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, 1994
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 29, 1994: 6,077,129
Common Stock Outstanding as of April 29, 1994: 14,786,792
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, 1994 and 1993 3
Condensed Consolidated Balance Sheet
- March 31, 1994 and December 31, 1993 4-5
Condensed Consolidated Statements of Cash Flows
- Three months ended March 31, 1994 and 1993 6
Notes to Condensed Consolidated Financial Statements
- March 31, 1994 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 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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, 1994 and 1993
(000 omitted except for per share data)
(Unaudited)
Three Months Ended
March 31
EARNINGS 1994 1993
Electrical Products Company $ 70,441 $63,734
Automotive Products Company 182,615 155,438
Water Products Company 68,002 59,629
Smith Fiberglass Products Inc. 12,700 11,412
Agricultural Products 6,045 5,885
--------- ---------
NET REVENUES $339,803 $296,098
Cost of products sold 286,420 248,019
-------- ---------
Gross profit 53,383 48,079
Selling, general and administrative expenses 25,540 23,192
Interest expense 2,972 3,524
Other expense - net 216 311
---------- ---------
24,655 21,052
Provision for income taxes 9,303 8,501
---------- ---------
Earnings before equity in earnings of
affiliated companies 15,352 12,551
Equity in earnings of affiliated companies 354 475
---------- ---------
NET EARNINGS 15,706 13,026
RETAINED EARNINGS
Balance at beginning of period 177,543 147,065
Cash dividends on common shares (2,276) (5,624)
-------- --------
BALANCE AT END OF PERIOD $190,973 $154,467
======== ========
DIVIDENDS PER COMMON SHARE
Regular (Class A and common) $ .11 $ .10
Special (Common stock only) $ - $ .25
NET EARNINGS PER COMMON SHARE $ .76 $ .64
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, 1994 and December 31, 1993
(000 omitted)
(unaudited)
March 31, 1994 December 31, 1993
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,410 $ 11,902
Trade receivables 159,489 126,949
Finance subsidiary receivables and leases 18,795 19,151
Customer tooling 19,957 15,471
Inventories (note 2) 98,105 89,804
Deferred income taxes 27,068 27,614
Other current assets 15,518 12,987
-------- ----------
TOTAL CURRENT ASSETS 344,342 303,878
Investment in and advances to affiliated companies 24,012 23,669
Deferred model change 20,498 22,095
Finance subsidiary receivables and leases 48,107 53,481
Other assets 46,391 44,962
Property, plant and equipment 834,458 823,786
Less accumulated depreciation 458,777 448,772
-------- ---------
Net property, plant and equipment 375,681 375,014
-------- ---------
TOTAL ASSETS $859,031 $823,099
======== ========
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES
Trade payables $119,513 $ 99,320
Accrued payroll and pension 36,771 38,347
Postretirement benefit obligation 9,106 8,950
Other current liabilities 60,835 62,155
Long-term debt due within one year 8,744 8,819
Finance subsidiary long-term debt due within one
year 3,493 5,598
-------- ----------
TOTAL CURRENT LIABILITIES 238,462 223,189
Long-term debt (note 3) 154,025 148,851
Finance subsidiary long-term debt 37,774 41,723
Postretirement benefit obligation 70,218 69,773
Other liabilities 30,059 28,652
Deferred income taxes 43,143 41,281
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Class A common stock, $5 par value: authorized
7,000,000 shares; issued 6,081,592 and 6,084,845 30,408 30,424
Common stock, $1 par value: authorized
24,000,000 shares; issued 15,618,058 and
15,614,805 15,618 15,615
Capital in excess of par value 67,294 65,950
Retained earnings (note 3) 190,973 177,543
Pension liability adjustment (9,141) (9,141)
Cumulative foreign currency translation
adjustments (1,060) (841)
Treasury stock at cost (8,742) (9,920)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 285,350 269,630
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $859,031 $823,099
======== ========
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, 1994 and 1993
(000 omitted)
(unaudited)
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $15,706 $ 13,026
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 11,338 9,970
Deferred income taxes 2,408 2,755
Equity in earnings of affiliates, net of dividends (354) (475)
Deferred model change and software amortization 2,162 2,310
Other - net 395 1,334
Change in current assets and liabilities:
Trade receivables and customer tooling (36,793) (31,694)
Current income tax accounts-net 2,229 4,943
Inventories (8,301) (10,025)
Prepaid expenses and other (1,882) (1,280)
Trade payables 20,193 22,336
