SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
- --- For the transition period from to
----------- ----------
Commission File Number 1-475
[GRAPHIC OMITTED][A.O. SMITH CORPORATION LOGO]
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P.O. Box 245008, Milwaukee, Wisconsin 53224-9508
Telephone: (414) 359-4000
Securities registered pursuant to Section 12(b) of the Act:
Shares of Stock Outstanding Name of Each Exchange on
Title of Each Class January 31, 2003 Which Registered
------------------- --------------------------- -------------------------
Class A Common Stock 8,559,425 Not listed
(par value $5.00 per share)
Common Stock 20,480,498 New York Stock Exchange
(par value $1.00 per share)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act) Yes X No
--- ---
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $12,791,576 for Class A Common Stock and $421,949,989 for Common
Stock as of January 31, 2003.
Documents Incorporated by Reference:
1. Portions of the company's definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year and, upon such filing, to be incorporated by
reference in Part III).
PART 1
ITEM 1 - BUSINESS
- -----------------
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 2002, we had
net sales of approximately $1.5 billion, with 54 percent attributable to our
Electrical Products business and 46 percent attributable to our Water Systems
business.
During the past six 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.
The following table summarizes our net sales by operating segment. This segment
summary and all other information presented in this section should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements which appear elsewhere in this document.
Years Ended December 31 (dollars in millions)
---------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Electrical Products $ 790.4 $ 802.7 $ 902.4 $ 735.0 $487.4
Water Systems 678.7 348.5 345.5 335.3 313.4
-------- -------- -------- -------- -------
Total Operations $1,469.1 $1,151.2 $1,247.9 $1,070.3 $800.8
======== ======== ======== ======== =======
ElectricAL PRODUCTS
Our Electrical Products segment sales decreased $12 million or two percent in
2002 to $790 million. Excluding the third quarter 2002 acquisition of the
hermetic motor assets of the Athens Products (Athens) division of the Electrolux
Group, segment sales declined approximately $32 million or four percent. The
decrease in sales in 2002 was primarily due to lower sales of motors to the
heating, ventilating, and air-conditioning (HVAC) market.
We are one of the three largest manufacturers of electric motors in North
America, having manufactured approximately 36 million electric motors in 2002.
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
customers electric motor needs. We have significantly broadened our electric
motor product line and customer base through a series of acquisitions over the
last six years, including
2
UPPCO, General Electric Company's domestic hermetic motor business, MagneTek's
electric motor business, and the hermetic motor assets of Athens.
Our motors are used in a wide range of targeted residential, commercial, and
industrial applications, including: hermetic motors that are sold worldwide to
manufacturers of air conditioning and commercial refrigeration compressors;
fractional horsepower fan motors used in furnaces, air conditioners, and
blowers; fractional horsepower motors for pumps for home water systems, swimming
pools, hot tubs, and spas; fractional horsepower motors used in other consumer
products (such as garage door openers); and integral horsepower AC and DC motors
for industrial and commercial applications. Sales to the heating, ventilating,
air conditioning and refrigeration market account for more than 60 percent of
segment sales. In July 2002, we expanded our presence in the hermetic motor
market by acquiring Athens.
Approximately 85 percent of our 2002 segment sales were to original equipment
manufacturers (OEM) in a diverse mix of industries, with the remainder of sales
directed to the aftermarket or distribution channels. Sales to our largest
customer, York International and its wholly owned Bristol Compressors
subsidiary, were $173 million in 2002 and represented approximately 22 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
estimate that approximately 60 percent of the market is derived from the less
cyclical replacement business with the remainder being impacted by general
business conditions in the new construction market.
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 late 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 included 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 to improve customer service while reducing
cost. In December 2001, we acquired Shenzhen Speeda, a manufacturer of
sub-fractional horsepower electric motors in China. In December 2002, we
acquired the motor manufacturing assets of Jiangsu Changheng Group Co. Ltd.
(Changheng), of Changzhou, China. While Changheng has an existing customer base
in China, the primary purpose of the Chinese acquisitions is to further expand
our ability to manufacture products for the U.S. market.
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, Baldor Electric, Regal-Beloit Corporation, and Jakel Incorporated,
compete with us in specific segments of the electric motor market.
WATER SYSTEMS
Our Water Systems business had sales in 2002 of $679 million, $330 million
higher than 2001 sales of $349 million. The higher sales were the result of $313
million in sales from the acquisition of State Industries Inc. (State).
Excluding State, sales increased approximately 5 percent. The majority of the
company's sales are in the less cyclical replacement market, although the new
housing market is also an important market for the business.
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. Domestic residential water heater sales in 2002 were $430 million or
approximately 63 percent of segment revenues.
3
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.
Our Water Systems business also manufactures and markets specialty commercial
water heaters, copper-tube boilers, expansion tanks, and related products and
parts.
We are one of the two largest manufacturers and marketers of water heaters in
North America, manufacturing more than three million units in 2002. 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. 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 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.
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 in July of this year, United States water heater manufacturers will be
required to comply with new flammable vapor ignition resistance standards for
virtually all residential gas water heaters. These new standards and testing
protocols established by the American National Standards Institute (ANSI)
require that gas water heaters deal with the accidental ignition of flammable
vapors, such as emitted 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 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.
Our principal domestic water heating competitors include Rheem Manufacturing
Company, Inc. and, to a lesser extent, American Water Heater Company and
Bradford-White Corporation.
4
RAW MATERIAL
Raw materials for our manufacturing operations, which consist primarily of
steel, copper, and aluminum, are generally available from several sources in
adequate quantities. We hedge the majority of our annual copper purchases to
protect against price volatility.
SEASONALITY
There is no significant seasonal pattern to our consolidated quarterly sales and
earnings.
RESEARCH AND DEVELOPMENT, PATENTS, AND TRADEMARKS
In order to improve competitiveness by generating new products and processes, we
conduct research and development at our Corporate Technology Center in
Milwaukee, Wisconsin as well as at our operating units. Total expenditures for
research and development in 2002, 2001, and 2000, were approximately $30.4,
$27.6, and $24.5 million, respectively.
We own and use in our businesses various trademarks, trade names, patents, trade
secrets, and licenses. While a number of these are important to us, we do not
consider a material part of our business to be dependent on any one of them.
EMPLOYEES
Our company and its subsidiaries employed approximately 16,200 employees as of
December 31, 2002.
BACKLOG
Normally, none of our operations sustain significant backlogs.
ENVIRONMENTAL LAWS
Our operations are governed by a variety of federal, state, and local laws
intended to protect the environment. While environmental considerations are a
part of all significant capital expenditures, compliance with the environmental
laws has not had a material effect and is not expected to have a material effect
upon the capital expenditures, earnings, or competitive position of our company.
See Item 3.
FOREIGN SALES
Total U.S. export sales from our operations were $90, $91, and $62 million in
2002, 2001, and 2000, respectively.
AVAILABLE INFORMATION
We maintain a website with the address www.aosmith.com. The information
contained on our website is not included as a part of, or incorporated by
reference into, this Annual Report on Form 10-K. Other than an investor's own
Internet access charges, we make available free of charge through our website
our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably
practicable after we have electronically filed such material with, or furnished
such material to, the Securities and Exchange Commission.
5
ITEM 2 - PROPERTIES
- -------------------
We manufacture our products in 44 plants worldwide. These facilities have an
aggregate floor space of 7,241,000 square feet, consisting of 5,367,000 square
feet owned by us and 1,874,000 square feet of leased space. Twenty-six of our
facilities are foreign plants with 2,585,000 square feet of space, of which
1,140,000 square feet are leased.
The manufacturing plants presently operated by us are listed below by industry
segment.
United States
Foreign
Electrical Products
(4,088,000 sq. ft.)
Athens, TN
McMinnville, TN; Mebane, NC;
Monticello, IN; Mt. Sterling, KY;
Owosso, MI; Ripley, TN;
Scottsville, KY; Tipp City, OH;
Upper Sandusky, OH
Acuna, Mexico (2);
Bray, Ireland;
Budapest, Hungary;
Gainsborough, England;
Juarez, Mexico (11)
Monterrey, Mexico (3);
JiangSu Province, China (2),
Shenzhen, China
Water Systems
(3,153,000 sq. ft.)
Ashland City, TN; Charlotte, NC;
Cookeville, TN; El Paso, TX;
Florence, KY; Franklin, TN;
McBee, SC; Renton, WA
Juarez, Mexico;
Nanjing, China;
Stratford, Canada;
Veldoven, The Netherlands
The principal equipment at our facilities consists of presses, welding,
machining, slitting, and other metal fabricating equipment, winding machines,
and furnace and painting equipment. We regard our plants and equipment as
well-maintained and adequate for its needs. Multishift operations are used where
necessary.
In addition to our manufacturing facilities, our World Headquarters and
Corporate Technology Center are located in Milwaukee, Wisconsin. We also have
offices in Alsip, Illinois; El Paso, Texas; London, England; and Singapore.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
We are involved in various unresolved legal actions, administrative proceedings,
and claims in the ordinary course of our 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, we believe these unresolved legal actions
will not have a material effect on our financial position or results of
operations. A more detailed discussion of these matters appears in Note 14 of
Notes to Consolidated Financial Statements.
6
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the security holders during the fourth
quarter of 2002.
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of
the current executive officers which is included as an unnumbered Item in Part I
of this report in lieu of being included in the company's Proxy Statement for
its 2003 Annual Meeting of Stockholders.
ROBERT J. O'TOOLE
- -----------------
Chairman of the Board of Directors, President and Chief Executive Officer
Mr. O'Toole, 62, became chairman of the board of directors in March 1992.
He is a member of the Investment Policy Committee of the board of
directors. He was elected chief executive officer in March 1989. He was
elected president, chief operating officer, and a director in 1986. Mr.
O'Toole joined the company in 1963. He is a director of Briggs & Stratton
Corporation, Factory Mutual Insurance Company, Marshall & Ilsley
Corporation and Sensient Technologies Corporation.
RANDALL S. BEDNAR
- -----------------
Vice President - Information Technology
Mr. Bednar, 50, was elected vice president-information technology in July
2001. From 1996 until 2000, he was vice president and chief information
officer of the Gates Corporation. Prior to the Gates Corporation, he held a
series of information technology assignments during 15 years at Rockwell
Automation.
CHARLES J. BISHOP
- -----------------
Vice President - Corporate Technology
Dr. Bishop, 61, has been vice president-corporate technology since 1985.
Dr. Bishop joined the company in 1981.
MICHAEL J. COLE
- ---------------
Vice President - Asia
Mr. Cole, 58, was elected vice president-Asia in March 1996. Previously he
was vice president-emerging markets of Donnelly Corporation, an automotive
supplier.
DONALD M. HEINRICH
- ------------------
Senior Vice President and President - A. O. Smith Electrical Products
Company
Mr. Heinrich, 50, was elected senior vice president in July 2001, and has
been president of A. O. Smith Electrical Products Company, a division of
the company, since July 2001. He joined A. O. Smith Electrical Products
Company in January 2000 as senior vice president-operations. He also served
as president of Smith Fiberglass Products Company, a former division of the
company, from November 1997 through January 2000. Mr. Heinrich joined the
company in October 1992 as vice president-business development.
