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, 2003.
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No ___
Class A Common Stock Outstanding as of September 30, 2003 -- 8,514,204 shares
Common Stock Outstanding as of September 30, 2003 -- 20,682,709 shares
Exhibit Index Page 18
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings
- Three and nine months ended September 30, 2003 and 2002 3
Condensed Consolidated Balance Sheets
- September 30, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Cash Flows
- Nine months ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements
- September 30, 2003 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Item 4. Controls and Procedures 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
Exhibit 31.1 19-20
Exhibit 31.2 21-22
Exhibit 32 23
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- ----------------------------
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Three and Nine Months ended September 30, 2003 and 2002
(dollars in millions, except for per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ --------------------
2003 2002 2003 2002
---- ---- ---- ----
Electrical Products $ 201.2 $ 197.5 $ 641.9 $ 612.9
Water Systems 155.2 154.9 520.0 497.7
------------ ------------ ------------ ------------
Net sales 356.4 352.4 1,161.9 1,110.6
Cost of products sold 294.9 286.1 938.4 885.9
------------ ------------ ------------ ------------
Gross profit 61.5 66.3 223.5 224.7
Selling, general and administrative expenses 48.8 48.3 154.5 151.7
Interest expense 3.1 3.2 9.0 11.1
Other (income) expense - net 0.3 (0.1) 0.6 0.6
------------ ------------ ------------ ------------
9.3 14.9 59.4 61.3
Provision for income taxes 3.3 4.9 19.8 21.2
------------ ------------ ------------ ------------
Net Earnings $ 6.0 $ 10.0 $ 39.6 $ 40.1
============ ============ ============ ============
Earnings per Common Share
Basic $0.21 $0.35 $1.36 $1.52
====== ====== ====== ======
Diluted $0.20 $0.34 $1.33 $1.49
====== ====== ====== ======
Dividends per Common Share $0.15 $0.14 $0.43 $0.40
====== ====== ====== ======
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
September 30, 2003 and December 31, 2002
(dollars in millions, except share data)
(unaudited)
September 30, 2003 December 31, 2002
------------------ -----------------
Assets
Current Assets
Cash and cash equivalents $ 35.4 $ 32.8
Receivables 225.7 215.5
Inventories 248.7 200.4
Deferred income taxes 21.9 26.7
Other current assets 14.0 12.9
---------------- ----------------
Total Current Assets 545.7 488.3
Property, plant and equipment 713.6 686.2
Less accumulated depreciation 361.4 323.5
---------------- ----------------
Net property, plant and equipment 352.2 362.7
Goodwill 302.4 302.4
Other assets 73.8 71.5
---------------- ----------------
Total Assets $ 1,274.1 $ 1,224.9
================ ================
Liabilities
Current Liabilities
Trade payables $ 148.1 $ 131.4
Accrued payroll and benefits 35.3 38.7
Accrued liabilities 45.7 60.4
Product warranty 19.3 19.5
Long-term debt due within one year 8.6 11.7
---------------- ----------------
Total Current Liabilities 257.0 261.7
Long-term debt 259.8 239.1
Pension liability 82.0 90.8
Other liabilities 110.1 114.7
Deferred income taxes 17.0 7.5
---------------- ----------------
Total Liabilities 725.9 713.8
Stockholders' Equity
Class A common stock, $5 par value: authorized
14,000,000 shares; issued 8,546,799 and 8,595,435 42.7 43.0
Common stock, $1 par value: authorized 60,000,000
shares; issued 24,002,563 and 23,953,927 24.0 24.0
Capital in excess of par value 73.7 73.5
Retained earnings 615.5 588.5
Accumulated other comprehensive loss (115.4) (121.9)
Treasury stock at cost (92.3) (96.0)
---------------- ----------------
Total Stockholders' Equity 548.2 511.1
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 1,274.1 $ 1,224.9
================ ================
See accompanying notes to unaudited condensed consolidated financial statements
4
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002
(dollars in millions)
(unaudited)
Nine Months Ended
September 30
----------------------------
2003 2002
---- ----
Operating Activities
Continuing
Net earnings $ 39.6 $ 40.1
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 37.1 36.6
Amortization 1.6 1.1
Net change in current assets and liabilities (49.0) 22.1
Net change in other noncurrent assets and liabilities (2.5) (0.8)
Other (0.7) (0.7)
--------------- ---------------
Cash Provided by Operating Activities 26.1 98.4
Investing Activities
Capital expenditures (28.1) (25.8)
Acquisition of business (3.1) (11.8)
--------------- ---------------
Cash Used in Investing Activities (31.2) (37.6)
Financing Activities
Long-term debt incurred 50.0 -
Long-term debt retired (32.3) (174.9)
Net proceeds from common stock offering - 127.5
Other stock transactions 2.6 5.3
Dividends paid (12.5) (10.2)
--------------- ---------------
Cash Provided by (Used in) Financing Activities 7.8 (52.3)
Cash (Used in) Provided by Discontinued Operations (0.1) 3.7
--------------- ---------------
Net increase in cash and cash equivalents 2.6 12.2
Cash and cash equivalents-beginning of period 32.8 20.7
--------------- ---------------
Cash and Cash Equivalents - End of Period $ 35.4 $ 32.9
=============== ===============
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
September 30, 2003
(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- and nine-month periods ended September 30, 2003 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 2003 presentation.
