SEC Filing | A. O. Smith Corporation

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, 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 Securities registered pursuant to Section 12(b) of the Act: Shares of Stock Title of Each Class Outstanding Name of Each Exchange February 28, 1997 on Which Registered Class A Common Stock 5,836,498 American Stock (par value $5.00 per Exchange share) Common Stock 14,036,123 New York Stock (par value $1.00 Exchange 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 $15,643,136 for Class A Common Stock and $459,640,569 for Common Stock as of February 28, 1997. Documents Incorporated by Reference: 1. Portions of the corporation's definitive Proxy Statement dated on or about April 21, 1997 for a May 21, 1997 Annual Meeting of Stockholders are incorporated by reference in Part III. PART I ITEM 1 - BUSINESS A. O. Smith Corporation, a Delaware corporation organized in 1916, its subsidiaries and its affiliates (hereafter collectively called the "corporation" unless the context otherwise requires) are engaged in three business segments. These segments are Electric Motor Technologies, Water Systems Technologies and Storage & Fluid Handling Technologies. The corporation's Electric Motor Technologies segment produces fractional horsepower and hermetic electric motors. The Water Systems Technologies Segment is a leading manufacturer of residential and commercial gas, oil, and electric water heating systems. Storage & Fluid Handling Technologies manufactures reinforced thermosetting resin piping, agricultural, industrial and municipal liquid and dry bulk storage systems. The corporation is in the process of selling the agricultural portion of this segment. The agricultural business is not considered material. Financial information regarding the corporation's business segments is provided in Note 15 to the Consolidated Financial Statements which appear elsewhere herein. On January 27, 1997 the corporation announced a definitive agreement to sell its Automotive Products Company to Tower Automotive, Inc. The transaction is expected to close early in the second quarter of this year. See Note 2 to the Consolidated Financial Statements, entitled "Discontinued Operations" which appears elsewhere herein. On March 4, 1997, the corporation announced a definitive agreement to acquire UPPCO, Inc., a privately held manufacturer of sub-fractional horsepower electric motors with projected 1997 sales of approximately $80 million. The transaction is expected to close near the end of the first quarter. The following table summarizes sales by segment for the corporation'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) 1996 1995 1994 1993 1992 Electric Motor Technologies $337.1 $317.3 $281.2 $242.6 $225.6 Water Systems Technologies 291.3 276.0 271.5 248.1 215.2 Storage & Fluid Handling Technologies 152.8 103.4 95.3 92.2 71.6 ----- ----- ----- ----- ----- Total Continuing Operations $781.2 $696.7 $648.0 $582.9 $512.4 ====== ====== ====== ====== ====== ELECTRIC MOTOR TECHNOLOGIES The Electric Motor Technologies segment includes the A. O. Smith Electrical Products Company and manufactures fan motors used in furnaces, air conditioners, and blowers, as well as fractional horsepower motors used in other consumer products and jet pump motors sold to manufacturers of home water systems, swimming pools, hot tubs and spas. Hermetic motors are sold worldwide to manufacturers of compressors and are used in air conditioning and refrigeration systems. In addition to selling its products directly to OEMs, the company also markets its products through a distributor network which sells to both OEMs and the related 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. Segment sales increased by $19.8 million or approximately 6 percent in 1996 to $337.1 million and represented 43 percent of total corporation sales. The increased volume resulted from strong market demand for hermetic motors. Sales of the company's hermetic motors totaled $132.9 million, $103.8 million and $79.5 million in 1996, 1995 and 1994, respectively. 1996 sales of hermetic motors were higher as a result of growing worldwide and replacement demand for air conditioning and refrigeration systems. The company's manufacturing operations handled the increased volume without disproportionate increases in costs. Segment sales to York International totaled $91.5 million, $72.5 million and $ 56.3 million in 1996, 1995 and 1994, respectively. The segment's principal products are sold in competitive markets with its major competitors being Emerson Electric, General Electric, Magnetek, Inc., Fasco, and vertically integrated customers. WATER SYSTEMS TECHNOLOGIES The Water Systems Technology segment includes the A. O. Smith Water Products Company which had 1996 sales of $291.3 million, approximately 6 percent higher than 1995 sales of $276.0 million and represented approximately 37 percent of total corporation sales. The company continued to capitalize on its strong wholesale channels to improve market share in the commercial water heater industry. The company markets residential gas and electric water heaters through a network of plumbing wholesalers in the United States. The majority of the company's sales are in the less cyclical replacement market although the new housing market is an important portion of the business as well. Residential sales in 1996 were $172 million or approximately 59 percent of segment revenues. 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 company also markets commercial water heating systems through a network of plumbing wholesalers in the United States and Canada. Commercial water heating systems 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 company estimates that approximately 80 percent of the commercial and residential market is derived from the less cyclical replacement business with the remainder being impacted by general business conditions in the new construction market. In 1995 Water Systems established a joint venture with Nanjing Water Heater Company of China to manufacture instantaneous and storage type heaters for the Chinese market. A.O. Smith is a majority owner of the venture, which began operation in 1996. The principal competitors in the Water Systems segment are Rheem Manufacturing, State Industries, The American Water Heater Group (formerly SABH, Inc.) and Bradford-White. A.O. Smith's Water Systems Technologies segment is the largest manufacturer of commercial water heaters and is a major manufacturer of residential water heaters in the United States. STORAGE & FLUID HANDLING TECHNOLOGIES The Storage & Fluid Handling segment provides world-wide solutions for effectively storing liquids and a wide range of dry materials; as well as high performance piping systems that safely and effectively contain and convey corrosive, abrasive or related materials. 1996 sales of $152.8 million were approximately 48 percent higher than 1995 as a result of the December 1995 acquisition of Peabody TecTank, Inc. (TecTank). Engineered Storage Products Engineered Storage Products manufactures industrial and municipal liquid and dry bulk storage products marketed by A. O. Smith Harvestore Products, Inc. (Harvestore), and TecTank. 1996 sales were $94.2 million compared with 1995 sales of $44.8 million. The increase in sales is attributable to the full year consolidation of TecTank. Harvestore's and TecTank's products are sold in competitive markets that include concrete, site- welded, and bolted tanks. Principal competitors include Columbian Steel Tank Company, Permastore LTD., Pittsburg Tank and Tower Company Inc. and Natgun Corporation. Fiberglass Products Sales of $58.6 million in 1996 were unchanged compared with 1995. Sales to petroleum production markets were higher in 1996 but were offset by a decline in sales to the service station market. Fiberglass Products manufactures reinforced thermosetting resin piping and fittings used to carry corrosive materials. Typical applications include chemical and industrial plant piping, oil field piping, and underground distribution at gasoline service stations. Fiberglass Products also manufactures high pressure fiberglass piping systems used in the petroleum production industry. Products are sold through a network of distributors. Fiberglass Products has formed a joint venture with Harbin Composites Corporation of Harbin, China to supply fiberglass pipe to the Chinese oil industry. The company is a majority owner of the new venture, which began production in 1996. The company's principal products are sold in competitive markets with its major competitors being Ameron Corporation, Fibercast Company, Environ Corporation, and Total Containment Corporation. RAW MATERIAL Raw materials for the corporation's operations, which consist primarily of steel, copper, and aluminum, are generally available from several sources in adequate quantities. SEASONALITY There is no significant seasonal pattern to the corporation's consolidated quarterly sales and earnings. RESEARCH AND DEVELOPMENT, PATENTS AND TRADEMARKS In order to improve competitiveness by generating new products and processes, the corporation conducts research and development at its Corporate Technology Center in Milwaukee, Wisconsin as well as at its operating unit locations. Total expenditures for research and development in 1996, 1995, and 1994 were approximately $17.3 million, $15.0 million, and $13.5 million, respectively. The corporation owns and uses in its businesses various trademarks, trade names, patents, trade secrets, and licenses. While a number of these are important to the corporation, it does not consider a material part of its business to be dependent on any one of them. EMPLOYEES The corporation and its subsidiaries employed approximately 7,700 persons in its continuing operations as of December 31, 1996. BACKLOG Normally, none of the corporation's operations sustain significant backlogs. ENVIRONMENTAL LAWS The corporation'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 corporation. See Item 3. FOREIGN SALES Total export sales of continuing operations from the U.S. were $52 million, $49 million, and $32 million in 1996, 1995, and 1994, respectively. The increase in sales of continuing operations from 1995 to 1996 was largely attributable to Storage & Fluid Handling, somewhat offset by decreased exports by Electric Motor Technologies. The amount of sales and operating profit derived from, or the assets attributable to, sales outside the North American geographic area are not a substantial portion of total corporation operations. ITEM 2 - PROPERTIES The corporation manufactures its products in 29 locations worldwide. These facilities have an