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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, 1993
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 23972, Milwaukee, Wisconsin 53223-0972
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 February 23, 1994 Which Registered
Class A Common Stock 6,081,297 American Stock Exchange
(par value $5.00 per
share)
Common Stock 14,734,569 American Stock Exchange
(par value $1.00 per
share)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $25,664,209 for Class A Common Stock and $499,874,253 for
Common Stock as of February 23, 1994.
Documents Incorporated by Reference:
1. Portions of the Corporation's definitive Proxy Statement dated March
3, 1994 for an April 13, 1994 Annual Meeting of Stockholders are
incorporated by reference in Part III
PART I
ITEM 1 - BUSINESS
A. O. Smith Corporation, a Delaware corporation organized in 1916, its
subsidiaries and its affiliates (hereafter collectively called the
"Corporation" unless the context otherwise requires) are engaged in four
business segments. These segments are Original Equipment Manufacturer
("OEM") Products, Water Products, Agricultural Products, and Other
Products.
The Corporation's principal OEM Products business is the Automotive
Products Company, a supplier of truck and automobile structural components
and assemblies. OEM Products also includes the Electrical Products
Company which produces fractional horsepower and hermetic electric motors.
Included in Water Products is the Water Products Company, a leading
manufacturer of residential and commercial gas, oil, and electric water
heating systems. Agricultural Products consists of two units.
A. O. Smith Harvestore Products, Inc. (Harvestore) is a manufacturer of
agricultural feed storage and handling systems, for which AgriStor Credit
Corporation (AgriStor) provides financing, and industrial and municipal
water and bulk storage systems. The Corporation intends to sell
Harvestore and is in the process of liquidating Agristor. Other Products
consist of Smith Fiberglass Products Inc. which manufactures reinforced
thermosetting resin piping. Information regarding industry segments is
provided in Note 13 to the Consolidated Financial Statements which appear
elsewhere herein.
The following table summarizes revenues by segment for the Corporation's
operations. This segment summary and all other information presented in
this section should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto which appear elsewhere herein.
Years Ended December 31 (Dollars in Millions)
1993 1992 1991 1990 1989
OEM Products
Automotive Products
Truck frames $ 487.2 $ 419.1 $318.5 $338.4 $ 348.1
Axles 17.6 36.9 55.2 63.8 71.6
Other 101.5 71.6 52.4 60.1 76.0
----- ------ ----- ----- -------
Total Automotive 606.3 527.6 426.1 462.3 495.7
Electrical Products 242.5 225.6 205.1 222.2 251.8
----- ------ ----- ----- -------
Total OEM Products 848.8 753.2 631.2 684.5 747.5
Water Products 248.1 215.2 194.6 197.6 179.0
Agricultural Products 38.1 34.0 36.1 42.4 39.5
Other 58.9 43.9 53.9 53.1 49.8
----- ------ ----- ----- -------
Total Corporation $1,193.9 $1,046.3 $915.8 $977.6 $1,015.8
======= ======= ====== ===== =======
OEM PRODUCTS
Automotive Products
Automotive sales in 1993 of $606.3 million, or 51 percent of total
Corporation revenues, increased almost 15 percent from previous year sales
due to continued strength in both the light and heavy truck segments plus
added volume in the passenger car segment. As a result of increased
volume, Automotive Products showed improved operating profits over 1992.
The largest product group within Automotive Products continues to be truck
frames and components which accounted for slightly more than 80 percent of
Automotive Products' sales and 41 percent of the Corporation's revenues.
The company continues to hold its lead position in truck frame
manufacturing in the United States and Canada, supplying more than 30
percent of the 1993 market.
Automotive Products had two product launches during 1993. The company
began to ship full frame assemblies for a Mazda pick-up truck in the
spring. During the third quarter, the company began production of a new
full frame assembly in Milwaukee, Wisconsin, for Chrysler's Dodge Ram
pick-up truck.
In 1994, the Granite City, Illinois, plant will begin shipping engine
cradles for a new Ford Windstar mini-van and Lincoln Continental, and for
the new Ford Contour and Mercury Mystique. The Milan, Tennessee, plant
will build trailing axles for the Ford mini-van and will manufacture a new
structural assembly for Toyota U.S.A. The company expects capital
expenditures to increase in 1994 to support these and additional new
product launches.
Automotive Products has contracts, some of which are subject to economic
price adjustments, to supply frame assemblies and components to Ford,
General Motors and Chrysler in the light truck class. The company is also
a supplier of truck frames to most domestic producers of medium and
heavy-duty trucks, such as Ford, Navistar International, General Motors,
Freightliner and Paccar.
The company believes the North American market will grow in 1994. Longer
term, the products now under development, combined with continuing
strength in the economy could result in Automotive's sales surpassing $800
million by 1996.
The company's products are sold in highly competitive markets with its
principal competitors including Dana Corporation and vertically integrated
units of Ford, General Motors, and Chrysler.
The following table summarizes sales to the company's three largest
automotive customers:
Years Ended December 31 (Dollars in Millions)
1993 1992 1991 1990 1989
Ford
Sales $266.9 $219.3 $177.5 $179.8 $171.3
Percentage of total
Corporation revenues 22.4% 21.0% 19.4% 18.4% 16.9%
General Motors
Sales $132.0 $148.1 $115.6 $136.3 $169.6
Percentage of total
Corporation revenues 11.1% 14.2% 12.6% 13.9% 16.7%
Chrysler
Sales $118.2 $ 96.7 $ 75.8 $ 96.8 $106.2
Percentage of total
Corporation revenues 9.9% 9.2% 8.3% 9.9% 10.5%
Total 43.4% 44.4% 40.3% 42.2% 44.1%
Electrical Products
The Corporation's sales of electric motors which are included in the OEM
Product segment totalled $242.5 million, or 20 percent of total
Corporation revenues in 1993. This represents a 7 percent increase over
the previous year's sales of $225.6 million. Although Electrical
Products' sales increased in 1993, profits declined from 1992 levels due
in part to the costs and lower initial productivity associated with
transferring the hermetic motor production from Mt. Sterling, Kentucky to
Mebane, North Carolina location.
Product lines include jet pump motors sold to manufacturers of home water
systems, swimming pools, hot tubs and spas plus fan motors used in
furnaces, air conditioners and ceiling fans as well as fractional
horsepower motors used in other consumer products. Hermetic motors are
sold to almost every U.S. manufacturer of compressors and are used in air
conditioning and refrigeration systems. In addition to selling its
products directly to OEMs, Electrical Products also markets its products
through a distributor network which sells to both OEMs and the related
after-market.
The company has maintained a reduced break-even point, which remains more
than 20 percent lower than in 1989. This improved cost structure has
roughly coincided with a competitive period in the motor industry and has
accounted for the company's ability to remain profitable during this time.
Electrical Products has reduced costs through increased productivity and
higher output from its Mexican facilities and reduced manufacturing
conversion costs throughout the organization. An improved economy should
have a positive effect on Electrical Products' 1994 sales and earnings.
Motor efficiency and environmental concerns are two areas influencing
product development. Electrical Products is working with new materials
and variable speed designs that can improve the efficiency of both
hermetic and fractional horsepower motors. Work continues on new motors
and motor insulation materials that are compatible with refrigerants that
do not deplete the ozone layer.
The company's principal products are sold in highly competitive markets
with its major competitors being Emerson Electric, General Electric,
Magnetek, Inc., Fasco and vertically integrated customers.
WATER PRODUCTS
Sales in 1993 were a record $248.1 million which represented 21 percent of
total Corporation revenues. Sales were up over 15 percent compared to
1992 sales of $215.2 million, as the company gained market share in
residential water heaters and increased unit volume in higher margin
commercial heaters. Operating profits also set new highs increasing 33%
percent over the prior year, which is the result of increased volume and
improved pricing. Water Products believes it is the most consistently
profitable water heater supplier in the extremely competitive U. S.
market.
Water Products markets residential gas and electric water heaters through
a diverse network of plumbing wholesalers. About 80 percent of Water
Products' sales is in the less cyclical replacement market although the
new housing market is an important segment as well. The company's
residential plants were able to adjust easily to 1993's increase in volume
without significantly increasing costs. The residential water heater
market remains highly competitive with Water Products and three other
manufacturers supplying over 90 percent of market requirements.
Water Products markets commercial water heating systems through a diverse
network of plumbing wholesalers and manufacturers' representatives.
Commercial water heating systems are used in a wide range of applications
including schools, nursing homes, hospitals, prisons, hotels, motels,
laundries, restaurants, stadiums, amusement parks, car washes, and other
large users of hot water. The commercial market is characterized by a
much broader range of competitors than the residential market.
The company expects both sales and profits will increase in 1994 due
primarily to new product introductions and an improving economy. In
addition, Water Products intends to grow through the selective addition of
quality distribution, possible acquisitions and further expansion of its
international presence.
The principal competitors in the Water Products segment are Rheem-Rudd,
State Industries, Bradford-White and SABH, Inc. Water Products believes
it continues to be the largest manufacturer of commercial water heaters
and the fourth largest manufacturer of residential water heaters in the
United States.
AGRICULTURAL PRODUCTS
Agricultural Products includes Harvestore and AgriStor. Harvestore sales
in 1993 were $33.3 million, which were about 20 percent higher than 1992
sales of $27.7 million. The increase was attributable to demand for water
and agricultural waste storage systems. Harvestore's operating profits
were much improved over 1992. AgriStor revenues in 1993 were $4.8
million, down 25 percent from $6.4 million in 1992. The lower revenues
resulted from a decline in the size of Agristor's lending portfolio and
represents management's continued progress toward its goal of phasing out
of the agricultural finance business. Agricultural Products sustained a
net loss of $4.8 million between Harvestore and Agristor operations which
include additional reserve provisions taken during the year.
Harvestore manufactures and markets agricultural feed storage and handling
systems, and industrial and municipal water and bulk storage systems.
Harvestore products are distributed through a network of independent
dealers. AgriStor assists farm customers in the financing of
Harvestore[R] equipment out of offices in Milwaukee, Wisconsin; Columbus,
Ohio; and Memphis, Tennessee.
A good backlog of Slurrystore[R] systems orders combined with the recovery
in industrial capital spending will benefit Harvestore in 1994.
Harvestore expects sales and earnings to increase in 1994.
Stable interest rates and adequate milk prices also will have a positive
impact on Agristor's operations. The Corporation expects its agricultural
operations loss in 1994 to be less than it was in 1993.
Harvestore's principal competitor in the municipal and industrial segment
is U.S. Filter.
OTHER PRODUCTS
Other Products consists essentially of Smith Fiberglass Products Inc.
Sales of Smith Fiberglass Products Inc. totaled $58.9 million in 1993; up
34 percent from 1992 sales of $43.9 million. Strong recoveries in the
service station and petroleum production markets were largely responsible
for the increase in sales. The company doubled its profits compared to
1992 due primarily to this resurgence in sales.
Smith Fiberglass manufactures reinforced thermosetting resin piping used
to carry corrosive materials. Typical applications include chemical and
industrial plant piping, oil field piping, and underground distribution at
gasoline service stations. Smith Fiberglass also manufactures high
pressure fiberglass piping systems used in the petroleum production
industry. Its products are sold through a network of distributors.
Smith Fiberglass should have another good year in 1994. The company
expects to increase its presence in international markets, expand
participation in the petroleum marketing segment and aggressively pursue
the chemical and industrial markets.
Smith Fiberglass has two principal competitors which are Ameron
Corporation and Fibercast Company.
Raw Material
Raw materials for the Corporation's operations, which consist primarily of
steel, copper and aluminum, are generally available from several sources
in adequate quantities.
Seasonality
The Corporation's third quarter revenues and earnings have traditionally
been lower than the other quarters due to Automotive Products' model year
changeovers and customer plant shutdowns.
Research and Development, Patents and Trademarks
The Corporation conducts new product and process development at its
Corporate Technology Center in Milwaukee, Wisconsin, and at its operating
unit locations. The objective of this activity is to increase the
competitiveness of A. O. Smith and generate new products to fit the
Corporation's market knowledge. Total expenditures for research and
development in 1993, 1992 and 1991 were approximately $7.6 million, $6.5
million, and $6.1 million, respectively.
The Corporation owns and uses in its businesses various trademarks, trade
names, patents, trade secrets and licenses. While a number of these are
important to the Corporation, it does not consider a material part of its
business to be dependent on any one of them.
Employees
The Corporation and its subsidiaries employed approximately 10,800 persons
in its operations as of December 31, 1993.
Backlog
Normally none of the Corporation's operations sustain significant
backlogs.
Environmental Laws
Compliance with federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of
the environment has not had a material effect and is not expected to have
a material effect upon the capital expenditures, earnings or competitive
position of the Corporation. See ITEM 3.
Foreign Sales
Total export sales from the U.S. were $71 million, $48 million, and $49
million in 1993, 1992, and 1991, respectively. The increase in export
sales from 1992 to 1993 was largely attributable to increased Automotive
Products Company exports to Canada. The amount of revenue and operating
profit derived from, or the assets attributable to, sales outside the
North American geographic area are not a substantial portion of total
Corporation operations.
ITEM 2 - PROPERTIES
The Corporation manufactures its products in 35 locations worldwide.
These facilities have an aggregate floor space of approximately 8,927,000
square feet and are owned by the Corporation with the exception of the
following leased facilities: four Automotive Products plants, two of
which are approximately 124,000 square feet each, located in Corydon,
Indiana and Rockford, Illinois, a plant of approximately 39,000 square
feet in Bowling Green, Kentucky and a fourth plant of approximately 41,000
square feet located in Barrie, Ontario, Canada; a Water Products Company
plant with floor space of approximately 84,000 square feet located in
Seattle, Washington and a second plant of approximately 100,000 square
feet in El Paso, Texas; and a Smith Fiberglass plant in Little Rock,
Arkansas, with floor space of approximately 45,000 square feet. A 258,000
square foot facility for the Electrical Products Company in Mt. Sterling,
Kentucky, a 533,000 square foot facility for the Automotive Products
Company in Milan, Tennessee, and a 237,000 square foot facility for the
Smith Fiberglass plant in Little Rock, Arkansas are being acquired on a
lease-purchase basis and have been capitalized for accounting purposes.
