SEC Filing | A. O. Smith Corporation

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, 2000 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 [Logo] Delaware 39-0619790 (State of Incorporation) (IRS Employer ID Number) P. O. Box 245008, Milwaukee, Wisconsin 53224-9508 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 March 31, 2000 8,690,125 shares Common Stock Outstanding as of March 31, 2000 14,721,810 shares Exhibit Index Page 14 1

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, 2000 and 1999 3 Condensed Consolidated Balance Sheet - March 31, 2000 and December 31, 1999 4 Condensed Consolidated Statement of Cash Flows - Three months ended March 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements - March 31, 2000 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Item 3. Quantitative and Qualitative Disclosure of Market Risk 11 Part II. Other Information Item 1. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Index to Exhibits 14 2

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, 2000 and 1999 (000 omitted except for per share data) (unaudited) Three Months Ended March 31 ------------------------------ 2000 1999 ---------- ---------- Continuing Operations Electric Motor Technologies $ 247,876 $ 147,875 Water Systems Technologies 87,167 81,988 ---------- ---------- NET SALES 335,043 229,863 Cost of products sold 267,648 183,936 ---------- ---------- Gross profit 67,395 45,927 Selling, general and administrative expenses 35,652 23,752 Interest expense 5,431 1,978 Interest income (97) (324) Other expense - net 4,030 1,780 ---------- ---------- 22,379 18,741 Provision for income taxes 8,224 6,789 ---------- ---------- Earnings from Continuing Operations 14,155 11,952 Discontinued Operations (note 4) Earnings (loss) from operations less related income tax (benefit) 2000 - $297, 1999 - ($313) 456 (550) ---------- ---------- Net Earnings 14,611 11,402 ========== ========== Retained Earnings Balance at beginning of period 531,204 499,954 Net Earnings 14,611 11,402 Cash dividends on common shares (2,807) (2,795) ---------- ---------- Balance at End of Period $ 543,008 $ 508,561 ========== ========== Basic Earnings (Loss) per Common Share (note 8) Continuing Operations $0.61 $0.51 Discontinued Operations 0.02 (0.02) ---------- ---------- Net Earnings $0.63 $0.49 ========== ========== Diluted Earnings (Loss) per Common Share (note 8) Continuing Operations $0.60 $0.50 Discontinued Operations 0.02 (0.02) ---------- ---------- Net Earnings $0.62 $0.48 ========== ========== Dividends per Common Share $0.12 $0.12 See accompanying notes to unaudited condensed consolidated financial statements. 3

PART I--FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS A. O. SMITH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2000 and December 31, 1999 (000 omitted) (unaudited) March 31, December 31, 2000 1999 ----------- ------------ Assets Current Assets Cash and cash equivalents (note 2) $ 5,132 $ 14,761 Receivables 224,351 183,442 Inventories (note 5) 170,002 163,443 Deferred income taxes 11,047 11,323 Other current assets 6,550 5,253 Net current assets - discontinued operations (note 4) 16,116 10,405 ----------- ------------ Total Current Assets 433,198 388,627 Property, plant and equipment 527,826 518,741 Less accumulated depreciation 243,610 235,248 ----------- ------------ Net property, plant and equipment 284,216 283,493 Goodwill and other intangibles 249,771 251,085 Other assets 96,200 88,990 Net long-term assets - discontinued operations (note 4) 50,509 51,791 ----------- ------------ Total Assets $1,113,894 $ 1,063,986 =========== ============ Liabilities Current Liabilities Notes payable $ 644 $ - Trade payables 101,346 81,221 Accrued payroll and benefits 28,427 32,272 Accrued liabilities 28,849 27,301 Product warranty 11,020 10,847 Income taxes 8,992 7,170 Long-term debt due within one year 9,629 9,629 ----------- ------------ Total Current Liabilities 188,907 168,440 Long-term debt (note 6) 364,785 351,251 Other liabilities 66,044 64,536 Deferred income taxes 51,966 48,675 ----------- ------------ Total Liabilities 671,702 632,902 Stockholders' Equity Class A common stock, $5 par value: authorized 14,000,000 shares; issued 8,722,720 43,614 43,615 Common stock, $1 par value: authorized 60,000,000 shares; issued 23,826,642 23,827 23,826 Capital in excess of par value 53,212 53,026 Retained earnings (note 6) 543,008 531,204 Accumulated other comprehensive loss (note 7) (4,228) (3,238) Treasury stock at cost (217,241) (217,349) ----------- ------------ Total Stockholders' Equity 442,192 431,084 ----------- ------------ Total Liabilities and Stockholders' Equity $1,113,894 $1,063,986 =========== ============ See accompanying notes to unaudited condensed consolidated financial statements 4

