As filed with the Securities and Exchange Commission on April 12, 2002
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
A. O. SMITH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-061970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11270 West Park Place
Milwaukee, WI 53224-9508
(414) 359-4000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------------------------------
W. David Romoser, Esq.
Vice President, General Counsel and Secretary
A. O. Smith Corporation
11270 West Park Place
Milwaukee, WI 53224-9508
Telephone: (414) 359-4000
Facsimile: (414) 359-4143
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------------------------
with a copy to:
Patrick G. Quick, Esq.
Foley & Lardner Tod B. Linstroth, Esq.
777 East Wisconsin Avenue Geoffrey R. Morgan, Esq.
Milwaukee, Wisconsin 53202 Gregory J. Lynch, Esq.
Telephone: (414) 271-2400 Michael Best & Friedrich LLP
Facsimile: (414) 297-4900 One South Pinckney Street
Madison, WI 53701-1806
Telephone: (608) 257-3501
Facsimile: (608) 283-2275
-------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=====================================================================================
Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to Be Offering Price Aggregate Offering Registration
to Be Registered Registered Per Share(1) Price(1) Fee
- -------------------------------------------------------------------------------------
Common Stock,
$1 par value...... 4,025,000 shares $26.36 $106,099,000 $9,762
=====================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, based on the average of the high and
low prices of the Common Stock of A. O. Smith Corporation as reported on the New
York Stock Exchange on April 5, 2002.
-------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where this offer or sale is not permitted.
Subject to Completion - April 12, 2002
[GRAPHIC OMITTED]
A.O. SMITH CORPORATION
3,500,000 Shares of Common Stock
-------------------------
We are offering 3,500,000 shares of our common stock. We have two classes
of common equity: our common stock being offered by this prospectus and our
class A common stock. The holders of our common stock are entitled to elect 25
percent of the members of our board of directors and to one-tenth of one vote on
all other matters.
Our common stock is listed on the New York Stock Exchange under the symbol
"AOS." The last reported sale price of our common stock on ___________, 2002 was
$____________ per share.
Investing in our common stock involves risks. See "Risk Factors" on page 9.
Per Share Total
--------- -----
Public offering price................................ $ $
Underwriting discounts and commissions............... $ $
Proceeds to A. O. Smith Corporation.................. $ $
We have granted the underwriters a 30-day option to purchase up to an
additional 525,000 shares to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
Robert W. Baird & Co.
Banc of America Securities LLC
Bear, Stearns & Co. Inc.
, 2002
Outside Gatefold:
"Comfort, Convenience, Security, and Fun . . ."
"Every day, you come in contact with the quality products of A. O. Smith
Corporation.
Our electrical motors and water heaters help make your life a little more
comfortable, a little more convenient . . . and even more fun . . . where you
live, work, and play."
[LEGEND Logo], [STATE WATER HEATERS logo], [UNIVERSAL ELECTRIC logo], [A. O.
SMITH PROMAX logo], [A. O. SMITH WATER PRODUCTS COMPANY logo], [A. O. SMITH
CENTURY logo], [CYCLONE XHE logo], [A. O. SMITH MASTER-FIT PLUS logo], [SEALED
SHOT logo], [A. O. SMITH ELECTRICAL PRODUCTS COMPANY logo], [APCOM logo],
[DURA-MAX logo], and [A. O. SMITH logo].
Inside Gatefold - Left Side
Top of page:
[A. O. Smith Logo] "COMFORT, CONVENIENCE, SECURITY, AND FUN . . .
A. O. Smith At a Glance
You will encounter quality products manufactured by
A. O. Smith at home, at work, or just about anywhere that
people live, work, or play."
[Page includes twelve separate descriptions and pictures of selected A. O. Smith
products. The descriptions and pictures are placed as follows around an
illustration of a single-family home that depicts the locations of each of the
twelve products in or around the home:
Product 1: "Precision hermetic motors for unitary air conditioning compressors";
[Picture of example product connected to a window air conditioner]
Product 2: "Cost-effective C-frame motors are used in residential ventilation
applications such as bathroom fans and range hood fans"; [Picture of example
product connected to a kitchen range hood]
Product 3: "Compact C-frame motors for appliances such as frost-free
refrigerators and humidifiers"; [Picture of example product connected to a
refrigerator]
Product 4: "Dependable fractional horsepower fan motors for attic fans and
whole-house fan applications"; [Picture of example product connected to an attic
fan]
Product 5: "Reversible garage door opener motors designed for frequent cycles in
all types of weather"; [Picture of example product connected to a garage door
opener]
Product 6: "Fractional horsepower electric motors are used on power sprayers and
small air compressors;" [Picture of example product connected to a portable air
compressor]
E-1
Product 7: "Manufacturers of swimming pool pumps use dependable A. O. Smith and
Century(R)two-compartment switched and switchless pump motors"; [Picture of
example product connected to a swimming pool pump]
Product 8: "A. O. Smith makes single-speed and two-speed motors for whirlpools,
spas, and jetted tubs"; [Picture of example product connected to a whirlpool
tub]
Product 9: "DC motors are used for treadmills and other exercise equipment";
[Picture of example product connected to a treadmill]
Product 10: "A. O. Smith has the right product and the right efficiency
residential water heater for any size home. Water heaters may be vented
conventionally or, for today's energy-efficient houses, direct vented or power
vented"; [Picture of example product connected to a residential water heater]
Product 11: "Durable pump motors for continuous-duty applications such as sump
pumps"; [Picture of example product connected to a sump pump]
Product 12: "Dependable fractional horsepower fan and blower motors for
furnaces, air conditioners, and heat pumps"; [Picture of example product
connected to a furnace]]
Inside Gatefold - Right Side
[Page includes thirteen separate descriptions and pictures of selected A. O.
Smith products. The descriptions and pictures are placed as follows around an
illustration of a hotel that depicts the locations of each of the thirteen
products in or around the hotel:
Product 1: "A. O. Smith manufactures hermetic motors in sizes up to 400
horsepower for commercial air conditioning equipment and rooftop chillers";
[Picture of example product connected to an air conditioner]
Product 2: "Totally enclosed, drip-proof integral horsepower motors for
continuous-duty fan and blower applications, such as commercial air conditioning
equipment"; [Picture of example product connected to an air conditioner]
Product 3: "94 percent efficiency, zero-clearance to combustibles design, and
direct venting make the Cyclone XHE (R) water heater well-suited to many
commercial applications"; [Picture of example product connected to a commercial
water heater]
Product 4: "A. O. Smith supplies integral horsepower and fractional horsepower
electric motors for commercial washing machines and dryers"; [Picture of example
product connected to a commercial washing machine and a commercial dryer]
Product 5: "Submersible integral motors power hydraulic and inverter
traction-driven elevators. Reliable integral DC motors open elevator doors";
[Picture of example product connected to an elevator door]
Product 6: "Durable, reversible fractional horsepower motors for commercial gate
openers"; [Picture of example product connected to a commercial gate opener]
Product 7: "For applications that require large amounts of hot water or hot
water at multiple temperatures, including sanitizing water, A. O. Smith offers
custom-designed commercial water heaters and hot water storage tanks"; [Picture
of example product connected to a commercial hot water heater]
E-2
Product 8: "High-efficiency copper-tube boilers are used for large-volume hot
water applications for hydronic heating"; [Picture of example product connected
to a hydronic heater]
Product 9: "For continuous-duty applications, such as sump or sewage pumps,
customers rely on durable A. O. Smith fractional horsepower pump motors";
[Picture of example product connected to a sump pump]
Product 10: "Single-speed and two-speed two-compartment pool motors"; [Picture
of example product connected to a pool motor]
Product 11: "Fractional horsepower electric motors are used for pool sweepers
and related leisure-time equipment"; [Picture of example product connected to a
pool sweeper]
Product 12: "Fractional horsepower ventilation motors for commercial convection
ovens and commercial rangehood fans"; [Picture of example product connected to a
commercial convection oven]
Product 13: "Specialty motors for carbonated dispenser pumps and vending
machines"; [Picture of example product connected to a vending machine]]
E-3
TABLE OF CONTENTS
Page Page
---- ----
Forward-Looking Statements.............1 Management and Board of Directors...32
Prospectus Summary.....................2 Description of Capital Stock........34
Risk Factors...........................9 Underwriting........................36
Use of Proceeds.......................13 Where You Can Find More
Price Ranges of Common Stock and Information.....................38
Class A Common Stock and Dividend Incorporation of Information by
Policy.............................14 Reference.......................38
Capitalization........................15 Legal Matters.......................38
Selected Historical Consolidated Experts.............................38
Financial Data ....................16 Index to Historical Consolidated
Business..............................18 Financial Statements...............F-1
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................25
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions where offers and
sales are permitted. You should assume that the information in this prospectus
and the documents incorporated by reference is accurate only as of the
respective dates of those documents in which the information is contained. Our
business, financial condition, results of operations, and prospects may have
changed since those dates.
The underwriters are offering the shares subject to various conditions and
may reject all or part of any order. Delivery of the shares of our common stock
will be made on or about ___________, 2002.
We have registered the following trademarks, which are used in this
prospectus: A. O. SMITH, BURKAY, CENTURY, CYCLONE XHE, DURA-MAX, LEGEND,
MASTER-FIT, PROMAX and RELIANCE. We also own the following trademarks and trade
names, which are used in this prospectus: APCOM, SEALED SHOT, STATE, UNIVERSAL,
and UPPCO.
Unless the context requires otherwise, references in this prospectus to
"we," "us," or "our" refer collectively to A. O. Smith Corporation and its
subsidiaries. Unless otherwise stated, the information contained in this
prospectus assumes the underwriters do not exercise the over-allotment option.
FORWARD-LOOKING STATEMENTS
This prospectus, including the information we incorporate by reference into
this prospectus, contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical facts, including
statements regarding our future financial position, business strategy, budgets,
projected sales, costs and earnings, and plans and objectives for future
operations, are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking words such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "believe," "continue," or words of
similar meaning. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
anticipated as of the date of this prospectus. Factors that could cause such a
variance are disclosed in the section "Risk Factors" and elsewhere in this
prospectus and include the following:
o instability in our electrical products and water systems markets
o our inability to timely and properly integrate our acquisition of State
Industries, Inc.
o our inability to implement cost-reduction programs
o adverse changes in general economic conditions
o competitive pressures on our businesses
The forward-looking statements included in this prospectus are made only as
of the date of this prospectus, and we undertake no obligation to update
publicly these statements to reflect subsequent events or circumstances. We urge
you to review carefully the section "Risk Factors" for a more complete
discussion of the risks of an investment in our common stock.
1
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere or incorporated by
reference in this prospectus. Because this is a summary, it is not complete and
does not contain all of the information that may be important to you. For a more
complete understanding of us and this offering of our common stock, we encourage
you to read this prospectus in its entirety and the other documents to which we
have referred you.
A. O. Smith Corporation
Overview
We are a leading manufacturer of electric motors and water heating
equipment, serving a diverse mix of residential, commercial, and industrial end
markets principally in the United States with a growing international presence.
Our company is organized in two segments: electrical products and water systems.
Our electrical products business manufactures and markets a comprehensive line
of hermetic motors, fractional horsepower alternating current (AC) and direct
current (DC) motors, and integral horsepower motors. Our water systems business
manufactures and markets a comprehensive line of residential gas and electric
water heaters, standard and specialty commercial water heating equipment,
high-efficiency copper-tube boilers, and water systems tanks. In 2001, on a pro
forma basis for our December 2001 acquisition of State Industries, Inc., we had
net sales of approximately $1.5 billion, with 55 percent attributable to our
electrical products business and 45 percent attributable to our water systems
business.
Our electric motors are used in a wide variety of targeted applications,
including heating, ventilating and air conditioning systems, commonly known as
HVAC systems; pools, spas and water well pumps; garage door openers; overhead
cranes; elevators; and industrial pumps. We primarily sell our electric motors
directly to original equipment manufacturers, or OEMs. We also market our motor
products through wholesale distributors who sell to smaller OEMs and aftermarket
customers. Our residential and commercial water heaters are used in a wide
variety of targeted applications, including homes, apartments, schools,
hospitals, hotels, laundries, restaurants, stadiums, and other large users of
hot water. Our water systems wholesale distribution channel includes more than
2,600 wholesale plumbing distributors that serve residential, commercial, and
industrial markets. We also sell our residential water heaters through the
retail channel. In this channel, our customers include four of the six largest
national hardware and home center chains, including a long-standing private
label relationship with Sears, Roebuck and Co.
During the past five years, we have significantly repositioned our company.
We have changed from a diversified manufacturer with five businesses, the
largest of which was our legacy automotive structural components business that
represented more than 50 percent of our total sales, to a company focused on our
electrical products and water systems businesses, which we believe offer the
opportunity for higher growth and more profitability. We divested our automotive
structural components business in 1997, realizing pre-tax proceeds of $770
million. By January 2001, we completed our repositioning with the divestiture of
our storage and fluid handling businesses. During this period of time, we also
made the following key acquisitions in our core electrical products and water
systems businesses, which significantly broadened our product offerings and
customer base:
o In March 1997, we acquired UPPCO, Inc., a manufacturer of C-frame
sub-fractional horsepower AC motors, which had annual sales of
approximately $70 million
o In July 1998, we acquired General Electric Company's domestic hermetic
motor business, which had annual sales of approximately $120 million
o In August 1999, we acquired MagneTek, Inc.'s electric motor business, which
had annual sales of approximately $380 million
o In December 2001, we nearly doubled the size of our water systems business
by acquiring State Industries, a manufacturer of residential and commercial
water heating systems, which had annual sales of approximately $320 million
2
Our Competitive Strengths
With the completion of our repositioning, we believe we possess the scale
and competitive strengths necessary to continue to succeed in our targeted
markets. Our principal competitive strengths are set forth below.
Market Leadership. We are one of the three largest manufacturers of
electric motors in North America, having manufactured approximately 36 million
electric motors in 2001. We believe we are among the leaders in North America in
manufacturing and selling hermetic and fractional horsepower motors, and we have
the leading position in the pool and spa motors niche. We are one of the two
largest manufacturers of water heaters in North America, having produced more
than 3 million units on a pro forma basis in 2001. We have a leading position in
the higher-margin commercial water heater segment. With our acquisition of State
Industries, we are now positioned to expand our presence in the residential
market through the home center retail channel.
Low-Cost Manufacturing Capabilities. We have been, and will continue to be,
proactive in shifting our manufacturing operations to lower-cost locations. We
were one of the first United States manufacturers of electric motors and water
heaters to capitalize on the low-cost manufacturing potential of Mexico, and we
currently produce approximately 75 percent of our electric motors and 20 percent
of our residential water heaters in our 17 Mexican manufacturing facilities. In
addition to being low-cost, we believe these facilities are widely regarded
within our industries as high-quality manufacturing operations. Our recent
acquisition of a motor manufacturer in China provides us with another platform
to manufacture products at lower costs.
Comprehensive Product Offerings with Leading Brands. We believe we offer
the most comprehensive product lines in our targeted markets. These offerings
give us a competitive advantage by enabling us to offer a broad range of
products that fulfill most electric motor and water heating needs of our
customers. Many of our brand names, including A. O. Smith, Reliance, and State,
are widely recognized within our industries and, we believe, are known for their
high quality, reliability, and performance. Our comprehensive product offerings
and strong brand identities have created customer loyalty and help us to
maintain existing business, as well as capture additional sales, particularly as
many of our customers seek to consolidate their supplier bases.
Operational and Engineering Flexibility. Our ability to offer fast,
innovative, and practical solutions to our customers is one of the reasons we
have achieved a leading position in many of our targeted markets. Our
engineering centers are staffed with highly qualified, experienced engineers
focused on quickly responding to our customers' needs by enhancing existing
products and developing new products on a timely basis. In addition, our
engineers work with our sales and marketing organization to develop new products
that meet our customers' evolving application needs and cost requirements.
During the last three years, we have invested on average over $25 million
annually in research and development.
Strong Relationships with Our Customers. We have established long-standing,
strong relationships with leading OEM customers, distributors, and retailers.
For many of our customers, we supply all or substantially all of their
requirements for the products we offer, and several of our customer
relationships date back for more than 40 years. In our water systems business,
we believe we offer the most extensive aftermarket technical support program,
and most of our customers use our personnel to provide support directly to their
end users.
Recurring Replacement Market Sales. We sell electric motors and water
heaters to customers who often provide replacement products to end users. As a
result, a substantial portion of our sales are less susceptible to the
cyclicality inherent to many manufacturers because it is often essential to the
end user's business or home to make the replacement purchase. In 2001, we
believe approximately 50 percent of our electrical products segment's net sales
and 80 percent of our water systems segment's pro forma net sales resulted from
the replacement needs of end users.
Experienced Management Team. Our senior management team has significant
experience in manufacturing, marketing, and sales. In addition, this team is
experienced in the acquisition and integration of businesses, aggressive cost
management, global operations, and efficient manufacturing techniques, all of
which are critical to our long-term business strategy. We have a track record of
acquiring complementary businesses and product lines, integrating them into our
organization, and aggressively managing their cost structures.
3
Our Business Strategy
We intend to use our competitive strengths to increase sales and
profitability through the initiatives outlined below.
Focus On Organic Growth. We believe our "customer first" philosophy,
customer relationships, and product development capabilities will enable us to
grow our net sales. Our specific organic growth initiatives include the
following:
o Increase Sales to Existing Customers. We are focused on securing additional
sales to existing customers. Our relationships with leading multi-national
manufacturers, distributors, and retailers, when combined with our expanded
product offerings, provide us with opportunities for growth. For example,
in 2001, our net sales of electrical products to York International
Corporation were $172 million, an increase of approximately 83 percent from
$94 million in 1997. Similarly, in 2001, our pro forma net sales of water
systems products to our top five wholesale distributors were $154 million,
an increase of approximately 63 percent from $94 million in 1997 to these
same customers. We expect that our expanded product offerings will allow us
to continue to increase sales to existing customers.
o Introduce New Products. We will continue to introduce differentiated
products in our targeted markets. We work closely with our customers to
develop new products or enhancements to existing products that improve
performance and meet their needs. We pride ourselves on our ability to
understand our customers' needs, and design, test, and build a product that
matches those needs. For example, our electrical products business recently
introduced two new lines of hermetic motors for use in commercial air
conditioners. The first is a redesigned motor that provides 20 percent
more horsepower with only an eight percent increase in motor size while the
second is a new line of motors for use in commercial scroll compressors. In
addition, during the last five years, our water systems business added
several new products, including our Cyclone XHE commercial water heater,
Genesis Burkay copper-tube boiler and Master-Fit line of commercial water
heaters.
o Expand Internationally. To complement our North American capabilities, we
have established a manufacturing presence in Europe and Asia, and we are
prepared to expand further to serve our OEM customers as they increase
their focus on international markets. We also intend to continue to
identify and directly serve niche markets outside of North America that we
believe offer significant growth opportunities. For example, we began
manufacturing and marketing water heaters in China in 1998 from our plant
in Nanjing and have grown this business to approximately $26 million in
sales in 2001. In addition, we have entered into a marketing agreement with
Aquecedores Cumulus S/A, the second-largest water heater manufacturer in
Brazil, which allows us to sell our high-efficiency commercial water heater
products in that country.
