SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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
Class A Common Stock Outstanding as of April 30, 1996: 5,884,148
Common Stock Outstanding as of April 30, 1996: 15,034,473
Exhibit Index Page 15
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings and
Retained Earnings
- Three months ended March 31, 1996 and 1995 3
Condensed Consolidated Balance Sheet
- March 31, 1996 and December 31, 1995 4-5
Condensed Consolidated Statements of Cash Flows
- Three months ended March 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements
- March 31, 1996 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 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Index to Exhibits 15
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
AND RETAINED EARNINGS
Three months ended March 31, 1996 and 1995
(000 omitted except for per share data)
(Unaudited)
Three Months Ended
March 31
1996 1995
EARNINGS
Electrical Products Company $ 92,301 $ 85,256
Automotive Products Company 230,938 221,669
Water Products Company 69,362 64,080
Smith Fiberglass Products Inc. 13,450 13,717
Other Products 20,939 8,266
-------- --------
NET REVENUES $426,990 $392,988
Cost of products sold 363,121 328,845
-------- --------
Gross profit 63,869 64,143
Selling, general and
administrative expenses 32,944 28,962
Interest expense 3,942 3,216
Other expense - net 1,383 1,984
-------- --------
25,600 29,981
Provision for income taxes 10,189 11,406
-------- --------
Earnings before minority interests and
equity in earnings of affiliated companies 15,411 18,575
Equity in earnings (loss) of
affiliated companies 1,800 (214)
Minority interests in net loss of
joint ventures 131 --
-------- --------
NET EARNINGS 17,342 18,361
RETAINED EARNINGS
Balance at beginning of period 273,751 224,467
Cash dividends on common shares (3,138) (2,718)
-------- --------
BALANCE AT END OF PERIOD $287,955 $240,110
======== ========
DIVIDENDS PER COMMON SHARE $.15 $.13
NET EARNINGS PER COMMON SHARE $.83 $.88
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
March 31, 1996 and December 31, 1995
(000 omitted)
(unaudited)
March 31, 1996 December 31, 1996
ASSETS
Cash and cash equivalents $ 4,171 $ 5,694
Trade receivables 188,229 165,924
Finance subsidiary receivables and 12,687 13,449
Customer tooling 51,045 30,799
Inventories (note 2) 113,314 103,540
Deferred income taxes 18,124 17,542
Other current assets 15,738 15,537
-------- --------
TOTAL CURRENT ASSETS 403,308 352,485
Deferred model change 27,106 25,246
Finance subsidiary receivables and 24,419 26,950
Other assets 82,623 79,305
Property, plant and equipment 1,010,156 975,842
Less accumulated depreciation 550,864 528,487
-------- --------
Net property, plant and equipment 459,292 447,355
-------- --------
TOTAL ASSETS $1,017,927 $ 952,918
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Trade payables $ 138,045 $ 112,645
Accrued payroll and benefits 39,939 47,763
Postretirement benefit obligation 7,806 7,837
Other current liabilities 39,606 40,469
Long-term debt due within one year 3,975 3,925
Finance subsidiary long-term debt due 1,012 1,008
-------- --------
TOTAL CURRENT LIABILITIES 230,383 213,647
Long-term debt (note 3) 195,698 167,139
Finance subsidiary long-term debt 20,688 23,799
Postretirement benefit obligation 75,085 74,799
Other liabilities 33,113 31,955
Deferred income taxes 64,458 63,239
Minority interests in joint ventures 12,254 5,976
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Class A common stock, $5 par value:
authorized 14,000,000 shares; issued 29,403 29,443
5,880,638 and 5,888,601
Common stock, $1 par value:
authorized 60,000,000 shares; issued 15,819 15,811
15,819,012 and 15,811,049
Capital in excess of par value 68,903 68,871
Retained earnings (note 3) 287,955 273,751
Cumulative foreign currency (7,819) (7,499)
translation adjustments
Treasury stock at cost (8,013) (8,013)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 386,248 372,364
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,017,927 $ 952,918
========== ==========
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
Three months ended March 31, 1996 and 1995
(000 omitted)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
Net earnings $ 17,342 $ 18,361
Adjustments to reconcile net earnings to net
operating activities
Depreciation 15,375 12,828
Deferred income taxes 637 1,772
Equity in earnings of affiliates, net of 600 214
Minority interests (131) -
Deferred model change and software 3,436 2,359
Other - net 47 644
Change in current assets and liabilities:
Trade receivables and customer tooling (42,015) (11,787)
Current income tax accounts-net 10,072 7,589
Inventories (9,774) (6,420)
Prepaid expenses and other (3,465) (2,798)
Trade payables 25,400 5,822
Accrued liabilities, payroll and benefits (15,526) (14,286)
Net change in noncurrent assets and 1,680 1,318
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 3,678 15,616
