officer or controlling person of the
registrant in the successful defense of any action, suit
or proceedings) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on behalf of the undersigned, thereunto duly authorized.
A. O. SMITH CORPORATION
By: /s/ Robert J. O'Toole
Robert J. O'Toole
Chief Executive Officer
Date: March 22, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 22, 1995 by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Name and Title Signature
ROBERT J. O'TOOLE /s/ Robert J. O'Toole
Chairman of the Board of Robert J. O'Toole
Directors, President, and
Chief Executive Officer
GLEN R. BOMBERGER /s/ Glen R. Bomberger
Executive Vice President, Glen R. Bomberger
Chief Financial Officer, and
Director
JOHN J. KITA /s/ John J. Kita
Treasurer and Controller John J. Kita
TOM H. BARRETT, Director /s/ Tom H. Barrett
Tom H. Barrett
RUSSELL G. CLEARY, Director /s/ Russell G. Cleary
Russell G. Cleary
THOMAS I. DOLAN, Director /s/ Thomas I. Dolan
Thomas I. Dolan
LEE W. JENNINGS, Director /s/ Lee W. Jennings
Lee W. Jennings
AGNAR PYTTE, Director /s/ Agnar Pytte
Agnar Pytte
DONALD J. SCHUENKE, Director /s/ Donald J. Schuenke
Donald J. Schuenke
ARTHUR O. SMITH, Director /s/ Arthur O. Smith
Arthur O. Smith
<PAGE>
A. O. SMITH CORPORATION
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000 Omitted)
Years ended December 31, 1994, 1993 and 1992
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other the End of
Description of Year Expenses<F1> Accounts Deductions<F2> Year
<S> <C> <C> <C> <C> <C>
1994:
Valuation allowance
for trade and notes
receivable $ 3,986 $ 579 $ -- $ 2,110 $ 2,455
Valuation allowance
for finance subsidiary
receivables 14,564 4,800 -- 9,344 10,020
1993:
Valuation allowance
for trade and notes
receivable 1,738 2,624 -- 376 3,986
Valuation allowance
for finance subsidiary
receivables 20,585 1,750 -- 7,771 14,564
1992:
Valuation allowance
for trade receivables 1,158 832 440<F3> 692 $1,738
Valuation allowance
for finance subsidiary
receivables 26,240 1,442 -- 7,097 20,585
<FN>
<F1> Provision (credit) based upon estimated collection.
<F2> Uncollectible amounts charged against the reserve.
<F3> Reclassification.
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
11 Computation of Earnings Per Common Shares
21 Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
EXHIBIT 11
<TABLE>
A. O. SMITH CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
YEARS ENDED DECEMBER 31, 1994, 1993, 1992
(000 omitted except for per share data)
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Primary
Earnings
Earnings before cumulative effect of
change in accounting principles $57,347 $42,678 $27,206
Deduct:
Preferred dividends paid - - 856
--------- ------- -------
Earnings before cumulative
effect of change in accounting
principles after preferred dividends 57,347 42,678 26,350
Tax credits realizable under FAS
No. 109 - - 1,600
-------- -------- -------
Earnings before effect of postretirement
benefits 57,347 42,678 27,950
Change in method of accounting for
postretirement benefits - - (46,122)
-------- --------- --------
Net earnings (loss) applied to
common stock $57,347 $42,678 $(18,172)
======= ======= ========
Shares
Weighted average number of common
shares outstanding 20,865,651 20,538,940 18,865,070
Per share amounts
Earnings before cumulative effect of
accounting changes $2.75 $2.08 $1.40
Realization of tax credits - - .08
------ ----- -----
Earnings before effect of postretirement
benefits 2.75 2.08 1.48
Change in postretirement benefits - - (2.44)
------ ------ -----
Net earnings (loss) $2.75 $2.08 $ (.96)
====== ====== =====
Assuming full dilution
Earnings
Earnings before cumulative effect
of change in accounting principles $57,347 $42,678 $ 27,206
Tax credits realizable under FAS
No. 109 - - 1,600
------- -------- -------
Earnings before effect of postretirement
benefits 57,347 42,678 28,806
Change in method of accounting for
postretirement benefits - - (46,122)
------- -------- -------
Net earnings (loss) $57,347 $42,678 $(17,316)
======= ======= =======
Shares
Weighted average number of common shares
outstanding 20,865,651 20,538,940 18,865,070
Assuming conversion of preferred stock - - 1,192,108
Assuming exercise of options reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such options - - 469,524
---------- ---------- ----------
Weighted average number of common shares
outstanding as adjusted 20,865,651 20,538,940 20,526,702
========== ========== ==========
Per share amounts
Earnings before cumulative effect of
accounting changes $2.75 $2.08 $1.33
Realization of tax credits - - .08
------ ------ -----
Earnings before effect of postretirement
benefits 2.75 2.08 1.41
Change in postretirement benefits - - (2.25)
----- ----- ------
Net earnings (loss) $2.75<F2> $2.08<F2> $ .(84)<F1>
===== ===== ======
<FN>
<F1> An antidilutive fully diluted net loss per share amount is presented for 1992 because the impact of conversion of
preferred stock on earnings before accounting changes is dilutive.
