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, 2001
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) 359-40
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, 2001 8,685,125 shares
Common Stock Outstanding as of March 31, 2001 14,890,708 shares
Exhibit Index Page 15
1
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, 2001 and 2000 3
Condensed Consolidated Balance Sheets
- March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statement of Cash Flows
- Three months ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements
- March 31, 2001 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Index to Exhibits 15
2
PART I--FINANCIAL INFORMATION
- -----------------------------
ITEM 1--FINANCIAL STATEMENTS
- ----------------------------
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
Three Months ended March 31, 2001 and 2000
(000 omitted except for per share data)
(unaudited)
Three Months Ended
March 31
----------------------------------
2001 2000
------------ ------------
Continuing Operations
Electric Motor Technologies $ 226,253 $ 252,343
Water Systems Technologies 91,982 92,223
------------ ------------
Net Sales 318,235 344,566
Cost of products sold 259,440 271,195
------------ ------------
Gross profit 58,795 73,371
Selling, general and administrative expenses 38,123 42,991
Interest expense 4,801 5,431
Amortization of intangibles 1,733 1,727
Other expense - net 599 843
------------ ------------
13,539 22,379
Provision for income taxes 5,010 8,224
------------ ------------
Earnings from Continuing Operations 8,529 14,155
Discontinued Operations (note 4)
Earnings from operations less related
income tax provision of $297 - 456
------------ ------------
Net Earnings $ 8,529 $ 14,611
============ ============
Retained Earnings
Balance at beginning of period $ 549,237 $ 531,204
Net Earnings 8,529 14,611
Cash dividends on common shares (3,061) (2,807)
------------ ------------
Balance at End of Period $ 554,705 $ 543,008
============ ============
Basic Earnings per Common Share (note 8)
Continuing Operations $0.36 $0.61
Discontinued Operations - 0.02
------------ ------------
Net Earnings $0.36 $0.63
============ ============
Diluted Earnings per Common Share (note 8)
Continuing Operations $0.36 $0.60
Discontinued Operations - 0.02
------------ ------------
Net Earnings $0.36 $0.62
============ ============
Dividends per Common Share $0.13 $0.12
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, 2001 and December 31, 2000
(000 omitted)
(unaudited)
March 31, 2001 December 31, 2000
-------------- -----------------
Assets
Current Assets
Cash and cash equivalents (note 2) $ 13,058 $ 15,287
Receivables 202,718 169,117
Inventories (note 5) 169,809 169,630
Deferred income taxes 6,488 7,215
Other current assets 22,431 22,199
Net current assets - discontinued operations (note 4) - 22,651
------------ ------------
Total Current Assets 414,504 406,099
Property, plant and equipment 549,851 542,018
Less accumulated depreciation 267,546 259,183
------------ ------------
Net property, plant and equipment 282,305 282,835
Net goodwill and other intangibles 243,088 244,821
Other assets 112,254 107,928
Net long-term assets - discontinued operations (note 4) - 17,493
------------ ------------
Total Assets $ 1,052,151 $ 1,059,176
============ ============
Liabilities
Current Liabilities
Trade payables $ 97,682 $ 91,780
Accrued payroll and benefits 23,615 27,388
Accrued liabilities 29,630 26,865
Product warranty 12,130 11,574
Income taxes 2,301 1,695
Long-term debt due within one year 11,129 11,129
------------ ------------
Total Current Liabilities 176,487 170,431
Long-term debt (note 6) 295,706 316,372
Other liabilities 62,509 61,856
Deferred income taxes 64,742 62,122
------------ ------------
Total Liabilities 599,444 610,781
Stockholders' Equity
Preferred Stock - -
Class A common stock, $5 par value: authorized
14,000,000 shares; issued 8,717,720 43,589 43,614
Common stock, $1 par value: authorized 60,000,000
shares; issued 23,831,642 23,832 23,827
Capital in excess of par value 53,693 53,521
Retained earnings (note 6) 554,705 549,237
Accumulated other comprehensive loss (note 7) (6,929) (5,438)
Treasury stock at cost (216,183) (216,366)
------------ ------------
Total Stockholders' Equity 452,707 448,395
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,052,151 $ 1,059,176
============ ============
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
Three Months Ended March 31, 2001 and 2000
(000 omitted)
(unaudited)
Three Months Ended
March 31
2001 2000
---- ----
Operating Activities
Continuing
Earnings from continuing operations $ 8,529 $ 14,155
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation 9,291 9,206
Amortization 2,120 2,114
Net change in current assets and liabilities (29,185) (25,677)
Net change in other noncurrent assets and liabilities (4,258) (3,890)
Other 307 414
------------ ------------
Cash Used In Operating Activities (13,196) (3,678)
Investing Activities
Capital expenditures (9,520) (11,660)
Other (88) (360)
------------ ------------
