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, 2002.
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 245008, Milwaukee, Wisconsin 53224-9508
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 March 31, 2002 8,638,989 shares
Common Stock Outstanding as of March 31, 2002 15,218,012 shares
Exhibit Index Page 19
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings
- Three months ended March 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets
- March 31, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows
- Three months ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements
- March 31, 2002 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Index to Exhibits 18
2
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months ended March 31, 2002 and 2001
(000 omitted except for per share data)
(unaudited)
Three Months Ended
March 31
------------------------------------
2002 2001
---------------- ------------------
Electrical Products $ 196,234 $ 226,253
Water Systems 175,693 91,982
---------------- ------------------
Net sales 371,927 318,235
Cost of products sold 295,026 259,440
---------------- ------------------
Gross profit 76,901 58,795
Selling, general and administrative expenses 53,204 38,123
Interest expense 4,177 4,801
Amortization of intangibles 81 1,733
Other expense - net 789 599
---------------- ------------------
18,650 13,539
Provision for income taxes 6,528 5,010
---------------- ------------------
Net Earnings $ 12,122 $ 8,529
================ ==================
Earnings per Common Share
Basic $0.51 $0.36
===== =====
Diluted $0.50 $0.36
===== =====
Dividends per Common Share $0.13 $0.13
===== =====
See accompanying notes to unaudited condensed consolidated financial statements.
3
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
(000 omitted except for per share data)
(unaudited)
March 31, 2002 December 31, 2001
-------------- -----------------
Assets
Current Assets
Cash and cash equivalents $ 21,851 $ 20,759
Receivables 237,690 209,871
Inventories 192,578 194,706
Deferred income taxes 18,878 22,403
Other current assets 16,456 28,039
Net current assets - discontinued operations - 1,796
-------------- --------------
Total Current Assets 487,453 477,574
Property, plant and equipment 641,804 637,503
Less accumulated depreciation 292,817 282,205
-------------- --------------
Net property, plant and equipment 348,987 355,298
Goodwill 295,723 295,073
Other intangible assets 6,480 6,851
Other assets 166,579 159,127
-------------- --------------
Total Assets $ 1,305,222 $ 1,293,923
============== ==============
Liabilities
Current Liabilities
Notes payable $ - $ 3,280
Trade payables 138,191 131,073
Accrued payroll and benefits 31,464 29,525
Accrued liabilities 55,949 58,443
Product warranty 19,155 19,470
Income taxes 2,419 887
Long-term debt due within one year 13,272 13,272
Net current liabilities - discontinued operations 2,902 -
-------------- --------------
Total Current Liabilities 263,352 255,950
Long-term debt 378,867 390,385
Other liabilities 130,277 133,556
Deferred income taxes 66,577 62,154
-------------- --------------
Total Liabilities 839,073 842,045
Stockholders' Equity
Class A common stock, $5 par value: authorized
14,000,000 shares; issued 8,671,584 43,358 43,432
Common stock, $1 par value: authorized 60,000,000
shares; issued 23,877,778 23,878 23,863
Capital in excess of par value 55,697 54,785
Retained earnings 560,448 551,420
Accumulated other comprehensive loss (2,815) (6,858)
Treasury stock at cost (214,417) (214,764)
-------------- --------------
Total Stockholders' Equity 466,149 451,878
-------------- --------------
Total Liabilities and Stockholders' Equity $ 1,305,222 $ 1,293,923
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements
4
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(000 omitted)
(unaudited)
Three Months Ended
March 31
---------------------------------------
2002 2001
-------------- ---------------
Continuing
Operating Activities
Earnings from continuing operations $ 12,122 $ 8,529
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 11,941 9,291
Amortization 356 2,120
Net change in current assets and liabilities 3,024 (27,610)
Net change in other noncurrent assets and liabilities (5,516) (5,832)
Other 927 218
------------- --------------
Cash Provided by (Used in) Operating Activities 22,854 (13,284)
Investing Activities
Capital expenditures (7,080) (9,520)
Acquisition of business (2,050) -
------------- --------------
Cash Used in Investing Activities (9,130) (9,520)
Cash Flow before Financing Activities 13,724 (22,804)
Financing Activities
Long-term debt retired (14,798) (20,666)
Net proceeds from common stock and option activity 815 101
Dividends paid (3,094) (3,061)
------------- --------------
Cash Used in Financing Activities (17,077) (23,626)
Cash Provided by Discontinued Operations 4,445 44,201
------------- --------------
Net increase (decrease) in cash and cash equivalents 1,092 (2,229)
Cash and cash equivalents-beginning of period 20,759 15,287
------------- --------------
Cash and Cash Equivalents - End of Period $ 21,851 $ 13,058
============= ===============
See accompanying notes to unaudited condensed consolidated financial statements.