<F2> Due to the absence of any materially dilutive securities the fully diluted earnings per share amounts are the same as
the primary earnings per share amounts for 1993 and 1994.
</TABLE>
EXHIBIT 21
SUBSIDIARIES
The following lists all significant subsidiaries and affiliates of A. O.
Smith Corporation. Certain direct and indirect subsidiaries of A. O.
Smith Corporation have been omitted because, considered in the aggregate
as a single subsidiary, such subsidiaries would not constitute a
significant subsidiary.
Jurisdiction in Which
Name of Subsidiary Incorporated
AOS Holding Company Delaware
A. O. Smith Export, Ltd. Barbados
A. O. Smith Harvestore Products, Inc. Delaware
A. O. Smith International Corporation
also d/b/a A. O. Smith Automotive
Products Group-Japan Delaware
AgriStor Credit Corporation Delaware
Smith Fiberglass Products Inc. Delaware
Claymore Insurance Company, Ltd. Bermuda
A. O. Smith Enterprises Ltd.
also d/b/a A. O. Smith Automotive Products
Company-Canada Canada
AgriStor Credit Corporation Canada, Ltd. Canada
A. O. Smith L'eau Chaude S.a.r.l. France
A. O. Smith Electric Motors (Ireland) Ltd. Ireland
A. O. Smith Holding (Ireland) Ltd. Ireland
Metalsa, S.A. Mexico
Motores Electricos de Juarez, S.A. de C.V. Mexico
Motores Electricos de Monterrey, S.A. de C.V. Mexico
Productos de Agua, S.A. de C.V. Mexico
Productos Electricos Aplicados, S.A. de C.V. Mexico
A. O. Smith Water Products Company B.V. The Netherlands
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 2-72542, 33-19015, 33-21356, 33-37878 and
33-56827) pertaining to the 1980 Long-Term Executive Incentive
Compensation Plan and the 1990 Long-Term Executive Incentive Compensation
Plan of A. O. Smith Corporation and in the related prospectuses of our
report dated January 17, 1995, with respect to the consolidated financial
statements and schedule of A. O. Smith Corporation included in this Annual
Report (Form 10-K) for the year ended December 31, 1994.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
March 17, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF A. O. SMITH CORPORATION AS OF AND
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 8,485
<SECURITIES> 0
<RECEIVABLES> 148,991
<ALLOWANCES> 0
<INVENTORY> 110,863
<CURRENT-ASSETS> 329,520
<PP&E> 881,717
<DEPRECIATION> (479,937)
<TOTAL-ASSETS> 847,857
<CURRENT-LIABILITIES> 215,923
<BONDS> 166,126
<COMMON> 105,966
0
0
<OTHER-SE> 206,779
<TOTAL-LIABILITY-AND-EQUITY> 847,857
<SALES> 1,373,546
<TOTAL-REVENUES> 1,373,546
<CGS> 1,162,096
<TOTAL-COSTS> 1,162,096
<OTHER-EXPENSES> 108,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,085
<INCOME-PRETAX> 90,503
<INCOME-TAX> 34,707
<INCOME-CONTINUING> 57,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,347
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.75
</TABLE>