Included in the above totals are approximately 478,000 square feet of
domestic floor space in DeKalb, Illinois, occupied by the Corporation's
agricultural operations and which is being held for sale.
Of the Corporation's facilities, thirteen are foreign plants with
approximately 1,142,000 square feet of space, including approximately
442,000 square feet which are leased.
The manufacturing plants presently operated by the Corporation are listed
below by industry segment. This data excludes six plants operated by a
Mexican affiliate.
United States Foreign
OEM Products
-Automotive Products Milwaukee, WI; Milan, TN; Barrie, Canada
(4,994,000 sq. ft.) Granite City, IL; Belcamp, MD;
Corydon, IN; Rockford, IL (2);
Bellevue, OH; Bowling Green, KY;
Williston, FL
-Electrical Products Tipp City, OH; Mebane, NC; Bray, Ireland;
(1,616,000 sq. ft.) Upper Sandusky, OH; Acuna, Mexico;
Mt. Sterling, KY Monterrey, Mexico;
Juarez, Mexico (5)
Water Products McBee, SC; Seattle, WA; Stratford, Canada (2);
(1,402,000 sq. ft.) El Paso, TX; Florence, KY Veldhoven,
The Netherlands;
Juarez, Mexico
Agricultural Products DeKalb, IL
(478,000 sq. ft.)
Other Little Rock, AR (2);
(437,000 sq. ft.) Wichita, KS
The principal equipment at the Corporation's facilities consist of
presses, welding, machining, slitting and other metal fabricating
equipment, winding machines, and furnace and painting equipment. The
Corporation regards its plant and equipment as well-maintained and
adequate for its needs. Multishift operations are used where necessary.
ITEM 3 - LEGAL PROCEEDINGS
As of December 31, 1993, the Corporation and Harvestore were defendants in
26 cases alleging damages for economic losses claimed to have arisen out
of alleged defects in Harvestore animal feed storage equipment. Some
plaintiffs are seeking punitive as well as compensatory damages. The
Corporation believes that a significant number of these claims were
related to the deteriorated general farm economy at the time suit was
commenced, including those filed in 1993. The Corporation and Harvestore
continue to vigorously defend these cases.
In 1993, nine new cases were filed and 38 cases were concluded. One of
the cases filed during 1993 is a New York state court action and contains
class action allegations, and names the Corporation, Harvestore and two of
its dealers as defendants. Among the many motions the defendants have
filed in this action is one to stay the action pending the ruling on class
action certification requested by the plaintiffs in a lawsuit pending in
the Federal District Court for the Southern District of Ohio. Based on
the facts currently available to management and its prior experience with
lawsuits alleging damages for economic loss resulting from use of the
Harvestore animal feed storage equipment, management is confident that the
motion for class certification in the Ohio lawsuit can be defeated and
that the lawsuit does not represent a material threat to the Corporation.
The Corporation believes that any damages, including any punitive damages,
arising out of the pending cases are adequately covered by insurance and
recorded reserves. The Corporation reevaluates its exposure periodically
and makes adjustment of its reserves as appropriate. A lawsuit for
damages and declaratory judgments in the Circuit Court of Milwaukee
County, State of Wisconsin, in which the Corporation and Harvestore are
plaintiffs, is pending against three insurance companies for failure to
pay in accordance with liability insurance policies issued to the
Corporation. The insurers have failed to pay, in full or in part, certain
judgments, settlements and defense costs incurred in connection with
pending and closed lawsuits alleging damages for economic losses claimed
to have arisen out of alleged defects in Harvestore animal feed storage
equipment. While the Corporation has, in part, assumed applicability of
this coverage, an adverse judgment should not be material to its financial
condition.
As part of its routine business operations, the Corporation disposes of
and recycles or reclaims certain industrial waste materials, chemicals and
solvents at disposal and recycling facilities which are licensed by
appropriate federal, state and local agencies. In some instances, when
those facilities are operated such that hazardous substances contaminate
the soil and groundwater, the United States Environmental Protection
Agency ("EPA") will designate the contaminated sites as Superfund sites,
and will designate those parties which are believed to have contributed
hazardous materials to the sites as potentially responsible parties
("PRPs"). Under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA" or the "Superfund" law) and similar state
laws, each PRP that contributes hazardous substances to a Superfund site
is jointly and severally liable for the costs associated with cleaning up
the site. Typically, PRPs negotiate with the EPA and those state
environmental agencies that are involved in the matter regarding the
selection and implementation of a plan to clean up the Superfund site and
the terms and conditions under which the PRPs will be involved in process.
PRPs also negotiate with each other regarding allocation of each PRP's
share of the clean up costs.
The Corporation is currently involved as a PRP in judicial and
administrative proceedings initiated on behalf of the EPA seeking to clean
up the environment at fifteen Superfund sites and to recover costs it has
or will incur as a result of the clean up. Certain state environmental
agencies have also asserted claims to recover their clean up costs in some
of these actions. The sites are as follows:
Two separate sites in Kentucky involving related storage and disposal
facilities. Proceedings were commenced on behalf of the EPA in the
United States District Court for the District of Kentucky, Louisville
Division in March, 1988 with respect to these sites. A consent decree
allocating liability among the PRPs for costs of remediation at the
sites and the response costs of the EPA and the Commonwealth of
Kentucky was executed by the Corporation in September, 1993. It is
anticipated that the consent decree will be entered by the Court in
1994.
A site in Indiana used for storage, treatment, recycling and disposal
of waste chemicals. In January, 1984, the Company and several other
PRPs became parties to an action that had been pending in the United
States District Court for the District of Indiana since January, 1980
regarding this site. In July, 1988, the Corporation executed a consent
decree allocating liability among the PRPs for costs of remediation at
the site and the EPA's response costs. Remediation is well underway at
the site.
A municipal landfill in Michigan is the subject of a proceeding that
was filed on behalf of the EPA in the United States District Court for
the Western District of Michigan in this case in April, 1991. The
final remedy has been selected and a consent decree has been executed
by the PRPs and the EPA. The consent decree was entered by the Court
in 1991. The bulk of the work on the remedy is expected to begin in
1995.
A county owned incinerator, ash disposal lagoon and landfill in Ohio.
A proceeding was commenced on behalf of the EPA in the United States
District Court for the Southern District of Ohio, Western Division
regarding this site in December, 1989. The final remedy has been
selected and the consent decree, which was executed by the PRPs and the
EPA, was entered by the Court in March, 1993. Work on the remedy began
shortly after the consent decree was entered and has been progressing.
An industrial and municipal waste landfill in Wisconsin. Separate
proceedings were commenced on behalf of the EPA and the State of
Wisconsin in the United States District Court for the Eastern District
of Wisconsin in November, 1991 relative to this site. The two actions
which were consolidated into a single matter in 1992. The consent
decree entered into by the PRPs, the EPA and the State of Wisconsin
divides the site into two operable units, the first of which deals with
soil remediation and an interim groundwater remedy and the second of
which is anticipated to deal with the long term groundwater remedy.
Work on the design of the remedy for the first operable unit is
underway. At this time, the extent to which remedial action will be
required with respect to the second operable unit has not been
determined.
A drum disposal site in Wisconsin. In September, 1992, the Corporation
joined a group of PRPs that attempted to negotiate with other PRPs and
the EPA to come to agreement as to the respective liabilities of the
PRPs involved at the site, the implementation of a plan to clean up the
site, and the terms and conditions under which the PRPs would be
involved in the process. In May, 1993, after those negotiations
stalled, the EPA issued an order to 17 of the PRPs, one of which was
the Corporation, under Section 106 of CERCLA requiring them to take
certain measures to clean up the site. Since then negotiations resumed
and settlement was reached among the PRPs with respect to some, but not
all of the issues related to liability under the Section 106 order.
The clean up has proceeded as directed by the EPA.
A former mining site in Colorado. The Corporation held the majority of
stock of a Colorado mining operation for a period of time beginning in
1936 and ending in 1942. Because of that stock ownership, the
Corporation was notified by the EPA in March, 1993 that it is a PRP at
the site. Estimates of clean up costs at this site have been as high
as $100,000,000. The Corporation believes that a large majority of
those costs relate to contamination caused by a corporation that worked
the mine in the 1980s, and the EPA has indicated that it does not
believe the Corporation is responsible to remediate the damage caused
by those operations. The EPA is not bound by that initial
determination and may seek to impose joint and several liability upon
the PRPs at the site. However, the Corporation believes that it has
valid defenses to any liability at this site. It is impossible at this
time to reasonably estimate the Corporation's liability at this site,
if any.
A manufacturing facility in Indiana. In January, 1994 the Corporation
received a general notice of potential liability from the EPA
concerning a plant site the Corporation operated in Indiana for a brief
period of time in the mid-1980s. Based upon a preliminary
investigation into this matter, the Corporation believes that a viable
business has a valid obligation to the Corporation to investigate and
remediate contamination at this site at the cost and expense of the
other business.
A drum recycling facility. In 1992, the EPA commenced an action
against a small group of PRPs in the United States District Court for
the Western District of Michigan to recover its response costs and
require the PRPs to clean up a Superfund site in Michigan. Those PRPs
believe they have valid defenses to any liability at this site and have
filed a motion for summary judgment in this matter. Those PRPs had
previously commenced a third party contribution action against
approximately eighty other parties which were involved at the subject
site but were not named as defendants in the EPA's action. The
Corporation became a third party defendant to that action in January,
1994.
CERCLA provides that the EPA has authority to enter into de minimis
settlement agreements with those PRPs that are believed to have
contributed relatively small ("de minimis") amounts of materials to a
Superfund site as compared to major contributors at the site. The
Corporation has settled its liability at sites in Indiana and Arkansas as
a de minimis party. Under those settlement agreements, the Corporation
may have additional liability to participate in cleaning up the affected
site under certain circumstances, such as: changes in the scope of
remedial action are required to the extent that costs to clean up the site
are substantially increased, or new information is discovered that
indicates that the Corporation contributed more or different materials to
the site than was previously believed. There is no information at this
time which would indicate that the Corporation will incur any material
additional liability at either site. Further, the Corporation has joined
with similarly situated PRPs to negotiate settlements as de minimis
parties at three sites in Indiana and Illinois.
Based upon information compiled by the Corporation, the estimate of known
and estimated cleanup costs for all parties at all sites involving claims
filed by the EPA where the Corporation has been designated a PRP is
approximately $232 million. The Corporation's estimate of the portion of
the total for which the Corporation is or may be responsible is
approximately $5.0 million, of which $3.6 million has been contributed
towards the cleanup costs by the Corporation and its insurance companies.
The balance of the identified potential cleanup costs is covered by
insurance and established reserves set by the Corporation which are
believed to be adequate to cover the Corporation's obligations with
respect to the unpaid balance of the claims. To the best of the
Corporation's knowledge, the insurers have the financial ability to pay
any such covered claims. The Corporation reevaluates its exposure
periodically and makes adjustment of its reserves as appropriate.
The above cost estimates are not complete. It is impossible at this time
to estimate the total cost of remediation for all of the sites, or the
Corporation's ultimate share of those costs, for a variety of reasons.
Many of the reasons are related to the fact that the sites are in various
stages of the remediation process. For example, the investigation of the
extent of remediation has not been completed at all sites; at several
sites the final remedy has not been selected; negotiations concerning the
Corporation's liability relative to the liability of the other PRPs
continue at some sites; and for others, even though the remedy has been
selected, final cost estimates have not been determined. Other
uncertainties are based upon the current status of the law. Key issues
that have not been resolved include the extent to which costs associated
with the sites are recoverable from insurers, the extent to which joint
and several liability can be imposed upon PRPs at the various sites, and
the viability of defenses asserted by the PRPs. It is impossible to
determine at this time how the courts will resolve those issues.
With the exception of the former mining site in Colorado discussed above,
the amount allocated to the Corporation at any specific site, or in the
aggregate for all sites, is not expected to be material. Concerning the
former mining site, a judgment as to materiality is premature given the
early stage of the investigation, the uncertainty regarding appropriate
remediation and its costs, and the potential liability of governmental
agencies in this case.
Over the past several years, the Corporation has self-insured a portion of
its product liability loss exposure and other business risks. The
Corporation has established reserves which it believes are adequate to
cover incurred claims. For the year ended December 31, 1993, the
Corporation had $60 million of third-party product liability insurance for
individual losses in excess of $1.5 million and for aggregate losses in
excess of $10 million.
In March 1992, a subsidiary of the Corporation, Smith Fiberglass Products
Inc. (Smith Fiberglass), won a patent infringement suit filed against a
competitor. A judgment was entered in favor of Smith Fiberglass. The
judgment was appealed by the defendant. However, the Court of Appeals
affirmed the award in 1993 and Smith Fiberglass recognized the judgment
which amounted to $1.9 million after recognition of legal fees as other
income in the second quarter of 1993.
A lawsuit initiated by the Corporation in connection with previously
concluded antitrust action involving a former subsidiary was terminated in
the second quarter of 1993 with a favorable settlement of $2.8 million
which was included as other income.
Reference also Note 12 in the Notes to the Consolidated Financial
Statements.
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 1993. The voting results from the Annual Meeting of
Stockholders held on April 7, 1993 were previously reported in the
Corporation's quarterly report on Form 10-Q for the quarter ended June 30,
1993.
EXECUTIVE OFFICERS OF THE CORPORATION
ROBERT J. O'TOOLE
Chairman of the Board of Directors, President, and Chief Executive
Officer
Mr. O'Toole, 53, became chairman of the board of directors on March 31,
1992. He is a member of the Investment Policy Committee of the board.
He was elected chief executive officer in March 1989. From November
1990 to May 1992, he served as head of the A. O. Smith Automotive
Products Company, a division of the Corporation. He was elected
president, chief operating officer and a director in 1986. He is a
director of Firstar Bank Milwaukee, N.A. Mr. O'Toole joined the
Corporation in 1963.
GLEN R. BOMBERGER
Executive Vice President, Chief Financial Officer and Director
Mr. Bomberger, 56, has been a director and executive vice president and
chief financial officer of the Corporation since 1986. He is a member
of the Investment Policy Committee of the board of directors. He is
currently a director and vice president-finance of Smith Investment
Company. He is a director of Portico Funds, Inc. Mr. Bomberger joined
the Corporation in 1960.
