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, 1999
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number 1-475
A. O. SMITH CORPORATION
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 23972, Milwaukee, Wisconsin 53223-0972
Telephone: (414) 359-4000
Securities registered pursuant to Section 12(b) of the Act:
Shares of Stock Outstanding Name of Each Exchange on
Title of Each Class January 31, 2000 Which Registered
- ------------------- --------------------------- ------------------------
Class A Common Stock 8,690,325 American Stock Exchange
(par value $5.00 per share)
Common Stock 14,710,552 New York Stock Exchange
(par value $1.00 per share)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes _X_ No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $13,321,301 for Class A Common Stock and $248,682,305 for Common
Stock as of January 31, 2000.
Documents Incorporated by Reference:
1. Portions of the company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year and, upon such filing, to be incorporated by
reference in Part III).
<PAGE>
PART 1
ITEM 1 - BUSINESS
- -----------------
A. O. Smith Corporation serves customers worldwide and is organized according to
the products it offers. Under this organizational structure, the company
consists of two platforms, Electric Motor Technologies and Water Systems
Technologies. The company's Electric Motor Technologies segment is one of North
America's largest manufacturers of fractional horsepower, integral horsepower
Alternating Current (A/C) and Direct Current (D/C), and hermetic electric
motors. The Water Systems Technologies segment is a leading manufacturer of
residential and commercial gas and electric water heating equipment and copper
tube boilers.
In January 2000, the company decided to divest its Storage and Fluid Handling
Technologies businesses. The operating results of the discontinued business have
been reported separately as discontinued operations in the accompanying
financial statements. See Note 3 to the Consolidated Financial Statements,
entitled "Discontinued Operations" which appears elsewhere herein.
On August 2, 1999, the company acquired MagneTek, Inc.'s worldwide electric
motor business for $245 million. The acquired MagneTek business, engaged in the
marketing and manufacture of fractional and integral horsepower A/C and D/C
motors, contributed approximately $145 million of 1999 sales.
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)
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Electric Motor Technologies $722.9 $480.0 $390.7 $337.1 $317.3
Water Systems Technologies 316.4 294.8 287.5 291.3 276.0
----- ----- ----- ----- -----
Total Continuing Operations $1,039.3 $774.8 $678.2 $628.4 $593.3
======= ===== ===== ===== =====
ELECTRIC MOTOR TECHNOLOGIES
Segment sales increased $243 million or 51 percent in 1999 to $723 million and
represented 70 percent of total sales from continuing operations. The increase
in sales in 1999 was primarily due to the August 1999 acquisition of MagneTek,
Inc.'s electric motor business and the July 1, 1998, acquisition of General
Electric's compressor motor business.
The Electric Motor Technologies segment consists of the A. O. Smith Electrical
Products Company which manufactures: hermetic motors that are sold worldwide to
manufacturers of air conditioning and commercial refrigeration compressors;
fractional horsepower fan motors used in furnaces, air conditioners, and
blowers; pump motors that are sold to manufacturers of home water systems,
swimming pools, hot tubs, and spas; and fractional horsepower motors used in
other consumer products (such as garage door openers). Sales to the heating,
ventilating, air conditioning and refrigeration market account for approximately
60 percent of Electric Motor Technologies' sales.
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The MagneTek motor business complements all of these product offerings. In
addition, the acquisition of MagneTek's integral horsepower A/C and D/C motors
provide access to new markets for industrial and commercial applications.
Electric Motor Technologies sells its products directly to original equipment
manufacturers (OEMs) and also markets its products through a distributor
network, which sells to smaller OEMs and the 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, Fasco, Jakel, and
vertically integrated customers.
WATER SYSTEMS TECHNOLOGIES
The Water Systems Technologies segment consists of the A. O. Smith Water
Products Company which had 1999 sales of $316 million, approximately seven
percent higher than 1998 sales of $295 million and represented 30 percent of
total sales from continuing operations.
Domestic residential water heater sales in 1999 were $165 million or
approximately 52 percent of segment revenues. The company markets residential
gas and electric water heaters through a network of plumbing wholesalers in the
United States and Canada. The majority of the company's sales are in the less
cyclical replacement market, although the new housing market is also an
important portion of the business. 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, and Bradford-White.
The company also markets commercial water heating equipment 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 in
North America. Commercial water heaters 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. The
majority of commercial sales are derived from the less cyclical replacement
market with the remainder being impacted by general business conditions in the
commercial construction market.
In 1995, Water Systems Technologies established a joint venture in China to
manufacture instantaneous and storage type heaters for the Chinese market. A. O.
Smith acquired its partner's interest during the fourth quarter of 1998 and
began reporting the Chinese subsidiary's financial results on a consolidated
basis effective January 1, 1999. The operation in China accounted for
approximately $13 million of the total increase of $21 million in 1999 sales.
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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 copper purchase 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 units. Total expenditures
for research and development in continuing operations in 1999, 1998, and 1997
were approximately $15.6, $12.8, and $12.6 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 15,100 persons in its
continuing operations as of December 31, 1999.
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 U. S. export sales from continuing operations were $46 million, $39
million, and $38 million in 1999, 1998, and 1997, respectively.
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ITEM 2 - PROPERTIES
- -------------------
The company manufactures its products in 39 plants worldwide. These facilities
have an aggregate floor space of 5,517,799 square feet, consisting of 3,501,746
square feet owned by the company and 2,016,053 square feet of leased space.
Twenty-three of the company's facilities are foreign plants with 2,251,077
square feet of space, of which 1,213,313 square feet are leased.
Excluded from the above totals are 1,132,000 square feet of domestic and 25,000
square feet of foreign space occupied by the company's Storage & Fluid Handling
Technologies businesses, which the company has announced as available for sale.
The manufacturing plants presently operated by the company's continuing
operations are listed below by industry segment.
United States Foreign
------------- -------
Electric Motor Alta Vista, VA; Gordonsville, TN; Acuna, Mexico;
Technologies McMinnville, TN; Mebane, NC; Bray, Ireland;
(3,868,707 sq. ft.) Monticello, IN; Mt. Sterling, KY; Budapest, Hungary;
Owosso, MI; Paoli, IN; Cegled, Hungary;
Ripley, TN; Scottsville, KY; Gainsborough, England;
Tipp City, OH; Upper Sandusky, OH Juarez, Mexico (11);
Monterrey, Mexico (2)
Water Systems El Paso, TX; Florence, KY; Juarez, Mexico;
Technologies McBee, SC; Renton, WA Nanjing, People's
(1,649,092 sq. ft.) Republic of China;
Stratford, Canada (2);
Veldhoven,
The Netherlands
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 plants 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
and Corporate Technology Center are located in Milwaukee, Wisconsin. The company
also has offices in Alsip, Illinois; Beijing, China; El Paso, Texas; Irving,
Texas; London, England; St. Louis, Missouri; and Singapore.
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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. The following paragraphs summarize noteworthy actions and
proceedings.
The company previously reported on the Dip Tube Litigation in its Form 10-Q
Reports for the Quarters ended March 31, 1999, and September 30, 1999. On July
16, 1999, a lawsuit was filed in the United States District Court, Western
District of Missouri by individuals on behalf of themselves and all persons
throughout the United States who have owned or currently own a water heater
manufactured by Rheem Manufacturing Company, A. O. Smith Corporation, Bradford
White Company, American Water Heater Company, Lochinvar Corporation and State
Industries, Inc. (the "water heater manufacturers") that contain a dip tube
manufactured, designed, supplied or sold by Perfection Corporation between
August 1993 and October 1996. A dip tube is a plastic tube in a residential
water heater which brings the cold water supply to the bottom area of the tank
to be heated.
The class claims in the lawsuit are broad and comprehensive and include by way
of example claims for violation of federal, state, common or other laws; breach
of any duties imposed by contract or otherwise; claims based on strict product
liability, negligence, breach of express or implied warranty, fraud, conspiracy,
suppression, consumer fraud, unfair or deceptive trade practices, negligent or
intentional misrepresentation, and violation of the Magnuson-Moss Act. The
plaintiffs and defendants reached a settlement of the claims of this litigation.
On October 21, 1999, the parties petitioned the court to enter an order
determining that the suit may be maintained as a class action and that the class
be constituted as set forth in the complaint. The petition also asks for
preliminary approval of the proposed settlement and approval of the form and
manner of notice which will be given to the class members. On November 22, 1999,
the court entered an order giving preliminary approval to the settlement. On
April 21, 2000, the court will hold a hearing on the fairness of the settlement
and final approval of the settlement.
The settlement agreement establishes a procedure whereby members of the class
will be able to file claims for reimbursement of damages previously incurred for
the repair or replacement of a subject dip tube and, for those class members who
have not incurred out-of-pocket expense or whose subject dip tube related
problems have not been fully remedied, the settlement provides a procedure for
the repair and replacement of the subject dip tubes at no expense to the class
member. The expenses of the reimbursements, repairs and replacements and
administration of the settlement will be paid by the defendant water heater
manufacturers. The settlement agreement contemplates an application to the court
for an award of reasonable attorney's fees and reimbursement of litigation
expenses incurred on behalf of class members by counsel for the class in the
amount of $5,650,000. The court approved award would also be paid by the
defendant water heater manufacturers. In consideration of the agreement by the
water heater manufacturers to effectuate the terms of the settlement agreement
for the benefit of the class members, the class members will release and
discharge the water heater manufacturers from any liability for settled claims.
Further, all such claims of the class against Perfection Corporation, the
manufacturer of the subject dip tubes, will be deemed assigned to the water
heater manufacturers. Individuals can elect to be excluded from the class and
separately pursue their remedies and if so elected, would not be entitled to the
benefits of the settlement agreement. All other legal actions brought against
the water heater manufacturers respecting dip tube claims have been stayed until
this lawsuit is resolved.
Separately, the water heater manufacturers on September 29, 1999, filed a direct
action lawsuit in the Civil District Court for the Parish of Orleans, State of
Louisiana against the insurers of Perfection Corporation and American Meter
Company, the parent company of Perfection. This lawsuit seeks coverage from the
defendant insurance companies for (i) the damages that the water heater
manufacturers and the class members in the federal court action referred to
above have incurred because of the property damages caused by the dip tube
failures, (ii) the liability of the water heater manufacturers assumed by
Perfection by contract, and (iii) the personal injuries
6
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suffered by the water heater manufacturers as a result of the disparagement of
them and their products in the media reports relating to the dip tubes.
