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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, 1996
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
Title of Each Class Outstanding Name of Each Exchange
February 28, 1997 on Which Registered
Class A Common Stock 5,836,498 American Stock
(par value $5.00 per Exchange
share)
Common Stock 14,036,123 New York Stock
(par value $1.00 Exchange
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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $15,643,136 for Class A Common Stock and $459,640,569 for
Common Stock as of February 28, 1997.
Documents Incorporated by Reference:
1. Portions of the corporation's definitive Proxy Statement dated
on or about April 21, 1997 for a May 21, 1997 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 three
business segments. These segments are Electric Motor Technologies, Water
Systems Technologies and Storage & Fluid Handling Technologies.
The corporation's Electric Motor Technologies segment produces fractional
horsepower and hermetic electric motors. The Water Systems Technologies
Segment is a leading manufacturer of residential and commercial gas, oil,
and electric water heating systems. Storage & Fluid Handling Technologies
manufactures reinforced thermosetting resin piping, agricultural,
industrial and municipal liquid and dry bulk storage systems. The
corporation is in the process of selling the agricultural portion of this
segment. The agricultural business is not considered material. Financial
information regarding the corporation's business segments is provided in
Note 15 to the Consolidated Financial Statements which appear elsewhere
herein.
On January 27, 1997 the corporation announced a definitive agreement to
sell its Automotive Products Company to Tower Automotive, Inc. The
transaction is expected to close early in the second quarter of this year.
See Note 2 to the Consolidated Financial Statements, entitled
"Discontinued Operations" which appears elsewhere herein.
On March 4, 1997, the corporation announced a definitive agreement to
acquire UPPCO, Inc., a privately held manufacturer of sub-fractional
horsepower electric motors with projected 1997 sales of approximately $80
million. The transaction is expected to close near the end of the first
quarter.
The following table summarizes sales 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)
1996 1995 1994 1993 1992
Electric Motor
Technologies $337.1 $317.3 $281.2 $242.6 $225.6
Water Systems
Technologies 291.3 276.0 271.5 248.1 215.2
Storage & Fluid
Handling Technologies 152.8 103.4 95.3 92.2 71.6
----- ----- ----- ----- -----
Total Continuing
Operations $781.2 $696.7 $648.0 $582.9 $512.4
====== ====== ====== ====== ======
ELECTRIC MOTOR TECHNOLOGIES
The Electric Motor Technologies segment includes the A. O. Smith
Electrical Products Company and manufactures fan motors used in furnaces,
air conditioners, and blowers, as well as fractional horsepower motors
used in other consumer products and jet pump motors sold to manufacturers
of home water systems, swimming pools, hot tubs and spas. Hermetic motors
are sold worldwide to manufacturers of compressors and are used in air
conditioning and refrigeration systems. In addition to selling its
products directly to OEMs, the company also markets its products through a
distributor network which sells to both OEMs and the related after-market.
The company estimates that approximately 60 percent of the market is
derived from the less cyclical replacement business with the remainder
being impacted by general business conditions in the new construction
market.
Segment sales increased by $19.8 million or approximately 6 percent in
1996 to $337.1 million and represented 43 percent of total corporation
sales. The increased volume resulted from strong market demand for
hermetic motors. Sales of the company's hermetic motors totaled $132.9
million, $103.8 million and $79.5 million in 1996, 1995 and 1994,
respectively. 1996 sales of hermetic motors were higher as a result of
growing worldwide and replacement demand for air conditioning and
refrigeration systems. The company's manufacturing operations handled the
increased volume without disproportionate increases in costs.
Segment sales to York International totaled $91.5 million, $72.5 million
and $ 56.3 million in 1996, 1995 and 1994, respectively.
The segment's principal products are sold in competitive markets with its
major competitors being Emerson Electric, General Electric, Magnetek,
Inc., Fasco, and vertically integrated customers.
WATER SYSTEMS TECHNOLOGIES
The Water Systems Technology segment includes the A. O. Smith Water
Products Company which had 1996 sales of $291.3 million, approximately 6
percent higher than 1995 sales of $276.0 million and represented
approximately 37 percent of total corporation sales. The company continued
to capitalize on its strong wholesale channels to improve market share in
the commercial water heater industry.
The company markets residential gas and electric water heaters through a
network of plumbing wholesalers in the United States. The majority of the
company's sales are in the less cyclical replacement market although the
new housing market is an important portion of the business as well.
Residential sales in 1996 were $172 million or approximately 59 percent of
segment revenues. The residential water heater market remains highly
competitive. A. O. Smith competes with four other manufacturers in
supplying over 90 percent of market requirements.
The company also markets commercial water heating systems through a
network of plumbing wholesalers in the United States and Canada.
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
competition from a broader range of products and competitors than occurs
in the residential market.
The company estimates that approximately 80 percent of the commercial and
residential market is derived from the less cyclical replacement business
with the remainder being impacted by general business conditions in the
new construction market.
In 1995 Water Systems established a joint venture with Nanjing Water
Heater Company of China to manufacture instantaneous and storage type
heaters for the Chinese market. A.O. Smith is a majority owner of the
venture, which began operation in 1996.
The principal competitors in the Water Systems segment are Rheem
Manufacturing, State Industries, The American Water Heater Group (formerly
SABH, Inc.) and Bradford-White. A.O. Smith's Water Systems Technologies
segment is the largest manufacturer of commercial water heaters and is a
major manufacturer of residential water heaters in the United States.
STORAGE & FLUID HANDLING TECHNOLOGIES
The Storage & Fluid Handling segment provides world-wide solutions for
effectively storing liquids and a wide range of dry materials; as well as
high performance piping systems that safely and effectively contain and
convey corrosive, abrasive or related materials. 1996 sales of $152.8
million were approximately 48 percent higher than 1995 as a result of the
December 1995 acquisition of Peabody TecTank, Inc. (TecTank).
Engineered Storage Products
Engineered Storage Products manufactures industrial and municipal liquid
and dry bulk storage products marketed by A. O. Smith Harvestore Products,
Inc. (Harvestore), and TecTank. 1996 sales were $94.2 million compared
with 1995 sales of $44.8 million. The increase in sales is attributable
to the full year consolidation of TecTank. Harvestore's and TecTank's
products are sold in competitive markets that include concrete, site-
welded, and bolted tanks. Principal competitors include Columbian Steel
Tank Company, Permastore LTD., Pittsburg Tank and Tower Company Inc. and
Natgun Corporation.
Fiberglass Products
Sales of $58.6 million in 1996 were unchanged compared with 1995. Sales
to petroleum production markets were higher in 1996 but were offset by a
decline in sales to the service station market.
Fiberglass Products manufactures reinforced thermosetting resin piping and
fittings used to carry corrosive materials. Typical applications include
chemical and industrial plant piping, oil field piping, and underground
distribution at gasoline service stations. Fiberglass Products also
manufactures high pressure fiberglass piping systems used in the petroleum
production industry. Products are sold through a network of distributors.
Fiberglass Products has formed a joint venture with Harbin Composites
Corporation of Harbin, China to supply fiberglass pipe to the Chinese oil
industry. The company is a majority owner of the new venture, which began
production in 1996.
The company's principal products are sold in competitive markets with its
major competitors being Ameron Corporation, Fibercast Company, Environ
Corporation, and Total Containment Corporation.
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
There is no significant seasonal pattern to the corporation's consolidated
quarterly sales and earnings.
RESEARCH AND DEVELOPMENT, PATENTS AND TRADEMARKS
In order to improve competitiveness by generating new products and
processes, the corporation conducts research and development at its
Corporate Technology Center in Milwaukee, Wisconsin as well as at its
operating unit locations. Total expenditures for research and development
in 1996, 1995, and 1994 were approximately $17.3 million, $15.0 million,
and $13.5 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 7,700 persons
in its continuing operations as of December 31, 1996.
BACKLOG
Normally, none of the corporation's operations sustain significant
backlogs.
ENVIRONMENTAL LAWS
The corporation's operations are governed by a variety of federal, state
and local laws intended to protect the environment. While environmental
considerations are a part of all significant capital expenditures,
compliance with the environmental laws has not had a material effect and
is not expected to have a material effect upon the capital expenditures,
earnings, or competitive position of the corporation. See Item 3.
FOREIGN SALES
Total export sales of continuing operations from the U.S. were $52
million, $49 million, and $32 million in 1996, 1995, and 1994,
respectively. The increase in sales of continuing operations from 1995 to
1996 was largely attributable to Storage & Fluid Handling, somewhat offset
by decreased exports by Electric Motor Technologies. The amount of sales
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 29 locations worldwide.
These facilities have an aggregate floor space of approximately 4,323,000
square feet, consisting of approximately 2,999,000 square feet owned by
the corporation and 1,324,000 square feet of leased space. Fourteen of
the corporation's facilities are foreign plants including affiliates and
joint ventures with approximately 1,279,000 square feet of space, of which
approximately 551,000 square feet are leased.
Excluded from the above totals are approximately 5,391,000 square feet of
domestic and 790,000 square feet of foreign floor space occupied by the
corporation's Automotive Products business which the corporation has
reached a definitive agreement to sell. The manufacturing plants
presently operated by the corporation's continuing operations are listed
below by industry segment.
