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, 1998 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, 1998: 5,815,774 Common Stock Outstanding as of April 30, 1998: 9,912,076 Exhibit Index Page 12
Index A.O. Smith Corporation Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Statement of Earnings, Comprehensive Earnings and Retained Earnings - Three months ended March 31, 1998 and 1997 3 Condensed Consolidated Balance Sheet - March 31, 1998 and December 31, 1997 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements - March 31, 1998 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II. Other Information Item 1. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Index to Exhibits 12
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS A.O. SMITH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS Three months ended March 31, 1998 and 1997 (000 omitted except for per share data) (unaudited) Three Months Ended March 31 EARNINGS 1998 1997 Electric Motor Technologies $111,839 $ 93,927 Water Systems Technologies 74,554 70,972 Storage & Fluid Handling Technologies 36,562 31,349 -------- -------- NET SALES 222,955 196,248 Cost of products sold 177,186 153,450 -------- -------- Gross profit 45,769 42,798 Selling, general and administrative expenses 27,900 27,393 Interest expense 1,624 2,244 Interest income (1,712) (58) Other expense - net 722 990 -------- -------- 17,235 12,229 Provision for income taxes 6,038 4,391 -------- -------- Earnings before equity in loss of joint ventures 11,197 7,838 Equity in loss of joint ventures (1,019) (717) -------- -------- EARNINGS FROM CONTINUING OPERATIONS 10,178 7,121 EARNINGS FROM DISCONTINUED OPERATIONS (less related income tax provision of $6,324) - 12,790 -------- -------- NET EARNINGS 10,178 19,911 Other comprehensive earnings, net of income tax (note 5): Foreign currency translation (less related income tax benefit 1998 - $123 and 1997 - $204) (189) (312) -------- -------- COMPREHENSIVE EARNINGS $ 9,989 $ 19,599 ======== ======== RETAINED EARNINGS Balance at beginning of period 466,514 325,361 Net earnings 10,178 19,911 Cash dividends on common shares (2,751) (3,560) -------- -------- BALANCE AT END OF PERIOD $473,941 $341,712 ======== ======== BASIC EARNINGS PER COMMON SHARE Continuing Operations $ .63 $ .35 Discontinued Operations - .63 -------- -------- NET EARNINGS $ .63 $ .98 ======== ======== DILUTED EARNINGS PER COMMON SHARE Continuing Operations $ .62 $ .34 Discontinued Operations - .62 -------- -------- NET EARNINGS $ .62 $ .96 ======== ======== DIVIDENDS PER COMMON SHARE $ .17 $ .17 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, 1998 and December 31, 1997 (000 omitted) (unaudited) March 31, December 31, 1998 1997 ASSETS CURRENT ASSETS Cash and cash equivalents (note 2) $110,287 $145,896 Receivables 144,163 126,232 Inventories (note 3) 79,132 79,049 Deferred income taxes 10,937 11,849 Other current assets 4,511 2,702 -------- -------- TOTAL CURRENT ASSETS 349,030 365,728 Property, plant and equipment 454,745 450,147 Less accumulated depreciation 246,478 242,391 -------- -------- Net property, plant and equipment 208,267 207,756 Investments in and advances to joint ventures 27,237 25,605 Other assets 67,559 65,644 Goodwill 51,354 51,783 -------- -------- TOTAL ASSETS $703,447 $716,516 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables $ 63,718 $ 61,299 Accrued payroll and benefits 22,683 26,397 Product warranty 8,188 7,972 Accrued income taxes 8,044 6,607 Long-term debt due within one year 5,598 5,590 Other current liabilities 21,850 20,017 -------- -------- TOTAL CURRENT LIABILITIES 130,081 127,882 Long-term debt (note 4) 101,605 100,972 Other liabilities 56,285 59,515 Deferred income taxes 28,650 28,442 STOCKHOLDERS' EQUITY: Class A common stock, $5 par value: authorized 14,000,000 shares; issued 5,838,334 29,192 29,192 Common stock, $1 par value: authorized 60,000,000 shares; issued 15,861,316 15,861 15,861 Capital in excess of par value 72,729 72,542 Retained earnings (note 4) 473,941 466,514 Cumulative foreign currency translation adjustments (note 5) (1,891) (1,579) Treasury stock at cost (203,006) (182,825) -------- -------- TOTAL STOCKHOLDERS' EQUITY 386,826 399,705 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $703,447 $716,516 ======== ======== 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, 1998 and 1997 (000 omitted) (unaudited) Three Months Ended March 31 1998 1997 CASH FLOW FROM OPERATING ACTIVITIES CONTINUING Net earnings $ 10,178 $ 7,121 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,919 6,126 Deferred income taxes 1,120 (1,235) Equity in loss of joint ventures 1,019 717 Net change in current assets and liabilities (15,631) (22,927) Net change in noncurrent assets and liabilities (6,423) 4,341 Other 266 130 -------- -------- CASH USED BY OPERATING ACTIVITIES (2,552) (5,727) -------- -------- INVESTING ACTIVITIES Capital expenditures (6,942) (11,052) Capitalized purchased software costs (308) (240) Investment in joint ventures (2,652) (3,451) Acquisition of business (net of cash acquired) - (60,443) -------- -------- CASH