SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended June 30, 2003.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 1-475
A.O. SMITH CORPORATION
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 245008, Milwaukee, Wisconsin 53224-9508
Telephone: (414) 359-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No
--- ---
Class A Common Stock Outstanding as of June 30, 2003 -- 8,533,888 shares
Common Stock Outstanding as of June 30, 2003 -- 20,602,373 shares
Exhibit Index Page 23
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings -
Three and six months ended June 30, 2003 and 2002 3
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial
Statements - June 30, 2003 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Item 4. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certification of Periodic Report 19-22
Index to Exhibits 23
Exhibit 99 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Three and Six Months ended June 30, 2003 and 2002
(dollars in millions, except for per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Electrical Products $ 227.6 $ 219.2 $ 440.7 $ 415.4
Water Systems 190.0 167.1 364.8 342.8
--------- --------- --------- ---------
Net Sales 417.6 386.3 805.5 758.2
Cost of products sold 333.8 304.9 643.5 599.9
--------- --------- --------- ---------
Gross profit 83.8 81.4 162.0 158.3
Selling, general and
administrative expenses 51.7 50.2 105.7 103.4
Interest expense 3.0 3.7 5.9 7.9
Other (income) expense - net (0.1) (0.2) 0.3 0.7
--------- --------- --------- ---------
29.2 27.7 50.1 46.3
Provision for income taxes 9.4 9.7 16.6 16.2
--------- --------- --------- ---------
Net Earnings $ 19.8 $ 18.0 $ 33.5 $ 30.1
========= ========= ========= =========
Earnings per Common Share
Basic $ 0.68 $ 0.68 $ 1.16 $ 1.20
========= ========= ========= =========
Diluted $ 0.67 $ 0.66 $ 1.13 $ 1.17
========= ========= ========= =========
Dividends per Common Share $ 0.14 $ 0.13 $ 0.28 $ 0.26
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(dollars in millions, except share data)
(unaudited) December 31,
June 30, 2003 2002
------------- ------------
Assets
Current Assets
Cash and cash equivalents $ 34.8 $ 32.8
Receivables 272.5 215.5
Inventories 233.2 200.4
Deferred income taxes 21.3 26.7
Other current assets 20.4 12.9
--------- ---------
Total Current Assets 582.2 488.3
Property, plant and equipment 702.4 686.2
Less accumulated depreciation 350.1 323.5
--------- ---------
Net property, plant and equipment 352.3 362.7
Goodwill 302.4 302.4
Other intangibles 6.6 6.8
Other assets 66.6 64.7
--------- ---------
Total Assets $ 1,310.1 $ 1,224.9
========= =========
Liabilities
Current Liabilities
Trade payables $ 162.7 $ 131.4
Accrued payroll and benefits 38.4 38.7
Accrued liabilities 49.9 58.6
Product warranty 19.1 19.5
Income taxes 2.8 1.8
Long-term debt due within one year 10.9 11.7
--------- ---------
Total Current Liabilities 283.8 261.7
Long-term debt 269.2 239.1
Pension liability 84.9 90.8
Other liabilities 110.3 114.7
Deferred income taxes 14.5 7.5
--------- ---------
Total Liabilities 762.7 713.8
Stockholders' Equity
Class A common stock, $5 par value: authorized
14,000,000 shares; issued 8,566,483 42.8 43.0
Common stock, $1 par value: authorized
60,000,000 shares; issued 23,982,879 24.0 24.0
Capital in excess of par value 73.6 73.5
Retained earnings 613.9 588.5
Accumulated other comprehensive loss (113.1) (121.9)
Treasury stock at cost (93.8) (96.0)
--------- ---------
Total Stockholders' Equity 547.4 511.1
--------- ---------
Total Liabilities and Stockholders' Equity $ 1,310.1 $ 1,224.9
========= =========
See accompanying notes to unaudited condensed consolidated financial statements
4
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Six
Months Ended June 30, 2003 and 2002
(dollars in millions)
(unaudited)
Six Months Ended
June 30
-------------------------
2003 2002
---------- ----------
Operating Activities
Continuing
Net earnings $ 33.5 $ 30.1
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation 24.8 24.4
Amortization 1.0 0.7
Net change in current assets and liabilities (62.4) (2.3)
