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 June 30, 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 July 31, 1996: 5,882,248 Common Stock Outstanding as of July 31, 1996: 15,038,773
Index A. O. Smith Corporation Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Earnings and Retained Earnings - Six months ended June 30, 1996 and 1995 3 Condensed Consolidated Balance Sheet - June 30, 1996 and December 31, 1995 4-5 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements - June 30, 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 2. Changes in Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13-14 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 and Six months ended June 30, 1996 and 1995 (000 omitted except for per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 EARNINGS 1996 1995 1996 1995 <S> <C> <C> <C> <C> Electrical Products Company $ 95,067 $ 84,560 $187,368 $169,816 Automotive Products Company 221,848 220,272 452,786 441,941 Water Products Company 72,706 66,870 141,237 130,950 Smith Fiberglass Products Inc. 14,810 15,600 28,260 29,317 Other Products 24,277 12,541 45,216 20,807 ------- ------- ------ ------ NET REVENUES 428,708 399,843 854,867 792,831 Cost of products sold 361,844 335,535 724,109 664,380 ------- ------- ------- ------- Gross profit 66,864 64,308 130,758 128,451 Selling, general and administrative expenses 32,737 29,315 65,270 58,277 Interest expense 3,545 3,349 7,397 6,565 Other expense - net 2,022 1,147 3,394 3,131 ------- ------- ------- ------- 28,560 30,497 54,697 60,478 Provision for income taxes 11,174 11,744 21,363 23,150 ------- ------ ------- ------- Earnings before equity in earnings of affiliated companies 17,386 18,753 33,334 37,328 Equity in earnings of affiliated companies 1,346 1,272 2,740 1,058 ------- ------- ------- ------- NET EARNINGS 18,732 20,025 36,074 38,386 ======= ======= ======= ======= RETAINED EARNINGS Balance at beginning of period 287,955 240,110 273,751 224,467 Cash dividends on common shares (3,556) (3,137) (6,694) (5,855) ------- ------- ------- ------- BALANCE AT END OF PERIOD $303,131 $256,998 $303,131 $256,998 ======= ======= ======= ======= NET EARNINGS PER COMMON SHARE $.90 $.96 $1.72 $1.84 DIVIDENDS PER COMMON SHARE $.17 $.15 $.32 $.28 </TABLE> 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 June 30, 1996 and December 31, 1995 (000 omitted) (unaudited) June 30, 1996 Dec. 31, 1995 ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,240 $ 4,807 Trade receivables 178,649 165,924 Finance subsidiary receivables and leases 11,920 13,449 Customer tooling 37,865 30,799 Inventories (note 2) 99.806 103,413 Deferred income taxes 18,208 17,542 Other current assets 14,734 14,327 ------- ------- TOTAL CURRENT ASSETS 365,422 350,261 Investment in and advances to affiliated companies 37,101 28,731 Deferred model change 28,119 25,246 Finance subsidiary receivables and leases 22,240 26,950 Other assets 78,540 79,220 Property, plant and equipment 1,039,718 965,021 Less accumulated depreciation 554,595 528,487 --------- --------- Net property, plant and equipment 485,123 436,534 --------- --------- TOTAL ASSETS $1,016,545 $946,942 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables $ 148,728 $112,645 Accrued payroll and benefits 46,895 47,763 Postretirement benefit obligation 7,774 7,837 Other current liabilities 32,007 40,469 Long-term debt due within one year 5,175 3,925 Finance subsidiary long-term debt due within one year 1,008 1,008 --------- --------- TOTAL CURRENT LIABILITIES 241,587 213,647 Long-term debt (note 3) 178,871 167,139 Finance subsidiary long-term debt 19,353 23,799 Postretirement benefit obligation 75,288 74,799 Other liabilities 34,092 31,955 Deferred income taxes 65,797 63,239 STOCKHOLDERS' EQUITY: Class A common stock , $5 par value authorized 14,000,000 shares; issued 5,887,608 and 5,888,601 29,438 29,443 Common stock, $1 par value: authorized 60,000,000 shares; issued 15,812,042 and 15,811,049 15,812 15,811 Capital in excess of par value 68,889 68,871 Retained earnings (note 3) 303,131 273,751 Cumulative foreign currency translation adjustments (7,721) (7,499) Treasury stock at cost (7,992) (8,013) --------- -------- TOTAL STOCKHOLDERS' EQUITY 401,557 372,364 --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,016,545 $946,942 ========= ======== 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 Six months ended June 30, 1996 and 1995 (000 omitted) - (unaudited) CASH FLOWS 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $36,074 $38,386 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 30,389 26,522 Deferred income taxes 1,892 4,706 Equity in earnings of affiliates, net of dividends (340) (1,058) Deferred model change and software amortization 6,970 3,807 Other - net 341 (1,157) Change in current assets and liabilities: Trade receivables and customer tooling (21,562) (15,811) Current income tax accounts-net 1,895 2,468 Inventories 3,607 902 Prepaid expenses and other (4,288) (6,311) Trade payables 36,083 (6,122) Accrued liabilities, payroll and benefits (7,408) (1,857) Net change in noncurrent assets and liabilities 8,249 1,837 -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 91,902 46,312 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (73,264) (32,592) Investment