7
JOHN J. KITA
- ------------
Vice President, Treasurer and Controller
Mr. Kita, 47, was elected vice president, treasurer and controller in April
1996. From 1995 to 1996, he was treasurer and controller. Prior thereto, he
served as assistant treasurer since he joined the company in 1988.
KENNETH W. KRUEGER
- ------------------
Senior Vice President and Chief Financial Officer
Mr. Krueger, 46, became senior vice president and chief financial officer
in August 2000. Previously he was a group vice president, finance and
business planning at Eaton Corporation. Prior to Eaton, he was vice
president, finance for Rockwell Automation, where he worked from 1983 to
1999.
RONALD E. MASSA
- ---------------
Senior Vice President and President - A. O. Smith Water Products Company
Mr. Massa, 53, became president of A. O. Smith Water Products Company, a
division of the company, in February 1999. He was elected senior vice
president in June 1997. He served as the president of A. O. Smith
Automotive Products Company, a former division of the company, from June
1996 to April 1997. He was the president of A. O. Smith Water Products
Company from 1995 to June 1996 and held other management positions in the
Water Products Company prior thereto. He joined the company in 1977.
ALBERT E. MEDICE
- ----------------
Vice President - Europe
Mr. Medice, 60, was elected vice president-Europe in 1995. Previously, from
1990 to 1995, he was the general manager of A. O. Smith Electric Motors
(Ireland) Ltd., a subsidiary of the company. Mr. Medice joined the company
in 1986 as vice president-marketing for its Electrical Products Company
division.
EDWARD J. O'CONNOR
- ------------------
Vice President - Human Resources and Public Affairs
Mr. O'Connor, 62, has been vice president-human resources and public
affairs for the company since 1986. He joined the company in 1970.
STEVE W. RETTLER
- ----------------
Vice President - Business Development
Mr. Rettler, 48, was elected vice president-business development in July
1998. Previously he was vice president and general manager of Brady
Precision Tape Co., a manufacturer of specialty tape products for the
electronics market.
W. DAVID ROMOSER
- ----------------
Vice President, General Counsel and Secretary
Mr. Romoser, 59, was elected vice president, general counsel and secretary
in March 1992.
8
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
- -------
(a) Market Information. Our Common Stock is listed on the New York Stock
Exchange under the symbol AOS. The Class A Common Stock of A. O. Smith
Corporation, formerly listed on the American Stock Exchange under the
symbol SMCA, was voluntarily delisted by the company in August 2002.
Wells Fargo Bank Minnesota, N.A., P.O. Box 64854, St. Paul, Minnesota
55164-0854 serves as the registrar, stock transfer agent, and the
dividend reinvestment agent for the company's Common Stock.
Quarterly Common Stock Price Range
----------------------------------
2002 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
High 28.50 32.25 32.75 29.62
Low 19.00 25.32 24.90 20.56
2001 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
High 20.10 19.53 18.50 19.75
Low 15.88 16.40 15.25 14.67
(b) Holders. As of January 31, 2003, the number of shareholders of record
of Common Stock and Class A Common Stock were 1,130 and 457,
respectively.
(c) Dividends. Dividends declared on the common stock are shown in Note 16
of Notes to Consolidated Financial Statements appearing elsewhere
herein. The company's credit agreements contain certain conditions and
provisions which restrict the company's payment of dividends. Under
the most restrictive of these provisions, retained earnings of $92.0
million were unrestricted as of December 31, 2002.
9
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
(Dollars in Thousands, except per share amounts)
Years ended December 31(1)
--------------------------------------------------------------
2002(2),(3) 2001(4) 2000 1999(5) 1998(6)
---- ---- ---- ---- ----
Net sales - continuing operations $1,469,100 $1,151,156 $1,247,945 $1,070,339 $800,803
Earnings (Loss)
Continuing operations 51,345 14,502 41,656 50,270 40,656
Discontinued operations:
Operating earnings (loss) - - - (890) 3,835
Loss on disposition - - (11,903) (6,958) -
---------- ---------- ---------- ---------- --------
- - (11,903) (7,848) 3,835
---------- ---------- ---------- ---------- --------
Net earnings $ 51,345 $ 14,502 $ 29,753 $ 42,422 $ 44,491
========== ========== ========== ========== ========
Basic earnings (loss) per share
of common stock
Continuing operations $ 1.90 $ .61 $ 1.78 $ 2.17 $ 1.73
Discontinued operations - - (.51) (.34) .16
---------- ---------- ---------- ---------- --------
Net earnings $ 1.90 $ .61 $ 1.27 $ 1.83 $ 1.89
========== ========== ========== ========== ========
Diluted earnings (loss) per share
of common stock
Continuing operations $ 1.86 $ .61 $ 1.76 $ 2.11 $ 1.68
Discontinued operations - - (.50) (.33) .16
---------- ---------- ---------- ---------- --------
Net earnings $ 1.86 $ .61 $ 1.26 $ 1.78 $ 1.84
========== ========== ========== ========== ========
Cash dividends per common share $ .54 $ .52 $ .50 $ .48 $ .47
December 31
--------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total assets $1,224,857 $1,293,923 $1,064,868 $1,065,585 $736,570
Long-term debt 239,084 390,385 316,372 351,251 131,203
Total stockholders' equity 511,052 451,878 448,395 431,084 401,093
- ---------------------------------------------------------------------------------------------------------------------
(1) The company has accounted for the fiberglass piping, liquid and dry storage and automotive businesses as
discontinued operations in the consolidated financial statements. On December 8, 2000, the company sold its
fiberglass piping business and on January 10, 2001, the company sold its liquid and dry storage business. See Note
3 of Notes to Consolidated Financial Statements included elsewhere herein.
(2) Effective January 1, 2002, the company changed its method of accounting for goodwill and identifiable intangible
assets with indefinite lives. See Note 8 of Notes to Consolidated Financial Statements included elsewhere herein.
(3) On July 1, 2002, the company acquired the hermetic motor assets of the Athens Products division of Electrolux for
$9.7 million. In December 2002, the company acquired the motor manufacturing assets of Jiangsu Changheng Group Co.
Ltd. (Changheng) for $15.3 million. See Note 2 of Notes to Consolidated Financial Statements included elsewhere
herein.
(4) On December 28, 2001, the company acquired all of the outstanding stock of State Industries, Inc., a manufacturer
of a comprehensive line of residential and commercial water heaters. The aggregate purchase price was $117.6
million. See Note 2 of Notes to Consolidated Financial Statements included elsewhere herein.
(5) On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s domestic electric motor business and six
wholly owned foreign subsidiaries for $244.6 million.
(6) On July 1, 1998, the company acquired certain assets of General Electric Company's domestic compressor motor
business for $125.6 million.
10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
LIQUIDITY AND CAPITAL RESOURCES
We recorded net earnings of $51.3 million or $1.86 per share in 2002,
significantly higher than the $14.5 million or $.61 per share earned in 2001.
The significant improvement in earnings was primarily a result of cost reduction
actions in our Electrical Products business and integration activities related
to the acquisition of State. The Water Systems business established new sales
and earnings records in 2002. Individual segment performance will be discussed
later in this section.
Our working capital for continuing operations at December 31, 2002, was $228.1
million compared with $219.8 million and $204.3 million at December 31, 2001 and
2000, respectively. The increase in our working capital in 2002 was due to
higher cash balances and the increase in 2001 was due to the acquisition of
State in December 2001. Cash flow from operating activities during 2002 was
$112.2 million compared with $49.8 million in 2001. Significantly higher
earnings levels and a $12.4 million tax refund received in March 2002 explain
the majority of the improvement.
Our capital expenditures were $42.5 million in 2002 compared with $35.3 million
in 2001 and $40.5 million in 2000. The increase in 2002 was associated with our
acquisition of State. The decrease in capital spending in 2001 occurred in our
Electrical Products business. We are projecting 2003 capital expenditures to be
approximately $45 million and marginally lower than projected 2003 depreciation
expense. Our cash flow during 2003 is expected to adequately cover our projected
capital expenditures. We believe that our present facilities and planned capital
expenditures are sufficient to provide adequate capacity for our operations in
2003.
On May 10, 2002, we completed the sale of 4.8 million shares of our common stock
through a public offering at a price of $28.25 per share. With the $127.5
million net proceeds from our stock offering and operating cash flow, we reduced
our debt by $156.2 million from $406.9 million at December 31, 2001, to $250.7
million at December 31, 2002. Our leverage, as measured by the ratio of total
debt to total capitalization, was 33 percent, down significantly from 47 percent
at the end of 2001. Excluding potential acquisitions, we expect 2003 cash flow
to result in a year-end leverage ratio less than 30 percent.
We expect to have adequate liquidity in 2003 as we have a minimal amount of
long-term debt maturing. In addition, we have a $250.0 million multi-year
revolving credit facility with a group of nine financial institutions that
expires on August 2, 2004, and an $82.5 million 364-day credit facility with a
group of six banks that expires on July 25, 2003. We expect these credit
facilities are adequate to support any short-term borrowing needs. At December
31, 2002, we had available borrowing capacity of $222.1 million under our credit
facilities. For information about our contractual obligations for indebtedness,
capital leases, operating leases and related obligations as of December 31,
2002, see Note 9 of Notes to Consolidated Financial Statements. 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.
Recent declines in the U.S. equity market have resulted in a reduction in the
fair value of the assets of our pension plans. This asset value reduction,
coupled with an increase in the present value of the obligations of our pension
plans due to declining interest rates, has resulted in accumulated pension
benefit obligations exceeding the fair value of the plan assets by $89 million.
Accordingly, we took a non-cash charge to equity of $115 million, representing
the recording of this liability, the elimination of the prepaid asset, and
related deferred tax effects. This charge has no impact on current cash flow or
net earnings. Our pension plans continue to meet all funding requirements under
ERISA regulations, and under current assumptions, we do not expect any
significant minimum funding requirements for several years. See Note 12 of Notes
to Consolidated Financial Statements.
11
In connection with our acquisition of Athens in July 2002, we recorded purchase
liabilities of $4.2 million primarily for employee severance costs associated
with product manufacturing repositioning. As of December 31, 2002, we have
charged $1.1 million against this reserve. In connection with the Athens
acquisition and certain other acquisitions, we recorded aggregate purchase
liabilities of $26.5 million at the respective acquisition dates for employee
severance and relocation, as well as certain facility exit costs. As of December
31, 2002, we incurred and charged $17.1 million against these liabilities. We
expect the majority of the activities to be completed by December 31, 2003.
Included in other assets is a $34.0 million receivable due to the payments of
claims associated with the dip tube class action lawsuit. See Note 14 of Notes
to Consolidated Financial Statements. We expect a modest increase to the
receivable in 2003. The receivable is classified as a long-term asset because
court proceedings will not begin until late 2003 and may not be concluded until
2004 or later.
We have paid dividends for 63 consecutive years. We paid total dividends of $.54
per share in 2002 compared with $.52 per share in 2001.