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (24,522) (14,901)
Other - net (6,450) (4,363)
-------- --------
CASH USED BY INVESTING ACTIVITIES (30,972) (19,264)
-------- --------
CASH FLOW BEFORE FINANCING ACTIVITIES (27,294) (3,648)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt incurred 32,259 15,000
Long-term debt retired (3,650) (8,783)
Finance subsidiary net long-term debt retired (3,107) (2,509)
Proceeds from common stock options exercised -- 90
Other stock transactions -- (13)
Joint ventures partners' contributions 3,407 --
Dividends paid (3,138) (2,718)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 25,771 1,067
Net decrease in cash and cash equivalents (1,523) (2,581)
Cash and cash equivalents-beginning of period 5,694 8,485
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,171 $ 5,904
======== ========
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
March 31, 1996
(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 three-
month period ended March 31, 1996 are not necessarily indicative of
the results expected for the full year. The consolidated balance
sheet as of December 31, 1995 is derived from the audited financial
statements but does not include all disclosures required by generally
accepted accounting principles.
2. Inventories
(000 omitted) March 31, 1996 December 31, 1995
Finished products $ 55,700 $ 53,788
Work in process 47,552 44,806
Raw materials 47,332 41,968
Supplies 9,172 9,067
-------- -------
159,756 149,629
Allowance to state
inventories at LIFO cost 46,442 46,089
-------- --------
$113,314 $103,540
======== ========
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 $104.9 million were unrestricted as of March 31, 1996 for
cash dividends and treasury stock purchases.
4. Accounting for Stock-Based Compensation
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The standard permits companies to continue
accounting for stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The
corporation intends to follow Opinion No. 25 as it requires no
recognition for compensation expense when the exercise price is equal
to the market price of the stock at the date of the grant. The
corporation will provide the pro forma disclosures required by SFAS
No. 123 in its annual report, if material.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST THREE MONTHS OF 1996 COMPARED TO 1995
Revenues for the first quarter of 1996 were $427 million surpassing last
year's first quarter revenues by $34 million or 8.7 percent, and
representing the highest quarterly revenues achieved in the corporation's
history. Net earnings of $17.3 million or $.83 per share in the first
quarter of 1996 declined $1.1 million from the $18.4 million or $.88 per
share reported in the same period last year.
With the exception of Smith Fiberglass Products Inc., the corporation's
product operations reflected increased revenues in the first quarter of
1996 compared to 1995's first quarter. The most notable sales increases
occurred at the Water Products and Electrical Products companies as both
of these operations experienced over an eight percent increase in sales
from the first quarter of 1995 to the same period in 1996. The sales
growth occurring within the Other Products segment was attributable to the
acquisition of Peabody TecTank, Inc. in December 1995.
Despite the higher 1996 first quarter sales, the corporation's gross
profit margin declined from 16.3 percent in the first quarter of 1995 to
15 percent in 1996. Several factors were responsible for the lower profit
margin. Automotive's margins were adversely impacted by start-up costs
associated with three facilities and higher depreciation expense. Water
Products' margins were significantly reduced as a result of pricing
pressure in the residential water heater segment, while unfavorable
product mix caused lower margins at Smith Fiberglass Products. Further
explanation of the causal factors for the lower gross profit margin are
included in the various segment discussions which follow.
First quarter sales for the Automotive Products Company increased $9.2
million or 4.2 percent from $221.7 million in 1995 to $230.9 million in
1996. Sales increased despite the March interruption of product
shipments caused by the GM strike.
Automotive's 1996 first quarter earnings were significantly lower than the
same period last year. Much of the earnings decline was caused by higher
fixed costs, most notably depreciation, which increased in conjunction
with higher capital spending levels in the recent past. Start-up costs
for plants in Plymouth, Michigan; Bowling Green, Kentucky; and Roanoke,
Virginia adversely impacted the 1996 first quarter earnings. Automotive's
first quarter earnings were lower than planned due to the curtailment of
scheduled production and shipment of product associated with the General
Motors strike, as well as lower than anticipated productivity levels.
