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, 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 October 31, 1997: 5,824,874 Common Stock Outstanding as of October 31, 1997: 11,181,722 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 - Three and Nine months ended September 30, 1997 and 1996 3 Condensed Consolidated Balance Sheet - September 30, 1997 and December 31, 1996 4-5 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 6 Notes to Condensed Consolidated Financial Statements - September 30, 1997 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Part II. Other Information Item 1. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Index to Exhibits 14
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS <TABLE> A.O. SMITH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS Three and Nine months ended September 30, 1997 and 1996 (000 omitted except for per share data) (unaudited) <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 EARNINGS 1997 1996 1997 1996 <S> <C> <C> <C> <C> Electric Motor Technologies $94,081 $76,676 $298,779 $264,044 Water Systems Technologies 68,872 70,101 211,218 211,338 Storage & Fluid Handling Technologies 43,011 41,343 117,153 113,997 -------- -------- -------- -------- NET SALES $205,964 $188,120 $627,150 $589,379 Cost of products sold 167,060 147,498 496,806 463,672 -------- -------- -------- -------- Gross profit $38,904 $40,622 $130,344 $125,707 Selling, general and administrative expenses 25,013 26,884 82,251 81,616 Interest expense 1,913 1,974 6,602 5,882 Interest income (3,010) (81) (6,370) (188) Other expense - net 394 239 2,085 3,438 -------- ------- -------- ------- $14,594 $11,606 $45,776 $34,959 Provision for income taxes 4,918 4,249 16,003 13,232 -------- ------- -------- ------- Earnings before equity in loss of joint ventures $9,676 $7,357 $29,773 $21,727 Equity in loss of joint ventures (667) (1,199) (1,965) (2,509) -------- ------- -------- ------- EARNINGS FROM CONTINUING OPERATIONS $9,009 $6,158 $27,808 $19,218 EARNINGS FROM DISCONTINUED OPERATIONS Earnings (Less related income tax provisions 1997-$548 and $7,698; 1996-$2,729 and $15,108) 980 6,376 15,231 29,390 Gain on disposition (Less related income tax provision of $58,056) (note 3) - - 94,616 - -------- ------- -------- ------- NET EARNINGS $9,989 $12,534 $137,655 $48,608 RETAINED EARNINGS Balance at beginning of period 446,229 303,131 325,361 273,751 Cash dividends on common shares (2,988) (3,557) (9,786) (10,251) -------- ------- -------- -------- BALANCE AT END OF PERIOD $453,230 $312,108 $453,230 $312,108 ======== ======= ======== ======== NET EARNINGS PER COMMON SHARE Continuing Operations $ .51 $ .29 $ 1.47 $ .92 Discontinued Operations .06 .31 5.80 1.40 ------ ------ ------ ------ NET EARNINGS $ .57 $ .60 $ 7.27 $ 2.32 ====== ====== ====== ====== DIVIDENDS PER COMMON SRE $ .17 $ 0.17 $ .51 $ 0.49 See accompanying notes to unaudited condensed consolidated financial statements. </TABLE>
A.O. SMITH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1997 and December 31, 1996 (000 omitted) (unaudited) Sept 30, 1997 Dec. 31, 1996 ASSETS CURRENT ASSETS Cash and cash equivalents (note 2) $185,026 $6,405 Receivables 130,865 121,571 Inventories (note 4) 84,366 80,445 Deferred income taxes 13,498 12,416 Other current assets 3,984 4,537 Net current assets-discontinued operations (note 3) - 13,836 -------- ------- TOTAL CURRENT ASSETS 417,739 239,210 Investments in and advances to joint ventures 22,924 14,579 Other