12
RESULTS OF OPERATIONS
Our sales in 2002 were $1.47 billion, an increase of $317.9 million or 27.6
percent from sales of $1.15 billion in 2001. The sales increase was due to our
acquisitions of State in December 2001 and Athens in July 2002 as well as higher
sales in our base water heater business partially offset by a modest decline in
our electric motor business. Sales in 2001 decreased by $96.8 million or 7.8
percent from sales of $1.25 billion in 2000. The lower sales resulted from an
11.0 percent decline in our Electrical Products segment, which more than offset
a slight increase in sales for our Water Systems business.
Our gross profit margin for 2002 was 20.4 percent, compared with 17.6 percent
and 19.9 percent in 2001 and 2000, respectively. The significant improvement in
margin from 2001 to 2002 resulted from lower manufacturing costs associated with
the product repositioning program at Electrical Products and the integration of
the State acquisition. The decline in gross margin from 2000 to 2001 occurred
within our 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.
Selling, general and administrative expense (SG&A) in 2002 was $206.2 million
and increased by $60.5 million from the $145.7 million recorded in 2001
primarily as a result of incremental SG&A associated with the State acquisition.
SG&A in 2001 was $8.0 million lower than 2000. The decrease resulted from
volume-related reductions in selling expense and cost reduction programs.
We have significant pension benefit costs and credits that are developed from
actuarial valuations. The valuations reflect key assumptions regarding, among
other things, discount rates, expected return on plan assets, retirement ages,
and years of service. Consideration is given to current market conditions,
including changes in interest rates, in making these assumptions. Our assumption
for the expected rate of return on pension plan assets was 9.75 percent in 2002
compared with 10.0 percent in 2001. Our 2003 assumption for return on assets
reflects a further reduction to 9.0 percent which should result in pension
income recognition of approximately $10.0 million in 2003. We recognized pension
income of $17.1 million, $20.2 million, and $17.7 million in 2002, 2001, and
2000 respectively, reflected as reductions to cost of products sold and SG&A.
See Note 12 of Notes to Consolidated Financial Statements.
In developing our expected long-term rate of return assumption, we evaluated our
pension plan's target asset allocation, historical long-term rates of return of
equity and bond indices, and actual historical returns of our pension plan. Our
plan's target allocation to equity managers is 65 percent and the target
allocation to bond managers is 35 percent. Due to market fluctuations, our
actual asset allocation as of December 31, 2002, was 60 percent to equity
managers and 40 percent to bond managers. We regularly review our actual asset
allocation and periodically rebalance our investments to our targeted allocation
when considered appropriate. We also considered our pension plan's historical
10-year and 25-year compounded annualized returns of 10.8 percent and 12.7
percent, respectively. We believe that with our target allocation and the
historical long-term returns of equity and bond indices, as well as our actual
historical returns, our 9.0 percent expected return on assets for 2003 is
reasonable.
The discount rate that we utilize for determining future pension obligations is
based on the average yield of Moody's Aa Corporate Bonds. The discount rate
determined on this basis has decreased from 7.25 percent at December 31, 2001,
to 6.75 percent at December 31, 2002. We will continue to evaluate our actuarial
assumptions at least annually, and we will adjust the assumptions as necessary.
Interest expense was $13.9 million in 2002, compared with $16.4 million and
$22.1 million in 2001 and 2000, respectively. Decreasing interest rates
throughout the past three years coupled with a significant reduction in debt
resulting from our stock offering in May 2002 were responsible for the downward
trend in interest expense. See Note 9 of Notes to Consolidated Financial
Statements.
Amortization of intangibles decreased to $0.3 million in 2002 from approximately
$7.0 million in both 2001 and 2000. We adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible
13
Assets" as of January 1, 2002. Under the new standard, goodwill and
indefinite-lived intangible assets are no longer amortized but instead are
reviewed annually for impairment, and accordingly goodwill amortization of $6.7
million in 2001 and 2000 was not recorded in 2002. See Note 8 of Notes to
Consolidated Financial Statements.
Other expense decreased slightly to $1.0 million from $1.4 million in 2001. The
$1.1 million increase from 2000 to 2001 was due mostly to losses incurred on
forward foreign currency contracts.
Our effective tax rate was 34.5 percent in 2002, 35.5 percent in 2001, and 36.0
percent in 2000. The effective rate in 2002 benefited from the implementation of
a more efficient tax structure for international operations. The decline in the
rate from 2000 to 2001 resulted from increased research and state tax credits,
partially offset by the negative impact of the losses in low-tax foreign
jurisdictions.
We recorded net earnings of $51.3 million or $1.86 per share in 2002 compared
with $14.5 million or $.61 per share in 2001. Net earnings in 2001 included a
$6.0 million after-tax special charge ($.25 on a per share basis) related
primarily to the restructuring of our electric motor operation.
Electrical Products
On July 1, 2002, we purchased the hermetic motor assets of Athens for
approximately $9.7 million. Athens, based in Athens, Tennessee, is a
manufacturer of hermetic motors for both scroll and reciprocating compressors.
This purchase is expected to generate incremental sales in 2003 of approximately
$20 million and modest earnings in the second half of the year. In the fourth
quarter of 2002, we also acquired the motor manufacturing assets of Jiangsu
Changheng Group Co. Ltd. (Changheng) for approximately $15.3 million. Changheng
is located in the JiangSu province of China and manufactures air-moving motors
for the Chinese air conditioning market. Although Changheng has an existing
customer base in China, the primary purpose of the acquisition is to further
expand our ability to manufacture products for the U.S. market. See Note 2 of
Notes to Consolidated Financial Statements.
Sales in our Electrical Products segment in 2002 were $790.4 million, $12.3
million lower than 2001 sales of $802.7 million. Excluding approximately $20
million in sales attributable to the Athens acquisition, sales declined by $32.0
million from 2001 to 2002. Sales to the heating, ventilating, and air
conditioning (HVAC) market, excluding Athens, declined by six percent in 2002
and accounted for the majority of the total decrease in sales. Sales in 2000
were $902.4 million. The HVAC market experienced a decline of approximately $60
million or 11 percent from 2000 to 2001. The lower demand 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.
Operating earnings for our Electrical Products segment in 2002 were $57.6
million or $22.1 million higher than 2001 earnings adjusted to exclude goodwill
amortization expense of $6.7 million and special pretax charges of $8.1 million
in 2001. The increased earnings were primarily due to the cost reduction program
announced in the fourth quarter of 2001. The program consisted of three major
elements: consolidation of warehouse facilities; reduction of approximately 150
salaried employees; and relocation of production from six domestic facilities to
Mexico and China. The combination of these actions was expected to generate
savings of $16 million in 2002 and $20 to $25 million annually thereafter.
During 2002, we exceeded our goal and generated $19 million in first-year
savings and project 2003 cost savings to exceed $25 million. Operating earnings
in 2000 were $75.5 million and compare with earnings of $28.9 million excluding
the special pretax charge of $8.1 million in 2001. The significant decline in
2001 earnings was due mostly to lower sales volume, higher costs for raw
materials and Mexican labor, and more competitive market conditions.
Water Systems
Sales for our Water Systems segment were $678.7 million in 2002, or $330.2
million higher than sales of $348.5 million in 2001. The State acquisition
contributed $312.6 million of the increase. The remaining increase was
attributable to higher volume for the base residential and commercial business
and the China operation. The slight
14
increase in 2001 sales from $345.5 million in 2000 was due to higher sales of
residential products and growth in the China operation, partially offset by
lower sales in other international markets.
Operating earnings for our Water Systems segment were $58.4 million or $17.9
million higher than 2001 earnings of $40.5 million before special charges. The
higher earnings in 2002 were the result of the State acquisition and its related
synergies, and increased sales volume in the base business. The earnings
improvement from $34.9 million in 2000 to $40.5 million before special charges
in 2001 was the result of higher volume, better performance in China, and
improved plant efficiencies throughout the organization.
During 2002, we moved the Water Systems segment headquarters from Irving, Texas
to Ashland City, Tennessee, State's headquarters, to facilitate the integration
of the two businesses. A special pretax charge of $1.3 million was recognized in
the fourth quarter of 2001 for lease and certain other costs associated with
this move.
Critical Accounting Policies
Our accounting policies are described in Note 1 of Notes to Consolidated
Financial Statements. Also as disclosed in Note 1, the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires the use of estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying
notes. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
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 14 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 and trends, and in some cases, actuarial techniques. We
constantly reevaluate these significant factors and adjustments are made when
facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimates described
above.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 143, "Accounting
for Asset Retirement Obligations," SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition Disclosures." 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 was adopted on January 1, 2002, has not had a material impact on our
consolidated financial statements since its adoption. SFAS No. 146 will be
effective for exit or disposal activities initiated after December 31, 2002.
Adoption of this statement is not expected to have a material impact on our
consolidated financial statements. Effective December 31, 2002, we began making
the disclosures required under SFAS No. 148.
Outlook
Our overall cost structure improved significantly during 2002. Our operating
units will continue to aggressively manage cost in the new year, and we remain
confident in our full-year 2003 earnings estimate of between $2.05 and $2.25 per
share.
While we are confident in the full-year estimate, earnings improvement will
occur primarily in the last half of the year. Cost increases, including pension,
employee medical costs, and liability insurance will impact us throughout the
year. Operating improvements, however, will build up incrementally during the
year and are weighted to the last half of the year. These improvements include
the continued success of the motor repositioning programs, the ongoing impact of
the State integration activities, and the introduction of new water heater
products. For the first
15
quarter of 2003, net earnings are projected to modestly surpass last year's
$12.1 million result. However, given the impact from our second quarter 2002
stock offering, our first quarter earnings forecast of $.41 to $.45 per share
will fall short of last year's figure of $.50 per share.
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 the company or third parties. We have expended financial and
managerial resources complying with such laws. Expenditures related to
environmental matters were not material in 2002 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 maintain procedures designed to
maintain compliance, there are no assurances that substantial additional costs
for compliance will not be incurred in the future. However, since the same laws
govern our competitors, we should not be placed at a competitive disadvantage.
Market Risk
We are exposed to various types of market risks, primarily currency and certain
commodities. We monitor our risks in such areas on a continuous basis and
generally enter into forward and futures contracts to minimize such exposures
for periods of less than one year. We do not engage in speculation in our
derivatives strategies. Further discussion regarding derivative instruments is
contained in Note 1 of Notes to Consolidated Financial Statements.
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, 2002, we had commodity
futures contracts amounting to $56 million of commodity purchases. A
hypothetical 10 percent change in the underlying commodity price of such
contracts would have a potential impact of $5.6 million. It is important to note
that gains and losses from the company's futures contract activities will be
offset by gains and losses in the underlying commodity purchase transactions
being hedged.
In addition, we enter into foreign currency forward contracts to minimize the
effect of fluctuating foreign currencies. At December 31, 2002, we had net
foreign currency contracts outstanding of $94.0 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 $9.4 million.
It is important to note that 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, 2002, we had $116.9 million in
outstanding floating-rate debt with a weighted-average interest rate of 2.0
percent at year end. A hypothetical 10 percent annual increase or decrease in
the year-end average cost of our outstanding floating-rate debt would result in
a change in annual pretax interest expense of $0.2 million.
