SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
-----------------------
Date of Report
(Date of earliest
event reported): July 15, 2003
A. O. Smith Corporation
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 1-475 39-0619790
---------------- --------- -----------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
P.O. Box 245008, Milwaukee, Wisconsin 53224-9508
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(Address of principal executive offices, including zip code)
(414) 359-4000
(Registrant's telephone number)
Item 7. Financial Statements and Exhibits
(a) Not applicable.
(b) Not applicable.
(c) Exhibits. The following exhibit is being filed herewith:
(99.1) Press Release of A. O. Smith Corporation, dated July 15, 2003.
(99.2) Script from the Second Quarter 2003 Earnings Conference Call held on July
15, 2003 at 10:00 a.m. Eastern Time.
Item 9. Regulation FD Disclosures. (Information is being provided under Item
12.)
On July 15, 2003, A. O. Smith Corporation ("the Company") issued a press release
announcing the Company's results for the quarter ended June 30, 2003 and its
earnings outlook for 2003. A copy of the Company's press release is attached as
Exhibit 99.1 to this Current Report on Form 8-K (this "Current Report") and is
incorporated by reference herein.
On July 15, 2003, the Company held its Second Quarter 2003 Earnings Conference
call in connection with the announcement of the Company's results for the
quarter ended June 30, 2003. A copy of the Company's script for such conference
call is attached as Exhibit 99.2, to this Current Report and is incorporated by
reference herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
A. O. SMITH CORPORATION
Date: July 17, 2003 By: /s/ Kenneth W. Krueger
-----------------------
Kenneth W. Krueger
Senior Vice President and
Chief Financial Officer
2
A. O. SMITH CORPORATION
Exhibit Index to Current Report on Form 8-K Dated July 15, 2003
Exhibit
Number Description
----- -----------
(99.1) Press Release of A. O. Smith Corporation, dated
July 15, 2003.
(99.2) Script from the Second Quarter 2003 Earnings Conference
Call held on July 15, 2003 at 10:00 a.m. Eastern Time.
A. O. SMITH CORPORATON
NEWS RELEASE For further information contact:
-------------------------------------------------------------------------------
MEDIA INQUIRES: ANALYST/INVESTOR INQUIRES: A. O. Smith Corporation
Edward J. O' Connor Craig Watson P.O. Box 245008
414-359-4100 414-359-4009 Milwaukee, WI 53224-9508
414-359-4000
NYSE: AOS
A. O. Smith reports second quarter results of $.67 per share and reaffirms 2003
outlook
Milwaukee, Wis.--Electric motor and water heater manufacturer A. O. Smith
Corporation (AOS-NYSE) today reported second quarter earnings of $.67 per share
with net earnings of $19.8 million marking a 10 percent improvement compared
with the second quarter of last year. Sales for the quarter ended June 30 were
$417.6 million, approximately eight percent higher than sales for the same
period in 2002.
The company forecasts third quarter earnings of $.42 to $.46 per share with
a full-year projection of $2.10 to $2.25 per share.
"Despite softness in key markets, we achieved improved sales due to
acquisitions and higher residential gas water heater volume. Ongoing weakness in
commercial construction markets negatively influenced sales of both commercial
water heaters and hermetic motors for commercial air conditioners," according to
Chairman and Chief Executive Officer Robert J. O'Toole.
"Notwithstanding the higher sales in the second quarter, business segment
income was slightly lower than the second quarter of 2002 because of the
low-margin sales of recent acquisitions in our motor business and unfavorable
sales mix in the water heater operation. Net earnings, however, improved due to
an insurance settlement, a lower tax rate, and lower interest expense."
3
For the first six months of 2003, A. O. Smith Corporation reported net
earnings of $33.5 million or $1.13 per share compared with earnings of $30.1
million or $1.17 per share. The May 2002 stock issuance of 4.8 million shares
had a $.13 per share dilutive
-more-
aosmith earnings add l
impact on 2003 when compared to 2002. Six-month sales of $805.5 million were
approximately six percent higher than 2002 first-half sales of $758.2 million.