USED BY INVESTING ACTIVITIES (9,902) (75,186) -------- -------- CASH USED BY CONTINUING OPERATIONS BEFORE FINANCING ACTIVITIES (12,454) (80,913) DISCONTINUED Cash used by discontinued operations before financing activities (814) (112,285) FINANCING ACTIVITIES Long-term debt incurred 641 241,940 Long-term debt retired - (4,675) Purchase of common stock held in treasury (20,231) (46,828) Proceeds from common stock options exercised - 2,432 Tax benefit from exercise of stock options - 287 Dividends paid (2,751) (3,560) -------- -------- CASH PROVIDED/(USED) BY FINANCING ACTIVITIES (22,341) 189,596 -------- -------- Net decrease in cash and cash equivalents (35,609) (3,602) Cash and cash equivalents-beginning of period 145,896 6,405 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $110,287 $ 2,803 ======== ======== See accompanying notes to unaudited condensed consolidated financial statements.
A.O. SMITH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (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, 1998 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 1997 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 1998 presentation. 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. Inventories (000 omitted) March 31, 1998 December 31, 1997 Finished products $ 43,993 $ 45,091 Work in process 18,685 19,656 Raw materials 45,093 42,870 Supplies 1,615 1,634 -------- -------- 109,386 109,251 Allowance to state inventories at LIFO cost 30,254 30,202 -------- -------- $ 79,132 $ 79,049 ======== ======== 4. Long-Term Debt The company's long-term credit agreements contain certain conditions and provisions which restrict the company's payment of dividends. Under the most restrictive of these provisions, retained earnings of $68.7 million were unrestricted as of March 31, 1998 for cash dividends and treasury stock purchases. 5. Comprehensive Earnings The company has adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes the standards for reporting and displaying comprehensive earnings and its components as part of a full set of financial statements. The company's other comprehensive income consists solely of foreign currency translation adjustments, which is disclosed separately in the Condensed Consolidated Statement of Earnings, Comprehensive Earnings, and Retained Earnings, as well as the Stockholders' Equity section of the Condensed Consolidated Balance Sheet. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FIRST THREE MONTHS OF 1998 COMPARED TO 1997 Sales were $223.0 million in the first quarter of 1998, an increase of approximately 14% over sales in the first quarter of 1997. Excluding the sales of UPPCO, the manufacturer of subfractional motors acquired on March 31, 1997, revenues increased $10.0 million or 5% compared with 1997 as a result of a 5% increase in sales at Water Systems and a 17% increase at Storage & Fluid Handling. First quarter earnings of $10.2 million were $3.1 million or 43% higher than 1997 earnings due to improvements at Storage & Fluid Handling and Water Systems, as well as higher interest income. On a per share basis, first quarter diluted earnings increased from $.34 to $.62 per share, reflecting the improvement in net earnings and the benefit of the company's continuing share repurchase program. The company's gross profit margin for the first quarter was 20.5%, compared with a margin of 21.8% in 1997. Lower margins were primarily due to lower relative margins at UPPCO and lower pricing in the Electric Motor Technologies segment. Sales in the first quarter for Electric Motor Technologies were $111.8 million, or $17.9 million higher than the same period last year. Excluding UPPCO, sales for the segment were flat compared to the first quarter of 1997, as increased sales in the pump and international business units offset a decline in the HVAC and after-market motor businesses. First quarter operating profits for Electric Motor Technologies were essentially flat compared to the first quarter of 1997. Earnings on UPPCO product were offset by lower prices and unfavorable product mix. Water Systems Technologies sales were $74.6 million in the first quarter of 1998, or $3.6 million higher than 1997 sales of $71.0 million. Overall, unit volumes for both residential and commercial water heaters increased 8% during the quarter. Sales increased 5%, reflecting the continued difficult pricing environment in the residential water heater marketplace. First quarter profits for Water Systems Technologies were modestly higher compared with 1997. First quarter sales for Storage & Fluid Handling Technologies were $36.6 million or 17% higher than the same period in 1997. Both units in this segment experienced solid increases in sales, with improvements in dry and liquid storage tank sales, as well as stronger sales of fiberglass pipe for petroleum production and service station applications. First quarter profits were significantly higher than the same period last year as a result of higher volumes and lower segment selling, general and administrative (SG&A) expenses. Overall, SG&A expenses for