As of this date, it is premature for the company to determine what, if any,
costs it will incur with respect to the aforementioned settlement. It is the
company's expectation that all or a substantial portion of the costs will be
recovered from the insurers of Perfection Corporation and American Meter Company
as well as the company's insurers.
A lawsuit for damages and declaratory judgments in the Circuit Court of
Milwaukee County, State of Wisconsin, in which the company is plaintiff is
pending against three insurance companies for failure to pay in accordance with
liability insurance policies issued to the company. 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 ("underlying claims"). In October 1998, the Wisconsin Appellate Court,
First District entered an order which reversed the decision of the Circuit Court
which had granted the company partial summary judgment against two insurance
companies with respect to three of the underlying claims. The company's petition
to the Wisconsin Supreme Court to accept its appeal of this decision was denied
in January 1999, and the Appellate Court remanded the case to the trial court
with directions to grant summary judgment in favor of the two insurance
companies with respect to the subject underlying claims. At the trial court, the
company and insurance companies filed cross motions for summary judgment with
respect to the balance of the underlying claims brought by the company. In
February 2000, the trial court judge issued a decision granting the insurance
companies summary judgment. The company intends to appeal the trial court
decision to the Wisconsin Appellate Court. While the company has, in part,
assumed applicability of this coverage, should the company not prevail on its
claims, it would not be material to its financial condition.
The company is currently involved as a potentially responsible party ("PRP") in
judicial and administrative proceedings initiated on behalf of various state and
federal regulatory agencies seeking to clean up twelve sites which have been
environmentally impacted and to recover costs they have incurred or will incur
as to those sites. The company has also been designated a PRP with respect to a
former mine in Colorado which is being environmentally remediated by the U.S.
EPA. The U.S. EPA commenced a lawsuit against a former owner of a mining company
involved at the site, and that owner commenced a third-party action against the
company and other parties for contribution.
It is impossible at this time to estimate the total cost of remediation for the
sites or the company's ultimate share of those costs, primarily because the
sites are in various stages of the remediation process and issues remain open at
many sites concerning the selection and implementation of the final remedy, the
cost of that remedy and the company's liability at a site relative to the
liability and viability of the other PRPs.
The company has established reserves for these sites in a manner that is
consistent with generally accepted accounting principles for costs associated
with such cleanups when those costs are capable of being reasonably estimated.
To the best of the company's knowledge, the reserves it has established and
insurance proceeds that are available to the company are sufficient to cover the
company's liability. The company further believes its 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 company has self-insured a portion
of its product liability loss exposure and other business risks for many years.
The company has established reserves which it believes are adequate to cover
incurred claims. For the year ended December 31, 1999, the company had $60
million of third-party product liability insurance for individual losses in
excess of $1.5 million and for aggregate annual losses in excess of $10 million.
The company reevaluates its exposure on claims periodically and makes
adjustments to its reserves as appropriate.
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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 1999.
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of
the current executive officers which 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 2000 Annual Meeting of Stockholders.
ROBERT J. O'TOOLE
- -----------------
Chairman of the Board of Directors, President and Chief Executive Officer
Mr. O'Toole, 59, 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 and Factory Mutual
Insurance Company.
GLEN R. BOMBERGER
- -----------------
Executive Vice President, Chief Financial Officer and Director
Mr. Bomberger, 62, 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 of Smith Investment Company and Firstar
Funds, Inc.
JOHN A. BERTRAND
- ----------------
Senior Vice President and President - A. O. Smith Electrical Products Company
Mr. Bertrand, 61, has been president of A. O. Smith Electrical Products
Company, a division of the company, since 1986. He was elected senior vice
president in October 1999. Mr. Bertrand joined the company in 1960.
CHARLES J. BISHOP
- -----------------
Vice President - Corporate Technology
Dr. Bishop, 58, has been vice president-corporate technology since 1985. Dr.
Bishop joined the company in 1981.
MICHAEL J. COLE
- ---------------
Vice President - Asia
Mr. Cole, 55, was elected vice president-Asia in March 1996. Previously he was
vice president-emerging markets of Donnelly Corporation, an automotive
supplier.
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DANIEL L. CURTIS
- ----------------
President - Smith Fiberglass Products Company
Mr. Curtis, 53, became the president of Smith Fiberglass Products Company, a
division of the company, in February 2000. He served as vice
president-manufacturing and engineering from 1997. He has also held executive
and operations management positions with Cabot Corporation, a major
manufacturer of specialty chemicals, and PPG Industries.
JOHN R. FARRIS
- --------------
President - A. O. Smith Engineered Storage Products Company
Mr. Farris, 50, 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.
JOHN J. KITA
- ------------
Vice President, Treasurer and Controller
Mr. Kita, 44, 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 and President - A. O. Smith Water Products Company
Mr. Massa, 50, became president of A. O. Smith Water Products Company, a
division of the company, in February 1999. He was elected senior vice
president in June 1997. He served as the president of A. O. Smith Automotive
Products Company, a former division of the company, from June 1996 to April
1997. He was the president of A. O. Smith Water Products Company from 1995 to
June 1996 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, 57, 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, 59, has been vice president-human resources and public affairs
for the company since 1986. He joined A. O. Smith in 1970.
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STEVE W. RETTLER
- ----------------
Vice President - Business Development
Mr. Rettler, 45, was elected vice president-business development in July 1998.
Previously he was vice president and general manager of Brady Precision Tape
Co., a manufacturer of specialty tape products for the electronics market.
W. DAVID ROMOSER
- ----------------
Vice President, General Counsel and Secretary
Mr. Romoser, 56, was elected vice president, general counsel and secretary in
March 1992.
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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
Bank, N.A., 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
----------------------------------
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- ---------
Common Stock
High 26-7/16 28 32 31-9/16
Low 19 19 25-1/2 18-13/16
Class A Common
High 25-11/16 25-9/16 31-1/2 31
Low 19-5/16 19-3/16 26-1/8 19-3/16
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
Common Stock
High 29-23/24 35-2/3 35-7/8 27
Low 26-7/8 28-2/3 18-7/8 15-13/16
Class A Common
High 29-2/3 35-1/3 35-2/3 26-1/16
Low 27-11/12 29-2/25 19 16-3/8
(b) Holders. As of January 31, 2000, the number of shareholders of record of
Common Stock and Class A Common Stock were 1,226 and 543, 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 $59.9 million were
unrestricted as of December 31, 1999.
(d) Stock Repurchase Authority. As of February 22, 2000, approximately 8.5
million shares of Class A Common Stock and Common Stock had been
repurchased for $212.5 million under three stock repurchase authorizations
granted by the Board of Directors in 1997.
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ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31(1)
-------------------------------------------------------------------------------------
1999(2)(3) 1998(3)(4) 1997(3)(5) 1996 1995
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales - continuing operations $ 1,039,281 $ 774,788 $ 678,207 $ 628,419 $ 593,370
Earnings
- --------
Continuing operations 50,270 40,656 32,065 19,933 17,861
Discontinued operations:
Operating earnings(loss) (890) 3,835 20,719 45,484 43,552
Gain(loss) on disposition (6,958) - 101,046 - -
------------ ---------- ---------- ---------- ----------
Earnings (7,848) 3,835 121,765 45,484 43,552
------------ ---------- ---------- ---------- ----------
Net earnings $ 42,422 $ 44,491 $ 153,830 $ 65,417 $ 61,413
============ ========== ========== ========== ==========
Basic earnings (loss) per share
- -------------------------------
of common stock
---------------
Continuing operations $ 2.17 $ 1.73 $ 1.16 $ .64 $ .57
Discontinued operations (.34) .16 4.41 1.45 1.39
------------ ---------- ---------- ---------- ----------
Net earnings $ 1.83 $ 1.89 $ 5.57 $ 2.09 $ 1.96
============ ========== ========== ========== ==========
Diluted earnings (loss) per share
- ---------------------------------
of common stock
---------------
Continuing operations $ 2.11 $ 1.68 $ 1.14 $ .63 $ .56
Discontinued operations (.33) .16 4.32 1.43 1.38
------------ ---------- ---------- ---------- ----------
Net earnings $ 1.78 $ 1.84 $ 5.46 $ 2.06 $ 1.94
============ ========== ========== ========== ==========
Cash dividends per common share $ .48 $ .47 $ .45 $ .44 $ .39
December 31
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets $ 1,063,986 $ 736,570 $ 682,789 $ 845,199 $ 723,620
Long-term debt 351,251 131,203 100,972 238,446 190,938
Total stockholders' equity 431,084 401,093 399,705 424,639 372,364
- --------------------------------------------------------------------------------------------------------------------------
1 On January 17, 2000, the company decided to divest its fiberglass piping and liquid and dry bulk storage businesses.
On April 18, 1997, the company sold its automotive products business, exclusive of its Mexican automotive affiliate,
and on October 1, 1997 the company sold its 40 percent interest in its Mexican affiliate. The company has accounted
for the fiberglass piping and liquid and dry bulk storage and automotive businesses as discontinued operations in the
consolidated financial statements. See Note 3 to the consolidated financial statements which appears elsewhere herein.
2 On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s domestic electric motor business and six wholly
owned foreign subsidiaries for $244.6 million.
3 See Note 2 to the consolidated financial statements included elsewhere herein.
4 On July 1, 1998, the company acquired certain assets of General Electric Company's domestic compressor motor business
for $125.6 million.
5 On March 31, 1997, the company acquired UPPCO, Incorporated, a manufacturer of subfractional C-frame electric motors,
for $60.9 million.
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
FINANCIAL REVIEW
A. O. Smith Corporation achieved record earnings from continuing operations in
1999 of $50 million or $2.11 per share, a 24 percent increase over last year's
earnings of $41 million or $1.68 per share. The Electric Motor Technologies and
Water Systems Technologies platforms established new sales and earnings records
in 1999. Details of individual segment performance will be discussed later in
this section.
Working capital at December 31, 1999, was $220 million compared with the
company's working capital of $155 million and $238 million at December 31, 1998
and 1997, respectively. The company purchased MagneTek, Inc.'s worldwide motor
operations for $245 million in the third quarter of 1999. In connection with the
MagneTek motors acquisition, additional purchase liabilities of $19.4 million
were recorded which included employee severance and relocation, as well as
certain facility exit costs. The reduction in cash and cash equivalents of $23
million during 1999, as well as the majority of the increases in accounts
receivable, inventory, and accounts payable, were primarily attributable to the
acquisition. In addition, Electric Motor Technologies' inventories increased in
the fourth quarter of 1999 in anticipation of higher customer demand in the
first quarter of 2000. Working capital declined in 1998 primarily as a result of
the decline in cash and equivalents associated with the $126 million acquisition
of General Electric's compressor motor business.
