SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000
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
[Logo]
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 245008, Milwaukee, Wisconsin 53224-9508
Telephone: (414) 359-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Class A Common Stock Outstanding as of March 31, 2000 8,690,125 shares
Common Stock Outstanding as of March 31, 2000 14,721,810 shares
Exhibit Index Page 14
1
<PAGE>
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings and Retained Earnings
- Three months ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheet
- March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Cash Flows
- Three months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements
- March 31, 2000 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to Exhibits 14
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
AND RETAINED EARNINGS
Three Months ended March 31, 2000 and 1999
(000 omitted except for per share data)
(unaudited)
Three Months Ended
March 31
------------------------------
2000 1999
---------- ----------
Continuing Operations
Electric Motor Technologies $ 247,876 $ 147,875
Water Systems Technologies 87,167 81,988
---------- ----------
NET SALES 335,043 229,863
Cost of products sold 267,648 183,936
---------- ----------
Gross profit 67,395 45,927
Selling, general and
administrative expenses 35,652 23,752
Interest expense 5,431 1,978
Interest income (97) (324)
Other expense - net 4,030 1,780
---------- ----------
22,379 18,741
Provision for income taxes 8,224 6,789
---------- ----------
Earnings from Continuing Operations 14,155 11,952
Discontinued Operations (note 4)
Earnings (loss) from operations
less related income tax (benefit)
2000 - $297, 1999 - ($313) 456 (550)
---------- ----------
Net Earnings 14,611 11,402
========== ==========
Retained Earnings
Balance at beginning of period 531,204 499,954
Net Earnings 14,611 11,402
Cash dividends on common shares (2,807) (2,795)
---------- ----------
Balance at End of Period $ 543,008 $ 508,561
========== ==========
Basic Earnings (Loss) per Common
Share (note 8)
Continuing Operations $0.61 $0.51
Discontinued Operations 0.02 (0.02)
---------- ----------
Net Earnings $0.63 $0.49
========== ==========
Diluted Earnings (Loss) per Common
Share (note 8)
Continuing Operations $0.60 $0.50
Discontinued Operations 0.02 (0.02)
---------- ----------
Net Earnings $0.62 $0.48
========== ==========
Dividends per Common Share $0.12 $0.12
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(000 omitted)
(unaudited)
March 31, December 31,
2000 1999
----------- ------------
Assets
Current Assets
Cash and cash equivalents (note 2) $ 5,132 $ 14,761
Receivables 224,351 183,442
Inventories (note 5) 170,002 163,443
Deferred income taxes 11,047 11,323
Other current assets 6,550 5,253
Net current assets - discontinued
operations (note 4) 16,116 10,405
----------- ------------
Total Current Assets 433,198 388,627
Property, plant and equipment 527,826 518,741
Less accumulated depreciation 243,610 235,248
----------- ------------
Net property, plant and equipment 284,216 283,493
Goodwill and other intangibles 249,771 251,085
Other assets 96,200 88,990
Net long-term assets - discontinued
operations (note 4) 50,509 51,791
----------- ------------
Total Assets $1,113,894 $ 1,063,986
=========== ============
Liabilities
Current Liabilities
Notes payable $ 644 $ -
Trade payables 101,346 81,221
Accrued payroll and benefits 28,427 32,272
Accrued liabilities 28,849 27,301
Product warranty 11,020 10,847
Income taxes 8,992 7,170
Long-term debt due within one year 9,629 9,629
----------- ------------
Total Current Liabilities 188,907 168,440
Long-term debt (note 6) 364,785 351,251
Other liabilities 66,044 64,536
Deferred income taxes 51,966 48,675
----------- ------------
Total Liabilities 671,702 632,902
Stockholders' Equity
Class A common stock, $5 par value:
authorized 14,000,000 shares;
issued 8,722,720 43,614 43,615
Common stock, $1 par value: authorized
60,000,000 shares; issued 23,826,642 23,827 23,826
Capital in excess of par value 53,212 53,026
Retained earnings (note 6) 543,008 531,204
Accumulated other comprehensive loss
(note 7) (4,228) (3,238)
Treasury stock at cost (217,241) (217,349)
----------- ------------
Total Stockholders' Equity 442,192 431,084
----------- ------------
Total Liabilities and Stockholders' Equity $1,113,894 $1,063,986
=========== ============
See accompanying notes to unaudited condensed consolidated financial statements
4
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PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(000 omitted)
(unaudited)
Three Months Ended
March 31
----------------------------
2000 1999
---------- ----------
Operating Activities
Continuing
Earnings from continuing operations $ 14,155 $ 11,952
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation 9,206 6,544
Amortization 2,114 1,302
Net change in current assets and
liabilities (25,677) (13,860)
Net change in other noncurrent
assets and liabilities (3,933) (5,661)
Other 414 124
---------- ----------
Cash Provided by (Used in) Operating
Activities (3,721) 401
Investing Activities
Capital expenditures (11,660) (8,657)
Other (360) (369)
---------- ----------
Cash Used in Investing Activities (12,020) (9,026)
---------- ----------
Cash Used in Operating and Investing
Activities (15,741) (8,625)
Discontinued
Cash Used in Discontinued Operations (5,340) (6,381)
Financing Activities
Debt incurred 14,178 332
Purchase of treasury stock - (2,691)
Net proceeds from common stock and
option activity 38 42
Tax benefit from exercise of stock
options 43 4
