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, 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 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, 1996: 5,884,148 Common Stock Outstanding as of April 30, 1996: 15,034,473 Exhibit Index Page 15
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, 1996 and 1995 3 Condensed Consolidated Balance Sheet - March 31, 1996 and December 31, 1995 4-5 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements - March 31, 1996 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 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Index to Exhibits 15
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, 1996 and 1995 (000 omitted except for per share data) (Unaudited) Three Months Ended March 31 1996 1995 EARNINGS Electrical Products Company $ 92,301 $ 85,256 Automotive Products Company 230,938 221,669 Water Products Company 69,362 64,080 Smith Fiberglass Products Inc. 13,450 13,717 Other Products 20,939 8,266 -------- -------- NET REVENUES $426,990 $392,988 Cost of products sold 363,121 328,845 -------- -------- Gross profit 63,869 64,143 Selling, general and administrative expenses 32,944 28,962 Interest expense 3,942 3,216 Other expense - net 1,383 1,984 -------- -------- 25,600 29,981 Provision for income taxes 10,189 11,406 -------- -------- Earnings before minority interests and equity in earnings of affiliated companies 15,411 18,575 Equity in earnings (loss) of affiliated companies 1,800 (214) Minority interests in net loss of joint ventures 131 -- -------- -------- NET EARNINGS 17,342 18,361 RETAINED EARNINGS Balance at beginning of period 273,751 224,467 Cash dividends on common shares (3,138) (2,718) -------- -------- BALANCE AT END OF PERIOD $287,955 $240,110 ======== ======== DIVIDENDS PER COMMON SHARE $.15 $.13 NET EARNINGS PER COMMON SHARE $.83 $.88 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, 1996 and December 31, 1995 (000 omitted) (unaudited) March 31, 1996 December 31, 1996 ASSETS Cash and cash equivalents $ 4,171 $ 5,694 Trade receivables 188,229 165,924 Finance subsidiary receivables and 12,687 13,449 Customer tooling 51,045 30,799 Inventories (note 2) 113,314 103,540 Deferred income taxes 18,124 17,542 Other current assets 15,738 15,537 -------- -------- TOTAL CURRENT ASSETS 403,308 352,485 Deferred model change 27,106 25,246 Finance subsidiary receivables and 24,419 26,950 Other assets 82,623 79,305 Property, plant and equipment 1,010,156 975,842 Less accumulated depreciation 550,864 528,487 -------- -------- Net property, plant and equipment 459,292 447,355 -------- -------- TOTAL ASSETS $1,017,927 $ 952,918 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Trade payables $ 138,045 $ 112,645 Accrued payroll and benefits 39,939 47,763 Postretirement benefit obligation 7,806 7,837 Other current liabilities 39,606 40,469 Long-term debt due within one year 3,975 3,925 Finance subsidiary long-term debt due 1,012 1,008 -------- -------- TOTAL CURRENT LIABILITIES 230,383 213,647 Long-term debt (note 3) 195,698 167,139 Finance subsidiary long-term debt 20,688 23,799 Postretirement benefit obligation 75,085 74,799 Other liabilities 33,113 31,955 Deferred income taxes 64,458 63,239 Minority interests in joint ventures 12,254 5,976 STOCKHOLDERS' EQUITY: Preferred stock -- -- Class A common stock, $5 par value: authorized 14,000,000 shares; issued 29,403 29,443 5,880,638 and 5,888,601 Common stock, $1 par value: authorized 60,000,000 shares; issued 15,819 15,811 15,819,012 and 15,811,049 Capital in excess of par value 68,903 68,871 Retained earnings (note 3) 287,955 273,751 Cumulative foreign currency (7,819) (7,499) translation adjustments Treasury stock at cost (8,013) (8,013) -------- -------- TOTAL STOCKHOLDERS' EQUITY 386,248 372,364 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,017,927 $ 952,918 ========== ========== 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, 1996 and 1995 (000 omitted) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 Net earnings $ 17,342 $ 18,361 Adjustments to reconcile net earnings to net operating activities Depreciation 15,375 12,828 Deferred income taxes 637 1,772 Equity in earnings of affiliates, net of 600 214 Minority interests (131) - Deferred model change and software 3,436 2,359 Other - net 47 644 Change in current assets and liabilities: Trade receivables and customer tooling (42,015) (11,787) Current income tax accounts-net 10,072 7,589 Inventories (9,774) (6,420) Prepaid expenses and other (3,465) (2,798) Trade payables 25,400 5,822 Accrued liabilities, payroll and benefits (15,526) (14,286) Net change in noncurrent assets and 1,680 1,318 -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 3,678 15,616 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (24,522) (14,901) Other - net (6,450) (4,363) -------- -------- CASH USED BY INVESTING ACTIVITIES (30,972) (19,264) -------- -------- CASH FLOW BEFORE