SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-475
A.O. SMITH CORPORATION
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 23972, Milwaukee, Wisconsin 53223-0972
Telephone: (414) 359-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Class A Common Stock Outstanding as of April 30, 1997: 5,835,398
Common Stock Outstanding as of April 30, 1997: 13,212,148
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings and Retained Earnings
- Three months ended March 31, 1997 and 1996 3
Condensed Consolidated Balance Sheet
- March 31, 1997 and December 31, 1996 4-5
Condensed Consolidated Statements of Cash Flows
- Three months ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements
- March 31, 1997 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Index to Exhibits 16
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
AND RETAINED EARNINGS
Three months ended March 31, 1997 and 1996
(000 omitted except for per share data)
(Unaudited)
Three Months Ended
March 31
EARNINGS 1997 1996
Electric Motor Technologies $ 93,927 $ 92,301
Water Systems Technologies 70,972 68,531
Storage & Fluid Handling Technologies 31,349 33,959
--------- ---------
NET SALES 196,248 194,791
Cost of products sold 153,450 154,371
--------- ---------
Gross profit 42,798 40,420
Selling, general and administrative
expenses 27,393 27,174
Interest expense 2,244 1,926
Other expense - net 932 1,338
--------- ---------
12,229 9,982
Provision for income taxes 4,391 3,809
--------- ---------
Earnings before equity in loss of joint
ventures 7,838 6,173
Equity in loss of joint ventures (717) (406)
--------- ---------
EARNINGS FROM CONTINUING OPERATIONS 7,121 5,767
EARNINGS FROM DISCONTINUED OPERATIONS
[Less related income tax provisions
(1997-$6,324; 1996-$6,380)] (note 2) 12,790 11,575
--------- ---------
NET EARNINGS 19,911 17,342
RETAINED EARNINGS
Balance at beginning of period 325,361 273,751
Cash dividends on common shares (3,560) (3,138)
--------- ---------
BALANCE AT END OF PERIOD $ 341,712 $ 287,955
========= =========
NET EARNINGS PER COMMON SHARE
Continuing Operations $ .35 $ .28
Discontinued Operations $ .63 $ .55
------ -------
NET EARNINGS $ .98 $ .83
====== =======
DIVIDENDS PER COMMON SHARE $ .17 $ .15
See accompanying notes to unaudited condensed consolidated financial
statements.
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1997 and December 31, 1996
(000 omitted)
(unaudited)
ASSETS March 31, December 31,
1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 2,803 $ 6,405
Receivables 140,304 121,571
Inventories (note 3) 89,566 80,445
Deferred income taxes 12,562 12,416
Other current assets 6,552 4,537
Net current assets-discontinued
operations 104,761 13,836
------- -------
TOTAL CURRENT ASSETS 356,548 239,210
Investments in and advances to joint
ventures 17,312 14,579
Other assets 136,029 90,945
Property, plant and equipment 420,598 407,016
Less accumulated depreciation 228,473 224,416
------- -------
Net property, plant and equipment 192,125 182,600
Net long-term assets - discontinued
operations 389,495 357,654
--------- ---------
TOTAL ASSETS $ 1,091,509 $ 884,988
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term debt $ 376,325 $ -
Trade payables 76,830 82,952
Accrued payroll and benefits 18,742 25,653
Long-term debt due within one year 8,247 11,932
Other current liabilities 30,142 17,851
------- -------
TOTAL CURRENT LIABILITIES 510,286 138,388
Long-term debt (note 4) 103,071 238,446
Other liabilities 34,739 35,244
Deferred income taxes 30,182 31,271
Postretirement benefit obligation 16,866 17,000
STOCKHOLDERS' EQUITY:
Class A common stock, $5 par value:
authorized 14,000,000 shares; issued
5,839,958 and 5,846,158 29,200 29,231
Common stock, $1 par value: authorized
60,000,000 shares; issued 15,859,692 and
15,853,492 15,860 15,853
Capital in excess of par value 71,290 69,410
Retained earnings (note 4) 341,712 325,361
Cumulative foreign currency translation
adjustments (7,917) (7,401)
Treasury stock at cost (53,780) (7,815)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 396,365 424,639
-------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,091,509 $ 884,988
========= ==========
See accompanying notes to unaudited condensed consolidated financial
statements.
