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, 1995
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, 1995: 15,027,980
Class A Common Stock Outstanding as of October 31, 1995: 5,885,441
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, 1995 and 1994 3
Condensed Consolidated Balance Sheet
- September 30, 1995 and December 31, 1994 4-5
Condensed Consolidated Statements of Cash Flows
- Nine months ended September 30, 1995 and 1994 6
Notes to Condensed Consolidated Financial Statements
- September 30, 1995 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 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, 1995 and 1994
(000 omitted except for per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
EARNINGS 1995 1994 1995 1994
Electrical Products Company $ 71,641 $ 70,278 $ 241,457 $ 215,577
Automotive Products Company 189,736 170,666 631,677 538,892
Water Products Company 66,287 64,098 197,237 194,864
Smith Fiberglass Products
Inc. 14,680 15,298 43,997 43,855
Agricultural Products 12,019 12,390 32,826 29,537
------- ------- --------- ---------
NET REVENUES 354,363 332,730 1,147,194 1,022,725
Cost of products sold 313,922 286,439 978,302 864,512
------- ------- --------- ---------
Gross profit 40,441 46,291 168,892 158,213
Selling, general and
administrative expenses 26,106 27,278 84,383 78,831
Interest expense 3,234 3,136 9,799 9,191
Other expense 20 87 3,151 1,225
------- ------- --------- ---------
11,081 15,790 71,559 68,966
Provision for income taxes 4,370 6,135 27,520 26,248
------- ------ -------- -------
Earnings before equity in
earnings of affiliated
companies 6,711 9,655 44,039 42,718
Equity in earnings of
affiliated companies 744 475 1,802 1,076
------- ------ ------- -------
NET EARNINGS 7,455 10,130 45,841 43,794
======= ====== ====== ======
RETAINED EARNINGS
Balance at beginning of
period 256,998 206,219 224,467 177,543
Cash dividends on
common shares (3,137) (2,717) (8,992) (7,705)
-------- -------- ------- --------
BALANCE AT END OF PERIOD $261,316 $213,632 $261,316 $213,632
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $.15 $.13 $.43 $.37
NET EARNINGS PER
COMMON SHARE $.36 $.48 $2.19 $2.10
See accompanying notes to unaudited condensed consolidated financial
statements.
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1995 and December 31, 1994
(000 omitted)
(unaudited)
September 30, 1995 December 31, 1994
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,373 $ 8,485
Trade receivables 152,184 132,630
Finance subsidiary receivables
and leases 14,953 16,361
Customer tooling 27,326 24,489
Inventories (note 2) 110,322 110,863
Deferred income taxes 22,955 28,100
Other current assets 14,249 8,592
------- -------
TOTAL CURRENT ASSETS 347,362 329,520
Investment in and advances to
affiliated companies 20,426 17,326
Deferred model change 24,566 18,638
Finance subsidiary receivables
and leases 30,914 37,842
Other assets 43,721 42,751
Property, plant and equipment 939,461 881,717
Less accumulated depreciation 516,615 479,937
------- -------
Net property, plant and equipment 422,846 401,780
------- -------
TOTAL ASSETS $889,835 $847,857
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Trade payables $112,927 $101,153
Accrued payroll and pension 37,853 36,641
Post-retirement benefit obligation 9,439 9,573
Other current liabilities 60,815 61,301
Long-term debt due within one year 3,925 3,775
Finance subsidiary long-term
debt due within one year 3,525 3,480
------- -------
TOTAL CURRENT LIABILITIES 228,484 215,923
Long-term debt (note 3) 140,560 136,769
Finance subsidiary long-term debt 23,498 29,357
Post-retirement benefit obligation 72,188 72,388
Other liabilities 20,106 26,230
Deferred income taxes 54,651 54,445
STOCKHOLDERS' EQUITY:
Class A common stock, $5 par
value: authorized 14,000,000
shares; issued 5,888,901 and
6,035,641 29,445 30,178
Common stock, $1 par value:
authorized 60,000,000 shares;
issued 15,810,749 and 15,664,109 15,811 15,664
Capital in excess of par value 68,848 68,209
Retained earnings (note 3) 261,316 224,467
Pension liability adjustment (9,653) (9,653)
Cumulative foreign currency
translation adjustments (7,359) (8,035)
Treasury stock at cost (8,060) (8,085)
-------- -------
TOTAL STOCKHOLDERS' EQUITY 350,348 312,745
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $889,835 $847,857
======== ========
See accompanying notes to unaudited condensed consolidated financial
statements.