PART I--FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS A. O. SMITH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, 2000 and 1999 (000 omitted) (unaudited) Three Months Ended March 31 ---------------------------- 2000 1999 ---------- ---------- Operating Activities Continuing Earnings from continuing operations $ 14,155 $ 11,952 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation 9,206 6,544 Amortization 2,114 1,302 Net change in current assets and liabilities (25,677) (13,860) Net change in other noncurrent assets and liabilities (3,933) (5,661) Other 414 124 ---------- ---------- Cash Provided by (Used in) Operating Activities (3,721) 401 Investing Activities Capital expenditures (11,660) (8,657) Other (360) (369) ---------- ---------- Cash Used in Investing Activities (12,020) (9,026) ---------- ---------- Cash Used in Operating and Investing Activities (15,741) (8,625) Discontinued Cash Used in Discontinued Operations (5,340) (6,381) Financing Activities Debt incurred 14,178 332 Purchase of treasury stock - (2,691) Net proceeds from common stock and option activity 38 42 Tax benefit from exercise of stock options 43 4 Dividends paid (2,807) (2,795) ---------- ---------- Cash Provided by (Used in) Financing Activities 11,452 (5,108) ---------- ---------- Net decrease in cash and cash equivalents (9,629) (20,114) Cash and cash equivalents-beginning of period (note 2) 14,761 37,666 ---------- ---------- Cash and Cash Equivalents - End of Period $ 5,132 $ 17,552 ========== ========== See accompanying notes to unaudited condensed consolidated financial statements. 5

PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS A. O. SMITH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (unaudited) 1. Basis of Presentation The condensed consolidated 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 a 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, 2000 are not necessarily indicative of the results expected for the full year. The condensed consolidated balance sheet as of December 31, 1999 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 2000 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. Acquisition On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s (MagneTek) domestic electric motor business and six wholly owned foreign subsidiaries for $244.6 million. The purchase price was allocated to the assets acquired and the liabilities assumed based upon current estimates of their respective fair values at the date of acquisition. These estimates may be revised at a later date. In connection with the MagneTek acquisition, the company recorded additional purchase liabilities of $19.4 million which included employee severance and relocation, as well as certain facility exit costs. Costs incurred and charged against the purchase liability totaled $0.8 million for the three-month period ended March 31, 2000. Total costs incurred and charged against the liability from August 2, 1999 to March 31, 2000 totaled $1.8 million. 4. Discontinued Operations In the first quarter, the company decided to divest its fiberglass piping and liquid and dry bulk storage tank businesses. Net sales of these businesses were $28.7 and $27.5 million for the three-month periods ended March 31, 2000 and 1999, respectively. The operating results of the discontinued businesses have been reported separately as discontinued operations in the accompanying financial statements. Certain expenses have been allocated to the discontinued operations, including interest expense, which was 6

allocated based on the ratio of net assets of the discontinued businesses to the total consolidated capital of the company. 5. Inventories (000 omitted) March 31, 2000 Dec. 31, 1999 -------------- ------------- Finished products $ 105,999 $ 99,335 Work in process 39,892 40,197 Raw materials 42,272 41,997 Supplies 1,247 1,322 -------- --------- 189,410 182,851 Allowance to state inventories at LIFO cost 19,408 19,408 -------- --------- $ 170,002 $ 163,443 ======== ========= 6. Long-Term Debt The company's credit agreement and term notes contain certain conditions and provisions which restrict the company's payment of dividends. Under the most restrictive of these provisions, retained earnings of $63.7 million were unrestricted as of March 31, 2000. 7. Comprehensive Earnings (Loss) The company's comprehensive earnings were $13.6 and $10.7 million for the three-month periods ended March 31, 2000 and 1999, respectively. Comprehensive earnings, for all periods presented, were comprised of net earnings and foreign currency translation adjustments. No provisions or benefits for U.S. income taxes have been made on these foreign currency translation adjustments. 7

