SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 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) 359-4000
Securities registered pursuant to Section 12(b) of the Act:
Shares of Stock Outstanding Name of Each Exchange on
Title of Each Class January 31, 2002 Which Registered
- ------------------- --------------------------- ------------------------
Class A Common Stock 8,653,889 American Stock Exchange
(par value $5.00 per share)
Common Stock 15,148,169 New York Stock Exchange
(par value $1.00 per share)
Securities registered pursuant to Section 12(g) of the Act: None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $13,492,651 for Class A Common Stock and $270,786,309 for Common
Stock as of January 31, 2002.
Documents Incorporated by Reference:
1. Portions of the company's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year and, upon such filing, to be incorporated by
reference in Part III).
PART 1
ITEM 1 - BUSINESS
A. O. Smith Corporation (the company) serves customers worldwide and consists of
two segments, Electric Motor and Water Systems Technologies. The company's
electric motor business is one of North America's largest manufacturers of
fractional horsepower, integral horsepower alternating current (A/C) and direct
current (D/C), and hermetic electric motors. The water systems business is a
leading manufacturer of residential and commercial gas and electric water
heating equipment and copper tube boilers.
On January 10, 2001, the company sold its engineered storage products business
to CST Industries. The sale completed the divestiture of the company's Storage
and Fluid Handling business segment. Net cash proceeds from the divestiture were
$35.3 million. (See Note 3 to the Consolidated Financial Statements, entitled
"Discontinued Operations" which appears elsewhere herein.)
The following table summarizes sales by segment for the company's operations.
This segment summary and all other information presented in this section should
be read in conjunction with the Consolidated Financial Statements and the Notes
thereto, which appear elsewhere herein.
Years Ended December 31 (dollars in millions)
---------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Electric Motor Technologies $ 802.7 $ 902.4 $ 735.0 $487.4 $397.7
Water Systems Technologies 348.5 345.5 335.3 313.4 305.4
-------- -------- -------- ------ ------
Total Operations $1,151.2 $1,247.9 $1,070.3 $800.8 $703.1
======== ======== ======== ====== ======
ELECTRIC MOTOR TECHNOLOGIES
Segment sales decreased $100 million or 11 percent in 2001 to $803 million and
represented 70 percent of total sales. The decrease in sales in 2001 was due to
a downturn that began in the heating and air conditioning market during the
second half of 2000 that expanded to include the company's other major motor
markets.
Electric Motor Technologies manufactures: hermetic motors that are sold
worldwide to manufacturers of air conditioning and commercial refrigeration
compressors; fractional horsepower fan motors used in furnaces, air
conditioners, and blowers; fractional horsepower motors for pumps for home water
systems, swimming pools, hot tubs, and spas; fractional horsepower motors used
in other consumer products (such as garage door openers); and integral
horsepower A/C and D/C motors for industrial and commercial applications. Sales
to the heating, ventilating, air conditioning and refrigeration market account
for more than 60 percent of segment sales.
The electric motor business continues to move production to its lower cost
facilities which are concentrated primarily in Mexico. In addition, the company
acquired a 100 percent equity interest in Shenzhen Speeda Industrial Co., Ltd.
in December 2001, and will utilize the facility located in the People's Republic
of China to manufacture electric motors.
2
The electric motor business sells directly to original equipment manufacturers
(OEMs) and also markets its products through a distributor network, which sells
to smaller OEMs and the after-market. The company estimates that approximately
60 percent of the market is derived from the less cyclical replacement business
with the remainder being impacted by general business conditions in the new
construction market.
The segment's principal products are sold in competitive markets with its major
competitors being Emerson Electric, General Electric, Fasco, Jakel and
vertically integrated customers.
WATER SYSTEMS TECHNOLOGIES
Segment sales in 2001 were $349 million, one percent higher than 2000 sales of
$346 million and represented 30 percent of total sales.
Domestic residential water heater sales in 2001 were $180 million or
approximately 52 percent of segment revenues. The company markets residential
gas and electric water heaters through a network of plumbing wholesalers in the
United States and Canada. The majority of the company's sales are in the less
cyclical replacement market, although the new housing market is also an
important portion of the business. The residential water heater market remains
highly competitive. On December 28, 2001, the company acquired State Industries,
Inc. (State) of Ashland City, Tennessee. State had 2001 sales of approximately
$316 million. The company competes with three other manufacturers in supplying
over 90 percent of market requirements. The principal competitors of the Water
Products business are Rheem Manufacturing, The American Water Heater Group, and
Bradford-White.
The company also markets commercial water heating equipment through a network of
plumbing wholesalers in the United States and Canada. The company's Water
Products business is the largest manufacturer of commercial water heaters in
North America. Commercial water heaters are used in a wide range of applications
including schools, nursing homes, hospitals, prisons, hotels, motels, laundries,
restaurants, stadiums, amusement parks, car washes, and other large users of hot
water. The commercial market is characterized by competition from a broader
range of products and competitors than occurs in the residential market. The
majority of commercial sales are derived from the less cyclical replacement
market with the remainder being impacted by general business conditions in the
commercial construction market.
3
RAW MATERIAL
Raw materials for the company's operations, which consist primarily of steel,
copper, and aluminum, are generally available from several sources in adequate
quantities. The company hedges the majority of its annual copper purchases to
protect against price volatility.
SEASONALITY
There is no significant seasonal pattern to the company's consolidated quarterly
sales and earnings.
RESEARCH AND DEVELOPMENT, PATENTS, AND TRADEMARKS
In order to improve competitiveness by generating new products and processes,
the company conducts research and development at its Corporate Technology Center
in Milwaukee, Wisconsin as well as at its operating units. Total expenditures
for research and development in continuing operations in 2001, 2000, and 1999,
were approximately $27.6, $24.5, and $23.9 million, respectively.
The company owns and uses in its businesses various trademarks, trade names,
patents, trade secrets, and licenses. While a number of these are important to
the company, it does not consider a material part of its business to be
dependent on any one of them.
EMPLOYEES
The company and its subsidiaries employed approximately 14,800 persons as of
December 31, 2001.
BACKLOG
Normally, none of the company's operations sustain significant backlogs.
ENVIRONMENTAL LAWS
The company's operations are governed by a variety of federal, state, and local
laws intended to protect the environment. While environmental considerations are
a part of all significant capital expenditures, compliance with the
environmental laws has not had a material effect and is not expected to have a
material effect upon the capital expenditures, earnings, or competitive position
of the company. See Item 3.
FOREIGN SALES
Total U.S. export sales from continuing operations were $91 million, $62
million, and $46 million in 2001, 2000, and 1999, respectively. The increase in
2001 was due primarily to the relocation of an electric motors customer from the
United States to Mexico.
4
ITEM 2 - PROPERTIES
The company manufactures its products in 40 plants worldwide. These facilities
have an aggregate floor space of 6,602,000 square feet, consisting of 4,845,000
square feet owned by the company and 1,757,000 square feet of leased space.
Twenty-three of the company's facilities are foreign plants with 2,122,000
square feet of space, of which 1,024,000 square feet are leased.
The manufacturing plants presently operated by the company are listed below by
industry segment.
United States Foreign
------------- -------
Electric Motor McMinnville, TN; Mebane, NC; Acuna, Mexico;
Technologies Monticello, IN; Mt. Sterling, KY; Bray, Ireland;
(3,449,000 sq. ft.) Owosso, MI; Ripley, TN; Budapest, Hungary;
Scottsville, KY; Tipp City, OH; Gainsborough, England;
Upper Sandusky, OH Juarez, Mexico (11);
Monterrey, Mexico (3);
Shenzhen, People's
Republic of China
Water Systems Ashland City, TN; Charlotte, NC; Juarez, Mexico;
Technologies Cookeville, TN; El Paso, TX; Nanjing, People's
(3,153,000 sq. ft.) Florence, KY; Franklin, TN; Republic of China;
McBee, SC; Renton, WA Stratford, Canada;
Veldhoven,
The Netherlands
The principal equipment at the company's facilities consists of presses,
welding, machining, slitting, and other metal fabricating equipment, winding
machines, and furnace and painting equipment. The company regards its plants and
equipment as well-maintained and adequate for its needs. Multishift operations
are used where necessary.
In addition to its manufacturing facilities, the company's World Headquarters
and Corporate Technology Center are located in Milwaukee, Wisconsin. The company
also has offices in Alsip, Illinois; El Paso, Texas; Irving, Texas; London,
England; and Singapore.
ITEM 3 - LEGAL PROCEEDINGS
The company is involved in various unresolved legal actions, administrative
proceedings, and claims in the ordinary course of its business involving product
liability, property damage, insurance coverage, patents, and environmental
matters including the disposal of hazardous waste. Although it is not possible
to predict with certainty the outcome of these unresolved legal actions or the
range of possible loss or recovery, the company believes these unresolved legal
actions will not have a material effect on its financial position or results of
operations. A more detailed discussion of these matters appears in Note 13 of
the Notes to Consolidated Financial Statements.
5
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of 2001.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of
the current executive officers which is included as an unnumbered Item in Part I
of this report in lieu of being included in the company's Proxy Statement for
its 2002 Annual Meeting of Stockholders.
ROBERT J. O'TOOLE
Chairman of the Board of Directors, President and Chief Executive Officer
Mr. O'Toole, 61, became chairman of the board of directors in March 1992. He is
a member of the Investment Policy Committee of the board of directors. He was
elected chief executive officer in March 1989. He was elected president, chief
operating officer, and a director in 1986. Mr. O'Toole joined the company in
1963. He is a director of Briggs & Stratton Corporation and Factory Mutual
Insurance Company.
RANDALL S. BEDNAR
Vice President - Information Technology
Mr. Bednar, 49, was elected vice president-information technology in July 2001.
From 1996 until 2000, he was vice president and chief information officer of The
Gates Corporation. Prior to the Gates Corporation, he held a series of
information technology assignments during 15 years at Rockwell Automation.
CHARLES J. BISHOP
Vice President - Corporate Technology
Dr. Bishop, 60, has been vice president-corporate technology since 1985. Dr.
Bishop joined the company in 1981.
MICHAEL J. COLE
Vice President - Asia
Mr. Cole, 57, was elected vice president-Asia in March 1996. Previously he was
vice president-emerging markets of Donnelly Corporation, an automotive supplier.
DONALD M. HEINRICH
Senior Vice President and President - A. O. Smith Electrical Products Company
Mr. Heinrich, 49, was elected senior vice president in July 2001, and has been
president of A. O. Smith Electrical Products Company, a division of the company,
since July 2001. He joined A. O. Smith Electrical Products Company in January
2000 as senior vice president-operations. He also served as president of Smith
Fiberglass Products Company, a former division of the company, from November
1997 through January 2000. Mr. Heinrich joined the company in October 1992 as
vice president-business development.
6
JOHN J. KITA
Vice President, Treasurer and Controller
Mr. Kita, 46, was elected vice president, treasurer and controller in April
1996. From 1995 to 1996 he was treasurer and controller. Prior thereto, he
served as assistant treasurer since he joined the company in 1988.
KENNETH W. KRUEGER
Senior Vice President and Chief Financial Officer
Mr. Krueger, 45, became senior vice president and chief financial officer in
August 2000. Previously he was a group vice president, finance and business
planning at Eaton Corporation. Prior to Eaton, he was vice president, finance
for Rockwell Automation, where he worked from 1983 to 1999.
RONALD E. MASSA
Senior Vice President and President - A. O. Smith Water Products Company
Mr. Massa, 52, became president of A. O. Smith Water Products Company, a
division of the company, in February 1999. He was elected senior vice president
in June 1997. He served as the president of A. O. Smith Automotive Products
Company, a former division of the company, from June 1996 to April 1997. He was
the president of A. O. Smith Water Products Company from 1995 to June 1996 and
held other management positions in the Water Products Company prior thereto. He
joined the company in 1976.
ALBERT E. MEDICE
Vice President - Europe
Mr. Medice, 59, was elected vice president-Europe in 1995. Previously, from 1990
to 1995, he was the general manager of A. O. Smith Electric Motors (Ireland)
Ltd., a subsidiary of the company. Mr. Medice joined the company in 1986 as vice
president-marketing for its Electrical Products Company division.
EDWARD J. O'CONNOR
Vice President - Human Resources and Public Affairs
Mr. O'Connor, 61, has been vice president-human resources and public affairs for
the company since 1986. He joined the company in 1970.
STEVE W. RETTLER
Vice President - Business Development
Mr. Rettler, 47, was elected vice president-business development in July 1998.
Previously he was vice president and general manager of Brady Precision Tape
Co., a manufacturer of specialty tape products for the electronics market.
W. DAVID ROMOSER
Vice President, General Counsel and Secretary
Mr. Romoser, 58, was elected vice president, general counsel and secretary in
March 1992.
7
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Common Stock is listed on the New York Stock
Exchange. The Class A Common Stock of A. O. Smith Corporation is listed on
the American Stock Exchange. The symbols for these classes of the company's
stock are: AOS for the Common Stock and SMCA for the Class A Common Stock.
Wells Fargo Bank Minnesota, N.A., P.O. Box 64854, St. Paul, Minnesota
55164-0854 serves as the registrar, stock transfer agent, and the dividend
reinvestment agent for both classes of the company's common stock.
Quarterly Common Stock Price Range
----------------------------------
2001 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
Common Stock
High 20.10 19.53 18.50 19.75
Low 15.88 16.40 15.25 14.67
Class A Common
High 19.80 19.20 18.30 18.90
Low 15.88 16.50 16.00 14.50
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
Common Stock
High 23.13 22.81 21.38 17.25
Low 14.94 17.81 11.19 12.50
Class A Common
High 22.00 22.44 17.25 16.88
Low 15.50 17.88 12.00 12.75
(b) Holders. As of January 31, 2002, the number of shareholders of record of
Common Stock and Class A Common Stock were 1,186 and 501, respectively.
(c) Dividends. Dividends paid on the common stock are shown in Note 15 to the
Consolidated Financial Statements appearing elsewhere herein. The company's
credit agreements contain certain conditions and provisions which restrict
the company's payment of dividends. Under the most restrictive of these
provisions, retained earnings of $58.5 million were unrestricted as of
December 31, 2001.