in joint ventures (7,993) - Other - net (13,090) (8,368) -------- -------- CASH USED BY INVESTING ACTIVITIES (94,347) (40,960) -------- -------- CASH FLOW BEFORE FINANCING ACTIVITIES (2,445) 5,352 -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Long-term debt incurred 16,707 15,000 Long-term debt retired (3,725) (13,665) Finance subsidiary net long-term debt retired (4,446) (4,217) Stock transactions 36 77 Dividends paid (6,694) (5,855) -------- -------- CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 1,878 (8,660) Net decrease in cash and cash equivalents (567) (3,308) Cash and cash equivalents-beginning of period 4,807 8,485 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,240 $5,177 ====== ====== 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 June 30, 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 six-month period ended June 30, 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. Certain prior year amounts have been reclassified to conform to the 1996 presentation. 2. Inventories (000 omitted) June 30, 1996 December 31, 1995 Finished products $50,547 $53,788 Work in process 43,543 44,806 Raw materials 42,470 41,841 Supplies 9,782 9,067 -------- ------- 146,342 149,502 Allowance to state inventories at LIFO cost 46,536 46,089 -------- -------- $99,806 $103,413 ======= ======== 3. Long-Term Debt In June the corporation amended its revolving credit agreement. The facility was increased from $160 million to $210 million, and the term of the agreement was extended one year to June 30, 2001. The amended agreement also carries lower fees and lower borrowing rates. 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 $111.7 million were unrestricted as of June 30, 1996 for cash dividends and treasury stock purchases.
PART 1 -- FINANCIAL INFORMATION ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - First six months of 1996 compared to 1995 Revenues for the first half of 1996 were $854.9 million or almost eight percent better than the $792.8 million of revenues in the same period of 1995. Revenues of $428.7 million in the second quarter of 1996 were the highest quarterly revenues in the corporation's history and surpassed last year's second quarter by $28.9 million or 7.2 percent. The corporation's 1996 first half earnings declined six percent to $36.1 million from $38.4 million in the first half of 1995. Second quarter earnings were $18.7 million in 1996, a decline of $1.3 million or 6.5 percent from the $20 million earned in the same quarter of 1995. Strong performance by the corporation's Electrical Products and Peabody TecTank businesses was overshadowed by lower profits from Automotive Products, Water Products and Smith Fiberglass. The gross profit margin through the first half of the year was 15.3 percent, down from 16.2 percent for the same period last year. The lower first half margin was caused by several factors. Automotive's margins were adversely impacted by start-up costs associated with three facilities. Water Products margins were significantly reduced as a result of matching industry-wide price concessions, while unfavorable product mix caused reduced margins at Smith Fiberglass Products. The second quarter gross margin of 15.6 percent declined from 16.1 percent from the second quarter of 1995. The aforementioned start-up costs at Automotive, price concessions in the water heater industry, and unfavorable mix for fiberglass pipe continued to erode margins throughout the second quarter. The Automotive Products Company sales in the first half were slightly higher than the same period in 1995 while sales in the second quarter of 1996 were about equal to last year's second quarter. 1996 second quarter sales were impacted by weak conditions in the medium/heavy truck market and by a shutdown of the Dodge Dakota frame line to accommodate a model changeover. The Dakota model changeover is near completion as the new plant in Plymouth, Michigan commenced production of full frame assemblies for the 1997 Dodge Dakota in July. Start-up costs associated with the aforementioned Plymouth, Michigan plant as well as two other new facilities contributed to lower earnings for the first half and second quarter of 1996 when compared to the same periods of 1995. Sales for the Electrical Products Company in the second quarter of 1996 were more than 12 percent higher than the same period last year as a result of strong demand in all of the company's major markets. The hermetic motor segment, in particular, has demonstrated significant improvement due to increased customer export sales, replacement demand and higher market share. Higher volumes, increased capacity utilization and enhanced productivity contributed to improved earnings for both the second quarter and first half of 1996 when compared to the same periods in 1995. Second quarter sales for the Water Products Company increased $6 million or 8.7 percent over the second quarter of 1995 while year-to-date sales were $10.3 million or 7.9 percent higher than the first half of 1995. The increased sales resulted from higher unit volumes for both residential and commercial water heaters. Despite the increased volume for Water Products, 1996 second quarter and first