8. Earnings per Share of Common Stock The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations: Three Months Ended March 31 -------------------------------- 2000 1999 ------------- ------------- Denominator for basic earnings per share - weighted-average shares 23,361,393 23,224,580 Effect of dilutive stock options 336,971 517,766 ------------- ------------- Denominator for diluted earnings per share 23,698,364 23,742,346 ============= ============= 9. Operations by Segment (000 omitted) Three Months Ended March 31 -------------------------------- 2000 1999 ------------- ------------- Net Sales Electric Motor Technologies $ 247,876 $ 147,875 Water Systems Technologies 87,167 81,988 ------------- ------------- Net Sales $ 335,043 $ 229,863 ============= ============= Earnings before Interest and Taxes Electric Motor Technologies $ 25,923 $ 18,386 Water Systems Technologies 9,465 8,503 ------------- ------------- Total Segments 35,388 26,889 General Corporate and Research and Development Expenses (7,675) (6,494) Interest Expense - Net (5,334) (1,654) ------------- ------------- Earnings before Income Taxes 22,379 18,741 Provision for Income Taxes (8,224) (6,789) ------------- ------------- Earnings from Continuing Operations $ 14,155 $ 11,952 ============= ============= Intersegment sales, which are immaterial, have been excluded from segment revenues. 8

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 2000 COMPARED TO 1999 Sales from continuing operations in the first quarter of 2000 were $335 million, an increase of $105.1 million or 46% over sales of $229.9 million in the first quarter of 1999. Approximately $90 million of the increase in sales was attributable to the MagneTek motor business acquired in August 1999 with the remaining increase representing growth in the base electric motor and water heater businesses. First quarter earnings from continuing operations of $14.2 million increased $2.2 million or 18.4% over 1999's first quarter continuing earnings of $12 million primarily as a result of the increased sales. First quarter diluted earnings per share for continuing operations were $.60 compared with $.50 for the first quarter of 1999. The company's gross profit margin of 20.1% in the first quarter of 2000 was consistent with the 20% margin achieved in the first quarter of 1999. Slightly lower margins in the electric motor business resulting from the aforementioned acquisition were offset by improved margins in the water heater business. First quarter sales for the Electric Motor Technologies segment were $247.9 million or $100 million higher than the same period last year. Approximately $90 million of the sales growth was attributable to the MagneTek motor business acquisition. Growth in the base motor business was about 7% and resulted from strong customer demand in the heating, ventilating, and air conditioning (HVAC), pump, and garage door opener markets. First quarter operating profits for Electric Motor Technologies increased from $18.4 million in 1999 to $25.9 million in 2000 as a result of the higher volume and improved manufacturing performance throughout the operation. First quarter sales for the Water Systems Technologies segment were $87.2 million or 6.3% higher than 1999 first quarter sales of $82 million. Significant growth in international operations, most notably the water heater business in China where sales nearly tripled over the first quarter of 1999, contributed to the increased volume. Operating profits were $9.5 million in the first quarter of 2000 or 11.3% higher than the $8.5 million generated in the first quarter of 1999 as a result of the higher volume. Selling, general, and administrative (SG&A) expense for the first quarter of 2000 was $35.7 million or $11.9 million higher than the $23.8 million expense in the first quarter of 1999. The majority of the increase was associated with the MagneTek acquisition. Relative to sales, SG&A was 10.6% in the first quarter or slightly higher than the 10.3% in the same period last year. 9

