SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-475
A. O. SMITH CORPORATION
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 23972, Milwaukee, Wisconsin 53223-0972
Telephone: (414) 359-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Common Stock Outstanding as of October 31, 1994: 14,851,540
Class A Common Stock Outstanding as of October 31, 1994: 6,054,081
Exhibit Index Page 14
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings and Retained Earnings
- Nine months ended September 30, 1994 and 1993 3
Condensed Consolidated Balance Sheet
- September 30, 1994 and December 31, 1993 4-5
Condensed Consolidated Statements of Cash Flows
- Nine months ended September 30, 1994 and 1993 6
Notes to Condensed Consolidated Financial Statements
- September 30, 1994 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Index to Exhibits 14
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
AND RETAINED EARNINGS
Three and Nine months ended September 30, 1994 and 1993
(000 omitted except for per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
EARNINGS 1994 1993 1994 1993
Electrical Products
Company $ 70,278 $ 56,746 $ 215,577 $186,760
Automotive Products
Company 170,666 130,867 538,892 445,167
Water Products Company 64,098 58,014 194,864 180,518
Smith Fiberglass Products
Inc. 15,298 16,192 43,855 45,056
Agricultural Products 12,390 10,997 29,537 27,215
-------- -------- --------- --------
NET REVENUES 332,730 272,816 1,022,725 884,716
Cost of products sold 286,439 237,692 864,512 749,618
-------- -------- --------- --------
Gross profit 46,291 35,124 158,213 135,098
Selling, general and
administrative expenses 27,278 21,868 78,831 70,379
Interest expense 3,136 3,313 9,191 10,265
Other (income) expense -
net 87 (144) 1,225 (427)
--------- -------- --------- --------
15,790 10,087 68,966 54,881
Provision for income
taxes 6,135 5,132 26,248 23,092
--------- -------- --------- ---------
Earnings before equity
in earnings of
affiliated companies 9,655 4,955 42,718 31,789
Equity in earnings of
affiliated companies
aftertax 475 513 1,076 1,782
--------- --------- --------- ---------
NET EARNINGS 10,130 5,468 43,794 33,571
RETAINED EARNINGS
Balance at beginning of
period 206,219 167,495 177,543 147,065
Cash dividends on
common shares (2,717) (2,262) (7,705) (9,935)
-------- ------- -------- --------
BALANCE AT END OF PERIOD $213,632 $170,701 $213,632 $170,701
======== ======== ========= ========
DIVIDENDS PER COMMON SHARE
Regular (Class A and
common) $ .13 $ .11 $ .37 $ .31
Special (Common stock
only) $. -- $. -- $. -- $ .25
NET EARNINGS PER COMMON
SHARE $ .48 $ .27 $2.10 $1.64
See accompanying notes to unaudited condensed consolidated financial
statements.
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1994 and December 31, 1993
(000 omitted)
(unaudited)
September 30, 1994 December 31, 1993
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,874 $ 11,902
Trade receivables 157,554 126,949
Finance subsidiary receivables
and leases 16,869 19,151
Customer tooling 21,084 15,471
Inventories (note 2) 108,738 89,804
Deferred income taxes 26,597 27,614
Other current assets 14,979 12,987
--------- ---------
TOTAL CURRENT ASSETS 352,695 303,878
Investment in and advances to
affiliated companies 24,462 23,669
Deferred model change 18,030 22,095
Finance subsidiary receivables
and leases 42,178 53,481
Other assets 47,071 44,962
Property, plant and equipment 863,466 823,786
Less accumulated depreciation 481,290 448,772
--------- ---------
Net property, plant and
equipment 382,176 375,014
--------- ---------
TOTAL ASSETS $866,612 $823,099
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Trade payables $115,207 $ 99,320
Accrued payroll and pension 35,620 38,347
Postretirement benefit
obligation 9,418 8,950
Other current liabilities 62,591 62,155
Long-term debt due within one
year 3,700 8,819
Finance subsidiary long-term
debt due within one year 5,932 5,598
--------- --------
TOTAL CURRENT LIABILITIES 232,468 223,189
Long-term debt (note 3) 146,357 148,851
Finance subsidiary long-term
debt 32,005 41,723
Postretirement benefit
obligation 71,644 69,773
Other liabilities 27,122 28,652
Deferred income taxes 47,229 41,281
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Class A common stock, $5 par
value: authorized
7,000,000 shares; issued
6,070,041 and 6,084,845 30,350 30,424
Common stock, $1 par value:
authorized 24,000,000
shares; issued 15,629,609 and
15,614,805 15,630 15,615
Capital in excess of par value 68,071 65,950
Retained earnings (note 3) 213,632 177,543
Pension liability adjustment (9,141) (9,141)
Cumulative foreign currency
translation adjustments (670) (841)
Treasury stock at cost (8,085) (9,920)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 309,787 269,630
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $866,612 $823,099
========= =========
See accompanying notes to unaudited condensed consolidated financial
statements.