5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2002 are not
necessarily indicative of the results expected for the full year. It is
suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the company's latest Annual
Report on Form 10-K. Certain prior year amounts have been reclassified to
conform to the 2002 presentation.
2. Acquisitions
On December 28, 2001, A. O. Smith Corporation (the company) acquired all
of the outstanding stock of State Industries, Inc. (State) for an
aggregate purchase price of $117.5 million. This was comprised of $57.8
million for the outstanding stock, assumption of $56.3 million of debt,
and $3.4 million of acquisition costs, of which $2.1 million were paid
during the three-month period ended March 31, 2002. The purchase price was
allocated to the assets acquired and liabilities assumed based upon
current estimates of their respective fair values at the date of
acquisition. In connection with the State acquisition, additional purchase
liabilities of $3.9 million were recorded for employee severance. As of
March 31, 2002, total costs incurred and charged against this liability to
date totaled $0.6 million.
On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s
(MagneTek) domestic electric motor business and six wholly owned foreign
subsidiaries for $244.6 million. In connection with the MagneTek
acquisition, the company recorded additional purchase liabilities of $17.9
million, which included employee severance and relocation, as well as
certain facility exit costs. The remaining balance of such purchase
liabilities at March 31, 2002 is $6.0 million.
3. Business Improvement Programs
In the fourth quarter of 2001, the company recorded restructuring and
other charges of $9.4 million. The charges included employee separation
costs of $7.7 million associated with product or component manufacturing
repositioning and the realignment of certain administrative functions. The
resulting reduction of workforce is approximately 150 salaried and 775
hourly employees. In addition, the company recorded facility impairment
and lease charges of $1.7 million representing estimated costs of
facilities to be vacated. The company
6
spent $1.5 million through March 31, 2002 for employee severance and
separation costs. As a result of actions taken through March 31, 2002, the
workforce has been reduced by approximately 94 employees. The company
expects to be substantially completed with the realignment activities
prior to December 31, 2002.
4. Inventories (000 omitted)
March 31, 2002 December 31, 2001
-------------- -----------------
Finished products $ 125,155 $ 120,231
Work in process 37,228 40,210
Raw materials 54,305 58,375
----------- -----------
216,688 218,816
Allowance to state inventories
at LIFO cost 24,110 24,110
----------- -----------
$ 192,578 $ 194,706
=========== ===========
5. Goodwill and Other Intangible Assets
The company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", effective January 1, 2002.
Under SFAS No. 142, goodwill and certain other intangible assets are no
longer amortized but are reviewed for impairment. In connection with the
adoption of SFAS No. 142, the company has completed the first step of the
transitional goodwill impairment test, which requires the company to
compare the fair value of its reporting units to the carrying value of the
net assets of the respective reporting units as of January 1, 2002. Based
on this analysis, the company has concluded that no impairment existed at
the time of adoption, and, accordingly, the company has not recognized any
transitional impairment loss.