Capital expenditures of continuing operations were $33 million in 1999 compared
with $19 million in 1998 and $37 million in 1997. The increase in capital
spending during 1999 occurred in the company's electric motors operation. The
company is projecting 2000 capital expenditures of approximately $45 to $50
million. The increase over historical expenditures is due to the MagneTek motors
acquisition. Cash flow from continuing operations is expected to adequately
cover these capital expenditures.
Long-term debt increased $220 million from $131 million at December 31, 1998, to
$351 million at December 31, 1999, primarily as a result of the MagneTek motors
acquisition. Additionally, the company's leverage, as measured by total debt to
total capital, increased to 45.6 percent at the end of 1999 compared with 25.3
percent at the end of 1998. In conjunction with the acquisition, the company
terminated its existing $100 million, multi-year credit facility and established
a new $250 million, five year revolving credit facility and a $100 million,
364-day revolving credit facility with a group of nine banks. Barring any
acquisitions, the company expects the combination of 2000 cash flow and the
previously announced sale of the Storage and Fluid Handling businesses will
result in a significantly lower leverage ratio at the end of 2000.
The company repurchased 126,400 shares of its common stock during 1999 under its
stock repurchase program. Since the program's inception in January 1997,
approximately 8.5 million shares have been repurchased. Under the company's odd
lot repurchase program initiated in July 1999, the company purchased 2,851
shares of its common stock.
A. O. Smith Corporation has paid dividends for 60 consecutive years. The company
paid a total of $.48 per share in 1999 versus $.47 per share in 1998.
RESULTS OF OPERATIONS
Sales from continuing operations in 1999 were $1.04 billion, surpassing 1998
sales of $775 million by $265 million or 34 percent. Approximately $210 million
of the increase was related to acquisition activities within the electric motors
business during the past two years with another $13 million attributable to the
inclusion of sales for the water heater operation in China which became wholly
owned in December 1998. The remaining growth occurred in the company's core
electric motor and water heater businesses. Sales from continuing operations in
1998 increased approximately $97 million compared with 1997 sales due mostly to
the mid 1998 acquisition of the hermetic compressor motor business and a full
year of sales from the subfractional motor business acquired in March 1997.
13
<PAGE>
On January 21, 2000, the company announced its intent to exit the storage tank
and fiberglass pipe markets. This decision is consistent with the company's
commitment to an expanded presence in the electric motor and water products
markets and the strategy to become a consolidator in these industries. 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.
The company's gross profit margin for 1999 was 19.9 percent, compared with the
20.4 percent and 20.7 percent gross margins achieved in 1998 and 1997,
respectively. The decline in gross margin resulted from the previously discussed
acquisitions and the Chinese water heater operation which carry lower margins
than the base motors and water heater businesses. The decrease in gross margin
from 1997 to 1998 was due to the previously discussed subfractional and hermetic
compressor motor acquisitions.
Sales for the Electric Motor Technologies segment in 1999 increased $243 million
or over 50 percent to a record $723 million from 1998 sales of $480 million.
Sales in 1997 were $391 million. The acquisition of the MagneTek motors business
on August 2, 1999, added approximately $145 million in sales while the hermetic
compressor motor business acquired mid-year 1998 contributed approximately $65
million to sales during the first half of 1999. Stronger sales of hermetic
motors and fractional motors for heating, ventilating, and air conditioning
(HVAC) applications accounted for most of the remaining improvement in sales as
the air conditioning industry experienced a good year in 1999. Most of the
increase in sales from 1997 to 1998 was due to the previously mentioned
subfractional and hermetic compressor motor acquisitions. Sales in 1998 were
also bolstered by a recovery in the hermetic motor business resulting from
improvement in the HVAC industry.
Earnings for the Electric Motor Technologies segment in 1999 increased to a
record $79 million or almost 40 percent higher than the $57 million earned in
1998. Earnings in 1997 were $46 million. The favorable trend in earnings
resulted primarily from the higher sales volume due to acquisitions and growth
in the base electric motor business.
Sales for Water Systems Technologies increased $21 million from $295 million in
1998 to $316 million in 1999. Sales in 1997 were $288 million. This segment's
Chinese operation became wholly owned in December 1998, and accordingly, $13
million of sales for this entity have been included in 1999. Higher commercial
product and other international sales accounted for the balance of the increase.
Earnings for Water Systems Technologies were $34 million in 1999, reflecting
improvement over 1998 and 1997 earnings of $30 million and $29 million,
respectively. Much of the earnings improvement was due to higher gross margins
in 1999 resulting from favorable cost performance.
As previously mentioned, the company announced its intent to divest the Smith
Fiberglass Products and Engineered Storage Products Companies. Sales for these
discontinued operations declined from $155 million in 1997 to $143 million in
1998, with a further decline to $118 million in 1999. Pricing related weakness
in the petroleum production and chemical markets over the past few years
resulted in reduced capital spending and an associated reduction in demand for
storage tanks and fiberglass pipe. The discontinued businesses of Smith
Fiberglass Products and Engineered Storage Products generated a loss from
operations equivalent to $.04 per share in 1999 compared with earnings of $.16
and $.19 in 1998 and 1997, respectively. The company recorded an after-tax
charge of approximately $7 million to cover the estimated costs associated with
the disposition of these businesses. The total loss from discontinued operations
was $.33 per share in 1999. The company expects its divestitures to be
substantially completed by the end of the third quarter of 2000. The total
earnings from discontinued operations in 1997 included $4.13 per share
associated with the sale of the Automotive Products Company in April 1997.
Selling, general, and administrative (SG & A) expense in 1999 was $111 million,
a $25 million increase over the $86 million recorded in 1998. The increase in
expense is due to the additional SG & A associated with the MagneTek motors
acquisition and the initial consolidation of the Chinese water products
operation. SG & A in 1998 remained fairly consistent with the $87 million
recorded in 1997. Relative to sales, SG & A dropped
14
<PAGE>
steadily from 12.8 percent in 1997 to 10.6 percent in 1999. The decline in SG &
A relative to sales reflects synergies associated with the previously discussed
hermetic compressor motor acquisition.
Interest expense, net of the amount allocated to discontinued operations, was
$12.8 million in 1999 compared with $5.9 million and $6.6 million in 1998 and
1997, respectively. The higher 1999 interest expense was the result of incurring
additional debt to finance the MagneTek motors acquisition. The decline in
interest expense from 1997 to 1998 was a function of slightly lower interest
rates and greater amounts of capitalized interest associated with major plant
and equipment expenditures.
Interest income declined from $8.9 million in 1997 to $3.7 million in 1998 and
$1.4 million in 1999 as marketable securities were liquidated during the period
to repurchase shares of common stock and to fund the $126 million compressor
motor acquisition. A further decline in interest income occurred in 1999 as the
remaining securities were liquidated to fund a portion of the MagneTek motors
acquisition.
Other expense was $7.8 million in 1999 and was significantly higher than the
previous two years due mostly to the amortization of goodwill and other
intangibles associated with the company's recent acquisitions.
The company's effective tax rate over the past three years has averaged 34.7
percent and has been relatively consistent. The differential from the statutory
rate was due primarily to the utilization of state tax loss carry-forwards
associated with liquidated subsidiaries and research and development tax
credits.
Outlook
The company has a number of important objectives in place for 2000. Completing
the divestitures announced in January will continue to receive significant
attention until those objectives are completed. Completion is expected before
the end of the third quarter. The Electric Motor Technologies platform will
continue to integrate the MagneTek motors acquisition, leveraging cost savings
from materials, SG & A, and plant rationalization. The company continues to
project the incremental earnings of $.30 to $.35 per share in 2000 as forecasted
at the time of the acquisition. Consolidation opportunities in both commercial
and residential markets for Water Systems Technologies will continue to be
explored. Losses in the company's operation in China are projected to decline as
sales growth continues to accelerate. On a consolidated basis, the company
projects 2000 sales will surpass $1.3 billion and earnings growth will exceed
the stated target of 15 percent.
OTHER MATTERS
Year 2000
During 1999, the company completed its efforts to address any potential Year
2000 issues. As a result of company-wide efforts, A. O. Smith Corporation
experienced no business issues with respect to the commencement of 2000. Key
customers, vendors, and service providers have performed normally early in 2000
and the company does not anticipate any future material adverse effect on its
business operations, products, or financial prospects.
Costs specifically associated with renovating software for Year 2000 readiness
were funded through operating cash flows and were not material to the company's
financial position or results of operations.
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 1999 and are
not expected to be material in any single year. Although the company believes
that its operations are substantially 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,
15
<PAGE>
since the same laws govern the company's competitors, the company should not be
placed at a competitive disadvantage.
Market Risk
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 forward and futures contracts to
minimize such exposures for periods of less than one year. The company does not
engage in speculation in its derivatives strategies. Further discussion
regarding derivative instruments is contained in Note 1 to the Consolidated
Financial Statements.
Commodity risks include raw material price fluctuations. The company uses
futures contracts to fix the cost of its expected needs with the objective of
reducing price risk. Futures contracts are purchased over time periods and at
volume levels which approximate expected usage. At December 31, 1999, the
company had commodity futures contracts amounting to approximately $41 million
of commodity purchases. A hypothetical 10 percent change in the underlying
commodity price of such contracts would have a potential impact of $4.1 million.
It is important to note that gains and losses from the company's futures
contract activities will be offset by gains and losses in the underlying
commodity purchase transactions being hedged.
In addition, the company enters into foreign currency forward contracts to
minimize the effect of fluctuating foreign currencies. At December 31, 1999, the
company had net foreign currency contracts outstanding of approximately $28
million. Assuming a hypothetical 10 percent movement in the respective
currencies, the potential foreign exchange gain or loss associated with the
change in rates would amount to $2.8 million. It is important to note that gains
and losses from the company's forward contract activities will be offset by
gains and losses in the underlying transactions being hedged.