Cash Used in Investing Activities (9,608) (12,020)
Financing Activities
Debt incurred - 14,178
Debt retired (20,666) -
Net proceeds from common stock and option activity 101 38
Dividends paid (3,061) (2,807)
------------ ------------
Cash Provided by (Used in) Financing Activities (23,626) 11,409
Cash Flow Provided by (Used in) Discontinued Operations 44,201 (5,340)
------------ ------------
Net decrease in cash and cash equivalents (2,229) (9,629)
Cash and cash equivalents-beginning of period (note 2) 15,287 14,761
------------ ------------
Cash and Cash Equivalents - End of Period $ 13,058 $ 5,132
============ ============
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, 2001
(unaudited)
1. Basis of Presentation
The condensed consolidated 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 a
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, 2001 are not necessarily indicative of the results expected for
the full year. The condensed consolidated balance sheet as of December 31,
2000 is derived from the audited financial statements but does not include
all disclosures required by generally accepted accounting principles.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
2. Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, cash and cash
equivalents include short-term investments held primarily for cash
management purposes. These investments normally mature within three months
from the date of acquisition.
3. Acquisition
On August 2, 1999, A. O. Smith Corporation (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. Costs incurred and
charged against the liabilities to date totaled $4.0 million. The majority
of the activities are expected to be completed by the end of 2001.
4. Discontinued Operations
In the first quarter 2000, the company, with the approval of the Board of
Directors, decided to divest its fiberglass piping and liquid and dry bulk
storage tank businesses. These sales were completed in December 2000 and
January 2001, respectively. Net sales of these businesses were $29.0
million for the three-month period ended March 31, 2000.
The operating results of the discontinued businesses have been reported
separately as discontinued operations in the accompanying financial
statements. Certain expenses have been allocated to the discontinued
operations, including interest expense, which was allocated based on the
ratio of net assets of the discontinued businesses to the total
consolidated capital of the company.
6
5. Inventories (000 omitted)
March 31, 2001 December 31, 2000
-------------- -----------------
Finished products $ 109,171 $ 109,702
Work in process 38,151 37,186
Raw materials 39,887 40,191
Supplies 909 860
----------- -----------
188,118 187,939
Allowance to state inventories
at LIFO cost 18,309 18,309
----------- -----------
$ 169,809 $ 169,630
=========== ===========
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 $62.4 million
were unrestricted as of March 31, 2001.
7. Comprehensive Earnings (Loss)
The company's comprehensive earnings were $7.0 and $13.6 million for the
three-month periods ended March 31, 2001 and 2000, respectively.
Comprehensive earnings were comprised of net earnings, foreign currency
translation adjustments, and at January 1, 2001 and March 31, 2001,
realized and unrealized gains and losses on cash flow derivative
instruments. Also included in comprehensive earnings for the period ended
March 31, 2001 was a cumulative loss adjustment on cash flow hedges of
approximately $0.6 million in connection with the adoption of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. The amount recorded in
earnings during the three month period ending March 31, 2001, associated
with the transition adjustment as of January 1, 2001, was not material to
the company's financial statements.
7
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
------------------------------
2001 2000
------------ ------------
Denominator for basic earnings
per share
- weighted-average shares 23,511,254 23,361,393
Effect of dilutive stock options 316,965 336,971
------------ ------------
Denominator for diluted earnings
per share 23,828,219 23,698,364
========== ==========
9. Operations by Segment (000 omitted) Three Months Ended
March 31
------------------------------
2001 2000
------------ ------------
Net Sales
Electric Motor Technologies $ 226,253 $ 252,343
Water Systems Technologies 91,982 92,223
------------ ------------
Net Sales $ 318,235 $ 344,566
============ ============
Earnings before Interest and Taxes
Electric Motor Technologies $ 14,024 $ 26,072
Water Systems Technologies 9,851 9,523
------------ ------------
Total Segments 23,875 35,595
Corporate Expenses (5,535) (7,785)
Interest Expense (4,801) (5,431)
------------ ------------
Earnings from Continuing
Operations before Income Taxes 13,539 22,379
Provision for Income Taxes (5,010) (8,224)
------------ ------------
Earnings from Continuing Operations $ 8,529 $ 14,155
============ ============
Intersegment sales, which are immaterial, have been excluded from segment
revenues.
