SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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
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
Common Stock Outstanding as of October 31, 1996: 15,059,923
Class A Common Stock Outstanding as of October 31, 1996: 5,861,098
<PAGE>
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings and Retained
Earnings - Nine months ended September 30, 1996 and 1995 3
Condensed Consolidated Balance Sheet
- September 30, 1996 and December 31, 1995 4-5
Condensed Consolidated Statements of Cash Flows
- Nine months ended September 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements
- September 30, 1996 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to Exhibits 14
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
<TABLE>
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
AND RETAINED EARNINGS
Three and Nine months ended September 30, 1996 and 1995
(000 omitted except for per share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
EARNINGS 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Electrical Products Company $ 76,676 $ 71,641 $ 264,044 $ 241,457
Automotive Products Company 194,943 189,736 647,729 631,677
Water Products Company 70,101 66,287 211,338 197,237
Smith Fiberglass Products Inc. 16,309 14,680 44,569 43,997
Other Products 25,398 12,019 70,614 32,826
------- ------- --------- ---------
NET REVENUES 383,427 354,363 1,238,294 1,147,194
Cost of products sold 329,060 313,922 1,053,169 978,302
-------- ------- --------- ---------
Gross profit 54,367 40,441 185,125 168,892
Selling, general and
administrative expenses 31,393 26,106 96,663 84,383
Interest expense 3,689 3,234 11,086 9,799
Other expense - net 775 20 4,169 3,151
------- ------- ------- -------
18,510 11,081 73,207 71,559
Provision for income taxes 6,977 4,370 28,340 27,520
------- ------- ------- -------
Earnings before equity in earnings
of affiliated companies 11,533 6,711 44,867 44,039
Equity in earnings of affiliated
companies 1,001 744 3,741 1,802
------- ------- -------- -------
NET EARNINGS 12,534 7,455 48,608 45,841
======= ======= ======== =======
RETAINED EARNINGS
Balance at beginning of period 303,131 256,998 273,751 224,467
Cash dividends on common shares (3,557) (3,137) (10,251) (8,992)
-------- -------- -------- --------
BALANCE AT END OF PERIOD $ 312,108 $ 261,316 $ 312,108 $ 261,316
========= ======== ======== ========
NET EARNINGS PER COMMON SHARE $.60 $.36 $2.32 $2.19
DIVIDENDS PER COMMON SHARE $.17 $.15 $.49 $.43
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
<PAGE>
PART 1-FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1996 and December 31, 1995
(000 omitted)
(unaudited) Dec. 31,
Sept. 30, 1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,252 $ 4,807
Trade receivables 153,668 165,924
Finance subsidiary receivables and
leases 11,139 13,449
Customer tooling 57,118 30,799
Inventories (note 2) 117,093 103,413
Deferred income taxes 19,028 17,542
Other current assets 12,815 14,327
-------- -------
TOTAL CURRENT ASSETS 378,113 350,261
Investment in and advances to
affiliated companies 45,904 28,731
Deferred model change 31,870 25,246
Finance subsidiary receivables and
leases 20,302 26,950
Other assets 86,846 79,220
Property, plant and equipment 1,092,947 965,021
Less accumulated depreciation 570,565 528,487
--------- ---------
Net property, plant and equipment 522,382 436,534
--------- -------
TOTAL ASSETS $1,085,417 $946,942
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables $ 162,200 $ 112,645
Accrued payroll and benefits 55,436 47,763
Postretirement benefit obligation 7,742 7,837
Other current liabilities 32,397 40,469
Long-term debt due within one year 7,804 3,925
Finance subsidiary long-term debt
due within one year 1,010 1,008
-------- --------
TOTAL CURRENT LIABILITIES 266,589 213,647
Long-term debt (note 3) 213,267 167,139
Finance subsidiary long-term debt 17,097 23,799
Postretirement benefit obligation 76,066 74,799
Other liabilities 34,464 31,955
Deferred income taxes 67,391 63,239
STOCKHOLDERS' EQUITY:
Class A common stock, $5 par value:
authorized 14,000,000 shares;
issued 5,885,458 and 5,888,601 29,427 29,443
Common stock, $1 par value:
authorized 60,000,000 shares;
issued 15,814,192 and 15,811,049 15,814 15,811
Capital in excess of par value 68,898 68,871
Retained earnings (note 3) 312,108 273,751
Cumulative foreign currency
translation adjustments (7,712) (7,499)
Treasury stock at cost (7,992) (8,013)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 410,543 372,364
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,085,417 $ 946,942
========= ========
See accompanying notes to unaudited condensed
consolidated financial statements
<PAGE>
PART 1-FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months ended September 30, 1996 and 1995
(000 omitted) - (unaudited)
CASH FLOWS 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 48,608 $ 45,841