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O.SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, 1997 and 1996
(000 omitted)
(unaudited)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
CONTINUING
Net earnings $ 7,121 $ 5,767
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 5,774 5,632
Deferred income taxes (1,235) (1,881)
Equity in loss of joint ventures 717 406
Net change in current assets and
liabilities (25,431) (7,736)
Net change in noncurrent assets and
liabilities 4,041 1,961
Other - net 1,727 566
------- -------
CASH PROVIDED/(USED) BY OPERATING
ACTIVITIES (7,286) 4,715
------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (11,052) (7,245)
Capitalized purchased software costs (240) (522)
Investment in joint ventures (4,201) (1,357)
Acquisition of business (net of cash
acquired) (60,443) (1,111)
-------- --------
CASH USED BY INVESTING ACTIVITIES (75,936) (10,235)
-------- --------
CASH FLOW FROM CONTINUING OPERATIONS
BEFORE FINANCING ACTIVITIES (83,222) (5,520)
DISCONTINUED
Cash provided/(used) by operating
activities (67,234) 4,509
Cash used by investing activities (42,742) (22,476)
-------- ---------
CASH FLOW FROM DISCONTINUED OPERATIONS
BEFORE FINANCING ACTIVITIES (109,976) (17,967)
CASH FLOW FROM FINANCING ACTIVITIES
Debt incurred 241,940 29,152
Debt retired (4,675) (3,650)
Purchase of common stock held in treasury (46,828) --
Proceeds from common stock options
exercised 2,432 --
Tax benefit from exercise of stock options 287 --
Dividends paid (3,560) (3,138)
------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 189,596 22,364
Net decrease in cash and cash equivalents (3,602) (1,123)
Cash and cash equivalents-beginning of
period 6,405 4,807
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,803 $ 3,684
======== ========
See accompanying notes to unaudited condensed consolidated financial
statements.
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
1. Basis of Presentation
The financial statements presented herein are based on interim
figures and are subject to audit. In the opinion of management, all
adjustments consisting of normal accruals considered necessary for
fair presentation of the results of operations and of financial
position have been made. The results of operations for the three-
month period ended March 31, 1997 are not necessarily indicative of
the results expected for the full year. The consolidated balance
sheet as of December 31, 1996 is derived from the audited financial
statements but does not include all disclosures required by generally
accepted accounting principles.
2. Discontinued Operations
On January 27, 1997, the corporation reached a definitive agreement
with Tower Automotive, Inc. regarding the sale of A. O. Smith's
automotive products business. On April 18, 1997 the corporation
closed on this transaction receiving gross proceeds of approximately
$725 million, which reflect additional investment and working capital
changes from the initial price of $625 million and is subject to
final adjustment. The transaction excludes the sale of the
corporation's 40% interest in its Mexican automotive affiliate,
Metalsa S.A.
The results of the automotive businesses have been reported
separately as discontinued operations. Prior year consolidated
financial statements have been restated accordingly.
3. Inventories
(000 omitted) March 31, 1997 December 31, 1996
Finished products $ 50,724 $ 51,706
Work in process 18,628 19,593
Raw materials 48,525 3,754
Supplies 1,398 1,368
--------- ---------
119,275 110,261
Allowance to state
inventories at LIFO
cost 29,709 29,816
--------- ---------
$ 89,566 $ 80,445
4. Long-Term Debt
The corporation's long-term credit agreements contain certain
conditions and provisions which restrict the corporation's payment of
dividends. Under the most restrictive of these provisions, retained
earnings of $59.1 million were unrestricted as of March 31, 1997 for
cash dividends and treasury stock purchases.
5. Acquisitions
On March 31, 1997 the corporation acquired the business of UPPCO,
Incorporated, the world's leading manufacturer of subfractional C-
frame electric motors. The purchase price was approximately $60.4
million and the transaction has been accounted for as a purchase.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST THREE MONTHS OF 1997 COMPARED WITH 1996
As a result of significant changes within the automotive supplier
industry, such as the increasing globalization, the drive towards
systemization and the consolidation of the supplier base, the corporation
decided to sell its automotive products business. On April 18, 1997
A. O. Smith sold this business to Tower Automotive, Inc. and received
gross proceeds of approximately $725 million, which reflect additional
investment and working capital changes from the initial price of $625
million and is subject to final adjustment.
The financial results of the automotive business are presented in the
accompanying statements as a discontinued operation. Also included in
discontinued operations is the corporation's 40% interest in its Mexican
automotive affiliate, Metalsa, S. A. Metalsa was not included in the
aforementioned sale to Tower Automotive. The corporation intends to sell
its interest in Metalsa and expects such sale to be completed by the end
of 1997.