Continue to Lower Manufacturing Costs. We are committed to being a low-cost
supplier. We continuously seek ways to lower costs, enhance product quality,
increase manufacturing efficiencies, and increase product throughput. The major
cost-saving initiatives that we have in process are:
o Complete the MagneTek Motor Operations Integration. We have recently
achieved our target of approximately $35 million of annualized cost savings
in the areas of raw materials purchasing, facility and product line
rationalization, and selling, general and administrative cost reductions
since our acquisition of the MagneTek motor operations in 1999. We are in
the process of transferring additional portions of our component and motor
assembly operations to our lower-cost Mexican operations and plan to
complete these transitions by the first quarter of 2003, which we expect
will result in additional annual cost savings of approximately $2 million.
o Further Reduce Costs in Our Electrical Products Operations. In addition to
the cost savings resulting from our MagneTek integration, during the fourth
quarter of 2001, we initiated several cost-reduction programs in our
electrical products business, including transferring six additional product
manufacturing lines to our lower-cost Mexican operations, reducing the
electrical products salaried workforce by 10 percent, and realigning our
motor warehouse operations to improve distribution efficiencies. We believe
these actions will enable us to achieve cost savings of more than $16
million in 2002 and $20 to $25 million annually in subsequent years.
4
o Selectively Manufacture in China. Although our Mexican operations, with
their scale and production flexibility, will continue to be the best
solution for supplying many of our customers, we believe that manufacturing
in China offers an opportunity to complement our Mexican manufacturing for
selected products, such as smaller size, higher order volume electric
motors. With our December 2001 acquisition of Shenzhen Speeda Industrial
Co., Ltd., a manufacturer of sub-fractional horsepower electric motors, we
now have a platform to manufacture electric motors in China.
o Integrate State Industries and Realize Operating Synergies. Our acquisition
of State Industries provides us with access to new markets and an
opportunity to improve the operations and efficiency of our overall water
systems business. We are moving our water systems business headquarters to
State Industries' headquarters in Ashland City, Tennessee, to facilitate
the integration of State Industries with our existing water systems
operations. Our integration plan will enable us to take advantage of the
best practices of the two organizations to improve efficiencies,
rationalize our product lines and reduce costs in the business. We have
identified immediate cost-reduction opportunities, including management
reductions, raw materials purchasing savings, and freight and logistics
savings, and we believe that these actions will enable us to realize cost
savings of approximately $5 million in 2002, $10 to $12 million in 2003,
and over $15 million annually in subsequent years.
Pursue Strategic Acquisitions. We have been a consolidator in our targeted
markets, and we believe we have assembled the scale necessary to continue to
succeed in these markets. We will pursue complementary strategic acquisitions
that allow us to leverage the marketing, engineering, and manufacturing
strengths of our businesses. Our current acquisition criteria generally require
that a potential candidate participates in a market segment growing faster than
10 percent per year and offers attractive profit margins.
Corporate Information
Our principal executive offices are located at 11270 West Park Place,
Milwaukee, Wisconsin 53224-9508, and our telephone number is (414) 359-4000. Our
website address is www.aosmith.com. However, the information contained on our
website is not part of this prospectus.
5
The Offering
Common stock offered by A. O. Smith
Corporation............................ 3,500,000 shares
Common stock to be outstanding after
the offering........................... 18,718,012 shares
Class A common stock outstanding before
and after the offering................. 8,638,989 shares
Common stock and class A common stock
outstanding after the offering......... 27,357,001 shares
Use of proceeds.......................... We expect to use the net proceeds of
the offering to reduce debt under
our multi-year credit facility
New York Stock Exchange symbol of common
stock.................................. AOS
Risk factors............................. See the section entitled "Risk
Factors" on page 9 for a discussion
of factors you should consider
carefully before deciding to buy our
common stock
The number of shares of common stock and class A common stock outstanding
after this offering is based on the actual number of shares outstanding as of
March 31, 2002, and excludes:
o 2,654,300 shares of common stock issuable upon exercise of options
outstanding as of March 31, 2002, at a weighted average exercise price of
$17.08 per share; and
o 1,664,950 shares of common stock available for future grants under our
stock option plans, including 1,500,000 shares available for future grants
under the stock option plan that our stockholders adopted on April 8, 2002.
The number of shares of common stock offered and to be outstanding assumes
that the underwriters have not exercised their over-allotment option. If the
underwriters exercise their over-allotment option in full, then we will issue
and sell an additional 525,000 shares of our common stock and will have
19,243,012 shares of our common stock outstanding after the offering.
Each share of our class A common stock is convertible into one share of our
common stock at any time at the holder's option. See "Description of Capital
Stock."
6
Summary Historical Consolidated Financial Data
The following table presents summary historical consolidated financial data
as of and for each of the five years ended December 31, 2001, which have been
derived from our audited consolidated financial statements, and as of and for
each of the three months ended March 31, 2001 and 2002, which have been derived
from our unaudited interim consolidated financial statements. You should read
this information together with "Selected Historical Consolidated Financial
Data," "Management's Discussion and Analysis of Results of Operations and
Financial Condition," and our consolidated financial statements, including the
related notes to consolidated financial statements, included elsewhere or
incorporated by reference in this prospectus (except for the consolidated
financial statements as of and for the years ended December 31, 1997 and 1998,
which are not included in this prospectus).
For the Three Months
For the Years Ended December 31,(1) Ended March 31,
-------------------------------------------------------------- ----------------------
1997(2) 1998(3) 1999(4) 2000 2001(5)(6) 2001(6) 2002
--------- ---------- ---------- ---------- ---------- ---------- ----------
(In millions, except per share amounts)
Statement of Earnings Data(7):
Continuing Operations:
Net sales......................... $ 703.1 $ 800.8 $ 1,070.3 $ 1,247.9 $ 1,151.2 $ 318.2 $ 371.9
Cost of products sold............. 543.4 623.2 839.5 999.8 948.8 259.4 295.0
--------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit...................... 159.7 177.6 230.8 248.1 202.4 58.8 76.9
Selling, general and
administrative expenses......... 105.8 105.2 136.3 153.7 145.7 38.1 53.2
Interest expense.................. 6.6 5.9 12.8 22.1 16.4 4.8 4.2
Amortization of intangibles....... 0.9 2.5 5.2 6.9 7.0 1.7 0.1
Restructuring and other charges... -- -- -- -- 9.4 -- --
Other(income) expense - net....... (6.7) (2.9) (0.6) 0.3 1.4 0.7 0.8
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes.... 53.1 66.9 77.1 65.1 22.5 13.5 18.6
Provision for income taxes........ 18.4 23.2 26.8 23.4 8.0 5.0 6.5
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before equity in
loss of joint ventures.......... 34.7 43.7 50.3 41.7 14.5 8.5 12.1
Equity in loss of joint ventures.. (2.6) (3.0) -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings from continuing
operations........................ 32.1 40.7 50.3 41.7 14.5 8.5 12.1
Discontinued Operations:
Operating earnings (loss)......... 20.7 3.8 (0.9) -- -- -- --
Gain (loss) on disposition........ 101.0 -- (7.0) (11.9) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
121.7 3.8 (7.9) (11.9) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings......................... $ 153.8 $ 44.5 $ 42.4 $ 29.8 $ 14.5 $ 8.5 $ 12.1
========= ========== ========== ========== ========== ========== ==========
Basic Earnings (Loss) per
Share:
Continuing operations............. $ 1.16 $ 1.73 $ 2.17 $ 1.78 $ 0.61 $ 0.36 $ 0.51
Discontinued operations........... 4.41 0.16 (0.34) (0.51) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................... $ 5.57 $ 1.89 $ 1.83 $ 1.27 $ 0.61 $ 0.36 $ 0.51
========= ========== ========== ========== ========== ========== ==========
Diluted Earnings (Loss) per
Share:
Continuing operations............. $ 1.14 $ 1.68 $ 2.11 $ 1.76 $ 0.61 $ 0.36 $ 0.50
Discontinued operations........... 4.32 0.16 (0.33) (0.50) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................... $ 5.46 $ 1.84 $ 1.78 $ 1.26 $ 0.61 $ 0.36 $ 0.50
========= ========== ========== ========== ========== ========== ==========
Average Shares Outstanding(8):
Basic............................. 27.6 23.6 23.2 23.4 23.6 23.5 23.8
Diluted........................... 28.2 24.2 23.8 23.7 23.9 23.8 24.3
Balance Sheet Data (at period end):
Cash and cash equivalents............ $ 145.9 $ 37.7 $ 14.8 $ 15.3 $ 20.8 $ 13.1 $ 21.9
Working capital...................... 237.8 155.2 217.7 227.0 221.6 238.0 224.1
Total assets......................... 682.8 736.6 1,065.6 1,064.9 1,293.9 1,052.2 1,305.2
Long-term debt....................... 101.0 131.2 351.3 316.4 390.4 295.7 378.9
Total stockholders' equity........... 399.7 401.1 431.1 448.4 451.9 452.7 466.1
Other Financial Data(9):
Capital expenditures................. $ 37.4 $ 18.5 $ 32.8 $ 40.5 $ 35.3 $ 9.5 $ 7.1
Depreciation and amortization........ 21.6 26.5 37.3 45.1 47.1 11.4 12.3
EBITDA(10)........................... 72.4 95.6 125.8 131.6 85.7 29.6 35.0
Cash provided by (used in)
operating activities.............. 73.5 65.6 47.8 75.2 49.8 (13.3) 22.9
- -------------------------
7
(1) We have accounted for our former fluid handling, liquid and dry storage,
and automotive structural components businesses as discontinued operations
in our consolidated financial statements. On April 18, 1997, we sold our
automotive structural components business, exclusive of our Mexican
automotive affiliate, and on October 1, 1997, we sold our 40 percent
interest in our Mexican affiliate. On December 8, 2000, we sold our fluid
handling business, and on January 10, 2001, we sold our storage business.
See Note 3 to the consolidated financial statements included elsewhere in
this prospectus.
(2) On March 31, 1997, we acquired UPPCO, Inc. for $60.9 million.
(3) On July 1, 1998, we acquired certain assets of General Electric Company's
domestic hermetic motor business for $125.6 million.
(4) On August 2, 1999, we acquired MagneTek, Inc.'s domestic electric motor
business for $244.6 million. See Note 2 to the consolidated financial
statements included elsewhere in this prospectus.
(5) On December 28, 2001, we acquired all of the outstanding stock of State
Industries for an aggregate purchase price of $117.2 million, and in
December 2001, we acquired 100 percent of the capital stock of Shenzhen
Speeda Industrial Co., Ltd. for a total purchase price of $3.3 million. See
Note 2 to the consolidated financial statements included elsewhere in this
prospectus.
(6) The statement of earnings data for the year ended December 31, 2001 and
the three months ended March 31, 2001 do not include any results of
operations of State Industries.
(7) Includes the results of the acquired businesses from their respective dates
of acquisition.
(8) Adjusted for a three-for-two stock split in August 1998. Includes shares of
common stock and class A common stock.
(9) Data shown is for continuing operations only.
(10) EBITDA consists of earnings before income taxes plus depreciation and
amortization and interest expense, less interest income. We have presented
EBITDA information solely as a supplemental disclosure because we believe
it allows for a more complete analysis of the results of our operations and
enables investors to determine our ability to service or incur
indebtedness. EBITDA should not be construed as an alternative to earnings
from continuing operations, net earnings, or cash flows from operating
activities, as determined in accordance with accounting principles
generally accepted in the United States. In addition, not all companies
that report EBITDA information calculate EBITDA in the same manner as we
do, and accordingly, our calculation is not necessarily comparable to
similarly entitled measures of other companies and may not be an
appropriate measure for performance relative to other companies.
8
RISK FACTORS
You should carefully consider the risk factors set forth below and all
other information contained in this prospectus, including the documents
incorporated by reference, before making an investment decision regarding our
common stock. If any of the events contemplated by the following risks actually
occurs, then our business, financial condition, or results of operations could
be materially adversely affected. As a result, the trading price of our common
stock could decline, and you may lose all or part of your investment. The risks
and uncertainties below are not the only risks facing our company.
Because we participate in markets that are highly competitive, our revenues
could decline as we respond to competition.
We sell all of our products in highly competitive markets. We compete in
each of our targeted markets based on product design, quality of products and
services, product performance, maintenance costs, and price. We compete against
manufacturers located in the United States and throughout the world. We also
face potential competition from some OEMs to whom we sell our electrical
products and from our customers and the end users of our products, who
continually assess any costs that could be reduced by vertically integrating or
using other alternate sources for the products we manufacture. A few of our
competitors have greater financial, marketing, manufacturing, and distribution
resources than we have. We cannot assure you that our products and services will
continue to compete successfully with those of our competitors or that we will
be able to retain our customer base or improve or maintain our profit margins on
sales to our customers, all of which could materially and adversely affect our
financial condition, results of operations, and cash flows.
Some of our markets are cyclical, and a decline in any of these markets could
have a material adverse effect on our operating performance.
Our electrical products business is cyclical and dependent on consumer
spending and is therefore impacted by the strength of the economy generally,
interest rates, and other factors. Economic factors adversely affecting OEM
production and consumer spending could adversely impact our business. During
recessionary periods, we have been adversely affected by reduced demand for our
products. OEM production experienced a downturn in 2000 and 2001, which
adversely affected demand for our electrical products. This downturn may
continue or become more severe.
We depend on revenues from a few significant customers, and any loss,
cancellation, reduction, or delay in purchases by these customers could harm our
business.
Sales to York International, our largest customer, represented 11.7 percent
of pro forma 2001 net sales, and collectively net sales to our four largest
customers represented approximately 25 percent of pro forma 2001 net sales. Our
success will depend on our continued ability to develop and manage relationships
with significant customers. We expect that significant customer concentration
will continue for the foreseeable future. Our dependence on sales from a
relatively small number of customers makes our relationship with each of these
customers important to our business. We cannot assure you that we will be able
to retain our largest customers. Some of our customers may in the future shift
their purchases of products from us to our competitors or to other sources. The
loss of one or more of our largest customers, any reduction or delay in sales to
these customers, our inability to successfully develop relationships with
additional customers, or future price concessions that we may make could
significantly harm our business.
We increasingly manufacture our products outside the United States, which may
present additional risks to our business.
A significant portion of our 2001 net sales were attributable to products
manufactured outside of the United States, principally in Mexico, and expanding
international manufacturing capacity in Mexico and China is part of our strategy
to reduce costs. Approximately 7,000 of our 15,000 total employees and 17 of our
41 manufacturing facilities are located in Mexico. Approximately 800 employees
and two manufacturing facilities are located in China. International operations
generally are subject to various risks, including political, religious and
economic instability, local labor market conditions, the imposition of foreign
tariffs and other trade restrictions, the impact of foreign government
regulations, and the effects of income and withholding tax, governmental
expropriation, and differences in business practices. We may incur increased
costs and experience delays or disruptions in product deliveries and payments in
connection with international manufacturing and sales that could cause loss of
revenue. Unfavorable changes in the political, regulatory, and business climate
could have a material adverse effect on our financial condition, results of
operations, and cash flows.
We manufacture a significant portion of our products in Mexico, which exposes us
to the risk of increased labor costs due to both wage inflation in Mexico and
stability or increases in the value of the Mexican peso relative to the U.S.
dollar.
We currently manufacture approximately 75 percent of our electric motors
and 20 percent of our residential water heaters in Mexico. The costs we incur
manufacturing these products are directly related to changes in labor costs in
Mexico and fluctuations in exchange rates of the Mexican peso relative to the
U.S. dollar because the labor costs we incur measured in U.S. dollars are based
on the cost of labor in Mexican pesos and the exchange rate of the Mexican peso
relative to the U.S. dollar. Historically,
9
Mexico has had higher wage inflation than the United States has had. That
inflation does not adversely affect our costs when there is a corresponding
decrease in the value of the Mexican peso relative to the U.S. dollar. However,
during periods in which the value of the Mexican peso increases or remains
stable relative to the U.S. dollar, higher wage inflation in Mexico results in
an increase in our labor costs because we are not able to offset any increases
in labor costs in Mexico when the cost of such labor in Mexican pesos is
measured in U.S. dollars.
Our operations will suffer if we are unable to complete our internal cost
reduction programs.
We are implementing a cost reduction program in our electrical products
business, which includes a transfer of portions of our manufacturing and
assembly work from six of our existing United States fabrication and motor
assembly plants to our operations in Mexico; a 10 percent reduction in the
electrical products salaried workforce; and a consolidation of several warehouse
facilities. As of March 31, 2002, we had charged $1.5 million against the
reserve we established for this program. In implementing this program, we may
not be able to successfully consolidate management, operations, product lines,
distribution networks, and manufacturing facilities, and we could experience a
disruption in our inventory and product supply or in administrative services. In
addition, we may not be able to complete this program without unexpected costs
or delays, or the need for increased management time and effort. If we do not
successfully implement this program on a timely basis, we will not achieve the
planned operational efficiencies and cost savings, and there could be an adverse
impact on ongoing relationships with our customers, all of which would impact
our profitability.
Failure to integrate State Industries would adversely affect our operations.
We completed our acquisition of State Industries on December 28, 2001.
Realization of the benefits of this acquisition requires the integration of
State Industries' sales and marketing, distribution, manufacturing, engineering,
and administrative organization. The successful integration of State Industries
will require substantial attention from our senior management, which will
decrease the time that they have to serve and attract customers and develop
new products and services. We cannot assure you that we will be able to
integrate successfully State Industries, that we will operate the acquired
business profitably, or that we will obtain the beneficial effect from this
acquisition. Our financial condition, results of operations, and cash flows
could be materially and adversely affected if we do not successfully integrate
State Industries.
A substantial portion of our results has come through acquisitions, and we may
not be able to identify or complete future acquisitions, which could adversely
affect our future growth.
Acquisitions we have made since 1997 have had a significant impact on our
results of operations during that period. While we will continue to evaluate
potential acquisitions, we may not be able to identify and successfully
negotiate suitable acquisitions, obtain financing for future acquisitions on
satisfactory terms, obtain regulatory approval for certain acquisitions, or
otherwise complete acquisitions in the future. If we complete any future
acquisitions, then we may not be able to successfully integrate the acquired
businesses or operate them profitably or accomplish our strategic objectives for
those acquisitions. Our level of indebtedness may increase in the future if we
finance acquisitions with debt, which would cause us to incur additional
interest expense and could increase our vulnerability to general adverse
economic and industry conditions and limit our ability to service our
10
debt or obtain additional financing. We cannot assure you that future
acquisitions will not have a material adverse effect on our financial condition,
results of operations, and cash flows.
Our sales of electrical products incorporated into HVAC systems are affected by
the weather, and mild or cooler weather could have an adverse effect on our
operating performance.
Many of our electrical products are incorporated into HVAC systems that
OEMs sell to end users. The number of installations of new and replacement HVAC
systems or components is higher during the spring and summer seasons due to the
increased use of air conditioning during warmer months. Mild or cooler weather
conditions during the spring and summer seasons often result in end users
deferring the purchase of new or replacement HVAC systems or components. As a
result, prolonged periods of mild or cooler weather conditions in the spring or
summer seasons in broad geographical areas could have a negative impact on the
demand for our electrical products and, therefore, could have an adverse effect
on our operating performance. In addition, due to variations in weather
conditions from year to year, our operating performance in any single year may
not be indicative of our performance in any future year.