A. O.SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 1995 and 1994
(000 omitted) - (unaudited)
CASH FLOWS 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 45,841 $43,794
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation 41,038 36,948
Deferred income taxes 5,351 6,965
Equity in earnings of affiliates,
net of dividends (1,802) (1,076)
Deferred model change and software
amortization 7,625 6,603
Other - net (759) 3,359
Change in current assets and liabilities:
Trade receivables and customer tooling (21,315) (34,159)
Current income tax accounts-net (275) (63)
Inventories 541 (18,934)
Prepaid expenses and other (6,830) (1,363)
Trade payables 11,774 15,887
Accrued liabilities, payroll and pension 2,040 (1,727)
Net change in non-current assets and
liabilities 956 4,638
------ ------
CASH PROVIDED BY OPERATING ACTIVITIES 84,185 60,872
------ ------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (61,146) (44,123)
Other - net (15,363) (971)
------- ------
CASH USED BY INVESTING ACTIVITIES (76,509) (45,094)
------ ------
CASH FLOW BEFORE FINANCING ACTIVITIES 7,676 15,778
----- ------
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt incurred 15,000 -
Long-term debt retired (11,059) (7,613)
Finance subsidiary net long-term
debt retired (5,814) (9,384)
Proceeds from common stock options exercised 90 1,902
Other stock transactions (13) 1,994
Dividends paid (8,992) (7,705)
------ ------
CASH USED BY FINANCING ACTIVITIES (10,788) (20,806)
Net decrease in cash and cash equivalents (3,112) (5,028)
Cash and cash equivalents-beginning of period 8,485 11,902
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,373 $ 6,874
======== =========
See accompanying notes to unaudited condensed consolidated financial
statements.
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(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, 1995 are not necessarily indicative of the
results expected for the full year. The consolidated balance sheet as
of December 31, 1994 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, 1995 December 31, 1994
Finished products $ 53,542 $ 55,331
Work in process 50,880 48,886
Raw materials 41,916 41,709
Supplies 9,199 7,457
-------- --------
155,537 153,383
Allowance to state
inventories at LIFO cost 45,215 42,520
-------- -------
$110,322 $110,863
======== ========
3. Long-Term Debt
The corporation's long-term credit agreements contain certain
conditions and provisions which restrict the corporation's payment of
dividends. Under the most restrictive of these provisions, retained
earnings of $97.1 million were unrestricted as of September 30, 1995
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 1995 COMPARED TO 1994
Revenues for the first nine months of 1995 were $1.15 billion reflecting
an increase of almost $125 million or a 12.2 percent improvement from the
$1.02 billion of revenues reported in the first nine months of 1994.
Third quarter revenues increased 6.5 percent from $332.7 million in 1994
to a record $354.4 million in 1995.
The corporation earned $45.8 million or $2.19 per share for the first nine
months of 1995 compared to $43.8 million or $2.10 per share in the first
nine months of 1994. Third quarter earnings of $7.5 million or $.36 per
share were the second highest in the corporation's history for the quarter
and were in line with estimates announced earlier by the corporation.
Earnings in the third quarter of 1994 were $10.1 million or $.48 per
share. A number of non-recurring factors in the third quarter in 1995
were responsible for the decline in third quarter earnings from 1994.
Extremely heavy demand at the Automotive Products Company for light and
heavy truck products created unusual pressures particularly at the
company's Milwaukee, Wisconsin facilities. The impact of strong demand
was accompanied by unprecedented hot weather which created numerous
production delays and other operational difficulties.
The third quarter gross margin of 11.4 percent was reflective of the
aforementioned difficulties and compared to a gross margin of 13.9 percent
in last year's third quarter. The gross profit margin through the first
nine months of the year declined from 15.5 percent in 1994 to 14.7 percent
in 1995 due to production difficulties experienced in the third quarter
and higher material costs.
