A.O. Smith Reports Fourth Quarter Operating Earnings of $.04 Per Share

MILWAUKEE, Jan. 23 /PRNewswire/ --A.O. Smith Corporation (NYSE: AOS) today announced earnings (before special charges) of $1.0 million or $.04 per share for the fourth quarter. For 2001, earnings before special charges were $21 million or $.86 per share. Fourth quarter operating earnings exceeded prior estimates of breakeven results.

Including a $9.4 million special charge related primarily to the restructuring of its electric motor operation, the company recorded a fourth-quarter net loss of $5.1 million, equivalent to $.21 per share and, for the full year, net earnings of $14.5 million, or $.61 per share.

Earnings from continuing operations in the 2000 fourth quarter were $2.6 million or $.11 per share. Earnings from continuing operations for 2000 were $42 million or $1.76 per share.

Sales for the Milwaukee-based manufacturer of electric motors and water heaters were approximately $1.15 billion, eight percent lower than the $1.25 billion generated in 2000. Fourth quarter sales were $256 million, approximately six percent lower than the comparable period in 2000.

"The weakness in our electric motors business that began in the second half of 2000 persisted throughout 2001," Chairman and Chief Executive Officer Robert J. O'Toole, observed. "On a more positive note, Water Products reported its fourth consecutive year of higher sales and operating profit, a noteworthy achievement considering the sluggish economic environment."

Electric Motors

Electric Motor sales in 2001 of $803 million were 11 percent lower than the prior year. The downturn that began in the heating and air conditioning market during the second half of 2000 expanded to include the company's other major motor markets during 2001. Operating profit (before special charges) declined to $28.9 million from $75.6 million in 2000 as a result of the lower volumes and increased competitive pressures.

During the fourth quarter of 2001, Electric Motors initiated a series of actions to reduce operating expenses. The program includes a 10 percent reduction of the company's salaried workforce, additional product repositioning actions, and the realignment of warehouse operations.

Water Systems

Higher volumes in its residential water heating business and the continued expansion of its international operations resulted in record Water Systems sales of $348 million, modestly higher than the prior year.

Operating profit (before special charges) at $40.5 million represents a new record. The 16 percent profit improvement over the prior year is due to improved operating efficiency and better performance in the company's operations in China.

On December 28, the company completed the acquisition of State Industries Inc. of Ashland City, Tenn. The acquisition will nearly double the size of the company's water heating business and is expected to generate earnings accretion of $.15 per share in 2002. State Industries serves both the retail and wholesale distribution channels of the residential water heating market segment and markets commercial water heaters through the wholesale distribution channel.

Company discusses outlook

"While recent information on lower inventory levels in the HVAC industry is encouraging, the market conditions during 2001 were difficult for A.O. Smith," O'Toole said. "We have taken the actions necessary to adjust our cost base to current sales volumes.

"We will be in a strong position when markets recover to more normal levels. This positioning, coupled with the impact of the State Industries acquisition and the new accounting standards eliminating goodwill amortization will contribute to earnings growth in 2002. This leads us to reiterate our earlier forecast of earnings in the range of $1.40 to $1.60 per share in 2002. We believe first and second quarter earnings will show modest improvement over 2001, with favorable comparisons accelerating in the second half of the year."

A.O. Smith will broadcast a live conference call beginning at 10:00 a.m. (eastern time) today. The call can be heard on the company's web site, http://www.aosmith.com . An audio replay of the call will be available on the company's website after the live event.

Forward-looking statements

Certain statements in this release are "forward-looking statements." These forward-looking statements can generally be identified as such because the context of the statement includes words such as the company "believes," "anticipates," "estimates," "expects," "projects," "forecasts" 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 the results expressed in forward-looking statements will be realized. 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 successful integration of State Industries, general economic conditions, cost stability, and competitive pressures.

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."