DONALD L. DUNAWAY
Executive Vice President
Mr. Dunaway, 56, became executive vice president in 1986. He is a
trustee of the Kemper Mutual Funds. Mr. Dunaway joined the Corporation
in 1963. He will retire effective April 30, 1994.
RODNEY A. LEMENSE
Executive Vice President
Mr. LeMense, 56, became executive vice president in 1986. Since July
1990, he has also been the president of A. O. Smith Water Products
Company, a division of the Corporation. He is a director of The
Oilgear Company. He joined the Corporation in 1957. Mr. LeMense will
retire effective March 31, 1994.
JOHN A. BERTRAND
President ~ A. O. Smith Electrical Products Company
Mr. Bertrand, 55, has been president of A. O. Smith Electrical Products
Company, a division of the Corporation, since 1986. Mr. Bertrand
joined the Corporation in 1960.
CHARLES J. BISHOP
Vice President ~ Corporate Technology
Dr. Bishop, 52, has been vice president-corporate technology since
1985. Dr. Bishop joined the Corporation in 1981.
DONALD M. HEINRICH
Vice President ~ Business Development
Mr. Heinrich, 41, was elected vice president-business development in
October 1992. Previously, from 1990 to 1992, he was president of DM
Heinrich & Co., a financial advisory firm. From 1983 to 1990, he was
senior vice president of Shearson Lehman Brothers, an investment
banking firm.
SAMUEL LICAVOLI
President ~ A. O. Smith Automotive Products Company
Mr. Licavoli, 52, was appointed president of A. O. Smith Automotive
Products Company, a division of the Corporation, in May 1992.
Previously, from 1988 to 1992, he was senior vice president, and from
1984 to 1988, vice president of operations for Walker Manufacturing
Company's OEM division, an automotive products company.
EDWARD J. O'CONNOR
Vice President ~ Human Resources and Public Affairs
Mr. O'Connor, 53, has been vice president-human resources and public
affairs for the Corporation since 1986. He joined the Corporation in
1970.
W. DAVID ROMOSER
Vice President, General Counsel and Secretary
Mr. Romoser, 50, was elected vice president, general counsel and
secretary on March 1, 1992. Prior thereto, he was vice president,
general counsel and secretary from 1988 to 1992 and general counsel and
secretary from 1982 to 1988 of Amsted Industries Incorporated, a
manufacturer of railroad, building and construction and industrial
products.
THOMAS W. RYAN
Vice President, Treasurer and Controller
Mr. Ryan, 47, was elected controller in February 1990, and was elected
treasurer of the Corporation in 1987. He joined the Corporation in
1985 as vice president and assistant controller.
JAMES C. SCHAAP
President ~ A. O. Smith Harvestore Products, Inc.
Mr. Schaap, 52, has been president of A. O. Smith Harvestore Products,
Inc., a subsidiary of the Corporation, since 1988. He joined the
Corporation in 1977.
WILLIAM V. WATERS
President ~ Smith Fiberglass Products Inc.
Mr. Waters, 59, has been president of Smith Fiberglass Products Inc., a
subsidiary of the Corporation, since 1988. Previously, he served as
vice president and controller for Smith Fiberglass Products since 1984.
Mr. Waters joined the Corporation in 1960.
MICHAEL W. WATT
President ~ A. O. Smith Water Products Company
Mr. Watt, 49, was named president of A. O. Smith Water Products
Company, a division of the Corporation, on January 1, 1994.
Previously, he was executive general manager from June 1988 to June
1991 and president from June 1991 to September 1993 of SABH
International Group, a manufacturer of water heaters.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. Both classes of A. O. Smith Corporation stock
are listed on the American Stock Exchange. The symbols for these
classes of the Corporation's stock are: SMCA for the Class A Common
Stock and SMC for the Common Stock. Firstar Trust Company, P. O. Box
2077, Milwaukee, Wisconsin 53201 serves as the registrar, stock
transfer agent and the dividend reinvestment agent for both classes of
the Corporation's stock.
Quarterly Common Stock Price Range (split adjusted dollars per share)
1993 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Class A Common
High 22-7/16 26-1/2 30 35-7/8
Low 17-7/16 19-1/16 23-1/4 26-3/4
Common Stock
High 22-5/8 26-7/8 30 35-3/4
Low 17-3/8 18-1/2 23-1/8 26-1/2
1992 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Class A Common
High 13-1/8 17-3/4 18-3/16 18-15/16
Low 9-11/16 13 13-1/2 12
Common Stock
High 13 17-5/8 18-1/8 19-1/8
Low 8-15/16 12-7/8 13-1/2 11-15/16
(b) Holders. As of January 31, 1994, the approximate number of
holders of Class A Common Stock and Common Stock were 700 and 1300,
respectively.
(c) Dividends. Dividends paid on the preferred (which was redeemed in
1992) and common stock are shown in Note 14 to the Consolidated
Financial Statements appearing elsewhere herein. The Corporation's
credit agreements contain certain conditions and provisions which
restrict the Corporation's payment of dividends. Under the most
restrictive of these provisions, retained earnings of $72.1 million
were unrestricted as of December 31, 1993.
ITEM 6 - SELECTED FINANCIAL DATA
(Dollars in Thousands, except per share amounts)
Years ended December 31
1993 1992 1991 1990 1989
Net Revenues $1,193,870 $1,046,345 $915,833 $977,586 $1,015,779
Earnings (loss)
Continuing operations 42,678 27,206 3,450 22,397 (7,267)
Cumulative effect of
accounting changes -- (44,522) -- -- --
Extraordinary item -- -- -- (4,594)
Net earnings (loss) 42,678 (17,316) 3,450 22,397 (11,861)
Net earnings (loss) applicable
to common stock 42,678 (18,172) 25 18,824 (15,503)
Primary earnings (loss) per share
of common stock
Earnings before cumulative effect
of accounting changes $2.08 $1.40 $ .00 $1.19 $(.69)
Realization of tax credits .00 .08 .00 .00 .00
----- ----- ----- ----- -----
Earnings before effect of
postretirement benefits 2.08 1.48 .00 1.19 (.69)
Change in postretirement
benefits, net of taxes .00 (2.44) .00 .00 .00
Extraordinary item .00 .00 .00 .00 (.29)
----- ----- ----- ----- -----
Net earnings (loss) $2.08 $(.96) $ .00 $1.19 $(.98)
===== ===== ===== ===== =====
Fully diluted earnings (loss) per
share of common stock
Earnings before cumulative effect
of accounting changes $2.08 $ 1.33 $ .00 $1.12 $(.69)*
Realization of tax credits .00 .08 .00 .00 .00
----- ----- ----- ---- -----
Earnings before effect of
postretirement benefits 2.08 1.41 .00 1.12 (.69)*
Change in postretirement
benefits, net of taxes .00 (2.25)* .00 .00 .00
Extraordinary item .00 .00 .00 .00 (.29)*
----- ----- ----- ----- ----
Net earnings (loss) $2.08 $(.84)* $ .00 $1.12 $(.98)*
===== ===== ===== ===== ====
Total assets 823,099 768,987 754,332 788,292 795,719
Long-term debt, including
finance subsidiary 190,574 236,621 249,186 244,710 239,336
Total stockholders' equity 269,630 244,656 266,897 265,429 260,719
Cash dividends per common share .42** .40 .40 .40 .40
* The impact of the assumed conversion in 1989 of the preferred stock is antidilutive. For 1992, the net loss per share
amounts are antidilutive because of the conversion of preferred stock.
** Excludes special dividend of .25 per share (split adjusted).
As discussed in Notes 10 and 11 to the Consolidated Financial Statements,
the Corporation changed its method of accounting for postretirement
benefits other than pensions and income taxes effective January 1, 1992.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Review
A. O. Smith Corporation achieved record earnings of $42.7 million or $2.08
per share in 1993 versus $28 million or $1.41 per share before a one-time
charge for postretirement benefits in 1992. Three units, Automotive
Products, Water Products and the Smith Fiberglass Products subsidiary,
established new sales records in 1993 while increasing their profits over
the prior year. Sales for the Electrical Products Company also increased
over 1992, but profits of this company were adversely affected by costs
associated with production transfer. Additional details of individual
unit performance will be discussed later in this section.
The Corporation's record operating results and improving prospects have
favorably impacted the performance of its common stock over the last three
years. Since the end of 1991 the market value of outstanding stock has
quadrupled, increasing from $180 million to $740 million at December 31,
1993.
Working capital at December 31, 1993 was $80.7 million compared to $62.6
million and $36.7 million at December 31, 1992 and 1991, respectively.
Higher sales in 1993 resulted in increased working capital requirements,
particularly for accounts receivable and inventories, which were partially
offset by related increases in trade payables and accrued wages and
benefits. In 1992, the Corporation's adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" resulted in an
increase in working capital versus 1991 due to the classification of $20.5
million of deferred taxes as a current asset.
Capital expenditures were $54.7 million in 1993 compared to $46.9 million
in 1992 and $59.3 million in 1991. In addition, production equipment
acquired under a master operating lease agreement totalled $10.9 million
in 1993, $8.1 million in 1992 and $19.2 million in 1991. Capital spending
in 1993 was up from 1992 levels due to new Automotive Products Company
programs including a full frame assembly for the new Chrysler light truck;
structural components for the Ford Contour and Windstar and the Mercury
Mystique; and a suspension assembly for Toyota, U.S.A. Capital
acquisitions in 1992 were down from 1991 levels primarily because the
Automotive Products Company's regional assembly plants had been
substantially completed.
The Corporation projects that it will use approximately $73 million of
internally generated funds and $13 million of operating lease financing to
support 1994 planned capital acquisitions of $86 million. The majority of
this money will be spent by Automotive Products Company to support new
product programs including full frames for a new General Motors truck and
the Ford Explorer; structural components for a Nissan light truck; and
engine cradles for the Ford Taurus, Mercury Sable and Lincoln Continental.
Long-term debt, excluding debt of the finance subsidiary, decreased from
$174.3 million in 1992 to $148.9 million at the end of 1993. The long-
term debt of the finance subsidiary has been reduced, as the planned
liquidation of AgriStor Credit Corporation continued, from $62.3 million
in 1992 to $41.7 million at December 31, 1993. As a result of these
reduced debt levels and 1993 earnings, the debt-to-equity ratio, excluding
the finance subsidiary, decreased from 71.2% at December 31, 1992 to 55.2%
at the end of 1993. The Corporation anticipates that, given a continued
economic rebound, debt and debt-to-equity levels will decline further
during 1994.
The Corporation drew a total of $30 million against facilities totalling
$65 million with two insurance companies. These notes have 10-year terms
and carry an average interest rate of approximately 6.8 percent.
During the third quarter the Corporation redeemed, at a modest premium,
$10 million in Granite City Industrial Revenue Bonds. The bonds, which
had a coupon rate of 11.5%, were to mature on August 1, 2003.
At a special meeting on January 26, 1993, shareholders approved charter
amendments to change the name of the Corporation's Class B Common Stock to
"Common Stock"; permit the holders of Class A Common Stock at any time, at
their option, to convert to Common Stock on a share-for-share basis; and
increase the number of authorized shares. These changes have increased
the Corporation's financial flexibility and enhanced the liquidity of the
Common Stock.
On February 1, 1993, the Board of Directors declared a special, one-time
dividend of $.25 per share, (split-adjusted), which was paid only to
Common Stockholders (formerly Class B) of record as of March 8, 1993.
Subsequent to the declaration of the special dividend on the Common Stock,
split-adjusted shares totaling 4,019,366 of Class A Common Stock including
1,133,584 shares held in Treasury were converted by the holders into
Common Stock.
At its June 8, 1993 meeting, A. O. Smith Corporation's Board of Directors
approved a 2-for-1 split of the Corporation's Class A and Common Stock
effected in the form of a 100 percent stock dividend to shareholders on
August 16, 1993. In addition, the Board of Directors increased the
regular quarterly dividend by 10 percent to a split-adjusted $.11 per
share on its common stocks (Class A and Common) for the last two quarterly
dividend payments of 1993, resulting in a total of $.42 per share being
paid versus $.40 per share in 1992. A. O. Smith Corporation has paid
dividends on its common stock for 54 consecutive years.
Results of Operations
Revenues in 1993 were $1.19 billion establishing a record and surpassing
1992 revenues of $1.05 billion by 14 percent and 1991 revenues of $915.8
million by 30 percent. All of the Corporation's product operations
reported double digit percentage increases in sales in 1993 with the
exception of the Electrical Products Company where sales increased 7.5
percent over 1992. For the second consecutive year the Automotive
Products Company provided the majority of the Corporation's year-to-year
sales increase as the recovery in the domestic automotive industry which
commenced in 1992 gained momentum in 1993.
The Corporation's gross profit margin was 14.9 percent in 1993,
representing a significant improvement from 13.6 percent and 11.1 percent
gross margins in 1992 and 1991, respectively. The impact of increased
volume was evident in the favorable trend in the gross margin.
The Automotive Products Company achieved record sales of $606.3 million in
1993, reflecting a 14.9 percent increase from 1992 sales of $527.6 million
and a 42.3 percent increase from 1991 sales of $426.1 million. The record
sales were a result of several factors. Light trucks continued to be the
vehicle of choice within the marketplace, as evidenced by the second
straight year in which this market has demonstrated 11 percent growth.
Automotive benefitted from the preference for this vehicle type over the
past two years, since it is a supplier for such popular vehicles as the
Ford Ranger, Econoline, and Explorer, General Motors GMT-400 and Suburban,
and the recently introduced redesigned Dodge Ram pick-up. The successful
launch of Chrysler's three new mid-sized LH model passenger cars also had
a major impact on Automotive's sales growth in 1993. The excellent
acceptance of these Chrysler vehicles resulted in additional production of
engine cradles and rear suspension modules and resulted in a new line
being placed in Automotive's plant in Belcamp, Maryland. Sales of heavy-
truck related products also bolstered Automotive's sales as the number of
heavy trucks sold during the year was the highest in the last five years.
Operating profits at Automotive increased over 1992 which in turn
reflected a significant improvement over the loss incurred in 1991. The
favorable trend in earnings was a direct result of Automotive's position
as a supplier of vehicles experiencing strong demand.