assets 51,055 84,405 Property, plant and equipment 440,407 407,016 Less accumulated depreciation 238,416 224,416 -------- ------- Net property, plant and equipment 201,991 182,600 Goodwill 52,211 6,540 Net long-term assets-discontinued operations (note 3) 22,968 357,654 -------- ------- TOTAL ASSETS $768,888 $884,988 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables $64,356 $82,952 Accrued payroll and benefits 23,499 25,653 Accrued income taxes 26,081 1,351 Long-term debt due within one year 5,625 11,932 Other current liabilities 27,660 16,500 Net current liabilities-discontinued operations (note 3) 3,066 0 ------- ------- TOTAL CURRENT LIABILITIES 150,287 138,388 Long-term debt (note 5) 100,985 238,446 Other liabilities 42,055 35,244 Deferred income taxes 28,546 31,271 Postretirement benefit obligation 16,909 17,000 STOCKHOLDERS' EQUITY: Class A common stock, $5 par value: authorized 14,000,000 shares; issued 5,838,858 and 5,846,158 29,194 29,231 Common stock, $1 par value: authorized 60,000,000 shares; issued 15,860,792 and 15,853,492 15,861 15,853 Capital in excess of par value 72,163 69,410 Retained earnings (note 5) 453,230 325,361 Cumulative foreign currency translation adjustments (8,661) (7,401) Treasury stock at cost (131,681) (7,815) -------- ------- TOTAL STOCKHOLDERS' EQUITY 430,106 424,639 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $768,888 $884,988 ======== ======== See accompanying notes to unaudited condensed consolidated financial statements.
A.O. SMITH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30, 1997 and 1996 (000 omitted) (unaudited) 1997 1996 CASH FLOW FROM OPERATING ACTIVITIES CONTINUING Net earnings $ 27,808 $ 19,218 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 17,704 16,580 Deferred income taxes (3,807) (3,301) Equity in loss of joint ventures 1,965 2,509 Net change in current assets and liabilities (2,531) 26,029 Net change in noncurrent assets and liabilities 11,723 3,264 Other - net 5,707 1,884 ------- ------ CASH PROVIDED BY OPERATING ACTIVITIES 58,569 66,183 ------- ------ CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (33,460) (24,703) Capitalized purchased software costs (1,094) (2,041) Investment in joint ventures (11,561) (8,852) Acquisition of business (net of cash acquired) (60,918) (1,111) -------- ------- CASH USED BY INVESTING ACTIVITIES (107,033) (36,707) -------- ------- CASH FLOW FROM CONTINUING OPERATIONS BEFORE FINANCING ACTIVITIES (48,464) 29,476 DISCONTINUED (note 3) Cash provided / (used) by operating activities (98,788) 71,038 Cash used by investing activities (52,456) (131,161) Proceeds from disposition 727,423 - Tax payments associated with disposition (74,398) - ------- ------- CASH FLOW FROM DISCONTINUED OPERATIONS BEFORE FINANCING ACTIVITIES 501,781 (60,123) CASH FLOW FROM FINANCING ACTIVITIES Long-term debt incurred - 47,107 Long-term debt retired (143,768) (3,800) Purchase of common stock held in treasury (125,168) - Proceeds from common stock options exercised 3,455 20 Tax benefit from exercise of stock options 571 16 Dividends paid (9,786) (10,251) -------- ------- CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (274,696) 33,092 -------- ------- Net increase in cash and cash equivalents 178,621 2,445 Cash and cash equivalents-beginning of period (note 2) 6,405 4,807 -------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $185,026 $ 7,252 ======== ======= See accompanying notes to unaudited condensed consolidated financial statements.