half profits were lower than the corresponding periods last year. The earnings reduction was a direct result of industry-wide residential price concessions which were established early in the year and continued through June. Recent indications suggest that the pricing pressure will moderate in the third quarter and that residential prices will return to more normal levels for the remainder of the year. Second quarter sales for Smith Fiberglass Products Inc. were lower than the second quarter of 1995 as demand for service station product and oil field piping remains weak. Sales for the first half of 1996 declined 3.6 percent from the first six months of 1995. The volume decline and unfavorable product mix resulted in decreased earnings for Fiberglass Products in both the second quarter and first half of the year when compared to the same periods last year. 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 $12.5 million in the second quarter of 1995 to $24.3 million in the second quarter of 1996. 1996 first half sales increased $24.4 million over the first half of 1995. The significant increase in revenues from year-to- year was attributable to the acquisition of PTT which experienced strong demand for its line of bolted tanks. AOSHPI's second quarter and first half revenues were adversely impacted by softness in the municipal and agricultural markets while AgriStor's revenues continue to decline consistent with the intent to liquidate this entity. The incremental profits generated by PTT helped this segment of the corporation's business substantially improve its earnings over the second quarter and first half of 1995. Selling, general and administrative (SGA) expenses in the second quarter were $3.4 million more than the same period in 1995. Through the first six months of the year SGA expenses were $7 million higher than the first half of 1995. Most of this increase was associated with the acquisition of PTT, general increases to support higher sales volumes and costs incurred relative to the start-up of the corporation's Chinese joint ventures. The $.8 million year-to-year increase in interest expense for the first half was a direct result of increased debt levels to support higher capital spending programs and the PTT acquisition. Other expenses were higher in the second quarter and first half of 1996 compared to the same periods in 1995 due primarily to the amortization of goodwill associated with the PTT acquisition. The effective tax rates for the second quarter and first half of 1996 were higher than the same periods in 1995 as the research and development tax credits recognized in 1995 were not available in 1996. Equity in earnings of affiliated companies for the second quarter was approximately the same as for 1995. The corporation's 40 percent owned Mexican affiliate, Metalsa, continues to perform well. As they did in the first quarter, sales in the second quarter increased more than 50 percent over the comparable quarter of 1995. Metalsa's operating profit for the period improved due to the higher sales volume. Its strong earnings helped offset expected losses associated with the corporation's start-up of new joint ventures in China. During the first six 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 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 second quarter or first half of 1996. Liquidity and Capital Resources The corporation's working capital was $123.8 million at June 30, 1996 compared to $136.6 million at December 31, 1995. Business activity related increases in trade receivables and customer tooling were more than offset by increases in trade payables. Cash flow provided by operations during the first half of 1996 was nearly double the level generated during the same period last year due primarily to lower relative working capital requirements. The corporation's long- term debt increased $11.8 million in the first six months of 1996 to $178.9 million to finance capital expenditures. However, its leverage ratio as measured by total debt excluding the finance subsidiary divided by total capitalization remained at 31%, the same level as at December 31, 1995. The finance subsidiary's long-term debt decreased $4.4 million during the first six months of 1996 to $19.4 million, reflecting the continuing liquidation of the business. In June, the corporation amended its revolving credit agreement. The facility was increased from $160 million to $210 million, and the term of the agreement was extended one year to June 30, 2001. The amended agreement also carries lower fees and lower borrowing rates. During the first six months of 1996, capital expenditures were $73.3 million, $40.7 million higher than the same period one year ago. As mentioned in the corporation's annual report on Form 10-K for the period ending December 31, 1995, capital spending will remain higher for the remainder of the year due largely to new automotive programs. Although the corporation expects that cash flow from operations will cover the majority of the planned capital requirements, debt levels will be higher during the balance of the year. At its June 11, 1996 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 August 15, 1996 to shareholders of record as of July 31, 1996.
PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS At June 30, 1996, the corporation or A. O. Smith Harvestore Products, Inc. ("AOSHPI"), a wholly-owned subsidiary of the corporation, were defendants in seven cases alleging damages for economic losses claimed to have arisen out of alleged defects in AOSHPI's animal feed storage equipment. No new cases have been filed against the corporation since July 1994. In the second quarter, a federal court jury in Lansing, Michigan returned a verdict against the corporation and AOSHPI holding that they violated the RICO Act and the former operators of a Michigan dairy farm were awarded $156,008.34. The companies and the plaintiffs are awaiting rulings on motions filed following the entry of the judgment. The plaintiffs are seeking attorneys' fees and costs and the companies are seeking a judgment as a matter of law. 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 in March 1994 the court 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. As reported in the environmental matters discussed in Item 3 in the corporation's Form 10-K Report for the period ending December 31, 1995, which is incorporated herein by reference, the corporation joined with a group of companies identified by the U.S. Environmental Protection Agency ("EPA") as Potentially Responsible Parties (PRPs) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") to negotiate settlements as de minimis parties at a site in Indiana. Pursuant to those discussions, the EPA issued an order under section 106 of CERCLA requiring the corporation and 38 other PRPs to perform certain remedial actions at the site. 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. Except for that matter, there have been no material changes in the environmental matters that were previously reported in Item 3. ITEM 2--CHANGES IN SECURITIES On June 19, 1996, the corporation's $160,000,000 Revolver Agreement with a group of ten banks was amended to $210,000,000 and the final maturity was extended from June 30, 2000 to June 30, 2001. The covenants and restrictions on the payment of dividends remain essentially the same. Refer to Note 3 on page 7 of this report for more detailed information regarding the corporation's debt covenants, dividend payment restrictions and retained earnings. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On March 4, 1996, the corporation mailed a proxy statement to its stockholders relating to the annual meeting of stockholders on April 3, 1996. The annual meeting included the election of directors and the consideration and action upon proposals to approve the ratification of Ernst & Young LLP as the independent auditors of the corporation for 1996 and to act upon a stockholder proposal to provide a post-meeting report of the annual meeting of stockholders. Directors are elected by a plurality of the votes cast, by proxy or in person, with the holders voting as separate classes. A plurality of votes means that the nominees who receive the greatest number of votes cast are elected as directors. Consequently, any shares which are not voted, whether by abstention, broker non-votes or otherwise, will have no effect on the election of directors. For all other matters considered at the meeting, both classes of stock vote together as a single class, with the Class A Common Stock entitled to one vote per share and the Common Stock entitled to 1/10th vote per share. All such other matters are decided by a majority of the votes cast. On such other matters, an abstention will have the same effect as a "no" vote but, because shares held by brokers will not be considered to vote on matters as to which the brokers withhold authority, a broker non-vote will have no effect on the vote. 1. Election of Directors Votes Broker Votes For Withheld Non-Votes Class A Common Stock Directors Tom H. Barrett 5,786,377 2,714 0 Glen R. Bomberger 5,786,477 2,614 0 Thomas I. Dolan 5,786,113 2,978 0 Robert J. O'Toole 5,786,477 2,614 0 Donald J. Schuenke 5,786,477 2,614 0 Arthur O. Smith 5,786,377 2,714 0 Bruce M. Smith 5,786,477 2,614 0 Common Stock Directors Russell G. Cleary 12,500,616 251,865 0 Leander W. Jennings 12,499,701 252,780 0 Dr. Agnar Pytte 12,501,758 250,723 0 2. Ratification of Ernst & Young LLP as Independent Auditors Votes Broker Votes For Against Abstentions Non Votes COMBINED CLASS VOTE: Class A Common Stock and Common Stock (1/10th vote) 7,054,072 6,336 3,929 0 3. Stockholder Proposal on Issuing a Post-Meeting Report of the Annual Stockholders Meeting Votes Broker Votes For Against Abstentions Non Votes COMBINED CLASS VOTE: Class A Common Stock and Common Stock (1/10th vote) 79,339 6,711,278 31,243 242,477 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (4) Amendment dated as of June 19, 1996 to the Revolver Agreement dated February 26, 1993. (27) Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the corporation in the second 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 August 9, 1996 /s/ John J. Kita John J. Kita Vice President, Treasurer and Controller August 9, 1996 /s/ Glen R. Bomberger G. R. Bomberger Executive Vice President and Chief Financial Officer
INDEX TO EXHIBITS Exhibit Number Description 4 Amendment dated as of June 19, 1996 to the Revolver Agreement dated February 26, 1993 27 Financial Data Schedule