aggregate floor space of approximately 4,323,000 square feet, consisting of approximately 2,999,000 square feet owned by the corporation and 1,324,000 square feet of leased space. Fourteen of the corporation's facilities are foreign plants including affiliates and joint ventures with approximately 1,279,000 square feet of space, of which approximately 551,000 square feet are leased. Excluded from the above totals are approximately 5,391,000 square feet of domestic and 790,000 square feet of foreign floor space occupied by the corporation's Automotive Products business which the corporation has reached a definitive agreement to sell. The manufacturing plants presently operated by the corporation's continuing operations are listed below by industry segment. United States Foreign Electric Motor Mebane, NC; Mt. Sterling, KY; Bray, Ireland; Technologies Tipp City, OH; Upper Sandusky, OH Acuna, Mexico; (1,641,000 sq. ft.) Juarez, Mexico(5); Monterrey, Mexico Water Systems Florence, KY; McBee, SC; Stratford, Canada(2); Technologies El Paso, TX; Seattle, WA Juarez, Mexico; (1,552,000 sq. ft.) Veldhoven, The Netherlands; Nanjing, People's Rep. of China Storage & Fluid Little Rock, AR(2); Bakersfield, Harbin, People's Handling CA; DeKalb IL; Parsons, KS; Republic of China Technologies Wichita, KS; Winchester, TN (1,130,000 sq. ft.) The principal equipment at the corporation's facilities consist of presses, welding, machining, slitting and other metal fabricating equipment, winding machines, and furnace and painting equipment. The corporation regards its plant and equipment as well-maintained and adequate for its needs. Multishift operations are used where necessary. ITEM 3 - LEGAL PROCEEDINGS The corporation 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 corporation believes these unresolved legal actions will not have a material effect on its financial position or results of operations. A more detailed discussion of these matters appears in Note 14 of the Notes to Consolidated Financial Statements. 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 1996. EXECUTIVE OFFICERS OF THE CORPORATION Pursuant to General Instruction of G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the corporation's Proxy Statement for its 1997 Annual Meeting of Stockholders. ROBERT J. O'TOOLE Chairman of the Board of Directors, President, and Chief Executive Officer Mr. O'Toole, 56, 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 corporation in 1963. He is a director of Firstar Bank Milwaukee, N.A. GLEN R. BOMBERGER Executive Vice President, Chief Financial Officer, and Director Mr. Bomberger, 59, has been a director and executive vice president and chief financial officer of the corporation since 1986. He is a member of the Investment Policy Committee of the board of directors. Mr. Bomberger joined the corporation in 1960. He is currently a director and vice president-finance of Smith Investment Company. He is a director of Portico Funds, Inc. JOHN A. BERTRAND President - A. O. Smith Electrical Products Company Mr. Bertrand, 58, has been president of A. O. Smith Electrical Products Company, a division of the corporation, since 1986. Mr. Bertrand joined the corporation in 1960. CHARLES J. BISHOP Vice President - Corporate Technology Dr. Bishop, 55, has been vice president-corporate technology since 1985. Dr. Bishop joined the corporation in 1981. MICHAEL J. COLE Vice President - Asia Mr. Cole, 53, was elected vice president-Asia in March 1996. Previously he was vice president-emerging markets of Donnelly Corporation, an automotive supplier. JOHN R. FARRIS President - A. O. Smith Harvestore Products, Inc. and Peabody TecTank, Inc. Mr. Farris, 47, was elected president of A. O. Smith Harvestore Products, Inc. in November 1996. Since 1987 he has been president of Peabody TecTank, Inc. which was acquired in December 1995. DONALD M. HEINRICH Vice President - Business Development Mr. Heinrich, 44, was elected vice president-business development in October 1992. Previously, from 1990 to 1992, he was president of DM Heinrich & Co., a financial advisory firm. From 1983 to 1990, he was senior vice president of Shearson Lehman Brothers, an investment banking firm. WILLIAM R. HENNIG President - A. O. Smith Water Products Company Mr. Hennig, 49, became the president of A. O. Smith Water Products Company, a division of the corporation, in June 1996. He served as vice president of A. O. Smith Electrical Products Company's Juarez Operations since January 1993 and held other management positions in the Electrical Products Company. He joined the corporation in 1989. JOHN J. KITA Vice President, Treasurer and Controller Mr. Kita, 41, was elected vice president, treasurer and controller on April 4, 1996. From 1995 to 1996 he was treasurer and controller. Prior thereto, he served as assistant treasurer since he joined the corporation in 1988. RONALD E. MASSA President - A. O. Smith Automotive Products Company Mr. Massa, 47, became the president of A. O. Smith Automotive Products Company, a division of the corporation, in June 1996. He served as the president of A. O. Smith Water Products Company since 1995 and has held other management positions in the Water Products Company. He joined the corporation in 1976. ALBERT E. MEDICE Vice President - Europe Mr. Medice, 54, was elected vice president - Europe in February 1995. Previously, from 1990 to 1995, he was the general manager of A. O. Smith Electric Motors (Ireland) Ltd., a subsidiary of the corporation. Mr. Medice joined the corporation 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, 56, has been vice president - human resources and public affairs for the corporation since 1986. He joined the corporation in 1970. W. DAVID ROMOSER Vice President, General Counsel and Secretary Mr. Romoser, 53, was elected vice president, general counsel and secretary in March 1992. Prior thereto, he was vice president, general counsel, and secretary from 1988 to 1992 and general counsel and secretary from 1982 to 1988 of Amsted Industries Incorporated, a manufacturer of railroad, building and construction and industrial products. WILLIAM V. WATERS President - Smith Fiberglass Products Inc. Mr. Waters, 62, has been president of Smith Fiberglass Products Inc., a subsidiary of the corporation, since 1988. He joined the corporation in 1960. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. The Class A Common Stock of A. O. Smith Corporation is listed on the American Stock Exchange. As of December 14, 1994, the Common Stock began trading on the New York Stock Exchange. The symbols for these classes of the corporation's stock are: SMCA for the Class A Common Stock and AOS for the Common Stock. Firstar Trust Company, P. O. Box 2077, Milwaukee, Wisconsin 53201 serves as the registrar, stock transfer agent, and the dividend reinvestment agent for both classes of the corporation's common stock. Quarterly Common Stock Price Range 1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Class A Common High 25-3/4 27-1/2 25-1/8 33 Low 20-1/2 22-3/4 21-1/2 24-1/8 Common Stock High 25-1/2 27-7/8 25-3/8 33 Low 20-7/8 22-5/8 21-5/8 24 1995 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Class A Common High 24-3/8 24-7/8 28-7/8 27-1/4 Low 19-3/8 22-1/8 23-3/4 20-1/8 Common Stock High 24-5/8 24-7/8 28-5/8 25-7/8 Low 19-1/8 21-7/8 23-5/8 19-1/8 (b) Holders. As of January 31, 1997, the number of shareholders of record of Class A Common Stock and Common Stock were 634 and 1279, respectively. (c) Dividends. Dividends paid on the common stock are shown in Note 16 to the Consolidated Financial Statements appearing elsewhere herein. The corporation's 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 $125.6 million were unrestricted as of December 31, 1996. (d) Stock Repurchase Authority. On January 27, 1997, the corporation's Board of Directors authorized the repurchase of up to three million shares of its outstanding Class A and Common Stock. As of February 28, 1997, 1,150,700 shares had been repurchased for approximately $38.4 million. ITEM 6 - SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REVIEW A. O. Smith Corporation recorded earnings from continuing operations of $25.2 million or $1.21 per share in 1996 versus $24.0 million or $1.15 per share in 1995. Earnings from discontinued operations added $40.2 million to the corporation's net earnings in 1996 compared to $37.4 million in 1995, providing the corporation with total net earnings of $65.4 million and $61.4 million in 1996 and 1995, respectively. As a result, earnings per share totaled $3.13 in 1996 versus $2.94 in 1995. Two segments, Electric Motor Technologies and Water Systems Technologies, established new sales and earnings records in 1996. Details of individual segment performance will be discussed later in this section. Working capital for continuing operations at December 31, 1996 was $87.0 million compared to $112.7 million and $118.1 million at December 31, 1995 and 1994, respectively. Lower accounts receivable and production-related increases in trade payables resulted in lower working capital at December 31, 1996 versus 1995. Sales-related increases in accounts receivable were more than offset by related increases in trade payables, resulting in lower working capital in 1995 versus 1994. Capital expenditures for continuing operations were $37.8 million in 1996 compared to $26.9 million in 1995 and $18.1 million in 1994. The increases in capital expenditures are primarily attributed to new equipment for the hermetic HVAC motor operations of the Electric Motor Technologies business. The corporation expects that cash flow from operations will adequately cover 1997 capital expenditures. The corporation established two joint ventures for continuing operations in the People's Republic of China in the fourth quarter of 1995. The corporation invested $15.1 million in these joint ventures during 1996 compared to $3.4 million in 1995. Long-term debt increased $47.5 million from $190.9 million at the end of 1995 to $238.4 million at the end of 1996. The majority of the increase was due to capital expenditures and investments in a joint venture associated with discontinued operations. The corporation's leverage, as measured by total debt to total capital, increased to 37.1% at the end of 1996 compared to 34.5% at the end of 1995. On January 27, 1997, the corporation reached a definitive agreement to sell its automotive products business. The sale price of the transaction, which excludes the sale of the corporation's investment in its Mexican affiliate, is approximately $625 million, subject to final adjustment. The corporation expects to pay approximately $100 million in taxes on this transaction. Closing