Accrued liabilities, payroll and pension (4,955) 4,106
Net change in noncurrent assets and liabilities 4,660 880
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 6,806 18,186
-------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (12,063) (13,869)
Other - net (512) (140)
------- ---------
CASH USED BY INVESTING ACTIVITIES (12,575) (14,009)
------ ---------
CASH FLOW BEFORE FINANCING ACTIVITIES (5,769) 4,177
------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt incurred 8,909 10,441
Long-term debt retired (3,810) (3,683)
Finance subsidiary net long-term debt retired (6,054) (4,880)
Proceeds from common stock options exercised 1,023 898
Other stock transactions 1,485 268
Dividends paid (2,276) (5,624)
--------- ---------
CASH USED BY FINANCING ACTIVITIES (723) (2,580)
Net increase (decrease) in cash and cash equivalents (6,492) 1,597
Cash and cash equivalents-beginning of period 11,902 6,025
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,410 $ 7,622
======== =========
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, 1994
(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, 1994 are not necessarily indicative of
the results expected for the full year. The consolidated balance
sheet as of December 31, 1993 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, 1994 December 31, 1993
Finished products $ 53,394 $ 53,337
Work in process 36,737 37,215
Raw materials 43,255 36,371
Supplies 6,056 5,228
------- -------
139,442 132,151
Allowance to state
inventories at LIFO cost 41,337 42,347
------- -------
$ 98,105 $ 89,804
======== =======
3. Long-Term Debt
On April 5, 1994, the $12.5 million 8.9 percent term loan agreement
was amended to carry a floating interest rate as of April 1994 and
the final maturity was extended from April 1996 to April 1999. The
interest rate is set at 50 basis points over LIBOR and the loan can
be repaid at any time without penalty.
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 $82.4 million were unrestricted as of March 31, 1994 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 THREE MONTHS OF 1994 COMPARED TO 1993
Revenues for the first quarter of 1994 were $339.8 million representing
the best quarterly performance on record and surpassing last year's first
quarter revenues by $43.7 million or 14.8 percent. Net earnings of $15.7
million or $.76 per share in the first quarter of 1994 also exceeded those
of any prior quarter and were $2.7 million higher than the $13.0 million
or $.64 per share reported in the same period last year.
Most of the Corporation's operating units benefitted from an expanding
economy which commenced in 1993 and continued in 1994 manifesting itself
in the form of increased sales for all of the Corporation's manufacturing
units and increased earnings in three of the Corporation's four largest
operating units when comparing the first quarter of 1994 to the same
period in 1993. While sales increased significantly in the first quarter
of 1994, the Corporation's overall gross profit margin declined from 16.2
percent in 1993's first quarter to 15.7 percent in the first quarter of
1994. The decline in the gross profit margin was due largely to costs
associated with new product launches within the Automotive Products
Company and competitive conditions in the electric motors markets.
The Automotive Products Company was the most notable beneficiary of the
expanding economy as they provided over 60 percent of the Corporation's
first quarter revenue increase. Automotive's 1994 first quarter sales
were $182.6 million representing an increase of $27.2 million or 17.5
percent over last year's first quarter. The significant sales increase
was the result of strong demand, particularly for light truck products in
which the company has a strong product presence.
The significant volume increase at Automotive resulted in 1994's earnings
being improved over the same period last year. The earnings
improvement was achieved despite having to contend with the costs
associated with a number of aggressive new product launches during the
quarter. The company began initial shipments of engine cradles and
trailing axles for the new Ford Windstar mini van. Full production of
this product is scheduled to occur by the end of the second quarter.
Automotive also began manufacturing the Toyota Camry rear suspension
assembly during the first quarter with full production anticipated by the
end of summer.
In the second quarter Automotive will begin shipping the engine cradle for
Ford's new Contour/Mystique passenger car. The company is responsible for
all North American cradle production and this program solidifies its
position as Ford's number one structure supplier.