The prognosis for 1994 is encouraging. In addition to the core of
successful products for which Automotive is the supplier, several new
launches will occur during the year. Shipment of engine cradles and rear
trailing axles for the new Ford Windstar mini van will begin in the first
quarter as will production of rear suspension assemblies for Toyota U.S.A.
During the second quarter Automotive will commence manufacturing of engine
cradles for the new Ford Contour/Mercury Mystique. Later in the year
Automotive will begin producing cradles for the redesigned Lincoln
Continental. Additional programs are being developed for subsequent years
and with a new automotive products office in Yokohama, Japan, a very good
opportunity exists for early involvement in future new products to be
manufactured by the Japanese.
Equity in the earnings of the Corporation's 40-percent owned Mexican
affiliate, Metalsa S.A., was $2.3 million in 1993 compared to $3.5 million
and $1.5 million in 1992 and 1991, respectively. In 1993, Metalsa's sales
decreased approximately 10% due to a decline in automotive industry sales
in Mexico. Earnings were lower than the prior year due to the lower
sales, product mix, and certain restructuring costs. In 1992, Metalsa's
sales increased about 8 percent over 1991 due to the improved Mexican
economy and, in particular, strength in the automotive sector. This
increase, combined with higher gross margins, lower administrative and
interest costs, and a low effective tax rate due to the benefit of tax
loss carryforwards, resulted in a significant increase in profits compared
to 1991.
Sales at the Electrical Products Company increased 7.5 percent in 1993 to
$242.5 million from $225.6 million in 1992. Sales in 1991 were $205
million. The company has shown a steady growth in sales over the past two
years despite weak market conditions and competitive pressures. In 1993
the market for pools, spas and room air conditioners was adversely
impacted by poor spring weather while in 1992 the same market was affected
by a cautious attitude on the part of consumers toward discretionary
spending.
Although sales increased in 1993, earnings declined from the 1992 level
and were sightly better than in 1991. The favorable impact of increased
1993 volume and productivity improvements resulting from the initiation of
a continuous improvement program throughout the organization were more
than offset by the costs associated with transferring the hermetic motor
production from the Mt. Sterling, Kentucky plant to the lower-cost Mebane,
North Carolina location. Costs associated with the transfer of
production, which was substantially completed in 1993, amounted to several
million dollars.
Sales for the Water Products Company established a record for the second
straight year in 1993, increasing more than 15 percent to $248.1 million
from the previous record of $215.2 million in 1992. 1991 sales were
$194.6 million. The domestic residential water heater market as a whole
increased by nearly seven percent in 1993 with Water Products benefitting
from this expanded market by capturing more than a pro rata share of the
increase. The company's most notable market penetration occurred in the
western United States where additional product distribution was
established. The introduction of the power vent line of water heaters
also had a favorable impact on residential volume. The commercial segment
of the business experienced mixed results. While the sales of replacement
commercial heaters was strong in 1993, a weakness in commercial
construction caused a decline in sales of specialty commercial units.
Plans to increase the activity in the international export market,
introduction of redesigned commercial products and an expected increase in
housing starts in 1994 should continue the trend of improved sales.
Earnings for the Water Products Company increased significantly in 1993
when compared to 1992 and 1991 as a result of higher revenues and the
ability to minimize incremental manufacturing costs associated with the
additional volume.
Sales for Smith Fiberglass Products, Inc. increased 34 percent in 1993 to
$58.9 million from $43.9 million in 1992 and exceeded the previous record
of $53.9 million in 1991. Strong recoveries in the service station and
petroleum production markets contributed significantly to the increase in
sales over both 1992 and 1991. 1993 volumes were particularly strong in
the service station market as customers increased their fiberglass pipe
installation to meet environmental regulations including the requirements
of the Federal Clean Air Act Amendments. The shipment of a large overseas
oil field order provided a major share of the increase in petroleum
production volume in 1993. The chemical and industrial segment of the
business experienced a relatively flat year in 1993. Continued
penetration of the overseas markets coupled with domestic service station
demand resulting from state programs to comply with federal vapor recovery
regulations bode well for 1994 sales activity.
Earnings for Fiberglass Products in 1993 more than doubled 1992 earnings
and were improved over 1991. The increased earnings were a direct result
of the resurgence of demand in the service station and petroleum
production market.
Revenues for agricultural products were $38.1 million in 1993, an increase
of $4.1 million and $2.0 million over 1992 and 1991, respectively. Much
of the increase in sales was attributable to the water storage segment of
A. O. Smith Harvestore Products, Inc. (Harvestore) where new markets for
this product line have developed as a result of recent Environmental
Protection Agency regulations regarding the handling and disposal of waste
water. Harvestore's 1993 earnings were much improved over both 1992 and
1991 as a result of higher volume. Revenues for AgriStor Credit
Corporation were $7.7 million, $6.4 million and $4.8 million in 1991,
1992, and 1993, respectively. This trend of decreasing revenues is
consistent with management's objective of expeditiously liquidating this
finance subsidiary. As the liquidation proceeds, the losses of AgriStor
continue to decline as a result of reduced operating expenses. Despite
operating earnings improvement for Harvestore and AgriStor the overall
loss within the agricultural segment has been relatively consistent over
the period of 1991 to 1993 reflecting the impact of maintaining adequate
bad debt and liability reserves.
Selling, general and administrative expense in 1993 was $96.3 million
compared to $85.6 million in 1992 and $77.9 million in 1991. The
increases over this time period were caused in part by higher employee
incentive and profit sharing accruals associated with the improved
earnings. Higher commissions and other expenses in support of the
increased sales volumes also contributed to the upward trend.
Interest expense in 1993 was $13.4 million and compares favorably to
interest of $17.9 million in 1992 and $20.9 million in 1991. The trend of
declining interest expense is a function of the continuation of lower
interest rates in conjunction with a steady reduction in debt levels
throughout the three year period.
During 1993, other income and expense for the Corporation reflected
several non-recurring items which had a minimal aggregate impact on net
earnings. A total of $4.7 million of income was recognized as a result of
favorable resolution of litigation which was offset by the impairment or
write off of certain fixed assets and receivables.
The Corporation's overall effective income tax rate increased from 1992 to
1993 due to the one percent federal rate increase and increased state
franchise taxes.
For purposes of determining net periodic pension expenses, the discount
rate was reduced to 8.5 percent. A further reduction in the discount rate
to 7.75 percent was made as of year-end to determine the benefit
obligations. At discount rates below 7.75 percent, management estimates
each 25 basis points of incremental lower discount rate would reduce
earnings by about two cents per share and would increase the pension
liability adjustment charged to stockholders' equity by about $3.5
million.
The assumed rate of return on plan assets was reduced to 10.25 percent in
1993. While this return assumption has been exceeded meaningfully and
consistently, including 1993 when the return was 14.8 percent, management
deemed it prudent to reduce the rate to reflect current market conditions.
The changes made resulted in an increase of approximately $2.0 million in
pension expense for 1993 compared to 1992.
As to other postretirement benefits, a reduction in discount rate
assumption to 7.75 percent was also made. Due to recent coverage policy
changes and current demographics, the discount rate change is anticipated
to have only a minimal impact on future expense.
A. O. Smith Corporation achieved record net earnings in 1993 of $42.7
million or $2.08 per share. In 1992 the Corporation earned $28 million or
$1.41 per fully diluted share before recognition of a one-time charge for
postretirement benefits as required by Financial Accounting Standard No.
106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions". The Corporation recorded an after tax charge of $46.1 million,
or $2.25 per share to record the cumulative effect of the accounting
change. 1992's earnings were also impacted by a $1.6 million favorable
cumulative effect as a result of the Corporation being able to recognize
tax credits. This tax adjustment was required due to the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" in the first quarter of 1992. As a result of adopting FAS
Nos. 106 and 109 in 1992, the Corporation reported a net loss applicable
to common shareholders of $18.2 million or $.84 per fully diluted share.
1991 was essentially a break-even year.
The Corporation achieved its expectation of establishing new sales and
earnings records in 1993. Considering domestic light vehicle sales are
projected to increase in 1994, the process of transferring electric motor
production is complete, and interest rates appear stable at historically
attractive rates, it appears that similar expectations may be achieved in
1994.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements: Form 10-K
Page Number
Report of Independent Auditors . . . . . . . . . . . . . 23
Consolidated Balance Sheet at December 31, 1993 and 1992 24
For each of the three years in the period
ended December 31, 1993:
- Consolidated Statement of Operations
and Retained Earnings . . . . . . . . . . . . . . . 25
- Consolidated Statement of Cash Flows . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . 27-46
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
A. O. Smith Corporation
We have audited the accompanying consolidated balance sheet of A. O. Smith
Corporation as of December 31, 1993 and 1992 and the related consolidated
statements of operations and retained earnings and cash flows for each of
the three years in the period ended December 31, 1993. Our audits also
included the financial statement schedules listed in the Index in Item
14(a). These financial statements and schedules are the responsibility of
the Corporation's management. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1993 and 1992, and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Notes 10 and 11 to the financial statements, the
Corporation changed its method of accounting for postretirement benefits
other than pensions and income taxes effective January 1, 1992.
ERNST & YOUNG
Milwaukee, Wisconsin
January 19, 1994
CONSOLIDATED BALANCE SHEET
December 31 (Dollars in Thousands)
Assets 1993 1992
Current Assets
Cash and cash equivalents $ 11,902 $ 6,025
Trade receivables 126,949 102,172
Finance subsidiary receivables and leases 19,151 19,680
Customer tooling 15,471 5,651
Inventories 89,804 72,750
Deferred income taxes 27,614 20,487
Other current assets 12,987 7,432
------- -------
Total Current Assets 303,878 234,197
Investments in and advances to
affiliated companies 23,669 22,919
Deferred model change 22,095 34,652
Finance subsidiary receivables and leases 53,481 67,098
Other assets 44,962 46,015
Net property, plant and equipment 375,014 364,106
-------- --------
Total Assets $823,099 $768,987
======== ========
Liabilities
Current Liabilities
Trade payables $ 99,320 $ 62,106
Accrued payroll and pension 38,347 29,803
Postretirement benefit obligation 8,950 8,332
Accrued liabilities 59,448 57,752
Income taxes 2,707 840
Long-term debt due within one year 8,819 6,406
Finance subsidiary long-term debt
due within one year 5,598 6,401
-------- -------
Total Current Liabilities 223,189 171,640
Long-term debt 148,851 174,284
Finance subsidiary long-term debt 41,723 62,337
Postretirement benefit obligation 69,773 71,198
Product warranty 12,981 10,917
Deferred income taxes 41,281 28,148
Other liabilities 15,671 5,807
-------- -------
Total Liabilities 553,469 524,331
Commitments and contingencies (notes 7 and 12)
Stockholders' Equity
Preferred Stock -- --
Class A Common Stock (shares issued 6,084,845
and 5,039,498) 30,424 25,197
Common Stock (shares issued 15,614,805
and 5,766,927) 15,615 5,767
Capital in excess of par value 65,950 78,009
Retained earnings 177,543 147,065
Cumulative foreign currency translation
adjustments (841) 656
Pension liability adjustment (9,141) (1,120)
Treasury stock at cost (9,920) (10,918)
-------- --------
Total Stockholders' Equity 269,630 244,656
-------- --------
Total Liabilities and Stockholders' Equity $823,099 $768,987
======== ========
See accompanying notes which are an integral part of these statements.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31 (Dollars in Thousands, except per share amounts)
Operations 1993 1992 1991
Net revenues $1,193,870 $1,046,345 $915,833
Cost of products sold 1,015,397 903,615 813,960
--------- --------- -------
Gross profit 178,473 142,730 101,873
Selling, general and
administrative expenses 96,345 85,578 77,866
Interest expense 13,431 17,897 20,874
Other expense--net 179 448 669
-------- -------- -------
68,518 38,807 2,464
Provision for income taxes 28,124 15,122 560
-------- -------- -------
Earnings before equity in earnings
of affiliated companies 40,394 23,685 1,904
Equity in earnings of affiliated
companies 2,284 3,521 1,546
-------- -------- -------
Earnings Before Cumulative Effect
of Changes in Accounting Principles 42,678 27,206 3,450
Tax credits realizable under FAS
No. 109 resulting from
reclassification of
agricultural businesses -- 1,600
--
-------- -------- -------
Earnings before effect of
postretirement benefits 42,678 28,806 3,450
Change in method of accounting
for postretirement benefits,
net of tax benefit of $28,873 -- (46,122)
--
-------- -------- -------
Net Earnings (Loss) 42,678 (17,316) 3,450
Preferred dividends (per share--
$.00, $.531 and $2.125,
respectively) -- (856) (3,425)
-------- -------- -------
Net Earnings (Loss) Applicable
to Common Stock 42,678 (18,172) 25
Retained Earnings
Balance at beginning of year 147,065 172,869 179,176
Cash dividends on common stock (12,200) (7,632) (6,332)
-------- -------- -------
Balance at End of Year $ 177,543 $ 147,065 $172,869
======== ======== =======
Primary Earnings (Loss) Per Share
of Common Stock Earnings before
cumulative effect of accounting
changes $2.08 $1.40 $ .00
Realization of tax credits of
agricultural businesses -- .08 --
-------- ------- -------
Earnings before effect of
postretirement benefits 2.08 1.48 .00
Change in postretirement
benefits, net of taxes -- (2.44) --
-------- ------- -------
Net earnings (loss) $2.08 $(.96) $ .00
======= ======= =======
Fully Diluted Earnings (Loss) Per
Share of Common Stock Earnings
before cumulative effect of
accounting changes $2.08 $1.33 $ .00
Realization of tax credits of
agricultural businesses -- .08 --
------ ------ ------
Earnings before effect
of postretirement benefits 2.08 1.41 .00
Change in postretirement
benefits, net of taxes -- (2.25) --
------ ------ ------
Net earnings (loss) $2.08 $(.84) $ .00
====== ====== ======
See accompanying notes which are an integral part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (Dollars in Thousands)
Cash Flow from Operating Activities 1993 1992 1991
Net earnings (loss) $ 42,678 $(17,316) $ 3,450
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation 42,607 39,458 37,773
Cumulative effect of change in method of
accounting for postretirement benefits -- 74,995 --
Vacation policy adjustment -- -- (7,862)
Deferred income taxes 11,800 (22,928) 1,530
Equity in earnings of affiliates, net of dividends 516 (1,456) (1,519)
Deferred model change and software amortization 9,080 9,520 9,445
Net change in current assets and liabilities (1,310) (16,454) 22,174
Net change in noncurrent assets and liabilities 4,640 (4,617) 1,408
Other 5,340 6,465 3,640
------- ------- -------
Cash Provided by Operating Activities 115,351 67,667 70,039
------- ------- -------
Cash Flow from Investing Activities
Capital expenditures (54,703) (46,947) (59,339)
Deferred model change expenditures (1,586) (4,169) (6,574)
Other (562) (437) (1,165)
------- ------- -------
Cash Used by Investing Activities (56,851) (51,553) (67,078)
------- ------- -------
Cash Flow before Financing Activities 58,500 16,114 2,961
Cash Flow from Financing Activities
Bank borrowings--net -- -- (1,986)
Long-term debt incurred 30,000 -- 26,172
Long-term debt retired (53,020) (2,760) (5,463)
Finance subsidiary net long-term debt retired (21,417) (13,682) (11,684)
Proceeds from common stock issued 3,167 4,539 763
Purchase of common and redemption of preferred stock
includes fees associated with conversion,
stock dividends and odd lot buy back (1,380) (746) (312)
Tax benefit from exercise of stock options 2,227 2,159 --
Dividends paid (12,200) (8,488) (9,757)
------- ------- -------
Cash Used by Financing Activities (52,623) (18,978) (2,267)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,877 (2,864) 694
Cash and cash equivalents--beginning of year 6,025 8,889 8,195
------- ------- -------
Cash and Cash Equivalents--End of Year $11,902 $ 6,025 $ 8,889
======= ======= =======
See accompanying notes which are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation. The consolidated financial
statements include the accounts of the Corporation and its wholly-owned
subsidiaries including the Corporation's agricultural businesses which are
being held for sale or liquidation.