Sales from continuing operations in the first quarter of 1997 were $196.2
million, modestly higher than last year's first quarter sales of $194.8
million. A 3.6 percent increase in Water Systems Technologies sales was
offset by a sales decline within the Storage & Fluid Handling Technologies
segment, while sales for Electric Motor Technologies were marginally
higher when comparing the first quarter of 1997 with the same period last
year.
Earnings from continuing operations were $7.1 million or $.35 per share in
the first quarter of 1997, compared with $5.8 million or $.28 per share
reported in the same period last year.
Despite only a modest increase in sales, the corporation's gross profit
margin increased a full percentage point from 20.8 percent in the first
quarter of 1996 to 21.8 percent in 1997. The most significant improvement
in margin occurred within the Water Systems Technologies segment where
favorable pricing resulted in a significant improvement in profit margin
compared with the first quarter of 1996. Last year's lower margins were a
direct result of industry-wide residential price concessions which were
established early in the year and continued through June, 1996. A richer
mix of sales for fiberglass pipe also contributed to a higher overall
margin within the Storage & Fluid Handling segment and more than offset
the decline in margin caused by the lower first quarter sales for
municipal and industrial tanks at Engineered Storage Products.
First quarter sales for Electric Motor Technologies increased from $92.3
million in the first quarter of 1996 to $93.9 million in 1997 as higher
volume in the hermetic motor and general industries market segments offset
a year-over-year decline in the pump motor market. Electric Motor
Technologies first quarter profits were moderately higher than 1996 due
primarily to higher volume.
On March 31, 1997, the corporation purchased the business of UPPCO,
Incorporated, the world's leading manufacturer of subfractional C-frame
motors used in bathroom and range hood fans, microwave and convection
ovens, medical equipment and other related equipment. UPPCO, with plant
locations in Monticello and Paoli, IN., broadens the product offering for
Electric Motor Technologies by moving this segment into markets not
previously served. It is anticipated that UPPCO sales will approximate $60
million for the remaining nine months of 1997 and will be an immediate
contributor to profits.
First quarter sales for Water Systems Technologies were $71.0 million in
1997 or $2.5 million higher than 1996 first quarter sales of $68.5
million. 1997 first quarter profits were significantly higher than
earnings in the same quarter of 1996. Most of the increase in both sales
and earnings was due to the previously discussed improvement in pricing.
First quarter sales for Storage & Fluid Handling Technologies decreased
7.7 percent when compared with the first quarter of 1996. All of the sales
shortfall from the prior year's first quarter was attributable to the
Engineered Storage Products component of this business segment and was
caused by decreased demand for municipal and industrial storage tanks.
Sales of fiberglass pipe were at the same level as in the first quarter of
1996.
1997 first quarter earnings for Storage & Fluid Handling Technologies were
lower than the same period last year. Although sales of fiberglass pipe
were relatively flat with the prior year, a favorable product mix in 1997
resulted in substantial earnings improvement for this element of the
business segment. The lower volumes for municipal and industrial storage
tanks caused a decline in earnings for Engineered Storage Products which
more than offset the favorable effect of the improved margins for
fiberglass pipe.
Selling, general and administrative expenses in the first quarter
reflected only a minimal increase over the same period of 1996 and
remained constant as a percentage of sales for the 1996 and 1997 first
quarters. Interest expense in the first quarter was $.3 million higher
than last year's first quarter due to increased debt levels associated
with the corporation's stock repurchase program. The first quarter
effective tax rate of 35.9 percent was lower than the 38.2 percent rate in
the same period last year due mostly to the recognition of research and
development tax credits in 1997.
Equity in the losses of the corporation's Chinese joint ventures was $.7
million in the first quarter of 1997 compared with a 1996 first quarter
loss of $.4 million. Most of the loss is associated with the Chinese joint
venture established to sell water heating equipment that began operation
in March of 1996. It is anticipated that this operation will continue to
reflect losses in 1997 as start-up costs continue to exceed revenues.
First quarter net earnings from the discontinued automotive business were
$12.8 million and were consistent with previous projections and $1.2
million better than the first quarter of 1996. The sale of the automotive
products business to Tower Automotive, Inc. did not include the
corporation's investment in its Mexican affiliate, Metalsa, which is
expected to be sold prior to year-end. The corporation's net earnings in
the first quarter including those of the discontinued operation, were
$19.9 million or $.98 per share compared with $17.3 million or $.83 per
share in the first quarter of 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. Among other provisions, the dilutive effect of stock
options must be excluded under the new requirements for calculating basic
earnings per share, which will replace primary earnings per share. This
change is not expected to materially impact the corporation's earnings per
share calculations.