A. O. SMITH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 nine- month period ended September 30, 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. Statement of Cash Flows For purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents include short-term investments held primarily for cash management purposes. These investments normally mature within three months from the date of acquisition. 3. Discontinued Operations On April 18, 1997 the corporation sold its automotive products company. In September 1997, the corporation announced the sale for $63 million of its 40% interest in its Mexican automotive affiliate, Metalsa S.A. The sale of Metalsa was completed in October 1997, and will be recognized in the fourth quarter. The results of the automotive products business have been reported separately as discontinued operations. Prior year consolidated financial statements have been restated to present the automotive products business as discontinued. 4. Inventories (000 omitted) September 30, 1997 December 31, 1996 Finished products $ 51,737 $ 51,706 Work in process 14,681 19,593 Raw materials 46,359 37,594 Supplies 1,537 1,368 --------- --------- 114,314 110,261 Allowance to state inventories at LIFO cost 29,948 29,816 --------- --------- $ 84,366 $ 80,445 ========= ========= 5. Long-Term Debt The corporation's long-term credit agreements contain certain conditions and provisions which restrict the corporation's payment of dividends. During the second and third quarters the company renegotiated some of its debt covenants with respect to these agreements, and under the most restrictive of these provisions, retained earnings of $124.3 million were unrestricted 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 1997 COMPARED TO 1996 Sales from continuing operations of $206.0 million in the third quarter of 1997 surpassed last year's third quarter by $17.8 million or more than nine percent. For the first nine months of 1997, sales from continuing operations were $627.2 million or six percent better than the $589.4 million of sales in the same period of 1996. Excluding the sales of UPPCO, the manufacturer of subfractional motors acquired on March 31, 1997, the year over year sales comparison for both the third quarter and first nine months were flat. Earnings from continuing operations were $9.0 million in the third quarter of 1997 or 46 percent higher than the $6.2 million earned in the third quarter last year. On a per share basis, third quarter earnings increased from $.29 in 1996 to $.51 in 1997. For the first nine months of 1997, the corporation's earnings from continuing operations increased to $27.8 million from $19.2 million, or to $1.47 per share from $.92 per share. Net earnings from discontinued operations for the first nine months of the year including those associated with the sale and operations of the automotive products business were $109.8 million or $5.80 per share. In September 1997, the corporation announced the sale of its 40 percent interest in its Mexican automotive affiliate, Metalsa S.A. The sale was completed and will be recognized in October 1997. The gross profit margin was 18.9 percent in the third quarter of 1997, compared with a margin of 21.6 percent in 1996. The margin through the first nine months of the year was 20.8 percent, down slightly from 21.3 percent for the same period last year. Lower margins were due to lower production in the Electric Motor Technologies segment and weaker prices in the Water Systems Technologies segment. Third quarter sales for Electric Motor Technologies were $94.1 million, or $17.4 million higher than the same period last year. Excluding approximately $19 million of third quarter sales associated with the UPPCO acquisition, overall sales for this segment declined two percent from the third quarter of 1996, due to a weak HVAC market resulting from an abnormally cool spring and summer. Sales through the first nine months of 1997 were $298.8 million, compared with $264.0 million for the same period in 1996. Excluding the sales of Uppco, current year sales were flat compared with the prior year as a result of lower HVAC-related sales offset primarily by the higher sales of the international and general industry business units. Third quarter operating earnings for the Electric Motor Technologies segment decreased from the third quarter of 1996 as lower profits resulting from lower production volumes in the core motor business more than offset the additional earnings of Uppco. Earnings for the first nine months of 1997 were modestly higher than earnings for the same period in 1996. Water Systems Technologies sales of $68.9 million for the third quarter were 1.8 percent lower than sales for the third quarter of 1996. Overall sales growth in the commercial water heater market segment was offset by slightly weaker demand and pricing pressures in the residential market segment. Sales for the first nine months of 1997 were essentially flat compared to the same period last year. Water Systems Technologies profits for the third quarter of 1997 were lower than the same period last year, reflecting the pricing pressures in the residential market. Profits through the first nine months of the current year were modestly