Our results of operations may be negatively impacted by product liability
lawsuits.
Our residential water heater business exposes us to potential product
liability risks that are inherent in the design, manufacture, and sale of our
products in that business. While we currently maintain what we believe to be
suitable product liability insurance, we cannot assure you that we will be able
to maintain this insurance on acceptable terms or that this insurance will
provide adequate protection against potential liabilities. In addition, we
self-insure a portion of product liability claims. A series of successful claims
against us could materially and adversely affect our reputation and our
financial condition, results of operations, and cash flows.
We have a $33.4 million asset relating to dip tube litigation that we may not be
able to collect.
We and other water heater manufacturers settled in 1999 a class action
lawsuit relating to water heaters that contained a dip tube (a water heater
component) manufactured, designed, supplied, or sold by Perfection Corporation
between August 1993 and October 1996. Following settlement of the class action
lawsuit, we joined together with the other water heater manufacturers in an
action against Perfection Corporation and other related parties and their
insurers seeking to recover the damages we sustained as a result of the class
action settlement and other damages. As of March 31, 2002, we recorded a
long-term receivable of $33.4 related to repair claims, administrative costs,
legal fees, and related expenses arising out of the settlement of the class
action lawsuit. Although we expect that we will recover all or a substantial
portion of this amount from Perfection Corporation, other related parties, their
insurers, or our insurers, we cannot assure you that we will do so.
One stockholder has voting control of the company.
We have two classes of common equity: our common stock, which we are
offering by this prospectus; and our class A common stock. Currently and
immediately after the offering, the holders of common stock are entitled, as a
class, to elect only 25 percent of our board of directors. Currently and
immediately after the offering, the holders of class A common stock are
entitled, as a class, to elect the remaining directors. As of March 31, 2002,
pro forma for the issuance of our common stock in the offering, a single
stockholder, Smith Investment Company, effectively controlled 75 percent of our
board of directors and our operations because it beneficially owned
approximately 93 percent of our class A common stock. Due to the differences in
the voting rights between shares of our common stock and shares of our class A
common stock, Smith Investment Company is and immediately after the offering
will be in a position to control to a large extent the outcome of matters
requiring a stockholder vote, including the adoption of amendments to our
certificate of incorporation or bylaws or approval of transactions involving a
change of control. The differences in the voting rights between shares of our
common stock and our class A common stock could have the effect of delaying,
deterring, or preventing a change of control. As of March 31, 2002, pro forma
for the issuance of our common stock in the offering, Smith Investment Company
beneficially owned approximately 35 percent of the total number of outstanding
shares of our common stock and class A common stock.
11
USE OF PROCEEDS
Based on an assumed offering price of $ per share, we estimate that we
will receive approximately $ million of net proceeds in this offering, after
deducting the underwriting discount and estimated offering expenses payable by
us. We intend to use the net proceeds from this offering to repay debt under
our $250 million multi-year revolving credit facility, which expires on August
2, 2004. The interest we pay under this credit facility was 2.4 percent per
annum as of March 31, 2002 and varies monthly with the London Interbank Offered
Rate and our debt to total capitalization ratio. As of March 31, 2002, we had
$120.0 million of total debt outstanding under this credit facility, $118.0
million of which we incurred in 2001 in connection with our acquisitions of
State Industries and Shenzhen Speeda.
12
PRICE RANGES OF COMMON STOCK AND
CLASS A COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the New York Stock Exchange under the symbol
"AOS," and our class A common stock is traded on the American Stock Exchange
under the symbol "SMCA." The following table sets forth the high and low sale
prices of our common stock and class A common stock as reported by the New York
Stock Exchange and the American Stock Exchange for the stated quarter.
Common Stock Class A Common Stock
------------ --------------------
High Low High Low
2000 ---- --- ---- ---
First Quarter.................. $ 23.13 $ 14.94 $ 22.00 $ 15.50
Second Quarter................. 22.81 17.81 22.44 17.88
Third Quarter.................. 21.38 11.19 17.25 12.00
Fourth Quarter................. 17.25 12.50 16.88 12.75
2001
First Quarter.................. $ 20.10 $ 15.88 $ 19.80 $ 15.88
Second Quarter................. 19.53 16.40 19.20 16.50
Third Quarter.................. 18.50 15.25 18.30 16.00
Fourth Quarter................. 19.75 14.67 18.90 14.50
2002
First Quarter.................. $ 28.50 $ 19.00 $ 27.60 $ 19.25
Second Quarter
(through _________, 2002).. $ $ $ $
On ____________, 2002, the last reported sale price for our common stock on
the New York Stock Exchange was $___, and the last reported sale price for our
class A common stock on the American Stock Exchange was $____.
We paid cash dividends of $.52 per share on our common stock and class A
common stock in 2001 and dividends of $.50 per share in 2000.
On April 9, 2002, our board of directors declared a quarterly cash dividend
of $.13 per share on our common stock and class A common stock payable on May
15, 2002, to shareholders of record on April 30, 2002. Holders of shares
purchased in this offering will not be entitled to receive this dividend on the
purchased shares.
We have paid cash dividends for 62 consecutive years. We currently intend
to declare and pay dividends on a regular basis at a minimum of the current
rate. However, the payment and amount of future dividends is at the discretion
of our board of directors and will depend upon future earnings, capital
requirements, our general financial condition, general business conditions, and
other factors. In addition, the terms of our credit agreement contain certain
conditions and provisions that restrict our ability to pay quarterly dividends.
Under the most restrictive of these provisions, retained earnings of $66.6
million were available for the payment of dividends as of March 31, 2002.
Whenever we pay cash dividends on our class A common stock, each share of
common stock is entitled to receive a dividend at least equal to the dividend
per share on our class A common stock. We may pay cash dividends to holders of
common stock in excess of dividends paid, or without paying dividends, to
holders of class A common stock.
13
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 2002, on an actual basis and as adjusted to give effect to our sale of
3,500,000 shares of common stock at an assumed public offering price of $_____
per share, after deducting the underwriting discount and estimated offering
expenses and after applying the net proceeds in this offering as we intend. You
should read this table together with "Management's Discussion and Analysis of
Results of Operations and Financial Condition," "Description of Capital Stock,"
and our consolidated financial statements, including the related notes to
consolidated financial statements incorporated by reference in this prospectus.
As of March 31, 2002
--------------------
Actual As Adjusted
------ -----------
(Dollars in millions)
Total debt(1) .............................................................. $ 392,139 $
=========== =========
Total stockholders' equity:
Preferred stock, 3,000,000 shares authorized; 0 shares outstanding........ $ -- $
Class A common stock, $5 par value; 14,000,000 shares authorized;
8,671,584 shares issued and 8,638,989 shares outstanding(2)............. 43,358
Common stock, $1 par value; 60,000,000 shares authorized; 23,877,778
shares issued and 15,218,012 shares outstanding; 23,877,778 shares
issued and 18,718,012 shares outstanding as adjusted.................... 23,878
Capital in excess of par value.............................................. 55,697
Retained earnings........................................................... 560,448
Accumulated other comprehensive loss........................................ (2,815)
Treasury stock, at cost, 32,595 shares of class A common stock and
8,659,766 shares of common stock; 32,595 shares of class A common
stock and 5,159,766 shares of common stock as adjusted.................. (214,417)
----------- ---------
Total stockholders' equity........................................... 466,149
----------- ---------
Total capitalization............................................. $ 858,288 $
=========== =========
- --------------------
(1) Total debt includes long-term debt and long-term debt due within one year.
(2) Each share of our class A common stock is convertible into one share of our
common stock at any time at the holder's option.
14
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data as of and for each of the five years ended December 31, 2001, which have
been derived from our audited consolidated financial statements, and as of and
for each of the three months ended March 31, 2001 and 2002, which have been
derived from our unaudited interim consolidated financial statements. You should
read this information together with "Management's Discussion and Analysis of
Results of Operations and Financial Condition," and our consolidated financial
statements, including the related notes to consolidated financial statements,
included elsewhere or incorporated by reference in this prospectus (except for
the consolidated financial statements as of and for the years ended December 31,
1997 and 1998, which are not included in this prospectus).
For the Three Months
For the Years Ended December 31,(1) Ended March 31,
-------------------------------------------------------------- -----------------------
1997(2) 1998(3) 1999(4) 2000 2001(5)(6) 2001(6) 2002
--------- ---------- ---------- ---------- ---------- ---------- ----------
(In millions, except per share amounts)
Statement of Earnings Data(7):
Continuing Operations:
Net sales......................... $ 703.1 $ 800.8 $ 1,070.3 $ 1,247.9 $ 1,151.2 $ 318.2 $ 371.9
Cost of products sold............. 543.4 623.2 839.5 999.8 948.8 259.4 295.0
--------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit...................... 159.7 177.6 230.8 248.1 202.4 58.8 76.9
Selling, general and
administrative expenses......... 105.8 105.2 136.3 153.7 145.7 38.1 53.2
Interest expense.................. 6.6 5.9 12.8 22.1 16.4 4.8 4.2
Amortization of intangibles....... 0.9 2.5 5.2 6.9 7.0 1.7 0.1
Restructuring and other charges... -- -- -- -- 9.4 -- --
Other(income) expense - net....... (6.7) (2.9) (0.6) 0.3 1.4 0.7 0.8
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before income taxes.... 53.1 66.9 77.1 65.1 22.5 13.5 18.6
Provision for income taxes........ 18.4 23.2 26.8 23.4 8.0 5.0 6.5
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings before equity in
loss of joint ventures.......... 34.7 43.7 50.3 41.7 14.5 8.5 12.1
Equity in loss of joint ventures.. (2.6) (3.0) -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings from continuing operations.. 32.1 40.7 50.3 41.7 14.5 8.5 12.1
Discontinued Operations:
Operating earnings (loss)......... 20.7 3.8 (0.9) -- -- -- --
Gain (loss) on disposition........ 101.0 -- (7.0) (11.9) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
121.7 3.8 (7.9) (11.9) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings......................... $ 153.8 $ 44.5 $ 42.4 $ 29.8 $ 14.5 $ 8.5 $ 12.1
========= ========== ========== ========== ========== ========== ==========
Basic Earnings (Loss) per
Share:
Continuing operations............. $ 1.16 $ 1.73 $ 2.17 $ 1.78 $ 0.61 $ 0.36 $ 0.51
Discontinued operations........... 4.41 0.16 (0.34) (0.51) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................... $ 5.57 $ 1.89 $ 1.83 $ 1.27 $ 0.61 $ 0.36 $ 0.51
========= ========== ========== ========== ========== ========== ==========
Diluted Earnings (Loss) per
Share:
Continuing operations............. $ 1.14 $ 1.68 $ 2.11 $ 1.76 $ 0.61 $ 0.36 $ 0.50
Discontinued operations........... 4.32 0.16 (0.33) (0.50) -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings...................... $ 5.46 $ 1.84 $ 1.78 $ 1.26 $ 0.61 $ 0.36 $ 0.50
========= ========== ========== ========== ========== ========== ==========
Average Shares Outstanding(8):
Basic............................. 27.6 23.6 23.2 23.4 23.6 23.5 23.8
Diluted........................... 28.2 24.2 23.8 23.7 23.9 23.8 24.3
Balance Sheet Data (at period end):
Cash and cash equivalents............ $ 145.9 $ 37.7 $ 14.8 $ 15.3 $ 20.8 $ 13.1 $ 21.9
Working capital...................... 237.8 155.2 217.7 227.0 221.6 238.0 224.1
Total assets......................... 682.8 736.6 1,065.6 1,064.9 1,293.9 1,052.2 1,305.2
Long-term debt....................... 101.0 131.2 351.3 316.4 390.4 295.7 378.9
Total stockholders' equity........... 399.7 401.1 431.1 448.4 451.9 452.7 466.1
Other Financial Data(9):
Capital expenditures................. $ 37.4 $ 18.5 $ 32.8 $ 40.5 $ 35.3 $ 9.5 $ 7.1
Depreciation and amortization........ 21.6 26.5 37.3 45.1 47.1 11.4 12.3
EBITDA(10)........................... 72.4 95.6 125.8 131.6 85.7 29.6 35.0
Cash provided by (used in)
operating activities.............. 73.5 65.6 47.8 75.2 49.8 (13.3) 22.9
15
(1) We have accounted for our former fluid handling, liquid and dry storage,
and automotive structural components businesses as discontinued operations
in our consolidated financial statements. On April 18, 1997, we sold our
automotive structural components business, exclusive of our Mexican
automotive affiliate, and on October 1, 1997, we sold our 40 percent
interest in our Mexican affiliate. On December 8, 2000, we sold our fluid
handling business, and on January 10, 2001, we sold our storage business.
See Note 3 to the consolidated financial statements included elsewhere in
this prospectus.
(2) On March 31, 1997, we acquired UPPCO, Inc. for $60.9 million.
(3) On July 1, 1998, we acquired certain assets of General Electric Company's
domestic hermetic motor business for $125.6 million.
(4) On August 2, 1999, we acquired MagneTek, Inc.'s domestic electric motor
business for $244.6 million. See Note 2 to the consolidated financial
statements included elsewhere in this prospectus.
(5) On December 28, 2001, we acquired all of the outstanding stock of State
Industries for an aggregate purchase price of $117.2 million, and in
December 2001, we acquired 100 percent of the capital stock of Shenzhen
Speeda Industrial Co., Ltd. for a total purchase price of $3.3 million. See
Note 2 to the consolidated financial statements included elsewhere in this
prospectus.
(6) The statement of earnings data for the year ended December 31, 2001 and
the three months ended March 31, 2001 do not include any results of
operations of State Industries.
(7) Includes the results of the acquired businesses from their respective dates
of acquisition.
(8) Adjusted for a three-for-two stock split in August 1998. Includes shares of
common stock and class A common stock.
(9) Data shown is for continuing operations only.
(10) EBITDA consists of earnings before income taxes plus depreciation and
amortization and interest expense, less interest income. We have presented
EBITDA information solely as a supplemental disclosure because we believe
it allows for a more complete analysis of the results of our operations and
enables investors to determine our ability to service or incur
indebtedness. EBITDA should not be construed as an alternative to earnings
from continuing operations, net earnings, or cash flows from operating
activities, as determined in accordance with accounting principles
generally accepted in the United States. In addition, not all companies
that report EBITDA information calculate EBITDA in the same manner as we
do, and accordingly, our calculation is not necessarily comparable to
similarly entitled measures of other companies and may not be an
appropriate measure for performance relative to other companies.
16
BUSINESS
Our Company
We are a leading manufacturer of electric motors and water heating
equipment, serving a diverse mix of residential, commercial, and industrial end
markets principally in the United States with a growing international presence.
Our company is organized in two segments: electrical products and water systems.
Our electrical products business manufactures and markets a comprehensive line
of hermetic motors, fractional horsepower AC and DC motors, and integral
horsepower motors. Our water systems business manufactures and markets a
comprehensive line of residential gas and electric water heaters, standard and
specialty commercial water heating equipment, high-efficiency copper-tube
boilers, and water systems tanks. In 2001, on a pro forma basis for our December
2001 acquisition of State Industries, we had net sales of approximately $1.5
billion, with 55 percent attributable to our electrical products business and 45
percent attributable to our water systems business.
Our electric motors are used in a wide variety of targeted applications,
including HVAC systems; pools, spas and water well pumps; garage door openers;
overhead cranes; elevators; and industrial pumps. We primarily sell our electric
motors directly to OEMs. We also market our motor products through wholesale
distributors who sell to smaller OEMs and aftermarket customers. Our residential
and commercial water heaters are used in a wide variety of targeted
applications, including homes, apartments, schools, hospitals, hotels,
laundries, restaurants, stadiums, and other large users of hot water. Our water
systems wholesale distribution channel includes more than 2,600 wholesale
plumbing distributors that serve residential, commercial, and industrial
markets. We also sell our residential water heaters through the retail channel.
In this channel, our customers include four of the six largest national hardware
and home center chains, including a long-standing private label relationship
with Sears.
During the past five years, we have significantly repositioned our company.
We have changed from a diversified manufacturer with five businesses, the
largest of which was our legacy automotive structural components business that
represented more than 50 percent of our total sales, to a company focused on our
electrical products and water systems businesses, which we believe offer the
opportunity for higher growth and more profitability. We divested our automotive
structural components business in 1997, realizing pre-tax proceeds of $770
million. By January 2001, we had completed our repositioning with the
divestiture of our storage and fluid handling businesses. During this period, we
also made key acquisitions, including:
Annual
Year Revenues at
Business Acquired Acquisition Products
-------- -------- ----------- --------
(In millions)
Electrical Products
UPPCO, Inc........................... 1997 $ 70 C-Frame sub-fractional horsepower AC motors
General Electric Company's domestic
hermetic motors business............. 1998 $ 120 Hermetic motors for HVAC and refrigeration
MagneTek, Inc.'s motor business...... 1999 $ 380 Fractional horsepower, integral AC and DC
motors
Water Systems
State Industries, Inc................ 2001 $ 320 Residential and commercial gas and electric
water heaters, tanks, parts and accessories
The following competitive strengths contribute to the success of our
business:
o We are among the leaders in North America in the electric motor and water
heating market segments that we target, and we have the scale to increase
our leadership positions
o We have established a presence in Mexico and China to capitalize on the
low-cost manufacturing potential of each region
17
o Our comprehensive product offerings and strong brand identities have
created customer loyalty and help us to maintain existing business, as well
as capture additional sales, particularly as many of our customers seek to
consolidate their supplier bases
o Our operational and engineering flexibility help us to provide fast,
innovative, and practical solutions for our customers
o Our businesses have established long-standing, strong relationships with
leading OEM customers, distributors, and retailers
o Our products are used in essential applications that often require
replacement purchases
o Our senior management team has significant experience in manufacturing,
marketing, and sales
We intend to use our competitive strengths to increase sales and
profitability through the initiatives outlined below:
o Increase sales to existing customers, introduce new products, and expand
operations internationally
o Continue to lower operating costs and realize significant cost savings by
completing our MagneTek integration, further reducing cost in our
electrical products operations, selectively manufacturing electric motors
in China, and completing our integration of State Industries
o Pursue complementary strategic acquisitions that position us in adjacent
markets and allow us to leverage the marketing, engineering, and
manufacturing strengths of our businesses
Electrical Products
We are one of the three largest manufacturers of electric motors in North
America, having manufactured approximately 36 million electric motors in 2001.
We offer a comprehensive line of hermetic motors, fractional horsepower AC and
DC motors, and integral horsepower motors, ranging in size from sub-fractional
C-frame ventilation motors up to 500 horsepower hermetic and 800 horsepower
specialty integral motors. We believe our extensive product offering gives us an
advantage in our targeted markets, often allowing us to serve all of our
customer's electric motor needs. We have significantly broadened our electric
motor product line and customer base through a series of acquisitions, including
UPPCO, General Electric Company's domestic hermetic motor business, and
MagneTek's electric motor business. Our motors are used in a wide range of
targeted residential, commercial, and industrial applications, including:
HVAC. We are North America's leading supplier of hermetic motors that is
not affiliated with a compressor manufacturer. These precisely engineered motors
range in size from 5.5 inches to more than 15 inches in diameter (1 1/2 to 500
horsepower) and are used for residential and commercial air conditioning
compressors, chillers, and commercial refrigeration equipment. We also
manufacture a wide range of fractional horsepower fan and blower motors for use
in furnaces, heat pumps, unitary and window air conditioners, and whole-house
fan systems.