In April, Automotive became aware that at the beginning of the 1998 model
year, it will no longer manufacture the engine cradle which is a component
of the front-suspension module it supplies for Chrysler's LH vehicles. In
1993 the cradle represented about $20 million in annual sales. Automotive
expects it will continue to supply both the front- and rear-suspension
modules for these vehicles.
Also in April, Automotive was awarded the contract to manufacture the full
frame for the 1996 model year Chrysler Dodge Ram extended cab model
pickup truck. This new business is expected to represent $35 million of
incremental sales. The company was also awarded a contract to manufacture
side member assemblies for the 1997 model Isuzu Rodeo and Honda Passport,
which should result in approximately $10 million of added annual sales and
continues to increase the company's penetration in the Japanese automotive
transplant segment of the market.
Equity in earnings of the Corporation's 40 percent owned Mexican
affiliate, Metalsa S.A. were modestly lower in the first quarter of 1994
compared to 1993. Start-up costs for new product and a continuation of
plant consolidation costs contributed to the lower earnings. Earnings are
expected to improve for the balance of 1994.
The Water Products Company experienced a 14 percent increase in sales in
the first quarter of 1994, climbing from $59.6 million in the first
quarter of 1993 to $68.0 million. Sales of residential water heaters were
particularly strong, reflecting the company's very competitive position in
the replacement market and the growth in new housing.
The incremental earnings for Water Products in the first quarter of 1994
over the same quarter last year were consistent with the increase in
residential product sales.
First quarter sales for the Electrical Products Company increased $6.7
million or 10.5 percent from the first quarter of 1993. The company's
first quarter earnings declined from 1993 first quarter levels as a result
of continuing pricing pressures within the motor market and certain
manufacturing inefficiencies.
Sales for Smith Fiberglass Products increased 11.3 percent when comparing
the first quarter of 1994 to 1993. First quarter shipments of service
station pipe were higher than the previous year despite the poor weather
conditions that hindered field installation. The chemical/industrial
markets and international petroleum production market also showed strength
in the first quarter.
First quarter earnings for Fiberglass Products were significantly higher
than those of the prior year's first quarter as a direct result of
increased volume and favorable product mix.
Smith Fiberglass received a boost to its international marketing efforts
during the first quarter when the Little Rock, AR facility earned ISO-9001
certification. With most countries outside the U.S. accepting ISO-9000
standards, this designation will enable the company to expand overseas
sales activity, especially for service station and oil field pipe. To
support this increased international presence, a sales and marketing
office was opened in London, England during the first quarter.
Revenues for A. O. Smith Harvestore Products, Inc. (AOSHPI) increased
modestly in the first quarter of 1994 as they experienced increased sales
especially in the municipal/industrial and water and waste storage
markets. Revenues for AgriStor Credit Corporation declined from the
levels of a year ago as the process of liquidating this finance subsidiary
continues. The loss incurred in the quarter reflects the seasonality of
AOSHPI's business and was at an expected level consistent with the first
quarter of 1993.
Selling, general and administrative expenses in the first quarter were
approximately $2.3 million more than the same period of 1993 but declined
as a percentage to sales from 7.8 percent in 1993 to 7.5 percent in 1994.
The absolute increase in expense was due mostly to higher employee
incentive and profit sharing accruals associated with the increased
earnings. Interest expense for the first quarter declined $.6 million
from the levels incurred in last year's first quarter as a result of lower
debt. The Corporation's effective tax rate in 1994 was lower than the
1993 rate due to the recognition of foreign tax credits.
The record sales and earnings established in the first quarter of 1994
supports the Corporation's objective of surpassing 1993's record
results. Assuming increases in short term borrowing rates do not
significantly impact the current favorable conditions within the
automotive and housing industries, the favorable trend established in the
first quarter should continue throughout the year. In view of this
projection, in April the Board of Directors increased the quarterly
dividend by 18 percent, from $.11 to $.13 per share commencing with the
dividend paid in May.
In the quarter, the corporation sent a delegation of senior executives
including the chief executive officer to the Peoples Republic of China
in order to assess opportunities in that market.