FINANCING ACTIVITIES (27,294) (3,648) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Long-term debt incurred 32,259 15,000 Long-term debt retired (3,650) (8,783) Finance subsidiary net long-term debt retired (3,107) (2,509) Proceeds from common stock options exercised -- 90 Other stock transactions -- (13) Joint ventures partners' contributions 3,407 -- Dividends paid (3,138) (2,718) -------- -------- CASH PROVIDED BY FINANCING ACTIVITIES 25,771 1,067 Net decrease in cash and cash equivalents (1,523) (2,581) Cash and cash equivalents-beginning of period 5,694 8,485 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,171 $ 5,904 ======== ======== 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, 1996 (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, 1996 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 1995 is derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. 2. Inventories (000 omitted) March 31, 1996 December 31, 1995 Finished products $ 55,700 $ 53,788 Work in process 47,552 44,806 Raw materials 47,332 41,968 Supplies 9,172 9,067 -------- ------- 159,756 149,629 Allowance to state inventories at LIFO cost 46,442 46,089 -------- -------- $113,314 $103,540 ======== ======== 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 $104.9 million were unrestricted as of March 31, 1996 for cash dividends and treasury stock purchases. 4. Accounting for Stock-Based Compensation In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The standard permits companies to continue accounting for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The corporation intends to follow Opinion No. 25 as it requires no recognition for compensation expense when the exercise price is equal to the market price of the stock at the date of the grant. The corporation will provide the pro forma disclosures required by SFAS No. 123 in its annual report, if material. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FIRST THREE MONTHS OF 1996 COMPARED TO 1995 Revenues for the first quarter of 1996 were $427 million surpassing last year's first quarter revenues by $34 million or 8.7 percent, and representing the highest quarterly revenues achieved in the corporation's history. Net earnings of $17.3 million or $.83 per share in the first quarter of 1996 declined $1.1 million from the $18.4 million or $.88 per share reported in the same period last year. With the exception of Smith Fiberglass Products Inc., the corporation's product operations reflected increased revenues in the first quarter of 1996 compared to 1995's first quarter. The most notable sales increases occurred at the Water Products and Electrical Products companies as both of these operations experienced over an eight percent increase in sales from the first quarter of 1995 to the same period in 1996. The sales growth occurring within the Other Products segment was attributable to the acquisition of Peabody TecTank, Inc. in December 1995. Despite the higher 1996 first quarter sales, the corporation's gross profit margin declined from 16.3 percent in the first quarter of 1995 to 15 percent in 1996. Several factors were responsible for the lower profit margin. Automotive's margins were adversely impacted by start-up costs associated with three facilities and higher depreciation expense. Water Products' margins were significantly reduced as a result of pricing pressure in the residential water heater segment, while unfavorable product mix caused lower margins at Smith Fiberglass Products. Further explanation of the causal factors for the lower gross profit margin are included in the various segment discussions which follow. First quarter sales for the Automotive Products Company increased $9.2 million or 4.2 percent from $221.7 million in 1995 to $230.9 million in 1996. Sales increased despite the March interruption of product shipments caused by the GM strike. Automotive's 1996 first quarter earnings were significantly lower than the same period last year. Much of the earnings decline was caused by higher fixed costs, most notably depreciation, which increased in conjunction with higher capital spending levels in the recent past. Start-up costs for plants in Plymouth, Michigan; Bowling Green, Kentucky; and Roanoke, Virginia adversely impacted the 1996 first quarter earnings. Automotive's first quarter earnings were lower than planned due to the curtailment of scheduled production and shipment of product associated with the General Motors strike, as well as lower than anticipated productivity levels. In March, Automotive was awarded the contract to manufacture frames for the next generation of the popular Ford Explorer sport utility vehicle. In addition, Automotive has been certified as a Full Service Supplier, which will give the company the opportunity for early involvement in new vehicle development and will enable the company to work more closely with Ford in the future. The Milwaukee, Wisconsin