The company's earnings exposure related to movements in interest rates is
primarily derived from outstanding floating rate debt instruments that are
determined by short-term money market rates. At December 31, 1999, the company
had $235 million in outstanding floating rate debt with a weighted average
interest rate of 6.4 percent at year-end. A hypothetical 10 percent annual
increase or decrease in the year end average cost of the company's outstanding
floating rate debt would result in a change in annual pre-tax interest expense
of approximately $1.5 million.
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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
See "Market Risk" above.
16
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Index to Financial Statements: Form 10-K
Page Number
-----------
Report of Independent Auditors.............................................18
Consolidated Balance Sheets at December 31, 1999 and 1998..................19
For each of the three years in the period ended December 31, 1999:
- Consolidated Statement of Earnings...................................20
- Consolidated Statement of Comprehensive Income.......................20
- Consolidated Statement of Cash Flows.................................21
- Consolidated Statement of Stockholders' Equity.......................22
Notes to Consolidated Financial Statements..............................23-39
17
<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 sheets of A. O. Smith
Corporation as of December 31, 1999 and 1998 and the related consolidated
statements of earnings, comprehensive income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the index at
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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, 2000
18
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31 (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 14,761 $ 37,666
Receivables 183,442 113,098
Inventories 163,443 87,216
Deferred income taxes 11,323 10,352
Other current assets 5,253 4,328
Net current assets - discontinued operations 10,405 15,218
---------- ----------
Total Current Assets 388,627 267,878
Net property, plant, and equipment 283,493 204,456
Goodwill and other intangibles 251,085 143,682
Prepaid pension 64,281 51,525
Other assets 24,709 19,777
Net long-term assets - discontinued operations 51,791 49,252
---------- ----------
Total Assets $ 1,063,986 $ 736,570
========== ==========
Liabilities
- ------------------------------------------------------------------------------------------------------------------
Current Liabilities
Trade payables $ 81,221 $ 51,074
Accrued payroll and benefits 32,272 28,453
Accrued liabilities 27,301 14,918
Product warranty 10,847 6,786
Income taxes 7,170 6,786
Long-term debt due within one year 9,629 4,629
---------- ----------
Total Current Liabilities 168,440 112,646
Long-term debt 351,251 131,203
Product warranty 17,475 18,315
Post retirement benefit obligation 18,523 17,417
Deferred income taxes 48,675 36,813
Other liabilities 28,538 19,083
---------- ----------
Total Liabilities 632,902 335,477
Commitments and contingencies (notes 7 and 12)
Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------
Preferred Stock - -
Class A Common Stock (shares issued 8,722,920 and 8,737,575) 43,615 43,688
Common Stock (shares issued 23,826,442 and 23,811,787) 23,826 23,812
Capital in excess of par value 53,026 51,121
Retained earnings 531,204 499,954
Accumulated other comprehensive loss (3,238) (1,488)
Treasury stock at cost (217,349) (215,994)
---------- --------
Total Stockholders' Equity 431,084 401,093
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,063,986 $ 736,570
========== ==========
See accompanying notes which are an integral part of these statements.
</TABLE>
19
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF EARNINGS
<CAPTION>
Years ended December 31 (dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Continuing Operations
<S> <C> <C> <C>
Net sales $ 1,039,281 $ 774,788 $ 678,207
Cost of products sold 832,369 616,516 537,542
---------- --------- ---------
Gross profit 206,912 158,272 140,665
Selling, general, and administrative expenses 110,613 85,806 86,809
Interest expense 12,821 5,914 6,605
Interest income (1,392) (3,714) (8,875)
Other expense - net 7,778 3,345 3,096
---------- --------- ---------
77,092 66,921 53,030
Provision for income taxes 26,822 23,189 18,370
---------- --------- ---------
Earnings before equity in loss
of joint venture 50,270 43,732 34,660
Equity in loss of joint venture - (3,076) (2,595)
---------- ---------- ---------
Earnings from Continuing Operations 50,270 40,656 32,065
Discontinued Operations
Earnings (loss)from operations less related income
tax (benefit) 1999 - $(475), 1998 - $2,020, and
1997 - $10,592 (890) 3,835 20,719
Gain (loss) on disposition less related income tax
(benefit) of $(4,542) in 1999 and $71,538 in 1997 (6,958) - 101,046
---------- --------- ---------
Net Earnings $ 42,422 $ 44,491 $ 153,830
========== ========= =========
Basic Earnings (Loss) Per Share of Common Stock
Continuing Operations $2.17 $1.73 $1.16
Discontinued Operations (.34) .16 4.41
----- ----- ----
Net Earnings $1.83 $1.89 $5.57
==== ==== ====
Diluted Earnings (Loss) Per Share of Common Stock
Continuing Operations $2.11 $1.68 $1.14
Discontinued Operations (.33) .16 4.32
----- ----- ----
Net Earnings $1.78 $1.84 $5.46
==== ==== ====
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Years ended December 31 (dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 42,422 $ 44,491 $ 153,830
Foreign currency translation adjustment (1,750) 91 (1,637)
Translation adjustment related to
sale of Mexican affiliate - - 7,459
---------- --------- ---------
Comprehensive Income $ 40,672 $ 44,582 $ 159,652
========== ========= =========
See accompanying notes which are an integral part of these statements.
</TABLE>
20
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Years ended December 31 (dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Continuing
<S> <C> <C> <C>
Earnings from continuing operations $ 50,270 $ 40,656 $ 32,065
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 30,769 22,952 19,813
Amortization 6,546 3,514 1,821
Equity in loss of joint venture - 3,076 2,595
Net change in current assets and liabilities (27,378) (7,543) 11,823
Net change in other noncurrent assets and liabilities (13,278) 1,601 4,759
Other 856 1,198 653
---------- --------- ---------
Cash Provided by Operating Activities 47,785 65,454 73,529
---------- --------- ---------
Investing Activities
Acquisition of businesses (244,592) (126,273) (60,918)
Capital expenditures (32,807) (18,511) (37,368)
Investment in joint venture - (7,224) (13,717)
Other (1,767) (1,705) (1,305)
---------- --------- ---------
Cash Used in Investing Activities (279,166) (153,713) (113,308)
---------- --------- ---------
Cash Used In Operating and Investing Activities (231,381) (88,259) (39,779)
Discontinued
Cash provided by (used in) operating activities 226 9,204 (99,413)
Cash used in investing activities (5,799) (9,713) (59,966)
Proceeds from disposition - - 773,090
Tax payments associated with disposition - - (106,039)
---------- --------- ---------
Cash Flow Provided by (Used in) Discontinued Operations (5,573) (509) 507,672
Financing Activities
Long-term debt incurred 229,677 30,028 -
Long-term debt retired (4,629) (5,590) (143,816)
Purchase of treasury stock (2,773) (33,288) (176,550)
Net proceeds from common stock and option activity 1,149 271 3,757
Tax benefit from exercise of stock options 1,797 168 884
Dividends paid (11,172) (11,051) (12,677)
---------- --------- ---------
Cash Provided by (Used in) Financing Activities 214,049 (19,462) (328,402)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents (22,905) (108,230) 139,491
Cash and cash equivalents--beginning of year 37,666 145,896 6,405
---------- --------- ---------
Cash and Cash Equivalents--End of Year $ 14,761 $ 37,666 $ 145,896
========== ========= =========
See accompanying notes which are an integral part of these statements.
</TABLE>
21
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Years ended December 31 (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Class A Common Stock
<S> <C> <C> <C>
Balance at beginning of year $ 43,688 $ 43,782 $ 43,821
Conversion of Class A Common Stock (73) (94) (39)
---------- --------- ---------
Balance at end of year $ 43,615 $ 43,688 $ 43,782
---------- --------- ---------
Common Stock
Balance at beginning of year $ 23,812 $ 23,793 $ 23,785
Conversion of Class A Common Stock 14 19 8
---------- --------- ---------
Balance at end of year $ 23,826 $ 23,812 $ 23,793
---------- --------- ---------
Capital in Excess of Par Value
Balance at beginning of year $ 51,121 $ 50,020 $ 46,888
Conversion of Class A Common Stock 59 75 31
Exercise of stock options (182) 344 2,217
Tax benefit from exercise of stock options 1,797 168 884
Stock incentives and directors' compensation 231 561 -
Other - (47) -
---------- --------- ---------
Balance at end of year $ 53,026 $ 51,121 $ 50,020
---------- --------- ---------
Retained Earnings
Balance at beginning of year $ 499,954 $ 466,514 $ 325,361
Net earnings 42,422 44,491 153,830
Cash dividends on common stock (11,172) (11,051) (12,677)
---------- --------- ---------
Balance at end of year $ 531,204 $ 499,954 $ 466,514
---------- --------- ---------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year $ (1,488) $ (1,579) $ (7,401)
Foreign currency translation adjustments (1,750) 91 (1,637)
Translation adjustments related to sale of
Mexican affiliate - - 7,459
---------- --------- ---------
Balance at end of year $ (3,238) $ (1,488) $ (1,579)
---------- --------- ---------
Treasury Stock
Balance at beginning of year $ (215,994) $ (182,825) $ (7,815)
Purchase of treasury stock (2,773) (33,241) (176,550)
Exercise of stock options 1,330 (73) 1,540
Stock incentives and directors' compensation 88 145 -
---------- --------- ---------
Balance at end of year $ (217,349) $ (215,994) $ (182,825)
---------- --------- ---------
Total Stockholders' Equity $ 431,084 $ 401,093 $ 399,705
========== ========= =========
See accompanying notes which are an integral part of these statements.
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A. O. Smith Corporation is a manufacturer serving customers
worldwide. The company's major product lines include: fractional and integral
horsepower Alternating Current (A/C) and Direct Current (D/C) and hermetic
electric motors, and residential and commercial water heaters. The company's
products are manufactured and marketed primarily in North America. Electric
motors are sold principally to original equipment manufacturers. Water heaters
are distributed principally through a diverse network of plumbing wholesalers.
As discussed in Note 3, the company's fiberglass piping systems and liquid and
dry storage systems are classified as discontinued operations. 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. Storage
tanks are sold through a network of dealers to municipalities, industrial
concerns and farmers.
Consolidation and basis of presentation. The consolidated financial statements
include the accounts of the company and its wholly owned subsidiaries.
Investment in joint ventures. At December 31, 1997, the company accounted for
its two joint ventures in the People's Republic of China on the equity method as
the local venture partners held certain participating rights. In December 1998,
the company bought out its partner in its water heater joint venture (see Note
2) and accordingly, the company consolidated this entity beginning December 31,
1998. The fiberglass piping joint venture became a wholly owned subsidiary in
January 1999 and is classified as a discontinued operation (see Note 3).