In March, the Corporation learned that the United States District
Court for the Southern District of Ohio ruled that a lawsuit filed by
three Ohio farmers in 1992 against the Corporation and Harvestore Products
can conditionally proceed as a class action on behalf of all purchasers of
Harvestore/R/ structures. The court's ruling does not address the merits of
the claims, and the court retains the discretion to decertify the class at
any time. The Corporation remains confident this issue can be resolved,
that adequate insurance and reserves are in place and the original
strategy of selling Harvestore and liquidating AgriStor can be pursued.
Liquidity and Capital Resources
The Corporation's working capital was $105.9 million at March 31, 1994
compared to $80.7 million at December 31, 1993. The majority of the
increase can be attributed to sales related increases in trade receivables
of $32 million and inventories of $8 million offset by a corresponding
increase in trade payables of $20 million.
Cash flow provided by operations was $11.4 million less than the same
period last year primarily due to increased working capital requirements.
The Corporation's long-term debt increased $5.2 million in the first three
months of 1994 to $154 million to finance working capital. The finance
subsidiary's long-term debt decreased $3.9 million during the first
quarter to $37.8 million, reflecting the continuing liquidation of the
business.
The Corporation anticipates that a combination of current earnings trends
and moderating working capital requirements will reduce debt and its debt-
to-equity ratio during the balance of 1994. Capital spending continues
at higher levels due largely to new autmotive product programs and is
expected to exceed $80 million in 1994.
On April 5, 1994, the $12.5 million 8.9 percent term loan agreement was
amended to carry a floating interest rate as of April 1994 and the final
maturity was extended from April 1996 to April 1999 (see Note 3).
At its April 14, 1994 meeting, A. O. Smith's Board of Directors increased
the regular quarterly dividend to $.13 per share on its common stock
(Classes A and Common) from $.11 per share. The dividend is payable on
May 16, 1994 to shareholders of record as of April 29, 1994.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
At March 31, 1994, the Corporation or A.O. Smith Harvestore Products, Inc.
("AOSHPI"), a wholly-owned subsidiary of the Corporation, were defendants
in approximately twenty-six (26) cases filed by various plaintiffs who
were 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 1994, three new cases were filed against the Corporation and
AOSHPI and three cases were settled. Among the pending cases is a case in
the New York State Court in the County of Dutchess brought by five parties
on "behalf of themselves and all other New York State residents similarly
situated who have purchased or leased Harvestore structures from any
defendant at anytime." The plaintiffs are seeking to recover for the
putative class the lease payments or purchase price paid for the
Harvestore structures, restitution for damages together with interest and
attorney fees. To date, the Corporation and AOSHPI have procured rulings
from the Court striking a number of the plaintiffs' claims, the balance of
the claims are also being procedurally attacked and the Corporation and
AOSHPI have filed their answers.
On March 25, 1994, the United States District Court for the Southern
District of Ohio ruled that a lawsuit filed by three Ohio farmers in 1992
against the Corporation and AOSHPI, as previously described in Part I,
Item 3, of the Corporation's 1992 and 1993 annual reports on Form 10-K,
can conditionally proceed as a class action on behalf of all purchasers of
Harvestore/R/ structures. The Court's ruling does not address the merits
of the claims, and the court retains the discretion to decertify the class
at any time. The Corporation believes that any damages, including any
punitive damages, arising out of the pending cases, including the
conditionally certified class action, are adequately covered by insurance
and recorded reserves.
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 ended December 31, 1993 which is incorporated herein by
reference.
PART II -- OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES
On April 5, 1994 the Corporation's $12.5 million term loan agreement with
NBD Bank, N.A. was amended to carry a floating interest rate as of April
1994 and the final maturity was extended from April 1996 to April 1999.
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.
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4) Term Loan Agreement, dated April 5, 1994, between A. O. Smith
Corporation and NBD Bank, N.A.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation in the first
quarter of 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly casued this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A. O. SMITH CORPORATION
May 6, 1994 THOMAS W. RYAN
Thomas W. Ryan
Vice President
Treasurer and Controller
May 6, 1994 G. R. BOMBERGER
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Exhibit
(4) Term Loan Agreement, dated April 5, 1994, between A. O. Smith
Corporation and NBD Bank, N.A.