During the first three months of 1997, the corporation was a party to
futures contracts for the purposes of hedging a portion of certain raw
material purchases. The corporation was also a party to forward foreign
exchange contracts to hedge foreign currency transactions consistent with
its committed exposures. Had these contracts not been in place, the net
earnings of the corporation would not have been materially affected in the
first quarter of 1997.
Liquidity and Capital Resources
As mentioned earlier, on April 18, 1997, the corporation closed on the
sale of its Automotive Products Company, excluding its investment in its
Mexican affiliate. As a result of this transaction, approximately $100
million in taxes will be owed. A portion of the proceeds of the sale will
be used to pay down existing debt to approximately $100 million. The
corporation plans to use the remaining proceeds to continue to repurchase
stock and make acquisitions in its three core businesses.
At March 31, 1997, the corporation's current liabilities exceeded current
assets by $258.5 million. The significant temporary increase in current
liabilities was a result of the reclassification of long term debt to
short term debt due to the closing of the sale of the automotive business
and the anticipated debt payoff after the sale. After the receipt of the
proceeds, the corporation's working capital was positive.
Cash flow provided by operations was $77.7 million less than the same
period last year primarily due to the acquisition of UPPCO. The
corporation's total debt increased $237.2 million from $250.4 million at
the end of December 1996 to $487.6 million at the end of March 1997. The
acquisition of UPPCO for $60.4 million, the repurchase of 1.4 million
shares totalling $46.8 million, and $110 million for working capital and
capital expenditures associated with discontinued operations all
contributed to the significant increase in the level of debt.
Capital expenditures for continuing operations during the first quarter
were $11.1 million, $3.8 million higher than during the first quarter of
1996. The corporation expects that cash flow from operations will
adequately cover 1997 capital expenditures.
At its April 10, 1997 meeting, A. O. Smith's Board of Directors declared a
regular quarterly dividend of $.17 per share on its common stock (Classes
A and Common). The dividend is payable on May 15, 1997 to shareholders of
record April 30, 1997.
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.
PART II - OTHER INFORMATION
ITEM 1 - 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.
The corporation reported in the environmental matters discussed in Item 3
in the corporation's Form 10-K Report for the period ended December 31,
1996, which is incorporated herein by reference, that it was involved as a
Potentially Responsible Party in judicial and administrative proceedings
initiated on behalf of the United States Environmental Protection Agency
and certain state environmental agencies to clean up the environment at a
total of 15 Superfund sites and to recover costs incurred or to be
incurred as a result of such clean ups. The claims pending against the
corporation in one such judicial proceeding were dismissed at the end of
the first quarter. Except for that matter, there have been no material
changes in the environmental matters that were previously reported in Item
3.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the first
quarter of 1997.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) Asset Purchase Agreement, dated as of January 27, 1997, among
A. O. Smith Corporation, A. O.Smith Enterprises, Ltd., Tower
Automotive Acquisition, Inc., Tower Automotive, Inc. and R. J.
Tower Corporation [incorporated by reference to Exhibit 2.1 of
the Form S-3 Registration Statement of Tower Automotive, Inc.
(Registration No. 333-21943)]. Schedules thereto have not been
filed; the corporation agrees to furnish a supplemental copy
of any omitted schedule to the Commission upon request.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the corporation in the first
quarter of 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A. O. SMITH CORPORATION
May 9, 1997 /s/ John J. Kita
John J. Kita
Vice President,
Treasurer and Controller
May 9, 1997 /s/ G. R. Bomberger
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number Description
(10) Asset Purchase Agreement, dated as of January 27, 1997, among A. O.
Smith Corporation, A. O.Smith Enterprises, Ltd., Tower Automotive
Acquisition, Inc., Tower Automotive, Inc. and R. J. Tower
Corporation [incorporated by reference to Exhibit 2.1 of the Form
S-3 Registration Statement of Tower Automotive, Inc. (Registration
No. 333-21943)]. Schedules thereto have not been filed; the
corporation agrees to furnish a supplemental copy of any omitted
schedule to the Commission upon request.
(27) Financial Data Schedule
5
1,000
3-MOS
DEC-31-1997
MAR-31-1997
2,803
0
140,304
0
89,566
356,548
420,598
(228,473)
1,091,509
133,961
479,396
0
0
62,750
333,795
1,091,509
196,248
196,248
153,450
153,450
28,325
0
2,244
12,229
4,391
7,121
12,790
0
0
19,911
0.98
0.98