The Automotive Products Company sales for the first nine months of 1995
increased by 17.2 percent over the same period of 1994 while third quarter
sales exceeded 1994's third quarter by 11.2 percent. Sales in 1995 for
both the quarter and first nine months benefitted from strong demand for
light and heavy truck products as well as from added volume resulting from
new product programs introduced in 1994 and early 1995.
Automotive's earnings for the first nine months of 1995 were about equal
to 1994's nine month earnings. Third quarter earnings in 1995 reflect a
sharp decline from the same period in 1994 and resulted from production
schedule complications as previously discussed.
Recently, Automotive Products Company announced two positive developments.
First, the company established a joint venture agreement with First Auto
Works and Golden Lion Group to become the first North American supplier to
manufacture automotive structures in China. A. O. Smith owns 60 percent
of the venture, which is scheduled to begin production of structural
components for the Volkswagen Jetta in January of 1997. Second, labor
negotiations at the Milwaukee plant were successfully concluded in October
with all bargaining units ratifying a new four-year contract.
While down somewhat from the second quarter, the corporation's 40 percent
owned Mexican affiliate continues to experience improved operating results
over the prior year. Export sales and manufacturing costs compare
favorably to 1994 reflecting the benefits of the affiliate's realigned
operations. Due to the affiliate's current financial position, the recent
decline in the value of the peso is not expected to have an adverse effect
on operating results.
Third quarter sales for the Electrical Products Company were slightly
improved over the third quarter of 1994, and year-to-date sales remain
substantially higher than the same period last year. Continued strength
in the hermetic market and increased export sales during the quarter
helped offset minor volume declines in the HVAC and pump markets.
Electrical Products third quarter earnings were approximately equal to
those of last year's third quarter as the favorable impact of the modest
increase in volume was offset by higher material costs. Year-to-date
profits remain well ahead of last year's nine months earnings and were
consistent with the significant increase in volume.
The Water Products Company sales for both the third quarter and first nine
months of 1995 surpassed those of the comparable periods last year. The
company continues to experience increased domestic commercial water heater
demand which more than offset the impact of a slight decline in
residential volume, and ongoing sluggishness in the European and Canadian
markets.
Recently, Water Products obtained a business license for a joint venture
in China in which it will be an 80 percent partner. The joint venture with
Nanjing Water Heater Company will manufacture instantaneous and storage
type water heaters.
Third quarter earnings for Water Products were higher than the 1994 third
quarter due to increased volume. Profits for the first nine months of the
year were only marginally better than those of the first nine months of
1994 reflecting the reduced volume experienced in the first quarter of
1995.
Third quarter sales for Smith Fiberglass Products Inc. were lower than the
third quarter of 1994 as this subsidiary continues to experience lower
demand in its major domestic markets. Sales for the first nine months of
the year were unchanged from the same period last year as strong export
sales to South American oil fields have helped offset the decline in the
domestic markets. Fiberglass Products is a 60 percent partner in a newly
formed Chinese joint venture with Harbin Composites Corporation. The
business has obtained its license and is scheduled to be in production in
early 1996. It will supply fiberglass pipe to the Chinese oil industry.
Earnings for both the third quarter and first nine months of 1995 for
Smith Fiberglass were lower than the comparable periods in 1994 as a
result of the lower margins realized on export sales.
The corporation's agricultural operations reflected profits for both the
third quarter and first nine months of the year in contrast to losses
incurred in the same periods in 1994. Through the first nine months of
the year, revenues for A. O. Smith Harvestore Products, Inc. have
increased 11 percent over the same period last year as the result of a
growing market for municipal/industrial water and waste storage products.
The significant increase in sales resulted in a substantial improvement in
1995 year-to-date earnings. The losses incurred by AgriStor Credit
Corporation were lower in 1995 than 1994 due mostly to a reduction in
costs associated with non-performing lease and retail contracts.
Selling, general and administrative expenses for the third quarter of 1995
were $1.2 million less than the same period last year due to the
aforementioned reduction in costs associated with non-performing contracts
within the AgriStor Credit Corporation portfolio. For the first nine
months of 1995, selling, general and administrative expenses reflect a
$5.6 million increase over the comparable period in 1994 due to general
increases to support the higher sales volumes. Interest expense for the
third quarter and year-to-date increased over the same periods in 1994 due
to higher interest rates.
