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, 1997
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:
Name of Each
Shares of Stock Exchange on
Outstanding Which
Title of Each Class February 25, 1998 Registered
Class A Common Stock 5,817,174 American Stock
(par value $5.00 per share) Exchange
Common Stock 10,184,022 New York Stock
(par value $1.00 per share) Exchange
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 $18,108,997 for Class A Common Stock and $380,492,515 for
Common Stock as of February 25, 1998.
Documents Incorporated by Reference:
1. Portions of the company's definitive Proxy Statement dated March 2,
1998 for an April 8, 1998 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 are engaged in three business segments.
These segments are Electric Motor Technologies, Water Systems Technologies
and Storage & Fluid Handling Technologies.
The company's Electric Motor Technologies segment produces fractional
horsepower and hermetic electric motors. The Water Systems Technologies
Segment is a leading manufacturer of residential and commercial gas, oil,
and electric water heating systems. Storage & Fluid Handling Technologies
manufactures reinforced thermosetting resin piping, agricultural,
industrial and municipal liquid and dry bulk storage systems. Financial
information regarding the company's business segments is provided in Note
13 to the Consolidated Financial Statements which appear elsewhere herein.
On April 18, 1997 the company sold its Automotive Products Company to
Tower Automotive, Inc. See Note 2 to the Consolidated Financial
Statements, entitled "Discontinued Operations" which appears elsewhere
herein.
On March 31 1997, the company acquired the business of UPPCO, Inc., a
privately held manufacturer of sub-fractional horsepower electric motors
with 1997 sales since the date of acquisition of approximately $57
million.
The following table summarizes sales by segment for the company'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)
1997 1996 1995 1994 1993
Electric Motor Technologies $390.7 $337.1 $317.3 $281.2 $242.6
Water Systems Technologies 287.5 291.3 276.0 271.5 248.1
Storage & Fluid Handling
Technologies 154.7 152.8 103.4 95.3 92.2
------- ------ ------ ------ ------
Total Continuing Operations $832.9 $781.2 $696.7 $648.0 $582.9
======= ====== ====== ====== ======
ELECTRIC MOTOR TECHNOLOGIES
Segment sales increased by $53.6 million or approximately 16 percent in
1997 to $390.7 million and represented 47 percent of total company
continuing sales. The increase in sales in 1997 was due to the
acquisition of UPPCO.
The Electric Motor Technologies segment includes the A. O. Smith
Electrical Products Company which manufactures fan motors used in
furnaces, air conditioners, and blowers, as well as fractional horsepower
motors used in other consumer products and jet pump motors sold to
manufacturers of home water systems, swimming pools, hot tubs and spas.
Hermetic motors are sold worldwide to manufacturers of compressors and are
used in air conditioning and refrigeration systems. Sales to the heating,
ventilating, air conditioning and refrigeration market account for
approximately 59 percent of the unit's sales.
In addition to selling its products directly to OEMs, the company also
markets its products through a distributor network which sells to both
OEMs and the related after-market. The company estimates that
approximately 60 percent 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 segment's principal products are sold in competitive markets with its
major competitors being Emerson Electric, General Electric, Magnetek,
Inc., Fasco, and Jakel and vertically integrated customers.
WATER SYSTEMS TECHNOLOGIES
The Water Systems Technology segment includes the A. O. Smith Water
Products Company which had 1997 sales of $287.5 million, approximately 1
percent lower than 1996 sales of $291.3 million and represented
approximately 35 percent of total company sales.
Residential sales in 1997 were $166 million or approximately 57 percent of
segment revenues. The company markets residential gas and electric water
heaters through a network of plumbing wholesalers in the United States.
The majority of the company's sales are in the less cyclical replacement
market although the new housing market is an important portion of the
business as well. The residential water heater market remains highly
competitive. A. O. Smith competes with four other manufacturers in
supplying over 90 percent of market requirements. The principal
competitors in the Water Systems segment are Rheem Manufacturing, State
Industries, The American Water Heater Group (formerly SABH, Inc.) and
Bradford-White.
The company also markets commercial water heating systems through a
network of plumbing wholesalers in the United States and Canada. A.O.
Smith's Water Systems Technologies segment is the largest manufacturer of
commercial water heaters. 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.
A significant portion of the company's commercial and residential business
is derived from the less cyclical replacement market with the remainder
being impacted by general business conditions in the new construction
market.
In 1995 Water Systems established a joint venture with Nanjing Water
Heater Company of China to manufacture instantaneous and storage type
heaters for the Chinese market. A.O. Smith is a majority owner of the
venture, which began operation in 1996.
STORAGE & FLUID HANDLING TECHNOLOGIES
The Storage & Fluid Handling segment provides world-wide solutions for
effectively storing liquids and a wide range of dry materials; as well as
high performance piping systems that safely and effectively contain and
convey corrosive, abrasive or related materials. Higher sales of fluid
handling products more than offset a decline in storage products, and as a
result, 1997 sales rose slightly to $154.7 million compared with 1996
sales of $152.8 million.
Engineered Storage Products manufactures industrial, municipal and
agricultural liquid and dry bulk storage products. 1997 sales of storage
products were $93.1 million. The company's storage products are sold in
competitive markets that include concrete, site welded, and bolted tanks.
Principal competitors include Columbian Steel Tank Company, Permastore
LTD., Pittsburg Tank and Tower Company Inc. and Natgun Corporation.
Fiberglass Products manufactures reinforced thermosetting resin piping and
fittings used to carry corrosive materials. Sales of fluid handling
products were $61.6 million in 1997. Typical applications include
chemical and industrial process and waste steam piping, high and low
pressure oil field pipe and tubing, and underground gasoline service
station piping. Products are sold through a network of distributors.
Fiberglass Products has formed a joint venture with Harbin Composites
Corporation of Harbin, China to supply fiberglass pipe to the Chinese oil
industry. The company is a majority owner of the new venture, which began
production in 1996.
Principal fluid handling products are sold in competitive markets with its
major competitors being Ameron Corporation, Fibercast Company, Environ
Corporation, and Total Containment Corporation.
RAW MATERIAL
Raw materials for the company's operations, which consist primarily of
steel, copper, and aluminum, are generally available from several sources
in adequate quantities. The company hedges the majority of its annual
purchases of copper and aluminum to protect against price volatility.
SEASONALITY
There is no significant seasonal pattern to the company's consolidated
quarterly sales and earnings.
RESEARCH AND DEVELOPMENT, PATENTS AND TRADEMARKS
In order to improve competitiveness by generating new products and
processes, the company conducts research and development at its Corporate
Technology Center in Milwaukee, Wisconsin as well as at its operating unit
locations. Total expenditures for research and development in 1997, 1996,
and 1995 were approximately $17.2 million, $17.3 million, and $15.0
million, respectively.
The company owns and uses in its businesses various trademarks, trade
names, patents, trade secrets, and licenses. While a number of these are
important to the company, it does not consider a material part of its
business to be dependent on any one of them.
EMPLOYEES
The company and its subsidiaries employed approximately 8,400 persons in
its operations as of December 31, 1997.
BACKLOG
Normally, none of the company's operations sustain significant backlogs.
ENVIRONMENTAL LAWS
The company's operations are governed by a variety of federal, state and
local laws intended to protect the environment. While environmental
considerations are a part of all significant capital expenditures,
compliance with the environmental laws 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 company. See Item 3.
FOREIGN SALES
Total export sales of continuing operations from the U.S. were $ 64
million, $ 52 million, and $ 49 million in 1997, 1996, and 1995,
respectively. The increase in sales in 1997 compared with prior years was
attributable to the acquisition of UPPCO.
ITEM 2 - PROPERTIES
The company manufactures its products in 33 locations worldwide. These
facilities have an aggregate floor space of 4,658,641 square feet,
consisting of 3,425,891 square feet owned by the company and 1,232,750
square feet of leased space. Fifteen of the company's facilities are
foreign plants including affiliates and joint ventures with 1,320,931
square feet of space, of which 428,786 square feet are leased.
United States Foreign
Electric Motor Mebane, NC; Monticello, IN; Acuna, Mexico;
Technologies Mt. Sterling, KY; Paoli, IN; Bray, Ireland;
(1,838,025 sq.ft.) Tipp City, OH; Upper Sandusky, OH Juarez, Mexico (5);
Monterrey, Mexico
Villa de Cura,
Venezuela
Water Systems El Paso, TX; Florence, KY; Juarez, Mexico;
Technologies McBee, SC; Renton, WA Nanjing, People's Rep.
(1,675,826 sq. ft.) of China;
Stratford, Canada (2);
Veldhoven,
The Netherlands
Storage & Fluid
Handling Bakersfield, CA; DeKalb, IL; Harbin, People's
Technologies Little Rock, AR (3); Parsons, KS; Republic ofChina
(1,144,790 sq. ft.) Wichita, KS; Winchester, TN
The principal equipment at the company's facilities consist of presses,
welding, machining, slitting and other metal fabricating equipment,
winding machines, and furnace and painting equipment. The company regards
its plant and equipment as well-maintained and adequate for its needs.
Multishift operations are used where necessary.
In addition to its manufacturing facilities, the company's World
Headquarters is located in Milwaukee, Wisconsin. It also has offices in
Alsip, Illinois; El Paso, Texas; Irving, Texas; London, England and
Beijing, China.
ITEM 3 - LEGAL PROCEEDINGS
The company is involved in various unresolved legal actions,
administrative proceedings and claims in the ordinary course of its
business involving product liability, property damage, insurance coverage,
patents and environmental matters including the disposal of hazardous
waste. Although it is not possible to predict with certainty the outcome
of these unresolved legal actions or the range of possible loss or
recovery, the company believes these unresolved legal actions will not
have a material effect on its financial position or results of operations.