Changes in the carrying amount of goodwill during the first quarter of
2002 consist of the following (000 omitted):
Electrical Water
Products Systems Total
----------- ---------- -----------
Balance at December 31, 2001 $ 230,004 $ 65,069 $ 295,073
Adjustment to property, plant and equipment
and other assets (37) 328 291
Additional acquisition costs - 359 359
---------- --------- ----------
Balance at March 31, 2002 $ 229,967 $ 65,756 $ 295,723
======= ========= =======
As required by SFAS No. 142, the results of operations for periods prior
to its adoption have not been restated. The following table reconciles
reported net earnings and earnings per share to pro forma net earnings and
earnings per share that would have resulted for the three-month period
ended March 31, 2001 if SFAS No. 142 had been adopted effective January 1,
2001 (000 omitted, except per share amounts):
7
Three Months Ended
March 31, 2001
----------------------
Net earnings as reported $ 8,529
Goodwill amortization - after tax 995
Assembled workforce amortization - after tax 58
--------
Net earnings - pro forma 9,582
========
Basic earnings per share:
As reported $ 0.36
========
Pro forma $ 0.41
========
Diluted earnings per share:
As reported $ 0.36
========
Pro forma $ 0.40
========
Other intangible assets at March 31, 2002 and December 31, 2001 consist of
the following (000 omitted):
March 31, 2002
----------------------------------------
Amortization Carrying Accumulated
Period Amount Amortization Net
---------------- ------- ------------ --------
Intangible assets subject
to amortization:
Patents 10 - 12 years $ 618 $ (126) $ 492
Customer lists 30 years 2,600 (231) 2,369
Other 5 - 15 years 996 (407) 589
------- ------ ------
4,214 (764) 3,450
Intangible assets not subject
to amortization:
Trademarks and other 3,030 - 3,030
----- ------ -----
Total intangible assets $ 7,244 $ (764) $ 6,480
======= ====== ======
December 31, 2001
----------------------------------------
Amortization Carrying Accumulated
Period Amount Amortization Net
---------------- ------- ------------ --------
Intangible assets subject
to amortization:
Patents 10 - 12 years $ 618 $ (111) $ 507
Customer lists 30 years 2,600 (209) 2,391
Other 5 - 15 years 1,296 (373) 923
------- ------ ------
4,514 (693) 3,821
Intangible assets not subject
to amortization:
Trademarks and other 3,030 - 3,030
----- ------ -----
Total intangible assets $ 7,544 $ (693) $ 6,851
======= ====== ======
8
Amortization expense is projected to be approximately $0.2 million for
each of the fiscal years ended December 31, 2002 through 2006.
6. Long-Term Debt
The company's credit agreement and term notes contain certain conditions
and provisions which restrict the company's payment of dividends. Under
the most restrictive of these provisions, retained earnings of $66.6
million were unrestricted as of March 31, 2002.
7. Comprehensive Earnings (000 omitted)
The company's comprehensive earnings were comprised of net earnings,
foreign currency translation adjustments, and realized and unrealized
gains and losses on cash flow derivative instruments. Also included in
comprehensive earnings for the three-month period ended March 31, 2001 was
a cumulative loss on cash flow hedges of approximately $0.6 million in
connection with the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, on January 1, 2001.
Three Months Ended
March 31
-------------------------
2002 2001
----------- ----------
Net Earnings $ 12,122 $ 8,529
Other comprehensive earnings (loss):
Foreign currency translation adjustments (276) (1,817)
Unrealized net gain on cash flow
derivative instruments less related income
tax: 2002- $2,767 and 2001- $209 4,319 326
--------- -------
Comprehensive Earnings $ 16,165 $ 7,038
========= =======
8. Earnings per Share of Common Stock
The numerator for the calculation of basic and diluted earnings per share
is net earnings. The following table sets forth the computation of basic
and diluted weighted-average shares used in the earnings per share
calculations:
Three Months Ended
March 31
-------------------------
2002 2001
---------- ----------
Denominator for basic earnings
per share
- weighted-average shares 23,772,140 23,511,254
Effect of dilutive stock options 545,337 316,965
---------- ----------
Denominator for diluted earnings
per share 24,317,477 23,828,219
========== ==========
9
9. Operations by Segment (000 omitted)
Three Months Ended
March 31
---------------------------------
2002 2001
------------- ------------
Net sales
Electrical Products $ 196,234 $ 226,253
Water Systems 175,693 91,982
---------- -----------
$ 371,927 $ 318,235
========== ==========
Earnings before interest and taxes
Electrical Products $ 15,162 $ 14,024
Water Systems 13,578 9,851
---------- ---------
28,740 23,875
Corporate expenses (5,913) (5,535)
Interest expense (4,177) (4,801)
----------- ---------
Earnings from continuing
operations before income taxes 18,650 13,539
Provision for income taxes (6,528) (5,010)
---------- ---------
Earnings from continuing operations $ 12,122 $ 8,529
========== =========
Intersegment sales, which are immaterial, have been excluded from segment
revenues.