Other expenses were relatively constant for the third quarters of 1995 and
1994, however the first nine months of 1995 reflects a $1.9 million
increase over the same period in 1994. The increase is explained by
translation losses, environmental costs and certain non-recurring costs
incurred in 1995. The effective tax rates for the third quarter and first
nine months of 1995 were slightly higher than the same periods in 1994 due
to recognition of research and development tax credits in 1994.
During the first nine months of 1995, 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 in the
third quarter or first nine months of 1995.
With three-fourths of the year complete, and 1995 earnings ahead of last
years earning's at the same time, the corporation anticipates that in
early 1996 it may be able to announce a third consecutive year of record
sales and profits.
Liquidity and Capital Resources
The corporation's working capital was $118.9 million at September 30, 1995
compared to $113.6 million at December 31, 1994. Sales related increases
in trade receivables were partially offset by related increases to trade
payables.
Cash flow provided by operations was $23.3 million greater than the same
period last year due primarily to smaller increases in working capital
requirements compared to the prior year. While the corporation's long-
term debt increased $3.8 million in the first nine months to $140.6
million, the debt to equity ratio, excluding the finance subsidiary,
improved over this period from 43.7% to 40.1% at September 30, 1995. The
long-term debt of the finance subsidiary declined $5.9 million to $23.5
million reflecting the continuing liquidation of that business.
Capital expenditures were $17 million higher than last year. Capital
spending will remain higher for the remainder of the year due largely to
new automotive product programs and could total $100 million in 1995. The
corporation anticipates that internally generated funds will cover capital
expenditure requirements. Additionally, the corporation expects capital
expenditures, excluding investments in joint ventures, to be higher in
1996.
At its October 10, 1995 meeting, A. O. Smith's Board of Directors declared
a regular quarterly dividend at $.15 per share on its common stock
(Classes A and Common). The dividend is payable on November 15, 1995 to
shareholders of record October 31, 1995.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
At September 30, 1995, the corporation or A. O. Smith Harvestore Products,
Inc. ("AOSHPI"), a wholly-owned subsidiary of the corporation, were
defendants in eight (8) lawsuits (one of which is a class action lawsuit)
filed by various plaintiffs who were alleging property damage claimed to
have arisen out of alleged defects in AOSHPI's animal feed storage
equipment. In the third quarter of 1995, no new cases were filed against
the corporation and AOSHPI, one case was favorably resolved and in a New
York State Court case, the judge has denied the plaintiffs' petition for
class action status. The United States District Court for the Southern
District of Ohio has cancelled the trial date and discovery has been
suspended in the conditionally certified class action brought on behalf of
purchasers and lessees of Harvestore structures manufactured by the
corporation and AOSHPI while the court considers the corporation's motions
to decertify the class action or in the alternative grant summary judgment
in the corporation's favor. Information on these lawsuits was previously
reported in Part I, Item 3 of the corporation's annual report on Form 10-K
for the fiscal year ended December 31, 1994 and in Part II, Item 1 of the
corporation's Form 10-Q reports for the quarterly periods ended March 31,
1995 and June 30, 1995, 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, 1994, which is incorporated
herein by reference. Additionally, the corporation has been identified by
the U.S. Environmental Protection Agency ("EPA") as being a "Potentially
Responsible Party" ("PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or the "Superfund" law) relative
to a contaminated site in South Milwaukee, Wisconsin and has, together
with approximately 80 other PRPs, received a unilateral order issued by
the EPA under Section 106 of CERCLA to remediate the site. There is
insufficient information available to the Company at this time to enable
it to estimate the extent of the corporation's involvement at the site.
However, based upon information that is currently available, the
corporation believes that its ultimate share of the costs associated with
this site should not be material to its financial condition.
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 1995.
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 13, 1995 /s/ John J. Kita
John J. Kita
Treasurer and Controller
November 13, 1995 /s/ 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-31-1995
JAN-01-1995
SEP-30-1995
5,373
0
167,137
0
110,322
347,362
939,461
(516,615)
889,835
228,484
164,058
106,044
0
0
244,304
889,835
1,147,194
1,147,194
978,302
978,302
87,534
0
9,799
71,559
27,520
45,841
0
0
0
45,841
$2.19
$2.19