Electrical Products
Electrical Products' second quarter sales were $227.6 million,
approximately $8 million higher than the 2002 second quarter, due to additional
sales from the acquisition of Athens Products and the company's Chinese motor
acquisitions. Reflecting the cooler-than-normal weather conditions in the
northern United States, sales of heating and air conditioning motors were five
percent lower than last year's second quarter, excluding the Athens Products
acquisition. Sales of pump motors were also approximately five percent lower as
a result of the cooler-than-normal weather. Operating earnings of $18.6 million
were 10 percent lower than the 2002 second quarter as a result of the lower
sales in the base business more than offsetting the contributions from the
acquisitions.
During the second quarter the business closed its Athens, Tenn., plant and
announced that its Ripley, Tenn., facility will cease production this month.
Water Systems
Second quarter sales were $190.0 million, nearly 14 percent higher than
second quarter 2002 sales of $167.1 million due to a price increase implemented
to offset higher steel prices, as well as higher volumes of residential gas
water heaters. As a result of the weak commercial construction market, sales of
commercial product declined less than five percent in the second quarter
compared with last year. Operating earnings for the same period were $17.8
million, seven percent higher than the 2002 second quarter. While operating
earnings improved, operating margins were adversely impacted by the unfavorable
commercial and residential product mix.
On July 1, Water Systems introduced its new line of residential gas-fired
water heaters, including redesigned products that comply with new ANSI
regulations that govern flammable vapor ignition resistance.
As part of the ongoing integration of the State Industries acquisition, the
company
-more-
aosmith earnings add 2
4
recently announced plans to consolidate the North American manufacture of
residential water heaters at its Ashland City, Tenn., and Juarez, Mexico,
facilities. The initiative, which will involve transferring residential
production from the McBee, S. C. plant, will be complete by the first quarter of
2004. The company also announced it will close its El Paso, Texas, boiler plant
and relocate this production to McBee. That transfer is scheduled to be complete
by the end of this year's third quarter.
Outlook
"The company's overall cost structure has improved significantly over the
last year and a half, and our operating units will continue to aggressively
manage cost as we go forward," O'Toole said. "We project per share earnings of
$.42 to $.46 in the third quarter. We also are reaffirming and narrowing our
guidance for full-year 2003 earnings to a range of between $2.10 and $2.25 per
share."
"While we don't anticipate any rebound in our served markets in 2003, the
impact of operating improvements and new products will materialize and
accelerate during the second half of the year. These improvements include the
continued success of the motor repositioning programs and the ongoing
integration of the State Industries acquisition. In addition to these operating
improvements, the introduction of new water heater products during the second
half of the year will generate additional sales and earnings. As a consequence,
we expect earnings per share comparisons to improve significantly in the third
and fourth quarters of this year," O'Toole continued.
A. O. Smith will broadcast a live conference call beginning at 10:00 a.m.
(Eastern Time) today. The call can be heard on the company's web site,
www.aosmith.com. An audio replay of the call will be available on the company's
web site after the live event.
Forward-looking statements
This release contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward- looking statements generally can be identified by the use of
words such as "may," "will,"
-more-
aosmith earnings add 3
"expect," "intend," "estimate," "anticipate," "believe," "continue," or
words of similar meaning. These forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those anticipated as of the date of this release. Factors that could cause such
a variance include the following: instability in the company's electric motor
and water products markets; inability to generate the synergistic cost savings
from the acquisition of State Industries; the inability to implement
cost-reduction programs; adverse changes in general economic conditions;
significant increases in raw material prices; competitive pressures
5
on the company's businesses; and the potential that assumptions on which the
company based its expectations are inaccurate or will prove to be incorrect.
Forward-looking statements included in this press release are made only as
of the date of this release, and the company is under no obligation to update
these statements to reflect subsequent events or circumstances. All subsequent
written and oral forward-looking statements attributable to the company, or
persons acting on its behalf, are qualified in their entirety by these
cautionary statements.