United States Foreign
Electric Motor Mebane, NC; Mt. Sterling, KY; Bray, Ireland;
Technologies Tipp City, OH; Upper Sandusky, OH Acuna, Mexico;
(1,641,000 sq. ft.) Juarez, Mexico(5);
Monterrey, Mexico
Water Systems Florence, KY; McBee, SC; Stratford, Canada(2);
Technologies El Paso, TX; Seattle, WA Juarez, Mexico;
(1,552,000 sq. ft.) Veldhoven,
The Netherlands;
Nanjing, People's Rep.
of China
Storage & Fluid Little Rock, AR(2); Bakersfield, Harbin, People's
Handling CA; DeKalb IL; Parsons, KS; Republic of China
Technologies Wichita, KS; Winchester, TN
(1,130,000 sq. ft.)
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
The corporation is involved in various unresolved legal actions,
administrative proceedings and claims in the ordinary course of its
business involving product liability, property damage, insurance coverage,
patents and environmental matters including the disposal of hazardous
waste. Although it is not possible to predict with certainty the outcome
of these unresolved legal actions or the range of possible loss or
recovery, the corporation believes these unresolved legal actions will not
have a material effect on its financial position or results of operations.
A more detailed discussion of these matters appears in Note 14 of the
Notes to 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 1996.
EXECUTIVE OFFICERS OF THE CORPORATION
Pursuant to General Instruction of G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this report in lieu of
being included in the corporation's Proxy Statement for its 1997 Annual
Meeting of Stockholders.
ROBERT J. O'TOOLE
Chairman of the Board of Directors, President, and Chief Executive Officer
Mr. O'Toole, 56, became chairman of the board of directors in March 1992.
He is a member of the Investment Policy Committee of the board of
directors. He was elected chief executive officer in March 1989. He was
elected president, chief operating officer and a director in 1986. Mr.
O'Toole joined the corporation in 1963. He is a director of Firstar Bank
Milwaukee, N.A.
GLEN R. BOMBERGER
Executive Vice President, Chief Financial Officer, and Director
Mr. Bomberger, 59, 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. Mr. Bomberger
joined the corporation in 1960. He is currently a director and vice
president-finance of Smith Investment Company. He is a director of
Portico Funds, Inc.
JOHN A. BERTRAND
President - A. O. Smith Electrical Products Company
Mr. Bertrand, 58, 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, 55, has been vice president-corporate technology since 1985.
Dr. Bishop joined the corporation in 1981.
MICHAEL J. COLE
Vice President - Asia
Mr. Cole, 53, was elected vice president-Asia in March 1996. Previously
he was vice president-emerging markets of Donnelly Corporation, an
automotive supplier.
JOHN R. FARRIS
President - A. O. Smith Harvestore Products, Inc. and Peabody TecTank,
Inc.
Mr. Farris, 47, was elected president of A. O. Smith Harvestore Products,
Inc. in November 1996. Since 1987 he has been president of Peabody
TecTank, Inc. which was acquired in December 1995.
DONALD M. HEINRICH
Vice President - Business Development
Mr. Heinrich, 44, 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.
WILLIAM R. HENNIG
President - A. O. Smith Water Products Company
Mr. Hennig, 49, became the president of A. O. Smith Water Products
Company, a division of the corporation, in June 1996. He served as vice
president of A. O. Smith Electrical Products Company's Juarez Operations
since January 1993 and held other management positions in the Electrical
Products Company. He joined the corporation in 1989.
JOHN J. KITA
Vice President, Treasurer and Controller
Mr. Kita, 41, was elected vice president, treasurer and controller on
April 4, 1996. From 1995 to 1996 he was treasurer and controller. Prior
thereto, he served as assistant treasurer since he joined the corporation
in 1988.
RONALD E. MASSA
President - A. O. Smith Automotive Products Company
Mr. Massa, 47, became the president of A. O. Smith Automotive Products
Company, a division of the corporation, in June 1996. He served as the
president of A. O. Smith Water Products Company since 1995 and has held
other management positions in the Water Products Company. He joined the
corporation in 1976.
ALBERT E. MEDICE
Vice President - Europe
Mr. Medice, 54, was elected vice president - Europe in February 1995.
Previously, from 1990 to 1995, he was the general manager of A. O. Smith
Electric Motors (Ireland) Ltd., a subsidiary of the corporation. Mr.
Medice joined the corporation in 1986 as vice president-marketing for its
Electrical Products Company division.
EDWARD J. O'CONNOR
Vice President - Human Resources and Public Affairs
Mr. O'Connor, 56, 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, 53, was elected vice president, general counsel and secretary
in March 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.
WILLIAM V. WATERS
President - Smith Fiberglass Products Inc.
Mr. Waters, 62, has been president of Smith Fiberglass Products Inc., a
subsidiary of the corporation, since 1988. He joined the corporation in
1960.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. The Class A Common Stock of A. O. Smith
Corporation is listed on the American Stock Exchange. As of December 14,
1994, the Common Stock began trading on the New York Stock Exchange. The
symbols for these classes of the corporation's stock are: SMCA for the
Class A Common Stock and AOS 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 common stock.
Quarterly Common Stock Price Range
1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Class A Common
High 25-3/4 27-1/2 25-1/8 33
Low 20-1/2 22-3/4 21-1/2 24-1/8
Common Stock
High 25-1/2 27-7/8 25-3/8 33
Low 20-7/8 22-5/8 21-5/8 24
1995 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Class A Common
High 24-3/8 24-7/8 28-7/8 27-1/4
Low 19-3/8 22-1/8 23-3/4 20-1/8
Common Stock
High 24-5/8 24-7/8 28-5/8 25-7/8
Low 19-1/8 21-7/8 23-5/8 19-1/8
(b) Holders. As of January 31, 1997, the number of shareholders of record
of Class A Common Stock and Common Stock were 634 and 1279, respectively.
(c) Dividends. Dividends paid on the common stock are shown in Note 16 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 $125.6 million were
unrestricted as of December 31, 1996.
(d) Stock Repurchase Authority. On January 27, 1997, the corporation's
Board of Directors authorized the repurchase of up to three million shares
of its outstanding Class A and Common Stock. As of February 28, 1997,
1,150,700 shares had been repurchased for approximately $38.4 million.
ITEM 6 - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Year Ended December 31
1996 1995 1994 1993 1992
Net sales - continuing operations $ 781,193 $ 696,700 $ 648,004 $ 582,919 $ 512,403
Earnings (loss)
Continuing operations:
Operating earnings 25,249 23,995 17,066 7,477 3,081
Cumulative effect of
accounting changes -- -- -- -- (9,045)
--------- -------- -------- -------- --------
Earnings (loss) 25,249 23,995 17,066 7,477 (5,964)
Discontinued operations:
Operating earnings 40,168 37,418 40,281 35,201 24,125
Cumulative effect of
accounting change -- -- -- -- (35,477)
--------- -------- -------- -------- --------
Earnings (loss) 40,168 37,418 40,281 35,201 (11,352)
--------- -------- -------- -------- --------
Net earnings (loss) 65,417 61,413 57,347 42,678 (17,316)
Net earnings (loss) applicable to
common stock $ 65,417 $ 61,413 $ 57,347 $ 42,678 $ (18,172)
========= ========= ========= ========= =========
Earnings (loss) per share
of common stock *
Continuing operations:
Earnings before cumulative effect
of accounting change $ 1.21 $ 1.15 $ .82 $ .37 $ .12
Realization of tax credits -- -- -- -- .08
Change in postretirement
benefits, net of taxes -- -- -- -- (.56)
--------- -------- -------- -------- --------
Earnings (loss) $ 1.21 $ 1.15 $ .82 $ .37 $ (.36)
Discontinued operations:
Earnings before cumulative effect
of accounting change $ 1.92 $ 1.79 $ 1.93 $ 1.71 $ 1.28
Change in postretirement
benefits, net of taxes -- -- -- -- (1.88)
--------- -------- -------- -------- --------
Earnings (loss) 1.92 1.79 1.93 1.71 (.60)
--------- -------- -------- -------- --------
Net earnings (loss) $ 3.13 $ 2.94 $ 2.75 $ 2.08 $ (.96)
Total Assets $ 884,988 $ 765,653 $ 660,546 $ 658,080 $ 631,195
Long-term debt 238,446 190,938 166,126 190,574 236,621
Total stockholders' equity 424,639 372,364 312,745 269,630 244,656
Cash dividends per common share $ .66 $ .58 $ .50 $ .42** $ .40
----------
* Preferred Stock was redeemed in 1992. Subsequent thereto there are no materially dilutive securities outstanding and
accordingly, no fully dilutive earnings per share amounts are presented. 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).
Effective January 1, 1992, the corporation adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." In addition, on January 1, 1992, the corporation adopted FAS No. 109, "Accounting for Income Taxes." The
corporation adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" effective January 1, 1996.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
A. O. Smith Corporation recorded earnings from continuing operations of
$25.2 million or $1.21 per share in 1996 versus $24.0 million or $1.15 per
share in 1995. Earnings from discontinued operations added $40.2 million
to the corporation's net earnings in 1996 compared to $37.4 million in
1995, providing the corporation with total net earnings of $65.4 million
and $61.4 million in 1996 and 1995, respectively. As a result, earnings
per share totaled $3.13 in 1996 versus $2.94 in 1995. Two segments,
Electric Motor Technologies and Water Systems Technologies, established
new sales and earnings records in 1996. Details of individual segment
performance will be discussed later in this section.
Working capital for continuing operations at December 31, 1996 was $87.0
million compared to $112.7 million and $118.1 million at December 31, 1995
and 1994, respectively. Lower accounts receivable and production-related
increases in trade payables resulted in lower working capital at
December 31, 1996 versus 1995. Sales-related increases in accounts
receivable were more than offset by related increases in trade payables,
resulting in lower working capital in 1995 versus 1994.