A more detailed discussion of these matters appears in Note 12 of the
Notes to 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 1997.
EXECUTIVE OFFICERS OF THE COMPANY
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 1998 Annual
Meeting of Stockholders.
ROBERT J. O'TOOLE
Chairman of the Board of Directors, President, and Chief Executive Officer
Mr. O'Toole, 57, became chairman of the board of directors in March 1992.
He is a member of the Investment Policy Committee of the board of
directors. He was elected chief executive officer in March 1989. He was
elected president, chief operating officer and a director in 1986. Mr.
O'Toole joined the company in 1963. He is a director of Briggs & Stratton
Corporation, Firstar Bank Milwaukee, N.A., Firstar Corporation and
Protection Mutual Insurance Company.
GLEN R. BOMBERGER
Executive Vice President, Chief Financial Officer, and Director
Mr. Bomberger, 60, has been a director and executive vice president and
chief financial officer of the company since 1986. He is a member of the
Investment Policy Committee of the board of directors. Mr. Bomberger
joined A.O. Smith in 1960. He is currently a director and vice
president-finance of Smith Investment Company. He is a director of
Firstar Funds, Inc.
JOHN A. BERTRAND
President - A. O. Smith Electrical Products Company
Mr. Bertrand, 59, has been president of A. O. Smith Electrical Products
Company, a division of the company, since 1986. Mr. Bertrand joined the
company in 1960.
CHARLES J. BISHOP
Vice President - Corporate Technology
Dr. Bishop, 56, has been vice president-corporate technology since 1985.
Dr. Bishop joined the company in 1981.
MICHAEL J. COLE
Vice President - Asia
Mr. Cole, 54, was elected vice president-Asia in March 1996. Previously
he was vice president-emerging markets of Donnelly Corporation, an
automotive supplier.
JOHN R. FARRIS
President - A. O. Smith Engineered Storage Products Company
Mr. Farris, 48, was elected president of A. O. Smith Engineered Storage
Products Company, a division of the company, in July 1997. Previously he
was president of A. O. Smith Harvestore Products, Inc. since November 1996
and president of Peabody TecTank, Inc. since 1987. Both of these
subsidiaries were dissolved and the new entity A. O. Smith Engineered
Storage Products Company established in July 1997.
DONALD M. HEINRICH
President - Smith Fiberglass Products Company
Mr. Heinrich, 45, became the president of Smith Fiberglass Products
Company, a division of the company, in November 1997. He served as vice
president-business development of A. O. Smith Corporation from October
1992.
WILLIAM R. HENNIG
President - A. O. Smith Water Products Company
Mr. Hennig, 50, became the president of A. O. Smith Water Products
Company, a division of the company, in June 1996. He served as vice
president of A. O. Smith Electrical Products Company's Juarez Operations
since January 1993 and held other management positions in the Electrical
Products Company. He joined A.O. Smith in 1989.
JOHN J. KITA
Vice President, Treasurer and Controller
Mr. Kita, 42, was elected vice president, treasurer and controller in
April 1996. From 1995 to 1996 he was treasurer and controller. Prior
thereto, he served as assistant treasurer since he joined the company in
1988.
RONALD E. MASSA
Senior Vice President
Mr. Massa, 48, was elected senior vice president in June 1997. He served
as the president of A. O. Smith Automotive Products Company from June 1996
to June 1997. He was the president of A. O. Smith Water Products Company
from 1995 and held other management positions in the Water Products
Company prior thereto. He joined the company in 1976.
ALBERT E. MEDICE
Vice President - Europe
Mr. Medice, 55, was elected vice president - Europe in 1995. Previously,
from 1990 to 1995, he was the general manager of A. O. Smith Electric
Motors (Ireland) Ltd., a subsidiary of the company. Mr. Medice joined
A.O. Smith 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, 57, has been vice president - human resources and public
affairs for the company since 1986. He joined A.O. Smith in 1970.
W. DAVID ROMOSER
Vice President, General Counsel and Secretary
Mr. Romoser, 54, was elected vice president, general counsel and secretary
in March 1992.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Common Stock is listed on the New York
Stock Exchange. The Class A Common Stock of A. O. Smith Corporation
is listed on the American Stock Exchange. The symbols for these
classes of the company's stock are: AOS for the Common Stock and SMCA
for the Class A 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
company's common stock.
Quarterly Common Stock Price Range
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Common Stock
High 35-5/8 37-1/2 39-3/4 43-3/8
Low 28-5/8 33-7/8 34 39-3/4
Class A Common
High 35-1/4 37-1/4 39-1/2 43-1/8
Low 29-3/4 34 34-3/4 40-3/8
1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Common stock
High 25-1/2 27-7/8 25-3/8 33
Low 20-7/8 22-5/8 21-5/8 24
Class A Common
High 25-3/4 27-1/2 25-1/8 33
Low 20-1/2 22-3/4 21-1/2 24-1/8
(b) Holders. As of January 31, 1998, the number of shareholders of
record of Common Stock and Class A Common Stock were 1,461 and 649,
respectively.
(c) Dividends. Dividends paid on the common stock are shown in Note 14
to the Consolidated Financial Statements appearing elsewhere herein.
The company's credit agreements contain certain conditions and
provisions which restrict the company's payment of dividends. Under
the most restrictive of these provisions, retained earnings of
$86.6 million were unrestricted as of December 31, 1998.
(d) Stock Repurchase Authority. On December 9, 1997, the company's Board
of Directors authorized the repurchase of up to $50 million of its
outstanding Class A and Common Stock. As of February 2, 1998,
approximately five million shares had been repurchased for $183
million, under the two previous authorizations granted in 1997.
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share amounts)
Years Ended December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales - continuing operations $ 832,937 $ 781,193 $ 696,700 $ 648,004 $ 582,919
Earnings
Continuing operations 37,553 25,249 23,995 17,066 7,477
Discontinued operations:
Operating earnings 15,231 40,168 37,418 40,281 35,201
Gain on disposition 101,046 -- -- -- --
-------- -------- --------- --------- ---------
Earnings 116,277 40,168 37,418 40,281 35,201
-------- -------- --------- --------- ---------
Net earnings $ 153,830 $ 65,417 $ 61,413 $ 57,347 $ 42,678
========= ======== ========= ========= =========
Basic earnings per share
of common stock
Continuing operations $ 2.04 $ 1.21 $ 1.15 $ .82 $ .37
Discontinued operations 6.31 1.92 1.79 1.93 1.71
-------- -------- -------- -------- --------
Net earnings $ 8.35 $ 3.13 $ 2.94 $ 2.75 $ 2.08
======== ======== ======== ======== ========
Diluted earnings per share
of common stock
Continuing operations $ 2.00 $ 1.19 $ 1.14 $ .81 $ .36
Discontinued operations 6.19 1.90 1.77 1.90 1.68
------- ------- ------- ------- --------
Net earnings $ 8.19 $ 3.09 $ 2.91 $ 2.71 $ 2.04
======= ======= ======= ======= ========
Cash dividends per common share $ .68 $ .66 $ .58 $ .50 $ .42*
<CAPTION>
December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total assets $ 716,516 $ 871,152 $ 748,479 $ 660,546 $ 658,080
Long-term debt 100,972 238,446 190,938 166,126 190,574
Total stockholders' equity 399,705 424,639 372,364 312,745 269,630
* Excludes special dividend of .25 per share (split adjusted).
</TABLE>
The company adopted FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" effective
January 1, 1996.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
A. O. Smith Corporation recorded earnings from continuing operations of
$37.6 million or $2.00 per diluted share in 1997 versus $25.2 million or
$1.19 per diluted share in 1996. Earnings from discontinued operations
added $116.3 million to the company's net earnings in 1997 compared to
$40.2 million in 1996, providing the company with total net earnings of
$153.8 million and $65.4 million in 1997 and 1996, respectively. The 1997
earnings from discontinued operations include a $101.0 million gain, net
of taxes, associated with the disposition of the automotive business. As
a result, diluted earnings per share totaled $8.19 in 1997 versus $3.09 in
1996. Details of individual segment performance will be discussed later in
this section.
Working capital for continuing operations at December 31, 1997 was $244.3
million compared to $103.4 million and $127.7 million at December 31, 1996
and 1995, respectively. The majority of the increase in 1997 was due to
the net cash proceeds received from the sale of the company's automotive
products business. Lower accounts receivable and production related
increases in trade payables resulted in lower working capital at December
31, 1996 versus 1995.
Capital expenditures for continuing operations were $44.9 million in 1997
compared to $37.8 million in 1996 and $26.9 million in 1995. The
increases in capital expenditures are primarily attributed to higher
capital expenditures for the Electric Motor Technologies business. The
company expects that cash flow from operations will adequately cover 1998
capital expenditures.
The company established two joint ventures in the People's Republic of
China in the fourth quarter of 1995. The company invested $13.7 million
in these joint ventures during 1997 compared to $15.1 million in 1996.
Long-term debt was reduced $137.4 million from $238.4 million at the end
of 1996 to $101.0 million at the end of 1997. The proceeds from the sale
of the automotive business, including its Mexican automotive affiliate,
was $773 million. A portion of the proceeds was used to pay taxes on the
transaction, repurchase common stock, retire long term debt, and complete
the acquisition of UPPCO. As a result, the company's leverage, as
measured by total debt to total capital, dropped to 21.0% at the end of
1997 compared to 37.1% at the end of 1996.
On January 27, 1997, the company's Board of Directors authorized the
repurchase of up to three million shares of its outstanding common stock.
On June 10, 1997 and December 9, 1997, the Board authorized the repurchase
of up to $80 million and $50 million, respectively, of additional common
stock. During 1997, the company purchased 14,500 shares of Class A Common
Stock and 4.8 million shares of Common Stock for approximately $176.6
million.