8
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
(Dollars in Thousands, except per share amounts)
Years ended December 31(1)
------------------------------------------------------------------------------------
2001(2) 2000 1999(3) 1998(4) 1997(5)
---- ---- ---- ---- ----
Net sales - continuing operations $ 1,151,156 $ 1,247,945 $ 1,070,339 $ 800,803 $ 703,050
Earnings (Loss)
Continuing operations 14,502 41,656 50,270 40,656 32,065
Discontinued operations:
Operating earnings (loss) - - (890) 3,835 20,719
Gain (loss) on disposition - (11,903) (6,958) - 101,046
------------ ----------- ------------ ---------- ----------
- (11,903) (7,848) 3,835 121,765
------------ ----------- ------------ ---------- ----------
Net earnings $ 14,502 $ 29,753 $ 42,422 $ 44,491 $ 153,830
============ =========== ============ ========== ==========
Basic earnings (loss) per share
of common stock
Continuing operations $ .61 $ 1.78 $ 2.17 $ 1.73 $ 1.16
Discontinued operations - (.51) (.34) .16 4.41
------------ ----------- ------------ ---------- ----------
Net earnings $ .61 $ 1.27 $ 1.83 $ 1.89 $ 5.57
============ =========== ============ ========== ==========
Diluted earnings (loss) per share
of common stock
Continuing operations $ .61 $ 1.76 $ 2.11 $ 1.68 $ 1.14
Discontinued operations - (.50) (.33) .16 4.32
------------ ----------- ------------ ---------- ----------
Net earnings $ .61 $ 1.26 $ 1.78 $ 1.84 $ 5.46
============ =========== ============ ========== ==========
Cash dividends per common share $ .52 $ .50 $ .48 $ .47 $ .45
December 31
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total assets $ 1,293,923 $ 1,064,868 $ 1,065,585 $ 736,570 $ 682,789
Long-term debt 390,385 316,372 351,251 131,203 100,972
Total stockholders' equity 451,878 448,395 431,084 401,093 399,705
- -------------------------------------------------------------------------------------------------------------------------
(1) The company has accounted for the fiberglass piping, liquid and dry storage and automotive businesses as discontinued
operations in the consolidated financial statements. On December 8, 2000, the company sold its fiberglass piping
business and on January 10, 2001, the company sold its liquid and dry storage business. On April 18, 1997, the
company sold its automotive products business, exclusive of its Mexican automotive affiliate, and on October 1, 1997,
the company sold its 40 percent interest in its Mexican affiliate. See Note 3 to the consolidated financial
statements included elsewhere herein.
(2) On December 28, 2001, the company acquired all of the outstanding stock of State Industries, Inc., a manufacturer of
a comprehensive line of residential and commercial water heaters. The aggregate purchase price was $117.2 million.
See Note 2 to the consolidated financial statements included elsewhere herein.
(3) On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s domestic electric motor business and six
wholly owned foreign subsidiaries for $244.6 million. See Note 2 to the consolidated financial statements included
elsewhere herein.
(4) On July 1, 1998, the company acquired certain assets of General Electric Company's domestic compressor motor business
for $125.6 million.
(5) On March 31, 1997, the company acquired UPPCO, Incorporated, a manufacturer of subfractional C-frame electric motors,
for $60.9 million.
9
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
A. O. Smith Corporation recorded net earnings from continuing operations of
$14.5 million or $.61 per share in 2001 compared with $41.7 million or $1.76 per
share in 2000. Excluding a $9.4 million pretax special charge related primarily
to the restructuring of its electric motor operations, the company recorded
earnings of $20.5 million, or $.86 per share. The significant decline in
earnings was primarily due to challenging market conditions in the electric
motor business, as explained later in this section. The water systems business
established new sales and earnings records in 2001. Individual segment
performance will be discussed later in this section.
Working capital for continuing operations at December 31, 2001, was $221.6
million compared with $204.3 million and $207.3 million at December 31, 2000 and
1999, respectively. The increase in working capital in 2001 was due to the
December 28, 2001, acquisition of State Industries, Inc. (State), a water heater
manufacturing company, for $117.2 million. The modest decline in working capital
in 2000 was due to lower accounts receivable resulting from weaker HVAC markets.
Capital expenditures were $35.3 million in 2001 versus $40.5 million in 2000 and
$32.8 million in 1999. The decrease in capital spending in 2001 and increase in
2000 occurred in the company's electric motor operation. The company is
projecting 2002 capital expenditures of approximately $45 million, an increase
over 2001 primarily due to the acquisition of State. The level of 2002 capital
expenditures is expected to be marginally lower than 2002 depreciation expense.
Cash flow during 2002 is expected to adequately cover projected capital
expenditures.
On June 8, 2001, the company issued $50 million in notes under loan facilities
with two insurance companies. The notes range in maturity from 2013 to 2016 and
carry an interest rate of 7.3 percent. Due to the acquisition of State,
long-term debt increased $74.0 million from $316.4 million at December 31, 2000,
to $390.4 million at December 31, 2001. The company's leverage as measured by
the ratio of total debt to total capitalization was 47 percent at December 31,
2001, compared with 42 percent at the end of 2000. Excluding potential
acquisitions, the company expects 2002 cash flow to result in a year-end
leverage ratio of approximately 43 percent, closer to its long-term target of 40
percent.
The company expects to have adequate liquidity in 2002 as it has a minimal
amount of long-term debt maturing. In addition, it has a $250 million multi-year
revolving credit facility with a group of 10 financial institutions that expires
on August 2, 2004, and an $83 million 364 day credit agreement with a group of
six banks, that expires on July 26, 2002, which will support any short-term
borrowing needs (see Note 8 of Notes to the Consolidated Financial Statements).
In connection with the acquisition of State in December 2001, the company
recorded additional purchase liabilities of approximately $3.9 million
associated with employee severance costs. In addition, the company recorded
purchase liabilities of $17.9 million in 1999 associated with the MagneTek motor
acquisition, which included employee severance and relocation, as well as
certain facility costs. The balance of MagneTek purchase liabilities of $6.5
million at December 31, 2001, are expected to be fully utilized during 2002.
Included in other assets is a $32.8 million receivable due to the payments of
claims associated with the dip tube class action lawsuit (see Note 13 of Notes
to the Consolidated Financial Statements). The company expects a modest increase
to the receivable in 2002. The receivable is classified as a long-term asset
because court proceedings will not begin until late 2002 and may not conclude
until 2003 or later.
A.O. Smith Corporation has paid dividends for 62 consecutive years. The company
paid a total of $.52 per share in 2001 compared with $.50 per share in 2000.
10
RESULTS OF OPERATIONS
Sales from continuing operations in 2001 were $1.15 billion, a decline of $96.8
million or 7.8 percent from sales of $1.25 billion in 2000. The decrease in
sales resulted from an 11 percent decline in the electric motors business, which
more than offset a slight increase in sales for the water heater business. Sales
in 2000 increased $178 million compared with 1999, with $190 million of the
increase resulting from an additional seven months of sales from the August 1999
acquisition of the MagneTek motor business, and an additional $12 million in
sales from the company's Chinese water heater operation. These increases were
partially offset by lower sales in the company's base electric motor business.
The company's gross profit margin for 2001 was 17.6 percent, compared with 19.9
percent and 21.6 percent in 2000 and 1999, respectively. The decline in gross
margin from 2000 to 2001 occurred within the electric motor business and was due
primarily to under-absorption of manufacturing costs associated with lower
volume, Mexican wage inflation throughout the year, and increased costs for
certain raw materials. The lower profit margin in 2000 compared with 1999 was
due to inclusion of a full year of sales for the MagneTek acquisition which
carried lower margins than the base electric motor business and less favorable
cost absorption associated with declining volumes in the latter half of the
year.
Sales in the Electric Motor Technologies segment in 2001 were $802.7 million,
$100 million or 11 percent lower than 2000 sales of $902.4 million. Sales in
1999 were $735.0 million. The heating, ventilation, and air conditioning (HVAC)
business experienced the largest sales decline of $60 million or 11 percent in
2001. The lower demand for motors in 2001 was due to a number of factors
including general economic conditions, reduced discretionary spending on the
part of consumers, and inventory adjustments by air conditioning manufacturers
and retailers. The increase in sales from 1999 to 2000 was due to the additional
seven months of ownership of the MagneTek motor business which contributed
approximately $190 million in sales. Excluding MagneTek, sales in the underlying
motor business declined five percent in 2000 due mostly to a reduction in demand
from HVAC customers.
Earnings for the Electric Motor Technologies segment in 2001 were $28.9 million
before special charges or $46.6 million lower than 2000 operating earnings of
$75.5 million. Earnings in 1999 were $78.9 million. The significant decline in
earnings was due mostly to lower sales volume, higher costs for raw materials
and Mexican labor, and more competitive market conditions. The decline in
earnings from 1999 to 2000 was due primarily to a weaker air conditioning
market.
In the fourth quarter of 2001, the company announced a cost reduction program to
address its challenging motor market conditions. The program consists of three
major elements. The first involves a reduction of approximately 10 percent of
the salaried workforce to be completed by the middle of 2002. The second element
targets improved contribution margins and involves the repositioning of
additional parts fabrication and assembly work to lower-cost Mexican operations
and is expected to be completed by the end of the first quarter of 2003. A
portion of the work currently performed at six domestic plants will be
transferred to the company's operations in Juarez, Acuna, and Monterrey, Mexico.
The third element involved re-alignment of distribution activities into three
hub warehouses thereby reducing cost and improving customer service and has been
completed. A pretax charge of $8.1 million was recognized in the fourth quarter
of 2001 of which $0.8 million was spent as of December 31, 2001. The program is
expected to generate pretax savings of more than $16.0 million in 2002 and $20.0
to $25.0 million annually thereafter.
Sales for the Water Systems Technologies segment increased slightly from $345.5
million in 2000 to $348.5 million in 2001 and represents the fourth consecutive
year of record sales. The increased sales resulted from higher sales of
residential products and growth in the Chinese operation, partially offset by
lower sales in other international markets. Sales of $345.5 million in 2000 were
higher than 1999 sales of $335.3 million due to a significant increase in China
where sales almost doubled, contributing an additional $12 million.
11
Earnings for Water Systems Technologies in 2001 were $40.5 million before
special charges, reflecting a 16 percent increase over 2000 earnings of $34.9
million. The improved earnings performance in 2001 was the result of higher
volume, better performance in China, and improved plant efficiencies throughout
the organization. The earnings improvement from $33.8 million in 1999 to $34.9
million in 2000 resulted from improved performance in China.
On December 28, 2001, the company acquired all of the outstanding stock of
State, a manufacturer of residential and standard commercial water heaters. The
acquisition will nearly double the size of the company's existing water heater
business while complementing the existing wholesale distribution channel and
adding a strong presence in the retail market. The company also expects to
achieve scale-related synergies as a result of the acquisition. The aggregate
purchase price was $117.2 million and was comprised of $57.8 million for the
outstanding stock, assumption of $56.3 million in debt, and $3.1 million of
acquisition costs. Additionally, the company recognized a special charge of $1.3
million in the fourth quarter of 2001 for lease costs associated with moving the
Water Products Company headquarters from Irving, Texas, to Ashland City,
Tennessee, State's headquarters. The move is intended to facilitate the
integration of the two businesses.
On January 21, 2000, the company announced its decision to exit the storage tank
and fiberglass pipe markets, consistent with the company's strategy to expand
its presence in the electric motor and water products markets. On December 8,
2000, the company sold the fiberglass business, Smith Fiberglass Products
Company, to Varco International Corporation. The transaction took the form of
the sale of the majority of the fiberglass piping domestic assets and the sale
of the company's equity interest in its Chinese operation. On January 10, 2001,
the company sold substantially all of the assets of its storage tank business,
Engineered Storage Products Company, to CST Industries. The sale of these
businesses resulted in net after-tax proceeds of $62 million. After-tax losses
associated with discontinued operations amounted to $11.9 million and $7.8
million in 2000 and 1999, respectively, and consisted mostly of losses
associated with the disposition of these businesses. The 2000 loss also included
an after-tax charge of $4 million related to revised estimates on certain claims
that arose out of the sale of its automotive business in April 1997 (see Note 3
of Notes to the Consolidated Financial Statements).
Selling, general, and administrative (SG&A) expense in 2001 was $145.7 million,
$8.0 million lower than the $153.7 million recorded in 2000. The decrease
resulted from volume-related reductions in selling expenses, cost reduction
programs, and lower accruals for incentive plans. SG&A in 2000 increased $17.4
million over 1999 due to the additional expense associated with a full year of
owning the MagneTek motor business. Relative to net sales, SG&A has been stable
over the last three years.
Interest expense was $16.4 million in 2001 compared with $22.1 million and $12.8
million in 2000 and 1999, respectively. The decline from 2000 to 2001 was the
result of lower average debt levels and declining interest rates while the
increase from 1999 to 2000 was due primarily to acquisition-related financings.
Amortization of intangibles was constant in 2001 and 2000, at approximately $7.0
million. The increase from $5.2 million in 1999 to 2000 was associated with the
acquisition of MagneTek.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets." Under the new standards, goodwill
and indefinite-lived intangible assets are no longer amortized but instead are
reviewed annually for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. Accordingly, the goodwill
associated with the December 2001 acquisition of State and Shenzhen Speeda
Industrial Co., Ltd. (see Note 2 of Notes to the Consolidated Financial
Statements) will not be amortized. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the company will apply the new accounting
standards beginning January 1, 2002. The company is currently assessing the
financial impact SFAS No. 142 will have on its Consolidated Financial
Statements. The company
12
anticipates that all of the goodwill amortization of $6.6 million in 2001 will
be eliminated as a charge to operations in 2002.
Other expense increased by $1.1 million from 2000 to 2001 due mostly to losses
incurred on forward foreign currency contracts. The change from other income of
$0.6 million in 1999 to other expense of $0.3 million in 2000 was due to a
decrease in interest income as marketable securities were liquidated to fund the
MagneTek motor business acquisition.
The company's effective tax rate was 35.5 percent in 2001, 36.0 percent in 2000,
and 34.8 percent in 1999. The rate decreased in 2001 as a result of increased
research and state tax credits, partially offset by the negative impact of the
losses on low-tax foreign jurisdictions. The rate increased in 2000 as a result
of fewer research tax credits as compared to 1999.