Capital expenditures for continuing operations were $37.8 million in 1996
compared to $26.9 million in 1995 and $18.1 million in 1994. The
increases in capital expenditures are primarily attributed to new
equipment for the hermetic HVAC motor operations of the Electric Motor
Technologies business. The corporation expects that cash flow from
operations will adequately cover 1997 capital expenditures.
The corporation established two joint ventures for continuing operations
in the People's Republic of China in the fourth quarter of 1995. The
corporation invested $15.1 million in these joint ventures during 1996
compared to $3.4 million in 1995.
Long-term debt increased $47.5 million from $190.9 million at the end of
1995 to $238.4 million at the end of 1996. The majority of the increase
was due to capital expenditures and investments in a joint venture
associated with discontinued operations. The corporation's leverage, as
measured by total debt to total capital, increased to 37.1% at the end of
1996 compared to 34.5% at the end of 1995.
On January 27, 1997, the corporation reached a definitive agreement to
sell its automotive products business. The sale price of the transaction,
which excludes the sale of the corporation's investment in its Mexican
affiliate, is approximately $625 million, subject to final adjustment.
The corporation expects to pay approximately $100 million in taxes on this
transaction. Closing is expected to occur early in the second quarter.
The proceeds of the sale will be used to pay down existing debt to
approximately $100 million, repurchase stock and make acquisitions in its
three core businesses. On January 27, 1997, the corporation's Board of
Directors authorized the repurchase of up to three million shares of its
outstanding class A and common stock. As of February 28, 1997, 1,150,700
shares had been purchased for approximately $38.4 million.
In June 1996, the corporation's multi-year revolving credit agreement was
increased to $210 million and extended to June 30, 2001. The amended
agreement carries lower fees and lower borrowing costs.
The corporation uses futures contracts to fix the cost of portions of its
expected raw materials needs, primarily for copper and aluminum, with the
objective of reducing risk due to market price fluctuations. In addition,
the corporation enters into foreign currency forward contracts to minimize
the effect of fluctuating foreign currencies on its income. Differences
between the corporation's fixed price and current market prices on raw
materials contracts are included as part of inventory cost when the
contracts mature. Differences between the corporation's fixed price and
current market prices on currency contracts are recognized in the same
period in which gains or losses from the transactions being hedged are
recognized and, accordingly, no net gain or loss is realized when
contracts mature. The corporation does not engage in speculation in its
derivatives strategies. The effect of these programs was not material to
the results of operations for 1996, 1995, or 1994.
At its April 4, 1996 meeting, A. O. Smith Corporation's Board of Directors
increased the regular quarterly dividend by 13 percent to $.17 per share
on its common stocks (Class A and Common). The last three quarterly
dividend payments in 1996 were paid at this rate, resulting in a total of
$.66 per share being paid versus $.58 per share in 1995. A. O. Smith
Corporation has paid dividends on its common stock for 57 consecutive
years.
Results of Operations
Sales from continuing operations in 1996 were $781.2 million surpassing
1995 sales of $696.7 by 12.1 percent. Sales in 1994 were $648 million.
Despite a slow start, 1996 proved to be another solid year as each of the
corporation's operating companies increased its sales over the prior year.
The most significant sales improvement occurred in the corporation's
Storage & Fluid Handling Technologies segment as a result of the TecTank
acquisition made in December of 1995. This subsidiary which manufactures
bolted steel tanks and shop-welded steel, stainless steel and aluminum
tanks provided approximately $50 million of the year-to-year increase in
sales. The corporation's larger two segments, Electric Motor Technologies
and Water Systems Technologies each reflected sales increases over the
prior year of approximately six percent.
On January 27,1997, the corporation announced it had reached a definitive
agreement with Tower Automotive Inc. to sell all the assets of Automotive
Products Company (APC) excluding the investment in its Mexican affiliate,
Metalsa, S. A. , which is expected to be sold within one year. Due to the
pending sale, APC and Metalsa have been accorded discontinued operations
treatment in the accompanying financial statements. Sales in 1996
including APC's sales of $863 million amounted to $1.64 billion, an
increase over 1995 of 6.5 percent.
The corporation's gross profit margin for continuing operations in 1996
was 21.4 percent, compared with 20.3 percent in 1995 and 19.7 percent in
1994. The favorable trend in margins was due largely to the higher
manufacturing volumes, increased capacity utilization and improved
operating efficiencies in the Electric Motor Technologies segment. The
gross margin for the Water Systems Technologies segment also reflected
improvement over the prior two years as a result of higher volume in 1996
which more than offset the unfavorable impact of industry-wide pricing
pressures which were prevalent throughout the first half of the year.
Partially offsetting the favorable trend in the corporation's overall
margin was a deterioration in the Storage & Fluid Handling Technologies
margin. This deterioration resulted from declining volumes for the
relatively higher margin fiberglass pipe produced for the service station
market by the Smith Fiberglass subsidiary.
Sales for the Electric Motor Technologies segment in 1996 increased almost
$20 million or 6.2 percent to a record $337.1 million from 1995 sales of
$317.3 million. Sales in 1994 were $281.2 million. Demand for hermetic
motor products associated with the heating, ventilating and air
conditioning (HVAC) industry provided most of the increase in sales over
the past two years. The replacement market for air conditioning equipment
was responsible for much of the growth in the hermetic motor business as a
growing percentage of the existing unitary air conditioning equipment in
the marketplace is at or near the end of its life cycle. In addition, the
use of new refrigerants and higher efficiency compressors has combined to
encourage the replacement of older commercial air conditioning and
refrigeration installations. Continued growth in exports of compressors by
the company's customers also bolstered hermetic volume.
Earnings for the Electric Motor Technologies segment in 1996 were $42.7
million or 34 percent higher than the $31.9 million earned in 1995.
Earnings in 1994 were $23.4 million. While increased volume was one of the
major factors responsible for the significant improvement in earnings over
the past three years, other factors were also important. Commencing in
1993 the company began concentrating production in its lower cost
facilities while making significant capital investments in new equipment.
These factors enabled this segment to efficiently handle higher
manufacturing volumes while continuing to improve productivity.
Sales for the Water Systems Technologies segment were $291.3 million in
1996 increasing 5.5 percent from $276 million in 1995 and establishing a
record for the fifth consecutive year. Sales in 1994 were $271.5 million.
The record sales in 1996 were achieved through domestic growth in both the
residential and commercial water heater market. The company's residential
volume increase corresponded to the growth in the overall domestic market
which experienced growth of approximately 5.6 percent in 1996. The strong
domestic economy and an active construction market resulted in commercial
water heater unit volume increasing in excess of six percent in 1996.
While the domestic market expanded in 1996, economic weakness in Europe
and Canada resulted in lower sales in both of these markets compared to
the prior year. Segment sales in 1995 demonstrated only a slight increase
from 1994 due to an announced price increase effective as of January
1, 1995. The price increase caused a shift in demand to the fourth quarter
of 1994 thereby reducing demand in 1995.
Although Water Systems Technologies sales increased 5.5 percent in 1996,
the earnings increase was minimal, increasing from $32.2 million in 1995
to $32.8 million in 1996. 1994 earnings were $30.1 million. In 1996, the
earnings contribution from higher sales was offset by higher selling
expense as well as transition costs associated with moving to an outside
sales organization. Earnings increased seven percent from 1994 to 1995
despite only a 1.7 percent increase in sales. 1995 earnings benefited from
increased volume of higher margin commercial product which more than
offset the adverse impact of lower volume and pricing for residential
water heaters.
The corporation's Storage & Fluid Handling Technologies segment is a
combination of two business units, Engineered Storage Products and
Fiberglass Products. Total sales for this segment reflected a $49.4
million increase over 1995 sales of $103.4 million. This increase was
directly attributable to the aforementioned acquisition of TecTank which
was completed in December of 1995. Sales in 1994 were $95.3 million. Total
earnings for this segment declined from $12.6 million in 1994 to $11.0
million in 1995 and rose slightly in 1996 to $11.1 million. The decline in
earnings from 1994 to 1995 was due to lower earnings at Fiberglass
Products. In 1996, the addition of TecTank's earnings compensated for a
further decline in earnings at Fiberglass Products.
The corporation continued to liquidate the portfolio of AgriStor Credit
Corporation in 1996. The net operating results of this finance subsidiary
are no longer integrated as part of the business segments of the
corporation and are included in general corporate expense with interest
expense consolidated with the corporation's total interest expense.
Interest costs and administrative expenses have declined throughout the
liquidation process and are not significant to the total corporation's
performance.
Selling, general, and administrative (SG & A) expense for the corporation
in 1996 was $107.4 million compared to $91.4 million and $88.5 million in
1995 and 1994, respectively. Approximately one third of the increase from
1995 to 1996 was attributable to the consolidation of SG & A associated
with the acquisition of TecTank. Other major reasons for the increase in
1996 include increased commissions and other expenses in support of
additional sales volume as well as costs incurred relative to establishing
joint venture operations in China. As a percent of sales, SG & A was 13.7
percent in 1996, 13.1 percent in 1995 and 13.7 percent in 1994.