Due to significant cash and cash equivalent balances, the company elected
to reduce its multi-year revolving credit agreement from $210 million to
$100 million effective September 30, 1997.
The company 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 company enters into foreign currency forward contracts to minimize the
effect of fluctuating foreign currencies on transactions and operations of
foreign affiliates. Differences between the company'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
company'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 company does not engage in
speculation in its derivatives strategies. The effects of these programs
were not material on the results of operations for 1997, 1996, or 1995.
A. O. Smith Company has paid dividends for 58 consecutive years. A total
of $.68 per share was paid in 1997 versus $.66 per share in 1996.
Results of Operations
Sales from continuing operations in 1997 were $832.9 million surpassing
1996 sales of $781.2 million by almost $52 million or 6.6 percent. The
increase in sales was attributable to the acquisition in March of UPPCO,
a manufacturer of subfractional horsepower C-frame electric motors, which
contributed $56.6 million to total company sales. The increase in sales
associated with UPPCO helped overcome weakness in the domestic air
conditioning and residential water heating industries which are two of the
company's most significant markets. Sales from continuing operations in
1996 increased approximately $85 million compared with 1995 sales of
$696.6 million. The sales increase was the result of $50 million of
additional sales associated with the acquisition of Peabody TecTank Inc.,
made in December of 1995 and sales increases of approximately 6 percent
for both Water Systems and Electric Motor Technologies.
During 1997, the company successfully completed its exit from the
automotive industry by selling the Automotive Products Company for $710
million on April 18, 1997. On October 1, 1997, the company divested the
remainder of its automotive business by selling its 40 percent interest
in a Mexican automotive affiliate for $63 million. The after-tax gain on
the sale of $101.1 million combined with 1997 after-tax earnings of $15.2
million generated net earnings from discontinued operations of $116.3
million or $6.19 per diluted share. The results of the automotive
business have been reported as discontinued operations in the consolidated
financial statements.
The company's gross profit margin for continuing operations in 1997 was
20.5 percent, compared with 21.4 percent in 1996 and 20.3 percent in 1995.
Each of the company's business units experienced a decline in 1997 profit
margin relative to 1996. Profit margins for Electric Motor Technologies
dropped due to lower production rates and the lower margins associated
with subfractional motors produced by UPPCO. Water Systems Technologies
experienced a slight decline in profit margin as second half pricing
pressure for residential products was only partially offset by increased
sales of higher margin commercial product. Storage & Fluid Handling
Technologies' overall margin declined as favorable product mix for
fiberglass pipe was more than offset by lower volumes for the relatively
high margin liquid storage tank product. The favorable trend in margins
from 1995 to 1996 was due mostly to higher manufacturing volume, increased
capacity utilization and improved operating efficiencies for electric
motor production.
Sales for the Electric Motor Technologies segment in 1997 increased $53.6
million or almost 16 percent to a record $390.7 million from 1996 sales of
$337.1 million. Sales in 1995 were $317.3 million. The increase in sales
in 1997 was due to the acquisition of UPPCO as discussed above. Although
1997 sales, excluding the additional sales from the aforementioned
acquisition, were comparable to 1996, the company was encouraged by the
performance of this segment given the weakness in the air conditioning
market in 1997. An abnormally cool selling season combined with high
customer inventory levels resulted in a decline in overall industry
production volume of more than 10 percent compared to 1996. Despite the
weak market conditions, hermetic motor volumes declined only modestly.
The cool weather also affected other motor markets, specifically pump
motors, heating, ventilating and air conditioning (HVAC) fan motors and
aftermarket sales. 1997 fractional horsepower sales were about equal to
1996 levels as a 10 percent growth in the General Industries market
resulting from additional air compressor and garage door opener motor
volume offset the weather related weakness.
Earnings for the Electric Motor Technologies segment in 1997 were $45.4
million or 6.2 percent higher than the $42.7 million earned in 1996.
Earnings in 1995 were $31.9 million. The improved earnings in 1997 were
due to the UPPCO acquisition while the significant improvement over the
past few years was due to increased volume and the continued payoff from
capital investments in new equipment and concentration of production in
lower cost facilities.
Sales for the Water Systems Technologies segment declined modestly from
$291.3 million in 1996 to $287.5 million in 1997. Sales in 1995 were $276
million. The minor drop off in sales in 1997 was due to decreased unit
volume for residential product which reflected conditions prevalent within
the general industry. The unfavorable impact of decreased volume was
amplified by a competitive pricing environment present during the second
half of the year. Conversely, sales of commercial product rose on the
strength of higher unit volume and better pricing. The international
environment improved in 1997 as both the Canadian and European markets for
Water Products showed signs of recovery.
Earnings for Water Systems Technologies in 1997 have remained fairly
constant over the past three years, despite the aggressive pricing
environment that has existed during this time period. Earnings were $33.4
million, $32.8 million and $32.2 million in 1997, 1996 and 1995,
respectively.
Sales for the Storage & Fluid Handling Technologies segment reflected
slight improvement in 1997 increasing to $154.7 million from $152.8
million in 1996. 1996 sales increased $49.4 million over 1995 sales of
$103.4 million due to the December, 1995 acquisition of Peabody TecTank,
Inc., which contributed approximately $50 million to this segment's 1996
sales. The sales increase from 1996 to 1997 resulted from record sales of
fiberglass pipe which more than offset a sales decline for liquid storage
tanks. Earnings in 1997 were similar to 1996 as the impact of additional
volume and favorable product mix for fiberglass pipe was offset by the
loss of volume for the relatively high margin liquid storage tanks.
Selling, general, and administrative (SG & A) expense in 1997 was $107.0
million, about equal to 1996 SG & A of $107.4 million. SG & A in 1995 was
$91.4 million. As a percent of sales, SG & A dropped from 13.7 percent in
1996 to 12.8 percent in 1997. The decline in SG & A relative to sales was
due largely to a reduction in general corporate expenses resulting from
the divestiture of the Automotive Products Company. The increase in SG &
A from $91.4 million in 1995 to $107.4 million in 1996 was due to the
consolidation of SG & A associated with the acquisition of Peabody
TecTank, Inc., as well as increased sales commissions and other expenses
in support of increased sales volumes.
Interest expense, net of the amount allocated to discontinued operations,
was $7.8 million in 1997 compared to $8.1 million and $7.6 million in 1996
and 1995, as debt levels for continuing operations remained fairly
constant during the period.
Interest income in 1997 was $9 million and resulted from investing the
proceeds received from the sale of the automotive business. Interest
income in 1996 and 1995 was minimal.
The company's effective tax rate decreased to 34.6 percent in 1997 from 37
percent and 35.9 percent in 1996 and 1995, respectively. The decline in
the rate in 1997 resulted primarily from the impact of the utilization of
state tax loss carryforwards associated with liquidated subsidiaries and
research tax credits.
The company's share of the pre-tax losses incurred by its joint ventures
in China increased slightly from 1996 to 1997, however, the after-tax
losses declined from $3.9 million in 1996 to $2.7 million in 1997 due to
the company's ability to now tax effect these losses for U.S. tax
purposes. Current projections for 1998 China activity reflect a loss
similar to that of 1997 as start up costs associated with the new water
heater plant in Nanjing are incurred.
Consolidated earnings from continuing operations in 1997 increased 49
percent to $37.6 million compared with 1996 earnings of $25.2 million
reflecting the UPPCO acquisition, increased interest income and reduced
general corporate expenses. Diluted earnings per share of $2.00 in 1997
were 68 percent higher than the $1.19 per share earned in 1996,
underscoring the additional benefit of the company's share repurchase
program.
Outlook
Looking ahead to 1998, the company expects to encounter continued
competitive pricing in the residential water heater market as well as in
certain electric motor markets. This impact should be mitigated by
favorable interest income, lower customer inventory levels in HVAC
markets, a full year of UPPCO earnings, and a significantly lower average
number of shares outstanding relative to 1997.
OTHER MATTERS
Year 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be
modified prior to the end of the year 1999 in order to remain functional.
Relative to the Year 2000, the company has conducted a comprehensive
review of its computer systems to identify those systems that could be
affected by this issue and has initiated a company wide project to resolve
any potential issues. The company believes that, with in-house
modifications and vendor-supplied enhancements to existing software as
well as deployment of new systems, the Year 2000 issue does not pose
significant operational problems for the company's computer systems. It
is anticipated that all modifications, enhancements, and deployment of
Year 2000-ready systems will be completed in early 1999, allowing adequate
time for testing. Modification and enhancement costs will be expensed as
incurred, while the costs of new software will be capitalized and
amortized over the software's useful life. The company does not expect the
costs to be incurred over the next two years to have a material effect on
its financial position or results of operations. The amount expensed in
1997 was not material.
Environmental
The company's operations are governed by a number of federal, state and
local environmental laws concerning the generation and management of
hazardous materials, the discharge of pollutants into the environment and
remediation of sites owned by the company or third parties. The company
has expended substantial financial and managerial resources complying with
such laws. Expenditures related to environmental matters were not
material in 1997 and are not expected to be material in any single year.
Although the company believes that its operations are in compliance with
such laws and maintains procedures designed to maintain compliance, there
are no assurances that substantial additional costs for compliance will
not be incurred in the future. However, since the company's competitors
are governed by the same laws, the company should not be placed at a
competitive disadvantage.
Forward Looking Statements
Certain statements in this report are forward-looking statements.