Net change in other noncurrent assets and liabilities (1.7) (3.6)
Other (1.3) 0.9
---------- ----------
Cash (Used in) Provided by Operating Activities (6.1) 50.2
Investing Activities
Capital expenditures (14.8) (16.4)
Acquisition of business -- (2.2)
---------- ----------
Cash Used in Investing Activities (14.8) (18.6)
Financing Activities
Debt incurred 32.2 --
Long-term debt retired (2.9) (152.4)
Net proceeds from common stock offering -- 127.5
Other stock transactions 1.5 0.8
Dividends paid (8.1) (6.2)
---------- ----------
Cash Provided by (Used in) Financing Activities 22.7 (30.3)
Cash Provided by Discontinued Operations 0.2 4.3
---------- ----------
Net increase in cash and cash equivalents 2.0 5.6
Cash and cash equivalents-beginning of period 32.8 20.8
---------- ----------
Cash and Cash Equivalents - End of Period $ 34.8 $ 26.4
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three- and six-month periods ended June 30, 2003 are not
necessarily indicative of the results expected for the full year. It is
suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the company's latest Annual
Report on Form 10-K. Certain prior year amounts have been reclassified to
conform to the 2003 presentation.
2. Acquisitions
On July 1, 2002, A. O. Smith Corporation (the company) completed the
purchase of the hermetic motor assets of the Athens Products (Athens)
division of Electrolux Group for cash consideration of $9.7 million. The
purchase price was allocated to the assets acquired and liabilities assumed
based upon current estimates of their respective fair values at the date of
acquisition.
In late 2002, the company acquired the motor manufacturing assets of
Jiangsu Changheng Group Co. Ltd. (Changheng) for a total of $15.3 million
including future payments of $3.8 million. The purchase price was allocated
to the assets acquired and liabilities assumed based upon current estimates
of their respective fair values at the date of acquisition.
In connection with the Athens acquisition and other acquisitions by the
company, aggregate additional purchase liabilities of $26.5 million were
recorded at the respective acquisition dates for employee severance and
relocation, as well as certain facility exit costs. As of June 30, 2003,
costs incurred and charged against these liabilities to date totaled $18.2
million.
3. Business Improvement Programs
In the fourth quarter of 2001, the company recorded restructuring and other
charges of $9.4 million. The charges included employee separation costs of
$7.7 million associated with product or component manufacturing
repositioning and the realignment of certain administrative functions. The
resulting reduction of workforce is approximately 150 salaried and 775
hourly employees. In addition, the company recorded facility impairment and
lease charges of $1.7 million representing estimated costs of facilities to
be vacated. The company
6
spent $5.0 million through June 30, 2003 for employee severance and
separation costs. At June 30, 2003, the company estimates approximately 180
employees are yet to be impacted. The realignment activities will be
substantially completed prior to December 31, 2003.
4. Inventories (dollars in millions)
June 30, 2003 December 31, 2002
------------- -----------------
Finished products $ 150.2 $ 130.7
Work in process 45.2 39.7
Raw materials 66.1 58.3
--------- ---------
261.5 228.7
LIFO reserve 28.3 28.3
--------- ---------
$ 233.2 $ 200.4
========= =========
5. Long-Term Debt
The company's credit agreement and term notes contain certain conditions
and provisions which restrict the company's payment of dividends. Under
the most restrictive of these provisions, retained earnings of $111.6
million were unrestricted as of June 30, 2003.
During June 2003, the company issued $50 million in senior notes with
various insurance companies. The notes range in maturity between 2013 and
2016 and carry a weighted-average interest rate of slightly less than
4.5%. The proceeds of the notes were used to repay commercial paper and
revolver borrowing.
