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, 1998
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, 1998: 5,815,774
Common Stock Outstanding as of April 30, 1998: 9,912,076
Exhibit Index Page 12
Index
A.O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Earnings,
Comprehensive Earnings and Retained Earnings
- Three months ended March 31, 1998 and 1997 3
Condensed Consolidated Balance Sheet
- March 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
- Three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements
- March 31, 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II. Other Information
Item 1. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Index to Exhibits 12
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS,
COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
Three months ended March 31, 1998 and 1997
(000 omitted except for per share data)
(unaudited)
Three Months Ended
March 31
EARNINGS 1998 1997
Electric Motor Technologies $111,839 $ 93,927
Water Systems Technologies 74,554 70,972
Storage & Fluid Handling Technologies 36,562 31,349
-------- --------
NET SALES 222,955 196,248
Cost of products sold 177,186 153,450
-------- --------
Gross profit 45,769 42,798
Selling, general and administrative expenses 27,900 27,393
Interest expense 1,624 2,244
Interest income (1,712) (58)
Other expense - net 722 990
-------- --------
17,235 12,229
Provision for income taxes 6,038 4,391
-------- --------
Earnings before equity in loss of
joint ventures 11,197 7,838
Equity in loss of joint ventures (1,019) (717)
-------- --------
EARNINGS FROM CONTINUING OPERATIONS 10,178 7,121
EARNINGS FROM DISCONTINUED OPERATIONS
(less related income tax provision of $6,324) - 12,790
-------- --------
NET EARNINGS 10,178 19,911
Other comprehensive earnings, net of
income tax (note 5):
Foreign currency translation (less related
income tax benefit 1998 - $123 and
1997 - $204) (189) (312)
-------- --------
COMPREHENSIVE EARNINGS $ 9,989 $ 19,599
======== ========
RETAINED EARNINGS
Balance at beginning of period 466,514 325,361
Net earnings 10,178 19,911
Cash dividends on common shares (2,751) (3,560)
-------- --------
BALANCE AT END OF PERIOD $473,941 $341,712
======== ========
BASIC EARNINGS PER COMMON SHARE
Continuing Operations $ .63 $ .35
Discontinued Operations - .63
-------- --------
NET EARNINGS $ .63 $ .98
======== ========
DILUTED EARNINGS PER COMMON SHARE
Continuing Operations $ .62 $ .34
Discontinued Operations - .62
-------- --------
NET EARNINGS $ .62 $ .96
======== ========
DIVIDENDS PER COMMON SHARE $ .17 $ .17
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, 1998 and December 31, 1997
(000 omitted)
(unaudited)
March 31, December 31,
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 2) $110,287 $145,896
Receivables 144,163 126,232
Inventories (note 3) 79,132 79,049
Deferred income taxes 10,937 11,849
Other current assets 4,511 2,702
-------- --------
TOTAL CURRENT ASSETS 349,030 365,728
Property, plant and equipment 454,745 450,147
Less accumulated depreciation 246,478 242,391
-------- --------
Net property, plant and equipment 208,267 207,756
Investments in and advances
to joint ventures 27,237 25,605
Other assets 67,559 65,644
Goodwill 51,354 51,783
-------- --------
TOTAL ASSETS $703,447 $716,516
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables $ 63,718 $ 61,299
Accrued payroll and benefits 22,683 26,397
Product warranty 8,188 7,972
Accrued income taxes 8,044 6,607
Long-term debt due within one year 5,598 5,590
Other current liabilities 21,850 20,017
-------- --------
TOTAL CURRENT LIABILITIES 130,081 127,882
Long-term debt (note 4) 101,605 100,972
Other liabilities 56,285 59,515
Deferred income taxes 28,650 28,442
STOCKHOLDERS' EQUITY:
Class A common stock, $5 par value:
authorized 14,000,000 shares;
issued 5,838,334 29,192 29,192
Common stock, $1 par value:
authorized 60,000,000 shares;
issued 15,861,316 15,861 15,861
Capital in excess of par value 72,729 72,542
Retained earnings (note 4) 473,941 466,514
Cumulative foreign currency translation
adjustments (note 5) (1,891) (1,579)
Treasury stock at cost (203,006) (182,825)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 386,826 399,705
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $703,447 $716,516
======== ========
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, 1998 and 1997
(000 omitted)
(unaudited)
Three Months Ended
March 31
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES
CONTINUING
Net earnings $ 10,178 $ 7,121
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 6,919 6,126
Deferred income taxes 1,120 (1,235)
Equity in loss of joint ventures 1,019 717
Net change in current assets
and liabilities (15,631) (22,927)
Net change in noncurrent assets
and liabilities (6,423) 4,341
Other 266 130
-------- --------
CASH USED BY OPERATING ACTIVITIES (2,552) (5,727)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (6,942) (11,052)
Capitalized purchased software costs (308) (240)
Investment in joint ventures (2,652) (3,451)
Acquisition of business (net of cash acquired) - (60,443)
-------- --------
CASH USED BY INVESTING ACTIVITIES (9,902) (75,186)
-------- --------
CASH USED BY CONTINUING OPERATIONS
BEFORE FINANCING ACTIVITIES (12,454) (80,913)
DISCONTINUED
Cash used by discontinued operations
before financing activities (814) (112,285)
FINANCING ACTIVITIES
Long-term debt incurred 641 241,940
Long-term debt retired - (4,675)
Purchase of common stock held in treasury (20,231) (46,828)
Proceeds from common stock options exercised - 2,432
Tax benefit from exercise of stock options - 287
Dividends paid (2,751) (3,560)
-------- --------
CASH PROVIDED/(USED) BY FINANCING ACTIVITIES (22,341) 189,596
-------- --------
Net decrease in cash and cash equivalents (35,609) (3,602)
Cash and cash equivalents-beginning of period 145,896 6,405
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $110,287 $ 2,803
======== ========
See accompanying notes to unaudited condensed consolidated financial
statements.