2. Acquisitions
On July 1, 2002, A. O. Smith Corporation (the company) completed the
purchase of the hermetic motor assets of the Athens Products (Athens)
division of Electrolux Group for cash consideration of $9.7 million. 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 late 2002, the company acquired the motor manufacturing assets of
Jiangsu Changheng Group Co. Ltd. (Changheng) for a total of $15.3 million
of which $3.1 million of deferred payments was paid in 2003. 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 Athens acquisition and other acquisitions by the
company, aggregate additional purchase liabilities of $26.5 million were
recorded at the respective acquisition dates for employee severance and
relocation, as well as certain facility exit costs. As of September 30,
2003, costs incurred and charged against these liabilities to date totaled
$22.0 million.
3. Business Improvement Programs
In the fourth quarter of 2001, the company recorded restructuring and
related 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 spent $5.2 million through September 30, 2003 for
employee severance and separation costs. At September 30,
6
2003, the company estimates approximately 170 employees are yet to be
impacted. The realignment activities will be substantially completed prior
to December 31, 2003.
4. Inventories (dollars in millions)
September 30, 2003 December 31, 2002
------------------ -----------------
Finished products $ 162.9 $ 130.7
Work in process 46.1 39.7
Raw materials 68.0 58.3
-------- -------
277.0 228.7
LIFO reserve 28.3 28.3
-------- -------
$ 248.7 $ 200.4
======== =======
5. 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 $109.4 million
were unrestricted as of September 30, 2003.
During June 2003, the company issued $50 million in senior notes with
various insurance companies. The notes range in maturity between 2013 and
2016 and carry a weighted-average interest rate of slightly less than 4.5%.
The proceeds of the notes were used to repay commercial paper and revolver
borrowing.
6. Product Warranty (dollars in millions)
The company offers warranties on the sales of certain of its products and
records an accrual for the estimated future claims. Such accruals are based
upon historical experience and management's estimate of the level of future
claims. The following table presents the company's warranty liability
activity for the nine-months ended September 30, 2003 and 2002,
respectively:
2003 2002
---------- --------
Balance at January 1 $ 70.5 $ 69.6
Expense 21.4 23.4
Claims settled (22.6) (20.5)
-------- ------
Balance at September 30 $ 69.3 $ 72.5
======== ======
7. Common Stock Issuance
On May 10, 2002, the company completed the sale of 4,776,065 shares of its
common stock held in treasury. The $127.5 million net proceeds from the
offering were used to reduce long-term debt. 8.