6. Product Warranty (dollars in millions)
The company offers warranties on the sales of certain of its products and
records an accrual for the estimated future claims. Such accruals are based
upon historical experience and management's estimate of the level of future
claims. The following table presents the company's warranty liability
activity for the six-months ended June 30, 2003 and 2002, respectively:
2003 2002
-------- --------
Balance at January 1 $ 70.5 $ 69.6
Expense 14.1 16.7
Claims settled (15.3) (14.7)
------- -------
Balance at June 30 $ 69.3 $ 71.6
======= =======
7. Common Stock Issuance
On May 10, 2002, the company completed the sale of 4,776,065 shares of its
common stock held in treasury. The $127.5 million net proceeds from the
offering were used to reduce long-term debt.
7
8. Comprehensive Earnings (dollars in millions)
The company's comprehensive earnings are comprised of net earnings, foreign
currency translation adjustments, and realized and unrealized gains and
losses on cash flow derivative instruments.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net Earnings $ 19.8 $ 18.0 $ 33.5 $ 30.1
Other comprehensive earnings (loss):
Foreign currency translation adjustments 1.3 2.4 1.8 2.1
Unrealized net gains (losses) on cash
flow derivative instruments less
related income tax provision (benefit):
2003 - $(4.0) & $(2.0); 2002 - $3.8 &
$1.4 6.3 (6.0) 7.0 (1.7)
------- ------- ------- -------
Comprehensive Earnings $ 27.4 $ 14.4 $ 42.3 $ 30.5
======= ======= ======= =======
9. Earnings per Share of Common Stock
The numerator for the calculation of basic and diluted earnings per share
is net earnings. The following table sets forth the computation of basic
and diluted weighted-average shares used in the earnings per share
calculations:
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Denominator for basic
earnings per share -
weighted-average shares 29,002,640 26,486,407 28,972,816 25,136,771
Effect of dilutive stock
options 653,070 745,678 616,502 645,508
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share 29,655,710 27,232,085 29,589,318 25,782,279
========== ========== ========== ==========
8
10. Stock Based Compensation
The company has one stock-based employee compensation plan as more fully
described in Note 11 of Notes to Consolidated Financial Statements of the
Company's 2002 annual report on Form 10-K. SFAS No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The company has chosen to continue applying Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plan. Accordingly, because the number of shares is fixed and the exercise
price of the stock options equals the market price of the underlying stock
on the date of grant, no compensation expense has been recognized.
Had compensation cost been determined based upon the fair value at the
grant date for awards under the plans based on the provisions of SFAS No.
123, the company's pro forma earnings and earnings per share would have
been as follows:
Three months ended Six months ended
June 30 June 30
(dollars in millions, ------------------ -----------------
except per share amounts) 2003 2002 2003 2002
- ----------------------------------------- ------- ------- ------- -------
Earnings:
As reported $ 19.8 $ 18.0 $ 33.5 $ 30.1
Deduct: Total stock based employee
compensation expense determined under
fair value based method, net of tax (0.4) (0.4) (0.9) (0.8)
------ ------ ------ ------
Pro forma $ 19.4 $ 17.6 $ 32.6 $ 29.3
====== ====== ====== ======
Earnings per share:
As reported:
Basic $ 0.68 $ 0.68 $ 1.16 $ 1.20
Diluted 0.67 0.66 1.13 1.17
Pro forma:
Basic $ 0.67 $ 0.66 $ 1.13 $ 1.17
Diluted 0.65 0.65 1.10 1.14
9
11. Operations by Segment (dollars in millions)
Three months ended Six months ended
June 30 June 30
------------------ -----------------
2003 2002 2003 2002
- ----------------------------------------- ------- ------- ------- -------
Net sales
Electrical Products $227.6 $219.2 $440.7 $415.4
Water Systems 190.0 167.1 364.8 342.8
------ ------ ------ ------
$417.6 $386.3 $805.5 $758.2
Earnings before interest and taxes
Electrical Products $ 18.6 $ 20.5 $ 36.2 $ 35.7
Water Systems 17.8 16.6 29.9 30.2
36.4 37.1 66.1 65.9
Corporate expenses (4.2) (5.7) (10.1) (11.7)
Interest expense (3.0) (3.7) (5.9) (7.9)
Earnings before income taxes 29.2 27.7 50.1 46.3
Provision for income taxes (9.4) (9.7) (16.6) (16.2)
Earnings from continuing operations $ 19.8 $ 18.0 $ 33.5 $ 30.1
Intersegment sales, which are immaterial, have been excluded from segment
revenues.