operation is also preparing to build the next generation of Ford Ranger frames with production scheduled to begin in the third quarter of 1997. The trend of improved earnings which commenced in 1995 for Metalsa, the corporation's 40 percent owned Mexican affiliate continued in the first quarter of 1996. Sales increased more than 50 percent over last year's first quarter due to additional sales in Mexico to Chrysler and General Motors for the export market. The higher volumes resulted in improved first quarter earnings which compare favorably to a nominal operating profit which was more than offset by a translation loss in the first quarter of 1995. First quarter sales for the Electrical Products Company increased $7.0 million or 8.3 percent from a very good first quarter experienced in 1995. Market conditions remained strong for all segments of the business but most notably for the hermetic, pump, and distribution markets. Electrical Products Company's first quarter profits exceeded 1995's first quarter earnings as a result of increased sales and improved manufacturing efficiency throughout its operations. First quarter sales for the Water Products Company increased $5.3 million or 8.2 percent from $64.1 million in 1995 to $69.4 million in 1996. The increased sales were the result of higher volumes for both residential and commercial product. Despite the increased volume for Water Products, 1996 first quarter profits were lower than last year's first quarter as a result of pricing concessions put in place to match discounts offered by other manufacturers within the industry. The company anticipates that margins will return to more normal levels in the second half of the year. Shipment of a new commercial water heater which achieves 94% efficiency, the most efficient of any storage type product on the market is scheduled to commence in the second quarter. This in conjunction with the completion of consolidation of the commercial boiler operation at the company's El Paso, Texas, plant should have a favorable impact on the remainder of the year. First quarter sales for Smith Fiberglass Products were slightly lower than the same period in 1995. The small decline in sales resulted in a disproportionate drop in first quarter earnings as a higher percentage of the subsidiary's sales were concentrated in lower margin product lines. Revenues for the Other Products segment of the corporation, consisting of A. O. Smith Harvestore Products, Inc. (AOSHPI), the recently acquired Peabody TecTank, Inc. (PTT), and AgriStor Credit Corporation increased from $8.3 million in the first quarter of 1995 to $20.9 million in the first quarter of 1996. The significant increase in quarterly revenues from year-to-year was attributable to the acquisition of PTT which experienced particularly strong demand for its line of bolted storage tanks. AOSHPI's first quarter revenues were adversely impacted by softness in the agricultural market, while AgriStor's revenues continue to decline consistent with the intent to liquidate this entity. The incremental profits generated by PTT in the quarter helped this segment of the corporation's business earn a first quarter profit compared to a loss in the first quarter of 1995. Selling, general and administrative expenses in the first quarter were $4.0 million more than the same period of 1995. Much of this increase was associated with the acquisition of PTT as well as general increases to support higher sales volumes. The $.7 million year-to-year increase in first quarter interest expense was a direct result of increased debt levels to support aggressive capital spending programs, the PTT acquisition, and increased working capital requirements. The effective tax rate for the first quarter of 1996 was 39.6 percent and compared to 38 percent in the first quarter of 1995. The first quarter of 1995 benefitted from the recognition of additional foreign tax credits. Additionally, 1996 first quarter earnings have been reduced by losses incurred in the Chinese joint ventures for which there is no immediate offsetting tax benefit. During the first three months of 1996, 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 first quarter of 1996. Liquidity and Capital Resources The corporation's working capital was $172.9 million at March 31, 1996 compared to $138.8 million at December 31, 1995. Business activity related increases in trade receivables, customer tooling and inventories were partially offset by a corresponding increase to trade payables. Cash flow provided by operations was $11.9 million lower during the first quarter ended March 31, 1996 than the same period last year due to higher working capital requirements. The corporation's long-term debt increased $28.6 million in the first three months of 1996 to $195.7 million to finance capital expenditures and working capital requirements. The corporation's leverage ratio as measured by total