Outlook
Recent information on lower inventory levels in the HVAC industry is
encouraging. The company believes it is taking the actions necessary to adjust
its cost base to current sales volumes and will be in a strong position when
markets recover to more normal levels. This positioning, coupled with the impact
of the State acquisition and the new accounting standards eliminating goodwill
amortization, will contribute to earnings growth in 2002 and leads the company
to reiterate its earlier forecast of earnings in the range of $1.40 to $1.60 per
share. The company further believes first and second quarter earnings will show
modest improvement over 2001, with favorable comparisons accelerating in the
second half of the year.
OTHER MATTERS
Environmental
The company's operations are governed by a number of federal, state, and local
environmental laws concerning the generation and management of hazardous
materials, the discharge of pollutants into the environment, and remediation of
sites owned by the company or third parties. The company has expended financial
and managerial resources complying with such laws. Expenditures related to
environmental matters were not material in 2001 and are not expected to be
material in any single year. Although the company believes that its operations
are substantially in compliance with such laws and maintains procedures designed
to maintain compliance, there are no assurances that substantial additional
costs for compliance will not be incurred in the future. However, since the same
laws govern the company's competitors, the company should not be placed at a
competitive disadvantage.
Market Risk
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. Further discussion
regarding derivative instruments is contained in Note 1 of Notes to the
Consolidated Financial Statements.
Commodity risks include raw material price fluctuations. The company uses
futures contracts to fix the cost of its expected needs with the objective of
reducing price risk. Futures contracts are purchased over time periods and at
volume levels which approximate expected usage. At December 31, 2001, the
company had commodity futures contracts amounting to $57 million of commodity
purchases. A hypothetical 10 percent change in the underlying commodity price of
such contracts would have a potential impact of $5.7 million. It is important to
note that gains and losses from the company's futures contract activities will
be offset by gains and losses in the underlying commodity purchase transactions
being hedged.
In addition, the company enters into foreign currency forward contracts to
minimize the effect of fluctuating foreign currencies. At December 31, 2001, the
company had net foreign currency contracts outstanding of $81
13
million. Assuming a hypothetical 10 percent movement in the respective
currencies, the potential foreign exchange gain or loss associated with the
change in rates would amount to $8.1 million. It is important to note that gains
and losses from the company's forward contract activities will be offset by
gains and losses in the underlying transactions being hedged.
The company's earnings exposure related to movements in interest rates is
primarily derived from outstanding floating-rate debt instruments that are
determined by short-term money market rates. At December 31, 2001, the company
had $260 million in outstanding floating-rate debt with a weighted-average
interest rate of 2.3 percent at year end. A hypothetical 10 percent annual
increase or decrease in the year-end average cost of the company's outstanding
floating-rate debt would result in a change in annual pretax interest expense of
$0.6 million.
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," "forecasts," 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 State acquisition, the implementation of
associated cost-reduction programs, general economic conditions, and competitive
pressures.
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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" above.
14
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Index to Financial Statements: Form 10-K
Page Number
Report of Independent Auditors............................................16
Consolidated Balance Sheets at December 31, 2001 and 2000.................17
For each of the three years in the period ended December 31, 2001:
- Consolidated Statement of Earnings..................................18
- Consolidated Statement of Comprehensive Earnings....................18
- Consolidated Statement of Cash Flows................................19
- Consolidated Statement of Stockholders' Equity......................20
Notes to Consolidated Financial Statements.............................21-40
15
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Board of Directors and Stockholders
A. O. Smith Corporation
We have audited the accompanying consolidated balance sheets of A. O. Smith
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of earnings, comprehensive earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of A. O. Smith
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 16, 2002
16
CONSOLIDATED BALANCE SHEETS
December 31 (dollars in thousands)
- -------------------------------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 20,759 $ 15,287
Receivables 209,871 169,117
Inventories 194,706 169,630
Deferred income taxes 22,403 12,907
Other current assets 28,039 7,789
Net current assets - discontinued operations 1,796 22,651
------------ ------------
Total Current Assets 477,574 397,381
Net property, plant, and equipment 355,298 282,835
Net goodwill and other intangibles 301,924 244,821
Prepaid pension 103,272 81,958
Other assets 55,855 40,380
Net long-term assets - discontinued operations - 17,493
------------ ------------
Total Assets $ 1,293,923 $ 1,064,868
============ ============
Liabilities
- -------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ 3,280 $ -
Trade payables 131,073 91,780
Accrued payroll and benefits 29,525 27,388
Accrued liabilities 58,443 26,865
Product warranty 19,470 11,574
Income taxes 887 1,695
Long-term debt due within one year 13,272 11,129
------------ ------------
Total Current Liabilities 255,950 170,431
Long-term debt 390,385 316,372
Product warranty 50,162 17,631
Post-retirement benefit obligation 17,073 18,012
Deferred income taxes 62,154 67,814
Other liabilities 66,321 26,213
------------ ------------
Total Liabilities 842,045 616,473
Commitments and contingencies (Notes 8 and 13)
Stockholders' Equity
- -------------------------------------------------------------------------------------------------------
Preferred Stock - -
Class A Common Stock (shares issued 8,686,484 and 8,722,720) 43,432 43,614
Common Stock (shares issued 23,862,878 and 23,826,642) 23,863 23,827
Capital in excess of par value 54,785 53,521
Retained earnings 551,420 549,237
Accumulated other comprehensive loss (6,858) (5,438)
Treasury stock at cost (214,764) (216,366)
------------ ------------
Total Stockholders' Equity 451,878 448,395
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,293,923 $ 1,064,868
============ ============
See accompanying notes which are an integral part of these statements.
17
CONSOLIDATED STATEMENT OF EARNINGS
Years ended December 31 (dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Continuing Operations
Net sales $1,151,156 $1,247,945 $1,070,339
Cost of products sold 948,815 999,821 839,572
---------- ---------- ----------
Gross profit 202,341 248,124 230,767
Selling, general, and administrative expenses 145,742 153,695 136,304
Interest expense 16,418 22,102 12,821
Amortization of intangibles 6,956 6,932 5,162
Restructuring and other charges 9,368 - -
Other (income) expense - net 1,371 307 (612)
---------- ---------- ----------
22,486 65,088 77,092
Provision for income taxes 7,984 23,432 26,822
---------- ---------- ----------
Earnings from Continuing Operations 14,502 41,656 50,270
Discontinued Operations
Loss from discontinued operations less related
income tax benefit 2000 - $7,772,
and 1999 - $5,017 - (11,903) (7,848)
---------- ---------- ----------
Net Earnings $ 14,502 $ 29,753 $ 42,422
========== ========== ==========
Basic Earnings (Loss) Per Share of Common Stock
Continuing Operations $0.61 $1.78 $2.17
Discontinued Operations - (.51) (.34)
----- ----- -----
Net Earnings $0.61 $1.27 $1.83
===== ===== =====
Diluted Earnings (Loss) Per Share of Common Stock
Continuing Operations $0.61 $1.76 $2.11
Discontinued Operations - (.50) (.33)
----- ----- -----
Net Earnings $0.61 $1.26 $1.78
===== ===== =====
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
Years ended December 31 (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Net Earnings $ 14,502 $ 29,753 $ 42,422
Other comprehensive earnings (loss)
Foreign currency translation adjustments (981) (2,200) (1,750)
Unrealized net loss on cash flow derivative
instruments less related income tax benefit
of $287 (439) - -
---------- ---------- ----------
Comprehensive Earnings $ 13,082 $ 27,553 $ 40,672
========== ========== ==========
See accompanying notes which are an integral part of these statements.
18
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Continuing
Operating Activities
Earnings from continuing operations $ 14,502 $ 41,656 $ 50,270
Adjustments to reconcile earnings from continuing
operations to cash provided by operating activities:
Depreciation 38,485 36,582 30,769
Amortization 8,591 8,477 6,546
Net change in current assets and liabilities 11,175 3,563 (24,929)
Net change in noncurrent assets and liabilities (22,667) (15,343) (13,930)
Other (258) 241 (911)
----------- ---------- ----------
Cash Provided by Operating Activities 49,828 75,176 47,815
Investing Activities
Acquisition of businesses (117,988) - (244,592)
Capital expenditures (35,318) (40,516) (32,807)
---------- ---------- ----------
Cash Used in Investing Activities (153,306) (40,516) (277,399)
Financing Activities
Long-term debt incurred 90,565 - 229,677
Long-term debt retired (11,129) (33,379) (4,629)
Purchase of treasury stock - - (2,773)
Net proceeds from common stock and option activity 1,407 816 1,149
Dividends paid (12,319) (11,720) (11,172)
---------- ---------- ----------
Cash Provided by (Used in) Financing Activities 68,524 (44,283) 212,252
Cash Flow Provided by (Used in) Discontinued Operations 40,426 10,149 (5,573)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 5,472 526 (22,905)
Cash and cash equivalents--beginning of year 15,287 14,761 37,666
---------- ---------- ----------
Cash and Cash Equivalents--End of Year $ 20,759 $ 15,287 $ 14,761
========== ========== ==========
See accompanying notes which are an integral part of these statements.
19
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31 (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Class A Common Stock
Balance at beginning of year $ 43,614 $ 43,615 $ 43,688
Conversion of Class A Common Stock (182) (1) (73)
---------- ---------- ----------
Balance at end of year $ 43,432 $ 43,614 $ 43,615
---------- ---------- ----------
Common Stock
Balance at beginning of year $ 23,827 $ 23,826 $ 23,812
Conversion of Class A Common Stock 36 1 14
---------- ---------- ----------
Balance at end of year $ 23,863 $ 23,827 $ 23,826
---------- ---------- ----------
Capital in Excess of Par Value
Balance at beginning of year $ 53,521 $ 53,026 $ 51,121
Conversion of Class A Common Stock 146 - 59
Exercise of stock options (116) (84) (182)
Tax benefit from exercise of stock options 1,114 404 1,797
Stock incentives and directors' compensation 120 175 231
---------- ---------- ----------
Balance at end of year $ 54,785 $ 53,521 $ 53,026
---------- ---------- ----------
Retained Earnings
Balance at beginning of year $ 549,237 $ 531,204 $ 499,954
Net earnings 14,502 29,753 42,422
Cash dividends on common stock (12,319) (11,720) (11,172)
---------- ---------- ----------
Balance at end of year $ 551,420 $ 549,237 $ 531,204
---------- ---------- ----------
Accumulated Other Comprehensive Loss
Balance at beginning of year $ (5,438) $ (3,238) $ (1,488)
Foreign currency translation adjustments (981) (2,200) (1,750)
Unrealized net loss on cash flow derivative
instruments less related income tax benefit of $287 (439) - -
---------- ---------- ----------
Balance at end of year $ (6,858) $ (5,438) $ (3,238)
---------- ---------- ----------
Treasury Stock
Balance at beginning of year $ (216,366) $ (217,349) $ (215,994)
Purchase of treasury stock - - (2,773)
Exercise of stock options 1,524 901 1,330
Stock incentives and directors' compensation 78 82 88
---------- ---------- ----------
Balance at end of year $ (214,764) $ (216,366) $ (217,349)
---------- ---------- ----------
Total Stockholders' Equity $ 451,878 $ 448,395 $ 431,084
========== ========== ==========
See accompanying notes which are an integral part of these statements.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A. O. Smith Corporation (the company) is a manufacturer serving
customers worldwide. The company's major product lines include fractional and
integral horsepower alternating current (A/C), direct current (D/C) and hermetic
electric motors, as well as residential and commercial water heaters. The
company's products are manufactured and marketed primarily in North America.
Electric motors are sold principally to original equipment manufacturers and
industrial distributors. Water heaters are sold principally to plumbing
wholesalers and retail outlets.
Consolidation. The consolidated financial statements include the accounts of the
company and its wholly owned subsidiaries after elimination of intercompany
transactions.
Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the accompanying financial statements and notes. Actual results could differ
from those estimates.
Fair values. The carrying amounts of cash and cash equivalents, receivables and
trade payables approximated fair value as of December 31, 2001 and 2000 due to
the short maturities of these instruments. The carrying amount of long-term debt
approximated fair value as of December 31, 2001 and 2000 based on current rates
offered to the company for debt with the same or similar maturities.
Foreign currency translation. For all subsidiaries outside the United States
with the exception of Mexico, the company uses the local currency as the
functional currency. For those operations using a functional currency other than
the U.S. dollar, assets and liabilities are translated into U.S. dollars at
year-end exchange rates, and revenues and expenses are translated at
weighted-average exchange rates. The resulting translation adjustments are
recorded as a separate component of stockholders' equity. The Mexico operations
use the U.S. dollar as the functional currency as such operations are a direct
and integral component of the company's U.S. operations. Gains and losses from
foreign currency transactions are included in net earnings.
Cash and cash equivalents. The company considers all highly liquid investments,
generally with a maturity of three months or less when purchased, to be cash
equivalents.
Inventory valuation. Inventories are carried at lower of cost or market. Cost is
determined on the last-in, first-out (LIFO) method for substantially all
domestic inventories which comprise 93 percent and 90 percent of the company's
total inventory at December 31, 2001 and 2000, respectively. Inventories of
foreign subsidiaries and supplies are determined using the first-in, first-out
(FIFO) method.
Property, plant, and equipment. Property, plant, and equipment are stated at
cost. Depreciation is computed primarily by the straight-line method. The
estimated service lives used to compute depreciation are generally 25 to 50
years for buildings and 5 to 20 years for equipment. Maintenance and repair
costs are expensed as incurred.
Goodwill and other intangibles. Goodwill is amortized over 40 years. The
amortization period for other intangibles is as follows: patents and licensed
technologies, 5 to 10 years; assembled workforce, 20 to 25 years; and customer
lists, 30 years.
21
1. Organization and Significant Accounting Policies (continued)
December 31 (dollars in thousands) 2001 2000
- ------------------------------------------------------------------------------
Goodwill, at cost $ 309,094 $ 248,925
Other intangibles, at cost 15,314 11,424
-------- --------
324,408 260,349
Less accumulated amortization 22,484 15,528
-------- --------
$ 301,924 $ 244,821
======== ========
Impairment of long-lived and intangible assets. Property, plant, and equipment,
goodwill, and other intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is recognized for
the difference between the fair value and carrying value of the asset or group
of assets. Such analyses necessarily involve significant judgment.