Although the company believes that its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business,
there can be no assurance that the company's financial goals will be
realized. Although a significant portion of the company's sales are
derived from the replacement of previously installed product and such
sales are therefore less volatile, numerous factors may affect the
company's actual results and may cause results to differ materially from
those expressed in forward-looking statements made by or on behalf of the
company. Among such numerous factors the company includes the continued
strong growth of the worldwide heating, ventilating and air conditioning
market, the stability of the pricing environment for residential water
heaters and the successful implementation of the company's joint venture
strategies in China.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements: Form 10-K
Page Number
Report of Independent Auditors . . . . . . . . . . 17
Consolidated Balance Sheet at
December 31, 1997 and 1996 . . . . . . . . . . . . 18
For each of the three years in
the period ended December 31, 1997:
- Consolidated Statement of Earnings
and Retained Earnings . . . . . . . . . . . . 19
- Consolidated Statement of Cash Flows . . . . 20
Notes to Consolidated Financial Statements . . 21-39
<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, 1997 and 1996 and the related consolidated
statements of earnings and retained earnings and cash flows for each of
the three years in the period ended December 31, 1997. 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 company'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, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997, 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.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 19, 1998
<PAGE>
CONSOLIDATED BALANCE SHEET
December 31 (dollars in thousands)
Assets 1997 1996
Current Assets
Cash and cash equivalents $ 145,896 $ 6,405
Receivables 126,232 121,571
Inventories 79,049 80,445
Deferred income taxes 11,849 12,416
Other current assets 2,702 4,537
--------- ---------
Total Current Assets 365,728 225,374
Net property, plant, and equipment 207,756 182,600
Investments in and advances to
joint ventures 25,605 14,579
Prepaid pension 37,468 46,628
Other assets 28,176 37,777
Goodwill 51,783 6,540
Net long-term assets - discontinued
operations -- 357,654
-------- ---------
Total Assets $ 716,516 $ 871,152
========= ==========
Liabilities
Current Liabilities
Trade payables $ 61,299 $ 66,514
Accrued payroll and benefits 26,397 27,362
Accrued liabilities 13,556 7,228
Income taxes 6,607 1,351
Product warranty 7,972 7,563
Long-term debt due within one year 5,590 11,932
Net current liabilities-discontinued
operations 6,461 2,602
--------- ---------
Total Current Liabilities 127,882 124,552
Long-term debt 100,972 238,446
Product warranty 18,349 17,109
Post retirement benefit obligation 16,756 17,000
Deferred income taxes 28,442 31,271
Other liabilities 24,410 18,135
--------- ---------
Total Liabilities 316,811 446,513
Commitments and contingencies (notes 7 and 12)
Stockholders' Equity
Preferred Stock -- --
Class A Common Stock (shares issued
5,838,858 and 5,846,158) 29,192 29,231
Common Stock (shares issued 15,860,792
and 15,853,492) 15,861 15,853
Capital in excess of par value 72,542 69,410
Retained earnings 466,514 325,361
Cumulative foreign currency translation
adjustments (1,579) (7,401)
Treasury stock at cost (182,825) (7,815)
---------- ----------
Total Stockholders' Equity 399,705 424,639
---------- ----------
Total Liabilities and Stockholders'
Equity $ 716,516 $ 871,152
========== ==========
See accompanying notes which are an integral part of these statements.
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
Years ended December 31 (dollars in thousands, except per share amounts)
Earnings 1997 1996 1995
Continuing
Net sales $ 832,937 $ 781,193 $ 696,700
Cost of products sold 662,227 614,218 555,578
--------- ---------- ---------
Gross profit 170,710 166,975 141,122
Selling, general, and
administrative expenses 106,999 107,350 91,398
Interest expense 7,762 8,114 7,616
Interest income (9,035) (341) (246)
Other expense - net 3,328 5,629 4,934
---------- ---------- ---------
61,656 46,223 37,420
Provision for income taxes 21,359 17,080 13,425
---------- ---------- ---------
Earnings before equity in loss
of joint ventures 40,297 29,143 23,995
Equity in loss of joint
ventures (2,744) (3,894) --
---------- ---------- ---------
Earnings from Continuing
Operations 37,553 25,249 23,995
Discontinued
Earnings from operations
less related income tax
(1997 - $7,698; 1996 -
$19,988; and 1995 -
$22,048) 15,231 40,168 37,418
Gain on disposition less
related income tax
of $71,538 101,046 -- --
---------- ---------- --------
Net Earnings 153,830 65,417 61,413
Retained Earnings
Balance at beginning of year 325,361 273,751 224,467
Cash dividends on common
stock (12,677) (13,807) (12,129)
--------- --------- ---------
Balance at End of Year $ 466,514 $ 325,361 $ 273,751
========= ========= =========
Basic Earnings Per Share of
Common Stock
Continuing Operations $2.04 $1.21 $1.15
Discontinued Operations 6.31 1.92 1.79
--------- -------- ---------
Net Earnings $8.35 $3.13 $2.94
========= ======== =========
Diluted Earnings Per Share of
Common Stock
Continuing Operations $2.00 $1.19 $1.14
Discontinued Operations 6.19 1.90 1.77
--------- -------- --------
Net Earnings $8.19 $3.09 $2.91
========= ======== ========
See accompanying notes which are an integral part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in thousands)
1997 1996 1995
Operating Activities
Continuing
Net earnings $ 37,553 $ 25,249 $ 23,995
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depreciation and amortization 26,286 23,601 22,166
Deferred income taxes (2,262) (3,345) 9,587
Equity in loss of joint
ventures 2,744 3,894 --
Net change in current assets and
liabilities 10,797 24,320 (6,647)
Net change in other noncurrent
assets and liabilities 3,635 4,083 4,040
Other 1,495 2,630 (737)
--------- --------- ---------
Cash Provided by Operating
Activities 80,248 80,432 52,404
--------- --------- ---------
Investing Activities
Capital expenditures (44,886) (37,804) (26,851)
Capitalized purchased software
costs (1,295) (2,567) (406)
Acquisition of businesses (60,918) (1,111) (18,000)
Investment in joint ventures (13,719) (15,147) (3,404)
--------- ---------- ---------
Cash Used by Investing
Activities (120,818) (56,629) (48,661)
--------- ---------- ---------
Cash Flow Provided (Used)
by Continuing Operations
before Financing Activities (40,570) 23,803 3,743
Discontinued
Cash provided (used) by operating
activities (106,132) 113,644 64,534
Cash used by investing activities (52,456) (177,116) (82,461)
Proceeds from disposition 773,090 -- --
Tax payments associated with
disposition (106,039) -- --
Cash Flow Provided (Used) by
Discontinued Operations
before Financing Activities 508,463 (63,472) (17,927)
Financing Activities
Long-term debt incurred -- 58,507 65,000
Long-term debt retired (143,816) (4,000) (42,510)
Purchase of treasury stock (176,550) -- --
Net proceeds from common
stock and option activity 3,757 539 49
Tax benefit from exercise
of stock options 884 28 96
Dividends paid (12,677) (13,807)
(12,129)
---------- ---------- ---------
Cash Provided (Used) by
Financing Activities (328,402) 41,267 10,506
---------- ---------- ---------
Net increase (decrease) in
cash and cash equivalents 139,491 1,598 (3,678)
Cash and cash equivalents--
beginning of year 6,405 4,807
8,485
---------- ---------- ---------
Cash and Cash Equivalents--
End of Year $ 145,896 $ 6,405 $ 4,807
========== ========== =========
See accompanying notes which are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A.O. Smith Corporation is a diversified manufacturer
serving customers world-wide. The corporation's major product lines
include: fractional horsepower and hermetic electric motors; residential
and commercial water heaters; fiberglass piping systems and water, waste
water, and dry storage tanks. The corporation's products are marketed
primarily in North America. The corporation has two plants in Europe and
two joint ventures in China. Original equipment manufacturers are the
largest customers of the electric motor technologies unit. Water heaters
are distributed principally through a diverse network of plumbing
wholesalers. Fiberglass piping is sold through a network of distributors
to the service station market and the petroleum production industry as
well as the chemical/industrial market. The corporation's storage tanks
and handling systems are sold through a network of dealers to
municipalities, industrial concerns, and farmers. As discussed in Note 2,
the operations of the automotive products business are classified as
discontinued operations.
Consolidation and basis of presentation. The consolidated financial
statements include the accounts of the corporation and its wholly-owned
subsidiaries.
Investments in joint ventures. The Corporation has two joint ventures in
the Peoples Republic of China, which are accounted for under the equity
method. The corporation holds a majority interest in each. The joint
ventures are involved in the manufacture and distribution of products
similar to those of the corporation's water systems and storage and fluid
handling technologies businesses.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Fair values. The carrying amounts of cash and cash equivalents, accounts
receivable and payable, and long-term borrowings approximated fair value
as of December 31, 1997 and 1996.
Foreign currency translation. For all subsidiaries outside the United
States with the exception of Mexico, the corporation uses the local
currency as the functional currency. For these operations, assets and
liabilities are translated into U.S. dollars at year-end exchange rates
and weighted average exchange rates are used for revenues and expenses.
The resulting translation adjustments are recorded as a separate component
of stockholders' equity. Gains and losses from foreign currency
transactions are included in net earnings.
Cash and cash equivalents. The Company considers all highly liquid
investments, generally with a maturity of three months or less when
purchased to be cash equivalents. Cash equivalents consisting principally
of money market funds, totaled $140 million at December 31, 1997. The
cost of these securities are considered to be "available for sale" for
financial reporting purposes.
Inventory valuation. Inventories are carried at lower of cost or market.
Cost is determined on the last-in, first-out (LIFO) method for a
significant portion of domestic inventories. 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, 1997, the corporation had contracts
covering the majority of its expected copper and aluminum requirements for
1998, with varying maturities in 1998, the longest duration of which is
December 1998. These futures contracts limit the impact from both
favorable and unfavorable price changes. The effect of these programs was
not material to the results of operations for the three years ended
December 31, 1997.
