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, 1997 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, 1997: 5,835,398 Common Stock Outstanding as of April 30, 1997: 13,212,148
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, 1997 and 1996 3 Condensed Consolidated Balance Sheet - March 31, 1997 and December 31, 1996 4-5 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1996 6 Notes to Condensed Consolidated Financial Statements - March 31, 1997 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Part II. Other Information Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 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 months ended March 31, 1997 and 1996 (000 omitted except for per share data) (Unaudited) Three Months Ended March 31 EARNINGS 1997 1996 Electric Motor Technologies $ 93,927 $ 92,301 Water Systems Technologies 70,972 68,531 Storage & Fluid Handling Technologies 31,349 33,959 --------- --------- NET SALES 196,248 194,791 Cost of products sold 153,450 154,371 --------- --------- Gross profit 42,798 40,420 Selling, general and administrative expenses 27,393 27,174 Interest expense 2,244 1,926 Other expense - net 932 1,338 --------- --------- 12,229 9,982 Provision for income taxes 4,391 3,809 --------- --------- Earnings before equity in loss of joint ventures 7,838 6,173 Equity in loss of joint ventures (717) (406) --------- --------- EARNINGS FROM CONTINUING OPERATIONS 7,121 5,767 EARNINGS FROM DISCONTINUED OPERATIONS [Less related income tax provisions (1997-$6,324; 1996-$6,380)] (note 2) 12,790 11,575 --------- --------- NET EARNINGS 19,911 17,342 RETAINED EARNINGS Balance at beginning of period 325,361 273,751 Cash dividends on common shares (3,560) (3,138) --------- --------- BALANCE AT END OF PERIOD $ 341,712 $ 287,955 ========= ========= NET EARNINGS PER COMMON SHARE Continuing Operations $ .35 $ .28 Discontinued Operations $ .63 $ .55 ------ ------- NET EARNINGS $ .98 $ .83 ====== ======= DIVIDENDS PER COMMON SHARE $ .17 $ .15 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, 1997 and December 31, 1996 (000 omitted) (unaudited) ASSETS March 31, December 31, 1997 1996 CURRENT ASSETS Cash and cash equivalents $ 2,803 $ 6,405 Receivables 140,304 121,571 Inventories (note 3) 89,566 80,445 Deferred income taxes 12,562 12,416 Other current assets 6,552 4,537 Net current assets-discontinued operations 104,761 13,836 ------- ------- TOTAL CURRENT ASSETS 356,548 239,210 Investments in and advances to joint ventures 17,312 14,579 Other assets 136,029 90,945 Property, plant and equipment 420,598 407,016 Less accumulated depreciation 228,473 224,416 ------- ------- Net property, plant and equipment 192,125 182,600 Net long-term assets - discontinued operations 389,495 357,654 --------- --------- TOTAL ASSETS $ 1,091,509 $ 884,988 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Short-term debt $ 376,325 $ - Trade payables 76,830 82,952 Accrued payroll and benefits 18,742 25,653 Long-term debt due within one year 8,247 11,932 Other current liabilities 30,142 17,851 ------- ------- TOTAL CURRENT LIABILITIES 510,286 138,388 Long-term debt (note 4) 103,071 238,446 Other liabilities 34,739 35,244 Deferred income taxes 30,182 31,271 Postretirement benefit obligation 16,866 17,000 STOCKHOLDERS' EQUITY: Class A common stock, $5 par value: authorized 14,000,000 shares; issued 5,839,958 and 5,846,158 29,200 29,231 Common stock, $1 par value: authorized 60,000,000 shares; issued 15,859,692 and 15,853,492 15,860 15,853 Capital in excess of par value 71,290 69,410 Retained earnings (note 4) 341,712 325,361 Cumulative foreign currency translation adjustments (7,917) (7,401) Treasury stock at cost (53,780) (7,815) -------- --------- TOTAL STOCKHOLDERS' EQUITY 396,365 424,639 -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,091,509 $ 884,988 ========= ========== 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, 1997 and 1996 (000 omitted) (unaudited) 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES CONTINUING Net earnings $ 7,121 $ 5,767 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 5,774 5,632 Deferred income taxes (1,235) (1,881) Equity in loss of joint ventures 717 406 Net change in current assets and liabilities (25,431) (7,736) Net change in noncurrent assets and liabilities 4,041 1,961 Other - net 1,727 566 ------- ------- CASH PROVIDED/(USED) BY OPERATING ACTIVITIES (7,286) 4,715 ------- ------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (11,052) (7,245) Capitalized purchased software costs (240) (522) Investment in joint ventures (4,201) (1,357) Acquisition of business (net of cash acquired) (60,443) (1,111) -------- -------- CASH USED BY INVESTING ACTIVITIES (75,936) (10,235) -------- -------- CASH FLOW FROM CONTINUING OPERATIONS BEFORE FINANCING ACTIVITIES (83,222) (5,520) DISCONTINUED Cash provided/(used) by operating activities (67,234) 4,509 Cash used by investing activities (42,742) (22,476) -------- --------- CASH FLOW FROM DISCONTINUED OPERATIONS BEFORE FINANCING ACTIVITIES (109,976) (17,967) CASH FLOW FROM FINANCING ACTIVITIES Debt incurred 241,940 29,152 Debt retired (4,675) (3,650) Purchase of common stock held in treasury (46,828) -- Proceeds from common stock options exercised 2,432 -- Tax benefit from exercise of stock options 287 -- Dividends paid (3,560) (3,138) ------- -------- CASH PROVIDED BY FINANCING ACTIVITIES 189,596 22,364 Net decrease in cash and cash equivalents (3,602) (1,123) Cash and cash equivalents-beginning of period 6,405 4,807 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,803 $ 3,684 ======== ======== 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, 1997 (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, 1997 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 1996 is derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. 2. Discontinued Operations On January 27, 1997, the corporation reached a definitive agreement with Tower Automotive, Inc. regarding the sale of A. O. Smith's automotive products business. On April 18, 1997 the corporation closed on this transaction receiving gross proceeds of approximately $725 million, which reflect additional investment and working capital changes from the initial price of $625 million and is subject to final adjustment. The transaction excludes the sale of the corporation's 40% interest in its Mexican automotive affiliate, Metalsa S.A. The results of the automotive businesses have been reported separately as discontinued operations. Prior year consolidated financial statements have been restated accordingly. 3. Inventories (000 omitted) March 31, 1997 December 31, 1996 Finished products $ 50,724 $ 51,706 Work in process 18,628 19,593 Raw materials 48,525 3,754 Supplies 1,398 1,368 --------- --------- 119,275 110,261 Allowance to state inventories at LIFO cost 29,709 29,816 --------- --------- $ 89,566 $ 80,445 4. 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 $59.1 million were unrestricted as of March 31, 1997 for cash dividends and treasury stock purchases. 5. Acquisitions On March 31, 1997 the corporation acquired the business of UPPCO, Incorporated, the world's leading manufacturer of subfractional C- frame electric motors. The purchase price was approximately $60.4 million and the transaction has been accounted for as a purchase. 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 1997 COMPARED WITH 1996 As a result of significant changes within the automotive supplier industry, such as the increasing globalization, the drive towards systemization and the consolidation of the supplier base, the corporation decided to sell its automotive products business. On April 18, 1997 A. O. Smith sold this business to Tower Automotive, Inc. and received gross proceeds of approximately $725 million, which reflect additional investment and working capital changes from the initial price of $625 million and is subject to final adjustment. The financial results of the automotive business are presented in the accompanying statements as a discontinued operation. Also included in discontinued operations is the corporation's 40% interest in its Mexican automotive affiliate, Metalsa, S. A. Metalsa was not included in the aforementioned sale to Tower Automotive. The corporation intends to sell its interest in Metalsa and expects such sale to be completed by the end of 1997. Sales from continuing operations in the first quarter of 1997 were $196.2 million, modestly higher than last year's first quarter sales of $194.8 million. A 3.6 percent increase in Water Systems Technologies sales was offset by a sales decline within the Storage & Fluid Handling Technologies segment, while sales for Electric Motor Technologies were marginally higher when comparing the first quarter of 1997 with the same period last year. Earnings from continuing operations were $7.1 million or $.35 per share in the first quarter of 1997, compared with $5.8 million or $.28 per share reported in the same period last year. Despite only a modest increase in sales, the corporation's gross profit margin increased a full percentage point from 20.8 percent in the first quarter of 1996 to 21.8 percent in 1997. The most significant improvement in margin occurred within the Water Systems Technologies segment where favorable pricing resulted in a significant improvement in profit margin compared with the first quarter of 1996. Last year's lower margins were a direct result of industry-wide residential price concessions which were established early in the year and continued through June, 1996. A richer mix of sales for fiberglass pipe also contributed to a higher overall margin within the Storage & Fluid Handling segment and more than offset the decline in margin caused by the lower first quarter sales for municipal and industrial tanks at Engineered Storage Products. First quarter sales for Electric Motor Technologies increased