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 September 30, 1995 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 Common Stock Outstanding as of October 31, 1995: 15,027,980 Class A Common Stock Outstanding as of October 31, 1995: 5,885,441 Exhibit Index Page 14
Index A. O. Smith Corporation Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Earnings and Retained Earnings - Nine months ended September 30, 1995 and 1994 3 Condensed Consolidated Balance Sheet - September 30, 1995 and December 31, 1994 4-5 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1995 and 1994 6 Notes to Condensed Consolidated Financial Statements - September 30, 1995 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Part II. Other Information Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Index to Exhibits 14
PART I--FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS A. O. SMITH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS Three and Nine months ended September 30, 1995 and 1994 (000 omitted except for per share data) (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 EARNINGS 1995 1994 1995 1994 Electrical Products Company $ 71,641 $ 70,278 $ 241,457 $ 215,577 Automotive Products Company 189,736 170,666 631,677 538,892 Water Products Company 66,287 64,098 197,237 194,864 Smith Fiberglass Products Inc. 14,680 15,298 43,997 43,855 Agricultural Products 12,019 12,390 32,826 29,537 ------- ------- --------- --------- NET REVENUES 354,363 332,730 1,147,194 1,022,725 Cost of products sold 313,922 286,439 978,302 864,512 ------- ------- --------- --------- Gross profit 40,441 46,291 168,892 158,213 Selling, general and administrative expenses 26,106 27,278 84,383 78,831 Interest expense 3,234 3,136 9,799 9,191 Other expense 20 87 3,151 1,225 ------- ------- --------- --------- 11,081 15,790 71,559 68,966 Provision for income taxes 4,370 6,135 27,520 26,248 ------- ------ -------- ------- Earnings before equity in earnings of affiliated companies 6,711 9,655 44,039 42,718 Equity in earnings of affiliated companies 744 475 1,802 1,076 ------- ------ ------- ------- NET EARNINGS 7,455 10,130 45,841 43,794 ======= ====== ====== ====== RETAINED EARNINGS Balance at beginning of period 256,998 206,219 224,467 177,543 Cash dividends on common shares (3,137) (2,717) (8,992) (7,705) -------- -------- ------- -------- BALANCE AT END OF PERIOD $261,316 $213,632 $261,316 $213,632 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $.15 $.13 $.43 $.37 NET EARNINGS PER COMMON SHARE $.36 $.48 $2.19 $2.10 See accompanying notes to unaudited condensed consolidated financial statements.
A. O. SMITH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1995 and December 31, 1994 (000 omitted) (unaudited) September 30, 1995 December 31, 1994 ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,373 $ 8,485 Trade receivables 152,184 132,630 Finance subsidiary receivables and leases 14,953 16,361 Customer tooling 27,326 24,489 Inventories (note 2) 110,322 110,863 Deferred income taxes 22,955 28,100 Other current assets 14,249 8,592 ------- ------- TOTAL CURRENT ASSETS 347,362 329,520 Investment in and advances to affiliated companies 20,426 17,326 Deferred model change 24,566 18,638 Finance subsidiary receivables and leases 30,914 37,842 Other assets 43,721 42,751 Property, plant and equipment 939,461 881,717 Less accumulated depreciation 516,615 479,937 ------- ------- Net property, plant and equipment 422,846 401,780 ------- ------- TOTAL ASSETS $889,835 $847,857 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables $112,927 $101,153 Accrued payroll and pension 37,853 36,641 Post-retirement benefit obligation 9,439 9,573 Other current liabilities 60,815 61,301 Long-term debt due within one year 3,925 3,775 Finance subsidiary long-term debt due within one year 3,525 3,480 ------- ------- TOTAL CURRENT LIABILITIES 228,484 215,923 Long-term debt (note 3) 140,560 136,769 Finance subsidiary long-term debt 23,498 29,357 Post-retirement benefit obligation 72,188 72,388 Other liabilities 20,106 26,230 Deferred income taxes 54,651 54,445 STOCKHOLDERS' EQUITY: Class A common stock, $5 par value: authorized 14,000,000 shares; issued 5,888,901 and 6,035,641 29,445 30,178 Common stock, $1 par value: authorized 60,000,000 shares; issued 15,810,749 and 15,664,109 15,811 15,664 Capital in excess of par value 68,848 68,209 Retained earnings (note 3) 261,316 224,467 Pension liability adjustment (9,653) (9,653) Cumulative foreign currency translation adjustments (7,359) (8,035) Treasury stock at cost (8,060) (8,085) -------- ------- TOTAL STOCKHOLDERS' EQUITY 350,348 312,745 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $889,835 $847,857 ======== ======== See accompanying notes to unaudited condensed consolidated financial statements.