is expected to occur early in the second quarter. The proceeds of the sale will be used to pay down existing debt to approximately $100 million, repurchase stock and make acquisitions in its three core businesses. On January 27, 1997, the corporation's Board of Directors authorized the repurchase of up to three million shares of its outstanding class A and common stock. As of February 28, 1997, 1,150,700 shares had been purchased for approximately $38.4 million. In June 1996, the corporation's multi-year revolving credit agreement was increased to $210 million and extended to June 30, 2001. The amended agreement carries lower fees and lower borrowing costs. The corporation uses futures contracts to fix the cost of portions of its expected raw materials needs, primarily for copper and aluminum, with the objective of reducing risk due to market price fluctuations. In addition, the corporation enters into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on its income. Differences between the corporation's fixed price and current market prices on raw materials contracts are included as part of inventory cost when the contracts mature. Differences between the corporation's fixed price and current market prices on currency contracts are recognized in the same period in which gains or losses from the transactions being hedged are recognized and, accordingly, no net gain or loss is realized when contracts mature. The corporation does not engage in speculation in its derivatives strategies. The effect of these programs was not material to the results of operations for 1996, 1995, or 1994. At its April 4, 1996 meeting, A. O. Smith Corporation's Board of Directors increased the regular quarterly dividend by 13 percent to $.17 per share on its common stocks (Class A and Common). The last three quarterly dividend payments in 1996 were paid at this rate, resulting in a total of $.66 per share being paid versus $.58 per share in 1995. A. O. Smith Corporation has paid dividends on its common stock for 57 consecutive years. Results of Operations Sales from continuing operations in 1996 were $781.2 million surpassing 1995 sales of $696.7 by 12.1 percent. Sales in 1994 were $648 million. Despite a slow start, 1996 proved to be another solid year as each of the corporation's operating companies increased its sales over the prior year. The most significant sales improvement occurred in the corporation's Storage & Fluid Handling Technologies segment as a result of the TecTank acquisition made in December of 1995. This subsidiary which manufactures bolted steel tanks and shop-welded steel, stainless steel and aluminum tanks provided approximately $50 million of the year-to-year increase in sales. The corporation's larger two segments, Electric Motor Technologies and Water Systems Technologies each reflected sales increases over the prior year of approximately six percent. On January 27,1997, the corporation announced it had reached a definitive agreement with Tower Automotive Inc. to sell all the assets of Automotive Products Company (APC) excluding the investment in its Mexican affiliate, Metalsa, S. A. , which is expected to be sold within one year. Due to the pending sale, APC and Metalsa have been accorded discontinued operations treatment in the accompanying financial statements. Sales in 1996 including APC's sales of $863 million amounted to $1.64 billion, an increase over 1995 of 6.5 percent. The corporation's gross profit margin for continuing operations in 1996 was 21.4 percent, compared with 20.3 percent in 1995 and 19.7 percent in 1994. The favorable trend in margins was due largely to the higher manufacturing volumes, increased capacity utilization and improved operating efficiencies in the Electric Motor Technologies segment. The gross margin for the Water Systems Technologies segment also reflected improvement over the prior two years as a result of higher volume in 1996 which more than offset the unfavorable impact of industry-wide pricing pressures which were prevalent throughout the first half of the year. Partially offsetting the favorable trend in the corporation's overall margin was a deterioration in the Storage & Fluid Handling Technologies margin. This deterioration resulted from declining volumes for the relatively higher margin fiberglass pipe produced for the service station market by the Smith Fiberglass subsidiary. Sales for the Electric Motor Technologies segment in 1996 increased almost $20 million or 6.2 percent to a record $337.1 million from 1995 sales of $317.3 million. Sales in 1994 were $281.2 million. Demand for hermetic motor products associated with the heating, ventilating and air conditioning (HVAC) industry provided most of the increase in sales over the past two years. The replacement market for air conditioning equipment was responsible for much of the growth in the hermetic motor business as a growing percentage of the existing unitary air conditioning equipment in the marketplace is at or near the end of its life cycle. In addition, the use of new refrigerants and higher efficiency compressors has combined to encourage the replacement of older commercial air conditioning and refrigeration installations. Continued growth in exports of compressors by the company's customers also bolstered hermetic volume. Earnings for the Electric Motor Technologies segment in 1996 were $42.7 million or 34 percent higher than the $31.9 million earned in 1995. Earnings in 1994 were $23.4 million. While increased volume was one of the major factors responsible for the significant improvement in earnings over the past three years, other factors were also important. Commencing in 1993 the company began concentrating production in its lower cost facilities while making significant capital investments in new equipment. These factors enabled this segment to efficiently handle higher manufacturing volumes while continuing to improve productivity. Sales for the Water Systems Technologies segment were $291.3 million in 1996 increasing 5.5 percent from $276 million in 1995 and establishing a record for the fifth consecutive year. Sales in 1994 were $271.5 million. The record sales in 1996 were achieved through domestic growth in both the residential and commercial water heater market. The company's residential volume increase corresponded to the growth in the overall domestic market which experienced growth of approximately 5.6 percent in 1996. The strong domestic economy and an active construction market resulted in commercial water heater unit volume increasing in excess of six percent in 1996. While the domestic market expanded in 1996, economic weakness in Europe and Canada resulted in lower sales in both of these markets compared to the prior year. Segment sales in 1995 demonstrated only a slight increase from 1994 due to an announced price increase effective as of January 1, 1995. The price increase caused a shift in demand to the fourth quarter of 1994 thereby reducing demand in 1995. Although Water Systems Technologies sales increased 5.5 percent in 1996, the earnings increase was minimal, increasing from $32.2 million in 1995 to $32.8 million in 1996. 1994 earnings were $30.1 million. In 1996, the earnings contribution from higher sales was offset by higher selling expense as well as transition costs associated with moving to an outside sales organization. Earnings increased seven percent from 1994 to 1995 despite only a 1.7 percent increase in sales. 1995 earnings benefited from increased volume of higher margin commercial product which more than offset the adverse impact of lower volume and pricing for residential water heaters. The corporation's Storage & Fluid Handling Technologies segment is a combination of two business units, Engineered Storage Products and Fiberglass Products. Total sales for this segment reflected a $49.4 million increase over 1995 sales of $103.4 million. This increase was directly attributable to the aforementioned acquisition of TecTank which was completed in December of 1995. Sales in 1994 were $95.3 million. Total earnings for this segment declined from $12.6 million in 1994 to $11.0 million in 1995 and rose slightly in 1996 to $11.1 million. The decline in earnings from 1994 to 1995 was due to lower earnings at Fiberglass Products. In 1996, the addition of TecTank's earnings compensated for a further decline in earnings at Fiberglass Products. The corporation continued to liquidate the portfolio of AgriStor Credit Corporation in 1996. The net operating results of this finance subsidiary are no longer integrated as part of the business segments of the corporation and are included in general corporate expense with interest expense consolidated with the corporation's total interest expense. Interest costs and administrative expenses have declined throughout the liquidation process and are not significant to the total corporation's performance. Selling, general, and administrative (SG & A) expense for the corporation in 1996 was $107.4 million compared to $91.4 million and $88.5 million in 1995 and 1994, respectively. Approximately one third of the increase from 1995 to 1996 was attributable to the consolidation of SG & A associated with the acquisition of TecTank. Other major reasons for the increase in 1996 include increased commissions and other expenses in support of additional sales volume as well as costs incurred relative to establishing joint venture operations in China. As a percent of sales, SG & A was 13.7 percent in 1996, 13.1 percent in 1995 and 13.7 percent in 1994. Interest expense, net of the amount allocated to discontinued operations was $8.1 million in 1996 compared to $7.6 million and $8.0 million in 1995 and 1994, respectively. Interest expense was allocated to discontinued operations based on the ratio of net assets discontinued to total consolidated net assets of the corporation. Interest expense before allocation to APC rose throughout the three year reporting period. This upward trend in interest expense before allocation was a function of increasing interest rates and rising debt levels to support aggressive capital spending programs at APC. Since APC's assets represented a greater proportion of the corporation's total net assets each year due to its capital spending program, their allocated interest expense increased each year. Earnings from continuing operations were $25.2 million or $1.21 per share in 1996 compared to $24.0 million or $1.15 per share in 1995. 