7
8. Comprehensive Earnings (dollars in millions)
The company's comprehensive earnings are comprised of net earnings, foreign
currency translation adjustments, and realized and unrealized gains and
losses on cash flow derivative instruments.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
Net Earnings $ 6.0 $ 10.0 $ 39.6 $ 40.1
Other comprehensive earnings (loss):
Foreign currency translation adjustments 0.1 (0.3) 1.8 1.8
Unrealized net gains (losses) on cash flow
derivative instruments less related income
tax provision (benefit): 2003 - ($1.6) &
$2.9; 2002 - ($2.0) & ($3.1) (2.4) (3.2) 4.6 (4.8)
---- ----- ----- -----
Comprehensive Earnings $ 3.7 $ 6.5 $ 46.0 $ 37.1
==== ===== ===== =====
9. 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 Nine Months Ended
September 30 September 30
-------------------------------- ------------------------------
2003 2002 2003 2002
-------------------------------- -------------- --------------
Denominator for basic earnings
per share
- weighted-average shares 29,074,083 28,752,219 29,007,013 26,355,164
Effect of dilutive stock options 706,028 698,739 646,286 663,251
------------ ------------ ------------ -----------
Denominator for diluted earnings
per share 29,780,111 29,450,958 29,653,299 27,018,415
========== ========== ========== ==========
8
10. Stock Based Compensation
The company has one stock-based employee compensation plan as more fully
described in Note 11 of Notes to Consolidated Financial Statements of the
Company's 2002 annual report on Form 10-K. SFAS No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The company has chosen to continue applying Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plan. Accordingly, because the number of shares is fixed and the exercise
price of the stock options equals the market price of the underlying stock
on the date of grant, no compensation expense has been recognized.
Had compensation cost been determined based upon the fair value at the
grant date for awards under the plans based on the provisions of SFAS No.
123, the company's pro forma earnings and earnings per share would have
been as follows:
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
(dollars in millions, except per share amounts) 2003 2002 2003 2002
- ------------------------------------------------------------- -------------- ------------- ------------- --------------
Earnings:
As reported $ 6.0 $ 10.0 $ 39.6 $ 40.1
Deduct: Total stock based employee compensation
expense determined under fair value based method,
net of tax (0.4) (0.4) (1.2) (1.3)
----- ------ ----- -----
Pro forma $ 5.6 $ 9.6 $ 38.4 $ 38.8
===== ====== ===== =====
Earnings per share:
As reported:
Basic $0.21 $ 0.35 $ 1.36 $1.52
Diluted 0.20 0.34 1.33 1.49
Pro forma:
Basic $0.19 $ 0.33 $ 1.32 $1.48
Diluted 0.19 0.33 1.29 1.44
9
11. Operations by Segment (dollars in millions)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ ------------ -----------
Net sales
Electrical Products $ 201.2 $ 197.5 $ 641.9 $ 612.9
Water Systems 155.2 154.9 520.0 497.7
-------- ------- ---------- --------
$ 356.4 $ 352.4 $ 1,161.9 $ 1,110.6
======== ======= ========== ========
Operating earnings
Electrical Products $ 9.6 $ 10.3 $ 45.9 $ 46.0
Water Systems 7.9 13.4 37.7 43.6
-------- ------- ---------- --------
17.5 23.7 83.6 89.6
Corporate expenses (5.1) (5.6) (15.2) (17.2)
--------- -------- ----------- ---------
Earnings before interest and taxes 12.4 18.1 68.4 72.4
Interest expense (3.1) (3.2) (9.0) (11.1)
-------- ------- ---------- --------
Earnings before income taxes 9.3 14.9 59.4 61.3
Provision for income taxes (3.3) (4.9) (19.8) (21.2)
-------- ------- ---------- --------
Net earnings $ 6.0 $ 10.0 $ 39.6 $ 40.1
======== ======= ========== ========
Intersegment sales, which are immaterial, have been excluded from segment
revenues.
10
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
- ---------------------
THIRD QUARTER AND FIRST NINE MONTHS OF 2003 COMPARED TO 2002
- ------------------------------------------------------------
Sales were $356.4 million in the third quarter of 2003, $4.0 million higher than
sales of $352.4 million in last year's third quarter. Sales for the first nine
months of the year were $1.16 billion, 4.6 percent higher than sales of $1.11
billion in the same period last year. Higher sales from our 2002 acquisition of
Jiangsu Changheng Group Co. Ltd. (Changheng) in our Electrical Products business
accounted for the higher sales in the quarter. The increase in year-to-date
sales was due primarily to our acquisitions of Athens Products and Jiangsu
Changheng Group Co. Ltd. in our Electrical Products business, and higher water
heater prices related to higher steel costs, and increased sales at our Chinese
water heater operation.