Forward-Looking Statements
This report contains statements that we believe are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements generally can be identified by the use of words such
as "may," "will," "expect," "intend," "estimate," "anticipate," "believe,"
"continue," "expectation," or words of similar meaning. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those anticipated as of the date of this
filing. Factors that could cause such a variance include the following:
instability in our electric motor and water heater markets; inability to
generate the synergistic cost savings from the acquisition of State; the
inability to implement cost-reduction programs; adverse changes in general
economic conditions; significant increases in raw material prices; a regulatory
delay or a failure to comply with new flammable vapor ignition resistant
standards in the residential gas water heater industry;
16
competitive pressures on our businesses; and the potential that assumptions on
which we have based our expectations are inaccurate or will prove to be
incorrect.
Forward-looking statements included in this report are made only as of the date
of the filing, and we are under no obligation to update these statements to
reflect subsequent events or circumstances. All subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are qualified in their entirety by these cautionary statements.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
See "Market Risk" above.
17
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Index to Financial Statements: Form 10-K
Page Number
-----------
Report of Ernst & Young LLP, Independent Auditors......................19
Consolidated Balance Sheets at December 31, 2002 and 2001..............20
For each of the three years in the period ended
December 31, 2002:
- Consolidated Statement of Earnings...............................21
- Consolidated Statement of Comprehensive Earnings.................21
- Consolidated Statement of Cash Flows.............................22
- Consolidated Statement of Stockholders' Equity...................23
Notes to Consolidated Financial Statements........................24 - 42
18
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, 2002 and 2001, 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, 2002. Our
audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of A. O. Smith
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 8 to the consolidated financial statements, effective
January 1, 2002, A. O. Smith Corporation changed its method of accounting for
goodwill and identifiable intangible assets with indefinite lives.
Ernst & Young LLP
Milwaukee, Wisconsin
January 16, 2003
19
CONSOLIDATED BALANCE SHEETS
December 31 (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 32,847 $ 20,759
Receivables 215,481 209,871
Inventories 200,351 194,706
Deferred income taxes 26,714 22,403
Other current assets 12,858 29,835
---------- ----------
Total Current Assets 488,251 477,574
Net property, plant, and equipment 362,730 355,298
Goodwill 302,410 295,073
Other intangibles 6,741 6,851
Prepaid pension - 103,272
Other assets 64,725 55,855
---------- ----------
Total Assets $1,224,857 $1,293,923
========== ==========
Liabilities
- --------------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ - $ 3,280
Trade payables 131,423 135,684
Accrued payroll and benefits 38,745 30,508
Accrued liabilities 58,576 52,849
Product warranty 19,478 19,470
Income taxes 1,786 887
Long-term debt due within one year 11,671 13,272
---------- ----------
Total Current Liabilities 261,679 255,950
Long-term debt 239,084 390,385
Product warranty 51,037 50,162
Post-retirement benefit obligation 17,170 17,073
Deferred income taxes 7,512 62,154
Pension liability 90,836 19,366
Other liabilities 46,487 46,955
---------- -----------
Total Liabilities 713,805 842,045
Commitments and contingencies (Notes 9 and 14)
Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------
Preferred Stock - -
Class A Common Stock (shares issued 8,595,435 and 8,686,484) 42,977 43,432
Common Stock (shares issued 23,953,927 and 23,862,878) 23,954 23,863
Capital in excess of par value 73,526 54,785
Retained earnings 588,487 551,420
Accumulated other comprehensive loss (121,877) (6,858)
Treasury stock at cost (96,015) (214,764)
---------- ----------
Total Stockholders' Equity 511,052 451,878
---------- ----------
Total Liabilities and Stockholders' Equity $1,224,857 $1,293,923
========== ==========
See accompanying notes which are an integral part of these statements
20
CONSOLIDATED STATEMENT OF EARNINGS
Years ended December 31 (dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Continuing Operations
Net sales $1,469,100 $1,151,156 $1,247,945
Cost of products sold 1,169,340 948,815 999,821
---------- ---------- ----------
Gross profit 299,760 202,341 248,124
Selling, general, and administrative expenses 206,169 145,742 153,695
Interest expense 13,926 16,418 22,102
Amortization of intangibles 282 6,956 6,932
Restructuring and other charges - 9,368 -
Other expense - net 993 1,371 307
---------- ---------- ----------
78,390 22,486 65,088
Provision for income taxes 27,045 7,984 23,432
---------- ---------- ----------
Earnings from Continuing Operations 51,345 14,502 41,656
Discontinued Operations
Loss from discontinued operations less related
income tax benefit of $7,772 - - (11,903)
---------- ---------- ----------
Net Earnings $ 51,345 $ 14,502 $ 29,753
========== ========== ==========
Net Earnings (Loss) Per Share of Common Stock
Continuing Operations $ 1.90 $ 0.61 $ 1.78
Discontinued Operations - - (0.51)
---------- ---------- ----------
Net Earnings $ 1.90 $ 0.61 $ 1.27
========== ========== ==========
Diluted Earnings (Loss) Per Share of Common Stock
Continuing Operations $ 1.86 $ 0.61 $ 1.76
Discontinued Operations - - (0.50)
---------- ---------- ----------
Net Earnings $ 1.86 $ 0.61 $ 1.26
========== ========== ==========
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS (LOSS)
Years ended December 31 (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 51,345 $ 14,502 $ 29,753
Other comprehensive earnings (loss)
Foreign currency translation adjustments 3,079 (981) (2,200)
Unrealized net loss on cash flow derivative
instruments, less related income tax benefit of $2,146
in 2002 and $287 in 2001 (3,358) (439) -
Additional minimum pension liability less related
income tax benefit of $75,210 (114,740) - -
---------- ---------- ----------
Comprehensive Earnings (Loss) $ (63,674) $ 13,082 $ 27,553
========== ========== ==========
See accompanying notes which are an integral part of these statements.
21
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Continuing
Operating Activities
Earnings from continuing operations $ 51,345 $ 14,502 $ 41,656
Adjustments to reconcile earnings from continuing
operations to cash provided by operating activities:
Depreciation 49,080 38,485 36,582
Amortization 1,613 8,591 8,477
Net change in current assets and liabilities 6,691 11,175 3,563
Net change in noncurrent assets and liabilities 3,809 (22,667) (15,343)
Other (341) (258) 241
--------- --------- --------
Cash Provided by Operating Activities 112,197 49,828 75,176
Investing Activities
Acquisition of businesses (23,381) (117,988) -
Capital expenditures (42,472) (35,318) (40,516)
Cash Used in Investing Activities (65,853) (153,306) (40,516)
--------- --------- --------
Financing Activities
Long-term debt incurred - 90,565 -
Long-term debt retired (156,182) (11,129) (33,379)
Net proceeds from common stock offering 127,480 - -
Net proceeds from option activity 5,754 1,407 816
Dividends paid (14,278) (12,319) (11,720)
--------- --------- --------
Cash Provided by (Used in) Financing Activities (37,226) 68,524 (44,283)
Cash Flow Provided by Discontinued Operations 2,970 40,426 10,149
--------- --------- --------
Net increase in cash and cash equivalents 12,088 5,472 526
Cash and cash equivalents-beginning of year 20,759 15,287 14,761
--------- --------- --------
Cash and Cash Equivalents-End of Year $ 32,847 $ 20,759 $ 15,287
========= ========= ========
See accompanying notes which are an integral part of these statements.
22
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31 (dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Class A Common Stock
Balance at beginning of year $ 43,432 $ 43,614 $ 43,615
Conversion of Class A Common Stock (455) (182) (1)
--------- --------- ---------
Balance at end of year $ 42,977 $ 43,432 $ 43,614
--------- --------- ---------
Common Stock
Balance at beginning of year $ 23,863 $ 23,827 $ 23,826
Conversion of Class A Common Stock 91 36 1
--------- --------- ---------
Balance at end of year $ 23,954 $ 23,863 $ 23,827
--------- --------- ---------
Capital in Excess of Par Value
Balance at beginning of year $ 54,785 $ 53,521 $ 53,026
Conversion of Class A Common Stock 364 146 -
Exercise of stock options (2,808) (116) (84)
Tax benefit from exercise of stock options 2,434 1,114 404
Sale of Common Stock 18,450 - -
Stock incentives and directors' compensation 301 120 175
--------- --------- ---------
Balance at end of year $ 73,526 $ 54,785 $ 53,521
--------- --------- ---------
Retained Earnings
Balance at beginning of year $ 551,420 $ 549,237 $ 531,204
Net earnings 51,345 14,502 29,753
Cash dividends on Common Stock (14,278) (12,319) (11,720)
--------- --------- ---------
Balance at end of year $ 588,487 $ 551,420 $ 549,237
--------- --------- ---------
Accumulated Other Comprehensive Loss
Balance at beginning of year $ (6,858) $ (5,438) $ (3,238)
Foreign currency translation adjustments 3,079 (981) (2,200)
Unrealized net loss on cash flow derivative
instruments, less related income tax benefit of
$2,146 in 2002 and $287 in 2001 (3,358) (439) -
Additional minimum pension liability less related
income tax benefit of $75,210 (114,740) - -
--------- --------- ---------
Balance at end of year $(121,877) $ (6,858) $ (5,438)
--------- --------- ---------
Treasury Stock
Balance at beginning of year $(214,764) $(216,366) $(217,349)
Sale of Common Stock 109,030 - -
Exercise of stock options, net of 10,325 shares
surrendered as proceeds in 2002 8,562 1,524 901
Stock incentives and directors' compensation 1,157 78 82
--------- --------- ---------
Balance at end of year $ (96,015) $(214,764) $(216,366)
--------- --------- ---------
Total Stockholders' Equity $ 511,052 $ 451,878 $ 448,395
========= ========= =========
See accompanying notes which are an integral part of these statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A. O. Smith Corporation (the company) is a manufacturer serving
customers worldwide. The company's major product lines include fractional and
integral horsepower alternating current (A/C), direct current (D/C), and
hermetic electric motors, as well as residential and commercial water heaters.
The company's products are manufactured and marketed primarily in North America.
Electric motors are sold principally to original equipment manufacturers and
industrial distributors. Water heaters are sold principally to plumbing
wholesalers and retail outlets.
Consolidation. The consolidated financial statements include the accounts of the
company and its wholly owned subsidiaries after elimination of intercompany
transactions.
Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the accompanying financial statements and notes. Actual results could differ
from those estimates.
Fair value of financial instruments. The carrying amounts of cash and cash
equivalents, receivables, and trade payables approximated fair value as of
December 31, 2002 and 2001, due to the short maturities of these instruments.
The carrying amount of long-term debt approximated fair value as of December 31,
2002 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 and the China operations of the company's
Electrical Products segment, 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 and China
operations of the company's Electrical Products segment 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 92 percent and 93 percent of the company's
total inventory at December 31, 2002 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. The company adopted Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under SFAS No. 142, goodwill and indefinite-lived
intangible assets (totaling $3.0 million at December 31, 2002) are no longer
amortized but are reviewed for impairment on an annual basis. Separable
intangible assets that are not deemed to have an indefinite life are amortized
on a straight-line basis over their estimated useful lives which range from 5 to
30 years.