Foreign Currency Translation. Financial statements for the Corporation's
subsidiaries outside of the United States are translated into U.S. dollars
at year-end exchange rates for assets and liabilities and weighted average
exchange rates for revenues and expenses. The resulting translation
adjustments are recorded as a component of stockholders' equity.
Inventory Valuation. Domestic inventories are carried at lower of cost or
market determined on the last-in, first-out (LIFO) method. Inventories of
foreign subsidiaries and supplies are determined using the first-in,
first-out (FIFO) method.
Futures Contracts. The Corporation enters into futures contracts to hedge
certain raw material purchases, principally copper and aluminum, with the
objective of minimizing cost risk due to market fluctuations. Any gains
or losses from hedging transactions are included as part of the inventory
cost.
The Corporation also enters into forward foreign exchange contracts to
hedge foreign currency transactions on a continuing basis for periods
consistent with its committed exposures. The Corporation does not engage
in speculation. The Corporation's foreign exchange contracts do not
subject the Corporation to risk due to exchange rate movements because
gains and losses on these contracts offset gains and losses on the assets,
liabilities, and transactions being hedged.
Gains and losses are recognized in the same period in which gains or
losses from the transactions being hedged are recognized. As of December
31, 1993, the Corporation and its foreign subsidiaries had contracts to
purchase or sell the U.S. dollar equivalent of $36.2 million in foreign
currencies (Canadian dollars, Irish punts, British pounds, Dutch guilders
and French francs) at varying maturities, most of which occur during 1994.
Deferred Model Change. Tool costs not reimbursed by customers and
expenses associated with significant model changes are amortized over the
estimated model life which ranges from four to ten years, with the shorter
periods associated with automobile structural components and the longer
periods associated with structural components for trucks.
Property, Plant and Equipment. Property, plant and equipment are stated
at cost. Depreciation is computed primarily by the straight-line method.
Finance Subsidiary. Finance charges for retail contracts receivable are
recognized as income as installments become due using the interest method.
For direct finance leases, income is recognized based upon a constant rate
of return on the unrecovered lease investment over the term of the related
lease.
Income Taxes. The Corporation accounts for income taxes using the
liability method prescribed by FAS No. 109 in 1993 and 1992 and FAS No. 96
in 1991.
Research and Development. Research and development costs are charged to
expense as incurred and amounted to approximately $7.6, $6.5 and $6.1
million during 1993, 1992 and 1991, respectively.
Common Stock Dividend. On January 26, 1993, the stockholders authorized
certain increases in the authorized capital stock as follows: increase of
1,000,000 shares of Class A Common Stock for a total of 7,000,000 shares
and 12,000,000 shares of Common Stock (formerly Class B Common Stock) for
a total of 24,000,000 shares. In addition, the stockholders authorized
the conversion of the Class A Common Stock into Common Stock on a share-
for-share basis, at any time, at the option of the holder.
On June 8, 1993, the Board of Directors declared a two-for-one stock split
in the form of a 100 percent stock dividend to stockholders of record on
July 30, 1993 and payable on August 16, 1993. All references in the
financial statements to average number of shares outstanding, price per
share, per share amounts and stock option plan data have been restated to
reflect the split.
Earnings (Loss) Per Share of Common Stock. Primary per share amounts are
determined by dividing earnings (loss) applicable to common shareholders
by the weighted average number of shares of common stock and materially
dilutive common stock equivalents (stock options) outstanding.
Fully diluted per share amounts include the dilutive effect, if any, of
the assumed conversion in 1991 and 1992 of the outstanding preferred stock
into common stock with appropriate adjustments being made to earnings
(loss) applicable to common stock for dividends on the preferred stock.
For 1992, fully diluted net loss per share amounts are anti-dilutive
because of the preferred stock conversion.
If the redemption of the Series I Preferred Stock discussed in Note 8 had
taken place at the beginning of 1992, primary loss per share for 1992
would not have been significantly impacted.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the 1993 presentation.
2. Statement of Cash Flows
For purposes of the consolidated statement of cash flows, cash and cash
equivalents include investments with original maturities of three months
or less. Supplemental cash flow information is as follows:
Years ended December 31 (Dollars in Thousands)
1993 1992 1991
Change in Current Assets and Liabilities:
Trade receivables and customer tooling $(35,008) $(17,340) $30,142
Finance subsidiary receivables 529 3,845 569
Inventories (17,054) 2,862 13,975
Other current assets (5,297) 1,327 6,092
Trade payables 37,214 1,501 (18,149)
Accrued liabilities, payroll and pension 16,274 (9,242) (5,069)
Current income tax accounts-net 2,032 593 (5,386)
-------- -------- -------
$ (1,310) $(16,454) $22,174
======== ======== =======
The finance subsidiary provided cash before financing activities of $21.4,
$13.7 and $11.7 million in 1993, 1992 and 1991, respectively.
3. Agricultural Businesses
The Corporation's strategic plan is to concentrate the Corporation's
resources in nonagricultural businesses and withdraw from the agricultural
market. The strategy includes plans to sell A. O. Smith Harvestore
Products, Inc. (Harvestore), a wholly-owned manufacturing subsidiary, and
to phase out AgriStor Credit Corporation (AgriStor), a wholly-owned
finance subsidiary.
Due to the uncertainties which continue to impact the farm sector, it is
not possible to predict when the sale of Harvestore will occur. The
Corporation is continuing to phase out AgriStor's operations in an orderly
manner. The agricultural businesses are classified as continuing
operations in accordance with SEC Staff Accounting Bulletin No. 93.
The Corporation's consolidated balance sheet includes AgriStor. A
condensed consolidated balance sheet of AgriStor is presented below:
December 31 (Dollars in Thousands)
1993 1992
Assets
Cash and cash equivalents $ 3,680 $ 4,688
Retail contracts receivable 29,049 33,856
Net investment in leases 32,023 37,685
Residual value of equipment 11,560 15,237
Due from parent 13,660 19,908
Other assets 2,941 4,161
------- --------
Total Assets $92,913 $115,535
======= ========
Liabilities and stockholder's equity
Long-term debt due within one year $ 5,598 $ 6,401
Other liabilities 21,838 21,410
Long-term debt 41,723 62,337
Subordinated debt due parent -- 1,900
Stockholder's equity 23,754 23,487
------- --------
Total Liabilities and Stockholder's Equity $92,913 $115,535
======= =======
The receivables and net investment in leases are net of bad debt reserves
totalling $14.6 and $20.6 million at December 31, 1993 and 1992,
respectively. AgriStor is the lessor in the direct finance leasing of
Harvestore equipment. The equipment has an estimated economic life of 15
years and is leased under agreements with original terms of 5 to 12 years.
Following is a summary of the components of net retail contracts
receivable and net investment in leases, which are included in the
consolidated balance sheet as finance subsidiary receivables and leases.
December 31 (Dollars in Thousands)
1993 1992
Installment contracts and loans
(net of allowance for credit losses) $32,362 $ 39,044
Less unearned finance charges (3,313) (5,188)
------ ------
Net installment contracts and loans 29,049 33,856
Gross rentals receivable (net of allowance
for credit losses) 17,789 21,252
Less unearned and deferred income (5,653) (8,033)
Estimated residual value 11,560 15,237
Equipment held for resale 19,887 24,466
------- ------
43,583 52,922
------- ------
Total $72,632 $ 86,778
======= ========
Current $19,151 $ 19,680
Non-current 53,481 67,098
------- --------
Total $72,632 $ 86,778
======= ========
There is no quoted market price available for the retail contracts and
leases. Management believes fair value approximates book value. While
some maturities extend beyond the year 2000, the portfolio is
predominantly of two to three year duration carrying an average interest
rate of 8.2%. As a liquidating business, it is possible certain
instruments could be sold before maturity and gains or losses recognized
at time of sale. Given the maturities involved, it is not expected that
such gains or losses would be material to the financial condition of the
Corporation.
Finance subsidiary long-term debt was comprised of the following:
December 31 (Dollars in Thousands)
1993 1992
Bank credit lines, average year-end interest
rate of 3.8% for 1993 and 6.0% for 1992 $ 4,969 $ 4,640
Commercial paper, average year-end interest
rate of 3.5% for 1993 and 3.9% for 1992 32,159 50,110
Other notes, expiring through 1998, average
year-end interest rate of 8.1% for 1993 and
8.1% for 1992 10,193 13,988
------- -------
47,321 68,738
Less amount due within one year 5,598 6,401
------- -------
$41,723 $62,337
======= =======
AgriStor has $36.5 million in committed bank credit facilities at December
31, 1993. The total consists of a $35 million multi-year revolving credit
facility from a group of eleven banks which expires January 2, 1997 and
$1.5 million from a revolver bank under a separate revolving credit
facility to provide additional liquidity for up to one year. In addition,
AgriStor Credit Corporation-Canada (AgriStor Canada) has a $7.6 million
credit facility to meet its borrowing needs. Included in AgriStor's other
notes are a $5.0 million term loan with a final maturity in 1995 and a
$5.2 million note with a final maturity in 1998 for AgriStor-Canada which
require a combined annual principal payment of $3.5 million in 1994. It
has been AgriStor's practice to renew or replace its credit agreements to
maintain 100% coverage of its borrowing needs in the commercial paper
market as well as its direct borrowing under the credit facilities.
AgriStor has entered into interest rate swap agreements to minimize the
impact of changes in interest rates on its line of credit and commercial
paper borrowings. At December 31, 1993, AgriStor had outstanding three
interest rate swap agreements and four interest rate cap agreements with
commercial banks, having a total notional principal of $40 million. The
fixed rates under the swap agreements range from 7.46% to 7.84% and expire
August 6, 1994. The interest rate cap agreements expire February 21,
1995.
Long-term, debt maturing within each of the five years subsequent to
December 31, 1993, is as follows: 1994--$5.6, 1995--$3.5, 1996--$1.0,
1997--$1.0, 1998--$1.0 million.
A condensed consolidated statement of operations of AgriStor is presented
below. The following does not include certain bad debt reserves provided
by the Corporation totalling $1.8, $1.4 and $1.0 million in 1993, 1992 and
1991, respectively:
Years Ended December 31 (Dollars in Thousands)
1993 1992 1991
Revenues $ 4,783 $ 6,354 $ 7,713
Interest expensed and paid 3,794 5,984 7,937
General and administrative expenses 2,951 3,250 4,553
------- ------- -------
Total expenses 6,745 9,234 12,490
------- ------- -------
Loss before income taxes $(1,962) $(2,880) $(4,777)
======= ======= =======
4. Inventories
December 31 (Dollars in Thousands)
1993 1992
Finished products $ 53,337 $ 41,951
Work in process 37,215 31,901
Raw materials 36,371 31,043
Supplies 5,228 6,054
-------- --------
132,151 110,949
Allowance to state inventories at LIFO cost 42,347 38,199
-------- --------
$ 89,804 $ 72,750
======== ========
During 1992 and 1991, inventory reductions in certain operations resulted
in liquidations of certain LIFO inventory quantities acquired at lower
costs in prior years as compared with 1992 and 1991 costs, the effect of
which reduced the 1992 net loss by $2.8 million and increased the 1991 net
earnings by $.6 million.
The inventory amounts exclude $19.9 and $24.5 million, respectively, of
equipment held for resale by AgriStor.
5. Investments in and Advances to Affiliated Companies
Investments in affiliates in which ownership is 50 percent or less are
accounted for under the equity method. During 1993, 1992 and 1991, the
Corporation received dividends of $2.8, $1.3 and $.8 million,
respectively, from such affiliates. The Corporation's equity in the
undistributed earnings of such affiliates at December 31, 1993, amounted
to approximately $22.5 million. In 1993, the Corporation advanced $1.2
million to its Mexican affiliate with repayment due in 1996 and interest
at 5% due quarterly.
6. Property, Plant and Equipment
December 31 (Dollars in Thousands)
1993 1992
Land $ 7,538 $ 7,539
Buildings 183,485 175,883
Equipment 632,763 600,692
-------- --------
823,786 784,114
Less accumulated depreciation 448,772 420,008
-------- --------
$375,014 $364,106
======== ========
Interest on borrowed funds during construction of $1.1, $.8 and $3.0
million was capitalized in 1993, 1992 and 1991, respectively. As of
December 31, 1993, the Corporation has pledged $4.1 million of net
property, plant and equipment under long-term debt obligations.