10. Accounting for Derivative Instruments
The company utilizes certain derivative instruments to enhance its ability
to manage currency exposures and raw materials price risks. Derivative
instruments are entered into for periods consistent with the related
underlying exposures and do not constitute positions independent of those
exposures. The company does not enter into contracts for speculative
purposes. The company has hedged certain of its forecasted exposures.
Greater than 98 percent of these contracts expire by December 31, 2003.
The contracts are executed with major financial institutions with no
credit loss anticipated for failure of the counterparties to perform.
Foreign Currency Forward Contracts
The company is exposed to foreign currency exchange risk as a result of
transactions in currencies other than the functional currency of certain
subsidiaries. The company utilizes foreign currency forward purchase and
sale contracts to manage the volatility associated with foreign currency
purchases and certain intercompany transactions in the normal course of
business. Contracts typically have maturities of a year or less. Principal
currencies include the Mexican peso, Hungarian forint, British pound, Euro
and U.S. dollar.
10
Forward contracts are accounted for as cash flow hedges of a forecasted
transaction. The fair value of these currency derivatives of $5.9 million
and $6.6 million have been recorded in other current assets as of March
31, 2002 and December 31, 2001, respectively. Gains and losses on these
instruments are recorded in other comprehensive income(loss) until the
underlying transaction is recorded in earnings. When the hedged item is
realized, gains or losses are reclassified from accumulated other
comprehensive income(loss) to the statement of earnings. The assessment of
effectiveness for forward contracts is based on changes in the forward
rates. These hedges have been determined to be perfectly effective.
Commodity Future Contracts
In addition to entering into supply arrangements in the normal course of
business, the company also enters into future contracts to fix the cost of
certain raw material purchases, principally copper, with the objective of
minimizing changes in inventory cost due to market price fluctuations.
The commodity future contracts are designated as cash flow hedges of a
forecasted transaction. Derivative commodity liabilities of $1.2 million
and $6.9 million are recorded in accrued liabilities as of March 31, 2002
and December 31, 2001, respectively, with the value of the effective
portion of the contracts of $0.8 million and $6.9 million recorded in
accumulated other comprehensive income(loss) as of March 31, 2002 and
December 31, 2001, respectively, and reclassified into cost of products
sold in the period in which the underlying transaction is recorded in
earnings. Ineffective portions of the commodity hedges are recorded into
earnings in the period in which the ineffectiveness occurs. Hedge
ineffectiveness and impact on earnings was not material for the
three-month periods ended March 31, 2002 and 2001, respectively.
The majority of the amounts in accumulated other comprehensive
income(loss) for cash flow hedges are expected to be reclassified into
earnings within a year.
11. Subsequent Event
On April 12, 2002, the company filed a Registration Statement on Form S-3
(Reg. No. 333-86074) with the Securities and Exchange Commission to sell
up to 4,025,000 shares of common stock.
11
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 2002 COMPARED TO 2001
First Quarter 2002 and 2001
Sales in the first quarter of 2002 were $371.9 million, an increase of $53.7
million or 16.9 percent over sales of $318.2 million in the first quarter of
2001. Increased year-over-year first quarter sales for our water systems segment
of $83.7 million more than offset a decline in sales of $30.0 million for our
electrical products segment. The significant increase in first quarter sales of
our water systems segment was attributable to the $84.1 million of sales
associated with our acquisition of State Industries on December 28, 2001. The
decline in electrical products segment sales reflects continued softness in the
electric motor market.
Our gross profit margin was 20.7 percent in the first quarter of 2002 compared
with the 18.5 percent margin achieved in the first quarter of 2001. The increase
was the result of cost reductions in our electrical products segment and the
addition of State Industries.