24
1. Organization and Significant Accounting Policies (continued)
Impairment of long-lived and amortizable intangible assets. Property, plant, and
equipment and intangible assets subject to amortization 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 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 materials price risks. Derivative instruments
are entered into for periods consistent with the related underlying exposures
and do not constitute positions independent of those exposures. The company does
not enter into contracts for speculative purposes. The 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 and accounted for as cash flow
hedges of a forecasted transaction. Derivative commodity liabilities of $1.8 and
$6.9 million are recorded in accrued liabilities as of December 31, 2002 and
2001, respectively, with the value of the effective portion of the contracts of
$1.7 and $6.9 million recorded in accumulated other comprehensive earnings
(loss), net of tax, 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 years ended December 31, 2002 and 2001, respectively.
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 one year or less. Principal currencies
include the Mexican peso, Hungarian forint, British pound, Euro, and U.S.
dollar.
Forward contracts are designated and accounted for as cash flow hedges of a
forecasted transaction. Derivative currency liabilities of $3.9 million as of
December 31, 2002, are recorded in other current liabilities, and 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
accumulated other comprehensive earnings (loss), net of tax, 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.
25
1. Organization and Significant Accounting Policies (continued)
The majority of the amounts in accumulated other comprehensive earnings (loss)
for cash flow hedges is expected to be reclassified into earnings within one
year.
The following table summarizes, by currency, the contractual amounts of the
company's foreign currency forward contracts.
December 31 (dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Buy Sell Buy Sell
--- ---- --- ----
Euro $ 2,980 $1,960 $ 3,900 $1,560
British pound - - 2,824 1,525
Hungarian forint 3,179 - 3,394 -
Mexican peso 89,831 - 74,279 -
------- ------ ------- ------
Total $95,990 $1,960 $84,397 $3,085
======= ====== ======= ======
The forward contracts in place at December 31, 2002 and 2001, amounted to
approximately 95 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 fourth quarter of 2001 and the second quarter of
2000, the company changed its vacation policy for certain employees so that
vacation pay is earned ratably throughout the year and must be used by year-end.
The accrual for compensated absences was reduced by $1.6 and $2.3 million in
2001 and 2000, respectively, to eliminate vacation pay no longer required to be
accrued under the current policy.
Research and development. Research and development costs are charged to
operations as incurred and amounted to $30.4, $27.6, and $24.5 million during
2002, 2001, and 2000, 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. The following table presents the company's product warranty
liability activity in 2002 and 2001:
2002 2001
---- ----
Balance at beginning of year $ 69,632 $ 29,205
Expense 32,738 19,068
Acquired obligations 73 40,028
Claims settled (31,928) (18,669)
-------- --------
Balance at end of year $ 70,515 $ 69,632
======== ========
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.
26
1. Organization and Significant Accounting Policies (continued)
Stock based compensation. The company has one stock-based employee compensation
plan (see Note 11). 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.
Had compensation cost been determined based upon the fair value at the grant
date for awards under the plans based on the provisions of SFAS No. 123, the
company's pro forma earnings and earnings per share would have been as follows:
Years ended December 31 (dollars in thousands, except per share amounts) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Earnings:
As reported $51,345 $14,502 $41,656
Deduct: Total stock based employee compensation expense
determined under fair value based method, net of tax (1,669) (1,775) (1,326)
------- ------- -------
Pro forma $49,676 $12,727 $40,330
======= ======= =======
Earnings per share:
As reported:
Basic $1.90 $0.61 $1.78
Diluted 1.86 0.61 1.76
Pro forma:
Basic $1.84 $0.54 $1.72
Diluted 1.80 0.53 1.70
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:
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share--weighted-
average shares outstanding 27,002,102 23,648,136 23,396,210
Effect of dilutive stock options 646,964 266,646 294,932
---------- ---------- ----------
Denominator for diluted earnings per share 27,649,066 23,914,782 23,691,142
========== ========== ==========
Reclassifications. Certain prior year amounts have been reclassified to conform
to the 2002 presentation.
New accounting standards. During 2002, the Financial Accounting Standards Board
issued SFAS No. 143, "Accounting for Asset Retirement Obligations," SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," and
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 143 will become effective for the company on January 1,
2003. Adoption of this statement is not expected to have a material impact on
the company's consolidated financial statements. SFAS No. 144, which was adopted
on January 1, 2002, did not have a material impact on the company's consolidated
financial statements since its adoption. SFAS No. 146 will be effective for exit
or disposal activities initiated after December 31, 2002. Adoption of this
statement is not expected to have a material impact on the company's
consolidated financial statements. Effective December 31, 2002, the company made
the disclosures required under SFAS No. 148.
27
2. Acquisitions
In 2002, the company acquired certain net assets of the Athens Products (Athens)
division of the Electrolux Group and the motor manufacturing assets of Jiangsu
Changheng Group Co. Ltd. (Changheng). The total cost of these acquisitions was
$25.0 million including future payments of $3.8 million and acquisition costs of
$0.1 million and exceeded the fair value of the net assets acquired by $3.7
million which was recorded as non-deductible goodwill in the Electrical Products
segment. Athens, based in Athens, Tennessee, is a manufacturer of hermetic
motors for both scroll and reciprocating compressors. Changheng is located in
the JiangSu province of China and manufactures air-moving motors principally for
the Chinese air conditioning market.
The respective purchase prices for the Athens and Changheng acquisitions were
allocated to the assets acquired and liabilities assumed based upon current
estimates of their respective fair values at the date of acquisition. The
operating results of these companies have been included in the company's
consolidated financial statements since the dates of acquisition. The pro forma
effect of these acquisitions, individually and in the aggregate, would not be
significant to 2002 or 2001 operating results.
On December 28, 2001, the company acquired all of the outstanding stock of State
Industries, Inc. (State). State is a manufacturer of residential and standard
commercial water heaters and has nearly doubled the size of the company's base
water heater business, while complementing the wholesale channel of distribution
with a strong presence in the retail market. The aggregate purchase price of
State was $117.6 million. This was comprised of $57.8 million for the
outstanding stock, assumption of $56.3 million of debt, and $3.5 million of
acquisition costs.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed in connection with the State acquisition. 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.
December 28, 2001 (dollars in thousands)
- -----------------------------------------------------------------------------
Current assets $102,436
Property, plant and equipment 73,322
Other intangibles 3,890
Goodwill 63,682
Other assets 854
--------
Total assets acquired $244,184
========
Current liabilities 74,969
Long-term liabilities 51,637
--------
Total liabilities assumed 126,606
--------
Net assets acquired $117,578
========
On a pro forma basis, the unaudited consolidated results assuming the State
acquisition occurred on January 1, 2001, is as follows:
Year ended December 31, 2001 (dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------
Net sales $1,467,261
Net earnings 17,604
Earnings per share:
Basic .74
Diluted .74
28
2. Acquisitions (continued)
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 all 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 acquisition been made as of the beginning of the period
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 Industries Co., Ltd. and is utilizing the facility located in China to
manufacture C-frame electric motors. The total purchase price of $3.3 million,
including future payments of $0.7 million, exceeded the fair value of the assets
acquired (principally plant and equipment) by $0.8 million and was recorded as
non-deductible goodwill within the Electrical Products segment.
In connection with the acquisition of Athens, the company recorded purchase
liabilities of $4.2 million primarily for employee severance costs associated
with product manufacturing repositioning. As of December 31, 2002, $1.1 million
has been charged against this reserve. In connection with the Athens acquisition
and certain other acquisitions by the company, aggregate purchase liabilities of
$26.5 million were recorded at the respective acquisition dates for employee
severance and relocation, as well as certain facility exit costs. As of December
31, 2002, costs incurred and charged against these liabilities to date totaled
$17.1 million.
3. Divestitures and Discontinued Operations
On January 17, 2000 (the measurement date), the company, with the approval of
its Board of Directors, decided to divest the company's fiberglass piping and
liquid and dry storage businesses. The combined net sales of these operations
were $129.3 million in 2000.
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:
Year ended December 31, 2000 (dollars in thousands)
- ------------------------------------------------------------------------------
Earnings from operations:
Engineered Storage Products Company $ 3,139
Loss on disposition:
Smith Fiberglass Products Company (9,032)
Engineered Storage Products Company (1,993)
Automotive Products Company (4,017)
--------
Net after-tax loss from discontinued operations $(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.
29
3. Divestitures and Discontinued Operations (continued)
An after-tax loss from operations (in an amount greater than what was originally
anticipated as of the measurement date) of $0.5 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 and 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 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 a $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.
Included in the consolidated balance sheet at December 31, 2002, are net current
liabilities of $1.6 million and net long-term liabilities of $1.7 million.
Included in the consolidated balance sheet at December 31, 2001, are net current
assets of $1.8 million and net long-term liabilities of $2.1 million.
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 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 expected to
approximate 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 $2.9 million
through December 31, 2002, for employee severance and separation costs. At
December 31, 2002, the company estimates approximately 500 employees are yet to
be impacted and plans to be substantially completed with the business
improvement activities prior to December 31, 2003.
5. Statement of Cash Flows
Supplemental cash flow information is as follows:
Years ended December 31 (dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Net change in current assets and liabilities:
Receivables $(1,350) $ 16,159 $10,278
Inventories (619) 6,983 (6,187)
Other current assets (310) 163 (377)
Trade payables (5,945) 7,265 10,559
Accrued liabilities, including payroll and benefits 7,314 (8,984) (3,091)
Income taxes 7,601 (10,411) (7,619)
------- -------- -------
$ 6,691 $ 11,175 $ 3,563
======= ======== =======
30
6. Inventories
December 31 (dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Finished products $130,685 $120,231
Work in process 39,691 40,210
Raw materials 58,306 58,375
-------- --------
Inventories, at FIFO cost 228,682 218,816
LIFO reserve 28,331 24,110
-------- --------
$200,351 $194,706
======== ========
7. Property, Plant, and Equipment
December 31 (dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Land $ 10,032 $ 9,408
Buildings 143,419 126,709
Equipment 532,729 501,386
-------- --------
686,180 637,503
Less accumulated depreciation 323,450 282,205
-------- --------
$362,730 $355,298
======== ========
8. Goodwill
In connection with the adoption of SFAS No. 142, the company completed the first
step of the transitional goodwill impairment test, which required the company to
compare the fair value of its reporting units to the carrying value of the net
assets of the respective reporting units as of January 1, 2002. Based on this
analysis, the company concluded that no impairment existed at the time of
adoption, and, accordingly, the company has not recognized any transitional
impairment loss. Additionally, the company concluded that no impairment existed
at the time of the annual impairment test which was performed in the fourth
quarter.