Dividends paid (2,807) (2,795)
---------- ----------
Cash Provided by (Used in) Financing
Activities 11,452 (5,108)
---------- ----------
Net decrease in cash and cash
equivalents (9,629) (20,114)
Cash and cash equivalents-beginning
of period (note 2) 14,761 37,666
---------- ----------
Cash and Cash Equivalents - End of Period $ 5,132 $ 17,552
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
5
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
1. Basis of Presentation
The condensed consolidated financial statements presented herein are based
on interim figures and are subject to audit. In the opinion of management,
all adjustments consisting of normal accruals considered necessary for a
fair presentation of the results of operations and of financial position
have been made. The results of operations for the three-month period ended
March 31, 2000 are not necessarily indicative of the results expected for
the full year. The condensed consolidated balance sheet as of December 31,
1999 is derived from the audited financial statements but does not include
all disclosures required by generally accepted accounting principles.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
2. Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, cash and cash
equivalents include short-term investments held primarily for cash
management purposes. These investments normally mature within three months
from the date of acquisition.
3. Acquisition
On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s
(MagneTek) domestic electric motor business and six wholly owned foreign
subsidiaries for $244.6 million. The purchase price was allocated to the
assets acquired and the liabilities assumed based upon current estimates of
their respective fair values at the date of acquisition. These estimates
may be revised at a later date.
In connection with the MagneTek acquisition, the company recorded
additional purchase liabilities of $19.4 million which included employee
severance and relocation, as well as certain facility exit costs. Costs
incurred and charged against the purchase liability totaled $0.8 million
for the three-month period ended March 31, 2000. Total costs incurred and
charged against the liability from August 2, 1999 to March 31, 2000 totaled
$1.8 million.
4. Discontinued Operations
In the first quarter, the company decided to divest its fiberglass piping
and liquid and dry bulk storage tank businesses. Net sales of these
businesses were $28.7 and $27.5 million for the three-month periods ended
March 31, 2000 and 1999, respectively.
The operating results of the discontinued businesses have been reported
separately as discontinued operations in the accompanying financial
statements. Certain expenses have been allocated to the discontinued
operations, including interest expense, which was
6
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allocated based on the ratio of net assets of the discontinued businesses
to the total consolidated capital of the company.
5. Inventories (000 omitted)
March 31, 2000 Dec. 31, 1999
-------------- -------------
Finished products $ 105,999 $ 99,335
Work in process 39,892 40,197
Raw materials 42,272 41,997
Supplies 1,247 1,322
-------- ---------
189,410 182,851
Allowance to state inventories
at LIFO cost 19,408 19,408
-------- ---------
$ 170,002 $ 163,443
======== =========
6. Long-Term Debt
The company's credit agreement and term notes contain certain conditions
and provisions which restrict the company's payment of dividends. Under the
most restrictive of these provisions, retained earnings of $63.7 million
were unrestricted as of March 31, 2000.
7. Comprehensive Earnings (Loss)
The company's comprehensive earnings were $13.6 and $10.7 million for the
three-month periods ended March 31, 2000 and 1999, respectively.
Comprehensive earnings, for all periods presented, were comprised of net
earnings and foreign currency translation adjustments. No provisions or
benefits for U.S. income taxes have been made on these foreign currency
translation adjustments.
7
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8. Earnings per Share of Common Stock
The numerator for the calculation of basic and diluted earnings per share
is net earnings. The following table sets forth the computation of basic
and diluted weighted-average shares used in the earnings per share
calculations:
Three Months Ended
March 31
--------------------------------
2000 1999
------------- -------------
Denominator for basic earnings
per share
- weighted-average shares 23,361,393 23,224,580
Effect of dilutive stock options 336,971 517,766
------------- -------------
Denominator for diluted earnings
per share 23,698,364 23,742,346
============= =============
9. Operations by Segment
(000 omitted) Three Months Ended
March 31
--------------------------------
2000 1999
------------- -------------
Net Sales
Electric Motor Technologies $ 247,876 $ 147,875
Water Systems Technologies 87,167 81,988
------------- -------------
Net Sales $ 335,043 $ 229,863
============= =============
Earnings before Interest and Taxes
Electric Motor Technologies $ 25,923 $ 18,386
Water Systems Technologies 9,465 8,503
------------- -------------
Total Segments 35,388 26,889
General Corporate and Research
and Development Expenses (7,675) (6,494)
Interest Expense - Net (5,334) (1,654)
------------- -------------
Earnings before Income Taxes 22,379 18,741
Provision for Income Taxes (8,224) (6,789)
------------- -------------
Earnings from Continuing Operations $ 14,155 $ 11,952
============= =============
Intersegment sales, which are immaterial, have been excluded from segment
revenues.