Our gross profit margin for the third quarter of 2003 declined to 17.3 percent
from 18.8 percent in the third quarter of 2002. Our year-to-date gross margin in
2003 was 19.2 percent compared with 20.2 percent in the same period in 2002. For
the quarter and year to date, most of the decline in gross profit margin
resulted from higher freight and manufacturing costs related to the introduction
of the flammable vapor ignition resistant water heater product.
Selling, general and administrative expenses in the third quarter and first nine
months of 2003 were higher than the same periods in 2002 by $.5 million and $2.8
million, respectively. The acquisitions made in 2002 contributed to the increase
in the quarterly and year-to-date selling, general and administrative expense.
Despite higher debt levels, interest expense in the third quarter of 2003 was
slightly lower than in the same period in 2002 due to lower interest rates.
Interest expense for the first nine months of 2003 was $2.1 million lower than
the comparable period in 2002 due to lower average debt levels resulting from
our May 10, 2002 stock offering, and lower interest rates.
We have significant pension benefit costs and credits that are developed from
actuarial valuation. The valuations reflect key assumptions regarding, among
other things, discount rates, expected return on plan assets, retirement ages,
and years of service. Consideration is given to current market conditions,
including changes in interest rates, in making these assumptions. Our assumption
for the expected rate of return on pension plan assets is 9.0 percent in 2003
compared with 9.75 percent in 2002. Pension income recognized in the third
quarter and first nine months of 2003 was $2.9 million and $8.7 million,
respectively, and compared with $4.1 million and $12.7 million in the comparable
periods of 2002. Our pension income is reflected as reductions to cost of
products sold and selling, general, and administrative expense.
Our year-to-date effective tax rate was 33.4 percent compared with 34.5 percent
for the first nine months of 2002. The year-to-date effective rate in 2003 was
favorably impacted by release of a $.7 million reserve upon resolution of a
federal tax audit in May 2003. The effective rate for the total year 2003 should
approximate 34.0 percent.
11
Net earnings for the third quarter of 2003 were $6.0 million or $.20 per share.
Net earnings for the third quarter of 2002 were $10.0 million or $.34 per share.
The third quarter decline in earnings was primarily due to costs associated with
disruptions encountered with the launch of new flammable vapor ignition
resistant product in our Water Systems business. For the first nine months of
the year, our net earnings were $39.6 million, slightly lower than net earnings
of $40.1 million in the same period of 2002. Despite a modest decline in
year-to-date net earnings from 2002 to 2003, diluted earnings per share declined
eleven percent, from $1.49 in 2002 to $1.33 in 2003. The majority of the
earnings per share decline was due to the dilutive impact of the May 2002 stock
offering.
Electrical Products
Third quarter sales for our Electrical Products segment were $201.2 million, or
$3.7 million higher than sales of $197.5 million in the third quarter of 2002.
The increase in sales for the third quarter was attributable to our China
acquisition at the end of 2002. Higher sales of air conditioning motors and
motors sold through the distribution channel offset lower sales of motors for
pumps, subfractional and general industry applications. Year-to-date sales for
this segment were $641.9 million, an increase of $29.0 million from 2002 nine
month sales of $612.9 million. The year over year increase was due to our July
2002 acquisition of Athens Products, and the December 2002 Changheng
acquisition.
Operating earnings for our Electrical Products segment in the third quarter
declined to $9.6 million from $10.3 million in the third quarter of 2002. The
decline in earnings was due primarily to a half million dollar operating loss
associated with the Changheng motor acquisition. Earnings for the first nine
months of 2003 were $45.9 million, similar to the same period in 2002.
During the quarter we entered into a letter of intent to acquire the assets of
Taicang Special Motor Co., Ltd., near Shanghai. Taicang will serve to expand our
China manufacturing capability to include hermetic motors. The transaction is
expected to be completed in the fourth quarter of 2003.
Water Systems
Third quarter sales for our Water Systems segment were $155.2 million, similar
to the same period last year. Higher sales in China, coupled with price
increases related to steel costs and the new flammable vapor ignition resistant
product offset lower unit sales of residential and commercial water heaters.