In March, Automotive was awarded the contract to manufacture frames for
the next generation of the popular Ford Explorer sport utility vehicle. In
addition, Automotive has been certified as a Full Service Supplier, which
will give the company the opportunity for early involvement in new vehicle
development and will enable the company to work more closely with Ford in
the future. The Milwaukee, Wisconsin operation is also preparing to build
the next generation of Ford Ranger frames with production scheduled to
begin in the third quarter of 1997.
The trend of improved earnings which commenced in 1995 for Metalsa, the
corporation's 40 percent owned Mexican affiliate continued in the first
quarter of 1996. Sales increased more than 50 percent over last year's
first quarter due to additional sales in Mexico to Chrysler and General
Motors for the export market. The higher volumes resulted in improved
first quarter earnings which compare favorably to a nominal operating
profit which was more than offset by a translation loss in the first
quarter of 1995.
First quarter sales for the Electrical Products Company increased $7.0
million or 8.3 percent from a very good first quarter experienced in 1995.
Market conditions remained strong for all segments of the business but
most notably for the hermetic, pump, and distribution markets.
Electrical Products Company's first quarter profits exceeded 1995's first
quarter earnings as a result of increased sales and improved manufacturing
efficiency throughout its operations.
First quarter sales for the Water Products Company increased $5.3 million
or 8.2 percent from $64.1 million in 1995 to $69.4 million in 1996. The
increased sales were the result of higher volumes for both residential and
commercial product.
Despite the increased volume for Water Products, 1996 first quarter
profits were lower than last year's first quarter as a result of pricing
concessions put in place to match discounts offered by other manufacturers
within the industry. The company anticipates that margins will return to
more normal levels in the second half of the year.
Shipment of a new commercial water heater which achieves 94% efficiency,
the most efficient of any storage type product on the market is scheduled
to commence in the second quarter. This in conjunction with the
completion of consolidation of the commercial boiler operation at the
company's El Paso, Texas, plant should have a favorable impact on the
remainder of the year.
First quarter sales for Smith Fiberglass Products were slightly lower than
the same period in 1995. The small decline in sales resulted in a
disproportionate drop in first quarter earnings as a higher percentage of
the subsidiary's sales were concentrated in lower margin product lines.
Revenues for the Other Products segment of the corporation, consisting of
A. O. Smith Harvestore Products, Inc. (AOSHPI), the recently acquired
Peabody TecTank, Inc. (PTT), and AgriStor Credit Corporation increased
from $8.3 million in the first quarter of 1995 to $20.9 million in the
first quarter of 1996. The significant increase in quarterly revenues
from year-to-year was attributable to the acquisition of PTT which
experienced particularly strong demand for its line of bolted storage
tanks. AOSHPI's first quarter revenues were adversely impacted by
softness in the agricultural market, while AgriStor's revenues continue to
decline consistent with the intent to liquidate this entity. The
incremental profits generated by PTT in the quarter helped this segment of
the corporation's business earn a first quarter profit compared to a loss
in the first quarter of 1995.
Selling, general and administrative expenses in the first quarter were
$4.0 million more than the same period of 1995. Much of this increase was
associated with the acquisition of PTT as well as general increases to
support higher sales volumes. The $.7 million year-to-year increase in
first quarter interest expense was a direct result of increased debt
levels to support aggressive capital spending programs, the PTT
acquisition, and increased working capital requirements. The effective
tax rate for the first quarter of 1996 was 39.6 percent and compared to 38
percent in the first quarter of 1995. The first quarter of 1995
benefitted from the recognition of additional foreign tax credits.
Additionally, 1996 first quarter earnings have been reduced by losses
incurred in the Chinese joint ventures for which there is no immediate
offsetting tax benefit.
During the first three months of 1996, 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
first quarter of 1996.
Liquidity and Capital Resources
The corporation's working capital was $172.9 million at March 31, 1996
compared to $138.8 million at December 31, 1995. Business activity
related increases in trade receivables, customer tooling and inventories
were partially offset by a corresponding increase to trade payables.
Cash flow provided by operations was $11.9 million lower during the first
quarter ended March 31, 1996 than the same period last year due to higher
working capital requirements. The corporation's long-term debt increased
$28.6 million in the first three months of 1996 to $195.7 million to
finance capital expenditures and working capital requirements. The
corporation's leverage ratio as measured by total debt excluding the
finance subsidiary divided by total capitalization was 34% compared to 31%
at the end of December 1995. The finance subsidiary's long-term debt
decreased $3.1 million during the first quarter to $20.7 million,
reflecting the continuing liquidation of the business.