8
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST THREE MONTHS OF 2000 COMPARED TO 1999
Sales from continuing operations in the first quarter of 2000 were $335 million,
an increase of $105.1 million or 46% over sales of $229.9 million in the first
quarter of 1999. Approximately $90 million of the increase in sales was
attributable to the MagneTek motor business acquired in August 1999 with the
remaining increase representing growth in the base electric motor and water
heater businesses.
First quarter earnings from continuing operations of $14.2 million increased
$2.2 million or 18.4% over 1999's first quarter continuing earnings of $12
million primarily as a result of the increased sales. First quarter diluted
earnings per share for continuing operations were $.60 compared with $.50 for
the first quarter of 1999.
The company's gross profit margin of 20.1% in the first quarter of 2000 was
consistent with the 20% margin achieved in the first quarter of 1999. Slightly
lower margins in the electric motor business resulting from the aforementioned
acquisition were offset by improved margins in the water heater business.
First quarter sales for the Electric Motor Technologies segment were $247.9
million or $100 million higher than the same period last year. Approximately $90
million of the sales growth was attributable to the MagneTek motor business
acquisition. Growth in the base motor business was about 7% and resulted from
strong customer demand in the heating, ventilating, and air conditioning (HVAC),
pump, and garage door opener markets.
First quarter operating profits for Electric Motor Technologies increased from
$18.4 million in 1999 to $25.9 million in 2000 as a result of the higher volume
and improved manufacturing performance throughout the operation.
First quarter sales for the Water Systems Technologies segment were $87.2
million or 6.3% higher than 1999 first quarter sales of $82 million. Significant
growth in international operations, most notably the water heater business in
China where sales nearly tripled over the first quarter of 1999, contributed to
the increased volume. Operating profits were $9.5 million in the first quarter
of 2000 or 11.3% higher than the $8.5 million generated in the first quarter of
1999 as a result of the higher volume.
Selling, general, and administrative (SG&A) expense for the first quarter of
2000 was $35.7 million or $11.9 million higher than the $23.8 million expense in
the first quarter of 1999. The majority of the increase was associated with the
MagneTek acquisition. Relative to sales, SG&A was 10.6% in the first quarter or
slightly higher than the 10.3% in the same period last year.
9
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The company recognized net interest expense of $5.3 million in the first quarter
of 2000, compared with $1.7 million in the first quarter of 1999. The increased
interest expense was due to the MagneTek acquisition.
Other expense increased from $1.8 million in the first quarter of 1999 to $4
million in the first quarter of 2000. The largest element of the increase was
the amortization of the goodwill associated with the MagneTek acquisition.
Additionally, the first quarter of 1999 benefited from certain non-recurring
income items.
The first quarter effective tax rate of 36.7% in 2000 was up slightly from 36.2%
in 1999.
In the first quarter the company announced its intent to exit the storage tank
and fiberglass pipe markets. As a result of the anticipated sale of these
businesses, Smith Fiberglass Products Company and A. O. Smith Engineered Storage
Products Company have been classified as discontinued operations in the
accompanying financial statements. Sales for these discontinued operations were
$28.7 million in the first quarter of 2000 compared with $27.5 million in the
same quarter last year. The after-tax profit from the discontinued operations of
Engineered Storage Products Company in the first quarter of 2000 was $.5 million
compared to $.3 million in 1999. The first quarter after-tax loss of $.6 million
in 1999 included both discontinued businesses. During the first quarter of 2000,
$1.1 million of after-tax costs, including Smith Fiberglass Products' 2000 first
quarter after-tax loss of $.7 million, were charged to the disposition reserves
established at December 31, 1999. At March 31, 2000, such reserves were deemed
adequate. The company expects its divestitures to be substantially completed by
the end of the third quarter of 2000.
During the first three months of 2000 and 1999, the company was party to futures
contracts for the purposes of hedging a portion of certain raw material
purchases. The company was also a party to forward foreign exchange contracts to
hedge foreign currency transactions consistent with its committed exposures.
Gains and losses from the company's futures contracts and forward foreign
exchange contracts are offset by gains and losses in the underlying transactions
being hedged.