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. The
contracts, which are executed with major financial institutions, generally
mature within one year with no credit loss anticipated for failure of the
counterparties to perform.
The following table summarizes, by currency, the contractual amounts of
the corporation's forward exchange contracts.
December 31 (dollars in thousands) 1997 1996
Buy Sell Buy Sell
U.S. dollar $ 2,500 $ 6,400$ 2,200$ 2,000
British pound 2,563 1,139 4,385 --
French franc -- 2,565 -- 746
German deutsche mark -- -- -- 1,491
Canadian dollar 709 -- -- --
Mexican peso 32,486 --
21,950 --
--------- -------- -------- --------
Total $ 38,258 $ 10,104 $ 28,535 $ 4,237
========= ======== ======== ========
The contracts in place at December 31, 1997 and 1996 amounted to
approximately 80 and 60 percent, respectively, of the corporation's
anticipated subsequent year exposure for those currencies hedged.
Goodwill. Goodwill, representing the excess of cost over net assets of
businesses acquired, is stated at cost and is amortized on a straight line
basis over periods of 15 to 40 years. The corporation reviews the
recoverability of goodwill when events and circumstances so indicate.
Amortization charged to operations amounted to $1.4 million and $.5
million in 1997 and 1996, respectively.
Property, plant, and equipment. Property, plant, and equipment are stated
at cost. Depreciation is computed primarily by the straight-line method.
Revenue recognition. The corporation recognizes revenue upon shipment of
product to the customer.
Research and development. Research and development costs are charged to
expense as incurred and amounted to approximately $17.2, $17.3, and $15.0
million for continuing operations during 1997, 1996, and 1995,
respectively.
Environmental remediation costs. The corporation accrues for losses
associated with environmental obligations when such losses are probable
and reasonably estimable. Costs of future expenditures are not discounted
to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed
probable. The accruals are adjusted as further information develops or
circumstances change.
Earnings per share of common stock. The corporation has adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share,"
which replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. All earnings per share
amounts for all periods have been restated to conform to the SFAS No.128
requirements. The numerator for the calculation of basic and diluted
earnings per share is earnings. The denominator is computed as follows:
1997 1996 1995
Denominator for basic earnings
per share--weighted average
shares 18,422,871 20,922,195 20,912,702
Employee stock options
(treasury stock method) 371,319 233,998 221,937
----------- ----------- ----------
Denominator for diluted
earnings per share 18,794,190 21,156,193 21,134,639
=========== =========== ===========
Reclassifications. Certain prior year amounts have been reclassified to
conform to the 1997 presentation.
New accounting standards. In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes the standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) as part
of a full set of financial statements. This statement requires that all
elements of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. The
statement is effective for fiscal years beginning after December 15, 1997.
Since this statement applies only to the presentation of comprehensive
income, it will not have any impact on the corporation's results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes the standards for the manner in which
public enterprises are required to report financial and descriptive
information about their operating segments. The statement defines
operating segments as components of an enterprise for which separate
financial information is available and evaluated regularly as a means for
assessing segment performance and allocating resources to segments. A
measure of profit or loss, total assets, and other related information are
required to be disclosed for each operating segment. In addition, this
statement requires the annual disclosure of information concerning
revenues derived from the enterprise's products or services, countries in
which it earns revenue or holds assets, and major customers. The
statement is also effective for fiscal years beginning after December 15,
1997. The adoption of SFAS No. 131 will not affect the corporation's
results of operations or financial position, but may affect the disclosure
of segment information.
2. Discontinued Operations
On April 18, 1997, the corporation sold its automotive products business,
excluding its Mexican automotive affiliate, for $710 million. On October
1, 1997, the corporation sold the remainder of its automotive business
with the sale of its 40% interest in its Mexican affiliate for $63
million. The results of the automotive businesses have been reported
separately as discontinued operations and prior year consolidated
financial statements have been restated.
The components of the net assets and liabilities of discontinued
operations included in the consolidated balance sheet at December 31, 1996
was as follows:
(dollars in thousands)
Current assets
Receivables $ 19,718
Inventories 32,882
Customer tooling 54,368
Other current assets 16,711
Less current liabilities
Trade payables 77,699
Accrued payroll and benefits 26,984
Other current liabilities 21,598
----------
Net current liabilities $ 2,602
==========
Long-term assets
Investments in affiliated companies $ 48,454
Deferred model change 24,181
Net property, plant, and equipment 365,785
Other assets 18,005
Less long-term liabilities
Deferred income taxes 39,095
Postretirement benefit obligation 59,676
----------
Net long-term assets $ 357,654
==========
The condensed statement of earnings of the discontinued operations for the
automotive products business for the period through April 18, 1997 and
Metalsa through October 1, 1997 and also the years ended December 31, 1996
and 1995 is presented below.
(dollars in thousands) 1997 1996 1995
Net sales $ 296,167 $ 862,977 $ 845,305
Cost of products sold 272,826 787,380 766,013
---------- --------- ----------
Gross profit 23,341 75,597 79,292
Selling, general, and
administrative expenses 4,761 18,231 18,855
Interest expense 3,210 6,974 5,477
Other income - net (362) (210) (1,142)
---------- ---------- ----------
15,732 50,602 56,102
Provision for income taxes 7,698 19,988 22,048
---------- ---------- ----------
Earnings before equity in
earnings of affiliates 8,034 30,614 34,054
Equity in earnings of
affiliates 7,197 9,554 3,364
----------- ---------- ----------
Net earnings $ 15,231 $ 40,168 $ 37,418
=========== ========== ==========
Liabilities of the discontinued business at December 31, 1997 consist
primarily of employee obligations such as workers' compensation and other
future estimated costs net of deferred income taxes. Certain expenses
have been allocated to the discontinued operations through the date of
sale, including interest expense, which was allocated based on the ratio
of net assets discontinued to the total consolidated net assets of the
corporation.
The cash flow provided (used) by discontinued operations is as follows:
Years ended December 31 (dollars in thousands)
1997 1996 1995
Earnings $ 15,231 $ 40,168 $ 37,418
Adjustments to reconcile earnings
to net cash provided by
discontinued operating activities:
Depreciation 13,246 40,848 33,998
Deferred model change and
software amortization 2,802 10,939 10,775
Deferred income taxes (38,840) 7,898 5,400
Equity in earnings of affiliates,
net of dividends ($7.0 and
$2.9 million in 1997 and 1996,
respectively) 2,394 (6,170) (3,364)
Net change in current assets and
liabilities (107,365) 6,885 (20,124)
Net change in noncurrent assets
and liabilities 8,896 14,743 3,585
Other (2,496) (1,667) (3,154)
Cash provided (used) by
discontinued operating
activities (106,132) 113,644 64,534
Cash (used) by discontinued
investing activities (52,456) (177,116) (82,461)
Proceeds from disposition 773,090 -- --
Tax payments associated with
disposition (106,039) -- --
---------- --------- --------
Cash flow provided (used) by
discontinued operations $ 508,463$ (63,472) $(17,927)
========== ======== ========
3. Acquisitions
On March 31, 1997, the corporation acquired the business of UPPCO,
Incorporated (UPPCO), a manufacturer of subfractional C-frame electric
motors, for approximately $60.9 million. On December 6, 1995, the
corporation acquired the stock of Peabody TecTank Inc. (TecTank), a
manufacturer of dry bulk storage tanks, for approximately $19.1 million,
which included a final purchase price adjustment of $1.1 million in 1996.
The transactions were accounted for as purchases and the consolidated
financial statements include the results of UPPCO and TecTank from the
respective dates of acquisition. The purchase prices have been allocated
to the assets purchased and the liabilities assumed based upon their
respective fair values at the date of acquisition. The excess of the
purchase prices over the fair values of net assets acquired, $46.2 million
and $7.0 million for UPPCO and TecTank, respectively, have been recorded
as goodwill. The proforma effect of the acquisitions would not be
significant to 1997, 1996 or 1995 operating results.
4. Statement of Cash Flows
Supplemental cash flow information is as follows:
Years ended December 31 (dollars in thousands)
1997 1996 1995
Change in current assets and liabilities:
Receivables $ 2,870 $ 13,945 $ (10,590)
Inventories 7,539 (5,491) 6,292
Other current assets 1,187 434 (432)
Trade payables (8,346) 13,187 (232)
Accrued liabilities, payroll,
and benefits 1,894 (539) 2,704
Current income tax accounts-
net 5,653 2,784 (4,389)
----------- ----------- ----------
$ 10,797 $ 24,320 $ (6,647)
=========== =========== ==========
5. Inventories
December 31 (dollars in thousands) 1997 1996
Finished products $ 45,091 $ 51,706
Work in process 19,656 19,593
Raw materials 42,870 37,594
Supplies 1,634 1,368
--------- ----------
109,251 110,261
Allowance to state inventories
at LIFO cost 30,202 29,816
--------- ----------
$ 79,049 $ 80,445
========= ==========
6. Property, Plant, and Equipment
December 31 (dollars in thousands) 1997 1996
Land $ 6,323 $ 3,957
Buildings 91,127 80,376
Equipment 352,697 322,683
450,147 407,016
Less accumulated depreciation 242,391 224,416
----------- ----------
$ 207,756 $ 182,600
=========== ===========
7. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands) 1997 1996
Bank credit lines, average
year-end interest rate of
4.8% for 1997 and 6.2% for
1996 $ 1,929 $ 51,257
Commercial paper, average
year-end interest rate of
5.6% -- 59,814
Long-term notes with insurance
companies, expiring through
2010, average year-end interest
rate of 7.1% for 1997
and 7.0% for 1996 86,172 90,000
Other notes, expiring through
2012, average year-end
interest rate of 5.2% for
1997 and 6.6% for 1996 18,461 49,307
----------- ----------
106,562 250,378
Less amount due within one year 5,590 11,932
------------ ----------
$ 100,972 $ 238,446
============ ==========
The corporation has a multi-year revolving credit agreement with a group
of ten banks which expires June 30, 2001. Due to its significant cash and
cash equivalent balances, the corporation elected to reduce this available
facility from $210 million to $100 million effective September 30, 1997.