A. O.SMITH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Nine months ended September 30, 1995 and 1994 (000 omitted) - (unaudited) CASH FLOWS 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 45,841 $43,794 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 41,038 36,948 Deferred income taxes 5,351 6,965 Equity in earnings of affiliates, net of dividends (1,802) (1,076) Deferred model change and software amortization 7,625 6,603 Other - net (759) 3,359 Change in current assets and liabilities: Trade receivables and customer tooling (21,315) (34,159) Current income tax accounts-net (275) (63) Inventories 541 (18,934) Prepaid expenses and other (6,830) (1,363) Trade payables 11,774 15,887 Accrued liabilities, payroll and pension 2,040 (1,727) Net change in non-current assets and liabilities 956 4,638 ------ ------ CASH PROVIDED BY OPERATING ACTIVITIES 84,185 60,872 ------ ------ CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (61,146) (44,123) Other - net (15,363) (971) ------- ------ CASH USED BY INVESTING ACTIVITIES (76,509) (45,094) ------ ------ CASH FLOW BEFORE FINANCING ACTIVITIES 7,676 15,778 ----- ------ CASH FLOW FROM FINANCING ACTIVITIES Long-term debt incurred 15,000 - Long-term debt retired (11,059) (7,613) Finance subsidiary net long-term debt retired (5,814) (9,384) Proceeds from common stock options exercised 90 1,902 Other stock transactions (13) 1,994 Dividends paid (8,992) (7,705) ------ ------ CASH USED BY FINANCING ACTIVITIES (10,788) (20,806) Net decrease in cash and cash equivalents (3,112) (5,028) Cash and cash equivalents-beginning of period 8,485 11,902 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,373 $ 6,874 ======== ========= See accompanying notes to unaudited condensed consolidated financial statements.
A. O. SMITH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 (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 nine-month period ended September 30, 1995 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 1994 is derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. 2. Inventories (000 omitted) September 30, 1995 December 31, 1994 Finished products $ 53,542 $ 55,331 Work in process 50,880 48,886 Raw materials 41,916 41,709 Supplies 9,199 7,457 -------- -------- 155,537 153,383 Allowance to state inventories at LIFO cost 45,215 42,520 -------- ------- $110,322 $110,863 ======== ======== 3. Long-Term Debt The corporation's long-term credit agreements contain certain conditions and provisions which restrict the corporation's payment of dividends. Under the most restrictive of these provisions, retained earnings of $97.1 million were unrestricted as of September 30, 1995 for cash dividends and treasury stock purchases. PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FIRST NINE MONTHS OF 1995 COMPARED TO 1994 Revenues for the first nine months of 1995 were $1.15 billion reflecting an increase of almost $125 million or a 12.2 percent improvement from the $1.02 billion of revenues reported in the first nine months of 1994. Third quarter revenues increased 6.5 percent from $332.7 million in 1994 to a record $354.4 million in 1995. The corporation earned $45.8 million or $2.19 per share for the first nine months of 1995 compared to $43.8 million or $2.10 per share in the first nine months of 1994. Third quarter earnings of $7.5 million or $.36 per share were the second highest in the corporation's history for the quarter and were in line with estimates announced earlier by the corporation. Earnings in the third quarter of 1994 were $10.1 million or $.48 per share. A number of non-recurring factors in the third quarter in 1995 were responsible for the decline in third quarter earnings from 1994. Extremely heavy demand at the Automotive Products Company for light and heavy truck products created unusual pressures particularly at the company's Milwaukee, Wisconsin facilities. The impact of strong demand was accompanied by unprecedented hot weather which created numerous production delays and other operational difficulties. The third quarter gross margin of 11.4 percent was reflective of the aforementioned difficulties and compared to a gross margin of 13.9 percent in last year's third quarter. The gross profit margin through the first nine months of the year declined from 15.5 percent in 1994 to 14.7 percent in 1995 due to production difficulties experienced in the third quarter and higher material costs. The Automotive Products Company sales for the first nine months of 1995 increased by 17.2 percent over the same period of 1994 while third quarter sales exceeded 1994's third quarter by 11.2 percent. Sales in 1995 for both the quarter and first nine months benefitted from strong demand for light and heavy truck products as well as from added volume resulting from new product programs introduced in 1994 and early 1995. Automotive's earnings for the first nine months of 1995 were about equal to 1994's nine month earnings. Third quarter earnings in 1995 reflect a sharp decline from the same period in 1994 and resulted from production schedule complications as previously discussed. Recently, Automotive