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 47,219 41,038
Deferred income taxes 2,666 5,351
Equity in earnings of affiliates, net
of dividends (1,341) (1,802)
Deferred model change and software
amortization 9,157 7,625
Other - net 267 (759)
Change in current assets and
liabilities:
Trade receivables and customer
tooling (15,099) (21,315)
Current income tax accounts-net 2,073 (275)
Inventories (13,680) 541
Prepaid expenses and other (2,611) (6,830)
Trade payables 49,555 11,774
Accrued liabilities, payroll and
benefits 1,556 2,040
Net change in noncurrent assets and
liabilities 7,740 956
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 136,110 84,185
------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (127,277) (61,146)
Capitalized purchased software costs (10,332) (4,413)
Deferred model change expenditures (13,259) (10,950)
Investment in joint ventures (15,889) -
-------- --------
CASH USED BY INVESTING ACTIVITIES (166,757) (76,509)
-------- --------
CASH FLOW BEFORE FINANCING ACTIVITIES (30,647) 7,676
------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt incurred 53,807 15,000
Long-term debt retired (3,800) (11,059)
Finance subsidiary net long-term debt
retired (6,700) (5,814)
Stock transactions 36 77
Dividends paid (10,251) (8,992)
------- --------
CASH PROVIDED/(USED) BY FINANCING
ACTIVITIES 33,092 (10,788)
Net increase/(decrease) in cash and
cash equivalents 2,445 (3,112)
Cash and cash equivalents-beginning of
period 4,807 8,485
------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 7,252 $ 5,373
======= =======
See accompanying notes to unaudited condensed
consolidated financial statements.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
1. Basis of
Presentation
The financial statements presented herein are based on
interim figures and are subject to audit. In the opinion of
management, all adjustments consisting of normal accruals
considered necessary for fair presentation of the results
of operations and of financial position have been made.
The results of operations for the nine-month period ended
September 30, 1996 are not necessarily indicative of the
results expected for the full year The consolidated
balance sheet as of December 31, 1995 is derived from the
audited financial statements but does not include all
disclosures required by generally accepted accounting
principles. Certain prior year amounts have been
reclassified to conform to the 1996 presentation.
2. Inventories
(000 omitted) September 30, 1996 December 31, 1995
Finished products $ 60,975 $ 53,788
Work in process 47,708 44,806
Raw materials 45,517 41,841
Supplies 9,590 9,067
------- --------
163,790 149,502
Allowance to
state inventories
at LIFO cost 46,697 46,089
-------- --------
$ 117,093 $ 103,413
======== ========
3. Long-Term Debt
The corporation's long-term 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
$115.7 million were unrestricted as of September 30, 1996
for cash dividends and treasury stock purchases.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1996 COMPARED TO 1995
Revenues for the first nine months of 1996 were $1.24 billion reflecting
an increase of over $90 million or almost an eight percent improvement
from the $1.15 billion of revenues reported in the first nine months of
1995. Third quarter revenues increased 8.2 percent from $354.4 million in
1995 to a record $383.4 million in 1996.
The corporation earned $48.6 million or $2.32 per share for the first nine
months of 1996 compared with $45.8 million or $2.19 per share in the first
nine months of 1995. Third quarter earnings of $12.5 million or $.60 per
share were 67% higher than third quarter 1995 earnings of $7.5 million or
$.36 per share. Third quarter 1995 earnings were impacted by a number of
non-recurring factors including unusually hot weather, heavy demand for
truck products, and operational difficulties which in combination
disrupted production at the company's automotive operation.
The third quarter gross margin of 14.2 percent was significantly higher
than the 11.4 percent gross margin achieved in last year's third quarter.
The reason for the dramatic improvement in the third quarter gross margin
was twofold. First, the Electrical Products Company generated improved
operating efficiencies on higher manufacturing volumes. Secondly,
Automotive Products did not have to contend with the aforementioned
weather-related and other production difficulties which caused a decline
in last year's third quarter gross margin. The gross profit margin
through the first nine months of the year increased to 15 percent in 1996
from 14 .7 percent in 1995 due mostly to the improvement in third quarter
results.
The Automotive Products Company sales for the first nine months and third
quarter of 1996 exceeded the corresponding periods of 1995 by
approximately 2.5 percent. Strong customer demand for structural
components for pickup trucks and sport utility vehicles, was responsible
for the increased sales.