Capital expenditures during the first quarter were $24.5 million, $9.6
million higher than during the first quarter of 1995. As mentioned in the
most recently issued Form 10-K Report, capital spending will remain higher
for the remainder of the year due largely to new automotive programs. The
corporation expects that cash flow from operations will cover the majority
of the planned capital requirements.
At its April 4, 1996 meeting, A. O. Smith's Board of Directors increased
the regular quarterly dividend to $.17 per share on its common stock
(Classes A and Common) from $.15 per share. The dividend is payable on
May 15, 1996 to shareholders of record April 30, 1996.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
At March 31, 1996, the Corporation or A. O. Smith Harvestore Products,
Inc. ("AOSHPI"), a wholly-owned subsidiary of the Corporation, were
defendants in approximately seven cases alleging damages for economic
losses claimed to have arisen out of alleged defects in AOSHPI's animal
feed storage equipment. In the first quarter of 1996, no new cases were
filed against the Corporation and AOSHPI and one case was settled.
Two of the seven pending cases contain class action allegations. One of
the cases is a New York State court action which names the corporation,
AOSHPI, and two of its dealers as defendants. The court has denied the
plaintiffs' motion to certify the class and has granted the defendants'
motions dismissing some of the plaintiffs' allegations. The plaintiffs
are appealing the court's rulings.
The second case is pending in the Federal District Court for the Southern
District of Ohio. It was filed in August 1992 and the court, in March
1994, conditionally certified it as a class action on behalf of purchasers
and lessees of Harvestore structures manufactured by the corporation and
AOSHPI. A notice of the certification was mailed to the purported class
members in the third quarter of 1994, with approximately 5,500 "opt out"
forms being filed with the court, the impact of which is unknown. The
court canceled a previously set trial date as a result of motions the
corporation filed seeking summary judgment or in the alternative
decertification of the class. The corporation is awaiting a ruling.
Based on the facts currently available to management and its prior
experience with lawsuits alleging damages for economic loss resulting from
use of the Harvestore animal feed storage equipment, management is
confident that the class action suits can be defeated and that the
lawsuits do not represent a material threat to the corporation. The
corporation believes that any damages, including any punitive damages,
arising out of the pending cases are adequately covered by insurance and
recorded reserves. No range of reasonably possible losses can be
estimated because, in most instances, the complaint is silent as to the
amount of the claim or states it as an unspecified amount in excess of the
jurisdictional minimum. The corporation reevaluates its exposure
periodically and makes adjustment of its reserves as appropriate.
There have been no material changes in the environmental matters
previously reported in Item 3 in the Company's Form 10-K Report for the
fiscal year ending December 31, 1995 which is incorporated herein by
reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the first
quarter of 1996.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3)(i) A. O. Smith Corporation Restated Certificate of
Incorporation, as amended April 5, 1995 and as
further amended February 5, 1996 [incorporated by
reference to Exhibit (3)(i) to the registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 1-475)]
(4) A. O. Smith Corporation Restated Certificate of
Incorporation, as amended April 5, 1995 and as further
amended on February 5, 1996 [incorporated by reference
to Exhibit (3)(i) hereto]
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the corporation in the first
quarter of 1996.
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
May 10, 1996 /s/ John J. Kita
John J. Kita
Vice President,
Treasurer and Controller
May 10, 1996 /s/ G.R. Bomberger
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number Description
(3)(i) A. O. Smith Corporation Restated Certificate of
Incorporation, as amended April 5, 1995 and as further
amended on February 5, 1996 [incorporated by
reference to Exhibit (3)(i) to the registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 1-475)]
(4) A. O. Smith Corporation Restated Certificate of
Incorporation, as amended April 5, 1995 and as further
amended on February 5, 1996 [incorporated by reference to
Exhibit (3)(i) hereto]
(27) Financial Data Schedule
5
1,000
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
4,171
0
200,916
0
113,314
403,308
1,010,156
(550,864)
1,017,927
230,383
216,386
0
0
106,112
280,136
1,017,927
426,990
426,990
363,121
363,121
34,327
0
3,942
25,600
10,189
17,342
0
0
0
17,342
0.83
0.83