Changes in the carrying amount of goodwill during the year ended December 31,
2002, consist of the following:
Electrical Water
(dollars in thousands) Products Systems Total
- -------------------------------------------------------------------------------------------
Balance at December 31, 2001 $230,004 $65,069 $295,073
Acquisition of businesses (see Note 2) 3,728 - 3,728
Adjustment to finalize 2001 acquisitions 50 3,559 3,609
-------- ------- --------
Balance at December 31, 2002 $233,782 $68,628 $302,410
======== ======= ========
31
8. Goodwill (continued)
As required by SFAS No. 142, the results of operations for periods prior to its
adoption have not been restated. The following table reconciles reported net
earnings and earnings per share to pro forma net earnings and earnings per share
that would have resulted for the years ended December 31, 2001 and 2000,
respectively, if SFAS No. 142 had been adopted effective January 1, 2000:
Years ended December 31 (dollars in thousands, except per share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Net earnings as reported $14,502 $29,753
Goodwill amortization - after tax 4,249 4,200
Assembled workforce amortization - after tax 238 236
------- -------
Net earnings - pro forma $18,989 $34,189
======= =======
Basic earnings per share:
As reported $ .61 $ 1.27
Pro forma .80 1.46
Diluted earnings per share:
As reported $ .61 $ 1.26
Pro forma .79 1.44
9. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands)
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Bank credit lines, average year-end interest rate of
2.9% for 2002 and 4.5% for 2001 $ 27,235 $ 25,596
Commercial paper, average year-end interest rate of
1.7% for 2002 and 2.3% for 2001 83,135 104,404
Revolver borrowings, average year-end interest rate of
2.3% for 2001 - 120,000
Term notes with insurance companies, expiring through
2018, average year-end interest rate of 7.1% for
2002 and 2001 127,885 141,157
Other notes, expiring through 2012, average year-end
interest rate of 2.6% for 2002 and 3.2% for 2001 12,500 12,500
-------- --------
250,755 403,657
Less amount due within one year 11,671 13,272
-------- --------
$239,084 $390,385
======== ========
The company has a $250 million multi-year revolving credit agreement with a
group of nine financial institutions, which expires on August 2, 2004. It also
has a $82.5 million 364-day credit agreement with a group of six banks, which
expires on July 25, 2003. At its option, the company maintains either cash
balances or pays fees for bank credit and services.
The company's credit agreements 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 $92 million were
unrestricted as of December 31, 2002.
32
9. 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.
Scheduled maturities of long-term debt within each of the five years subsequent
to December 31, 2002, is as follows: 2003-$11.7; 2004-$8.6; 2005-$8.6;
2006-$6.9; 2007-$6.9 million.
Future minimum payments under noncancelable operating leases total $66.3 million
and are due as follows: 2003-$14.3; 2004-$12.1; 2005-$8.8; 2006-$6.8; 2007-$6.0
and thereafter - $18.3 million. Rent expense including payments under operating
leases, was $22.0, $19.0, and $18.3 million in 2002, 2001, and 2000,
respectively.
Interest paid by the company for continuing and discontinued operations, was
$13.9, $16.9, and $24.6 million in 2002, 2001, and 2000, respectively.
10. 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.
On May 10, 2002, the company completed the sale of 4,776,065 shares of Common
Stock held in treasury. The $127.5 million net proceeds from the offering were
used to reduce long-term debt.
During 2002, 2001, and 2000, 91,049, 36,236, and 200 shares, respectively, of
Class A Common Stock were converted into Common Stock. Regular dividends paid on
the Class A Common Stock and Common Stock amounted to $.54, $.52, and $.50 per
share in 2002, 2001, and 2000, respectively.
At December 31, 2002, 32,595 and 3,476,844, 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.
Accumulated other comprehensive loss is as follows:
December 31 (dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------
Foreign currency translation adjustments $ (3,340) $(6,419)
Unrealized net loss on cash flow derivative instruments (3,797) (439)
Additional minimum pension liability (114,740) -
--------- -------
$(121,877) $(6,858)
========= =======
33
11. Stock Options
The company adopted the A. O. Smith Combined Executive Incentive Compensation
Plan (the "plan") effective January 1, 2002. The plan supercedes and replaces
two predecessor incentive compensation plans. The plan provides for the issuance
of 1.5 million stock options at exercise prices equal to the fair value of
Common Stock on the date of grant. Additionally, any shares that would have been
available for stock option grants under either of the predecessor plans, if such
plans were in effect, will be available for granting of stock option awards
under the plan. 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, 2002, was
1,325,850.
Participants may also be awarded shares of restricted stock under the plan. In
2002, the company granted 49,000 shares of restricted common stock under the
plan. The restricted shares were valued at $1.3 million at the date of issuance
and will be recognized as compensation expense ratably over the three-year
vesting period. Compensation expense of $0.1 million was recognized in 2002.
Changes in option shares, all of which are Common Stock, were as follows:
Weighted-
Average
Per Share Years Ended December 31
Exercise ---------------------------------------------------
Price 2002 2001 2000
--------- ---- ---- ----
Outstanding at beginning of year $17.01 2,733,600 2,448,500 1,979,800
Granted
2002--$26.88 per share 26.88 296,400
2001--$15.14 per share 510,700
2000--$13.56 to $16.28 per share 632,000
Exercised
2002--$8.67 to $18.33 per share 13.92 (432,400)
2001--$5.63 to $16.33 per share (225,600)
2000--$4.67 to $16.33 per share (141,600)
Expired
2002--$27.25 to $29.03 per share 28.14 (12,600) - -
2000--$18.00 to $27.25 per share - - (21,700)
--------- --------- ---------
Outstanding at end of year
(2002--$13.56 to $29.03 per share) 18.54 2,585,000 2,733,600 2,448,500
========= ========= =========
Exercisable at end of year 17.46 2,288,600 2,222,900 1,816,500
========= ========= =========
34
Stock Options (continued)
The following table summarizes weighted-average information by range of exercise
prices for stock options outstanding and exercisable at December 31, 2002:
Weighted-
Options Weighted- Options Weighted- Average
Outstanding at Average Exercisable at Average Remaining
Range of December 31, Exercise December 31, Exercise Contractual
Exercise Prices 2002 Price a 2002 Price Life
--------------- -------------- ------- -------------- -------- -----------
$13.56 545,300 13.56 545,300 13.56 8 years
$15.14 to 1,414,900 16.47 1,414,900 16.47 5 years
$18.33
$26.88 to 624,800 27.55 328,400 28.16 8 years
--------- ---------
$29.03
2,585,000 2,288,600
========= =========
The weighted-average fair value per option at the date of grant during 2002,
2001, and 2000 using the Black-Scholes option-pricing model, was $9.71, $5.30,
and $4.73, respectively. Assumptions were as follows:
2002 2001 2000
- ------------------------------------------------------------------------------
Expected life (years) 6.3 6.0 5.0
Risk-free interest rate 3.3% 4.7% 5.0%
Dividend yield 2.2% 2.3% 2.2%
Expected volatility 41.3% 37.9% 39.9%
12. 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 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, including its pension and
defined-contribution benefit plans.
The company 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. 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 eight percent in 2002 trending down to six percent in 2004
and thereafter.
The following tables present the changes in benefit obligations, plan assets,
funded status, and major assumptions used to determine these amounts for
domestic pension and post-retirement plans and components of net periodic
benefit costs.
35
12. Pension and Other Post-retirement Benefits (continued)
Pension Benefits Post-retirement Benefits
---------------------------- ---------------------------
Years ended December 31 (dollars in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligation at beginning of year $(650,487) $(561,771) $(16,455) $(17,177)
ESPP benefit obligation at beginning of year - (6,963) - -
Service cost (8,268) (5,900) (267) (258)
Interest cost (46,906) (41,579) (1,198) (1,227)
Participant contributions - - (536) (387)
Plan amendments (1,228) (542) - -
Actuarial gains (losses) including
assumption changes (49,033) (15,759) (1,503) 2
Acquisition - (64,642) - -
Benefits paid 52,013 46,669 1,796 2,592
--------- --------- -------- --------
Benefit obligation at end of year $(703,909) $(650,487) $(18,163) $(16,455)
========= ========= ======== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 704,328 $ 737,119 $ - $ -
Actual return on plan assets (60,319) (35,967) - -
Contribution by the company 763 946 1,260 2,205
Participant contributions - - 536 387
Acquisition - 48,899 - -
Benefits paid (52,013) (46,669) (1,796) (2,592)
--------- --------- -------- --------
Fair value of plan assets at end of year $ 592,759 $ 704,328 $ - $ -
========= ========= ======== ========
Funded status (111,150) 53,841 $(18,163) $(16,455)
Unrecognized net actuarial loss (gain) 205,741 22,285 (266) (1,781)
Unrecognized prior service cost (credit) 8,030 7,780 (372) (525)
--------- --------- -------- --------
Net amount recognized $ 102,621 $ 83,906 $(18,801) $(18,761)
========= ========= ======== ========
Amounts recognized in the statement of financial position:
Prepaid pension $ - $ 103,272 $ - $ -
Other assets 5,307 - - -
Accumulated other comprehensive loss before tax 189,950 - - -
Current liabilities (1,800) - (1,631) (1,688)
Non-current liabilities (90,836) (19,366) (17,170) (17,073)
--------- --------- -------- --------
Net amount recognized $ 102,621 $ 83,906 $(18,801) $(18,761)
========= ========= ======== ========
Actuarial assumptions used to determine cost and benefit obligations for employee benefit plans are as follows:
Assumptions as of December 31
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets (1) 9.75% 10.00% n/a n/a
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
(1) For 2003, the expected return on plan assets will be 9.0 percent.
36
12. Pension and Other Post-retirement Benefits (continued)
Pension Benefits Post-retirement Benefits
--------------------------------------- ------------------------------------
Years ended December 31 (dollars in thousands) 2002 2001 2000 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 8,268 $ 5,900 $ 6,631 $ 267 $ 258 $ 271
Interest cost 46,906 41,579 40,926 1,198 1,227 1,267
Expected return on plan assets (73,291) (68,067) (64,854) - - -
Amortization of prior service cost 978 937 559 (152) (152) (152)
Amortization of transition asset - (499) (939) - - -
Amortization of net actuarial gain - - - (13) (66) (82)
-------- -------- -------- ------ ------ ------
Defined-benefit plan cost (income) (17,139) (20,150) (17,677) $1,300 $1,267 $1,304
====== ====== ======
Various U.S. defined-contribution
plans cost 4,760 2,418 3,559
-------- -------- --------
$(12,379) $(17,732) $(14,118)
======== ======== ========
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 $703,909, $686,565, and $592,759, respectively, as of
December 31, 2002, and $71,561, $68,104, and $48,899, respectively, as of
December 31, 2001.
The accumulated benefit obligations related to the company's pension plans
exceeded the fair value of the plans' assets by $88,713 as of December 31, 2002.
This under-funded status is primarily due to the impact of recent declines in
the U.S. equity markets, which resulted in a drop in the fair value of pension
assets; and declines in interest rates, which resulted in an increase in the
present value of pension obligations.
As a result of the under-funded status, the company recorded a charge to
stockholders' equity of $114,740, representing the elimination of the prepaid
pension asset, the establishment of a liability for under-funding, as well as
the related deferred income tax impacts. This non-cash charge has no impact on
income or cash flow. While declines in the equity markets and interest rates had
a significant impact on the funded status of the plans, the pension plans
continue to meet all funding requirements under ERISA regulations, and under
current assumptions, no significant minimum funding requirement is expected for
several years.