debt excluding the finance subsidiary divided by total capitalization was 34% compared to 31% at the end of December 1995. The finance subsidiary's long-term debt decreased $3.1 million during the first quarter to $20.7 million, reflecting the continuing liquidation of the business. Capital expenditures during the first quarter were $24.5 million, $9.6 million higher than during the first quarter of 1995. As mentioned in the most recently issued Form 10-K Report, capital spending will remain higher for the remainder of the year due largely to new automotive programs. The corporation expects that cash flow from operations will cover the majority of the planned capital requirements. At its April 4, 1996 meeting, A. O. Smith's Board of Directors increased the regular quarterly dividend to $.17 per share on its common stock (Classes A and Common) from $.15 per share. The dividend is payable on May 15, 1996 to shareholders of record April 30, 1996. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS At March 31, 1996, the Corporation or A. O. Smith Harvestore Products, Inc. ("AOSHPI"), a wholly-owned subsidiary of the Corporation, were defendants in approximately seven cases alleging damages for economic losses claimed to have arisen out of alleged defects in AOSHPI's animal feed storage equipment. In the first quarter of 1996, no new cases were filed against the Corporation and AOSHPI and one case was settled. Two of the seven pending cases contain class action allegations. One of the cases is a New York State court action which names the corporation, AOSHPI, and two of its dealers as defendants. The court has denied the plaintiffs' motion to certify the class and has granted the defendants' motions dismissing some of the plaintiffs' allegations. The plaintiffs are appealing the court's rulings. The second case is pending in the Federal District Court for the Southern District of Ohio. It was filed in August 1992 and the court, in March 1994, conditionally certified it as a class action on behalf of purchasers and lessees of Harvestore structures manufactured by the corporation and AOSHPI. A notice of the certification was mailed to the purported class members in the third quarter of 1994, with approximately 5,500 "opt out" forms being filed with the court, the impact of which is unknown. The court canceled a previously set trial date as a result of motions the corporation filed seeking summary judgment or in the alternative decertification of the class. The corporation is awaiting a ruling. Based on the facts currently available to management and its prior experience with lawsuits alleging damages for economic loss resulting from use of the Harvestore animal feed storage equipment, management is confident that the class action suits can be defeated and that the lawsuits do not represent a material threat to the corporation. The corporation believes that any damages, including any punitive damages, arising out of the pending cases are adequately covered by insurance and recorded reserves. No range of reasonably possible losses can be estimated because, in most instances, the complaint is silent as to the amount of the claim or states it as an unspecified amount in excess of the jurisdictional minimum. The corporation reevaluates its exposure periodically and makes adjustment of its reserves as appropriate. There have been no material changes in the environmental matters previously reported in Item 3 in the Company's Form 10-K Report for the fiscal year ending December 31, 1995 which is incorporated herein by reference. 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 1996. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (3)(i) A. O. Smith Corporation Restated Certificate of Incorporation, as amended April 5, 1995 and as further amended February 5, 1996 [incorporated by reference to Exhibit (3)(i) to the registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-475)] (4) A. O. Smith Corporation Restated Certificate of Incorporation, as amended April 5, 1995 and as further amended on February 5, 1996 [incorporated by reference to Exhibit (3)(i) hereto] (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 1996.
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 10, 1996 /s/ John J. Kita John J. Kita Vice President, Treasurer and Controller May 10, 1996 /s/ G.R. Bomberger G. R. Bomberger Executive Vice President and Chief Financial Officer
INDEX TO EXHIBITS Exhibit Number Description (3)(i) A. O. Smith Corporation Restated Certificate of Incorporation, as amended April 5, 1995 and as further amended on February 5, 1996 [incorporated by reference to Exhibit (3)(i) to the registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-475)] (4) A. O. Smith Corporation Restated Certificate of Incorporation, as amended April 5, 1995 and as further amended on February 5, 1996 [incorporated by reference to Exhibit (3)(i) hereto] (27) Financial Data Schedule