7. Long-Term Debt and Lease Commitments
December 31 (Dollars in Thousands)
1993 1992
Bank credit lines, average year-end interest rate
of 3.8% for 1993 and 4.6% for 1992 $ 12,413 $ 14,340
Commercial paper, average year-end interest rate
of 3.5% for 1993 and 3.9% for 1992 60,838 94,508
8.75% notes, payable annually through 1997 14,275 17,850
8.9% term loan, payable semi-annually,
through April 1996 12,500 15,000
Long-term notes, expiring through 2003,
average year-end interest rate of 6.8%
for 1993 30,000 --
Other notes, expiring through 2012, average
year-end interest rate of 5.8% for 1993 and
8.3% for 1992 27,644 38,992
------- --------
157,670 180,690
Less amount due within one year 8,819 6,406
------- --------
$148,851 $174,284
======== ========
The Corporation has a $115 million multi-year revolving credit facility
from a group of eleven banks which expires April 3, 1996. At its option,
the Corporation maintains either cash balances or pays fees for bank
credit and services.
In 1993, the Corporation entered into two loan facilities with insurance
companies totalling $65 million. Through December 31, 1993, the
Corporation had drawn down, under ten year terms, $30 million under these
facilities. The Corporation used a portion of these proceeds to redeem a
$1.2 million bank note with an interest rate of 9.5% due December 1, 2001
and, at a modest premium, a $10 million Industrial Revenue Bond with an
interest rate of 11.5% due August 1, 2003 saving several million dollars
in interest costs over the remaining term of the retired instruments.
The Corporation's credit agreement and term loans contain certain
conditions and provisions which restrict the Corporation's payment of
dividends. Under the most restrictive of these provisions, retained
earnings of $72.1 million were unrestricted as of December 31, 1993.
Borrowings under the bank credit lines and in the commercial paper market
are supported by the revolving credit agreements and have been classified
as long-term. It has been the Corporation's practice to renew or replace
the credit agreements so as to maintain the availability of debt on a
long-term basis and to provide 100% backup for its borrowings in the
commercial paper market.
Long-term debt, exclusive of AgriStor, maturing within each of the five
years subsequent to December 31, 1993, is as follows: 1994--$8.8;
1995--$8.9; 1996--$6.6; 1997--$7.9; 1998--$5.0 million.
The Corporation sold, without recourse and at market rates, certain
automotive related receivables totalling $16.0 million at December 31,
1993, compared to $14.0 million at December 31, 1992. The receivables
sale program is scheduled to expire on April 30, 1994, unless mutually
extended.
Future minimum payments under noncancelable operating leases total $105.4
million and are due as follows: 1994--$20.7; 1995--$18.1; 1996--$14.6;
1997--$13.1; 1998--$12.7; thereafter--$26.2 million. Rent expense,
including payments under operating leases, was $28.2, $27.5 and $23.9
million in 1993, 1992 and 1991, respectively.
Interest paid by the Corporation, excluding AgriStor, was $10.2, $12.4 and
$12.5 million in 1993, 1992 and 1991, respectively.
8. Stockholders' Equity
As of December 31, 1993, there were 7,000,000 shares of Class A Common
Stock $5 par value, 24,000,000 shares of Common Stock $1 par value and
3,000,000 shares of preferred stock $1 par value authorized. 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 February 1, 1993 the Board of Directors declared a special $.25 per
share dividend payable on March 22 to Common Stockholders of record March
8. No special dividend was declared on the Class A Common Stock. During
1993, 2,009,683 shares of Class A Common Stock including 623,362 shares
held in Treasury were converted by the holders into Common Stock. Regular
dividends paid on the Class A Common and Common Stock amounted to $.42,
$.40 and $.40 per share in 1993, 1992 and 1991, respectively.
The Corporation issued 1,725,000 shares of Series I Preferred Stock in
1985. The preferred stock was convertible at the option of the holder at
any time into approximately 1.1905 shares of Common Stock. The
Corporation called for redemption of all of its $2.125 Convertible
Exchangeable Preferred Stock on April 23, 1992. The Corporation issued
1,901,458 shares of Common Stock as a result of the conversion of
1,597,313 shares of its preferred stock prior to the redemption date with
cash of $377,659 paid in lieu of 14,387 shares of preferred stock which
otherwise would have been converted into fractional shares of Common
Stock. On January 26, 1993, the stockholders authorized a restatement of
the Certificate of Incorporation deleting the designation relating to
Series I Preferred Stock.
Changes in certain components of stockholders' equity are as follows:
Capital in Treasury Stock
Class A Excess of -------------------
(Dollars in Thousands) Preferred Common Common Par Value Shares Amount
Balance at December 31, 1990 $ 1,725 $25,197 $3,500 $74,692 736,411 $13,462
Exercise of stock options -- -- 35 432 (17,300) (296)
Purchase of treasury shares -- -- -- -- 19,350 312
---------- --------- --------- --------- ------- --------
Balance at December 31, 1991 1,725 25,197 3,535 75,124 738,461 13,478
Redemption of preferred stock (1,725) -- 1,901 (3,452) (113,300) (2,530)
Exercise of stock options -- -- 331 4,178 (1,799) (30)
Tax benefit from exercise of
stock options -- -- -- 2,159 -- --
---------- --------- --------- -------- ------- ---------
Balance at December 31, 1992 -- 25,197 5,767 78,009 623,362 10,918
Conversion of Class A Common -- (10,048) 2,010 7,746 -- --
Stock
Exercise of stock options (net of -- -- 43 1,056 (183,300) (1,267)
21,200 shares surrendered as
stock option proceeds)
Purchase of treasury shares -- -- -- -- 5,930 269
Tax benefit from exercise of
stock options -- -- -- 2,227 -- --
Two-for-one stock split -- 15,275 7,795 (23,088) 566,792 --
--------- ------- -------- ------- ---------- ---------
Balance at December 31, 1993 $ -- $30,424 $15,615 $65,950 1,012,784 $9,920
========= ======= ======= ======= ========= ======
In 1993, 5,930 shares of treasury stock were acquired under a purchase
offer made to holders of less than 100 shares of Class A Common Stock and
Common Stock.
At December 31, 1993, 3,460 and 1,009,324 shares of Class A Common Stock
and Common Stock, respectively, were held as treasury stock.
9. Stock Options
During 1990, the Corporation adopted a Long-Term Executive Incentive
Compensation Plan (1990 Plan). The 1990 Plan initially reserved 1,000,000
shares of common stock for granting of nonqualified and incentive stock
options. The Corporation will submit a proposal to stockholders in 1994
for approval to reserve an additional 1,000,000 shares of Common Stock.
Each option entitles the holder upon exercise to obtain one share of
Common Stock. In addition, the Corporation has a Long-Term Executive
Incentive Compensation Plan (1980 Plan) which has terminated except as to
outstanding options. Options under both plans 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, 1993 and 1992 was 25,400. Options as to 188,400 shares
granted in 1993 are subject to approval by the stockholders.
Changes in option shares (all Common Stock) were as follows:
Years ended December 31
1993 1992 1991
Outstanding at beginning of year 1,184,200 1,627,200 1,469,400
Granted
1993--$27.50 per share 188,400
1992--$11.125 to $15.188 per share 232,200
1991--$8.438 and $9.563 per share 262,400
Exercised
1993--$6.375 to $15.188 per share (362,800)
1992--$6.375 to $9.563 per share (666,200)
1991--$6.375 to $8.688 per share (104,600)
Canceled or expired -- (9,000) --
------- -------- --------
Outstanding at End of Year
(1993--$7.00 to $27.50 per share) 1,009,800 1,184,200 1,627,200
========= ========= =========
Exercisable at December 31, 1993 821,400
=======
10. Retirement Plans
The Corporation and its domestic subsidiaries have noncontributory defined
benefit pension plans covering all employees. Plans covering salaried
employees provide benefits that are based on an employee's years of
service and compensation. Plans covering hourly employees provide
benefits of stated amounts for each year of service. The Corporation's
funding policy is to contribute amounts which are actuarially determined
to provide the plans with sufficient assets to meet future benefit payment
requirements consistent with the funding requirements of federal laws and
regulations. Plan assets consist primarily of marketable equities and
debt securities. The Corporation also has several foreign pension plans,
none of which are material.
The following tables present the components of pension expense, the funded
status and the major assumptions used to determine these amounts for
domestic pension plans:
Years ended December 31 (Dollars in Thousands)
1993 1992 1991
Components of pension
expense:
Service cost--
benefits earned
during the year $6,261 $5,581 $5,484
Interest cost on
projected benefit
obligation 27,400 27,067 26,740
Return on plan
assets:
Actual return $(42,270) $(25,140) $(60,650)
Deferral of
investment return
in excess of
(less than)
expected return 9,145 (8,802) 30,651
-------- -------- --------
(33,125) (33,942) (29,999)
Net amortization and
deferral 569 353 420
-------- -------- --------
Net periodic pension
expense (income) $ 1,105 $ (941) $ 2,645
======= ======= ========
December 31 (Dollars in Thousands)
1993 1992
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
Actuarial present value
of benefit obligations:
Vested benefit obligation $138,138 $182,531 $133,583 $164,454
======== ======== ======== ========
Accumulated benefit
obligation $147,018 $212,145 $142,065 $191,152
======== ======== ======== ========
Projected benefit obligation $174,210 $212,755 $159,159 $191,152
Plan assets at fair value 232,188 162,516 215,405 153,208
-------- -------- -------- --------
Plan assets in excess of
(less than) projected
benefit obligation 57,978 (50,239) 56,246 (37,944)
Unrecognized net transition
(asset) obligation at
January 1, 1986 (14,061) 13,882 (16,069) 15,448
Unrecognized net (gain) loss (11,480) 15,669 (12,904) 1,821
Prior service cost not yet
recognized in periodic
pension cost 4,244 10,657 4,694 10,944
Adjustment required to recognize
minimum liability1 -- (39,598) -- (28,213)
-------- -------- ------- --------
Prepaid pension asset (liability) $ 36,681 $(49,629) $ 31,967 $(37,944)
======== ======== ======= ========
Net liability recognized in
consolidated balance sheet $(12,948) $ (5,977)
======== ========
1 The provisions of FAS No. 87, "Employers' Accounting for Pensions",
require the recognition of an additional minimum liability for each
defined benefit plan for which the accumulated benefit obligation exceeds
plan assets. This amount has been recorded as a long-term liability with
an offsetting intangible asset. Because the asset recognized may not
exceed the amount of unrecognized prior service cost and transition
obligation on an individual plan basis, the balance, net of tax benefits,
is reported as a separate reduction of stockholders' equity at December
31, 1993 and 1992, as follows:
1993 1992
Minimum liability adjustment $39,598 $28,213
Intangible asset 24,539 26,392
------- -------
15,059 1,821
Tax benefit 5,918 701
------- -------
Pension liability adjustment
to stockholders' equity $ 9,141 $ 1,120
======= =======
Major assumptions at year-end:
1993 1992 1991
Discount rate 7.75% 8.75% 8.75%
Rate of increase in
compensation level 4.00% 5.50% 5.50%
Expected long-term rate
of return on assets 10.25% 10.50% 10.50%
Net periodic pension cost is determined using the assumptions as of the
beginning of the year. The funded status is determined using the
assumptions as of the end of the year.
The Corporation has a defined contribution profit sharing and retirement
plan covering salaried nonunion employees which provides for annual
corporate contributions of 35 percent to 140 percent of qualifying
contributions made by participating employees. The amount of the
Corporation's contribution in excess of 35 percent is dependent upon the
Corporation's profitability. The amount of the contribution was $4.0,
$2.3 and $1.2 million for 1993, 1992 and 1991, respectively.
The Corporation has several unfunded defined benefit postretirement plans
covering certain hourly and salaried employees which provide medical and
life insurance benefits from retirement to age 65. Salaried employees
retiring after January 1, 1995 will be covered by an unfunded defined
contribution plan with benefits based on years of service. Certain hourly
employees retiring after January 1, 1996 will be subject to a maximum
annual benefit limit. Salaried employees hired in the future are not
eligible for postretirement medical benefits.
Effective January 1, 1992, the Corporation adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The Corporation recorded a charge of $46.1 million ($75.0 million before
tax) or $2.25 per share to record the cumulative effect of the accounting
change which represents the transition obligation as of January 1, 1992.
Net periodic postretirement benefit cost included the following
components:
Years ended December 31 (Dollars in Thousands)
1993 1992
Service cost--benefits attributed
to employee service during the years $1,841 $1,672
Interest cost on accumulated
postretirement benefit obligation 6,959 6,931
------ ------
Net periodic postretirement benefit cost $8,800 $8,603
====== ======
The following table sets forth the plans' status as reflected in the
consolidated balance sheet:
December 31 (Dollars in Thousands)
1993 1992
Accumulated postretirement benefit obligation:
Retirees $39,269 $36,227
Fully eligible active plan participants 11,880 10,958
Other active plan participants 35,062 32,345
------- -------
86,211 79,530
Unrecognized net loss (7,488)
--
------- -------
Accrued postretirement benefit cost $78,723 $79,530
======= =======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation (APBO) was 10% in 1992, declining by 1%
per year to 6% in 1996. The weighted average discount rate used in
determining the APBO was 7.75% and 8.75% at December 31, 1993 and 1992,
respectively. If the health care cost trend rate was increased by 1%, the
APBO at December 31, 1993 would increase by $4.1 million and net periodic
postretirement benefit cost for 1993 would increase by $.5 million.
Prior to 1992, the cost of continuing life and health insurance for
eligible retirees was accounted for on a pay-as-you-go basis and totalled
$8.5 million in 1991.
11. Income Taxes
Effective January 1, 1992, the Corporation adopted FAS No. 109,
"Accounting for Income Taxes." The adoption of FAS No. 109 had a $1.6
million favorable effect as of January 1, 1992 as a result of the
realization of tax credits.