Products Company announced two positive developments. First, the company established a joint venture agreement with First Auto Works and Golden Lion Group to become the first North American supplier to manufacture automotive structures in China. A. O. Smith owns 60 percent of the venture, which is scheduled to begin production of structural components for the Volkswagen Jetta in January of 1997. Second, labor negotiations at the Milwaukee plant were successfully concluded in October with all bargaining units ratifying a new four-year contract. While down somewhat from the second quarter, the corporation's 40 percent owned Mexican affiliate continues to experience improved operating results over the prior year. Export sales and manufacturing costs compare favorably to 1994 reflecting the benefits of the affiliate's realigned operations. Due to the affiliate's current financial position, the recent decline in the value of the peso is not expected to have an adverse effect on operating results. Third quarter sales for the Electrical Products Company were slightly improved over the third quarter of 1994, and year-to-date sales remain substantially higher than the same period last year. Continued strength in the hermetic market and increased export sales during the quarter helped offset minor volume declines in the HVAC and pump markets. Electrical Products third quarter earnings were approximately equal to those of last year's third quarter as the favorable impact of the modest increase in volume was offset by higher material costs. Year-to-date profits remain well ahead of last year's nine months earnings and were consistent with the significant increase in volume. The Water Products Company sales for both the third quarter and first nine months of 1995 surpassed those of the comparable periods last year. The company continues to experience increased domestic commercial water heater demand which more than offset the impact of a slight decline in residential volume, and ongoing sluggishness in the European and Canadian markets. Recently, Water Products obtained a business license for a joint venture in China in which it will be an 80 percent partner. The joint venture with Nanjing Water Heater Company will manufacture instantaneous and storage type water heaters. Third quarter earnings for Water Products were higher than the 1994 third quarter due to increased volume. Profits for the first nine months of the year were only marginally better than those of the first nine months of 1994 reflecting the reduced volume experienced in the first quarter of 1995. Third quarter sales for Smith Fiberglass Products Inc. were lower than the third quarter of 1994 as this subsidiary continues to experience lower demand in its major domestic markets. Sales for the first nine months of the year were unchanged from the same period last year as strong export sales to South American oil fields have helped offset the decline in the domestic markets. Fiberglass Products is a 60 percent partner in a newly formed Chinese joint venture with Harbin Composites Corporation. The business has obtained its license and is scheduled to be in production in early 1996. It will supply fiberglass pipe to the Chinese oil industry. Earnings for both the third quarter and first nine months of 1995 for Smith Fiberglass were lower than the comparable periods in 1994 as a result of the lower margins realized on export sales. The corporation's agricultural operations reflected profits for both the third quarter and first nine months of the year in contrast to losses incurred in the same periods in 1994. Through the first nine months of the year, revenues for A. O. Smith Harvestore Products, Inc. have increased 11 percent over the same period last year as the result of a growing market for municipal/industrial water and waste storage products. The significant increase in sales resulted in a substantial improvement in 1995 year-to-date earnings. The losses incurred by AgriStor Credit Corporation were lower in 1995 than 1994 due mostly to a reduction in costs associated with non-performing lease and retail contracts. Selling, general and administrative expenses for the third quarter of 1995 were $1.2 million less than the same period last year due to the aforementioned reduction in costs associated with non-performing contracts within the AgriStor Credit Corporation portfolio. For the first nine months of 1995, selling, general and administrative expenses reflect a $5.6 million increase over the comparable period in 1994 due to general increases to support the higher sales volumes. Interest expense for the third quarter and year-to-date increased over the same periods in 1994 due to higher interest rates. Other expenses were relatively constant for the third quarters of 1995 and 1994, however the first nine months of 1995 reflects a $1.9 million increase over the same period in 1994. The increase is explained by translation losses, environmental costs and certain non-recurring costs incurred in 1995. The effective tax rates for the third quarter and first nine months of 1995 were slightly higher than the same periods