from $92.3 million in the first quarter of 1996 to $93.9 million in 1997 as higher volume in the hermetic motor and general industries market segments offset a year-over-year decline in the pump motor market. Electric Motor Technologies first quarter profits were moderately higher than 1996 due primarily to higher volume. On March 31, 1997, the corporation purchased the business of UPPCO, Incorporated, the world's leading manufacturer of subfractional C-frame motors used in bathroom and range hood fans, microwave and convection ovens, medical equipment and other related equipment. UPPCO, with plant locations in Monticello and Paoli, IN., broadens the product offering for Electric Motor Technologies by moving this segment into markets not previously served. It is anticipated that UPPCO sales will approximate $60 million for the remaining nine months of 1997 and will be an immediate contributor to profits. First quarter sales for Water Systems Technologies were $71.0 million in 1997 or $2.5 million higher than 1996 first quarter sales of $68.5 million. 1997 first quarter profits were significantly higher than earnings in the same quarter of 1996. Most of the increase in both sales and earnings was due to the previously discussed improvement in pricing. First quarter sales for Storage & Fluid Handling Technologies decreased 7.7 percent when compared with the first quarter of 1996. All of the sales shortfall from the prior year's first quarter was attributable to the Engineered Storage Products component of this business segment and was caused by decreased demand for municipal and industrial storage tanks. Sales of fiberglass pipe were at the same level as in the first quarter of 1996. 1997 first quarter earnings for Storage & Fluid Handling Technologies were lower than the same period last year. Although sales of fiberglass pipe were relatively flat with the prior year, a favorable product mix in 1997 resulted in substantial earnings improvement for this element of the business segment. The lower volumes for municipal and industrial storage tanks caused a decline in earnings for Engineered Storage Products which more than offset the favorable effect of the improved margins for fiberglass pipe. Selling, general and administrative expenses in the first quarter reflected only a minimal increase over the same period of 1996 and remained constant as a percentage of sales for the 1996 and 1997 first quarters. Interest expense in the first quarter was $.3 million higher than last year's first quarter due to increased debt levels associated with the corporation's stock repurchase program. The first quarter effective tax rate of 35.9 percent was lower than the 38.2 percent rate in the same period last year due mostly to the recognition of research and development tax credits in 1997. Equity in the losses of the corporation's Chinese joint ventures was $.7 million in the first quarter of 1997 compared with a 1996 first quarter loss of $.4 million. Most of the loss is associated with the Chinese joint venture established to sell water heating equipment that began operation in March of 1996. It is anticipated that this operation will continue to reflect losses in 1997 as start-up costs continue to exceed revenues. First quarter net earnings from the discontinued automotive business were $12.8 million and were consistent with previous projections and $1.2 million better than the first quarter of 1996. The sale of the automotive products business to Tower Automotive, Inc. did not include the corporation's investment in its Mexican affiliate, Metalsa, which is expected to be sold prior to year-end. The corporation's net earnings in the first quarter including those of the discontinued operation, were $19.9 million or $.98 per share compared with $17.3 million or $.83 per share in the first quarter of 1996. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. Among other provisions, the dilutive effect of stock options must be excluded under the new requirements for calculating basic earnings per share, which will replace primary earnings per share. This change is not expected to materially impact the corporation's earnings per share calculations. During the first three months of 1997, the corporation was a party to futures contracts for the 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 1997. Liquidity and Capital Resources As mentioned earlier, on April 18, 1997, the corporation closed on the sale of its Automotive Products Company, excluding its investment in its Mexican affiliate. As a result of this transaction, approximately $100 million in taxes will be owed. A portion of the proceeds of the sale will be used to pay down existing debt to approximately $100 million. The corporation plans to use the remaining proceeds to continue to repurchase stock and make acquisitions in its three core businesses. At March 31, 1997, the corporation's current liabilities exceeded current