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O.SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 1994 and 1993
(000 omitted) - (unaudited)
CASH FLOWS 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $43,794 $33,571
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 36,948 31,345
Deferred income taxes 6,965 7,155
Equity in earnings of affiliates, net of
dividends (1,076) (182)
Deferred model change and software
amortization 6,603 6,915
Other - net 3,359 5,085
Change in current assets and liabilities:
Trade receivables and customer tooling (34,159) (36,776)
Current income tax accounts-net (63) 4,992
Inventories (18,934) (23,195)
Prepaid expenses and other (1,363) (11,520)
Trade payables 15,887 41,661
Accrued liabilities, payroll and pension (1,727) 18,255
Net change in noncurrent assets and
liabilities 4,638 1,903
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 60,872 79,209
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (44,123) (42,040)
Other - net (971) (769)
-------- --------
CASH USED BY INVESTING ACTIVITIES (45,094) (42,809)
-------- --------
CASH FLOW BEFORE FINANCING ACTIVITIES 15,778 36,400
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt incurred - 30,000
Long-term debt retired (7,613) (43,513)
Finance subsidiary net long-term debt retired (9,384) (15,062)
Proceeds from common stock options exercised 1,902 1,906
Other stock transactions 1,994 361
Dividends paid (7,705) (9,935)
-------- ---------
CASH USED BY FINANCING ACTIVITIES (20,806) (36,243)
Net increase/(decrease) in cash and cash
equivalents (5,028) 157
Cash and cash equivalents-beginning of period 11,902 6,025
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,874 $ 6,182
======== =========
See accompanying notes to unaudited condensed consolidated financial
statements.
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(unaudited)
1. Basis of Presentation
The financial statements presented herein are based on interim figures
and are subject to audit. In the opinion of management, all
adjustments consisting of normal accruals considered necessary for
fair presentation of the results of operations and of financial
position have been made. The results of operations for the nine-month
period ended September 30, 1994 are not necessarily indicative of the
results expected for the full year. The consolidated balance sheet as
of December 31, 1993 is derived from the audited financial statements
but does not include all disclosures required by generally accepted
accounting principles.
2. Inventories
(000 omitted) September 30, 1994 December 31, 1993
Finished products $ 56,458 $ 53,337
Work in process 40,084 37,215
Raw materials 46,206 36,371
Supplies 7,555 5,228
-------- --------
150,303 132,151
Allowance to state
inventories at LIFO cost 41,565 42,347
-------- --------
$108,738 $ 89,804
======== ========
3. Long-Term Debt
On April 5, 1994, the $12.5 million 8.9 percent term loan agreement
was amended to carry a floating interest rate as of April 1994 and the
final maturity was extended from April 1996 to April 1999. The
interest rate is set at 50 basis points over LIBOR and the loan can be
repaid at any time without penalty.
On June 15, 1994, the Corporation put in place a $140 million
revolving credit agreement which replaced a $115 million A. O. Smith
facility and a $30 million AgriStor Credit Corporation facility. The
term of the amended agreement was extended two years until
April 3, 1998. In addition to lower fees and lower borrowing rates
the agreement contains fewer restrictive covenants. Due to a
continuing reduction in funding needs, AgriStor Credit Corporation
terminated its commercial paper program on June 15, 1994.