The components of the provision for income taxes consisted of the
following:
Years ended December 31 (Dollars in Thousands)
1993 1992 1991
Current:
Federal $11,208 $ 4,916 $ 931
State 1,955 1,449 725
Foreign 3,109 1,466 1,462
Cumulative effect of rate change 836 -- --
Deferred 11,297 7,879 (1,715)
Business tax credits (281) (588) (843)
------- ------- ------
Provision for income taxes $28,124 $15,122 $ 560
======= ======= ======
The tax provision differs from the statutory U.S. federal rate due to the
following items:
Years ended December 31 (Dollars in Thousands) 1993 1992 1991
Provision at federal statutory rate $23,981 $13,195 $ 838
Cumulative effect of rate change 836 -- --
Foreign income taxes 637 286 539
State income and franchise taxes 3,056 1,864 73
Business and foreign tax credits (631) (588) (1,143)
Non-deductible items 287 325 265
Other (42) 40 (12)
------- ------- ------
Provision for income taxes $28,124 $15,122 $ 560
======= ======= ======
On August 10, 1993, the Revenue Reconciliation Act of 1993 was signed into
law. The Act increased the corporate federal income tax rate from 34
percent to 35 percent. In the third quarter, the Corporation adjusted its
deferred income tax accounts by $.8 million and increased its provision
for current income taxes for the first half of 1993 by $.4 million.
The domestic and foreign components of income (loss) from operations
before income taxes were as follows:
Years ended December 31 (Dollars in Thousands)
1993 1992 1991
Domestic $60,407 $34,776 $ (926)
Foreign 8,111 4,031 3,390
------ ------ -------
$68,518 $38,807 $ 2,464
====== ====== ======
Taxes paid amounted to $12.2, $5.4 and $4.6 million in 1993, 1992 and
1991, respectively.
The Corporation has the following carryforwards for federal income tax
purposes:
- Tax credits of $14.4 million which expire from 1996 through 2007.
- Alternative Minimum Tax credits of $6.1 million which do not expire.
No provision for U.S. income taxes has been made on the undistributed
earnings of foreign subsidiaries as such earnings are considered to be
permanently invested. At December 31, 1993, the undistributed earnings
amounted to $16.7 million. It is not practical to determine the income
tax liability that would result had such earnings been repatriated. The
amount of withholding taxes that would be payable upon such repatriation
is estimated to be $.7 million.
No provision for U.S. income taxes has been made on undistributed earnings
of equity investees attributable to cumulative net translation gains and
other items. Since the investees do not have the capability to remit such
gains in the foreseeable future, such gains are considered permanently
invested. At December 31, 1993, the amount of unrecognized U.S. tax
liability for the net translation gains and other items of $17.7 million
amounted to $6.2 million.
The approximate tax effects of temporary differences between income tax
and financial reporting at December 31, 1993 and 1992, respectively, are
as follows:
1993 1992
December 31 (Dollars in Thousands) Assets Liabilities Assets Liabilities
Finance subsidiary leases $ -- $(19,999) $ -- $(24,174)
Group health insurance and other
postemployment obligations 35,214 -- 34,190 --
Employee benefits 3,465 (6,031) 3,118 (8,242)
Product liability and warranty 7,592 -- 8,692 --
Bad debts 7,111 -- 9,163 --
Tax over book depreciation -- (48,388) -- (46,652)
Deferred model change -- (11,150) -- (13,302)
Equity in affiliates -- (1,068) -- (1,109)
Tax carryforwards 22,331 -- 33,333 --
All other -- (2,744) -- (2,678)
------- ------- ------- -------
$75,713 $(89,380) $88,496 $(96,157)
======= ======= ======= =======
Net liability $(13,667) $ (7,661)
======= ========
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. The balances are as follows:
Current deferred income tax assets $ 27,614 $20,487
Long-term deferred income tax liabilities (41,281) (28,148)
-------- -------
Net liability $(13,667) $(7,661)
======== =======
12. Litigation and Insurance Matters
As of December 31, 1993, the Corporation and Harvestore were defendants in
26 cases alleging damages for economic losses claimed to have arisen out
of alleged defects in Harvestore animal feed storage equipment. Some
plaintiffs are seeking punitive as well as compensatory damages. The
Corporation believes that a significant number of these claims were
related to the deteriorated general farm economy at the time suit was
commenced, including those filed in 1993. The Corporation and Harvestore
continue to vigorously defend these cases.
In 1993, nine new cases were filed and 38 cases were concluded. One of
the cases filed during 1993 is a New York state court action and contains
class action allegations, and names the Corporation, Harvestore and two of
its dealers as defendants. Among the many motions the defendants have
filed in this action is one to stay the action pending the ruling on class
action certification requested by the plaintiffs in a lawsuit pending in
the Federal District Court for the Southern District of Ohio. Based on
the facts currently available to management and its prior experience with
lawsuits alleging damages for economic loss resulting from use of the
Harvestore animal feed storage equipment, management is confident that the
motion for class certification in the Ohio lawsuit can be defeated and
that the lawsuit does not represent a material threat to the Corporation.
The Corporation believes that any damages, including any punitive damages,
arising out of the pending cases are adequately covered by insurance and
recorded reserves. The Corporation reevaluates its exposure periodically
and makes adjustment of its reserves as appropriate. A lawsuit for
damages and declaratory judgments in the Circuit Court of Milwaukee
County, State of Wisconsin, in which the Corporation and Harvestore are
plaintiffs, is pending against three insurance companies for failure to
pay in accordance with liability insurance policies issued to the
Corporation. The insurers have failed to pay, in full or in part, certain
judgments, settlements and defense costs incurred in connection with
pending and closed lawsuits alleging damages for economic losses claimed
to have arisen out of alleged defects in Harvestore animal feed storage
equipment. While the Corporation has, in part, assumed applicability of
this coverage, an adverse judgment should not be material to its financial
condition.
The Corporation is involved in other litigation and claims which arise in
the ordinary course of its business including governmental proceedings
regarding the disposal of hazardous waste at sites which are in various
stages of the remediation process. For some of the sites, total costs for
remediation are not available because the final remedy has not been
selected or for other reasons. Further, the ultimate liability of the
Corporation, if any, has not been determined at all of the sites. As a
result, it is impossible at this time to estimate the total cost of
remediation for all of the sites. The total estimated cleanup costs
identified at this time for all parties at all sites involving claims
filed by the Environmental Protection Agency or similar state agencies
where the Corporation has been designated a potentially responsible party
is approximately $232 million. The estimated portion of the total for
which the Corporation is or may be responsible is approximately $5.0
million, of which $3.6 million has been contributed towards the cleanup
costs by the Corporation and its insurance companies. The balance of the
identified potential cleanup costs is covered by insurance and established
reserves set by the Corporation which are believed to be adequate to cover
the Corporation's obligations with respect to the unpaid balance of the
claims. To the best of the Corporation's knowledge, the insurers have the
financial ability to pay any such covered claims. The Corporation
reevaluates its exposure periodically and makes adjustment of its reserves
as appropriate.
In March 1992, a subsidiary of the Corporation, Smith Fiberglass Products
Inc. (Smith Fiberglass), won a patent infringement suit filed against a
competitor. A judgment was entered in favor of Smith Fiberglass. The
judgment was appealed by the defendant. However, the Court of Appeals
affirmed the award and Smith Fiberglass recognized the judgment which
amounted to $1.9 million after recognition of legal fees as other income
in the second quarter of 1993.
A legal action against a supplier of certain automotive equipment alleging
breach of warranty was settled in December 1992. The Corporation recorded
the settlement, net of expenses, of $1.1 million as other income in 1992.
A lawsuit initiated by the Corporation in connection with previously
concluded antitrust action involving a former subsidiary was terminated in
the second quarter of 1993 with a favorable settlement of $2.8 million
which is included as other income.
Over the past several years, the Corporation has self-insured a portion of
its product liability loss exposure and other business risks. The
Corporation has established reserves which it believes are adequate to
cover incurred claims. For the year ended December 31, 1993, the
Corporation had $60 million of third-party product liability insurance for
individual losses in excess of $1.5 million and for aggregate losses in
excess of $10 million.
13. Operations by Segment
Years ended December 31 (Dollars in Millions)
Net Revenues/1/ Earnings (Loss)
------------- --------------
1993 1992 1991 1990 1989 1993 1992 1991 1990 1989/4/
OEM Products
Auto and truck structural
components, fractional
horsepower and hermetic
electric motors $848.8 $753.2 $631.2 $ 684.5 $ 747.5 $70.2 $52.8 $12.0/2/ $38.7 $15.2
Water Products/3/
Water heaters and water
heating systems and
protective industrial
coatings 248.1 215.2 194.6 197.6 179.0 26.5 18.2 11.0 20.4 7.1
Agricultural Products
Agricultural feed storage
systems, agricultural
financing, municipal and
industrial storage systems 38.1 34.0 36.1 42.4 39.5 (4.8) (4.5) (3.6) (11.0) (7.3)
Other
Fiberglass reinforced piping
systems and other 58.9 43.9 53.9 53.1 49.8 9.8 4.9 11.6 12.4 11.4
------- ------- ----- ----- ------- ----- ----- ----- ------ ------
$1,193.9 $1,046.3 $915.8 $977.6 $1,015.8 101.7 71.4 31.0 60.5 26.4
======== ======= ===== ====== =======
General corporate and
research and development
expense (23.6) (20.7) (16.0) (16.4) (21.8)
Interest income -- -- .5 .1 .6
Interest expense/5/ ( 9.6) (11.9) (13.0) (15.7) (17.5)
----- ------ ----- ----- ------
Earnings (Loss) Before
Income Taxes, Equity in
Earnings of Affiliated
Companies and Cumulative
Effect of Accounting Changes $68.5 $38.8 $ 2.5 $ 28.5 $(12.3)
===== ===== ===== ===== =====
/1/ Revenues are primarily from the North American area. Major customers for the Original Equipment Manufacturers (OEM)
segment are Ford, General Motors and Chrysler who accounted for $266.9, $132.0, and $118.2 million in 1993; $219.3, $148.1
and $96.7 million in 1992; $177.5, $115.6 and $75.8 million in 1991; $179.8, $136.3 and $96.8 in 1990 and $171.3, $169.6
and $106.2 million in 1989 of this segment's revenues.
/2/ Includes approximately $4.1 million of non-recurring income.
/3/ Includes approximately $.7, $3.1 and $5.5 million of non-recurring expense in 1993, 1992 and 1991, respectively.
/4/ A restructuring charge of $15.6 million has been treated as an expense of the related industry segments including general
corporate.
/5/ Interest expense of the finance subsidiary of $3.8, $6.0, $7.9, $9.2 and $11.4 million in 1993, 1992, 1991, 1990 and 1989,
respectively, has been included in earnings (loss) of the Agricultural Products segment.
Further discussion of the segment results, including Automotive Products
and Electrical Products which comprise the OEM segment, can be found under
"Management's Discussion and Analysis--Results of Operations."
(Dollars in Millions)
Capital
Identifiable Depreciation Expenditures
Total Assets (Years ended (Years ended
(December 31) December 31) December 31)
1993 1992 1991 1993 1992 1991 1993 1992 1991
Automotive Products $322.4 $302.7 $304.9 $21.1 $20.6 $19.1 $31.5 $25.4 $38.2
Electrical Products 161.0 148.7 133.5 12.0 10.1 9.9 14.8 14.0 12.4
Water Products 119.0 105.5 106.3 5.9 5.7 5.4 3.5 4.5 5.1
Agricultural Products 102.5 107.6 120.5 1.4 1.3 1.6 1.2 .6 1.3
Other 30.6 29.6 29.8 1.9 1.4 1.5 3.5 2.1 2.0
Investments in
affiliated companies 23.8 22.9 20.2 -- -- -- -- -- --
Corporate Assets 63.8 52.0 39.1 .3 .4 .3 .2 .3 .3
----- ----- ----- ----- ----- ----- ----- ----- -----
Total $823.1 $769.0 $754.3 $42.6 $39.5 $37.8 $54.7 $46.9 $59.3
====== ====== ====== ===== ===== ===== ===== ===== =====
14. Quarterly Results of Operations (Unaudited)
(Dollars in Millions, except per share amounts)
1st Quarter
2nd Quarter
3rd Quarter 4th Quarter
1993 1992 1993 1992 1993 1992 1993 1992
Net revenues $296.1 $253.2 $315.8 $286.8 $272.8 $241.0 $309.2 $265.3
Gross profit 48.1 32.6 51.9 47.1 35.1 27.3 43.4 35.7
Earnings (loss)
Operations 13.0 4.7 15.1 12.1 5.5 4.2 9.1 6.2
Cumulative effect of
accounting changes -- (44.5) -- -- -- -- -- --
Net earnings (loss) 13.0 (39.8) 15.1 12.1 5.5 4.2 9.1 6.2
Per share
Primary earnings (loss)
Operations .64 .24 .74 .64 .27 .21 .44 .30
Cumulative effect of
accounting changes -- (2.79) -- -- -- -- -- --
Net earnings (loss) .64 (2.55) .74 .64 .27 .21 .44 .30
Fully diluted earnings (loss)
Operations .64 .23 .74 .59 .27 .20 .44 .30
Cumulative effect of
accounting changes -- (2.18) -- -- -- -- -- --
Net earnings (loss) .64 (1.95) .74 .59 .27 .20 .44 .30
Dividends declared
Preferred -- .531 -- -- -- -- -- --
Common .10* .10 .10 .10 .11 .10 .11 .10
* Excludes $.25 special dividend on Common Stock (see note 8).
Net earnings (loss) per share is 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 7 for restrictions on the payment of dividends.
The cumulative effect of the accounting changes in the first quarter of
1992 includes a credit of $1.6 million ($.10 and $.08 per primary and
fully diluted shares, respectively) for a change in accounting for income
taxes and a charge of $46.1 million [($2.89) and ($2.26) per primary and
fully diluted shares, respectively] for a change in accounting for
postretirement benefits.
The fourth quarter of 1993 includes, on an after-tax basis, approximately
$2.3 million of charges for additions to product liability and bad debt
reserves and writedown of certain assets partially offset by inventory
adjustments.
The fourth quarter of 1992 includes, on an after-tax basis, approximately
$3.0 million of charges for additions to product liability and bad debt
reserves partially offset by net proceeds of a lawsuit settlement.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of Directors" in the
Corporation's definitive Proxy Statement dated March 3, 1994 for the
Annual Meeting of Stockholders to be held April 13, 1994 is incorporated
herein by reference. The information required regarding Executive
Officers of the Corporation is included in Part I of this Form 10-K under
the caption "Executive Officers of the Corporation."