1996 earnings demonstrated improvement over 1995 despite nearly $4.0 million of losses and other administrative costs to establish the corporation's joint ventures in China. The corporation earned $17.1 million or $.82 per share in 1994. Outlook The corporation projects sales growth from continuing operations before acquisitions to range between five and ten percent compared with 1996. The corporation's Electric Motor Technologies segment expects to benefit from continued strong growth in the heating, ventilating, air conditioning and refrigeration (HVAC&R) market as well as improved demand in its General Industries business unit. Water Systems is projecting continued penetration of the commercial water heater market as well as stronger market growth for residential water heaters. The Storage & Fluid Handling segment expects to benefit from increased capital spending for industrial storage products as well as increased demand for chemical and industrial pipe. OTHER MATTERS Environmental The corporation'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 corporation or third parties. The corporation has expended substantial financial and managerial resources complying with such laws. However, expenditures related to environmental matters were not material in 1996 and are not expected to be material in any single year. Although the corporation believes that its operations are in substantial 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, since the corporation's competitors are governed by the same laws, the corporation should not be placed in a competitive disadvantage. Forward Looking Statements Certain statements in this report are forward-looking statements. Although the corporation 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 corporation's financial goals will be realized. Although a significant portion of the corporation's sales are derived from the replacement of previously installed product and such sales are therefore less volatile, numerous factors may affect the corporation's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the corporation. Among such numerous factors the corporation includes the continued strong growth of the worldwide heating, ventilating and air conditioning market, the stability of the pricing environment for residential water heaters and the successful implementation of the corporation's joint venture strategies in China. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements: Form 10-K Page Number Report of Independent Auditors ......................... 18 Consolidated Balance Sheet at December 31, 1996 and 1995 19 For each of the three years in the period ended December 31, 1996: - Consolidated Statement of Earnings and Retained Earnings .......................... 20 - Consolidated Statement of Cash Flows ............ 21 Notes to Consolidated Financial Statements ........... 22-40 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders A. O. Smith Corporation We have audited the accompanying consolidated balance sheet of A. O. Smith Corporation as of December 31, 1996 and 1995 and the related consolidated statements of earnings and retained earnings and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index in Item 14(a). These financial statements and schedule are the responsibility of the corporation'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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statement taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Milwaukee, Wisconsin January 16, 1997, except for Note 2 as to which the date is January 27, 1997 CONSOLIDATED BALANCE SHEET December 31 (dollars in thousands) Assets 1996 1995 Current Assets Cash and cash equivalents $ 6,405 $ 4,807 Receivables 121,571 135,515 Inventories 80,445 74,955 Deferred income taxes 12,416 9,842 Other current assets 4,537 8,707 Net current assets - discontinued operations 13,836 23,881 -------- -------- Total Current Assets 239,210 257,707 Net property, plant, and equipment 182,600 161,876 Investments in and advances to joint ventures 14,579 3,528 Other assets 90,945 97,322 Net long-term assets - discontinued operations 357,654 245,220 -------- -------- Total Assets $884,988 $765,653 ======== ======== Liabilities Current Liabilities Trade payables $ 82,952 $ 71,613 Accrued payroll and benefits 25,653 22,028 Accrued liabilities 8,937 12,379 Income taxes 1,351 2,303 Product warranty 7,563 7,837 Long-term debt due within one year 11,932 4,933 -------- -------- Total Current Liabilities 138,388 121,093 Long-term debt 238,446 190,938 Product warranty 17,109 16,658 Deferred income taxes 31,271 32,042 Other liabilities 35,135 32,558 -------- -------- Total Liabilities 460,349 393,289 Commitments and contingencies (notes 8 and 14) Stockholders' Equity Preferred Stock -- -- Class A Common Stock (shares issued 5,846,158 and 5,888,601) 29,231 29,443 Common Stock (shares issued 15,853,492 and 15,811,049) 15,853 15,811 Capital in excess of par value 69,410 68,871 Retained earnings 325,361 273,751 Cumulative foreign currency translation adjustments (7,401) (7,499) Treasury stock at cost (7,815) (8,013) -------- -------- Total Stockholders' Equity 424,639 372,364 -------- -------- Total Liabilities and Stockholders' Equity $884,988 $765,653 ======== ======== See accompanying notes which are an integral part of these statements. CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS Years ended December 31 (dollars in thousands, except per share amounts) Earnings 1996 1995 1994 Continuing Net sales $781,193 $696,700 $648,004 Cost of products sold 614,218 555,578 520,589 -------- -------- -------- Gross profit 166,975 141,122 127,415 Selling, general, and administrative expenses 107,350 91,398 88,521 Interest expense 8,114 7,616 7,953 Other expense - net 5,288 4,688 4,243 -------- -------- -------- 46,223 37,420 26,698 Provision for income taxes 17,080 13,425 9,632 -------- -------- -------- Earnings before equity in loss of joint ventures 29,143 23,995 17,066 Equity in loss of joint ventures (3,894) -- -- -------- -------- -------- Earnings from Continuing Operations 25,249 23,995 17,066 Discontinued Earnings from operations less related income tax provisions (1996 - $19,988; 1995 - $22,048; and 1994 - $25,075) 40,168 37,418 40,281 -------- -------- -------- Net Earnings 65,417 61,413 57,347 Retained Earnings Balance at beginning of year 273,751 224,467 177,543 Cash dividends on common stock (13,807) (12,129) (10,423) -------- -------- -------- Balance at End of Year $325,361 $273,751 $224,467 ======== ======== ======== Per Share of Common Stock Continuing Operations $1.21 $1.15 $ .82 Discontinued Operations 1.92 1.79 1.93 ----- ----- ----- Net Earnings $3.13 $2.94 $2.75 ===== ===== ===== See accompanying notes which are an integral part of these statements. CONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31 (dollars in thousands) 1996 1995 1994 Cash Flow from Operating Activities Continuing Net earnings $ 25,249 $ 23,995 $ 17,066 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 22,577 21,703 21,726 Deferred income taxes (3,345) 9,587 15,196 Equity in loss of joint ventures 3,894 -- -- Net change in current assets and liabilities 23,228 (1,854) (11,127) Net change in other noncurrent assets and liabilities 3,830 1,438 5,757 Other 4,263 2,642 8,017 -------- -------- -------- Cash Provided by Operating Activities 79,696 57,511 56,635 -------- -------- -------- Investing Activities Capital expenditures (37,804) (26,851) (18,117) Purchase of subsidiary (1,111) (18,000) -- Investment in joint ventures (15,147) (3,404) -- Other (2,567) (406) (382) -------- -------- -------- Cash Used by Investing Activities (56,629) (48,661) (18,499) -------- -------- -------- Cash Flow from Continuing Operations before Financing Activities 23,067 8,850 38,136 Discontinued Cash provided by operating activities 114,380 59,427 62,838 Cash used by investing activities (177,116) (82,461) (66,254) -------- -------- -------- Cash Flow Used by Discontinued Operations before Financing Activities (62,736) (23,034) (3,416) Cash Flow from Financing Activities Long-term debt incurred 58,507 65,000 -- Long-term debt retired (4,000) (42,510) (31,610) Net proceeds from common stock and option activity 539 49 1,764 Tax benefit from exercise of stock options 28 96 2,132 Dividends paid (13,807) (12,129) (10,423) -------- -------- -------- Cash Provided (Used) by Financing Activities 41,267 10,506 (38,137) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,598 (3,678) (3,417) Cash and cash equivalents-- beginning of year 4,807 8,485 11,902 -------- -------- -------- Cash and Cash Equivalents-- End of Year $ 6,405 $ 4,807 $ 8,485 ======== ======== ======== See accompanying notes which are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Significant Accounting Policies Organization. A.O. Smith Corporation is a diversified manufacturer serving customers world-wide. The corporation's major product lines include: fractional horsepower and hermetic electric motors; residential and commercial water heaters; fiberglass piping systems and water, waste water, and dry storage tanks. The corporation's products are marketed primarily in North America. Original equipment manufacturers are the largest customers of the electrical products unit. Water heaters are distributed principally through a diverse network of plumbing wholesalers. 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. The corporation's storage tanks and handling systems are sold through a network of dealers to municipalities, industrial concerns, and farmers. As discussed in Note 2, the operations of the automotive products business are classified as discontinued operations. Consolidation and basis of presentation. The consolidated financial statements include the accounts of the corporation and its wholly-owned subsidiaries. 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 financial statements and accompanying notes. Actual results could differ from those estimates. Fair values. The carrying amounts of cash and cash equivalents, accounts receivable and payable, and long-term borrowings approximated fair value as of December 31, 1996 and 1995. Foreign currency translation. For all subsidiaries outside the United States with the exception of entities in Mexico, the corporation 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 weighted average exchange rates are used for revenues and expenses. 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. Inventory valuation. Inventories are carried at lower of cost or market. Cost is determined on the last-in, first-out (LIFO) method for a significant portion of domestic inventories. Inventories of foreign subsidiaries and supplies are determined using the first-in, first-out (FIFO) method. Derivative instruments. The corporation enters into futures contracts to fix the cost of certain raw material purchases, principally copper and aluminum, with the objective of minimizing cost risk due to market fluctuations. Any differences between the corporation's fixed price and current market prices are included as part of the inventory cost when the contracts mature. As of December 31, 1996, the corporation had contracts covering the majority of its expected copper and aluminum requirements for 1997, with varying maturities in 1997, the longest duration of which is December 1997. 