Pumps. We are the leading supplier of fractional horsepower pump motors for
swimming pools, spas, and jetted tubs, serving virtually all of the largest
manufacturers in this niche. Our motors also can be found in residential water
equipment, such as sump pumps, sewage pumps, sprinkling or irrigation systems,
and water well pumps.
Other residential and commercial. We are a leading supplier of fractional
horsepower motors for residential and commercial garage door and gate openers,
small air compressors, residential and commercial ventilation (range hood fans,
and kitchen and bathroom fans), and hundreds of other specialized uses.
18
Industrial. Our fractional horsepower and integral horsepower motors are
used in overhead cranes, conveyors, elevators, commercial air conditioning,
agricultural, power transmission, and industrial pump applications.
We estimate that total sales of electric motors in the United States were
approximately $9 billion in 2001, and we believe international demand for
electric motors is about twice the size of the domestic demand. We target
selected segments of these markets. HVAC-related applications accounted for
approximately 60 percent of our 2001 segment sales, with pump, or water-moving,
applications representing 20 percent of our 2001 segment sales, and the
remainder made up of other residential, commercial, and industrial applications.
We believe approximately 50 percent of our 2001 segment sales resulted from the
replacement needs of end users.
Approximately 85 percent of our 2001 segment sales were to OEMs in a
diverse mix of industries, with the remainder of sales directed to the
aftermarket or distribution channels. Our 10 largest motor customers represented
50 percent of 2001 segment sales. Sales to our largest customer, York
International and its wholly owned Bristol Compressors subsidiary, were $172
million in 2001 and represented approximately 20 percent of segment sales. We
believe that more than 25 percent of our total segment sales were attributable
to products used outside of the United States.
We have a direct sales force consisting of 94 salespeople as of February
28, 2002. One-half of our sales force serves OEMs and the other one-half serves
distributors. Our sales and marketing organization is focused on specific
segments of our motor markets to identify and act on trends in the industries we
serve. Our approach of focused marketing, supported by product engineering, has
allowed us to establish close working relationships with many of the leading
companies in the industries we serve. In many instances, we supply all or
substantially all of their requirements for the products we offer, and several
of our customer relationships date back for more than 40 years. We serve
segments of the electric motor aftermarket through a nationwide network of
wholesale electrical equipment distributors. We have traditionally concentrated
our distribution services efforts in the HVAC and pool and spa aftermarkets,
although the MagneTek acquisition expanded our distribution efforts into the
industrial motor markets.
With our extensive technical resources, we are able to work with individual
customers to design and build a motor that meets their specific needs. Our
design engineers use computer-aided design tools and sophisticated math models
to develop a motor that matches our customers' performance requirements,
mechanical specifications, safety standards, energy efficiency needs, and cost
targets. We evaluate motor designs in well-equipped performance labs, using
accelerated life tests, electrical tests, and mechanical measures to assure the
design performs in often-harsh environments or under difficult operating
conditions. Specialized testing includes sound chambers, wind tunnels, and
combustion labs. We also test motors and customer systems in certified labs that
comply with Underwriters' Laboratories, Canadian Standards Association,
International Electro-Technical Commission, or European Committee for
Standardization requirements, a capability that often reduces the time needed to
obtain agency approval.
To remain a leader in this highly competitive industry, we are committed to
being a low-cost supplier of electrical products. We were one of the first motor
manufacturers to identify the cost-reduction potential of Mexican operations,
and today, we manufacture a majority of our electric motors in our 16 Mexican
motor facilities. In 2001, we undertook an initiative to accelerate the
cost-reduction programs that were already underway in our motor operations to
enhance our competitive position. These initiatives include transferring six
additional product manufacturing lines to our lower-cost Mexican operations;
reducing salaried workforce by 10 percent; and realigning our warehouse
facilities into three hub operations that will improve customer service while
reducing cost. In December 2001, we acquired Shenzhen Speeda, a manufacturer of
sub-fractional horsepower electric motors in China. This acquisition gave us our
first Asian motor manufacturing presence, and we intend to use this capability
to serve a portion of the North American HVAC market segment.
Our principal competitors in the electric motor industry are Emerson
Electric Co. and General Electric Company. A number of other companies, such as
Fasco Motors (a subsidiary of Invensys Motor Systems),
19
Baldor Electric, Regal-Beloit Corporation, and Jakel Incorporated, compete with
us in specific segments of the electric motor market.
Water Systems
We are one of the two largest manufacturers and marketers of water heaters
in North America, having manufactured more than 3 million units on a pro forma
basis in 2001. We have a leading share in the commercial water heating segment,
and we believe we are the only domestic manufacturer that offers standard and
specialty commercial water heater products. We believe that our comprehensive
commercial product line gives us a competitive advantage in this higher-margin
segment of the water heating industry. We also are one of the leaders in the
residential water heating segment with an extensive line of high-efficiency gas
and electric models. We significantly broadened our market scope and product
offering with the acquisition of State Industries. This acquisition allowed us
to enter the retail segment of the residential market, a channel that represents
approximately one-half of the total United States residential market. The
acquisition of State Industries also enhanced our position in the wholesale
distribution channel and gave us a position in several new distribution
channels, such as direct sales to large homebuilders and the manufactured
housing market.
We serve residential, commercial, and industrial end markets with a broad
range of products, including:
Residential gas and electric water heaters. Our residential water heaters
come in sizes ranging from two-gallon (point-of-use) models to 120-gallon
appliances with varying efficiency ranges. We offer traditional atmospheric
water heaters as well as direct-vented and power-vented models for today's
energy efficient homes.
Standard commercial water heaters. Our gas, oil, and electric water heaters
come in capacities ranging from 50 to 100 gallons and are used by customers who
require a consistent, economical source of hot water. Typical applications
include restaurants, hotels and motels, laundries, car washes, and small
businesses.
Specialty commercial water heaters. Our products include powered burner
water heaters, large-volume gas and electric water heaters, and other water
heating equipment that is custom-designed for the user's application. Our units
are often combined with water storage tanks to provide the customer with a
complete hot water system. Typical applications include hospitals, schools,
prisons, large hotels, factories, or other commercial environments where the
customer requires large volumes or high-demand periods of hot water.
Copper-tube boilers. We manufacture four distinct copper-tube boiler brands
designed to meet the customer's specific volume, efficiency, and cost
requirements. Our high-efficiency boilers are used in potable hot water and
hydronic heating applications. Applications for our boilers include schools,
stadiums, prisons, and other institutions.
Pump tanks, expansion tanks, and related products. We supply expansion
tanks for domestic water systems which are used to equalize the pressure in the
system, as well as tanks for reverse osmosis water purification and related
applications.
Parts. Through our wholly owned APCOM subsidiary and protective coatings
division, we manufacture and market a wide range of water heater components,
including burners, gas manifolds, heating elements, thermostats, inlet tubes,
and glass frit used in making porcelain enamel linings. APCOM and our protective
coatings division provide us with a captive supply of water heater components to
reduce the risk of a shortage in supply. Additionally, APCOM supplies water
heater components to other major North American water heater manufacturers.
We estimate that the total sales of water heaters in the United States were
approximately $2 billion in 2001, and we believe international demand for water
heaters is about twice the size of the domestic demand. We believe approximately
80 percent of our 2001 pro forma segment sales resulted from the replacement
needs of end users.
20
We distribute our residential water heaters through the traditional
plumbing wholesale and retail channels. Residential water heaters represented 63
percent of total 2001 pro forma water systems sales, with approximately 71
percent of our residential water heaters sold through the plumbing wholesale
channel. With the State Industries acquisition, we now have access to the retail
channel and sell water heaters to four of the six largest national hardware and
home center chains, including a long-standing private label relationship with
Sears. Approximately 29 percent of our pro forma residential water heater sales
and 18 percent of our total 2001 pro forma segment sales were through retail
channels.
We sell our commercial water systems products, including standard and
specialty water heaters, high-efficiency copper-tube boilers, and large-volume
hot water storage tanks, exclusively through wholesale distributors. Sales of
our commercial water systems products represented approximately 20 percent of
2001 pro forma segment sales.
We have identified markets outside of North America as growth opportunities
for our water systems business, and we have a manufacturing and engineering
presence in Europe and Asia to complement our domestic capabilities. We opened
our manufacturing plant in Nanjing, China, in 1998, and we have grown this
business to more than $26 million in sales in 2001. Our China operation offers a
line of instantaneous gas and electric water heaters and wall-mounted gas and
electric units for a number of Chinese residential applications. We also
recently began marketing commercial water heaters in China. In addition, we have
entered into a marketing agreement with Aquecedores Cumulus S/A, the
second-largest water heater manufacturer in Brazil, which allows us to sell our
high-efficiency commercial water heater products in that country. Our plant in
Veldhoven, The Netherlands, serves residential and commercial customers in
Europe and the Middle East. Over the last several years, we have successfully
adapted many of our popular U.S. commercial water systems products, such as the
Cyclone XHE commercial water heater, to European standards. In 2001, our water
systems business sold our products in 59 countries.
Engineering and technical support are important in the water heating
industry, particularly in the commercial segment, due to the specialized needs
of customers and challenging application requirements. We believe our product
engineering capabilities have contributed to our leadership in this commercial
segment. Our principal product engineering center is in McBee, South Carolina,
with a focused boiler testing facility in El Paso, Texas. Our engineers use
sophisticated computer-aided design tools to develop new residential and
commercial water heater designs. We put our new products through a thorough
evaluation in our performance test labs, where we monitor combustion,
efficiency, standby recovery, and product safety. We test products to ensure
they comply with American Gas Association, Underwriters' Laboratories, and
Canadian Standards Association requirements, as well as to meet local and state
codes. We also field-test products at a number of facilities around the United
States. Evidence of the effectiveness of our product engineering efforts is the
number of successful new products we have introduced over the last several
years, including:
o Our Cyclone XHE commercial water heater, which has 94 percent thermal
efficiency, is the most efficient storage-type unit on the market. In
addition to its high efficiency, the Cyclone can be either sealed-direct
vented or vented conventionally, offering customers installation
flexibility and substantial cost savings.
o Our Genesis Burkay copper-tube boiler offers customers high efficiency
in a compact, space-saving design. This boiler offers multiple venting
options and microprocessor-controlled diagnostics. We also recently
introduced a line of larger models directly targeted at hydronic heating
applications.
o Our Master-Fit line of commercial water heaters is designed for a wide
range of new and replacement applications. The compact size of these
products makes them well suited for retrofit applications, and we have
introduced models specifically designed for restaurants as well as
low-emission units.
An increasing number of government regulations will have a significant
impact on the United States water heating industry in the coming years, and we
believe we will benefit from our engineering expertise in this challenging
environment. Beginning next year, United States water heater manufacturers will
be required to comply with new flammable vapor resistance standards for
residential gas water heaters. These new regulations,
21
developed by the manufacturers in cooperation with the United States Consumer
Product Safety Commission, dictate that gas water heaters must be designed to
protect against accidental ignition of flammable vapors caused by spilled
gasoline or other liquids. Other regulations impacting our markets include
restrictions on water heater emissions of nitrogen oxides (to date mandated only
in California and Texas) and a United States government requirement to increase
the efficiency of residential gas and electric water heaters by January 2004. We
believe we will successfully comply with these new regulations on a timely
basis.
Our acquisition of State Industries provides an opportunity to improve the
operations and efficiency of our overall water systems business. We are moving
our water systems business headquarters to State Industries' headquarters in
Ashland City, Tennessee, to facilitate the integration of State Industries with
our existing water systems operations. Our integration plan will enable us to
take advantage of the best practices of the two organizations to improve
efficiency, consolidate our product lines, and reduce costs in the business. We
have identified immediate cost reduction opportunities, including management
reductions, raw materials purchasing savings, and freight and logistics savings,
and we believe that these actions will enable us to realize cost savings of
approximately $5 million in 2002, $10 to $12 million in 2003, and over $15
million annually in subsequent years.
Our principal domestic water heating competitors include Rheem
Manufacturing Company, Inc. and, to a lesser extent, American Water Heater
Company and Bradford-White Corporation. We also compete against a number of
companies, such as Lochinvar Corporation, Raypak, Inc., Teledyne Laars Jandy
Products (a subsidiary of Water Pik Technologies, Inc.), and many smaller,
regional competitors, in certain segments of the United States water heater
market, as well as numerous competitors in international markets.
Manufacturing and Operations
We manufacture 99 percent of the products we sell. Our 41 manufacturing
plants are well-equipped, and many are located in areas with low cost labor,
including 17 plants in Mexico and two in China. Most of our plants are focused
facilities, concentrating on one particular product line. We frequently upgrade
our manufacturing operations to enhance productivity, quality, and response
times and regularly invest in tooling, equipment, automated processes
technologies, and information systems. These capital improvements have allowed
us to reduce costs and improve efficiency and product flow, helping us better
serve the rapidly changing needs of our customers. All of our plants operate
under a continuous improvement philosophy that encourages employee involvement
and improves customer satisfaction. We rigorously test our products throughout
the manufacturing process and, in some cases, have developed proprietary testing
equipment and procedures.
Our manufacturing operations are highly integrated, and we fabricate a
significant number of the components that comprise our motors and water heaters.
This gives us flexibility in responding to market demand and enables us to
upgrade continually the quality and performance of our products. In addition, we
manufacture a wide range of water heater components, including all of the water
heater porcelain enamels we use. We believe we are the only domestic water
heater manufacturer that formulates and manufactures its own glass coatings. We
take advantage of the size and scale of our businesses when purchasing raw
materials such as steel, copper, and aluminum, and through our global network of
suppliers we are able to reduce our overall materials cost while maintaining a
consistent source of supply.
22
Facilities
The following table provides information regarding our manufacturing and other principal facilities.
Location Square Footage Status Description of Use
-------- -------------- ------ ------------------
Electrical Products - United States
El Paso, Texas 101,000 Leased Warehouse
Lavergne, Tennessee 188,000 Leased Warehouse
McMinnville, Tennessee 265,000 Leased Manufacturing
Mebane, North Carolina 225,000 Owned Manufacturing
Monticello, Indiana 132,000 Owned Manufacturing
Mt. Sterling, Kentucky 268,000 Leased Manufacturing
Owosso, Michigan 200,000 Owned Manufacturing
Ripley, Tennessee 103,000 Owned Manufacturing
Scottsville, Kentucky 229,000 Owned Manufacturing
Tipp City, Ohio 93,000 Owned Manufacturing
Tipp City, Ohio 167,000 Owned Warehouse
Tipp City, Ohio 128,000 Owned Electrical Products Headquarters
Tipp City, Ohio 43,000 Leased Electrical Products Headquarters
Upper Sandusky, Ohio 129,000 Owned Manufacturing
Electrical Products - International
Acuna, Mexico (2 facilities) 163,000 Leased Manufacturing
Bray, Ireland 49,000 Leased Manufacturing
Budapest, Hungary 180,000 Leased Manufacturing
Gainsborough, England 44,000 Owned Manufacturing
Juarez, Mexico (8 facilities) 583,000 Leased Manufacturing
Juarez, Mexico (3 facilities) 313,000 Owned Manufacturing
Monterrey, Mexico (3 facilities) 175,000 Owned Manufacturing
Shenzhen, China 60,000 Owned Manufacturing
Water Systems - United States
Alsip, Illinois 51,000 Leased Product/Customer Service
Ashland City, Tennessee(1) 1,288,000 Owned Manufacturing
Charlotte, North Carolina 96,000 Owned Manufacturing
Cookeville, Tennessee 50,000 Owned Manufacturing
El Paso, Texas 100,000 Leased Manufacturing
El Paso, Texas 111,000 Leased Warehouse
El Paso, Texas 26,000 Leased Data Center
Florence, Kentucky 41,000 Owned Manufacturing
Franklin, Tennessee 125,000 Owned Manufacturing
Irving, Texas(1) 26,000 Leased Water Systems Headquarters
McBee, South Carolina 742,000 Owned Manufacturing
Renton, Washington 100,000 Leased Manufacturing
Water Systems - International
Juarez, Mexico 264,000 Owned Manufacturing
Nanjing, China 189,000 Owned Manufacturing
Stratford, Canada 53,000 Owned Manufacturing
Stratford, Canada 56,000 Leased Warehouse
Veldhoven, The Netherlands 105,000 Leased Manufacturing
Corporate Offices
Milwaukee, Wisconsin 110,000 Leased World Headquarters
(1) We are in the process of moving our water systems business headquarters from Irving, Texas to Ashland City,
Tennessee.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS and FINANCIAL CONDITION
The following discussion and analysis should be read together with
"Selected Historical Consolidated Financial Data" and our consolidated financial
statements, including the related notes, included elsewhere in this prospectus.
Overview
We are a leading manufacturer of electric motors and water heating
equipment. Our company is organized in two segments: electrical products and
water systems. Our electrical products business manufactures and markets a
comprehensive line of hermetic motors, fractional horsepower (AC) and (DC)
motors, and integral horsepower motors. Our water systems business manufactures
and markets a comprehensive line of standard and specialty commercial water
heating equipment, residential gas and electric water heaters, high-efficiency
copper-tube boilers, and water systems tanks.
Results of Operations
First Quarter 2002 and 2001
Sales in the first quarter of 2002 were $371.9 million, an increase of
$53.7 million or 16.9 percent over sales of $318.2 million in the first quarter
of 2001. Increased year-over-year first quarter sales for our water systems
segment of $83.7 million more than offset a decline in sales of $30.0 million
for our electrical products segment. The significant increase in first quarter
sales of our water systems segment was attributable to the $84.1 million of
sales associated with our acquisition of State Industries on December 28, 2001.
The decline in electrical products segment sales reflects continued softness in
the electric motor market.
Net earnings in the first quarter of 2002 were $12.1 million or $3.6
million higher than net earnings of $8.5 million in the first quarter of 2001.
On a per share basis, net earnings in the first quarter of 2002 were $.50
compared to $.36 in the first quarter of 2001. The increase in earnings was
primarily attributable to increased earnings for our water systems segment, the
elimination of goodwill amortization of $1.6 million, and a decrease in interest
expense of $0.6 million due to lower interest rates. The increase in earnings
for our water systems segment was due to the additional sales volume and
benefits of integration associated with the acquisition of State Industries.
Operating earnings for our water systems segment in the first quarter of
2002 were $13.6 million, which included $3.8 million of earnings associated with
the State Industries acquisition. The net $9.8 million of earnings for our base
water heater business compared to first quarter 2001 profits of $9.9 million and
included a $1.7 million non-recurring charge associated with the consolidation
of water systems' management staff. Operating earnings for our electrical
products segment in the first quarter of 2002 were $15.1 million or $0.5 million
less than the $15.6 million of operating earnings in the first quarter of 2001,
as adjusted to exclude $1.6 million of goodwill amortization. Notwithstanding
this decrease in operating earnings, operating margins improved from 6.9 percent
to 7.7 percent. The favorable trend in our year-over-year operating margin for
electrical products was the result of cost reduction activities including those
announced in the fourth quarter of 2001.