Automotive's earnings for the first nine months of 1996 were lower than
the same period last year. Most of the earnings decline was caused by
start-up costs for several new facilities and the Dodge Dakota model
changeover in the second quarter. Third quarter earnings in 1996
reflected an increase from the same period in 1995 as the aforementioned
production complications were not experienced in the third quarter of
1996.
During the fourth quarter Automotive will begin production at its new
heavy truck operation in Roanoke, Virginia. This facility incorporates
sophisticated automation and innovative techniques in its manufacturing
processes which should afford customers shorter lead times and reduced
transportation costs. This plant should strengthen Automotive's position
in both the medium and heavy truck segments of the market.
Third quarter sales for the Electrical Products Company were 7 percent
higher than the third quarter of 1995 as demand for fractional horsepower
and hermetic electric motors continued at the increased levels experienced
in the first half of the year. The HVAC market segment exhibited
particular strength as hermetic and fan motor sales were substantially
higher than last year's third quarter. Demand for pump motors was also
strong in the third quarter.
Electrical Products' manufacturing operations have demonstrated the
ability to operate efficiently at higher volumes which resulted in
improved earnings for both the third quarter and the first nine months of
1996 when compared with the same periods in 1995.
Increased unit volume for both commercial and residential water heaters
resulted in nearly a six percent third quarter sales increase for Water
Products Company when comparing 1996 with 1995. Year-to-date sales were
more than 7 percent higher than the first nine months of 1995 as a result
of the unit volume increase.
Third quarter earnings for Water Products were higher than the 1995 third
quarter due to increased volume. Profits for the first nine months of the
year were also better than those of the first nine months of 1995 as the
impact of increased volume more than offset the adverse effect of the
industry-wide residential price concessions which were prevalent for most
of the first half of 1996.
Third quarter sales for Smith Fiberglass Products Inc. increased 11.1
percent over 1995's third quarter while year-to-date sales were 1.3
percent higher than the first nine months of 1995. Despite higher sales,
earnings were lower in both the third quarter and first nine months of
1996 compared with the corresponding periods in 1995. Throughout the
year, earnings have been adversely impacted by a shift in sales mix from
higher to lower margin products.
Revenues for the Other Products segment of the corporation consisting of
A. O. Smith Harvestore Products Inc. (AOSHPI), the recently acquired
Peabody TecTank, Inc. (PTT) and AgriStor Credit Corporation increased from
$12 million in the third quarter of 1995 to $25.4 million in the third
quarter of 1996. Year-to-date sales increased $37.8 million over the
first nine months of 1995. This significant year over year increase in
revenues was attributed to the acquisition of PTT which experienced strong
demand for its line of bolted tanks. AOSHPI's third quarter year-to-date
sales were adversely impacted by softness in the municipal and
agricultural markets while AgriStor's revenues continue to decline
consistent with the intent to liquidate this entity. The incremental
profits generated by PTT in the third quarter of 1996 were more than
offset by lower earnings for AOSHPI and AgriStor. Year-to-date earnings
were substantially higher than the first nine months of 1995 as a result
of the PTT acquisition.
Selling, general and administrative (SG&A) expenses in the third quarter
were $5.3 million more than the same period in 1995. Through the first
nine months of the year SG&A expenses were $12.3 million higher than the
first nine months of 1995. Most of this increase was associated with the
consolidation of the SG&A of Peabody TecTank (PTT), general increases to
support higher sales volumes and costs incurred relative to the start-up
of the corporation's Chinese joint ventures. The $1.3 million year-over-
year increase in interest expense for the first nine months was a direct
result of increased debt levels to support higher capital spending
programs and the PTT acquisition.
The recognition of research and development and foreign tax credits in the
third quarter of 1996 resulted in a lower effective tax rate compared with
the same quarter in 1995.
Equity in earnings of affiliated companies for the third quarter of 1996
increased over the same period in 1995. Metalsa, the corporation's 40
percent owned Mexican affiliate, continues to benefit from higher sales
and improved margins. Offsetting Metalsa's earnings were losses resulting
from the start-ups of the company's Chinese joint ventures.
During the first nine months of 1996, the corporation was a party to
futures contracts for purposes of hedging a portion of certain raw
material purchases. The corporation was also a party to forward exchange
contracts to hedge foreign currency transactions consistent with its
committed exposures. Had these contracts not been in place, the net
earnings of the corporation would not have been materially affected in the
third quarter or the first nine months of 1996.
Liquidity and Capital Resources
The corporation's working capital was $111.5 million at September 30, 1996
compared with $136.6 million at December 31, 1995. The majority of the
reduction is attributed to business-related increases in trade payables
partially offset by related increases in customer tooling and inventories.