A.O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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, 1998 are not necessarily indicative of
the results expected for the full year. The consolidated balance
sheet as of December 31, 1997 is derived from the audited financial
statements but does not include all disclosures required by generally
accepted accounting principles. Certain prior year amounts have been
reclassified to conform to the 1998 presentation.
2. Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, cash and
cash equivalents include short-term investments held primarily for
cash management purposes. These investments normally mature within
three months from the date of acquisition.
3. Inventories
(000 omitted) March 31, 1998 December 31, 1997
Finished products $ 43,993 $ 45,091
Work in process 18,685 19,656
Raw materials 45,093 42,870
Supplies 1,615 1,634
-------- --------
109,386 109,251
Allowance to state inventories
at LIFO cost 30,254 30,202
-------- --------
$ 79,132 $ 79,049
======== ========
4. Long-Term Debt
The company's long-term credit agreements contain certain conditions
and provisions which restrict the company's payment of dividends.
Under the most restrictive of these provisions, retained earnings of
$68.7 million were unrestricted as of March 31, 1998 for cash
dividends and treasury stock purchases.
5. Comprehensive Earnings
The company has adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income", which establishes
the standards for reporting and displaying comprehensive earnings and
its components as part of a full set of financial statements. The
company's other comprehensive income consists solely of foreign
currency translation adjustments, which is disclosed separately in
the Condensed Consolidated Statement of Earnings, Comprehensive
Earnings, and Retained Earnings, as well as the Stockholders' Equity
section of the Condensed Consolidated Balance Sheet.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST THREE MONTHS OF 1998 COMPARED TO 1997
Sales were $223.0 million in the first quarter of 1998, an increase of
approximately 14% over sales in the first quarter of 1997. Excluding the
sales of UPPCO, the manufacturer of subfractional motors acquired on March
31, 1997, revenues increased $10.0 million or 5% compared with 1997 as a
result of a 5% increase in sales at Water Systems and a 17% increase at
Storage & Fluid Handling.
First quarter earnings of $10.2 million were $3.1 million or 43% higher
than 1997 earnings due to improvements at Storage & Fluid Handling and
Water Systems, as well as higher interest income. On a per share basis,
first quarter diluted earnings increased from $.34 to $.62 per share,
reflecting the improvement in net earnings and the benefit of the
company's continuing share repurchase program.
The company's gross profit margin for the first quarter was 20.5%,
compared with a margin of 21.8% in 1997. Lower margins were primarily due
to lower relative margins at UPPCO and lower pricing in the Electric Motor
Technologies segment.
Sales in the first quarter for Electric Motor Technologies were $111.8
million, or $17.9 million higher than the same period last year.
Excluding UPPCO, sales for the segment were flat compared to the first
quarter of 1997, as increased sales in the pump and international business
units offset a decline in the HVAC and after-market motor businesses.
First quarter operating profits for Electric Motor Technologies were
essentially flat compared to the first quarter of 1997. Earnings on UPPCO
product were offset by lower prices and unfavorable product mix.
Water Systems Technologies sales were $74.6 million in the first quarter
of 1998, or $3.6 million higher than 1997 sales of $71.0 million.
Overall, unit volumes for both residential and commercial water heaters
increased 8% during the quarter. Sales increased 5%, reflecting the
continued difficult pricing environment in the residential water heater
marketplace. First quarter profits for Water Systems Technologies were
modestly higher compared with 1997.
First quarter sales for Storage & Fluid Handling Technologies were $36.6
million or 17% higher than the same period in 1997. Both units in this
segment experienced solid increases in sales, with improvements in dry and
liquid storage tank sales, as well as stronger sales of fiberglass pipe
for petroleum production and service station applications. First quarter
profits were significantly higher than the same period last year as a
result of higher volumes and lower segment selling, general and
administrative (SG&A) expenses.