10. Accounting for Derivative Instruments
Effective January 1, 2001, the company adopted (SFAS) No. 133. The standard
requires that all derivative instruments be recorded on the balance sheet
at fair value and establishes criteria for designation and effectiveness of
the hedging relationships. Any fair value changes
8
are recorded in net income or comprehensive income. The cumulative effect
of adopting SFAS No. 133 was not material to the company's consolidated
financial statements as of January 1, 2001.
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
through 2002. 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 and
U.S. dollar.
Forward contracts are accounted for as cash flow hedges of a forecasted
transaction. The net change in the fair value of these currency derivatives
was approximately $2.4 million as of March 31, 2001. 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 on the same line
item as the underlying transaction. The assessment of effectiveness for
forward contracts is based on changes in the forward rates.
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.
Derivative commodity liabilities of approximately $2.2 million are recorded
in other liabilities as of March 31, 2001 with the value of the effective
portion of the contracts of approximately $2.0 million recorded in
accumulated other comprehensive income/loss 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 in the same
statement of earnings line item as the intended underlying exposure is
recorded. Hedge ineffectiveness and impact on earnings was not material for
the three month period ended March 31, 2001.
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.
9
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 2001 COMPARED TO 2000
- -------------------------------------------
Sales in the first quarter of 2001 were $318.2 million or $26.4 million lower
than sales of $344.6 million in the first quarter of 2000. The entire decline in
sales occurred in the Electric Motor Technologies segment, where most product
lines were affected by lower demand compared with the prior year.
First quarter earnings from continuing operations were $8.5 million or $5.7
million less than the $14.2 million earned in the first quarter of 2000. On a
per share basis earnings from continuing operations were $.36 and $.60 for the
first quarter of 2001 and 2000, respectively. The lower earnings were a direct
result of the decline in volume experienced by Electric Motor Technologies.
The company's gross profit margin was 18.5% in the first quarter of 2001
compared with the 21.3% margin achieved in the first quarter of 2000. While the
water heater business margins were consistent from year to year, the margins in
the electric motor business declined primarily due to under-absorption of
manufacturing cost associated with the lower volume.
First quarter sales for the Electric Motor Technologies segment were $226.3
million or approximately 10% lower than sales of $252.3 million in the same
period last year. Although volume in most of this segment's product lines
declined in the first quarter of 2001, the major decrease occurred in the
heating, ventilating and air conditioning market when compared with the first
quarter of 2000.
First quarter operating profits for Electric Motor Technologies were $14.0
million in 2001 or $12.1 million less than the first quarter of 2000. The
decline in earnings was due mostly to lower sales volume, with increased utility
costs and Mexican labor inflation also having an impact.
First quarter sales for the Water Systems Technologies segment were $92.0
million, about equal to sales in the same period last year. Lower sales of
commercial water heaters were offset by higher sales in the China market.
Operating profits of $9.9 million were higher than the $9.5 million earned in
the first quarter of 2000, primarily as a result of continued improved
performance in China.
Selling, general, and administrative (SG&A) expense for the first quarter of
2001 was $38.1 million or $4.9 million lower than the $43.0 million expense in
the first quarter of 2000. The reduction in SG&A was attributable to lower
corporate expense, cost reduction programs, and lower sales. Relative to net
sales, SG&A declined from 12.5% in the first quarter of 2000 to 12% in 2001.
10
Interest expense in the first quarter of 2001 declined to $4.8 million from $5.4
million in the first quarter of 2000 as a result of reduced debt levels and
lower interest rates.
The first quarter effective tax rate of 37% in 2001 was up slightly from 36.7%
in 2000.
In the first quarter of 2000, the company recognized after-tax earnings from
discontinued operations of $.5 million associated with the storage tank
business. This entity was sold early in January 2001. A more detailed discussion
of the sale transaction can be found in the company's 2000 Annual Report on Form
10-K.