Water Systems' sales for the first nine months of 2003 were $520.0 million or
$22.3 million higher than the comparable period in 2002. Most of the increase
was due to the price increase associated with steel costs, and a significant
increase in sales at our Chinese water heater operation.
Third quarter operating earnings for our Water Systems segment were $7.9 million
or $5.5 million lower than the third quarter of 2002. The lower earnings were
the result of higher freight and one-time manufacturing costs associated with
the launch of the flammable vapor ignition resistant product.
Outlook
As we indicated in our Sept. 24 press release and Form 8-K filed with the SEC,
we expect earnings for 2003 to range between $1.75 and $1.80 per share. This
reduction from our previous forecast was due to the earnings shortfall in the
third quarter and efforts to reduce electric motor inventory in the fourth
quarter. We expect these implementation difficulties to be behind us as we enter
2004.
12
Accordingly, we expect earnings per share in 2004 to be in line with our
strategic plan, in a range of $2.40 to $2.60 per share.
Liquidity & Capital Resources
Our working capital was $288.7 million at September 30, 2003, $62.1 million
higher than at December 31, 2002. The majority of the increase resulted from
higher accounts receivable levels of $10.2 million and higher inventory levels
of $48.3 million primarily related to product repositioning in our electrical
products business and a new product launch in our water systems business. Cash
provided by operating activities during the first nine months of 2003 was $26.1
million compared with $98.4 million provided during the same period in 2002.
Essentially all of the difference is due to the higher investment in working
capital, as described above, during 2003 compared with 2002, and the receipt of
a $12.4 million tax refund in 2002. We project cash provided by operating
activitites of $60 to $70 million for the full year.
Our capital expenditures during the first nine months of 2003 totaled $28.1
million, which was slightly higher than the capital spending during the same
period last year. For the full year, we are projecting 2003 capital expenditures
of approximately $40 to $45 million, compared with the $42.5 million spent in
2002. We expect that cash flow during 2003 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
2003.
Our total debt increased by $17.6 million from $250.8 million at December 31,
2002 to $268.4 million at September 30, 2003. Our leverage as measured by the
ratio of total debt to total capitalization was 33%, unchanged from the end of
2002. We did not enter into any significant operating leases during the first
nine months of 2003.
At September 30, 2003, our company had available borrowing capacity of $166.8
million under our credit facility. 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 acquisitions, we have recorded aggregate purchase liabilities
of $26.5 million at the respective acquisition dates for employee severance and
relocation as well as certain facility exit costs. As of September 30, 2003, we
incurred and charged $22.0 million against these liabilities. We expect the
majority of the activities to be completed by December 31, 2003.
On October 7, 2003, our board of directors declared a regular quarterly dividend
of $.15 per share on our Common stock and Class A common stock, which is payable
on November 17, 2003 to stockholders of record on October 31, 2003.
Critical Accounting Policies
Our accounting policies are described in Note 1 of Notes to Consolidated
Financial Statements as disclosed in the Form 10-K for the fiscal year ended
December 31, 2002. Also as disclosed in Note 1, the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires the use of estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying
notes. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
13
The most significant accounting estimates inherent in the preparation of our
financial statements include estimates associated with the evaluation of the
impairment of goodwill, as well as the recoverability of receivables resulting
from the payment of claims associated with the dip tube class action lawsuit
(see Note 14 of notes to consolidated financial statements in the Form 10-K for
the fiscal year ended December 31, 2002). There are also significant estimates
used in the determination of liabilities related to warranty activity,
litigation, product liability, environmental matters and pensions and other
post-retirement benefits. Various assumptions and other factors underlie the
determination of these significant estimates. The process of determining
significant estimates is fact-specific and takes into account factors such as
historical experience and trends, and in some cases, actuarial techniques. We
constantly reevaluate these significant factors and adjustments are made when
facts and circumstances dictate.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure", and FASB
Interpretation Number ("FIN") 46, "Consolidation of Variable Interest Entities."
SFAS No. 143, which was adopted on January 1, 2003, did not have a material
impact on our consolidated financial statements since its adoption. SFAS No. 146
is effective for exit or disposal activities initiated after December 31, 2002.