Derivative instruments. Effective January 1, 2001, the company adopted Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, which 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 are recorded in net earnings or other
comprehensive earnings (loss). 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 material 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 contracts are executed
with major financial institutions with no credit loss anticipated for failure of
the counterparties to perform.
Commodity Future Contracts
In addition to entering into supply arrangements in the normal course of
business, the company also enters into futures contracts to fix the cost of
certain raw material purchases, principally copper, with the objective of
minimizing changes in cost due to market price fluctuations.
The commodity futures contracts are designated as cash flow hedges of a
forecasted transaction. Derivative commodity liabilities of $6.9 million are
recorded in accrued liabilities as of December 31, 2001, with the value of the
effective portion of the contracts of $6.9 million recorded in accumulated other
comprehensive earnings (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 in earnings in the period in which
the ineffectiveness occurs. The impact of hedge ineffectiveness on earnings was
not material for the year ended December 31, 2001.
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,
sales 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.
22
1. Organization and Significant Accounting Policies (continued)
Forward contracts are accounted for as cash flow hedges of a forecasted
transaction. Derivative currency assets of $6.6 million as of December 31, 2001,
are recorded in other current assets. Gains and losses on these instruments are
recorded in other comprehensive earnings (loss) until the underlying transaction
is recorded in earnings. When the hedged item is realized, gains or losses are
reclassified from accumulated other comprehensive earnings (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.
The majority of the amounts in accumulated other comprehensive earnings (loss)
for cash flow hedges are expected to be reclassified into earnings within a
year.
The following table summarizes, by currency, the contractual amounts of the
company's foreign currency forward contracts.
December 31 (dollars in thousands) 2001 2000
- -------------------------------------------------------------------------------
Buy Sell Buy Sell
------ ------ ------ ------
Euro $ 3,900 $1,560 $12,400 $1,840
British pound 2,824 1,525 1,515 1,532
Hungarian forint 3,394 - 3,135 -
Mexican peso 74,279 - 64,901 -
------ ----- ------- -----
Total $84,397 $3,085 $81,951 $3,372
====== ===== ====== =====
The forward contracts in place at December 31, 2001 and 2000, amounted to
approximately 85 percent and 75 percent, respectively, of the company's
anticipated subsequent year exposure for those currencies hedged.
Revenue recognition. The company recognizes revenue upon transfer of title,
which generally occurs upon shipment of the product to the customer.
Compensated absences. In the fourth quarter of 2001 and the second quarter of
2000, the company changed its vacation policy for certain employees so that
vacation pay is earned ratably throughout the year and must be used by year-end.
The accrual for compensated absences was reduced by $1.6 and $2.3 million in
2001 and 2000, respectively, to eliminate vacation pay no longer required to be
accrued under the current policy.
Research and development. Research and development costs are charged to
operations as incurred and amounted to $27.6, $24.5, and $23.9 million for
continuing operations during 2001, 2000, and 1999, respectively.
Product warranty. The company offers warranties on the sales of certain of its
products and records an accrual for estimated future claims. Such accruals are
based upon historical experience and management's estimate of the level of
future claims.
Environmental costs. The company accrues for losses associated with
environmental obligations when such losses are probable and reasonably
estimable. Costs of estimated future expenditures are not discounted to their
present value. Recoveries of environmental costs from other parties are recorded
as assets when their receipt is considered probable. The accruals are adjusted
as facts and circumstances change.
23
1. Organization and Significant Accounting Policies (continued)
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:
2001 2000 1999
- --------------------------------------------------------------------------------
Denominator for basic earnings per share--
weighted-average shares 23,648,136 23,396,210 23,220,813
Effect of dilutive stock options 266,646 294,932 566,540
---------- ---------- ----------
Denominator for diluted earnings per share 23,914,782 23,691,142 23,787,353
========== ========== ==========
Reclassifications. Certain prior year amounts have been reclassified to conform
to the 2001 presentation.
New accounting standards. In June 2001, the Financial Accounting Standards Board
issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." Under the new standards, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. Accordingly, the goodwill associated with the
December 2001 acquisitions (see Note 2) will not be amortized. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the company will
apply the new accounting standards beginning January 1, 2002. The company is
currently assessing the financial impact SFAS No. 142 will have on the
Consolidated Financial Statements. The company anticipates that all of the
goodwill amortization of $6.6 million in 2001 will be eliminated as a charge to
operations in 2002.
2. Acquisitions
On December 28, 2001, the company acquired all of the outstanding stock of State
Industries, Inc. (State). State is a manufacturer of a comprehensive line of
residential and standard commercial water heaters and will nearly double the
size of the company's existing water heater business, while complementing the
existing wholesale channel of distribution with a strong presence in the retail
market. Scale related synergies also are expected to be achieved as a result of
the acquisition.
The aggregate purchase price was $117.2 million. This was comprised of $57.8
million for the outstanding stock, assumption of $56.3 million of debt, and $3.1
million of acquisition costs of which $1.8 million are unpaid at December 31,
2001. In connection with the State acquisition, additional purchase liabilities
of $3.9 million were recorded for employee severance.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. The company is in the
process of obtaining third-party appraisal of property, plant, and equipment and
valuation of certain intangible assets and, therefore, the allocation of the
purchase price is subject to refinement. The non-deductible goodwill has been
recorded within the Water Systems Technologies segment. Of the $3.9 million of
acquired intangible assets, $3.0 million was assigned to trademarks that are not
subject to amortization. The weighted average amortization period of the
remaining acquired intangible assets is expected to be 8.6 years.
24
2. Acquisitions (continued)
December 28, 2001 (dollars in thousands)
- --------------------------------------------------------------------------------
Current assets $ 102,665
Property, plant and equipment 74,409
Intangible assets 3,890
Goodwill 60,123
Other assets 653
---------
Total assets acquired $ 241,740
=========
Current liabilities 74,261
Long-term liabilities 52,094
---------
Total liabilities assumed 126,355
---------
Net assets acquired $ 115,385
=========
On a pro forma basis, the unaudited consolidated results from continuing
operations assuming the State acquisition occurred on January 1, 2000, is as
follows:
Years ended December 31 (dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Net sales $1,467,261 $1,572,923
Earnings from continuing operations 17,604 33,572
Earnings per share:
Basic .74 1.43
Diluted .74 1.42
The pro forma results have been prepared for informational purposes only and
include adjustments to depreciation expense of acquired plant and equipment,
amortization of intangible assets other than goodwill and trademarks, increased
interest expense on acquisition debt, and certain other adjustments, together
with related income tax effects of such adjustments. Anticipated efficiencies
from the consolidation of manufacturing and commercial activities and
anticipated lower material costs related to the consolidation of purchasing have
been excluded from the pro forma operating results. These pro forma results do
not purport to be indicative of the results of operations that would have
occurred had the purchases been made as of the beginning of the periods
presented or of the results of operations that may occur in the future.
In December 2001, the company acquired a 100 percent equity interest in Shenzhen
Speeda Industrial Co., Ltd. and will utilize the facility located in the
People's Republic of China to manufacture electric motors. The total purchase
price of $3.3 million, including future payments of $.7 million, exceeded the
fair value of the assets acquired (principally plant and equipment) by $.8
million which was recorded as non-deductible goodwill within the Electric Motor
Technologies segment.
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. The acquisition was accounted for using the purchase method of
accounting and the financial statements include MagneTek's operating results
since the date of acquisition. The purchase price was allocated to the assets
acquired and liabilities assumed based on their respective fair values at the
date of acquisition. The excess of the purchase price over the fair value of net
assets acquired of $104.3 million has been recorded as goodwill. Other
intangibles acquired, customer lists, patents, and trademarks were assigned fair
values aggregating $9.0 million and are being amortized over periods of 5 to 30
years. In connection with the MagneTek acquisition, additional purchase
liabilities of $17.9 million were recorded which included employee severance and
relocation, as well as certain facility exit costs. The remaining balance of
such purchase liabilities at December 31, 2001, is $6.5 million.
25
3. Divestitures and Discontinued Operations
On January 17, 2000 (the measurement date), the company, with the approval of
its Board of Directors, decided to divest the company's fiberglass piping and
liquid and dry storage businesses. The combined net sales of these operations
were $129.3 and $118.6 million in 2000 and 1999, respectively.
On December 8, 2000, the company sold the fiberglass piping business, operated
as Smith Fiberglass Products Company. On January 10, 2001 the company sold its
liquid and dry storage business, operated as Engineered Storage Products
Company. The net after-tax proceeds from the sale of these businesses were $62
million.
The components of the after-tax loss from discontinued operations included in
the consolidated statement of earnings are as follows:
Years ended December 31 (dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------
Earnings (loss) from operations:
Smith Fiberglass Products Company $ - $(4,355)
Engineered Storage Products Company 3,139 3,465
Loss on disposition:
Smith Fiberglass Products Company (9,032) (6,958)
Engineered Storage Products Company (1,993) -
Automotive Products Company (4,017) -
------- ------
Net after-tax loss from discontinued operations $(11,903) $(7,848)
======= ======
Certain expenses have been allocated to the operations of the discontinued
businesses, 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.
The $9.0 million additional loss recorded at the time of the disposition of the
fiberglass piping business in 2000 resulted from recognition of sales proceeds
substantially less than originally anticipated, as the acquisition financing
market, both generally and specific to the potential buyer, deteriorated to the
point where the original transaction was not feasible. Subsequently, a sales
contract containing a substantial reduction in sales proceeds and other
concessions made by the company relative to the assumption of certain future
costs was negotiated. An after-tax loss from operations (in an amount greater
than what was originally anticipated as of the measurement date) of $.5 million
is included in the $9.0 million loss on disposition in 2000.
As a result of difficult financing conditions prevalent late in 2000, certain
prospective buyers for the storage business withdrew from active negotiations
resulting in a single interested buyer. The company agreed to price concessions
to successfully complete its exit from this business, which resulted in an
unanticipated after-tax loss on disposition for this business of $2.0 million.
The $4.0 million after-tax loss on disposition in 2000 for the automotive
business consists of two items: $2.8 million ($4.0 million pretax) for workers'
compensation costs associated with increased claims having an occurrence date
prior to the 1997 sale of the automotive business for which the company retained
responsibility per the sales contract, and $1.2 million ($2.0 million pretax)
for final settlement of a purchase price dispute in the amount of $7.6 million
for which $5.6 million pretax reserve had been established at the time of sale.
The $2.8 million adjustment for workers' compensation costs was incremental to a
$12.3 million reserve for workers' compensation retained by the company at the
time of sale.
26
3. Divestitures and Discontinued Operations (continued)
The components of the net assets of discontinued operations included in the
consolidated balance sheets are as follows:
December 31 (dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Receivables $ 264 $ 25,915
Inventories - 4,138
Other current assets 7,371 8,737
Trade payables - (3,090)
Accrued payroll and benefits - (2,908)
Other current liabilities (5,839) (10,141)
------- ---------
Net current assets $ 1,796 $ 22,651
======= ========
Net property, plant, and equipment $ - $ 18,266
Other assets - 5,130
Long-term liabilities (2,078) (5,903)
------- --------
Net long-term assets (liabilities) $ (2,078) $ 17,493
======= ========
The net long-term liability in 2001 is included in other liabilities in the
consolidated balance sheet.
4. Business Improvement Programs
In the fourth quarter of 2001, the company recorded restructuring and other
charges of $9.4 million ($6.0 million after tax, or $.25 per share). The program
is expected to generate pretax savings of more than $16.0 million in 2002 and
$20.0 to $25.0 million annually thereafter. The charges include 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 $.8 million through December 31, 2001, for
employee severance and separation costs. As a result of actions taken through
December 31, 2001, the workforce has been reduced by approximately 66 employees.
The company expects to be substantially completed with the realignment
activities prior to December 31, 2002.
5. Statement of Cash Flows
Supplemental cash flow information is as follows:
Years ended December 31 (dollars in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------
Net change in current assets and liabilities:
Receivables $ 16,159 $ 10,278 $ (7,726)
Inventories 6,983 (6,187) (20,158)
Other current assets 163 (377) 393
Trade payables 7,265 10,559 6,654
Accrued liabilities, including payroll and benefits (8,984) (3,091) (1,979)
Income taxes (10,411) (7,619) (2,113)
------- -------- -------
$ 11,175 $ 3,563 $(24,929)
======= ======= =======
27
6. Inventories
December 31 (dollars in thousands) 2001 2001
- -----------------------------------------------------------------------------------------
Finished products $ 120,231 $ 109,702
Work in process 40,210 37,186
Raw materials 58,375 41,051
-------- --------
Inventories, at FIFO cost 218,816 187,939
Allowance to state inventories at LIFO cost 24,110 18,309
-------- --------
$ 194,706 $ 169,630
======== ========
7. Property, Plant, and Equipment
December 31 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
Land $ 9,408 $ 6,690
Buildings 136,189 99,888
Equipment 491,906 435,440
-------- --------
637,503 542,018
Less accumulated depreciation 282,205 259,183
-------- --------
$ 355,298 $ 282,835
======== ========
8. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
Bank credit lines, average year-end interest rate of
4.5% for 2001 and 6.6% for 2000 $ 25,596 $ 37,770
Commercial paper, average year-end interest rate of
2.3% for 2001 and 7.1% for 2000 104,404 124,945
Revolver borrowings, average year-end interest rate of
2.3% for 2001 and 7.2% for 2000 120,000 50,000
Term notes with insurance companies, expiring through
2018, average year-end interest rate of 7.1% for 2001 and
7.0% for 2000 141,157 102,286
Other notes, expiring through 2012, average year-end
interest rate of 3.2 % for 2001 and 4.5% for 2000 12,500 12,500
-------- --------
403,657 327,501
Less amount due within one year 13,272 11,129
-------- --------
$ 390,385 $ 316,372
======= =======
The company has a $250 million multi-year revolving credit agreement with a
group of 10 financial institutions, that expires on August 2, 2004. It also has
an $83 million 364-day credit agreement with a group of six banks, that expires
on July 26, 2002. At its option, the company maintains either cash balances or
pays fees for bank credit and services.