At its option, the corporation maintains either cash balances or pays fees
for bank credit and services.
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 $86.6 million were unrestricted as of December 31, 1997.
Borrowings under the bank credit lines and in the commercial paper market
are supported by the revolving credit agreement and accordingly 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, 1997, is as follows: 1998--$5.6; 1999--$4.6; 2000--$9.6;
2001--$11.1; 2002--$13.3 million.
Future minimum payments under noncancelable operating leases from
continuing operations total $30.8 million and are due as follows: 1998--
$8.1; 1999--$6.8; 2000--$4.4; 2001--$3.8; 2002--$2.7; thereafter--$5.0
million. Rent expense for continuing operations, including payments under
operating leases, was $12.9, $12.1, and $10.3 million in 1997, 1996, and
1995, respectively.
Interest paid by the corporation for continuing and discontinued
operations, was $13.0, $15.1, and $13.1 million in 1997, 1996, and 1995,
respectively.
8. Stockholders' Equity
The corporation's authorized capital consists of 3 million shares of
Preferred Stock $1 par value, 14 million shares of Class A Common Stock $5
par value and 60 million shares of Common Stock $1 par value. 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.
During 1997, 1996, and 1995, 7,300, 42,443, and 146,940 shares of Class A
Common Stock were converted into Common Stock, respectively. Regular
dividends paid on the Class A Common and Common Stock amounted to $.68,
$.66, and $.58 per share in 1997, 1996, and 1995, respectively.
Changes in certain components of stockholders' equity are as follows:
<TABLE>
<CAPTION>
Foreign
Class A Capital in Currency
Common Common Excess of Translation Treasury
Stock Stock Par Value Adjustments Stock
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 30,178 $ 15,664 $ 68,209 $ (8,035) $ 8,085
Conversion of Class A Common
Stock (735) 147 588 -- --
Exercise of stock options
(net of 3,400 shares surrendered
as stock option proceeds)-
13,000 shares -- -- (22) -- (72)
Tax benefit from exercise of
stock options -- -- 96 -- --
Translation adjustments -- -- -- 536 --
---------- --------- --------- --------- ---------
Balance at December 31, 1995 29,443 15,811 68,871 (7,499) 8,013
Conversion of Class A Common
Stock (212) 42 170 -- --
Exercise of stock options -
21,900 shares -- -- 341 -- (198)
Tax benefit from exercise of
stock options -- -- 28 -- --
Translation adjustments -- -- -- 98 --
---------- --------- --------- --------- ---------
Balance at December 31, 1996 29,231 15,853 69,410 (7,401) 7,815
Conversion of Class A Common
Stock (39) 8 31 -- --
Purchase of treasury stock -- -- -- -- 176,550
Exercise of stock options -
170,150 shares -- -- 2,217 -- (1,540)
Tax benefit from exercise of
stock options -- -- 84 -- --
Translation adjustments -- -- -- (1,637) --
Sale of Mexican affiliate -- -- -- 7,459 --
---------- --------- ---------- ---------- ----------
Balance at December 31, 1997 $ 29,192 $ 15,861 $ 72,542 $ (1,579) $182,825
========== ========= ========== ========== ==========
</TABLE>
On January 27, 1997, the corporation's Board of Directors approved for
repurchase 3 million shares of Common Stock. On June 10, 1997 and
December 9, 1997, the Board authorized the repurchase of up to $80 million
and $50 million, respectively, of additional Common Stock. During 1997,
the corporation purchased 14,500 shares of Class A Common Stock and
4,807,375 shares of Common Stock. At December 31, 1997, 17,960 and
5,392,894 shares of Class A Common Stock and Common Stock, respectively,
were held as treasury stock.
9. Stock Options
The corporation has a Long-Term Executive Incentive Compensation Plan
(1990 Plan) under which 2 million shares of Common Stock for granting of
nonqualified and incentive stock options have been reserved. 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, 1997,
1996, and 1995 was 147,700, 264,400, and 470,500, respectively.
Changes in option shares (all Common Stock) were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Per Share
Exercise Years Ended December 31
Price-1997 1997 1996 1995
<S> <C> <C> <C> <C>
Outstanding at beginning of year $18.24 1,308,800 1,124,600 963,600
Granted
1997--$40.88 per share 40.88 116,700
1996--$24.50 and $27.00 per share 206,100
1995--$23.13 and $25.00 per share 189,100
Exercised
1997--$8.44 to $27.50 per share 22.08 (170,150)
1996--$8.44 to $27.50 per share (21,900)
1995--$7.00 to $8.00 per share (16,400)
Canceled or expired -- -- -- (11,700)
------ --------- --------- ---------
Outstanding at End of Year
(1997--$7.00 to $40.88 per share) 19.83 1,255,350 1,308,800 1,124,600
Exercisable at End of Year 17.67 1,138,650 1,102,700 935,500
</TABLE>
<TABLE>
The following table summarizes weighted-average information by range of
exercise prices for stock options outstanding and exercisable at December
31, 1997:
<CAPTION>
Weighted-
Options Weighted Options Weighted Average
Outstanding at Average Exercisable at Average Remaining
Range of December 31, Exercise December 31, Exercise Contractual
Exercise Prices 1997 Price 1997 Price Life
<S> <C> <C> <C> <C> <C>
$7.00 to $8.69 429,800 $ 7.89 429,800 $ 7.89 3 years
$13.00 108,800 13.00 108,800 13.00 5 years
$21.56 to $27.50 600,050 25.52 600,050 25.52 7 years
$40.88 116,700 40.88 -- 10 years
$7.00 to $40.88 1,255,350 1,138,650 6 years
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at
fair value. The corporation has chosen to continue applying Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, because the exercise price of the stock options
equals the market price of the underlying stock on the date of grant , no
compensation expense has been recognized. Had compensation cost been
determined based upon the fair value at the grant date for awards under
the plans based on the provisions of SFAS No. 123, the corporation's pro
forma net earnings and pro forma net earnings per share would have been as
follows:
Years ended December 31 (dollars in thousands,
except per share amounts) 1997 1996 1995
Net earnings:
As reported $ 153,830 $ 65,417 $ 61,413
Pro forma 152,932 64,538 61,200
Net earnings per share:
As reported:
Basic $8.35 $3.13 $2.94
Diluted 8.19 3.09 2.91
Pro forma:
Basic 8.30 3.08 2.93
Diluted 8.14 3.05 2.90
The weighted-average fair value per option at the date of grant during
1997, 1996,and 1995 using the Black-Scholes option-pricing model, was
$11.27, $7.45 and $7.48, respectively. Assumptions were as follows:
1997 1996 1995
Expected life (years) 4.0 4.0 4.0
Risk-free interest rate 5.9% 6.3% 5.9%
Dividend yield 2.0% 2.1% 2.1%
Expected volatility 30.4% 34.7% 34.7%
10. Retirement Plans
The corporation and its domestic subsidiaries provide retirement benefits
for all employees. As of December 31, 1995, the corporation merged its
various qualified noncontributory defined benefit plans in the United
States into one pension plan. Benefits for salaried employees are based
on an employee's years of service and compensation. Benefits for hourly
employees are generally based on specified benefit rates for each year of
service. The corporation's funding policy is to contribute amounts which
are actuarially determined to provide 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 to the corporation's financial
position.
The following tables present the components of pension income, the funded
status, and the major assumptions used to determine these amounts for
domestic pension plans of continuing operations.
<TABLE>
<CAPTION>
Years ended December 31 (dollars in thousands)
1997 1996 1995
<S> <C> <C> <C>
Components of pension
expense:
Service cost--
benefits earned
during the year $ 2,765 $ 2,815 $ 2,069
Interest cost on
projected benefit
obligation 35,944 9,610 9,564
Return on plan assets:
Actual return $ (107,495) $ (29,013) $ (45,164)
Deferral of
investment return
in excess of
(less than)
expected return 57,650 10,424 30,187
---------- ---------- ---------
Net amortization and
deferral 20 (1,369) (1,258)
---------- ---------- ---------
Net periodic pension
(income) $ (11,116) $ (7,533) $ (4,602)
========== ========== =========
</TABLE>
The pension income data presented above is for continuing operations.
Pursuant to the agreement to sell the automotive products operations, the
corporation retained all existing pension assets as well as all pension
liabilities earned through the closing date. Accordingly, investment
return on these assets and interest cost on the obligation is included in
the calculation of net periodic pension income for 1997, whereas, such
amounts prior to the sale were excluded as they were allocated to the
components of discontinued operations pension expense. Subsequent to the
closing date, the buyer assumed the responsibility for pension service
earned by active employees of the automotive business.
December 31 (dollars in thousands) 1997 1996
Actuarial present value
of benefit obligations:
Vested benefit obligation $ 421,422 $ 367,268
=========== ===========
Accumulated benefit
obligation $ 488,967 $ 422,296
=========== ===========
Projected benefit obligation $ 495,215 $ 441,766
Plan assets at fair value 580,865 503,933
----------- -----------
Plan assets in excess of
projected benefit obligation 85,650 62,167
Unrecognized net transition
asset at January 1, 1986 (3,315) (4,253)
Unrecognized net loss (gain) (47,378) (35,079)
Prior service cost not yet
recognized in periodic
pension cost 2,511 23,793
------------ -----------
Prepaid pension asset $ 37,468 $ 46,628
============ ===========
Major assumptions at year-end:
1997 1996 1995
Discount rate 7.25% 8.00% 7.50%
Rate of increase in compensation level 4.00% 4.00% 4.00%
Expected long-term rate of return on assets 10.25% 10.25% 10.25%
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 corporation's contribution including for
discontinued operations through date of sale was $3.5, $5.3, and $5.2
million for 1997, 1996, and 1995, 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 are 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.