Adoption of this statement did not have a material impact on our consolidated
financial statements. Effective December 31, 2002, we began making the
disclosures required under SFAS No. 148. To date, FIN 46 has not had a material
impact on our consolidated financial statements nor is FIN 46 expected to have a
material impact on our consolidated financial statements in the future.
14
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, 2002, 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.
ITEM 4 - CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of disclosure controls and procedures
The chief executive officer and chief financial officer have evaluated the
effectiveness of the company's disclosure controls and procedures as of
September 30, 2003 and have concluded that these disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the company and its consolidated subsidiaries would be made known to
them by others within those entities.
Changes in internal controls
There were no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect our disclosure
controls and procedures nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.
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. Forward-looking statements generally can be identified by the use of
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
release. Factors that could cause such a variance include the following:
instability in the company's electric motor and water products markets;
inability to generate the synergistic cost savings from the acquisition of State
Industries; the inability to implement cost-reduction programs; adverse changes
in general economic conditions; significant increases in raw material prices;
competitive pressures on the company's businesses; and the potential that
assumptions on which the company based its expectations are inaccurate or will
prove to be incorrect.
Forward-looking statements included in this document are made only as of the
date of this filing, and the company is under no obligation to upgrade these
statements to reflect subsequent events or circumstances. All subsequent written
and oral forward-looking statements attributed to the company, or persons acting
on its behalf, are qualified entirely by these cautionary statements.
15
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
There have been no material changes in the legal and environmental matters
previously reported in Part 1, Item 3 and Note 14 of the Notes to Consolidated
Financial Statements in the company's Form 10-K Report for the year ended
December 31, 2002.
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
- -----------------------------------------
On July 17, 2003 the Company filed a Current Report on Form 8-K, reporting under
Items 7 and 9, announcing the Company's results for the second quarter ended
June 30, 2003 and its earnings outlook for 2003.
On September 24, 2003 the Company filed a Current Report on Form 8-K, reporting
under Items 7 and 9, revising the Company's earnings outlook for 2003.
On October 15, 2003 the Company filed a Current Report on Form 8-K, reporting
under Items 7 and 9, announcing the Company's results for the third quarter
ended September 30, 2003 and its earnings outlook for 2003.
16
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
October 30, 2003 /s/John J. Kita
----------------------------
John J. Kita
Vice President,
Treasurer and Controller
October 30, 2003 /s/Kenneth W. Krueger
----------------------------
Kenneth W. Krueger
Senior Vice President
and Chief Financial Officer
17
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
31.1 Certification of Periodic Report by the Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
31.2 Certification of Periodic Report by the Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
32 Written Statement of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.
18
Exhibit 31.1
- ------------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Robert J. O'Toole, Chairman, President, and Chief Executive Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of A. O. Smith
Corporation (the "company");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any changes in the company's internal control
over financial reporting that occurred during the company's most
recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the company's internal control over
financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of the company's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal
control over financial reporting.
Date: October 30, 2003
/s/ Robert J. O'Toole
- ---------------------
Robert J. O'Toole
Chairman, President, and Chief Executive Officer
Exhibit 31.2
- ------------
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Kenneth W. Krueger, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of A. O. Smith
Corporation (the "company");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any changes in the company's internal control
over financial reporting that occurred during the company's most
recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the company's internal control over
financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of the company's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal
control over financial reporting.
Date: October 30, 2003
/s/ Kenneth W. Krueger
- ----------------------
Kenneth W. Krueger
Senior Vice President and Chief Financial Officer
Exhibit 32
Written Statement of the Chief Executive Officer and the
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, each of the undersigned certifies that to the best of our knowledge:
(1) the Quarterly Report on Form 10-Q of A. O. Smith Corporation for the
quarter ended September 30, 2003 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of A. O. Smith
Corporation.
Date: October 30, 2003
/s/ Robert J. O'Toole
- ---------------------
Robert J. O'Toole
Chairman, President, and Chief Executive Officer
/s/ Kenneth W. Krueger
- ----------------------
Kenneth W. Krueger
Senior Vice President and Chief Financial Officer