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, 1996. As a result of having various foreign operations, the corporation is exposed to the effect of foreign currency rate fluctuations on the U.S. dollar value of its foreign subsidiaries. Further, the corporation and its subsidiaries conduct business in various foreign currencies. To minimize the effect of fluctuating foreign currencies on its income, the corporation 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 corporation's exposures. The corporation 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 corporation's forward exchange contracts. December 31 (dollars in thousands) 1996 1995 Buy Sell Buy Sell U.S. dollars 2,200 2,000 $ 3,102 $ -- British pounds 5,153 -- 4,659 -- French franc -- 756 -- 1,483 German deutsche mark -- 1,500 -- 3,208 Italian lira -- -- -- 992 Mexican peso 21,950 -- 3,808 -- ------- ------ ------- ------ Total $29,303 $4,256 $11,569 $5,683 ======= ====== ======= ====== The contracts in place at December 31, 1996 and 1995 amounted to approximately 62 and 40 percent, respectively, of the corporation's anticipated subsequent year exposure for those currencies hedged. Property, plant, and equipment. Property, plant, and equipment are stated at cost. Depreciation is computed primarily by the straight-line method. Revenue recognition. The corporation recognizes revenue upon shipment of product to the customer. Research and development. Research and development costs are charged to expense as incurred for continuing operations and amounted to approximately $17.3, $15.0, and $13.5 million during 1996, 1995, and 1994, respectively. Environmental remediation costs. The corporation accrues for losses associated with environmental obligations when such losses are probable and reasonably estimable. Costs of 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 deemed probable. The accruals are adjusted as further information develops or circumstances change. Earnings per share of common stock. Earnings per common share are computed using the weighted average number of shares outstanding during the year. The effect of shares issuable under stock compensation plans is not significant. Reclassifications. Certain prior year amounts have been reclassified to conform to the 1996 presentation. 2. Discontinued Operations On January 27, 1997, the corporation reached a definitive agreement to sell its automotive products business. The sale price of the transaction, which excludes the sale of the corporation's Mexican affiliate, is approximately $625 million, subject to final adjustment. Closing is expected to occur early in the second quarter of 1997. The corporation also intends to sell its interest in its Mexican affiliate, which had been accounted for under the equity method. The results of the automotive businesses have been reported separately as discontinued operations. Prior year consolidated financial statements have been restated to present the automotive businesses as discontinued. The components of the net assets of discontinued operations included in the consolidated balance sheets are as follows: December 31 (dollars in thousands) 1996 1995 Current assets Receivables $ 19,718 $ 43,552 Inventories 32,882 28,459 Customer tooling 54,368 31,105 Other current assets 16,711 13,320 Less current liabilities Trade payables 61,261 41,033 Accrued payroll and benefits 26,984 25,735 Other current liabilities 21,598 25,787 -------- -------- Net current assets $ 13,836 $ 23,881 ======== ======== Long-term assets Investments in affiliated companies $ 48,454 $ 25,203 Deferred model change 24,181 25,246 Net property, plant, and equipment 365,785 274,658 Other assets 18,005 8,848 Less long-term liabilities Deferred income taxes 39,095 31,197 Postretirement benefit obligation 59,676 57,538 -------- -------- Net long-term assets $357,654 $245,220 ======== ======== The condensed statement of earnings of the discontinued operations is presented below. Years ended December 31 (dollars in thousands) 1996 1995 1994 Net sales $862,977 $845,305 $722,718 Cost of products sold 787,380 766,013 641,507 -------- -------- -------- Gross profit 75,597 79,292 81,211 Selling, general, and administrative expenses 18,231 18,855 16,925 Interest expense 6,974 5,477 4,133 Other income - net (210) (1,142) (3,652) -------- -------- -------- 50,602 56,102 63,805 Provision for income taxes 19,988 22,048 25,075 -------- -------- -------- Earnings before equity in earnings of affiliated company 30,614 34,054 38,730 Equity in earnings of affiliated company 9,554 3,364 1,551 -------- -------- -------- Net earnings $ 40,168 $ 37,418 $ 40,281 ======== ======== ======== Certain expenses have been allocated to the discontinued operations, including interest expense, which was allocated based on the ratio of net assets discontinued to the total consolidated net assets of the corporation. The cash flow used by discontinued operations is as follows: Years ended December 31 (dollars in thousands) 1996 1995 1994 Earnings $ 40,168 $ 37,418 $ 40,281 Adjustments to reconcile earnings to net cash provided by discontinued operating activities: Depreciation 40,848 33,998 27,434 Deferred model change and software amortization 10,939 10,775 7,699 Deferred income taxes 7,898 5,400 (900) Equity in earnings of affiliate, net of dividends (6,170) (3,364) (751) Net change in current assets and liabilities 7,621 (25,231) (18,288) Net change in noncurrent assets and liabilities 14,743 3,585 7,644 Other (1,667) (3,154) (281) -------- -------- -------- Cash provided by discontinued operating activities 114,380 59,427 62,838 Cash used by discontinued investing activities (177,116) (82,461) (66,254) -------- -------- -------- Cash flow used by discontinued operations $ (62,736) $ (23,034) $ (3,416) ========= ========= ======== In 1995, because the Mexican affiliate's sales, financing, and certain costs were primarily U.S. dollar denominated, the corporation changed the functional currency for foreign currency translation purposes from the Mexican peso to the U.S. dollar. In 1994, due to the decline in the value of the Mexican peso, the corporation recorded as a component of stockholders' equity, translation adjustments of approximately $7.5 million. During 1996 and 1994, the corporation received dividends of $2.9 and $.8 million, respectively, from the affiliate. 3. Acquisition On December 6, 1995, the corporation acquired the stock of Peabody TecTank Inc. (TecTank), a manufacturer of environmental bulk storage tanks, for approximately $19.1 million, which included a final purchase price adjustment of $1.1 million in 1996. The transaction was accounted for as a purchase and the consolidated financial statements include the results of TecTank from the date of acquisition. The purchase price has been allocated to the assets purchased and the liabilities assumed based upon the respective fair values at the date of acquisition. The excess of the purchase price over the fair values of net assets acquired has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. The proforma effect of this acquisition would not be significant to either 1995 or 1994 operating results. 4. Statement of Cash Flows For purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents include investments with original maturities of three months or less. Supplemental cash flow information is as follows: Years ended December 31 (dollars in thousands) 1996 1995 1994 Change in current assets and liabilities: Receivables $ 13,589 $ (10,904) $ (8,657) Inventories (5,491) 6,292 (3,209) Other current assets 434 (432) 762 Trade payables 12,451 2,728 6,053 Accrued liabilities, payroll, and benefits (539) 4,851 (3,020) Current income tax accounts-net 2,784 (4,389) (3,056) -------- -------- -------- $ 23,228 $ (1,854) $(11,127) ======== ========= ======== 5. Inventories December 31 (dollars in thousands) 1996 1995 Finished products $ 51,706 $ 46,909 Work in process 19,593 20,333 Raw materials 37,594 37,037 Supplies 1,368 1,073 ------- ------- 110,261 105,352 Allowance to state inventories at LIFO cost 29,816 30,397 ------- ------- $ 80,445 $ 74,955 ======== ======== 6. Investments in Joint Ventures In the fourth quarter of 1995, the corporation established two joint ventures in the Peoples Republic of China, which are part of continuing operations and are accounted for under the equity method. The corporation holds a majority interest in each. The corporation also initiated a third joint venture in 1995 which will be sold with the automotive products company. 7. Property, Plant, and Equipment December 31 (dollars in thousands) 1996 1995 Land $ 3,957 $ 3,957 Buildings 80,376 78,755 Equipment 322,683 286,913 ------- ------- 407,016 369,625 Less accumulated depreciation 224,416 207,749 ------- ------- $182,600 $161,876 ======== ======== 8. Long-Term Debt and Lease Commitments December 31 (dollars in thousands) 1996 1995 Bank credit lines, average year-end interest rate of 6.2% for 1996 and 6.6% for 1995 $ 51,257 $ 8,135 Commercial paper, average year-end interest rate of 5.6% for 1996 and 5.9% for 1995 59,814 43,345 8.75% notes, payable annually through 1997 3,550 7,125 Long-term notes, expiring through November 2000 average year-end interest rate of 6.1% for 1996 and 6.3% for 1995 17,500 17,500 Long-term notes, expiring through 2010, average year-end interest rate of 7.0% for 1996 and 1995 90,000 90,000 Other notes, expiring through 2012, average year-end interest rate of 6.6% for 1996 and 6.8% for 1995 28,257 29,766 ------- ------- 250,378 195,871 Less amount due within one year 11,932 4,933 ------- ------- $238,446 $190,938 ======== ======== In June 1996, the corporation's multi-year revolving credit agreement with a group of ten banks was increased from $160 million to $210 million and extended to June 30, 2001. The amended agreement carries lower fees and borrowing costs. During 1995, the corporation borrowed $5 million with a five year term from one of the banks. At its option, the corporation maintains either cash balances or pays fees for bank credit and services. In 1995, the corporation entered into two loan facilities with insurance companies totaling $125 million. Through December 31, 1996, the corporation had drawn down, under terms ranging from ten to fifteen years, $45 million under these facilities. The corporation's credit agreement and term loans contain certain conditions and provisions which restrict the corporation's payment of dividends. Under the most restrictive of these provisions, retained earnings of $125.6 million were unrestricted as of December 31, 1996. Borrowings under the bank credit lines and in the commercial paper market are supported by the revolving credit agreement and accordingly have been classified as long-term. It has been the corporation's practice to renew or replace the 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, 1996, is as follows: 1997--$11.9; 1998--$12.2; 1999--$8.1; 2000--$9.9; 2001--$12.1 million. Under an agreement, the corporation sold at face value certain automotive related receivables without recourse totaling $50 million at December 31, 1996, compared to $41.0 million at December 31, 1995. Future minimum payments under noncancelable operating leases from continuing operations total $37.9 million and are due as follows: 1997-- $7.6; 1998--$6.9; 1999--$5.3; 2000--$5.1; 2001--$7.7; thereafter--$5.3 million. Rent expense for continuing operations, including payments under operating leases, was $12.1, $10.3, and $9.5 million in 1996, 1995, and 1994, respectively. Interest paid by the corporation, was $15.1, $13.1, and $13.3 million in 1996, 1995, and 1994, respectively. 