Pursuant to the agreement to sell the automotive products operations,
effective with the closing date, the buyer assumed all obligations for all
postretirement benefits other than pensions.
Net periodic postretirement benefit cost of continuing operations included
the following components:
Years ended December 31 (dollars in thousands)
1997 1996 1995
Service cost--benefits attributed
to employee service during the
year $ 222 $ 298 $ 251
Interest cost on accumulated
postretirement benefit
obligation 1,155 1,318 1,335
Amortization of unrecognized
net gain (367) (117) (103)
--------- ------- -------
Net periodic postretirement
benefit cost $ 1,010 $ 1,499 $ 1,483
========= ======= =======
The following table sets forth the plans' status as reflected in the
consolidated balance sheet:
December 31 (dollars in thousands)
1997 1996
Accumulated postretirement benefit
obligation:
Retirees $ 7,273 $ 8,487
Fully eligible active plan
participants 2,834 331
Other active plan participants 5,101 6,181
---------- ---------
15,208 14,999
Unrecognized net gain 3,179 3,710
---------- ---------
Accrued postretirement benefit cost
$ 18,387 $ 18,709
========== =========
Accrued postretirement benefit cost is included in the consolidated
balance sheet in the accounts shown below:
December 31 (dollars in thousands)
1997 1996
Accrued liabilities
$ 1,631 $ 1,709
Other liabilities
16,756 17,000
-------- ---------
Accrued postretirement benefit cost
$ 18,387 $ 18,709
======== =========
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation (APBO) is 6 percent. The weighted
average discount rate used in determining the APBO was 7.25 and 8.00
percent at December 31, 1997 and 1996, respectively. If the health care
cost trend rate was increased by 1 percent, the APBO at December 31, 1997
would increase by $.6 million and net periodic postretirement benefit cost
for 1997 would increase by $.1 million.
11. Income Taxes
The components of the provision for income taxes of continuing operations
consisted of the following:
Years ended December 31 (dollars in thousands)
1997 1996 1995
Current:
Federal $ 26,475 $ 13,002 $ 627
State 607 3,143 1,069
Foreign 894 708 1,689
Deferred (4,917) 627 11,020
Business tax credits (1,700) (400) (980)
--------- ---------- ---------
Provision for income taxes $ 21,359 $ 17,080 $ 13,425
========= ========== =========
The tax provision differs from the statutory U.S. federal rate due to the
following items:
Years ended December 31 (dollars in thousands)
1997 1996 1995
Provision at federal statutory
rate $ 21,580 $ 16,178 $ 13,097
Foreign income taxes (158) 5 227
State income and franchise
taxes 1,450 1,581 1,142
Business and foreign tax
credits (1,700) (400) (1,445)
Non-deductible items 568 594 552
Foreign sales corporation
benefit (381) (959) (278)
Other -- 81 130
----------- ---------- ---------
Provision for income taxes $ 21,359 $ 17,080 $ 13,425
=========== ========== =========
The domestic and foreign components of income from continuing operations
before income taxes were as follows:
Years ended December 31 (dollars in thousands)
1997 1996 1995
Domestic $ 58,740 $ 43,527 $ 33,457
Foreign 2,916 2,696 3,963
$ 61,656 $ 46,223 $ 37,420
=========== =========== ==========
Total taxes paid by the corporation including for discontinued operations
amounted to $133.6, $29.9, and $25.2 million in 1997, 1996, and 1995,
respectively.
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, 1997, the undistributed earnings
amounted to $15.7 million. It is not practical to determine the income
tax liability that would result had such earnings been repatriated.
The approximate tax effects of temporary differences between income tax
and financial reporting of continuing operations are as follows:
December 31 (dollars in thousands)
1997 1996
Assets Liabilities Asset Liabilities
Finance leases $ -- $ 2,025 $ -- $ 4,354
Group health insurance and
postretirement obligations 8,479 -- 9,263 --
Employee benefits 4,286 13,655 4,894 16,939
Product liability and warranty 9,021 -- 8,129 --
Tax over book depreciation -- 17,338 -- 15,109
All other -- 5,361 -- 4,739
--------- --------- --------- --------
$ 21,786 $ 38,379 $ 22,286 $ 41,141
========= ========= ========= ========
Net liability $ 16,593 $ 18,855
========= =========
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:
December 31 (dollars in thousands) 1997 1996
Current deferred income tax assets $ 11,849 $ 12,416
Long-term deferred income tax
liabilities (28,442) (31,271)
---------- ---------
Net liability $ 16,593 $ 18,855
========== ==========
12. Litigation and Insurance Matters
The corporation is involved in various unresolved legal actions,
administrative proceedings and claims in the ordinary course of its
business involving product liability, property damage, insurance coverage,
patents and environmental matters including the disposal of hazardous
waste. Although it is not possible to predict with certainty the outcome
of these unresolved legal actions or the range of possible loss or
recovery, the corporation believes these unresolved legal actions will not
have a material effect on its financial position or results of operations.
The following paragraphs summarize noteworthy actions and proceedings.
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 closed lawsuits alleging damages for economic losses claimed to have
arisen out of alleged defects in Harvestore animal feed storage equipment.
The court granted the corporation partial summary judgment against two of
the insurers which have appealed that ruling to the Wisconsin Court of
Appeals. In the interim, discovery is continuing. 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 and are owned and operated
by third parties unrelated to the corporation. 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 (the "Superfund" law) and similar state laws, each PRP
that contributed hazardous substances to a Superfund site may be 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 the process. PRPs
also negotiate with each other regarding allocation of each PRP's share of
the clean up costs.
One such site is 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
$150,000,000. 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 continues to maintain that it has valid defenses to any
liability at this site. While it is impossible at this time to reasonably
estimate the corporation's liability at this site, if any, it is
anticipated that the corporation's liability at the site will not be
material because the EPA continues to treat the corporation as a potential
de minimis party.
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 and to recover costs it has or will incur as a result
of the clean up at a total of fourteen Superfund sites. Certain state
environmental agencies have also asserted claims to recover their clean up
costs in some of these actions. Further, a claim has been asserted by the
owner of a landfill which has been designated as a Superfund site to
recover part of the owner's costs to remediate the site from the
corporation and several other parties that are alleged to have contributed
materials to the site.
The corporation has compiled available information concerning costs
associated with remediation at these sites. It is impossible at this time
to estimate the total cost of remediation for all of the sites, or the
corporation's ultimate share of those costs, for a variety of reasons.
Many of the reasons are related to the fact that the sites are in various
stages of the remediation process. Of the costs the corporation has been
able to identify, the corporation estimates the share for which it is or
may be responsible is approximately $7.9 million. The corporation and its
insurance companies have paid $7.2 million of that amount and the balance
is adequately covered through insurance and reserves 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 there are
viable PRPs at each of the sites which have the financial ability to pay
their respective shares of liability at the sites.
With respect to non-environmental claims, the corporation has self-insured
a portion of its product liability loss exposure and other business risks
for many years. The corporation has established reserves which it believes
are adequate to cover incurred claims. For the year ended December 31,
1997, 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.
The corporation reevaluates its exposure on claims periodically and makes
adjustments to its reserves as appropriate.
13. Operations by Segment
<TABLE>
<CAPTION>
Years ended December 31 (dollars in millions)
Net Sales Earnings Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
Electric Motor Technologies
Fractional horsepower
and hermetic electric
motors $390.7 $337.1 $317.3 $281.2 $242.6 $45.4 $42.7 $31.9 $23.4 $11.6
Water Systems Technologies
Water heaters and water
heating systems and protective
industrial coatings 287.5 291.3 276.0 271.5 248.1 33.4 32.8 32.2 30.1 26.5
Storage & Fluid Handling
Technologies
Fiberglass reinforced piping
systems, liquid & dry
bulk storage systems 154.7 152.8 103.4 95.3 92.2 ___10.9 11.1 11.0 12.6 8.4
------- ------- ----- ------ ----- ------ ------ ------- ------ -----
$832.9 $781.2 $696.7 $648.0 $582.9 89.7 86.6 75.1 66.1 46.5
======= ======= ====== ====== ====== ====== ====== ======= ====== ======
Financial services (4.1) (2.8) (3.6) (6.3) .1
General corporate and research
and development expense (24.9) (29.5) (26.5) (25.1) (22.7)
Interest income (expense) - net 1.0 (8.1) (7.6) (8.0) (9.6)
------ ------ ------ ------ ------
Earnings From Continuing Operations,
Before Income Taxes and Equity in Loss
of Joint Ventures $61.7 $46.2 $37.4 $26.7 $14.3
====== ===== ====== ====== ======
(dollars in millions)
<CAPTION>
1997 1996 1995 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electric Motor Technologies $242.2 $165.5 $162.5 $12.9 $11.9 $12.3 $27.9 $19.8 $12.9
Water Systems Technologies 138.6 141.1 131.6 6.4 6.1 6.0 9.0 13.0 9.8
Storage & Fluid Handling
Technologies 90.1 85.3 88.4 4.1 4.1 3.0 7.5 4.2 3.4
Investments in
joint ventures 25.6 14.6 3.5 -- -- -- -- -- --
Corporate assets 220.0 107.0 110.6 .5 .5 .4 .5 .8 .7
Discontinued operations -- 357.7 251.9 13.2 40.8 34.0 39.1 132.4 58.8
------- ------ ------ ----- ----- ------ ------- ------ ------
Total $716.5 $871.2 $748.5 $37.1 $63.4 $55.7 $84.0 $170.2 $85.6
======= ====== ====== ===== ===== ====== ======= ====== ======
Electric Motor Technologies sales included sales to York International of $93.5, $91.5, and $72.5 million in 1997,
1996, and 1995, respectively.