Selling, general and administrative expense for the first quarter of 2002 was
$53.2 million or $15.1 million higher than the $38.1 million expense in the
first quarter of 2001. The increase in selling, general and administrative
expense was the result of the additional $14.0 million of expense associated
with State Industries and a $1.7 million charge associated with the
consolidation of water systems' management staff. This increase was partially
offset by reduced selling, general and administrative expense in our electrical
products segment resulting from the business improvement programs announced in
the fourth quarter of 2001.
Interest expense in the first quarter of 2002 declined to $4.2 million from $4.8
million in the first quarter of 2001. While our debt levels were higher in the
first quarter of 2002 than the same quarter last year, a significant decline in
interest rates resulted in reduced interest expense.
We have significant pension benefit costs and credits we develop from actuarial
valuations. These valuations reflect key assumptions regarding, among other
things, discount rates, expected returns on plan assets, retirement ages and
years of service. We are required to consider current market conditions,
including changes in interest rates, in making these assumptions. Changes in
related pension costs or credits may occur in the future as a result of changes
affecting the assumptions. We recognized $4.5 million of pension credits in the
first quarter of 2002 including $0.6 million of pension expense associated with
the State Industries acquisition. In the first quarter of 2001, we recognized
$4.5 million of pension credits, and in all of 2001, we recognized pension
credits of $20.2 million. These credits are reflected as offsets to cost of
products sold and selling, general and administrative expense.
Our effective tax rate declined from 37.0 percent in the first quarter of 2001
to 35.0 percent in the first quarter of 2002 due primarily to the implementation
of a more efficient tax structure for international operations.
12
Net earnings in the first quarter of 2002 were $12.1 million or $3.6 million
higher than net earnings of $8.5 million in the first quarter of 2001. On a per
share basis, net earnings in the first quarter of 2002 were $.50 compared to the
$.36 in the first quarter of 2001. The increase in earnings was primarily
attributable to increased earnings for our water systems segment (discussed
subsequently), the elimination of goodwill amortization of $1.6 million, and the
aforementioned $0.6 million decrease in interest expense.
Electrical Products
First quarter sales for our electrical products segment were $196.2 million or
$30.0 million lower than sales of $226.2 million in the same period last year,
and reflect continued softness in the electric motor market. Our heating,
ventilation and air conditioning (HVAC) and pump business declined approximately
15 percent during the quarter compared to last year, with the remainder of the
business down approximately ten percent. Though air conditioning inventory
replenishment is progressing slower than we had anticipated at the beginning of
the year, we believe air conditioning inventories remain at historically low
levels and offer sales upside as we progress through the year.
Operating earnings for our electrical products segment in the first quarter of
2002 were $15.1 million or $0.5 million less than the $15.6 million of operating
earnings in the first quarter of 2001, as adjusted to exclude $1.6 million of
goodwill amortization. Notwithstanding this decrease in operating earnings,
operating margins improved from 6.9 percent to 7.7 percent. The favorable trend
in our year-over-year operating margin for electrical products was the result of
cost reduction activities, including those announced in the fourth quarter of
2001.
Water Systems
First quarter sales for our water systems segment were $175.7 million, or $83.7
million higher than sales of $92.0 million in the same period last year. The
increase in sales was associated with our State Industries acquisition which
recorded sales of $84.1 million in the first quarter. Excluding the State
acquisition, sales in the water systems segment were flat. Higher sales in the
commercial and China business offset a modest decline in residential and other
products.
Operating earnings for our water systems segment in the first quarter of 2002
were $13.6 million, which included $3.8 million of earnings associated with the
State Industries acquisition. The net $9.8 million of earnings for our base
water heater business compared to first quarter 2001 profits of $9.9 million and
included a $1.7 million charge associated with the consolidation of water
systems' management staff.