A. O. Smith Corporation, with headquarters in Milwaukee, Wis., is one of
North America's largest manufacturers of electric motors, with a comprehensive
line of hermetic motors, fractional horsepower alternating current (AC) and
direct current (DC) motors, and integral horsepower motors, as well as one of
North America's largest manufacturers of residential and commercial water
heating equipment. A. O. Smith Corporation has facilities in the United States,
Mexico, Canada, England, Ireland, Hungary, the Netherlands, and China and
employs approximately 17,000 people.
6
A. O. SMITH CORPORATION AND
SUBSIDIARIES (condensed consolidated
financial statements -
dollars in millions, except per share data)
Statement of Earnings
Three Months ended Six Months ended
June 30 June 30
------------------------------------- --------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Electrical Products $ 227.6 $ 219.2 $ 440.7 $ 415.4
Water Systems 190.0 167.1 364.8 342.8
--------------- --------------- --------------- ---------------
Net sales 417.6 386.3 805.5 758.2
Cost of products sold 333.8 304.9 643.5 599.9
--------------- --------------- --------------- ---------------
Gross profit 83.8 81.4 162.0 158.3
Selling, general and administrative 51.7 50.2 105.7 103.4
Interest expense 3.0 3.7 5.9 7.9
Other (income) / expense (0.1) (0.2) 0.3 0.7
--------------- --------------- --------------- ---------------
29.2 27.7 50.1 46.3
Tax provision 9.4 9.7 16.6 16.2
--------------- --------------- --------------- ---------------
Net Earnings $ 19.8 $ 18.0 $ 33.5 $ 30.1
=============== =============== =============== ===============
Net Earnings Per Share of
Common Stock (Diluted) $ 0.67 $ 0.66 $ 1.13 $ 1.17
=============== =============== =============== ===============
Average Common Shares
Outstanding (000's omitted) 29,656 27,232 29,589 25,782
7
A. O. SMITH CORPORATION
Balance Sheet
June 30 December 31
2003 2002
------------------ --------------------
ASSETS:
Cash and cash equivalents $ 34.8 $ 32.8
Receivables 272.5 215.5
Inventories 233.2 200.4
Deferred income taxes 21.3 26.7
Other current assets 20.4 12.9
--------------- -----------------
Total Current Assets 582.2 488.3
Net property, plant and equipment 352.3 362.7
Goodwill and other intangibles 309.0 309.2
Other assets 66.6 64.7
--------------- -----------------
Total Assets $ 1,310.1 $ 1,224.9
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Trade payables $ 162.7 $ 131.4
Accrued payroll and benefits 38.4 38.7
Product warranty 19.1 19.5
Income taxes 2.8 1.8
Long-term debt due within one year 10.9 11.7
Other current liabilities 49.9 58.6
--------------- -----------------
Total Current Liabilities 283.8 261.7
Long-term debt 269.2 239.1
Other liabilities 110.3 114.7
Pension liability 84.9 90.8
Deferred income taxes 14.5 7.5
Stockholders' equity 547.4 511.1
--------------- -----------------
Total Liabilities and Stockholders' Equity $ 1,310.1 $ 1,224.9
=============== =================
8
A. O. SMITH CORPORATION
STATEMENT OF CASH FLOWS
Six Months ended
June 30
----------------------------------------
2003 2002
--------------- ----------------
Operating Activities
Continuing
----------
Net earnings $ 33.5 $ 30.1
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation & amortization 25.8 25.1
Net change in current assets and liabilities (62.4) (2.3)
Net change in noncurrent assets and liabilities (1.7) (3.6)
Other (1.3) 0.9
--------------- ----------------
Cash Provided by (Used in) Operating Activities (6.1) 50.2
--------------- ----------------
Investing Activities
Capital expenditures (14.8) (16.4)
Acquisitions - (2.2)
--------------- ----------------
Cash Used in Investing Activities (14.8) (18.6)
--------------- ----------------
Financing Activities
Debt incurred 32.2 -
Debt retired (2.9) (152.4)
Proceeds from common stock offering - 127.5
Other stock transactions 1.5 0.8
Dividends paid (8.1) (6.2)
--------------- ----------------
Cash Provided by (Used in) Financing Activities 22.7 (30.3)
Discontinued
------------
Cash Provided by Discontinued Operations 0.2 4.3
--------------- ----------------
Net increase in cash and cash equivalents 2.0 5.6
Cash and cash equivalents - beginning of period 32.8 20.8
--------------- ----------------
Cash and Cash Equivalents - End of Period $ 34.8 $ 26.4