Full Year 2001, 2000 and 1999
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 11.0 percent decline in the electrical products
segment, which more than offset a slight increase in sales for the water systems
business. Sales in 2000 increased $177.6 million compared with 1999, with
approximately $190 million of the increase resulting from an additional seven
months of sales from the August 1999 acquisition of the MagneTek motor business,
and approximately $12 million in sales from our Chinese water heater operation.
These increases were partially offset by lower sales in our base electric motor
business.
24
Our 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 electrical products segment 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 motor business
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.
Selling, general and administrative 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. Selling, general and
administrative expense 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, selling, general and administrative expense has
been stable over the last three years.
We have significant pension benefit costs and credits we develop from
actuarial valuations. These valuations reflect key assumptions regarding, among
other things, discount rates, expected returns on plan assets, retirement ages
and years of service. We are required to consider current market conditions,
including changes in interest rates, in making these assumptions. Changes in
related pension costs or credits may occur in the future as a result of changes
affecting the assumptions. We recognized pension credits of $20.2, $17.7 and
$15.8 million in 2001, 2000, and 1999, respectively, reflected as offsets to
cost of products sold and selling, general and administrative expense. See Note
11 of notes to consolidated financial statements.
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 the MagneTek motor business.
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.
Our 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 in low-tax foreign jurisdictions. The rate increased in 2000 as a result
of fewer research tax credits as compared to 1999.
We 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 pre-tax special charge related primarily to the
restructuring of our electric motor operations, we recorded earnings of $20.5
million, or $.86 per share.
25
Operations by Segment
For the Three Months
For the Years Ended December 31, Ended March 31,
----------------------------------------------------------------------
1999 2000 2001 2001 2002
---- ---- ---- ---- ----
(In millions)
Net Sales:
Electrical products.................... $ 735.0 $ 902.4 $ 802.7 $ 226.2 $ 196.2
Water systems.......................... 335.3 345.5 348.5 92.0 175.7
---------- ---------- ---------- ---------- ----------
$ 1,070.3 $ 1,247.9 $ 1,151.2 $ 318.2 $ 371.9
========== ========== ========== ========== ==========
Operating Earnings:
Electrical products.................... $ 78.9 $ 75.5 $ 20.8 $ 14.0 $ 15.1
Water systems.......................... 33.8 34.9 39.2 9.9 13.6
---------- ---------- ---------- ---------- ----------
112.7 110.4 60.0 23.9 28.7
General, corporate and research and
development expenses................ (22.8) (23.2) (21.1) (5.6) (5.9)
Interest expense....................... (12.8) (22.1) (16.4) (4.8) (4.2)
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations
before income taxes................. $ 77.1 $ 65.1 $ 22.5 $ 13.5 $ 18.6
========== ========== ========== ========== ==========
Electrical Products
Sales in the electrical products segment in 2001 were $802.7 million, $99.7
million or 11.0 percent lower than 2000 sales of $902.4 million. Sales in 1999
were $735.0 million. Our HVAC-related business experienced the largest sales
decline of approximately $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 the MagneTek acquisition, sales in the base motor
business declined five percent in 2000 due mostly to a reduction in demand from
HVAC customers.
Operating earnings for our electrical products segment in 2001 were $28.9
million before special charges or $46.6 million lower than 2000 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, we announced a cost reduction program to
address challenging motor market conditions. The program consists of three major
elements. The first element 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 our 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 our operations in Juarez, Acuna, and Monterrey, Mexico. The third
element involved realignment of distribution activities into three hub
warehouses, thereby reducing cost and improving customer service, and has been
completed. We recognized a pre-tax charge of $8.1 million in the fourth quarter
of 2001, of which $0.8 million was spent as of December 31, 2001. We expect the
program to generate pre-tax savings of more than $16 million in 2002 and $20.0
to $25 million annually thereafter.
Water Systems
Sales for our water systems 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
26
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.
Operating earnings for our water systems segment in 2001 were $40.5 million
before special charges, reflecting a 16.0 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, we acquired all of the outstanding stock of State
Industries, a manufacturer of residential and standard commercial water heaters.
The acquisition nearly doubled the size of our existing water heater business
while complementing the existing wholesale distribution channel and adding a
strong presence in the retail market. We also expect 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, we recognized a special charge of $1.3 million in the fourth
quarter of 2001 for lease costs associated with moving the water systems segment
headquarters from Irving, Texas to Ashland City, Tennessee, State Industries'
headquarters. The move is intended to facilitate the integration of the two
businesses.
Liquidity and Capital Resources
First Quarter 2002 and 2001
Our working capital for continuing operations was $227.0 million at March
31, 2002, $7.2 million higher than at December 31, 2001. A sales-related
increase in accounts receivable of $27.8 million was partially offset by an
increase in accounts payable and a reduction in our other current assets account
as a result of receiving an expected $12.4 million tax refund in the first
quarter of 2002. Cash provided by our operations during the first quarter of
2002 was $22.9 million compared with $13.3 million cash used by our operations
during the same period one year ago. We had higher earnings and smaller
increases in working capital during the first quarter of 2002 compared with the
first quarter of 2001. Our capital expenditures during the first quarter of 2002
totaled $7.1 million, which was less than the $9.5 million spent in the first
quarter of 2001. We believe that our present facilities and planned capital
expenditures are sufficient to provide adequate capacity for our operations in
2002.
Our long-term debt decreased by $11.5 million from $390.4 million at
December 31, 2001 to $378.9 million at March 31, 2002. Our leverage as measured
by the ratio of total debt to total capitalization was 46 percent, down slightly
from the end of 2001. We did not enter into any significant operating leases
during the first quarter of 2002. We believe that the combination of available
borrowing capacity and operating cash flow will provide sufficient funds to
finance our existing operations for the foreseeable future. On April 9, 2002,
our board of directors declared a regular quarterly dividend at $.13 per share
on our common stock and class A common stock, which is payable on May 15, 2002
to stockholders of record on April 30, 2002.
Full Year 2001, 2000 and 1999
Our working capital for continuing operations at December 31, 2001 was
$219.8 million compared with $204.3 million and $207.3 million at December 31,
2000 and 1999, respectively. The increase in our working capital in 2001 was due
to the December 28, 2001 acquisition of State Industries. The modest decline in
our working capital in 2000 was due to lower accounts receivable resulting from
weaker HVAC markets.
27
Our 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 our electrical products segment. We are projecting
2002 capital expenditures of approximately $45 million, an increase over 2001
primarily due to the acquisition of State Industries. The level of 2002 capital
expenditures is expected to be marginally lower than 2002 depreciation expense.
Our cash flow during 2002 is expected to adequately cover projected capital
expenditures.
On June 8, 2001, we 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 our acquisition of State Industries,
long-term debt increased $74.0 million from $316.4 million at December 31, 2000,
to $390.4 million at December 31, 2001. Our leverage as measured by the ratio of
total debt to total capitalization was 47.4 percent at December 31, 2001,
compared with 42.2 percent at the end of 2000. Excluding potential acquisitions,
we expect 2002 cash flow to result in a year-end leverage ratio of approximately
43 percent, closer to our long-term target of 40 percent.
We expect to have adequate liquidity in 2002 as we have a minimal amount of
long-term debt maturing during 2002. In addition, we have 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 we expect to support
any short-term borrowing needs. At December 31, 2001, we had available borrowing
capacity of $79.5 million under our credit facilities. For information about our
contractual cash obligations for indebtedness, capital leases, operating leases,
and related obligations as of December 31, 2001, see Note 8 of notes to
consolidated financial statements.
In connection with the acquisition of State Industries in December 2001, we
recorded additional purchase liabilities of approximately $3.9 million
associated with employee severance costs. In addition, we recorded purchase
liabilities of $17.9 million in 1999 associated with the MagneTek motor business
acquisition, which included employee severance and relocation, as well as
certain facility costs. We expect that the balance of MagneTek purchase
liabilities of $6.5 million at December 31, 2001 will 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 consolidated financial statements. We expect 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.
We have paid dividends for 62 consecutive years. We paid total dividends of
$.52 per share in 2001 compared with $.50 per share in 2000.
Critical Accounting Policies
Our accounting policies are more fully described in Note 1 of notes to
consolidated financial statements. As disclosed in Note 1 of notes to
consolidated financial statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and
28
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
The most significant accounting estimates inherent in the preparation of
our financial statements include estimates associated with the evaluation of the
recoverability of certain assets including goodwill and receivables resulting
from the payment of claims associated with the dip tube class action lawsuit
(see Note 13 of notes to consolidated financial statements) as well as those
estimates used in the determination of liabilities related to warranty activity,
litigation, product liability, environmental matters and pensions and other
post-retirement benefits. Various assumptions and other factors underlie the
determination of these significant estimates. The process of determining
significant estimates is fact specific and takes into account factors such as
historical experience, product mix, and in some cases, actuarial techniques. We
constantly reevaluate these significant factors and make adjustments where facts
and circumstances dictate. Historically, actual results have not significantly
deviated from those determined using the estimates described above.
OTHER MATTERS
Environmental
Our 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 us or third parties. We have expended financial and managerial
resources to comply 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 we believe that our operations are substantially in
compliance with such laws, and we have procedures designed to maintain
compliance, we cannot provide any assurance that substantial additional costs
for compliance will not be incurred in the future.
Market Risk
We are exposed to various types of market risks, primarily currencies and
certain commodities. We monitor our risks in these areas on a continuous basis
and generally enter into forward and futures contracts to minimize these
exposures for periods of less than one year. We do not engage in speculation in
our derivative strategies. Further discussion regarding derivative instruments
is contained in Note 1 of notes to consolidated financial statements.
Our commodity risks include raw material price fluctuations. We use futures
contracts to fix the cost of our 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, we 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. Any gains and losses
from our futures contract activities will be offset by gains and losses in the
underlying commodity purchase transactions being hedged.
In addition, we enter into foreign currency forward contracts to minimize
the effect of fluctuating foreign currencies. At December 31, 2001, we had net
foreign currency contracts outstanding of $81 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.
Any gains and losses from our forward contract activities will be offset by
gains and losses in the underlying transactions being hedged.
Our 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, we had $260 million in
outstanding floating-rate debt with a weighted-average interest rate of 2.3
percent at year-end. A
29
hypothetical 10 percent annual increase or decrease in the year-end average cost
of our company's outstanding floating-rate debt would result in a change in
annual pre-tax interest expense of $0.6 million.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS 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 acquisitions of
State Industries and Shenzhen Speeda will not be amortized. See Note 2 of notes
to consolidated financial statements. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, we have applied the new accounting
standards effective January 1, 2002. We have assessed the recoverability of our
goodwill and intangible assets and have concluded that there is no impairment in
value of these assets. All of the goodwill amortization of $6.6 million in 2001
will be eliminated as a charge to operations in 2002.
Additionally, the FASB has issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 143 will become effective for us on
January 1, 2003. Adoption of this statement is not expected to have a material
impact on our consolidated financial statements. SFAS No. 144, which we adopted
on January 1, 2002, has not had a material impact on our consolidated financial
statements since its adoption.
Discontinued Operations
On January 21, 2000, we announced the decision to exit the storage and
fluid handling markets, consistent with our strategy to expand our presence in
electrical products and water systems. On December 8, 2000, we sold our fluid
handling business, Smith Fiberglass Products Company, to Varco International
Corporation. On January 10, 2001, we sold substantially all of the assets of the
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 the automotive structural
components business in April 1997. See Note 3 of notes to consolidated financial
statements.
30
MANAGEMENT AND BOARD OF DIRECTORS
The following table sets forth information as of April 12, 2002, concerning
our directors and certain executive officers. All of our officers serve terms of
one year and until their successors are elected and qualified. Our board of
directors currently includes eight members, with two directors elected by
holders of common stock and six elected by holders of class A common stock and
all directors serving terms of one year and until their successors are elected
and qualified.
Name Age Position Background
- ---- --- -------- ----------
Robert J. O'Toole......... 61 Chairman, President, Elected Chairman in 1992; Chief Executive Officer since
and Chief Executive 1989; President since 1986; joined A. O. Smith in 1963
Officer
Kenneth W. Krueger........ 45 Senior Vice President Elected Senior Vice President and Chief Financial
and Chief Financial in August 2000; previously employed by Eaton
Officer Corporation as Group Vice President, Finance and
Business Planning; Vice President, Finance at
Rockwell Automation, where he worked from 1983 to 1999
Donald M. Heinrich........ 49 Senior Vice President Elected Senior Vice President in July 2001; President of
and President, A. O. A. O. Smith Electrical Products Company since July 2001;
Smith Electrical joined A. O. Smith Electrical Products Company in
Products Company January 2000, as Senior Vice President-Operations;
served as President of Smith Fiberglass Products Company
from November 1997 through January 2000; joined A. O.
Smith in October 1992 as Vice President-Business
Development
Ronald E. Massa........... 52 Senior Vice President Named President of A. O. Smith Water Products Company in
and President, A. O. February 1999; elected Senior Vice President in June
Smith Water Products 1997; served as President of A. O. Smith Automotive
Company Products Company from June 1996 to April 1997; served as
President of A. O. Smith Water Products Company from
1995 to June 1996; held other management positions in
the A. O. Smith Water Products Company prior thereto;
joined A. O. Smith in 1976
Glen R. Bomberger......... 64 Director Elected a Director in 1986; Executive Vice President
from 1986 through April 2001; Chief Financial Officer
from 1986 to 2000; joined A. O. Smith in 1960; Director
of Smith Investment Company
Ronald D. Brown........... 48 Director Elected a Director in 2001; named Chairman, President
and Chief Executive Officer of Milacron Inc. in June
2001; served as President and Chief Operating Officer of
Milacron Inc. since September 1999; on Milacron Inc.'s
Board of Directors since November 1999; served as Chief
Financial Officer of Milacron Inc. from 1993 through
1999; joined Milacron Inc. in 1980
William F. Buehler........ 62 Director Elected a Director in 1998; Vice Chairman of the Board
of Directors and President - Industry Solutions
Operations of Xerox Corporation from April 1999 through
2000; joined Xerox Corporation in 1991 as Executive Vice
President and Chief Staff Officer; prior to joining
Xerox, spent 27 years with AT&T Corporation; Director of
Quest Diagnostics
31
Name Age Position Background
- ---- --- -------- ----------
Kathleen J. Hempel........ 51 Director Elected a Director in 1998; Vice Chairman and Chief
Financial Officer of Fort Howard Corporation from 1992
until its merger into Fort James Corporation in 1997;
joined Fort Howard Corporation in 1973; Director of
Oshkosh Truck Corporation, Whirlpool Corporation,
Kennametal Corporation, Actuant Corporation, and Visteon
Corporation
Dr. Agnar Pytte........... 69 Director Elected a Director in 1991; became president of Case
Western Reserve University in July 1987 and retired in June
1999; prior to July 1987, was the Provost at Dartmouth
College where he held other academic positions since
1958; currently Adjunct Professor at Dartmouth College;
Director of The Goodyear Tire & Rubber Company
Bruce M. Smith............ 53 Director Elected a Director in 1995; elected Chairman and Chief
Executive Officer of Smith Investment Company in January
1999; elected President of Smith Investment Company in
1993; Executive Vice President of A. O. Smith Water
Products Company from 1991 through June 1993; Managing
Director of A. O. Smith Electric Motors (Ireland) Ltd.
from 1988 to 1991; joined A. O. Smith in 1978; Director
of Smith Investment Company
Mark D. Smith............. 40 Director Elected a Director in 2001; served as a Product Business
Manager for Strattec Security Corporation since 1997;
Operations Manager of A. O. Smith Automotive Products
Company from 1994 to 1997
32
DESCRIPTION OF CAPITAL STOCK
Our restated certificate of incorporation provides that we have authority
to issue 60,000,000 shares of common stock, 14,000,000 shares of class A common
stock, and 3,000,000 shares of preferred stock. As of March 31, 2002, we had
15,218,012 shares of common stock issued and outstanding, 8,638,989 shares of
class A common stock issued and outstanding and no shares of preferred stock
issued and outstanding. All of the outstanding shares are fully paid and
nonassessable, and the shares of common stock being sold by us will, upon
completion of this offering, be fully paid and nonassessable.
The following summary of some provisions of our common stock, class A
common stock, and preferred stock is not complete. You should refer to our
restated certificate of incorporation, which is incorporated by reference as an
exhibit to the registration statement of which this prospectus is a part, and
applicable law for more information.
Common Stock and Class A Common Stock
Dividends. The holders of shares of our class A common stock and our common
stock are entitled to receive dividends, including dividends of our stock, as
and when declared by our board of directors, subject to any limitations
applicable by law and to the rights of the holders, if any, of our preferred
stock. Whenever we pay any dividends, other than dividends of our stock, on our
class A common stock, each share of common stock is entitled to receive a
dividend at least equal to the dividend paid per share on our class A common
stock. We may pay dividends, other than dividends of our stock, to holders of
common stock in excess of dividends paid, or without paying dividends, to
holders of class A common stock.
Voting Rights. Currently, and immediately following the offering, holders
of our common stock, voting as a separate class, have the right to elect or
remove 25 percent of our entire board of directors, rounded to the nearest whole
number of directors. Currently, and immediately following the offering, holders
of our class A common stock are entitled to elect the remaining directors,
subject to any rights granted to holders of any series of preferred stock.
Except as may be required by law and in connection with some significant
actions, such as mergers, consolidations, or amendments to our restated
certificate of incorporation that affect the rights of stockholders, holders of
our common stock and our class A common stock will vote together as a single
class, except that the holders of class A common stock will have one vote per
share and the holders of common stock will have one-tenth vote per share.
Conversion. Each share of our class A common stock is convertible into one
share of our common stock at any time at the holder's option.
Other Terms. None of our stockholders have preemptive or other rights to
subscribe for, purchase, or receive any additional securities. No class of
common stock is subject to redemption.
Transfer Agent. The transfer agent for our common stock is Wells Fargo Bank
Minnesota, N.A. Shareholder Services.
Preferred Stock
Our restated certificate of incorporation authorizes our board of directors
to issue our preferred stock in series and to determine and fix the rights,
preferences, and limitations of any series and the relative variations between
series with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be redeemed, the amount payable in the event of
our voluntary or involuntary liquidation, the terms of any sinking fund
provisions or redemption or repurchase of shares, the terms and conditions for
conversion into any other class or series of our stock, and voting rights.
33
The issuance of any series of our preferred stock may have an adverse
effect on the rights of holders of our common stock and could decrease the
amount of earnings and assets available for distribution to holders of our
common stock. In addition, any issuance of our preferred stock could have the
effect of delaying, deferring, or preventing a change in control of our company.
Supermajority Voting Provisions
Under our restated certificate of incorporation, the following
extraordinary corporate actions require approval by a vote of two-thirds of the
total number of votes represented by the outstanding shares entitled to vote
thereon:
o any plan of merger or consolidation other than a plan of merger or
consolidation with or into any of our subsidiaries of which we own at least
90 percent of the outstanding capital stock
o any sale, lease, exchange, or other disposition of all or substantially all
of our assets, if not made in the ordinary course of our business
o any amendment to our restated certificate of incorporation that changes the
supermajority voting requirements discussed above
These supermajority voting requirements could have the effect of delaying,
deferring, or preventing a change of control of our company.