The information included under the heading "Compliance with Section 16(a)
of the Securities Exchange Act" in the Corporation's definitive Proxy
Statement dated March 3, 1994 for the Annual Meeting of Stockholders to be
held on April 13, 1994 is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
Corporation's definitive Proxy Statement dated March 3, 1994 for the April
13, 1994 Annual Meeting of Stockholders 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 Corporation's
Proxy Statement dated March 3, 1994 for the April 13, 1994 Annual Meeting
of Stockholders is incorporated hereby by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the headings "Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider
Participation" in the Corporation's Proxy Statement dated March 3, 1994
for the April 13, 1994 Annual Meeting of Stockholders is incorporated
herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
Form 10-K
Page Number
The following consolidated financial statements of
A. O. Smith Corporation are included in Item 8:
Consolidated Balance Sheet at December 31, 1993 and 1992 . . . . . .
For each of the three years in the period ended
December 31, 1993:
- Consolidated Statement of Operations
and Retained Earnings . . . . . . . . . . . . . . . . . . . . . .
- Consolidated Statement of Cash Flows . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . .
The following consolidated financial statement schedules of
A. O. Smith Corporation are included in Item 14(d):
Schedule V - Consolidated Property, Plant and Equipment . . . . . .
Schedule VI - Consolidated Accumulated Depreciation
of Property, Plant and Equipment . . . . . . . . . .
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . .
Schedule IX - Consolidated Short-Term Borrowings . . . . . . . . . .
Schedule X - Consolidated Supplementary Income
Statement Information . . . . . . . . . . . . . . .
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
Financial statements of Metalsa S.A., an affiliate in which the
Corporation has a 40 percent investment, are omitted since it does not
meet the significant subsidiary test of Rule 3-09 of Regulation S-X.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1993. A
current report on Form 8-K was voluntarily filed by the Corporation on
February 9, 1993. The Form 8-K reported on the approval of three charter
amendments by the stockholders of the Corporation at a special meeting
held on January 26, 1993 and included as an exhibit the Corporation's
Amended and Restated Certificate of Incorporation. The Form 8-K also
contained a copy of a press release issued by the Corporation relating to
the declaration of a special dividend payable only to holders of Common
Stock of record on March 8, 1993.
(c) Exhibits
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities
Exchange Act of 1934, as amended, the Corporation 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 of any of the following exhibits to its security holders.
Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 14(c) of Form 10-K are listed below
as Exhibits 10(a) through 10(h).
Form 10-K
Page Number
(3i) Restated Certificate of Incorporation of the
Corporation as amended and restated January 26,
1993 incorporated by reference to the Form 8-K report
dated February 8, 1993 filed by the Corporation . . . . . . N/A
(3ii) By-laws of the Corporation as amended
February 5, 1990 incorporated by reference to the
Annual Report on Form 10-K for the year ended
December 31, 1989 . . . . . . . . . . . . . . . . . . . . . N/A
(4) (a) Certain long-term debt is described in Note 7
to the Consolidated Financial Statements. The
Corporation agrees to furnish to the Commission, upon
request, copies of any instruments defining rights of
holders of long-term debt described in Note 7 . . . . . . . N/A
(b) Amended and Restated $115 Million Credit
Agreement incorporated by reference to the Annual
Report on Form 10-K for the fiscal year ended
December 31, 1992 . . . . . . . . . . . . . . . . . . . . . N/A
(c) A. O. Smith Corporation agreement dated
July 6, 1987 regarding a Credit Agreement on the same
date between AgriStor Credit Corporation and various
banks incorporated by reference to Amendment No. 1
to the quarterly report on Form 10-Q for the quarter
ended September 30, 1987 . . . . . . . . . . . . . . . . . N/A
(d) AgriStor Credit Corporation Credit Agreement
dated June 25, 1990 extending its revolving credit
agreement with its lending banks to June 30, 1994.
The Agreement is incorporated by reference to the
quarterly report on Form 10-Q for the quarter ended
June 30, 1990 . . . . . . . . . . . . . . . . . . . . . . . N/A
(e) A. O. Smith Corporation Restated Certificate of
Incorporation dated January 26, 1993 (incorporated by
reference to Exhibit (3)(i) hereto) . . . . . . . . . . . . N/A
(f) Note Purchase and Medium-Term Note Agreement,
dated July 23, 1993 between A. O. Smith Corporation and
Metropolitan Life Insurance Company, incorporated by
reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993 . . . . . . . . . . . . . . . . N/A
(g) Note and Agreement dated May 14, 1993 between
A. O. Smith Corporation and The Prudential Insurance
Company of America, incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . N/A
(10) Material Contracts
(a) 1990 Long-Term Executive Compensation Plan
incorporated by reference to the Corporation's Proxy
Statement dated March 3, 1994 for an April 13, 1994
Annual Meeting of Shareholders . . . . . . . . . . . . . . . N/A
(b) 1980 Long-Term Executive Incentive Compensation
Plan incorporated by reference to the Corporation's
Proxy Statement dated March 1, 1988 for an April 6,
1988 Annual Meeting of Shareholders . . . . . . . . . . . . N/A
(c) Executive Incentive Compensation Plan, as amended,
incorporated by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1992 . . . . . . N/A
(d) Letter Agreement dated December 15, 1979, as amended
by the Letter Agreement dated November 9, 1981, between
the Corporation and Thomas I. Dolan incorporated by reference
to Amendment No. 2 to the Annual Report on Form 10-K
for the year ended December 31, 1984 . . . . . . . . . . . . N/A
(e) Supplemental Benefit Plan, as amended, incorporated by
reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 . . . . . . . . . . . . . . . . N/A
(f) Executive Life Insurance Plan, incorporated by reference
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 . . . . . . . . . . . . . . . . . . . . . N/A
(g) 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 . . . N/A
(h) Non-employee Directors' Retirement Plan
incorporated by reference to the quarterly report on
Form 10-Q for the quarter ended June 30, 1991 . . . . . . . N/A
(11) Computation of Earnings Per Common Share . . . . . . . . . . . .
(21) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
(23) Consent of Independent Auditors . . . . . . . . . . . . . . . .
(24) (a) Power of Attorney - Thomas F. Russell
Arthur O. Smith incorporated by reference to the
Annual Report on Form 10-K for the year
ended December 31, 1980 . . . . . . . . . . . . . . . . . . N/A
(b) Power of Attorney - Tom H. Barrett
incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1981 . . . . . N/A
(c) Power of Attorney - Russell G. Cleary
incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1984 . . . . . N/A
(d) Power of Attorney - Lee W. Jennings
incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1986 . . . . . N/A
(e) Power of Attorney - Donald J. Schuenke
incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1988 . . . . . N/A
(f) Power of Attorney - Dr. Agnar Pytte
incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1990 . . . . . N/A
(g) Power of Attorney - Thomas I. Dolan
incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1992 . . . . . N/A
N/A = Not Applicable
A. O. SMITH CORPORATION
SCHEDULE V - CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT2
(000 Omitted)
Years ended December 31, 1993, 1992 and 1991
Balance at Balance
Beginning Additions at End
of Year at Cost Retirements Other3 of Year
1993:
Land $ 7,539 $ 0 $ 0 $ (1) $ 7,538
Buildings 175,883 7,209 (453) 846 183,485
Equipment 600,692 47,494 (14,533)1 (890) 632,763
-------- ------- --------- ------- --------
$784,114 $54,703 $ (14,986) $ (45) $823,786
======== ======= ========= ======= ========
1992:
Land $ 7,426 $ 115 $ 0 $ (2) $ 7,539
Buildings 168,596 7,400 (17) (96) 175,883
Equipment 569,909 39,432 (8,313)1 (336) 600,692
--------- -------- --------- ------- --------
$745,931 $46,947 $ (8,330) $ (434) $784,114
======== ======= ========= ======= ========
1991:
Land $ 7,314 $ 112 $ 0 $ 0 $ 7,426
Buildings 143,344 25,252 (4) 4 168,596
Equipment 539,699 33,975 (4,553)1 788 569,909
--------- -------- --------- ------- --------
$ 690,357 $ 59,339 $ (4,557) $ 792 $745,931
======== ======== ========= ======= ========
1 Includes amortization of durable tools based on a useful life of 30 months charged to operations:
1993--$71; 1992--$85; 1991--$89.
2 Estimated useful lives are: buildings--20 to 75 years; equipment--3 to 20 years.
3 Translation, other adjustments and reclassifications.
A. O. SMITH CORPORATION
SCHEDULE VI - CONSOLIDATED ACCUMULATED DEPRECIATION OF
PROPERTY, PLANT AND EQUIPMENT
(000 Omitted)
Years ended December 31, 1993, 1992 and 1991
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses1 Retirements Other2 of Year
1993:
Buildings $ 84,958 $ 6,189 $ (227) $ 436 $ 91,356
Equipment 335,050 36,347 (13,501) (480) 357,416
-------- ------- -------- -------- --------
$420,008 $42,536 $(13,728) $ (44) $448,772
======== ======= ======== ======== ========
1992:
Buildings $ 70,373 $ 5,980 $ (15) $ 8,620 $ 84,958
Equipment 318,418 33,393 (7,651) (9,110) 335,050
-------- ------- -------- ------- --------
$388,791 $39,373 $ (7,666) $ (490) $420,008
======== ======= ======== ======== ========
1991:
Buildings $ 65,512 $ 4,858 $ (1) $ 4 $ 70,373
Equipment 289,763 32,826 (4,145) (26) 318,418
-------- ------- -------- -------- --------
$355,275 $37,684 $ (4,146) $ (22) $388,791
======== ======= ======== ========= ========
1993 1992 1991
1 Total $42,536 $39,373 $ 37,684
Amortization of durable tools
(See Schedule V) 71 85 89
-------- ------- --------
Depreciation and amortization of
plant and equipment $42,607 $39,458 $ 37,773
======== ======= ========
2 Translation, other adjustments and reclassifications.
A. O. SMITH CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(000 Omitted)
Years ended December 31, 1993, 1992 and 1991
Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other the End of
Description of Year Expenses/1/ Accounts Deductions/2/ Year
1993:
Valuation allowance
for trade and notes
receivable $ 1,738 $ 2,624 $ -- $ 376 $ 3,986
Valuation allowance
for finance subsidiary
receivables 20,585 1,750 -- 7,771 14,564
1992:
Valuation allowance
for trade receivables 1,158 832 440/3/ 692 $1,738
Valuation allowance
for finance subsidiary
receivables 26,240 1,442 -- 7,097 20,585
1991:
Valuation allowance
for trade receivables 1,039 616 -- 497 1,158
Valuation allowance
for finance subsidiary
receivables 33,950 (972) -- 6,738 26,240
/1/ Provision (credit) based upon estimated collection.
/2/ Uncollectible amounts charged against the reserve.
/3/ Reclassification.
A. O. SMITH CORPORATION
SCHEDULE IX - CONSOLIDATED SHORT-TERM BORROWINGS
(000 Omitted)
Years Ended December 31, 1993, 1992 and 1991
Maximum Average Weighted
Category of Weighted Amount Amount Average
Aggregate Balance Average Outstanding Outstanding Interest Rate
Short-Term at End of Interest During the During the During the
Borrowings Year Rate Year/1/ Year/2/ Year
1993 Notes Payable-
Banks $ 0 0.0% $ 0 $ 0 0.0%
1992 Notes Payable-
Banks $ 0 0.0% $ 0 $ 0 0.0%
1991 Notes Payable-
Banks $ 0 0.0% $3,259 $1,244 10.3%
/1/ The maximum amount outstanding is the maximum amount outstanding at any month-end.
/2/ The average amount outstanding was computed by averaging the month-end balances.
SCHEDULE X - CONSOLIDATED SUPPLEMENTARY INCOME
STATEMENT INFORMATION
(000 Omitted)
Years ended December 31, 1993, 1992 and 1991
Item Charged to Costs and Expenses
1993 1992 1991
Maintenance and Repairs $40,609 $34,743 $30,339
======= ======= =======
Depreciation and amortization of intangible assets, pre-operating costs
and similar deferrals; taxes, other than payroll and income taxes;
royalties; and advertising costs are each less than 1 percent of
consolidated net sales.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of
1933, the undersigned registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into registrant's
Registration Statements on Form S-8 Nos. 2-72542 filed on May 26, 1981,
Post-Effective Amendment No. 1, filed on May 12, 1983, Post-Effective
Amendment No. 2, filed on December 22, 1983, Post-Effective Amendment No.
3, filed on March 30, 1987; 33-19015 filed on December 11, 1987; 33-21356
filed on April 21, 1988; and Form S-8 No. 33-37878 filed November 16,
1990:
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 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 Date
By: ROBERT J. O'TOOLE March 22, 1994
Robert J. O'Toole
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Title Signature Date
ROBERT J. O'TOOLE ROBERT J. O'TOOLE March 22, 1994
Chairman of the Board of Robert J. O'Toole
Directors, President and
Chief Executive Officer
GLEN R. BOMBERGER GLEN R. BOMBERGER March 22, 1994
Executive Vice President, Glen R. Bomberger
Chief Financial Officer and
Director
THOMAS W. RYAN THOMAS W. RYAN March 22, 1994
Vice President, Treasurer and Thomas W. Ryan
Controller and Principal
Accounting office
TOM H. BARRETT, Director TOM H. BARRETT March 22, 1994
Tom H. Barrett
RUSSELL G. CLEARY, Director RUSSELL G. CLEARY March 22, 1994
Russell G. Cleary
THOMAS I. DOLAN, Director THOMAS I. DOLAN March 22, 1994
Thomas I. Dolan
LEE W. JENNINGS, Director LEE W. JENNINGS March 22, 1994
Lee W. Jennings
AGNAR PYTTE, Director AGNAR PYTTE March 22, 1994
Agnar Pytte
THOMAS F. RUSSELL, Director THOMAS F. RUSSELL March 22, 1994
Thomas F. Russell
DONALD J. SCHUENKE, Director DONALD J. SCHUENKE March 22, 1994
Donald J. Schuenke
ARTHUR O. SMITH, Director ARTHUR O. SMITH March 22, 1994
Arthur O. Smith
EXHIBIT INDEX
Exhibit No. Description
(11) Computation of Earnings Per Common Share
(21) Subsidiaries
(23) Consent of Independent Auditors