Interest expense, net of the amount allocated to discontinued operations
was $8.1 million in 1996 compared to $7.6 million and $8.0 million in 1995
and 1994, respectively. Interest expense was allocated to discontinued
operations based on the ratio of net assets discontinued to total
consolidated net assets of the corporation. Interest expense before
allocation to APC rose throughout the three year reporting period. This
upward trend in interest expense before allocation was a function of
increasing interest rates and rising debt levels to support aggressive
capital spending programs at APC. Since APC's assets represented a greater
proportion of the corporation's total net assets each year due to its
capital spending program, their allocated interest expense increased each
year.
Earnings from continuing operations were $25.2 million or $1.21 per share
in 1996 compared to $24.0 million or $1.15 per share in 1995. 1996
earnings demonstrated improvement over 1995 despite nearly $4.0 million of
losses and other administrative costs to establish the corporation's joint
ventures in China. The corporation earned $17.1 million or $.82 per share
in 1994.
Outlook
The corporation projects sales growth from continuing operations before
acquisitions to range between five and ten percent compared with 1996.
The corporation's Electric Motor Technologies segment expects to benefit
from continued strong growth in the heating, ventilating, air conditioning
and refrigeration (HVAC&R) market as well as improved demand in its
General Industries business unit. Water Systems is projecting continued
penetration of the commercial water heater market as well as stronger
market growth for residential water heaters. The Storage & Fluid Handling
segment expects to benefit from increased capital spending for industrial
storage products as well as increased demand for chemical and industrial
pipe.
OTHER MATTERS
Environmental
The corporation's operations are governed by a number of federal, state
and local environmental laws concerning the generation and management of
hazardous materials, the discharge of pollutants into the environment and
remediation of sites owned by the corporation or third parties. The
corporation has expended substantial financial and managerial resources
complying with such laws. However, expenditures related to environmental
matters were not material in 1996 and are not expected to be material in
any single year. Although the corporation believes that its operations
are in substantial compliance with such laws and maintains procedures
designed to maintain compliance, there are no assurances that substantial
additional costs for compliance will not be incurred in the future.
However, since the corporation's competitors are governed by the same
laws, the corporation should not be placed in a competitive disadvantage.
Forward Looking Statements
Certain statements in this report are forward-looking statements.
Although the corporation believes that its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business,
there can be no assurance that the corporation's financial goals will be
realized. Although a significant portion of the corporation's sales are
derived from the replacement of previously installed product and such
sales are therefore less volatile, numerous factors may affect the
corporation's actual results and may cause results to differ materially
from those expressed in forward-looking statements made by or on behalf of
the corporation. Among such numerous factors the corporation includes the
continued strong growth of the worldwide heating, ventilating and air
conditioning market, the stability of the pricing environment for
residential water heaters and the successful implementation of the
corporation's joint venture strategies in China.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements: Form 10-K
Page Number
Report of Independent Auditors ......................... 18
Consolidated Balance Sheet at December 31, 1996 and 1995 19
For each of the three years in the period
ended December 31, 1996:
- Consolidated Statement of Earnings
and Retained Earnings .......................... 20
- Consolidated Statement of Cash Flows ............ 21
Notes to Consolidated Financial Statements ........... 22-40
REPORT OF ERNST & YOUNG LLP,
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, 1996 and 1995 and the related consolidated
statements of earnings and retained earnings and cash flows for each of
the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the index in Item
14(a). These financial statements and schedule are the responsibility of
the corporation's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We conducted our audits in accordance with 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statement taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 16, 1997, except for Note 2
as to which the date is
January 27, 1997
CONSOLIDATED BALANCE SHEET
December 31 (dollars in thousands)
Assets 1996 1995
Current Assets
Cash and cash equivalents $ 6,405 $ 4,807
Receivables 121,571 135,515
Inventories 80,445 74,955
Deferred income taxes 12,416 9,842
Other current assets 4,537 8,707
Net current assets - discontinued operations 13,836 23,881
-------- --------
Total Current Assets 239,210 257,707
Net property, plant, and equipment 182,600 161,876
Investments in and advances to joint ventures 14,579 3,528
Other assets 90,945 97,322
Net long-term assets - discontinued operations 357,654 245,220
-------- --------
Total Assets $884,988 $765,653
======== ========
Liabilities
Current Liabilities
Trade payables $ 82,952 $ 71,613
Accrued payroll and benefits 25,653 22,028
Accrued liabilities 8,937 12,379
Income taxes 1,351 2,303
Product warranty 7,563 7,837
Long-term debt due within one year 11,932 4,933
-------- --------
Total Current Liabilities 138,388 121,093
Long-term debt 238,446 190,938
Product warranty 17,109 16,658
Deferred income taxes 31,271 32,042
Other liabilities 35,135 32,558
-------- --------
Total Liabilities 460,349 393,289
Commitments and contingencies (notes 8 and 14)
Stockholders' Equity
Preferred Stock -- --
Class A Common Stock (shares issued
5,846,158 and 5,888,601) 29,231 29,443
Common Stock (shares issued
15,853,492 and 15,811,049) 15,853 15,811
Capital in excess of par value 69,410 68,871
Retained earnings 325,361 273,751
Cumulative foreign currency
translation adjustments (7,401) (7,499)
Treasury stock at cost (7,815) (8,013)
-------- --------
Total Stockholders' Equity 424,639 372,364
-------- --------
Total Liabilities and Stockholders' Equity $884,988 $765,653
======== ========
See accompanying notes which are an integral part of these statements.
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
Years ended December 31 (dollars in thousands, except per share amounts)
Earnings 1996 1995 1994
Continuing
Net sales $781,193 $696,700 $648,004
Cost of products sold 614,218 555,578 520,589
-------- -------- --------
Gross profit 166,975 141,122 127,415
Selling, general, and
administrative expenses 107,350 91,398 88,521
Interest expense 8,114 7,616 7,953
Other expense - net 5,288 4,688 4,243
-------- -------- --------
46,223 37,420 26,698
Provision for income taxes 17,080 13,425 9,632
-------- -------- --------
Earnings before equity in loss
of joint ventures 29,143 23,995 17,066
Equity in loss of joint ventures (3,894) -- --
-------- -------- --------
Earnings from Continuing Operations 25,249 23,995 17,066
Discontinued
Earnings from operations less
related income tax provisions
(1996 - $19,988; 1995 -
$22,048; and 1994 - $25,075) 40,168 37,418 40,281
-------- -------- --------
Net Earnings 65,417 61,413 57,347
Retained Earnings
Balance at beginning of year 273,751 224,467 177,543
Cash dividends on common stock (13,807) (12,129) (10,423)
-------- -------- --------
Balance at End of Year $325,361 $273,751 $224,467
======== ======== ========
Per Share of Common Stock
Continuing Operations $1.21 $1.15 $ .82
Discontinued Operations 1.92 1.79 1.93
----- ----- -----
Net Earnings $3.13 $2.94 $2.75
===== ===== =====
See accompanying notes which are an integral part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31
(dollars in thousands) 1996 1995 1994
Cash Flow from Operating Activities
Continuing
Net earnings $ 25,249 $ 23,995 $ 17,066
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation 22,577 21,703 21,726
Deferred income taxes (3,345) 9,587 15,196
Equity in loss of joint ventures 3,894 -- --
Net change in current assets
and liabilities 23,228 (1,854) (11,127)
Net change in other noncurrent
assets and liabilities 3,830 1,438 5,757
Other 4,263 2,642 8,017
-------- -------- --------
Cash Provided by Operating Activities 79,696 57,511 56,635
-------- -------- --------
Investing Activities
Capital expenditures (37,804) (26,851) (18,117)
Purchase of subsidiary (1,111) (18,000) --
Investment in joint ventures (15,147) (3,404) --
Other (2,567) (406) (382)
-------- -------- --------
Cash Used by Investing Activities (56,629) (48,661) (18,499)
-------- -------- --------
Cash Flow from Continuing Operations
before Financing Activities 23,067 8,850 38,136
Discontinued
Cash provided by operating activities 114,380 59,427 62,838
Cash used by investing activities (177,116) (82,461) (66,254)
-------- -------- --------
Cash Flow Used by Discontinued
Operations before Financing
Activities (62,736) (23,034) (3,416)
Cash Flow from Financing Activities
Long-term debt incurred 58,507 65,000 --
Long-term debt retired (4,000) (42,510) (31,610)
Net proceeds from common stock
and option activity 539 49 1,764
Tax benefit from exercise of
stock options 28 96 2,132
Dividends paid (13,807) (12,129) (10,423)
-------- -------- --------
Cash Provided (Used) by
Financing Activities 41,267 10,506 (38,137)
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents 1,598 (3,678) (3,417)
Cash and cash equivalents--
beginning of year 4,807 8,485 11,902
-------- -------- --------
Cash and Cash Equivalents--
End of Year $ 6,405 $ 4,807 $ 8,485
======== ======== ========
See accompanying notes which are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A.O. Smith Corporation is a diversified manufacturer
serving customers world-wide. The corporation's major product lines
include: fractional horsepower and hermetic electric motors; residential
and commercial water heaters; fiberglass piping systems and water, waste
water, and dry storage tanks. The corporation's products are marketed
primarily in North America. Original equipment manufacturers are the
largest customers of the electrical products unit. Water heaters are
distributed principally through a diverse network of plumbing wholesalers.
Fiberglass piping is sold through a network of distributors to the service
station market and the petroleum production industry as well as the
chemical/industrial market. The corporation's storage tanks and handling
systems are sold through a network of dealers to municipalities,
industrial concerns, and farmers. As discussed in Note 2, the operations
of the automotive products business are classified as discontinued
operations.