10
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST SIX MONTHS OF 2003 COMPARED TO 2002
Sales were $417.6 million in the second quarter of 2003, approximately eight
percent higher than sales of $386.3 million in the second quarter of 2002. Sales
for the first half of 2003 were $805.5 million or six percent higher than sales
of $758.2 million in the same period last year. The increase in second quarter
and first half sales was due primarily to our acquisitions of Athens Products
(Athens) and Jiangsu Changheng Group Co. Ltd. in the last half of 2002 as well
as higher residential gas water heater volume.
Our gross profit margin for the second quarter and first half of 2003 was 20.1
percent. Our gross profit margins for the second quarter and first half of 2002
were 21.1 percent and 20.9 percent, respectively. Much of the decline in our
gross profit margins was due to increased steel prices, lower margin sales of
recent acquisitions in our motor business, and unfavorable sales mix in the
water heater operation.
Selling, general and administrative expenses in the second quarter and first
half of 2003 were higher than the same periods in 2002 by $1.5 million and $2.3
million, respectively. The increase was due to the aforementioned acquisitions
and was partially offset by cost reduction activities within our operating units
and an insurance settlement of $.9 million recognized in the second quarter.
Interest expense for the second quarter and first half of 2003 was lower than
the comparable periods in 2002 by $.7 million and $2.0 million, respectively,
due to reduced debt levels throughout most of the first six months resulting
from our May 10, 2002 stock offering and lower interest rates.
We have significant pension benefit costs and credits that are developed from
actuarial valuation. The valuations reflect key assumptions regarding, among
other things, discount rates, expected return on plan assets, retirement ages,
and years of service. Consideration is given to current market conditions,
including changes in interest rates, in making these assumptions. Our assumption
for the expected rate of return on pension plan assets is 9.0 percent in 2003
compared with 9.75 percent in 2002. Pension income recognized in the second
quarter and first half of 2003 was $3.4 million and $5.8 million, respectively,
and compared with $4.1 million and $8.6 million in the comparable periods of
2002. Our pension income is reflected as reductions to cost of products sold and
selling, general, and administrative expense.
Other expense decreased from $.7 million in the first half of 2002 to $.3
million in the first half of 2003 due mostly to a non-recurring gain on the sale
of securities in the first quarter of 2003.
Our effective tax rates for the second quarter and first half of 2003 were 32.1
percent and 33.1 percent, respectively, and were both favorably impacted by
release of a $.7 million reserve upon
11
resolution of a federal tax audit in May 2003. The effective rate for the total
year 2003 should approximate 34.0 percent. Our effective tax rate for the second
quarter and first half of 2002 was 35.0 percent. The lower rates in 2003 were
due to the aforementioned tax audit resolution and continued optimization of the
tax structure of our international operations.
Net earnings for the second quarter were $19.8 million, surpassing the same
quarter last year by $1.8 million. Net earnings of $33.5 million for the first
half of 2003 were $3.4 million higher than net earnings of $30.1 million in the
first half of 2002. The increase in earnings in both the second quarter and
first half was attributable to lower interest expense, a liquidation
distribution from a bankrupt insurer, and a favorable resolution of a tax credit
issue. Second quarter diluted earnings per share increased from $.66 in 2002 to
$.67 in 2003 overcoming most of the $.05 per share dilutive impact of the May
2002 stock offering of 4.8 million shares. On a year-to-date basis, diluted
earnings per share declined to $1.13 from $1.17 in the same period last year.
The dilutive impact of the May 2002 stock offering was $.13 per share in the
first half of 2003.