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 accompanying financial
statements and notes. Actual results could differ from those estimates.
Fair values. The carrying amounts of cash and cash equivalents, receivables,
trade payables, and long-term debt approximated fair value as of December 31,
1999 and 1998.
Foreign currency translation. For all subsidiaries outside the United States
with the exception of Mexico, the company 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 revenues and expenses are
translated at weighted-average exchange rates. 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 $26.9 million at December 31, 1998. 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 substantially all
domestic inventories. Inventories of foreign subsidiaries and supplies are
determined using the first-in, first-out (FIFO) method.
Property, plant, and equipment. Property, plant, and equipment are stated at
cost. Depreciation is computed primarily by the straight-line method.
Goodwill and other intangibles. Goodwill and other intangibles are stated at
cost and are amortized on a straight-line basis over the estimated periods
benefited ranging from 10 to 40 years.
23
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Impairment of long-lived assets. Property, plant, and equipment, other long-term
assets, goodwill, and other intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is recognized for
the difference between the fair value and carrying value of the asset or group
of assets. Such analyses necessarily involve significant judgment.
Derivative instruments. The company enters into futures contracts to fix the
cost of certain raw material purchases, principally copper, with the objective
of minimizing changes in inventory cost due to market fluctuations. Any
differences between the company's fixed price and current market prices are
included as part of the inventory cost when the contracts mature. As of December
31, 1999, the company had contracts covering the majority of its expected copper
requirements for 2000. 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,
1999.
As a result of having various foreign operations, the company is exposed to the
effect of foreign currency rate fluctuations on the U.S. dollar value of its
foreign subsidiaries. Further, the company and its subsidiaries conduct business
in various foreign currencies. To minimize the effect of fluctuating foreign
currencies on its income, the company 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 company's exposures.
The company 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
company's forward exchange contracts.
December 31 (dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
Buy Sell Buy Sell
-------- ------- -------- -------
U.S. dollar $ 1,400 $ 8,100 $ 2,400 $ 2,400
British pound 477 1,391 498 1,991
Mexican peso 35,516 - 32,535 -
-------- ------- -------- ------
Total $ 37,393 $ 9,491 $ 35,433 $ 4,391
======= ====== ======= ======
The forward contracts in place at December 31, 1999 and 1998 amounted to
approximately 60 and 80 percent, respectively, of the company's anticipated
subsequent year exposure for those currencies hedged.
Revenue recognition. The company recognizes revenue upon shipment of product to
the customer.
Research and development. Research and development costs are charged to
operations as incurred and amounted to $15.6, $12.8, and $12.6 million for
continuing operations during 1999, 1998 and 1997, respectively.
24
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Environmental remediation costs. The company accrues for losses associated with
environmental obligations when such losses are probable and reasonably
estimable. Costs of estimated 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 probable. The accruals are adjusted
as facts and circumstances change.
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:
1999 1998 1997
- --------------------------------------------------------------------------------
Denominator for basic earnings per share--
weighted-average shares 23,220,813 23,583,790 27,634,307
Effect of dilutive stock options 566,540 600,114 556,978
---------- ---------- ----------
Denominator for diluted earnings per share 23,787,353 24,183,904 28,191,285
========== ========== ==========
New accounting standards. During 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (the Statement), which was amended by SFAS No. 137. Provisions of
the Statement are required to be adopted for years beginning after June 15,
2000, and will require the company to recognize all derivatives in the balance
sheet at fair value. The company will adopt the Statement no later than January
1, 2001, and estimates that the adoption of SFAS No. 133 will not be material to
its results of operations, financial position, or cash flows.
2. Acquisitions
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. On July 1, 1998, the company acquired certain
assets of General Electric Company's domestic compressor motor business
(Scottsville) for $125.6 million. On March 31, 1997, the company acquired UPPCO,
Incorporated (UPPCO), a manufacturer of subfractional C-frame electric motors,
for $60.9 million. All of the acquisitions were accounted for using the purchase
method of accounting and, accordingly, the financial statements include the
operating results of the acquired businesses from their respective dates of
acquisition. The purchase prices have been allocated to the assets acquired 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, $103.6, $92.6 and $46.2 million for MagneTek, Scottsville, and
UPPCO, respectively, have been recorded as goodwill. The MagneTek purchase price
allocation was based upon current estimates and may be revised. Other
intangibles acquired in connection with the MagneTek acquisition including
assembled workforce, customer list, patents, and trademarks were assigned fair
values aggregating $9.0 million and are being amortized over periods of 10 to 30
years.
In connection with the MagneTek acquisition, additional purchase liabilities of
$19.4 million were recorded which included employee severance and relocation, as
well as certain facility exit costs. Costs incurred from August 2, 1999 to
December 31, 1999 and charged against the purchase liabilities totaled $.9
million.
25
<PAGE>
2. Acquisitions (continued)
As discussed in Note 1, the company purchased its partner's interest in its
water systems joint venture in December 1998. The excess of the consideration,
including the distribution to the partner of certain inventories and equipment
over the fair values of the assets acquired, amounted to $5.3 million and has
been recorded as goodwill.
On a pro forma basis, the unaudited consolidated results from continuing
operations assuming the acquisitions of MagneTek and Scottsville occurred on
January 1, 1998 follows:
Years ended December 31 (dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Net sales $1,275,508 $1,223,675
Earnings 42,379 41,891
Earnings per share:
Basic 1.83 1.78
Diluted 1.78 1.73
The pro forma results have been prepared for informational purposes only and
include adjustments to depreciation expense of acquired plant and equipment,
amortization of goodwill, increased interest expense on acquisition debt, and
certain other adjustments, together with related income tax effects of all such
adjustments. Anticipated efficiencies from the consolidation of certain
manufacturing activities and anticipated lower material costs related to the
consolidation of purchasing have been excluded from the pro forma operating
results. These pro forma results do not purport to be indicative of the results
of operations that would have occurred had the purchases been made as of the
beginning of the periods presented or of the results of operations that may
occur in the future.
3. Discontinued Operations
On January 17, 2000, the company, with the approval of its Board of Directors,
decided to divest the company's fiberglass piping and liquid and dry bulk
storage businesses. Net sales of the fiberglass piping and liquid and dry
storage businesses were $117.8, $142.8 and $154.7 million in fiscal 1999, 1998,
and 1997, respectively.
On April 18, 1997, the company sold its automotive products business, excluding
its Mexican automotive affiliate, for $710 million. On October 1, 1997, the
company sold its 40 percent interest in its Mexican affiliate for $63 million.
Net sales of the automotive operations were $296.2 for 1997, through the date of
the sale.
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 allocated based on the ratio of net assets of the
discontinued businesses to the total consolidated capital of the company.
26
<PAGE>
3. Discontinued Operations (continued)
<TABLE>
<CAPTION>
The components of the net assets of discontinued operations included in the consolidated balance sheets
are as follows:
December 31 (dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Current Assets
<S> <C> <C>
Receivables $ 23,644 $ 20,666
Inventories 11,636 12,768
Other current assets 5,048 5,174
Trade payables (6,410) (6,355)
Accrued payroll and benefits (5,410) (6,705)
Other (18,103) (10,330)
---------- ----------
Net current assets $ 10,405 $ 15,218
========== ==========
Long-Term Assets
Net property, plant, and equipment $ 47,376 $ 44,314
Other assets 14,724 16,289
Long-term liabilities (10,309) (11,351)
---------- ----------
Net long-term assets $ 51,791 $ 49,252
========== ==========
</TABLE>
<TABLE>
<CAPTION>
4. Statement of Cash Flows
Supplemental cash flow information is as follows:
Years ended December 31 (dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Change in current assets and liabilities:
<S> <C> <C> <C>
Receivables $ (11,773) $ 3,068 $ 3,819
Inventories (20,158) (10,190) 7,775
Other current assets 392 (922) 1,117
Trade payables 6,654 (5,855) (6,671)
Accrued liabilities, including payroll and benefits (1,979) 6,614 3,362
Income taxes (514) (258) 2,421
--------- ---------- ----------
$ (27,378) $ (7,543) $ 11,823
========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
5. Inventories
December 31 (dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished products $ 99,335 $ 51,057
Work in process 40,197 16,861
Raw materials 41,997 40,018
Supplies 1,322 902
---------- ----------
182,851 108,838
Allowance to state inventories at LIFO cost 19,408 21,622
---------- ----------
$ 163,443 $ 87,216
========== ==========
</TABLE>
<TABLE>
<CAPTION>
6. Property, Plant, and Equipment
December 31 (dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 6,690 $ 5,528
Buildings 91,417 80,465
Equipment 420,634 319,552
---------- ----------
518,741 405,545
Less accumulated depreciation (235,248) (201,089)
---------- ----------
$ 283,493 $ 204,456
========== ==========
</TABLE>
27
<PAGE>
6. Property, Plant, and Equipment (continued)
Capitalized interest on borrowed funds during construction was $1.5 and $1.0
million in 1998 and 1997, respectively. In 1999, there was no capitalized
interest within the company's continuing operations.
7. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Bank credit lines, average year-end interest rate of
6.1% for 1999 and 6.4% for 1998 $ 19,944 $ 6,789
Commercial paper, average year-end interest rate of
6.3% for 1999 134,522 -
Revolver borrowings, average year-end interest rate of
6.9% for 1999 82,000 -
Term notes with insurance companies, expiring through
2018, average year-end interest rate of 7.0% for 1999
and 1998 106,914 111,543
Other notes, expiring through 2012, average year-end
interest rate of 4.7% for 1999 and 4.6% for 1998 17,500 17,500
-------- --------
360,880 135,832
Less amount due within one year 9,629 4,629
-------- --------
$351,251 $131,203
======== ========
The company has a $350 million revolving credit agreement with a group of nine
banks of which $100 million expires July 31, 2000, and $250 million expires
August 2, 2004. At its option, the company maintains either cash balances or
pays fees for bank credit and services.
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 $59.9 million were
unrestricted as of December 31, 1999.
Borrowings under the bank credit lines and in the commercial paper market are
supported by the long-term portion of the revolving credit agreement, and
accordingly, have been classified as long-term. It has been the company's
practice to renew or replace the revolving 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, 1999, is as follows: 2000-$9.6; 2001-$11.1; 2002-$13.3; 2003-$11.7;
2004-$8.6 million.