=============== ================
9
A. O. SMITH CORPORATION AND SUBSIDIARIES
Business Segments
(dollars in millions)
Three Months ended Six Months ended
June 30 June 30
------------------------------ -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
Net sales
Electrical Products $ 227.6 $ 219.2 $ 440.7 $ 415.4
Water Systems 190.0 167.1 364.8 342.8
------------ ------------ ------------ -------------
$ 417.6 $ 386.3 $ 805.5 $ 758.2
============ ============ ============ =============
arnings before interest and taxes
Electrical Products $ 18.6 $ 20.5 $ 36.2 $ 35.7
Water Systems 17.8 16.6 29.9 30.2
------------ ------------ ------------ -------------
Business Segment Earnings 36.4 37.1 66.1 65.9
Corporate expenses (4.2) (5.7) (10.1) (11.7)
Interest expense (3.0) (3.7) (5.9) (7.9)
Earnings before income taxes 29.2 27.7 50.1 46.3
Provision for income taxes (9.4) (9.7) (16.6) (16.2)
------------ ------------ ------------ -------------
Net earnings $ 19.8 $ 18.0 $ 33.5 $ 30.1
============ ============ ============ =============
10
A. O. Smith Corporation - Script
2003 Second Quarter Earnings Conference Call
July 15, 2003 at 10:00 a.m. Eastern Time
Slide 1
------------------------------------------------
A. O. Smith Corporation Logo
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------------------------------------------------
A. O. Smith
Second Quarter 2003
Conference Call
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Introduction (Craig Watson, Investor Relations Director)
Good morning ladies and gentlemen and thank you for joining us on this
conference call. With me this morning participating in the call are Bob O'Toole,
Chairman and Chief Executive Officer; Ken Krueger, Chief Financial Officer; and
John Kita; Treasurer and Controller.
Before we begin with Bob's remarks I would like to remind you that some of the
comments that will be made during this conference call, including answers to
your questions, could constitute forward-looking statements. These
forward-looking statements are subject to risks that could cause actual results
to be materially different. Those risks include, among others, matters that we
have described in this morning's press release.
I'd also like to point out that we have posted slides on our website so feel
free to follow along while we conduct the call.
Bob will now make a few opening comments and Ken will discuss results in more
detail.
Bob ...
Thank you Craig.
Slide 2
Second Quarter Financial Results
(in millions, except per share)
2003 2002 change
---- ---- ------
Sales $417.6 $386.3 $31.3
Net Earnings 19.8 18.0 1.8
EPS $0.67 $0.66 $0.01
====== ====== ======
11
Financial Overview (Robert O'Toole, Chairman, President and Chief Executive
Officer)
Second quarter earnings were $19.8 million, representing a ten percent
improvement compared with the $18 million earned in last year's second quarter.
Earnings were sixty seven cents per share, and compared with prior year earnings
of sixty six cents per share. EPS only increased one cent as a result of the
dilutive effect of the secondary stock offering in May of 2002. Second quarter
sales were $418 million compared with $386 million in the second quarter of last
year. The increase in sales was due to the July 2002 acquisition of Athens
Products, sales from the recently acquired Chinese motor operation and higher
volume at Water Products.
We had an unusually large number of dynamics affecting second quarter financial
performance.
As I just said, sales were up about $32 million for the quarter. Sales increases
were due to the July 2002 acquisition of Athens Products, our recently acquired
Chinese motor operations, and accelerated buying of residential gas water
heaters ahead of the July 1 launch of the flammable vapor resistant product.
These sales increases more than offset weakness in the commercial construction
market for both commercial water heaters and air conditioners as well as
softness in residential air conditioning markets.
The resulting mix of these sales negatively impacted operating margins. The
decline in operating margins, however, was overcome by one-time positive items,
including an insurance settlement and favorable resolution of an R&D credit for
tax purposes.
All of these dynamics resulted in improved performance relative to last year.