the first quarter of 1998 were slightly higher than the same period of 1997. As a percent of sales, SG&A expenses decreased from 14.0% in 1997 to 12.5% in 1998 as a result of lower administrative expense at both corporate and operating unit levels. The company recognized net interest income of $0.1 million in the first quarter of 1998, compared with net interest expense of $2.2 million in 1997. Investment of the proceeds from the sale of the company's automotive products division in April 1997 generated $1.7 million of interest income during the quarter. The first quarter effective tax rate was 35.0% in 1998, compared with a rate of 35.9% in 1997. The 1998 rate benefited from the impact of the company's foreign sales corporation as well as research and development tax credits. After-tax equity in losses of the company's Chinese joint ventures was $1.0 million in the first quarter of 1998, or $0.3 million higher than the same period in 1997, and is attributable to additional start up costs associated with the new water heating plant in Nanjing. The company expects current year losses in this operating unit to be comparable to the prior year. During 1997, the Financial Accounting Standards Board issued several Statements of Financial Accounting Standards ("SFAS") that are effective for the company in 1998. SFAS No. 130, "Reporting Comprehensive Income" is effective for the company as of January 1, 1998 and has been incorporated into the company's financial statements. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" is effective for the company for 1998. Neither of the statements will have any impact on A.O. Smith Corporation's results of operations, financial position or cash flows. During the first three months of 1998, the company was a party to futures contracts for the purposes of hedging a portion of certain raw material purchases. The company 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 company would not have been materially affected. Liquidity & Capital Resources The company's working capital was $218.9 million at March 31, 1998 compared with $237.8 million at December 31, 1997, a decline of $18.9 million. The reduction was primarily attributable to cash and cash equivalents which were $35.6 million lower at March 31, 1998 than at year end 1997. The decline in cash was primarily the result of stock repurchases in the amount of $20.2 million and a $17.9 million sales- related increase in accounts receivable. Cash flow from operations was $68.5 million higher than the same period last year primarily due to the $60 million acquisition of UPPCO in the first quarter of 1997 and lower capital expenditures during the first three months of this year compared with last year. Capital expenditures during the first quarter totaled $6.9 million compared with $11.1 million during the same period last year. The company expects lower capital spending in 1998 compared with 1997, and expects such capital expenditures to be covered by 1998 operating cash flow. The company repurchased 478,300 shares of its common stock during the first quarter of 1998 under the company's ongoing stock repurchase program. Since the program's inception in January of 1997, approximately 5.3 million shares have been repurchased. As of the end of the first quarter, $37.2 million remained of the $50 million authorization granted in December of 1997. At its April 9, 1998 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 May 15, 1998 to shareholders of record April 30, 1998. Forward Looking Statements Certain statements in this report are forward-looking statements. Although the company believes that its expectations are based upon reasonable assumptions within the bounds of its knowledge of its business, there can be no assurance that its financial goals will be realized. Although a significant portion of the company's sales are derived from the replacement of previously installed product and such sales are therefore less volatile, numerous factors may affect actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the company. Among such numerous factors the company includes the continued 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 company's joint venture strategies in China. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The company 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 company 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 and Note 12 of the Notes to Consolidated Financial Statements in the company's annual report on Form 10-K Report for the year ended December 31, 1997, which is 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 (27.1) Financial Data Schedule (27.2) Restated Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the company in the first quarter of 1998.
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 11, 1998 /s/John J. Kita John J. Kita Vice President, Treasurer and Controller May 11, 1998 /s/G. R. Bomberger G. R. Bomberger Executive Vice President and Chief Financial Officer
INDEX TO EXHIBITS Exhibit Number Description (27.1) Financial Data Schedule (27.2) Restated Financial Data Schedule