in 1994 due to recognition of research and development tax credits in 1994. During the first nine months of 1995, the corporation was a party to futures contracts for purposes of hedging a portion of certain raw material purchases. The corporation was also a party to forward foreign exchange contracts to hedge foreign currency transactions consistent with its committed exposures. Had these contracts not been in place, the net earnings of the corporation would not have been materially affected in the third quarter or first nine months of 1995. With three-fourths of the year complete, and 1995 earnings ahead of last years earning's at the same time, the corporation anticipates that in early 1996 it may be able to announce a third consecutive year of record sales and profits. Liquidity and Capital Resources The corporation's working capital was $118.9 million at September 30, 1995 compared to $113.6 million at December 31, 1994. Sales related increases in trade receivables were partially offset by related increases to trade payables. Cash flow provided by operations was $23.3 million greater than the same period last year due primarily to smaller increases in working capital requirements compared to the prior year. While the corporation's long- term debt increased $3.8 million in the first nine months to $140.6 million, the debt to equity ratio, excluding the finance subsidiary, improved over this period from 43.7% to 40.1% at September 30, 1995. The long-term debt of the finance subsidiary declined $5.9 million to $23.5 million reflecting the continuing liquidation of that business. Capital expenditures were $17 million higher than last year. Capital spending will remain higher for the remainder of the year due largely to new automotive product programs and could total $100 million in 1995. The corporation anticipates that internally generated funds will cover capital expenditure requirements. Additionally, the corporation expects capital expenditures, excluding investments in joint ventures, to be higher in 1996. At its October 10, 1995 meeting, A. O. Smith's Board of Directors declared a regular quarterly dividend at $.15 per share on its common stock (Classes A and Common). The dividend is payable on November 15, 1995 to shareholders of record October 31, 1995. PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS At September 30, 1995, the corporation or A. O. Smith Harvestore Products, Inc. ("AOSHPI"), a wholly-owned subsidiary of the corporation, were defendants in eight (8) lawsuits (one of which is a class action lawsuit) filed by various plaintiffs who were alleging property damage claimed to have arisen out of alleged defects in AOSHPI's animal feed storage equipment. In the third quarter of 1995, no new cases were filed against the corporation and AOSHPI, one case was favorably resolved and in a New York State Court case, the judge has denied the plaintiffs' petition for class action status. The United States District Court for the Southern District of Ohio has cancelled the trial date and discovery has been suspended in the conditionally certified class action brought on behalf of purchasers and lessees of Harvestore structures manufactured by the corporation and AOSHPI while the court considers the corporation's motions to decertify the class action or in the alternative grant summary judgment in the corporation's favor. Information on these lawsuits was previously reported in Part I, Item 3 of the corporation's annual report on Form 10-K for the fiscal year ended December 31, 1994 and in Part II, Item 1 of the corporation's Form 10-Q reports for the quarterly periods ended March 31, 1995 and June 30, 1995, which are incorporated herein by reference. There have been no material changes in the environmental matters previously reported in Item 3 in the corporation's annual report on Form 10-K for the fiscal year ending December 31, 1994, which is incorporated herein by reference. Additionally, the corporation has been identified by the U.S. Environmental Protection Agency ("EPA") as being a "Potentially Responsible Party" ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or the "Superfund" law) relative to a contaminated site in South Milwaukee, Wisconsin and has, together with approximately 80 other PRPs, received a unilateral order issued by the EPA under Section 106 of CERCLA to remediate the site. There is insufficient information available to the Company at this time to enable it to estimate the extent of the corporation's involvement at the site. However, based upon information that is currently available, the corporation believes that its ultimate share of the costs associated with this site should not be material to its financial condition. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed by the corporation in the third quarter of 1995.
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 November 13, 1995 /s/ John J. Kita John J. Kita Treasurer and Controller November 13, 1995 /s/ G. R. Bomberger G. R. Bomberger Executive Vice President and Chief Financial Officer
INDEX TO EXHIBITS Exhibit Number Description 27 Financial Data Schedule