13. Income Taxes
The components of the provision for income taxes consisted of the following:
Years ended December 31 (dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 4,802 $(10,100) $ 3,964
State 1,543 (12) 428
International 3,489 2,426 3,581
Deferred 17,211 15,670 15,459
------- -------- -------
$27,045 $ 7,984 $23,432
======= ======== =======
37
13. Income Taxes (continued)
The provision for income taxes differs from the U.S. federal statutory rate due to the following items:
Years ended December 31 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Provision at U.S. federal statutory rate 35.0 % 35.0 % 35.0 %
State income and franchise taxes 3.5 (.8) 3.0
International income tax rate differential (2.3) 2.2 (1.1)
Research tax credits (1.3) (1.3) (.1)
Other (.4) .4 (.8)
---- ---- ----
34.5 % 35.5 % 36.0 %
==== ==== ====
Components of earnings before income taxes were as follows:
Years ended December 31 (dollars in thousands) 2002 2001 2000A
- ----------------------------------------------------------------------------------------------------------------------
United States $63,468 $18,939 $57,845
International 14,922 3,547 7,243
------- ------- -------
$78,390 $22,486 $65,088
======= ======= =======
Total taxes paid (tax refunds received) by the company for continuing and
discontinued operations amounted to $(10.6), $(2.7), and $13.1 million in 2002,
2001, and 2000, respectively.
No provision for U.S. income taxes or foreign withholding taxes has been made on
the undistributed earnings of foreign subsidiaries as such earnings are
considered to be permanently invested. At December 31, 2002, the undistributed
earnings amounted to $52.4 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 are as follows:
December 31 (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------- -------------------------------------
Assets Liabilities Assets Liabilities
-----------------------------------------------------------------------------
Employee benefits $ 52,242 $ - $25,605 $ 42,125
Inventory - 2,582 - 3,363
Recoverable dip tube costs - 13,262 - 12,941
Product liability and warranty 41,925 - 40,986 -
Depreciation differences - 45,603 - 42,781
Amortization differences - 24,119 - 17,941
Tax loss and credit carryovers 6,770 - 9,946 -
All other 3,831 - 2,863 -
-------- ------- ------- --------
$104,768 $85,566 $79,400 $119,151
======== ======= ======= ========
Net asset (liability) $ 19,202 $(39,751)
======== ========
38
13. Income Taxes (continued)
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) 2002 2001
- --------------------------------------------------------------------------------
Current deferred income tax assets $26,714 $ 22,403
Long-term deferred income tax liabilities (7,512) (62,154)
------- --------
Net asset (liability) $19,202 $(39,751)
======= ========
As a result of the acquisition of State, the company has $5.8 million of federal
net operating loss carryovers that expire between 2018 and 2021, $7.6 million of
federal capital loss carryovers that expire in 2006, $0.5 million of
contribution carryovers that expire between 2003 and 2006, and $2.9 million of
tax credits, the majority of which have an unlimited carryover period. Due to a
change in State ownership, the annual limitation for utilization of the federal
net operating loss carryovers is the equivalent of $2.2 million of deductions.
The company also has approximately $125 million of state and local net operating
loss carryovers. The majority of these carryovers expire between 2010 and 2022.
14. Litigation and Insurance Matters
The company is involved in various unresolved legal actions, administrative
proceedings, and claims in the ordinary course of its business involving product
liability, property damage, insurance coverage, patents, and environmental
matters including the disposal of hazardous waste. Although it is not possible
to predict with certainty the outcome of these unresolved legal actions or the
range of possible loss or recovery, the company believes these unresolved legal
actions will not have a material effect on its financial position or results of
operations. The following paragraphs summarize noteworthy actions and
proceedings.
In 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 the water heater manufacturers reached
a settlement of this lawsuit which the court approved in 2000. The water heater
manufacturers paid the settlement, and all other legal actions brought against
the water heater manufacturers related to dip tube claims have been dismissed as
a result of the settlement of the class action.
Separately, the water heater manufacturers in late 1999 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., 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.
39
14. Litigation and Insurance Matters (continued)
As of December 31, 2002, the company recorded as a long-term receivable
approximately $34.0 million (as detailed below) related to dip tube repair
claims, administrative costs, legal fees, and related expenses. It is the
company's expectation that all or a substantial portion of its costs will be
recovered from Perfection, American Meter Company, Manner Plastics Materials,
Inc. and their insurers, as well as the company's insurers.
2000 Cumulative
(dollars in thousands) 2002 2001 and Prior December 31, 2002
- -------------------------------------------------------------------------------------------------------
Claim payments $ 53 $13,378 $ 8,805 $22,236
Administrative costs 19 4,503 3,030 7,552
Legal fees 1,173 470 2,575 4,218
------ ------- ------- -------
$1,245 $18,351 $14,410 $34,006
====== ======= ======= =======
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 11 sites which have been
environmentally impacted (the "sites") and to recover costs they have incurred
or will incur as to the 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. The State of Colorado has appealed the trial court's decision in
one of those actions, and the company believes that the trial court's
well-reasoned decision will be upheld by the appellate court. 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 accounting principles
generally accepted in the United States for costs associated with such cleanups
when those costs are capable of being reasonably estimated. To the best of the
company's knowledge, the reserves it has established and insurance proceeds that
are available to the company are sufficient to cover the company's liability.
The company further believes its insurers have the financial ability to pay any
such covered claims, and there are viable PRPs at each of the sites which have
the financial ability to pay their respective shares of liability at the sites.
With respect to non-environmental claims, the company has self-insured a portion
of its product liability loss exposure and other business risks for many years.
The company has established reserves which it believes are adequate to cover
incurred claims. For the year ended December 31, 2002, the company (excluding
State) 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 $125 million of third-party product liability
insurance for individual losses in excess of $3.0 million and for aggregate
annual losses in excess of $65 million. The company periodically reevaluates its
exposure on claims and makes adjustments to its reserves as appropriate.
40
15. Operations by Segment
The company has two reportable segments: Electrical Products and Water Systems.
The Electrical Products segment manufactures fractional horsepower alternating
current (A/C) and direct current (D/C) and integral horsepower 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 pumps, 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.
Earnings from
Continuing Operations Net Sales
------------------------------- -----------------------------------
Years ended December 31 (dollars in millions) 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Electrical Products $ 57.6 $ 20.8 $ 75.5 $ 790.4 $ 802.7 $ 902.4
Water Systems 58.4 39.2 34.9 678.7 348.5 345.5
------ ------ ------ -------- -------- --------
Total Segments - EBIT 116.0 60.0 110.4 $1,469.1 $1,151.2 $1,247.9
======== ======== ========
General Corporate and Research
and Development Expenses (23.7) (21.1) (23.2)
Interest Expense (13.9) (16.4) (22.1)
------ ------ ------
Earnings from Continuing Operations
before Income Taxes 78.4 22.5 65.1
Provision for Income Taxes (27.1) (8.0) (23.4)
------ ------ ------
Earnings from Continuing Operations $ 51.3 $ 14.5 $ 41.7
====== ====== ======
Net sales of the Electrical Products segment includes sales to York International Corporation of $173.3, $171.9, and
$182.9 million in 2002, 2001, and 2000, respectively.
41
15. Operations by segment (continued)
Assets, depreciation, and capital expenditures by segment
Depreciation and Capital
Amortization Expenditures
Total Assets (Years Ended (Years Ended
(December 31) December 31) December 31)
------------------------------------------------------------------------------------------
(dollars in millions) 2002 2001 2000 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Electrical Products $ 697.4 $ 680.3 $ 700.6 $33.1 $37.0 $34.7 $24.6 $29.5 $35.6
Water Systems 434.7 420.6 182.8 16.9 8.9 9.0 17.6 5.7 4.6
-------- -------- -------- ----- ----- ----- ----- ----- -----
Total Segments 1,132.1 1,100.9 883.4 50.0 45.9 43.7 42.2 35.2 40.2
Corporate Assets 92.8 191.2 141.4 0.7 1.2 1.3 0.3 0.1 0.3
Discontinued Operations - 1.8 40.1 - - 5.6 - - 1.5
-------- -------- -------- ----- ----- ----- ----- ----- -----
Total $1,224.9 $1,293.9 $1,064.9 $50.7 $47.1 $50.6 $42.5 $35.3 $42.0
======== ======== ======== ===== ===== ===== ===== ===== =====
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, other intangibles, and long-lived
assets of discontinued operations.
Long-Lived Assets Net Sales
-------------------------------------- --------------------------------------
(dollars in millions) 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
United States $283.0 $283.4 $200.1 United States $1,282.9 $ 984.4 $1,108.9
Mexico 102.7 102.0 98.7 Foreign 186.2 166.8 139.0
-------- -------- --------
China 26.6 17.2 15.2 Total $1,469.1 $1,151.2 $1,247.9
======== ======== ========
Other Foreign 9.8 8.6 9.2
------ ------ ------
Total $422.1 $411.2 $323.2
====== ====== ======
16. Quarterly Results of Operations (Unaudited)
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------- -------------------- ------------------- -----------------
2002 2001 2002 2001 2002 2001 2002 2001
------------------- -------------------- -------------------- -----------------
Net sales $371.9 $318.2 $386.3 $308.3 $352.4 $269.1 $358.5 $255.6
Gross profit 76.9 58.8 81.4 58.6 66.4 42.6 75.1 42.3
Net earnings (loss) 12.1 8.5 18.0 10.7 10.0 0.4 11.2 (5.1)
Net earnings (loss) per share
Basic .51 .36 .68 .45 .35 .02 .39 (.21)
Diluted .50 .36 .66 .45 .34 .02 .38 (.21)
Common dividends declared .13 .13 .13 .13 .14 .13 .14 .13
Net earnings 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 9 for restrictions on the payment of dividends.
42
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
43
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information included under the heading "Election of Directors" in the
company's definitive Proxy Statement for the 2003 Annual Meeting of Stockholders
(to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant's fiscal year) is incorporated
herein by reference. The information required regarding Executive Officers of
the Company is included in Part I of this Annual Report on Form 10-K under the
caption "Executive Officers of the Company."
The information included under the heading "Compliance with Section 16(a) of the
Securities Exchange Act" in the company's definitive Proxy Statement for the
2003 Annual Meeting of Stockholders (to be filed with the Securities and
Exchange Commission under Regulation 14A within 120 days after the end of the
registrant's fiscal year) is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The information included under the heading "Executive Compensation" in the
company's definitive Proxy Statement for the 2003 Annual Meeting of Stockholders
(to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant's fiscal year) is incorporated
herein by reference, except for the information required by paragraphs (i), (k),
and (l) of Item 402(a)(8) of Regulation S-K.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information included under the headings "Principal Stockholders" and
"Security Ownership of Directors and Management" in the company's definitive
Proxy Statement for the 2003 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission under Regulation 14A within 120 days
after the end of the registrant's fiscal year) is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information included under the headings and "Compensation Committee
Interlocks and Insider Participation" in the company's definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission under Regulation 14A within 120 days after
the end of the registrant's fiscal year) is incorporated herein by reference.
ITEM 14 - CONTROLS AND PROCEDURES
- ---------------------------------
Evaluation of disclosure controls and procedures
Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures, have concluded that our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the company and its consolidated subsidiaries
would be made known to them by others within those entities.