Outlook
We previously issued a forecast for 2002 that called for earnings to range
between $1.40 to $1.60. Although we continue to be cautious about the timing and
magnitude of the market recovery in 2002, we have improved our earnings
projection to a range of $1.60 to $1.70 per share. This increase is based on the
early and projected continued success of our cost-reduction programs and the
integration of State Industries and is based on share levels currently
outstanding. On the same basis, we expect second quarter earnings per share to
be similar to or slightly higher than first quarter levels.
13
Our earnings expectations for 2002 also are based on a number of other
assumptions, including: no declines in consumer spending or weakening of the
economy compared with current levels; normal U. S. weather conditions during the
spring and summer of 2002; and no material price changes for raw materials,
including steel, aluminum, and copper.
Liquidity & Capital Resources
Our working capital for continuing operations was $227.0 million at March 31,
2002, $7.2 million higher than at December 31, 2001. A sales-related increase in
accounts receivable of $27.8 million was partially offset by increases in
accounts payable and a reduction in our other current assets account as a result
of receiving an expected $12.4 million tax refund in the first quarter of 2002.
Cash provided by our operations during the first quarter of 2002 was $22.9
million compared with $13.3 million of cash used by our operations during the
same period in 2001. We had higher earnings and smaller increases to working
capital during the first quarter of 2002 compared with the first quarter of
2001. We project operating cash flow of $75 to $80 million for the full year.
Our capital expenditures during the first quarter of 2002 totaled $7.1 million,
which was less than the $9.5 million spent in the first quarter of 2001 due to
lower spending by our electrical products segment. We are projecting 2002
capital expenditures of $45 million, an increase of approximately $10 million
over the prior year, due primarily to the acquisition of State Industries. We
expect the level of 2002 capital expenditures to be marginally lower than 2002
depreciation expense and that cash flow during 2002 will adequately cover
planned capital expenditures. We believe that our present facilities and planned
capital expenditures are sufficient to provide adequate capacity for our
operations in 2002.
Our long-term debt decreased by $11.5 million from $390.4 million at December
31, 2001 to $378.9 million at March 31, 2002. Our leverage as measured by the
ratio of total debt to total capitalization was 45.7 percent, down slightly from
the end of 2001. Excluding potential acquisitions and assuming current
outstanding share levels, we expect 2002 cash flow to result in a year-end
leverage ratio of approximately 43%, closer to our long-term target of 40%. We
did not enter into any significant operating leases during the first quarter of
2002. We expect to have adequate liquidity in 2002 as we have a minimal amount
of long-term debt maturing, and we have adequate credit facilities to support
our short-term borrowing needs. At March 31, 2002, our company had available
borrowing capacity of $92.2 million under our credit facilities. We believe that
the combination of available borrowing capacity and operating cash flow will
provide sufficient funds to finance our existing operations for the foreseeable
future.
In connection with our acquisition of State Industries in December of 2001, we
recorded additional purchase liabilities of approximately $3.9 million
associated with employee severance costs. As of March 31, 2002, we have charged
$0.6 million against this reserve. In addition, we recorded purchase liabilities
of $17.9 million in 1999 associated with our MagneTek motor acquisition, which
included employee severance and relocation, as well as certain facility costs.
The balance of the MagneTek purchase liabilities was $6.0 million at March 31,
2002. We expect these activities to be completed within the next year.
14
On April 9, 2002, our board of directors declared a regular quarterly dividend
of $.13 per share on our Common stock and Class A common stock, which is payable
on May 15, 2002 to stockholders of record on April 30, 2002.
15
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
As is more fully described in our annual report on Form 10-K for the year ended
December 31, 2001, we are exposed to various types of market risks, primarily
currency and certain commodities. We monitor our risks in these areas on a
continuous basis and generally enter into forward and futures contracts to
minimize these exposures for periods of less than one year. Our company does not
engage in speculation in our derivative strategies. It is important to note that
gains and losses from our forward and futures contract activities are offset by
changes in the underlying costs of the transactions being hedged.