Future minimum payments under noncancelable operating leases for continuing
operations total $64.2 million and are due as follows: 2000-$10.5; 2001-$9.0;
2002-$8.0; 2003-$7.5; 2004-$6.6; and thereafter- $22.6 million. Rent expense for
continuing operations, including payments under operating leases, was $15.3,
$12.9, and $11.6 million in 1999, 1998, and 1997, respectively.
Interest paid by the company for continuing and discontinued operations, was
$13.8, $6.4 and $13.0 million in 1999, 1998, and 1997, respectively.
28
<PAGE>
8. Stockholders' Equity
The company'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 1999, 1998, and 1997, 14,655, 19,914, and 10,950 shares, respectively, of
Class A Common Stock were converted into Common Stock. Regular dividends paid on
the Class A Common and Common Stock amounted to $.48, $.47, and $.45 per share
in 1999, 1998, and 1997, respectively.
On January 27, 1997, the company's board of directors approved the repurchase of
up to 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 1999 and 1998, the company
purchased 855 and 4,800 shares of Class A Common Stock and 128,396 and 1,183,650
shares of Common Stock, respectively. At December 31, 1999, 32,595 and 9,122,640
shares of Class A Common Stock and Common Stock, respectively, were held as
treasury stock. At December 31, 1998, 31,740 and 9,226,036 shares of Class A
Common Stock and Common Stock, respectively, were held as treasury stock.
9. Stock Options
The company has two Long-Term Executive Incentive Compensation Plans for
granting of nonqualified and incentive stock options to key employees. The 1990
Plan has terminated except as to outstanding options. The 1999 Plan provides for
the issuance of 1.5 million stock options at fair value on the date of grant.
The options granted 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, 1999 was 1,270,300.
29
<PAGE>
9. Stock Options (continued)
<TABLE>
Changes in option shares, all of which are Common Stock, were as follows:
<CAPTION>
Weighted-
Average
Per Share
Exercise Years Ended December 31
Price-1999 1999 1998 1997
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Outstanding at beginning of year $14.29 2,022,900 1,883,025 1,963,200
Granted
1999--$29.03 per share 29.03 173,900
1998--$18.31 to $29.83 per share 277,350
1997--$27.25 per share 175,050
Exercised
1999--$4.67 to $16.67 per share 5.29 (217,000)
1998--$5.79 to $18.33 per share (137,475)
1997--$5.63 to $18.33 per share (255,225)
--------------------------------------------------
Outstanding at End of Year
(1999--$4.67 to $29.83 per share) 16.57 1,979,800 2,022,900 1,883,025
========= ========= =========
Exercisable at End of Year 15.37 1,805,900 1,745,550 1,707,975
========= ========= =========
</TABLE>
During 1998, an executive elected to defer the gain related to the exercise of
107,100 options. As a result, the executive deferred the receipt of 79,870
shares of Common Stock for which the company's obligation to issue the shares is
included within Stockholders' Equity.
The following table summarizes weighted-average information by range of exercise
prices for stock options outstanding and exercisable at December 31, 1999:
<TABLE>
<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 1999 Price 1999 Price Life
- ------------------- -------------- --------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C>
$4.67 to $5.63 335,100 $5.28 335,100 $ 5.28 2 years
$8.67 151,200 8.67 151,200 8.67 3 years
$16.33 to $18.33 1,135,700 17.31 1,135,700 17.31 7 years
$25.25 to $29.83 357,800 28.14 183,900 27.30 9 years
--------- ---------
1,979,800 1,805,900
========= =========
</TABLE>
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 company 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 number of shares is fixed and 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.
30
<PAGE>
9. Stock Options (continued)
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
company's pro forma earnings and earnings per share from continuing operations
would have been as follows:
Years ended December 31 (dollars in thousands,
except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Earnings:
As reported $50,270 $40,656 $32,065
Pro forma 49,311 39,839 31,167
Earnings per share:
As reported:
Basic $ 2.17 $1.73 $1.16
Diluted 2.11 1.68 1.14
Pro forma:
Basic 2.12 1.69 1.13
Diluted 2.07 1.65 1.11
The weighted-average fair value per option at the date of grant during 1999,
1998, and 1997 using the Black-Scholes option-pricing model, was $9.58, $5.30
and $7.51, respectively. Assumptions were as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Expected life (years) 4.0 4.0 4.0
Risk-free interest rate 6.5% 4.6% 5.9%
Dividend yield 2.1% 2.1% 2.0%
Expected volatility 38.6% 35.2% 30.4%
31
<PAGE>
10. Pension and Other Post-retirement Benefits
The company provides retirement benefits for all United States employees and has
several foreign pension plans, none of which are material to the company's
financial position. Plan assets consist primarily of marketable equities and
debt securities. The company also has several unfunded defined benefit
post-retirement plans covering certain hourly and salaried employees which
provide medical and life insurance benefits from retirement to age 65.
The following tables present the changes in benefit obligations, plan assets,
funded status and major assumptions used to determine these amounts for domestic
pension and post-retirement plans, and components of net periodic benefit costs
including amounts for discontinued operations.
<TABLE>
<CAPTION>
Pension Benefits Post-retirement Benefits
----------------------------- --------------------------------
Years ended December 31 (dollars in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ (527,597) $ (495,215) $ (16,312) $ (15,208)
Service cost (4,890) (4,368) (338) (194)
Interest cost (36,314) (35,761) (1,195) (1,026)
Participant contributions - - (261) (165)
Plan amendments (125) (2,462) - -
Acquisitions (33,136) - (1,770) (1,627)
Actuarial gains (losses) including
assumption changes 33,072 (25,543) 152 (129)
Benefits paid 38,332 35,752 2,247 2,037
---------- ---------- --------- ----------
Benefit obligation at end of year $ (530,658) $ (527,597) $ (17,477) $ (16,312)
========== ========== ========= ==========
Change in plan assets
Fair value of plan assets at beginning of year $ 628,856 $ 580,865 $ - $ -
Actual return on plan assets 134,902 83,743 - -
Contribution by the company - - 1,986 1,872
Participant contributions - - 261 165
Acquisitions 30,061 - - -
Benefits paid (38,332) (35,752) (2,247) (2,037)
---------- ---------- --------- ----------
Fair value of plan assets at end of year $ 755,487 $ 628,856 $ - $ -
========== ========== ========= ==========
Funded status $ 224,829 $ 101,259 $ (17,477) $ (16,312)
Unrecognized net actuarial gain (163,361) (51,985) (1,848) (1,755)
Unrecognized net transition asset (1,437) (2,376) - -
Unrecognized prior service cost 4,250 4,627 (829) (981)
---------- ---------- --------- ----------
Prepaid pension asset (accrued cost) $ 64,281 $ 51,525 $ (20,154) $ (19,048)
========== ========== ========= ==========
Major assumptions as of December 31
Discount rate 7.75% 7.00% 7.75% 7.00%
Expected return on plan assets 10.25% 10.25% n/a n/a
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
Health care cost trend rate n/a n/a 6.00% 6.00%
</TABLE>
32
<PAGE>
10. Pension and Other Post-retirement Benefits (continued)
<TABLE>
<CAPTION>
Pension Benefits Post-retirement Benefits
---------------------------------- -------------------------------------
Years ended December 31 (dollars in thousands) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 4,890 $ 4,368 $ 2,765 $ 338 $ 194 $ 222
Interest cost 36,314 35,761 35,944 1,195 1,026 1,155
Expected return on plan assets (56,598) (53,100) (49,845) - - -
Amortization of prior service cost 502 346 959 (152) (152) -
Amortization of transition asset (939) (939) (939) - - -
Amortization of net actuarial gain - - - (59) (162) (367)
-------- -------- -------- ------- ------ -------
Benefit cost (income) $(15,831) $(13,564) $(11,116) $ 1,322 $ 906 $ 1,010
======== ======== ======== ======= ====== =======
</TABLE>
Net periodic benefit 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.
Accrued post-retirement benefit cost is included in the consolidated balance
sheet in the accounts shown below:
December 31 (dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Accrued liabilities $ 1,631 $ 1,631
Post-retirement benefit obligation 18,523 17,417
------- -------
Accrued post-retirement benefit cost $ 20,154 $ 19,048
======= =======
The company does not provide post-retirement health care benefits beyond age 65.
Certain hourly employees retiring after January 1, 1996, are subject to a
maximum annual benefit and salaried employees hired after December 31, 1993, are
not eligible for post-retirement medical benefits. As a result, a one percentage
point change in the health care cost trend rate would not have a significant
effect on the amounts reported.
The company has a defined contribution profit sharing and retirement plan
covering the majority of its salaried nonunion employees which provides for
annual company contributions of 35 percent to 140 percent of qualifying
contributions made by participating employees. The amount of the company's
contribution in excess of 35 percent is dependent upon the company's
profitability. In connection with the acquisition of MagneTek, the company
established a defined contribution plan that provides for matching company
contributions of 2 percent of the first 6 percent of qualified employee
contributions up to an annual maximum contribution that is consistent with the
previous employer. The company's contributions for all defined contribution
plans, including amounts for discontinued operations and acquisitions from the
date of acquisition, were $4.0, $3.5, and $3.5 million for 1999, 1998, and 1997,
respectively.
33
<PAGE>
11. Income Taxes
The components of the provision for income taxes for continuing operations
consisted of the following:
Years ended December 31 (dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal $13,210 $15,036 $23,391
State 2,399 1,330 607
International 1,339 718 894
Deferred 11,274 6,855 (4,822)
Business tax credits (1,400) (750) (1,700)
------- ------ ------
$26,822 $23,189 $18,370
======= ====== =======
The provision for income taxes for continuing operations differs from the
statutory U.S. federal rate due to the following items:
Years ended December 31 (dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Provision at federal statutory rate $26,982 $23,422 $18,561
International income taxes (1,413) (662) (158)
State income and franchise taxes 2,782 1,534 1,532
Business tax credits (1,400) (750) (1,700)
Non-deductible items 439 499 516
Foreign sales corporation benefit (568) (854) (381)
------- ------ ------
$26,822 $23,189 $18,370
======= ====== ======
Components of earnings from continuing operations before income taxes were as
follows:
Years ended December 31 (dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
United States $76,201 $62,449 $50,114
International 891 4,472 2,916
------ ------ ------
$77,092 $66,921 $53,030
====== ====== ======
Total taxes paid by the company for continuing and discontinued operations
amounted to $11.6, $6.5, and $133.6 million in 1999, 1998, and 1997,
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, 1999, the undistributed earnings amounted to $28.5
million. It is not practical to determine the income tax liability that would
result had such earnings been repatriated. In addition, no provision or benefit
for U. S. income taxes have been made on foreign currency translation gains or
losses.