Electrical Products
Second quarter sales for our Electrical Products segment were $227.6 million,
approximately $8.4 million higher than sales of $219.2 million in the second
quarter of 2002. Year-to-date sales for this segment were $440.7 million, an
increase of $25.3 million from 2002 first half sales of $415.4 million. The
increase in sales for the second quarter and first half was the result of our
July 2002 acquisition of Athens and additional sales from our recently acquired
Chinese motor operations. The additional sales from our acquisitions were
partially offset by a five percent decline in sales of heating and air
conditioning motors and pump motors as a result of cooler than normal weather
conditions during the second quarter in the northern United States.
Operating earnings for our Electrical Products segment in the second quarter
were $18.6 million or approximately nine percent lower than the $20.5 million of
operating earnings in the second quarter of 2002. The decline in earnings was
due mostly to the weather related decline in the base business sales. First half
operating earnings in 2003 were higher than the same period in 2002 by $.5
million reflecting the favorable impact of cost reduction initiatives.
During the second quarter we closed the Athens, Tennessee plant and announced
that our Ripley, Tennessee facility will cease production in July.
Water Systems
Second quarter and first half sales for our Water Systems segment both increased
by approximately $22.0 million over the comparable periods in 2002. The higher
sales were the result of a price increase introduced early in the year to offset
increased steel costs, incremental sales of residential gas water heaters in
advance of introducing the new higher cost flammable vapor ignition resistant
product, and a substantial increase in sales at our Chinese operation. Sales of
commercial product declined less than five percent in the second quarter when
compared to the same period in 2002 due to a weak commercial construction
market.
Operating earnings for our Water Systems segment were $17.8 million in the
second quarter, over seven percent higher than the second quarter of 2002. While
operating earnings improved, margins were adversely impacted by the unfavorable
commercial and residential product mix. Operating earnings for the first half of
2003 were $29.8 million, slightly less than earnings of
12
$30.2 million in the same period last year. The lower first half earnings
reflect the impact of increased steel costs.
We recently announced plans to consolidate the North American manufacture of
residential water heaters at our Ashland City, Tennessee, and Juarez, Mexico,
facilities. This initiative will involve transferring residential production
from the McBee, South Carolina plant and will be complete by the first quarter
of 2004. We are also consolidating most of our commercial manufacturing in the
McBee plant by relocating production from Ashland City and our El Paso, Texas,
boiler plant.
Outlook
The company's overall cost structure has improved significantly over the last
year and a half, and our operating units will continue to aggressively manage
cost as we go forward. We project per share earnings of $.42 to $.46 in the
third quarter. We also are reaffirming and narrowing our guidance for full-year
2003 earnings to a range of between $2.10 and $2.25 per share.
While we don't anticipate any rebound in our served markets in 2003, the impact
of operating improvements and new products will materialize and accelerate
during the second half of the year. These improvements include the continued
success of the motor repositioning programs and the ongoing integration of the
State Industries acquisition. In addition to these operating improvements, the
introduction of new water heater products during the second half of the year
will generate additional sales and earnings. As a consequence, we expect
earnings per share comparisons to improve significantly in the third and fourth
quarters of this year.
Liquidity & Capital Resources
Our working capital was $298.4 million at June 30, 2003, $71.8 million higher
than at December 31, 2002. The majority of the increase resulted from increases
in accounts receivable of $57.0 million due to higher sales and higher inventory
levels of $32.8 million partially related to product repositioning. These
increases were partially offset by increases in accounts payable of $31.3
million. Cash used in operating activities during the first half of 2003 was
$6.1 million compared with $50.2 million of cash provided by operating
activities during the same period in 2002. Essentially all of the difference is
due to the higher investment in working capital, as described above, during the
first half of 2003 compared with the first half of 2002, and the receipt of a
$12.4 million tax refund in the first half of 2002. We project cash provided by
operating activities of $80 to $90 million for the full year due to improved
working capital levels and second half earnings.
Our capital expenditures during the first half of 2003 totaled $14.8 million,
which was slightly less than the capital spending during the same period last
year. However, for the full year, we are projecting 2003 capital expenditures of
approximately $45 million, slightly more than the $42.5 million spent during the
full year last year. We expect that cash flow during 2003 will adequately cover
planned capital expenditures. We believe that our present facilities and planned
capital expenditures are sufficient to provide adequate capacity for our
operations in 2003.