assets by $258.5 million. The significant temporary increase in current liabilities was a result of the reclassification of long term debt to short term debt due to the closing of the sale of the automotive business and the anticipated debt payoff after the sale. After the receipt of the proceeds, the corporation's working capital was positive. Cash flow provided by operations was $77.7 million less than the same period last year primarily due to the acquisition of UPPCO. The corporation's total debt increased $237.2 million from $250.4 million at the end of December 1996 to $487.6 million at the end of March 1997. The acquisition of UPPCO for $60.4 million, the repurchase of 1.4 million shares totalling $46.8 million, and $110 million for working capital and capital expenditures associated with discontinued operations all contributed to the significant increase in the level of debt. Capital expenditures for continuing operations during the first quarter were $11.1 million, $3.8 million higher than during the first quarter of 1996. The corporation expects that cash flow from operations will adequately cover 1997 capital expenditures. At its April 10, 1997 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 May 15, 1997 to shareholders of record April 30, 1997. Forward Looking Statements Certain statements in this report are forward-looking statements. Although the corporation believes that its expectations are based upon reasonable assumptions within the bounds of its knowledge of its business, there can be no assurance that the corporation's financial goals will be realized. Although a significant portion of the corporation's sales are derived from the replacement of previously installed product and such sales are therefore less volatile, numerous factors may affect the corporation's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the corporation. Among such numerous factors the corporation includes the continued strong growth of the worldwide heating, ventilating and air conditioning market, the stability of the pricing environment for residential water heaters and the successful implementation of the corporation's joint venture strategies in China. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The corporation is involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of its business involving product liability, property damage, insurance coverage, patents and environmental matters including the disposal of hazardous waste. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss or recovery, the corporation believes these unresolved legal actions will not have a material effect on its financial position or results of operations. The corporation reported in the environmental matters discussed in Item 3 in the corporation's Form 10-K Report for the period ended December 31, 1996, which is incorporated herein by reference, that it was involved as a Potentially Responsible Party in judicial and administrative proceedings initiated on behalf of the United States Environmental Protection Agency and certain state environmental agencies to clean up the environment at a total of 15 Superfund sites and to recover costs incurred or to be incurred as a result of such clean ups. The claims pending against the corporation in one such judicial proceeding were dismissed at the end of the first quarter. Except for that matter, there have been no material changes in the environmental matters that were previously reported in Item 3. 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 1997. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (10) Asset Purchase Agreement, dated as of January 27, 1997, among A. O. Smith Corporation, A. O.Smith Enterprises, Ltd., Tower Automotive Acquisition, Inc., Tower Automotive, Inc. and R. J. Tower Corporation [incorporated by reference to Exhibit 2.1 of the Form S-3 Registration Statement of Tower Automotive, Inc. (Registration No. 333-21943)]. Schedules thereto have not been filed; the corporation agrees to furnish a supplemental copy of any omitted schedule to the Commission upon request. (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 1997.
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 9, 1997 /s/ John J. Kita John J. Kita Vice President, Treasurer and Controller May 9, 1997 /s/ G. R. Bomberger G. R. Bomberger Executive Vice President and Chief Financial Officer
INDEX TO EXHIBITS Exhibit Number Description (10) Asset Purchase Agreement, dated as of January 27, 1997, among A. O. Smith Corporation, A. O.Smith Enterprises, Ltd., Tower Automotive Acquisition, Inc., Tower Automotive, Inc. and R. J. Tower Corporation [incorporated by reference to Exhibit 2.1 of the Form S-3 Registration Statement of Tower Automotive, Inc. (Registration No. 333-21943)]. Schedules thereto have not been filed; the corporation agrees to furnish a supplemental copy of any omitted schedule to the Commission upon request. (27) Financial Data Schedule