Outlook
The company recently reported it anticipates further improvement in sales and
profit in the second quarter. Second-quarter earnings are expected to be in the
range of $.45 to $.50 per share. The second quarter is traditionally the
strongest season for HVAC sales, and industry inventory levels appear to be
trending down from the higher levels attained last summer and fall.
For the full year, the company continues to anticipate 2001 earnings will exceed
the 2000 results of $1.76 per share. The company recognizes that the economy is
currently very volatile, making market and sales projections more difficult.
However, the company believes that ongoing cost reduction efforts and capacity
rationalization will continue to contribute to profitability as the year
progresses.
Liquidity & Capital Resources
The company's working capital for continuing operations was $238.0 million at
March 31, 2001, $25.0 million higher than at December 31, 2000. Sales related
increases to accounts receivable of $33.6 million were partially offset by
increases to accounts payable. Cash used by operations during the first quarter
of 2001 was $13.2 million compared to $3.7 million during the same time period
one year ago primarily due to lower earnings, as explained above.
Capital expenditures by continuing operations during the first quarter of 2001
totaled $9.5 million, down from the $11.7 million spent in the first quarter of
2000. The company expects capital spending in 2001 to be essentially the same as
2000 spending levels, and expects such capital expenditures to be covered by
operating cash flow.
In connection with the MagneTek acquisition in August 1999, additional purchase
liabilities of $17.9 million were recorded, which included employee severance
and relocation, as well as certain facility exit costs. Costs incurred and
charged against the liability to date totaled $4.0 million. The majority of the
activities are expected to be completed by the end of 2001.
The company's long-term debt decreased by $20.7 million from $316.4 million at
December 31, 2000 to $295.7 million at March 31, 2001. The proceeds received
from the divestiture of the storage tank business in the first quarter were used
to reduce debt. The company's leverage as measured by the ratio of total debt to
total capitalization improved to 40% at March 31, 2001 from 42% at the end of
last year.
At its April 5, 2001 meeting, the company's Board of Directors declared a
regular quarterly dividend at $.13 per share on its common stock (Class A and
Common). The dividend is payable on May 15, 2001 to shareholders of record on
April 30, 2001.
11
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- ----------------------------------------------------------------
As is more fully described in the company's annual report on Form 10-K for the
year ended December 31, 2000, the company is exposed to various types of market
risks, primarily currency and certain commodities. The company monitors its
risks in such areas on a continuous basis and, generally enters into forward and
futures contracts to minimize such exposures for periods of less than one year.
The company does not engage in speculation in its derivatives strategies. It is
important to note that gains and losses from the company's forward and futures
contract activities are offset by changes in the underlying costs of the
transactions being hedged.
Forward Looking Statements
Certain statements in this report are "forward-looking statements." These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the company "believes,"
"anticipates," "estimates," "expects," "projects," or words of similar import.
Although the company believes that its expectations are based upon reasonable
assumptions within the bounds of its knowledge of its business, there can be no
assurance that the results expressed in forward-looking statements will be
realized. Although a significant portion of the company's sales are derived from
the replacement of previously installed product, and such sales are therefore
less volatile, numerous factors may affect actual results and cause results to
differ materially from those expressed in forward-looking statements made by, or
on behalf of, the company. The company considers most important among such
factors, the stability in its electric motor and water products markets, the
timely and proper integration of the MagneTek motors acquisition, and the
implementation of associated cost reduction programs.
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.
12
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 12 of the Notes to Consolidated
Financial Statements in the company's Form 10-K Report for the year ended
December 31, 2000, which is incorporated herein by reference. In such report,
the company advised that the State of Colorado had given notice that it intended
to commence a legal action against the company to recover the remediation and
oversight costs it incurred at a gold mine in Colorado that was primarily
remediated by the U.S. EPA. The State filed such action against the company and
other PRPs in the first quarter. The company continues to believe it has very
good defenses to the claims of the former owner and the State of Colorado.
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
- -----------------------------------------
None.
13
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 24, 2001 /s/John J. Kita
---------------
John J. Kita
Vice President,
Treasurer and Controller
April 24, 2001 /s/Kenneth W. Krueger
---------------------
Kenneth W. Krueger
Senior Vice President
and Chief Financial Officer
14
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
None
15