Consolidation and basis of presentation. The consolidated financial
statements include the accounts of the corporation and its wholly-owned
subsidiaries.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Fair values. The carrying amounts of cash and cash equivalents, accounts
receivable and payable, and long-term borrowings approximated fair value
as of December 31, 1996 and 1995.
Foreign currency translation. For all subsidiaries outside the United
States with the exception of entities in Mexico, the corporation uses the
local currency as the functional currency. For these operations, assets
and liabilities are translated into U.S. dollars at year-end exchange
rates and weighted average exchange rates are used for revenues and
expenses. The resulting translation adjustments are recorded as a
separate component of stockholders' equity. Gains and losses from foreign
currency transactions are included in net earnings.
Inventory valuation. Inventories are carried at lower of cost or market.
Cost is determined on the last-in, first-out (LIFO) method for a
significant portion of domestic inventories. Inventories of foreign
subsidiaries and supplies are determined using the first-in, first-out
(FIFO) method.
Derivative instruments. The corporation enters into futures contracts to
fix the cost of certain raw material purchases, principally copper and
aluminum, with the objective of minimizing cost risk due to market
fluctuations. Any differences between the corporation's fixed price and
current market prices are included as part of the inventory cost when the
contracts mature. As of December 31, 1996, the corporation had contracts
covering the majority of its expected copper and aluminum requirements for
1997, with varying maturities in 1997, the longest duration of which is
December 1997. These futures contracts limit the impact from both
favorable and unfavorable price changes. The effect of these programs was
not material to the results of operations for the three years ended
December 31, 1996.
As a result of having various foreign operations, the corporation is
exposed to the effect of foreign currency rate fluctuations on the U.S.
dollar value of its foreign subsidiaries. Further, the corporation and
its subsidiaries conduct business in various foreign currencies. To
minimize the effect of fluctuating foreign currencies on its income, the
corporation enters into foreign currency forward contracts. The contracts
are used to hedge known foreign currency transactions on a continuing
basis for periods consistent with the corporation's exposures.
The corporation does not engage in speculation. The difference between
market and contract rates is recognized in the same period in which gains
or losses from the transactions being hedged are recognized. The
contracts, which are executed with major financial institutions, generally
mature within one year with no credit loss anticipated for failure of the
counterparties to perform.
The following table summarizes, by currency, the corporation's forward
exchange contracts.
December 31 (dollars in thousands) 1996 1995
Buy Sell Buy Sell
U.S. dollars 2,200 2,000 $ 3,102 $ --
British pounds 5,153 -- 4,659 --
French franc -- 756 -- 1,483
German deutsche mark -- 1,500 -- 3,208
Italian lira -- -- -- 992
Mexican peso 21,950 -- 3,808 --
------- ------ ------- ------
Total $29,303 $4,256 $11,569 $5,683
======= ====== ======= ======
The contracts in place at December 31, 1996 and 1995 amounted to
approximately 62 and 40 percent, respectively, of the corporation's
anticipated subsequent year exposure for those currencies hedged.
Property, plant, and equipment. Property, plant, and equipment are stated
at cost. Depreciation is computed primarily by the straight-line method.
Revenue recognition. The corporation recognizes revenue upon shipment of
product to the customer.
Research and development. Research and development costs are charged to
expense as incurred for continuing operations and amounted to
approximately $17.3, $15.0, and $13.5 million during 1996, 1995, and 1994,
respectively.
Environmental remediation costs. The corporation accrues for losses
associated with environmental obligations when such losses are probable
and reasonably estimable. Costs of future expenditures are not discounted
to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed
probable. The accruals are adjusted as further information develops or
circumstances change.
Earnings per share of common stock. Earnings per common share are
computed using the weighted average number of shares outstanding during
the year. The effect of shares issuable under stock compensation plans is
not significant.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the 1996 presentation.
2. Discontinued Operations
On January 27, 1997, the corporation reached a definitive agreement to
sell its automotive products business. The sale price of the transaction,
which excludes the sale of the corporation's Mexican affiliate, is
approximately $625 million, subject to final adjustment. Closing is
expected to occur early in the second quarter of 1997. The corporation
also intends to sell its interest in its Mexican affiliate, which had been
accounted for under the equity method.
The results of the automotive businesses have been reported separately as
discontinued operations. Prior year consolidated financial statements
have been restated to present the automotive businesses as discontinued.
The components of the net assets of discontinued operations included in
the consolidated balance sheets are as follows:
December 31 (dollars in thousands) 1996 1995
Current assets
Receivables $ 19,718 $ 43,552
Inventories 32,882 28,459
Customer tooling 54,368 31,105
Other current assets 16,711 13,320
Less current liabilities
Trade payables 61,261 41,033
Accrued payroll and benefits 26,984 25,735
Other current liabilities 21,598 25,787
-------- --------
Net current assets $ 13,836 $ 23,881
======== ========
Long-term assets
Investments in affiliated companies $ 48,454 $ 25,203
Deferred model change 24,181 25,246
Net property, plant, and equipment 365,785 274,658
Other assets 18,005 8,848
Less long-term liabilities
Deferred income taxes 39,095 31,197
Postretirement benefit obligation 59,676 57,538
-------- --------
Net long-term assets $357,654 $245,220
======== ========
The condensed statement of earnings of the discontinued operations is
presented below.
Years ended December 31
(dollars in thousands) 1996 1995 1994
Net sales $862,977 $845,305 $722,718
Cost of products sold 787,380 766,013 641,507
-------- -------- --------
Gross profit 75,597 79,292 81,211
Selling, general, and
administrative expenses 18,231 18,855 16,925
Interest expense 6,974 5,477 4,133
Other income - net (210) (1,142) (3,652)
-------- -------- --------
50,602 56,102 63,805
Provision for income taxes 19,988 22,048 25,075
-------- -------- --------
Earnings before equity in
earnings of affiliated company 30,614 34,054 38,730
Equity in earnings of
affiliated company 9,554 3,364 1,551
-------- -------- --------
Net earnings $ 40,168 $ 37,418 $ 40,281
======== ======== ========
Certain expenses have been allocated to the discontinued operations,
including interest expense, which was allocated based on the ratio of net
assets discontinued to the total consolidated net assets of the
corporation.
The cash flow used by discontinued operations is as follows:
Years ended December 31
(dollars in thousands) 1996 1995 1994
Earnings $ 40,168 $ 37,418 $ 40,281
Adjustments to reconcile earnings
to net cash provided by
discontinued operating activities:
Depreciation 40,848 33,998 27,434
Deferred model change and
software amortization 10,939 10,775 7,699
Deferred income taxes 7,898 5,400 (900)
Equity in earnings of affiliate,
net of dividends (6,170) (3,364) (751)
Net change in current assets
and liabilities 7,621 (25,231) (18,288)
Net change in noncurrent assets
and liabilities 14,743 3,585 7,644
Other (1,667) (3,154) (281)
-------- -------- --------
Cash provided by discontinued
operating activities 114,380 59,427 62,838
Cash used by discontinued
investing activities (177,116) (82,461) (66,254)
-------- -------- --------
Cash flow used by discontinued
operations $ (62,736) $ (23,034) $ (3,416)
========= ========= ========
In 1995, because the Mexican affiliate's sales, financing, and certain
costs were primarily U.S. dollar denominated, the corporation changed the
functional currency for foreign currency translation purposes from the
Mexican peso to the U.S. dollar. In 1994, due to the decline in the value
of the Mexican peso, the corporation recorded as a component of
stockholders' equity, translation adjustments of approximately $7.5
million. During 1996 and 1994, the corporation received dividends of
$2.9 and $.8 million, respectively, from the affiliate.
3. Acquisition
On December 6, 1995, the corporation acquired the stock of Peabody TecTank
Inc. (TecTank), a manufacturer of environmental bulk storage tanks, for
approximately $19.1 million, which included a final purchase price
adjustment of $1.1 million in 1996. The transaction was accounted for as
a purchase and the consolidated financial statements include the results
of TecTank from the date of acquisition. The purchase price has been
allocated to the assets purchased and the liabilities assumed based upon
the respective fair values at the date of acquisition. The excess of the
purchase price over the fair values of net assets acquired has been
recorded as goodwill and is being amortized on a straight-line basis over
15 years. The proforma effect of this acquisition would not be significant
to either 1995 or 1994 operating results.
4. 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) 1996 1995 1994
Change in current assets and liabilities:
Receivables $ 13,589 $ (10,904) $ (8,657)
Inventories (5,491) 6,292 (3,209)
Other current assets 434 (432) 762
Trade payables 12,451 2,728 6,053
Accrued liabilities, payroll,
and benefits (539) 4,851 (3,020)
Current income tax accounts-net 2,784 (4,389) (3,056)
-------- -------- --------
$ 23,228 $ (1,854) $(11,127)
======== ========= ========
5. Inventories
December 31 (dollars in thousands) 1996 1995
Finished products $ 51,706 $ 46,909
Work in process 19,593 20,333
Raw materials 37,594 37,037
Supplies 1,368 1,073
------- -------
110,261 105,352
Allowance to state inventories at LIFO cost 29,816 30,397
------- -------
$ 80,445 $ 74,955
======== ========
6. Investments in Joint Ventures
In the fourth quarter of 1995, the corporation established two joint
ventures in the Peoples Republic of China, which are part of continuing
operations and are accounted for under the equity method. The corporation
holds a majority interest in each. The corporation also initiated a third
joint venture in 1995 which will be sold with the automotive products
company.