9. Stockholders' Equity On April 5, 1995, the corporation's stockholders approved an increase in the authorized shares of Class A Common Stock $5 par value from 7 million shares to 14 million shares and in the authorized shares of Common Stock $1 par value from 24 million shares to 60 million shares. 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. As of December 31, 1996, there are also 3 million shares of preferred stock $1 par value authorized. During 1996, 1995, and 1994, 42,443, 146,940, and 49,304 shares of Class A Common Stock were converted into Common Stock, respectively. Regular dividends paid on the Class A Common and Common Stock amounted to $.66, $.58, and $.50 per share in 1996, 1995, and 1994, respectively. Changes in certain components of stockholders' equity are as follows: Class A Capital in Treasury Stock Common Common Excess of (dollars in thousands) Stock Stock Par Value Shares Amount Balance at December 31, 1993 $ 30,424 $15,615 $ 65,950 1,012,784 $9,920 Conversion of Class A Common Stock (246) 49 197 -- -- Exercise of stock options (net of 4,845 shares surrendered as stock option proceeds) -- -- (70) (218,755) (1,835) Tax benefit from exercise of stock options -- -- 2,132 -- -- -------- ------- ------- ------- ------- Balance at December 31, 1994 30,178 15,664 68,209 794,029 8,085 Conversion of Class A Common Stock (735) 147 588 -- -- Exercise of stock options (net of 3,400 shares surrendered as stock option proceeds) -- -- (22) (13,000) (72) Tax benefit from exercise of stock options -- -- 96 -- -- -------- ------- ------- ------- ------- Balance at December 31, 1995 29,443 15,811 68,871 781,029 8,013 Conversion of Class A Common Stock (212) 42 170 -- -- Exercise of stock options -- -- 341 (21,900) (198) Tax benefit from exercise of stock options -- -- 28 -- -- -------- ------- ------- ------- ------- Balance at December 31, 1996 $ 29,231 $15,853 $69,410 759,129 $ 7,815 ======== ======= ======= ======= ======= At December 31, 1996, 3,460 and 755,669 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock. 10. Stock Options During 1990, the corporation adopted a Long-Term Executive Incentive Compensation Plan (1990 Plan) which initially reserved 1 million shares of Common Stock for granting of nonqualified and incentive stock options. In April 1994, stockholders approved a proposal to reserve an additional 1 million shares of Common Stock for the 1990 plan. In addition, the corporation has a Long-Term Executive Incentive Compensation Plan (1980 Plan) which has terminated except as to outstanding options. Options under both plans 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, 1996, 1995, and 1994 was 264,400, 470,500, and 659,600 respectively. Changes in option shares (all Common Stock) were as follows: Weighted Average Per Share Exercise Years Ended December 31 Price-1996 1996 1995 1994 Outstanding at beginning $17.20 1,124,600 963,600 1,009,800 of year Granted 24.61 1996--$24.50 to $27.00 206,100 per share 1995--$23.13 and $25.00 189,100 per share 1994--$21.56 and $25.81 177,400 per share Exercised 24.62 1996--$8.44 to $27.50 (21,900) per share 1995--$7.00 to $8.00 (16,400) per share 1994--$7.00 to $13.00 (223,600) per share Canceled or expired -- -- (11,700) -- ----- --------- --------- ------- Outstanding at End of Year (1996--$7.00 to $27.50 18.24 1,308,800 1,124,600 963,600 per share) Exercisable at End of Year 17.05 1,102,700 935,500 786,200 The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and exercisable at December 31, 1996: Options Options Weighted- Outstanding Weighted Exercisable Weighted Average at Average at Average Remaining Range of December 31, Exercise December 31, Exercise Contractual Exercise 1996 Price 1996 Price Life Prices $7.00 to $8.69 462,200 $ 7.93 462,200 $ 7.93 4 years $13.00 116,800 13.00 116,800 13.00 6 years $21.56 to $27.50 729,800 25.61 523,700 26.00 9 years --------- --------- $7.00 to $27.50 1,308,800 18.24 1,102,700 17.05 7 years ========= ========= Statement of Financial Accounting Standards (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 corporation 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 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. 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 corporation's pro forma net earnings and pro forma net earnings per share would have been as follows: Years ended December 31 (dollars in thousands, except per share amounts) 1996 1995 Net earnings: As reported $65,417 $61,413 Pro forma 64,538 61,220 Net earnings per share: As reported $ 3.13 $ 2.94 Pro forma 3.08 2.93 The pro forma effect on net earnings for 1995 is not representative of the pro forma effect on net earnings in future years because it does not take into consideration pro forma compensation expense related to 1994 grants. The weighted-average fair value per option at the date of grant during 1996 and 1995, using the Black-Scholes option-pricing model, was $7.45 and $7.48, respectively. Assumptions were as follows: 1996 1995 Expected life (years) 4.0 4.0 Risk-free interest rate 6.3% 5.9% Dividend yield 2.1% 2.1% Expected volatility 34.7% 34.7% 11. Retirement Plans The corporation and its domestic subsidiaries provide retirement benefits for all employees. As of December 31, 1995, the corporation merged its various qualified noncontributory defined benefit plans in the United States into one pension plan. Benefits for salaried employees are based on an employee's years of service and compensation. Benefits for hourly employees are generally based on years of service. The corporation's funding policy is to contribute amounts which are actuarially determined to provide sufficient assets to meet future benefit payment requirements consistent with the funding requirements of federal laws and regulations. Plan assets consist primarily of marketable equities and debt securities. The corporation also has several foreign pension plans, none of which are material to the corporation's financial position. The following tables present the components of pension (income) expense, the funded status, and the major assumptions used to determine these amounts for domestic pension plans of continuing operations. Years ended December 31 (dollars in thousands) 1996 1995 1994 Components of pension expense: Service cost-- benefits earned during the year $ 2,815 $ 2,069 $3,030 Interest cost on projected benefit obligation 9,610 9,564 6,513 Return on plan assets: Actual return $(29,013) $(45,164) $ 678 Deferral of investment return in excess of (less than) expected return 10,424 30,187 (13,026) ------ ------- ------- (18,589) (14,977) (12,348) Net amortization and deferral (1,369) (1,258) (1,131) ------- ------- ------- Net periodic pension income $(7,533) $(4,602) $(3,936) ======= ======= ======= December 31 (dollars in thousands) 1996 1995 Actuarial present value of benefit obligations: Vested benefit obligation $367,268 $384,726 ======== ======== Accumulated benefit obligation $422,296 $432,143 ======== ======== Projected benefit obligation $441,766 $450,577 Plan assets at fair value 503,933 462,093 -------- -------- Plan assets in excess of projected benefit obligation 62,167 11,516 Unrecognized net transition asset at January 1, 1986 (4,253) (5,192) Unrecognized net loss (gain) (35,079) 6,310 Prior service cost not yet recognized in periodic pension cost 23,793 29,404 -------- -------- Prepaid pension asset $ 46,628 $ 42,038 ======== ======== Major assumptions at year-end: 1996 1995 1994 Discount rate 8.00% 7.50% 8.50% Rate of increase in compensation level 4.00% 4.00% 4.50% Expected long-term rate of return on assets 10.25% 10.25% 10.25% Net periodic pension 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. Pursuant to the agreement to sell the automotive products operations, the corporation will retain all existing pension assets as well as all liabilities earned through the closing date. The corporation has a defined contribution profit sharing and retirement plan covering salaried nonunion employees which provides for annual corporate contributions of 35 percent to 140 percent of qualifying contributions made by participating employees. The amount of the corporation's contribution in excess of 35 percent is dependent upon the corporation's profitability. The corporation's contribution was $5.3, $5.2, and $5.2 million for 1996, 1995, and 1994, respectively. Postretirement Benefits other than Pensions The corporation has several unfunded defined benefit postretirement plans covering certain hourly and salaried employees which provide medical and life insurance benefits from retirement to age 65. Salaried employees retiring after January 1, 1995 are covered by an unfunded defined contribution plan with benefits based on years of service. Certain hourly employees retiring after January 1, 1996 will be subject to a maximum annual benefit limit. Salaried employees hired after December 31, 1993 are not eligible for postretirement medical benefits. Pursuant to the agreement to sell the automotive products operations, all liabilities for active employees and retirees of these operations will be transferred to the buyer. Net periodic postretirement benefit cost of continuing operations included the following components: Years ended December 31 (dollars in thousands) 1996 1995 1994 Service cost--benefits attributed to employee service during the year $ 298 $ 251 $ 493 Interest cost on accumulated postretirement benefit obligation 1,318 1,335 1,552 Amortization of unrecognized net (gain) loss (117) (103) 522 ------- ------- ------- Net periodic postretirement benefit cost $ 1,499 $ 1,483 $ 2,567 ======= ======= ======= The following table sets forth the plans' status as reflected in the consolidated balance sheet: December 31 (dollars in thousands) 1996 1995 Accumulated postretirement benefit obligation: Retirees $ 8,487 $10,931 Fully eligible active plan participants 331 477 Other active plan participants 6,181 5,798 ------- ------- 14,999 17,206 Unrecognized net gain 3,710 1,864 ------- ------- Accrued postretirement benefit cost $18,709 $19,070 ======= ======= Accrued postretirement benefit cost is included in the consolidated balance sheet in the accounts shown below: December 31 (dollars in thousands) 1996 1995 Accrued liabilities $ 1,709 $ 1,809 Other liabilities 17,000 17,261 ------- ------- Accrued postretirement benefit cost $18,709 $19,070 ======= ======= The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation (APBO) is 6 percent. The weighted average discount rate used in determining the APBO was 8.00 and 7.50 percent at December 31, 1996 and 1995, respectively. If the health care cost trend rate was increased by 1 percent, the APBO at December 31, 1996 would increase by $.7 million and net periodic postretirement benefit cost for 1996 would increase by $.1 million. 