Liquidity & Capital Resources
The company's working capital was $244.3 million at March 31, 2000, $24.1
million higher than at December 31, 1999. Sales related increases of $40.9
million to accounts receivable were partially offset by increases to accounts
payable. Cash used by continuing operations during the first quarter was $15.7
million compared to $8.6 million during the same time period one year ago due to
higher working capital requirements.
Capital expenditures by continuing operations during the first quarter totaled
$11.7 million compared with $8.7 million during the same period in 1999. The
majority of the increase in capital spending was related to incremental spending
requirements in the MagneTek motor businesses. The company expects higher
capital spending in 2000 compared to 1999, but expects such capital expenditures
to be covered by operating cash flow.
10
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The company's long term debt increased by $13.5 million from $351.3 million at
December 31, 1999 to $364.8 million at March 31, 2000. The company's leverage as
measured by the ratio of total debt to total capitalization was unchanged from
the end of last year at 46%.
In connection with the MagneTek acquisition in 1999, additional purchase
liabilities of $19.4 million were recorded which included employee severance and
relocation, as well as certain facility exit costs. Costs incurred and charged
against the purchase liabilities totaled $.8 million and $1.8 million during the
first quarter and since the acquisition, respectively.
At its April 6, 2000 meeting, A. O. Smith's Board of Directors declared a
regular quarterly dividend of $.12 per share on its common stock (Class A Common
and Common). The dividend is payable on May 15, 2000 to shareholders of record
April 28, 2000.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
As is more fully described in the company's annual report on Form 10-K for the
year ended December 31, 1999, the company is exposed to various types of market
risks, primarily currency and certain commodities. The company monitors its
risks in such areas on a continuous basis and, generally enters into futures
contracts to minimize such exposures for periods of less than one year. The
company does not engage in speculation in its derivatives strategies. There have
been no material changes in the company's futures contracts since December 31,
1999.
Forward Looking Statements
Certain statements in this report are "forward-looking statements." These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the company "believes,"
"anticipates," "expects," "projects," or words of similar import. 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 its 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
actual results and cause results to differ materially from those expressed in
forward-looking statements made by, or on behalf of, the company. The company
considers most important among such factors, the stability in its electric motor
and water products markets, the timely and proper integration of the MagneTek
motors acquisition, and the implementation of associated cost reduction
programs.
All subsequent written and oral forward-looking statements attributable to the
company, or persons acting on its behalf, are expressly qualified in their
entirety by these cautionary statements.
11
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There have been no material changes in the legal and environmental matters
previously reported in Part 1, Item 3 and Note 12 of the Notes to Consolidated
Financial Statements in the company's Form 10-K Report for the year ended
December 31, 1999, which are incorporated herein by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A. O. SMITH CORPORATION
April 19, 2000 /s/ John J. Kita
-----------------------------
John J. Kita
Vice President,
Treasurer and Controller
April 19, 2000 /s/ G. R. Bomberger
-----------------------------
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
13
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
(27) Financial Data Schedule
(27-1) Restated Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,132
<SECURITIES> 0
<RECEIVABLES> 227,548
<ALLOWANCES> (3,197)
<INVENTORY> 170,002
<CURRENT-ASSETS> 433,198
<PP&E> 527,826
<DEPRECIATION> 243,610
<TOTAL-ASSETS> 1,113,894
<CURRENT-LIABILITIES> 188,907
<BONDS> 364,785
<COMMON> 67,441
0
0
<OTHER-SE> 374,751
<TOTAL-LIABILITY-AND-EQUITY> 1,113,894
<SALES> 335,043
<TOTAL-REVENUES> 335,043
<CGS> 267,648
<TOTAL-COSTS> 267,648
<OTHER-EXPENSES> 4,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,431
<INCOME-PRETAX> 22,379
<INCOME-TAX> 8,224
<INCOME-CONTINUING> 14,155
<DISCONTINUED> 456
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,611
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 17,552
<SECURITIES> 0
<RECEIVABLES> 149,802
<ALLOWANCES> (1,737)
<INVENTORY> 87,073
<CURRENT-ASSETS> 286,339
<PP&E> 414,227
<DEPRECIATION> 207,994
<TOTAL-ASSETS> 764,682
<CURRENT-LIABILITIES> 131,144
<BONDS> 131,535
<COMMON> 67,500
0
0
<OTHER-SE> 339,062
<TOTAL-LIABILITY-AND-EQUITY> 764,682
<SALES> 229,863
<TOTAL-REVENUES> 229,863
<CGS> 183,936
<TOTAL-COSTS> 183,936
<OTHER-EXPENSES> 1,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,978
<INCOME-PRETAX> 18,741
<INCOME-TAX> 6,789
<INCOME-CONTINUING> 11,952
<DISCONTINUED> (550)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,402
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.48
</TABLE>