On the operating front, our repositioning activities continue in 2003 as we move
product out of higher cost facilities in the U.S. into Mexico and manufacture an
increasing numbers of motors in our new facilities in China. Earlier this month
we began manufacturing the Flammable Vapor Resistant gas water heater in 30, 40
& 50 gallon sizes. In addition to incremental sales and margin, the introduction
of these new products will allow us to accelerate the standardization of the
combined water heater product line which is expected to generate significant
cost savings as we streamline manufacturing and ship product from plants that
are better aligned with our customers' location. Last week we announced the
rationalization of our major U.S. residential and commercial water heating
operations in our Ashland City, Tennessee and McBee, South Carolina facilities,
respectively and Ken will elaborate on those actions shortly.
12
Slide 3
2003 Earnings Forecast
----------------------
Q3 03 $.42 - $.46
2003 $2.10 - $2.25
The company's overall cost structure has improved significantly over the last
eighteen months and our operating units will continue to aggressively improve
cost in both the third and fourth quarters. This morning we announced a
projection of .42 to .46 per share for the third quarter, reaffirmed our 2003
outlook and narrowed our guidance for full year 2003 earnings of between $2.10
and $2.25 per share.
As we have previously stated, operating improvements will materialize and
accelerate during the second half of the year. These improvements include the
continued success of the motor repositioning programs and the ongoing
integration of the State Industries acquisition. In addition to these operating
improvements, the introduction of new water heater products during the second
half of the year is projected to generate additional sales and earnings. As a
consequence, earnings per share comparisons are expected to improve
significantly in the third and fourth quarters of this year.
Ken will now take you through a more detailed discussion of the quarter, and the
outlook for the balance of 2003. Ken...
Thanks, Bob.......
Slide 4
Second Quarter Financial Results
(in millions, except per share earnings)
----------------------------------------
2003 2002 change
---- ---- ------
Sales $418 $386 $ 32
Acquisitions (19) - (19)
------ ------ ------
Core Sales 399 386 13
Net Earnings 19.8 18.0 1.8
EPS $ 0.67 $ 0.66 $ 0.01
====== ====== ======
Shares 29.7 27.2 2.5
Second quarter financials (Ken Krueger (Senior Vice President and Chief
Financial Officer)
13
During the second quarter, sales were $418 million, up 8% from the second
quarter of 2002. As Bob said, sales increases came from acquisitions in the
motors business, and residential gas water heater sales, which more than offset
declines in sales of commercial water heaters and air conditioners, as well as
residential electric water heaters.
Net earnings for the quarter increased to $19.8 million, compared to $18 million
last year. Business segment earnings were down $700 thousand due to the mix of
product sales. This shortfall was more than offset by an insurance recovery from
a bankrupt carrier and the favorable resolution of an R&D tax credit. Earnings
per share improved modestly to sixty seven cents from sixty six cents last year,
as improved earnings more than overcame the five cent dilutive impact of the
May, 2002 stock offering. On a year-to-date basis, earnings are $1.13 per share
compared to last year's $1.17 per share. The stock offering had a thirteen cent
dilutive impact on this six month comparison.
Slide 5
2003 June 30 YTD Cash Flow
Cash Flow from Operations
($ in millions)
---------------
1999 $23
2000 $30
2001 $17
2002 $50
2003 $(6)
Cash Flow and Balance Sheet
Operating cash flow for the first six months of the year was an outflow of $6.1
million dollars.
Operating cash flow is typically weighted to the second half of the year. This
is due to the seasonality of motor sales to the HVAC and pump markets in the
first half of the year, which tends to build up receivables at June 30.
In addition to this seasonality, two other items caused increases in receivables
and inventory this year. Electrical Products repositioning to Mexico and China
required increased inventory levels to minimize customer service disruption
through the transition. The launch of flammable vapor resistant water heaters on
July 1 caused pressure on both receivables and inventories at Water Systems.
For the full year, we are projecting operating cash flow of $80 to $90 million,
as working capital returns to normalized levels, coupled with specific efforts
to reduce inventory at Electrical Products. One encouraging area was accounts
payable, which improved $31.3 million from year-end.