34
UNDERWRITING
Under an underwriting agreement dated ___________, 2002, we have agreed to
sell to the underwriters named below the indicated numbers of shares of our
common stock:
Number
Underwriter of Shares
- ----------- ---------
Robert W. Baird & Co. Incorporated.......................
Banc of America Securities LLC...........................
Bear, Stearns & Co. Inc.................................. -------------
Total............................................. 3,500,000
=============
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of our common stock in the offering if any are
purchased, other than those shares covered by the over-allotment option we
describe below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a
pro-rata basis up to 525,000 additional shares from us at the public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of our common stock.
The underwriters propose to offer the shares of our common stock initially
at the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of up to $_________ per
share. The underwriters and selling group members may allow a discount of
$________ per share on sales to other broker/dealers. After the offering, the
underwriters may change the public offering price and concession and discount to
broker/dealers. As used in this section:
o Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the underwriters are the three
firms acting on behalf of the underwriters.
o Selling group members are securities broker/dealers to whom the
underwriters may sell shares of our common stock at the public offering
price less the selling concession above, but who do not have a contractual
commitment to purchase shares from us.
o Broker/dealers are firms registered under applicable securities laws to
sell securities to the public.
The following table summarizes the compensation and estimated expenses we
will pay. The compensation we will pay to the underwriters will consist solely
of the underwriting discount, which is equal to the public offering price per
share of common stock less the amount the underwriters pay to us per share of
common stock. The underwriters have not received and will not receive from us
any other item of compensation or expense in connection with this offering
considered by the National Association of Securities Dealers, Inc. to be
underwriting compensation under its rules of fair practice.
Per Share Total
-------------------------------- ---------------------------------
Without With Without With
over-allotment over-allotment over-allotment over-allotment
-------------- -------------- -------------- --------------
Underwriting discounts and
commissions paid by us........ $ $ $ $
Expenses payable by us.......... $ $ $ $
35
We have agreed to pay all of the expenses in connection with this offering.
The principal components of the offering expenses payable by us will include the
fees and expenses of our accountants and attorneys, the fees of our registrar
and transfer agent, the cost of printing this prospectus, and filing fees paid
to the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc.
We and our directors and key officers have agreed not to offer, sell,
transfer, pledge, contract to sell, transfer or pledge, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act of 1933, as amended, relating to any additional shares of our common stock
or securities convertible into or exchangeable or exercisable for any of shares
of our common stock without the prior written consent of Robert W. Baird & Co.
Incorporated for a period of 90 days after the date of this prospectus, except
that these restrictions will not apply to our ability to grant employee or
director stock options under the terms of stock option plans in effect on the
date of this prospectus or to issue our common stock upon any exercise of these
options. The restrictions will also not apply to transfers by our directors and
key officers by gift, will, or intestacy so long as the transferee agrees not to
make further transfers of the shares during the 90-day period.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, as amended, or to contribute to payments that the
underwriters may be required to make in that respect.
Some of the underwriters and their affiliates have provided, and may
provide in the future, advisory and investment banking services to us, for which
they have received and would receive customary compensation.
The underwriters may engage in over-allotment transactions, stabilizing
transactions, and syndicate covering transactions in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended.
o Stabilizing transactions permit bids to purchase shares of our common
stock so long as the stabilizing bids do not exceed a specified
maximum.
o Over-allotment involves sales by the underwriters of shares in excess
of the number of shares the underwriters are obligated to purchase,
which creates a syndicate short position.
o Syndicate covering transactions involve purchases of our common stock
in the open market after the distribution has been completed to cover
syndicate short positions.
These stabilizing transactions and syndicate covering transactions may
cause the price of our common stock to be higher than the price that might
otherwise exist in the open market. These transactions may be effected on the
New York Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.
36
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements, and other
information with the Securities and Exchange Commission, or SEC. We have also
filed a registration statement on Form S-3, including exhibits, under the
Securities Act of 1933 with respect to the common stock offered by this
prospectus. This prospectus is a part of the registration statement, but does
not contain all of the information included in the registration statement or the
exhibits. You may read and copy the registration statement and any other
document that we file at the SEC's public reference rooms at 450 Fifth Street,
N.W., Washington D.C., and at regional SEC offices in New York, New York and
Chicago, Illinois. You can call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. You can also find
our public filings with the SEC on the Internet at a web site maintained by the
SEC located at http://www.sec.gov. Our common stock is listed on the New York
Stock Exchange and reports, proxy statements and other information concerning us
can be inspected at the New York Stock Exchange located at 11 Wall Street, New
York, New York 10005.
INCORPORATION OF INFORMATION BY REFERENCE
We are "incorporating by reference" specified documents that we file with
the SEC, which means:
o incorporated documents are considered part of this prospectus
o we are disclosing important information to you by referring you to those
documents; and
o information we file with the SEC will automatically update and supersede
information contained in this prospectus
We incorporate by reference the documents we list below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this prospectus and before the
end of the offering of our common stock:
o our Annual Report on Form 10-K for the year ended December 31, 2001
o our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
o our Current Reports on Form 8-K dated December 28, 2001, as amended, and
April 12, 2002
o the description of our common stock contained in our Registration Statement
on Form 8-A, filed with the SEC on December 9, 1994, including any
amendment or report filed for the purpose of updating such description
You may request a copy of any of these filings, at no cost, by writing to
Craig Watson, Director Public Relations, A. O. Smith Corporation, P.O. Box
245008, Milwaukee, Wisconsin 53224-9508, or by calling Mr. Watson at (414)
359-4000.
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for us by Foley & Lardner, Milwaukee, Wisconsin. Some legal
matters will be passed upon for the underwriters by Michael Best & Friedrich
LLP, Madison, Wisconsin. Jere D. McGaffey, a partner in the law firm of Foley &
Lardner, is a director of our controlling stockholder, Smith Investment Company,
and he is a co-trustee of trusts in which he has no beneficial interest that own
approximately 60% of the capital stock of Smith Investment Company.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 2001, and for each of the three
years in the period ended December 31, 2001, as set forth in their report
appearing in this prospectus and registration statement. Ernst & Young LLP also
audited
37
the financial statement schedule incorporated by reference from our Annual
Report on Form 10-K for the year ended December 31, 2001. We have included our
financial statements in the prospectus and elsewhere in the registration
statement and incorporated our financial statement schedule in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
Lattimore Black Morgan & Cain, PC, independent public accountants, have
audited the financial statements of State Industries as set forth in their
report incorporated by reference in this prospectus and registration statement
from our Current Report on Form 8-K filed with the SEC on December 28, 2001, as
amended on March 12, 2002. We have incorporated by reference the financial
statements of State Industries in this prospectus and registration statement in
reliance on Lattimore Black Morgan & Cain, PC's report, given on their authority
as experts in accounting and auditing.
38
INDEX TO HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS
Page
Consolidated Financial Statements ----
- ---------------------------------
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Consolidated Balance Sheets for the Years Ended December 31, 2000
and 2001........................................................... F-3
Consolidated Statement of Earnings for the Years Ended December 31,
1999, 2000 and 2001................................................ F-4
Consolidated Statement of Comprehensive Earnings for the Years
Ended December 31, 1999, 2000 and 2001............................. F-4
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001................................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 1999, 2000 and 2001............................. F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
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. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements 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.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 16, 2002
F-2
CONSOLIDATED BALANCE SHEETS
December 31 (dollars in thousands)
- --------------------------------------------------------------------------------------------------------
2000 2001
- --------------------------------------------------------------------------------------------------------
Assets
------------------------------------
Current Assets
Cash and cash equivalents $ 15,287 $ 20,759
Receivables 169,117 209,871
Inventories 169,630 194,706
Deferred income taxes 12,907 22,403
Other current assets 7,789 28,039
Net current assets - discontinued operations 22,651 1,796
------------- -------------
Total Current Assets 397,381 477,574
Net property, plant, and equipment 282,835 355,298
Net goodwill and other intangibles 244,821 301,924
Prepaid pension 81,958 103,272
Other assets 40,380 55,855
Net long-term assets - discontinued operations 17,493 -
------------- -------------
Total Assets $ 1,064,868 $ 1,293,923
============= =============
Liabilities
- --------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ - $ 3,280
Trade payables 91,780 131,073
Accrued payroll and benefits 27,388 29,525
Accrued liabilities 26,865 58,443
Product warranty 11,574 19,470
Income taxes 1,695 887
Long-term debt due within one year 11,129 13,272
------------- -------------
Total Current Liabilities 170,431 255,950
Long-term debt 316,372 390,385
Product warranty 17,631 50,162
Post-retirement benefit obligation 18,012 17,073
Deferred income taxes 67,814 62,154
Other liabilities 26,213 66,321
------------- -------------
Total Liabilities 616,473 842,045
Commitments and contingencies (Notes 8 and 13)
Stockholders' Equity
- --------------------------------------------------------------------------------------------------------
Preferred Stock - -
Class A Common Stock (shares issued 8,722,720 and 8,686,484) 43,614 43,432
Common Stock (shares issued 23,826,642 and 23,862,878) 23,827 23,863
Capital in excess of par value 53,521 54,785
Retained earnings 549,237 551,420
Accumulated other comprehensive loss (5,438) (6,858)
Treasury stock at cost (216,366) (214,764)
------------- -------------
Total Stockholders' Equity 448,395 451,878
------------- -------------
Total Liabilities and Stockholders' Equity $ 1,064,868 $ 1,293,923
============= =============
See accompanying notes which are an integral part of these statements.
F-3
CONSOLIDATED STATEMENT OF EARNINGS
Years ended December 31 (dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------
1999 2000 2001
- --------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Net sales $ 1,070,339 $ 1,247,945 $ 1,151,156
Cost of products sold 839,572 999,821 948,815
------------- ------------- -------------
Gross profit 230,767 248,124 202,341
Selling, general, and administrative expenses 136,304 153,695 145,742
Interest expense 12,821 22,102 16,418
Amortization of intangibles 5,162 6,932 6,956
Restructuring and other charges - - 9,368
Other (income) expense - net (612) 307 1,371
------------- ------------- -------------
77,092 65,088 22,486
Provision for income taxes 26,822 23,432 7,984
------------- ------------- -------------
Earnings from Continuing Operations 50,270 41,656 14,502
Discontinued Operations
Loss from discontinued operations less related income
tax benefit 1999 - $5,017, and 2000 - $7,772 (7,848) (11,903) -
------------- ------------- -------------
Net Earnings $ 42,422 $ 29,753 $ 14,502
============= ============= =============
Basic Earnings (Loss) Per Share of Common Stock
Continuing Operations $ 2.17 $ 1.78 $ 0.61
Discontinued Operations (.34) (.51) -
-------- --------- ---------
Net Earnings $ 1.83 $ 1.27 $ 0.61
======== ========= =========
Diluted Earnings (Loss) Per Share of Common Stock
Continuing Operations $ 2.11 $ 1.76 $ 0.61
Discontinued Operations (.33) (.50) -
-------- --------- ---------
Net Earnings $ 1.78 $ 1.26 $ 0.61
======== ========= =========
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
Years ended December 31 (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
1999 2000 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 42,422 $ 29,753 $ 14,502
Other comprehensive earnings (loss)
Foreign currency translation adjustments (1,750) (2,200) (981)
Unrealized net loss on cash flow derivative instruments
less related income tax benefit of $287 - - (439)
------------- ------------- -------------
Comprehensive Earnings $ 40,672 $ 27,553 $ 13,082
============= ============= =============
See accompanying notes which are an integral part of these statements.
F-4
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
1999 2000 2001
- --------------------------------------------------------------------------------------------------------------------------
Continuing
Operating Activities
Earnings from continuing operations $ 50,270 $ 41,656 $ 14,502
Adjustments to reconcile earnings from
continuing operations to cash provided by
operating activities:
Depreciation 30,769 36,582 38,485
Amortization 6,546 8,477 8,591
Net change in current assets and liabilities (24,929) 3,563 11,175
Net change in noncurrent assets and
liabilities (13,930) (15,343) (22,667)
Other (911) 241 (258)
------------- ------------- -------------
Cash Provided by Operating Activities 47,815 75,176 49,828
Investing Activities
Acquisition of businesses (244,592) - (117,988)
Capital expenditures (32,807) (40,516) (35,318)
------------- ------------- -------------
Cash Used in Investing Activities (277,399) (40,516) (153,306)
Financing Activities
Long-term debt incurred 229,677 - 90,565
Long-term debt retired (4,629) (33,379) (11,129)
Purchase of treasury stock (2,773) - -
Net proceeds from common stock and option
activity 1,149 816 1,407
Dividends paid (11,172) (11,720) (12,319)
------------- ------------- -------------
Cash Provided by (Used in) Financing Activities 212,252 (44,283) 68,524
Cash Flow Provided by (Used in) Discontinued Operations (5,573) 10,149 40,426
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents (22,905) 526 5,472
Cash and cash equivalents--beginning of year 37,666 14,761 15,287
------------- ------------- -------------
Cash and Cash Equivalents-End of Year $ 14,761 $ 15,287 $ 20,759
============= ============= =============
See accompanying notes which are an integral part of these statements.
F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31 (dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------
Class A Common Stock
Balance at beginning of year $ 43,688 $ 43,615 $ 43,614
Conversion of Class A Common Stock (73) (1) (182)
------------- ------------- -------------
Balance at end of year $ 43,615 $ 43,614 $ 43,432
------------- ------------- -------------
Common Stock
Balance at beginning of year $ 23,812 $ 23,826 $ 23,827
Conversion of Class A Common Stock 14 1 36
------------- ------------- -------------
Balance at end of year $ 23,826 $ 23,827 $ 23,863
------------- ------------- -------------
Capital in Excess of Par Value
Balance at beginning of year $ 51,121 $ 53,026 $ 53,521
Conversion of Class A Common Stock 59 - 146
Exercise of stock options (182) (84) (116)
Tax benefit from exercise of stock options 1,797 404 1,114
Stock incentives and directors' compensation 231 175 120
------------- ------------- -------------
Balance at end of year $ 53,026 $ 53,521 $ 54,785
------------- ------------- -------------
Retained Earnings
Balance at beginning of year $ 499,954 $ 531,204 $ 549,237
Net earnings 42,422 29,753 14,502
Cash dividends on common stock (11,172) (11,720) (12,319)
------------- ------------- -------------
Balance at end of year $ 531,204 $ 549,237 $ 551,420
------------- ------------- -------------
Accumulated Other Comprehensive Loss
Balance at beginning of year $ (1,488) $ (3,238) $ (5,438)
Foreign currency translation adjustments (1,750) (2,200) (981)
Unrealized net loss on cash flow derivative
instruments less related income tax benefit of $287 - - (439)
------------- ------------- -------------
Balance at end of year $ (3,238) $ (5,438) $ (6,858)
------------- ------------- -------------
Treasury Stock
Balance at beginning of year $ (215,994) $ (217,349) $ (216,366)
Purchase of treasury stock (2,773) - -
Exercise of stock options 1,330 901 1,524
Stock incentives and directors' compensation 88 82 78
------------- ------------- -------------
Balance at end of year $ (217,349) $ (216,366) $ (214,764)
------------- ------------- -------------
Total Stockholders' Equity $ 431,084 $ 448,395 $ 451,878
============= ============= =============
See accompanying notes which are an integral part of these statements.
F-6
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 (AC), direct current (DC) 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, 2000 and 2001, due to
the short maturities of these instruments. The carrying amount of long-term debt
approximated fair value as of December 31, 2000 and 2001, 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 90 percent and 93 percent of the company's
total inventory at December 31, 2000 and 2001, 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.
F-7
1. Organization and Significant Accounting Policies (continued)
December 31 (dollars in thousands) 2000 2001
- -------------------------------------------------------------------------------
Goodwill, at cost $ 248,925 $ 309,094
Other intangibles, at cost 11,424 15,314
------------ ------------
260,349 324,408
Less accumulated amortization 15,528 22,484
------------ ------------
$ 244,821 $ 301,924
============ ============
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.
F-8
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) 2000 2001
- --------------------------------------------------------------------------------
Buy Sell Buy Sell
--------------------------------------------
Euro $ 12,400 $ 1,840 $ 3,900 $ 1,560
British pound 1,515 1,532 2,824 1,525
Hungarian forint 3,135 - 3,394 -
Mexican peso 64,901 - 74,279 -
-------- -------- -------- -------
Total $ 81,951 $ 3,372 $ 84,397 $ 3,085
======== ======== ======== =======
The forward contracts in place at December 31, 2000 and 2001, amounted to
approximately 75 percent and 85 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 second quarter of 2000 and the fourth quarter of
2001, 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 $2.3 and $1.6 million in
2000 and 2001, 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 $23.9, $24.5, and $27.6 million for
continuing operations during 1999, 2000, and 2001, 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.
F-9
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:
1999 2000 2001
- -------------------------------------------------------------------------------------------------
Denominator for basic earnings per share - weighted- 23,220,813 23,396,210 23,648,136
average shares
Effect of dilutive stock options 566,540 294,932 266,646
---------- ---------- ----------
Denominator for diluted earnings per share 23,787,353 23,691,142 23,914,782
========== ========== ==========
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 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.
F-10
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) 2000 2001
- -----------------------------------------------------------------------------
Net sales $ 1,572,617 $ 1,467,261
Earnings from continuing operations 33,572 17,604
Earnings per share:
Basic 1.43 .74
Diluted 1.42 .74
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 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 Electrical Products 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.
F-11
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 $118.6 and $129.3 million in 1999 and 2000, 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) 1999 2000
- ------------------------------------------------------------------------------
Earnings (loss) from operations:
Smith Fiberglass Products Company $ (4,355) $ -
Engineered Storage Products Company 3,465 3,139
Loss on disposition:
Smith Fiberglass Products Company (6,958) (9,032)
Engineered Storage Products Company - (1,993)
Automotive Products Company - (4,017)
--------- --------
Net after-tax loss from discontinued operations $ (7,848) $(11,903)
========= ========
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.
F-12
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) 2000 2001
- ------------------------------------------------------------------------------
Receivables $ 25,915 $ 264
Inventories 4,138 -
Other current assets 8,737 7,371
Trade payables (3,090) -
Accrued payroll and benefits (2,908) -
Other current liabilities (10,141) (5,839)
------------ ------------
Net current assets $ 22,651 $ 1,796
============ ============
Net property, plant, and equipment $ 18,266 $ -
Other assets 5,130 -
Long-term liabilities (5,903) (2,078)
------------ ------------
Net long-term assets (liabilities) $ 17,493 $ (2,078)
============ ============
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) 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------
Net change in current assets and liabilities:
Receivables $ (7,726) $ 10,278 $ 16,159
Inventories (20,158) (6,187) 6,983
Other current assets 393 (377) 163
Trade payables 6,654 10,559 7,265
Accrued liabilities, including payroll and benefits (1,979) (3,091) (8,984)
Income taxes (2,113) (7,619) (10,411)
---------- ---------- ---------
$ (24,929) $ 3,563 $ 11,175
========== ========== =========
F-13
6. Inventories
December 31 (dollars in thousands) 2000 2001
- --------------------------------------------------------------------------------
Finished products $ 109,702 $ 120,231
Work in progress 37,186 40,210
Raw materials 41,051 58,375
------------ ------------
Inventories, at FIFO cost 187,939 218,816
Allowance to state inventories at LIFO cost 18,309 24,110
------------ ------------
$ 169,630 $ 194,706
============ ============
7. Property, Plant, and Equipment
December 31 (dollars in thousands) 2000 2001
- --------------------------------------------------------------------------------
Land $ 6,690 $ 9,408
Buildings 99,888 136,189
Equipment 435,440 491,906
------------ ------------
542,018 637,503
Less accumulated depreciation 259,183 282,205
------------ ------------
$ 282,835 $ 355,298
============ ============
8. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands) 2000 2001
- ---------------------------------------------------------------------------------------------------
Bank credit lines, average year-end interest rate of 6.6 $ 37,770 $ 25,596
percent for 2000 and 4.5 percent for 2001
Commercial paper, average year-end interest rate of 7.1
percent for 2000 and 2.3 percent for 2001 124,945 104,404
Revolver borrowings, average year-end interest rate of
7.2 percent for 2000 and 2.3 percent for 2001 50,000 120,000
Term notes with insurance companies, expiring
through 2018, average year-end interest rate of 7.0
percent for 2000 and 7.1 percent for 2001 102,286 141,157
Other notes, expiring through 2012, average year-end
interest rate of 4.5 percent for 2000 and 3.2 percent
for 2001 12,500 12,500
------------ ------------
327,501 403,657
Less amount due within one year 11,129 13,272
------------ ------------
$ 316,372 $ 390,385
============ ============
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 percent.