Changes in internal controls
There were no significant changes in our internal controls or in other factors
that could significantly affect our disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in our internal controls. As a result, no
corrective actions were required or undertaken.
44
PART IV
-------
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES and REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
Form 10-K
Page Number
-----------
The following consolidated financial statements of A. O. Smith
Corporation are included in Item 8:
Consolidated Balance Sheets at December 31, 2002 and 2001.................. 20
For each of the three years in the period ended
December 31, 2002:
- Consolidated Statement of Earnings..................................... 21
- Consolidated Statement of Comprehensive Earnings....................... 21
- Consolidated Statement of Cash Flows................................... 22
- Consolidated Statement of Stockholders' Equity......................... 23
Notes to Consolidated Financial Statements................................. 24 - 42
The following consolidated financial statement schedule of
A. O. Smith Corporation is included in Item 15(d):
Schedule II - Valuation and Qualifying Accounts............................... 46
Schedules not included have been omitted because they are not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 2002.
(c) Exhibits - see the Index to Exhibits on pages 55 - 56 of this report.
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities
Exchange Act of 1934, as amended, the company will, upon request and
upon payment of a reasonable fee not to exceed the rate at which such
copies are available from the Securities and Exchange Commission,
furnish copies to its security holders of any exhibits listed in the
Index to Exhibits.
Management contracts and compensatory plans and arrangements required
to be filed as exhibits pursuant to Item 15(c) of Form 10-K are
listed as Exhibits 10(a) through 10(g) in the Index to Exhibits.
45
A. O. SMITH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Years ended December 31, 2002, 2001, and 2000
Balance at Charged to Acquisition Balance at
Beginning Costs and of End of
Description of Year Expenses(1) Businesses(2) Deductions(3) Year
- ----------- ----------- ------------ ------------- ------------- -----------
2002:
Valuation allowance
for trade and notes
receivable $4,880 $2,612 $ (660) $(2,067) $4,765
2001:
Valuation allowance
for trade and notes
receivable 2,989 2,344 1,581 (2,034) 4,880
2000:
Valuation allowance
for trade and notes
receivable 3,121 2,023 - (2,155) 2,989
(1)Provision based upon estimated collection.
(2)Associated with the purchase of State and Shenzhen Speeda
Industrial Co., Ltd.
(3)Uncollectible amounts/expenditures charged against the reserve.
46
EXHIBIT 21
- ----------
SUBSIDIARIES
The following lists all significant subsidiaries and affiliates of
A. O. Smith Corporation.
Jurisdiction in Which
---------------------
Name of Subsidiary Incorporated
- ------------------ ------------
AOS Holding Company Delaware
A. O. Smith International Corporation Delaware
APCOM, Inc. Tennessee
State Industries, Inc. Tennessee
A. O. Smith Export, Ltd. Barbados
A. O. Smith Holdings (Barbados) SRL Barbados
A. O. Smith Enterprises Ltd. Canada
A. O. Smith (China) Water Heater Co., Ltd. China
A. O. Smith Electrical Products (Changzhou) Co., Ltd. China
A. O. Smith Electrical Products (Shenzhen) Co., Ltd. China
A. O. Smith Electrical Products (Taizhou) Co., Ltd. China
A. O. Smith L'eau chaude S.a.r.l. France
A. O. Smith Warmwasser-Systemtechnik GmbH Germany
A. O. Smith Electrical Products Limited Liability Company Hungary
A. O. Smith Electric Motors (Ireland) Ltd. Ireland
A. O. Smith Holdings (Ireland) Ltd. Ireland
IG-Mex, S.A. de C.V. Mexico
Motores Electricos de Juarez, S.A. de C.V. Mexico
Motores Electricos de Monterrey, S.A. de C.V. Mexico
Productos de Agua, S.A. de C.V. Mexico
Productos Electricos Aplicados, S.A. de C.V. Mexico
A.O. Smith Electrical Products B.V. The Netherlands
A.O. Smith Water Products Company B.V. The Netherlands
A.O. Smith Holdings B.V. The Netherlands
A.O. Smith Products v.o.f. The Netherlands
A. O. Smith Electrical Products (S.E.A.) Pte Ltd Singapore
A. O. Smith Electrical Products Limited United Kingdom
State Water Heaters (U.K.) Limited United Kingdom
47
EXHIBIT 23
- ----------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-72542, 33-19015, 33-21356, 33-37878, 33-56827, 333-05799,
333-92329 and 333-92482) pertaining to the A. O. Smith Corporation 1990
Long-Term Executive Incentive Compensation Plan, the A. O. Smith Corporation
Long-Term Executive Incentive Compensation Plan and the A. O. Smith Corporation
Combined Executive Incentive Compensation Plan and in the related prospectuses
of our report dated January 16, 2003, with respect to the consolidated financial
statements and schedule of A. O. Smith Corporation included in this Annual
Report (Form 10-K) for the year ended December 31, 2002.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 18, 2003
48
Exhibit 99
- ----------
Written Statement of the Chief Executive Officer and the
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, each of the undersigned certifies that to the best of our knowledge:
(1) the Annual Report on Form 10-K of the company for the year ended December
31, 2002 (the "Report") fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the company.
Dated: February 19, 2003
/s/ Robert J. O'Toole
- ---------------------
Robert J. O'Toole
Chairman, President, and Chief Executive Officer
/s/ Kenneth W. Krueger
- ----------------------
Kenneth W. Krueger
Senior Vice President and Chief Financial Officer
49
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on behalf
of the undersigned, thereunto duly authorized.
A. O. SMITH CORPORATION
By: /s/ Robert J. O'Toole
----------------------------------
Robert J. O'Toole
Chief Executive Officer
Date: February 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of February 19, 2003 by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Name and Title Signature
ROBERT J. O'TOOLE /s/ Robert J. O'Toole
Chairman of the Board of -----------------------------------
Directors, President and Robert J. O'Toole
Chief Executive Officer
KENNETH W. KRUEGER /s/ Kenneth W. Krueger
Senior Vice President and -----------------------------------
Chief Financial Officer Kenneth W. Krueger
JOHN J. KITA /s/ John J. Kita
Vice President, Treasurer -----------------------------------
and Controller John J. Kita
GLEN R. BOMBERGER /s/ Glen R. Bomberger
Director -----------------------------------
Glen R. Bomberger
RONALD D. BROWN /s/ Ronald D. Brown
Director -----------------------------------
Ronald D. Brown
WILLIAM F. BUEHLER /s/ William F. Buehler
Director -----------------------------------
William F. Buehler
KATHLEEN J. HEMPEL /s/ Kathleen J. Hempel
Director -----------------------------------
Kathleen J. Hempel
AGNAR PYTTE /s/ Agnar Pytte
Director -----------------------------------
Agnar Pytte
BRUCE M. SMITH /s/ Bruce M. Smith
Director -----------------------------------
Bruce M. Smith
MARK D. SMITH /s/ Mark D. Smith
Director -----------------------------------
Mark D. Smith
50
CERTIFICATION OF PERIODIC REPORT
I, Robert J. O'Toole, Chairman, President, and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of A. O. Smith Corporation
(the "company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this annual report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the company's auditors and the audit committee
of the company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the company's ability to record,
process, summarize and report financial data and have identified for
the company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal
controls; and
51
6. The company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 19, 2003
/s/ Robert J. O'Toole
- ---------------------
Robert J. O'Toole
Chairman, President, and Chief Executive Officer
52
CERTIFICATION OF PERIODIC REPORT
I, Kenneth W. Krueger, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of A. O. Smith Corporation
(the "company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this annual report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the company's auditors and the audit committee
of the company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the company's ability to record,
process, summarize and report financial data and have identified for
the company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the company's internal
controls; and
53
6. The company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 19, 2003
/s/ Kenneth W. Krueger
- ----------------------
Kenneth W. Krueger
Senior Vice President and Chief Financial Officer
54
INDEX TO EXHIBITS
- -----------------
Exhibit
Number Description
- ------ -----------
(3)(i) Restated Certificate of Incorporation of the corporation as
amended April 5, 1995, incorporated by reference to the quarterly
report on Form 10-Q for the quarter ended March 31, 1995, and as
further amended on February 5, 1996, and incorporated by reference
to the annual report on Form 10-K for the year ended December 31,
1995.
(3)(ii) By-laws of the corporation as amended October 7, 1997,
incorporated by reference to the quarterly report on Form 10-Q for
the quarter ended September 30, 1997.
(4) (a) Restated Certificate of Incorporation of the corporation as
amended April 5, 1995, incorporated by reference to Exhibit 3 to
the corporation's annual report on Form 10-K for the year ended
December 31, 1995 (File No. 1-475)
(b) 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 the
corporation's annual report on Form 10-K for the year ended
December 31, 2000 (File No. 1-475)
(c) First Amendment, dated as of July 28, 2000, to Credit Agreement,
among A. O. Smith Corporation, various financial institutions,
Bank One, N.A. (formerly The First National Bank of Chicago), as
Syndication Agent, and Bank of America, N.A., as Agent,
incorporated by reference to Exhibit 4.3 to corporation's
registration statement on Form S-3 (Reg. No. 333-86074)
(d) Second Amendment, dated as of July 27, 2001, to Credit Agreement,
among A. O. Smith Corporation, various financial institutions,
Bank One, N.A. (formerly The First National Bank of Chicago), as
Syndication Agent, and Bank of America, N.A., as Agent,
incorporated by reference to Exhibit 4.4 to corporation's
registration statement on Form S-3 (Reg. No. 333-86074)
(e) The corporation 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.
(10) Material Contracts
(a) A. O. Smith Corporation 1990 Long-Term Executive Incentive
Compensation Plan, as amended, incorporated by reference to the
Form S-8 Registration Statement filed by the corporation on
December 13, 1994, (Reg. No. 33-56827)
(b) A. O. Smith Corporation Long-Term Executive Incentive
Compensation Plan incorporated by reference to the Form S-8
Registration Statement filed by the corporation on December 8,
1999, (Reg. No. 333-92329)
(c) A. O. Smith Corporation Combined Executive Incentive
Compensation Plan, incorporated by reference to Exhibit A to the
Proxy Statement filed on March 4, 2002, for the April 8, 2002,
Annual Meeting of Stockholders.
55
INDEX TO EXHIBITS (continued)
- -----------------------------
Exhibit
Number Description
- ------ -----------
(10) (d) Executive Life Insurance Plan, incorporated by reference to
the Annual Report on Form 10-K for the fiscal year ended
December 31, 1992
(e) Corporate Directors' Deferred Compensation Plan, as amended,
incorporated by reference to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1992
(f) Executive Supplemental Pension Plan incorporated by Reference to
the Annual Report on Form 10-K for the fiscal year ended December
31, 2001.
(g) Supplemental Profit Sharing Plan, incorporated by Reference to
the Annual Report on Form 10-K for the fiscal year ended December
31, 2001.
(21) Subsidiaries (Page 47).
(23) Consent of Independent Auditors (Page 48).
(99) Written Statement of the Chief Executive Officer and the Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 (Page 49).
56