On June 8, 2001, the company issued $50 million in notes under loan facilities
with two insurance companies. The notes range in maturity from 2013 to 2016 and
carry an interest rate of 7.3%.
28
8. Long-Term Debt and Lease Commitments
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 $58.5 million were
unrestricted as of December 31, 2001.
Borrowings under the bank credit lines and in the commercial paper market that
are supported by the multi-year revolving credit agreement have been classified
as long-term. It has been the company's practice to renew or replace the
revolving credit agreement so as to maintain the availability of debt on a
long-term basis and to provide 100 percent backup for its borrowings in the
commercial paper market.
Long-term debt, maturing within each of the five years subsequent to December
31, 2001, is as follows: 2002-$13.3; 2003-$11.7; 2004-$8.6; 2005-$8.6; and
2006-$6.9 million.
Future minimum payments under noncancelable operating leases total $69.0 million
and are due as follows: 2002-$15.0; 2003-$12.0; 2004-$10.7; 2005-$6.7; 2006-$5.7
and thereafter-$18.9 million. Rent expense, including payments under operating
leases, was $19.0, $18.3, and $15.3 million in 2001, 2000, and 1999,
respectively.
Interest paid by the company for continuing and discontinued operations, was
$16.9, $24.6, and $13.8 million in 2001, 2000, and 1999, respectively.
9. Stockholders' Equity
The company's authorized capital consists of 3 million shares of Preferred Stock
$1 par value, 14 million shares of Class A Common Stock $5 par value, and 60
million shares of Common Stock $1 par value. The Common Stock has equal dividend
rights with Class A Common Stock and is entitled, as a class, to elect 25
percent of the board of directors and has 1/10th vote per share on all other
matters.
During 2001, 2000, and 1999, 36,236, 200, and 14,655 shares, respectively, of
Class A Common Stock were converted into Common Stock. Regular dividends paid on
the Class A Common and Common Stock amounted to $.52, $.50, and $.48 per share
in 2001, 2000, and 1999, respectively.
On December 9, 1997, the company's board of directors authorized the repurchase
of up to $50 million of Common Stock of which $21.5 million remains available at
December 31, 2001. At December 31, 2001, 32,595 and 8,730,594, shares of Class A
Common Stock and Common Stock, respectively, were held as treasury stock. At
December 31, 2000, 32,595 and 8,967,312 shares of Class A Common Stock and
Common Stock, respectively, were held as treasury stock.
10. Stock Options
The company has two Long-Term Executive Incentive Compensation Plans for
granting nonqualified and incentive stock options to key employees. The 1990
Plan has terminated except as to outstanding options. The 1999 Plan provides for
the issuance of 1.5 million stock options at fair value on the date of grant.
The options granted become exercisable one year from date of grant and, for
active employees, expire ten years after date of grant. The number of shares
available for granting of options at December 31, 2001, was 158,650.
29
10. Stock Options (continued)
Changes in option shares, all of which are Common Stock, were as follows:
Weighted-
Average
Per Share
Exercise Years Ended December 31
------------------------------------
Price-2001 2001 2000 1999
--------------- ---- ---- ----
Outstanding at beginning of year $ 12.87 2,448,500 1,979,800 2,022,900
Granted
2001--$15.14 per share 15.14 510,700
2000--$13.56 to $16.28 per share 632,000
1999--$29.03 per share 173,900
Exercised
2001--$5.63 to $16.33 per share 6.24 (225,600)
2000--$4.67 to $16.33 per share (141,600)
1999--$4.67 to $16.67 per share (217,000)
Expired
2000--$18.00 to $27.25 per share - (21,700) -
------------------------------------
Outstanding at end of year
(2001--$8.67 to $29.83 per share) 17.01 2,733,600 2,448,500 1,979,800
========= ========= =========
Exercisable at end of year 17.44 2,222,900 1,816,500 1,805,900
========= ========= =========
The following table summarizes weighted-average information by range of exercise prices for
stock options outstanding and exercisable at December 31, 2001:
Weighted-
Options Weighted- Options Weighted- Average
Outstanding at Average Exercisable at Average Remaining
Range of December 31, Exercise December 31, Exercise Contractual
Exercise Prices 2001 Price 2001 Price Life
--------------- -------------- --------- -------------- --------- ------------
$8.67 to $13.56 747,100 12.63 747,100 12.63 7 years
$15.14 to $18.33 1,636,650 16.62 1,125,950 17.29 6 years
$25.25 to $29.83 349,850 28.16 349,850 28.16 7 years
--------- ---------
2,733,600 2,222,900
========= =========
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
plans. 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.
30
10. Stock Options (continued)
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 from continuing operations
would have been as follows:
Years ended December 31 (dollars in thousands, except per share amounts) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Earnings:
As reported $14,502 $41,656 $50,270
Pro forma 12,727 40,330 49,311
Earnings per share:
As reported:
Basic $ 0.61 $ 1.78 $2.17
Diluted 0.61 1.76 2.11
Pro forma:
Basic 0.54 1.72 2.12
Diluted 0.53 1.70 2.07
The weighted-average fair value per option at the date of grant during 2001,
2000, and 1999 using the Black-Scholes option-pricing model, was $5.30, $4.73,
and $9.58, respectively. Assumptions were as follows:
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Expected life (years) 6.0 5.0 4.0
Risk-free interest rate 4.7% 5.0% 6.5%
Dividend yield 2.3% 2.2% 2.1%
Expected volatility 37.9% 39.9% 38.6%
31
11. Pension and Other Post-retirement Benefits
The company provides retirement benefits for all United States employees. Plan
assets consist primarily of marketable equities and debt securities. The company
also has several foreign pension plans, none of which are material to the
company's financial position. Effective January 1, 2001, the company changed its
Executive Supplemental Pension Plan (ESPP) to an unfunded defined benefit plan.
The company also has several unfunded defined benefit post-retirement plans
covering certain hourly and salaried employees that provide medical and life
insurance benefits from retirement to age 65.
The company has a defined contribution profit sharing and retirement plan
covering the majority of its salaried nonunion employees which provides for
annual company contributions of 35 percent to 140 percent of qualifying
contributions made by participating employees. The amount of the company's
contribution in excess of 35 percent is dependent upon the company's
profitability. The company also has defined contribution plans for certain
hourly employees which provide for annual matching company contributions.
On December 28, 2001, the company acquired State Industries, Inc., including its
pension and defined contribution benefit plans.
The company does not provide post-retirement health care benefits beyond age 65.
Certain hourly employees retiring after January 1, 1996, are subject to a
maximum annual benefit and salaried employees hired after December 31, 1993, are
not eligible for post-retirement medical benefits. As a result, a one percentage
point change in the health care cost trend rate would not have a significant
effect on the amounts reported. The post-retirement benefit obligation was
determined using an assumed healthcare cost trend rate of nine percent in 2001
trending down to six percent in 2004 and thereafter.
The following tables present the changes in benefit obligations, plan assets,
funded status, and major assumptions used to determine these amounts for
domestic pension and post-retirement plans and components of net periodic
benefit costs.
32
11. Pension and Other Post-retirement Benefits (continued)
Pension Benefits Post-retirement Benefits
-------------------------- -------------------------------
Years ended December 31 (dollars in thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligation at beginning of year $(561,771) $(530,658) $ (17,177) $ (17,477)
ESPP benefit obligation at beginning of year (6,963) - - -
Service cost (5,900) (6,631) (258) (271)
Interest cost (41,579) (40,926) (1,227) (1,267)
Participant contributions - - (387) (264)
Plan amendments (542) - - -
Actuarial gains (losses) including
assumption changes (15,759) (23,084) 2 79
Acquisition (64,642) - - -
Benefits paid 46,669 39,528 2,592 2,023
-------- -------- -------- --------
Benefit obligation at end of year $(650,487) $(561,771) $ (16,455) $ (17,177)
======== ======== ======== =======
Change in plan assets
Fair value of plan assets at beginning of year $ 737,119 $ 755,487 $ - $ -
Actual return on plan assets (35,967) 21,160 - -
Contribution by the company 946 - 2,205 1,759
Participant contributions - - 387 264
Acquisition 48,899 - - -
Benefits paid (46,669) (39,528) (2,592) (2,023)
-------- -------- ------- --------
Fair value of plan assets at end of year $ 704,328 $ 737,119 $ - $ -
======== ======== ======== ========
Funded status $ 53,841 $ 175,348 $ (16,455) $ (17,177)
Unrecognized net actuarial loss (gain) 22,290 (97,503) (1,781) (1,845)
Unrecognized net transition asset - (499) - -
Unrecognized prior service cost (credit) 7,780 4,612 (525) (677)
-------- -------- -------- --------
Net amount recognized $ 83,911 $ 81,958 $ (18,761) $ (19,699)
======== ======== ======== ========
Amounts recognized in the statement
of financial position consist of:
Prepaid pension asset $ 103,272 $ 81,958 $ - $ -
Accrued benefit liability (19,361) - (1,688) (1,687)
Post-retirement benefit obligation - - (17,073) (18,012)
-------- -------- -------- --------
Net amount recognized $ 83,911 $ 81,958 $ (18,761) $ (19,699)
======== ======== ======== =======
Weighted-average assumptions as of December 31
Discount rate 7.25% 7.50% 7.25% 7.50%
Expected return on plan assets 10.00% 10.25% n/a n/a
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
33
11. Pension and Other Post-retirement Benefits (continued)
Pension Benefits Post-retirement Benefits
-------------------------------------- ------------------------------------
Years ended December 31 (dollars in thousands) 2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 5,900 $ 6,631 $ 4,890 $ 258 $ 271 $ 338
Interest cost 41,579 40,926 36,314 1,227 1,267 1,195
Expected return on plan assets (68,067) (64,854) (56,598) - - -
Amortization of prior service cost 937 559 502 (152) (152) (152)
Amortization of transition asset (499) (939) (939) - - -
Amortization of net actuarial gain - - - (66) (82) (59)
--------- -------- --------- ------- ------- -------
Defined benefit plan cost (income) $ (20,150) $ (17,677) $ (15,831) $ 1,267 $ 1,304 $ 1,322
======= ===== =====
Various U.S. defined contribution
plans cost 2,418 3,559 5,087
--------- -------- ---------
$ (17,732) $ (14,118) $ (10,744)
========= ========= =========
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $71,561, $68,104 and $48,899, respectively, as of
December 31, 2001. The amounts were zero at December 31, 2000, since these plans
were acquired or changed during 2001.
Net periodic benefit cost is determined using the assumptions as of the
beginning of the year. The funded status is determined using the assumptions as
of the end of the year.
34
12. Income Taxes
The components of the provision for income taxes for continuing operations
consisted of the following:
Years ended December 31 (dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------
Current:
Federal $ (10,100) $ 3,964 $ 11,810
State (12) 428 2,399
International 2,426 3,581 1,339
Deferred 15,670 15,459 11,274
--------- -------- --------
$ 7,984 $ 23,432 $ 26,822
========= ======== ========
The provision for income taxes for continuing operations differs from the U.S.
federal statutory rate due to the following items:
Years ended December 31 (dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------
Provision at U.S. federal statutory rate 35.0% 35.0% 35.0%
International income tax rate differential 2.2 (1.1) (1.8)
State income and franchise taxes (.8) 3.0 3.6
Research tax credits (1.3) (.1) (1.8)
Other .4 (.8) (.2)
---- ----- ----
35.5% 36.0% 34.8%
==== ==== ====
Components of earnings from continuing operations before income taxes were as
follows:
Years ended December 31 (dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------
United States $ 18,939 $ 57,845 $ 76,201
International 3,547 7,243 891
----- ------- -------
$ 22,486 $ 65,088 $ 77,092
====== ======= ======
Total taxes paid (tax refunds received) by the company for continuing and
discontinued operations amounted to $(2.7), $13.1, and $11.6 million in 2001,
2000, and 1999, respectively.
No provision for U.S. income taxes or foreign taxes has been made on the
undistributed earnings of foreign subsidiaries as such earnings are considered
to be permanently invested. At December 31, 2001, the undistributed earnings
amounted to $38.5 million. Determination of the amount of unrecognized deferred
tax liability on the undistributed earnings is not practicable. In addition, no
provision or benefit for U.S. income taxes have been made on foreign currency
translation gains or losses.
35
12. Income Taxes (continued)
The tax effects of temporary differences of assets and liabilities between
income tax and financial reporting for continuing operations are as follows:
December 31 (dollars in thousands)
- -----------------------------------------------------------------------------------------------------
2001 2000
---------------------------- ------------------------------
Assets Liabilities Assets Liabilities
- -----------------------------------------------------------------------------------------------------
Employee benefits $ 25,605 $ 42,125 $ 19,261 $ 33,791
Inventory - 3,363 1,134 -
Receivables - 10,111 - 4,697
Product liability and warranty 40,986 - 11,814 -
Depreciation differences - 42,781 - 27,781
Amortization differences - 17,941 - 13,094
Tax loss and credit carryovers 9,946 - - -
All other 33 - - 7,753
-------- --------- ------- --------
$ 76,570 $ 116,321 $ 32,209 $ 87,116
======== ========= ======= ========
Net liability $ 39,751 $ 54,907
========= ========
These deferred tax assets and liabilities are classified in the balance sheet as
current or long-term based on the balance sheet classification of the related
assets and liabilities as follows:
December 31 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------
Current deferred income tax assets $ 22,403 $ 12,907
Long-term deferred income tax liabilities (62,154) (67,814)
--------- ---------
Net liability $ 39,751 $ 54,907
======== ========
As a result of the acquisition of State Industries, Inc., the company has $19
million of federal net operating loss carryovers that expire between 2018 and
2021, $7.8 million of federal capital loss carryovers that expire in 2006, $2.0
million of contribution carryovers that expire between 2002 and 2006, and $2.5
million of tax credits, the majority of which have an unlimited carryover
period. Due to a change in State Industries, Inc. ownership, the annual
limitation for utilization of the federal tax carryovers is the equivalent of
$2.7 million of deductions.
The company also has approximately $140 million of state and local net operating
loss carryovers. The majority of these carryovers expire between 2010 and 2021.