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.
F-14
8. Long-Term Debt and Lease Commitments (continued)
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 $15.3, $18.3, and $19.0 million in 1999, 2000, and 2001,
respectively.
Interest paid by the company for continuing and discontinued operations, was
$13.8, $24.6, and $16.9 million in 1999, 2000, and 2001, 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 1999, 2000, and 2001, 14,655, 200, and 36,236 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 $.48, $.50, and $.52 per share
in 1999, 2000, and 2001, 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, 2000, 32,595 and 8,967,312 shares of Class A
Common Stock and Common Stock, respectively, were held as treasury stock. 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.
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.
F-15
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 1999 2000 2001
------------ ---- ---- ----
Outstanding at beginning of year $12.87 2,022,900 1,979,800 2,448,500
Granted
1999--$29.03 per share 173,900
2000--$13.56 to $16.28 per share 632,000
2001--$15.14 per share 15.14 510,700
Exercised
1999--$4.67 to $16.67 per share (217,000)
2000--$4.67 to $16.33 per share (141,600)
2001--$5.63 to $16.33 per share 6.24 (225,600)
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 1,979,800 2,448,500 2,733,600
============ ============ ============
Exercisable at end of year 17.44 1,805,900 1,816,500 2,222,900
============ ============ ============
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.
F-16
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) 1999 2000 2001
- -------------------------------------------------------------------------------
Earnings:
As reported $ 50,270 $ 41,656 $ 14,502
Pro forma 49,311 40,330 12,727
Earnings per share:
As reported:
Basic $ 2.17 $ 1.78 $ 0.61
Diluted 2.11 1.76 0.61
Pro forma:
Basic 2.12 1.72 0.54
Diluted 2.07 1.70 0.53
The weighted-average fair value per option at the date of grant during 1999,
2000, and 2001 using the Black-Scholes option-pricing model, was $9.58, $4.73,
and $5.30, respectively. Assumptions were as follows:
1999 2000 2001
- -------------------------------------------------------------------------------
Expected life (years) 4.0 5.0 6.0
Risk-free interest rate 6.5% 5.0% 4.7%
Dividend yield 2.1% 2.2% 2.3%
Expected volatility 38.6% 39.9% 37.9%
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.
F-17
11. Pension and Other Post-retirement Benefits (continued)
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.
Pension Benefits Post-retirement Benefits
--------------------------------- --------------------------------
Years ended December 31 (dollars in thousands) 2000 2001 2000 2001
- -------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligation at beginning of year $ (530,658) $ (561,771) $ (17,477) $ (17,177)
ESPP benefit obligation at beginning of year - (6,963) - -
Service cost (6,631) (5,900) (271) (258)
Interest cost (40,926) (41,579) (1,267) (1,227)
Participant contributions - - (264) (387)
Plan amendments - (542) - -
Actuarial gains (losses) including assumption changes (23,084) (15,759) 79 2
Acquisition - (64,642) - -
Benefits paid 39,528 46,669 2,023 2,592
------------ ------------ ------------ ------------
Benefit obligation at end of year $ (561,771) $ (650,487) $ (17,177) $ (16,455)
============ ============ ============ ============
Change in plan assets
Fair value of plan assets at beginning of year $ 755,487 $ 737,119 $ - $ -
Actual return on plan assets 21,160 (35,967) - -
Contribution by the company - 946 1,759 2,205
Participant contributions - - 264 387
Acquisition - 48,899 - -
Benefits paid (39,528) (46,669) (2,023) (2,592)
------------ ------------ ------------ ------------
Fair value of plan assets at end of year $ 737,119 $ 704,328 $ - $ -
============ ============ ============ ============
Funded status $ 175,348 $ 53,841 $ (17,177) $ (16,455)
Unrecognized net actuarial loss (gain) (97,503) 22,290 (1,845) (1,781)
Unrecognized net transition asset (499) - - -
Unrecognized prior service cost (credit) 4,612 7,780 (677) (525)
------------ ------------ ------------ ------------
Net amount recognized $ 81,958 $ 83,911 $ (19,699) $ (18,761)
============ ============ ============ ============
Amounts recognized in the statement of financial
position consist of:
Prepaid pension asset $ 81,958 $ 103,272 $ - $ -
Accrued benefit liability - (19,361) (1,687) (1,688)
Post-retirement benefit obligation - - (18,012) (17,073)
------------ ------------ ------------ ------------
Net amount recognized $ 81,958 $ 83,911 $ (19,699) $ (18,761)
============ ============ ============ ============
Weighted-average assumptions as of December 31
Discount rate 7.50% 7.25% 7.50% 7.25%
Expected return on plan assets 10.25% 10.00% n/a n/a
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
F-18
11. Pension and Other Post-retirement Benefits (continued)
Pension Benefits Post-retirement Benefits
- -------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 (dollars in thousands) 1999 2000 2001 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 4,890 $ 6,631 $ 5,900 $ 338 $ 271 $ 258
Interest cost 36,314 40,926 41,579 1,195 1,267 1,227
Expected return on plan assets (56,598) (64,854) (68,067) - - -
Amortization of prior service cost 502 559 937 (152) (152) (152)
Amortization of transition asset (939) (939) (499) - - -
Amortization of net actuarial gain - - - (59) (82) (66)
--------- --------- --------- --------- --------- ---------
Defined benefit plan cost (income) $ (15,831) $ (17,677) $ (20,150) $ 1,322 $ 1,304 $ 1,267
========= ========= =========
Various U.S. defined contribution
plans cost 5,087 3,559 2,418
--------- --------- ---------
$ (10,744) $ (14,118) $ (17,732)
========= ========= =========
The company did not have any pension plans with accumulated benefit obligations
in excess of plan assets at December 31, 2000. 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.
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.
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) 1999 2000 2001
- -------------------------------------------------------------------------------
Current:
Federal $ 11,810 $ 3,964 $ (10,100)
State 2,399 428 (12)
International 1,339 3,581 2,426
Deferred 11,274 15,459 15,670
-------- -------- ---------
$ 26,822 $ 23,432 $ 7,984
======== ======== =========
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) 1999 2000 2001
- -------------------------------------------------------------------------------
Provision at U.S. federal statutory rate 35.0% 35.0% 35.0%
International income tax rate differential (1.8) (1.1) 2.2
State income and franchise taxes 3.6 3.0 (.8)
Research tax credits (1.8) (.1) (1.3)
Other (.2) (.8) .4
------ ------ -----
34.8% 36.0% 35.5%
====== ====== =====
F-19
12. Income Taxes (continued)
Components of earnings from continuing operations before income taxes were as
follows:
Years ended December 31 (dollars in thousands) 1999 2000 2001
- -------------------------------------------------------------------------------
United States $ 76,201 $ 57,845 $ 18,939
International 891 7,243 3,547
-------- -------- --------
$ 77,092 $ 65,088 $ 22,486
======== ======== ========
Total taxes paid (tax refunds received) by the company for continuing and
discontinued operations amounted to $11.6, $13.1, and $(2.7) million in 1999,
2000, and 2001, 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.
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)
- ----------------------------------------------------------------------------------------------------
2000 2001
------------------------------ ------------------------------
Assets Liabilities Assets Liabilities
Employee benefits $ 19,261 $ 33,791 $ 25,605 $ 42,125
Inventory 1,134 - - 3,363
Receivables - 4,697 - 10,111
Product liability and warranty 11,814 - 40,986 -
Depreciation differences - 27,781 - 42,781
Amortization differences - 13,094 - 17,941
Tax loss and credit carryovers - - 9,946 ?-
All other - 7,753 33 -
--------- --------- --------- ----------
$ 32,209 $ 87,116 $ 76,570 $ 116,321
========= ========= ========= ==========
Net liability $ 54,907 $ 39,751
========= ==========
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) 2000 2001
- -------------------------------------------------------------------------------
Current deferred income tax assets $ 12,907 $ 22,403
Long-term deferred income tax liabilities (67,814) (62,154)
---------- ----------
Net liability $ 54,907 $ 39,751
========== ==========
F-20
12. Income Taxes (continued)
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.
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
F-21
13. Litigation and Insurance Matters (continued)
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.
1999 Cumulative
(dollars in thousands) and Prior 2000 2001 December 31, 2001
- -------------------------------------------------------------------------------
Repair claim payments $ 2,537 $ 6,268 $ 13,378 $ 22,183
Administrative costs 1,021 2,009 4,503 7,533
Legal fees 490 2,085 470 3,045
-------- -------- -------- --------
Total funding $ 4,048 $ 10,362 $ 18,351 $ 32,761
======== ======== ======== ========
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.
F-22
13. Litigation and Insurance Matters (continued)
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.
14. Operations by Segment
The company has two reportable segments: Electrical Products and Water Systems.
The Electrical Products segment manufactures fractional and integral alternating
current (AC) and direct current (DC) 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 Electrical Products segment manufactures hermetic motors which are sold
worldwide to manufacturers of compressors used in air conditioning and
refrigeration systems. The Water Systems 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 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) 1999 2000 2001 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------------
Electrical Products $ 78.9 $ 75.5 $ 20.8 $ 735.0 $ 902.4 $ 802.7
Water Systems 33.8 34.9 39.2 335.3 345.5 348.5
------- ------- ------- --------- --------- ---------
Total Segments - EBIT 112.7 110.4 60.0 $ 1,070.3 $ 1,247.9 $ 1,151.2
========= ========= =========
General Corporate and Research and
Development Expenses (22.8) (23.2) (21.1)
Interest Expense (12.8) (22.1) (16.4)
------- ------- -------
Earnings from Continuing Operations before
Income Taxes 77.1 65.1 22.5
Provision for Income Taxes (26.8) (23.4) (8.0)
------- ------- -------
Earnings from Continuing Operations $ 50.3 $ 41.7 $ 14.5
======= ======= =======
Net sales of the Electrical Products segment includes sales to York
International Corporation of $191.3, $182.9, and $171.9 million in 1999, 2000,
and 2001, respectively.
F-23
14. Operations by Segment (continued)
Total assets, depreciation and amortization, and capital expenditures by segment
Total Assets Depreciation and Amortization Capital Expenditures
(December 31) (Years Ended December 31) (Years Ended December 31)
-------------------------------- ------------------------------ ----------------------------
(dollars in millions) 1999 2000 2001 1999 2000 2001 1999 2000 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Electrical Products $ 705.1 $ 700.6 $ 680.3 $ 27.3 $ 34.7 $ 37.0 $ 27.0 $ 35.6 $ 29.5
Water Systems 177.4 182.8 420.6 8.8 9.0 8.9 5.6 4.6 5.7
-------- -------- -------- ------ ------ ------ ------ ------ ------
Total Segments 882.5 883.4 1,100.9 36.1 43.7 45.9 32.6 40.2 35.2
Corporate Assets 120.9 141.4 191.2 1.2 1.3 1.2 0.2 0.3 0.1
Discontinued Operations 62.2 40.1 1.8 5.3 5.6 - 5.1 1.5 -
-------- -------- -------- ------ ------ ------ ------ ------ ------
Total $1,065.6 $1,064.9 $1,293.9 $ 42.6 $ 50.6 $ 47.1 $ 37.9 $ 42.0 $ 35.3
======== ======== ======== ====== ====== ====== ====== ====== ======
Corporate assets consist primarily of cash and cash equivalents, deferred income taxes, and prepaid pension.
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) 1999 2000 2001 1999 2000 2001
- ------------------------ ----------- ------------ ---------------- ------------ ----------- -----------
United States $ 192.1 $ 200.1 $ 283.4 United States $ 959.7 $ 1,108.9 $ 984.4
Mexico 91.7 98.7 102.0 Foreign 110.6 139.0 166.8
---------- ---------- ----------
Other Foreign 28.5 24.4 25.8 Total $ 1,070.3 $ 1,247.9 $ 1,151.2
--------- --------- --------- ========== ========== ==========
Total $ 312.3 $ 323.2 $ 411.2
========= ========= =========
15. Quarterly Results of Operations (Unaudited)
(dollars in millions, except per 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------------------------------------------------------------------------
share amounts) 2000 2001 2000 2001 2000 2001 2000 2001
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 344.6 $ 318.2 $ 341.3 $ 308.3 $ 290.8 $ 269.1 $ 271.2 $ 255.6
Gross profit 73.4 58.8 73.5 58.6 54.3 42.6 46.9 42.3
Earnings
Continuing 14.2 8.5 17.6 10.7 7.3 0.4 2.5 (5.1)
Discontinued 0.4 - - - 1.5 - (13.8) -
-------- ------ ------ ------ -------- ------ --------- --------
Net Earnings 14.6 8.5 17.6 10.7 8.8 0.4 (11.3) (5.1)
======== ======= ======== ======== ======= ======= ==== ==== ========
Basic earnings per share
Continuing .61 .36 .75 .45 .31 .02 .11 (.21)
Discontinued .02 - - - .07 - (.59) -
-------- ------ ------ ------ -------- ------ --------- --------
Net Earnings .63 .36 .75 .45 .38 .02 (.48) (.21)
======== ======== ======== ======== ======== ======== ========= ========
Diluted earnings per share
Continuing .60 .36 .74 .45 .31 .02 .11 (.21)
Discontinued .02 - - - .06 - (.58) -
-------- ------ ------ ------ -------- ------ --------- --------
Net Earnings .62 .36 .74 .45 .37 .02 (.47) (.21)
======== ======== ======== ======== ======== ======== ========= ========
Common dividends declared .12 .13 .12 .13 .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.
F-24
[A. O. SMITH CORPORATION LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission filing fee....... $ 9,762
NASD filing fee..................................... 11,110
Transfer agent expenses and fees.................... 4,000
Accounting fees and expenses........................ 93,000
Legal fees and expenses............................. 200,000
Printing and engraving expenses..................... 50,000
Miscellaneous....................................... 7,128
-----------
Total expenses................................. $ 375,000
===========
All of the above fees and expenses will be paid by A. O. Smith Corporation
(the "Registrant"). Other than the Securities and Exchange Commission filing fee
and the NASD filing fee, all fees and expenses are estimated.
Item 15. Indemnification of Directors and Officers.
Under the provisions of Section 145 of the Delaware General Corporation
Law, the Registrant is required to indemnify any present or former officer or
director against expenses arising out of legal proceedings in which the director
or officer becomes involved by reason of being a director or officer if the
director or officer is successful in the defense of such proceedings. Section
145 also provides that the Registrant may indemnify a director or officer in
connection with a proceeding in which he is not successful in defending if it is
determined that he acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the Registrant or, in the case of a
criminal action, if it is determined that he had no reasonable cause to believe
his conduct was unlawful. Liabilities for which a director or officer may be
indemnified include amounts paid in satisfaction of settlements, judgments,
fines and other expenses (including attorneys' fees incurred in connection with
such proceedings). In a stockholder derivative action, no indemnification may be
paid in respect of any claim, issue or matter as to which the director or
officer has been adjudged to be liable to the Registrant (except for expenses
allowed by a court).
Under the provisions of Article VII of the Registrant's By-Laws and
individual indemnity agreements between the Registrant and its directors and
certain of its officers, the Registrant is required to indemnify officers or
directors to a greater extent than under the current provisions of Section 145
of the Delaware General Corporation Law. Except with respect to stockholder
derivative actions, the By-Law provisions and the indemnity agreements generally
state that the director or officer will be indemnified against expenses, amounts
paid in settlement and judgments, fines, penalties and/or other amounts incurred
with respect to any threatened, pending or completed proceeding (including,
without limitation, proceedings brought under and/or predicated upon the
Securities Act of 1933 and/or the Securities Exchange Act of 1934); provided
that (i) such individual did not engage in criminal, fraudulent or intentional
misconduct in the performance of his duties to the Registrant; (ii) with respect
to criminal actions, such individual had no reasonable cause to believe his
conduct was unlawful; and (iii) with respect to securities law actions, such
individual acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Registrant and its stockholders.
The foregoing standards also apply with respect to the indemnification of
expenses incurred in a stockholder derivative suit. However, in order for a
director or officer to be indemnified for settlement amounts or judgments
incurred in a derivative suit, it also must be determined that (i) such
individual has not breached his duty of loyalty to the Registrant or its
stockholders; (ii) has not committed acts or omissions in bad faith or which
involve intentional misconduct or a knowing violation of the law; (iii) has not
engaged in any willful or negligent conduct in paying dividends or repurchasing
stock of the Registrant out of other than lawfully available funds; and (iv) has
not derived an improper personal benefit from the subject transaction.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this Registration Statement.
II-1
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the Registration Statement shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions set
forth or described in Item 15 of this Registration Statement, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Milwaukee, State of Wisconsin, on April 11, 2002.
A. O. SMITH CORPORATION
By:/s/ Robert J. O'Toole
-------------------------------------
Robert J. O'Toole
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Robert J. O'Toole, Kenneth W. Krueger and W. David
Romoser, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and any additional registration statement to be filed pursuant to Rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
--------- ----- ----
/s/ Robert J. O'Toole Chairman of the Board of Directors, April 11, 2002
- ------------------------ President and Chief Executive
Robert J. O'Toole Officer and Director
(Principal Executive Officer)
/s/ Kenneth W. Krueger Senior Vice President and Chief April 11, 2002
- ------------------------ Financial Officer
Kenneth W. Krueger (Principal Financial Officer)
/s/ John J. Kita Vice President, Treasurer and April 11, 2002
- ------------------------ Controller
John J. Kita (Principal Accounting Officer)
/s/ Glen R. Bomberger Director April 11, 2002
- ------------------------
Glen R. Bomberger
/s/ Ronald D. Brown Director April 11, 2002
- ------------------------
Ronald D. Brown
/s/ William F. Buehler Director April 11, 2002
- ------------------------
William F. Buehler
/s/ Kathleen J. Hempel Director April 11, 2002
- ------------------------
Kathleen J. Hempel
/s/ Agnar Pytte Director April 11, 2002
- ------------------------
Agnar Pytte
/s/ Bruce M. Smith Director April 11, 2002
- ------------------------
Bruce M. Smith
/s/ Mark D. Smith Director April 11, 2002
- ------------------------
Mark D. Smith
S-1
EXHIBIT INDEX
Exhibit
- -------
Number Document Description
- ------ --------------------
(1) Form of Underwriting Agreement.*
(2) Stock Purchase and Sale Agreement, dated as of September 13, 2001, by
and among the shareholders of Ocelot Oil Corp., the beneficiaries of
the Herbert W. Lindahl, Jr. State Industries Trust and the John R.