12. Income Taxes The components of the provision for income taxes of continuing operations consisted of the following: Years Ended December 31 1996 1995 1994 (dollars in thousands) Current: Federal $13,002 $ 627 $(7,055) State 3,143 1,069 1,271 Foreign 708 1,689 1,490 Deferred 627 11,020 15,469 Business tax credits (400) (980) (1,543) ------- ------- ------ Provision for income taxes $17,080 $13,425 $9,632 ======= ======= ====== The tax provision differs from the statutory U.S. federal rate due to the following items: Years Ended December 31 1996 1995 1994 (dollars in thousands) Provision at federal statutory rate $16,178 $13,097 $ 9,344 Foreign income taxes 5 227 125 State income and franchise taxes 1,581 1,142 1,373 Business and foreign tax credits (400) (1,445) (1,877) Non-deductible items 594 552 542 Foreign sales corporation benefit (959) (278) -- Other 81 130 125 ------- ------- ------ Provision for income taxes $17,080 $13,425 $9,632 ======= ======= ====== The domestic and foreign components of income from continuing operations before income taxes were as follows: Years Ended December 31 1996 1995 1994 (dollars in thousands) Domestic $43,527 $33,457 $22,974 Foreign 2,696 3,963 3,724 ------- ------- ------- $46,223 $37,420 $26,698 ======= ======= ======= Total taxes paid by the corporation including for discontinued operations amounted to $29.9, $25.2, and $21.7 million in 1996, 1995, and 1994, 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, 1996, the undistributed earnings amounted to $15.2 million. It is not practical to determine the income tax liability that would result had such earnings been repatriated. No provision for U.S. income taxes has been made on the cumulative net translation gains and other items of equity investees. At December 31, 1996, the amount of unrecognized U.S. tax liability for the net translation gains and other items totaling $9.9 million amounted to $3.5 million. The approximate tax effects of temporary differences between income tax and financial reporting of continuing operations are as follows: December 31 (dollars in thousands) 1996 1995 Assets Liabilities Assets Liabilities Finance leases $ -- $ (4,354) $ -- $(7,278) Group health insurance and postretirement obligations 9,263 -- 9,600 -- Employee benefits 4,894 (16,939) 3,413 (15,559) Product liability and warranty 8,129 -- 7,472 -- Bad debts 704 -- 1,276 -- Tax over book depreciation -- (15,109) -- (16,182) All other -- (5,443) -- (4,942) ------- -------- ------- -------- $22,990 $(41,845) $21,761 $(43,961) ======= ======== ======= ======== Net liability $(18,855) $(22,200) ========= ======== 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. The balances are as follows: December 31 (dollars in thousands) 1996 1995 Current deferred income tax assets $ 12,416 $ 9,842 Long-term deferred income tax liabilities (31,271) (32,042) -------- -------- Net liability $(18,855) $(22,200) ======== ======== 13. Agricultural Businesses The corporation's strategic plan is to concentrate its resources in nonagricultural businesses and withdraw from the agricultural market. The strategy includes plans to sell the agricultural business and to phase out the related finance operations. It is not possible to predict when the sale of the agricultural business will occur. The corporation is continuing to phase out the finance operations in an orderly manner. AgriStor Credit Corporation (AgriStor), a wholly owned finance subsidiary, was merged into the corporation as of December 31, 1996. The finance operations are no longer deemed to be material, and, accordingly, the accounts related thereto are not presented separately in the consolidated financial statements. Condensed consolidated financial statements of AgriStor are also no longer presented. 14. Litigation and Insurance Matters The corporation 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 corporation 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. A lawsuit for damages and declaratory judgments in the Circuit Court of Milwaukee County, State of Wisconsin, in which the corporation and Harvestore are plaintiffs is pending against three insurance companies for failure to pay in accordance with liability insurance policies issued to the corporation. 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. The court granted the corporation partial summary judgment against two of the insurers and the appellate court accepted an appeal of that ruling. In the interim, discovery is stayed. While the corporation has, in part, assumed applicability of this coverage, an adverse judgment should not be material to its financial condition. As part of its routine business operations, the corporation disposes of and recycles or reclaims certain industrial waste materials, chemicals and solvents at disposal and recycling facilities which are licensed by appropriate federal, state and local agencies and are owned and operated by third parties unrelated to the corporation. In some instances, when those facilities are operated such that hazardous substances contaminate the soil and groundwater, the United States Environmental Protection Agency ("EPA") will designate the contaminated sites as Superfund sites, and will designate those parties which are believed to have contributed hazardous materials to the sites as potentially responsible parties ("PRPs"). Under the Comprehensive Environmental Response, Compensation, and Liability Act (the "Superfund" law) and similar state laws, each PRP that contributed hazardous substances to a Superfund site may be jointly and severally liable for the costs associated with cleaning up the site. Typically, PRPs negotiate with the EPA and those state environmental agencies that are involved in the matter regarding the selection and implementation of a plan to clean up the Superfund site and the terms and conditions under which the PRPs will be involved in the process. PRPs also negotiate with each other regarding allocation of each PRP's share of the clean up costs. One such Superfund site is a former mining site in Colorado. The corporation was a majority owner of a Colorado mining operation for a period of time beginning in 1936 and ending in 1942. Because of that stock ownership, the corporation was notified by the EPA in March, 1993 that it is a PRP at the site. Estimates of clean up costs at this site have been as high as $150,000,000. The corporation believes that a large majority of those costs relate to contamination caused by a corporation that worked the mine in the 1980s. In 1995, the EPA made an offer to negotiate de minimis settlements with each PRP that contributed less than 3% of the hazardous materials to the site. The corporation accepted that offer which has not been finalized, however the corporation continues to maintain that it has valid defenses to any liability at this site. It is impossible at this time to reasonably estimate the corporation's liability at this site, if any. However, it is anticipated that the corporation's liability at the site will not be material because the EPA is treating the corporation as a potential de minimis party. The corporation is currently involved as a PRP in judicial and administrative proceedings initiated on behalf of the EPA seeking to clean up the environment at a total of fifteen Superfund sites and to recover costs it has or will incur as a result of the clean up. Certain state environmental agencies have also asserted claims to recover their clean up costs in some of these actions. Further, a claim has been asserted by the owner of a landfill which has been designated as a Superfund site to recover part of the owner's costs to remediate the site from the corporation and several other parties that are alleged to have contributed materials to the site. The corporation has compiled available information concerning costs associated with remediation at these sites. It is impossible at this time to estimate the total cost of remediation for all of the sites, or the corporation's ultimate share of those costs, for a variety of reasons. Many of the reasons are related to the fact that the sites are in various stages of the remediation process. Of the costs the corporation has been able to identify, the corporation estimates the share for which it is or may be responsible is approximately $7.1 million. The corporation and its insurance companies have paid $6.4 million of that amount and the balance is adequately covered through insurance and reserves established by the corporation. To the best of the corporation's knowledge, the 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. The corporation has self-insured a portion of its product liability loss exposure and other business risks for many years. The corporation has established reserves which it believes are adequate to cover incurred claims. For the year ended December 31, 1996, the corporation had $60 million of third-party product liability insurance for individual losses in excess of $1.5 million and for aggregate losses in excess of $10 million. The corporation reevaluates its exposure on claims periodically and makes adjustments to its reserves as appropriate. 15. Operations by Segment Years ended December 31 (dollars in millions)