34
<PAGE>
11. Income Taxes (continued)
The tax effects of temporary differences of assets and liabilities between
income tax and financial reporting for continuing operations are as follows:
December 31 (dollars in thousands)
- --------------------------------------------------------------------------------
1999 1998
--------------------- -----------------------
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Employee benefits $17,365 $26,895 $14,890 $20,754
Product liability and warranty 10,107 - 10,238 -
Depreciation differences - 25,252 - 22,087
Amortization differences - 7,151 - 3,121
All other - 5,526 - 5,627
------ ------ ------- ------
$27,472 $64,824 $25,128 $51,589
====== ====== ======= ======
Net liability $37,352 $26,461
====== ======
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 as follows:
December 31 (dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Current deferred income tax assets $11,323 $10,352
Long-term deferred income tax liabilities (48,675) (36,813)
------ -------
Net liability $37,352 $26,461
====== ======
12. Litigation and Insurance Matters
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. The following paragraphs summarize noteworthy actions and
proceedings.
On July 16, 1999, a lawsuit was filed in the United States District Court,
Western District of Missouri, by individuals on behalf of themselves and all
persons throughout the United States who have owned or currently own a water
heater manufactured by Rheem Manufacturing Company, A. O. Smith Corporation,
Bradford White Company, American Water Heater Company, Lochinvar Corporation and
State Industries, Inc. (the "water heater manufacturers") that contain a dip
tube manufactured, designed, supplied or sold by Perfection Corporation between
August 1993 and October 1996. A dip tube is a plastic tube in a residential
water heater that brings the cold water supply to the bottom area of the tank to
be heated.
The plaintiffs and defendants reached a settlement of the claims of this
litigation. On November 22, 1999, the United States District Court, Western
District of Missouri, entered an order giving preliminary approval to the
settlement. On April 21, 2000, the court will hold a hearing on the fairness of
the settlement and final approval of the settlement. All other legal actions
brought against the water heater manufacturers respecting dip tube claims have
been stayed until the lawsuit which is the subject of the settlement agreement
is resolved.
35
<PAGE>
12. Litigation and Insurance Matters (continued)
Separately, the water heater manufacturers on September 29, 1999, filed a direct
action lawsuit in the Civil District Court for the Parish of Orleans, State of
Louisiana, against the insurers of Perfection Corporation and American Meter
Company, the parent company of Perfection. This lawsuit seeks coverage from the
defendant insurance companies for (i) the damages that the water heater
manufacturers and the class members in the federal court action referred to
above have incurred because of the property damages caused by the dip tube
failures, (ii) the liability of the water heater manufacturers assumed by
Perfection by contract, and (iii) the personal injuries suffered by the water
heater manufacturers as a result of the disparagement of them and their products
in the media reports relating to the dip tubes.
As of this date, it is premature for the company to determine what, if any,
costs it will incur with respect to the aforementioned settlement. It is the
company's expectation that all or a substantial portion of the costs will be
recovered from the insurers of Perfection and American Meter Company, as well as
the company's insurers.
A lawsuit for damages and declaratory judgments in the Circuit Court of
Milwaukee County, State of Wisconsin, in which the company is plaintiff is
pending against three insurance companies for failure to pay in accordance with
liability insurance policies issued to the company. 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 ("underlying claims"). In October 1998, the Wisconsin Appellate Court,
First District, entered an order which reversed the decision of the Circuit
Court which had granted the company partial summary judgment against two
insurance companies with respect to three of the underlying claims. The
company's petition to the Wisconsin Supreme Court to accept its appeal of this
decision was denied in January 1999, and the Appellate Court remanded the case
to the trial court with directions to grant summary judgment in favor of the two
insurance companies with respect to the subject underlying claims. At the trial
court, the company and insurance companies filed cross motions for summary
judgment with respect to the balance of the underlying claims brought by the
company. In February 2000, the trial court judge issued a decision granting the
insurance companies summary judgment. The company intends to appeal the trial
court decision to the Wisconsin Appellate Court. While the company has, in part,
assumed applicability of this coverage, should the company not prevail on its
claims, it would not be material to its financial condition.
The company is currently involved as a potentially responsible party ("PRP") in
judicial and administrative proceedings initiated on behalf of various state and
federal regulatory agencies seeking to clean up eleven sites which have been
environmentally impacted and to recover costs they have incurred or will incur
as to those sites. The company has also been designated a PRP with respect to a
former mine in Colorado which is being environmentally remediated by the U.S.
EPA. The U.S. EPA commenced a lawsuit against a former owner of a mining company
involved at the site, and that owner commenced a third-party action against the
company and other parties for contribution.
It is impossible at this time to estimate the total cost of remediation for the
sites or the company's ultimate share of those costs, primarily because the
sites are in various stages of the remediation process and issues remain open at
many sites concerning the selection and implementation of the final remedy, the
cost of that remedy and the company's liability at a site relative to the
liability and viability of the other PRPs.
The company has established reserves for these sites in a manner that is
consistent with generally accepted accounting principles for costs associated
with such cleanups when those costs are capable of being reasonably estimated.
To the best of the company's knowledge, the reserves it has established and
insurance proceeds that are available to the company are sufficient to cover the
company's liability. The company further believes its 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.
36
<PAGE>
12. Litigation and Insurance Matters (continued)
With respect to non-environmental claims, the company has self-insured a portion
of its product liability loss exposure and other business risks for many years.
The company has established reserves which it believes are adequate to cover
incurred claims. For the year ended December 31, 1999, the company had $60
million of third-party product liability insurance for individual losses in
excess of $1.5 million and for aggregate annual losses in excess of $10 million.
The company reevaluates its exposure on claims periodically and makes
adjustments to its reserves as appropriate.
13. Operations by Segment
The company is organized based on the products it offers and under this
organizational structure has two reportable segments: Electric Motor
Technologies and Water Systems Technologies. The Electric Motor Technologies
segment manufactures fractional and integral Alternating Current (A/C) and
Direct Current (D/C) motors used in fans and blowers in furnaces, air
conditioners, and ventilating systems; industrial applications such as material
handling; as well as in other consumer products such as home appliances and jet
pump motors sold to manufacturers of home water systems, swimming pools, hot
tubs, and spas. In addition, the Electric Motor Technologies segment
manufactures hermetic motors which are sold worldwide to manufacturers of
compressors used in air conditioning and refrigeration systems. The Water
Systems Technologies segment manufactures residential gas and electric water
heaters as well as commercial water heating systems used in a wide range of
applications including hotels, laundries, car washes, factories, and large
institutions.
The accounting policies of the reportable segments are the same as those
described in the "Summary of Significant Accounting Policies" outlined in Note
1. Intersegment sales have been excluded from segment revenues and are
immaterial. Earnings before interest and taxes as adjusted for the pretax equity
in the losses of the company's joint venture in 1998 and 1997, is used to
measure the performance of the segments and allocate resources.
37
<PAGE>
13. Operations by Segment (continued)
<TABLE>
Operations by segment
<CAPTION>
Earnings before
Interest and Taxes Net Sales
------------------------------- --------------------------------
Years ended December 31 (dollars in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Electric Motor Technologies $ 78.9 $ 56.5 $ 45.7 $ 722.9 $ 480.0 $390.7
Water Systems Technologies 33.8 30.0 29.2 316.4 294.8 287.5
------ ------ ------ ------- ------ -----
Total Segments 112.7 86.5 74.9 $1,039.3 $ 774.8 $678.2
------- ------ =====
Financial Services (0.1) (0.6) (4.1)
General Corporate and Research
and Development Expenses (24.1) (21.8) (24.3)
Interest (Expense) Income - Net (11.4) (2.2) 2.3
------ ------ ------
Earnings from Continuing Operations
before Income Taxes 77.1 61.9 48.8
Provision for Income Taxes (26.8) (21.2) (16.7)
------ ------ ------
Earnings from Continuing Operations $ 50.3 $ 40.7 $ 32.1
====== ====== ======
Net sales of the Electric Motor Technologies segment includes sales to York International Corporation of $188.6, $128.5,
and $93.5 million in 1999, 1998, and 1997, respectively.
</TABLE>
<TABLE>
Assets, depreciation, and capital expenditures by segment
<CAPTION>
Depreciation and Capital
Amortization Expenditures
Total Assets (Years Ended (Years Ended
(December 31) December 31) December 31)
- ----------------------------------------------------------- -------------------------- ------------------------------
(dollars in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------- -------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electric Motor Technologies $ 705.1 $378.5 $239.8 $27.3 $18.8 $14.1 $27.0 $14.0 $27.9
Water Systems Technologies 177.4 168.1 161.0 8.8 6.7 6.6 5.6 4.2 9.0
------- ------ ------ ---- ---- ---- ---- ----- ----
Total Segments 882.5 546.6 400.8 36.1 25.5 20.7 32.6 18.2 36.9
Corporate Assets 119.3 125.5 221.8 1.2 1.0 0.9 0.2 0.3 0.5
Discontinued Operations 62.2 64.5 60.1 5.3 4.7 20.7 5.1 9.4 46.6
------- ------ ------ ---- ---- ---- ---- ----- ----
Total $1,064.0 $736.6 $682.7 $42.6 $31.2 $42.3 $37.9 $27.9 $84.0
======= ====== ===== ==== ==== ==== ===== ===== ====
Corporate assets consist primarily of cash, cash equivalents, deferred taxes, and prepaid pension.
</TABLE>
38
<PAGE>
13. Operations by Segment (continued)
Net sales and long-lived assets by geographic location
The following data by geographic area includes net sales based on product
shipment destination and long-lived assets based on physical location.
Long-lived assets include net property, plant, and equipment and other long-term
assets and exclude intangible assets and long-lived assets of discontinued
operations.