</TABLE>
14. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1997 1996 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales - continuing 196.2 194.8 224.9 206.5 206.0 188.1 205.8 191.8
Gross profit - continuing 42.8 40.4 48.6 44.7 38.9 40.6 40.4 41.3
Earnings
Continuing 7.1 5.7 11.7 7.3 9.0 6.2 9.8 6.0
Discontinued 12.8 11.6 96.1 11.4 1.0 6.4 6.4 10.8
Net earnings 19.9 17.3 107.7 18.7 10.0 12.6 16.2 16.8
Basic earnings per share
Continuing .35 .28 .62 .35 .51 .29 .58 .29
Discontinued .63 .55 5.09 .55 .06 .31 .38 .51
Net earnings .98 .83 5.71 .90 .57 .60 .96 .80
Diluted earnings per share
Continuing .34 .27 .61 .34 .50 .29 .56 .28
Discontinued .62 .55 4.99 .54 .05 .30 .37 .51
Net earnings .96 .82 5.60 .88 .55 .59 .93 .79
Common dividends declared .17 .15 .17 .17 .17 .17 .17 .17
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 7 for restrictions on the payment of dividends.
</TABLE>
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 2, 1998 for the
Annual Meeting of Stockholders to be held April 8, 1998 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 2, 1998 for the Annual Meeting of Stockholders to be
held on April 8, 1998 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 2, 1998 for the April
8, 1998 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 2, 1998 for the April 8, 1998 Annual Meeting
of Stockholders is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the headings and "Compensation Committee
Interlocks and Insider Participation" in the corporation's Proxy Statement
dated March 2, 1998 for the April 8, 1998 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, 1997 and 1996 . . . . . . . . . . . . . . . 18
For each of the three years in the period ended
December 31, 1997:
- Consolidated Statement of Earnings
and Retained Earnings . . . . . . . . . . . . . 19
- Consolidated Statement of Cash Flows . . . . . . 20
Notes to Consolidated Financial Statements . . . . .21-39
The following consolidated financial
statement schedule of A. O. Smith
Corporation is included in Item 14(d):
Schedule II - Valuation and Qualifying
Accounts . . . . . . . . . . . . . . . . . . . . . . . 42
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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
(c) Exhibits - see the Index to Exhibits on pages 47 - 48 of this
report.
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 to its security holders of any exhibits listed in the Index to
Exhibits.
Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 14(c) of Form 10-K are listed as
Exhibits 10(a) through 10(h) in the Index to Exhibits.
<PAGE>
<TABLE>
<CAPTION>
A. O. SMITH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000 Omitted)
Years ended December 31, 1997, 1996, and 1995
Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other the End
Description of Year Expenses 1 Accounts Deductions 2 Year
<S> <C> <C> <C>
1997:
Valuation allowance
for trade and notes
receivable $ 3,473 $ 2,065 $ -- $ 2,698 $ 2,840
1996:
Valuation allowance
for trade and notes
receivable 4,796 615 -- 1,938 3,473
1995:
Valuation allowance
for trade and notes
receivables 12,475 4,306 -- 11,985 4,796
1 Provision (credit) based upon estimated collection.
2 Uncollectible amounts charged against the reserve.
</TABLE>
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; Form S-8 No.
33-56827 filed December 13, 1994; and Form S-8 No. 333-05799 filed
June 12, 1996.
<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 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 23, 1998 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
Vice President, Treasurer and Controller John J. Kita
TOM H. BARRETT, Director /s/ Tom H. Barrett
Tom H. Barrett
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
BRUCE M. SMITH, Director /s/ Bruce M. Smith
Bruce M. Smith
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
(3)(i) Restated Certificate of Incorporation of the corporation as
amended April 5, 1995 incorporated by reference to the quarterly
report on Form 10-Q for the quarter ended March 31, 1995 and as
further amended on February 5, 1996 and incorporated by
reference to the annual report on Form 10-K for the year ended
December 31, 1995
(3)(ii) By-laws of the corporation as amended October 7, 1997
incorporated by reference to the quarterly report on Form 10-Q
for the quarter ended September 30, 1997
(4) (a) The corporation's outstanding long-term debt is described
in Note 7 to the Consolidated Financial Statements. None of the
long-term debt is registered under the Securities Act of 1933.
None of the debt instruments outstanding at the date of this
report exceeds 10% of the corporation's total consolidated
assets, except for the item disclosed as exhibit 4(b) below. The
corporation agrees to furnish to the Securities & Exchange
Commission, upon request, copies of any instruments defining
rights of holders of long-term debt described in Note 7.
(b) Fourth Amendment dated June 19, 1996 to the Amended and
Restated Credit Agreement dated as of February 26, 1993
incorporated by reference to the quarterly report on Form 10-Q
for the quarter ended June 30, 1996.
(c) A. O. Smith Corporation Restated Certificate of
Incorporation as amended April 5, 1995 [incorporated by
reference to Exhibit (3)(i) above]
(10) Material Contracts (a) 1990 Long-Term Executive Incentive
Compensation Plan,as amended, incorporated by reference to the
Form S-8 Registration Statement filed by the corporation on
December 13, 1994, (Reg. No. 33-56827)
(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
(c) Executive Incentive Compensation Plan, as amended,
incorporated by reference to Exhibit A to the Proxy Statement
dated April 21, 1997 for a May 21, 1997 Annual Meeting of
Stockholders
(d) Supplemental Benefit Plan, as amended, incorporated by
reference to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1992
(e) Executive Life Insurance Plan, incorporated by reference to
the Annual Report on Form 10-K for the fiscal year ended
December 31, 1992
(f) 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
(g) Non-employee Directors' Retirement Plan incorporated by
reference to the quarterly report on Form 10-Q for the quarter
ended June 30, 1991
(21) Subsidiaries [Page 43]
(23) Consent of Independent Auditors [Page 44]
*(27) Financial Data Schedules
*Filed Herewith
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 International Corporation Delaware
A. O. Smith Export, Ltd. Barbados
Claymore Insurance Company, Ltd. Bermuda
A. O. Smith Enterprises 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
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
Harbin A. O. Smith Fiberglass Products
Company Limited (HSF) China
Nanjing A. O. Smith Water Heater Co. Ltd. China
Motores Muppca, C.A. Venezuela
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, 33-56827
and 333-05799) 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 19, 1998, 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, 1997.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
March 19, 1998
<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 PERIOD ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,845
<SECURITIES> 140,051
<RECEIVABLES> 126,232
<ALLOWANCES> 0
<INVENTORY> 79,049
<CURRENT-ASSETS> 365,728
<PP&E> 450,147
<DEPRECIATION> (242,391)
<TOTAL-ASSETS> 716,516
<CURRENT-LIABILITIES> 127,882
<BONDS> 100,972
0
0
<COMMON> 45,053
<OTHER-SE> 354,652
<TOTAL-LIABILITY-AND-EQUITY> 716,516
<SALES> 832,937
<TOTAL-REVENUES> 832,937
<CGS> 662,227
<TOTAL-COSTS> 662,227
<OTHER-EXPENSES> 101,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,762
<INCOME-PRETAX> 61,656
<INCOME-TAX> 21,359
<INCOME-CONTINUING> 37,553
<DISCONTINUED> 116,277
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,830
<EPS-PRIMARY> 8.35
<EPS-DILUTED> 8.19
</TABLE>
<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 PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,405
<SECURITIES> 0
<RECEIVABLES> 121,571
<ALLOWANCES> 0
<INVENTORY> 80,445
<CURRENT-ASSETS> 225,374
<PP&E> 407,016
<DEPRECIATION> (224,416)
<TOTAL-ASSETS> 871,152
<CURRENT-LIABILITIES> 124,552
<BONDS> 238,446
0
0
<COMMON> 45,084
<OTHER-SE> 379,555
<TOTAL-LIABILITY-AND-EQUITY> 871,152
<SALES> 781,193
<TOTAL-REVENUES> 781,193
<CGS> 614,218
<TOTAL-COSTS> 614,218
<OTHER-EXPENSES> 116,532
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,114
<INCOME-PRETAX> 42,329
<INCOME-TAX> 17,080
<INCOME-CONTINUING> 25,249
<DISCONTINUED> 40,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,417
<EPS-PRIMARY> 3.13
<EPS-DILUTED> 3.09
</TABLE>
<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 PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,807
<SECURITIES> 0
<RECEIVABLES> 135,515
<ALLOWANCES> 0
<INVENTORY> 74,955
<CURRENT-ASSETS> 350,261
<PP&E> 369,625
<DEPRECIATION> (207,749)
<TOTAL-ASSETS> 946,942
<CURRENT-LIABILITIES> 213,647
<BONDS> 190,938
0
0
<COMMON> 190,938
<OTHER-SE> 327,110
<TOTAL-LIABILITY-AND-EQUITY> 946,942
<SALES> 696,700
<TOTAL-REVENUES> 696,700
<CGS> 555,578
<TOTAL-COSTS> 555,578
<OTHER-EXPENSES> 96,086
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,616
<INCOME-PRETAX> 37,420
<INCOME-TAX> 13,425
<INCOME-CONTINUING> 23,995
<DISCONTINUED> 37,418
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,413
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.91
</TABLE>