(dollars in millions)

16. Quarterly Results of Operations (Unaudited)

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the heading "Election of Directors" in the corporation's definitive Proxy Statement dated on or about April 21, 1997 for the Annual Meeting of Stockholders to be held May 21, 1997 is incorporated herein by reference. The information required regarding Executive Officers of the corporation is included in Part I of this Form 10-K under the caption "Executive Officers of the Corporation." The information included under the heading "Compliance with Section 16(a) of the Securities Exchange Act" in the corporation's definitive Proxy Statement dated on or about April 21, 1997 for the Annual Meeting of Stockholders to be held on May 21, 1997 is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION The information included under the heading "Executive Compensation" in the corporation's definitive Proxy Statement dated on or about April 21, 1997 for the May 21, 1997 Annual Meeting of Stockholders 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 corporation's Proxy Statement dated on or about April 21, 1997 for the May 21, 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the headings "Relationships and Related Transactions" and "Compensation Committee Interlocks and Insider Participation" in the corporation's Proxy Statement dated on or about April 21, 1997 for the May 21, 1997 Annual Meeting of Stockholders is incorporated herein by reference. PART IV 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 Sheet at December 31, 1996 and 1995 ........................................19 For each of the three years in the period ended December 31, 1996: - Consolidated Statement of Earnings and Retained Earnings ..........................20 - Consolidated Statement of Cash Flows.............21 Notes to Consolidated Financial Statement..........22-40 The following consolidated financial statement schedule of A. O. Smith Corporation is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts ........43 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. Financial statements of Metalsa S.A., an affiliate in which the corporation has a 40 percent investment, are omitted since it does not meet the significant subsidiary test of Rule 3-09 of Regulation S-X. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 1996. (c) Exhibits - see the Index to Exhibits on pages 48 - 50 of this report. Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act of 1934, as amended, the corporation 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. 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; and Form S-8 No. 333-05799 filed June 12, 1996. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceedings) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 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 21, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of March 21, 1997 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 Chairman of the Board of Directors, President, and /s/ Robert J. O'Toole Chief Executive Officer Robert J. O'Toole GLEN R. BOMBERGER Executive Vice President, Chief Financial Officer, and /s/ Glen R. Bomberger Director Glen R. Bomberger 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 RUSSELL G. CLEARY, Director /s/ Russell G. Cleary Russell G. Cleary THOMAS I. DOLAN, Director /s/ Thomas I. Dolan Thomas I. Dolan LEE W. JENNINGS, Director /s/ Lee W. Jennings Lee W. Jennings AGNAR PYTTE, Director /s/ Agnar Pytte Agnar Pytte DONALD J. SCHUENKE, Director /s/ Donald J. Schuenke Donald J. Schuenke ARTHUR O. SMITH, Director /s/ Arthur O. Smith Arthur O. Smith BRUCE M. SMITH, Director /s/ Bruce M. Smith Bruce M. Smith A. O. SMITH CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (000 Omitted) Years ended December 31, 1996, 1995, and 1994 Balance at Charged to Balance at Beginning Costs and the End of Description of Year Expenses 1/ Deductions 2/ Year 1996: Valuation allowance for trade and notes receivable $ 4,796 $ 615 $ 1,938 $ 3,473 1995: Valuation allowance for trade and notes receivable 12,475 4,306 11,985 4,796 1994: Valuation allowance for trade and notes receivables 18,550 5,379 11,454 12,475 1/ Provision (credit) based upon estimated collection. 2/ Uncollectible amounts charged against the reserve. INDEX TO EXHIBITS Exhibit Form 10-K Number Description Page Number (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 N/A (3)(ii) By-laws of the corporation as amended February 5, 1990 incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1989 N/A (4) (a) The corporation's outstanding long-term debt is described in Note 8 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 8. (b) Extension and Third Amendment, dated as of June 19, 1996, $210 Million Credit Agreement incorporated by reference to the quarterly report on Form 10-Q for the quarter ended June 30, 1996 N/A (c) A. O. Smith Corporation Restated Certificate of Incorporation as amended April 5, 1995 [incorporated by reference to Exhibit (3)(i) above] N/A (10) Material Contracts (a) 1990 Long-Term Executive Compensation Plan, as amended, incorporated by reference to the Form S-8 Registration Statement filed by the corporation on December 13, 1994 N/A (b) 1980 Long-Term Executive Incentive Compensation Plan incorporated by reference to the corporation's Proxy Statement dated March 1, 1988 for an April 6, 1988 Annual Meeting of Shareholders N/A (c) Executive Incentive Compensation Plan, as amended, incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1992 N/A (d) Letter Agreement dated December 15, 1979, as amended by the Letter Agreement dated November 9, 1981, between the corporation and Thomas I. Dolan incorporated by reference to Amendment No. 2 to the Annual Report on Form 10-K for the year ended December 31, 1984 N/A (e) Supplemental Benefit Plan, as amended, incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1992 N/A (f) Executive Life Insurance Plan, incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1992 N/A (g) 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 N/A (h) Non-employee Directors' Retirement Plan incorporated by reference to the quarterly report on Form 10-Q for the quarter ended June 30, 1991 N/A (21) Subsidiaries 44 (23) Consent of Independent Auditors 45 (24) (a) Power of Attorney - Arthur O. Smith incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1980 N/A (b) Power of Attorney - Tom H. Barrett incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1981 N/A (c) Power of Attorney - Russell G. Cleary incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1984 N/A (d) Power of Attorney - Lee W. Jennings incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1986 N/A (e) Power of Attorney - Donald J. Schuenke incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1988 N/A (f) Power of Attorney - Dr. Agnar Pytte incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1990 N/A (g) Power of Attorney - Thomas I. Dolan incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1992 N/A *(27) (a) Financial Data Schedule (as revised for the period ended December 31, 1994 N/A *(27) (b) Financial Data Schedule (as revised for the period ended March 31, 1995 N/A *(27) (c) Financial Data Schedule (as revised for the period ended June 30, 1995 N/A *(27) (d) Financial Data Schedule (as revised for the period ended September 30, 1995 N/A *(27) (e) Financial Data Schedule (as revised for the period ended December 31, 1995 N/A *(27) (f) Financial Data Schedule (as revised for the period ended March 31, 1996 N/A *(27) (g) Financial Data Schedule (as revised for the period ended June 30, 1996 N/A *(27) (h) Financial Data Schedule (as revised for the period ended September 30, 1996 N/A *(27) (i) Financial Data Schedule for the period ended December 31, 1996 N/A * Filed Herewith N/A = Not Applicable

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 Harvestore Products, Inc. Delaware A. O. Smith International Corporation also d/b/a A. O. Smith Automotive Products Group-Japan Delaware Smith Fiberglass Products Inc. Delaware Peabody TecTank, Inc. Missouri A. O. Smith Export, Ltd. Barbados Claymore Insurance Company, Ltd. Bermuda A. O. Smith do Brasil Industria E Comercio LTDA. Brazil A. O. Smith Enterprises Ltd. also d/b/a A. O. Smith Automotive Products Company-Canada Canada A. O. Smith L'eau Chaude S.a.r.l. France A. O. Smith Electric Motors (Ireland) Ltd. Ireland A. O. Smith Holding (Ireland) Ltd. Ireland Metalsa, S.A. 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 Water Products Company B.V. The Netherlands Changchun A. O. Smith Golden Ring Automotive Products Company Ltd. China Harbin A. O. Smith Fiberglass Products Company Limited (HSF) China Nanjing A. O. Smith Water Heater Co. Ltd. China

EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, 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 and 333-05799) pertaining to the 1980 Long-Term Executive Incentive Compensation Plan and the 1990 Long-Term Executive Incentive Compensation Plan of A. O. Smith Corporation and in the related prospectuses of our report dated January 16, 1997, except for Note 2 as to which the date is January 27, 1997, 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, 1996. Milwaukee, Wisconsin March 24, 1997 ERNST & YOUNG LLP

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1994 DEC-31-1994 8485 0 116387 0 77913 226091 344709 (192830) 660546 112492 166126 0 0 105966 206779 660546 648004 648004 520589 520589 92764 0 7953 26698 9632 17066 40281 0 0 57347 $2.75 $2.75

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 MAR-31-1995 5904 0 133802 0 85771 257822 350330 (197520) 692006 129194 168061 0 0 106044 223086 692006 170486 170486 134927 134927 25175 0 1918 8466 2950 5516 12845 0 0 18361 $0.88 $0.88

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1995 JUN-30-1995 5177 0 124724 0 80713 264398 354829 (201196) 704042 133627 163072 0 0 106043 240121 704042 349141 349141 276750 276750 49780 0 3883 18728 6742 11986 26400 0 0 38386 $1.84 $1.84

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 SEP-30-1995 5373 0 114633 0 74714 241099 359617 (205047) 696261 122221 164058 0 0 106044 244304 696261 513246 513246 408626 408626 72757 0 5749 26114 9660 16454 29387 0 0 45841 $2.19 $2.19

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 DEC-31-1995 4807 0 135515 0 74955 257707 369625 (207749) 765653 121093 190938 0 0 106112 266252 765653 696700 696700 555578 555578 96086 0 7616 37420 13425 23995 37418 0 0 61413 $2.94 $2.94

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 MAR-31-1996 3684 0 150366 0 76126 290754 375481 (211944) 806400 122883 216386 0 0 106112 280151 806400 194791 194791 154370 154370 28919 0 1926 9576 3809 5767 11575 0 0 17342 $0.83 $0.83

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JUN-30-1996 4240 0 152689 0 71981 267079 389502 (214828) 823508 143241 198224 0 0 106147 295410 823508 401259 401259 316174 316174 59133 0 3908 22044 8984 13060 23014 0 0 36074 $1.72 $1.72

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-30-1996 7252 0 124229 0 75455 255205 395739 (219632) 866202 143677 230364 0 0 106147 304396 866202 589379 589379 463672 463672 87375 0 5882 32450 13232 19218 29390 0 0 48608 $2.32 $2.32

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF A.O. SMITH CORPORATION AS OF AND FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 6405 0 121571 0 80445 239210 407016 (224416) 884988 138388 238446 0 0 106679 317960 884988 781193 781193 614218 614218 116532 0 8114 42329 17080 25249 40168 0 0 65417 $3.13 $3.13