Overall, SG&A expenses for the first quarter of 1998 were slightly higher
than the same period of 1997. As a percent of sales, SG&A expenses
decreased from 14.0% in 1997 to 12.5% in 1998 as a result of lower
administrative expense at both corporate and operating unit levels.
The company recognized net interest income of $0.1 million in the first
quarter of 1998, compared with net interest expense of $2.2 million in
1997. Investment of the proceeds from the sale of the company's
automotive products division in April 1997 generated $1.7 million of
interest income during the quarter.
The first quarter effective tax rate was 35.0% in 1998, compared with a
rate of 35.9% in 1997. The 1998 rate benefited from the impact of the
company's foreign sales corporation as well as research and development
tax credits.
After-tax equity in losses of the company's Chinese joint ventures was
$1.0 million in the first quarter of 1998, or $0.3 million higher than the
same period in 1997, and is attributable to additional start up costs
associated with the new water heating plant in Nanjing. The company
expects current year losses in this operating unit to be comparable to the
prior year.
During 1997, the Financial Accounting Standards Board issued several
Statements of Financial Accounting Standards ("SFAS") that are effective
for the company in 1998. SFAS No. 130, "Reporting Comprehensive Income"
is effective for the company as of January 1, 1998 and has been
incorporated into the company's financial statements. SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" is
effective for the company for 1998. Neither of the statements will have
any impact on A.O. Smith Corporation's results of operations, financial
position or cash flows.
During the first three months of 1998, the company was a party to futures
contracts for the purposes of hedging a portion of certain raw material
purchases. The company 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 company would not have been materially affected.
Liquidity & Capital Resources
The company's working capital was $218.9 million at March 31, 1998
compared with $237.8 million at December 31, 1997, a decline of $18.9
million. The reduction was primarily attributable to cash and cash
equivalents which were $35.6 million lower at March 31, 1998 than at year
end 1997. The decline in cash was primarily the result of stock
repurchases in the amount of $20.2 million and a $17.9 million sales-
related increase in accounts receivable. Cash flow from operations was
$68.5 million higher than the same period last year primarily due to the
$60 million acquisition of UPPCO in the first quarter of 1997 and lower
capital expenditures during the first three months of this year compared
with last year.
Capital expenditures during the first quarter totaled $6.9 million
compared with $11.1 million during the same period last year. The company
expects lower capital spending in 1998 compared with 1997, and expects
such capital expenditures to be covered by 1998 operating cash flow.
The company repurchased 478,300 shares of its common stock during the
first quarter of 1998 under the company's ongoing stock repurchase
program. Since the program's inception in January of 1997, approximately
5.3 million shares have been repurchased. As of the end of the first
quarter, $37.2 million remained of the $50 million authorization granted
in December of 1997.
At its April 9, 1998 meeting, A. O. Smith's Board of Directors declared a
regular quarterly dividend at $.17 per share on its common stock (Classes
A and Common). The dividend is payable on May 15, 1998 to shareholders of
record April 30, 1998.
Forward Looking Statements
Certain statements in this report are forward-looking statements.
Although the company believes that its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business,
there can be no assurance that its financial goals will be realized.
Although a significant portion of the company's sales are derived from the
replacement of previously installed product and such sales are therefore
less volatile, numerous factors may affect actual results and may cause
results to differ materially from those expressed in forward-looking
statements made by or on behalf of the company. Among such numerous
factors the company includes the continued 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 company's joint venture strategies in China.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The company 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 company believes these unresolved legal actions will not
have a material effect on its financial position or results of operations.
There have been no material changes in the environmental matters
previously reported in Part 1, Item 3 and Note 12 of the Notes to
Consolidated Financial Statements in the company's annual report on
Form 10-K Report for the year ended December 31, 1997, which is
incorporated herein by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27.1) Financial Data Schedule
(27.2) Restated Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the company in the first quarter
of 1998.
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 11, 1998 /s/John J. Kita
John J. Kita
Vice President,
Treasurer and Controller
May 11, 1998 /s/G. R. Bomberger
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number Description
(27.1) Financial Data Schedule
(27.2) Restated Financial Data Schedule
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
3,907
106,380
144,163
0
79,132
349,030
454,745
(246,478)
703,447
130,081
101,605
0
0
45,053
341,773
703,447
222,955
222,955
177,186
177,186
26,910
0
1,624
17,235
6,038
10,178
0
0
0
10,178
0.63
0.62
5
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
2,803
0
140,304
0
89,566
342,418
420,598
(228,473)
1,077,380
119,832
479,396
0
0
45,060
351,305
1,077,380
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
0.96