Our total debt increased by $29.3 million from $250.8 million at December 31,
2002 to $280.1 million at June 30, 2003. Our leverage as measured by the ratio
of total debt to total
13
capitalization was 34%, up slightly from the 33% at the end of 2002. We did not
enter into any significant operating leases during the first six months of 2003.
To take advantage of historically low long-term borrowing rates, during June our
company issued $50 million in senior notes with various insurance companies. The
notes range in maturity between 2013 and 2016 and carry a weighted-average
interest rate of slightly less than 4.50%. The proceeds of the notes were used
to repay commercial paper and revolver borrowing.
At June 30, 2003, our company had available borrowing capacity of $239.8 million
under our credit facilities. As a result of the new term notes in our capital
structure (described above), we have chosen not to renew our $82.5 million 364
day credit facility that expires on July 25, 2003. We believe that the remaining
combination of available borrowing capacity and operating cash flow will provide
sufficient funds to finance our existing operations for the foreseeable future.
In connection with acquisitions, we have recorded aggregate purchase liabilities
of $26.5 million at the respective acquisition dates for employee severance and
relocation as well as certain facility exit costs. As of June 30, 2003, we
incurred and charged $18.2 million against these liabilities. We expect the
majority of the activities to be completed by December 31, 2003.
On July 8, 2003, our board of directors increased the quarterly dividend from
$.14 per share to $.15 per share on our Common stock and Class A common stock,
which is payable on August 15, 2003 to stockholders of record on July 31, 2003.
Critical Accounting Policies
Our accounting policies are described in Note 1 of Notes to Consolidated
Financial Statements as disclosed in the Form 10-K for the fiscal year ended
December 31, 2002. Also as disclosed in Note 1, the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires the use of estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying
notes. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our
financial statements include estimates associated with the evaluation of the
impairment of goodwill, as well as the recoverability of receivables resulting
from the payment of claims associated with the dip tube class action lawsuit
(see Note 14 of notes to consolidated financial statements in the Form 10-K for
the fiscal year ended December 31, 2002). There are also significant estimates
used in the determination of liabilities related to warranty activity,
litigation, product liability, environmental matters and pensions and other
post-retirement benefits. Various assumptions and other factors underlie the
determination of these significant estimates. The process of determining
significant estimates is fact-specific and takes into account factors such as
historical experience and trends, and in some cases, actuarial techniques. We
constantly reevaluate these significant factors and adjustments are made when
facts and circumstances dictate.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure", and FASB
Interpretation Number ("FIN") 46, "Consolidation of Variable Interest Entities."
SFAS No. 143, which was adopted on January 1, 2003, did not have a material
impact on our consolidated financial statements since its adoption. SFAS No. 146
is effective for exit or disposal activities initiated after December 31, 2002.
Adoption of this statement did not have a material impact on our consolidated
financial statements. Effective December 31, 2002, we began making the
disclosures required under SFAS No. 148. To date, FIN 46 has not had a material
impact on our consolidated financial statements nor is FIN 46 expected to have a
material impact on our consolidated financial statements in the future.
14
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
As is more fully described in our annual report on Form 10-K for the year ended
December 31, 2002, we are exposed to various types of market risks, primarily
currency and certain commodities. We monitor our risks in these areas on a
continuous basis and generally enter into forward and futures contracts to
minimize these exposures for periods of less than one year. Our company does not
engage in speculation in our derivative strategies. It is important to note that
gains and losses from our forward and futures contract activities are offset by
changes in the underlying costs of the transactions being hedged.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The chief executive officer and chief financial officer have evaluated the
effectiveness of the company's disclosure controls and procedures within the
90-day period prior to the filing of this report and have concluded that these
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the company and its consolidated subsidiaries
would be made known to them by others within those entities.
Changes in internal controls
There were no significant changes in our internal controls 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.