14
Capital spending totaled $15 million compared with depreciation and amortization
of $26 million. For the full year, we are projecting capital spending of
approximately $45 million and depreciation of $50 million.
Slide 6
Debt-to-Capital
---------------
12/31/02 33%
6/30/03 34%
Debt to Capital
As a result of the negative cash flow year-to-date, our debt to capital ratio of
34% is slightly higher than the 33% recorded at year-end. During the second
quarter, we took advantage of the favorable interest rate market and secured
approximately $50 million in new long term debt at a fixed rate of just under
four and a half percent.
Now I'd like to move on to a discussion of the operating performance in our
Electrical Products and Water Systems businesses.
Slide 7
Electrical Products
(in millions)
-------------
Q2 03 Q2 02 change %
----- ----- ------ ---
Sales 208.6 219.2 (10.6) -5%
Athens 12.7 - 12.7
China 6.3 6.3
----- ----- ------ ---
Total 227.6 219.2 8.4 4%
EBIT 18.6 20.5 (1.9) -9%
EBIT Margin 8.2% 9.4%
Electrical Products
Sales in our Electrical Products business increased $8 million to $228 million
in the second quarter, primarily as a result of the Athens Product and Chinese
motor acquisitions. Excluding these acquisition-related sales of approximately
$19 million, sales were modestly lower as a result of continued weakness in
commercial markets
and weather-related softness in both HVAC and leisure pump markets. HVAC sales
declined approximately five percent.
Electrical Products reported a nine percent decline in operating income to $18.6
million compared with $20.5 million last year. Second quarter EBIT margin was
8.2% of sales. The decline in operating margin was due primarily to the
acquisitions, whose sales do not yet contribute to profitability.
15
Slide 8
EPC Repositioning
-----------------
o Six facilities or lines of production
o More than $25 million in annual savings
o Substantially repositioned
- Monticello - closed Q1 03
- Athens - closed Q2 03
- Ripley - will close this month
o China
- Shenzhen
- 25,000 motors per day; pump motors next
- Changzhou
Update on EPC Restructuring
EPC repositioning activities continue. During the first quarter of 2003 we
closed our Monticello operation and during the second quarter we completed the
transfer of production from our Athens facility. We also announced that our
Ripley operation will close this month. In combination with a ten percent
reduction in salaried workforce in 2002 and the consolidation of logistics
operations, these actions generated $19 million in savings in 2002 and are
expected to generate more than $25 million in 2003 and beyond.
China
While we suffered a brief delay due to the SARS situation transition of motor
manufacturing to China continues. Our Shenzhen facility is producing a
significant volume of C-Frame motors. We are in the final stages of customer
approval for pump and fan motors at both Shenzhen and our motor operations in
Changzhou. We are also continuing our evaluation and expect to expand our
Chinese manufacturing capabilities to include hermetic motors.
16
Slide 9
Air Conditioning Inventories
May Month-end
Industry Inventories (000's)
----------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Distributors 1,194,862 1,326,492 1,190,595 986,880 1,044,152
OEM 498,395 657,640 658,502 546,535 613,641
--------- --------- --------- --------- ---------
Total 1,693,257 1,984,132 1,849,097 1,533,415 1,657,793
AC Market
As I mentioned, HVAC sales, excluding the sales of the Athens Product
acquisition, declined in the quarter, consistent with industry trends. Total air
conditioning inventory of 1.7 million units at the end of May was eight percent
higher than last year. Year-to-date, distributor sales are down ten percent
while OEM sales have declined four.
Slide 10
Water Systems
(in millions)
-------------
Q2 03 Q2 02 change %
----- ----- ------ ---
Sales 190.0 167.1 22.9 14%
EBIT 17.8 16.6 1.2 7%
EBIT Margin 9.4% 9.9%
Water Systems
Water Systems second quarter sales of $190 million were twenty three million
higher than in the second quarter of last year. The higher sales were driven by
the price increase introduced earlier in the year to offset higher steel costs,
expanded sales of residential gas water heaters in anticipation of the new
flammable vapor resistant product, and a more than 40 percent increase in sales
at our Chinese operation. Commercial sales declined less than five percent
reflecting the soft commercial construction market.