                   A.O. SMITH CORPORATION AND SUBSIDIARIES
                (condensed consolidated financial statements -
                     $000 omitted except per share data)

                              Statement of Earnings

                                     Three Months ended        Year ended
    Continuing Operations                December 31          December 31
    Net Sales                           2001      2000       2001       2000
       Electric Motor Technologies   $168,303  $185,050   $802,721   $902,419
       Water Systems Technologies      87,238    86,220    348,435    345,526
                                      255,541   271,270  1,151,156  1,247,945

    Costs and Expenses
       Cost of products sold          213,216   224,319    948,815    999,821
       Selling, general and
        administrative                 35,905    36,113    145,742    153,695
       Interest expense                 3,551     5,343     16,418     22,102
       Amortization of intangibles      1,756     1,734      6,956      6,932
       Restructuring and other
        charges                         9,368        --      9,368         --
       Other (income) expense            (340)     (247)     1,371        307
       Tax provision (benefit)         (2,809)    1,443      7,984     23,432
          Total costs and expenses    260,647   268,705  1,136,654  1,206,289

    Earnings (Loss) from Continuing
     Operations                        (5,106)    2,565     14,502     41,656

    Discontinued operations less
     related income tax
     benefit - $9,024 & $7,772             --   (13,820)        --    (11,903)

    Net Earnings (Loss)               $(5,106) $(11,255)   $14,502    $29,753

    Net Earnings (Loss) Per Share of
     Common Stock (Diluted)
       Continuing Operations           $(0.21)    $0.11      $0.61      $1.76
       Discontinued Operations            $--    $(0.58)       $--     $(0.50)
            Net Earnings (Loss)        $(0.21)   $(0.47)     $0.61      $1.26

       Average Common Shares
        Outstanding  (000's omitted)   23,990    23,705     23,915     23,691


                            A.O. SMITH CORPORATION
                                Balance Sheet

                                                December 31       December 31
                                                   2001              2000
    ASSETS:

        Cash and cash equivalents                  $20,759           $15,287
        Receivables                                209,871           169,117
        Inventories                                194,706           169,630
        Deferred income taxes                       22,403            12,907
        Other current assets                        28,039             7,789
        Net current assets-discontinued
         operations                                  1,796            22,651

           Total Current Assets                    477,574           397,381

        Net property, plant and equipment          355,298           282,835
        Goodwill and other intangibles             301,924           244,821
        Other assets                               159,127           122,338
        Net long-term assets -
         discontinued operations                        --            17,493

        Total Assets                            $1,293,923        $1,064,868

    LIABILITIES AND STOCKHOLDERS' EQUITY:

        Notes payable                               $3,280               $--
        Trade payables                             131,073            91,780
        Accrued payroll and benefits                29,525            27,388
        Product warranty                            19,470            11,574
        Income taxes                                   887             1,695
        Long-term debt due within one
         year                                       13,272            11,129
        Other current liabilities                   58,443            26,865

           Total Current Liabilities               255,950           170,431

        Long-term debt                             390,385           316,372
        Other liabilities                          133,556            61,856
        Deferred income taxes                       62,154            67,814
        Stockholders' equity                       451,878           448,395

        Total Liabilities and
         Stockholders' Equity                   $1,293,923        $1,064,868


                            A.O. SMITH CORPORATION
                           STATEMENT OF CASH FLOWS

                                                           Year ended
                                                           December 31
                                                     2001              2000
    Operating Activities
    Continuing
      Net earnings                                  $14,502           $41,656

      Adjustments to reconcile net earnings to
       net cash provided by operating activities:
          Depreciation & amortization                47,076            45,059
          Net change in current assets and
           liabilities                               11,175             3,563
          Net change in noncurrent assets and
           liabilities                              (22,667)          (15,343)
          Other                                        (258)              241
    Cash Provided by Operating Activities            49,828            75,176

    Investing Activities
      Capital expenditures                          (35,318)          (40,516)
      Acquisitions                                 (117,988)               --
    Cash Used in Investing Activities              (153,306)          (40,516)

    Cash Flow before Financing                     (103,478)           34,660

    Financing Activities
      Debt incurred                                  90,565                --
      Debt retired                                  (11,129)          (33,379)
      Other stock transactions                        1,407               816
      Dividends paid                                (12,319)          (11,720)
    Cash Provided by (Used in) Financing
     Activities                                      68,524           (44,283)

    Discontinued
    Cash Provided by Discontinued Operations         40,426            10,149

      Net increase in cash and cash equivalents       5,472               526
      Cash and cash equivalents - beginning of
       period                                        15,287            14,761

    Cash and Cash Equivalents - End of Period       $20,759           $15,287