The Corporation's long-term credit agreements contain certain
conditions and provisions which restrict payment of dividends. Under
the most restrictive of these provisions, retained earnings of $92.4
million were unrestricted as of September 30, 1994 for cash dividends
and treasury stock purchases.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1994 COMPARED TO 1993
The Corporation continued the trend of higher revenues and earnings
established during the first half of the year by setting new quarterly
revenue and net earnings records for the third consecutive quarter.
Through the first nine months of the year, the Corporation's three largest
operating units exceeded the revenues and earnings levels for the same
period of 1993.
Revenues for the first nine months of 1994 exceeded $1.0 billion
reflecting an increase of $138 million or a 15.6 percent improvement from
the $884.7 million of revenues reported in the first nine months of 1993.
Third quarter revenues increased 22 percent from $272.8 million in 1993 to
a record $332.7 million in 1994.
The Corporation earned $43.8 million or $2.10 per share for the first nine
months of 1994 compared to $33.6 million or $1.64 per share in the first
nine months of 1993. Third quarter earnings of $10.1 million or $.48 per
share established a record and were nearly double the $5.5 million or $.27
per share reported in the third quarter of 1993. Last year's third
quarter was unfavorably impacted by a $1.2 million or $.06 per share
adjustment associated with the increase in the federal income tax rate
imposed by the Revenue Reconciliation Act of 1993.
The third quarter gross margin of 13.9 percent compared favorably to the
12.9 percent margin in the same period of 1993. Increased volume and
improved manufacturing efficiencies at the Electrical Products Company
contributed to the third quarter improvement in profit margin. Overtime
and other costs to meet higher volumes along with higher new product
launch costs at Automotive prevented additional growth in the third
quarter margins. The gross profit margin through the first nine months of
the year was 15.5 percent or slightly better than the 15.3 percent
realized in the same period in 1993. This reflects a weak first quarter
comparison where a decline in gross margin compared to the prior year was
due largely to costs associated with new product within Automotive
Products Company and competitive conditions in the electrical motors
markets.
The strong consumer demand for new cars and light trucks that has been
prevalent for the past several quarters continued in the third quarter of
1994. The latest indications are that sales of U.S. light trucks will
reach 6.1 million units in 1994 reflecting a 13 percent increase over the
prior year. This strong demand for light truck products bodes well for
the Automotive Products Company since a large percentage of the company's
revenues is concentrated in this product line. Automotive's sales
increased by 21.1 percent when comparing the first nine months of 1994 to
the same period last year. Third quarter sales were 30.4 percent higher
than the 1993 third quarter. This strong showing in the third quarter was
particularly encouraging since this quarter is traditionally the weakest
for the company as a result of customer shutdowns for model year
changeover.
Automotive's earnings through the first nine months of 1994 improved when
compared to the first nine months of 1993. Although third quarter profits
were higher than the same quarter of 1993, the profit realization on the
additional volume was somewhat lower than might be expected due to the
cost pressures associated with meeting the significant increase in demand.
These costs should diminish over time as the company addresses production
capacity considerations. Additionally, start-up costs associated with new
product programs have offset a portion of the volume related earnings
increase. As the life cycle of these new programs progresses, these
start-up costs should have less of an impact on earnings.
Early in the fourth quarter, Volvo announced that it had placed its heavy
truck side-rail business with the Automotive Products Company. This
additional business should provide approximately $12 million in annual
sales for the company with the full impact being recognized in 1997. This
business may require the operation of a new regional facility in the
Southeast.
Earnings of the Corporation's 40-percent-owned Mexican affiliate were also
affected by start-up costs for new products as well as costs incurred to
realign manufacturing operations. Consequently, the Corporation's equity
in these earnings was lower than the previous year for both the first nine
months and third quarter.
The Water Products Company sales for the first nine months of 1994 were
$194.9 million or almost 8 percent higher than the same period in 1993.