Lindahl State Industries Trust, State Industries, Inc., Ocelot Oil
Corp., John R. Lindahl, Herbert W. Lindahl, Jr. and A. O. Smith
Corporation. [Incorporated by reference to Exhibit 2 to A. O. Smith
Corporation's Current Report on Form 8-K dated December 28, 2001 (File
No. 1-475)]
(4.1) Restated Certificate of Incorporation of the corporation as amended
April 5, 1995. [Incorporated by reference to Exhibit 3 to A. O. Smith
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995 (File No. 1-475)]
(4.2) Credit Agreement, dated as of August 2, 1999, among A. O. Smith
Corporation, various financial institutions, The First National Bank
of Chicago, as Syndication Agent, and Bank of America, N.A., as Agent.
[Incorporated by reference to Exhibit 4(b) to A. O. Smith
Corporation's Annual Report on Form 10-K for the year ended December
31, 2000 (File No. 1-475)]
(4.3) First Amendment, dated as of July 28, 2000, to Credit Agreement, among
A. O. Smith Corporation, various financial institutions, Bank One,
N.A. (formerly The First National Bank of Chicago), as Syndication
Agent, and Bank of America, N.A., as Agent.
(4.4) Second Amendment, dated as of July 27, 2001, to Credit Agreement,
among A. O. Smith Corporation, various financial institutions, Bank
One, N.A. (formerly The First National Bank of Chicago), as
Syndication Agent, and Bank of America, N.A., as Agent.
(4.5) The Registrant has instruments that define the rights of holders of
long-term debt that are not being filed with this Registration
Statement in reliance upon Item 601(b)(4)(iii) of Regulation S-K. The
Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, copies of these instruments.
(5) Opinion of W. David Romoser, Vice President, General Counsel and
Secretary of the Registrant (including consent of counsel).
(23.1) Consent of Ernst & Young LLP.
(23.2) Consent of Lattimore Black Morgan & Cain, PC.
(23.3) Consent of W. David Romoser, Vice President, General Counsel and
Secretary of the Registrant (filed as part of Exhibit (5)).
(24) Power of Attorney relating to subsequent amendments (included on the
signature page to this Registration Statement)
- --------------------------
* To be filed by amendment or under a subsequent Current Report on Form 8-K.
FIRST AMENDMENT
THIS FIRST AMENDMENT dated as of July 28, 2000 (this "Amendment") amends
the Credit Agreement dated as of August 2, 1999 (the "Credit Agreement") among
A.O. SMITH CORPORATION (the "Company"), various financial institutions (the
"Lenders"), BANK ONE, NA (formerly known as The First National Bank of Chicago),
as Syndication Agent, and Bank of America, N.A., as Agent. Terms defined in the
Credit Agreement are, unless otherwise defined herein or the context otherwise
requires, used herein as defined therein.
WHEREAS, the Company, the Lenders, the Syndication Agent, the Agent have
entered into the Credit Agreement; and
WHEREAS, the parties hereto desire to amend the Credit Agreement as more
fully set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1 Amendment. Effective on (and subject to the occurrence of) the
Amendment Effective Date (as defined below), the last sentence of Section 7.3 of
the Credit Agreement is amended in its entirety to read as follows:
Notwithstanding the foregoing, (a) the Company and its
Subsidiaries may (i) sell or otherwise dispose of their storage
and fluid handling technologies businesses during fiscal year
2000 and (ii) make other Dispositions of assets so long as the
aggregate book value of all assets disposed of in any fiscal year
(in addition to Dispositions permitted by the foregoing sentence
and by clause (i) of this sentence) do not exceed 5% (or, for any
year other than fiscal year 2000, if neither the Company nor any
Subsidiary is a party to any Securitization Transaction, 10%) of
Consolidated Net Worth; and (b) the Company and its Subsidiaries
may make additional Dispositions so long as 75% of the Net Cash
Proceeds for all Dispositions in any fiscal year (excluding any
Disposition permitted by the foregoing provisions of this Section
7.3) are applied to reduce the Aggregate Commitment Amount
hereunder and, if applicable, the 364-Day Commitment Amount on a
proportional basis.
SECTION 2 Representations and Warranties. The Company represents and
warrants to the Lenders that (a) each representation and warranty set forth in
Section 5 of the Credit Agreement is true and correct as of the date of the
execution and delivery of this Amendment by the Company, with the same effect as
if made on such date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they were true and correct as
of such earlier date), and (b) the Credit Agreement, as amended hereby (as so
amended, the "Amended Credit Agreement"), is the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency or
similar laws of general application affecting the enforcement of creditors'
rights or by general principles of equity limiting the availability of equitable
remedies.
First Amendment - Long-Term
SECTION 3 Effectiveness. The amendment set forth in Section 1 above shall
become effective, as of July 28, 2000, on such date (the "Amendment Effective
Date") when the Agent shall have received counterparts of this Amendment
executed by the Company and the Required Lenders.
SECTION 4 Miscellaneous.
4.1 Continuing Effectiveness, etc. As herein amended, the Credit Agreement
shall remain in full force and effect and is hereby ratified and confirmed in
all respects. After the Amendment Effective Date, all references in the Credit
Agreement and the Notes to "Credit Agreement", "Agreement" or similar terms
shall refer to the Amended Credit Agreement.
4.2 Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Amendment.
4.3 Governing Law. This Amendment shall be a contract made under and
governed by the laws of the State of Illinois applicable to contracts made and
to be fully performed within such State.
4.4 Successors and Assigns. This Amendment shall be binding upon the
Company, the Lenders and the Agent and their respective successors and assigns,
and shall inure to the benefit of the Company, the Lenders and the Agent and the
respective successors and assigns of the Lenders and the Agent.
2 First Amendment - Long-Term
IN WITNESS WHEREOF the parties hereto have executed and delivered this
Amendment as of the day and year first above written.
A.O. SMITH CORPORATION
By: /s/
--------------------------------------
Title: Vice President, Treasurer and
Controller
BANK OF AMERICA, N.A.,
as Agent and as a Lender
By: /s/
--------------------------------------
Title:
-----------------------------------
BANK ONE, NA (Main Office Chicago), as
Syndication Agent and as a Lender
By: /s/
--------------------------------------
Title:
-----------------------------------
THE BANK OF NEW YORK
By: /s/
--------------------------------------
Title:
-----------------------------------
CITIBANK, N.A.
By: /s/
--------------------------------------
Title:
-----------------------------------
FIRSTAR BANK MILWAUKEE, N.A.,
By: /s/
--------------------------------------
Title:
-----------------------------------
MARSHALL & ILSLEY BANK
By: /s/
--------------------------------------
Title:
-----------------------------------
Signature Page - 1 First Amendment - Long-Term
By: /s/
--------------------------------------
Title:
-----------------------------------
NORWEST BANK WISCONSIN, N.A.
By: /s/
--------------------------------------
Title:
-----------------------------------
U.S. BANK NATIONAL ASSOCIATION
By: /s/
--------------------------------------
Title:
-----------------------------------
WACHOVIA BANK, N.A.
By: /s/
--------------------------------------
Title:
-----------------------------------
Signature Page - 2 First Amendment - Long-Term
SECOND AMENDMENT
THIS SECOND AMENDMENT dated as of July 27, 2001 (the "Amendment") amends
the Credit Agreement dated as of August 2, 1000 (the "Credit Agreement") among
A.O. SMITH CORPORATION (the "Company"), various financial institutions (the
"Lenders"), BANK ONE, NA (formerly known as The First National Bank of Chicago),
as Syndication Agent, and BANK OF AMERICA, N.A., as Agent. Terms defined in the
Credit Agreement are, unless otherwise defined herein or the context otherwise
requires, used herein as defined therein.
WHEREAS, the Company, the Lenders, the Syndication Agent, the Agent have
entered into the Credit Agreement; and
WHEREAS, the parties hereto desire to amend the Credit Agreement as more
fully set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1 Amendments. Effective on (and subject to the occurrence of) the
Amendment Effective Date (as defined below), the Credit Agreement shall be
amended as set forth below:
1.1. Definition of 364-Day Credit Agreement. The definition of "364-Day
Credit Agreement" in Section 1.1 is amended in its entirety to read as follows:
364-Day Credit Agreement means the Amended and Restated Credit
Agreement dated as of July 24, 2001 among the Company, various
financial institutions and BofA, as Agent.
1.2. Amendment to Subsection 2.11(c). Subsection 2.11(c) is amended in its
entirety to read as follows:
(c) Utilization Fees. The Company shall pay to the Agent for the
account of each Lender a utilization fee on such Lender's Pro Rata
Share of the aggregate principal amount of all outstanding Committed
Loans for any day on which such aggregate principal amount exceeds 50%
of the Aggregate Commitment Amount, computed at a rate per annum equal
to 0.05% or, at any time the Leverage Ratio is greater than 0.55 to 1,
0.075%. Such utilization fee shall accrue on each applicable day from
the Closing Date to the Termination Date and shall be due and payable
quarterly in arrears on the last Business Day of each calendar quarter
through the Termination Date, with the final payment to be made on the
Termination Date.
1 Second Amendment - Five Year Agreement
1.3. Amendment to Section 2.17. The first sentence of Section 2.17 is
amended in its entirety to read as follows:
2.17 Optional Increase in Commitments. The Company may at any
time (but not more than once in any calendar year), by means of a
letter to the Agent substantially in the form of Exhibit J, request
that the Aggregate Commitment Amount be increased by (a) increasing
the amount of the Commitment of one or more Lenders which have agreed
to such increase and/or (b) adding an Eligible Assignee as a party
hereto with a Commitment in an amount agreed to by such Eligible
Assignee; provided that (i) no Eligible Assignee shall be added as a
party hereto unless such Eligible Assignee shall have been approved in
writing by the Agent (which approval shall not be unreasonably
withheld), (ii) in no event shall the Aggregate Commitment Amount
exceed $285,714,285.71 without the written consent of all Lenders,
(iii) at the time of such increase, and after giving effect thereto,
no Event of Default or Unmatured Event of Default shall exist and (iv)
both before and after giving effect to such increase, the Company
shall be in pro forma compliance with all financial covenants set
forth in Section 7.
1.4. Amendment to Section 3.7. Section 3.7 is amended by (i) deleting the
language ", or a Lender declines or fails to respond to an Extension Request (as
defined in the 364-Day Credit Agreement pursuant to subsection 2.18(a) of the
364-Day Credit Agreement)" and (ii) deleting the language "or declining or
failing to respond to an Extension Request,".
1.5. Amendment to Subsection 10.8(a). Subsection 10.8(a) is amended in its
entirety to read as follows:
10.8 Assignments, Participations, etc. (a) Any Lender may, with
the written consent of the Company (at all times other than during the
existence of an Event of Default or Unmatured Event of Default) and
the Agent, which consents shall not be unreasonably withheld, at any
time assign and delegate to one or more Eligible Assignees (provided
that no written consent of the Company or the Agent shall be required
in connection with any assignment and delegation by a Lender to an
Eligible Assignee that is an Affiliate of such Lender) (each an
"Assignee") all, or any ratable part of all, of the Committed Loans,
the Commitment and the other rights and obligations of such Lender
hereunder; provided that (i) except in the case of an assignment by a
Lender of all of its remaining rights and obligations hereunder, the
amount of the Commitment so assigned shall not be less than
$5,000,000; and (ii) the Company and the Agent may continue to deal
solely and directly with such Lender in connection with the interest
so assigned to an Assignee until (x) written notice of such
assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the
Company and the Agent by such Lender and the Assignee; (y) such Lender
and its Assignee shall have delivered to the Company and
2 Second Amendment - Five Year Agreement
the Agent an Assignment and Acceptance in the form of Exhibit G
("Assignment and Acceptance") and (z) the assignor Lender or Assignee
has paid to the Agent a processing fee in the amount of $3,500.
1.6. Amendment to Exhibit J. Exhibit J is amended by (i) deleting at the
end of clause (b) the brackets around the word "and", (ii) deleting at the end
of clause (c) the language "; [and" and replacing such language with a period
and (iii) deleting clause (d) in its entirety.
SECTION 2 Representations and Warranties. The Company represents and
warrants to the Lenders that (a) each representation and warranty set forth in
Section 5 of the Credit Agreement is true and correct as of the date of the
execution and delivery of this Amendment by the Company, with the same effect as
if made on such date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they were true and correct as
of such earlier date), and (b) the Credit Agreement, as amended hereby (as so
amended, the "Amended Credit Agreement"), is the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency or
similar laws of general application affecting the enforcement of creditors'
rights or by general principles of equity limiting the availability of equitable
remedies.
SECTION 3 Effectiveness. The amendments set forth in Section 1 above shall
become effective on the date (the "Amendment Effective Date") when the Agent
shall have received counterparts of this Amendment executed by the Company and
the Required Lenders.
SECTION 4 Miscellaneous.
4.1. Continuing Effectiveness, etc. As herein amended, the Credit Agreement
shall remain in full force and effect and is hereby ratified and confirmed in
all respects. After the Amendment Effective Date, all references in the Credit
Agreement and the Notes to "Credit Agreement", "Agreement" or similar terms
shall refer to the Amended Credit Agreement.
4.2. Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Amendment.
4.3. Governing Law. This Amendment shall be a contract made under and
governed by the laws of the State of Illinois applicable to contracts made and
to be fully performed within such State.
3 Second Amendment - Five Year Agreement
4.4. Successors and Assigns. This Amendment shall be binding upon the
Company, the Lenders and the Agent and their respective successors and assigns,
and shall inure to the benefit of the Company, the Lenders and the Agent and the
respective successors and assigns of the Lenders and the Agent.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the day and year first above written.
A.O. SMITH CORPORATION
By: /s/
-------------------------------------
Title: Assistant Treasurer
BANK OF AMERICA, N.A.,
as Agent and as a Lender
By: /s/
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Title:
-----------------------------------
BANK ONE, NA (Main Office Chicago), as
Syndication Agent and as a Lender
By: /s/
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Title:
-----------------------------------
THE BANK OF NEW YORK
By: /s/
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Title:
-----------------------------------
CITIBANK, N.A.
By: /s/
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Title:
-----------------------------------
S-1 Second Amendment - Five Year Agreement
FIRSTAR BANK, N.A.
By: /s/
-------------------------------------
Title:
-----------------------------------
MARSHALL & ILSLEY BANK
By: /s/
-------------------------------------
Title:
-----------------------------------
By: /s/
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Title:
-----------------------------------
WELLS FARGO BANK, N.A.
By: /s/
-------------------------------------
Title:
-----------------------------------
U.S. BANK NATIONAL ASSOCIATION
By: /s/
-------------------------------------
Title:
-----------------------------------
WACHOVIA BANK, N.A.
By: /s/
-------------------------------------
Title:
-----------------------------------
S-2 Second Amendment - Five Year Agreement
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/
-------------------------------------
Title:
-----------------------------------
S-3 Second Amendment - Five Year Agreement
A. O. SMITH CORPORATION
WORLD HEADQUARTERS
LAW DEPARTMENT
MAILING ADDRESS: P.O. BOX 245009, MILWAUKEE, WI 53224-9509
STREET ADDRESS: 11270 WEST PARK PLACE, MILWAUKEE, WI 53224
Writer's Direct Dial Number: (414) 359-4137
Facsimile Number: (414) 359-4143
E-Mail Address: dromoser@aosmith.com
April 12, 2002
A. O. Smith Corporation
11270 West Park Place
Milwaukee, WI 53244
Ladies and Gentlemen:
I have acted as counsel for A. O. Smith Corporation, a Delaware
corporation (the "Company"), in conjunction with the preparation of a
Registration Statement on Form S-3 (the "Registration Statement"), including the
prospectus constituting a part thereof (the "Prospectus"), to be filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), relating to 3,500,000 shares of the
Company's common stock, $1 par value (the "Common Stock"), together with up to
525,000 additional shares of Common Stock being registered to cover the
over-allotment option to be granted by the Company to the underwriters.
In this connection, I have examined: (i) the Registration Statement,
including the Prospectus; (ii) the Company's Restated Certificate of
Incorporation and Bylaws, as amended to date; (iii) resolutions of the Company's
Board of Directors relating to the authorization of the sale and delivery of the
Common Stock subject to the Registration Statement and (iv) such other
proceedings, documents and records as I have deemed necessary to enable me to
render this opinion.
Based upon the foregoing, I am of the opinion that:
1. The Company is a corporation validly existing under the laws of the
State of Delaware.
2. The shares of Common Stock covered by the Registration Statement
that are to be offered and sold by the Company, when the price and the other
terms of sale thereof have been determined by action of the special offering
committee designated by the Company's Board of Directors in the manner
contemplated by and as authorized by the Company's Board of Directors, and when
issued and paid for in the manner contemplated in the Registration Statement and
the Prospectus, will be validly issued, fully paid and nonassessable. Under the
laws of Delaware, stockholders of the Company have no personal liability for the
debts or
A.O. Smith Corporation
April 12, 2002
Page 2
obligations of the Company as a result of their status as stockholders of the
Company except that under a decision of the Wisconsin Supreme Court that applies
such statute to corporations such as the Company, which are licensed to do
business in Wisconsin, the holders of Common Stock are personally liable for the
unpaid wage claims of the Company's employees, not to exceed six months' service
in any one case, as provided in Section 180.0622(2)(b) of the Wisconsin Statutes
as such action may be interpreted by a court of law.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement. In giving this consent, I do not admit that I am an
"expert" within the meaning of Section 11 of the Securities Act or within the
category of persons whose consent is required by Section 7 of the Securities
Act.
Very truly yours,
A. O. SMITH CORPORATION
/s/ W. David Romoser
W. David Romoser
Vice President, General Counsel
and Secretary
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to the
use of our report dated January 16, 2002 in the Registration Statement (Form S-3
No. 333-00000) and related Prospectus of A. O. Smith Corporation for the
registration of 4,025,000 shares of its Common Stock.
We also consent to the incorporation by reference therein of our report dated
January 16, 2002 with respect to the financial statement schedule of A. O. Smith
Corporation for the years ended December 31, 2001, 2000 and 1999 included in the
Annual Report (Form 10-K) for 2001 filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
April 11, 2002
EXHIBIT 23.2
Consent of Independent Auditors
As independent auditors, we hereby consent to the incorporation by reference in
this registration statement on Form S-3 of our report dated February 2, 2001,
November 27, 2001 and March 6, 2002, pertaining to the financial statements of
State Industries, Inc. and its subsidiaries as of and for the year ended
December 31, 2000 included in A. O. Smith Corporation's Current Report on Form
8-K, dated December 28, 2001, as amended on March 12, 2002, and to all
references to our firm included in this registration statement.
/s/ Lattimore Black Morgan & Cain, PC
Brentwood, Tennessee
April 11, 2002