higher than the same period last year. Third quarter sales for the Storage & Fluid Handling technologies segment increased four percent over the third quarter of 1996, due to higher sales of industrial storage tanks and fiberglass pipe. Year-to-date sales for this segment reflected a 2.8 percent increase over the first nine months of last year. Storage & Fluid Handling Technologies profits for the third quarter and the first nine months of 1997 were modestly higher, respectively, than the same periods last year. Increased earnings were attributable to higher sales volume and a more favorable sales mix for fiberglass piping. Selling, general and administrative (SG&A) expenses for the third quarter were $1.9 million lower than the same period last year. SG&A expenses as a percent of sales decreased from 14.3 percent of sales in the third quarter of 1996 to 12.1 percent of sales in the third quarter of 1997. Lower SG&A expenses were the result of reductions in corporate overhead related to the sale of the company's automotive products business as well as lower administrative expenses at the operating units. During the third quarter, the corporation recognized net interest income of $1.1 million compared to net interest expense of $1.9 million in the third quarter of 1996. Approximately $3.0 million of additional interest income was recognized in the third quarter of 1997 from investing the cash proceeds of the automotive business sale. The effective tax rate for the first nine months of 1997 was 35.0 percent compared with a rate of 37.9 percent for the first nine months of 1996. The 1997 rate benefited from the impact of the utilization of state tax loss carryforwards associated with liquidated subsidiaries as well as research and development tax credits. During 1997, the Financial Accounting Standards Board has issued several Statements of Financial Accounting Standards ("SFAS"). SFAS No. 128, "Earnings Per Share" is effective for the corporation as of December 31, 1997. SFAS No. 130, "Reporting Comprehensive Information" is effective for the corporation as of January 1, 1998. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" is effective for the corporation for 1998. None of the statements will have any impact on A. O. Smith's results of operations, financial position or cash flows. During the first nine 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. Liquidity and Capital Resources The corporation's working capital from continuing operations was $270.5 million compared to $87.0 million at December 31, 1996. The majority of the increase is due to the cash proceeds that the corporation received from the sale of its automotive products business. The corporation plans to use the cash to continue to repurchase stock and make acquisitions in its three core businesses. Cash flow from continuing operations was $77.9 million lower than the same period last year primarily due to the $60 million acquisition of UPPCO in the first quarter of 1997, as well as higher investments in capital expenditures and joint ventures. Capital expenditures of continuing operations during the first nine months of 1997 were $33.5 million, $8.8 million higher than during the same period last year. The increase is primarily attributable to higher capital expenditures for the Electric Motors Technologies business. The corporation expects that cash flow from continuing operations will cover 1997 capital expenditures. A portion of the after-tax cash proceeds from the sale of Automotive was used to pay down debt and repurchase stock. The corporation's total debt decreased $143.8 million from $250.4 million at the end of December, 1996 to $106.6 million at the end of September, 1997. As of September 30, 1997, 3.6 million shares had been repurchased for $125.2 million bringing total shares outstanding to approximately 17.5 million Common and Class A Common stock. Due to its significant cash and marketable securities balances, the corporation elected to reduce its revolving credit facility from $210 million to $100 million effective September 30, 1997. No other changes to the facility were made during the third quarter. At its October 7, 1997 meeting, A. O. Smith's Board of Directors declared a regular quarterly dividend at $.17 per share on its common stock (Classes A and Common). The dividend is payable on November 17, 1997 to shareholders of record October 31, 1997.
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. There have been no material changes in the environmental matters previously reported in Part 1, Item 3 in the corporation's annual report on Form 10-K Report for the year ended December 31, 1996, and Part 2, Item 1 in the quarterly report on Form 10-Q for the quarter ended June 30, 1997, which are incorporated herein by reference. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (3)(ii) By-Laws (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 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 November 10, 1997 /s/ John J. Kita John J. Kita Vice President, Treasurer and Controller November 10, 1997 /s/ G.R. Bomberger G. R. Bomberger Executive Vice President and Chief Financial Officer
INDEX TO EXHIBITS Exhibit Number Description (3)(ii) By-Laws (27) Financial Data Schedule