The company recognized net interest expense of $5.3 million in the first quarter of 2000, compared with $1.7 million in the first quarter of 1999. The increased interest expense was due to the MagneTek acquisition. Other expense increased from $1.8 million in the first quarter of 1999 to $4 million in the first quarter of 2000. The largest element of the increase was the amortization of the goodwill associated with the MagneTek acquisition. Additionally, the first quarter of 1999 benefited from certain non-recurring income items. The first quarter effective tax rate of 36.7% in 2000 was up slightly from 36.2% in 1999. In the first quarter the company announced its intent to exit the storage tank and fiberglass pipe markets. As a result of the anticipated sale of these businesses, Smith Fiberglass Products Company and A. O. Smith Engineered Storage Products Company have been classified as discontinued operations in the accompanying financial statements. Sales for these discontinued operations were $28.7 million in the first quarter of 2000 compared with $27.5 million in the same quarter last year. The after-tax profit from the discontinued operations of Engineered Storage Products Company in the first quarter of 2000 was $.5 million compared to $.3 million in 1999. The first quarter after-tax loss of $.6 million in 1999 included both discontinued businesses. During the first quarter of 2000, $1.1 million of after-tax costs, including Smith Fiberglass Products' 2000 first quarter after-tax loss of $.7 million, were charged to the disposition reserves established at December 31, 1999. At March 31, 2000, such reserves were deemed adequate. The company expects its divestitures to be substantially completed by the end of the third quarter of 2000. During the first three months of 2000 and 1999, the company was 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. Gains and losses from the company's futures contracts and forward foreign exchange contracts are offset by gains and losses in the underlying transactions being hedged. Liquidity & Capital Resources The company's working capital was $244.3 million at March 31, 2000, $24.1 million higher than at December 31, 1999. Sales related increases of $40.9 million to accounts receivable were partially offset by increases to accounts payable. Cash used by continuing operations during the first quarter was $15.7 million compared to $8.6 million during the same time period one year ago due to higher working capital requirements. Capital expenditures by continuing operations during the first quarter totaled $11.7 million compared with $8.7 million during the same period in 1999. The majority of the increase in capital spending was related to incremental spending requirements in the MagneTek motor businesses. The company expects higher capital spending in 2000 compared to 1999, but expects such capital expenditures to be covered by operating cash flow. 10

The company's long term debt increased by $13.5 million from $351.3 million at December 31, 1999 to $364.8 million at March 31, 2000. The company's leverage as measured by the ratio of total debt to total capitalization was unchanged from the end of last year at 46%. In connection with the MagneTek acquisition in 1999, additional purchase liabilities of $19.4 million were recorded which included employee severance and relocation, as well as certain facility exit costs. Costs incurred and charged against the purchase liabilities totaled $.8 million and $1.8 million during the first quarter and since the acquisition, respectively. At its April 6, 2000 meeting, A. O. Smith's Board of Directors declared a regular quarterly dividend of $.12 per share on its common stock (Class A Common and Common). The dividend is payable on May 15, 2000 to shareholders of record April 28, 2000. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK As is more fully described in the company's annual report on Form 10-K for the year ended December 31, 1999, the company is exposed to various types of market risks, primarily currency and certain commodities. The company monitors its risks in such areas on a continuous basis and, generally enters into futures contracts to minimize such exposures for periods of less than one year. The company does not engage in speculation in its derivatives strategies. There have been no material changes in the company's futures contracts since December 31, 1999. Forward Looking Statements Certain statements in this report are "forward-looking statements." These forward-looking statements can generally be identified as such because the context of the statement will include words such as the company "believes," "anticipates," "expects," "projects," or words of similar import. 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 cause results to differ materially from those expressed in forward-looking statements made by, or on behalf of, the company. The company considers most important among such factors, the stability in its electric motor and water products markets, the timely and proper integration of the MagneTek motors acquisition, and the implementation of associated cost reduction programs. All subsequent written and oral forward-looking statements attributable to the company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. 11

PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There have been no material changes in the legal and environmental matters previously reported in Part 1, Item 3 and Note 12 of the Notes to Consolidated Financial Statements in the company's Form 10-K Report for the year ended December 31, 1999, which are 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 None. 12

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 April 19, 2000 /s/ John J. Kita ----------------------------- John J. Kita Vice President, Treasurer and Controller April 19, 2000 /s/ G. R. Bomberger ----------------------------- G. R. Bomberger Executive Vice President and Chief Financial Officer 13

INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- (27) Financial Data Schedule (27-1) Restated Financial Data Schedule 14

5 1,000 3-MOS DEC-31-2000 MAR-31-2000 5,132 0 227,548 (3,197) 170,002 433,198 527,826 243,610 1,113,894 188,907 364,785 67,441 0 0 374,751 1,113,894 335,043 335,043 267,648 267,648 4,030 0 5,431 22,379 8,224 14,155 456 0 0 14,611 0.63 0.62

5 1,000 3-MOS DEC-31-1999 MAR-31-1999 17,552 0 149,802 (1,737) 87,073 286,339 414,227 207,994 764,682 131,144 131,535 67,500 0 0 339,062 764,682 229,863 229,863 183,936 183,936 1,780 0 1,978 18,741 6,789 11,952 (550) 0 0 11,402 0.49 0.48