<TABLE>
<CAPTION>
Net Sales Long-Lived Assets
------------------------------ ---------------------------------
(dollars in millions) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 929.7 $ 701.7 $ 607.8 $ 252.3 $ 178.0 $ 147.4
Mexico 8.2 3.9 2.3 91.7 71.7 70.6
Other Foreign 101.4 69.2 68.1 28.5 26.1 32.5
-------- ------ ------ ------ ------ ------
Total $1,039.3 $ 774.8 $ 678.2 $ 372.5 $ 275.8 $ 250.5
======= ====== ====== ====== ====== ======
</TABLE>
14. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------- ---------------- ---------------- ----------------
1999 1998 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $229.9 $186.4 $235.4 $188.1 $287.4 $207.0 $286.6 $193.3
Gross profit 45.9 38.2 49.5 39.3 54.7 40.4 56.8 40.4
Earnings
Continuing 12.0 9.4 14.2 10.8 12.5 10.3 11.6 10.2
Discontinued (.6) .8 (.3) 1.8 (.1) .7 (6.9) .5
------ ------ ------ ------ ------ ------ ----- ------
Net Earnings 11.4 10.2 13.9 12.6 12.4 11.0 4.7 10.7
====== ====== ====== ====== ====== ====== ===== ======
Basic earnings per share
Continuing .51 .39 .61 .46 .54 .44 .50 .44
Discontinued (.02) .03 (.01) .08 (.01) .03 (.30) .02
------ ------ ------ ------ ------ ----- ----- ------
Net Earnings .49 .42 .60 .54 .53 .47 .20 .46
====== ====== ====== ====== ====== ===== ===== ======
Diluted earnings per share
Continuing .50 .38 .60 .45 .52 .43 .49 .43
Discontinued (.02) .03 (.01) .07 - .03 (.29) .02
------ ------ ------ ------ ------ ----- ----- ------
Net Earnings .48 .41 .59 .52 .52 .46 .20 .45
====== ====== ====== ====== ====== ===== ===== ======
Common dividends declared .12 .11 .12 .11 .12 .12 .12 .12
====== ====== ====== ====== ====== ===== ===== ======
Net earnings and dividends declared per share are computed separately for each period and, therefore, the sum of such
quarterly per share amounts may differ from the total for the year.
</TABLE>
See Note 7 for restrictions on the payment of dividends.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None
39
<PAGE>
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information included under the heading "Election of Directors" in the
company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders
(to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant's fiscal year) is incorporated
herein by reference. The information required regarding Executive Officers of
the company is included in Part I of this Form 10-K under the caption "Executive
Officers of the company."
The information included under the heading "Compliance with Section 16(a) of the
Securities Exchange Act" in the company's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders (to be filed with the Securities and
Exchange Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year) is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The information included under the heading "Executive Compensation" in the
company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders
(to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant's fiscal year) 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 company's definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission under Regulation 14A within 120 days
after the end of the registrant's fiscal year) 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 company's definitive Proxy
Statement for the 2000 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission under Regulation 14A within 120 days after
the end of the registrant's fiscal year) is incorporated herein by reference.
40
<PAGE>
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 Sheets at December 31, 1999 and 1998.....19
For each of the three years in the period ended
December 31, 1999:
- Consolidated Statement of Earnings........................20
- Consolidated Statement of Comprehensive Income............20
- Consolidated Statement of Cash Flows......................21
- Consolidated Statement of Stockholders' Equity............22
Notes to Consolidated Financial Statements....................23-39
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 1999.
(c) Exhibits - see the Index to Exhibits on pages 49 - 50 of this report.
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act
of 1934, as amended, the company 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.
41
<PAGE>
<TABLE>
A. O. SMITH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Years ended December 31, 1999, 1998, and 1997
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Year Expenses1 Accounts2 Deductions3 Year
- ----------- ---------- ---------- --------- ----------- ----------
1999:
<S> <C> <C> <C> <C> <C>
Valuation allowance
for trade and notes
receivable $ 2,523 $ 1,159 $ - $ 561 $ 3,121
Purchase liabilities:
severance, relocation,
and facility exit costs - - 19,382 935 18,447
1998:
Valuation allowance
for trade and notes
receivable 1,992 989 - 458 2,523
1997:
Valuation allowance
for trade and notes
receivable 2,426 1,890 - 2,324 1,992
1 Provision (credit) based upon estimated collection.
2 Established in connection with the acquisition of MagneTek, Inc.
3 Uncollectible amounts/expenditures charged against the reserve.
</TABLE>
42
<PAGE>
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Nos. 2-72542
filed on May 26, 1981, Post-Effective Amendment No. 1, filed on May 12, 1983,
Post-Effective Amendment No. 2, filed on December 22, 1983, Post-Effective
Amendment No. 3, filed on March 30, 1987; 33-19015 filed on December 11, 1987;
33-21356 filed on April 21, 1988; Form S-8 No. 33-37878 filed November 16, 1990;
Form S-8 No. 33-56827 filed December 13, 1994; Form S-8 No. 333-05799 filed June
12, 1996, and 333-92329 filed December 1999.
45
<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 3, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of March 3, 2000 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
WILLIAM F. BUEHLER, Director /s/ William F. Buehler
William F. Buehler
KATHLEEN J. HEMPEL, Director /s/ Kathleen J. Hempel
Kathleen J. Hempel
ROBERT N. POKELWALDT, Director /s/ Robert N. Pokelwaldt
Robert N. Pokelwaldt
AGNAR PYTTE, Director /s/ Agnar Pytte
Agnar Pytte
ARTHUR O. SMITH, Director /s/ Arthur O. Smith
Arthur O. Smith
BRUCE M. SMITH, Director /s/ Bruce M. Smith
Bruce M. Smith
46
<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) Long-Term Executive Incentive Compensation Plan incorporated by
reference to the Form S-8 Registration Statement filed by the
corporation on December 8, 1999, (Reg. No. 333-92329).
(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
47
<PAGE>
INDEX TO EXHIBITS (continued...)
- -----------------
Exhibit
Number Description
- ------- -----------
(21) Subsidiaries [Page 45]
(23) Consent of Independent Auditors [Page 46]
*(27) Financial Data Schedules
*Filed Herewith
48
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
A. O. Smith Electrical Products Canada Limited Canada
A. O. Smith Enterprises Ltd. Canada
A. O. Smith (China) Water Heater Co., Ltd. China
Harbin A. O. Smith Fiberglass Products Co. Ltd. China
A. O. Smith L'eau Chaude S.a.r.l. France
A. O. Smith Warmwasser-Systemtechnik GmbH Germany
A. O. Smith Electrical Products Limited Liability Company Hungary
A. O. Smith Electric Motors (Ireland) Ltd. Ireland
A. O. Smith Holding (Ireland) Ltd. Ireland
IG-Mex, S.A. de C.V. Mexico
Motores Electricos de Juarez, S.A. de C.V. Mexico
Motores Electricos de Monterrey, S.A. de C.V. Mexico
Productos de Agua, S.A. de C.V. Mexico
Productos Electricos Aplicados, S.A. de C.V. Mexico
A. O. Smith Electrical Products B.V. The Netherlands
A. O. Smith Water Products Company B.V. The Netherlands
A. O. Smith Electrical Products (S.E.A) Pte Ltd Singapore
A. O. Smith Electrical Products Limited United Kingdom
45
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, 333-05799, and
333-92329) pertaining to the 1990 Long-Term Executive Incentive Compensation
Plan and Long-Term Executive Incentive Compensation Plan of A. O. Smith
Corporation and in the related prospectuses of our report dated January 19,
2000, 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, 1999.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 29, 2000
46
<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
YEAR ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,743
<SECURITIES> 18
<RECEIVABLES> 186,563
<ALLOWANCES> (3,121)
<INVENTORY> 163,443
<CURRENT-ASSETS> 388,627
<PP&E> 518,741
<DEPRECIATION> (235,248)
<TOTAL-ASSETS> 1,063,986
<CURRENT-LIABILITIES> 168,440
<BONDS> 351,251
0
0
<COMMON> 67,441
<OTHER-SE> 363,643
<TOTAL-LIABILITY-AND-EQUITY> 1,063,986
<SALES> 1,039,281
<TOTAL-REVENUES> 1,039,281
<CGS> 832,369
<TOTAL-COSTS> 832,369
<OTHER-EXPENSES> 7,778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,821
<INCOME-PRETAX> 77,092
<INCOME-TAX> 26,822
<INCOME-CONTINUING> 50,270
<DISCONTINUED> (7,848)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,422
<EPS-BASIC> 1.83
<EPS-DILUTED> 1.78
</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
YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,807
<SECURITIES> 26,859
<RECEIVABLES> 115,621
<ALLOWANCES> (2,523)
<INVENTORY> 87,216
<CURRENT-ASSETS> 267,878
<PP&E> 405,545
<DEPRECIATION> (201,089)
<TOTAL-ASSETS> 736,570
<CURRENT-LIABILITIES> 112,646
<BONDS> 131,203
0
0
<COMMON> 67,500
<OTHER-SE> 333,593
<TOTAL-LIABILITY-AND-EQUITY> 736,570
<SALES> 774,788
<TOTAL-REVENUES> 774,788
<CGS> 616,516
<TOTAL-COSTS> 616,516
<OTHER-EXPENSES> 3,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,914
<INCOME-PRETAX> 66,921
<INCOME-TAX> 23,189
<INCOME-CONTINUING> 40,656
<DISCONTINUED> 3,835
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,491
<EPS-BASIC> 1.89
<EPS-DILUTED> 1.84
</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
YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,845
<SECURITIES> 140,051
<RECEIVABLES> 104,649
<ALLOWANCES> (1,992)
<INVENTORY> 64,988
<CURRENT-ASSETS> 345,181
<PP&E> 358,209
<DEPRECIATION> (188,783)
<TOTAL-ASSETS> 682,729
<CURRENT-LIABILITIES> 107,335
<BONDS> 100,972
0
0
<COMMON> 65,575
<OTHER-SE> 334,130
<TOTAL-LIABILITY-AND-EQUITY> 682,729
<SALES> 678,207
<TOTAL-REVENUES> 678,207
<CGS> 537,542
<TOTAL-COSTS> 537,542
<OTHER-EXPENSES> 3,096
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,605
<INCOME-PRETAX> 53,030
<INCOME-TAX> 18,370
<INCOME-CONTINUING> 32,065
<DISCONTINUED> 121,765
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,830
<EPS-BASIC> 5.57
<EPS-DILUTED> 5.46
</TABLE>