The major portion of the year-to-year increase in sales was the result of
demand for residential water heaters. Sales for the third quarter of 1994
increased 10.5 percent over 1993's third quarter and reflected a pick up
in demand for commercial heaters as wholesalers depleted previously high
levels of inventory. The company continues to acquire market share in
both the residential and commercial segments and currently remains on a
record setting sales pace for 1994. An announced price increase effective
January 1, 1995 could pull sales into the fourth quarter of 1994.
Operating profits for the Water Products Company for the first nine months
of 1994 were improved over the same period of 1993. The impact of the
increased residential volume more than offset the adverse effect of the
reduction in the volume of the commercial product. Profits for the third
quarter of 1994 demonstrated a significant percentage increase over the
third quarter of 1993 due to the recovery in sales of the higher margin
commercial product. Given year-to-date results and strengthening demand
for commercial product, 1994 should show another solid earnings
performance by Water Products.
The turnaround that commenced in the second quarter at the Electrical
Products Company continued in the third quarter as nine month and third
quarter sales were improved by 15.4 percent and 23.8 percent over the
respective periods in 1993. Volumes were strong in all segments of the
business with the most notable improvements occurring in the HVAC, garage
door opener, air compressor and export businesses. Warm summer weather
also provided a positive influence on the sale of replacement motors.
Electrical Products profits for both the first nine months and third
quarter reflected significant improvement over the comparable periods in
1993. The major reason for the improved earnings was the additional
volume. Also contributing to the increased earnings was the effect of
enhanced productivity, especially at the Mebane, NC plant which last year
had to contend with the transfer-in of hermetic motor production. These
factors should continue to have a favorable impact on the business in the
fourth quarter.
Sales for Smith Fiberglass Products were lower in 1994 for both the first
nine months and third quarter as the prior year benefitted from two large
oil field shipments. Earnings for the first nine months were lower than
the same period last year as a result of lower volume and the favorable
impact in 1993 of a non-recurring patent infringement lawsuit recovery.
Third quarter earnings were essentially unchanged from 1993's third
quarter. The recent introduction of a new flexible piping system to the
service station market meets a need in this segment for a high quality,
flexible, underground system that can safely contain all major fuel
blends.
The net loss incurred by the agricultural operations for the first nine
months of 1994 was modestly higher than the loss reported in the same
period last year. A minor third quarter loss was reported compared to a
slight profit in the third quarter of 1993. The first nine months and
third quarter of 1994 were impacted by higher costs associated with the
teardown and re-marketing of repossessed feed storage structures by
AgriStor Credit Corporation as well as an additional bad debt provision.
A positive development within the agricultural segment has A. O. Smith
Harvestore Products, Inc. reporting higher sales and earnings for both the
first nine months and third quarter versus the same periods last year.
This favorable performance was due largely to strong activity in the
municipal and industrial, and water and waste storage markets.
Selling, general and administrative expenses in 1994 were higher than the
respective periods of 1993 as a result of several factors. Employee
incentive and profit sharing accruals were higher due to the increased
earnings of the Corporation. The provision for bad debts within the
agricultural segment was also responsible for a major portion of the
increase. Higher commissions and other expenses in support of additional
volume also contributed to the increase. Through the first nine months of
1994, interest expense was approximately 10 percent lower than in the same
period of 1993 due to a decline in debt levels from a year ago.
Non-operating expenses for 1994 reflected an unfavorable swing of $1.7
million when comparing the first nine months to the same period in 1993.
Nineteen ninety-three benefitted from several one-time litigation items.
The effective tax rate declined from approximately 42 percent in the first
nine months of 1993 to around 38 percent thus far in 1994 due to the
relative impact of the Revenue Reconciliation Act of 1993 on the
respective periods and the recognition of research and development and
foreign tax credits on the 1994 rate. The effective rate for the third
quarter dropped 12 percentage points from the third quarter of 1993 which
was affected by the cumulative impact of the 1993 tax rate increases.