Forward Looking Statements
This document contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements, other than statements of historical facts, including
statements made in the "Outlook" section of this document, statements regarding
our future financial position, business strategy, budgets, projected sales,
costs and earnings, and plans and objectives for future operations, are
forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking words such as "may," "will," "expect,"
"intend," "estimate," "anticipate," "believe," "continue," or words of similar
meaning. These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those anticipated as
of the date of this filing. Factors that could cause such a variance include the
following: instability in our electric motor and water products markets; our
inability to timely and properly integrate our acquisition of State Industries;
our inability to implement cost-reduction programs; adverse changes in general
economic conditions; competitive pressures on our businesses; and the potential
that assumptions on which we based our expectations are inaccurate or will prove
to be incorrect.
The forward-looking statements included in this document are made only as of the
date of this filing, and we undertake no obligation to update publicly these
statements to reflect subsequent events or circumstances. All subsequent written
and oral forward-looking statements attributable to the company, or persons
acting on its behalf, are expressly qualified in their entirety by these
cautionary statements.
A. O. Smith Corporation, with headquarters in Milwaukee, Wis., is one of North
America's largest manufacturers of electric motors, with a comprehensive line of
hermetic motors, fractional horsepower alternating current (AC) and direct
current (DC) motors, and integral horsepower motors, as well as one of North
America's largest manufacturers of residential and commercial water heating
equipment. A. O. Smith Corporation has facilities in the United States, Mexico,
Canada, England, Ireland, Hungary, the Netherlands, and China and employs
approximately 15,000 people.
16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There have been no material changes in the legal and environmental matters
discussed in Part 1, Item 3 and Note 13 of the Notes to Consolidated Financial
Statements in the company's Form 10-K Report for the year ended December 31,
2001, which is incorporated herein by reference. In such report, the company
reported that it is currently involved as a potentially responsible party in
judicial and administrative proceedings initiated on behalf of various state and
federal regulatory agencies seeking to clean up 12 sites which have been
environmentally impacted (the "Sites") and to recover costs they have incurred
or will incur as to the Sites. During the first quarter the company resolved its
past, present and future liability at one of those sites under a de minimis
settlement agreement with the United States Environmental Protection Agency,
reducing the number of Sites at which it is currently involved to 11.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed in the accompanying Index to Exhibits are
incorporated by reference as part of this Quarterly Report on Form
10-Q.
(b) Reports on Form 8-K:
On January 11, 2002, the company filed a Current Report on Form 8-K,
dated December 28, 2001 (the "Form 8-K"), reporting under Items 2 and 7
the company's acquisition of all of the issued and outstanding shares
of State Industries. On March 12, 2002, the company filed an amendment
on Form 8-K/A to the Form 8-K. The Form 8-K, as amended, included
audited financial statements for State Industries as of December 31,
2000 and for the year ended December 31, 2000, unaudited financial
statements for State Industries as of September 29, 2001 and for the
nine months ended September 29, 2001 and September 30, 2000, and
unaudited pro forma condensed consolidated financial statements for the
company for the year ended December 31, 2000 and the nine months ended
September 30, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has authorized this report to be signed on its behalf by the
undersigned.
A. O. SMITH CORPORATION
April 17, 2002 /s/John J. Kita
-----------------------------
John J. Kita
Vice President,
Treasurer and Controller
April 17, 2002 /s/Kenneth W. Krueger
-----------------------------
Kenneth W. Krueger
Senior Vice President
and Chief Financial Officer
18
INDEX TO EXHIBITS
Exhibit
Number Description
(4.1) First Amendment, dated as of July 28, 2000, to Credit Agreement,
among A. O. Smith Corporation, various financial institutions, Bank
One, N.A. (formerly The First National Bank of Chicago), as
Syndication Agent, and Bank of America, N.A., as Agent [Incorporated
by reference to Exhibit 4.3 to A. O. Smith Corporation's
Registration Statement on Form S-3 (Reg. No. 333-86074)].
(4.2) Second Amendment, dated as of July 27, 2001, to Credit Agreement,
among A. O. Smith Corporation, various financial institutions, Bank
One, N.A. (formerly The First National Bank of Chicago), as
Syndication Agent, and Bank of America, N.A., as Agent [Incorporated
by reference to Exhibit 4.4 to A. O. Smith Corporation's
Registration Statement on Form S-3 (Reg. No. 333-86074)].
19