36
13. Litigation and Insurance Matters
The company and the newly acquired State Industries, Inc. (State) are involved
in various unresolved legal actions, administrative proceedings, and claims in
the ordinary course of its business involving product liability, property
damage, insurance coverage, patents, and environmental matters, including the
disposal of hazardous waste. Although it is not possible to predict with
certainty the outcome of these unresolved legal actions or the range of possible
loss or recovery, the company believes these unresolved legal actions will not
have a material effect on its financial position or results of operations. The
following paragraphs summarize noteworthy actions and proceedings.
On July 16, 1999, a class action lawsuit was filed in the United States District
Court, Western District of Missouri, by individuals on behalf of themselves and
all persons throughout the United States who have owned or currently own a water
heater manufactured by Rheem Manufacturing Company, A. O. Smith Corporation,
Bradford White Company, American Water Heater Company, Lochinvar Corporation,
and State Industries, Inc. (the "water heater manufacturers") that contains a
dip tube manufactured, designed, supplied, or sold by Perfection Corporation
between August 1993 and October 1996. A dip tube is a plastic tube in a
residential water heater that brings the cold water supply to the bottom area of
the tank to be heated.
The plaintiffs and defendants reached a settlement of the claims of this
litigation. On November 22, 1999, the United States District Court, Western
District of Missouri, entered an order giving preliminary approval to the
settlement. On May 1, 2000, the District Court, which oversees the dip tube
class action, gave final approval to the settlement. The final order approved
the remedial system provided for in the settlement agreement. The deadline for
filing claims under the class action settlement agreement was December 31, 2000.
The water heater manufacturers paid the settlement claims. All other legal
actions brought against the water heater manufacturers respecting dip tube
claims have been dismissed as a result of the settlement of the class action.
Separately, the water heater manufacturers filed a direct action lawsuit in the
Civil District Court for the Parish of Orleans, State of Louisiana, against
Perfection Corporation and American Meter Company, the parent company of
Perfection: Manner Plastics Materials, Inc., the developer of the polypropylene
formula which it sold to Perfection Corporation: and their insurers. This
lawsuit seeks (1) recovery of damages sustained by the water heater
manufacturers related to the costs of the class action settlement and the
handling of dip tube claims outside of and prior to the national class action
settlement, (2) damages for the liability of the water heater manufacturers
assumed by Perfection Corporation by contract, and (3) personal injuries
suffered by the water heater manufacturers as a result of the disparagement of
their businesses. Also relating to the water heater manufacturers' recovery
efforts, the insurers of Perfection Corporation have brought third-party claims
against the water heater manufacturers in a state court action in Cook County,
Illinois. Perfection Corporation has also sued the water heater manufacturers in
a separate action in Cook County, Illinois. The filing by Perfection Corporation
is an attempt to preempt the Louisiana lawsuit.
As of December 31, 2001, the company recorded a long-term receivable of $32.8
million (as detailed below) related to dip tube repair claims, administrative
costs, legal fees and related expenses. It is the company's expectation that all
or a substantial portion of its costs will be recovered from Perfection,
American Meter Company, Manner Plastics Materials, Inc., and their insurers, as
well as the company's insurers.
Cumulative
1999 December 31,
(dollars in thousands) 2001 2000 and Prior 2001
- ------------------------------------------------------------------------------
Repair claim payments $13,378 $ 6,268 $2,537 $22,183
Administrative costs 4,503 2,009 1,021 7,533
Legal fees 470 2,085 490 3,045
------- ------ ------ -------
Total funding $18,351 $10,362 $4,048 $32,761
====== ====== ===== ======
37
13. Litigation and Insurance Matters (continued)
State is a defendant in three lawsuits pending at December 31, 2001, in state
courts in Texas, California and Alabama. The plaintiffs in each of these
lawsuits are claiming they purchased a water heater manufactured by State which
was defective, causing the plaintiffs to incur expenses for repair, replacement
or property damages. State ceased manufacturing this type water heater in 1999.
The plaintiffs in each lawsuit are seeking class action status. The Texas
lawsuit was certified by the trial court as a class action in 1999.
Subsequently, State and the class representatives entered into a settlement
agreement which provided compensation for the class members. As a result of a
class member's objection to the settlement, the appellate court, in reviewing
the certification of the class and the objection to the settlement, overruled
the trial court and in 2001 ordered the decertification of the class action. The
Texas Supreme Court affirmed the appellate court decision. State filed a
separate lawsuit which is pending in the federal District Court in Dallas, Texas
against the class representatives seeking to have the court declare that State
has no obligation under the settlement agreement. State is vigorously contesting
all of the claims in the three lawsuits. The company believes that were there to
be an adverse outcome with these lawsuits, it would not be material to the
company's financial condition. The insurer of State is disputing the
insurability of these claims. State and its insurer are suing each other in a
lawsuit which is pending in the federal District Court in Nashville, Tennessee
respectively seeking a declaration concerning the coverage provided, if any, by
the insurance policies for these claims.
The company is currently involved as a potentially responsible party ("PRP") 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. State is not involved in any environmentally
impacted sites. The company previously reported that it was a defendant in two
separate lawsuits involving a former mine in Colorado that is being remediated
by the United States Environmental Protection Agency ("EPA"). The claims against
the company have been dismissed by the trial court in both of those actions.
While the State of Colorado retains the right to appeal the trial court's
decision in one of those actions, the company believes that the trial court's
well reasoned decision would be upheld on any appeal brought by the State of
Colorado. Since the EPA has indicated that it does not intend to pursue any
claims against the company with respect to this site, the company should have no
further potential liability with respect to the site.
It is impossible at this time to estimate the total cost of remediation for the
Sites or the company's ultimate share of those costs, primarily because the
Sites are in various stages of the remediation process and issues remain open at
many Sites concerning the selection and implementation of the final remedy, the
cost of that remedy and the company's liability at a Site relative to the
liability and viability of the other PRPs.
The company has established reserves for the Sites in a manner that is
consistent with generally accepted accounting principles for costs associated
with such cleanups when those costs are capable of being reasonably estimated.
To the best of the company's knowledge, the reserves it has established and
insurance proceeds that are available to the company are sufficient to cover the
company's liability. The company further believes its insurers have the
financial ability to pay any such covered claims, and there are viable PRPs at
each of the Sites which have the financial ability to pay their respective
shares of liability at the sites.
With respect to non-environmental claims, the company has self-insured a portion
of its product liability loss exposure and other business risks for many years.
The company has established reserves which it believes are adequate to cover
incurred claims. For the year ended December 31, 2001, the company had $125
million of third-party product liability insurance for individual losses in
excess of $1.5 million and for aggregate annual losses in excess of $10 million;
State had $100 million of third-party product liability insurance for individual
losses in excess of $3.0 million and for aggregate annual losses in excess of $8
million. The company reevaluates its exposure on claims periodically and makes
adjustments to its reserves as appropriate.
38
14. Operations by Segment
The company has two reportable segments: Electric Motor Technologies and Water
Systems Technologies. The Electric Motor Technologies segment manufactures
fractional and integral alternating current (A/C) and direct current (D/C)
motors used in fans and blowers in furnaces, air conditioners, and ventilating
systems; industrial applications such as material handling; as well as in other
consumer products such as home appliances and jet pump motors, swimming pools,
hot tubs, and spas. In addition, the Electric Motor Technologies segment
manufactures hermetic motors which are sold worldwide to manufacturers of
compressors used in air conditioning and refrigeration systems. The Water
Systems Technologies segment manufactures residential gas and electric water
heaters as well as commercial water heating equipment used in a wide range of
applications including hotels, laundries, car washes, factories, and large
institutions. In addition, the Water Systems Technologies segment manufactures
copper tube boilers used in large-volume hot water and hydronic heating
applications.
The accounting policies of the reportable segments are the same as those
described in the "Summary of Significant Accounting Policies" outlined in Note
1. Intersegment sales have been excluded from segment revenues and are
immaterial. Earnings before interest and taxes (EBIT) is used to measure the
performance of the segments and allocate resources.
Operations by segment
Earnings from
Continuing Operations Net Sales
------------------------------- ---------------------------------
Years ended December 31 (dollars in millions) 2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Electric Motor Technologies $ 20.8 $ 75.5 $ 78.9 $ 802.7 $ 902.4 $ 735.0
Water Systems Technologies 39.2 34.9 33.8 348.5 345.5 335.3
------ ------ ------- --------- -------- --------
Total Segments - EBIT 60.0 110.4 112.7 $ 1,151.2 $ 1,247.9 $ 1,070.3
======= ======= =======
General Corporate and Research
and Development Expenses (21.1) (23.2) (22.8)
Interest Expense (16.4) (22.1) (12.8)
------ ------- -------
Earnings from Continuing Operations
before Income Taxes 22.5 65.1 77.1
Provision for Income Taxes (8.0) (23.4) (26.8)
------ ------- ------
Earnings from Continuing Operations $ 14.5 $ 41.7 $ 50.3
====== ====== ======
Net sales of the Electric Motor Technologies segment includes sales to York International Corporation of $140.4, $182.9, and
$191.3 million in 2001, 2000, and 1999, respectively.
Total assets, depreciation and amortization, and capital expenditures by segment
Depreciation and Capital
Amortization Expenditures
Total Assets (Years Ended (Years Ended
(December 31) December 31) December 31)
- ---------------------------------------------------------------------------------------------------------------------
(dollars in millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Electric Motor Technologies $ 680.3 $ 700.6 $ 705.1 $ 37.0 $ 34.7 $ 27.3 $ 29.5 $ 35.6 $ 27.0
Water Systems Technologies 420.6 182.8 177.4 8.9 9.0 8.8 5.7 4.6 5.6
--------- --------- --------- ------ ------ ----- ----- ----- ------
Total Segments 1,100.9 883.4 882.5 45.9 43.7 36.1 35.2 40.2 32.6
Corporate Assets 191.2 141.4 120.9 1.2 1.3 1.2 0.1 0.3 0.2
Discontinued Operations 1.8 40.1 62.2 - 5.6 5.3 - 1.5 5.1
--------- --------- --------- ------ ------ ----- ----- ----- ------
Total $ 1,293.9 $ 1,064.9 $ 1,065.6 $ 47.1 $ 50.6 $ 42.6 $ 35.3 $ 42.0 $ 37.9
========= ========= ========= ====== ====== ===== ===== ===== ======
Corporate assets consist primarily of cash and cash equivalents, deferred income
taxes, and prepaid pension.
39
14. Operations by Segment (continued)
Net sales and long-lived assets by geographic location
The following data by geographic area includes net sales based on product
shipment destination and long-lived assets based on physical location.
Long-lived assets include net property, plant, and equipment and other long-term
assets and exclude prepaid pension, intangible assets, and long-lived assets of
discontinued operations.
Long-Lived Assets Net Sales
----------------------------- ---------------------------------
(dollars in millions) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------- ---------------------------------------------------
United States $ 283.4 $ 200.1 $ 192.1 United States $ 984.4 $ 1,108.9 $ 959.7
Mexico 102.0 98.7 91.7 Foreign 166.8 139.0 110.6
------- --------- --------
Other Foreign 25.8 24.4 28.5 Total $1,151.2 $ 1,247.9 $1,070.3
------- ------ ------ ======= ======== =======
Total $ 411.2 $ 323.2 $ 312.3
======= ======= =======
15. Quarterly Results of Operations (Unaudited)
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- ----------------- -----------------
2001 2000 2001 2000 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 318.2 $ 344.6 $ 308.3 $ 341.3 $ 269.1 $ 290.8 $ 255.6 $ 271.2
Gross profit 58.8 73.4 58.6 73.5 42.6 54.3 42.3 46.9
Earnings
Continuing 8.5 14.2 10.7 17.6 0.4 7.3 (5.1) 2.5
Discontinued - 0.4 - - - 1.5 - (13.8)
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings 8.5 14.6 10.7 17.6 0.4 8.8 (5.1) (11.3)
====== ====== ====== ====== ====== ====== ====== ======
Basic earnings per share
Continuing .36 .61 .45 .75 .02 .31 (.21) .11
Discontinued - .02 - - - .07 - (.59)
------ ------- ------ ------ ------ ------ ------ ------
Net Earnings .36 .63 .45 .75 .02 .38 (.21) (.48)
====== ====== ====== ====== ====== ====== ====== ======
Diluted earnings per share
Continuing .36 .60 .45 .74 .02 .31 (.21) .11
Discontinued - .02 - - - .06 - (.58)
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings .36 .62 .45 .74 .02 .37 (.21) (.47)
====== ====== ====== ====== ====== ====== ====== ======
Common dividends declared .13 .12 .13 .12 .13 .13 .13 .13
====== ====== ====== ====== ====== ====== ====== ======
Net earnings and dividends declared per share are computed separately for each
period and, therefore, the sum of such quarterly per share amounts may differ
from the total for the year.
See Note 8 for restrictions on the payment of dividends.
40
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of Directors" in the
company's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders
(to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant's fiscal year) is incorporated
herein by reference. The information required regarding Executive Officers of
the company is included in Part I of this Form 10-K under the caption "Executive
Officers of the company."
The information included under the heading "Compliance with Section 16(a) of the
Securities Exchange Act" in the company's definitive Proxy Statement for the
2002 Annual Meeting of Stockholders (to be filed with the Securities and
Exchange Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year) is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
company's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders
(to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant's fiscal year) is incorporated
herein by reference, except for the information required by paragraphs (i), (k),
and (l) of Item 402(a)(8) of Regulation S-K.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the headings "Principal Stockholders" and
"Security Ownership of Directors and Management" in the company's definitive
Proxy Statement for the 2002 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission under Regulation 14A within 120 days
after the end of the registrant's fiscal year) is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the headings and "Compensation Committee
Interlocks and Insider Participation" in the company's definitive Proxy
Statement for the 2002 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission under Regulation 14A within 120 days after
the end of the registrant's fiscal year) is incorporated herein by reference.