7. Property, Plant, and Equipment
December 31 (dollars in thousands) 1996 1995
Land $ 3,957 $ 3,957
Buildings 80,376 78,755
Equipment 322,683 286,913
------- -------
407,016 369,625
Less accumulated depreciation 224,416 207,749
------- -------
$182,600 $161,876
======== ========
8. Long-Term Debt and Lease Commitments
December 31 (dollars in thousands) 1996 1995
Bank credit lines, average year-end interest
rate of 6.2% for 1996 and 6.6% for 1995 $ 51,257 $ 8,135
Commercial paper, average year-end interest
rate of 5.6% for 1996 and 5.9% for 1995 59,814 43,345
8.75% notes, payable annually through 1997 3,550 7,125
Long-term notes, expiring through November 2000
average year-end interest rate of 6.1% for
1996 and 6.3% for 1995 17,500 17,500
Long-term notes, expiring through 2010, average
year-end interest rate of 7.0% for 1996
and 1995 90,000 90,000
Other notes, expiring through 2012, average
year-end interest rate of 6.6% for 1996
and 6.8% for 1995 28,257 29,766
------- -------
250,378 195,871
Less amount due within one year 11,932 4,933
------- -------
$238,446 $190,938
======== ========
In June 1996, the corporation's multi-year revolving credit agreement with
a group of ten banks was increased from $160 million to $210 million and
extended to June 30, 2001. The amended agreement carries lower fees and
borrowing costs. During 1995, the corporation borrowed $5 million with a
five year term from one of the banks. At its option, the corporation
maintains either cash balances or pays fees for bank credit and services.
In 1995, the corporation entered into two loan facilities with insurance
companies totaling $125 million. Through December 31, 1996, the
corporation had drawn down, under terms ranging from ten to fifteen years,
$45 million under these facilities.
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 $125.6 million were unrestricted as of December 31, 1996.
Borrowings under the bank credit lines and in the commercial paper market
are supported by the revolving credit agreement and accordingly have been
classified as long-term. It has been the corporation's practice to renew
or replace the credit agreement so as to maintain the availability of debt
on a long-term basis and to provide 100 percent backup for its borrowings
in the commercial paper market.
Long-term debt, maturing within each of the five years subsequent to
December 31, 1996, is as follows: 1997--$11.9; 1998--$12.2; 1999--$8.1;
2000--$9.9; 2001--$12.1 million.
Under an agreement, the corporation sold at face value certain automotive
related receivables without recourse totaling $50 million at December 31,
1996, compared to $41.0 million at December 31, 1995.
Future minimum payments under noncancelable operating leases from
continuing operations total $37.9 million and are due as follows: 1997--
$7.6; 1998--$6.9; 1999--$5.3; 2000--$5.1; 2001--$7.7; thereafter--$5.3
million. Rent expense for continuing operations, including payments under
operating leases, was $12.1, $10.3, and $9.5 million in 1996, 1995, and
1994, respectively.
Interest paid by the corporation, was $15.1, $13.1, and $13.3 million in
1996, 1995, and 1994, respectively.
9. Stockholders' Equity
On April 5, 1995, the corporation's stockholders approved an increase in
the authorized shares of Class A Common Stock $5 par value from 7 million
shares to 14 million shares and in the authorized shares of Common Stock
$1 par value from 24 million shares to 60 million shares. 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. As of December 31, 1996, there are
also 3 million shares of preferred stock $1 par value authorized.
During 1996, 1995, and 1994, 42,443, 146,940, and 49,304 shares of Class A
Common Stock were converted into Common Stock, respectively. Regular
dividends paid on the Class A Common and Common Stock amounted to $.66,
$.58, and $.50 per share in 1996, 1995, and 1994, respectively.
Changes in certain components of stockholders' equity are as follows:
Class A Capital in Treasury Stock
Common Common Excess of
(dollars in thousands) Stock Stock Par Value Shares Amount
Balance at
December 31, 1993 $ 30,424 $15,615 $ 65,950 1,012,784 $9,920
Conversion of Class A
Common Stock (246) 49 197 -- --
Exercise of stock options
(net of 4,845 shares
surrendered as stock
option proceeds) -- -- (70) (218,755) (1,835)
Tax benefit from exercise
of stock options -- -- 2,132 -- --
-------- ------- ------- ------- -------
Balance at
December 31, 1994 30,178 15,664 68,209 794,029 8,085
Conversion of Class A
Common Stock (735) 147 588 -- --
Exercise of stock options
(net of 3,400 shares
surrendered as stock
option proceeds) -- -- (22) (13,000) (72)
Tax benefit from exercise
of stock options -- -- 96 -- --
-------- ------- ------- ------- -------
Balance at
December 31, 1995 29,443 15,811 68,871 781,029 8,013
Conversion of Class A
Common Stock (212) 42 170 -- --
Exercise of stock options -- -- 341 (21,900) (198)
Tax benefit from exercise
of stock options -- -- 28 -- --
-------- ------- ------- ------- -------
Balance at
December 31, 1996 $ 29,231 $15,853 $69,410 759,129 $ 7,815
======== ======= ======= ======= =======
At December 31, 1996, 3,460 and 755,669 shares of Class A Common Stock and
Common Stock, respectively, were held as treasury stock.
10. Stock Options
During 1990, the corporation adopted a Long-Term Executive Incentive
Compensation Plan (1990 Plan) which initially reserved 1 million shares of
Common Stock for granting of nonqualified and incentive stock options. In
April 1994, stockholders approved a proposal to reserve an additional 1
million shares of Common Stock for the 1990 plan. 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, 1996, 1995, and
1994 was 264,400, 470,500, and 659,600 respectively.
Changes in option shares (all Common Stock) were as follows:
Weighted
Average
Per Share
Exercise Years Ended December 31
Price-1996 1996 1995 1994
Outstanding at beginning $17.20 1,124,600 963,600 1,009,800
of year
Granted 24.61
1996--$24.50 to $27.00 206,100
per share
1995--$23.13 and $25.00 189,100
per share
1994--$21.56 and $25.81 177,400
per share
Exercised 24.62
1996--$8.44 to $27.50 (21,900)
per share
1995--$7.00 to $8.00 (16,400)
per share
1994--$7.00 to $13.00 (223,600)
per share
Canceled or expired -- -- (11,700) --
----- --------- --------- -------
Outstanding at End of Year
(1996--$7.00 to $27.50 18.24 1,308,800 1,124,600 963,600
per share)
Exercisable at End of Year 17.05 1,102,700 935,500 786,200
The following table summarizes weighted-average information by range of
exercise prices for stock options outstanding and exercisable at
December 31, 1996:
Options Options Weighted-
Outstanding Weighted Exercisable Weighted Average
at Average at Average Remaining
Range of December 31, Exercise December 31, Exercise Contractual
Exercise 1996 Price 1996 Price Life
Prices
$7.00 to
$8.69 462,200 $ 7.93 462,200 $ 7.93 4 years
$13.00 116,800 13.00 116,800 13.00 6 years
$21.56 to
$27.50 729,800 25.61 523,700 26.00 9 years
--------- ---------
$7.00 to
$27.50 1,308,800 18.24 1,102,700 17.05 7 years
========= =========
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at
fair value. The corporation has chosen to continue applying Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, because the exercise price of the stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense has been recognized. Had compensation cost been
determined based upon the fair value at the grant date for awards under
the plans based on the provisions of SFAS No. 123, the corporation's pro
forma net earnings and pro forma net earnings per share would have been as
follows:
Years ended December 31 (dollars in thousands,
except per share amounts) 1996 1995
Net earnings:
As reported $65,417 $61,413
Pro forma 64,538 61,220
Net earnings per share:
As reported $ 3.13 $ 2.94
Pro forma 3.08 2.93
The pro forma effect on net earnings for 1995 is not representative of the
pro forma effect on net earnings in future years because it does not take
into consideration pro forma compensation expense related to 1994 grants.
The weighted-average fair value per option at the date of grant during
1996 and 1995, using the Black-Scholes option-pricing model, was $7.45 and
$7.48, respectively. Assumptions were as follows:
1996 1995
Expected life (years) 4.0 4.0
Risk-free interest rate 6.3% 5.9%
Dividend yield 2.1% 2.1%
Expected volatility 34.7% 34.7%
11. Retirement Plans
The corporation and its domestic subsidiaries provide retirement benefits
for all employees. As of December 31, 1995, the corporation merged its
various qualified noncontributory defined benefit plans in the United
States into one pension plan. Benefits for salaried employees are based
on an employee's years of service and compensation. Benefits for hourly
employees are generally based on years of service. The corporation's
funding policy is to contribute amounts which are actuarially determined
to provide 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 to the corporation's financial position.
The following tables present the components of pension (income) expense,
the funded status, and the major assumptions used to determine these
amounts for domestic pension plans of continuing operations.
Years ended December 31 (dollars in thousands)
1996 1995 1994
Components of pension
expense:
Service cost--
benefits earned
during the year $ 2,815 $ 2,069 $3,030
Interest cost on
projected benefit
obligation 9,610 9,564 6,513
Return on plan assets:
Actual return $(29,013) $(45,164) $ 678
Deferral of
investment return
in excess of
(less than)
expected return 10,424 30,187 (13,026)
------ ------- -------
(18,589) (14,977) (12,348)
Net amortization and
deferral (1,369) (1,258) (1,131)
------- ------- -------
Net periodic pension
income $(7,533) $(4,602) $(3,936)
======= ======= =======
December 31 (dollars in thousands) 1996 1995
Actuarial present value
of benefit obligations:
Vested benefit obligation $367,268 $384,726
======== ========
Accumulated benefit
obligation $422,296 $432,143
======== ========
Projected benefit obligation $441,766 $450,577
Plan assets at fair value 503,933 462,093
-------- --------
Plan assets in excess of
projected benefit obligation 62,167 11,516
Unrecognized net transition
asset at January 1, 1986 (4,253) (5,192)
Unrecognized net loss (gain) (35,079) 6,310
Prior service cost not yet
recognized in periodic
pension cost 23,793 29,404
-------- --------
Prepaid pension asset $ 46,628 $ 42,038
======== ========
Major assumptions at year-end:
1996 1995 1994
Discount rate 8.00% 7.50% 8.50%
Rate of increase in compensation level 4.00% 4.00% 4.50%
Expected long-term rate of return on assets 10.25% 10.25% 10.25%
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.