Cash flow provided by operations was $51.9 million greater than the same
period last year primarily as the result of a reduction in working capital
requirements compared with the prior year.
During the first nine months of 1996, capital expenditures were $127.3
million, $66.1 million higher than during the same period in 1995. The
corporation anticipates that capital spending will be higher than the
original projection of $140 million discussed in the corporation's 1995
annual report on Form 10-K primarily due to earlier than anticipated
spending on 1998 model year automotive programs. Lower capital
expenditures are anticipated in 1997.
The corporation's long-term debt, excluding the debt of the company's
finance subsidiary, increased $46.1 million in the first nine months to
$213.3 million to finance capital expenditures and investments in joint
ventures. Additionally, its leverage ratio as measured by total debt
excluding the finance subsidiary divided by total capitalization was 35%
compared with 31% at December 31, 1995. The long-term debt of the finance
subsidiary declined $6.7 million to $17.1 million, reflecting the
continuing liquidation of that business. Although cash flow from
operations will cover the majority of the planned capital requirements,
the corporation projects that the total debt to total capital ratio will
remain higher for the remainder of the year.
At its October 8, 1996 meeting, A. O. Smith's Board of Directors declared
a regular quarterly dividend at $.17 per share on its common stock
(Classes A and Common). The dividend is payable on November 15, 1996 to
shareholders of record October 31, 1996.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
At September 30, 1996, the corporation and A. O. Smith Harvestore
Products, Inc. ("AOSHPI"), a wholly-owned subsidiary of the corporation,
were defendants in three (3) cases alleging damages for economic losses
claimed to have arisen out of alleged defects in AOSHPI's animal feed
storage equipment. Subsequent to the end of the quarter, a new case was
filed against the corporation and AOSHPI, which is the first such case
filed since July 1994.
It was previously reported that a federal court jury in Lansing, Michigan
returned a verdict against the corporation and AOSHPI holding that they
violated the RICO Act, and the former operators of a Michigan dairy farm
were awarded $156,008. The Judgment Order was vacated and the lawsuit
settled.
One of the remaining cases is a New York State court action which names
the corporation, AOSHPI, and two of its dealers as defendants. The court
denied the plaintiffs' motion to certify the case as a class action and
has granted the defendants' motions dismissing some of the plaintiffs'
allegations. The plaintiffs are appealing the court's rulings.
Another of the cases was filed in August 1992 in the Federal District
Court for the Southern District of Ohio, and in March 1994, the court
conditionally certified it as a class action on behalf of purchasers and
lessees of Harvestore structures manufactured by the corporation and
AOSHPI. In August 1996, the court granted the corporation's motion to
decertify the class and ordered it decertified. A notification to the
former class members advising them of the decertification is to be mailed
and the lawsuit will proceed as individual actions by named plaintiffs.
The corporation believes that any damages, including any punitive damages,
arising out of the pending cases do not reach the threshold of materiality
requiring disclosure in this filing, and absent changes in circumstances,
this litigation will not be discussed in future filings.
There have been no material changes in the environmental matters
previously reported in Part 1, Item 3 in the corporation's annual report
on Form 10-K for the year ended December 31, 1995 and Part 2, Item 1 in
the quarterly report on Form 10-Q for the quarter ended June 30, 1996,
which are incorporated herein by reference.
ITEM 2--CHANGES IN SECURITIES
None.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the corporation in the third
quarter of 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A. O. SMITH CORPORATION
November 12, 1996 /s/ John J. Kita
John J. Kita
Vice President,
Treasurer and Controller
November 12, 1996 /s/ G. R. Bomberger
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-30-1996
<PERIOD-END> JAN-01-1996
<CASH> 7,252
<SECURITIES> 0
<RECEIVABLES> 164,807
<ALLOWANCES> 0
<INVENTORY> 117,093
<CURRENT-ASSETS> 378,113
<PP&E> 1,092,947
<DEPRECIATION> (570,565)
<TOTAL-ASSETS> 1,085,417
<CURRENT-LIABILITIES> 266,589
<BONDS> 230,364
106,147
0
<COMMON> 0
<OTHER-SE> 304,396
<TOTAL-LIABILITY-AND-EQUITY> 1,085,417
<SALES> 1,238,294
<TOTAL-REVENUES> 1,238,294
<CGS> 1,053,169
<TOTAL-COSTS> 1,053,169
<OTHER-EXPENSES> 100,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,086
<INCOME-PRETAX> 73,207
<INCOME-TAX> 28,340
<INCOME-CONTINUING> 48,608
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,608
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 2.32
</TABLE>