41
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES and REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
Form 10-K
Page Number
The following consolidated financial statements of A. O. Smith
Corporation are included in Item 8:
Consolidated Balance Sheets at December 31, 2001 and 2000.. 17
For each of the three years in the period ended
December 31, 2001:
- Consolidated Statement of Earnings..................... 18
- Consolidated Statement of Comprehensive Earnings 18
- Consolidated Statement of Cash Flows................... 19
- Consolidated Statement of Stockholders' Equity......... 20
Notes to Consolidated Financial Statements 21-40
The following consolidated financial statement schedule of
A. O. Smith Corporation is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts............... 43
Schedules not included have been omitted because they are not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 2001.
(c) Exhibits - see the Index to Exhibits on pages 46-47 of this report.
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act
of 1934, as amended, the company will, upon request and upon payment of a
reasonable fee not to exceed the rate at which such copies are available from
the Securities and Exchange Commission, furnish copies to its security holders
of any exhibits listed in the Index to Exhibits.
Management contracts and compensatory plans and arrangements required to be
filed as exhibits pursuant to Item 14(c) of Form 10-K are listed as Exhibits
10(a) through 10(f) in the Index to Exhibits.
42
A. O. SMITH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000 Omitted)
Years ended December 31, 2001, 2000, and 1999
Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Year Expenses1 Accounts2 Deductions3 Year
- ----------- -------------- ------------- ------------ ------------- -------------
2001:
Valuation allowance
for trade and notes
receivable $ 2,989 $ 2,344 $ 1,581 $ 2,034 $ 4,880
2000:
Valuation allowance
for trade and notes
receivable 3,121 2,023 - 2,155 2,989
1999:
Valuation allowance
for trade and notes
receivable 2,523 1,159 - 561 3,121
1Provision (credit) based upon estimated collection.
2Associated with the purchase of State and Shenzhen Speeda Industrial Co., Ltd.
3Uncollectible amounts/expenditures charged against the reserve.
43
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Nos. 2-72542
filed on May 26, 1981, Post-Effective Amendment No. 1, filed on May 12, 1983,
Post-Effective Amendment No. 2, filed on December 22, 1983, Post-Effective
Amendment No. 3, filed on March 30, 1987; 33-19015 filed on December 11, 1987;
33-21356 filed on April 21, 1988; Form S-8 No. 33-37878 filed November 16, 1990;
Form S-8 No. 33-56827 filed December 13, 1994; Form S-8 No. 333-05799 filed June
12, 1996, and 333-92329 filed December 8, 1999.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on behalf
of the undersigned, thereunto duly authorized.
A. O. SMITH CORPORATION
By: /s/ Robert J. O'Toole
-------------------------------
Robert J. O'Toole
Chief Executive Officer
Date: February 20, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of February 20, 2002 by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Name and Title Signature
/s/ Robert J. O'Toole
ROBERT J. O'TOOLE ----------------------------------
Chairman of the Board of Robert J. O'Toole
Directors, President and
Chief Executive Officer
/s/ Kenneth W. Krueger
KENNETH W. KRUEGER ----------------------------------
Senior Vice President and Kenneth W. Krueger
Chief Financial Officer
/s/ John J. Kita
JOHN J. KITA ----------------------------------
Vice President, Treasurer and Controller John J. Kita
/s/ W. Michael Barnes
W. MICHAEL BARNES ----------------------------------
Director W. Michael Barnes
/s/ Glen R. Bomberger
GLEN R. BOMBERGER ----------------------------------
Director Glen R. Bomberger
/s/ Ronald D. Brown
RONALD D. BROWN ----------------------------------
Director Ronald D. Brown
/s/ William F. Buehler
WILLIAM F. BUEHLER ----------------------------------
Director William F. Buehler
/s/ Kathleen J. Hempel
KATHLEEN J. HEMPEL ----------------------------------
Director Kathleen J. Hempel
/s/ Agnar Pytte
AGNAR PYTTE ----------------------------------
Director Agnar Pytte
/s/ Bruce M. Smith
BRUCE M. SMITH ----------------------------------
Director Bruce M. Smith
/s/ Mark D. Smith
MARK D. SMITH ----------------------------------
Director Mark D. Smith
45
INDEX TO EXHIBITS
Exhibit
Number Description
(3)(i) Restated Certificate of Incorporation of the corporation as amended
April 5, 1995, incorporated by reference to the quarterly report on
Form 10-Q for the quarter ended March 31, 1995, and as further amended
on February 5, 1996, and incorporated by reference to the annual
report on Form 10-K for the year ended December 31, 1995
(3)(ii) By-laws of the corporation as amended October 7, 1997, incorporated by
reference to the quarterly report on Form 10-Q for the quarter ended
September 30, 1997.
(4) (a) The corporation's outstanding long-term debt is described in Note
8 to the Consolidated Financial Statements. None of the long-term debt
is registered under the Securities Act of 1933. None of the debt
instruments outstanding at the date of this report exceeds 10 percent
of the corporation's total consolidated assets, except for the item
disclosed as exhibit 4(b) below. The corporation agrees to furnish to
the Securities & Exchange Commission, upon request, copies of any
instruments defining rights of holders of long-term debt described in
Note 7.
(b) A. O. Smith Corporation Restated Certificate of Incorporation as
amended April 5, 1995, [incorporated by reference to Exhibit (3)(i)
above]
(c) The Company has instruments that define the rights of holders of
long-term debt that are not being filed with this Annual Report on
Form 10-K in reliance upon Item 601(b) (4) (iii) of Regulation S-K.
The Company agrees to furnish to the Securities and Exchange
Commission, upon request, copies of these instruments.
(10) Material Contracts
(a) 1990 Long-Term Executive Incentive Compensation Plan, as amended,
incorporated by reference to the Form S-8 Registration Statement filed
by the corporation on December 13, 1994, (Reg. No. 33-56827)
(b) Long-Term Executive Incentive Compensation Plan incorporated by
reference to the Form S-8 Registration Statement filed by the
corporation on December 8, 1999, (Reg. No. 333-92329)
(c) Executive Incentive Compensation Plan, as amended, incorporated by
reference to Exhibit A to the Proxy Statement dated April 21, 1997,
for a May 21, 1997, Annual Meeting of Stockholders
(d) Executive Life Insurance Plan, incorporated by reference to the
Annual Report on Form 10-K for the fiscal year ended December 31, 1992
(e) Corporate Directors' Deferred Compensation Plan, as amended,
incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1992
(f) Executive Supplemental Pension Plan dated as of January 1, 2001
(g) Supplemental Profit Sharing Plan as of January 1, 2001
46
INDEX TO EXHIBITS (continued)
- -----------------
Exhibit
Number Description
(21) Subsidiaries
(23) Consent of Independent Auditors
47
A. O. SMITH CORPORATION
EXECUTIVE SUPPLEMENTAL PENSION PLAN
AS AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 2001
Section 1. Purpose
The purpose of this Plan is to provide a pension plan supplement for
certain key executives of the Company. This Plan, effective January 1, 2001,
applies only to Executives who are in active employment with the Company on or
after such date.
This plan is an amendment and restatement of the A. O. Smith
Corporation Supplemental Benefit Plan, dated December 14, 1993, and is a
continuation of the pension plan supplement part of that plan. The profit
sharing supplement part of that plan was continued under the A. O. Smith
Corporation Supplemental Profit Sharing Plan, effective January 1, 2001.
Section 2. Definitions
(a) "Affiliate" a domestic subsidiary or affiliated company of A. O.
Smith Corporation which has been designated as being eligible to participate in
the Plan by the Committee.
(b) "Average Monthly Earnings" means the monthly average in the five
(5) Plan Years (of the most recent ten (10) Plan Years prior to termination of
employment) in which the greatest Earnings were received.
(c) "Company" means A. O. Smith Corporation.
(d) "Committee" means the Personnel and Compensation Committee of the
Board of Directors of the Company.
(e) "Earnings" shall mean the total of all wages, salaries,
commissions and bonuses paid to the Executive, including any deferred
compensation or salary reduction amounts pursuant to Section 125 and 401(k) of
the Internal Revenue Code.
(f) "Executive" means an employee of the Company or an Affiliate with
a position which is assigned Grade 23 or above and who is entitled to a deferred
vested or retirement benefit in the Pension Plan.
(g) "Pension Plan" means the A. O. Smith Retirement Plan.
(h) "Plan Year" means the calendar year.
Section 3. Pension Plan Supplement
(a) An Executive may be entitled to receive a monthly Pension Plan
supplement (the "Pension Plan Supplement") from the Company under this Plan. The
formula for calculation of the monthly Pension Plan Supplement, if any, which an
Executive may receive is as follows:
(1) 1.65% of the Executive's Average Monthly Earnings multiplied by
the number of years of Credited Service (as defined in the
Pension Plan), but not more than forty (40) years;
(2) reduced by any applicable reduction factors for early retirement
in the Pension Plan;
(3) minus the total monthly retirement or deferred vested benefit
actually payable to the Executive from the Pension Plan; and
(4) minus the benefit that the Executive is entitled to under the A.
O. Smith Corporation Executive Life Insurance Plan.
(b) The monthly Pension Plan Supplement shall be paid to the Executive
in each calendar month the Executive actually receives a retirement or deferred
vested benefit from the Pension Plan in the same form elected under the Pension
Plan. The Pension Plan Supplement shall cease on the date of the cessation of
Pension Plan benefits to the Executive or any beneficiaries thereof.
(c) In the event survivor benefits are payable to beneficiaries of the
Executive from the Pension Plan, the Company shall pay a monthly supplement to
the same beneficiaries equal in the aggregate to the Pension Plan Supplement,
provided however, that any such supplemental beneficiary payments shall be
reduced to reflect the joint and survivor benefit option election made by the
Executive and in effect under the Pension Plan. In no event shall a benefit be
paid under this Plan to a beneficiary of an Executive if the Executive dies
prior to beginning receipt of his payments under the Pension Plan.
Section 4. Unfunded Plan
The rights of the Executive or an Executive's beneficiary under the
Plan shall be solely those of an unsecured creditor of the Company. The Company
shall not be required to set aside any assets with respect to the Plan and any
assets actually held by the Company with reference to the Plan shall be the sole
property of the Company. Neither the Executive nor an Executive's beneficiaries,
heirs, legal representatives, or assigns shall have ownership rights of any
nature with respect to any assets set aside for the Plan, unless and until such
time as such assets are paid over and transferred to the Executive or the
Executive's beneficiaries under the terms of the Plan.
2
Section 5. Non-Alienation of Benefits
Neither an Executive nor his designated beneficiaries shall have the
power to transfer, assign, anticipate or otherwise encumber in advance the
payments provided in this Plan; nor shall any of said payments, nor any assets
or funds of the Company or any Affiliate be subject to seizure for the payment
of any of the Executive's or his beneficiaries' judgments, alimony or separate
maintenance or be reached or transferred by operation of law in the event of the
bankruptcy or insolvency of the Executive or any beneficiary.
Section 6. Administration
The Committee shall have all such powers that may be necessary to
carry out the provisions of the Plan, including without limitation, the
discretionary power and authority to delegate administrative matters to other
persons, to construe and interpret the Plan, to adopt and revise rules,
regulations and forms relating to and consistent with the Plan's terms, to
select the actuarial factors to be used, to make all other benefit
determinations, and to make any other determination which it deems necessary or
advisable for the implementation and administration of the Plan. Subject to the
foregoing, all decisions and determinations by the Committee shall be final,
binding and conclusive as to all parties, including without limitation any
Executive and all other employees and persons, unless arbitrary and capricious.
Section 7. Appeals Procedures
(a) If an Executive (or beneficiary) believes he is entitled to a
benefit hereunder that was not provided, the Executive or beneficiary
(hereinafter referred to as the "claimant") shall file a written claim for such
benefit with the Committee. If for any reason a claim for benefits under this
Plan is denied by the Committee, the Committee shall deliver to the claimant a
written explanation setting forth the specific reasons for the denial, pertinent
references to the section of the Plan on which the denial is based, a
description of such other data as may be pertinent to the claim review, and
information on the procedures to be followed by the claimant in obtaining a
review of his claim and his right to file a civil suit pursuant to ERISA section
502, all written in a manner calculated to be understood by the claimant. For
this purpose, the claimant's claim shall be deemed filed when presented in
writing to the Committee, and the Committee's explanation shall be in writing
delivered to the claimant within ninety (90) days of the date the claim is
filed.
(b) The claimant shall have sixty (60) days following his receipt of
the denial of the claim to file with the Committee a written request for review
of the denial. For such review, the claimant or his representative may review
pertinent documents and submit written issues and comments. The Committee shall
decide the issue on review and furnish the claimant with a copy of its decision
within sixty (60) days of receipt of the claimant's request for review of his
claim. The decision on review shall be final and binding and in writing and
shall include specific reasons for the decision, written in a manner calculated
to be understood by the claimant, as well as specific references to the
pertinent provisions of the Plan on which the
3
decision is based, a statement that the claimant is entitled to receive copies
of, or access to, pertinent documents, and a statement that the claimant is
entitled to bring an action under ERISA section 502. If a copy of the decision
is not so furnished to the claimant within such sixty (60) days, the claim shall
be deemed denied on review.
Section 8. Limitation of Rights Against the Company
Participation in this Plan, or any modifications thereof, or the
payments of any benefits hereunder, shall not be construed as giving to any
Executive any right to be retained in the service of the Company, limiting in
any way the right of the Company to terminate such Executive's employment at any
time, evidencing any agreement or understanding, express or implied, that the
Company will employ such Executive in any particular position or at any
particular rate of compensation and/or guaranteeing such Executive any right to
receive any other form or amount of remuneration from the Company.
Section 9. Construction
The Plan shall be construed, administered and governed in all respects
under and by the laws of the State of Wisconsin, without reference to conflict
of law principles thereof. Wherever any words are used herein in the masculine,
they shall be construed as though they were used in the feminine for all cases
where they would so apply; and wherever any words are used herein in the
singular or the plural, they shall be construed as though they were used in the
plural or the singular, as the case may be, in all cases where they would so
apply. The words "hereof', "herein" and "hereunder" and other similar compounds
of the word "here" shall mean and refer to this entire document and not to any
particular paragraph.