Forward Looking Statements
This document contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements generally can be identified by the use of
words such as "may," "will," "expect," "intend," "estimate," "anticipate,"
"believe," "continue," "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 the company's electric motor and water products markets;
inability to generate the synergistic cost savings from the acquisition of State
Industries; the inability to implement cost-reduction programs; adverse changes
in general economic conditions; significant increases in raw material prices;
competitive pressures on the company's businesses; and the potential that
assumptions on which the company based its expectations are inaccurate or will
prove to be incorrect.
Forward-looking statements included in this document are made only as of the
date of this filing, and the company is under no obligation to update these
statements to reflect subsequent events or circumstances. All subsequent written
and oral forward-looking statements attributable to the company, or persons
acting on its behalf, are qualified in their entirety by these cautionary
statements.
15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There have been no material changes in the legal and environmental matters
previously reported in Part 1, Item 3 and Note 14 of the Notes to Consolidated
Financial Statements in the company's Form 10-K Report for the year ended
December 31, 2002.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 5, 2003, the company mailed a proxy statement to its stockholders
relating to the annual meeting of stockholders on April 7, 2003. The annual
meeting included the election of directors and the ratification of Ernst & Young
LLP as the independent auditors of the company for 2003.
Directors are elected by a plurality of votes cast, by proxy or in person, with
the holders voting as separate classes. A plurality of votes means that the
nominees who receive the greatest number of votes cast are elected as directors.
Consequently, any shares which are not voted, whether by abstention, broker
nonvotes or otherwise, will have no effect on the election of directors.
For all other matters considered at the meeting, both classes of stock vote
together as a single class, with the Class A Common Stock entitled to one vote
per share and the Common Stock entitled to 1/10th vote per share. All such other
matters are decided by a majority of the votes cast. On such other matters, an
abstention will have the same effect as a "no" vote but, because shares held by
brokers will not be considered to vote on matters as to which the brokers
withhold authority, a broker nonvote will have no effect on the vote.
1. Election of Directors
Class A Common Stock Directors Votes For Votes Withheld
Ronald D. Brown 8,473,419 1,672
Robert J. O'Toole 8,473,239 1,852
Bruce M. Smith 8,473,345 1,746
Mark D. Smith 8,473,645 1,446
Common Stock Directors Votes For Votes Withheld
William F. Buehler 17,661,889 938,179
Kathleen J. Hempel 17,087,047 1,513,021
2. Ratification of Ernst & Young LLP as Independent Auditors Broker
COMBINED CLASS VOTE: Votes For Votes Against Abstentions
Class A Common Stock and
Common Stock (1/10th vote) 10,180,645 153,754 699
16
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
On April 16, 2003 the Company filed a Current Report on Form 8-K, reporting
under Items 7 and 9, announcing the Company's results for the quarter ended
March 31, 2003 and its earnings outlook for 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has authorized this report to be signed on its behalf by the
undersigned.
A. O. SMITH CORPORATION
July 31, 2003 /s/John J. Kita
-----------------------------
John J. Kita
Vice President,
Treasurer and Controller
July 31, 2003 /s/Kenneth W. Krueger
-----------------------------
Kenneth W. Krueger
Senior Vice President
and Chief Financial Officer
18
CERTIFICATION OF PERIODIC REPORT
I, Robert J. O'Toole, Chairman, President, and Chief Executive Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of A. O. Smith
Corporation (the "company");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
19
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
6. The company's other certifying officer and I have indicated in this
quarterly 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: July 31, 2003
/s/ Robert J. O'Toole
- ------------------------------------------------
Robert J. O'Toole
Chairman, President, and Chief Executive Officer
20
CERTIFICATION OF PERIODIC REPORT
I, Kenneth W. Krueger, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of A. O. Smith
Corporation (the "company");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
21
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
6. The company's other certifying officer and I have indicated in this
quarterly 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: July 31, 2003
/s/ Kenneth W. Krueger
- ------------------------------------------------
Kenneth W. Krueger
Senior Vice President and Chief Financial Officer
22
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
99 Written Statement of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.
23