In view of sales and net earnings records for the first three quarters of
the year, the prospects remain favorable that 1994 financial results may
surpass last year's record setting results.
During the first nine months of 1994, the Corporation was a party to
futures contracts for purposes of hedging a portion of certain raw
material purchases. The Corporation was also a party to forward foreign
exchange contracts to hedge foreign currency transactions consistent with
its committed exposures. Had these contracts not been in place, the net
earnings of the Corporation would not have been materially affected for
either the first nine months or the third quarter of 1994.
Liquidity and Capital Resources
The Corporation's working capital was $120.2 million at September 30, 1994
compared to $80.7 million at December 31, 1993. Business activity related
increases in trade receivables, customer tooling and inventories were
partially offset by a related increase in trade payables. In addition,
certain customer terms for trade receivables were modified during the
third quarter which increased this balance.
Cash flow provided by operations was $18.3 million less than the same
period last year due to an increase in working capital requirements and
pension funding. In view of the favorable cash flow and debt situation,
the Corporation took the opportunity to increase its pension plan funding
and contributed $9 million during the quarter. The Corporation's long-
term debt decreased $2.5 million in the first nine months to $146.4
million and the debt to equity ratio has improved to 47.2% from 55.2% at
December 31, 1993. The long-term debt of the finance subsidiary declined
$9.7 million to $32.0 million reflecting the continuing liquidation of
that business.
The Corporation anticipates that current earnings trends will reduce debt
and further improve its debt to equity ratio during the balance of 1994.
Capital spending, due largely to new automotive product programs, could
total $70 million in 1994.
At its October 11, 1994 meeting, the Board of Directors declared a regular
quarterly dividend of $.13 per share on its common stock (Classes A and
Common). The dividend will be paid on November 15, 1994 to shareholders
of record as of October 31, 1994.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
At September 30, 1994, the Corporation or A. O. Smith Harvestore Products,
Inc. ("AOSHPI"), a wholly-owned subsidiary of the Corporation, were
defendants in twenty-seven lawsuits (two of which are class action
lawsuits) filed by various plaintiffs who were alleging damages for
economic losses claimed to have arisen out of alleged defects in AOSHPI's
animal feed storage equipment. In the third quarter of 1994, one new case
was filed against the Corporation and AOSHPI and one case was favorably
resolved. The United States District Court for the Southern District of
Ohio has set an October 16, 1995 trial date in the conditionally certified
class action brought on behalf of purchasers and lessees of Harvestore
structures manufactured by the Corporation and AOSHPI. The Notice which
was mailed during the quarter to the class members resulted in
approximately 5,500 "opt out" forms being filed with the Court by the
August 31, 1994 deadline, the impact of which is unknown. Information on
these lawsuits was previously reported in Part I, Item 3 of the
Corporation's 1993 annual report on Form 10-K and in Part II, Item 1 of
the Corporation's Form 10-Q reports for the quarterly periods ended March
31, 1994 and June 30, 1994 which are incorporated herein by reference.
There have been no material changes in the environmental matters
previously reported in Item 3 in the Corporation's annual report on Form
10-K for the fiscal year ending December 31, 1993, which is incorporated
herein by reference.
ITEM 2 -- CHANGES IN SECURITIES
Previously reported in Item 2, Part II of the Corporation's quarterly
report on Form 10-Q for the quarter ended March 31, 1994, which is
incorporated herein by reference.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation in the
third quarter of 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A. O. SMITH CORPORATION
November 7, 1994 THOMAS W. RYAN
------------------------
Thomas W. Ryan
Vice President
Treasurer and Controller
November 7, 1994 G. R. BOMBERGER
------------------------
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number Description
27 Financial Data Schedule
5
1,000
9-MOS
DEC-31-1994
SEP-30-1994
6,874
0
174,423
0
108,738
352,695
863,466
(481,290)
866,612
232,468
178,362
105,966
0
0
203,821
866,612
1,022,725
1,022,725
864,512
864,512
80,056
0
9,191
68,966
26,248
43,794
0
0
0
43,794
2.10
2.10