Section 10. Amendment or Termination of the Plan
The Committee shall have the right to amend, modify, terminate or
discontinue the Plan at any time; and such action shall be final, binding and
conclusive as to all parties, including any Executive, any beneficiary thereof
and all other employees and persons. Notwithstanding the foregoing, any such
Committee action to terminate or discontinue the Plan or to change the payment
amounts or the time and manner of payment thereof as then provided in the Plan
shall not be effective and operative with respect to benefits accrued as of such
date, unless and until written consent thereto is obtained from each Executive
affected by such action or, if any such Executive is not then living, from the
beneficiary thereof.
Section 11. Relationship to Employment Agreements
Except as otherwise expressly provided herein, the Plan does not
affect the rights of the Executive under any employment or other compensation
agreement with the Company covering an Executive.
4
Section 12. Successors and Assigns
The terms and conditions of the Plan, as amended and in effect from
time to time, shall be binding upon the successors and assigns of the Company,
including without limitation any entity into which the Company may be merged or
with which the Company may be consolidated.
5
A. O. SMITH CORPORATION
SUPPLEMENTAL Profit Sharing PLAn
EFFECTIVE JANUARY 1, 2001
Section 1. Purpose
The purpose of the A. O Smith Corporation Supplemental Profit Sharing
Plan ("the Plan") is to provide a profit sharing plan supplement for certain key
employees of the Company and its Affiliates who are subject to any reduction in
Company Matching Contributions from the A. O. Smith Profit Sharing Retirement
Plan due to the restrictions of Section 401(a)(17), on covered compensation or
due to the maximum limitation on contributions under Sections 401(k), and
401(m), or 402(g) of the Internal Revenue Code
This Plan is a continuation of the profit sharing supplement part
("Reserve Account I") of the A. O. Smith Corporation Supplemental Benefit Plan,
dated December 14, 1993. The A. O. Smith Corporation Supplemental Benefit Plan
has been amended and restated effective January 1, 2001 and renamed the A. O.
Smith Corporation Executive Supplemental Pension Plan.
Section 2. Definitions
(a) "Affiliate" a domestic subsidiary or affiliated company of A. O.
Smith Corporation which has been designated as being eligible to participate in
the Plan by the Committee.
(b) "Company" means A. O. Smith Corporation
(c) "Company Matching Contribution" shall have the same meaning as set
forth in the Qualified Plan.
(d) "Committee" means the Personnel and Compensation Committee of the
Board of Directors of the Company.
(e) "Crediting Election" means the investment fund(s) selected by the
Employee to be used as the basis for calculation of the rate of return
equivalent for the Employee's Profit Sharing Account. An Employee's Crediting
Election may be changed on a daily basis.
(f) "Eligible Tax Deferred Employee Contribution" shall have the same
meaning as set forth in the Qualified Plan
(g) "Employee" means any employee of the Company or an Affiliate who
is assigned Grade 21 or above and whose Company Matching Contribution in the A.
O. Smith Profit Sharing Retirement Plan is limited by application of the
Sections 401(a)(17), 402(g), 401(k) or 401(m) of the Internal Revenue Code.
(h) "Plan Year" means the calendar year.
(i) ""Profit Sharing Account" means the bookkeeping reserve account
(formerly named Reserve Account I) for each Employee to identify the applicable
profit sharing supplement under this Plan.
(j) "Qualified Plan" means the A. O. Smith Profit Sharing Retirement
Plan.
Section 3. Profit Sharing Plan Supplement
The Company shall establish a Profit Sharing Account for each Employee
to identify the value of the applicable supplement from time to time. To be
eligible for a credit to the Profit Sharing Account for a Plan Year, the
Employee must contribute the maximum Eligible Tax-Deferred Employee
Contributions allowed by law to the Qualified Plan. As of each December 31st,
the amount to be credited to the Employee's Profit Sharing Account shall be
equal to the difference between (a) and (b):
(a) The Company Matching Contribution the Employee would have been
entitled to from the Qualified Plan in the Plan Year assuming the Employee had
made the maximum Eligible Tax-Deferred Employee Contributions for such Plan Year
without the application of the restrictions in Sections 401(a)(17) on covered
compensation or the limitations on contributions under Sections 401(k), 401(m)
and 402(g) of the Internal Revenue Code, and
(b) The actual Company Matching Contribution allocable to the account
of the Employee for such Plan Year in the Qualified Plan.
For purposes of determining the Company Matching Contribution under (a) above,
an Employee's compensation shall include the amount of any base salary which the
Employee has chosen to defer for such year under any deferred compensation
arrangement of the Company. The amount of the supplement determined under this
Section 3 shall be credited to the Employee's Profit Sharing Account on January
31st of each Plan Year following the Plan Year in which the supplement is
earned.
Section 4. Vesting
An Employee shall vest in the amounts allocated to the Profit Sharing
Account under the same vesting rules set forth in Article IX of the Qualified
Plan.
Section 5. Profit Sharing Account
(a) As of the last day of each calendar month, an additional amount
shall be credited or debited against the Employee's Profit Sharing Account based
on the rate of return of the Employee's Crediting Election. The Committee shall
select a minimum of four investment funds to be used to determine the rate of
return equivalent on the Employee's Profit Sharing Account.
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(b) Subject to an alternative election described below, payment of the
vested amounts credited to the Profit Sharing Account for each Employee shall
commence during the month of January immediately following the Employee's
termination of employment with the Company and shall be made in fifteen (15)
annual installments, subject to a minimum annual installment amount of $5,000 or
such higher amount determined in the discretion of the Committee and uniformly
applicable to all Employees. The first such installment shall equal the vested
value of the Profit Sharing Account as of the date of distribution divided by
fifteen (15). Each subsequent installment shall equal the remaining value of the
Profit Sharing Account, including earnings (or losses) as of the date of such
distribution divided by the number of remaining installment payments.
Notwithstanding the foregoing, on or prior to December 31st of the calendar year
preceding the Employee's termination of employment, the Employee may elect by
written instrument delivered to the Committee that the number of annual
installment periods be any whole number less than fifteen (15); in any such
case, the method of determining the distributable amount each year shall be
correspondingly adjusted.
(c) In the event of an Employee's death either before or after
benefits hereunder have commenced to him, any amount remaining allocated to the
Profit Sharing Account shall be paid to such beneficiary or beneficiaries as the
Employee shall designate by written instrument delivered to the Committee, or if
no such written instrument is properly delivered or if such designated
beneficiary predeceases the Employee, to the executors, administrators, or
personal representatives of the Employee's estate. Any installment payments
previously commenced to the Employee shall continue to such beneficiary. In the
event no distributions had been made to the Employee prior to his death,
installment payments shall commence thereafter to the beneficiary as provided in
subsection (b) above.
(d) The Profit Sharing Account shall be utilized solely as a device
for the measurement and determination of the amount to be paid to an Employee at
the times specified above for the payment of the accumulated value of
supplemental profit sharing benefits under this Plan. The rights of the Employee
or an Employee's beneficiary under the Plan shall be solely those of an
unsecured creditor of the Company. Neither the Profit Sharing Account nor any
other reserve established on the Company's books to reflect the liabilities
under this Plan shall constitute or be treated as a trust fund of any kind. On
the contrary, it is expressly agreed and understood that the Company shall not
be required to set aside any assets with respect hereto and that any assets
actually held by the Company with reference to this Plan shall be and remain the
sole property of the Company, and that neither an Employee nor an Employee's
beneficiaries, heirs, legal representatives or assigns shall have ownership
rights of any nature with respect thereto, unless and until such time as such
assets are paid over and transferred to the Employee or the Employee's
beneficiaries, as herein provided.
Section 6. Non-Alienation of Benefits
Neither an Employee nor his designated beneficiaries shall have the
power to transfer, assign, anticipate or otherwise encumber in advance any of
the payments provided in this Plan; nor shall any of said payments, nor any
assets or funds of the Company be subject to seizure for the payment of any of
the Employee's or his beneficiaries' judgments, alimony or separate
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maintenance or be reached or transferred by operation of law in the event of the
bankruptcy or insolvency of the Employee or any beneficiary.
Section 7. Administration
The Committee shall have all such powers that may be necessary to
carry out the provisions of the Plan, including without limitation, the
discretionary power and authority to delegate administrative matters to other
persons, to construe and interpret the Plan, determine benefits, to adopt and
revise rules, regulations and forms relating to and consistent with the Plan's
terms and to make any other determination which it deems necessary or advisable
for the implementation and administration of the Plan. Subject to the foregoing,
all decisions and determinations by the Committee shall be final, binding and
conclusive as to all parties, including without limitation any Employee and all
other persons unless, arbitrary and capricious.
Section 8. Appeals Procedures
(a) If an Employee (or beneficiary) believes he is entitled to a
benefit hereunder that was not provided, the Employee or beneficiary
(hereinafter referred to as the "claimant") shall file a written claim for such
benefit with the Committee. If for any reason a claim for benefits under this
Plan is denied by the Committee, the Committee shall deliver to the claimant a
written explanation setting forth the specific reasons for the denial, pertinent
references to the section of the Plan on which the denial is based, a
description of such other data as may be pertinent to the claim review, and
information on the procedures to be followed by the claimant in obtaining a
review of his claim, and his right to file a civil suit pursuant to ERISA
Section 502, all written in a manner calculated to be understood by the
claimant. For this purpose, the claimant's claim shall be deemed filed when
presented in writing to the Committee, and the Committee's explanation shall be
in writing delivered to the claimant within ninety (90) days of the date the
claim is filed.
(b) The claimant shall have sixty (60) days following his receipt of
the denial of the claim to file with the Committee a written request for review
of the denial. For such review, the claimant or his representative may review
pertinent documents and submit written issues and comments. The Committee shall
decide the issue on review and furnish the claimant with a copy of its decision
within sixty (60) days of receipt of the claimant's request for review of his
claim. The decision on review shall be final and binding and in writing and
shall include specific reasons for the decision, written in a manner calculated
to be understood by the claimant, as well as specific references to the
pertinent provisions of the Plan on which the decision is based. If a copy of
the decision is not so furnished to the claimant within such sixty (60) days,
the claim shall be deemed denied on review.
Section 9. Limitation of Rights Against the Company
Participation in this Plan, or any modifications thereof, or the
payments of any benefits hereunder, shall not be construed as giving to any
Employee any right to be retained in the service of the Company, limiting in any
way the right of the Company to terminate such
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Employee's employment at any time, evidencing any agreement or understanding,
express or implied, that the such Employee will be employed in any particular
position or at any particular rate of compensation and/or guaranteeing such
Employee any right to receive any other form or amount of remuneration from the
Company.
Section 10. Construction
The Plan shall be construed, administered and governed in all respects
under and by the laws of the State of Wisconsin, without reference to conflict
of law principles thereof. Wherever any words are used herein in the masculine,
they shall be construed as though they were used in the feminine for all cases
where they would so apply; and wherever any words are used herein in the
singular or the plural, they shall be construed as though they were used in the
plural or the singular, as the case may be, in all cases where they would so
apply. The words "hereof', "herein" and "hereunder" and other similar compounds
of the word "here" shall mean and refer to this entire document and not to any
particular paragraph.
Section 11. Amendment or Termination of the Plan
The Committee shall have the right to amend, modify, terminate or
discontinue the Plan at any time; and such action shall be final, binding and
conclusive as to all parties, including any Employee, any beneficiary thereof
and all other persons. Notwithstanding the foregoing, any such Committee action
to terminate or discontinue the Plan or to change the payment amounts or the
time and manner of payment thereof as then provided in the Plan shall not be
effective and operative with respect to amounts allocated to the Profit Sharing
Account as of such date, unless and until written consent thereto is obtained
from each Employee affected by such action or, if any such Employee is not then
living, from the beneficiary thereof.
Section 12. Relationship to Employment Agreements
Except as otherwise expressly provided herein, the Plan does not
affect the rights of the Employee under any employment or other compensation
agreement with the Company or any Affiliate.
Section 13. Successors and Assigns
The terms and conditions of the Plan, as amended and in effect from
time to time shall be binding upon the successors and assigns of the Company.
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EXHIBIT 21
SUBSIDIARIES
The following lists all significant subsidiaries and affiliates of A. O. Smith
Corporation. Certain direct and indirect subsidiaries of A. O. Smith Corporation
have been omitted because, considered in the aggregate as a single subsidiary,
such subsidiaries would not constitute a significant subsidiary.
Jurisdiction in Which
Name of Subsidiary Incorporated
AOS Holding Company Delaware
A. O. Smith International Corporation Delaware
APCOM, Inc. Tennessee
State Industries, Inc. Tennessee
A. O. Smith Export, Ltd. Barbados
A. O. Smith Holdings (Barbados) SRL Barbados
A. O. Smith Enterprises Ltd. Canada
A. O. Smith (China) Water Heater Co., Ltd. China
A. O. Smith Electrical Products (Shenzhen)Co., Ltd. China
A. O. Smith L'eau Chaude S.a.r.l. France
A. O. Smith Warmwasser-Systemtechnik GmbH Germany
A. O. Smith Electrical Products Limited Liability Company Hungary
A. O. Smith Electric Motors (Ireland) Ltd. Ireland
A. O. Smith Holdings (Ireland) Ltd. Ireland
IG-Mex, S.A. de C.V. Mexico
Motores Electricos de Juarez, S.A. de C.V. Mexico
Motores Electricos de Monterrey, S.A. de C.V. Mexico
Productos de Agua, S.A. de C.V. Mexico
Productos Electricos Aplicados, S.A. de C.V. Mexico
A.O. Smith Electrical Products B.V. The Netherlands
A.O. Smith Water Products Company B.V. The Netherlands
A.O. Smith Holdings B.V. The Netherlands
A.O. Smith Products v.o.f. The Netherlands
A. O. Smith Electrical Products (S.E.A) Pte Ltd Singapore
A. O. Smith Electrical Products Limited United Kingdom
State Water Heaters (U.K.) Limited United Kingdom
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-72542, 33-19015, 33-21356, 33-37878, 33-56827, 333-05799, and
333-92329) pertaining to the 1990 Long-Term Executive Incentive Compensation
Plan and Long-Term Executive Incentive Compensation Plan of A. O. Smith
Corporation and in the related prospectuses of our report dated January 16,
2002, with respect to the consolidated financial statements and schedule of A.
O. Smith Corporation included in this Annual Report (Form 10-K) for the year
ended December 31, 2001.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 18, 2002