Pursuant to the agreement to sell the automotive products operations, the
corporation will retain all existing pension assets as well as all
liabilities earned through the closing date.
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 corporation's contribution was $5.3,
$5.2, and $5.2 million for 1996, 1995, and 1994, respectively.
Postretirement Benefits other than Pensions
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 are 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 after December 31, 1993
are not eligible for postretirement medical benefits.
Pursuant to the agreement to sell the automotive products operations, all
liabilities for active employees and retirees of these operations will be
transferred to the buyer.
Net periodic postretirement benefit cost of continuing operations included
the following components:
Years ended December 31 (dollars in thousands) 1996 1995 1994
Service cost--benefits attributed to
employee service during the year $ 298 $ 251 $ 493
Interest cost on accumulated
postretirement benefit obligation 1,318 1,335 1,552
Amortization of unrecognized
net (gain) loss (117) (103) 522
------- ------- -------
Net periodic postretirement benefit cost $ 1,499 $ 1,483 $ 2,567
======= ======= =======
The following table sets forth the plans' status as reflected in the
consolidated balance sheet:
December 31 (dollars in thousands) 1996 1995
Accumulated postretirement benefit obligation:
Retirees $ 8,487 $10,931
Fully eligible active plan participants
331 477
Other active plan participants 6,181 5,798
------- -------
14,999 17,206
Unrecognized net gain 3,710 1,864
------- -------
Accrued postretirement benefit cost $18,709 $19,070
======= =======
Accrued postretirement benefit cost is included in the consolidated
balance sheet in the accounts shown below:
December 31 (dollars in thousands) 1996 1995
Accrued liabilities
$ 1,709 $ 1,809
Other liabilities 17,000 17,261
------- -------
Accrued postretirement benefit cost $18,709 $19,070
======= =======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation (APBO) is 6 percent. The weighted
average discount rate used in determining the APBO was 8.00 and 7.50
percent at December 31, 1996 and 1995, respectively. If the health care
cost trend rate was increased by 1 percent, the APBO at December 31, 1996
would increase by $.7 million and net periodic postretirement benefit cost
for 1996 would increase by $.1 million.
12. Income Taxes
The components of the provision for income taxes of continuing operations
consisted of the following:
Years Ended December 31 1996 1995 1994
(dollars in thousands)
Current:
Federal $13,002 $ 627 $(7,055)
State 3,143 1,069 1,271
Foreign 708 1,689 1,490
Deferred 627 11,020 15,469
Business tax credits (400) (980) (1,543)
------- ------- ------
Provision for income taxes $17,080 $13,425 $9,632
======= ======= ======
The tax provision differs from the statutory U.S. federal rate due to the
following items:
Years Ended December 31 1996 1995 1994
(dollars in thousands)
Provision at federal statutory rate $16,178 $13,097 $ 9,344
Foreign income taxes 5 227 125
State income and franchise taxes 1,581 1,142 1,373
Business and foreign tax credits (400) (1,445) (1,877)
Non-deductible items 594 552 542
Foreign sales corporation benefit (959) (278) --
Other 81 130 125
------- ------- ------
Provision for income taxes $17,080 $13,425 $9,632
======= ======= ======
The domestic and foreign components of income from continuing operations
before income taxes were as follows:
Years Ended December 31 1996 1995 1994
(dollars in thousands)
Domestic $43,527 $33,457 $22,974
Foreign 2,696 3,963 3,724
------- ------- -------
$46,223 $37,420 $26,698
======= ======= =======
Total taxes paid by the corporation including for discontinued operations
amounted to $29.9, $25.2, and $21.7 million in 1996, 1995, and 1994,
respectively.
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, 1996, the undistributed earnings
amounted to $15.2 million. It is not practical to determine the income
tax liability that would result had such earnings been repatriated.
No provision for U.S. income taxes has been made on the cumulative net
translation gains and other items of equity investees. At December 31,
1996, the amount of unrecognized U.S. tax liability for the net
translation gains and other items totaling $9.9 million amounted to $3.5
million.
The approximate tax effects of temporary differences between income tax
and financial reporting of continuing operations are as follows:
December 31 (dollars in thousands)
1996 1995
Assets Liabilities Assets Liabilities
Finance leases $ -- $ (4,354) $ -- $(7,278)
Group health insurance and
postretirement obligations 9,263 -- 9,600 --
Employee benefits 4,894 (16,939) 3,413 (15,559)
Product liability and warranty 8,129 -- 7,472 --
Bad debts 704 -- 1,276 --
Tax over book depreciation -- (15,109) -- (16,182)
All other -- (5,443) -- (4,942)
------- -------- ------- --------
$22,990 $(41,845) $21,761 $(43,961)
======= ======== ======= ========
Net liability $(18,855) $(22,200)
========= ========
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:
December 31 (dollars in thousands) 1996 1995
Current deferred income tax assets $ 12,416 $ 9,842
Long-term deferred income tax liabilities (31,271) (32,042)
-------- --------
Net liability $(18,855) $(22,200)
======== ========
13. Agricultural Businesses
The corporation's strategic plan is to concentrate its resources in
nonagricultural businesses and withdraw from the agricultural market. The
strategy includes plans to sell the agricultural business and to phase out
the related finance operations. It is not possible to predict when the
sale of the agricultural business will occur. The corporation is
continuing to phase out the finance operations in an orderly manner.
AgriStor Credit Corporation (AgriStor), a wholly owned finance subsidiary,
was merged into the corporation as of December 31, 1996.
The finance operations are no longer deemed to be material, and,
accordingly, the accounts related thereto are not presented separately in
the consolidated financial statements. Condensed consolidated financial
statements of AgriStor are also no longer presented.
14. Litigation and Insurance Matters
The corporation is involved in various unresolved legal actions,
administrative proceedings and claims in the ordinary course of its
business involving product liability, property damage, insurance coverage,
patents and environmental matters including the disposal of hazardous
waste. Although it is not possible to predict with certainty the outcome
of these unresolved legal actions or the range of possible loss or
recovery, the corporation believes these unresolved legal actions will not
have a material effect on its financial position or results of operations.
The following paragraphs summarize noteworthy actions and proceedings.
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 closed lawsuits alleging damages for economic losses claimed to have
arisen out of alleged defects in Harvestore animal feed storage equipment.
The court granted the corporation partial summary judgment against two of
the insurers and the appellate court accepted an appeal of that ruling.
In the interim, discovery is stayed. 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 and are owned and operated
by third parties unrelated to the corporation. 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 (the "Superfund" law) and similar state laws, each PRP
that contributed hazardous substances to a Superfund site may be 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 the process. PRPs
also negotiate with each other regarding allocation of each PRP's share of
the clean up costs.
One such Superfund site is a former mining site in Colorado. The
corporation was a majority owner 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 $150,000,000. The corporation believes that a large
majority of those costs relate to contamination caused by a corporation
that worked the mine in the 1980s. In 1995, the EPA made an offer to
negotiate de minimis settlements with each PRP that contributed less than
3% of the hazardous materials to the site. The corporation accepted that
offer which has not been finalized, however the corporation continues to
maintain 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. However, it is anticipated that the corporation's
liability at the site will not be material because the EPA is treating the
corporation as a potential de minimis party.
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 a total of 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. Further, a claim has been asserted by the
owner of a landfill which has been designated as a Superfund site to
recover part of the owner's costs to remediate the site from the
corporation and several other parties that are alleged to have contributed
materials to the site.
The corporation has compiled available information concerning costs
associated with remediation at these sites. 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. Of the costs the corporation has been
able to identify, the corporation estimates the share for which it is or
may be responsible is approximately $7.1 million. The corporation and its
insurance companies have paid $6.4 million of that amount and the balance
is adequately covered through insurance and reserves established by the
corporation. To the best of the corporation's knowledge, the insurers
have the financial ability to pay any such covered claims and there are
viable PRPs at each of the sites which have the financial ability to pay
their respective shares of liability at the sites.
The corporation has self-insured a portion of its product liability loss
exposure and other business risks for many years. The corporation has
established reserves which it believes are adequate to cover incurred
claims. For the year ended December 31, 1996, 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.
The corporation reevaluates its exposure on claims periodically and makes
adjustments to its reserves as appropriate.