Operating profit of $17.8 million was seven percent higher than last year. The
slower growth in operating income compared to sales is the result of higher
steel costs and the adverse product mix.
17
Slide 11
Water Systems
Flammable Vapor Resistant Product
---------------------------------
o July 1 manufacturing mandate
- all 30, 40 and 50 gallon gas water heaters; manufacturing began
July 1
o Sales expectations - existing product
- until channel is clear
- Second quarter pre-buy
Flammable Vapor
Manufacturing of the flammable vapor resistant product has begun for all gas
units in the 30, 40 and 50-gallon capacities, as mandated by American National
and Canadian Standards associations (ANSI & CSA). Any inventory of existing
pre-regulation product, regardless of its location in the channel, will continue
to be saleable until all inventories are liquidated. In the second quarter,
customers purchased approximately one month of extra volume of 30, 40 and 50
gallon gas water heaters. Unit volume of electric product was depressed during
the quarter and so replenishment of that product should mitigate the expected
softness in the residential gas market during the first half of the third
quarter. Sales of the flammable vapor product should positively impact both
sales and margin later in the third quarter and all of the fourth quarter.
Slide 12
Water Systems
Standardization with Customization
o Leverage flammable vapor product introduction to standardize the
basic product
o New design allows for customization and enhanced customer service
o Facility rationalization
o Ashland City - residential product
o McBee - commercial product
Product Standardization
In connection with the introduction of the new flammable vapor resistant
product, we have launched a program to "standardize and customize" the Water
Systems product line. This program will benefit our business in two ways: first,
standardizing the basic
18
design will allow us to build product in plants closest to their end market,
maximizing logistics and shipping efficiencies. Secondly, these products, while
having a standard "chassis", will allow for customized configuration further
along in the assembly process. This "standardize and customize" program allows
us to streamline our manufacturing operation while enhancing customer service,
and maintains the most up to date products for all brands.
The company recently announced plans to consolidate the North American
manufacture of residential water heaters at its Ashland City, Tenn., and Juarez,
Mexico, facilities. The initiative, which will involve transferring residential
production from the McBee, S. C. plant, will be complete by the first quarter of
2004. At the same time, we are consolidating most of our commercial
manufacturing in our McBee facility, which involves the transfer of production
from Ashland City, Tennessee and the El Paso, Texas, boiler plant.
Slide 13
2003 Earnings Forecast
----------------------
2003 est. 2002
--------- ----
Third Quarter $.42 - .46 $ 0.34
Full Year $2.10 - 2.25 $ 1.86
2003 Outlook
As Bob mentioned at the beginning of this call, our cost structure has improved
significantly over the last eighteen months and this morning we projected third
quarter earnings of .42 cents to .46 cents and reaffirmed our full year 2003
earnings estimate of between $2.10 and $2.25 per share.
Significant operating improvements will begin to materialize in the third
quarter and accelerate in the fourth quarter. These improvements include
completing the motor repositioning program with the closure of the Athens and
Ripley plants, ramping up the Chinese operations, and the integration of the
State Industries acquisition. In addition to these operating improvements, the
introduction of new flammable vapor resistant water heaters beginning this
quarter should generate additional sales and earnings during the second half.
From this point forward, our comparable year-over-year share base will include
last year's five million share stock offering and we will no longer need to
overcome the dilutive effect of the additional shares. As a consequence of all
these items, earnings per share comparisons are expected to improve
significantly in the third quarter, with even further improvement in the fourth
quarter.
Slide 14
[A. O. SMITH CORPORATION LOGO]
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Conclusion
In conclusion, our cost saving and new product initiatives are on track and we
are financially well positioned to take advantage of growth opportunities as
they materialize. We look forward to reporting on our continued progress again
next quarter.
(Craig speaks)
That completes our opening remarks and we are now ready for your questions. As a
reminder please limit your inquiries to one or two questions at a time so that
everyone interested has an opportunity to participate.
Q&A
(Bob speaks)
We have made a solid start in 2003 but many of the revenue and margin
improvement programs are still ahead of us. We look forward to updating you on
our ongoing success in implementing these programs.
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