15. Operations by Segment
Years ended December 31 (dollars in millions)
Net Sales Earnings (Loss)
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
Electric Motor Technologies $337.1 $317.3 $281.2 $242.6 $225.6 $42.7 $31.9 $23.4 $11.6 $13.2
Fractional horsepower
and hermetic electric
motors
Water Systems Technologies 291.3 276.0 271.5 248.1 215.2 32.8 32.2 30.1 26.5 18.2
Water heaters and water
heating systems and protective
industrial coatings
Storage & Fluid Handling 152.8 103.4 95.3 92.2 71.6 11.1 11.0 12.6 8.4 4.4
Technologies ------ ------ ------ ------ ------ ----- ----- ---- ----- -----
Fiberglass reinforced piping
systems, liquid & dry bulk
storage systems
$781.2 $696.7 $648.0 $582.9 $512.4 86.6 75.1 66.1 46.5 35.8
====== ====== ====== ====== ======
Financial services (2.8) (3.6) (6.3) .1 1.7
General corporate and research
and development expense (29.5) (26.5) (25.1) (22.7) (19.5)
Interest expense (8.1) (7.6) (8.0) (9.6) (12.7)
----- ----- ----- ----- ----
Earnings From Continuing Operations, $46.2 $37.4 $26.7 $14.3 $5.3
Before Income Taxes, Equity in Loss ===== ===== ===== ===== ====
of Joint Ventures, and Cumulative
Effect of Accounting Changes
(dollars in millions)
Identifiable Total Assets Depreciation Capital Expenditures
(December 31) (Years ended December 31) (Years ended December 31)
1996 1995 1994 1996 1995 1994 1996 1995 1994
Electric Motor Technologies $165.5 $162.5 $158.9 $ 11.9 $ 12.3 $ 12.7 $ 19.8 $ 12.9 $ 8.1
Water Systems Technologies 141.1 131.6 127.8 6.1 6.0 6.0 13.0 9.8 4.8
Storage & Fluid Handling 90.4 88.4 56.3 4.1 3.0 2.7 4.2 3.4 4.6
Investments in joint ventures 14.6 3.5 .1 -- -- -- -- -- --
Corporate assets 101.9 110.6 111.9 .5 .4 .4 .8 .7 .6
Discontinued operations 371.5 269.1 205.5 40.8 34.0 27.4 132.4 58.8 58.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $885.0 $765.7 $660.5 $ 63.4 $ 55.7 $ 49.2 $170.2 $ 85.6 $ 76.1
Electric Motor Technologies sales included sales to York International of $91.5, $72.5, and $56.3 million in 1996, 1995, and
1994, respectively.
16. Quarterly Results of Operations (Unaudited)
(dollars in millions, except per share amounts)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1996 1995 1996 1995 1996 1995 1996 1995
Net sales - continuing 194.8 170.5 206.5 178.7 188.1 164.1 191.8 183.4
Gross profit - continuing 40.4 35.6 44.7 36.8 40.6 32.2 41.3 36.5
Earnings
Continuing 5.7 5.5 7.3 6.4 6.2 4.5 6.0 7.6
Discontinued 11.6 12.9 11.4 13.6 6.4 2.9 10.8 8.0
Net earnings 17.3 18.4 18.7 20.0 12.6 7.4 16.8 15.6
Earnings per share
Continuing .28 .26 .35 .31 .29 .22 .29 .36
Discontinued .55 .62 .55 .65 .31 .14 .51 .38
Net earnings .83 .88 .90 .96 .60 .36 .80 .74
Common dividends declared .15 .13 .17 .15 .17 .15 .17 .15
See note 8 for restrictions on the payment of dividends.
Continuing operations for the fourth quarter of 1996 includes, on an after-tax basis, approximately $.9 million of charges for
the write-down of certain assets offset by inventory adjustments of $1.0 million
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 on or about April 21, 1997
for the Annual Meeting of Stockholders to be held May 21, 1997 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 on or about April 21, 1997 for the Annual Meeting of
Stockholders to be held on May 21, 1997 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 on or about April 21, 1997
for the May 21, 1997 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 on or about April 21, 1997 for the May 21, 1997
Annual Meeting of Stockholders is incorporated herein 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 on or about
April 21, 1997 for the May 21, 1997 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,
1996 and 1995 ........................................19
For each of the three years in the
period ended December 31, 1996:
- Consolidated Statement of Earnings
and Retained Earnings ..........................20
- Consolidated Statement of Cash Flows.............21
Notes to Consolidated Financial Statement..........22-40
The following consolidated financial statement
schedule of A. O. Smith Corporation is included
in Item 14(d):
Schedule II - Valuation and Qualifying Accounts ........43
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 1996.
(c) Exhibits - see the Index to Exhibits on pages 48 - 50 of this
report.
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 to its security holders of any exhibits listed in the Index to
Exhibits.
Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 14(c) of Form 10-K are listed as
Exhibits 10(a) through 10(h) in the Index to Exhibits.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking
shall be incorporated by reference into registrant's Registration
Statements on Form S-8 Nos. 2-72542 filed on May 26, 1981, Post-Effective
Amendment No. 1, filed on May 12, 1983, Post-Effective Amendment No. 2,
filed on December 22, 1983, Post-Effective Amendment No. 3, filed on March
30, 1987; 33-19015 filed on December 11, 1987; 33-21356 filed on April 21,
1988; Form S-8 No. 33-37878 filed November 16, 1990; Form S-8 No. 33-56827
filed December 13, 1994; and Form S-8 No. 333-05799 filed June 12, 1996.
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 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on behalf of the undersigned, thereunto duly authorized.
A. O. SMITH CORPORATION
By: /s/ Robert J. O'Toole
Robert J. O'Toole
Chief Executive Officer
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 21, 1997 by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
Name and Title Signature
ROBERT J. O'TOOLE
Chairman of the Board of
Directors, President, and /s/ Robert J. O'Toole
Chief Executive Officer Robert J. O'Toole
GLEN R. BOMBERGER
Executive Vice President,
Chief Financial Officer, and /s/ Glen R. Bomberger
Director Glen R. Bomberger
JOHN J. KITA /s/ John J. Kita
Vice President, Treasurer and Controller John J. Kita
TOM H. BARRETT, Director /s/ Tom H. Barrett
Tom H. Barrett
RUSSELL G. CLEARY, Director /s/ Russell G. Cleary
Russell G. Cleary
THOMAS I. DOLAN, Director /s/ Thomas I. Dolan
Thomas I. Dolan
LEE W. JENNINGS, Director /s/ Lee W. Jennings
Lee W. Jennings
AGNAR PYTTE, Director /s/ Agnar Pytte
Agnar Pytte
DONALD J. SCHUENKE, Director /s/ Donald J. Schuenke
Donald J. Schuenke
ARTHUR O. SMITH, Director /s/ Arthur O. Smith
Arthur O. Smith
BRUCE M. SMITH, Director /s/ Bruce M. Smith
Bruce M. Smith
A. O. SMITH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000 Omitted)
Years ended December 31, 1996, 1995, and 1994
Balance at Charged to Balance at
Beginning Costs and the End of
Description of Year Expenses 1/ Deductions 2/ Year
1996:
Valuation allowance
for trade and notes
receivable $ 4,796 $ 615 $ 1,938 $ 3,473
1995:
Valuation allowance
for trade and notes
receivable 12,475 4,306 11,985 4,796
1994:
Valuation allowance
for trade and notes
receivables 18,550 5,379 11,454 12,475
1/ Provision (credit) based upon estimated collection.
2/ Uncollectible amounts charged against the reserve.
INDEX TO EXHIBITS
Exhibit Form 10-K
Number Description Page Number
(3)(i) Restated Certificate of Incorporation of the
corporation as amended April 5, 1995 incorporated by
reference to the quarterly report on Form 10-Q for the
quarter ended March 31, 1995 and as further amended on
February 5, 1996 and incorporated by reference to the
annual report on Form 10-K for the year ended
December 31, 1995 N/A
(3)(ii) 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) The corporation's outstanding long-term debt is
described in Note 8 to the Consolidated Financial
Statements. None of the long-term debt is registered
under the Securities Act of 1933. None of the debt
instruments outstanding at the date of this report
exceeds 10% of the corporation's total consolidated
assets, except for the item disclosed as exhibit 4(b)
below. The corporation agrees to furnish to the
Securities & Exchange Commission, upon request, copies
of any instruments defining rights of holders of
long-term debt described in Note 8.
(b) Extension and Third Amendment, dated as of
June 19, 1996, $210 Million Credit Agreement
incorporated by reference to the quarterly report on
Form 10-Q for the quarter ended June 30, 1996 N/A
(c) A. O. Smith Corporation Restated Certificate of
Incorporation as amended April 5, 1995 [incorporated
by reference to Exhibit (3)(i) above] N/A
(10) Material Contracts
(a) 1990 Long-Term Executive Compensation Plan, as
amended, incorporated by reference to the Form S-8
Registration Statement filed by the corporation on
December 13, 1994 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
(21) Subsidiaries 44
(23) Consent of Independent Auditors 45
(24) (a) Power of Attorney - 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
*(27) (a) Financial Data Schedule (as revised for the period
ended December 31, 1994 N/A
*(27) (b) Financial Data Schedule (as revised for the period
ended March 31, 1995 N/A
*(27) (c) Financial Data Schedule (as revised for the period
ended June 30, 1995 N/A
*(27) (d) Financial Data Schedule (as revised for the period
ended September 30, 1995 N/A
*(27) (e) Financial Data Schedule (as revised for the period
ended December 31, 1995 N/A
*(27) (f) Financial Data Schedule (as revised for the period
ended March 31, 1996 N/A
*(27) (g) Financial Data Schedule (as revised for the period
ended June 30, 1996 N/A
*(27) (h) Financial Data Schedule (as revised for the period
ended September 30, 1996 N/A
*(27) (i) Financial Data Schedule for the period
ended December 31, 1996 N/A
* Filed Herewith
N/A = Not Applicable